<PAGE>
As filed with the Securities and Exchange Commission on November 6, 1998
Registration No. 333-64089
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GRAND CENTRAL FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or
organization)
6035
(Primary Standard
Classification Code Number)
Being Applied For
(IRS Employer Identification No.)
Grand Central Financial Corp.
601 Main Street
Wellsville, Ohio 43968
(330) 532-1517
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
William R. Williams
Chief Executive Officer
Grand Central Financial Corp.
601 Main Street
Wellsville, Ohio 43968
(330) 532-1517
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Douglas P. Faucette, Esquire
John R. Hall, Esquire
Brian K. Lee, Esquire
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. /_/
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /_/
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Title of each Class of Proposed Proposed Maximum
Securities to be Amount to Maximum Offering Aggregate Offering Price Amount of
Registered be Registered Price per Unit (1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,248,250
$0.01 par Value Shares $10.00 $22,482,500 $ (2)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The registration fee of $7,803 was previously paid upon the initial filing
of the Form SB-2.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE>
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
GRAND CENTRAL FINANCIAL CORP.
(Proposed Holding Company for Central Federal Savings
and Loan Association of Wellsville)
__________ Shares of Common Stock
Grand Central Financial Corp. (the "Company"), a Delaware corporation, is
offering for sale in a syndicated community offering (the "Syndicated Community
Offering") __________ shares, at a per share price of $10.00, of its common
stock, par value $.01 per share (the "Common Stock"), to be sold upon the
conversion (the "Conversion") of Central Federal Savings and Loan Association of
Wellsville, Wellsville, Ohio (the "Association") from a federally chartered
mutual savings association to a federally chartered stock savings association
and the issuance of the Association's outstanding capital stock to the Company
pursuant to a plan of conversion, (the "Plan of Conversion"). The remaining
__________ shares of the Common Stock to be sold in the Conversion have been
subscribed for in subscription and community offerings (the "Subscription and
Community Offerings") by holders of deposit accounts with the Association with a
balance of $50 or more as of December 31, 1996, by the Central Federal Savings
and Loan Association of Wellsville Employee Stock Ownership Plan, a
tax-qualified employee benefit plan, and related trust (the "ESOP"), by holders
of deposit accounts with the Association with a balance of $50 or more as of
September 30, 1998, by certain other account holders and borrowers of the
Association and, then, by certain members of the general public. See "The
Conversion - General." Contained herein is the Prospectus in the form used in
the Subscription and Community Offerings. The purchase price for all shares sold
in the Syndicated Community Offering will be the same as the price paid by
subscribers in the Subscription and Community Offerings (the "Purchase Price").
The Purchase Price of $10.00 per share is the amount to be paid for each share
at the time a purchase order is submitted. See the cover page of the Prospectus
and the table below for information as to the method by which the range within
which the number of shares offered may vary and the method of subscribing for
shares of the Common Stock.
Funds submitted to the Association with purchase orders will earn interest
at the Association's passbook rate of interest from the date of receipt until
completion or termination of the Conversion. The Syndicated Community Offering
will expire no later than _______________, 199_, unless extended by the
Association and the Company with the approval of the Office of Thrift
Supervision (the "OTS"). Such extensions may not go beyond December __, 2000. If
an extension of time has been granted, all subscribers will be notified of such
extension, and of their rights to confirm their subscriptions, or to modify or
rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which the subscriber must notify the
Association of his intention to confirm, modify or rescind his subscription. If
an affirmative response to any resolicitation is not received by the Association
and the Company from subscribers, such orders will be rescinded and all funds
will be returned promptly with interest. The minimum number of shares which may
be purchased is 25 shares. Except for the ESOP, which may purchase up to 10% of
the total number of shares of Common Stock issued in the Conversion, no person,
together with associates of and persons acting in concert with such person, may
purchase more than the total
<PAGE>
number of shares offered in the Community Offering and the Syndicated Community
Offering that could be purchased for $200,000 at the Purchase Price and no
person, together with associates of and persons acting in concert with such
person, may purchase more than $200,000 in the Conversion. See "Plan of
Conversion - Subscription Rights and Limitations on Common Stock Purchases." The
Company reserves the right, in its absolute discretion, to accept or reject, in
whole or in part, any or all subscriptions in the Syndicated Community Offering.
The Company and the Association have engaged Charles Webb & Company, a
Division of Keefe, Bruyette & Woods, Inc. ("Webb") as financial advisors to
assist them in the sale of the Common Stock in the Syndicated Community
Offering. It is anticipated that Webb will use the services of other registered
broker-dealers ("Selected Dealers") and that fees to Webb and such Selected
Dealers will not exceed 5.5% of the aggregate Purchase Price of the shares sold
in the Syndicated Community Offering. Neither Webb nor any Selected Dealer shall
have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering.
The Company has applied to have its Common Stock listed on the Nasdaq
SmallCap Market under the symbol "GCFC." However, if the Company, after the
Offerings, qualifies to be listed on the Nasdaq National Market, it will take
steps to do so. Prior to this offering, there has not been a public market for
the Common Stock, and there can be no assurance that an active and liquid
trading market for the Common Stock will develop. The absence or discontinuance
of a market may have an adverse impact on both the price and liquidity of the
stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
<PAGE>
<TABLE>
<CAPTION>
Minimum Maximum
1,445,000 1,955,000
Per Share Shares Shares (1)
------------------- ------------------ --------------------------
<S> <C> <C> <C>
Public offering price.................... $10.00 $17,000,000 $26,450,000
Estimated underwriting commissions
and other expenses.................. $0.34 to $0.45 $771,320 $920,000
Estimated proceeds to Company............ $9.55 to $9.66 $16,228,680 $25,530,000
</TABLE>
__________________________________
(1) Subject to changes in market conditions and the approval of the Office of
Thrift Supervision, up to 2,248,250 shares, an additional 15% above the
maximum number of shares, may be issued.
- ----------------------------------------------------------------------
Charles Webb & Company
a Division of Keefe, Bruyette & Woods, Inc.
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The date of this Prospectus is _____________, 1998.
<PAGE>
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 15.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF
THRIFT SUPERVISION OR ANY OTHER FEDERAL AGENCY, NOR HAS SUCH OFFICE OR OTHER
AGENCY 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, 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 _______________, 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 _____________, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................... 4
Summary of Recent Developments........................................ 9
Selected Financial and Other Data of the Association.................. 13
Risk Factors.......................................................... 15
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
Statements of Income.................................................. 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 35
Business of the Association........................................... 50
Federal and State Taxation............................................ 72
Regulation............................................................ 74
Management of the Company............................................. 82
Management of the Association......................................... 83
The Conversion........................................................ 95
Restrictions on Acquisition of the Company and the Association........ 115
Description of Capital Stock of the Company........................... 122
Description of Capital Stock of the Association....................... 123
Transfer Agent and Registrar.......................................... 124
Experts............................................................... 124
Legal and Tax Opinions................................................ 124
Additional Information................................................ 125
Index to Financial Statements......................................... F-1
</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 15 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"), which is 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, as follows:
(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."
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;
4
<PAGE>
(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 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 ________, 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.
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.
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
5
<PAGE>
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 not submitted on 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.
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.
6
<PAGE>
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 Company 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 Company 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, in connection with the Conversion, 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.
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 of
Value of Shares(1) Shares Issued
------------------ --------------
<S> <C> <C>
Employee Stock Ownership Plan $1,360,000 8.0%
Stock-Based Incentive Plan:
Stock Awards(2) ........... 680,000 4.0
Stock Options(3) .......... -- 10.0
---------- ----
Total ................. $2,040,000 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.
7
<PAGE>
(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 be
provided with 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.
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 such persons should purchase the common stock. An investment
in the common stock must be made pursuant to each investor's evaluation of his
or her best interests.
Conversion Center
If you have any questions regarding the Conversion, please call the
Conversion Center at (330) 505-1765.
8
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The selected financial and operating data presented below at September
30, 1998 and for the 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 nine months ended September 30, 1998 are not
necessary indicative of the results of operations that may be expected for the
year ended 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>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Selected Operating Data:
Total interest income .................... $6,638 $6,628
Total interest expense ................... 3,797 4,001
------ ------
Net interest income ................... 2,841 2,627
Provision for loan losses ................ 154 7
------ ------
Net interest income after provision
for loan losses 2,687 2,620
Noninterest income:
Net gain (loss) on sale of securities 13 5
Other ................................ 234 203
------ ------
Total noninterest income ........ 247 208
Noninterest expense ...................... 2,503 2,027
------ ------
Income before income tax ................. 431 801
Provision for income tax ................. 105 226
------ ------
Net income ............................ $ 326 $ 575
------ ------
------ ------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Selected Financial Ratios and Other Data (1):
Performance Ratios:
Average yield on interest-earning assets(2) ............................... 7.64% 7.39%
Average rate paid on interest-bearing liabilities ......................... 4.82 4.94
Net interest rate spread(3) ............................................... 2.82 2.45
Net interest margin(4) .................................................... 3.33 2.93
Ratio of interest-earning assets to interest-bearing liabilities .......... 111.89 110.95
Efficiency ratio(5) ....................................................... 81.40 71.63
Noninterest expense as a percent of average assets ........................ 2.76 2.19
Return on average assets .................................................. 0.36 0.62
Return on average equity .................................................. 3.04 5.70
Ratio of average retained equity to average assets ........................ 11.84 10.92
Regulatory Capital Ratios(6):
Tangible capital .......................................................... 12.01 11.52
Core capital .............................................................. 12.01 11.52
Total Risk-based capital .................................................. 27.36 25.89
Asset Quality Data and Ratios:
Total nonperforming loans(7) .............................................. $ 25 $ 209
Real estate owned, net .................................................... -- --
Total nonperforming assets(8) ............................................. 25 209
Allowance for loan losses ................................................. 379 244
Nonperforming loans as a percent of total loans(7)(9) ..................... 0.04% 0.37%
Nonperforming assets as a percent of total assets(8) ...................... 0.02 0.17
Allowance for loan losses as a percent of total loans(9) .................. 0.60 0.43
Allowance for loan losses as a percent of nonperforming loans (7) ......... 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. It is the policy of the Association to cease
accruing 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.
10
<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 of the Association 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. Federal Home Loan Bank
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 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 Association's 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 loan
11
<PAGE>
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.
12
<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
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)
13
<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
------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<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 assets .............. 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>
- ----------
(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 non-interest expense divided by net interest income plus
non-interest 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. 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. 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.
14
<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 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 advances 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."
15
<PAGE>
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 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 non-interest 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 are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. 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 is substantially
dependent on the Association's maintaining relationships with such dealers.
Also, because loan underwriting is accomplished without benefit of direct
interaction between the
16
<PAGE>
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."
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."
17
<PAGE>
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 with certain officers and the employee severance compensation plan
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
18
<PAGE>
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 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
19
<PAGE>
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 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.
20
<PAGE>
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.
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."
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 Conversion costs or in changes in the
Conversion valuation. The Subscription and Community Offerings could be extended
to _____________, 1999 before subscribers would have the right to confirm,
modify or rescind their subscriptions. If the Subscription and Community
Offerings are extended beyond December __, 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."
21
<PAGE>
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.
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,
22
<PAGE>
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 and that such net proceeds
are invested in assets that carry a 20% risk-weighting, such as short-term
interest-bearing deposits. 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
25
<PAGE>
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.
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
26
<PAGE>
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.
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
arithmatic 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 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: 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 2,248,300
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: 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%
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>
CENTRAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF WELLSVILLE
STATEMENTS OF INCOME
The following Statements of Income of the Association for the fiscal
years ended December 31, 1997, 1996 and 1995 have been audited by Robb, Dixon,
Francis, Davis, Oneson & Company ("Robb, Dixon"), independent certified public
accountants, whose report thereon is included elsewhere in this Prospectus. With
respect to the information for the six months ended June 30, 1998 and 1997 which
is unaudited, in the opinion of management, all adjustments necessary for a fair
presentation of such interim periods have been included and are of a normal
recurring nature. Results 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. These Statements of Income should be read in
conjunction with the Financial Statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, For the Year Ended December 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans ............................. $ 2,434 $ 2,091 $ 4,405 $ 4,068 $ 4,002
Mortgage-related securities ....... 1,395 1,584 2,933 3,288 3,683
Investment securities:
Taxable ........................ 510 706 1,347 1,093 248
Non-taxable .................... 9 9 18 26 33
Interest-bearing deposits ......... 64 43 100 138 151
------- ------- ------- ------- -------
Total interest income ....... 4,412 4,433 8,803 8,613 8,117
------- ------- ------- ------- -------
Interest expense:
Deposits .......................... 1,718 1,655 3,367 3,232 2,893
FHLB advances and other ........... 818 1,001 1,906 1,965 1,878
------- ------- ------- ------- -------
Total interest expense ......... 2,536 2,656 5,273 5,197 4,771
------- ------- ------- ------- -------
Net interest income .................. 1,876 1,777 3,530 3,416 3,346
Provision for loan losses ............ 150 -- -- -- 42
------- ------- ------- ------- -------
Net interest income after provision
for loan losses ................... 1,726 1,777 3,530 3,416 3,304
Noninterest Income:
Service charges and other fees .... 85 83 171 130 96
Gain (loss) on sale of:
Loans ....................... 33 -- 5 4 2
Available-for-sale securities 4 -- -- (9) --
Other ....................... 40 32 65 44 59
------- ------- ------- ------- -------
Total noninterest income .... 162 115 241 169 157
------- ------- ------- ------- -------
Noninterest expense:
Salaries and net employee benefits 839 686 1,553 1,441 1,257
Occupancy costs ................... 227 188 353 297 205
Data Processing ................... 69 63 128 125 118
FDIC assessments .................. 24 15 39 614 160
Franchise taxes ................... 111 103 201 201 177
Other ............................. 422 304 609 574 568
------- ------- ------- ------- -------
Total noninterest expense ...... 1,692 1,359 2,883 3,252 2,485
------- ------- ------- ------- -------
Income before income taxes ........... 196 533 888 333 976
Income taxes ......................... 45 156 207 46 307
------- ------- ------- ------- -------
Net income ........................... $ 151 $ 377 $ 681 $ 287 $ 669
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(See notes to the Financial Statements appearing elsewhere herein)
34
<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 are dependent
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 reach 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
35
<PAGE>
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
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--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
Value of Assets
-------------------------
Change in Net Portfolio Value
Interest Rates ----------------------------------------------
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
- ---------------------------------
(1) Expressed in basis points.
</TABLE>
36
<PAGE>
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. 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.
37
<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.
38
<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.
39
<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 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 (Decrease) Increase (Decrease) Increase (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
borrowings ........... (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
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 due to
slightly higher credit risk. While many private issues carry insurance or
guarantees against
40
<PAGE>
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 increases to FHLB 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
non-interest 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.
41
<PAGE>
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 Balances, Interest Rates
and Yields," "Rate/Volume Analysis of Net Interest Income" 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 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 suggested
the need to increase 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 potential 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.
42
<PAGE>
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.
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
43
<PAGE>
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 Balances, Interest Rates
and Yields," "Rate/Volume Analysis of Net Interest Income" 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 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. 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 $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%.
44
<PAGE>
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 Balances, Interest Rates
and Yields," "Rate/Volume Analysis of Net Interest Income" 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 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. 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.
45
<PAGE>
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 FHLB 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
46
<PAGE>
of $4.8 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
47
<PAGE>
efforts and is engaged in the testing phase of its Year 2000 plan. 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 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.
48
<PAGE>
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.
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.
49
<PAGE>
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 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 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.
50
<PAGE>
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.
51
<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
Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- --------- -------- --------- --------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 4.74
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
------ ------ ------- ------- -------- ------ ------- ------
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: ------ ------ ------ ------
------ ------ ------ ------
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
Amount of Total Amount of Total
--------- ---------- ---------- -----------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C>
Single-family(1) ............ $37,070 75.94% $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
-------- ------------ ---------------- --------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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>
Real estate loans:
<C> <C> <C>
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 is dependent 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.
53
<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 $1,058 and $491 for
the six months ended June 30, 1998 and 1997, and $574, $550 and $199
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 ("ARM") 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.
54
<PAGE>
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 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
55
<PAGE>
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.
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
56
<PAGE>
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 are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. 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 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 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
57
<PAGE>
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.
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.
<PAGE>
The following table sets forth the delinquencies in the Association's
loan portfolio as of the dates indicated.(1)
<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 of Balance of of Balance of of Balance of
Loans Loans Loans Loans Loans Loans Loans 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, 1995
--------------------------------------------------------------------------------------
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 of Balance of of Balance of of Balance of
Loans Loans Loans Loans Loans Loans Loans 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.
59
<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
no 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.
60
<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 ................ 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>
61
<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,
---------------------------------
1998
---------------------------------
% of Percent
Allowance of Loans
in each in Each
Category Category
to Total to Total
Amount Allowance Loans
-------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate ......................................... $135 36.00% 74.16%
Consumer ............................................ 103 27.47 25.20
Commercial .......................................... 137 36.53 0.64
Unallocated ......................................... -- -- --
-------- ----------- -----------
Total allowance
for loan losses ................................ $375 100.00% 100.00%
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
% of Percent % of Percent
Allowance of Loans Allowance of Loans
in each in Each in each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
---------- ------------ ---------- --------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate ........ $107 46.32% 76.27% $107 46.73% 81.27%
Consumer ........... 37 16.02 23.20 35 15.28 18.15
Commercial ......... 87 37.66 0.53 87 37.99 0.58
Unallocated ........ -- -- -- -- -- --
---------- ------------ ---------- --------- ----------- ------------
Total allowance
for loan losses.... $231 100.00% 100.00% $229 100.00% 100.00%
---------- ------------ ---------- --------- ----------- ------------
---------- ------------ ---------- --------- ----------- ------------
<CAPTION>
At December 31,
-------------------------------------------------------------------
1995 1994
---------------------------------- --------------------------------
% of Percent % of Percent
Allowance of Loans Allowance of Loans
in each in Each in each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
--------- ------------ ----------- -------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate ........ $120 48.19% 80.67% $111 52.61% 81.50%
Consumer ........... 42 16.87 17.70 30 14.22 16.75
Commercial ......... 87 34.94 1.63 70 33.17 1.75
Unallocated ........ -- -- -- -- -- --
--------- ------------ ----------- -------- ----------- -----------
Total allowance
for loan losses.... $249 100.00% 100.00% $211 100.00% 100.00%
--------- ------------ ----------- -------- ----------- -----------
--------- ------------ ----------- -------- ----------- -----------
<CAPTION>
At December 31,
-------------------------------------
1993
-------------------------------------
% of Percent
Allowance of Loans
in each in Each
Category Category
to Total to Total
Amount Allowance Loans
---------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate ........ $ 87 49.15% 84.37%
Consumer ........... 32 18.08 13.80
Commercial ......... 58 32.77 1.83
Unallocated ........ -- -- --
---------- ------------- ------------
Total allowance
for loan losses.... $177 100.00% 100.00%
---------- ------------- ------------
---------- ------------- ------------
</TABLE>
63
<PAGE>
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 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 advances. The success of such
use of FHLB 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 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.
64
<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
--------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment securities: (In thousands)
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.
government agencies ...................... 9,990 9,977 9,989 9,905 10,988 10,540
Municipal securities ....................... 225 231 275 284 328 339
---------- ---------- ----------- --------- ---------- ---------
Total ................................ 10,215 10,208 10,264 10,189 11,316 10,879
Total debt securities ................ 11,712 11,719 13,753 13,696 16,815 16,386
---------- ---------- ----------- --------- ---------- ---------
Mortgage-related securities:
Mortgage-related securities held-to-
maturity:
Freddie Mac ................................ 19,927 19,555 22,714 22,884 31,991 30,967
Fannie Mae ................................. 4,425 4,410 5,273 5,234 5,902 6,033
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
---------- ---------- ----------- --------- ---------- ---------
Mortgage-related securities available-for-sale:
Freddie Mac ................................ 367 354 391 396 490 491
Fannie Mae ................................. 2,530 2,568 3,734 3,809 5,452 5,531
Ginnie Mae ................................. 2,949 3,025 3,358 3,424 4,014 4,071
---------- ---------- ----------- --------- ---------- ---------
Total mortgage-related securities
available-for-sale ...................... 5,846 5,947 7,483 7,629 9,956 10,093
---------- ---------- ----------- --------- ---------- ---------
Total mortgage-related securities .... 39,922 39,535 35,470 35,747 47,849 47,093
---------- ---------- ----------- --------- ---------- ---------
Net unrealized (losses) gains on
available-for-sale securities .......... 94 -- 71 -- (300) --
---------- ---------- ----------- --------- ---------- ---------
Total securities ..................... $ 51,728 $ 51,254 $ 49,294 $ 49,443 $ 64,364 $ 63,479
---------- ---------- ----------- --------- ---------- ---------
---------- ---------- ----------- --------- ---------- ---------
<CAPTION>
At December 31,
--------------------
1995
--------------------
Amortized Fair
Cost Value
---------- ---------
<S> <C> <C>
Investment securities: (In thousands)
Debt securities held-to-maturity:
Obligations of U.S. government agencies ....... $ -- $ --
Commercial paper ........................... -- --
---------- ---------
Total ................................ -- --
---------- ---------
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies ...................... 2,499 2,500
Municipal securities ....................... 426 448
---------- ---------
Total ................................ 2,925 2,948
Total debt securities ................ 2,925 2,948
---------- ---------
Mortgage-related securities:
Mortgage-related securities held-to-
maturity:
Freddie Mac ................................ 31,908 31,815
Fannie Mae ................................. 6,577 6,550
Collateralized Mortgage Obligations ........ -- --
---------- ---------
Total mortgage-related securities
held-to-maturity ..................... 38,485 38,365
---------- ---------
Mortgage-related securities available-for-sale:
Freddie Mac ................................ 538 533
Fannie Mae ................................. 6,611 6,660
Ginnie Mae ................................. 4,633 4,678
---------- ---------
Total mortgage-related securities
available-for-sale ...................... 11,782 11,871
---------- ---------
Total mortgage-related securities .... 50,267 50,236
---------- ---------
Net unrealized (losses) gains on
available-for-sale securities .......... 112 --
---------- ---------
Total securities ..................... $ 53,304 $ 53,184
---------- ---------
---------- ---------
</TABLE>
65
<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.
66
<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 One Year More than Five Years
One Year or Less to Five Years to Ten Years
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
---------- ---------- --------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Obligations of U.S.
government agencies .............. $ -- --% $ 1,497 7.05% $ -- --%
Mortgage-related securities:
Freddie Mac ........................ -- -- 148 9.50 2,727 6.00
Fannie Mae ......................... -- -- -- -- -- --
Collateralized Mortgage Obligations... -- -- -- -- -- --
---------- --------- ----------
Total securities at amortized cost... $ -- --% $ 1,645 7.27% $ 2,727 6.00%
---------- --------- ----------
---------- --------- ----------
Available-for-sale securities:
Investment securities:
Obligations of U.S.
government agencies ............... $ -- --% $ -- --% $ -- --%
Municipal securities (1) ........... 102 9.89 129 9.85 -- --
Mortgage-related securities:
Freddie Mac ........................ -- -- -- -- -- --
Fannie Mae ......................... -- -- -- -- -- --
Ginnie Mae ......................... -- -- -- -- -- --
---------- ---------- --------- ----------- ---------- -----------
Total securities at fair value ... $ 102 9.89% $ 129 9.85% $ -- --%
---------- ---------- --------- ----------- ---------- -----------
---------- ---------- --------- ----------- ---------- -----------
<CAPTION>
At June 30, 1998
--------------------------------------------
More than Ten Years Total
-------------------- ---------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Obligations of U.S.
government agencies .............. $ -- --% $ 1,497 7.05%
Mortgage-related securities:
Freddie Mac ........................ 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... $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) ........... -- -- 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 ... $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%.
67
<PAGE>
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 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.
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>
68
<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>
At June 30, 1998
----------------------------------
Percent
of Total
Balance Deposits Rate Paid
------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
NOW accounts .......................... $ 7,953 10.08% 2.50%
Money market accounts ................. 2,585 3.28 3.00
Savings accounts ...................... 23,945 30.35 3.10
Certificates of deposit ............... 43,449 55.05 5.74
Noninterest-bearing deposits:
Demand deposits .................... 977 1.24 --
------- ------
Total average deposits .......... $78,909 100.00% 4.50%
------- ------
------- ------
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- -----------------------------
Percent of Percent of Percent of
Total Total Total
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid
------- -------- --------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts .......................... $ 7,611 10.08% 2.63% $ 7,237 9.90% 2.72% $ 7,446 10.59% 2.93%
Money market accounts ................. 2,741 3.63 3.36 2,888 3.95 3.29 3,583 5.10 3.27
Savings accounts ...................... 23,424 31.01 3.09 24,536 33.58 3.09 25,282 35.96 3.09
Certificates of deposit ............... 41,001 54.29 5.73 37,740 51.65 5.78 33,383 47.49 5.32
Noninterest-bearing deposits:
Demand deposits .................... 751 0.99 -- 666 0.92 -- 605 0.86 --
------- ------ ------- ------ ------- ------
Total average deposits .......... $75,528 100.00% 4.46% $73,067 100.00% 4.42% $70,299 100.00% 4.12%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
69
<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,
--------------------------------------------------------------- ------------------------------------
Two to Over
Less 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 advances as an alternative to
retail deposits to fund its operations as part of its operating strategy. These
FHLB 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. FHLB 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 will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the FHLB. 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>
70
<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 the Association's offices as of June 30, 1998.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Leasehold
Year Date of Improvements
Leased or Leased or Lease at June 30,
Location Owned Acquired Expiration 1998
--------- ---------- ---------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Administrative/Home Office:
601 Main Street ........................ Owned 1998(1) -- $502
Wellsville, Ohio 43968
Branch Offices:
49028 Foulks Drive ..................... Owned 1979 -- $273
East Liverpool, Ohio 43920
100 Main Street ........................ Leased 1996 2011 $200
Wintersville, Ohio 43952
7121 Tiffany Boulevard ................. Leased 1997 2012 $243
Boardman, Ohio 44514
3551 Belmont Avenue .................... Leased 1998 2013 $216
Youngstown, Ohio 44505
4755 Mahoning Avenue ................... Leased 1998(2) 2013 --
Austintown, Ohio 44515
</TABLE>
- --------------------------
(1) Expansion completed 1998.
(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.
71
<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
72
<PAGE>
to the Company that would reduce amounts appropriated to the Association's bad
debt reserve and deducted for federal income tax purposes would create a tax
liability for the Association. The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Association makes a "non-dividend distribution,"
then approximately one and one-half times the amount so used would be includable
in gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Association. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
bad debt reserve deduction claimed by the Association over the deduction that
would have been allowable under the experience method is treated as a preference
item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Association currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). 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
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$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.
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 Possible Legislation."
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
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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 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.
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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 Possible Legislation."
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.
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
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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 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
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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,
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(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 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.
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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.
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
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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. 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 Possible Legislation."
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.
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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."
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
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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 1979 2000
and Director
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.
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.
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
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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
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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.
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 two.
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 $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
----------------------------------------- ----------------------- ---------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Compensation Awards Options Payouts Compensation
Positions Year Salary($)(1) Bonus($) ($)(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) Under Annual Compensation, the column titled "Salary" 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.
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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 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
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<PAGE>
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 $1.19 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 $1.19 million.
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
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<PAGE>
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.
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.
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<PAGE>
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
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<PAGE>
retirement (in accordance with the standard retirement policies of 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
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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 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
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<PAGE>
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 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
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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.
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
of the Estimated Price At the Maximum
Range(1) of the Estimated Price Range(1)
------------------------------ --------------------------------
As a Percent As a Percent
Number of Shares Number of Shares
Name Amount of Shares Offered of 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 __, 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 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
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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."
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
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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 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
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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.
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
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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 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"
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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 __, 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."
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
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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 __, 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."
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
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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
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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.
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
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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.
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 _________________, 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
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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 __, 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.
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
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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 shall not be reimbursed for its expenses, including its legal fees. 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. Webb will pass onto selected
broker-dealers, who assist in the Syndicated Community Offering, an amount
competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a similar
market environment. Fees with respect to purchases effected with the assistance
of a selected broker/dealer other than Webb shall be transmitted 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.
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
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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.
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,
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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.
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
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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 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
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
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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 __, 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 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%;
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(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,
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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),
(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.
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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 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
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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 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.
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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 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
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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 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.
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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 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
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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
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<PAGE>
meetings, the number and classification of directors, director and officer
indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
Anti-Takeover Effects of the Company's Certificate of Incorporation and Bylaws
and Management Remuneration Adopted in Conversion
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, 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
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<PAGE>
approved either the business combination or the transaction which resulted in
the stockholder becoming an Interested Stockholder; (ii) any business
combination involving a person who acquired at least 85% of the outstanding
voting stock in the transaction in which he became an Interested Stockholder,
with the number of shares outstanding calculated without regard to those shares
owned by the corporation's directors who are also officers and by certain
employee stock plans; (iii) any business combination with an Interested
Stockholder that is approved by the Board of Directors and by a two-thirds vote
of the outstanding voting stock not owned by the Interested Stockholder; and
(iv) certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A corporation
may exempt itself from the requirements of the statute by adopting an amendment
to its Certificate of Incorporation or Bylaws electing not to be governed by
Section 203. At the present time, the Board of Directors does not intend to
propose any such amendment.
Restrictions in the Association's New Charter and Bylaws
Although the Board of Directors of the Association is not aware of any
effort that might be made to obtain control of the Association after the
Conversion, the Board of Directors believes that it is appropriate to adopt
certain provisions permitted by federal regulations to protect the interests of
the converted Association and its stockholders from any hostile takeover. Such
provisions may, indirectly, inhibit a change in control of the Company, as the
Association's sole stockholder. See "Risk Factors--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.
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<PAGE>
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. 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
121
<PAGE>
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.
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."
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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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CENTRAL FEDERAL SAVINGS
& LOAN ASSOCIATION of WELLSVILLE
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report for the year December 31, 1997................................................... F-2
Balance Sheets................................................................................................ F-3
Statements of income and comprehensive income................................................................. F-4
Statements of changes in equity............................................................................... F-5
Statements of cash flows...................................................................................... F-6
Notes to Financial Statements................................................................................. F-7
</TABLE>
All schedules are omitted because they are not required or applicable, or the
required information is shown in the financial statements or notes thereto.
The financial statements the Holding Company have been omitted because the
Holding Company has not yet issued any stock, has no assets and no liabilities,
and has not conducted any business other than of an organizational nature.
- --------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Central Federal Savings & Loan Association
Wellsville, Ohio
We have audited the accompanying balance sheets of Central Federal
Savings & Loan Association as of December 31, 1997 and 1996 and the related
statements of income and comprehensive income, changes in equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Central Federal
Savings & Loan Association as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Robb, Dixon, Francis, Davis, Oneson & Co.
---------------------------------------------
ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
March 18, 1998
- --------------------------------------------------------------------------------
F-2
<PAGE>
CENTRAL FEDERAL SAVINGS & LOAN ASSOCIATION
WELLSVILLE, OHIO
BALANCE SHEETS
June 30, 1998 (Unaudited) and December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions ............. $ 2,216 $ 990 $ 960
Interest-bearing deposits in other banks ...................... 1,217 4,856 4,278
------------ ------------ ------------
Total cash and cash equivalents ...................... 3,433 5,846 5,238
Securities
Securities held-to-maturity (estimated fair value
of $35,099 in 1998; $31,625 in 1997 and $42,507
in 1996) .................................................... 35,573 31,476 43,392
Securities available-for-sale ................................. 16,155 17,818 20,972
------------ ------------ ------------
Total securities .......................................... 51,728 49,294 64,364
Loans held for sale ................................................ 689 1,605 2,448
Loans, net ......................................................... 59,873 56,281 47,069
Accrued interest receivable ........................................ 868 877 973
Premises and equipment, net ........................................ 1,953 1,611 1,440
Stock in Federal Home Loan Bank, at cost ........................... 2,605 2,514 2,341
Other assets ....................................................... 492 237 313
------------ ------------ ------------
TOTAL ASSETS ......................................... $ 121,641 $ 118,265 $ 124,186
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES
Deposits
Noninterest bearing ........................................... $ 977 $ 1,091 $ 390
Interest bearing .............................................. 77,932 75,892 75,438
------------ ------------ ------------
Total deposits ............................................ 78,909 76,983 75,828
Advances from Federal Home Loan Bank ............................... 27,680 26,161 34,277
Accrued interest payable ........................................... 150 154 186
Advance payments by borrowers for taxes and insurance .............. 463 665 575
Other liabilities .................................................. 108 137 77
------------ ------------ ------------
TOTAL LIABILITIES .................................... 107,310 104,100 110,943
Commitments and contingencies
EQUITY
Retained earnings, substantially restricted ........................ 14,270 14,119 13,438
Accumulated other comprehensive income ............................. 61 46 (195)
------------ ------------ ------------
TOTAL EQUITY ......................................... 14,331 14,165 13,243
------------ ------------ ------------
TOTAL LIABILITIES AND EQUITY ......................... $ 121,641 $ 118,265 $ 124,186
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
F-3
<PAGE>
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Six months ended June 30, 1998 and 1997 (Unaudited) and
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended June 30, Years ended December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans ................... $ 2,434 $ 2,091 $ 4,405 $ 4,068 $ 4,002
Interest on investment securities:
Taxable ................................. 1,905 2,290 4,280 4,381 3,931
Non-taxable ............................. 9 9 18 26 33
Interest on interest-bearing deposits
in banks ................................... 64 43 100 138 151
----------- ----------- ----------- ----------- -----------
TOTAL INTEREST INCOME ............... 4,412 4,433 8,803 8,613 8,117
----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits ......................... 1,718 1,655 3,367 3,232 2,893
Interest on advances from Federal Home
Loan Bank .................................. 818 1,001 1,906 1,965 1,878
----------- ----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE .............. 2,536 2,656 5,273 5,197 4,771
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME ................. 1,876 1,777 3,530 3,416 3,346
Provision for loan losses .................... 150 0 0 0 42
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES ....................... 1,726 1,777 3,530 3,416 3,304
OTHER INCOME
Service charges .............................. 85 83 171 130 96
Gain on sale of loans ........................ 33 0 5 4 2
Gain (loss) on sale of securities ............ 4 0 0 (9) 0
Other income ................................. 40 32 65 44 59
----------- ----------- ----------- ----------- -----------
TOTAL OTHER INCOME .................. 162 115 241 169 157
OTHER EXPENSES
Salaries and employee benefits ............... 839 686 1,553 1,441 1,257
Net occupancy expense ........................ 227 188 353 297 205
Data processing expense ...................... 69 63 128 125 118
FDIC assessments ............................. 24 15 39 614 160
Franchise taxes .............................. 111 103 201 201 177
Other operating expenses ..................... 422 304 609 574 568
----------- ----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES ................ 1,692 1,359 2,883 3,252 2,485
----------- ----------- ----------- ----------- -----------
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE ................ 196 533 888 333 976
Federal income tax expense ................... 45 156 207 46 307
----------- ----------- ----------- ----------- -----------
NET INCOME .......................... $ 151 $ 377 $ 681 $ 287 $ 669
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Other comprehensive income net of tax:
Change in unrealized gain (loss)
on securities available-for-sale ...... 15 43 241 (268) 492
----------- ----------- ----------- ----------- -----------
COMPREHENSIVE INCOME ......................... $ 166 $ 420 $ 922 $ 19 $ 1,161
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
F-4
<PAGE>
STATEMENTS OF CHANGES IN EQUITY
Six months ended June 30, 1998 (Unaudited) and
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Unrealized gain
(Loss)
on securities
available-for-sale
net of applicable
Retained deferred Total
earnings income Taxes equity
----------- ------------------- ---------
<S> <C> <C> <C>
Balances at December 31, 1994 .................. $ 12,482 $ (419) $ 12,063
Net income ..................................... 669 669
Change in unrealized
gain (loss) on securities
available-for-sale.............................. 492 492
------------ ------------ ------------
Balances at December 31, 1995 .................. 13,151 73 13,224
Net income ..................................... 287 287
Change in unrealized
gain (loss) on securities
available-for-sale ............................. (268) (268)
------------ ------------ ------------
Balances at December 31, 1996 .................. 13,438 (195) 13,243
Net income ..................................... 681 681
Change in unrealized
gain (loss) on securities
available-for-sale ............................ 241 241
------------ ------------ ------------
Balance at December 31, 1997 ................... 14,119 46 14,165
Net income (unaudited) ......................... 151 151
Change in unrealized
gain (loss) on securities
available-for-sale (unaudited) 15 15
------------ ------------ ------------
Balances at June 30, 1998 (unaudited) .......... $ 14,270 $ 61 $ 14,331
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1998 and 1997 (Unaudited) and
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended June 30, Years ended December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..........................................$ 151 $ 377 $ 681 $ 287 $ 669
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization net of discount accretion . (58) (60) (67) 66 341
(Gain) loss on sale of securities .............. (4) 9
Provision for loan losses ...................... 150 42
(Gain) loss on sale of fixed assets, net ....... (5) 4
Gain on sales of loans held for sale, net ...... (33) (4) (20) (2)
Depreciation ................................... 116 96 156 161 115
Deferred income taxes .......................... (77) (89) (55) 12 (9)
Originations of loans held-for-sale ............ (3,675) (54) (54)
Proceeds from sale of loans held-for-sale ...... 4,624 99 877 629 549
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable ............................... (9) (41) 96 (354)
(Increase) decrease in other assets ........ (164) 74 (1) (4) (8)
Increase (decrease) in accrued interest
payable .................................. (4) (2) (32) (17) (27)
Increase (decrease) in other liabilities ... (29) 158 60 33 (8)
--------- --------- -------- -------- ---------
Net cash provided by operating activities .. 988 558 1,652 806 1,662
--------- --------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities ........... (8,243) (2,000) (3,987) (11,499) 100
Proceeds from maturities and payments on held-to-maturity
securities ....................................... 4,179 3,457 15,964 6,451 5,403
Purchases of available-for-sale securities ......... (1,929) (4,989) (11,144) (1,000)
Proceeds from sale of available-for-sale securities. 184 1,509
Proceeds from maturities and payments on available-for-
sale securities .................................. 3,460 740 8,522 3,137 2,916
Net increase in loans .............................. (3,746) (4,237) (9,187) (1,808) (70)
Purchases of premises and equipment ................ (458) (51) (329) (367) (210)
Proceeds from sales of premise and equipment 7
Purchase of FHLB stock ............................. (91) (83) (173) (157) (142)
--------- --------- -------- -------- ---------
Net cash provided by (used in) investing
activities .............................. (6,644) (2,174) 5,828 (13,878) 6,997
---------- --------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ................ 1,926 (480) 1,155 3,829 717
Net increase (decrease) in short-term FHLB advances. (5,500) 2,200 (4,750) 10,938 (8,193)
Proceeds from long-term FHLB advances .............. 8,500
Repayment of long-term FHLB advances ............... (1,481) (1,480) (3,367) (1,185)
Net increase in escrow accounts .................... (202) (181) 90 87 47
--------- --------- -------- -------- ---------
Net cash provided by (used in) financing
activities .............................. 3,243 59 (6,872) 13,669 (7,429)
--------- --------- -------- -------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ............................. (2,413) (1,557) 608 597 1,230
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ....................... 5,846 5,238 5,238 4,641 3,410
--------- --------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR ............................ $ 3,433 $ 3,681 $ 5,846 $ 5,238 $ 4,640
--------- --------- -------- -------- ---------
--------- --------- -------- -------- ---------
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest ............ $ 2,540 $ 2,658 $ 5,305 $ 5,214 $ 4,798
Cash paid during the year for income taxes ........ 160 - 276 68 344
Transfers to REO .................................. 4 39 39 - 32
</TABLE>
- --------------------------------------------------------------------------------
F-6
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Central Federal Savings & Loan Association is a federally-chartered mutual
thrift association headquartered in Wellsville, Ohio. The Association provides a
variety of financial services to individuals and corporate customers, through
its four offices in Wellsville, Ohio and surrounding areas, which are primarily
light industrial areas. The Association's primary source of revenue is
single-family residential loans to middle income individuals.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate. In connection with the determination of the estimated
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A majority of the Association's loan portfolio consists of single family
residential loans in the Columbiana County area. The regional economy depends
heavily on light industry. Accordingly, the ultimate collectibility of a
substantial portion of the Association's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future reductions in the carrying amounts of loans and
foreclosed assets may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans and
foreclosed real estate. Such agencies may require the Association to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the allowances for losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
Securities
Securities Held-to-Maturity: Debt securities that management has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts that are recognized in
interest income using the interest method over the period of maturity.
Mortgage-backed securities represent participating interest in pools of
long-term mortgage loans originated and serviced by issuers of the securities.
Mortgage-backed securities are carried at unpaid principal balances, adjusted
for unamortized premiums and unearned discounts. Premiums and discounts are
amortized using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
- --------------------------------------------------------------------------------
F-7
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
Securities Available-for-Sale: Available-for-sale securities consist of
investment securities not classified as held-to-maturity securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are
reported as a net amount in a separate component of retained earnings until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. The amortization of
premiums and the accretion of discounts are recognized in interest income using
the interest method over the period of maturity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are carried
at the lower of cost or market valued determined on an aggregate basis. Net
unrealized losses are recognized through a valuation allowance by charges to
income. Gains and losses on the sale of loans held for sale are determined using
the specific identification method.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination as well as certain direct origination costs, are deferred and
amortized as a yield adjustment over the contractual lives of the related loans
using the interest method. Amortization of deferred loans fees is discontinued
when a loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. The accrual of
interest on loans is suspended when a loan is 90 days or more past due or when,
in management's opinion, the collection of all or a portion of the loan
principal has become doubtful. When a loan is placed on nonaccrual status,
accrued and unpaid interest at risk is charged against income. Interest income
on nonaccrual loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions and other risks inherent in the portfolio. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral. Loans are evaluated for impairment when payments are delayed,
typically 90 days or more, or when it is probable that all principal and
interest amounts will not be collected according to the original terms of the
loan.
- --------------------------------------------------------------------------------
F-8
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost and
are depreciated on the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the respective assets which range
from 3 to 40 years.
Foreclosed Real Estate
Foreclosed real estate is recorded at the lower of cost or fair value, less
estimated costs to sell. Any reduction in fair value is reflected in a valuation
allowance account established by a charge to income. Cost incurred to carry the
foreclosed real estate are charged to expense.
Mortgage Servicing Rights
Effective January 1, 1995, the Association adopted Statement of Financial
Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights."
This statement requires lenders who sell or securitize originated loans and
retain servicing rights to recognize as separate assets the rights to service
mortgage loans for others. Effective January 1, 1997, SFAS No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" superseded SFAS No. 122 and was adopted by the Association. SFAS
No. 125 provided new guidance on the determination of the value of mortgage
servicing rights and when to recognize the sale of loans without changing the
concept of assigning value to mortgage servicing rights when a loan is sold or
securitized and the servicing is retained. Both statements were adopted
prospectively.
The Association recognizes as separate assets the rights to service mortgage
loans for others, whether the servicing rights are acquired through purchases or
loan originations. The fair value of capitalized mortgage servicing rights is
based upon the present value of estimated future cash flows. Based upon current
fair values and considering outstanding positions of derivative financial
instruments utilized as hedges, capitalized mortgage servicing rights are
periodically assessed for impairment, which is recognized in the statement of
income during the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. For purposes of performing its impairment
evaluation, the Association stratifies its portfolio on the basis of certain
risk characteristics including loan type and note rate. Capitalized mortgage
servicing rights are amortized over the period of estimated net servicing income
and take into account appropriate prepayment assumptions.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, accumulated depreciation, and deferred
loan fees for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and liabilities are reflected at
income tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Pension Plan
The Association has a pension plan covering substantially all employees. It is
the policy of the Association to fund the maximum amount that can be deducted
for federal income tax purposes but in amounts not less than the minimum amounts
required by law.
Statements of Cash Flows
The Association considers all cash, demand amounts due from depository
institutions, and interest-bearing deposits in other banks to be cash
equivalents for purposes of the statements of cash flows.
- --------------------------------------------------------------------------------
F-9
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on-and off-balance sheet financial
instruments does not include the value of anticipated future business or the
values of assets and liabilities not considered financial instruments.
Interim Financial Information
The unaudited balance sheet as of June 30, 1998 and related statements of income
and comprehensive income, changes in equity and cash flows for the six months
ended June 30, 1998 and 1997 have been prepared in a manner consistent with the
audited financial information presented. Management believes that all
adjustments, which were all of a normal and recurring nature, have been recorded
to the best of its knowledge and that the unaudited financial information fairly
presents the financial position and results of operations and cash flows of the
Association in accordance with generally accepted accounting principles.
Reclassifications
Certain amounts in prior financial statements have been reclassified to conform
with the current presentation.
- --------------------------------------------------------------------------------
F-10
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE B -SECURITIES
Securities have been classified according to management's intent. The amortized
cost of securities and their approximate fair values are as follows:
<TABLE>
<CAPTION>
Securities held-to-maturity
(Dollars in thousands)
June 30, 1998 (Unaudited) December 31, 1997
--------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government and federal
agencies ......................... $ 1,497 $ 14 $ $ 1,511 $ 2,497 $ 18 $ $ 2,515
Corporate notes 992 992
Mortgage related securities:
Freddie Mac .................... 19,927 70 (442) 19,555 22,714 346 (176) 22,884
Fannie Mae ..................... 4,425 65 (80) 4,410 5,273 70 (109) 5,234
CMO's .......................... 9,724 (101) 9,623
-------- -------- -------- --------- --------- --------- --------- ---------
Total ............................ $ 35,573 $ 149 $ (623) $ 35,099 $ 31,476 $ 434 $ (285) $ 31,625
-------- -------- -------- --------- --------- --------- --------- ---------
-------- -------- -------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and federal
agencies .................. $ 5,499 $ 14 $ (6) $ 5,507
Corporate notes
Mortgage related securities:
Freddie Mac ............. 31,991 46 (1,070) 30,967
Fannie Mae .............. 5,902 135 (4) 6,033
CMO's ...................
--------- --------- --------- ---------
Total ..................... $ 43,392 $ 195 $ (1,080) $ 42,507
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Securities available-for-sale
(Dollars in thousands)
June 30, 1998 (Unaudited) December 31, 1997
--------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and federal
agencies ........................ $ 9,990 $ $ (13) $ 9,977 $ 9,989 $ $ (84) $ 9,905
Municipal Securities ............ 225 6 231 275 9 284
Mortgage related securities:
Freddie Mac ................... 367 1 (14) 354 391 5 396
Fannie Mae .................... 2,530 66 (28) 2,568 3,734 75 3,809
Ginnie Mae .................... 2,949 77 (1) 3,025 3,358 66 3,424
-------- -------- -------- --------- --------- --------- --------- ---------
Total ........................... $ 16,061 $ 150 $ (56) $ 16,155 $ 17,747 $ 155 $ (84) $ 17,818
-------- -------- -------- --------- --------- --------- --------- ---------
-------- -------- -------- --------- --------- --------- --------- ---------
December 31, 1996
--------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<C> <C> <C> <C>
U.S. government and federal
agencies ........................ $ 10,988 $ $ (448) $ 10,540
Municipal Securities ............ 328 12 (1) 339
Mortgage related securities:
Freddie Mac ................... 490 1 491
Fannie Mae .................... 5,452 79 5,531
Ginnie Mae .................... 4,014 60 (3) 4,071
--------- --------- --------- ---------
Total ........................... $ 21,272 $ 152 $ (452) $ 20,972
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
F-11
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
The following is a summary of maturities of securities held-to-maturity and
available-for-sale:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1998 December 31, 1997
------------------------------------------ -------------------------------
Available-for-sale Held-to-maturity Available-for-sale Held-to-maturity
------------------ ---------------- ------------------ ----------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
------ ------- ------ ------- ------ ------- ------ -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year or less ........... $ 100 $ 102 $ $ $ 100 $ 102 $ 992 $ 992
After one year through
five years ............... 125 129 1,497 1,511 175 182 2,497 2,515
After ten years ............ 9,990 9,977 9,989 9,905
Mortgage-backed
securities ............... 5,846 5,947 34,076 33,588 7,483 7,629 27,987 28,118
--------- --------- --------- --------- --------- --------- --------- ---------
$ 16,061 $ 16,155 $ 35,573 $ 35,099 $ 17,747 $ 17,818 $ 31,476 $ 31,625
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
The amortized cost and fair value of mortgage-backed securities are presented in
the held-to-maturity and available-for-sale category by contractual maturity in
the preceding table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
During the six months ended June 30, 1998 and the year ended December 31, 1996,
the Association sold securities available-for-sale for total proceeds of
approximately $184,000 and $1,509,000 resulting in gross realized gains of
approximately $4,000 and gross realized losses of approximately $9,000. During
the six months ended June 30, 1997 and years ended December 31, 1997 and 1995
the Association did not sell any securities available-for-sale.
There were no securities transferred between classifications during 1998, 1997
or 1996. Securities with a carrying amount of approximately $19,233,000,
$20,510,000 and $22,554,000 were pledged to secure deposits as required or
permitted by law at June 30, 1998, December 31, 1997 and 1996, respectively.
NOTE C - LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Loans secured by real estate:
Construction loans on one-to-four family residences ........... $ 1,607 $ 1,017 $ 612
Secured by 1-4 family residential properties .................. 41,897 40,659 35,891
Secured by multifamily residential properties ................. 16 17 99
Secured by nonresidential properties .......................... 942 989 1,349
Commercial loans ................................................... 394 308 290
Consumer loans ..................................................... 15,392 13,522 9,057
------------ ------------ ------------
60,248 56,512 47,298
Allowance for loan losses .......................................... (375) (231) (229)
------------ ------------ ------------
Total ......................................................... $ 59,873 $ 56,281 $ 47,069
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
F-12
<PAGE>
Notes to financila statements (Cont.)
- --------------------------------------------------------------------------------
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended June 30, Years ended December 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period ........... $ 231 $ 229 $ 229 $ 249 $ 211
Loans charged off ...................... (7) (4) (20) (4)
Recoveries ............................. 1 2 6
Provision for losses ................... 150 42
----------- ----------- ----------- ----------- -----------
Balance, end of period ................. $ 375 $ 231 $ 231 $ 229 $ 249
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
At June 30, 1998 and December 31, 1997 and 1996, the total recorded investment
in impaired loans, all of which had allowances determined in accordance with
SFAS No. 114 and No. 118, amounted to approximately $55,000, $5,000 and $0,
respectively. The average recorded investment in impaired loans amounted to
approximately $55,000, $2,000 and $0 for the six months ended June 30, 1998 and
for the years ended December 31, 1997 and 1996, respectively. No interest income
on impaired loans was recognized for cash payments received for the six months
ended June 30, 1998, 1997 and years ended December 31, 1997, 1996 and 1995.
The Association has no commitments to loan additional funds to borrowers whose
loans have been modified.
In the ordinary course of business, the Association has and expects to continue
to have transactions, including borrowings, with its officers, directors, and
their affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any other
unfavorable features to the Association. Loans to such borrowers are summarized
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six Months
Ended Year Ended
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Balance, beginning of period ....................................................... $ 280 $ 240
New loans .......................................................................... 170 164
Payments ........................................................................... (176) (124)
------------- ------------
Balance, end of period ............................................................. $ 274 $ 280
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
F-13
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE D - MORTGAGE BANKING ACTIVITIES
The components of mortgage banking non-interest income is presented below:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Loan servicing fees .................... $ 7 $ 4 $ 9 $ 8 $ 8
Net gain on sales of mortgage .......... 33 5 4 2
----------- ----------- ----------- ----------- -----------
Totals ................................. $ 40 $ 4 $ 14 $ 12 $ 10
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The outstanding balances of serviced loans were $7,511,000 and
$3,065,000 at June 30, 1998 and 1997, respectively. The outstanding balances of
serviced loans were $3,453,000, $3,264,000 and $3,480,000 at December 31, 1997,
1996 and 1995, respectively.
Changes in capitalized mortgage loan servicing rights included in other assets
were:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
---------------------------- -----------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ............ $ 11 $ 4 $ 4 $ 0 $ 0
Originations ............................ 18 2 10 4 0
Amortization ............................ (4) (1) (3) 0 0
----------- ----------- ----------- ----------- -----------
Totals .................................. $ 25 $ 5 $ 11 $ 4 $ 0
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loans .............................................................. $ 291 $ 286 $ 238
Mortgage-backed securities ......................................... 258 235 318
Investments and other .............................................. 319 356 417
------------ ------------ ------------
Totals ............................................................. $ 868 $ 877 $ 973
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
F-14
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE F - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Land .............................................................. $ 63 $ 63 $ 63
Buildings and improvements ........................................ 1,449 1,449 1,449
Furniture, fixtures and equipment ................................. 1,095 926 880
Leasehold improvements ............................................ 727 334 223
Construction in process............................................ 150
------------ ------------ ------------
3,334 2,922 2,615
Accumulated depreciation and amortization ......................... (1,381) (1,311) (1,175)
------------ ------------ ------------
Total ............................................................. $ 1,953 $ 1,611 $ 1,440
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Certain Association facilities and equipment are leased under various operating
leases. Rental expense was $37,000 and $20,000 for six months ended June 30,
1998 and 1997 and $42,000, $23,000 and $0 for years ended December 31, 1997,
1996 and 1995. Future minimum rental commitments under noncancelable leases are:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1998 December 31, 1997
- --------------------------------------- ---------------------------
(Unaudited)
<S> <C> <S> <C>
1999 ........... $ 123 1998 ............ $ 80
2000 ........... 128 1999 ............ 73
2001 ........... 129 2000 ............ 68
2002 ........... 133 2001 ............ 73
After 2003 ..... 1,600 After 2003 ...... 811
------------ ------------
Total .......... $2,113 Total ........... $1,105
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
F-15
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE G - DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
------------------------ ---------------------------------------------------
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
accounts ........................ $ 977 1.2% $ 1,091 1.4% $ 390 .5%
Interest-bearing checking
account ......................... 10,538 13.3 10,379 13.5 11,452 15.1
Savings accounts .................. 23,945 30.4 23,266 30.2 23,972 31.6
Certificates of deposit ........... 43,449 55.1 42,247 54.9 40,014 52.8
--------- ------- ------------ -------- ---------- -------
$ 78,909 100.0% $ 76,983 100.0% $ 75,828 100.0%
--------- ------- ------------ -------- ---------- -------
--------- ------- ------------ -------- ---------- -------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $3,344,000, $2,427,000 and $1,363,000
at June 30, 1998, December 31, 1998 and 1997. Deposits in excess of $100,000 are
not insured by the FDIC.
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1998 December 31, 1997
- --------------------------------------- ----------------------------
(Unaudited)
<S> <C> <S> <C>
1999 ............... $ 25,585 1998 ......... $ 25,851
2000 ............... 16,483 1999 ......... 15,293
2001 ............... 1,065 2000 ......... 720
2002 ............... 227 2001 ......... 284
After 2003 ......... 89 After 2003 ... 99
------------ ------------
Total .............. $ 43,449 Total ........ $ 42,247
------------ ------------
------------ ------------
</TABLE>
The Association held deposits of approximately $1,229,000 for related parties at
June 30, 1998.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
---------------------------- ------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest bearing checking ............... $ 154 $ 155 $ 292 $ 292 $ 335
Savings ................................. 358 361 724 759 781
Certificates of deposit ................. 1,206 1,139 2,351 2,181 1,777
----------- ----------- ----------- ----------- -----------
Totals .................................. $ 1,718 $ 1,655 $ 3,367 $ 3,232 $ 2,893
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
F-16
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE H - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances are comprised of the following:
<TABLE>
<CAPTION>
Current
Interest June 30, December 31,
Rate 1998 1997 1996
---- ---- ---- ----
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Bank advances
Variable rate advances:
Due in ninety (90) days .................. 6.02% $ 10,988 $ 14,988 $ 3,000
Due in one (1) year ...................... 14,988
Fixed rate advances, with monthly interest
payments:
Advance due in 1997 ..................... 4,750
Advance due in 1998 ..................... 3,000 2,000
Advances due in 1999 ..................... 5.07 1,500
Advances due in 2000 ..................... 5.21 2,500
Advances due in 2003 .................... 5.59 6,000
Fixed rate advances, with monthly principal and
interest payments:
Advance due 2002 ......................... 6.04 1,980 2,513 3,020
Advance due 2003 ......................... 5.76 3,738 4,486 5,181
Advance due 2005 ......................... 6.93 153 153 173
Advance due 2006 ......................... 6.31 53 60 67
Advance due 2007 ......................... 6.52 768 961 1,098
---------- ------------ ------------ ------------
Total Federal Home Loan Bank
Advances .................................... 5.86% $ 27,680 $ 26,161 $ 34,277
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
Federal Home Loan Bank (FHLB) advances are collateralized by all shares of FHLB
stock (totaling $2,605,000 at June 30, 1998 and $2,514,000 at December 31,
1997), securities owned by the Association (totaling $18,712,000 at June 30,
1998 and $17,879,000 at December 31, 1997) and by 100% of the Association's
qualified mortgage loan portfolio (totaling approximately $41,018,000 at June
30, 1998 and $40,659,000 at December 31, 1997). Based on the carrying amount of
FHLB stock owned by the Association, total FHLB advances are limited to
approximately $52,100,000 at June 30, 1998 and $50,276,000 at December 31, 1997.
The aggregate minimum future annual principal payments on FHLB advances at June
30, 1998 are $12,487,000 in 1999, $2,500,000 in 2000, $0 in 2001, $0 in 2002 and
$12,693,000 after 2002. The aggregate minimum future annual principal payments
on FHLB advances at December 31, 1997 are $19,317,000 in 1998, $1,409,000 in
1999, $1,493,000 in 2000, $1,574,000 in 2001 and $2,368,000 after 2001.
- --------------------------------------------------------------------------------
F-17
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE I - FEDERAL INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended June 30, Years ending December 31,
---------------------------- ------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current federal tax ............... $ 124 $ 172 $ 262 $ 34 $ 316
Deferred federal tax expense ...... (79) (16) (55) 12 (9)
------------ ------------ ------------ ------------ ------------
$ 45 $ 156 $ 207 $ 46 $ 307
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended June 30, Years ending December 31,
---------------------------- ----------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected tax provision at a
34% rate ......................... $ 67 $ 181 $ 302 $ 113 $ 332
Effect of tax-exempt income ........ (9) (9) (67) (62) (54)
Other .............................. (13) (16) (28) (5) 29
------------ ------------ ------------ ------------ ------------
$ 45 $ 156 $ 207 $ 46 $ 307
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Effective tax rate ................. 23.0% 29.3% 23.3% 13.8% 31.5%
</TABLE>
- --------------------------------------------------------------------------------
F-18
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
The net deferred tax assets in the balance sheets include the following
components:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended June 30, Years ending December 31,
1998 1997 1996
-------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Bad debt ...................................... $ 86 $ 30 $ 19
Deferred loan fees and costs .................. 206 188 151
Unrealized loss on securities
available for sale ......................... 100
Other ......................................... 6 8 1
------------ ------------ ------------
Total deferred tax assets .......................... $ 298 $ 226 $ 271
Deferred tax liabilities
Fixed assets .................................. $ (86) $ 98 $ 96
Unrealized gain on securities
available for sale ......................... (31) 24
Other ......................................... (10) 5 1
------------ ------------ ------------
Total deferred tax liabilities ..................... $ (127) $ 127 $ 97
------------ ------------ ------------
Net deferred tax assets (liabilities) .............. $ 171 $ 99 $ 174
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
No valuation allowance for deferred tax assets was provided at June 30, 1998 or
December 31, 1997 and 1996, because the Association had sufficient taxes paid in
and available for recovery to warrant recording the full deferred tax asset.
NOTE J - PENSION PLAN
The Association maintains a contributory trusted pension plan for all eligible
employees. The benefits contemplated by the plan are funded as accrued through
the purchase of individual life insurance policies. The cost of funding is
charged directly to operations. No funded liability exist for past service
costs. The Association's contributions to the plan charged to earnings for six
months ended June 30, 1998 and 1997 and for the years ended December 31, 1997,
1996 and 1995 amounted to $0, $9,000, $9,000, $36,000 and $44,000.
NOTE K - REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift Supervision
(OTS). Failure to meet minimum capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators that, if
undertaken, could have a direct affect on the Association and the financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet specific
capital guidelines that involve quantitative measures of the Association's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification under the prompt corrective action guidelines are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
- --------------------------------------------------------------------------------
F-19
<PAGE>
Notes to financila statements (Cont.)
- --------------------------------------------------------------------------------
Qualitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios of:
total risk-based capital and Tier I capital to risk-weighted assets (as defined
in the regulations), Tier I capital to adjusted total assets (as defined), and
tangible capital to total assets (as defined). As discussed in greater detail
below, as of June 30, 1998, the Association meets all of the capital adequacy
requirements to which it is subject.
As of June 30, 1998, the most recent notifications from the OTS, the Association
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, the Association
would have to maintain minimum total risk-based, Tier I risk-based, Teri I
leverage ratios as set forth in the table below. There are no conditions or
events since the most recent notification that management believes have changed
the Association's prompt corrective action category.
<TABLE>
<CAPTION>
(Dollars in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998 (Unaudited)
Total Risk-Based
Capital (to Risk
Weighted Assets) ... $ 14,620 23.2% $ 5,037 8.0% $ 6,296 10.0%
Tier I Capital
(to Risk Weighted
Assets) ............ 14,245 22.6 2,519 4.0 3,778 6.0
Tier I Capital
(to Adjusted Assets) ... 14,245 11.7 4,863 4.0 6,079 5.0
As of December 31, 1997:
Total Risk-Based ..... $ 14,388 27.5% $ 4,193 8.0% $ 5,242 10.0%
Capital
(to Risk Weighted Assets)
Tier I Capital ....... 14,158 27.0 2,097 4.0 3,145 6.0
(to Risk Weighted
Assets)
Tier I Capital ....... 14,158 12.0 4,729 4.0 5,911 5.0
(to Adjusted Assets)
As of December 31, 1996:
Total Risk-Based ..... $ 13,667 28.4% $ 3,853 8.0% $ 4,816 10.0%
Capital
(to Risk Weighted Assets)
Tier I Capital ....... 13,438 27.9 1,927 4.0 2,889 6.0
(to Risk Weighted
Assets)
Tier I Capital ....... 13,438 10.8 4,968 4.0 6,211 5.0
(to Adjusted Assets)
</TABLE>
- --------------------------------------------------------------------------------
F-20
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
A reconciliation of GAAP capital to regulatory capital at June 30, 1998 and
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Total Tier I Tangible
----- ------ --------
June 30, 1998
<S> <C> <C> <C>
GAAP Capital ..................................................... $ 14,331 $ 14,331 $ 14,331
Unrealized gain on securities available for sale ................. (61) (61) (61)
Allowable allowance for loan losses .............................. 375
Other adjustments ................................................ (25) (25) (25)
---------- ----------- -----------
$ 14,620 $ 14,245 $ 14,245
---------- ----------- -----------
---------- ----------- -----------
December 31, 1997
GAAP Capital ..................................................... $ 14,165 $ 14,165 $ 14,165
Unrealized gain on securities available for sale ................. (46) (46) (46)
Allowable allowance for loan losses .............................. 230
Other adjustments ................................................ 39 39 39
---------- ----------- -----------
$ 14,388 $ 14,158 $ 14,158
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTE L - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Association has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. The principal commitments of the Association
are as follows:
The Association had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
First mortgages ................................................................... $ 2,087 $ 574
Consumer lines .................................................................... 1,236 1,332
Commercial lines .................................................................. 1,410 1,481
------------ ------------
$ 4,733 $ 3,387
------------ ------------
------------ ------------
</TABLE>
As of June 30, 1998, fixed-rate commitments totaled $3,257,000 and had interest
rates ranging from 6.625% to 8.50%. As of December 31, 1997, fixed-rate
commitments totaled $1,712,000 and had interest rates ranging from 7.25%
to8.50%.
In addition, the Association periodically is a defendant in various legal
proceedings arising in connection with its business. It is the best judgment of
management that neither the financial position nor results of operations of the
Association will be materially affected by the final outcome of these legal
proceedings.
- --------------------------------------------------------------------------------
F-21
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheets.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Association upon extension of credit,
varies and is based on management's credit evaluation of the counterparty.
- --------------------------------------------------------------------------------
F-22
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excluded certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Association.
The following methods and assumptions were used by the Association in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and commercial
and industrial loans) are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates
include judgments regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable. The carrying amount of accrued interest receivable approximates
its fair value.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their fair
values. Fair values for fixed -rate certificates of deposit are using a
estimated discounted cash flow calculation that applies interest rates
currently offered on certificates to a schedule of aggregated contractual
expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates fair value.
Federal Home Loan Bank (FHLB) advances: Fair value for FHLB advances are
estimated using a discounted cash flow analysis that applies interest rates
currently being offered on FHLB advances to a schedule of aggregated
contractual maturities on such borrowings.
- --------------------------------------------------------------------------------
F-23
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
The estimated fair values of the Association's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
---- ---- ----
(Unaudited)
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Amount
-------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ... $ 3,433 $ 3,433 $ 5,846 $ 5,846 $ 5,238 $ 5,238
Investment securities ....... 51,728 51,254 49,294 49,443 64,364 63,482
Loans, net of allowance ..... 59,873 59,873 56,281 57,651 47,069 47,830
Loans held for sale ......... 689 689 1,605 1,611 2,448 2,451
Accrued interest receivable .... 868 868 877 877 973 973
Financial liabilities:
Deposits ..................... 78,909 78,970 76,983 76,995 75,828 76,523
Federal Home Loan Bank
advances ................... 27,680 27,598 26,161 26,043 34,277 34,020
Accrued interest payable ..... 150 150 154 154 186 186
Advance payments by
borrowers for taxes
and insurance .............. 463 463 665 665 575 575
</TABLE>
The carrying amounts in the preceding table are included in the balance sheets
under the applicable captions. The contract or notional amounts of the
Association's financial instruments with off-balance-sheet risk are disclosed in
NOTE L. No derivatives were held by the Association for trading purposes. It is
not practicable to estimate the fair value of Federal Home Loan Bank (FHLB)
stock because it is not marketable. The carrying amount of these investment is
reported in the balance sheets.
NOTE O - ADOPTION OF PLAN OF CONVERSION
On June 11, 1998, the Board of Directors of the Association, subject to
regulatory approval and approval by the members of the Association, unanimously
adopted a Plan of Conversion from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association with the
concurrent formation of a holding company. The Holding Company will acquire 100
percent of the Association's common stock. The conversion is expected to be
accomplished through amendment of the Association's charter and the sale of the
Holding Company's common stock in an amount equal to the pro forma market value
of the Association after giving effect to the conversion. A subscription
offering of the shares of the Holding Company's common stock will be offered to
the Association's depositors, then to an employee stock benefit plan and then to
other members. Any shares of the Holding Company's common stock not sold in the
subscription offering may be offered for sale to the general public.
At the time of the conversion, the Association will establish a liquidation
account in the amount equal to its regulatory capital as of the latest
practicable date before the conversion at which such regulatory capital can be
determined. The liquidation account will be maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Association
after the conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Association may not pay dividends that would reduce
stockholders' equity below the required liquidation account balance.
- --------------------------------------------------------------------------------
F-24
<PAGE>
Notes to financial statements (Cont.)
- --------------------------------------------------------------------------------
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts that are both well capitalized
and given favorable qualitative examination ratings by the OTS.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At June 30, 1998, approximately $29,000 of conversion
related costs have been deferred.
- --------------------------------------------------------------------------------
F-25
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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.
------------------------
Until ___________________ 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.
__________ Shares
[GRAND CENTRAL FINANCIAL CORP.]
(Proposed Holding Company for
Central Federal Savings and Loan Association of Wellsville)
COMMON STOCK
------------------------
PROSPECTUS
------------------------
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
_______________, 1998
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH: Indemnification.
A. Each person who was or is made a party or is threatened to
be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or
was a Director or an Officer of the Corporation or is or was serving at the
request of the Corporation as a Director, Officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a Director, Officer, employee or
agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such
law permitted the corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by Such indemnitee in connection therewith;
provided, however, that, except as provided in Section C hereof with
respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a Director or
Officer (and not in any other capacity in which service was or is rendered
by such indemnitee, including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to
be a Director, Officer, employee or agent and shall inure to the benefit of
the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is
not paid in full by the Corporation within sixty days after a written claim
has been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to receive the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to
<PAGE>
recover an advancement of expenses pursuant to the terms of an undertaking,
the indemnitee shall be entitled to be paid also the expenses of
prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee has
met the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders)
that the indemnitee has not met such applicable standard of conduct, shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall be on
the Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article TENTH shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation, Bylaws, agreement,
vote of stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director Officer, employee or agent of the
Corporation or Subsidiary or Affiliate or another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
F. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of
the Corporation.
ELEVENTH: Limitations of Director's Liability. A Director of this
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a Director,
except for liability: (i) for any breach of the Director's duty of loyalty to
the Corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the Delaware General Corporation Law; or (iv) for any
transaction from which the Director derived an improper personal benefit. If the
Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of Directors, then the
liability of a Director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the conversion are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC filing fee(1)...................................................................................$7,803
OTS filing fee.......................................................................................8,400
NASD filing fee(1)...................................................................................3,195
Stock Market listing fee(1).........................................................................48,750
Printing, postage and mailing......................................................................150,000
Legal fees and expenses (including underwriter's
counsel)......................................................................................200,000
Accounting fees and expenses........................................................................70,500
Appraisers' fees and expenses (including
business plan).................................................................................28,500
Marketing fees and selling commissions.............................................................310,123
Underwriter's expenses...................................................................................0
Conversion agent fees and expenses..................................................................14,000
Transfer agent fees and expenses....................................................................10,000
Certificate printing.................................................................................5,000
Telephone, temporary help and other equipment.......................................................10,000
Blue Sky fees and expenses..........................................................................10,000
Miscellaneous.......................................................................................43,729
TOTAL.............................................................................................$920,000
--------
--------
</TABLE>
- ----------------------
(1) Unless otherwise noted, based upon the registration and issuance of
2,248,250 shares at $10.00 per share.
Item 26. Recent Sales of Unregistered Securities.
None.
<PAGE>
Item 27. Exhibits.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Central Federal Savings and Loan Association
of Wellsville and Charles Webb & Company, a Division of Keefe, Bruyette
and Woods, Inc.*
1.2 Draft Form of Agency Agreement
2.1 Plan of Conversion (including the Stock Charter and Bylaws of Central
Federal Savings and Loan Association of Wellsville)*
3.1 Certificate of Incorporation of Grand Central Financial Corp.*
3.2 Bylaws of Grand Central Financial Corp.*
3.3 Stock Charter and Bylaws of Central Federal Savings and Loan
Association of Wellsville (See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Grand Central Financial Corp.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of Crowe Chizek and Company LLP re: State Tax Matters
10.1 Form of Central Federal Savings and Loan Association of Wellsville
Employee Stock Ownership Plan*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Central Federal Savings and Loan Association of
Wellsville Employment Agreement*
10.4 Form of Grand Central Financial Corp. Employment Agreement*
10.5 Form of Central Federal Savings and Loan Association of Wellsville
Supplemental Executive Retirement Plan*
10.6 Form of Central Federal Savings and Loan Association of Wellsville
Employee Severance Compensation Plan*
23.1 Consent of Robb, Dixon, Francis, Oneson & Company
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc.(P)
- ---------------------
* Previously filed.
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
Item 28. Undertakings.
The small business issuer will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the Village of
Wellsville, State of Ohio, on November 6, 1998.
Grand Central Financial Corp.
By: /s/ William R. Williams
--------------------------
William R. Williams
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William R. Williams President, Chief Executive November 6, 1998
- ------------------------------------ Officer and Director
William R. Williams (principal executive
officer)
/s/ John A. Rife Executive Vice President November 6, 1998
- ------------------------------------ and Treasurer
John A. Rife (principal accounting and
financial officer)
* Director
- ------------------------------------
Gerry W. Grace
* Director
- ------------------------------------
Jeffrey W. Aldrich
* Director
- ------------------------------------
Thomas P. Ash
* Director
- ------------------------------------
Fred C. Jackson
* Director
- ------------------------------------
William F. Porter
* Director
- ------------------------------------
Joseph M. Wells, Jr.
</TABLE>
- ------------------
*Pursuant to Power of Attorney filed on September 23, 1998, as Exhibit 24.1 to
the Registration Statement on Form SB-2 for Grand Central Financial Corp.
<TABLE>
<CAPTION>
<S> <C>
/s/ William R. Williams November 6, 1998
- ---------------------------
William R. William
President, Chief Executive Officer
and Director
</TABLE>
<PAGE>
TABLE OF CONTENTS
List of Exhibits (filed herewith unless otherwise noted)
The exhibits filed as a part of this Registration Statement are as follows:
<TABLE>
<CAPTION>
<S> <C>
1.1 Engagement Letter between Central Federal Savings and Loan Association of
Wellsville and Charles Webb & Company, a Division of Keefe, Bruyette and
Woods, Inc.*
1.2 Draft Form of Agency Agreement
2.1 Plan of Conversion (including the Stock Charter and Bylaws of Central
Federal Savings and Loan Association of Wellsville)*
3.1 Certificate of Incorporation of Grand Central Financial Corp.*
3.2 Bylaws of Grand Central Financial Corp.*
3.3 Stock Charter and Bylaws of Central Federal Savings and Loan Association
of Wellsville (See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Grand Central Financial Corp.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of Crowe Chizek and Company LLP re: State Tax Matters
10.1 Form of Central Federal Savings and Loan Association of Wellsville
Employee Stock Ownership Plan*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Central Federal Savings and Loan Association of Wellsville
Employment Agreement*
10.4 Form of Grand Central Financial Corp. Employment Agreement*
10.5 Form of Central Federal Savings and Loan Association of Wellsville
Supplemental Executive Retirement Plan*
10.6 Form of Central Federal Savings and Loan Association of Wellsville
Employee Severance Compensation Plan*
23.1 Consent of Robb, Dixon, Francis, Oneson & Company
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc.(P)
</TABLE>
- -----------------------
* Previously filed.
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
Up to 2,645,000 Shares of Common Stock
($0.01 Par Value Per Share)
Purchase Price $10.00 Per Share
AGENCY AGREEMENT
November ___, 1998
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
211 Bradenton Drive
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
Grand Central Financial Corp., Wellsville, Ohio ("Company"), and
Central Federal Savings and Loan Association of Wellsville, Wellsville, Ohio
("Association"), a federally chartered mutual savings and loan association with
its deposit accounts insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC"), hereby
confirm their agreement with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc.
("Agent") as follows:
Section 1. The Offering. The Association, in accordance with a plan of
conversion ("Plan"), adopted by its Board of Directors, intends to convert from
a federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association, and issue all of its outstanding
capital stock to the Company. Unless the context requires otherwise, all
references to "Association" herein shall include the Association in its mutual
and in its converted form as a federal stock savings and loan association.
Pursuant to the Plan, the Company intends to offer and sell up to
2,300,000 (subject to adjustment up to 2,645,000) shares of its common stock,
par value $0.01 per share ("Shares" or "Common Stock"), in a subscription
offering ("Subscription Offering") to (i) Eligible Account Holders, (ii) the
Association's ESOP, (iii) Supplemental Eligible Account Holders and (iv) Other
Members, as those terms are defined in the Plan. The Company shall offer any
Shares not subscribed for in the Subscription Offering for sale in a community
offering ("Community Offering" and, when referred to together with the
Subscription Offering, the "Subscription and Community Offering") to certain
members of the general public to whom a copy of the Prospectus (as hereinafter
defined) is delivered, with preference given first, to natural persons who
reside in Columbiana, Mahoning and Jefferson Counties, Ohio. If any Shares are
not subscribed for or purchased in the
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 2
Subscription and Community Offering, the Agent, at the request of the Company
and the Association, shall seek to form a syndicate of selected registered
broker-dealers to assist in the sale of such Shares on a best efforts basis in a
syndicated community offering ("Syndicated Community Offering"). It is
acknowledged that the purchase of the Shares is subject to the purchase
limitations described in the Plan and that the Company and the Association may
reject, in whole or in part, any orders received in the Community Offering or
the Syndicated Community Offering. The Subscription Offering, Community Offering
and Syndicated Community Offering are collectively referred to as the
"Offering." Collectively, these transactions are referred to herein as the
"Conversion."
The Company has filed with the Securities and Exchange Commission
("Commission") a registration statement on Form SB-2 (File No. 333-64089),
including exhibits (as amended or supplemented, the "Registration Statement"),
containing a prospectus relating to the Offering, for the registration of the
Shares under the Securities Act of 1933 ("1933 Act"), and has filed such
amendments and supplements thereto, if any, and such amended prospectuses and
supplemented prospectuses as may have been required to the date hereof. The
prospectus, as amended or supplemented, on file with the Commission at the time
the Registration Statement initially becomes effective is hereinafter called the
"Prospectus," except that if any prospectus is filed by the Company pursuant to
Rule 424(b) or (c) of the rules and regulations of the Commission under the 1933
Act ("1933 Act Regulations") differing from the prospectus on file at the time
the Registration Statement initially becomes effective, the term "Prospectus"
shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and
after the time said prospectus is filed with the Commission.
The Association has filed with the Office of Thrift Supervision ("OTS")
an Application for Approval of Conversion, including exhibits (as amended or
supplemented the "Conversion Application"), including the Prospectus contained
therein, and has filed such amendments or supplements thereto, if any, as may
have been required pursuant to the Home Owners' Loan Act, as amended ("HOLA"),
and 12 C.F.R. Part 563b ("Conversion Regulations"). In addition, the Company has
filed with the OTS an application on Form H-(e)1-S, including exhibits (as
amended or supplemented, the "Holding Company Application"), and has filed such
amendments or supplements thereto, if any, as may have been required to become a
registered savings and loan holding company under the HOLA.
Section 2. Retention of Agent; Compensation and Expenses; Sale and
Delivery of the Shares. Subject to the terms and conditions herein set forth,
the Company and the Association hereby appoint the Agent as their exclusive
financial advisor and marketing agent to utilize its best efforts to solicit
subscriptions for the Shares and to advise and assist the Company and the
Association with respect to the sale of the Shares in the Offering.
On the basis of the representations and warranties and the agreements
herein, but subject to the terms and conditions herein, the Agent accepts such
appointment and agrees to consult with and
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 3
advise the Company and the Association as to the matters set forth in the letter
agreement dated June 11, 1998 ("Letter Agreement"), between the Association and
the Agent. The Agent shall not be required to purchase any Shares or take any
action inconsistent with all applicable laws, regulations, decisions or orders.
In the event of the Syndicated Community Offering, the Agent shall seek to
assemble and manage a selling group of selected registered broker-dealers which
are members of the National Association of Securities Dealers, Inc. ("NASD") to
participate in the solicitation of purchase orders for shares under a selected
dealers' agreement in the form attached hereto as Exhibit A.
The obligations of the Agent pursuant to this Agreement shall terminate
upon the completion, termination or abandonment of the Plan by the Association
or upon termination of the Offering, but in no event later than 45 days after
the completion of the Subscription and Community Offering ("End Date"). All
unpaid fees and expenses due to the Agent shall be payable in next day funds at
the earlier of the Closing Date (as hereinafter defined) or the End Date. In the
event the Offering is extended beyond the End Date, the Company, the Association
and the Agent may agree to renew this Agreement under mutually acceptable terms.
In the event the Company is unable to sell a minimum of 1,700,000
Shares during the Offering (including any permitted extensions thereof) herein
provided, this Agreement shall terminate and the Company shall refund to all
persons who have subscribed for any of the Shares, the full amount of their
subscriptions plus accrued interest as set forth in the Prospectus and none of
the parties to this Agreement shall have any obligation to the other parties
hereunder, except as set forth in this Section 2 and in Sections 8, 9, and 10
hereof.
In the event the Offering is terminated for any reason not attributable
to the action or inaction of the Agent, the Agent shall have earned and be
entitled to be paid the fees and expenses accruing to the date of such
termination pursuant to this Section 2.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the receipt of subscriptions for the minimum
number of Shares permitted to be sold in the Conversion on the basis of the most
recent updated appraisal report and compliance by the Company and the
Association of the conditions set forth in Section 7 hereof to the reasonable
satisfaction of the Agent and its counsel, are satisfied, the Company agrees to
issue, or have issued, the Shares sold in the Offering and deliver certificates
for such Shares within three business days after the Closing Date (as
hereinafter defined) against payment to the Company by any means authorized by
the Plan. The release of Shares against payment therefor shall be made at a
time, date and place mutually acceptable to the Company, the Association and the
Agent. Certificates for Shares shall be delivered directly to the purchasers in
accordance with their directions. The date upon which the Company shall release
or deliver the Shares sold in the Offering, in accordance with the terms herein,
is called the "Closing Date."
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 4
The Agent shall receive the following compensation for its services
hereunder:
(a) A management fee of $25,000, payable in four consecutive
monthly installments, of which $_______ the parties hereto
acknowledge and agree has been paid. Such management fee shall
be deemed earned when due.
(b) A success fee of 1.3% of the aggregate purchase price of the
Shares sold in the Subscription and Community Offering,
excluding Shares subscribed or purchased by the Association's
officers, directors or employees (or their immediate family
members) or by the ESOP or any tax-qualified or stock-based
compensation plans (except Individual Retirement Accounts) or
similar plan created by the Association for some or all of its
directors or employees. The management fee set forth in
subsection (a) shall be applied against the success fee.
(c) For Shares sold in the Syndicated Community Offering by
selected broker-dealers, the Agent shall receive a fee not to
exceed 5.5% of the aggregate purchase price of the Shares sold
by such selected broker-dealers, and the Agent shall pass on
to such selected broker-dealers an amount competitive with
gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per
share in a similar market environment. In the event any fees
are paid pursuant to this subsection (c), such fees shall be
in lieu of, and not in addition to, the fees paid pursuant to
subsections (a) and (b) above. Fees with respect to purchases
affected with the assistance of broker-dealers other than the
Agent shall be transmitted by the Agent to such broker/dealer.
Whether or not the Conversion is completed or the sale of the Shares by
the Company is consummated, the Company and the Association jointly and
severally agree to pay or reimburse the Agent, from time to time upon the
Agent's request, for: (a) all reasonable out-of-pocket expenses incurred by the
Agent including, but are not limited to, travel, communication, lodging and
postage, not to exceed $10,000 (which expenses the Agent shall document) and (b)
the reasonable legal fees and expenses of its counsel not to exceed $30,000.
The Company and the Association shall bear the expenses of the Offering
customarily borne by issuers including, without limitation, OTS, Commission,
"Blue Sky," and NASD filing and registration fees; the fees of the Association's
accountants, attorneys, appraiser, transfer agent and registrar, and other agent
fees and expenses; any stock issue or transfer taxes; printing, mailing and
marketing and syndicate expenses associated with the Conversion.
Full payment of all fees and expenses payable to the Agent, as
described above, shall be made in next day funds on the earlier of the Closing
Date or the End Date.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 5
Section 3. Representations and Warranties of the Company and
Association. The Company and the Association jointly and severally represent and
warrant to the Agent as follows:
(a) The Registration Statement has been declared effective by the
Commission; at the time the Registration Statement became effective, the
Registration Statement, including the Prospectus contained therein, complied as
to form in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations, and the Registration Statement, including the Prospectus
contained therein, and any information regarding the Company or the Association
contained in Sales Information (as such term is defined in Section 8 hereof)
authorized by the Company or the Association for use in connection with the
Offering, did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and at the time any prospectus was filed with the Commission
pursuant to Rule 424(b) or Rule 424(c) of the 1933 Act regulations and as of the
date of this Agreement, the Registration Statement, including the Prospectus
contained therein (including any amendment or supplement thereto), any
information regarding the Company or the Association contained in Sales
Information (as such term is defined in Section 8 hereof) authorized by the
Company or the Association for use in connection with the Offering did not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this Section 3(a) shall not apply to
statements or omissions made in reliance upon and in conformity with written
information furnished to the Company or the Association by the Agent expressly
regarding the Agent for use in the Prospectus under the captions "Market for
Common Stock" and "The Conversion--Marketing, Underwriting and Records
Management Services Arrangements."
(b) The Conversion Application has been approved by the OTS and the
related Prospectus and the proxy statement of the Association relating to the
special meeting of members at which the Plan shall be considered for approval by
the Association's eligible voting members have been authorized for use by the
OTS; at the time of the approval of the Conversion Application, including the
Prospectus contained therein, and as of the date of this Agreement, the
Conversion Application, including the Prospectus, complied as to form in all
material respects with the Conversion Regulations. At the time of the approval
of the Conversion Application, including the Prospectus contained therein, and
as of the date of this Agreement, the Conversion Application, including the
Prospectus contained therein, did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the representations and
warranties in this Section 3(b) shall not apply to statements or omissions made
in reliance upon and in conformity with written information furnished to the
Company or the Association by the Agent expressly regarding the Agent for use in
the Prospectus under the captions "Market for Common Stock" and "The
Conversion--Marketing, Underwriting and Records Management Services
Arrangements."
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 6
(c) The Holding Company Application has been approved by the OTS.
(d) No order has been issued by the OTS, the Commission or any other
governmental agency preventing or suspending the use of the Prospectus and no
action by or before any governmental entity to revoke any approval,
authorization or order of effectiveness related to the Conversion is pending or,
to the best knowledge of the Company and the Association, threatened.
(e) The Plan has been adopted by the Board of Directors of the
Association as required by the Conversion Regulations and has been acknowledged
by the Board of Directors of the Company.
(f) To the best knowledge of the Company and the Association, no person
has sought to obtain review of the final action of the OTS in approving the Plan
or in approving the Conversion Application or the Holding Company Application
pursuant to the HOLA, the Conversion Regulations, state securities laws and
regulations (collectively, the "Blue Sky Laws").
(g) The Association is organized and is validly existing as a federally
chartered savings and loan association in mutual form of organization in good
standing under the laws of the United States, duly authorized to conduct its
business and own its property as described in the Registration Statement and the
Prospectus; the Association has obtained all licenses, permits and other
governmental authorizations required for the conduct of its business except
those that individually or in the aggregate would not materially adversely
affect the financial condition, earnings, capital, assets or properties of the
Company and the Association taken as a whole; all such licenses, permits and
governmental authorizations are in full force and effect and the Association is
complying therewith in all material respects; the Association is duly qualified
as a foreign corporation to transact business in each jurisdiction in which the
failure to be so qualified in one or more of such jurisdictions would have a
material adverse effect on the financial condition, earnings, capital, assets
properties or business of the Association.
(h) The Association does not own any equity securities or any equity
interest in any business enterprise except as described in the Prospectus.
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus; the Company is qualified to do business as a foreign corporation in
each jurisdiction in which the conduct of its business requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on the financial condition, earnings, capital, assets, properties
or the business of the Company; the Company has obtained all licenses, permits
and other governmental authorizations currently required for the conduct of its
business except those that individually or in the aggregate would not materially
adversely affect the financial condition,
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 7
earnings, capital, assets or properties of the Company and the Association taken
as a whole; and all such licenses, permits and governmental authorizations are
in full force and effect, and the Company is complying in all material respects
therewith.
(j) The Association is a member of the Federal Home Loan Bank of
Cincinnati ("FHLB-Cincinnati"); the deposit accounts of the Association are
insured by the FDIC under the SAIF up to applicable legal limits; and no
proceedings for the termination or revocation of such membership or insurance
are pending or, to the best knowledge of the Association, threatened.
(k) The Company and the Association have good and marketable title to
all real property and other assets material to the business of the Company and
the Association and to those properties and assets described in the Registration
Statement and Prospectus as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except as described therein or are not material to
the business of the Company and the Association, taken as a whole; and all of
the leases and subleases material to the business of the Company and the
Association, including those described in the Registration Statement and
Prospectus, are in full force and effect and the Company and the Association are
complying therewith in all material respects.
(l) The Company and the Association have received an opinion of
Muldoon, Murphy & Faucette, Washington, D.C., with respect to the federal income
tax consequences of the Conversion, and an opinion from Crowe Chizek and Company
LLP with respect to the Ohio income tax consequences of the Conversion, as
described in the Registration Statement and Prospectus; and the facts and
representations upon which such opinions are based are true, accurate and
complete, and neither the Company nor the Association has taken any actions
inconsistent therewith.
(m) The Company and the Association have all such power, authority,
authorizations, approvals and orders as may be required to enter into and
perform this Agreement; the consummation of the Conversion, the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated have been duly and validly authorized by all
necessary corporate action on the part of the Company and the Association and
this Agreement has been validly executed and delivered by the Company and the
Association and is the valid, legal and binding Agreement of the Company and
the Association enforceable in accordance with its terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency,
moratorium, reorganization, conservatorship, receivership or other similar
laws relating to or affecting the enforcement of creditors' rights generally
or the rights of creditors of insured financial institutions and their
holding companies, the accounts of whose subsidiaries are insured by the
FDIC, (ii) general equity principles regardless of whether such
enforceability is considered in a proceeding in equity or at law, or (iii)
laws relating to the safety and soundness of insured depository institutions
and their affiliates as set forth in 12 U.S.C. Section 1818(b), and except
to the extent, if any, that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or Section 23A of the Federal Reserve
Act, as amended ("Section 23A").
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 8
(n) The execution, delivery and performance of this Agreement by the
Company and the Association shall not conflict with, or result in a breach of,
any of the terms, provision or conditions of, or constitute a default (or event
which with notice or lapse of time or both would constitute a default) under,
the articles of incorporation or bylaws of the Company or the charter and bylaws
of the Association.
(o) The Company and the Association are not in violation of any
directive from the OTS, FDIC or any other governmental agency to make any change
in the method of conducting their businesses so as to comply in all material
respects with all applicable statutes and regulations and, except as set forth
in the Registration Statement and the Prospectus, there is no suit, proceeding,
charge or action before or by any court, regulatory authority or governmental
agency or body, pending or, to the best knowledge of the Company and the
Association, threatened, which might materially and adversely affect the
Conversion, the performance of this Agreement, the consummation of the
transactions contemplated by the Plan and as described in the Registration
Statement and the Prospectus or which might have a material adverse affect on
the financial condition, earnings, capital, properties, assets or business of
the Company or the Association, taken as a whole.
(p) The financial statements of the Association which are included in
the Registration Statement, the Conversion Application and the Prospectus
present fairly the financial condition, results of operations, retained earnings
and cash flows of the Association at the respective dates thereof and for the
respective periods covered thereby, and comply as to form in all material
respects with the applicable accounting requirements of the Conversion
Regulations, Regulation S-X of the Commission, and generally accepted accounting
principles ("GAAP") consistently applied through the periods involved (except as
noted therein). Such financial statements are consistent with the most recent
financial statements and other reports filed by the Association with the OTS,
except that accounting principles employed in such regulatory filings conform to
the requirements of such authorities and not necessarily to GAAP. The other
financial, statistical and pro forma information and related notes included in
the Prospectus present fairly the information shown therein on a basis
consistent with the audited and unaudited financial statements of the
Association included in the Registration Statement and the Prospectus, and as to
the pro forma adjustments, the adjustments made therein have been properly
applied on the bases described therein.
(q) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as may otherwise be stated
therein: (i) there has not been any material adverse change in the financial
condition, earnings, capital, properties or business of the Company and the
Association, considered as one enterprise, whether or not arising in the
ordinary course of business; (ii) there has not been any material increase in
loans past due 90 days or more or in real estate acquired by foreclosure, by
deed-in-lieu of foreclosure, or deemed in-substance foreclosure, (iii) there has
not been any material decrease in surplus and reserves or total assets of the
Association, (iv) neither the Company nor the Association has issued any
securities or incurred
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 9
any liability or obligation for borrowing other than in the ordinary course of
business; (v) there have not been any transactions entered into by the Company
or the Association, except with respect to those transactions entered into in
the ordinary course of business; (vi) the properties and business of the Company
and the Association conform in all material respects to the descriptions thereof
contained in the Prospectus; and (vii) neither the Company nor the Association
has any material contingent liabilities except as disclosed in the Prospectus.
(r) Neither the Company nor the Association is in violation of its
articles of incorporation or bylaws or charter or bylaws, as applicable, or in
default in the performance or observance of any obligation, agreement, covenant,
or condition contained in any contract, lease, loan agreement, indenture or
other instrument to which it is a party or by which it or any of its property
may be bound, which would result in a material adverse effect on the financial
condition, earnings, capital, assets, properties or business of the Company and
the Association, considered as one enterprise.
(s) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a material default on the part of the
Company or the Association in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of trust, note, bank loan
or credit agreement or any other instrument or agreement to which the Company or
the Association is a party or by which any of them or any of their property is
bound or affected, except such defaults which would not have a material adverse
effect on the financial condition, earnings, capital, assets, properties or
business of the Company and the Association, considered as one enterprise; and
such agreements are in full force and effect and no other party to any such
agreements has instituted or, to the best knowledge of the Company and the
Association, threatened any action or proceeding wherein the Company or the
Association might be alleged to be in default thereunder under circumstances
where such action or proceeding, if determined adversely to the Company or the
Association, would have a material adverse effect on the financial condition,
earnings, capital, assets, properties or business of Company and the
Association, considered as one enterprise.
(t) Notwithstanding subscription rights granted pursuant to the Plan,
no preemptive rights exist with respect to the Shares.
(u) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except for the approvals of the OTS and
the Commission and any necessary qualification, notification, registration or
exemption under the Blue Sky Laws of the various jurisdictions in which the
Shares are to be offered.
(v) Robb, Dixon, Francis, Davis, Oneson & Company, which has certified
the financial statements of the Association contained in the Registration
Statement, Conversion Application, and the Prospectus, are, with respect to the
Company and the Association, independent public
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 10
accountants within the meaning of the Code of Professional Ethics of the
American Institute of Certified Public Accountants, the Conversion Regulations,
and the 1933 Act Regulations.
(w) Keller and Company, Inc., which has prepared the Conversion
Valuation Appraisal Report as of September 18, 1998, as amended or supplemented,
if so amended or supplemented ("Appraisal"), is independent of the Company and
the Association within the meaning of the Conversion Regulations.
(x) Keller and Company, Inc., which has prepared the Conversion
Valuation Appraisal Report as of September 18, 1998, as amended or supplemented,
if so amended or supplemented ("Appraisal"), is independent of the Company and
the Association within the meaning of the Conversion Regulations.
(y) The Company and the Association have timely filed all required
federal, state and local tax returns; and the Company and the Association have
paid all taxes due and payable in respect of such returns, and except where
permitted to be extended, and have made adequate reserves for similar future tax
liabilities and no deficiency has been asserted with respect thereto by any
taxing authority.
(z) The Association complies in all material respects with the
applicable financial recordkeeping and reporting requirements of the Currency
and Foreign Transactions Reporting Act of 1970, as amended, and the regulations
and rules thereunder.
(aa) Neither the Company nor the Association has lent any funds for the
purchase of Shares or has made any other payment of funds prohibited by law, and
no funds have been set aside to be used for any payment prohibited by law.
(bb) Neither the Company nor the Association has: (i) issued any
securities within the last 18 months (except for notes to evidence other bank
loans or other liabilities in the ordinary course of business or as described in
the Prospectus and with respect to the Company, except for shares issued in
connection with the incorporation of the Company); (ii) had any dealings within
the immediate prior 12 months with any NASD member, or any person related to or
associated with such member, other than discussions and meetings relating to the
Offering and purchases and sales of United States government and agency and
other securities in the ordinary course of business; (iii) entered into a
financial or management consulting agreement except as contemplated hereunder
and except for the Letter Agreement; and (iv) engaged any intermediary
other than the Agent in connection with the Offering, and no person is being
compensated in any manner for such service.
(cc) The Company and the Association have not relied upon the Agent or
the Agent's counsel for any legal, tax or accounting advice in connection with
the Conversion.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 11
(dd) All documents delivered by the Association or the Company or their
representatives in connection with the issuance and sale of the Common Stock and
the Agent's exercise of due diligence, were, on the dates on which they were
delivered, accurate and complete in all material respects or were amended in
writing to be accurate and complete in all material respects.
(ee) The records of Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are accurate and complete in all material
respects and the Agent shall have no liability to any person for the accuracy,
reliability and completeness of such records or for any denial or reduction of a
subscription or order to purchase Common Stock, whether as a result of a
properly calculated allocation pursuant to the Plan or otherwise, based upon
such records.
(ff) To the best knowledge of the Company and the Association, the
Company and the Association comply in all material respects with all laws, rules
and regulations relating to environmental protection, and neither the Company
nor the Association has been notified or is otherwise aware that either of them
is potentially liable, or is considered potentially liable, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or any other Federal, state or local environmental laws and
regulations; no action, suit, regulatory investigation or other proceeding is
pending, or to the best knowledge of the Company and the Association, threatened
against the Company or the Association relating to environmental protection, nor
does the Company or the Association have any reason to believe any such
proceedings may be brought against either of them; and to the best knowledge of
the Company and the Association, no disposal, release or discharge of hazardous
or toxic substances, pollutants or contaminants, including petroleum and gas
products, as any of such terms may be defined under federal, state or local law,
has occurred on, in, at or about any facilities or properties owned or leased by
the Company or the Association or in which the Association has a security
interest.
Any certificate signed by an officer of the Company or the Association
pursuant to the conditions of this Agreement and delivered to the Agent or its
counsel that refers to this Agreement shall be deemed to be a representation and
warranty by the Company or the Association to the Agent as to the matters
covered thereby with the same effect as if such representation and warranty were
set forth herein.
Section 4. Representations and Warranties of the Agent. The Agent
represents and warrants to the Company and the Association that:
(a) The Agent is a corporation in good standing under the laws of the
State of New York with full power and authority to provide the services to be
furnished to the Association and the Company hereunder.
(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 12
action on the part of the Agent, and this Agreement has been duly and validly
executed and delivered by the Agent and is the legal, valid and binding
agreement of the Agent, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or other similar laws relating to
or affecting the enforcement of creditors' rights generally, (ii) general equity
principles regardless of whether such enforceability is considered in a
proceeding in equity or at law, or (iii) except to the extent, if any, that the
provisions of Sections 8 and 9 hereof may be unenforceable as against public
policy.
(c) The execution and delivery of this Agreement by the Agent, the
consummation of the transactions contemplated hereby and compliance with the
terms and provision hereof shall not conflict with, or result in a breach of,
any of the terms, provision or conditions of, or constitute a default (or event
which with notice or lapse of time or both would constitute a default) under,
the articles of incorporation of the Agent or any material agreement, indenture
or other instrument to which the Agent is a party or by which it or its property
is bound.
(d) The Agent and its employees, and to the best knowledge of the
Agent, its representatives, who shall perform any of the services hereunder
shall be duly authorized and empowered, and shall have all licenses, approvals
and permits necessary to perform such services; and the Agent is a registered
selling agent in each of the jurisdictions in which the Shares are to be offered
for sale by the Company in reliance upon the Agent as a registered selling agent
as set forth in the blue sky memorandum prepared with respect to the Offering.
(e) No approval of any regulatory, supervisory or other public
authority other than the NASD is required in connection with the Agent's
execution and delivery of this Agreement and the approval of the NASD has been
received.
(f) There is no suit, proceeding, charge, or action before or by any
court, regulatory authority or government agency or body pending or, to the best
knowledge of the Agent, threatened, which might materially and adversely affect
the Agent's performance of this Agreement.
Section 5. Covenants of the Company and the Association. The Company
and the Association hereby jointly and severally covenant with the Agent as
follows:
(a) From the time the Registration Statement, including the Prospectus
contained therein (including any amendment or supplement thereto), became
effective and up to the Closing Date, the Registration Statement, including the
Prospectus contained therein (including any amendment or supplement thereto),
and any information regarding the Company or the Association contained in Sales
Information (as such term is defined in Section 8 hereof) authorized by the
Company or the Association for use in connection with the Offering, shall not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 13
of the circumstances under which they were made, not misleading; provided,
however, that the covenant in this Section 5(a) shall not apply to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Company or the Association by the Agent expressly regarding the
Agent for use in the Prospectus under the captions "Market for Common Stock" and
"The Conversion--Marketing, Underwriting and Records Management Services
Arrangements."
(b) From the time of the approval of the Conversion Application,
including the Prospectus contained therein, and up to the Closing Date, the
Conversion Application, including the Prospectus contained therein, shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that this covenant in this Section 5(b) shall not apply to statements
or omissions made in reliance upon and in conformity with written information
furnished to the Company or the Association by the Agent expressly regarding the
Agent for use in the Prospectus under the captions "Market for Common Stock" and
"The Conversion--Marketing, Underwriting and Records Management Services
Arrangements."
(c) At any time after the date the Registration Statement is declared
effective, the Company shall not file any amendment or supplement to the
Registration Statement without providing the Agent and its counsel an
opportunity to review such amendment or supplement, and shall not file any
amendment or supplement to which the Agent or its counsel shall reasonably
object.
(d) At any time after the Conversion Application is approved by the
OTS, the Association shall not file any amendment or supplement to the
Conversion Application without providing the Agent and its counsel an
opportunity to review such amendment or supplement, and shall not file any
amendment or supplement to which the Agent or its counsel shall reasonably
object.
(e) At any time after the Holding Company Application is approved by
the OTS, the Company shall not file any amendment or supplement to such Holding
Company Application without providing the Agent and its counsel an opportunity
to review such amendment or supplement, and shall not file any amendment or
supplement to which the Agent or its counsel shall reasonably object.
(f) The Company and the Association shall notify the Agent in writing
of any violation of its articles of incorporation and bylaws, in the case of the
Company, and its charter and bylaws, in the case of the Association, at any time
after the date hereof and prior to the Closing Date. Unless waived in writing by
the Agent, which waiver shall not be unreasonably withheld, the Company shall
not be in violation of its articles of incorporation or bylaws, and the
Association shall not be in violation of its charter or bylaws, at any time
after the date hereof and prior to the Closing Date.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 14
(g) The Company and the Association shall use their best efforts to
cause any post-effective amendment to the Registration Statement to be declared
effective by the Commission and any post-approval amendment to the Conversion
Application to be approved by the OTS, and shall immediately notify the Agent
upon receipt of any information concerning any of the following events: (i) when
any post-effective amendment to the Registration Statement has become effective;
(ii) when any post-approval amendment to the Conversion Application has been
approved; (iii) when any post-approval amendment to the Holding Company
Application has been approved; (iv) when any comments from the Commission, the
OTS, or any other governmental entity are issued with respect to the
Registration Statement, Conversion Application, Holding Company Application, or
the transactions contemplated by this Agreement; (v) when any request is made by
the Commission, the OTS or any other governmental entity for any amendment or
supplement to the Registration Statement, the Conversion Application or the
Holding Company Application, or for any other additional information; (vi) when
the Commission, the OTS or any other governmental entity issues any order or
takes or threatens any action to suspend the Offering, the effectiveness of the
Registration Statement, or the use of the Prospectus or any other filing of the
Company or the Association under the Conversion Regulations, or other applicable
law; (vii) the issuance by the Commission, the OTS or any other governmental
authority of any stop order suspending the effectiveness of the Registration
Statement or the approval of the Conversion Application or Holding Company
Application, or of the initiation or threat of initiation of any proceedings for
any such purpose; or (viii) the occurrence of any event mentioned in paragraph
(m) below; and the Company and the Association will make every reasonable effort
to prevent the issuance by the Commission, the OTS or any state authority of any
order referred to in (vi) and (vii) above, and if any such order shall at any
time be issued, to obtain the lifting thereof at the earliest possible time.
(h) As of the Closing Date, the Association shall have all approvals
and authority to issue and sell the capital stock of the Association to the
Company and the Company shall have such approvals and orders to issue and sell
the Shares as provided for herein and as described in the Prospectus.
(i) The Company and the Association shall deliver to the Agent and to
its counsel two conformed copies of the Registration Statement, the Conversion
Application and the Holding Company Application, as originally filed and of each
amendment or supplement thereto. The Company and the Association shall also
deliver such additional copies of the foregoing documents to counsel to the
Agent as may be required for any NASD filings.
(j) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company shall be within the range set forth in
the Prospectus under the caption "Capitalization," and, except for shares issued
in connection with the incorporation of the Company which shall be canceled upon
consummation of the Conversion, no shares of Common Stock shall be issued and
outstanding prior to the Closing Date; the Shares shall have been duly and
validly authorized for issuance and, when issued and delivered by the Company
pursuant to the Plan against
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 15
payment of the consideration calculated as set forth in the Plan and in the
Prospectus, shall be duly and validly issued, fully paid and non-assessable; the
terms and provisions of the Shares shall conform to the description thereof
contained in the Registration Statement and the Prospectus; and upon the
issuance of the Shares, good title to the Shares shall be transferred from the
Company to the purchasers thereof against payment therefor, subject to such
claims as may be asserted against the purchasers thereof by third-party
claimants.
(k) The Company and the Association shall furnish to the Agent, from
time to time during the period when the Prospectus is required to be delivered
under the 1933 Act or the Securities Exchange Act of 1934 ("1934 Act"), such
number of copies of such Prospectus as the Agent may reasonably request for the
purposes contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or
the rules and regulations promulgated under the 1934 Act ("1934 Act
Regulations"); and the Company and the Association authorize the Agent to use
the Prospectus in any lawful manner contemplated by the Plan in connection with
the sale of the Shares.
(l) The Company and the Association shall comply with any and all
terms, conditions, requirements and provisions with respect to the Conversion
and the transactions contemplated thereby imposed by the Commission and the OTS,
to be complied with subsequent to the Closing Date; and when the Prospectus is
required to be delivered, the Company and the Association shall comply, at their
own expense, with all requirements imposed upon them by the Commission and the
OTS, including, without limitation, Rule 10b-5 under the 1934 Act, in each case
as from time to time in force, so far as necessary to permit the continuance of
sales or dealing in shares of Common Stock during such period in accordance with
the provisions hereof and the Prospectus.
(m) If, at any time during the period when the Prospectus is
required to be delivered, any event relating to or affecting the Company or
the Association shall occur, as a result of which it is necessary or
appropriate, in the opinion of counsel for the Company and the Association or
in the opinion of the Agent' counsel, to amend or supplement the Registration
Statement or Prospectus in order to make the Registration Statement or
Prospectus not misleading in light of the circumstances existing at the time
the Prospectus is delivered, the Company and the Association shall, at their
own expense, prepare and file with the Commission and the OTS and furnish to
the Agent a reasonable number of copies of an amendment or amendments of, or
a supplement or supplements to, the Registration Statement or Prospectus (in
form and substance satisfactory to the Agent and its counsel after a
reasonable time for review) which shall amend or supplement the Registration
Statement or Prospectus, so that as amended or supplemented the Registration
Statement and the Prospectus shall not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading.
(n) The Company and the Association shall each timely furnish to the
Agent such information with respect to them as the Agent may from time to time
reasonably request.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 16
(o) The Company shall take all necessary action required to register
the Shares for offering and sale by the Company or to exempt such Shares from
registration and to exempt the Company as a broker-dealer and its officers,
directors and employees as broker-dealers or Agent under the Blue Sky Laws of
such jurisdictions in which the Agent and the Company and the Association may
reasonably agree upon; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify to do
business in any jurisdiction in which it is not so qualified; and in each
jurisdiction where any of the Shares shall have been qualified or registered the
Company shall prepare and file, at its own expense, such statements and reports
as may be required by the laws of such jurisdiction.
(p) The liquidation account for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders shall be duly established and
maintained by the Association in accordance with the Conversion Regulations.
(q) The Company and the Association shall not sell or issue, contract
to sell or otherwise dispose of, for a period of 90 days after the Closing Date,
without the prior written consent of the Agent, any shares of Common Stock other
than in connection with any plan or arrangement described in the Prospectus.
(r) The Common Stock shall be the subject of an effective registration
statement under Section 12(g) of the 1934 Act as of the Closing Date and the
Company shall maintain the effectiveness of such registration for not less than
three years.
(s) During the period during which the Common Stock is registered under
the 1934 Act or for three years from the Closing Date, whichever period is
greater, the Company shall furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report in accordance with Rule
14a-3(b) of the 1934 Act Regulations.
(t) During the period of three years from the Closing Date, the Company
shall furnish to the Agent: (i) as soon as practicable after such information is
publicly available, a copy of each report of the Company furnished to or filed
with the Commission under the 1934 Act or any national securities exchange or
system on which any class of securities of the Company is listed or quoted
(including, but not limited to, reports on Forms 10-K(SB), 10-Q(SB) and 8-K and
all proxy statements and annual reports to stockholders), (ii) if requested, a
copy of each other non-confidential report of the Company mailed to its
stockholders or filed with the Commission, the OTS or any other supervisory or
regulatory authority or any national securities exchange or system on which any
class of securities of the Company is listed or quoted, each press release and
material news items and additional documents and information with respect to the
Company or the Association as the Agent may reasonably request; and (iii) from
time to time, such other non-confidential information concerning the Company or
the Association as the Agent may reasonably request.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 17
(u) The Company and the Association shall use the net proceeds from the
sale of the Shares in the manner set forth in the Prospectus under the caption
"Use of Proceeds."
(v) The Company shall not distribute any prospectus (as defined in
Section 2(10) of the 1933 Act) other than the Prospectus and the Sales
Information (as defined in Section 8 hereof) in connection with the offer and
sale of the Shares without first notifying the Agent.
(w) The Company shall use its best efforts to (i) encourage and assist
two market makers to establish and maintain a market for the Shares and (ii)
list the Shares on a national securities exchange or on The Nasdaq Stock Market
effective on or prior to the Closing Date.
(x) In accordance with the Plan and as described in the Prospectus, the
Association shall deposit all funds received from subscribers in an interest
bearing account until the Closing Date and the satisfaction of all conditions
precedent to the release of the Shares, or until refunds of such funds have been
made to the persons entitled thereto or withdrawal authorizations canceled.
(y) The Company shall register as a savings and loan holding company
under the HOLA within 90 days of the Closing Date.
(z) The Company and the Association shall take such actions and furnish
such information as are reasonably requested by the Agent in order for the Agent
to ensure compliance with the NASD's "Interpretation Relating to Free Riding and
Withholding."
(aa) The Association shall not amend the Plan of Conversion in any
manner that, in the reasonable opinion of the Agent, would materially and
adversely affect the sale of the Shares or the terms of this Agreement, without
first notifying and receiving the consent of the Agent, which consent shall not
be unreasonably withheld.
(bb) From the date of this Agreement up to the Closing Date, the
records of Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members shall be accurate, reliable and complete in all material respects;
and the Agent, who shall assist the Company and the Association in their
allocation of the Shares in the event of an oversubscription, shall have no
liability to any person for the accuracy, reliability and completeness of such
records or for any denial or reduction of a subscription or order to purchase
Common Stock, whether as a result of a properly calculated allocation pursuant
to the Plan or otherwise, based upon such records.
(cc) Prior to the Closing Date, the Plan shall have been approved by
the eligible voting members of the Association in accordance with the Conversion
Regulations and the provisions of the Association's mutual charter and bylaws.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 18
(dd) The Company and the Association shall conduct the Conversion in
accordance with the Plan, all applicable laws and regulations and in the manner
described in the Prospectus.
(ee) The Company and the Association shall comply with the provisions
of Rule 158 of the 1933 Act Regulations.
(ff) The Company shall file with the Commission the information
required by Rule 463 of the 1933 Act Regulations.
(gg) The Company and the Association shall use all reasonable efforts
to comply with, or cause to be complied with, the conditions precedent to the
several obligations of the Agent specified in Section 7 hereof.
(hh) Until and including the Closing Date, the Company and the
Association shall conduct their businesses in material compliance with all
applicable federal and state laws, rules, regulations, decisions, directives and
orders, including all decisions, directives and orders of the Commission, the
OTS and the FDIC.
(ii) Upon completion of the sale by the Company of the Shares
contemplated by the Prospectus, (i) the Association shall have been converted
pursuant to the Plan to a federally chartered stock savings and loan
association, (ii) all of the authorized and outstanding capital stock of the
Association shall be owned by the Company, (iii) the Company shall have no
direct subsidiaries other than the Association, and (iv) the Conversion shall
have been effected in accordance with all applicable statutes, regulations,
decisions and orders; and all terms, conditions, requirements and provisions
with respect to the Conversion (except those that are conditions subsequent)
imposed by the Commission, the OTS or any other governmental agency, if any,
shall have been complied with by the Company and the Association in all material
respects or appropriate waivers shall have been obtained and all notice and
waiting periods shall have been satisfied, waived or elapsed.
(jj) The consummation of the transactions herein contemplated shall not
conflict with or constitute a breach of, or default under, the charter and
bylaws of the Association in capital stock form.
Section 6. Covenants of the Agent. The Agent hereby covenants with the
Company and the Association as follows:
(a) During the Offering, the Agent shall comply, in all material
respects with all requirements imposed upon it by the OTS and, to the extent
applicable, by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934
Act Regulations, and the Agent shall remain a registered selling agent in all
such jurisdictions in which the Company is so relying for the sale of Shares as
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 19
set forth in the blue sky memorandum with respect to the Offering until the
Conversion is consummated or terminated.
(b) The Agent shall distribute the Prospectus in connection with the
sales of the Common Stock in accordance with Conversion Regulations, the 1933
Act and the 1933 Act Regulations.
Section 7. Conditions to the Agent's Obligations. The Agent's
obligations hereunder are subject, to the extent not waived in writing by the
Agent, to the condition that all representations and warranties of the Company
and the Association herein are, at and as of the commencement of the Offering
and at and as of the Closing Date, true and correct in all material respects,
the condition that the Company and the Association shall have performed all of
their obligations hereunder to be performed on or before such dates, and to the
following further conditions:
(a) At the Closing Date, the Company and the Association shall have
conducted the Conversion in all material respects accordance with the Plan, the
Conversion Regulations, and all other applicable laws, regulations, decisions
and orders, including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon them by the OTS, the FDIC, the
Commission and any state securities agency.
(b) The Registration Statement shall have been declared effective by
the Commission, the Conversion Application approved by the OTS, and the Holding
Company Application approved by the OTS not later than 5:30 p.m. on the date of
this Agreement, or with the Agent's consent at a later time and date; and at the
Closing Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefore
initiated or threatened by the Commission, or any state authority and no order
or other action suspending the authorization of the Prospectus or the
consummation of the Conversion shall have been issued or proceedings therefore
initiated or, to the best of the Company's and the Association's knowledge,
threatened by the Commission, the OTS or any other federal or state authority.
(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing Date and
addressed to the Agent for their benefit, of Muldoon, Murphy &
Faucette, Washington, D.C., counsel for the Company and the
Association, in form and substance to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has full corporate power and authority to own its
properties and to conduct its business as described in the Registration
Statement and Prospectus and to enter into and perform its obligations
under this Agreement.
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Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 20
(iii) The Company is qualified to do business as a foreign corporation
in the State of Ohio and in each other jurisdiction in which such
qualification is required, except where the failure to so qualify would
not have a material adverse effect upon the financial condition,
results of operations or business of the Company and the Savings Bank,
taken as a whole.
(iv) Upon consummation of the Conversion the authorized, issued and
outstanding capital stock of the Company will be within the range as
set forth in the Prospectus under "Capitalization," and no shares of
Common Stock have been issued and will remain outstanding prior to the
Closing Date.
(v) The Shares have been duly and validly authorized for issuance and
sale and, when issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth in the
Plan, will be duly and validly issued and fully paid and
non-assessable.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights arising by operation of law or, to the best of
such counsel's knowledge and information, otherwise.
(vii) The Association has been at all times since the date hereof and
prior to the Closing Date organized, and is validly existing, under the
laws of the United States of America as a federally chartered savings
and loan association of mutual form, and, at the Closing Date , has
become duly organized, validly existing and in good standing under the
laws of the United States of America as a federally chartered savings
and loan association of stock form, in both instances with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement
and the Prospectus; and the Association is qualified to do business as
a foreign corporation in each jurisdiction in which such qualification
is required, except where the failure to so qualify would not have a
material adverse effect upon the financial condition, results of
operations or business of the Company and the Association , taken as a
whole.
(viii) The Association is a member of the FHLB - Cincinnati and the
deposit accounts of the Association are insured by the FDIC up to the
applicable limits.
(ix) Upon consummation of the Conversion, all of the issued and
outstanding capital stock of the Association will be duly authorized
and validly issued and fully paid and nonassessable, and all such
capital stock will be owned of record by the Company free and clear of
any security interest, mortgage, pledge, lien, encumbrance or legal or
equitable claim.
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Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 21
(x) The OTS has approved the Holding Company Application and the
Conversion Application; such approvals remain in full force and effect
and no action is pending or, to the best of such counsel's knowledge,
threatened respecting the Holding Company Application or the Conversion
Application or the acquisition by the Company of all of the Savings
Bank's issued and outstanding capital stock; the Holding Company
Application and the Conversion Application comply as to form in all
material respects with the Conversion Regulations and all other
applicable requirements of the OTS, and, to best of such counsel's
knowledge, include all documents required to be filed as exhibits
thereto, excluding the Prospectus and any related marketing materials
filed as a part of the Holding Company Application or the Conversion
Application as to which no opinion need be given; the Company is duly
authorized to become a savings and loan holding company and is duly
authorized to own all of the issued and outstanding capital stock of
the Association to be issued pursuant to the Plan.
(xi) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, (A) have been duly and validly
authorized by all necessary action on the part of each of the Company
and the Association, and this Agreement constitutes the legal, valid
and binding agreement of each of the Company and the Association,
enforceable in accordance with its terms, except as rights to indemnity
and contribution hereunder may be limited under applicable law (it
being understood that such counsel may avail itself of customary
exceptions concerning the effect of bankruptcy, insolvency or similar
laws and the availability of equitable remedies), (B) to the best of
such counsel's knowledge, will not conflict with or constitute a breach
of, or default under, and no event has occurred which, with notice or
lapse of time or both, would constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or the Association pursuant to any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company or the Association is a party or by
which any of them may be bound, or to which any of the property or
assets of the Company or the Association is subject that, individually
or in the aggregate, would have a material adverse effect on the
financial condition, results of operations or business of the Company
and the Association, taken as a whole, and (C) will not result in any
violation of the provisions of the articles or certificate of
incorporation, charter, as the case may be, or bylaws of the Company or
the Association.
(xii) The Prospectus has been duly authorized by the OTS for final use
pursuant to the Conversion Regulations and no action has been taken, or
is pending or, to the best of such counsel's knowledge, threatened, by
the OTS to revoke such authorization.
(xiii) The Registration Statement has been declared effective under the
1933 Act and no stop order suspending the effectiveness of the
Registration Statement has been issued under
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Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 22
the 1933 Act or proceedings therefor that require notice initiated or,
to the best of such counsel's knowledge, threatened by the Commission.
(xiv) No further approval, authorization, consent or other order of any
public board or body is required in connection with the execution and
delivery of this Agreement, the issuance of the Shares and the
consummation of the Conversion, except as may be required under the
securities or Blue Sky laws of various jurisdictions as to which no
opinion need be rendered.
(xv) At the time the Registration Statement became effective, the
Registration Statement (other than the financial statements, appraisal
and statistical data included therein, as to which no opinion need be
rendered) complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
(xvi) The Common Stock conforms to the description thereof contained in
the Prospectus, and the form of certificate used to evidence the Common
Stock is in due and proper form and complies with all applicable
statutory and regulatory requirements.
(xvii) To the best of such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against or affecting the
Company or the Association that are required, individually or in the
aggregate, to be disclosed in the Registration Statement and
Prospectus, other than those disclosed therein, and all pending legal
or governmental proceedings to which the Company or the Association is
a party or to which any of their property is subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, are, considered in the
aggregate, not material.
(xviii) The information in the Prospectus describing the liquidation
account under the captions "The Conversion - Effects of Conversion -
Effect on Liquidation Rights," and the information under "Risk Factors
- Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights," "Regulation," "The Conversion," "Restrictions on
Acquisition of the Company and the Association," "Description of
Capital Stock of the Company" and "Description of Capital Stock of the
Association" to the extent that it constitutes matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, is complete in all material respects.
(xix) To the best of such counsel's knowledge, there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described
or referred to therein or filed as exhibits thereto.
(xx) The Plan has been duly authorized by the Boards of Directors of
the Company and the Association; the Association's charter has been
amended, effective upon consummation
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 23
of the Conversion and the filing of such amended charter with the OTS,
to authorize the issuance of permanent capital stock; to the best of
such counsel's knowledge, the Company and the Association have
conducted the Conversion in all material respects in accordance with
applicable requirements of the Plan, the Conversion Regulations, and
all other applicable regulations, decisions and orders thereunder,
including all material applicable terms, conditions, requirements and
conditions precedent to the Conversion imposed upon the Company or the
Association by the OTS and no order, to the best of such counsel's
knowledge, has been issued by the OTS to suspend the Offerings and, no
action for such purpose has been instituted or, to the best of such
counsel's knowledge threatened by the OTS; and, to the best of such
counsel's knowledge, no person has sought to obtain review of the final
action of the OTS in approving the Plan.
(xxi) To the best of such counsel's knowledge and information, each of
the Company and the Association have obtained all licenses, permits and
other governmental approvals and authorizations currently required for
the conduct of their respective businesses as described in the
Registration Statement and Prospectus, except for such licenses,
permits, approvals or authorizations the failure of which to have would
not result in a material adverse change in the financial condition,
results of operations or the business of the Company and the
Association, taken as a whole, and all such licenses, permits and other
governmental authorizations are in full force and effect, and each of
the Company and the Association is in all material respects complying
therewith.
(xxii) Neither the Company nor the Association is in violation of its
certificate or articles of incorporation or charter, as the case may
be, upon consummation of the Conversion nor, to the best of such
counsel's knowledge, in default (nor has any event occurred which, with
notice or lapse of time or both, would constitute a default) in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or the
Association is a party or by which the Company, the Association or the
Subsidiary or any of their respective property may be bound in any
respect that would have a material adverse effect upon the financial
condition, results of operations or business of the Company and the
Association, taken as a whole.
In giving such opinion, such counsel may rely as to all matters of fact
on certificates of officers or directors of the Company and the Association and
certificates of public officials. All references "to such counsel's knowledge"
in such opinion shall refer to the actual and conscious awareness of facts or
other information of the individual attorneys who have been actively involved in
the transactions contemplated by this Agreement or the preparation of such
opinion . For purposes of such opinion, no proceedings shall be deemed to be
pending, no order or stop order shall be deemed to be issued, and no action
shall be deemed to be instituted unless, in each case, a director or executive
officer of the Company or the Association, or their counsel, shall have received
a copy
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 24
of such proceedings, order, stop order or action. Such counsel may assume that
any agreement is the valid and binding obligation of any parties to such
agreement other than the Company or the Association.
In addition, such counsel shall provide a letter stating that during
the preparation of the Registration Statement, Conversion Application and the
Prospectus, such counsel participated in conferences with certain officers and
other representatives of the Association and the Company, representatives of the
Agent, counsel to the Agent, representatives of the independent public
accountants for the Association and the Company at which the contents of the
Registration Statement, the Conversion Application and the Prospectus and
related matters were discussed and, although they are not passing upon and do
not assume the responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement, the Conversion Application
and Prospectus, on the basis of the foregoing (relying as to factual matters on
certificates of officers and other factual representations by the Association
and the Company), nothing has come to such counsel's attention that caused them
to believe that the Registration Statement at the time it was declared effective
by the SEC, or the Prospectus as of its date and as of the Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that such counsel shall express
no comment or opinion with respect to the financial statements, schedules and
other financial information and statistical and stock valuation data included,
or statistical methodology employed, in the Registration Statement, Conversion
Application and Prospectus).
(2) The favorable opinion, dated as of the Closing Date, of
Breyer & Aguggia LLP, Washington, D.C., counsel to the Agent, with
respect to such matters as the Agent may reasonably require. Such
opinion may rely, as to matters of fact, upon certificates of officers
and directors of the Company and the Association delivered pursuant
hereto or as such counsel shall reasonably request.
(d) At the Closing Date, the Agent shall receive a certificate of the
Chief Executive Officer and the Chief Financial Officer of the Company and a
certificate of the Chief Executive Officer and the Chief Financial Officer of
the Association, both dated as of the Closing Date, that state that: (i) they
have reviewed the Prospectus and, at the time the Prospectus became authorized
for final use, the Prospectus did not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; (ii) since the respective dates as of which information is given in
the Registration Statement and the Prospectus and as of the Closing Date, no
material adverse change in the financial condition or in the earnings, capital,
properties or business of the Company and the Association, considered as one
enterprise, has occurred and no other event has occurred, which should have been
set forth in an amendment or supplement to the Prospectus which has not been so
set forth, and the conditions set forth in this Section 7 have been satisfied;
(iii) the
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 25
representations and warranties in Section 3 are true and correct with the same
force and effect as though expressly made at and as of the Closing Date; (iv)
the Company and the Association have complied with all agreements and satisfied
all conditions on their part to be performed or satisfied at or prior to the
Closing Date and shall comply in all material respects with all obligations to
be satisfied by them after the Closing Date; (v) no stop order suspending the
effectiveness of the Registration Statement has been initiated or, to the best
knowledge of the Company or the Association, threatened by the Commission or any
state authority; (vi) no order suspending the Offering, the Conversion, or the
effectiveness of the Prospectus has been issued or is pending or, to the best
knowledge of the Company or the Association, threatened by the OTS, the
Commission, or any other authority; and (vii) to the best knowledge of the
Company or the Association, no person has sought to obtain review of the final
action of the OTS approving the Plan.
(e) Prior to and at the Closing Date: (i) in the reasonable opinion of
the Agent, there shall have been no material adverse change in the financial
condition, or in the earnings or business of the Company and the Association,
considered as one enterprise, from that as of the latest dates as of which such
condition is set forth in the Prospectus other than transactions referred to or
contemplated therein; (ii) the Company or the Association shall not have
received any directive from the OTS or the FDIC to make any material change in
the method of conducting their business with which it has not complied (which
directive, if any, shall have been disclosed to the Agent) or which materially
and adversely would affect the business, operations or financial condition or
income of the Company and the Association, considered as one enterprise; (iii)
the Company and the Association shall not have been in default (nor shall an
event have occurred which, with notice or lapse of time or both, would
constitute a default) under any provision of any agreement or instrument
relating to any outstanding indebtedness; (iv) no action, suit or proceedings,
at law or in equity or before or by any federal or state commission, board or
other administrative agency, shall be pending or, to the best knowledge of the
Company and the Association, threatened against the Company or the Association
or affecting any of their properties wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business operations, financial
condition or income of the Company and the Association, considered as one
enterprise; and (v) where required, the Shares have been qualified or registered
for offering and sale under the Blue Sky Laws of the jurisdictions in which the
Shares have been offered for sale.
(f) Concurrently with the execution of this Agreement, the Agent shall
receive a letter from Crowe Chizek and Company LLP, dated the date hereof and
addressed to the Agent: (i) confirming that Crowe Chizek and Company LLP are
independent public accountants within the meaning of the 1933 Act, the 1933 Act
Regulations, 12 CFR Section 571.2(c)(3) and the Code of Professional Ethics of
the American Institute of Certified Public Accountants, and stating in effect
that based on their reading of the financial statements of the Association as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995 audited by Robb, Dixon, Francis, Davis, Oneson & Company and included in
the Registration Statement and the Prospectus, such financial statements and the
related notes comply as to form in all material respects with the
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 26
applicable accounting requirements of the 1933 Act, the 1933 Act Regulations,
the Conversion Regulations, and GAAP applied consistently; (ii) stating in
effect that, on the basis of certain agreed upon procedures (but not an audit
examination in accordance with generally accepted auditing standards) consisting
of a reading of the latest available unaudited interim financial statements of
the Association prepared by the Association, a reading of the minutes of the
meetings of the Boards of Directors of the Association and the Company and the
members of the Association, and consultations with officers of the Association
responsible for financial and accounting matters, nothing came to its attention
which caused it to believe that: (A) the unaudited financial statements of the
Association included in the Prospectus are not in conformity with GAAP applied
on a basis substantially consistent with that of the audited financial
statements included in the Prospectus; and (B) during the period from the date
of the latest audited financial statements included in the Prospectus to a
specified date not more than three business days prior to the date hereof, there
was any increase in borrowings or in non-performing assets by the Company or the
Association; and (C) except as otherwise discussed in the Prospectus, there was
any decrease in retained earnings of the Association at the date of such letter
as compared with amounts shown in the latest audited statement of condition
included in the Prospectus or there was any decrease in net income or net
interest income of the Association for the number of full months commencing
immediately after the period covered by the latest audited income statement
included in the Prospectus and ended on the latest month end prior to the date
of the Prospectus or in such letter as compared to the corresponding period in
the preceding year (included in the Recent Developments Section of the
Prospectus); and (iii) stating that, in addition to the performance of the
procedures referred to in clause (ii) of this subsection (f), it has compared
with the general accounting records of the Company and/or the Association, as
applicable, which are subject to the internal controls of the Company's and/or
the Association's, as applicable, accounting system and other data prepared by
the Company and/or the Association, as applicable, directly from such accounting
records, to the extent specified in such letter, such amounts and/or percentages
set forth in the Prospectus as the Agent may reasonably request, and they have
found such amounts and percentages to be in agreement therewith.
(g) At the Closing Date, the Agent shall receive a letter from Crowe
Chizek & Company LLP, dated the Closing Date and addressed to the Agent,
confirming the statements made by them in the letter delivered by them pursuant
to subsection (f) of this Section 10, the "specified date" referred to in clause
(ii) of subsection (f) thereof to be a date specified in such letter, which
shall not be more than three business days prior to the Closing Date.
(h) At the Closing Date, the Agent shall receive a letter from Keller &
Company, Inc., Inc., dated the Closing Date and addressed to the Agent, (i)
confirming that said firm is independent of the Company and the Association and
is experienced and expert in the area of corporate appraisals within the meaning
of the Conversion Regulations, (ii) stating in effect that the Appraisal
prepared by such firm complies in all material respects with the applicable
requirements of the Conversion Regulations, and (iii) further stating that its
opinion of the aggregate pro forma market value of the Company and the
Association expressed in the appraisal as most recently updated, remains in
effect.
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Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 27
(i) The Company and the Association shall not have sustained since the
date of the latest audited financial statements included in the Prospectus any
material loss or interference with their businesses from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Registration Statement and Prospectus.
(j) At or prior to the Closing Date, the Agent shall receive: (i) a
copy of the letters from the OTS approving the Conversion Application and the
Holding Company Application and authorizing the use of the Prospectus; (ii) a
copy of the order from the Commission declaring the Registration Statement
effective; (iii) a certificate from the OTS evidencing the existence of the
Association; (iv) a certificate of good standing from the State of Delaware
evidencing the good standing of the Company; (v) a certificate from the FDIC
evidencing the Association's insurance of accounts; (vi) a certificate of the
FHLB-Cincinnati evidencing the Association's membership therein, and (vii) any
other documents that the Agent shall reasonably request.
(k) As soon as available after the Closing Date, the Agent shall
receive a copy of the Association's federal stock charter as executed by the
OTS.
(l) At or prior to the Closing Date, there shall not have occurred
any of the following: (i) a suspension or limitation in trading in securities
generally on the New York Stock Exchange or in the over-the-counter market,
or quotations halted generally on The Nasdaq Stock Market, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required by either of such exchanges or The Nasdaq Stock
Market or by order of the Commission or any other governmental authority;
(ii) a general moratorium on the operations of commercial banks, Ohio or
federal savings and loan associations or a general moratorium on the
withdrawal of deposits from commercial banks, Ohio or federal savings and
loan associations declared by federal or state authorities; (iii) the
engagement by the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities in the
effect of any of the above in the Agent' reasonable judgment, makes it
impracticable or inadvisable to proceed with the Offering or the delivery of
the Shares on the terms and in the manner contemplated in the Registration
Statement and Prospectus.
Section 8. Indemnification.
(a) The Company and the Association jointly and severally agree to
indemnify and hold harmless the Agent, its officers, directors, agents, servants
and employees and each person, if any, who controls the Agent within the meaning
of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and
all loss, liability, claim, damage or expense whatsoever (including but not
limited to settlement expenses), joint or several, that the Agent or any of them
may suffer or to which the Agent and any such persons may become subject under
all applicable federal or state laws or
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Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 28
otherwise, and to promptly reimburse the Agent and any such persons upon written
demand for any expenses (including reasonable fees and disbursements of counsel)
incurred by the Agent or any of them in connection with investigating, preparing
to defend or defending any actions, proceedings or claims (whether commenced or
threatened) to the extent such losses, claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment or supplement thereto), Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any amendment or supplement thereto),
the Holding Company Application (or any amendment or supplement thereto), or any
blue sky application or other instrument or document executed by the Company or
the Association or based upon written information supplied by the Company or the
Association filed in any state or jurisdiction to register or qualify any or all
of the Shares or to claim an exemption therefrom, or provided to any state or
jurisdiction to exempt the Company as a broker-dealer or its officers, directors
and employees as broker-dealers or agents, under the securities laws thereof
(collectively, the "Blue Sky Application"), or any application or other
document, advertisement, oral statement or communication ("Sales Information")
prepared, made or executed by or on behalf of the Company or the Association
based upon written or oral information furnished by or on behalf of the Company
or the Association, whether or not filed in any jurisdiction, in order to
qualify or register the Shares or to claim an exemption therefrom under the
securities laws thereof; (ii) arise out of or based upon the omission or alleged
omission to state in any of the foregoing documents or information, a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; or
(iii) arise from any theory of liability whatsoever relating to or arising from
or based upon the Registration Statement (or any amendment or supplement
thereto), Prospectus (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto), the Holding Company
Application (or any amendment or supplement thereto), any Blue Sky Application
or Sales Information or other documentation distributed in connection with the
Conversion, or (iv) arise out of or based upon the Conversion or the Agent's
engagement hereunder; provided, however, that no indemnification is required
under this paragraph (a) to the extent such losses, claims, damages, liabilities
or actions arise out of or are based upon any untrue material statement or
alleged untrue material statements in, or material omission or alleged material
omission from, the Registration Statement (or any amendment or supplement
thereto), Prospectus (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto), the Holding Company
Application (or any amendment or supplement thereto), any Blue Sky Application
or Sales Information made in reliance upon and in conformity with information
furnished in writing to the Company or the Association by the Agent regarding
the Agent; and provided further, however, that the Company and the Association
shall not be liable under the foregoing indemnification provision to the extent
that any loss, claim, damage, liability or action is found in a final judgment
by a court of competent jurisdiction to have resulted from the Agent's bad faith
or gross negligence.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 29
(b) The Agent agrees to indemnify and hold harmless the Company and the
Association, their directors and officers and each person, if any, who controls
the Company or the Association within the meaning of Section 15 of the 1933 Act
or Section 20(a) of the 1934 Act against any and all loss, liability, claim,
damage or expense whatsoever (including but not limited to settlement expenses),
joint or several, which they, or any of them, may suffer or to which they, or
any of them may become subject under all applicable federal and state laws or
otherwise, and to promptly reimburse the Company, the Association, and any such
persons upon written demand for any expenses (including reasonable fees and
disbursements of counsel) incurred by them, or any of them, in connection with
investigating, preparing to defend or defending any actions, proceedings or
claims (whether commenced or threatened) to the extent such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto) or the Prospectus (or any
amendment or supplement thereto), or are based upon the omission or alleged
omission to state in any of the foregoing documents a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that the Agent's obligations under this Section 8(b) shall exist only if and
only to the extent (i) that such untrue statement or alleged untrue statement
was made in, or such material fact or alleged material fact was omitted from,
the Registration Statement (or any amendment or supplement thereto), the
Prospectus (or any amendment or supplement thereto) or the Conversion
Application (or any amendment or supplement thereto), and Blue Sky Application
or Sales Information in reliance upon and in conformity with information
furnished in writing to the Company or the Association by the Agent regarding
the Agent.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may
be sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 8
or otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object
to such assumption on the ground that there may be legal defenses available
to them that are different from or in addition to those available to such
indemnifying party. If an indemnifying party assumes the defense of such
action, the indemnifying parties shall not be liable for any fees and
expenses of counsel for the indemnified parties incurred thereafter in
connection with such action, proceeding or claim, other than reasonable costs
of investigation. In no event shall the indemnifying parties be liable for
the fees and expenses of more than one separate firm of attorneys (and any
special counsel that said firm may retain) for each indemnified party in
connection with any one action, proceeding or claim or separate but similar
or
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 30
related actions, proceedings or claims in the same jurisdiction arising out of
the same general allegations or circumstances.
(d) The agreements in this Section 8 and in Section 9 hereof and the
representations and warranties of the Company and the Association set forth in
this Agreement shall remain operative and in full force and effect regardless
of: (i) any investigation made by or on behalf of the Agent or its officers,
directors or controlling persons, agents or employees or by or on behalf of the
Company or the Association or any officers, directors or controlling persons,
agents or employees of the Company or the Association; (ii) delivery of and
payment hereunder for the Shares; or (iii) any termination of this Agreement. To
the extent applicable, the Company's, the Association's and the Agent'
obligations under this Section 8 are subject to and limited by public policy and
the provisions of applicable law, including Section 23A.
Section 9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Association or the Agent, as the
case may be, the Company, the Association and the Agent shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding of any claims asserted, but after
deducting any contribution received by the Company, the Association or the Agent
from persons other than the other party thereto, who may also be liable for
contribution) in such proportion so that the Agent is responsible for that
portion represented by the percentage that the fees and expenses paid to the
Agent pursuant to Section 2 of this Agreement bears to the gross proceeds
received by the Company from the sale of the Shares in the Offering, and the
Company and the Association shall be responsible for the balance. If, however,
the allocation provided above is not permitted by applicable law or if the
indemnified party failed to give the notice required under Section 8 above, then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative fault of the Company and the Association, on the one hand, and the
Agent, on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions, proceedings
or claims in respect thereto), but also the relative benefits received by the
Company and the Association, on the one hand, and the Agent, on the other, from
the Offering (before deducting expenses). The relative benefits received by the
Company and the Association, on the one hand, and the Agent, on the other, shall
be deemed to be in the same proportion as the gross proceeds from the Offering
received by the Company bear to the total fees and expenses received by the
Agent. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Association, on the one hand, or the Agent, on
the other, and the parties' relative intent, good faith, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Association and the Agent agree that it would not be just and
equitable if
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 31
contribution pursuant to this Section 9 were determined by pro-rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to above in this Section 9. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions, proceedings or claims in respect thereof) referred to
above in this Section 9 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, proceeding or claim. It is expressly agreed that
the Agent shall not be required to contribute any amount which in the aggregate
exceeds the amount paid (excluding reimbursable expenses) to the Agent under
this Agreement. It is understood that the above stated limitation on the Agent's
liability is essential to the Agent and that the Agent would not have entered
into this Agreement if such limitation had not been agreed to by the parties to
this Agreement. No person found guilty of any fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation. The obligations of the Company and the Association under this
Section 9 and under Section 8 shall be in addition to any liability which the
Company and the Association may otherwise have. For purposes of this Section 9,
each of the Agent's, the Company's or the Association's officers and directors
and each person, if any, who controls the Agent or the Company or the
Association within the meaning of the 1933 Act and the 1934 Act shall have the
same rights to contribution as the Agent, the Company or the Association. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action, suit, claim or proceeding against such party in respect of which
a claim for contribution may be made against another party under this Section 9,
shall notify such party from whom contribution may be sought, but the omission
to so notify such party shall not relieve the party from whom contribution may
be sought from any other obligation it may have hereunder or otherwise than
under this Section 9. To the extent applicable, the Company's, the Association's
and the Agent's obligations under this Section 9 are subject to and limited by
public policy and the provisions of applicable law.
Section 10. Survival of Agreements, Representations and Indemnities.
The respective indemnities of the Company, the Association and the Agent, and
the representations and warranties and other statements of the Company, the
Association and the Agent set forth in or made pursuant to this Agreement, shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of the Agent, the
Company, the Association or any controlling person referred to in Section 8
hereof, and shall survive the issuance of the Shares, and any legal
representative, successor or assign of the Agent, the Company, the Association,
and any such controlling person shall be entitled to the benefit of the
respective agreements, indemnities, warranties and representations.
Section 11. Termination. (a) The Agent may terminate its obligations
under this Agreement by giving the notice indicated below in subsection (b) at
any time after this Agreement becomes effective as follows:
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 32
(i) In the event the Company fails to sell the required
minimum number of Shares by the End Date, and in accordance with the
provisions of the Plan or as required by the Conversion Regulations,
and applicable law, this Agreement shall terminate upon refund by the
Association to each person who has subscribed for or ordered any of the
Shares the full amount which it may have received from such person,
together with interest as provided in the Prospectus, and no party to
this Agreement shall have any obligation to the other hereunder, except
as otherwise provided in Sections 2, 8, 9 and 10 hereof.
(ii) If any of the conditions specified in Section 7 shall not
have been fulfilled when and as required by this Agreement unless
waived in writing, or by the Closing Date, this Agreement and all of
the Agent's obligations hereunder may be canceled by the Agent by
notifying the Company and the Association of such cancellation as
provided in Section 12 hereof in writing or at any time at or prior to
the Closing Date, and any such cancellation shall be without liability
of any party to any other party except as otherwise provided in
Sections 2, 8, 9 and 10 hereof.
(iii) In the event either the Company or the Association is in
material breach of the representations and warranties or covenants
contained in Sections 3 and 5 and such breach has not been cured after
the Company and the Association have provided the Agent with notice of
such breach.
(b) If the Agent elects to terminate this Agreement with respect to it
as provided in this Section 11, the Company and the Association shall be
notified promptly by telephone, confirmed by letter.
(c) The Company and the Association may terminate this Agreement with
respect to the Agent in the event the Agent is in material breach of the
representation and warranties or covenants contained in Sections 4 and 6 and
such breach has not been cured after the Company and the Association have
provided the Agent with notice of such breach, and no party to this Agreement
shall have any obligation to the other hereunder, except as provided for in
Sections 2, 8, 9 and 10 hereof.
(d) This Agreement may also be terminated by mutual written consent of
the parties hereto.
Section 12. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to the
Agent shall be mailed or delivered and confirmed to Charles Webb & Company, a
Division of Keefe, Bruyette & Woods, Inc., 211 Bradenton, Dublin, Ohio
43017-5034, Attention: John Bruno (with a copy to Breyer & Aguggia LLP, 1300 I
Street, N.W., Suite 470 East, Washington, D.C. 20005, Attention: John F. Breyer,
Jr., Esquire), if sent to the Company and the Association, shall be mailed or
delivered and confirmed to
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 33
the Company and the Association at 601 Main Street, Wellsville, Ohio 43968,
Attention: William R. Williams, President and Chief Executive Officer (with a
copy to Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue, N.W., Washington,
D.C. 20016, Attention: Douglas P. Faucette, Esquire).
Section 13. Parties. The Company and the Association shall be entitled
to act and rely on any request, notice, consent, waiver or agreement given on
behalf of the Agent when the same shall have been given by the undersigned. The
Agent shall be entitled to act and rely on any request, notice, consent, waiver
or agreement purportedly given on behalf of the Company or the Association, when
the same shall have been given by the undersigned or any other officer of the
Company or the Association. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Agent, the Company, the Association, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained.
Section 14. Entire Agreement. It is understood and agreed that this
Agreement is the exclusive agreement among the parties hereto, and supersedes
any prior agreement among the parties (except for specific references herein to
the Letter Agreement) and may not be varied except in writing signed by all the
parties.
Section 15. Partial Invalidity. In the event that any term, provision
or covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
Section 16. Construction. This Agreement shall be construed in
accordance with the laws of the State of New York, except to the extent that
federal law shall apply.
Section 17. Counterparts. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
<PAGE>
Charles Webb & Company,
a Division of Keefe Bruyette & Woods, Inc.
Page 34
If the foregoing correctly sets forth the arrangement among the
Company, the Association, and the Agent, please indicate acceptance thereof in
the space provided below for that purpose, whereupon this letter and the Agent's
acceptance shall constitute a binding agreement.
Very truly yours,
GRAND CENTRAL FINANCIAL CORP.
By:
-------------------------------------------
William R. Williams
President and Chief Financial Officer
CENTRAL FEDERAL SAVINGS AND LOAN
ASSOCIATION OF WELLSVILLE
By:
-------------------------------------------
William R. Williams
President and Chief Executive Officer
AGREED TO AND ACCEPTED
AS OF THE DATE FIRST WRITTEN ABOVE:
CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
By:
----------------------------------
Title:
Name:
<PAGE>
EXHIBIT A
GRAND CENTRAL FINANCIAL CORP.
Up to 2,300,000 Shares)
(Par Value $0.01 Per Share)
Selected Dealers' Agreement
___________________ ___, 1998
Gentlemen:
We have agreed to assist Central Federal Savings and Loan Association
of Wellsville, Wellsville, Ohio ("Association"), a federally chartered mutual
savings and loan association, in connection with the offer and sale of up to
2,300,000 shares of the common stock, par value $0.01 per share ("Common
Stock"), of Grand Central Financial Corp., Wellsville, Ohio ("Company"), a
Delaware corporation, to be issued in connection with the conversion of the
Association from the mutual to stock form of ownership pursuant to the Home
Owners' Loan Act, as amended, and 12 C.F.R. Part 563b. The total number of
shares of Common Stock to be offered may be decreased to a minimum of 1,700,000
shares and increased to a maximum of 2,645,000 shares. The price per share has
been fixed at $10.00. The Common Stock, the number of shares to be issued, and
certain of the terms on which they are being offered, are more fully described
in the enclosed Prospectus dated November ____, 1998 ("Prospectus"). In
connection with the Conversion, the Company, on a best efforts basis, is
offering for sale such shares of Common Stock ("Shares"), in a Subscription
Offering (as defined in the Prospectus). Any Shares not sold in the Subscription
Offering shall be offered to the general public in the Community Offering (as
defined in the Prospectus) giving preference first, to natural persons residing
in Columbiana, Mahoning and Jefferson Counties, Ohio.
The Subscription and Community Offerings are being conducted under a
plan of conversion ("Plan"), adopted by the Association's Board of Directors.
Pursuant to the Plan, the Association intends to convert from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association and concurrently become the wholly-owned subsidiary
of the Company ("Conversion"). The Subscription and Community Offerings are
further being conducted in accordance with the regulations of the OTS and
subject to the provisions contained in the Plan.
The Common Stock is also being offered in accordance with the Plan by
broker/dealers licensed by the National Association of Securities Dealers, Inc.
("NASD") which have been approved by the Association ("Approved Brokers").
We are offering the Approved Brokers (of which you are one) the
opportunity to participate in the solicitation of offers to buy the Common Stock
and we shall pay you a fee in the amount of
<PAGE>
____ percent (____%) of the dollar amount of the Common Stock sold on behalf of
the Company by you, as evidenced by the authorized designation of your firm on
the order form or forms for payment therefor to the special account established
by the Association for the purpose of holding such funds. It is understood, of
course, that payment of your fee shall be made only out of compensation received
by us for the Common Stock sold on behalf of the Company by you, as evidenced in
accordance with the preceding sentence. As soon as practicable after the closing
date of the offering, we shall remit to you, only out of our compensation as
provided above, the fees to which you are entitled hereunder.
Each order form for the purchase of Common Stock must set forth the
identity and address of each person to whom the certificates for such Common
Stock should be issued and delivered. Such order form also must clearly identify
you firm in order for you to receive compensation. You shall instruct any
subscriber who elects to send his order form to you to make any accompanying
check payable to "Grand Central Financial Corp."
This offer is made subject to the terms and conditions herein set forth
and is made only to Approved Brokers who are members in good standing of the
NASD who are to comply with all applicable rules of the NASD, including, without
limitation, the NASD's Interpretation With Respect to Free-Riding and
Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice.
Orders for Common Stock shall be subject to confirmation and we, acting
on behalf of the Company and the Association, reserve the right in our
unfettered discretion to reject any order in whole or in part, to accept or
reject orders in the order of their receipt or otherwise, and to allot. Neither
you nor any other person is authorized by the Company and the Association, or by
us to give any information or make any representations other than those
contained in the Prospectus in connection with the sale of any of the Common
Stock. No Approved Broker is authorized to act as agent for us when soliciting
offers to buy the Common Stock from the public or otherwise. No Approved Broker
shall engage in any stabilizing (as defined in Rule 10b-7 promulgated under the
Securities Exchange Act of 1934) with respect to the Company's Common Stock
during the offering.
We and each Approved Broker assisting in selling Common Stock pursuant
hereto agree to comply with the applicable requirements of the Securities
Exchange Act of 1934 and applicable state rules and regulations. Each
customer-carrying selected dealer that is not a minimum net capital reporting
broker/dealer agrees that it shall not use a sweep arrangement and that it shall
transmit all customer checks by noon of the next business day after receipt
thereof. In addition, we and each selected dealer confirm that the Securities
and Exchange Commission interprets Rule 15c2-8 promulgated under the Securities
Exchange Act of 1934 as requiring that a Prospectus be supplied to each person
who is expected to receive a confirmation of sale 48 hours prior to delivery of
such person's order form.
We and each Approved Broker further agree that to the extent that your
customers desire to pay for shares with funds held by or to be deposited with
us, in accordance with the interpretations of the Securities and Exchange
Commission of Rule 15c2-4 promulgated under the Securities Exchange Act of 1934,
either (a) upon receipt of an executed order form or direction to execute an
order form on behalf of a customer to forward the offering price of the Common
Stock ordered on
<PAGE>
or before noon of the next business day following receipt or execution of an
order form by us to the Company for deposit in a segregated account or (b) to
solicit indications of interest in which event (i) we shall subsequently contact
any customer indicating interest to confirm the interest and give instructions
to execute and return an order form or to receive authorization to execute the
order form on the customer's behalf, (ii) we shall mail acknowledgments of
receipt of orders to each customer confirming interest on the business day
following such confirmation, (iii) we shall debit accounts of such customers on
the third business day ("Debit Date") following receipt of the confirmation
referred to in (i), and (iv) we shall forward complete order forms together with
such funds to the Company on or before twelve noon on the next business day and
each selected dealer acknowledges that if the procedure in (b) is adopted, our
customers' funds are not required to be in their accounts until the Debit Date.
Unless earlier terminated by us, this Agreement shall terminate upon
the closing date of the Conversion. We may terminate this Agreement or any
provisions hereof any time by written or telegraphic notice to you. Of course,
our obligations hereunder are subject to the successful completion of the
Conversion.
You agree that at any time or times prior to the termination of this
Agreement you shall, upon our request, report to us the number of shares of
Common Stock sold on behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem
advisable in respect of all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement.
Upon application to us, we shall inform you as to the states in
which we believe the Common Stock has been qualified for sale under, or are
exempt from the requirements of, the respective blue sky laws of such states,
but we assume no responsibility or obligation as to your rights to sell
Common Stock in any state.
Additional copies of the Prospectus and any supplements thereto shall
be supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned, or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the
State of New York.
<PAGE>
Please confirm your agreement hereto by signing and returning the
confirmations accompanying this letter at once to us at Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc., 211 Bradenton, Dublin, Ohio 43017.
The enclosed duplicate copy shall evidence the agreement between us.
CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
By:
---------------------------------------
Name:
Title:
CONFIRMED AS OF:
_____________ ____, 1998
- ------------------------------------
(Name of Dealer)
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
<PAGE>
Exhibit 5.0
[Muldoon,Murphy & Faucette Letterhead]
November 6, 1998
Board of Directors
Grand Central Financial Corp.
601 Main Street
Wellsville, Ohio 43968
Re: The offering of up to 2,248,250 shares of
Grand Central Financial Corp. Common Stock
------------------------------------------
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of Central Federal Savings and Loan
Association of Wellsville (the "Association"), a federally-chartered savings and
loan association, from the mutual form of ownership to a federally-chartered
capital stock savings association (the "Conversion"), and the related
subscription offering, community offering and syndicated community offering (the
"Offerings") by Grand Central Financial Corp., a Delaware corporation (the
"Company"), of up to 1,955,000 shares of its common stock, par value $.01 per
share ("Common Stock") (2,248,250 shares if the Estimated Valuation Range is
increased up to 15% to reflect changes in market and financial conditions
following commencement of the Offerings).
In connection with your request for our opinion, you have provided to
us and we have reviewed the Company's certificate of incorporation filed with
the Secretary of State of Delaware on September 10, 1998 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form SB-2, as filed with the Securities and Exchange Commission initially on
September 23, 1998 (the "Registration Statement"); a consent of the sole
incorporator of the Company; the ESOP trust agreement and the ESOP loan
agreement; resolutions of the Board of Directors of the Company (the "Board")
concerning the organization of the Company, the Offerings and designation of a
Pricing Committee of the Board, and the form of stock certificate approved by
the Board to represent shares of Common Stock. We have also been furnished a
certificate of the Delaware Secretary of State certifying the Company's good
standing as a Delaware corporation. Capitalized terms used but not defined
herein shall have the meaning given them in the Certificate of Incorporation.
<PAGE>
Board of Directors
Grand Central Financial Corp.
November 6, 1998
Page 2
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law, upon which opinion we
believe you are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell, which opinion is in form satisfactory to us.
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company has duly
authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid
corporate purpose for the Company; (c) the Loan will be made at an interest rate
and on other terms that are fair to the Company; (d) the terms of the Loan will
be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP Trust to
the Company as a result of the Loan; and (e) the closing for the Loan and for
the sale of Common Stock to the ESOP Trust will be held after the closing for
the sale of the other shares of Common Stock sold in the Offerings and the
receipt by the Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offerings, the
Common Stock to be issued in the Offerings (including the shares to be issued to
the ESOP Trust) will be duly authorized and, when such shares are sold and paid
for or granted in accordance with the terms set forth in the Prospectus and such
resolution of the Pricing Committee, will be validly issued, fully paid and
nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and
Section D of Article EIGHTH, which grant the Board
the authority to construe and apply the provisions of
those Articles, subsection C.4 of Article FOURTH, to
the extent that subsection obligates any person to
provide to the Board the information such subsection
authorizes the Board to demand, and the provision of
Subsection C.7 of Article EIGHTH empowering the Board
to determine the Fair Market Value of property
offered or paid for the
<PAGE>
Board of Directors
Grand Central Financial Corp.
November 6, 1998
Page 3
Company's stock by an Interested Stockholder, in each
case to the extent, if any, that a court applying
Delaware law were to impose equitable limitations
upon such authority; and
(b) Article NINTH, which authorizes the Board to consider
the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating
any such offer.
We consent to the filing of this opinion as an exhibit to the
Registration Statement on Form SB-2 and the Form AC and to the use of the name
of our firm where it appears in the Registration Statement, Form AC and
Prospectus.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
------------------------------
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 5.1
[MORRIS, NICHOLS, ARSHT & TUNNELL LETTERHEAD]
November 6, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of Central Federal Savings and Loan
Association of Wellsville, a federally chartered savings and loan association
(the "Association"), from the mutual form of ownership to stock form of
ownership (the "Conversion"), and the subscription and community offering
(the "Offering"), in connection with the Conversion, by Grand Central
Financial Corp., a Delaware corporation (the "Company"), of up to 22,482,500
shares of its common stock, par value $.01 per share (the "Common Stock").
In connection with your request for our opinion, you have provided to
us, and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its bylaws, the Registration Statement filed
with the Securities and Exchange Commission in connection with the Offering
(the "Registration Statement"), including the prospectus constituting a part
thereof (the "Prospectus"), a consent of the sole incorporator of the
Company, resolutions of the Board of Directors of the Company (the "Board")
concerning, INTER ALIA, the organization of the Company, the Offering and the
designation of a Pricing Committee of the Board (the "Pricing Committee"),
and the form of stock certificate approved by the Board to represent shares of
<PAGE>
Muldoon, Murphy & Faucette
November 6, 1998
Page 2
Common Stock. We have also obtained a certificate of the Delaware Secretary
of State as to the Company's good standing as a Delaware corporation.
Capitalized terms used but not defined herein shall have the meanings given
them in the Certificate of Incorporation.
We understand that the Company will loan to the Association's Employee
Stock Ownership Plan (the "ESOP") the funds the ESOP will use to purchase the
shares of Common Stock for which the ESOP has subscribed as part of the
Offering. In this regard, we have assumed, for purposes of rendering the
opinion set forth in paragraph 2 below, that: (a) the Board has duly
authorized the loan to the ESOP (the "Loan"); (b) the Loan serves a valid
corporate purpose; (c) the Loan will be made at an interest rate and on other
terms that are fair to the Company; (d) the terms of the Loan will be set
forth in customary and appropriate documents including, without limitation, a
promissory note representing the indebtedness of the ESOP to the Company as a
result of the Loan; and (e) the closing for the Loan and for the sale of
Common Stock to the ESOP will be held after the closing for the sale of the
other shares of Common Stock sold in the Offering and the receipt by the
Company of the proceeds thereof.
We call your attention to the fact that the opinions expressed herein
are limited in all respects to matters of Delaware corporate law. We express
no opinion concerning the requirements of any other law, rule or regulation,
state or federal, applicable to the Association, the Company, the Offering,
or the Conversion, including, without limitation, those applicable to
federally chartered savings and loan associations or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware, with the
corporate power and
<PAGE>
Muldoon, Murphy & Faucette
November 6, 1998
Page 3
authority to own its property and conduct its business as now conducted as
described in the Prospectus.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offering, the
Common Stock to be issued in the Offering (including the shares to be issued
to the ESOP) will be duly authorized and, when such shares are sold and paid
for in accordance with the terms set forth in the Prospectus and such
resolution of the Pricing Committee, and certificates representing such shares
in the form provided to us are duly and properly issued, will be validly
issued, fully paid and non-assessable, with no personal liability for the
payment of the Company's debts arising solely by virtue of the ownership
thereof; such issuance and sale will not be violation of or subject to any
preemptive rights provided for by Delaware law or by the Certificate of
Incorporation.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure
to give effect to such provisions will not affect the duly authorized,
validly issued, fully paid and non-assessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the
provisions of those Articles, subsection C.4 of Article FOURTH, to the extent
that provision obligates any person to provide to the Board the information
such subsection authorizes the Board to demand, and the provision of Section
C.7 of Article EIGHTH empowering the Board to determine the Fair Market Value
of property offered or paid for the Company's stock by an Interested
Stockholder, to the extent, if any, that a court applying Delaware law were
to impose equitable limitations upon the authority of the directors of the
Company under such provisions.
<PAGE>
Muldoon, Murphy & Faucette
November 6, 1998
Page 4
(b) Article NINTH of the Certificate of Incorporation, which purports
to permit the Board to consider the effect of any offer to acquire the
Company on constituencies other than stockholders in evaluating any such
offer.
Very truly yours,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
------------------------------------
Morris, Nichols, Arsht & Tunnell
<PAGE>
Exhibit 8.0
November 6, 1998
Board of Directors
Central Federal Savings & Loan Association of Wellsville
601 Main Street
Wellsville, Ohio 43968-1662
Board of Directors
Grand Central Financial Corp.
601 Main Street
Wellsville, Ohio 43968-1662
Re: Federal Tax Consequences of the Conversion of Central Federal
Savings & Loan Association of Wellsville from a
Federally-chartered Mutual Savings and Loan Association to a
Federally-chartered Capital Stock Savings Association and the
Offer and Sale of Common Stock of Grand Central Financial
Corp. (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion concerning the material federal income
tax consequences of the proposed conversion of Central Federal Savings & Loan
Association of Wellsville (the "Association") from a federally-chartered mutual
savings and loan association to a federally-chartered capital stock savings
association and the acquisition of the Association's capital stock by Grand
Central Financial Corp., a Delaware corporation (the "Holding Company"),
pursuant to the plan of conversion adopted by the Board of Directors on June 11,
1998 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
We have made such inquiries and have examined such documents and
records as we have deemed appropriate for the purpose of this opinion. In
rendering this opinion, we have received certain standard representations of the
Holding Company and the Association concerning the Holding Company and the
Association as well as the transaction ("Representations"). These
Representations are required to be furnished prior to the execution of this
letter and again prior to
<PAGE>
Board of Directors
November 6, 1998
Page 2
the closing of the Conversion. We will rely upon the accuracy of the
Representations of the Holding Company and the Association and the statements of
facts contained in the examined documents, particularly the Plan of Conversion.
We have also assumed the authenticity of all signatures, the legal capacity of
all natural persons and the conformity to the originals of all documents
submitted to us as copies. Each capitalized term used herein, unless otherwise
defined, has the meaning set forth in the Plan of Conversion. We have assumed
that the Conversion will be consummated strictly in accordance with the terms of
the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed
description of the Conversion. These documents as well as the Representations to
be provided by the Holding Company and the Association are incorporated in this
letter as part of the statement of the facts.
Central Federal Savings & Loan Association of Wellsville, with its
headquarters office in Wellsville, Ohio, is a federally-chartered mutual savings
and loan association. As a mutual savings and loan association, the Association
has never been authorized to issue stock. Instead, the proprietary interest in
the reserves and undivided profits of the Association belong to the deposit
account holders of the Association, hereinafter sometimes referred to as
"depositors." A depositor of the Association has a right to share, pro rata,
with respect to the withdrawal value of his respective deposit account in any
liquidation proceeds distributed in the event the Association is ever
liquidated. In addition, a depositor of the Association is entitled to interest
on his account balance as fixed and paid by the Association.
In order to provide organizational and economic strength to the
Association, the Board of Directors has adopted the Plan of Conversion whereby
the Association will convert itself into a federally-chartered capital stock
savings Association (the "Converted Association"), the stock of which will be
held entirely by the Holding Company. Assuming that the Holding Company form of
organization is utilized, the Holding Company will acquire the stock of the
Association by purchase, in exchange for the Conversion proceeds that are not
permitted to be retained by the Holding Company. The Holding Company will apply
to the Office of Thrift Supervision ("OTS") to retain up to 50% of the proceeds
received from the Conversion. The aggregate sales price of the Common Stock
issued in the Conversion will be based on an independent appraiser's valuation
of the estimated pro forma market value of the Common Stock of the Converted
Association. The Conversion and sale of the Common Stock will be subject to
approval by the OTS and the approval of the Voting Members.
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Association shall establish
at the time of Conversion a liquidation account in an amount equal to its net
worth as of the latest practicable date prior to Conversion. The liquidation
account will be maintained by the Association for the benefit of the Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
<PAGE>
Board of Directors
November 6, 1998
Page 3
maintain their Savings Accounts at the Association. Each Eligible Account Holder
and Supplemental Eligible Account Holder shall, with respect to his Savings
Account, hold a related inchoate interest in a portion of the liquidation
account balance, in relation to his Savings Account balance on the Eligibility
Record Date and/or Supplemental Eligibility Record Date or to such balance as it
may be subsequently reduced, as provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Association (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the
Association's capital stock. No merger, consolidation, purchase of bulk assets
with assumption of Savings Accounts and other liabilities, or similar
transaction with an FDIC institution, in which the Association is not the
surviving institution, shall be deemed to be a complete liquidation for this
purpose. In such transactions, the liquidation account shall be assumed by the
surviving institution.
* * *
You have provided the following factual Representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts
plus interests in the liquidation account of the Converted
Association to be constructively received under the Plan of
Conversion will, in each instance, be equal to the fair market
value of the withdrawable deposit accounts (plus the related
interest in the residual equity of the Association) deemed to
be surrendered in exchange therefor.
(b) If an individual's total deposits in the Association equal or
exceed $50 as of the Eligibility Record Date or the
Supplemental Eligibility Record Date, then no amount of that
individual's total deposits will be excluded from
participating in the liquidation account. The fair market
value of the deposit accounts of the Association which have a
balance of less than $50 on the Eligibility Record Date or the
Supplemental Eligibility Record Date will be less than 1% of
the total fair market value of all deposit accounts of the
Association.
(c) Immediately following the Conversion, the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Association will own all of the outstanding interests in the
liquidation account and will own such interest solely by
<PAGE>
Board of Directors
November 6, 1998
Page 4
reason of their ownership of deposits in the Association
immediately before the Conversion.
(d) After the Conversion, the Converted Association will continue
the business of the Association in the same manner as prior to
the Conversion. The Converted Association has no plan or
intention and the Holding Company has no plan or intention to
cause the Converted Association to sell its assets other than
in the ordinary course of business.
(e) The Holding Company has no plan or intention to sell,
liquidate or otherwise dispose of the stock of the Converted
Association other than in the ordinary course of business.
(f) The Holding Company and the Converted Association have no
current plan or intention to redeem or otherwise acquire any
of the Common Stock issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities
of the Converted Association will be identical to the assets
and liabilities of the Association immediately prior to the
Conversion, plus the net proceeds from the sale of the
Converted Association's common stock to the Holding Company
and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the
Employee Plans.
(h) The Association is federally-chartered as a mutual savings and
loan association. The Converted Bank will receive a federal
stock charter as a stock savings association. The Holding
Company is incorporated under the law of the state of
Delaware.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Association in the Conversion will
be issued or acquired at a discount. However, shares may be
given to certain Directors and employees as compensation by
means of the Employee Plans. Compensation to be paid to such
Directors and depositor-employees will be commensurate with
amounts paid to third parties bargaining at arm's length for
similar services.
(j) The fair market value of the assets of the Association, which
will be transferred to the Converted Association in the
Conversion, will equal or exceed the sum of the
<PAGE>
Board of Directors
November 6, 1998
Page 5
liabilities of the Association which will be assumed by the
Converted Association and any liabilities to which the
transferred assets are subject.
(k) The Association is not insolvent and is not under the
jurisdiction of a bankruptcy or similar court, a
receivership, foreclosure, or similar proceeding in a Federal
or State court.
(l) Upon the completion of the Conversion, the Holding Company
will own and hold 100% of the issued and outstanding capital
stock of the Converted Association and no other shares of
capital stock of the Converted Association will be issued
and/or outstanding. At the time of the Conversion, the
Converted Association does not have any plan or intention to
issue additional shares of its stock following the
transaction. Further, no shares of preferred stock of the
Converted Association will be issued and/or outstanding.
(m) Upon the completion of the Conversion, there will be no
rights, warrants, contracts, agreements, commitments or
understandings with respect to the capital stock of the
Converted Association, nor will there be any securities
outstanding which are convertible into the capital stock of
the Converted Association.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of
(a) nontransferable subscription rights, or (b) an interest in
the liquidation account of the Converted Association.
(o) The Association has utilized the reserve method of accounting
for bad debts in filing its federal income tax return for the
past 3 tax years. For the past three (3) tax years, the
Association has calculated its addition to the tax reserve for
bad debts under the experience method. Following the
Conversion, to the extent allowed under the Code, the
Converted Bank will maintain a tax reserve for bad debts to
the extent allowable under the Internal Revenue Code.
(p) In preparing its federal income tax return for the past 3
taxable years, the Association has analyzed
<PAGE>
Board of Directors
November 6, 1998
Page 6
its assets by reference to whether 60% of its total assets
consists of the items listed below and has satisfied this test
in each of the preceding 3 tax years. In each of the 3
preceding tax years, at least 60% of the amount of the total
assets at the close of the year consisted of the following
items: (i) cash, (ii) obligations of the US, of a State or
political subdivision of a State, obligations of a corporation
which is an instrumentality of the US or of a State (but
excluding tax-exempt obligations), (iii) certificates of
deposit in, or obligations of a corporation organized under a
State law which specifically authorizes such corporation to
insure the deposits or share accounts, (iv) loans secured by a
deposit or share of a member, (v) loans secured by an interest
in real property which is residential real property or used
primarily for church purposes, loans made for the improvement
of residential or church property, (vi) loans secured by an
interest in educational, health, or welfare institutions or
facilities, including structures designed to be used for
residential purposes, (vii) property acquired through the
liquidation of defaulted loans described in (v) or (vi) above,
(viii) loans made for the repayment of expenses of college or
university education or vocational training, (ix) property
used by the Association in the conduct of the business of
acquiring the savings of the public and investing in loans,
and (x) any regular or residual interest in a REMIC, but only
in the proportion of the assets of the REMIC which consists of
property described in (i) through (ix) above.
(q) Depositors will pay the expenses of the Conversion solely
applicable to them, if any. The Holding Company and the
Association will each pay expenses of the transaction
attributable to them and will not pay any expenses solely
attributable to the depositors or to the Holding Company
shareholders.
(r) The exercise price of the subscription rights received by the
Association's Eligible Account Holders, Supplemental Eligible
Account Holders, and other holders of subscription rights to
purchase Holding Company Common Stock will be equal to the
fair market value of the stock of the Holding Company at the
time of the completion of the Conversion as determined by an
independent appraisal.
(s) The liquidation account will be maintained by the Association
for the benefit of the Eligible Account Holders and the
Supplemental Eligible Account Holders who continue to maintain
their Savings Accounts at the Association.
(t) There is no plan or intention for the Converted Association to
be liquidated or merged with another corporation following
this proposed transaction.
<PAGE>
Board of Directors
November 6, 1998
Page 7
(u) The liabilities of the Association assumed by the Converted
Association plus the liabilities, if any, to which the
transferred assets are subject were incurred by the
Association in the ordinary course of its business and are
associated with the assets transferred.
(v) The Association currently has no net operating losses for
federal tax purposes, and has no such losses available for
carryover to future tax years. The Association has neither
generated nor carried forward a net operating loss for federal
tax purposes in the past ten tax years.
(w) The proprietary interests of the Eligible Account Holders and
the Supplemental Eligible Account Holders in the Association
arise solely by virtue of the fact that they are account
holders in the Association.
LIMITATIONS ON OPINION
----------------------
Our opinions expressed herein are based solely upon current provisions
of the Internal Revenue Code of 1986, as amended, including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. No opinion is expressed herein
with regard to the federal, state, or city tax consequences of the Conversion
under any section of the Code except if and to the extent specifically
addressed.
FEDERAL TAX OPINION
-------------------
Based solely upon the foregoing Representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level
other than changes in the form of organization will be
insubstantial. Based upon that fact and the fact that the
equity interest of a depositor in a mutual savings and loan
association is more nominal than real, unlike that of a
shareholder of a corporation, the Conversion of the
Association from a mutual savings and loan association to a
stock savings Association is a tax-free reorganization since
it is a mere change in identity, form or place of organization
within the meaning of section 368(a)(1)(F) of the Code (see
Rev. Rul. 80-105, 1980-1 C.B. 78). Neither the Association nor
the Converted Association shall recognize gain or loss as a
result of the Conversion. The
<PAGE>
Board of Directors
November 6, 1998
Page 8
Association and the Converted Association shall each be "a
party to a reorganization" within the meaning of section
368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted
Association or the Holding Company on the receipt by the
Converted Association of money from the Holding Company in
exchange for shares of the Converted Association's capital
stock or by the Holding Company upon the receipt of money from
the sale of its Common Stock (Section 1032(a) of the Code).
(3) The basis of the assets of the Association in the hands of the
Converted Association shall be the same as the basis of such
assets in the hands of the Association immediately prior to
the Conversion (Section 362(b) of the Code).
(4) The holding period of the assets of the Association in the
hands of the Converted Association shall include the period
during which the Association held the assets (Section 1223(2)
of the Code).
(5) No gain or loss shall be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Association on the issuance to them of withdrawable deposit
accounts in the Converted Association plus interests in the
liquidation account of the Converted Association in exchange
for their deposit accounts in the Association or to the other
depositors on the issuance to them of withdrawable deposit
accounts (Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of
the stock, no gain or loss will be recognized by Eligible
Account Holders and Supplemental Eligible Account Holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in the Holding Company
(Section 356(a)). Gain realized, if any, by the Eligible
Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription
rights to purchase shares of Common Stock will be recognized
but only in an amount not in excess of the fair market value
of such subscription rights (Section 356(a)). Eligible Account
Holders and Supplemental Eligible Account Holders will not
realize any taxable income as a result of the exercise by them
of the nontransferable subscription rights (Rev. Rul.
56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Association
to be received by the Eligible Account Holders, Supplemental
Eligible Account Holders and other
75660.1: November 5, 1998
<PAGE>
Board of Directors
November 6, 1998
Page 9
depositors of the Association will be the same as the basis of
their deposit accounts in the Association surrendered in
exchange therefor (Section 358(a)(1) of the Code). The basis
of the interests in the liquidation account of the Converted
Association to be received by the Eligible Account Holders of
the Association shall be zero (Rev. Rul. 71-233, 1971-1
C.B. 113). The basis of the Holding Company Common Stock to
its stockholders will be the purchase price thereof plus the
basis, if any, of nontransferable subscription rights (Section
1012 of the Code). Accordingly, assuming the nontransferable
subscription rights have no value, the basis of the Common
Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The
holding period of the Common Stock purchased pursuant to the
exercise of subscription rights shall commence on the date on
which the right to acquire such stock was exercised (Section
1223(6) of the Code).
Our opinion under paragraph (6) above is predicated on the
Representation that no person shall receive any payment, whether in money or
property, in lieu of the issuance of subscription rights. Our opinion under
paragraphs (6) and (7) above assumes that the subscription rights to purchase
shares of Common Stock received by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have a fair market value of zero. We
understand that you have received a letter from Keller & Company, Inc. that the
subscription rights do not have any value. We express no view regarding the
valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Association may be taxable on the distribution of the
subscription rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause us
to modify our opinion.
<PAGE>
Board of Directors
November 6, 1998
Page 10
We consent to the inclusion of this opinion as an exhibit to the Form
AC and Form SB-2 Registration Statement of Grand Central Financial Corp. and the
references to and summary of this opinion in such Form AC and Form SB-2
Registration Statement.
Sincerely,
/s/ MULDOON, MURPHY & FAUCETTE
------------------------------
Muldoon, Murphy & Faucette
<PAGE>
Exhibit 8.1
[Letterhead]
November 6, 1998
Board of Directors
Central Federal Savings & Loan Association of Wellsville
601 Main Street
Wellsville, Ohio 43968-1662
Board of Directors
Grand Central Financial Corp.
601 Main Street
Wellsville, Ohio 43968-1662
RE: Ohio business franchise tax and Ohio personal income tax opinion relating
to the proposed Conversion of Central Federal Savings & Loan Association of
Wellsville, a federally-chartered mutual savings and loan association, to a
federally-chartered capital stock savings association and the concurrent
acquisition of 100% of the newly-issued stock of such corporation by Grand
Central Financial Corp., a newly-formed Delaware holding company.
Ladies and Gentlemen:
Pursuant to your request, our opinion concerning certain Ohio business
franchise tax and Ohio personal income tax consequences of the proposed
Conversion of Central Federal Savings & Loan Association of Wellsville, a
federally-chartered mutual savings and loan association ("Association") to
a federally-chartered capital stock savings association ("Converted
Association") and the concurrent acquisition of 100% of the newly-issued
stock of such corporation by Grand Central Financial Corp., a newly-formed
Delaware corporation operating exclusively within the State of Ohio
("Holding Company"), is set forth below.
Statement of Facts
The facts and circumstances surrounding the proposed reorganization are quite
detailed and are described at length in the Plan of Conversion dated June 11,
1998. A summary of the proposed Conversion and the related assumptions
regarding such Conversion are documented in the federal tax opinion letter
dated November 6, 1998, as provided by Muldoon, Murphy & Faucette.
Our opinion is based solely upon our understanding that, pursuant to the Plan
of Conversion, Association will, through a series of transactions, convert
from a federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings association and issue 100% of its
newly-issued stock to Holding Company.
<PAGE>
Board of Directors
November 6, 1998
Page 2
In addition, we have assumed, based solely on the opinion of Muldoon, Murphy
& Faucette, as presented in their letter dated November 6, 1998, for purposes
of this opinion, that the following federal tax consequences will result:
1) The Conversion of Association to Converted Association will constitute
a tax-free reorganization under the Internal Revenue Code of 1986 as
amended.
2) No gain or loss will be recognized for federal income tax purposes by
Association, Converted Association or Holding Company as a result of
the Conversion.
3) Taxable income will be recognized for federal income tax purposes by
the Eligible Account Holders and Supplemental Eligible Account Holders
of Association only to the extent of the taxable value, if any, of the
stock subscription rights received.
Opinion
Based upon our analysis of applicable Ohio tax law and administrative
rulings, we have made the following determinations:
A) The income tax liability of a corporation, other than a bank or thrift,
conducting business and owning property within Ohio, is calculated by
reference to the separate federal taxable income of that corporation,
with certain modifications (Section 5733.04(I) of the Ohio Revised
Code).
B) Banks and thrifts are not subject to the Ohio income tax (Section
5733.06(D) of the Ohio Revised Code).
C) The net worth tax liability of any corporation, including banks and
thrifts, conducting business and owning property within Ohio, is
determined by reference to the balance sheet of the corporation as of
the end of its fiscal year or, under certain circumstances, as of
December 31 of the year preceding the first year such corporation is
required to file an Ohio franchise tax return (Sections 5733.056(B),
5733.05(C) and 5733.031(A) of the Ohio Revised Code and tax
Commissioner's Rule 5703-5-03)
D) The income tax liability of an individual subject to the Ohio income
tax on personal income is calculated by reference to the federal
Adjusted Gross Income of that individual, with certain modifications
(Section 5747.02 of the Ohio Revised Code).
Based upon the above facts and the opinions provided in the federal tax
opinion letter dated November 6, 1998, as provided by Muldoon, Murphy &
Faucette, we are of the opinion that, if the Conversion is effected in
accordance with the Plan of Conversion, for Ohio tax purposes:
1) No gain or loss will be recognized by Association upon its Conversion
from a federally-chartered mutual savings and loan association to a
federally-chartered capital stock
<PAGE>
Board of Directors
November 6, 1998
Page 3
savings association because such conversion will have no effect on the
federal taxable income of Association and because Association is exempt
from the Ohio income tax.
2) No gain or loss will be recognized by Holding Company or Converted
Association upon the acquisition of the stock of Converted Association
by Holding Company because such acquisition will have no effect on the
federal taxable income of either corporation.
3) No gain or loss will be recognized by Holding Company upon the receipt
of property in exchange for its newly issued shares of stock because
such receipt will have no effect on the federal taxable income of
Holding Company.
4) Ohio taxable income will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders of Association only to the extent
that taxable income is recognized with respect to the stock
subscription rights received in the Eligible Account Holders' and
Supplemental Eligible Account Holders' federal Adjusted Gross Income.
Our opinion is based upon legal authorities currently in effect, which
authorities are subject to modification or challenge at any time and perhaps
with retroactive effect. Further, no opinion is expressed as to the tax
treatment of the transaction under the provisions of any of the other
sections of the Ohio Revised Code which may also be applicable thereto, or as
to the tax treatment of any conditions existing at the time of, or effects
resulting from, the transaction which are not specifically covered by the
opinions set forth above.
Respectfully submitted,
/s/ Crowe, Chizek and Company LLP
- ----------------------------------
Crowe, Chizek and Company LLP
<PAGE>
The Board of Directors
Central Federal Savings and Loan Association
Wellsville, Ohio
We consent to the use in the registration statement on Form SB-2 of
Grand Central Financial Corp. and the application for conversion on Form AC of
Central Federal Savings and Loan Association, of our report dated March 18,
1998, with respect to the financial statements of Central Federal Savings and
Loan Association as of December 31, 1997 and 1996 and for each of the years in
the three-year period ended December 31, 1997 included herein, and to the
reference to our firm under the heading "Expert" in the prospectus.
/s/ ROBB, DIXON, FRANCIS, DAVIS, ONESON & CO.
---------------------------------------------
Robb, Dixon, Francis, Davis, Oneson & Company
Granville, Ohio
November 6, 1998
<PAGE>
[Keller & Company, Inc. Letterhead]
November 4, 1998
Re: Valuation Appraisal of Grand Central Financial Corp.
Central Federal Savings and Loan Association of Wellsville
Wellsville, Ohio
We hereby consent to the use of our firm's name, Keller & Company, Inc.
("Keller"), and the reference to our firm as experts in the Application for
Conversion on Form AC to be filed by Central Federal Savings and Loan
Association of Wellsville and any amendments thereto and references to our
opinion regarding subscription rights filed as an exhibit to the applications
referred to hereafter. We also consent to the use of our firm's name in the Form
SB-2 to be filed by Grand Central Financial Corp. with the Securities and
Exchange Commission and any amendments thereto, and to the statements with
respect to us and the references to our Conversion Valuation Appraisal Report
and any updates thereof and in the said Form AC and any amendments thereto and
in the notice and Application for Conversion filed by Central Federal Savings
and Loan Association.
Very truly yours,
KELLER & COMPANY, INC.
By: /s/ JOHN A. SHAFFER
-------------------------
John A. Shaffer
Vice President
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[Keller & Company, Inc.]
November 4, 1998
The Board of Directors
Central Federal Savings and Loan Association
601 Main Street
Wellsville, Ohio 43968
Re: Subscription Rights - Conversion of Central Federal Savings and Loan
Association of Wellsville
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of Grand Central
Financial Corp. (the "Corporation"), Wellsville, Ohio, in regard to the
conversion of Central Federal Savings and Loan Association of Wellsville
("Central Federal" or the "Association") from a federal-chartered mutual savings
and loan association to a federal-chartered stock savings and loan association.
Because the Subscription Rights to purchase shares of Common Stock in
the Corporation, which are to be issued to the depositors of Central Federal,
and the other members of the Association and will be acquired by such recipients
without cost, will be nontransferable and of short duration and will afford the
recipients the right only to purchase shares of Common Stock at the same price
as will be paid by members of the general public in a Direct Community Offering,
we are of the opinion that:
(1) The Subscription Rights will have no ascertainable fair market
value, and;
(2) The price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of the exercise.
Further, it is our opinion that the Subscription Rights will have no
economic value on the date of distribution or at the time of exercise, whether
or not a community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
/s/ JOHN A. SHAFFER
-------------------
John A. Shaffer
Vice President
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