<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 1 )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional
Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Seven Hills Financial Corporation
(Name of Registrant as Specified In Its Charter)
Seven Hills Financial Corporation
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined)
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[x] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
SEVEN HILLS FINANCIAL CORPORATION
1440 MAIN STREET
CINCINNATI, OHIO 45210
(513) 621-9143
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Notice is hereby given that a Special Meeting of the Shareholders of
Seven Hills Financial Corporation, an Ohio corporation ("SHFC"), will be held at
the offices of SHFC at 1440 Main Street, Cincinnati, Ohio 45210, on November 1,
1996, at 4:00 p.m., local time (the "Special Meeting"), for the following
purposes, all of which are more completely set forth in the accompanying Proxy
Statement:
1. To consider and vote upon the adoption of an
amendment to the amended Articles of Incorporation of SHFC to
delete Article EIGHTH, which prohibits an offer to acquire or
the acquisition of more than 10% of the outstanding common
shares of SHFC;
2. To consider and vote upon the adoption of the
Agreement and Plan of Merger and Reorganization dated June 14,
1996, by and among Western Ohio Financial Corporation
("WOFC"), SHFC and Seven Hills Savings Association, an Ohio
savings and loan association and a wholly-owned subsidiary of
SHFC, pursuant to which a wholly-owned subsidiary of WOFC
will, upon the satisfaction of certain conditions, merge with
and into SHFC in a transaction in which each outstanding SHFC
common share will be canceled and extinguished in
consideration and exchange for the right to receive a minimum
of $19.65 cash and an estimated maximum of $19.72 cash;
3. To consider and vote upon a proposal to adjourn
the Special Meeting in the event that a sufficient number of
votes necessary to adopt the foregoing proposals is not
received; and
4. To transact such other business as may properly
come before the Special Meeting or any adjournments thereof.
Only shareholders of SHFC of record at the close of business on
September 30, 1996, will be entitled to receive notice of and to vote at the
Special Meeting and at any adjournments thereof. Whether or not you expect to
attend the Special Meeting, we urge you to consider the accompanying Proxy
Statement carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO
THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF
A QUORUM MAY BE ASSURED. The giving of a Proxy does not affect your right to
vote in person in the event you attend the Special Meeting.
By Order of the Board of Directors,
Arthur W. Wendel, Jr., President
Cincinnati, Ohio
October 7, 1996
<PAGE> 3
SEVEN HILLS FINANCIAL CORPORATION
1440 MAIN STREET
CINCINNATI, OHIO 45210
(513) 621-9143
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement and the accompanying Notice and Proxy are
furnished to shareholders of Seven Hills Financial Corporation, an Ohio
corporation ("SHFC"), in connection with the solicitation of proxies by the
Board of Directors of SHFC to be used at the Special Meeting of Shareholders to
be held at the offices of SHFC at 1440 Main Street, Cincinnati, Ohio 45210 on
November 1, 1996, at 4:00 p.m., local time, and at any adjournments thereof (the
"Special Meeting"). Copies of this Proxy Statement and the accompanying Notice
and Proxy are first being mailed to shareholders on or about October 7, 1996.
At the Special Meeting, shareholders of SHFC will be asked to consider
and vote upon the following:
1. The adoption of an amendment to the amended
Articles of Incorporation of SHFC to delete Article EIGHTH,
which prohibits an offer to acquire or the acquisition of more
than 10% of the outstanding common shares of SHFC (the
"Amendment");
2. The adoption of the Agreement and Plan of Merger
and Reorganization dated June 14, 1996, by and among Western
Ohio Financial Corporation, a Delaware corporation located in
Ohio ("WOFC"), SHFC and Seven Hills Savings Association, an
Ohio savings and loan association and a wholly-owned
subsidiary of SHFC ("Seven Hills"), a copy of which is
attached hereto as Annex A (the "Agreement"), pursuant to
which a wholly-owned subsidiary of WOFC will, upon the
satisfaction of certain conditions, merge with and into SHFC
(the "Merger") in a transaction in which each outstanding SHFC
common share will be canceled and extinguished on the
effective date of the Merger in consideration and exchange for
the right to receive the sum of the following (the "Per Share
Merger Consideration"):
(A) $19.65 in cash; plus
(B) The quotient of
(I) The difference between (a) the
amount(s) actually received from the
liquidation and winding up of the
Ohio Deposit Guarantee Fund (the
"ODGF") between June 14, 1996, and
the effective date of the Merger,
less (b) the out-of-pocket expenses
and estimated federal and state
income tax liabilities attributable
to such amount(s);
divided by
(II) 583,763, an amount which equals
the sum of the number of SHFC
outstanding common shares on the
effective date of the Merger, plus
the number of shares subject to
outstanding options to purchase SHFC
common shares.
Such quotient is not expected to exceed
$.07, as a result of which the maximum cash
amount expected to be paid by WOFC in
consideration and exchange for each SHFC
common share is $19.72.
3. The adjournment of the Special Meeting in the
event that a sufficient number of votes necessary to approve
the foregoing proposals is not received; and
4. The transaction of such other business as may
properly come before the Special Meeting.
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On June 13, 1996, the date preceding the public announcement of the
execution of the Agreement, the closing bid and asked prices for SHFC's common
shares were $14.50 and $16.50 per share, respectively. On September 30, 1996,
the closing bid and asked prices for SHFC's common shares were $17.50 and $19.50
per share, respectively.
THE BOARD OF DIRECTORS BELIEVES THAT THE ADOPTION OF THE AMENDMENT AND
THE AGREEMENT IS IN THE BEST INTERESTS OF SHFC SHAREHOLDERS AND
RECOMMENDS, THEREFORE, THE ADOPTION OF THE AMENDMENT AND THE AGREEMENT.
THE BOARD OF DIRECTORS ALSO RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY, IN ORDER TO
FACILITATE THE ADOPTION OF THE AMENDMENT AND THE AGREEMENT.
The close of business on September 30, 1996, has been fixed as the
record date for determining the shareholders entitled to receive notice of, and
to vote at, the Special Meeting (the "Record Date"). On the Record Date, there
were 536,472 SHFC common shares outstanding. SHFC has no other class of shares
outstanding other than the common shares.
All common shares represented by each properly executed Proxy received
by the Board of Directors pursuant to this solicitation will be voted in
accordance with the shareholder's directions as specified on the Proxy. If no
directions are specified on the Proxy, the common shares represented by the
Proxy will be voted in favor of the adoption of the Amendment, in favor of the
adoption of the Agreement and in favor of the adjournment of the Special
Meeting, if necessary.
Management knows of no other matters to be brought before the Special
Meeting. If any other matters are properly brought before the Special Meeting,
however, the persons named as proxies in the enclosed Proxy will vote in
accordance with their best judgment on such matters.
Without affecting any vote previously taken, a shareholder signing and
returning the accompanying Proxy has the power to revoke the proxy at any time
before exercise (i) by giving notice to SHFC in a writing received by Henry C.
Gessing, Secretary of SHFC, at SHFC's offices at 1440 Main Street, Cincinnati,
Ohio 45210, (ii) by executing a subsequent proxy received by SHFC or (iii) by
attending the Special Meeting and giving notice of such revocation in person to
the Inspectors of Election at the Special Meeting. Attendance at the Special
Meeting will not, in and of itself, constitute a revocation of a Proxy.
The presence, in person or by Proxy, of the holders of a majority of
the issued and outstanding SHFC common shares entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting. Each
shareholder is entitled to one vote for each share held. Under Ohio law, shares
that are held by a nominee for a beneficial owner and which are represented in
person or by proxy, but which are not voted with respect to the adoption of the
Amendment, the adoption of the Agreement or the adjournment of the Special
Meeting ("non-votes"), are counted as present for purposes of establishing a
quorum. The effect of an abstention or a non-vote is the same as a vote against
the adoption of the Amendment, the adoption of the Agreement or the adjournment
of the Special Meeting. If, however, the accompanying Proxy is signed and dated
by the shareholder, but no vote is specified thereon, the shares held by such
shareholder will be voted FOR the adoption of the Amendment, FOR the adoption of
the Agreement and FOR the adjournment of the Special Meeting and will not be
considered a "non-vote."
SHFC will bear the cost of the solicitation of Proxies from its
shareholders. In addition to the use of the mail, Proxies may be solicited by
personal interview, telephone, telegram and telecopy by the directors and
officers of SHFC, who will receive no additional compensation for such services.
Arrangements will be made with brokerage firms and other custodians, nominees
and fiduciaries for the distribution of solicitation materials to the beneficial
owners of SHFC common shares held of record by such persons, and such brokers,
custodians, nominees and fiduciaries will be reimbursed for reasonable
out-of-pocket expenses incurred by them in connection with such distribution.
AVAILABLE INFORMATION
SHFC is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
accordingly, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected or copied at the public
reference facilities of the Commission located at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549; at the Commission's Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601;
and at its New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
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<PAGE> 5
SEVEN HILLS FINANCIAL CORPORATION
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY.............................................................................................................. 1
Introduction...................................................................................................... 1
Parties to the Agreement.......................................................................................... 2
SHFC and Seven Hills........................................................................................... 2
WOFC........................................................................................................... 2
Special Meeting of SHFC Shareholders.............................................................................. 3
The Amendment..................................................................................................... 3
The Merger........................................................................................................ 3
Background and Reasons for the Merger.......................................................................... 3
Opinion of Charles Webb & Company.............................................................................. 5
Terms of the Merger............................................................................................... 6
Exchange of SHFC Common Shares................................................................................. 6
Assumption of SHFC Options..................................................................................... 6
Representations, Warranties and Covenants...................................................................... 7
Conditions and Effective Time.................................................................................. 7
Subsequent Merger.............................................................................................. 7
Termination.................................................................................................... 7
Surrender of Certificates Evidencing SHFC Common Shares........................................................ 7
Federal Income Tax Consequences................................................................................ 8
Effect of Merger on SHFC Directors and Executive Officers and the Seven Hills Savings
Association Employee Stock Ownership Plan................................................................ 8
Dissenters' Rights of Appraisal................................................................................... 8
Market for the SHFC Common Shares and Related Shareholder Matters................................................. 8
AMENDMENT OF THE AMENDED ARTICLES OF INCORPORATION................................................................... 10
THE MERGER........................................................................................................... 11
Background and Reasons for the Merger............................................................................. 11
Opinion of Charles Webb & Company................................................................................. 13
Recommendation of the Board of Directors of SHFC.................................................................. 14
Exchange of SHFC Common Shares.................................................................................... 14
Assumption of SHFC Options..................................................................................... 15
Representations, Warranties and Covenants......................................................................... 15
Conditions........................................................................................................ 16
Effective Time.................................................................................................... 16
Subsequent Merger................................................................................................. 16
Termination....................................................................................................... 16
Surrender of Certificates Evidencing SHFC Common Shares........................................................... 17
Federal Income Tax Consequences................................................................................... 18
Effect of Merger on SHFC Directors and Executive Officers and the ESOP............................................ 18
Interests of Certain Persons...................................................................................... 19
Accounting Treatment.............................................................................................. 19
REGULATORY APPROVALS................................................................................................. 19
SELECTED CONSOLIDATED FINANCIAL DATA................................................................................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 21
General........................................................................................................... 21
Changes in Financial Condition.................................................................................... 22
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995.................................... 22
Comparison of Results of Operations for the Years Ended June 30, 1995 and 1994.................................... 23
Liquidity and Capital Resources................................................................................... 24
</TABLE>
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<TABLE>
<S> <C>
Asset and Liability Management.................................................................................... 25
Impact of Inflation and Changing Prices........................................................................... 26
Effect of Recent Accounting Pronouncements........................................................................ 26
THE BUSINESS OF SHFC................................................................................................. 27
Lending Activities................................................................................................ 27
Investment Activities............................................................................................. 37
Deposits and Borrowings........................................................................................... 39
Yields Earned and Rates Paid...................................................................................... 43
Competition....................................................................................................... 46
Personnel......................................................................................................... 47
REGULATION........................................................................................................... 47
General........................................................................................................... 47
Ohio Corporation Law.............................................................................................. 47
Ohio Savings and Loan Regulation.................................................................................. 48
Office of Thrift Supervision...................................................................................... 48
Federal Deposit Insurance Corporation............................................................................. 53
FRB Regulations................................................................................................... 54
Federal Home Loan Banks........................................................................................... 54
TAXATION............................................................................................................. 54
Federal Taxation.................................................................................................. 54
Ohio Taxation..................................................................................................... 56
MARKET FOR THE SHARES AND RELATED SHAREHOLDER MATTERS................................................................ 56
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................... 57
IDENTITY AND BACKGROUND OF WOFC...................................................................................... 58
DISSENTERS' RIGHTS OF APPRAISAL...................................................................................... 59
ADJOURNMENT OF THE SPECIAL MEETING................................................................................... 60
AUDITORS............................................................................................................. 61
SHAREHOLDER PROPOSALS................................................................................................ 61
FINANCIAL STATEMENTS................................................................................................. F-1
</TABLE>
ANNEX A:.AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
ANNEX B:.OPINION OF CHARLES WEBB & COMPANY
ANNEX C:.PROVISIONS OF THE OHIO REVISED CODE WITH RESPECT TO DISSENTERS' RIGHTS
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<PAGE> 7
SUMMARY
The following is a summary of certain information with respect to
matters to be considered at the Special Meeting and is not intended to be a
complete statement of all material facts regarding such matters. This summary
should be read in conjunction with, and is qualified in its entirety by
reference to, the full text of this Proxy Statement, including the Agreement
attached hereto as Annex A and the other annexes attached hereto.
INTRODUCTION
On June 14, 1996, SHFC, Seven Hills and WOFC entered into the
Agreement. If the Amendment and the Agreement are adopted by the affirmative
vote of the holders of a majority of the outstanding SHFC common shares and if
all other conditions to the consummation of the Merger are satisfied or waived,
a wholly-owned subsidiary of WOFC (the "Acquisition Subsidiary") will merge with
and into SHFC. On the date on which the Merger becomes effective (the "Effective
Date"), each outstanding SHFC common share will be canceled and extinguished in
consideration and exchange for the right to receive the Per Share Merger
Consideration, which is the sum of the following:
(A) $19.65 cash; plus
(B) The quotient of
(I) The difference between (a) the amount(s)
actually received from the liquidation and
winding up of the ODGF between June 14,
1996, and the Effective Date, less (b) the
out-of-pocket expenses and estimated federal
and state income tax liabilities
attributable to such amount(s);
divided by
(II) 583,763, an amount which equals the sum
of the number of SHFC outstanding shares on
the Effective Date, plus the number of
shares subject to outstanding options. See
"THE MERGER - Exchange of SHFC Options."
As of September 30, 1996, $45,118 had been received by SHFC as a distribution
from the ODGF. There is no assurance that any additional amounts will be
received from the ODGF before the Effective Date. If, however, the maximum
possible amounts are received by SHFC from the ODGF before the Effective Date,
the foregoing quotient is not expected to exceed, after the deduction of such
expenses and liabilities, $.07. Accordingly, the maximum Per Share Merger
Consideration is expected to equal $19.72.
The Per Share Merger Consideration was determined as a result of
arms-length negotiations between the Boards of Directors of WOFC and SHFC. Such
negotiations commenced when WOFC responded to SHFC's request by making an offer
to SHFC based upon the subjective consideration by WOFC of a number of factors,
including, but not limited to, the book value and earnings per share of SHFC,
the asset quality of SHFC and the amounts paid in similar transactions.
On June 14, 1996, there were 536,472 SHFC common shares outstanding and
49,406 SHFC common shares subject to outstanding options, the exercise price of
each of which was $10 (the "SHFC Options"). Of the 536,472 SHFC common shares
outstanding on June 14, 1996, 2,115 shares were held by the Seven Hills Savings
Association Recognition and Retention Plan ("RRP") and were available for award
to RRP participants in accordance with the terms of the RRP (the "Unallocated
Shares"). See "VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." The Agreement requires that SHFC retire the Unallocated Shares to
authorized, but unissued, shares without the payment of any consideration before
the Effective Date. Accordingly, the outstanding shares on the Effective Date
will equal 534,357.
Each holder of SHFC Options has agreed not to exercise the SHFC Options
before the Effective Date and to the assumption of such options on the Effective
Date, thereafter entitling the optionholder to purchase WOFC common shares.
Based upon the provisions of the Agreement, each of the SHFC Options will after
the Effective Date entitle the optionholder to purchase 6,136 common shares of
WOFC at $11.50 per share, or 6,158 common shares of WOFC at $11.46 per share if
the shareholders of SHFC receive $.07 per share from an ODGF distribution. See
"Terms of the Merger."
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<PAGE> 8
Following the consummation of the Merger, SHFC will be a wholly-owned
subsidiary of WOFC. Immediately after the Effective Date, SHFC will merge with
and into WOFC, as a result of which the separate corporate existence of SHFC
will terminate. Seven Hills will thereafter be a direct, wholly-owned subsidiary
of WOFC and will continue to serve the community as Seven Hills Savings
Association.
PARTIES TO THE AGREEMENT
SHFC AND SEVEN HILLS. SHFC is a unitary savings and loan holding
company incorporated under the laws of the State of Ohio and owns all of the
issued and outstanding common shares of Seven Hills, a savings and loan
association incorporated under the laws of the State of Ohio. In December 1993,
SHFC acquired all of the common shares issued by Seven Hills upon its conversion
from a mutual savings and loan association to a stock savings and loan
association (the "Conversion"). Since the Conversion, SHFC's activities have
been limited primarily to holding the common shares of Seven Hills.
Serving the Cincinnati, Ohio, area since 1882, Seven Hills conducts
business from its main office at 1440 Main Street in Cincinnati and from two
full-service branch offices located in the Cincinnati area. Engaged principally
in the business of making first mortgage loans secured by one- to four-family
residential real estate located in and around Cincinnati, Ohio, Seven Hills also
originates loans for the construction of one- to four-family residential real
estate, loans secured by multi-family residences (over four units) and
non-residential real estate and loans secured by deposits at Seven Hills. Seven
Hills also invests in U.S. Government and agency obligations, interest-bearing
deposits in other financial institutions, government guaranteed mortgage-backed
securities and other investments permitted by applicable law. Funds for lending
and other investment activities are obtained primarily from savings deposits and
loan principal repayments.
As a savings and loan holding company, SHFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Seven Hills is subject to
regulation, supervision and examination by the OTS, the Federal Deposit
Insurance Corporation (the "FDIC") and the Ohio Division of Financial
Institutions (the "Division"). Deposits in Seven Hills are insured up to
applicable limits by the FDIC. Seven Hills is also a member of the Federal Home
Loan Bank (the "FHLB") of Cincinnati.
WOFC. WOFC, a Delaware corporation, was organized in March 1994 for
the purpose of becoming the savings and loan holding company for Springfield
Federal Savings and Loan Association ("Springfield FSLA") in connection with
Springfield FSLA's conversion from the mutual to the stock form of organization
(the "Springfield Conversion"). In the Springfield Conversion, Springfield FSLA
converted to a federal stock savings bank under the name "Springfield Federal
Savings Bank" ("Springfield FSB"). WOFC owns all of the outstanding stock of
Springfield FSB issued on July 29, 1994. WOFC's common stock is traded on the
Nasdaq National Market System under the symbol "WOFC."
On March 29, 1996, WOFC acquired Mayflower Financial Corporation
("Mayflower"), located in Cincinnati, Ohio, and its subsidiary, Mayflower
Savings Bank. In connection with such acquisition, Mayflower Savings Bank
converted to a federal savings bank charter under the name "Mayflower Federal
Savings Bank" ("Mayflower FSB") and is held as a subsidiary separate from
Springfield FSB.
WOFC, Springfield FSB and Mayflower FSB are subject to comprehensive
regulation, examination and supervision by the OTS and the FDIC. Springfield FSB
and Mayflower FSB are members of the FHLB System, and their deposits are backed
by the full faith and credit of the United States Government and are separately
insured up to applicable limits by the FDIC.
Springfield FSB is headquartered in Springfield, Ohio. Springfield
FSB's primary market area covers Clark County, Ohio, and parts of contiguous
counties, and is serviced through its main office in Springfield, Ohio, and four
branch offices in Enon, New Carlisle, Springfield and Yellow Springs. Mayflower
FSB is headquartered in Cincinnati and primarily serves that area.
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<PAGE> 9
SPECIAL MEETING OF SHFC SHAREHOLDERS
The Special Meeting will be held at 4:00 p.m. local time, on November
1, 1996, at the offices of SHFC at 1440 Main Street, Cincinnati, Ohio 45210. At
the Special Meeting, shareholders of SHFC will be asked to consider and act upon
(i) the adoption of the Amendment, (ii) the adoption of the Agreement and (iii)
such other business as may properly come before the Special Meeting and any
adjournment thereof. In the event that a sufficient number of votes to adopt the
Amendment and the Agreement is not received, the shareholders will be asked to
adjourn the Special Meeting for up to 30 days. Only the holders of record of
SHFC common shares outstanding on the Record Date will be entitled to notice of
and to vote at the Special Meeting and any adjournment thereof. As of the Record
Date, 536,472 SHFC common shares were outstanding and entitled to vote and held
of record by approximately 274 shareholders. The affirmative vote of the holders
of a majority of the outstanding SHFC common shares, voting in person or by
proxy, will be necessary to adopt the Amendment and the Agreement. The
affirmative vote, therefore, of the holders of 268,237 SHFC common shares will
be necessary to adopt the Amendment and the Agreement.
As of the Record Date, the directors and executive officers of SHFC had
sole or shared voting power, in the aggregate, with respect to 160,880
outstanding SHFC common shares, or 29.99% of the outstanding SHFC common shares.
Each of the directors of SHFC has agreed to vote all of the SHFC common shares
held solely or jointly by each such director, other than shares held in a
fiduciary capacity, FOR the adoption of the Amendment and FOR the adoption of
the Agreement.
THE AMENDMENT
Article EIGHTH of the amended Articles of Incorporation of SHFC
prohibits the offer to acquire or the acquisition of more than 10% of the
outstanding shares of SHFC. Upon the consummation of the Merger, WOFC will be
deemed under Article EIGHTH to have acquired more than 10% of the outstanding
shares of SHFC.
The Board of Directors believes that the Agreement is fair to and in
the best interests of SHFC shareholders. As a result, the Board of Directors
unanimously recommends that the shareholders of SHFC vote to adopt the Agreement
at the Special Meeting. Accordingly, the Board of Directors unanimously
recommends that the SHFC shareholders remove Article EIGHTH of the amended
Articles of Incorporation, which prohibits an offer to acquire or the
acquisition of 10% or more of the outstanding shares of SHFC, by voting to
approve the Amendment at the Special Meeting. The affirmative vote of the
holders of a majority of the outstanding SHFC common shares is required to adopt
the Amendment. See "THE AMENDMENT OF THE AMENDED ARTICLES OF INCORPORATION."
THE MERGER
BACKGROUND AND REASONS FOR THE MERGER. After the consummation of the
Conversion in 1993, the Board of Directors continually evaluated various
possible strategies for increasing the comparatively low returns on equity and
assets of SHFC. At June 30, 1994, 1995 and 1996, for example, the returns on
equity of SHFC equaled 3.37%, 5.17% and 1.80%, respectively. On the same dates,
the returns on assets of SHFC equaled 0.55%, 1.10% and 0.38%, respectively. The
Board of Directors was not satisfied with such returns.
While specific possible strategies to increase such returns were
identified during the past few years, the directors generally recognized that
effective implementation would require significant capital investment. As a
small, neighborhood thrift, Seven Hills could not make the capital investment
necessary to market a competitive array of products and services without a
material impact on earnings. Although the directors believed that the erosion of
short-term earnings was an acceptable consequence of an eventual improvement in
net income, they understood clearly that ultimate improvement was not assured.
For example, the Board of Directors agreed that Seven Hills should
provide access to automated teller machines ("ATMs") in order to retain existing
and attract new customers. An investment in ATMs and the expense of joining an
ATM network were substantial, however, and did not provide any prospect of
significant income in the short or long term. Accordingly, the directors
concluded that the investment and expense would decrease the earnings of Seven
Hills on a short-term basis and would not produce any material income in the
long term.
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The Board of Directors also believed that the net interest margin of
Seven Hills might be materially enhanced by a substantial increase in loan
volume. During the past several years, Seven Hills invested available funds in
comparatively low-yield mortgage-backed securities because the nominal demand
for home financing from Seven Hills precluded the origination of a material
amount of higher-yield mortgage loans. The directors concluded that a strategy
to revitalize the mortgage loan department and to increase loan volume
substantially required the employment of a mortgage loan solicitor and support
personnel and an investment in equipment, including computer hardware and
software. Although such employment and investment might eventually increase loan
volume, they would substantially decrease earnings during the next several
years.
The Board of Directors considered, therefore, whether the
implementation of a long-term strategy to improve earnings would be in the best
interests of shareholders in view of the consequent adverse impact on the
existing low level of earnings and the uncertainty of ultimate success. As part
of such consideration, the directors noted the consolidation of the thrift and
bank industries in a manner by which the larger thrifts and banks competed more
effectively for deposits and loans than the smaller, neighborhood thrifts; the
uncertainty of Congressional and other proposals to eliminate the thrift as a
viable financial institution; and the absence of an active and liquid market for
the outstanding shares of SHFC. The directors questioned whether such
competition and legislation could detrimentally affect the viability of SHFC
even if the directors successfully implemented the strategy for long-term
improvement in earnings. Specifically, the directors wondered whether the future
would permit the profitable operation of a small, neighborhood thrift.
In addition, the directors focused on the fact that the market for the
outstanding common shares of SHFC would remain inactive and illiquid for the
foreseeable future regardless of whether the strategy was successfully
implemented. Both the relatively small number of shareholders and the
comparatively small capitalization of SHFC had impeded the development of an
active and liquid market. While an increase in earnings would benefit
shareholders generally, the continuation of the illiquid and inactive market
would make the realization by shareholders of any such benefit through a sale of
the SHFC shares in the open market difficult.
As the directors considered the foregoing factors, they focused on
whether a sale of SHFC might be in the best interests of shareholders because
the risk of the implementation of a long-term strategy would be eliminated. As a
result, the directors decided to investigate the possible sale of SHFC and
retained the services of Charles Webb & Company, Inc. ("Webb"), the investment
banking firm which advised SHFC in the Conversion, to assist in such
investigation. Effective July 31, 1996, Webb became a division of Keefe,
Bruyette & Woods, Inc.
Beginning in March of 1996, the Board of Directors conducted through
Webb a confidential inquiry into the possible interest of 15 entities in
pursuing a merger with or acquisition of SHFC. Each of such entities expressing
an interest was provided certain information on SHFC, including financial
statements, loan and deposit summaries and other data. Following such inquiry,
WOFC and a thrift institution (the "Thrift") expressed an interest in
immediately pursuing discussions.
The Thrift, an entity approximately equal in size to Seven Hills,
proposed a "merger of equals" in which the shareholders of each entity would own
approximately equal percentages of the combined entity. With the assistance of
Webb, the Board of Directors carefully examined the benefits of the proposed
merger of equals, including the preservation of the historic role of Seven Hills
as a neighborhood depository and lender, the continuation of the local ownership
of the institution and the continuity of management and personnel. As the
directors pondered the nature of a pro forma combined entity and internally
projected earnings for five years into the future, they agreed that a merger of
equals may produce a larger entity with essentially the same earnings' posture
as each individual institution. Although the directors recognized that a larger
entity might more effectively make necessary capital investments and compete for
business, they perceived the same overall uncertainty of implementing a
long-term strategic plan after a merger with the Thrift as they perceived in
implementing the various strategies to improve the earnings of SHFC. Moreover,
the development of an active and liquid market for the shares of the combined
entity would be unlikely for the foreseeable future regardless of whether a
long-term strategy were successfully implemented.
As a result, the directors turned their attention to WOFC. If a
negotiated transaction with WOFC would produce for shareholders a premium over
the market price of SHFC shares, then the WOFC transaction might be preferable
to a merger of equals because the risk of the implementation of a long-term
strategy to improve earnings would be eliminated.
WOFC then performed an extensive due diligence examination of the books
and records of SHFC. Following such examination, SHFC and WOFC commenced
negotiations over the terms and conditions of the Agreement. When such
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<PAGE> 11
negotiations were concluded, WOFC indicated a willingness to pay $19.65 cash per
share of SHFC, plus the per share value of any amounts paid to SHFC by the ODGF
before the Effective Date of the merger, less the expenses and state and federal
tax consequences of such payment. In evaluating the proposed price, the
directors focused on the fact that many shareholders paid $10 for their shares
at the time of the Conversion; that the bid prices of SHFC shares ranged between
$14.50 and $14.75 for the last several months; that the $19.65 per share offer
equalled 109% of SHFC's book value per share at March 31, 1996; and that the
$19.65 was 63.4 times the annualized earnings per share of SHFC for the quarter
ended March 31, 1996.
The directors questioned Webb about the financial aspects of the
proposed transaction, specifically inquiring into the key financial components
of comparable transactions. Following such questioning, Webb provided the Board
of Directors with the opinion that the transaction was fair to SHFC's
shareholders from a financial point of view.
Based upon all of the foregoing, the Board of Directors concluded that
a merger of the Acquisition Subsidiary with and into SHFC in a transaction in
which SHFC's shareholders would receive a minimum of $19.65 cash per share was
preferable to the implementation of a long-term strategy to improve earnings and
was, therefore, in the best interests of SHFC's shareholders. Accordingly, the
Board of Directors unanimously approved the Agreement and unanimously recommends
the adoption of the Agreement by the shareholders at the Special Meeting.
OPINION OF CHARLES WEBB & COMPANY. On January 26, 1996, Webb was
retained by SHFC to evaluate SHFC's strategic alternatives for increasing
shareholder value and, in certain circumstances, to act as its financial advisor
in connection with its ongoing consideration and implementation of such
alternatives. Webb, as part of its investment banking business, is continuously
engaged in the evaluation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings and distributions of listed
and unlisted securities. Webb is familiar with the market for common stocks of
publicly traded Midwest-based banks, thrifts and bank and thrift holding
companies. The SHFC Board of Directors selected Webb on the basis of the firm's
reputation and its experience and expertise in transactions similar to the
Merger and its prior work for and relationship with SHFC in connection with
SHFC's initial offering of common shares to the public.
Pursuant to its engagement, Webb was asked to render an opinion as to
the fairness, from a financial point of view, of the Per Share Merger
Consideration to the shareholders of SHFC. Webb has delivered its fairness
opinion to the SHFC Board of Directors that as of June 14, 1996, and as of
October 7, 1996, the Per Share Merger Consideration is fair to the shareholders
of SHFC from a financial point of view. No limitations were imposed by the SHFC
Board of Directors upon Webb with respect to the investigations made or
procedures followed in rendering its opinion. Webb has consented to the
inclusion herein of the summary of its opinion to the SHFC Board of Directors
and to the reference to the entire opinion attached hereto as Annex B.
THE FULL TEXT OF THE OPINION OF WEBB, UPDATED AS OF THE DATE OF THIS
PROXY STATEMENT, WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEWS UNDERTAKEN, IS ATTACHED AS ANNEX B TO THE PROXY
STATEMENT AND SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF WEBB
SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE OPINION.
In rendering its opinion, Webb (i) reviewed the financial and business
data supplied to it by SHFC, including SHFC's Annual Reports to Shareholders and
Annual Reports on Form 10-KSB for the fiscal years ended June 30, 1995 and 1994,
SHFC's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996, and
SHFC's financial statements for the fiscal year ended June 30, 1996; (ii)
reviewed WOFC's Annual Report to Shareholders and Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, and WOFC's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, and for the quarter ended June 30,
1996; (iii) discussed with senior management and the Board of Directors of SHFC
and Seven Hills the possibility of obtaining other acquisition proposals and the
Board of Directors' reasons for seeking affiliation and merger; (iv) discussed
with senior management of WOFC the current and prospective outlook for WOFC and
the reasons for seeking affiliation and merger; (v) considered historical
quotations and the prices of recorded transactions in SHFC's common shares since
its Conversion; and (vi) reviewed the financial and stock market data of other
thrifts, particularly in the Midwest region, and the financial and structural
terms of several other recent transactions involving thrift mergers or
acquisitions or proposed changes of control of comparably situated companies.
In rendering its opinion, Webb assumed and relied upon the accuracy and
completeness of the information provided to it by WOFC and SHFC and obtained by
it from public sources. In its review, with the consent of the SHFC
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<PAGE> 12
Board of Directors, Webb did not undertake any independent verification of the
information provided to it, nor did it make any independent appraisal or
evaluation of the assets or liabilities or potential or contingent liabilities
of WOFC or SHFC.
Webb's review of comparable transactions included the compilation of
pending or recently completed acquisitions of thrift institutions. Such
companies were selected for one of the following reasons: (i) comparable total
transaction value; (ii) similar Midwestern location; or (iii) similar asset size
to SHFC. Webb identified in its analysis 19 comparable transactions that met the
above criteria; nine transactions were completed and ten transactions had been
announced but not yet closed.
The information in the following table summarizes the material
information analyzed by Webb with respect to the transactions referred to above.
The summary does not purport to be a complete description of the analysis
performed by Webb and should not be construed independently of the other
information considered by Webb in rendering its opinion. Selecting portions of
Webb's analysis or isolating certain aspects of the comparable transaction
without considering all analyses and factors could create an incomplete or
potentially misleading view of the evaluation process.
<TABLE>
<CAPTION>
Aggregate Consideration as a Consideration as a
Consideration Multiple of Earnings(1) Percent of Book Value
<S> <C> <C> <C>
Median for comparable transactions $ 8.0 million 24.8x 155%
Highest amount/value for a comparable
transaction $15.0 million 57.9x 219%
Lowest amount/value for a comparable
transaction $ 4.6 million 15.1x 107%
WOFC Offer $11.5 million 63.4x(2) 109%
</TABLE>
- -----------------------------
(1) Earnings were computed for a twelve-month period, but not necessarily a
fiscal year basis.
(2) Based on earnings for the twelve months ended March 31, 1996, the most
recent available quarterly data at the time of Webb's analyses, and
585,878 fully diluted shares outstanding at March 31, 1996.
In preparing its analyses, Webb made numerous assumptions with respect
to industry performance, business and economic conditions and other matters,
many of which are beyond the control of Webb and SHFC. The analyses performed by
Webb are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses and
do not purport to be appraisals or reflect the prices at which a business may be
sold.
For services rendered in connection with advising SHFC regarding the
Merger, including the fairness opinion and financial advisory services provided
to SHFC since the completion of SHFC's conversion from a mutual to a stock
company. Webb will receive a fee of approximately $175,000 assuming a fair
market value of $22.60 per WOFC share. As of the date of this Proxy Statement,
Webb has received $60,000 of such fee.
TERMS OF THE MERGER
EXCHANGE OF SHFC COMMON SHARES. At the Effective Date, the Acquisition
Subsidiary will merge with and into SHFC. As a result of the consummation of the
Merger, each of the outstanding SHFC common shares will be canceled and
extinguished in consideration and exchange for the Per Share Merger
Consideration. See "THE MERGER - Exchange of SHFC Common Shares."
ASSUMPTION OF SHFC OPTIONS. In connection with the Conversion, SHFC
issued to the directors and executive officers options to purchase an aggregate
of 49,406 SHFC common shares at an option exercise price of $10 per share. See
"VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Each of the holders of SHFC Options has agreed not to exercise his or her SHFC
Option before the Effective Date and to the assumption of such options by WOFC
on the Effective Date. During the arm's length negotiations of the Agreement,
SHFC and WOFC agreed that the exercise price of, and the number of shares
subject to, the SHFC Options after their assumption should preserve as of June
14, 1996, the economic value of the SHFC Options as measured by the difference
between the $10 exercise price of each SHFC Option and the Per Share Merger
Consideration.
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<PAGE> 13
As a result, the number of WOFC common shares subject to an SHFC Option
after assumption will equal the product of the number of shares subject to each
SHFC Option, multiplied by the following quotient (the "Exchange Ratio"):
(A) The Per Share Merger Consideration,
divided by
(B) $22.60, which was the average of the closing
prices for a share of WOFC on the Nasdaq
National Market System reported for the five
consecutive trading days before June 14,
1996, the date of the execution of the
Agreement.
Similarly, the exercise price of each SHFC Option after assumption will equal
the quotient of the $10 option exercise price of each SHFC Option, divided by
the Exchange Ratio. The exercise price will, therefore, equal approximately
$11.46 to $11.50, depending upon the amount of any distribution from the ODGF
received by the SHFC shareholders as part of the Per Share Merger Consideration.
Each holder of an SHFC Option has also agreed not to exercise his or
her SHFC Option until the assumption of the SHFC Options is approved by the
stockholders of WOFC at the next annual meeting of the stockholders of WOFC. If
the WOFC stockholders fail to approve the assumption of the SHFC Options, each
holder of an SHFC Option will be entitled to receive for each SHFC common share
formerly subject to an SHFC Option a cash payment equal to the Per Share Merger
Consideration, less the $10 exercise price of the SHFC Options. See "THE MERGER
- -Assumption of SHFC Options."
REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of SHFC, Seven Hills
and WOFC has made certain representations and warranties in the Agreement in
respect of various matters, including, but not limited to, the corporate
organization and financial condition of each. In addition, SHFC and Seven Hills
have made certain covenants in respect of various matters, including, but not
limited to, the conduct of business between the date of the Agreement and the
Effective Date. See "THE MERGER - Representations, Warranties and Covenants."
CONDITIONS AND EFFECTIVE TIME. The consummation of the Merger is
subject to the satisfaction or waiver of a number of conditions, including, but
not limited to, the adoption of the Amendment and the Agreement by the
affirmative vote of the holders of a majority of the outstanding SHFC common
shares; the receipt of all necessary regulatory approvals; the exercise of
dissenters' rights by the holders of no more than 10% of the outstanding shares
of SHFC; the absence of any material adverse change in the business, operations,
properties, assets or financial condition of SHFC since March 31, 1996; and a
minimum SHFC shareholders' equity in the amount of $9.65 million, exclusive of
certain expenses of the Merger, accounting adjustments and other amounts.
Following the satisfaction or waiver of all of such conditions, Certificates of
Merger will be filed as soon as practicable with the Ohio Secretary of State,
after which the Merger will be effective. See "THE MERGER - Conditions and -
Effective Time."
SUBSEQUENT MERGER. Following the consummation of the Merger, SHFC will
be a wholly-owned subsidiary of WOFC. Immediately after such consummation, SHFC
will merge with and into WOFC, as a result of which the separate corporate
existence of SHFC will terminate. Seven Hills will thereafter be a direct
wholly-owned subsidiary of WOFC and will continue to serve the community as
Seven Hills Savings Association. See "THE MERGER - Subsequent Merger."
TERMINATION. The Agreement may be terminated and the Merger abandoned
upon the occurrence of certain events, including, but not limited to, the mutual
agreement of the parties, the uncured material breach of the Agreement by either
party, the failure to satisfy or waive all conditions to the consummation of the
Merger and the failure to consummate the Merger on or before March 31, 1997. See
"THE MERGER - Termination."
SURRENDER OF CERTIFICATES EVIDENCING SHFC COMMON SHARES. As soon as
practicable after the consummation of the Merger, each SHFC shareholder will be
advised of such consummation by letter accompanied by instructions for use in
surrendering the certificate or certificates evidencing SHFC to Registrar and
Transfer Company, the exchange agent for the Merger (the "Exchange Agent").
CERTIFICATES FOR SHFC SHARES SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL
AFTER RECEIPT OF THE LETTER OF TRANSMITTAL AND SHOULD NOT BE RETURNED TO SHFC
WITH THE ENCLOSED PROXY. See "THE MERGER - Surrender of Certificates Evidencing
SHFC Common Shares."
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<PAGE> 14
FEDERAL INCOME TAX CONSEQUENCES. The following is a summary discussion
of the material federal income tax consequences of the Merger. This summary does
not purport to discuss all aspects of federal income taxation that may be
applicable to particular shareholders, some of whom may be subject to special
rules, nor does it address any aspects of state, local or foreign tax laws. This
summary is based upon current law, which is subject to change. SHFC's
shareholders are advised to consult their own tax advisors.
Under current law, each SHFC shareholder who receives cash for his or
her SHFC common shares, either in the Merger or pursuant to the exercise of
dissenters' rights, will recognize a gain or loss for federal income tax
purposes in an amount measured by the difference between the cash received and
such SHFC shareholder's adjusted basis in the SHFC common shares surrendered.
Provided the SHFC common shares surrendered for cash qualify as capital assets
in the hands of each SHFC shareholder, the gain or loss will be treated as
capital gain or loss and will be either long-term or short-term, depending upon
whether on the Effective Date such shareholder has held his or her SHFC common
shares for more than one year. See "THE MERGER - Federal Income Tax
Consequences."
EFFECT OF MERGER ON SHFC DIRECTORS AND EXECUTIVE OFFICERS AND THE SEVEN
HILLS SAVINGS ASSOCIATION EMPLOYEE STOCK OWNERSHIP PLAN . Arthur W. Wendel, Jr.,
James R. Maurer, Robert A. West and Roger L. Ruhl, four of the five current
members of the Board of Directors of SHFC and Seven Hills, have agreed to serve
on the Board of Directors of Seven Hills following the consummation of the
Merger. Henry Gessing, the fifth current member of the Board of Directors of
SHFC and Seven Hills, has agreed to serve Seven Hills following the consummation
of the Merger as a Director Emeritus. In addition, Diana Bowman D'Amico, the
Vice President of SHFC and Seven Hills, has agreed to serve on the Board of
Directors and as President and Managing Officer of Seven Hills following the
consummation of the Merger.
Currently, the directors of SHFC are paid no fees for service as SHFC
directors. Each director of Seven Hills is paid $950 per month for service as a
director of Seven Hills. Generally, the Board of Directors meets twice each
month. Each member of the Executive Committee receives an additional $200 per
month for service as a member of the Executive Committee. Each director is also
entitled to a death benefit of $500 for each year of service to Seven Hills, up
to a maximum of $5,000. In addition, the directors received stock options and
RRP awards. See "VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Following the Effective Time, the directors of Seven Hills are expected
to be paid a total of $700 per month, and the Board of Directors will meet only
once per month on a regular basis. No additional death benefits will accrue, and
the RRP will be terminated.
On the Effective Date, certain actions will be taken with respect to
the Seven Hills Savings Association Employee Stock Ownership Plan (the "ESOP")
which, in their entirety, will terminate the ESOP and distribute ESOP benefits
to the ESOP participants pursuant to the terms of the ESOP. See "THE MERGER -
Effect of Merger on SHFC Directors and Executive Officers and the ESOP."
DISSENTERS' RIGHTS OF APPRAISAL
Any shareholder of SHFC who does not vote in favor of the adoption of
the Agreement and who delivers a written demand for payment of the fair cash
value of such shareholder's SHFC common shares not later than ten days after the
Special Meeting and in the manner provided by Ohio Revised Code Section 1701.85,
a copy of which is attached hereto as Annex B, shall be entitled, if and when
the Merger is consummated and upon strict compliance with certain procedures set
forth in Ohio Revised Code Section 1701.85, to receive the fair cash value of
such SHFC common shares. A shareholder of SHFC who wishes to submit a written
demand for payment of the fair cash value of common shares should deliver such
demand to Arthur W. Wendel, Jr., President, Seven Hills Financial Corporation,
1440 Main Street, Cincinnati, Ohio 45210. See "DISSENTERS' RIGHTS OF APPRAISAL."
MARKET FOR THE SHFC COMMON SHARES AND RELATED SHAREHOLDER MATTERS
On the Record Date, there were 536,472 common shares of SHFC
outstanding and held of record by approximately 274 shareholders. Price
information with respect to SHFC's common shares is quoted on The Nasdaq
SmallCap Market ("Nasdaq"). The following table sets forth the range of high and
low bid information for the common shares of SHFC, as
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<PAGE> 15
quoted by Nasdaq, together with the dividends declared per common share for each
quarter since the completion of the Conversion.
<TABLE>
<CAPTION>
Quarter Ended High Low Cash Dividends Declared
<S> <C> <C> <C>
March 31, 1994 $12.00 $11.00 $.00
June 30, 1994 $15.50 $11.50 $.05
September 30, 1994 $17.50 $15.75 $.55
December 31, 1994 $17.50 $15.00 $.07
March 31, 1995 $16.25 $14.50 $.07
June 30, 1995 $17.50 $15.00 $.07
September 30, 1995 $16.00 $16.00 $.63
December 31, 1995 $16.00 $14.50 $.08
March 31, 1996 $14.75 $14.50 $.08
June 30, 1996 $17.50 $14.50 $.09
September 30, 1996 $17.50 $17.50 $.09
</TABLE>
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<PAGE> 16
AMENDMENT OF THE AMENDED ARTICLES OF INCORPORATION
Since the Conversion, Article EIGHTH of the Articles of Incorporation
of SHFC has provided as follows:
EIGHTH: Until the expiration of five years from the
date of the acquisition by the corporation of the capital
stock of Seven Hills Savings Association ("Seven Hills") to be
issued in connection with the conversion of Seven Hills from
mutual to stock form, no Person (hereinafter defined) shall
directly or indirectly offer (hereinafter defined) to Acquire
(hereinafter defined) or Acquire the Beneficial Ownership
(hereinafter defined) of more than 10% of any class of any
equity security of the corporation; provided, however, that
such prohibition shall not apply to the purchase of shares by
underwriters in connection with a public offering or the power
of trustees to vote shares of the corporation held by the
Seven Hills Savings Association Employee Stock Ownership Plan
or its successor. In the event that any shares of the
corporation are Acquired in violation of this Article Eighth,
all shares Beneficially Owned by any Person in excess of 10%
of any class of equity security of the corporation shall not
be counted as shares entitled to vote, shall not be voted by
any Person and shall not be counted as voting shares in
connection with any matter submitted to the shareholders for a
vote. For purposes of this Article Eighth, the following terms
shall have the meanings set forth below:
(A) "Person" includes an individual, a group acting in
concert, a corporation, a partnership, an
association, a joint stock company, a trust, an
unincorporated organization or similar company, a
syndicate or any other group formed for the purpose
of acquiring or disposing of the equity securities of
the corporation, but does not include the Seven Hills
Savings Association Employee Stock Ownership Plan or
its successor.
(B) "Offer" includes every offer to buy or otherwise
acquire, solicitations of an offer to sell, tender
offer for, or request or invitation for tenders of, a
security or interest in a security for value.
(C) "Acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or
otherwise.
(D) "Acting in concert" means (i) participation in a
joint activity or conscious parallel action towards a
common goal, whether or not pursuant to an express
agreement, or (ii) a combination or pooling of voting
or other interests in the securities of an issuer for
a common purpose pursuant to any contract,
understanding, relationship, agreement or other
arrangement, whether written or otherwise.
(E) "Beneficial Ownership" shall include, without
limitation, (i) all shares directly or indirectly
owned by a Person, by an Affiliate (hereinafter
defined) of such Person or by an Associate
(hereinafter defined) of such Person or such
Affiliate, (ii) all shares which such Person,
Affiliate or Associate has the right to acquire
through the exercise of any option, warrant or right
(whether or not currently exercisable), through the
conversion of a security, pursuant to the power to
revoke a trust, discretionary account or similar
arrangement, or pursuant to the automatic termination
of a trust, discretionary account or similar
arrangement, and (iii) all shares as to which such
Person, Affiliate or Associate directly or indirectly
through any contract, arrangement, understanding,
relationship or otherwise (including, without
limitation, any written or unwritten agreement to act
in concert) has or shares voting power (which
includes the power to vote or to direct the voting of
such shares) or investment power (which includes the
power to dispose or to direct the disposition of such
shares) or both.
(F) "Affiliate" shall mean a Person that directly or
indirectly, through one or more intermediaries,
controls or is controlled by, or is under common
control with, another Person.
(G) "Associate" of a Person shall mean (i) any
corporation or organization (other than the
corporation or a subsidiary of the corporation) of
which the Person is an officer or partner or is,
directly or indirectly, the beneficial owner of ten
percent or more of any class of equity securities,
(ii) any trust or other estate in which the Person
has a substantial beneficial interest or as to which
the Person serves as trustee or in a similar
fiduciary capacity, except a tax-qualified
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<PAGE> 17
employee stock benefit plan in which the Person has a
substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity or a
tax-qualified employee stock benefit plan, and (iii)
any relative or spouse of the Person, or any relative
of such spouse, who has the same home as the Person
or is a director or officer of the corporation or any
of its parents or subsidiaries.
Provisions similar to Article EIGHTH are contained in the Articles of
Incorporation of savings associations which convert from mutual to stock form
and are designed to discourage changes in control which are deemed by the Board
of Directors of the association not to be in the best interests of the
association or its shareholders. Because the Board of Directors of SHFC has
determined that the adoption of the Agreement would be in the best interests of
the shareholders of SHFC, the Board of Directors of SHFC unanimously recommends
that the SHFC shareholders vote to approve an amendment to the SHFC amended
Articles of Incorporation to delete Article EIGHTH in its entirety and to remove
thereby the prohibition against the offer to acquire or the acquisition of 10%
or more of the outstanding SHFC common shares. Accordingly, the Board of
Directors of SHFC unanimously recommends that the SHFC shareholders vote to
approve the following resolution at the Special Meeting:
RESOLVED, that an amendment of the amended Articles of Incorporation of
Seven Hills Financial Corporation to delete Article EIGHTH in its
entirety be, and it hereby is, adopted.
The affirmative vote of the holders of a majority of the outstanding SHFC common
shares is required to adopt the Amendment.
THE MERGER
This section of the Proxy Statement describes certain aspects of the
Agreement, a copy of which is attached hereto as Annex A. The following
description does not purport to be complete and is qualified in its entirety by
reference to the Agreement. All shareholders are urged to read the Agreement in
its entirety.
BACKGROUND AND REASONS FOR THE MERGER
After consummation of the Conversion in December 1993, the Board of
Directors continually evaluated various possible strategies for increasing the
comparatively low returns on equity and assets of SHFC. At June 30, 1994, 1995
and 1996, for example, the returns on equity of SHFC equaled 3.37%, 5.17% and
1.80%, respectively. On the same dates, the returns on assets of SHFC equaled
0.55%, 1.10% and 0.38%, respectively. The Board of Directors was not satisfied
with such returns.
While specific possible strategies to increase such returns were
identified during the past few years, the directors generally recognized that
effective implementation would require significant capital investment. As a
small, neighborhood thrift, Seven Hills could not make the capital investment
necessary to market a competitive array of products and services without a
material impact on earnings. Although the directors believed that the erosion of
short-term earnings was an acceptable consequence of an eventual improvement in
net income, they understood clearly that ultimate improvement was not assured.
For example, the Board of Directors agreed that Seven Hills should
provide access to ATMs in order to retain existing and attract new customers. An
investment in ATMs and the expense of joining an ATM network were substantial,
however, and did not provide any prospect of significant income in the short or
long term. Accordingly, the directors concluded that the investment and expense
would decrease the earnings of Seven Hills on a short-term basis and would not
produce any material income in the long term.
The Board of Directors also believed that the net interest margin of
Seven Hills might be materially enhanced by a substantial increase in loan
volume. During the past several years, Seven Hills invested available funds in
comparatively low-yield mortgage-backed securities because the nominal demand
for home financing from Seven Hills precluded the origination of a material
amount of higher-yield mortgage loans. The directors concluded that a strategy
to revitalize the mortgage loan department and to increase loan volume
substantially required the employment of a mortgage loan solicitor and support
personnel and an investment in equipment, including computer hardware and
software. Although such employment and investment might eventually increase loan
volume, they would substantially decrease earnings during the next several
years.
-11-
<PAGE> 18
The Board of Directors considered, therefore, whether the
implementation of a long-term strategy to improve earnings would be in the best
interests of shareholders in view of the consequent adverse impact on the
existing low level of earnings and the uncertainty of ultimate success. As part
of such consideration, the directors noted the consolidation of the thrift and
bank industries in a manner by which the larger thrifts and banks competed more
effectively for deposits and loans than the smaller, neighborhood thrifts; the
uncertainty of Congressional and other proposals to eliminate the thrift as a
viable financial institution; and the absence of an active and liquid market for
the outstanding shares of SHFC. The directors questioned whether such
competition and legislation could detrimentally affect the viability of SHFC
even if the directors successfully implemented the strategy for long-term
improvement in earnings. Specifically, the directors wondered whether the future
would permit the profitable operation of a small, neighborhood thrift.
In addition, the directors focused on the fact that the market for the
outstanding common shares of SHFC would remain inactive and illiquid for the
foreseeable future regardless of whether the strategy was successfully
implemented. Both the relatively small number of shareholders and the
comparatively small capitalization of SHFC had impeded the development of an
active and liquid market. While an increase in earnings would benefit
shareholders generally, the continuation of the illiquid and inactive market
would make the realization by shareholders of any such benefit through a sale of
the SHFC shares in the open market difficult.
As the directors considered the foregoing factors, they focused on
whether a sale of SHFC might be in the best interests of shareholders because
the risk of the implementation of a long-term strategy would be eliminated. As a
result, the directors decided to investigate the possible sale of SHFC and
retained the services of Webb, the investment banking firm which advised SHFC in
the mutual to stock conversion, to assist in such investigation.
Beginning in March of 1996, the Board of Directors conducted through
Webb a confidential inquiry into the possible interest of 15 entities in
pursuing a merger with or acquisition of SHFC. Each of such entities expressing
an interest was provided certain information on SHFC, including financial
statements, loan and deposit summaries and other data. Following such inquiry,
WOFC and the Thrift expressed an interest in immediately pursuing discussions.
The Thrift, an entity approximately equal in size to Seven Hills,
proposed a "merger of equals" in which the shareholders of each entity would own
approximately equal percentages of the combined entity. With the assistance of
Webb, the Board of Directors carefully examined the benefits of the proposed
merger of equals, including the preservation of the historic role of Seven Hills
as a neighborhood depository and lender, the continuation of the local ownership
of the institution and the continuity of management and personnel. As the
directors pondered the nature of a pro forma combined entity and internally
projected earnings for five years into the future, they agreed that a merger of
equals may produce a larger entity with essentially the same earnings' posture
as each individual institution. Although the directors recognized that a larger
entity might more effectively make necessary capital investments and compete for
business, they perceived the same overall uncertainty of implementing a
long-term strategic plan after a merger with the Thrift as they perceived in
implementing the various strategies to improve the earnings of SHFC. Moreover,
the development of an active and liquid market for the shares of the combined
entity would be unlikely for the foreseeable future regardless of whether a
long-term strategy were successfully implemented.
As a result, the directors turned their attention to WOFC. If a
negotiated transaction with WOFC would produce for shareholders a premium over
the market price of SHFC shares, then the WOFC transaction might be preferable
to a merger of equals because the risk of the implementation of a long-term
strategy to improve earnings would be eliminated.
WOFC then performed an extensive due diligence examination of the books
and records of SHFC. Following such examination, SHFC and WOFC commenced
negotiations over the terms and conditions of the Agreement. When such
negotiations were concluded, WOFC indicated a willingness to pay $19.65 cash per
share of SHFC, plus the per share value of any amounts paid to SHFC by the ODGF
before the Effective Date, less the expenses and state and federal tax
consequences of such payment. In evaluating the proposed price, the directors
focused on the fact that many shareholders paid $10 for their shares at the time
of the Conversion; that the bid prices of SHFC shares ranged between $14.50 and
$14.75 for the last several months; that the $19.65 per share offer equalled
109% of SHFC's book value per share at March 31, 1996; and that the $19.65 was
63.4 times the annualized earnings per share of SHFC for the quarter ended March
31, 1996.
-12-
<PAGE> 19
The directors questioned Webb about the financial aspects of the
proposed transaction, specifically inquiring into the key financial components
of comparable transactions. Following such questioning, Webb provided the Board
of Directors with the opinion that the transaction was fair to shareholders from
a financial point of view.
Based upon all of the foregoing, the Board of Directors concluded that
a merger of the Acquisition Subsidiary with and into SHFC in a transaction in
which SHFC shareholders would receive a minimum of $19.65 cash per share was
preferable to the implementation of a long-term strategy to improve earnings and
was, therefore, in the best interests of SHFC's shareholders. Accordingly, the
Board of Directors unanimously approved the Agreement and unanimously recommends
the adoption of the Agreement by the shareholders at the Special Meeting.
OPINION OF CHARLES WEBB & COMPANY
On January 26, 1996, Webb was retained by SHFC to evaluate SHFC's
strategic alternatives for increasing shareholder value and, in certain
circumstances, to act as its financial advisor in connection with its ongoing
consideration and implementation of such alternatives. Webb, as part of its
investment banking business, is continuously engaged in the evaluation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings and distributions of listed and unlisted securities.
Webb is familiar with the market for common stocks of publicly traded
Midwest-based banks, thrifts and bank and thrift holding companies. The SHFC
Board of Directors selected Webb on the basis of the firm's reputation and its
experience and expertise in transactions similar to the Merger and its prior
work for and relationship with SHFC in connection with SHFC's initial offering
of common shares to the public.
Pursuant to its engagement, Webb was asked to render an opinion as to
the fairness, from a financial point of view, of the Per Share Merger
Consideration to the shareholders of SHFC. Webb has delivered its fairness
opinion to the SHFC Board of Directors that as of June 14, 1996, and as of
October 7, 1996, the Per Share Merger Consideration is fair to the shareholders
of SHFC from a financial point of view. No limitations were imposed by the SHFC
Board of Directors upon Webb with respect to the investigations made or
procedures followed in rendering its opinion. Webb has consented to the
inclusion herein of the summary of its opinion to the SHFC Board of Directors
and to the reference to the entire opinion attached hereto as Annex B.
THE FULL TEXT OF THE OPINION OF WEBB, UPDATED AS OF THE DATE OF THIS
PROXY STATEMENT, WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEWS UNDERTAKEN, IS ATTACHED AS ANNEX B TO THE PROXY
STATEMENT AND SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF WEBB
SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE OPINION.
In rendering its opinion, Webb (i) reviewed the financial and business
data supplied to it by SHFC, including SHFC's Annual Reports to Shareholders and
Annual Reports on Form 10-KSB for the fiscal years ended June 30, 1995 and 1994,
SHFC's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996, and
SHFC's financial statements for the fiscal year ended June 30, 1996; (ii)
reviewed WOFC's Annual Report to Shareholders and Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, and WOFC's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, and for the quarter ended June 30,
1996; (iii) discussed with senior management and the Board of Directors of SHFC
and Seven Hills the possibility of obtaining other acquisition proposals and the
Board of Directors' reasons for seeking affiliation and merger; (iv) discussed
with senior management of WOFC the current and prospective outlook for WOFC and
the reasons for seeking affiliation and merger; (v) considered historical
quotations and the prices of recorded transactions in SHFC's common shares since
its Conversion; and (vi) reviewed the financial and stock market data of other
thrifts, particularly in the Midwest region, and the financial and structural
terms of several other recent transactions involving thrift mergers or
acquisitions or proposed changes of control of comparably situated companies.
In rendering its opinion, Webb assumed and relied upon the accuracy and
completeness of the information provided to it by WOFC and SHFC and obtained by
it from public sources. In its review, with the consent of the SHFC Board of
Directors, Webb did not undertake any independent verification of the
information provided to it, nor did it make any independent appraisal or
evaluation of the assets or liabilities or potential or contingent liabilities
of WOFC or SHFC.
Webb's review of comparable transactions included the compilation of
pending or recently completed acquisitions of thrift institutions. Such
companies were selected for one of the following reasons: (i) comparable total
transaction value; (ii) similar Midwestern location; or (iii) similar asset size
to SHFC. Webb identified in its analysis 19 comparable transactions that met the
above criteria; nine transactions were completed and ten transactions had been
announced but not yet closed.
-13-
<PAGE> 20
The information in the following table summarizes the material
information analyzed by Webb with respect to the transactions referred to above.
The summary does not purport to be a complete description of the analysis
performed by Webb and should not be construed independently of the other
information considered by Webb in rendering its opinion. Selecting portions of
Webb's analysis or isolating certain aspects of the comparable transaction
without considering all analyses and factors could create an incomplete or
potentially misleading view of the evaluation process.
<TABLE>
<CAPTION>
Aggregate Consideration as a Consideration as a
Consideration Multiple of Earnings (1) Percent of Book Value
<S> <C> <C> <C>
Median for comparable transactions $ 8.0 million 24.8x 155%
Highest amount/value for a comparable
transaction $15.0 million 57.9x 219%
Lowest amount/value for a comparable
transaction $ 4.6 million 15.1x 107%
WOFC Offer $11.5 million 63.4x (2) 109%
</TABLE>
- -----------------------------
(1) Earnings were computed for a twelve-month period, but not necessarily a
fiscal year basis.
(2) Based on earnings for the twelve months ended March 31, 1996, the most
recent available quarterly data at the time of Webb's analyses, and
585,878 fully diluted shares outstanding at March 31, 1996.
In preparing its analyses, Webb made numerous assumptions with respect
to industry performance, business and economic conditions and other matters,
many of which are beyond the control of Webb and SHFC. The analyses performed by
Webb are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses and
do not purport to be appraisals or reflect the prices at which a business may be
sold.
For services rendered in connection with advising SHFC regarding the
Merger, including the fairness opinion and financial advisory services provided
to SHFC since the completion of the Conversion. Webb will receive a fee of
approximately $175,000 assuming a fair market value of $22.60 per WOFC share. As
of the date of this Proxy Statement, Webb has received $60,000 of such fee.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF SHFC
THE SHFC BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, SHFC'S SHAREHOLDERS AND, THEREFORE,
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF SHFC VOTE FOR THE ADOPTION OF
THE AGREEMENT.
EXCHANGE OF SHFC COMMON SHARES
On the Effective Date, the Acquisition Subsidiary will merge with and
into SHFC. As a result of the consummation of the Merger, each outstanding SHFC
common share will be canceled and extinguished in consideration and exchange for
the right to receive the sum of the following:
(A) $19.65; plus
(B) The quotient of
(I) The difference between (a) the amount(s)
actually received from the liquidation and
winding up of the ODGF between June 14,
1996, and the Effective Date, less (b) the
out-of-pocket expenses and estimated federal
and state income tax liabilities
attributable to such amount(s);
-14-
<PAGE> 21
divided by
(II) 583,763, an amount which equals the sum
of the number of SHFC outstanding shares on
the Effective Date, plus the number of
shares subject to outstanding options.
The foregoing quotient is not expected to exceed, after the deduction of such
expenses and liabilities, approximately $.07. Accordingly, the estimated maximum
Per Share Merger Consideration is $19.72.
ASSUMPTION OF SHFC OPTIONS. In connection with the Conversion, SHFC
issued to the directors and executive officers options to purchase an aggregate
of 49,406 SHFC common shares at an option exercise price of $10 per share. See
"VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Each of the holders of SHFC Options has agreed not to exercise his or her SHFC
Option before the Effective Date and to the assumption of such SHFC Option by
WOFC on the Effective Date. During the arm's length negotiations of the
Agreement, SHFC and WOFC agreed that the exercise price of, and the number of
shares subject to, each SHFC Option after its assumption should preserve as of
June 14, 1996, the economic value of the SHFC Option as measured by the
difference between the $10 exercise price of each SHFC Option and the Per Share
Merger Consideration.
As a result, the number of WOFC common shares subject to an SHFC Option
after assumption will equal the product of the number of shares subject to the
SHFC Option, multiplied by the following quotient (the "Exchange Ratio"):
(A) The Per Share Merger Consideration,
divided by
(B) $22.60, which was the average of the closing
prices for a share of WOFC on the Nasdaq
National Market System reported for the five
consecutive trading days before June 14,
1996, the date of the execution of the
Agreement.
Similarly, the exercise price of each SHFC Option after assumption will equal
the quotient of the $10 option exercise price of each SHFC Option, divided by
the Exchange Ratio. The exercise price will, therefore, equal approximately
$11.46 to $11.50, depending upon the amount of any distribution from the ODGF
received by the SHFC shareholders as part of the Per Share Merger Consideration.
Each of the holders of an SHFC Option has also agreed not to exercise
his or her SHFC Option until the approval of WOFC's assumption of the SHFC
Options by the stockholders of WOFC at the next annual meeting of the
stockholders of WOFC. If the WOFC stockholders fail to approve the assumption,
each holder of an SHFC Option shall be entitled to receive for each SHFC common
share formerly subject to an SHFC Option a cash payment equal to the Per Share
Merger Consideration, less the $10 exercise price of the SHFC Options.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Each of SHFC, Seven Hills and WOFC has made certain representations and
warranties in the Agreement in respect of various matters. Such matters include
representations and warranties in respect of corporate organization, authority,
capital, financial condition, legal proceedings and business condition. In
addition, SHFC and Seven Hills have made certain other representations and
warranties in respect of the past conduct of business, investments, properties,
taxes, contracts, employee benefit plans, environmental issues and other
matters.
SHFC, Seven Hills and WOFC have also each made certain covenants in the
Agreement. During the period between June 14, 1996, and the Effective Date, for
example, SHFC must conduct its business only in the ordinary course consistent
with past practice, except to the extent authorized in writing by WOFC. In
addition, SHFC may not solicit, encourage or initiate any negotiations or
discussions with respect to inquiries, offers or proposals relating to the
possible sale or other disposition of SHFC common shares or other disposition of
a substantial portion of its assets to, or merger or consolidation with, any
person (collectively, an "Unsolicited Acquisition Proposal"), subject to the
good faith exercise of the fiduciary duties of the Board of Directors of SHFC.
In the event that the Board of Directors of SHFC receives an Unsolicited
Acquisition Proposal and, as a result, determines that a recommendation that the
shareholders of SHFC vote in favor of the adoption of the Agreement is
reasonably likely to constitute a breach of its fiduciary duties to the
shareholders
-15-
<PAGE> 22
of SHFC, then either WOFC or SHFC may terminate the Agreement, and SHFC and
Seven Hills must pay to WOFC $535,000 upon such termination.
SHFC has also agreed to establish and take, at the request of WOFC and
to the extent permitted by law and consistent with generally accepted accounting
principles and the fiduciary duties of the directors, such reserves and accruals
to conform SHFC loan, accrual, reserve and other accounting policies to WOFC's
policies. SHFC does not have to establish and take such reserves and accruals,
however, unless certain conditions to closing have been satisfied and unless
there is no basis for the termination of the Agreement.
In addition, WOFC has agreed to indemnify the officers and directors of
SHFC from and against certain liabilities for a three-year period beginning at
the Effective Date to the maximum extent permitted by the WOFC Certificate of
Incorporation and the Bylaws of WOFC, but subject to applicable limitations
under Delaware law.
CONDITIONS
The obligation of each of WOFC and SHFC to consummate the Merger is
subject to a number of conditions, including, but not limited to, the receipt of
all necessary regulatory approvals. In addition, the obligation of WOFC to
consummate the Merger is subject to a number of conditions, including, but not
limited to, the truth in all material respects of all of SHFC's representations
and warranties in the Agreement; the performance and compliance by SHFC of all
agreements, covenants and conditions in the Agreement; the absence of a material
adverse change in the financial condition, results of operations, assets,
deposit liabilities or business since March 31, 1996; the exercise of
dissenters' rights by the holders of not more than 10% of the SHFC common shares
of SHFC; and SHFC shareholders' equity on the Effective Date, as calculated in
accordance with generally accepted accounting principles, in an amount not less
than $9.65 million, exclusive of expenses related to the Merger, of reserves,
accruals and charges taken or established by SHFC at the request of WOFC and of
certain other expenses and charges.
The obligation of SHFC to consummate the Merger is also subject to a
number of conditions, including, but not limited to, the truth in all material
respects of all of WOFC's representations and warranties in the Agreement, the
adoption of the Amendment and the Agreement at the Special Meeting, and the
material performance and compliance of WOFC with all agreements, covenants and
conditions in the Agreement.
Any of the foregoing conditions may be waived by the party which is
entitled to the benefits thereof.
EFFECTIVE TIME
Following the satisfaction or waiver of all conditions set forth in the
Agreement, Certificates of Merger in respect of the Merger will be filed as soon
as practicable with the Ohio Secretary of State, after which the Merger will be
consummated. It is currently anticipated that the Merger will be consummated in
November 1996.
SUBSEQUENT MERGER
Following the consummation of the Merger, SHFC will be a wholly-owned
subsidiary of WOFC. Immediately after such consummation, SHFC will merge with
and into WOFC, as a result of which the separate corporate existence of SHFC
will terminate. Seven Hills will thereafter be a direct, wholly-owned subsidiary
of WOFC and will continue to serve the community as Seven Hills Savings
Association.
TERMINATION
The Agreement may be terminated in writing, either before or after its
adoption by the shareholders of SHFC, at any time on or prior to the Effective
Date:
(a) By the mutual consent of WOFC and SHFC;
(b) By WOFC if SHFC or Seven Hills has, or by
SHFC, if WOFC has, breached in any material
respect any of the representations and
warranties or agreements contained in the
Agreement and such breach is not cured
within ten days after notice to cure such
-16-
<PAGE> 23
breach is given by the non-breaching party
or, if such breach is not capable of being
cured within ten days, steps are not
initiated within ten days to effect a cure;
(c) On the Effective Date, by either WOFC or
SHFC, if any conditions precedent to closing
set forth in the Agreement with respect to
such party have not been satisfied or
waived;
(d) At any time on or prior to the Effective
Date, by either WOFC or SHFC, if any of the
applications for prior approval from
regulatory agencies have been denied;
(e) At any time on or prior to the Effective
Date, by either WOFC or SHFC, if (i) SHFC's
Board of Directors is excused from its
obligation to recommend that SHFC's
shareholders vote in favor of the adoption
of the Agreement due to the receipt of an
Unsolicited Acquisition Proposal or (ii) the
required approval of the Agreement by SHFC's
shareholders has not been obtained;
(f) At any time on or prior to the Effective
Date, by WOFC, if Seven Hills has become a
party or is subject to any regulatory
enforcement action or proceeding with or by
any federal or state agency charged with the
supervision or regulation of savings banks
or savings associations, which is reasonably
determined by WOFC to be significant to
Seven Hills' business, operations or
financial condition; or
(g) By either WOFC or SHFC, if the Effective
Date has not occurred on or prior to March
31, 1997.
In the event the Agreement is terminated, the Agreement will become void and
will have no effect, except that the parties will continue to be bound by their
agreements in the Agreement with respect to the payment of expenses and the
confidentiality of information, and a termination resulting from the uncured
willful breach of a covenant or agreement will not relieve the breaching party
from liability for that breach. In the event that the Board of Directors of SHFC
receives an Unsolicited Acquisition Proposal and, as a result, determines that a
recommendation that the shareholders of SHFC vote in favor of the adoption of
the Agreement is reasonably likely to constitute a breach of its fiduciary
duties to the shareholders of SHFC, then either WOFC or SHFC may terminate the
Agreement, and SHFC and Seven Hills must pay to WOFC $535,000 upon such
termination.
SURRENDER OF CERTIFICATES EVIDENCING SHFC COMMON SHARES
As soon as practicable after the consummation of the Merger, the
Exchange Agent will mail to each holder of record of a certificate or
certificates which immediately before such consummation evidenced outstanding
SHFC common shares (the "Certificates") a form letter of transmittal. The letter
of transmittal will contain instructions for effecting the surrender of the
Certificates in exchange for the Per Share Merger Consideration. Upon surrender
of a Certificate, together with such letter of transmittal, duly executed, to
the Exchange Agent for exchange and cancellation, the holder of such Certificate
will be entitled to receive the Per Share Merger Consideration to which such
Certificate holder will have become entitled pursuant to the provisions of the
Agreement. Any shareholder of SHFC who has lost or misplaced a Certificate
should immediately contact Diana Bowman D'Amico, Vice President of SHFC, at
(513) 621-9143. A written statement detailing the procedures for replacing the
lost Certificates will be mailed to the shareholder following such contact.
If any check for the Per Share Merger Consideration is to be issued in
a name other than that in which the certificate for Shares of SHFC surrendered
for exchange is registered, the certificates so surrendered must be properly
endorsed or otherwise be in proper from for transfer and the person requesting
such exchange must pay to SHFC or its agent any applicable transfer or other
taxes required by reason thereof. CERTIFICATES FOR SHARES OF SHFC SHOULD NOT BE
SENT WITH YOUR PROXY.
On the Effective Date, holders of certificates representing common
shares of SHFC shall cease to have any rights with respect to such common shares
(except such rights, if any, as such holders may have as dissenting
shareholders), and each such certificate will be deemed for all purposes to
evidence the right to receive the cash into which such SHFC shares have been
converted.
-17-
<PAGE> 24
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY DISCUSSION OF THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER. THIS SUMMARY DOES NOT PURPORT TO DISCUSS ALL
ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE APPLICABLE TO PARTICULAR
CATEGORIES OF SHAREHOLDERS, SOME OF WHICH MAY BE SUBJECT TO SPECIAL RULES, NOR
DOES IT ADDRESS ANY ASPECTS OF STATE, LOCAL OR FOREIGN TAX LAWS. THIS SUMMARY IS
BASED UPON CURRENT FEDERAL LAW, WHICH IS SUBJECT TO CHANGE. SHFC'S SHAREHOLDERS
ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL AND OTHER TAX LAWS.
For federal income tax purposes, the Merger will be treated as a direct
purchase by WOFC for cash of the SHFC common shares. The Merger will qualify as
a tax-free liquidation under Section 332 and Section 337 of the Internal Revenue
Code of 1986, as amended. Under current law, each holder of SHFC common shares
who receives cash for his or her SHFC common shares, either in the Merger or
pursuant to the exercise of dissenters' rights, will recognize a gain or loss
for federal income tax purposes in an amount measured by the difference between
the cash received and such SHFC shareholder's adjusted basis in the SHFC common
shares surrendered. Provided the shares surrendered for cash qualify as capital
assets in the hands of each SHFC shareholder, the gain or loss will be treated
as capital gain or loss and will be either long-term or short-term, depending
upon whether at the Effective Time of the Merger such shareholder has held his
or her SHFC shares for more than one year.
EFFECT OF MERGER ON SHFC DIRECTORS AND EXECUTIVE OFFICERS AND THE ESOP
Arthur W. Wendel, Jr., James R. Maurer, Robert A. West and Roger L.
Ruhl, four of the five current members of the Board of Directors of SHFC and
Seven Hills, have agreed to serve on the Board of Directors of Seven Hills
following the consummation of the Merger. Henry C. Gessing, the fifth current
member of the Board of Directors of SHFC and Seven Hills, has agreed to serve
Seven Hills following the consummation of the Merger as a Director Emeritus. In
addition, Diana Bowman D'Amico, the Vice President of SHFC and Vice President
and Managing Officer of Seven Hills, has agreed to serve on the Board of
Directors and as President and Managing Officer of Seven Hills following the
consummation of the Merger.
Currently, the directors of SHFC are paid no fees for service as SHFC
directors. Each director of Seven Hills is paid $950 per month for service as a
director of Seven Hills. Generally, the Board of Directors meets twice each
month. Each member of the Executive Committee receives an additional $200 per
month for service as a member of the Executive Committee. Each director is also
entitled to a death benefit of $500 for each year of service to Seven Hills, up
to a maximum of $5,000. In addition, the directors received stock options and
RRP awards. See "VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Following the Effective Time, the directors of Seven Hills are expected
to be paid a total of $700 per month, and the Board of Directors will meet only
once per month on a regular basis. No additional death benefits will accrue, and
the RRP will be terminated.
At the time of the Conversion, the ESOP borrowed from SHFC the funds
needed to purchase SHFC shares. As the loan has been repaid with contributions
made to the ESOP by Seven Hills, the shares for which payment has been made have
been allocated to the accounts of employees. Payments have been made on the loan
in installments of one-fifth each year. The amount of the allocation is limited
not only by the contribution of funds determined by the Board of Directors of
Seven Hills, but also by tax laws that limit the amount which may be allocated
each year to the account of any individual participant and to the accounts of
all participants in the aggregate in tax-qualified employee stock benefit plans.
On the Closing Date, the cash received by the ESOP from WOFC for the
unallocated SHFC shares will be used to repay the ESOP loan. Seven Hills and
WOFC will also request from the Internal Revenue Service (the "IRS") a
determination letter permitting the cash held in the ESOP and not yet allocated
to the accounts of participants to be immediately allocated without limitation
by the applicable tax laws. If the IRS issues a favorable determination letter,
all of the funds held by the ESOP will be allocated to the accounts of
participants as soon as practicable, and the ESOP will be terminated. If the IRS
does not issue a favorable determination letter, then the funds in the ESOP will
be allocated as soon as possible within the limits of the applicable tax laws.
It is expected that all amounts in the ESOP will be allocated by the end of
1997. To the extent such amounts cannot be allocated by the end of 1997, the
remaining unallocated amounts will be transferred to a tax-qualified plan of
WOFC.
-18-
<PAGE> 25
INTERESTS OF CERTAIN PERSONS
As of the Record Date, the directors and executive officers of SHFC had
sole or shared voting power, in the aggregate, with respect to 160,880
outstanding SHFC common shares, or 29.99% of the outstanding SHFC common shares.
The directors of SHFC have agreed to vote 83,771 shares, which are all of the
outstanding SHFC common shares owned solely or jointly by each such director,
other than shares held in a fiduciary capacity, FOR the approval of the
Amendment and FOR the adoption of the Agreement.
In connection with the Conversion, SHFC issued to the directors and
executive officers options to purchase an aggregate of 49,406 SHFC common shares
at an option exercise price of $10 per share. See "VOTING SECURITIES AND
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Each of the holders of
SHFC Options has agreed not to exercise his or her SHFC Options before the
Effective Date and to the assumption of such options by WOFC on the Effective
Date. During the arm's length negotiations of the Agreement, SHFC and WOFC
agreed that the exercise price of, and the number of shares subject to, an SHFC
Option after assumption should preserve as of June 14, 1996, the economic value
of an SHFC Option as measured by the difference between the $10 exercise price
of each SHFC Option and the Per Share Merger Consideration. See "Assumption of
SHFC Options."
The following table sets forth certain information in respect of the
existing SHFC Options and the SHFC Options after assumption by WOFC based on Per
Share Merger Consideration of $19.65:
<TABLE>
<CAPTION>
Number of Shares Number of WOFC
Subject to Exercise Price of Shares Subject to Exercise Price of
Optionee Office SHFC Option SHFC Option Assumed Option Assumed Option
- -------- ------ ---------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Diana Bowman D'Amico Vice President 7,058 $10 6,136 $11.50
Henry C. Gessing Secretary
and Director 7,058 $10 6,136 $11.50
Shirley A. Gluck Treasurer 7,058 $10 6,136 $11.50
James R. Maurer Director 7,058 $10 6,136 $11.50
Roger L. Ruhl Director 7,058 $10 6,136 $11.50
Arthur W. Wendel, Jr. President
and Director 7,058 $10 6,136 $11.50
Robert A. West Director 7,058 $10 6,136 $11.50
</TABLE>
ACCOUNTING TREATMENT
The acquisition of SHFC pursuant to the Merger will be accounted for
pursuant to the purchase method of accounting. Under the purchase method of
accounting, the assets and liabilities of SHFC will be recorded on the books of
WOFC at their respective fair values at the Effective Time. Any excess of the
value of the consideration paid by WOFC over the fair value of SHFC's
identifiable net assets acquired will be recorded as good will.
REGULATORY APPROVALS
The consummation of the Merger is subject to the receipt of approvals
from the OTS and the Division, both of which have been received.
WOFC and SHFC are not aware of any governmental approvals or actions
that are required for consummation of the Merger, except as described above.
Should any such approval or action be required, it is presently contemplated
that such approval or action would be sought. There can be no assurance that any
such approval or action, if needed, could be obtained and would not be
conditioned in a manner that would cause WOFC to abandon the Merger. There can
be no assurance that no action would be brought challenging the Merger.
-19-
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding SHFC at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
Selected financial condition and 1996 1995 1994
other data: ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Total amount of:
Assets $44,944 $46,580 $48,020
Cash and cash equivalents (1) 552 1,830 1,699
Certificates of deposit in other
financial institutions - 750 1,800
Investment securities (2) 1,364 3,843 4,018
Mortgage-backed securities (2) 6,677 6,412 7,257
Loans receivable - net 34,988 32,477 32,024
Deposits 34,767 36,115 37,840
Shareholders' equity - restricted, net 9,676 10,111 9,912
Number of:
Real estate loans outstanding 570 575 565
Deposit accounts 3,502 3,754 3,884
Full service offices 3 4 4
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------
Summary of earnings: 1996 1995 1994
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income $3,297 $3,227 $3,200
Interest expense 1,780 1,668 1,704
------- ------- -------
Net interest income 1,517 1,559 1,496
Provision for loan losses - 2 6
------- ------- -------
Net interest income after provision for
loan losses 1,517 1,557 1,490
Other income 12 523 18
General, administrative and other expense
1,295 1,295 1,111
------- ------- -------
Earnings before income taxes 234 785 397
Federal income taxes 59 262 133
------- ------- -------
Net earnings 175 $ 523 $ 264
======= ====== =======
Earnings per share $ 0.33 $ 0.96 $ 0.23
======= ====== =======
</TABLE>
- -----------------------------
(1) Includes cash and due from banks, interest-bearing deposits in other
financial institutions and federal funds sold.
(2) Includes securities designated as available for sale. SHFC adopted
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as
of July 1, 1994. See Notes A-2 and B of Notes to Consolidated Financial
Statements for additional information.
-20-
<PAGE> 27
<TABLE>
<CAPTION>
At or for the year ended June 30,
-------------------------------------------------------------
Selected financial ratios: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest rate spread (difference between
average yield on interest-earning
assets and average cost of
interest-bearing liabilities) 2.43% 2.46% 2.56%
Net interest margin (net interest income
as a percentage of average
interest-earning assets) 3.43 3.38 3.21
Return on equity (net earnings divided
by average equity) 1.80 5.17 3.37
Return on assets (net earnings divided
by average total assets) 0.38 1.10 0.55
Equity-to-assets ratio (average equity
divided by average total assets) 21.34 21.38 16.36
Loan loss allowance as a percentage of
non-performing loans 47.20 56.20 27.00
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since SHFC acquired the common shares of Seven Hills in connection with
the Conversion, SHFC's activities have been limited primarily to holding such
common shares. Consequently, the following discussion and analysis focuses on
the financial condition and results of operations of Seven Hills.
Seven Hills is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in permanent mortgage
loans secured by one- to four-family residential real estate located primarily
in Hamilton County, Ohio. Seven Hills also originates loans for the construction
of one- to four-family residential real estate and loans secured by multifamily
real estate (over four units), home equity loans, nonresidential real estate and
deposits. Seven Hills also invests in U.S. Government and agency obligations,
interest-bearing deposits, mortgage-backed securities and other investments
permitted by applicable law.
Seven Hills' profitability is primarily dependent upon its net interest
income, which is the difference between interest income on its loan and
investment portfolios and interest paid on deposits and other borrowed funds.
Net interest income is directly affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on such amounts. Seven Hills' profitability is also affected by
the provision for loan losses and the level of other income and general and
administrative expenses. Other income consists primarily of service charges.
General, administrative and other expense includes salaries and employee
benefits, occupancy of premises, federal deposit insurance premiums, state
franchise taxes and other operating expenses.
The operating results of Seven Hills are also affected by general
economic conditions, the monetary and fiscal policies of the federal government
and the regulatory policies of agencies that regulate financial institutions.
Seven Hills' cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demands for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made, general
economic conditions affecting loan demand and the availability of funds for
lending activities.
On June 14, 1996, SHFC, Seven Hills and WOFC entered into the Merger
Agreement. If the Merger Agreement is adopted by the shareholders of SHFC and
all other conditions to the consummation of the transaction contemplated thereby
are satisfied or waived, SHFC will cease to exist and Seven Hills will become a
wholly-owned subsidiary of WOFC. See "Description of Business -- General."
-21-
<PAGE> 28
CHANGES IN FINANCIAL CONDITION
At June 30, 1996, Seven Hills' total assets were $44.9 million, a
decrease of $1.6 million, or 3.5%, from the total at June 30, 1995. The decrease
in assets was due primarily to a decrease in cash and cash equivalents and
certificates of deposit in other financial institutions.
Cash, interest-bearing deposits, certificates of deposit in other
financial institutions and investment securities totalled $1.9 million at June
30, 1996, compared to $6.4 million at June 30, 1995. The decrease of $4.5
million was due to maturities of investments and decreases in cash. Such amounts
were used to fund an increase in loans receivable and the decrease in deposits.
Mortgage-backed securities increased by $265,000, or 4.1%, from $6.4
million at June 30, 1995, to $6.7 million at June 30, 1996. Such increase was
due to purchases of mortgage-backed securities totalling $1.5 million, which
were partially offset by principal repayments of $1.1 million and decreases in
the market value of mortgage-backed securities available for sale. Seven Hills'
investments in mortgage-backed securities are limited to pass-through
participation certificates issued by a U.S. Government agency or a corporation
chartered by the U.S. Government or the U.S. Congress. Such securities are
guaranteed as to principal and interest by such agency or corporations. While
the yield on some adjustable-rate mortgage-backed securities is currently below
fixed-rate yields, the adjustable-rate yields will continue to increase over
time if interest rates continue to rise.
Loans receivable increased by $2.5 million, or 7.7%, from $32.5 million
to $35.0 million during the year ended June 30, 1996. Loan originations totalled
$7.6 million during the year ended June 30, 1996, which were partially offset by
loan principal repayments of $5.1 million.
At June 30, 1996, Seven Hills' allowance for loan losses totalled
$50,000, which represented no change from such allowance at June 30, 1995.
Management considered the amount to be adequate based on experience and current
and projected economic conditions. Because the loan loss allowance is based on
estimates, it is monitored regularly on an ongoing basis and adjusted as
necessary to provide an adequate allowance. At June 30, 1996, Seven Hills'
allowance for loan losses consisted entirely of general valuation allowances, as
defined by OTS regulations, and represented .14% of the total amount of loans
outstanding and 47.2% of non-performing assets. General valuation allowances, as
defined by OTS regulations, are included as a component of regulatory risk-based
capital.
Deposits declined by $1.3 million, or 3.7%, during the year ended June
30, 1996. Transaction accounts (NOW accounts, Super NOW accounts, passbook and
money market passbook accounts), decreased by $1.9 million, or 18.5%, to $8.4
million. Certificates of deposit increased by $600,000, from $25.8 million to
$26.4 million, representing a 2.1% increase. The overall decrease in deposits is
primarily attributed to the closure of the Westwood office.
Shareholders' equity decreased by $435,000 during fiscal year 1996
primarily due to dividends paid and the purchase of additional shares of
treasury stock.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND
1995
GENERAL. Net earnings totaled $175,000 for the year ended June 30,
1996, compared to $523,000 for the same period of 1995, a decrease of $348,000,
or 66.5%. The decrease in earnings is principally attributable to a fiscal 1995
after-tax gain of approximately $334,000 on the sale of Federal Home Loan
Mortgage Corporation ("FHLMC") stock. There was no such gain in fiscal year
1996.
NET INTEREST INCOME AND PROVISION FOR LOSSES ON LOANS. Interest income
on loans for the year ended June 30, 1996, increased by $174,000, or 7.1%, from
the 1995 period. This increase resulted from increases in both the weighted
average yield and average portfolio balance outstanding. Interest income on
mortgage-backed securities increased by $56,000, or 15.9%, over the 1995 period
as a result of an increase in the weighted average rate on the portfolio, which
consists primarily of adjustable-rate securities. There was very little change
in the weighted average balance outstanding.
Interest income on investments and interest-bearing deposits decreased
by $160,000, or 38.3%, from $418,000 in fiscal 1995 to $258,000 in fiscal 1996.
The decrease resulted from a large decrease in the weighted average balance
outstanding, which was partially offset by an increase in the weighted average
rate.
-22-
<PAGE> 29
Interest paid on deposits increased by $112,000, or 6.7%, for the
fiscal year ended June 30, 1996. The increase resulted primarily from an
increase in the weighted average cost of deposits, which was partially offset by
a decrease in the weighted average balance outstanding. The increase in the cost
of deposits generally reflects the overall increase in interest rates in the
economy.
As a result of the foregoing changes in interest income and expense,
net interest income decreased by $42,000, or 2.7%, from $1.6 million for the
year ended June 30, 1995, to $1.5 million for the year ended June 30, 1996. The
interest rate spread declined slightly from 2.46% during the year ended June 30,
1995, to 2.43% during the year ended June 30, 1996.
OTHER INCOME. Other income for fiscal year 1996 decreased by $511,000,
due primarily to the aforementioned gain on sale of FHLMC stock of $504,000
during fiscal year 1995.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense was unchanged for the year ended June 30, 1996. Employee
compensation and benefits decreased by $23,000, or 3.1%, while franchise taxes
increased by $23,000, or 23.5%. The decline in employee compensation and
benefits resulted primarily from a reduction in staffing levels year-to-year,
which was partially offset by normal merit increases. The increase in franchise
taxes was due to an increase in taxable shareholders' equity, which is the basis
for franchise taxes, from the fiscal year ended June 30, 1994, to the fiscal
year ended June 30, 1995.
FEDERAL INCOME TAXES. The provision for federal income taxes decreased
by $203,000, or 77.5%, for the year ended June 30, 1996, compared to the same
period in 1995, due primarily to a $551,000 decrease in pre-tax earnings. SHFC's
effective tax rate was 25.2% for the 1996 period and 34.0% for the 1995 period.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
GENERAL. Net earnings for the year ended June 30, 1995, totalled
$523,000, an increase of $259,000, or 98.1%, from the $264,000 of net earnings
for the year ended June 30, 1994. The increase in earnings resulted primarily
from a $504,000 gain on the sale of FHLMC stock and a $63,000 increase in net
interest income, which were partially offset by a $184,000 increase in general,
administrative and other expense and a $129,000 increase in federal income
taxes.
NET INTEREST INCOME. Interest income on loans decreased $169,000, or
6.4%, from $2.6 million for the year ended June 30, 1994, to $2.5 million for
the year ended June 30, 1995. Such decrease was primarily due to an $825,000
decline in weighted average loan balances outstanding, coupled with a 0.32%
decline in the weighted average yield, from 7.93% for the year ended June 30,
1994, to 7.61% for the year ended June 30, 1995. The decline in yield primarily
reflects the overall decline in interest rates within the economy during the
last half of the prior fiscal year. Interest income on mortgage-backed
securities increased $64,000, or 22.2%, from $288,000 for the year ended June
30, 1994, to $352,000 for the year ended June 30, 1995, due to a 0.78% increase
in weighted average yield, coupled with a $265,000 increase in the weighted
average outstanding balance. The weighted average yield on the mortgage-backed
securities increased because the underlying adjustable-rate loans originally had
interest rates below market rates which adjusted upward during fiscal year 1995.
Interest income on investments and interest-bearing deposits increased
$132,000, or 46.2%, from $286,000 in fiscal year 1994 to $418,000 in fiscal year
1995. This increase was the result of a 1.3% increase and a 2.2% increase in the
weighted average yield on investments and interest-bearing deposits,
respectively. The weighted average balance of such securities declined only
$1,000 from June 30, 1994, to June 30, 1995.
Interest expense on deposits totalled $1.7 million for the fiscal year
ended June 30, 1995, a decrease of $37,000, or 2.2%, from the year ended June
30, 1994. This decrease was primarily the result of the decline in the weighted
average balance from $39.7 million for the year ended June 30, 1994, to $36.7
million for the year ended June 30, 1995. The decline in interest expense as a
result of the decline in weighted average balance was partially offset by an
increase of 0.24% in the weighted average rate paid on deposits. During part of
fiscal year 1995, Seven Hills paid relatively higher rates on deposits in order
to attract deposits.
-23-
<PAGE> 30
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $63,000, or 4.2%, from $1.5 million
for the year ended June 30, 1994, to $1.6 million for the year ended June 30,
1995. The interest rate spread declined slightly from 2.56% during the year
ended June 30, 1994, to 2.46% during the year ended June 30, 1995.
OTHER INCOME. Other income increased by $505,000 for the fiscal year
ended June 30, 1995, due primarily to the aforementioned gain on the sale of
FHLMC stock.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased by $184,000, or 16.6%, from $1.1 million for the year
ended June 30, 1994, to $1.3 million for the year ended June 30, 1995. This
increase was primarily due to a $138,000, or 23.0%, increase in employee
compensation and benefits and a $23,000, or 30.7%, increase in franchise taxes.
The increase in employee compensation and benefits is primarily due to the
amortization expense related to SHFC's and Seven Hills' stock benefit plans, as
well as normal merit increases. The increase in franchise taxes is primarily due
to the increase in equity capital from June 30, 1993, to June 30, 1994. The
capital at June 30, 1994, is the tax base for both SHFC and Seven Hills.
FEDERAL INCOME TAXES. The provision for federal income taxes increased
$129,000, or 97.0%, for the year ended June 30, 1995, due primarily to the
increase in earnings before income taxes. The effective tax rate was 33.4% and
33.5% for the fiscal years ended June 30, 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Seven Hills' principal source of funds are deposits, repayments on
loans and mortgage-backed securities, maturities of investment securities and
funds provided by operations. While scheduled loan and mortgage-backed
securities amortization and maturing interest-bearing deposits and investment
securities are relatively predictable sources of funds, deposit flows and loan
and mortgage-backed securities prepayments are greatly influenced by economic
conditions, the general level of interest rates and competition. The particular
sources of funds utilized by Seven Hills from time to time are selected based on
comparative costs and availability.
The OTS requires savings associations to maintain a minimum level of
investments in specified types of liquid assets. OTS regulations presently
require Seven Hills to maintain an average daily balance of investments in
United States Treasury, federal agency obligations and other investments having
maturities of five years or less. Such minimum requirement is an amount equal to
5% of the sum of Seven Hills' average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirements,
which may be changed from time to time by the OTS to reflect changing economic
conditions, are intended to provide a source of relatively liquid funds upon
which Seven Hills may rely if necessary to fund deposit withdrawals and other
short-term funding needs. Seven Hills' regulatory liquidity at June 30, 1996,
was 6.7%, or approximately $600,000 in excess of the minimum requirements.
The cash flows resulting from SHFC's operating, investing and financing
activities for the periods presented are summarized below:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net earnings $ 175 $ 523 $ 264
Adjustments to reconcile net earnings to net
cash provided by operating activities 123 (283) (2)
-------- ------- -------
Net cash provided by operating activities 298 240 262
Net cash provided by (used in) investing activities 332 2,157 (4,425)
Net cash provided by (used in) financing activities (1,908) (2,266) 2,015)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,278) 131 (2,148)
Cash and cash equivalents at beginning of year 1,830 1,699 3,847
-------- ------- -------
Cash and cash equivalents at end of year $ 552 $ 1,830 $ 1,699
======== ======= =======
</TABLE>
-24-
<PAGE> 31
Seven Hills is required by applicable law and regulations to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement. Seven Hills exceeded all of its capital requirements at June 30,
1996.
The tangible capital requirement requires savings associations to
maintain "tangible capital" of not less than 1.5% of the association's adjusted
total assets. "Tangible capital" is defined in OTS regulations as "core capital"
minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in consolidated subsidiaries, and certain nonwithdrawable
accounts and pledged deposits of mutual associations. Intangible assets,
primarily certain purchased mortgage servicing rights and qualifying supervisory
goodwill, were fully phased out by January 1, 1995, in accordance with a
schedule mandated by the OTS. OTS regulations require savings associations to
maintain core capital of at least 3% of the association's total assets. The OTS
has proposed to increase such requirement to 4% to 5%, except for those
associations with the highest examination ratings and acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. "Risk-based
capital" is defined as core capital, plus certain additional items of capital,
which in the case of Seven Hills includes the general loan loss allowance.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association must measure the
effect of a 200 basis point change in interest rates on the value of its
portfolio as determined under the methodology of the OTS. If the measured
interest rate risk is above the level deemed normal under the regulation, the
association will be required to deduct one-half of such excess exposure from its
total capital when determining its risk-based capital. In general, an
association with less than $300 million in assets and a risk-based capital ratio
in excess of 12% will not be subject to the interest rate risk requirement.
Seven Hills currently qualifies for such exemption from the interest rate risk
requirement. Pending implementation of the interest rate risk requirement, the
OTS has the authority to impose a higher individualized capital requirement on
any savings association it deems to have excess interest rate risk. The OTS also
may adjust the risk-based capital requirement on an individualized basis to take
into account risks due to concentrations of credit and non-traditional
activities.
The following table sets forth the regulatory capital of Seven Hills at
June 30, 1996:
<TABLE>
<CAPTION>
Capital at Excess of
June 30, capital over
1996 Requirement requirement
-------------------- ------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $8,323 18.5% $ 674 1.5% $7,649 17.0%
Core capital 8,323 18.5 1,348 3.0 6,975 15.5
Risk-based capital 8,373 38.5 1,740 8.0 6,633 30.5
</TABLE>
ASSET AND LIABILITY MANAGEMENT
Seven Hills' interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. The
management and Board of Directors of Seven Hills attempt to manage Seven Hills'
exposure to interest rate risk in a manner to maintain the projected
four-quarter percentage change in net interest income and the projected change
in the market value of portfolio equity within the limits established by the
Board of Directors, assuming a permanent and instantaneous parallel shift in
interest rates. Seven Hills
-25-
<PAGE> 32
is currently attempting to manage its interest rate risk by offering an interest
rate slightly higher than the prevailing market rate on two-year certificates of
deposit and introducing loans with terms of 10, 15 or 20 years, rather than 30
years.
As a part of its effort to monitor its interest rate risk, Seven Hills
reviews the reports of the OTS which sets forth the application of the "net
portfolio value" ("NPV") methodology recently adopted by the OTS as part of its
capital regulations to the assets and liabilities of Seven Hills. Although Seven
Hills is not currently subject to the NPV regulation because such regulation
does not apply to institutions with less than $300 million in assets and
risk-based capital in excess of 12%, the application of the NPV methodology may
illustrate Seven Hills' interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution must
deduct 50% of the amount of the decrease in excess of such 2% in the calculation
of the institution's risk-based capital. See "Liquidity and Capital Resources."
At June 30, 1996, 2% of the present value of Seven Hills' assets was
approximately $900,000. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $1,740,000 at June 30, 1996, Seven Hills
would have been required to deduct $420,000 (50% of the approximate $840,000
difference) from its capital in determining whether Seven Hills met its
risk-based capital requirement. Regardless of such reduction, however, Seven
Hills' risk-based capital at June 30, 1996, would still have exceeded the
regulatory requirement by approximately $6.2 million.
In the event that interest rates continue to rise from the recent low
levels, Seven Hills' net interest income could be expected to be negatively
affected. Moreover, rising interest rates could negatively affect Seven Hills'
earnings due to diminished loan demand.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated 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 in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of Seven Hills are monetary in nature. As a result, interest rates
have a more significant impact on Seven Hills' 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.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires SHFC to disclose the fair values of its financial instruments, both
assets and liabilities, recognized and not recognized in the statements of
financial condition, for which it is practical to estimate fair value. SFAS No.
107 requires only disclosure of fair values and does not have any impact on
SHFC's earnings or financial condition.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," was
effective for SHFC's fiscal years beginning after July 1, 1995. SFAS No. 114
specifies that allowances for loan losses on impaired loans should be determined
using the present value of estimated future cash flows of the loan, discounted
at the loan's effective interest rate. A loan is impaired when it is probable
that all principal and interest amounts will not be collected according to the
loan contracts. Management adopted SFAS No. 114 as of July 1, 1995, without
material consolidated financial statement effect.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," is effective for fiscal years beginning after December 15, 1993.
The Statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Such investments should be
-26-
<PAGE> 33
classified in three categories and accounted for as follows: (i) debt securities
that the entity has the positive intent and ability to hold to maturity are to
be classified as held to maturity and reported at amortized cost; (ii) debt and
equity securities that are held for current resale are to be classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings; and (iii) debt and equity securities not classified as
either securities held to maturity or trading securities are to be classified as
securities available for sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity. Management adopted SFAS No. 115 on July 1, 1994. In fiscal
year 1996, Seven Hills recognized a $284,000 after-tax addition to shareholders'
equity as a result thereof.
In May 1995, the Financial Accounting Standards Board promulgated SFAS
No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that
SHFC recognize as separate assets rights to service mortgage loans for others,
regardless of how those servicing rights were acquired. An institution that
acquires mortgage servicing rights through either the purchase or the
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage servicing
rights. SFAS No. 122 also requires that an enterprise allocate the cost of
purchasing or originating the mortgage loans between the mortgage servicing
rights and the loans when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally, it
requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment would be measured
based on fair value.
SFAS No. 122 is to be applied prospectively to fiscal years beginning
after December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights and capitalized excess servicing receivables whenever acquired.
Retroactive application would be prohibited. SFAS No. 122 does not have a
material effect on SHFC's financial position or results of operations.
THE BUSINESS OF SHFC
LENDING ACTIVITIES
GENERAL. Seven Hills' primary lending activity is the origination of
conventional mortgage loans secured by one- to four-family residential real
estate located in Seven Hills' primary market area. Loans for the construction
of one- to four-family homes, home equity loans and mortgage loans on
multifamily properties containing five units or more and nonresidential
properties are also offered by Seven Hills. Seven Hills has recently commenced
the offering of loans insured by the Federal Housing Administration (the "FHA")
for sale to and funding at closing by a third party. Seven Hills does not
originate loans guaranteed by the Veterans Administration. In addition to
mortgage lending, Seven Hills makes a limited amount of consumer loans, secured
predominantly by deposits.
Seven Hills' loan portfolio also includes mortgage-backed securities.
In the current low-interest rate environment, with the consumer preference for
fixed-rate loans, management has chosen to limit interest rate risk by deploying
cash into adjustable-rate mortgage-backed securities. While the yield on such
investments is currently below fixed-rate yields, management believes the
adjustable rate yields will limit interest rate risk if interest rates rise.
-27-
<PAGE> 34
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Seven Hills' loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of loan:
Residential real estate loans:
Interim construction loans $ 862 2.4% $ 322 1.0% $ 621 1.9%
Permanent loans 30,715 87.8 29,090 89.5 28,775 89.9
Home equity loans 194 0.5 54 0.2 -- --
Nonresidential real estate loans 3,688 10.6 3,171 9.8 2,967 9.2
Consumer loans 37 0.1 32 0.1 28 0.1
-------- ----- -------- ----- ------- -----
35,496 101.4 32,669 100.6 32,391 101.1
Less:
Loans in process (479) (1.4) (136) (0.4) (304) (0.9)
Deferred loan origination fees 21 0.1 (6) (0.1) (15) (0.1)
Allowance for loan losses (50) (0.1) (50) (0.1) (48) (0.1)
-------- ----- -------- ----- -------- -----
Total loans $ 34,988 100.0% $ 32,477 100.0% $ 32,024 100.0%
======== ===== ======== ===== ======== =====
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of security:
Residential real estate:
1-4 family $ 28,124 80.4% $ 26,575 81.8% $ 26,653 83.2%
Multifamily 3,647 10.4 2,891 8.9 2,743 8.6
Nonresidential real estate 3,688 10.5 3,171 9.8 2,967 9.2
Deposit accounts 35 .1 32 0.1 26 0.1
Other 2 -- -- 2 0.0
-------- ----- -------- ----- -------- -----
$ 35,496 101.4 32,669 100.6 32,391 101.1
Less:
Loans in process (479) (1.4) (136) (0.4) (304) (0.9)
Deferred loan origination fees 21 0.1 (6) (0.1) (15) (0.1)
Allowance for loan losses (50) (0.1) (50) (0.1) (48) (0.1)
-------- ----- -------- ----- -------- -----
Total loans $ 34,988 100.0% $ 32,477 100.0% $ 32,024 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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<PAGE> 35
LOAN AND MORTGAGE-BACKED SECURITIES MATURITY SCHEDULE. The following
table sets forth certain information as of June 30, 1996, regarding the dollar
amount of loans and mortgage-backed securities maturing in Seven Hills'
portfolio based on their contractual terms. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less.
<TABLE>
<CAPTION>
Due in Due in
one year one year to Due after
or less five years five years Total
------- ----------- ---------- -----
<S> <C> <C> <C> <C>
Mortgage loans (1)(2):
One- to four-family residential $ 824 $ 3,977 $23,129 $27,930
Home equity -- -- 194 194
Multifamily residential 118 600 2,929 3,647
Nonresidential 82 405 3,201 3,688
Consumer loans 36 1 -- 37
------- ------- ------- -------
Total loans $ 1,060 $ 4,983 $29,453 $35,496
======= ======= ======= =======
Mortgage-backed securities (3) $ 126 $ 596 $ 5,965 $ 6,687
======= ======= ======= =======
</TABLE>
(1) Amounts shown are gross of loans in process of $479,000, deferred loan
origination costs of $21,000 and an allowance for loan losses of
$50,000.
(2) Includes construction loans.
(3) Amount shown excludes premiums paid by Seven Hills upon the purchase of
the mortgage-backed securities.
The following table sets forth at June 30, 1996, the dollar amount of
all loans and mortgage-backed securities before net items, due after one year
from June 30, 1996, which have predetermined interest rates and floating or
adjustable interest rates:
<TABLE>
<CAPTION>
Floating or
Predetermined adjustable
rates rates
----- -----
(In thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family residential $18,181 $ 9,749
Home equity loans -- 194
Multi-family residential 947 2,700
Nonresidential 371 3,317
Consumer loans 2 35
------- -------
Total loans $19,501 $15,995
======= =======
Mortgage-backed securities - held to maturity $ 127 $ 1,124
======= =======
Mortgage-backed securities - available for sale $ 348 $ 5,088
======= =======
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Seven Hills has been the origination of permanent conventional loans
secured by one- to four-family residential real estate, primarily single-family
residences, located within Seven Hills' primary market area. Seven Hills also
originates a limited amount of loans for the construction of one- to four-family
residential real estate. Each of such loans is secured by a mortgage on the
underlying real estate and improvements thereon, if any. In June 1995, Seven
Hills entered into an agreement with American Mortgage Service Company
("American Mortgage") pursuant to which Seven Hills intends to originate loans
insured by the
-29-
<PAGE> 36
FHA, and American Mortgage will fund the loan at closing and purchase each such
loan from Seven Hills immediately after closing. No such loans have yet been
originated.
OTS regulations limit the amount which Seven Hills may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Seven Hills makes
fixed-rate loans on one- to four-family residences up to 95% of the value of the
real estate and improvements (the "Loan-to-Value Ratio" or "LTV") and
adjustable-rate mortgage loans ("ARMs") up to 95% LTV. Seven Hills requires
private mortgage insurance for loans of 90% LTV and greater.
ARMs are offered by Seven Hills for terms of up to 30 years. The
interest rate adjustment periods on the ARMs are either one year or three years.
The interest rate adjustments on one-year and three-year ARMs presently
originated by Seven Hills are tied to changes in the weekly average yield on the
one- and three-year U.S. Treasury constant maturities index, respectively. Rate
adjustments are computed by adding a stated margin, typically 2.5%, to the
index. The maximum allowable adjustment at each adjustment date is usually 2%
with a maximum adjustment of 5.5% over the term of the loan. The initial rate is
dependent, in part, on how often the rate can be adjusted. From time to time,
Seven Hills has originated ARMs which had initial interest rates lower than the
sum of the index plus the margin. Such loans are subject to increased risk of
delinquency or default due to increasing monthly payments as the interest rates
on such loans increase to the fully-indexed level, although such increase is
considered in Seven Hills' underwriting of such loans. In addition, in the
1980s, Seven Hills originated loans with margins from less than one percent to
two percent over the index. At June 30, 1996, loans with margins of less than
two percent had aggregate outstanding balances of $4.3 million. Fixed-rate loans
are offered by Seven Hills for terms of up to 30 years.
Seven Hills' one- to four-family residential real estate loan portfolio
was approximately $28.1 million at June 30, 1996, and represented 80.4% of total
loans at such date.
HOME EQUITY LOANS. Seven Hills began offering home equity loans during
the fiscal year ended June 30, 1995. Such loans are secured by a second mortgage
on the home, and the aggregate principal balance of the loans secured by
mortgages on the home may not have an LTV in excess of 80%. The maximum Seven
Hills will lend on a home equity loan is $50,000. All of such loans have
adjustable rates of interest. At June 30, 1996, Seven Hills had approximately
$194,000, or 0.5% of total loans, invested in home equity loans.
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Seven Hills makes loans secured by multifamily
properties containing over four units. Multifamily loans generally have terms of
up to 25 years and a maximum LTV of 80%. Such loans are currently made with
adjustable interest rates and a margin of 3.5% to 3.75% over the index.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower. Seven
Hills attempts to reduce the risk associated with multifamily lending by
evaluating the credit-worthiness of the borrower and the projected income from
the project and by obtaining personal guarantees on most loans made to
corporations and partnerships. Seven Hills generally obtains rent rolls and
financial statements annually to enable Seven Hills to monitor the loan,
although no such requirement existed until 1993.
At June 30, 1996, loans secured by multifamily properties totalled
approximately $3.6 million, or 10.4% of total loans. None of Seven Hills'
multifamily residential real estate loans was delinquent at June 30, 1996.
CONSTRUCTION LOANS. Seven Hills makes loans for the construction of
residential real estate. Such loans are structured to become permanent loans at
the completion of construction and are offered primarily with adjustable rates
of interest and for terms of up to 30 years. The borrower pays only interest for
the first six months while the residence is being constructed. Approximately 25%
of the construction loans originated by Seven Hills are made to owner-occupants
for the construction of single-family homes. The remainder are made to builders
for small projects, some of which have not been pre-sold. At June 30, 1996, a
total of $862,000, or approximately 2.4% of Seven Hills' total loans, consisted
of construction loans.
-30-
<PAGE> 37
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTVs
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Seven Hills would have to
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Almost all of Seven Hills'
construction loans are secured by property in Hamilton County and contiguous
townships in Clermont, Warren and Butler Counties, and the economy of such
lending area has been relatively stable.
NONRESIDENTIAL REAL ESTATE LOANS. Seven Hills also makes loans secured
by nonresidential real estate consisting primarily of retail stores, warehouses,
and office buildings. Loans are seldom made on single purpose buildings. Such
loans generally are made only with adjustable rates of interest and a margin of
3.50% to 3.75% over the index. Such loans have terms of up to 25 years and a
maximum LTV of 75%. Seven Hills has, however, purchased a 30%, $246,000
participation in one 15-year fixed-rate nonresidential loan.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Seven Hills has endeavored to reduce such risk
by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation.
At June 30, 1996, Seven Hills had a total of $3.7 million invested in
nonresidential real estate loans. Such loans comprised approximately 10.6% of
Seven Hills' total loans at such date. Included in such total are loans to one
borrower totalling $1.3 million secured by warehouses, which loans were current
at June 30, 1996. At such date Seven Hills had one delinquent nonresidential
real estate loan with an outstanding balance of $9,000.
Federal regulations limit the amount of nonresidential mortgage loans
that an association may make to 400% of its capital. At June 30, 1996, Seven
Hills' nonresidential mortgage loans totaled 44.6% of Seven Hills' capital.
CONSUMER LOANS. Seven Hills makes consumer loans, almost exclusively to
depositors on the security of their deposit accounts. Such loans are made at
adjustable rates of interest only and are permitted to remain outstanding
indefinitely so long as interest payments are current.
Consumer loans, other than loans secured by deposits, may entail
greater risk than do residential mortgage loans. The risk of default on consumer
loans increases during periods of recession, high unemployment and other adverse
economic conditions. Although Seven Hills has not had significant delinquencies
on consumer loans, no assurance can be provided that delinquencies will not
increase. At June 30, 1996, Seven Hills had approximately $37,000, or less than
one percent of total loans, invested in consumer loans.
COMMERCIAL LOANS. Seven Hills does not issue any letters of credit or
originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Seven Hills' directors,
officers and lending staff and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan
personnel. Seven Hills obtains a credit report, verification of employment and
other documentation concerning the credit-worthiness of the borrower. An
appraisal of the fair market value of the real estate which will be given as
security for the loan is generally prepared by an independent fee appraiser
approved by the Board of Directors. An environmental study is conducted only if
the appraiser or a director has reason to believe than an environmental problem
may exist. For multifamily and nonresidential mortgage loans, a personal
guarantee is required. Seven Hills also obtains information with respect to
prior projects completed by the borrower. Upon
-31-
<PAGE> 38
the completion of the appraisal and the receipt of information on the borrower,
the application for a loan is submitted to the Executive Committee and/or the
Board of Directors for approval or rejection. Any loan applications which do not
conform in all respects with Seven Hills' underwriting guidelines are reviewed
and accepted or rejected by the Executive Committee or the full Board of
Directors.
If a mortgage loan application is approved, an attorney's opinion of
title is obtained on the real estate which will secure the mortgage loan. Seven
Hills does not obtain title insurance. Borrowers are required to carry fire and
casualty insurance and flood insurance, if applicable, and to name Seven Hills
as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Seven Hills
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Seven Hills' loans carry pre-payment penalties and provisions that the
entire balance of the loan is due upon sale of the property securing the loan.
LOAN ORIGINATIONS, PURCHASES AND SALES. During the past several years,
Seven Hills has been actively originating new fixed-rate and adjustable-rate
loans. Most fixed-rate loans are originated pursuant to secondary market
guidelines, although Seven Hills has sold no loans since April 1992.
Adjustable-rate loans originated by Seven Hills are held in Seven Hills' loan
portfolio. Prior to 1980, Seven Hills originated mortgage loans only at
fixed-rates. In the early 1980's, Seven Hills originated mortgage loans only at
adjustable rates. In approximately 1986, Seven Hills began originating a limited
amount of fixed-rate mortgage loans, most of which it held in its portfolio, in
addition to ARMs. Between fiscal year 1990 and fiscal year 1992, Seven Hills
sold some fixed-rate mortgage loans. Such sales were not material to its annual
originations. Seven Hills retains the servicing of such loans, as well as the
loans sold in prior years, and serviced $257,000, $438,000 and $445,000 of such
loans at June 30, 1996, 1995 and 1994, respectively. Seven Hills generally
receives servicing income of .25% per year on the principal balance of the loans
it services. Although Seven Hills has entered into an agreement with a third
party pursuant to which Seven Hills will originate FHA loans to be funded by and
sold at closing to such third-party purchaser, no such loans have yet been
originated, and Seven Hills is unable at this time to determine how significant
such sales will be to its future operations.
Seven Hills occasionally has purchased or participated in loans
originated by other institutions. During fiscal year 1996, Seven Hills purchased
two participations in the amount of $530,000 in multi-family residential loans.
One participation, in the amount of $330,000, represents a 50% participation in
a $660,000 loan, while the other, in the amount of $200,000, represents a 73.5%
participation in a loan that had a balance of $272,000 at the time the
participation was purchased.
-32-
<PAGE> 39
The following table presents Seven Hills' mortgage loan origination,
purchase and sale activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family $5,255 $2,427 $8,232
Home equity 166 54 --
Multifamily 259 152 72
Construction 782 754 549
Nonresidential real estate 583 106 315
Consumer loans 28 24 9
Loan participations purchased 530 575 --
------ ------ ------
Total loans originated and purchased $7,603 $4,092 $9,177
====== ====== ======
Insured, guaranteed or collateralized
mortgage-backed securities purchased $1,475 $ -- $4,264
====== ====== ======
</TABLE>
OTS regulations generally limit the aggregate amount that a savings
association can lend to one borrower to an amount equal to 15% of the
association's total capital for risk-based capital purposes plus any loan
reserves not already included in total capital (collectively, "Unimpaired
Capital"). A savings association may loan to one borrower an additional amount
not to exceed 10% of the association's Unimpaired Capital if the additional
amount is fully secured by certain forms of "readily marketable collateral."
Real estate is not considered "readily marketable collateral." In applying these
limits, the regulations require that loans to certain related or affiliated
borrowers be aggregated. An exception to these limits permits loans to one
borrower of up to $500,000 "for any purpose." Based on such limits, Seven Hills
was able to lend approximately $1.3 million to one borrower at June 30, 1996.
Seven Hills had outstanding loans in excess of such limits to one borrower at
June 30, 1996. The loans to such borrower, totalling $1.3 million at June 30,
1996, are secured by warehouses. Such amount was loaned before the enactment of
the current lending limits and need not be divested by Seven Hills. Seven Hills
may not advance additional amounts to such borrower. All loans to such borrower
were current at June 30, 1996. Seven Hills has not made any loans in excess of
such limits since the limits were imposed.
LOAN ORIGINATION AND OTHER FEES. Seven Hills realizes loan origination
fees and other fee income from its lending activities and also realizes income
from late payment charges, application fees, and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
DELINQUENT LOANS, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Seven Hills attempts to
cause the deficiency to be cured by contacting the borrower. In most cases,
deficiencies are cured promptly.
Loans originated by Seven Hills before 1980 required payment of
interest in advance. Although the mortgage documents require payments on the
first of each month, borrowers were told that payments would not be treated as
delinquent if made by the last working day of that month. For such loans, late
notices are mailed by the fifth day of the following month if payment has not
been received. If payment has still not been received by the fifteenth day of
such following month, second notices are sent or telephone calls are made to the
borrower.
Loans originated commencing in 1980 require interest in arrears, and
payments are due on the first day of the following month. When payments on such
loans have not been made by the eleventh of the month, late notices are sent. If
payment is not received by the twentieth of the month, second notices or
telephone calls are made to the borrower.
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<PAGE> 40
When a loan with a balance over $2,000 is more than two payments
delinquent, it is reviewed by the Board of Directors and action is taken which
may include referral to an attorney, a request for an appraisal and/or a
drive-by inspection. When a loan becomes delinquent, an inspection of the
property will be conducted when deemed necessary, and an appraisal of the
security may be performed. If the appraisal indicates that the value of the
collateral is less than the book value of the loan, a valuation allowance is
established for such loan.
When deemed appropriate by management, Seven Hills institutes action to
foreclose on the real estate or to acquire the real estate by deed in lieu of
foreclosure. A decision as to whether and when to initiate foreclosure
proceedings is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of the delinquency and the
borrower's ability and willingness to cooperate in curing delinquencies. If a
foreclosure occurs, the real estate is sold at public sale and may be purchased
by Seven Hills.
Real estate acquired, or deemed acquired, by Seven Hills as a result of
foreclosure proceedings is classified as real estate owned ("REO") until it is
sold. When property is so acquired, or deemed to have been acquired, it is
recorded by Seven Hills at the lower of the book value of the related loan or
the estimated fair value of the real estate less selling expenses at the date of
acquisition, and any write-down resulting therefrom is charged to the carrying
value of the property. Interest accrual, if any, ceases no later than the date
of acquisition of the real estate, and all costs incurred from such date in
maintaining the property are expensed. Costs relating to the development and
improvement of the property are capitalized to the extent of fair value. Seven
Hills has had only one piece of REO during the last ten years.
In the case of delinquencies on consumer loans, the borrower is
contacted after a payment is ten days past due.
Seven Hills places loans on nonaccrual status when the collectibility
of the loan is in doubt or when a loan is delinquent in interest payments more
than 90 days. If a payment has been missed but payments resume and are expected
to continue, the loan is not placed on nonaccrual status.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
---------------------------- ------------------------------- ------------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1)(2):
30 - 59 days 6 $130 0.37% 10 $265 0.82% 7 $244 0.76%
60 - 89 days -- -- -- 1 22 0.07 9 170 0.53
90 days and over 8 106 0.30 8 89 0.27 7 178 0.56
---- ---- ---- ---- ---- ---- ---- ---- ----
Total delinquent loans 14 $236 0.67% 19 $376 1.16% 23 $592 1.85%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ----------------------------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) All delinquent loans, except one with a total balance of $9,000, are
secured by one- to four-family residential real estate.
-34-
<PAGE> 41
The following table sets forth information with respect to the accrual
and nonaccrual status of Seven Hills' loans which are 90 days or more past due
and other non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-----------------------------
1996 1995 1994
------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent 90 days or more $ 106 $ 83 $115
Loans accounted for on a nonaccrual basis:
Real estate:
Residential -- -- 63
Nonresidential -- 6 --
Consumer -- -- --
------ ---- ----
Total nonaccrual loans -- 6 63
Other non-performing assets (1) -- -- --
------ ---- ----
Total non-performing assets $ 106 $ 89 $178
====== ==== ====
Total non-performing assets as a percentage of total assets .2% .2% .4%
====== ==== ====
Specific loan loss allowance $ -- $-- $--
General loan loss allowance (unallocated as to any specific
loan type) 50 50 48
------ ---- ----
Total loan loss allowance $ 50 $ 50 $ 48
====== ==== ====
Loan loss allowance as a percent of non-performing loans 47.2% 56.2% 27.0%
====== ==== ====
Loan loss allowance as a percent of non-performing assets 47.2% 56.2% 27.0%
====== ==== ====
</TABLE>
- -----------------------------
(1) Other non-performing assets can represent real estate acquired by Seven
Hills through foreclosure, which is carried at the lower of the fair
value of the real estate, less selling expenses, or the unpaid
principal balance of the loan at the date of foreclosure. At each of
the dates presented, Seven Hills did not have real estate which was
acquired through foreclosure.
During the year ended June 30, 1996, $879 of interest, including
interest due in the previous year, was recorded in income on nonaccruing loans
during the period, and interest of $570 would have been recorded in income
during the period if the loans had been current in accordance with their
original terms. During the periods shown, Seven Hills had no restructured loans
within the meaning of SFAS No. 15. There are no loans which are not currently
classified as nonaccrual, 90 days past due or restructured but which may be so
classified in the near future because management has concerns as to the ability
of the borrowers to comply with repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Seven Hills classifies as "substandard" all loans that are
delinquent more than 60 days, unless management believes the delinquency status
is short-term due to unusual circumstances or the likelihood of a loss is
remote. Loans delinquent fewer than 60 days may also be classified if the loans
have the characteristics described above rendering classification appropriate.
-35-
<PAGE> 42
The aggregate amounts of Seven Hills' classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Substandard $ 40 $ 23 $151
Doubtful -- -- --
Loss -- -- --
---- ---- ----
Total classified assets $ 40 $ 23 $151
==== ==== ====
</TABLE>
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the District Director of the OTS. Seven
Hills had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Seven Hills establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, the association must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount.
ALLOWANCE FOR LOAN LOSSES. The Board of Directors reviews on a
quarterly basis the allowance for loan losses as it relates to a number of
relevant factors, including but not limited to, trends in the level of
non-performing assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience and possible losses
arising from specific problem assets. To a lesser extent, management also
considers loan concentrations to single borrowers and changes in the composition
of the loan portfolio. While the Board of Directors believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in adjustments, and net earnings could
be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. At June 30, 1996, 1995 and
1994, Seven Hills' allowance for loan losses totaled $50,000, $50,000 and
$48,000, respectively, none of which was allocated to a particular type of loan
at any of such dates. Due to the absence of any loss on any loan for many years,
the management of Seven Hills does not believe such a specific allocation is
necessary.
The following table sets forth an analysis of Seven Hills' allowance
for loan losses for the periods indicated. Seven Hills had no foreclosures and
therefore no recoveries during such periods.
<TABLE>
<CAPTION>
For the year ended or at June 30,
---------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 50 $ 48 $ 42
Loans charged-off -- -- --
Recoveries -- -- --
Provision for losses on loans (charged to operations) -- 2 6
---- ---- ----
Balance at end of year $ 50 $ 50 $ 48
==== ==== ====
Ratio of net charge-offs to average loans outstanding
during the period -- -- --
Ratio of allowance for loan losses to non-accrual loans (1) 833.3% 131.3%
Ratio of allowance for loan losses to total loans .14% .15% .15%
</TABLE>
- -----------------------------
(1) Not meaningful because Seven Hills had no non-accrual loans at such
date.
Seven Hills did not increase its allowance for loan losses from June
30, 1995, to June 30, 1996.
-36-
<PAGE> 43
INVESTMENT ACTIVITIES
OTS regulations require that Seven Hills maintain a minimum amount of
liquid assets, which may be invested in U. S. Treasury obligations, securities
of various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Seven Hills is also permitted to make investments
in certain commercial paper, corporate debt securities rated in one of the four
highest rating categories by one or more nationally recognized statistical
rating organizations, and mutual funds, as well as other investments permitted
by federal regulations. In recent periods, Seven Hills has maintained liquid
assets on a monthly average basis in an amount between 18.3% and 6.7% of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. See "REGULATION" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
-37-
<PAGE> 44
The following table sets forth the composition of Seven Hills'
interest-bearing deposits and investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1996 1995
----------------------------------------- -------------------------------------
Carrying % of Market % of Carrying % of Market % of
Value Total Value Total Value Total Value Total
--------- ------ -------- ----- --------- ----- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Investment securities:
U.S. Government and agency
securities $ 99 4.8% $ 99 4.8% $3,788 60.6% $3,797 60.6%
Certificates of deposit in
other financial institutions -- -- -- -- 750 12.0 750 12.0
------ ----- ------ ----- ------ ----- ------ -----
Total investment securities
held to maturity 99 4.8 99 4.8 $4,538 72.6% $4,547 72.6%
------ ----- ------ ----- ------ ----- ------ -----
Other investments:
Interest-bearing deposits in
other financial 205 10.0 205 10.0 $1,051 16.8% $1,051 16.8%
institutions
Federal funds sold -- -- -- -- 150 2.4 150 2.4
Federal Home Loan Bank stock 490 23.8 490 23.8 457 7.3 457 7.3
------ ----- ------ ----- ------ ----- ------ -----
Total other investments 695 33.8 695 33.8 1,658 26.5 1,658 26.5
------ ----- ------ ----- ------ ----- ------ -----
Available for sale:
FHLMC stock 69 3.3 69 3.3 55 0.9 55 0.9
------ ----- ------ ----- ------ ----- ------ -----
U.S. Government and agency
securities 1,196 58.1 1,196 58.1 -- --
------ ----- ------ ----- ------ ----- ------ -----
Total available for sale 1,265 61.4 1,265 61.4 -- --
------ ----- ------ ----- ------ ----- ------ -----
Total investments $2,059 100.0% $2,059 100.0% $6,251 100.0% $6,260 100.0%
====== ===== ====== ===== ====== ===== ====== =====
<CAPTION>
June 30,
-----------------------------------------
1994
-----------------------------------------
Carrying % of Market % of
Value Total Value Total
--------- ----- ------ -----
<S> <C> <C> <C> <C>
Held to maturity:
Investment securities:
U.S. Government and agency
securities $3,980 51.7% $3,886 47.7%
Certificates of deposit in
other financial institutions 1,800 23.4 1,800 22.1
------ ----- ------ -----
Total investment securities
held to maturity $5,780 75.1% $5,686 69.8%
------ ----- ------ -----
Other investments:
Interest-bearing deposits in
other financial $1,245 16.2% $1,245 15.3%
institutions
Federal funds sold 200 2.6 200 2.4
Federal Home Loan Bank stock 429 5.6 429 5.3
------ ----- ------ -----
Total other investments 1,874 24.4 1,874 23.0
------ ----- ------ -----
Available for sale:
FHLMC stock 38 0.5 586 7.2
------ ----- ------ -----
U.S. Government and agency
securities -- -- -- --
------ ----- ------ -----
Total available for sale -- -- -- --
------ ----- ------ -----
Total investments $7,692 100.0% $8,146 100.0%
====== ===== ====== =====
</TABLE>
-38-
<PAGE> 45
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for Seven Hills' investment securities
at June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------------------------------------------------
One year or less One to five years Six to ten years Eleven to fifteen years
------------------ ----------------- ------------------- -----------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
-------- ------- -------- ------- -------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government and agency
securities $-- -% $ 99 6.835% $ -- -% $-- -%
Total investment
securities held to -- -- 99 6.835 -- -- -- --
maturity
Available for sale:
FHLMC stock 68 1.65 -- -- -- -- -- --
U.S. Government and agency
securities 298 4.77 495 5.93 -- -- 403 7.65
---- ------ ---- ------ ------ ------ ---- ------
Total investments
available for sale 366 4.19 495 5.93 -- -- 403 7.65
---- ------ ---- ------ ------ ------ ---- ------
Total investment securities $366 4.19% $594 6.08% $ -- -% $403 7.65%
==== ====== ==== ====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------
Total investment
securities
----------------------------------------------
Average Weighted
life Carrying Market average
in years value value yield
--------- -------- ------ --------
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government and agency securities 2.8% $ 99 $ 99 6.835%
Total investment securities held to maturity 2.8 99 99 6.835
Available for sale:
FHLMC stock -- 68 68 1.65
U.S. Government and agency securities 5.7 1,196 1,196 6.22
----- ------ ------ -----
Total investments available for sale 5.7 1,264 1,264 5.97
----- ------ ------ -----
Total investment securities 5.5% $1,363 $1,363 6.03%
===== ====== ====== =====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Seven
Hills' funds for use in lending and other investment activities. In addition to
deposits, Seven Hills derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, income on earning assets,
service charges and gains on the sale of assets. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions. Seven Hills borrowed a total of $400,000 during the fiscal year
ended June 30, 1996. Such loans were each outstanding for less than one month.
Seven Hills borrowed a total of $200,000 during the fiscal year ended June 30,
1995. Such loans were outstanding for 19 days. With the exception of such loans,
Seven Hills has not borrowed money during the last five years.
DEPOSITS. Deposits are attracted principally from within Seven Hills'
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, Super
NOW accounts, money market passbook accounts, regular passbook savings accounts,
Christmas Club accounts, term certificate accounts and individual retirement
accounts ("IRAs"). Interest rates paid, maturity terms, service fees and
withdrawal penalties for
-39-
<PAGE> 46
the various types of accounts are established periodically by management of
Seven Hills based on Seven Hills' liquidity requirements, growth goals and
interest rates paid by competitors. Seven Hills does not use brokers to attract
deposits. In a rising interest rate environment, Seven Hills attempts to manage
its interest rate risk by lengthening the term to maturity or repricing of more
of its deposit liabilities.
At June 30, 1996, Seven Hills' certificates of deposit totaled $26.4
million, or 75.9% of total deposits. Of such amount, approximately $20.6 million
in certificates of deposit mature within one year. Based on past experience and
Seven Hills' prevailing pricing strategies, management believes that a
substantial percentage of such certificates will renew with Seven Hills at
maturity. If there is a significant deviation from historical experience, Seven
Hills can utilize borrowings from the FHLB as an alternative to this source of
funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Seven Hills at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts(1) $ 3,905 11.2% $ 4,457 12.3% $ 5,775 15.3%
Money market passbook accounts(2) 2,214 6.4 2,959 8.2 3,866 10.2
NOW accounts(3) 577 1.7 902 2.5 1,042 2.7
Super NOW accounts(4) 1,704 4.9 1,983 5.5 1,654 4.4
------- ------ ------- ------ ------- ------
Total transaction accounts 8,400 24.2 10,301 28.5 12,337 32.6
Certificates of deposit(5):
2.00 - 3.99% 172 0.5 149 0.4 7,160 18.9
4.00 - 5.99% 21,376 61.5 12,597 34.9 16,726 44.2
6.00 - 7.99% 4,778 13.7 12,940 35.8 451 1.2
8.00 - 9.99% 41 0.1 128 0.4 1,166 3.1
------- ------ ------- ------ ------- ------
Total certificates of deposit 26,367 75.8 25,814 71.5 25,503 67.4
------- ------ ------- ------ ------- ------
Total deposits $34,767 100.00% $36,115 100.0% $37,840 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
- -----------------------------
(1) Includes Christmas Club accounts. Seven Hills' weighted average rate on
passbook accounts fluctuates with the general movement of interest
rates. The weighted average interest rate on passbook accounts was
3.00% at June 30, 1996, 1995 and 1994, respectively.
(2) Seven Hills' weighted average interest rate paid on money market
passbook accounts fluctuates with the general movement of interest
rates. At June 30, 1996, 1995 and 1994, the weighted average rates on
money market passbook accounts were 3.15%, 3.15% and 3.05%,
respectively.
(3) Seven Hills' weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At June 30,
1996, 1995 and 1994, the weighted average rates on NOW accounts were
2.25%, 2.25% and 2.86%, respectively.
(4) Seven Hills' weighted average interest rate paid on Super NOW accounts
also fluctuates with the general movement of interest rates. At June
30, 1996, 1995 and 1994, the weighted average rates on Super NOW
accounts were 2.00%, 2.00% and 2.47%, respectively.
(5) IRAs are included within the various certificate of deposit balances.
IRAs totalled $2.3 million, $2.4 million and $4.3 million as of June
30, 1996, 1995 and 1994, respectively.
-40-
<PAGE> 47
The following table shows rate and maturity information for Seven
Hills' certificates of deposit as of June 30, 1996:
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- --------- -------- -------- -----
(In thousands)
<C> <C> <C> <C> <C> <C>
2.00 - 3.99% $ 172 $ - $ - $ - $ 172
4.00 - 5.99 16,155 4,305 668 248 21,376
6.00 - 7.99 4,293 108 323 54 4,778
8.00 - 9.99 - - 41 - 41
------- ------ ------ ---- -------
Total certificates of deposit $20,620 $4,413 $1,032 $302 $26,367
======= ====== ====== ==== =======
</TABLE>
The following table presents the amount of Seven Hills' certificates of
deposit of $100,000 or more by the time remaining until maturity as of June 30,
1996:
<TABLE>
<CAPTION>
Maturity At June 30, 1996
-------- ----------------
(In thousands)
<S> <C>
Three months or less $ 609
Over 3 months to 6 months 565
Over 6 months to 12 months 737
Over twelve months 100
-------
Total $2,011
======
</TABLE>
The following table sets forth Seven Hills' deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 36,115 $ 37,840 $ 40,432
Deposits 22,931 23,183 19,587
Withdrawals (25,594) (26,228) (23,640)
-------- -------- --------
Net decrease before interest credited (2,663) (3,045) (4,053)
Interest credited 1,315 1,320 1,461
-------- -------- --------
Ending balance $ 34,767 $ 36,115 $ 37,840
-------- ======== ========
Net decrease $ (1,348) $ (1,725) $ (2,592)
======== ======== ========
Percent decrease (3.73)% (4.56)% (6.41)%
======== ======== ========
</TABLE>
BORROWINGS. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, Seven Hills is authorized to apply for
advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender Test (the "QTL Test"). See "REGULATION -
Office of Thrift Supervision -- Qualified Thrift Lender Test." If an association
meets the QTL Test, it will be eligible for 100% of the advances it would
otherwise
-41-
<PAGE> 48
be eligible to receive. If an association does not meet the QTL Test, it will be
eligible for such advances only to the extent it holds specified QTL Test
assets. At June 30, 1996, Seven Hills was in compliance with the QTL Test. Seven
Hills borrowed $400,000 and repaid $200,000 from the FHLB of Cincinnati during
the fiscal year ended June 30, 1996. Seven Hills borrowed and repaid $200,000
from the FHLB of Cincinnati during the fiscal year ended June 30, 1995. Seven
Hills did not utilize FHLB advances during the fiscal year ended June 30, 1994.
-42-
<PAGE> 49
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to Seven
Hills' average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio, net of the allowance for loss. Management does not believe
that the use of month-end balances instead of daily balances has caused any
material differences in the information presented.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------------- ------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $33,818 $2,631 7.78% $32,289 $2,457 7.61% $33,114 $2,626 7.93%
Mortgage-backed securities 6,729 408 6.06 6,736 352 5.23 6,471 288 4.45
Investment securities 1,909 131 6.86 3,978 234 5.88 2,397 110 4.59
Interest-bearing deposits 1,732 127 7.33 3,113 184 5.91 4,695 176 3.75
------- ------ ------ ------- ------ ------ ------- ------ ------
and other
Total interest-earning
assets 44,188 3,297 7.46 46,116 3,227 7.00 46,677 3,200 6.86
Non-interest-earning assets 1,328 1,223 1,241
------- ------- -------
Total assets $45,516 $47,339 $47,918
------- ------- -------
Interest-bearing liabilities:
Money market passbooks $ 2,389 $ 76 3.18% $3,283 $ 105 3.20% $ 4,049 $ 133 3.28%
Passbooks 4,123 123 2.98 5,089 156 3.07 5,989 192 3.21
NOW's 638 15 2.35 992 30 3.02 1,210 38 3.14
Super NOW's 1,870 42 2.25 1,879 54 2.87 1,874 57 3.04
Certificates 26,321 1,523 5.79 25,442 1,322 5.20 26,549 1,284 4.84
------- ------ ------ ------- ------ ------ ------- ------ ------
Total deposits 35,341 1,779 5.03 36,685 1,667 4.54 39,671 1,704 4.30
FHLB advances 25 1 4.00 16 1 6.25 - - -
------- ------ ------ ------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities 35,366 $1,780 5.03% 36,701 $1,668 4.54% 39,671 $1,704 4.30%
------ ------ ------ ------ ------ ------
Non-interest-bearing liabilities 435 517 408
------- ------- -------
Total liabilities 35,801 37,218 40,079
Shareholders' equity 9,715 10,121 7,839
------- ------- -------
Total liabilities and
shareholders' equity $45,516 $47,339 $47,918
------- ------- -------
Net interest income; interest
rate spread $1,517 2.43% $1,559 2.46% $1,496 2.56%
------ ------ ------ ------ ------ ------
Net yield (net interest
income as a percent of
average interest-earning
assets) 3.43% 3.38% 3.21%
------ ------ ------
Average interest-earning
assets to interest-bearing 124.94% 125.65% 117.66%
liabilities ------ ------ ------
</TABLE>
-43-
<PAGE> 50
Seven Hills' interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. The
management and Board of Directors of Seven Hills attempt to manage Seven Hills'
exposure to interest rate risk in a manner to maintain the projected
four-quarter percentage change in net interest income and the projected change
in the market value of portfolio equity within the limits established by the
Board of Directors, assuming a permanent and instantaneous parallel shift in
interest rates.
As a part of its effort to monitor its interest rate risk, Seven Hills
reviews the reports of the OTS which set forth the application of the NPV
methodology adopted by the OTS as part of its capital regulations to the assets
and liabilities of Seven Hills. Although Seven Hills is not currently subject to
the NPV regulation because such regulation does not apply to institutions with
less than $300 million in assets and risk-based capital in excess of 12%, the
application of the NPV methodology may illustrate Seven Hills' interest rate
risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution must
deduct 50% of the amount of the decrease in excess of such 2% in the calculation
of the institution's risk-based capital. See "Liquidity and Capital Resources."
At June 30, 1996, 2% of the present value of Seven Hills' assets was
approximately $900,000. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $1,740,000 at June 30, 1996, Seven Hills
would have been required to deduct $420,000 (50% of the approximate $840,000
difference) from its capital in determining whether Seven Hills met its
risk-based capital requirement. Regardless of such reduction, however, Seven
Hills' risk-based capital at June 30, 1996, would still have exceeded the
regulatory requirement by approximately $6.2 million.
Presented below, as of June 30, 1996, is an analysis of Seven Hills'
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates.
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment, the
amount of interest Seven Hills would receive on its loans would increase
relatively slowly as loans are slowly prepaid and new loans at higher rates are
made. Moreover, the interest Seven Hills would pay on its deposits would
increase rapidly because Seven Hills' deposits generally have shorter periods to
repricing. Assumptions used in calculating the amounts in this table are OTS
assumptions.
-44-
<PAGE> 51
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
----------------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
+300 $(2,695) (31)%
+200 (1,735) (20)
+100 (814) (9)
0 - -
-100 649 8
-200 1,050 12
-300 1,371 16
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making the risk calculations.
In the event that interest rates rise from the recent low levels, Seven
Hills' net interest income could be expected to be negatively affected.
Moreover, rising interest rates could negatively affect Seven Hills' earnings
due to diminished loan demand.
The following table sets forth, for the years and at the date
indicated, the weighted average yields earned on Seven Hills' interest-earning
assets, the weighted average interest rates paid on interest-bearing
liabilities, the interest rate spread and the net interest margin on
interest-earning assets. Such yields and costs are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
years presented.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 7.78% 7.61% 7.93%
Weighted average yield on mortgage-backed securities 6.06 5.23 4.45
Weighted average yield on investment securities 6.86 5.88 4.59
Weighted average yield on other interest-earning assets 7.33 5.91 3.75
Weighted average yield on all interest-earning assets 7.46 7.00 6.86
Weighted average interest rate paid on deposits 5.04 4.54 4.30
Weighted average interest rate paid on all
interest-bearing liabilities 5.03 4.54 4.30
Interest rate spread (spread between weighted average
interest rate on all interest-bearing assets and all
interest-bearing liabilities) 2.43 2.46 2.56
Net yield (net interest income as a percentage of average
interest-earning assets) 3.43 3.38 3.21
</TABLE>
-45-
<PAGE> 52
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Seven Hills' interest income and expense during the
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii) total
changes in rate and volume. The combined effects of changes in both volume and
rate, which cannot be separately identified, have been allocated proportionately
to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------- ----------------------------
Increase Increase
(decrease) (decrease)
due to due to
----------------- -----------------
Volume Rate Total Volume Rate Total
------ ----- ----- ------ ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $ 118 $ 56 $ 174 $ (65) $(104) $(169)
Mortgage-backed securities 0 56 56 12 52 64
Investment securities (137) 34 (103) 87 37 124
Other interest-earning assets(1) (94) 37 (57) (72) 80 8
----- ----- ----- ----- ----- -----
Total interest income (113) 183 70 (38) 65 27
----- ----- ----- ----- ----- -----
Interest expense attributable to:
Borrowings -- -- -- 1 -- 1
Deposits (63) 178 115 (131) 94 (37)
----- ----- ----- ----- ----- -----
Total interest expense (63) 178 115 (130) 94 (36)
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income $ (50) $ 5 $ (45) $ 92 $ (29) $ 63
===== ===== ===== ===== ===== =====
</TABLE>
- ------------------
(1) Includes interest-bearing deposits, certificates of deposit in other
financial institutions and other interest-earning assets.
COMPETITION
Seven Hills competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds and insurance
products. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Seven Hills competes with other
savings associations, commercial banks, consumer finance companies, credit
unions, leasing companies and other lenders. Seven Hills competes for loan
originations primarily through the interest rates and loan fees it charges and
through the efficiency and quality of services it provides to borrowers.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable.
Due to Seven Hills' size relative to the many other financial
institutions in its market area, management believes that Seven Hills has an
insubstantial share of the deposit and loan markets.
The size of financial institutions competing with Seven Hills is likely
to increase as a result of changes in statutes and regulations eliminating
various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon Seven
Hills. In addition, disparities with respect to the deposit insurance
assessments for banks and savings associations may have an adverse effect upon
Seven Hills. See "REGULATION Federal Deposit Insurance Corporation --
Assessments."
-46-
<PAGE> 53
PERSONNEL
As of June 30, 1996, Seven Hills had 12 full-time employees and 3
part-time employees. Seven Hills believes that relations with its employees are
excellent. Seven Hills offers health, disability, life and dependent care
benefits. None of the employees of Seven Hills are represented by a collective
bargaining unit.
REGULATION
GENERAL
SHFC is a savings and loan holding company within the meaning of the
Home Owners Loan Act of 1933, as amended (the "HOLA"). Consequently, SHFC is
subject to regulation, examination and oversight by the OTS and must submit
periodic reports thereto. Because SHFC is a corporation organized under Ohio
law, it is subject to provisions of the Ohio Revised Code applicable to
corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Seven Hills is subject to regulation, examination and oversight by the
Superintendent of the Division. Because Seven Hills' deposits are insured by the
FDIC, Seven Hills also is subject to regulation and examination by the OTS, as
its primary federal regulator, and by the FDIC. Seven Hills must file periodic
reports with the Ohio Superintendent and the OTS concerning its activities and
financial condition. Examinations are conducted periodically by these federal
and state regulators to determine whether Seven Hills is in compliance with
various regulatory requirements and is operating in a safe and sound manner.
Because it accepts federally insured deposits and offers transaction accounts,
Seven Hills is also subject to certain regulations issued by the Board of
Governors of the Federal Reserve System ("FRB"). Seven Hills is a member of the
FHLB of Cincinnati.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
the Articles of Incorporation of SHFC nor Seven Hills opt out of the protection
afforded by Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3%, or 50% of the outstanding voting securities of SHFC (a "Control Share
Acquisition") must be approved in advance by the holders of at least a majority
of the outstanding voting shares represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting, excluding the voting shares owned
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by the acquiring shareholder. The Control Share Acquisition Statute was
intended, in part, to protect shareholders of Ohio corporations from coercive
tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offerees of all information material to a decision to
accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the cost of supervision and examination. Ohio law prescribes
the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally chartered savings association. See "Federal Deposit
Insurance Corporation." The Ohio Superintendent also has approval authority over
any mergers involving or acquisitions of control of Ohio savings and loan
associations. The Ohio Superintendent may initiate certain supervisory measures
or formal enforcement actions against Ohio associations. Ultimately, if the
grounds provided by law exist, the Superintendent may place an Ohio association
in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, Seven Hills is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
subject to the general oversight of the Secretary of the Treasury. The Director
of the OTS is responsible for the regulation and supervision of all federally
chartered savings associations and all other savings associations, the deposits
of which are insured by the FDIC through the SAIF. The OTS issues regulations
governing the operation of savings associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the costs of general supervision and examination. The OTS
also may initiate enforcement actions against savings associations and certain
persons affiliated with them for violations of laws or regulations or for
engaging in unsafe or unsound practices. If the grounds provided by law exist,
the OTS may appoint a conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations focus on how well and to what extent an institution meets the credit
needs in its community, particularly in low- to moderate-income areas. Seven
Hills has received a "satisfactory" rating under those regulations.
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REGULATORY CAPITAL REQUIREMENTS. Seven Hills is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of Seven Hills
at June 30, 1996, and the amount by which it exceeds the minimum requirements.
Tangible and core capital are reflected as a percentage of adjusted total
assets. Risk-based (or total) capital, which consists of core and supplementary
capital, is reflected as a percentage of risk-weighted assets.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Tangible capital $8,323 18.5%
Requirement 674 1.5
------ ----
Excess $7,649 17.0%
====== ====
Core capital $8,323 18.5%
Requirement 1,348 3.0
------ ----
Excess $6,975 15.5%
====== ====
Risk-based capital $8,373 38.5%
Risk-based requirement 1,740 8.0
------ ----
Excess $6,633 30.5%
====== ====
</TABLE>
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for Seven Hills consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital (which
for Seven Hills consists of core capital and general valuation allowances) of 8%
of risk-weighted assets (assets are weighted at percentage levels ranging from
0% to 100% depending on their relative risk). The OTS has proposed to amend the
core capital requirement so that those associations that do not have the highest
examination rating and exceed an acceptable level of risk will be required to
maintain core capital of from 4% to 5%, depending on the association's
examination rating and overall risk. Seven Hills does not anticipate that it
will be adversely affected if the core capital requirement regulation is amended
as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the impact of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. In general, an association with less than $300 million in
assets and a risk-based capital ratio in excess of 12% will not be subject to
this requirement. Seven Hills qualifies for this exemption. Pending
implementation of the interest rate risk component, the OTS may adjust the
risk-based capital requirement on an individualized basis to take into account
risks due to concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after it becomes
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. Seven Hills' capital at June 30, 1996, met the standards
for a well-capitalized institution.
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Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each association to maintain an average daily
balance of short-term liquid assets at a specified percentage, currently 1%, of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed upon associations failing to
meet liquidity requirements. The eligible liquidity of Seven Hills, as computed
under current regulations, at June 30, 1996, was approximately $2.4 million, or
6.70%, and exceeded the then applicable 5.0% liquidity requirement by
approximately $600,000, or 1.70%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments. Such investments are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. The QTL Test, as amended by the
Improvement Act, requires that 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) consist of qualified thrift investments on a monthly
average basis in 9 out of every 12 months. The OTS may grant exceptions to the
QTL Test under certain circumstances. If a savings association fails to meet the
QTL Test, the association and its holding company will be subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL Test will not be eligible for new FHLB advances. See "Federal Home Loan
Banks." At June 30, 1996, Seven Hills had QTL investments equal to approximately
92.6% of its total portfolio assets.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Unimpaired Capital. A savings association may loan to one
borrower an additional amount not to exceed 10% of the association's Unimpaired
Capital, if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." Certain types of loans are not subject to these limits. In applying
these limits, the regulations require that loans to certain related borrowers be
aggregated. Notwithstanding the specified limits, an association may lend to one
borrower up to $500,000 "for any purpose." At June 30, 1996, Seven Hills was in
compliance with this lending limit. See "Lending Activities - Loan Originations,
Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Unimpaired Capital (or 200% of
Unimpaired Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public, and loans to executive officers
are subject to additional limitations. Seven Hills was in compliance with such
restrictions at June 30, 1996.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. SHFC is
an affiliate of Seven Hills. Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which a savings association or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, (ii) limit the aggregate of all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
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provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Seven Hills was in
compliance with these requirements and restrictions at June 30, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
including dividend payments. An association is prohibited from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
net worth of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion. OTS regulations also establish a system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed distribution, meet their fully phased-in capital
requirements. Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net income, current
year-to-date, plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a Tier 2 association. A Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association. Seven Hills meets the
requirements for a Tier 1 association and has not been notified of any need for
more than normal supervision.
The second category, Tier 2, consists of associations that before and
after the proposed distribution meet their current minimum, but not fully
phased-in, capital requirements. Associations in this category may make capital
distributions of up to 75% of net income over the most recent four quarters.
Tier 3 associations do not meet current minimum capital requirements and must
obtain OTS approval of any capital distribution. Tier 2 associations that
propose to make a capital distribution in excess of the noted safe harbor level
must also obtain OTS approval. Tier 2 associations proposed to make a capital
distribution within the safe harbor provisions and Tier 1 associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution.
As a subsidiary of SHFC, Seven Hills will also be required to give the
OTS 30 days' notice prior to declaring any dividend on its stock. The OTS may
object to the distribution during that 30-day period based on safety and
soundness concerns.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, associations not owned by a holding
company with a camel examination rating of 1 or 2 could make a capital
distribution without notice to the OTS if they remain adequately capitalized, as
described above, after the distribution is made. Any other association seeking
to make a capital distribution that would not cause the association to fall
below the capital levels to qualify as adequately capitalized or better would
have to provide notice to the OTS. Except under limited circumstances and with
OTS approval, no capital distributions would be permitted if it caused the
association to become undercapitalized or worse.
HOLDING COMPANY REGULATION. The HOLA generally prohibits a savings and
loan holding company from controlling any other savings association or savings
and loan holding company, without prior approval of the OTS, or from acquiring
or retaining more than 5% of the voting shares of a savings association or
holding company thereof, which is not a subsidiary. Under certain circumstances,
a savings and loan holding company is permitted to acquire, with the approval of
the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings association for cash without such savings association
being deemed to be controlled by the holding company. Except with the prior
approval of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
SHFC is a unitary savings and loan holding company. There are generally
no restrictions on the activities of a unitary savings and loan holding company,
and such companies are the only financial institution holding companies which
may engage in any commercial, securities and insurance activities. Congress is
considering, however, either limiting unitary savings and loan holding companies
to the same activities as other financial institution holding companies or
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permitting certain bank holding companies to engage in commercial activities and
expanded securities and insurance activities. The Company cannot predict if and
in what form these proposals might become law. The broad latitude to engage in
activities under current law can be restricted, however, if the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the OTS
may impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the foregoing rules as to permissible business
activities of a unitary savings and loan holding company, if the savings
association subsidiary of a holding company fails to meet the QTL Test, then
such unitary holding company would become subject to the activities restrictions
applicable to multiple holding companies. At June 30, 1996, Seven Hills met the
QTL Test.
If SHFC were to acquire control of another savings institution, other
than through a merger or other business combination with Seven Hills, SHFC would
become a multiple savings and loan holding company. Unless the acquisition is an
emergency thrift acquisition and each subsidiary savings association meets the
QTL Test, the activities of SHFC and any of its subsidiaries (other than Seven
Hills or other subsidiary savings associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days' advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF SHFC AND SEVEN HILLS.
In addition to the Ohio law limitations on the merger and acquisition of Seven
Hills and SHFC previously discussed, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent federal
law and regulations, no person, directly or indirectly, or acting in concert
with others, may acquire control of Seven Hills or SHFC without 60 days prior
notice to the OTS. "Control" is generally defined as having more than 25%
ownership or voting power; however, ownership or voting power of more than 10%
may be deemed "control" if certain factors are in place. If the acquisition of
control is by a company, the acquiror must obtain approval, rather than give
notice, of the acquisition as a savings and loan holding company.
In addition, any merger of Seven Hills must be approved by the OTS as
well as the Superintendent. Further, any merger of SHFC in which SHFC is not the
resulting company must also be approved by both the OTS and the Superintendent.
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FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the banking and
thrift industries. The FDIC administers two separate insurance funds, the Bank
Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF
for savings associations and is required to maintain designated levels of
reserves in each fund. Seven Hills is a member of the SAIF and its deposit
accounts are insured by the FDIC, up to the prescribed limits. The FDIC has
examination authority over all insured depository institutions, including Seven
Hills, and has authority to initiate enforcement actions against federally
insured savings associations, if the FDIC does not believe the OTS has taken
appropriate action to safeguard safety and soundness and the deposit insurance
fund.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met. Seven Hills has no present
intention to convert to the BIF or to a bank charter.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance each for members of the BIF and the SAIF.
The FDIC may increase assessment rates for either fund if necessary to restore
the fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such rates if such target level has been met.
The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
cost of prior thrift failures. The BIF has, however, met its required reserve
level.
The assessments paid by healthy savings associations exceeded those
paid by healthy BIF members by approximately $.19 per $100 in deposits for 1995,
and no BIF assessments will be required of healthy commercial banks in 1996
except a $2,000 minimum fee. The disparity in the premiums paid between savings
associations and commercial banks could have a negative competitive impact on
Seven Hills and other savings associations.
Legislation to recapitalize the SAIF and eliminate the significant
premium disparity became effective September 30, 1996. The recapitalization plan
provides for a special assessment to be paid by November 29, 1996, estimated to
be equal to approximately $.69 to $.71 per $100 of SAIF deposits held at March
31, 1995. This special assessment will increase SAIF reserves to the level
required by law. Certain BIF institutions holding SAIF-insured deposits would
pay a lower special assessment. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF, which will increase BIF
assessments. After the payment of the special assessment, SAIF assessments for
healthy savings associations should be set at a significantly lower level but
could never be reduced below the level set for healthy BIF institutions.
Seven Hills had $37.6 million in deposits at March 31, 1995. If a
special assessment of $.69 to $.71 per $100 in deposits as of March 31, 1995, is
imposed, Seven Hills will pay an additional assessment of approximately $259,000
to $267,000. Such assessment should be tax-deductible, but it will reduce
earnings and capital for the quarter in which it is recorded.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming all savings associations have become
banks. As a result, it is expected that the thrift charter or separate thrift
regulation under federal law will be eliminated prior to the merger of the
deposit insurance funds. As a result, Seven Hills would be regulated as a bank
under federal law and would be subject to the more restrictive activity limits
imposed on national banks. In addition, SHFC would become a bank holding
company, which would become subject to more restrictive activity limits and
capital requirements similar to those imposed on Seven Hills. SHFC cannot
predict the impact of conversion of Seven Hills to, or regulation of Seven Hills
as, a bank until the legislation requiring such change is enacted.
Legislation has also been enacted requiring, generally, that bad debt
reserves taken after 1987 using the percentage of taxable income method must be
included in future taxable income of the association over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. Seven Hills will be required,
therefore, to recapture approximately $91,000 of its bad debt reserve taken
after 1987.
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FRB REGULATIONS
RESERVE REQUIREMENTS. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts)
and non-personal time deposits. Such regulations currently require that reserves
of 3% be maintained against net transaction accounts up to $52 million (subject
to an exemption of up to $4.3 million), and that reserves of 10% be maintained
against that portion of total net transaction accounts in excess of $52 million.
At June 30, 1996, Seven Hills was in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances.
Seven Hills is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of that FHLB in an amount equal to the greater
of 1.0% of the aggregate outstanding principal amount of Seven Hills'
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. Seven Hills is
in compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $490,100 at June 30, 1996.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
TAXATION
FEDERAL TAXATION
SHFC and Seven Hills file a consolidated federal income tax return on a
fiscal year basis. SHFC is subject to the federal tax laws and regulations which
apply to corporations generally. Seven Hills is also subject to the federal tax
laws and regulations which apply to corporations generally. Certain thrift
institutions, including Seven Hills, were, however, prior to the enactment of
the Small Business Jobs Protection Act, which was signed into law on August 21,
1996, allowed deductions for bad debts under methods more favorable than those
granted to other taxpayers. Qualified thrift institutions could compute
deductions for bad debts using either the specific charge off method of Section
166 of the Internal Revenue Code of 1986, as amended (the "Code"), or the
reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to
deduct bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an addition
to its bad debt reserve equal to 8% of its taxable income (determined without
regard to this deduction and with additional adjustments). Under the experience
method, a thrift institution was generally allowed a deduction for an addition
to its bad debt reserve equal to the greater of (i) an amount based on its
actual average experience for losses in the current and five preceding taxable
years, or (ii) an amount necessary to restore the reserve to its balance as of
the close of the base year. A thrift institution could elect annually to compute
its allowable addition to bad debt reserves for qualifying loans either under
the experience method or the percentage of taxable income method. For tax years
1995, 1994 and 1993, Seven Hills used the percentage of taxable income method
because such method provided a higher bad debt deduction than the experience
method.
Section 1616(a) of the Small Business Job Protection Act repealed
the Section 593 reserve method of accounting for bad debts by thrift
institutions, effective for taxable years beginning after 1995. Thrift
institutions that would
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be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, like Seven Hills, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less then its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential real and church
property and certain mobile homes), but only to the extent that the loan is made
to the owner of the property to acquire, construct, or improve the property.
In addition to the regular income tax, SHFC and Seven Hills are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1996, SHFC and Seven Hills are also subject to an environmental tax equal
to 0.12% of the excess of alternative minimum taxable income for the taxable
year (determined without regard to net operating losses and the deduction for
the environmental tax) over $2.0 million.
The balance of the pre-1988 reserves is subject to the provisions
of Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (excess to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by Seven Hills to SHFC is deemed paid out of its pre-1988 reserves under these
rules, the pre-1988 reserves would be reduced and Seven Hills' gross income for
tax purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of June 30, 1996,
Seven Hills' pre-1988 reserves for tax purposes totaled approximately $1.1
million. Seven Hills believes it had approximately $4.3 million of accumulated
earnings and profits for tax purposes as of June 30, 1996, which would be
available for dividend distributions, provided regulatory restrictions
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applicable to the payment of dividends are met. See "REGULATION - OTS
Regulations -- Limitations on Capital Distributions." No representation can be
made as to whether Seven Hills will have current or accumulated earnings and
profits in subsequent years.
The tax returns of Seven Hills have been audited or closed without
audit through calendar year 1992. In the opinion of management, any examination
of open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Seven Hills.
OHIO TAXATION
SHFC is subject to the Ohio corporation franchise tax, which, as
applied to SHFC, 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 or (ii)
0.582% times taxable net worth.
In computing its tax under the net worth method, SHFC may exclude 100%
of its investment in the capital stock of Seven Hills after the Conversion, as
reflected on the balance sheet of SHFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of
Seven Hills. The calculation of the exclusion from net worth is based on the
ratio of the excludable investment (net of any appreciation or goodwill included
in such investment) to total assets multiplied by the net value of the stock. As
a holding company, SHFC may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
SHFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Seven Hills is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of Seven
Hills' book net worth determined in accordance with generally accepted
accounting principles ("GAAP"). As a "financial institution," Seven Hills is not
subject to any tax based upon net income or net profits imposed by the State of
Ohio.
MARKET FOR THE SHARES AND RELATED SHAREHOLDER MATTERS
On the Record Date, there were 536,472 common shares of SHFC
outstanding and held of record by approximately 274 shareholders. Price
information with respect to SHFC's common shares is quoted on Nasdaq. The
following table sets forth the range of high and low bid information for the
common shares of SHFC, as quoted by Nasdaq, together with the dividends declared
per common share for each quarter since the completion of the Conversion.
<TABLE>
<CAPTION>
Quarter Ended High Low Cash Dividends Declared
------------- ---- --- -----------------------
<S> <C> <C> <C>
March 31, 1994 $12.00 $11.00 $.00
June 30, 1994 $15.50 $11.50 $.05
September 30, 1994 $17.50 $15.75 $.55
December 31, 1994 $17.50 $15.00 $.07
March 31, 1995 $16.25 $14.50 $.07
June 30, 1995 $17.50 $15.00 $.07
September 30, 1995 $16.00 $16.00 $.63
December 31, 1995 $16.00 $14.50 $.08
March 31, 1996 $14.75 $14.50 $.08
June 30, 1996 $17.50 $14.50 $.09
September 30, 1996 $17.50 $17.50 $.09
</TABLE>
On June 13, 1996, the date preceding the public announcement of the execution of
the Agreement, the bid and asked prices for SHFC's common shares were $14.50 and
$16.50 per share, respectively.
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<PAGE> 63
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only persons known to SHFC to own beneficially more than five percent of the
outstanding common shares of SHFC as of August 31, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership Shares Outstanding (2)
- ---------------- -------------------- ------------------
<S> <C> <C>
Shirley A. Gluck 34,018(3) 6.26%
James R. Maurer 35,203(4) 6.48%
Arthur W. Wendel, Jr. 63,330(5) 11.65%
Robert A. West 44,049(6) 8.10%
</TABLE>
- ------------------------
(1) Each of the individuals named in the table may be contacted at 1440
Main Street, Cincinnati, Ohio 45210.
(2) "Beneficial ownership," as defined by the regulations of the Commission
governing disclosures within this Proxy Statement, includes shares
which are not included in the definition of "beneficial ownership" in
the regulations of the OTS governing acquisitions of 10% or more of the
common shares of a savings association or its holding company and which
are not included with respect to the prohibition contained in the
Articles of Incorporation of SHFC that no persons may, within five
years after the consummation of the conversion of SHFC from a mutual
savings association to a stock savings association, acquire the
beneficial ownership of more than 10% of any equity security of SHFC.
In addition, the definition of "beneficial ownership" governing
disclosures within the Proxy Statement includes shares not included for
purposes of certain aspects of the Seven Hills Financial Corporation
1993 Stock Option and Incentive Plan (the "Stock Option Plan").
(3) Consists of 6,177 shares held solely by Ms. Gluck; 14,372 shares held
jointly with Ms. Gluck's husband; 2,797 shares held by Ms. Gluck's
husband; 1,272 shares awarded to Ms. Gluck pursuant to the RRP, with
respect to which Ms. Gluck had voting but no dispositive power; 2,342
shares allocated to Ms. Gluck's account pursuant to the ESOP; and 7,058
shares which may be acquired by Ms. Gluck upon the exercise of an
option granted to Ms. Gluck pursuant to the Stock Option Plan.
(4) Consists of 5,166 shares held solely by Mr. Maurer; 17,524 shares held
jointly with Mr. Maurer's wife; 1,220 shares held solely by Mr.
Maurer's wife; 2,120 shares awarded to Mr. Maurer pursuant to the RRP;
2,115 shares held by the RRP trust and not yet awarded to participants,
with respect to which Mr. Maurer shares voting and dispositive power as
a member of the RRP Committee of the Board of Directors of SHFC; and
7,058 shares which may be acquired by Mr. Maurer upon the exercise of
an option granted to Mr. Maurer pursuant to the Stock Option Plan.
(5) Consists of 13,668 shares held solely by Mr. Wendel; 7,100 shares held
by Mr. Wendel's wife; 3,389 shares awarded to Mr. Wendel pursuant to
the RRP and 4,366 allocated to Mr. Wendel's account under the ESOP,
with respect to which Mr. Wendel has voting but not dispositive power;
27,749 shares held by the ESOP, of which Mr. Wendel is a co-trustee and
pursuant to which Mr. Wendel shares voting power with respect to
unallocated shares; and 7,058 shares which may be acquired by Mr.
Wendel upon the exercise of an option granted to Mr. Wendel pursuant to
the Stock Option Plan.
(6) Consists of 4,933 shares held solely by Mr. West; 1,346 shares held by
Mr. West's wife; 2,115 shares held by the RRP and not yet awarded to
participants, with respect to which Mr. West shares voting and
dispositive power as a member of the RRP Committee; 848 shares awarded
to Mr. West pursuant to the RRP, with respect to which Mr. West has
sole voting but no dispositive power; 27,749 shares held by the ESOP,
of which Mr. West is a co-trustee and pursuant to which Mr. West shares
voting power with respect to unallocated shares; and 7,058 shares which
may be acquired by Mr. West upon the exercise of an option granted to
Mr. West pursuant to the Stock Option Plan. Does not include 15,635
shares held in a trust for the benefit of Mr. West's wife, with respect
to which Mr. West disclaims beneficial ownership.
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<PAGE> 64
The following table sets forth certain information with respect to the
number of common shares of SHFC beneficially owned by each director of SHFC and
by all directors and executive officers of SHFC as a group as of August 31,
1996:
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name and Address (1) of Beneficial Ownership (2) Shares Outstanding
-------------------- --------------------------- ------------------
<S> <C> <C>
Henry C. Gessing 26,294(3) 4.84%
James R. Maurer 35,203(4) 6.48%
Roger L. Ruhl 21,694(5) 3.99%
Arthur W. Wendel, Jr. 63,330(6) 11.65%
Robert A. West 44,049(7) 8.10%
All directors and executive officers
of SHFC as a group (8 persons) 210,286(8) 35.89%
</TABLE>
- ------------------------------
(1) Each of the persons listed in this may be contacted at the address of
SHFC.
(2) The beneficial owner has sole voting and investment power unless
otherwise indicated. Shares awarded under the RRP are earned over time
and may be voted after being awarded but not disposed of until earned.
(3) Includes 2,544 shares awarded to Mr. Gessing pursuant to the RRP, with
respect to which Mr. Gessing has voting but no dispositive power, and
7,058 shares which may be acquired by Mr. Gessing upon the exercise of
an option granted to Mr. Gessing pursuant to the Stock Option Plan.
(4) See footnote 4 to the previous table for a description of the nature of
Mr. Maurer's beneficial ownership.
(5) Consists of 11,673 shares held solely by Mr. Ruhl; 848 shares awarded
to Mr. Ruhl pursuant to the RRP; 2,115 shares held by the RRP trust and
not yet awarded to participants, with respect to which Mr. Ruhl shares
voting and dispositive power as a member of the RRP Committee; and
7,058 shares which may be acquired by Mr. Ruhl upon the exercise of an
option granted to Mr. Ruhl pursuant to the Stock Option Plan.
(6) See footnote 5 to the previous table for a description of the nature of
Mr. Wendel's beneficial ownership.
(7) See footnote 6 to the previous table for a description of the nature of
Mr. West's beneficial ownership.
(8) Includes 106,202 shares with respect to which directors and executive
officers share voting and dispositive power and 49,406 shares which may
be acquired in the aggregate upon the exercise of options granted to
all directors and executive officers of SHFC pursuant to the Stock
Option Plan. Because the same unallocated ESOP shares and unawarded RRP
shares are included in more than one individual director's amount, the
total of all shares beneficially owned by the directors and executive
officers is less than the sum of their individual amounts.
The directors and executive officers of SHFC have expressed their
intention to vote all of the shares they beneficially own in favor of adoption
of the Agreement.
IDENTITY AND BACKGROUND OF WOFC
WOFC, a Delaware corporation, was organized in March 1994 for the
purpose of becoming the savings and loan holding company for Springfield FSB in
connection with the Springfield Conversion. In the Springfield Conversion,
Springfield FSLA converted to a federal stock savings bank under the name
"Springfield Federal Savings Bank". WOFC owns all of the outstanding stock of
Springfield FSB issued on July 29, 1994. WOFC's common stock is traded on the
Nasdaq National Market System under the symbol "WOFC."
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On March 29, 1996, WOFC acquired Mayflower, located in Cincinnati,
Ohio, and its subsidiary, Mayflower Savings Bank. In connection with such
acquisition, Mayflower Savings Bank converted to a federal savings bank charter
under the name "Mayflower Federal Savings Bank" and is held as a subsidiary
separate from Springfield FSB.
WOFC, Springfield FSB and Mayflower FSB are subject to comprehensive
regulation, examination and supervision by the OTS and the FDIC. Springfield FSB
and Mayflower FSB are members of the FHLB System, and their deposits are backed
by the full faith and credit of the United States Government and are separately
insured up to applicable limits by the FDIC.
Springfield FSB is headquartered in Springfield, Ohio. Springfield
FSB's primary market area covers Clark County, Ohio, and parts of contiguous
counties, and is serviced through its main office in Springfield, Ohio, and four
branch offices in Enon, New Carlisle, Springfield and Yellow Springs. Mayflower
FSB is headquartered in Cincinnati and primarily serves that area.
At March 31, 1996, WOFC had assets of $320 million, Springfield FSB had
assets of $253 million, and Mayflower FSB had assets of $54 million. At March
31, 1996, Springfield FSB had deposits of $141 million, and Mayflower FSB had
deposits of $41 million.
DISSENTERS' RIGHTS OF APPRAISAL
Holders of SHFC common shares who so desire are entitled to relief as
dissenting shareholders under Ohio Revised Code Section 1701.85. A shareholder
of SHFC wILL be entitled to such relief, however, only if he complies strictly
with all of the procedural and other requirements of Section 1701.85. The
following summary does not purport to be a complete statement of the method of
compliance with Section 1701.85 and is qualified in its entirety by reference to
the copy of Section 1701.85 attached hereto as Annex C.
An SHFC shareholder who wishes to perfect his rights as a dissenting
shareholder in the event the Agreement is adopted:
(a) Must have been a record holder of the SHFC common shares as
to which he seeks relief on the SHFC Record Date;
(b) Must not have voted his SHFC common shares in favor of
adoption of the Agreement; and
(c) Must deliver to SHFC, not later than ten days after the
Special Meeting, a written demand for payment of the fair
cash value of the shares as to which he seeks relief. Such
written demand must state the name of the shareholder, his
address, the number of shares as to which he seeks relief
and the amount claimed as the fair cash value thereof.
A vote against the adoption of the Agreement will not satisfy the
requirements of a written demand for payment. Any written demand for payment
should be mailed or delivered to: Arthur W. Wendel, Jr., President, Seven Hills
Financial Corporation, 1440 Main Street, Cincinnati, Ohio 45210. As the written
demand must be delivered to Seven Hills within the ten-day period following the
Special Meeting, it is recommended, although not required, that a shareholder
using the mails should use certified or registered mail, return receipt
requested, to confirm that he has made a timely delivery.
If SHFC sends the dissenting shareholder, at the address specified in
his demand, a request for the certificate(s) representing his shares, such
dissenting shareholder must deliver the certificate(s) to SHFC within 15 days of
the sending of such request. SHFC may endorse the certificate(s) with a legend
to the effect that the shareholder has demanded the fair cash value of the
shares represented by the certificate(s). Failure to deliver the certificate(s)
within 15 days of the request terminates the shareholder's rights as a
dissenting shareholder. SHFC must notify the shareholder of its election to
terminate his rights as a dissenting shareholder within 20 days after the lapse
of the 15-day period.
Unless the dissenting shareholder and SHFC agree on the fair cash value
per share of the SHFC common shares, either may, within three months after the
service of the written demand by the shareholder, file a petition in the Court
of Common Pleas of Hamilton County, Ohio. If the court finds that the
shareholder is entitled to be paid the fair cash value of
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any shares, the court may appoint one or more appraisers to receive evidence and
to recommend a decision on the amount of the fair cash value.
Fair cash value: (i) will be determined as of the day prior to the
Special Meeting, (ii) will be the amount a willing seller and willing buyer
would accept or pay with neither being under compulsion to sell or buy, (iii)
will not exceed the amount specified in the shareholder's written demand, and
(iv) will exclude any appreciation or depreciation in market value resulting
from the Merger. The court will make a finding as to the fair cash value of a
share and render judgment against SHFC, for its payment with interest at such
rate and from such date as the court considers equitable. The costs of
proceedings shall be assessed or apportioned as the court considers equitable.
The rights of any dissenting shareholder will terminate if (a) the
dissenting shareholder has not complied with Section 1701.85, unless SHFC, by
its Board of Directors, waives such failure, (b) SHFC abandons or is finally
enjoined or prevented from carrying out, or the shareholders of SHFC rescind
their adoption of, the Agreement, (c) the dissenting shareholder withdraws his
written demand with the consent of SHFC, by its Board of Directors, or (d) SHFC
and the dissenting shareholder have not agreed upon the fair cash value per
share of the SHFC common shares and neither has timely filed or joined in a
petition in an appropriate court for a determination of the fair cash value of
the shares. For a discussion of the tax consequences to a shareholder who
exercises dissenters' rights, see "THE MERGER - Federal Income Tax
Consequences."
Because a proxy which does not contain voting instructions will be
voted for adoption of the Amendment and the Agreement, a shareholder who wishes
to exercise dissenters' rights must either (i) not sign and return his proxy or,
(ii) if he signs and returns his proxy, vote against or abstain from voting on
the adoption of the Agreement.
SHFC shareholders who are not in favor of the Merger but who do not
wish to exercise dissenters' rights may, in the alternative, attempt to sell
their shares in the open market at the then current market price. There is,
however, no active trading market for SHFC common shares.
ADJOURNMENT OF THE SPECIAL MEETING
The shareholders of SHFC will be asked to approve a proposal to permit
the adjournment of the Special Meeting, if necessary, to solicit additional
proxies with respect to the adoption of the Amendment and the adoption of the
Agreement. The Amendment and the Agreement must be adopted by the affirmative
vote of at least a majority of the outstanding shares of SHFC. If either of such
matters does not receive the requisite vote of shareholders at the Special
Meeting and does not receive a sufficient number of negative votes to assure the
failure of the matter, the Board of Directors may decide to adjourn the Special
Meeting to solicit additional proxies. If the Board of Directors decides to
adjourn the Special Meeting with respect to the Amendment and the Agreement, the
Chairman of the Special Meeting will request a motion that the Special Meeting
be adjourned for up to 30 days.
Each proxy given in connection with the Special Meeting will be voted
on a motion for adjournment in accordance with the instructions contained
therein. If no contrary instructions are given, each proxy will be voted in
favor of any motion to adjourn the Special Meeting. The holders of the majority
of the shares of SHFC represented in person or by proxy at the Special Meeting
will be required to approve a motion to adjourn the Special Meeting.
If a motion to adjourn the Special Meeting is approved, no vote will be
taken on the Amendment or the Agreement at the Special Meeting on November 1,
1996, but the Amendment and the Agreement will be voted upon at the adjourned
meeting. Unless revoked prior to its use, any proxy solicited for the Special
Meeting will continue to be valid and will be voted in accordance with the
instructions contained therein at the adjourned meeting.
Because the Board of Directors recommends that the shareholders vote
FOR the adoption of the Amendment and the Agreement, the Board of Directors also
recommends that the shareholders vote FOR the proposal to adjourn the Special
Meeting, which will facilitate the adoption of the Amendment and the Agreement.
Such an adjournment would be disadvantageous to shareholders who oppose the
Amendment and the Agreement because the adjournment will give SHFC additional
time to solicit votes in favor of the Amendment and the Agreement, thereby
increasing the chances of passing the Amendment and Agreement proposals. SHFC
has no reason to believe that an adjournment of the Special Meeting will be
required.
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<PAGE> 67
If a quorum is not present at the Special Meeting, none of the
proposals will be acted upon, and the Board of Directors will adjourn the
Special Meeting to a later date in order to solicit additional proxies to assure
the presence of a quorum. The proposal to approve a motion to adjourn the
Special Meeting does not apply to an adjournment relating to the absence of a
quorum.
AUDITORS
A representative of Grant Thornton LLP, SHFC's auditors for the current
year and for the fiscal year ended June 30, 1996, is expected to be present at
the Special Meeting, will have the opportunity to make a statement if he or she
so desires and is expected to be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
In accordance with the Exchange Act, proposals by SHFC's shareholders
for inclusion in SHFC's Proxy Statement for SHFC's 1996 Annual Meeting of
Shareholders were required to be received by SHFC at its principal office not
later than May 29, 1996. Because management of SHFC expects the Merger to close
in November 1996, no preparations are currently being made for a 1996 Annual
Meeting of Shareholders. If an Annual Meeting of Shareholders should become
necessary and the meeting will be held later than January 27, 1997, shareholders
will be notified and provided the new date by which proposals must be received.
Each proposal submitted should be accompanied by the name and address of the
shareholder submitting the proposal, the number of shares of SHFC owned and the
date such shares were acquired by the holder. If the proponent is not a
shareholder of record, proof of beneficial ownership also should be submitted.
The proponent should also state his intention to personally appear at the Annual
Meeting to present the proposal. The proxy rules of the Commission govern the
content and form of shareholder proposals. All proposals must be a proper
subject for action at the Annual Meeting.
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CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS F-3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION F-3
CONSOLIDATED STATEMENTS OF EARNINGS F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
F-1
<PAGE> 69
Report of Independent Certified Public Accountants
Board of Directors
Seven Hills Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Seven Hills Financial Corporation and Subsidiary as of June 30, 1996 and
1995, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the years ended June 30, 1996, 1995 and 1994. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seven Hills
Financial Corporation and Subsidiary as of June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
years ended June 30, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
As more fully explained in Notes A-2 and B, the Corporation changed its method
of accounting for certain investment and mortgage-backed securities as of July
1, 1994. Also, as discussed in Note A-9 (except for Note K as to which the date
is August 20, 1996), the Corporation changed its method of accounting for
compensation expense for shares acquired by the employee stock ownership plan
for the year ended June 30, 1995.
Grant Thornton LLP
Cincinnati, Ohio
July 11, 1996
F-2
<PAGE> 70
SEVEN HILLS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 347 $ 629
Federal funds sold -- 150
Interest-bearing deposits in other financial institutions 205 1,051
------- -------
Cash and cash equivalents 552 1,830
Certificates of deposit in other financial institutions -- 750
Investment securities designated as available for sale
- at market 1,265 55
Investment securities - at amortized cost, approximate
market value of $99 and $3,797 as of June 30,
1996 and 1995 99 3,788
Mortgage-backed securities designated as available for
sale - at market 5,395 1,427
Mortgage-backed securities - at cost, approximate
market value of $1,265 and $4,816 as of June 30,
1996 and 1995 1,282 4,985
Loans receivable - net 34,988 32,477
Office premises and equipment - at depreciated cost 376 403
Federal Home Loan Bank stock - at cost 490 457
Accrued interest receivable on loans 152 130
Accrued interest receivable on mortgage-backed securities 55 44
Accrued interest receivable on investments and
interest-bearing deposits 24 79
Prepaid expenses and other assets 227 145
Prepaid federal income taxes 39 10
------- -------
Total assets $44,944 $46,580
======= =======
</TABLE>
F-3
<PAGE> 71
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
<S> <C> <C>
Deposits $ 34,767 $ 36,115
Advances from Federal Home Loan Bank 200 --
Accrued interest payable 49 36
Other liabilities 56 55
Deferred federal income taxes 196 263
-------- --------
Total liabilities 35,268 36,469
Commitments -- --
Shareholders' equity
Common stock- authorized 1,000,000 shares without par
or stated value; 564,707 shares issued in 1996 and 1995 -- --
Additional paid-in capital 5,438 5,362
Retained earnings - restricted 5,067 5,335
Unrealized gains (losses) on securities designated as available for sale (34) 32
Less required contributions for shares acquired by employee
benefit plans (339) (474)
Less 28,235 and 9,000 shares of treasury stock - at cost (456) (144)
-------- --------
Total shareholders' equity 9,676 10,111
-------- --------
Total liabilities and shareholders' equity $ 44,944 $ 46,580
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 72
SEVEN HILLS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended June 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans $ 2,631 $2,457 $2,626
Mortgage-backed securities 408 352 288
Investment securities 131 234 110
Interest-bearing deposits and other 127 184 176
------- ------ ------
Total interest income 3,297 3,227 3,200
Interest expense
Deposits 1,779 1,667 1,704
Borrowings 1 1 --
------- ------ ------
1,780 1,668 1,704
------- ------ ------
Net interest income 1,517 1,559 1,496
Provision for losses on loans -- 2 6
------- ------ ------
Net interest income after
provision for losses on loans 1,517 1,557 1,490
Other income
Gain on sale of FHLMC stock -- 504 --
Service fees, charges and other operating 12 15 18
Recovery of loss on Ohio Deposit Guarantee
Fund Certificate of Deposit -- 4 --
------- ------ ------
Total other income 12 523 18
General, administrative and other expense
Employee compensation and benefits 714 737 599
Occupancy and equipment 185 192 176
Federal deposit insurance premiums 85 91 92
Franchise taxes 121 98 75
Other operating 190 177 169
------- ------ ------
Total general, administrative
and other expense 1,295 1,295 1,111
------- ------ ------
Earnings before income taxes 234 785 397
Federal income taxes
Current 92 200 77
Deferred (33) 62 56
------- ------ ------
Total federal income taxes 59 262 133
------- ------ ------
NET EARNINGS $ 175 $ 523 $ 264
======= ====== ======
EARNINGS PER COMMON SHARE $ 0.33 $ 0.96 $ 0.23
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 73
SEVEN HILLS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1996, 1995 and 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
ADDITIONAL DESIGNATED SHARES ACQUIRED
COMMON PAID-IN RETAINED AS AVAILABLE BY EMPLOYEE
STOCK CAPITAL EARNINGS FOR SALE BENEFIT PLANS
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 $-- $ -- $ 4,974 $ -- $ --
Proceeds from issuance of common stock, no stated value -- 5,314 -- -- (678)
Net earnings for the year ended June 30, 1994 -- -- 264 -- --
Amortization of expense related to employee benefit plans -- -- -- -- 66
Cash dividends of $.05 per common share -- -- (28) -- --
--- ------ ------- ----- -----
Balance at June 30, 1994 -- 5,314 5,210 -- (612)
Designation of securities as available for sale upon
adoption of SFAS No. 115 -- -- -- 284 --
Purchase of treasury stock -- -- -- -- --
Net earnings for the year ended June 30, 1995 -- -- 523 -- --
Amortization of expense related to employee benefit plans -- 48 -- -- 138
Cash dividends of $0.76 per common share -- -- (398) -- --
Realized gain on sale of securities designated as
available for sale, net of related tax effects -- -- -- (333) --
Unrealized gain on securities designated as available
for sale, net of related tax effects -- -- -- 81 --
--- ------ ------- ----- -----
Balance at June 30, 1995 -- 5,362 5,335 32 (474)
Purchase of treasury stock -- -- -- -- --
Net earnings for the year ended June 30, 1996 -- -- 175 -- --
Amortization of expense related to employee benefit plans -- 76 -- -- 135
Cash dividends of $0.88 per common share -- -- (443) -- --
Unrealized loss on securities designated as available
for sale, net of related tax effects -- -- -- (66) --
--- ------ ------- ----- -----
Balance at June 30, 1996 $-- $5,438 $ 5,067 $ (34) $(339)
=== ====== ======= ===== =====
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
<S> <C> <C>
Balance at July 1, 1993 $ -- $ 4,974
Proceeds from issuance of common stock, no stated value -- 4,636
Net earnings for the year ended June 30, 1994 -- 264
Amortization of expense related to employee benefit plans -- 66
Cash dividends of $.05 per common share -- (28)
----- --------
Balance at June 30, 1994 -- 9,912
Designation of securities as available for sale upon
adoption of SFAS No. 115 -- 284
Purchase of treasury stock (144) (144)
Net earnings for the year ended June 30, 1995 -- 523
Amortization of expense related to employee benefit plans -- 186
Cash dividends of $0.76 per common share -- (398)
Realized gain on sale of securities designated as
available for sale, net of related tax effects -- (333)
Unrealized gain on securities designated as available
for sale, net of related tax effects -- 81
----- --------
Balance at June 30, 1995 (144) 10,111
Purchase of treasury stock (312) (312)
Net earnings for the year ended June 30, 1996 -- 175
Amortization of expense related to employee benefit plans -- 211
Cash dividends of $0.88 per common share -- (443)
Unrealized loss on securities designated as available
for sale, net of related tax effects -- (66)
----- --------
Balance at June 30, 1996 $(456) $ 9,676
===== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 74
SEVEN HILLS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 175 $ 523 $ 264
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees -- (3) (34)
Depreciation and amortization 32 34 27
Amortization of premiums and discounts on mortgage-backed securities 22 17 31
Accretion of discounts on investment securities (6) (8) (17)
Provision for losses on loans -- 2 6
Gain on sale of FHLMC stock -- (504) --
Amortization of expense attendant to employee benefit plans 211 186 66
Federal Home Loan Bank stock dividends (33) (28) (20)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (22) (1) 12
Accrued interest receivable on mortgage-backed securities (11) (2) (10)
Accrued interest receivable on investments and
interest-bearing deposits 55 (2) (60)
Prepaid expenses and other assets (82) (55) (19)
Accrued interest payable 13 6 (12)
Other liabilities 6 (1) (5)
Federal income taxes
Current (29) 14 (23)
Deferred (33) 62 56
------- ------- --------
Net cash provided by operating activities 298 240 262
Cash flows provided by (used in) investing activities:
Purchase of investment securities -- (400) (3,672)
Proceeds from maturity of investment securities 2,501 600 810
Purchase of mortgage-backed securities (1,475) -- (4,264)
Principal repayments on mortgage-backed securities 1,073 827 1,191
Principal repayments on loans 5,091 3,640 11,750
Loan disbursements (7,603) (4,092) (9,177)
Proceeds from sale of FHLMC stock -- 539 --
Purchase of office premises and equipment (5) (7) (63)
(Increase) decrease in certificates of deposit in other financial
institutions - net 750 1,050 (1,000)
------- ------- --------
Net cash provided by (used in) investing activities 332 2,157 (4,425)
------- ------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) 630 2,397 (4,163)
------- ------- --------
</TABLE>
F-7
<PAGE> 75
SEVEN HILLS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 630 $ 2,397 $(4,163)
Cash flows provided by (used in) financing activities:
Net decrease in deposits (1,348) (1,725) (2,592)
Net proceeds from issuance of common stock -- -- 4,636
Dividends paid on common stock (443) (398) (28)
Purchase of treasury stock (312) (144) --
Proceeds from Federal Home Loan Bank advances 400 -- --
Repayment of Federal Home Loan Bank advances (200) -- --
Advances by borrowers for taxes and insurance (5) 1 (1)
------- ------- -------
Net cash provided by (used in) financing activities (1,908) (2,266) 2,015
------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,278) 131 (2,148)
Cash and cash equivalents at beginning of year 1,830 1,699 3,847
------- ------- -------
Cash and cash equivalents at end of year $ 552 $ 1,830 $ 1,699
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 83 $ 185 $ 112
======= ======= =======
Interest on deposits and borrowings $ 1,766 $ 1,662 $ 1,716
======= ======= =======
Supplemental disclosure of noncash investing activities:
Unrealized (loss) gain on investment securities designated as
available for sale, net of applicable tax effects $ (66) $ 32 $ --
======= ======= =======
Transfer of investments and mortgage-backed securities
to an available for sale classification $ 4,379 $ 2,021 $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 76
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Seven Hills Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of Seven Hills Savings Association (the "Association"). The Association
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Association's profitability is significantly dependent on net interest
income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Association can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside
of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from such estimates.
The following is a summary of significant accounting policies which, with the
exception of the policies described in Notes A-2 and A-9, have been
consistently applied in the preparation of the accompanying consolidated
financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and the Association. All significant intercompany balances and transactions
have been eliminated in the accompanying consolidated financial statements.
2. Investment Securities and Mortgage-Backed Securities
Prior to July 1, 1994, investment securities and mortgage-backed securities
were stated at the unpaid principal balance (cost), adjusted for unamortized
premiums and discounts. Premiums and discounts are amortized and accreted to
operations using the interest method over the estimated life of the
underlying loans collateralizing the securities. Investment securities and
mortgage-backed securities held for portfolio investments were carried at
cost, rather than the lower of cost or market, as it was management's intent,
and the Corporation had the ability to hold the securities until maturity.
Investment securities and mortgage-backed securities which would be held for
indefinite periods of time, or used as part of the Corporation's
asset/liability management strategy, or that may be sold in response to
changes in interest rates, prepayment risk or the perceived need to increase
regulatory capital were classified as held for sale and were carried at the
lower of aggregate cost or market.
F-9
<PAGE> 77
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
that investments be categorized as held-to-maturity, trading, or available
for sale. Securities classified as held-to-maturity are carried at cost only
if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available for sale
are carried at fair value with resulting unrealized gains or losses recorded
to operations or shareholders' equity, respectively. The Corporation adopted
SFAS No. 115 for the fiscal year beginning July 1, 1994. The effect of
initial adoption was to increase shareholders' equity by approximately
$284,000 on July 1, 1994, representing the unrealized market value
appreciation on investment and mortgage-backed securities designated as
available for sale, net of applicable deferred federal income taxes. During
fiscal 1995, the Corporation sold the preponderance of its FHLMC stock, which
resulted in an approximate realized gain of $504,000.
During September 1995, the FASB granted financial institutions the
opportunity to reclassify their investment portfolios without calling into
question the Corporation's prior intent under SFAS No. 115. The Corporation
took advantage of this opportunity by reclassifying approximately $3.9
million of mortgage-backed securities from held to maturity to the available
for sale classification, $770,000 of mortgage-backed securities from the
available for sale classification to held to maturity, and $1.2 million of
investment securities from held to maturity classification to available for
sale. All reclassifications were made on a single day in conformity with the
requirement. Management believes that such changes will allow more
flexibility in managing interest rate risk within the investment and
mortgage-backed securities portfolios. At June 30, 1996, the Corporation's
net unrealized loss on securities designated as available for sale totaled
$34,000.
Realized gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees and the allowance for loan
losses. Interest is accrued as earned unless the collectibility of the loan
is in doubt. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued, and income is subsequently recognized
only to the extent that cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments has returned to normal, in which case the loan is returned to
accrual status. If the ultimate collectibility of principal is in doubt, in
whole or in part, all payments received on nonaccrual loans are applied to
reduce principal until such doubt is eliminated.
F-10
<PAGE> 78
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
The Corporation accounts for loan origination fees in accordance with the
provisions of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Pursuant to the provisions of SFAS No. 91, origination fees received
from loans, net of direct origination costs, are deferred and amortized to
interest income using the level-yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Corporation's
experience with similar commitments, are deferred and amortized over the life
of the related loan using the level-yield method. Fees for other loan
commitments will be deferred and amortized over the loan commitment period on
a straight-line basis.
5. Allowance for Loan Losses
It is the Corporation's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, current trends in the level of
delinquent and problem loans, loan concentrations to single borrowers,
changes in the composition of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in its primary
lending areas. When the collection of a loan becomes doubtful, or otherwise
troubled, the Corporation records a charge-off equal to the difference
between the fair value of the property securing the loan and the loan's
carrying value. Major loans and major lending areas are reviewed periodically
to determine potential problems at an early date. The allowance for loan
losses is increased by charges to earnings and decreased by charge-offs (net
of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement requires that impaired loans be
measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral. SFAS No.
114 was effective for years beginning after December 15, 1994 (July 1, 1995
as to the Corporation). The Corporation adopted SFAS No. 114 effective July
1, 1995, without material effect on consolidated financial condition or
results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Association
considers its investment in one-to-four family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the
Association's investment in impaired multi-family and nonresidential loans,
such loans are collateral dependent, and as a result, are carried as a
practical expedient at the lower of cost or fair value.
F-11
<PAGE> 79
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
It is the Association's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No.
114 at that time.
At June 30, 1996, the Association had no loans that would be defined as
impaired under SFAS No. 114.
6. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided primarily using the straight-line
method over the useful lives of the assets, estimated to be twenty-five to
forty-five years for buildings, ten to twenty-five years for building
improvements, seven to fifteen years for leasehold improvements, and three to
ten years for furniture and equipment. An accelerated depreciation method is
used for tax reporting purposes.
7. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. The loan loss allowance is charged for
any write down in the loan's carrying value to fair value at the date of
acquisition. Real estate loss provisions are recorded if the properties' fair
value subsequently declines below the value determined at the recording date.
In determining the lower of cost or fair value at acquisition, costs relating
to development and improvement of property are considered. Costs relating to
holding real estate acquired through foreclosure, net of rental income, are
charged against earnings as incurred.
8. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the current
and previous years. It requires an asset and liability approach for financial
accounting and reporting for income taxes. Pursuant to the provisions of SFAS
No. 109, a deferred tax liability or deferred tax asset is computed by
applying the current statutory tax rates to net taxable or deductible
differences between the tax basis of an asset or liability and its reported
amount in the financial statements that will result in taxable deductible
amounts in future periods. Deferred tax assets are recorded only to the
extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current
F-12
<PAGE> 80
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Federal Income Taxes (continued)
period earnings, carried back against prior years' earnings, offset against
taxable temporary differences reversing in future periods, or utilized to the
extent of management's estimate of future taxable income. A valuation
allowance is provided for deferred tax assets to the extent that the value of
net deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary differences
taxable in the future.
Deferral of federal income taxes results primarily from the practice of
preparing the federal income tax return on the cash basis of accounting,
while the consolidated financial statements are prepared on the accrual basis
of accounting and from different methods of accounting for deferred loan
origination fees, Federal Home Loan Bank stock dividends and certain
components of retirement expense. Additionally, a temporary difference is
recognized for depreciation utilizing accelerated methods for federal income
tax purposes.
9. Employee Benefit Plans and Stock Option Plans
The Association provides retirement benefits to the surviving spouses or
other designated beneficiaries of all present and past directors of the
Association. Upon the death of a director, a retirement benefit is paid equal
to the number of years of service as a director times $500, with a maximum
benefit of $5,000. The accrual for such retirement benefits at June 30, 1996
totaled approximately $27,000. Expense incurred by the Association for
director retirement benefits amounted to $2,800, $4,000 and $8,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
In conjunction with the conversion to the stock form of ownership, the
Corporation implemented an Employee Stock Ownership Plan ("ESOP"). The ESOP
provides retirement benefits for substantially all employees who have
completed one year of service. During fiscal 1995, the Corporation adopted
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans". SOP 93-6 changes the measure of compensation expense
recorded by employers from the cost of allocated ESOP shares to the fair
value of ESOP shares allocated to participants during a fiscal year. Adoption
of SOP 93-6 resulted in an increase in compensation expense from the amount
which would have been computed under the prior accounting method totaling
$76,000 and $48,000 for the fiscal years ended June 30, 1996 and 1995,
respectively. The Corporation recognized approximately $166,000 and $140,000
of expense related to the ESOP for the years ended June 30, 1996 and 1995,
respectively.
F-13
<PAGE> 81
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Employee Benefit Plans and Stock Option Plans (continued)
Additionally, the Association adopted a Recognition and Retention Plan
("RRP") as a means of providing directors and certain key employees of the
Association with an ownership interest in a manner designed to compensate
such directors and key employees for services to the Association. In
connection with implementation of the Plan, the RRP purchased 22,588 common
shares of common stock during fiscal 1994. Such common shares granted under
the RRP vest ratably over a five-year period, commencing in December, 1994.
The Association recorded a provision of $74,000 and $48,000 to expense under
this plan for the years ended June 30, 1996 and 1995, respectively.
The Corporation has a stock option plan that provides for the issuance of
56,470 shares of common stock. At June 30, 1996, 49,406 options had been
granted at an exercise price of $10.00 per share, none of which had been
exercised.
In October 1994, the FASB issued SFAS No. 123 entitled "Accounting for
Stock-Based Compensation". SFAS No. 123 establishes a fair value based method
of accounting for stock-based compensation paid to employees. The Statement
recognizes the fair value of an award of stock or stock options on the grant
date and is required to be adopted by fiscal 1997, although earlier adoption
is permitted. Management does not believe that adoption of SFAS No. 123 will
have a material adverse effect on the Corporation's consolidated financial
condition or results of operations.
10. Earnings Per Share
Primary and fully diluted earnings per share is based upon the
weighted-average shares outstanding during the period plus those stock
options that are dilutive, less shares in the ESOP that are unallocated and
not committed to be released. Primary and fully-diluted weighted-average
common shares deemed outstanding totaled 530,755 and 544,131 for the years
ended June 30, 1996 and 1995, respectively. Earnings per share for the fiscal
year ended June 30, 1994 is based on the Corporation's net earnings for the
six months that it was operational as a stock corporation divided by 564,707
weighted-average shares outstanding.
11. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold and interest-bearing deposits in other
financial institutions with original maturities of less than 90 days.
F-14
<PAGE> 82
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Repurchase of Common Stock
During the fiscal year ended June 30, 1995, the Corporation repurchased 9,000
of its common shares in the marketplace at $16.00 per share. During the
fiscal year ended June 30, 1996, the Corporation repurchased an additional
19,235 common shares at prices ranging from $16.125 to $16.25 per share. The
treasury stock is carried at cost in the Corporation's consolidated statement
of financial condition as a reduction of shareholders' equity.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1996:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statement of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four family
residential, multi-family residential and nonresidential real
estate. These loan categories were further delineated into
fixed-rate and adjustable-rate loans. The fair values for the
resultant loan categories were computed via discounted cash flow
analysis, using current interest rates offered for loans with
similar terms to borrowers of similar credit quality. For loans on
deposit accounts and consumer and other loans, fair values were
deemed to equal the historic carrying values. The historical
carrying amount of accrued interest on loans is deemed to
approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statement of financial condition is deemed to
approximate fair value.
F-15
<PAGE> 83
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
Deposits: The fair value of NOW accounts, passbook and club
accounts, and money market deposits is deemed to approximate the
amount payable on demand at June 30, 1996. Fair values for
fixed-rate certificates of deposit have been estimated using a
discounted cash flow calculation using the interest rates currently
offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances: The fair value of Federal Home Loan
Bank advances have been estimated using discounted cash flow
analysis, based on the interest rates currently offered for advances
of similar remaining maturities.
Commitments to extend credit: For fixed-rate and adjustable-rate
loan commitments, the fair value estimate considers the difference
between current levels of interest rates and committed rates. The
difference between the fair value and notional amount of outstanding
loan commitments at June 30, 1996, was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
(In thousands)
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 552 $ 552
Investment securities 1,364 1,364
Mortgage-backed securities 6,677 6,660
Loans receivable 34,988 34,449
Federal Home Loan Bank stock 490 490
------- -------
$44,071 $43,515
======= =======
Financial liabilities
Deposits $34,767 $34,792
Advances from Federal Home Loan Bank 200 200
------- -------
$34,967 $34,992
======= =======
</TABLE>
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
F-16
<PAGE> 84
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized cost and approximate market values of investment securities are
summarized as follows at June 30:
<TABLE>
<CAPTION>
1996 1995
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U. S. Government and
agency obligations $ 99 $ 99 $3,788 $3,797
====== ====== ====== ======
AVAILABLE FOR SALE:
U. S. Government and
agency obligations $1,194 $1,196 $ -- $ --
FHLMC stock 3 69 3 55
------ ------ ------ ------
$1,197 $1,265 $ 3 $ 55
====== ====== ====== ======
</TABLE>
At June 30, 1996, the market value of U.S. Government and agency obligations
exceeded the Corporation's amortized cost by $2,000, comprised of $1,000 of
unrealized losses and $3,000 of unrealized gains. The market value of the
Corporation's FHLMC stock exceeded the amortized cost at June 30, 1996 by
$66,000.
At June 30, 1995, the market value of U.S. Government and agency obligations
exceeded the Corporation's amortized cost by $9,000 comprised of $7,000 of
unrealized losses and $16,000 of unrealized gains. The market value of the
Corporation's FHLMC stock exceeded the amortized cost at June 30, 1995 by
$52,000. During the fiscal year, the Corporation sold the preponderance of
its FHLMC stock recognizing a $504,000 gain.
The amortized cost and market value of U. S. Government and agency
obligations at June 30, 1996, by term to maturity are shown below.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
(In thousands)
<S> <C> <C>
Due within three years $ 893 $ 894
Due in thirteen years 400 401
------ ------
$1,293 $1,295
====== ======
</TABLE>
F-17
<PAGE> 85
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
market values of mortgage-backed securities, including those designated as
available for sale, at June 30, 1996 and 1995 are shown below.
<TABLE>
<CAPTION>
1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
FNMA $ 133 $ -- $ (3) $ 130
FHLMC 605 2 (10) 597
GNMA 544 3 (9) 538
------ ----- ------- ------
Total mortgage-backed securities
held to maturity 1,282 5 (22) 1,265
AVAILABLE FOR SALE:
FNMA 1,313 -- (47) 1,266
FHLMC 3,019 9 (72) 2,956
GNMA 1,181 -- (8) 1,173
------ ----- ------- ------
Total mortgage-backed securities
designated as available for sale 5,513 9 (127) 5,395
------ ----- ------- ------
Total mortgage-backed securities $6,795 $ 14 $ (149) $6,660
====== ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
FNMA $1,198 $- $ (51) $1,147
FHLMC 2,346 - (101) 2,245
GNMA 1,441 3 (20) 1,424
------ -- ----- ------
Total mortgage-backed securities
held to maturity 4,985 3 (172) 4,816
AVAILABLE FOR SALE:
FHLMC 865 2 -- 867
GNMA 564 3 (7) 560
------ -- ----- ------
Total mortgage-backed securities
designated as available for sale 1,429 5 (7) 1,427
------ -- ----- ------
Total mortgage-backed securities $6,414 $8 $(179) $6,243
====== == ===== ======
</TABLE>
F-18
<PAGE> 86
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities at June 30, 1996, including
those designated as available for sale, by contractual terms to maturity are
shown below. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST
(In thousands)
<S> <C>
Due in one to three years $ 415
Due in five to ten years 54
Due in ten to twenty years 736
Due after twenty years 5,590
------
Total mortgage-backed securities $6,795
</TABLE> ======
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $ 27,280 $ 26,411
Multi-family 3,435 2,679
Construction 862 322
Nonresidential real estate and land 3,688 3,171
Home equity 194 54
Consumer and other 37 32
-------- --------
35,496 32,669
Less:
Undisbursed portion of loans in process (479) (136)
Deferred loan origination (fees) costs 21 (6)
Allowance for loan losses (50) (50)
-------- --------
$ 34,988 $ 32,477
</TABLE> ======== ========
F-19
<PAGE> 87
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Association's lending efforts have historically
focused on one-to-four family residential and multi-family residential real
estate loans, which comprise approximately $31.1 million, or 89%, of the
total loan portfolio at June 30, 1996, and $29.2 million, or 90%, of the
total loan portfolio at June 30, 1995. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Association with adequate collateral coverage
in the event of default. Nevertheless, the Association, as with any lending
institution, is subject to the risk that residential real estate values could
deteriorate in its primary lending area of southwestern Ohio, thereby
impairing collateral values. However, management is of the belief that
residential real estate values in the Association's primary lending area are
presently stable.
The Association has sold whole loans in the secondary market, retaining
servicing on the loans sold. Loans sold and serviced for others totaled
approximately $257,000, $438,000 and $445,000 at June 30, 1996, 1995 and
1994, respectively.
F-20
<PAGE> 88
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Beginning balance $50 $48 $42
Provision for loan losses -- 2 6
--- --- ---
Ending balance $50 $50 $48
=== === ===
</TABLE>
At June 30, 1996, the Association's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a component
of regulatory risk-based capital.
At June 30, 1996, the Association had no loans which had been placed on
nonaccrual status due to concerns as to borrowers' ability to pay. At June
30, 1995, the Association had loans of $6,000, which had been placed on
nonaccrual status due to concerns as to borrowers' ability to pay. Interest
income that would have been recognized had nonaccrual loans performed
pursuant to contractual terms totaled approximately $300 for the year ended
June 30, 1995.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Land and improvements $106 $106
Office buildings and improvements 452 451
Leasehold improvements 24 52
Furniture, fixtures and equipment 149 219
---- ----
731 828
Less accumulated depreciation and amortization 355 425
---- ----
$376 $403
==== ====
</TABLE>
F-21
<PAGE> 89
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Deposit type and weighted-average
interest rate
Passbook accounts
1996 - 3.00% $ 3,905
1995 - 3.00% $ 4,457
Money market demand deposit
1996 - 3.15% 2,214
1995 - 3.15% 2,959
NOW accounts
1996 - 2.25% 577
1995 - 2.25% 902
Super NOW accounts
1996 - 2.00% 1,704
1995 - 2.00% 1,983
-------- --------
Total demand, transaction
and passbook accounts 8,400 10,301
Certificates of deposit
Original maturities of:
Less than 12 months
1996 - 5.21% 4,801
1995 - 6.15% 4,134
12 to 24 months
1996 - 5.76% 9,067
1995 - 5.90% 8,317
24 to 36 months
1996 - 5.92% 6,564
1995 - 5.57% 7,329
More than 36 months
1996 - 5.64% 1,610
1995 - 5.90% 1,977
Individual Retirement Accounts
1996 - 5.32% 2,314
1995 - 6.59% 2,374
Jumbo
1996 - 5.63% 2,011
1995 - 6.03% 1,683
-------- --------
Total certificates of deposit 26,367 25,814
-------- --------
Total deposits $ 34,767 $ 36,115
======== ========
</TABLE>
F-22
<PAGE> 90
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Passbook accounts $ 123 $ 156 $ 192
Money market passbook accounts 76 105 133
NOW accounts 15 30 38
Super NOW accounts 42 54 57
Certificates of deposit 1,523 1,322 1,284
------ ------ ------
$1,779 $1,667 $1,704
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 1995
(In thousands)
<S> <C> <C>
Less than six months $12,799 $ 8,097
Six months to one year 7,820 9,083
One to three years 5,229 8,061
Three to five years 519 573
------- -------
$26,367 $25,814
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Association has a $2.1 million line of credit facility with the Federal
Home Loan Bank of Cincinnati. As of June 30, 1996, the Association had one 90
day advance outstanding in the amount of $200,000. The interest rate on the
advance is 5.80%.
NOTE H - COMMITMENTS
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 their
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of the
Association's involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
F-23
<PAGE> 91
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H - COMMITMENTS (continued)
At June 30, 1996, the Association had outstanding commitments of
approximately $378,000 to originate residential one-to-four family real
estate fixed-rate loans on the basis of an 80% loan-to-value ratio. The
Association also had unused lines of credit under home equity loans of
$387,000. Additionally, the Association had previously committed a total of
$150,000 of loan funds to the Cincinnati Development Fund, a nonprofit
organization created to provide financing and financial consulting to
developers of affordable housing in the Cincinnati area. In April 1996, the
Association committed an additional $500,000 of loan funds. The fund was
established to target below market rate housing for the poor. As of June 30,
1996 and 1995, approximately $551,000 and $93,000 of such funds are
undisbursed, respectively. In the opinion of management, all loan commitments
equaled or exceeded prevalent market interest rates as of June 30, 1996, and
such commitments have been underwritten on the same basis as that of the
existing loan portfolio. Management believes that all loan commitments are
able to be funded through cash flow from operations and existing excess
liquidity. Fees received in connection with these commitments have not been
recognized in earnings.
The Association leases one of its branch offices under an operating lease
agreement. The following is a schedule by years of minimum payments required
under such operating lease.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, (In thousands)
<S> <C>
1997 $22
1998 11
==
Total minimum payments required $33
</TABLE> ===
The lease on the Association's Westwood office expired September 30, 1995.
Management decided not to renew the lease and the office closed with the
deposits transferred to other branch locations.
F-24
<PAGE> 92
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE I - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that computed
at the statutory corporate tax rate at June 30 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at statutory rate $ 80 $ 267 $ 135
Decrease resulting from:
Other (primarily surtax exemptions in 1996) (21) (5) (2)
---- ----- -----
Federal income tax provision per consolidated
financial statements $ 59 $ 262 $ 133
==== ===== =====
</TABLE>
The composition of the Corporation's net deferred tax liability at June 30 is as
follows:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY 1996 1995
DIFFERENCES AT STATUTORY RATE: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred loan origination costs $ (6) $ --
Difference between cash and accrual basis of accounting (112) (117)
Federal Home Loan Bank stock dividends (87) (84)
Difference between book and tax depreciation (16) (41)
Percentage of earnings bad debt deduction (35) (48)
Unrealized gain on securities available for sale -- (18)
Other (2) (2)
----- -----
Total deferred tax liabilities (258) (310)
Deferred tax assets:
Deferred loan origination fees -- 2
Deferred compensation and MRP expense 29 28
General loan loss allowance 17 17
Unrealized losses on securities designated
as available for sale 16 --
----- -----
Total deferred tax assets 62 47
----- -----
Net deferred tax liability $(196) $(263)
===== =====
</TABLE>
F-25
<PAGE> 93
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE I - FEDERAL INCOME TAXES (continued)
The Association is allowed a special bad debt deduction based on a percentage
of earnings, generally limited to 8% of otherwise taxable income, or the
amount of qualifying and nonqualifying loans outstanding and subject to
certain limitations based on aggregate loans and savings account balances at
the end of the year. This percentage of earnings bad debt deduction had
accumulated to approximately $1.3 million as of June 30, 1996. If the amounts
that qualify as deductions for federal income tax purposes are later used for
purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to Federal income taxes at
the then current corporate income tax rate. The approximate amount of the
unrecognized deferred tax liability relating to the cumulative bad debt
deduction is $381,000 at June 30, 1996. See Note K for additional information
regarding subsequent period developments related to the percentage of
earnings deduction.
NOTE J - OHIO DEPOSIT GUARANTEE FUND CERTIFICATE OF DEPOSIT
The Association was a member of the Ohio Deposit Guarantee Fund (the Fund).
As a condition of membership, the Association was required to deposit in cash
a specified percentage of deposit liabilities with the Fund, receiving in
exchange a promissory note obligation in the form of a promise to repay the
amount of the Association's deposit upon withdrawal or liquidation.
Additionally, the Association was entitled to a pro rata share in the Fund's
cumulative earnings up to the date of withdrawal or liquidation, or
conversely, share ratably in the Fund's losses. In March 1985, the Fund's
largest member was placed in receivership. In May of 1985, emergency
legislation was enacted facilitating the sale of such member, wherein the
Fund transferred substantially all of its assets to the receiver.
As a result of the foregoing, the Association had provided for a loss equal
to the entire amount of the Fund certificate of deposit in 1985.
The Fund subsequently settled various actions against third-party claimants
and, as a result, liquidating cash distributions were made to the former Fund
members during the year ended June 30, 1995.
F-26
<PAGE> 94
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Association is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision ("OTS"). Such minimum capital
standards generally require the maintenance of regulatory capital sufficient
to meet each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as shareholders' equity less all intangible assets) equal to
1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase the
core capital requirement to a range of 4.0% - 5.0% of adjusted total assets
for substantially all savings associations. Management anticipates no
material change to the Association's present excess regulatory capital
position as a result of this change in the regulatory capital requirement.
The risk-based capital requirement provides for the maintenance of core
capital plus general loss allowances equal to 8.0% of risk-weighted assets.
In computing risk-weighted assets, the Association multiplies the value of
each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one-to-four family residential loans carry a
risk-weighted factor of 50%.
As of June 30, 1996, the Association's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $8,289 $8,289 $8,289
Additional capital items
Unrealized losses on certain
securities available for sale 34 34 34
General valuation allowances -- -- 50
------ ------ ------
Regulatory capital 8,323 18.5 8,323 18.5 8,373 38.5
Minimum capital requirement 675 1.5 1,349 3.0 1,740 8.0
------ ---- ------ ---- ------ ----
Regulatory capital - excess $7,648 17.0 $6,974 15.5 $6,633 30.5
====== ==== ====== ==== ====== ====
</TABLE>
F-27
<PAGE> 95
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
As a condition to regulatory approval of the reorganization to the holding
company form of ownership, the Association has agreed to limit the amount of
dividends payable to the Corporation. Regulations of the OTS impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under such regulations, a savings association that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully
phased-in capital requirement is generally permitted without OTS approval
(but subsequent to 30 days prior notice to the OTS of the planned dividend)
to make capital distributions during a calendar year in the amount of up to
the greater of (i) 100% of its net earnings to date during the year plus an
amount equal to one-half of the amount by which its total capital to assets
ratio exceeded its fully phased-in capital to assets ratio at the beginning
of the year or (ii) 75% of its net income for the most recent four quarters.
Pursuant to such OTS dividend regulations, Seven Hills Savings Association
had the ability to pay dividends of approximately $3.3 million to Seven Hills
Financial Corporation at June 30, 1996.
The deposit accounts of the Association and of other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF are below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay the
cost of prior thrift failures. The deposit accounts of commercial banks are
insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the extent
such banks have acquired SAIF deposits. The reserves of the BIF met the level
required by law in May 1995. As a result of the respective reserve levels of
the funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per
$100 in deposits in 1995. In 1996, no BIF assessments will be required for
healthy commercial banks except for a $2,000 minimum fee. A continuation of
this premium disparity could have a negative competitive impact on the
Association and other institutions with SAIF deposits.
Congress is considering legislation to recapitalize the SAIF and eliminate
the significant premium disparity. Currently, that recapitalization plan
provides for a special assessment of approximately $.69 to $.71 per $100 of
SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF. This would likely increase BIF
assessments by $.02 to $.025 per $100 in deposits. SAIF assessments would
initially be set at the same level as BIF assessments and could never be
reduced below the level for BIF assessments. These projected assessment
levels may change if commercial banks holding SAIF deposits are provided some
relief from the special assessment or are allowed to transfer SAIF deposits
to the BIF.
F-28
<PAGE> 96
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1998. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Association would be regulated as a bank
under Federal laws which would subject it to the more restrictive activity
limits imposed on national banks. Under separate legislation recently enacted
into law on August 20, 1996, the Association is required to recapture, as
taxable income, approximately $112,000 of its percentage of earnings bad debt
reserve, representing the post-1987 additions to the reserve, and will be
unable to utilize the percentage of earnings method to compute taxable income
in the future. The Association will be permitted by such legislation to
amortize the recapture of its bad debt reserve into taxable income over six
years. The Association has previously provided deferred taxes on the amount
of the bad debt reserve subject to recapture.
The Association had $39.9 million in deposits at March 31, 1995. If the
special assessment is finalized at $.71 per $100 in deposits on March 31,
1995, the Association will pay an additional assessment of $284,000. This
assessment should be tax deductible, but it will reduce earnings and capital
for the quarter in which it is recorded.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the
Corporation can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated and cannot predict the impact of being
regulated as a bank until the legislation requiring such change is enacted.
F-29
<PAGE> 97
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE L - CONDENSED FINANCIAL STATEMENTS OF SEVEN HILLS FINANCIAL CORPORATION
The following condensed financial statements summarize the financial position
of Seven Hills Financial Corporation as of June 30, 1996 and 1995, and the
results of its operations for the periods then ended.
SEVEN HILLS FINANCIAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Interest-bearing deposits in Seven Hills Savings Association $ 1,070 $ 1,792
Loan receivable from ESOP 282 378
Investment in Seven Hills Savings Association 8,289 7,942
Prepaid expenses and other 45 10
------- --------
Total assets $ 9,686 $ 10,122
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 10 $ 11
Shareholders' equity
Common stock and additional paid-in capital 5,438 5,362
Retained earnings 5,067 5,335
Less required contributions for shares acquired
by employee benefit plans (339) (474)
Unrealized gains (losses) on securities designated
as available for sale (34) 32
Less treasury stock (456) (144)
------- --------
Total shareholders' equity 9,676 10,111
------- --------
Total liabilities and shareholders' equity $ 9,686 $ 10,122
======= ========
</TABLE>
SEVEN HILLS FINANCIAL CORPORATION
STATEMENT OF EARNINGS
Period ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenue
Interest income $ 65 $ 92 $ 38
Equity in earnings of Seven Hills Savings Association 171 489 113
---- ---- ----
Total revenue 236 581 151
General and administrative expenses 59 41 13
---- ---- ----
Earnings before income taxes 177 540 138
Federal income taxes 2 17 8
---- ---- ----
NET EARNINGS $175 $523 $130
==== ==== ====
</TABLE>
F-30
<PAGE> 98
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE L - CONDENSED FINANCIAL STATEMENTS OF SEVEN HILLS FINANCIAL CORPORATION
(continued)
SEVEN HILLS FINANCIAL CORPORATION
STATEMENT OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash provided by (used in) operating activities:
Net earnings $ 175 $ 523
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
ESOP and RRP amortization expense 211 186
Undistributed earnings of consolidated subsidiary (413) (304)
Decrease in cash due to changes in:
Prepaid expenses and other assets (35) (3)
Other liabilities (1) (1)
------- -------
Net cash provided by (used in) operating activities (63) 401
Cash flows provided by investing activities:
Proceeds from repayment of loan 96 88
Cash flows used in financing activities:
Purchase of treasury stock (312) (144)
Payment of dividends on common stock (443) (398)
------- -------
Net cash used in financing activities (755) (542)
------- -------
Net decrease in cash and cash equivalents (722) (53)
Cash and cash equivalents at beginning of year 1,792 1,845
------- -------
Cash and cash equivalents at end of year $ 1,070 $ 1,792
======= =======
</TABLE>
The 1994 earnings of $130,000 do not agree with the earnings of $264,000 on
the consolidated statement of earnings. Seven Hills Financial Corporation
became a savings and loan holding company on December 30, 1993 and thus only
had equity in earnings of Seven Hills Savings Association for the six months
ended June 30, 1994.
F-31
<PAGE> 99
SEVEN HILLS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE M - PENDING BUSINESS COMBINATION
On June 14, 1996, the Corporation's Board of Directors entered into an
Agreement and Plan of Merger and Reorganization (the Agreement) by and among
Western Ohio Financial (Western Ohio), the Corporation and the Association.
Pursuant to the terms of the Agreement, Western Ohio will purchase all of the
Corporation's outstanding shares for aggregate cash consideration of
approximately $11.5 million. The acquisition will be accounted for using the
purchase method of accounting and is subject to the receipt of regulatory and
shareholder approval. Management anticipates that the business combination
will be consummated in the second quarter of fiscal 1997.
F-32
<PAGE> 100
ANNEX A
---------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
by and among
SEVEN HILLS FINANCIAL CORPORATION
SEVEN HILLS SAVINGS ASSOCIATION
and
WESTERN OHIO FINANCIAL CORPORATION
---------------------------------
---------------------
June 14, 1996
--------------------
A-1
<PAGE> 101
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE ONE - TERMS OF THE MERGER AND CLOSING
<S> <C>
Section 1.01 Formation of Acquisition Subsidiary ................... 2
Section 1.02 Merger; Surviving Corporation ......................... 2
Section 1.03 Effective Time of the Merger .......................... 2
Section 1.04 Company Merger ........................................ 3
Section 1.05 Closing ............................................... 7
Section 1.06 Actions At Closing .................................... 7
ARTICLE TWO - REPRESENTATIONS AND WARRANTIES OF SHFC AND THE ASSOCIATION
Section 2.01 Organization and Capital Stock ........................ 9
Section 2.02 Authorization; No Defaults ............................ 10
Section 2.03 No Subsidiaries; Equity Interests ..................... 11
Section 2.04 Financial Information ................................. 12
Section 2.05 Absence of Changes .................................... 12
Section 2.06 Regulatory Enforcement Matters ........................ 13
Section 2.07 Tax Matters ........................................... 13
Section 2.08 Litigation ............................................ 14
Section 2.09.Employment and Severance Agreements ................... 14
Section 2.10 Reports ............................................... 14
Section 2.11 Investment Portfolio .................................. 15
Section 2.12 Loan Portfolio ........................................ 15
Section 2.13 Employee Matters and ERISA ............................ 15
Section 2.14 Title to Properties; Insurance; Personal Property ..... 16
Section 2.15 Environmental Matters ................................. 18
Section 2.16 Compliance with Laws .................................. 19
Section 2.17 Brokerage ............................................. 19
Section 2.18 Undisclosed Liabilities ............................... 19
Section 2.19 Statements True and Correct ........................... 20
Section 2.20 Material Contracts .................................... 20
Section 2.21 No Sensitive Transactions ............................. 21
Section 2.22 Certain Payments ...................................... 21
ARTICLE THREE - REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Section 3.01 Organization and Capital Stock ........................ 22
Section 3.02 Authorization ......................................... 22
Section 3.03 Subsidiaries .......................................... 24
Section 3.04 Financial Information ................................. 24
Section 3.05 Absence of Changes .................................... 24
Section 3.06 Litigation ............................................ 24
Section 3.07 Reports ............................................... 24
Section 3.08 Compliance With Laws .................................. 25
Section 3.09 Statements True and Correct ........................... 25
Section 3.10 Undisclosed Liabilities ............................... 25
Section 3.11 Regulatory Enforcement Matters ........................ 25
Section 3.12 Tax Matters ........................................... 26
Section 3.13 Investment Portfolio .................................. 26
Section 3.14 Stock Ownership ....................................... 26
Section 3.15 Availability of Funds ................................. 26
</TABLE>
A-2
<PAGE> 102
<TABLE>
<S> <C>
ARTICLE FOUR - AGREEMENTS OF SHFC AND THE ASSOCIATION
Section 4.01 Business in Ordinary Course ........................... 27
Section 4.02 Breaches .............................................. 30
Section 4.03 Submission to Shareholders ............................ 31
Section 4.04 Consents to Contracts and Leases ...................... 31
Section 4.05 Conforming Accounting and Reserve Policies;
Restructuring Expenses ................................ 31
Section 4.06 Consummation of Agreement ............................. 32
Section 4.07 Access to Information ................................. 32
Section 4.08 Subsequent Disclosure Schedule ........................ 32
Section 4.09 Unallocated Recognition and Retention Plan Shares ..... 33
Section 4.10 Delivery of Reports ................................... 33
Section 4.11 Report of Funds Received from ODGF .................... 33
Section 4.12 Amendment of Association Articles of Incorporation .... 33
ARTICLE FIVE - AGREEMENTS OF ACQUIROR
Section 5.01 Regulatory Approvals and Proxy Statement .............. 33
Section 5.02 Breach ................................................ 33
Section 5.03 Consummation of Agreement ............................. 34
Section 5.04 Directors and Officers' Liability Insurance and
Indemnification ....................................... 34
Section 5.05 Employee Benefit and Related Matters .................. 34
Section 5.06 The Association's Employee Stock Ownership Plan ....... 35
Section 5.07 Board of Directors of the Association ................. 35
Section 5.08 Managing Officer of the Association ................... 36
Section 5.09 Shareholder Approval for Conversion of SHFC Stock
Options ............................................... 36
Section 5.10 Delivery of Reports ................................... 36
Section 5.11 Distribution of RRP Proceeds .......................... 36
ARTICLE SIX - CONDITIONS PRECEDENT TO THE MERGER
Section 6.01 Conditions to Acquiror's Obligations .................. 36
Section 6.02 Conditions to SHFC's Obligations ...................... 38
ARTICLE SEVEN - TERMINATION OR ABANDONMENT
Section 7.01 Mutual Agreement ...................................... 38
Section 7.02 Breach of Agreement ................................... 38
Section 7.03 Failure of Conditions ................................. 39
Section 7.04 Denial of Regulatory Approval ......................... 29
Section 7.05 Failure of Stockholders to Adopt ...................... 39
Section 7.06 Regulatory Enforcement Matters ........................ 39
Section 7.07 Automatic Termination ................................. 40
Section 7.08 Termination Fee ....................................... 40
ARTICLE EIGHT - GENERAL
Section 8.01 Confidential Information .............................. 40
Section 8.02 Publicity ............................................. 41
Section 8.03 Return of Documents ................................... 41
Section 8.04 Notice ................................................ 41
Section 8.05 Liabilities ........................................... 42
Section 8.06 Expenses .............................................. 42
Section 8.07 Nonsurvival of Representations and Warranties ......... 42
Section 8.08 Entire Agreement ...................................... 42
Section 8.09 Headings and Captions ................................. 42
</TABLE>
A-3
<PAGE> 103
<TABLE>
<S> <C>
Section 8.10 Waiver, Amendment or Modification ..................... 42
Section 8.11 Rules of Construction ................................. 43
Section 8.12 Counterparts .......................................... 43
Section 8.13 Successors and Assigns ................................ 43
Section 8.14 Governing Law; Assignment ............................. 43
Section 8.15 Specific Performance and Injunctive Relief ............ 43
</TABLE>
SIGNATURES
EXHIBIT A Shareholder Agreement
EXHIBIT B Optionholder Agreement
EXHIBIT C Plan of Merger
EXHIBIT D Plan of Subsidiary Merger
EXHIBIT E SHFC and Target Association's Legal Opinion
EXHIBIT F Acquiror's Legal Opinion
EXHIBIT G Directors of Target Association
EXHIBIT H Director Emeritus of Target Association
A-4
<PAGE> 104
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement"),
dated June 14, 1996, is by and among Western Ohio Financial Corporation, a
Delaware corporation ("Acquiror"); Seven Hills Financial Corporation, an Ohio
corporation ("SHFC"); and Seven Hills Savings Association, an Ohio savings and
loan association and a wholly owned subsidiary of SHFC (the "Association").
A. Acquiror, SHFC and the Association wish to provide for the terms and
conditions of the following described business transaction in which an inactive
transitory subsidiary to be formed by Acquiror and incorporated under the laws
of the State of Ohio ("Acquisition Subsidiary") will be merged with and into
SHFC and the separate existence of Acquisition Subsidiary shall cease ("Company
Merger"), SHFC will be merged with and into Acquiror and the separate existence
of SHFC shall cease ("Subsidiary Merger") and, as a result of the Company Merger
and the Subsidiary Merger, the Association will become a wholly owned subsidiary
of Acquiror. The Company Merger and the Subsidiary Merger are collectively
referred to as the "Merger."
B. For federal income tax purposes, it is intended that the Company Merger
be deemed a stock purchase of all of the outstanding capital stock of SHFC by
Acquiror and the Subsidiary Merger shall qualify as a tax-free liquidation under
Section 332 and Section 337 of the Internal Revenue Code of 1986, as amended
(the "Code").
C. For accounting purposes, it is intended that the Merger shall be
accounted for as a purchase.
D. The parties hereto desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and also to prescribe
various conditions to the Merger.
E. Concurrently with the execution and delivery of this Agreement, and as
a condition and material inducement to Acquiror's willingness to enter INTO this
Agreement, each of the directors of SHFC has entered into a shareholder
agreement (each a "Shareholder Agreement") in the form attached hereto as
Exhibit A.
F. Concurrently with the execution and delivery of the Agreement, and as a
condition and material inducement to Acquiror's willingness to enter into this
Agreement, each holder of an SHFC option (as defined in Section 1.04(d)(i)
hereof) has executed an agreement not to exercise his or her SHFC Options prior
to the Effective Time (as hereinafter defined) and during the time period
described in Section I .04(d)(iv) hereof (each, an "Optionholder Agreement") in
the form attached hereto as Exhibit B.
Accordingly, and in consideration of the representations, warranties,
covenants, agreements and conditions herein contained, the parties hereto agree
as follows:
A-5
<PAGE> 105
ARTICLE ONE
TERMS OF THE MERGER AND CLOSING
Section 1.01. Formation of Acquisition Subsidiary. Acquiror shall organize
Acquisition Subsidiary, an Ohio corporation, as a wholly-owned subsidiary of
Acquiror and shall cause Acquisition Subsidiary to fulfill the obligations of
Acquisition Subsidiary under this Agreement.
Section 1.02. Merger; Surviving Corporation. Subject to the terms and
conditions of this Agreement, and pursuant to the provisions of the Ohio General
Corporation Law ("OGCL"), the Delaware General Corporation Law ("DGCL"), the
Home Owners' Loan Act ("HOLA") and the rules and regulations promulgated
thereunder (the "Thrift Regulations"), and Chapter 1151 of Title II of the Ohio
Revised Code, the following shall occur:
(a) At the Effective Time, Acquisition Subsidiary shall be merged
with and into SHFC pursuant to the terms and conditions set forth herein
and pursuant to a Plan of Merger attached hereto as Exhibit C ("Plan of
Merger") which shall be executed by Acquiror, SHFC and Acquisition
Subsidiary at least two (2) days prior to the Effective Time. Upon
consummation of the Company Merger, the separate existence of Acquisition
Subsidiary shall cease and SHFC shall continue as the surviving
corporation. The name of SHFC, as the surviving corporation, shall by
virtue of the Company Merger remain "Seven Hills Financial Corporation."
From and after the consummation of the Company Merger, SHFC, as the
surviving corporation, shall possess all assets and property of every
description, and every interest in the assets and property, wherever
located, and the rights, privileges, immunities, powers, franchises and
authority, of a public as well as a private nature, 9f SHFC and
Acquisition Subsidiary, and all obligations belonging or due to each of
them.
(b) Upon consummation of the Company Merger as set forth in (a),
above, SHFC will be merged with and into Acquiror in accordance with
applicable state law pursuant to a Plan of Merger, attached hereto as
Exhibit D ("Plan of Subsidiary Merger"), which shall be executed by the
parties thereto immediately after the completion of the Company Merger.
Upon completion of the Subsidiary Merger, the separate existence of SHFC
shall cease and Acquiror shall continue as the surviving corporation. The
name of Acquiror, as the surviving corporation, shall by virtue of the
Subsidiary Merger remain "Western Ohio Financial Corporation." From and
after the Subsidiary Merger, Acquiror, as the surviving corporation, shall
possess all assets and property of every description, and every interest
in the assets and property, wherever located, and the rights, privileges,
immunities, powers, franchises and authority, of a public as well as a
private nature, of SHFC and Acquiror, and all obligations belonging or due
to each of them.
Section 1.03. Effective Time of the Merger. As soon as practicable after
each of the conditions set forth in Article Six hereof have been satisfied or
waived, SHFC and Acquisition Subsidiary will file or cause to be filed a
certificate of merger with the Secretary of State of the State of Ohio for the
Company Merger, and Acquiror and SHFC will file or cause to be filed
certificates of merger with the Secretaries of State of the States of Delaware
and Ohio for the Subsidiary Merger, which certificates of merger shall in each
case be in the form required by and executed in accordance with the applicable
provisions of the OGCL and the DGCL. The Company Merger and the Subsidiary
Merger shall each become effective at the time specified in the respective
certificate of merger for such merger as filed with the Secretaries of State of
the appropriate states (the "Effective Time"). The parties shall cause the
Company Merger to become effective prior to the Subsidiary Merger.
Section 1.04. Company Merger.
(a) (i) Each common share of SHFC, no par value (the "SHFC Common"),
issued and outstanding immediately prior to the Effective Time (except for
Dissenting Shares, as defined in Section 1.04(b) below) shall, by virtue
of the Company Merger and without any action on the part of the holder
thereof be converted to a right to receive in cash from Acquiror the sum
of the following subparagraphs (A) and (B) (hereinafter referred to as the
"Per Share Merger Consideration"):
(A)...Nineteen Dollars and Sixty-Five cents ($19.65); plus
A-6
<PAGE> 106
(B) The quotient of
(I) The difference between (x) the amount(s) actually
received from the liquidation and winding up of the Ohio
Deposit Guarantee Fund ("ODGF") between the date of the
Agreement and the Effective Time, less (y) the
out-of-pocket expenses and estimated federal and state
income tax liabilities attributable to such amount(s),
as set forth in the statement referred to in Section
4.11; divided by
(II) Five hundred eighty-three thousand seven hundred
sixty-three (583,763).
The holders of certificates representing shares of SHFC Common
shall cease to have any rights as shareholders of SHFC, except such
rights, if any, as they may have pursuant to the OGCL. Except as provided
below with respect to Dissenting Shares, until certificates representing
shares of SHFC Common are surrendered for exchange, each such certificate
shall, after the Effective Time, represent for all purposes only the right
to receive the Per Share Merger Consideration for the number of shares
represented by such certificate.
(ii) Each share of Acquisition Subsidiary capital stock issued and
outstanding or held in treasury immediately prior to the Effective Time
shall be and constitute the issued and outstanding shares of SHFC Common
at the Effective Time.
(b) Dissenting Shares. Any shares of SHFC Common held by a holder who
dissents from the Company Merger and who pursues and perfects the rights of a
dissenter in accordance with Section 1701.85 of the OGCL shall be herein called
"Dissenting Shares." Notwithstanding ally other provision of this Agreement, any
Dissenting Shared shall not, after the Effective Time of the Company Merger, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall be entitled only to such rights as are afforded in respect of
Dissenting Shares pursuant to the OGCL. If, after the Effective Time, such
holder's rights shall terminate in accordance with Section 1701.85(D) of the
OGCL, such shares of SHFC Common shall be treated as if they had been converted
as of the Effective Time into a right to receive the Per Share Merger
Consideration.
(c) Exchange of SHFC Common
(i) As soon as practicable after the Effective Time of the Company
Merger, holders of record of certificates formerly representing shares of
SHFC Common (the "Certificates") shall be instructed by Acquiror to tender
such Certificates to Acquiror, or, at the election of Acquiror, to an
exchange agent designated by Acquiror (the "Exchange Agent"), pursuant to
a letter of transmittal that Acquiror shall deliver or cause to be
delivered to such holders. Such letters of transmittal shall specify that
risk of loss and title to Certificates shall pass only upon delivery of
such Certificates as specified in the letter of transmittal.
(ii) After the Effective Time of the Company Merger, each holder of
a Certificate that surrenders such Certificate to Acquiror or, at the
election of Acquiror, to the Exchange Agent, will, upon acceptance thereof
by Acquiror or the Exchange Agent, be entitled to the Per Share Merger
Consideration for the number of shares represented by such Certificate,
which shall be paid promptly (but in no event later than five business
days) after acceptance of such Certificate.
(iii) Acquiror or, at the election of Acquiror, the Exchange Agent
shall accept Certificates upon compliance with such reasonable terms and
conditions as Acquiror or the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with customary exchange practices.
Certificates shall be appropriately endorsed or accompanied by such
instruments of transfer as Acquiror or the Exchange Agent may require.
(iv) Each outstanding Certificate shall, until duly surrendered to
Acquiror or the Exchange Agent, be deemed to evidence the right to receive
the Per Share Merger Consideration for the number of shares represented by
such Certificate.
(v) After the Effective Time of the Company Merger, holders of
Certificates shall cease to have rights with respect to the SHFC Common
previously represented by such Certificates, and their sole rights shall
be to exchange such Certificates for, and to receive, the Per Share Merger
Consideration for the number of shares represented by such Certificate.
After the Effective Time of the Company Merger, there shall be no further
transfer
A-7
<PAGE> 107
on the records of SHFC of Certificates, and if any Certificates are
presented to SHFC for transfer, they shall be canceled in exchange for the
Per Share Merger Consideration for the number of shares represented by
such Certificates. Acquiror shall not be obligated to deliver the Per
Share Merger Consideration to any former holder of SHFC Common until such
holder surrenders the Certificates as provided herein. Neither the
Exchange Agent nor any party to this Agreement nor any affiliate thereof
shall be liable to any holder of SHFC Common represented by any
Certificate for any consideration paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. SHFC and the
Exchange Agent shall be entitled to rely upon the stock transfer books of
SHFC to establish the identity of those persons entitled to receive
consideration specified in this Agreement, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership
of stock represented by any Certificate, Acquiror and the Exchange Agent
shall be entitled to deposit any consideration in respect thereof in
escrow with an independent third party and thereafter be relieved with
respect to any claims thereto.
(vi) If the Per Share Merger Consideration is to be issued to a
person other than a person in whose name a surrendered Certificate is
registered, it shall be a condition of issuance that the surrendered
Certificate shall be properly endorsed or otherwise in proper form for
transfer and that the person requesting such issuance shall pay to
Acquiror or the Exchange Agent any required transfer or other taxes or
establish to the satisfaction of Acquiror or the Exchange Agent that such
tax has been paid or is not applicable.
(vii) In the event any Certificate shall have been lost, stolen or
destroyed, the owner of such lost, stolen or destroyed Certificate shall
deliver to Acquiror or the Exchange Agent an affidavit stating such fact,
in form satisfactory to Acquiror, and, at Acquiror's discretion, a bond in
such reasonable sum as Acquiror or the Exchange Agent may direct as
indemnity against any claim that may be made against Acquiror or the
Association or its successor or any other party with respect to the
Certificate alleged to have been lost, stolen or destroyed. Upon such
delivery, the owner shall have the right to receive the Per Share Merger
Consideration with respect to the shares represented by the lost, stolen
or destroyed Certificate.
(d) Stock Options.
Acquiror shall assume the obligations of SHFC under the SHFC Stock
Option Plan in the following manner:
(i) At the Effective Time of the Company Merger by virtue of the
Company Merger and without any action on the part of any holder of any
option, each option granted by SHFC to purchase shares of SHFC Common
Stock which is outstanding prior to the date of this Agreement and
unexercised immediately prior to the Effective Time of the Company Merger
(each an "SHFC Option") shall continue outstanding as an option (a
"Substitute Option") to purchase shares of Acquiror Common (as defined in
Section 3.01(c) hereof) in an amount and at an exercise price determined
as provided below and otherwise subject to the terms of the SHFC Stock
Option Plan under which they were issued and the agreements evidencing
grants thereunder:
(A) The number of shares of Acquiror Common to be subject to a
Substitute Option shall be equal to the product of the number of
shares of SHFC Common Stock subject to the original option and the
Exchange Ratio (as defined below), provided that any fractional
shares of Acquiror Common resulting from such multiplication shall
be rounded down to the nearest whole share; and
(B) The exercise price per share of Acquiror Common under the
Substitute Option shall be equal to the exercise price per share of
SHFC Common Stock under the original option divided by the Exchange
Ratio, provided that such exercise price shall be rounded down to
the nearest whole cent.
(ii) The term "Exchange Ratio" shall mean the Per Share Merger
Consideration divided by the Average Price (as defined below) for Acquiror
Common.
(iii) The term "Average Price" shall mean the average closing prices
for a share of Acquiror Common on the NASDAQ National Market System
reported for the five (5) consecutive trading days ending on the first
trading day immediately prior to the date of this Agreement.
(iv) No exercise of options for Acquiror Common will be permitted
until the shareholders of Acquiror approve the assumption of the
obligations of SHFC under the SHFC Stock Option Plan as contemplated by
Section
A-8
<PAGE> 108
5.09 hereof. Acquiror shall seek approval of its shareholders at its April
1997 annual meeting of shareholders ("Annual Meeting") to reserve for
issuance sufficient shares of Acquiror Common, from authorized and
unissued shares or treasury shares of Acquiror, to effect the substitution
of Acquiror Common for SHFC Common Stock under the SHFC Stock Option Plan.
At all times after receipt of such shareholder approval, Acquiror shall
reserve for issuance such number of shares of Acquiror Common s is
necessary to permit the exercise of options granted under the SHFC Stock
Option Plan in the manner contemplated by this Agreement and the
instruments pursuant to which such options were granted. Notwithstanding
the foregoing, in the event that Acquiror does not receive the shareholder
approval contemplated by Section 5.09 hereof, then the outstanding options
under the SHFC Stock Option Plan shall be converted to a right to receive
the Per Share Merger Consideration, less the exercise price per share for
each share of SHFC Common Stock subject to an option. As a condition to
receipt of the cash payment pursuant to the preceding sentence, each
holder of an outstanding option to acquire SHFC Common Stock shall be
required to execute a stock option cancellation agreement in form and
substance reasonably satisfactory to Acquiror. No interest shall be paid
or payable with respect to the cash amount to be paid for the cancellation
of SHFC stock options.
(e) Articles of Incorporation and Code of Regulations of SHFC as the
Surviving Corporation. The Articles of Incorporation and Code of
Regulations of SHFC, as in effect immediately prior to the Effective Time
of the Company Merger, shall be the Articles of Incorporation and Code of
Regulations of the surviving corporation of the Company Merger, until
either is thereafter amended in accordance with applicable law.
(f) Directors and Officers of SHFC as the Surviving Corporation. The
directors and officers of Acquisition Subsidiary immediately prior to the
Effective Time of the Company Merger shall be and become the directors and
officers of SHFC immediately following the Effective Time of the Company
Merger.
Section 1.05. Closing. Subject to the provisions of this Agreement, the
closing of the Company Merger (the "Closing") shall take place as soon as
practicable after satisfaction or waiver of all of the conditions to Closing.
Subject to the preceding sentence, the date, time and location of the Closing
shall be as designated in writing by Acquiror to SHFC but shall be no sooner
than the first business day after receipt of all necessary regulatory and
shareholder approvals and the expiration of any applicable waiting periods. The
date on which the Closing actually occurs is herein referred to as the "Closing
Date." Time is of the essence for Closing.
Section 1.06. Actions At Closing.
(a) At the Closing, SHFC shall deliver to Acquiror:
(i) a certificate signed by an appropriate officer of SHFC stating
that all of the conditions set forth in Sections 6.01(a), (b), (c), (d), (f),
(g) and (h) of this Agreement (but, as to Section 6.01(d), relating only to
approvals which SHFC is required by law to obtain) have been satisfied or waived
as provided therein;
(ii) a certified copy of the resolutions of SHFC's Board of
Directors and shareholders, as required for valid approval of the execution of
this Agreement and the Plan of Merger (which certification shall be signed by
the Secretary or Assistant Secretary of SHFC, shall specify that such
resolutions remain in effect a- of the Effective Time of the Company Merger and
have not been modified or rescinded, and which shall be in a form reasonable;
acceptable to counsel to Acquiror); the Plan of Merger, executed by SHFC; and a
Certificate of Merger for the Company Merger, executed by SHFC and in proper
form for filing with the Ohio Secretary of State;
(iii) certificates of the Ohio Secretary of State, each dated a
recent date, as to the good standing of SHFC and of the Association, and a
certificate of the Federal Deposit Insurance Corporation ("FDIC"), dated a
recent date, as to the existence of deposit insurance of the Association;
(iv) a legal opinion from counsel for SHFC and the Association, in
the form attached here to as Exhibit E hereto;
(v) the Subsequent Disclosure Schedule required by Section 4.08
hereof; if the Subsequent Disclosure Schedule was previously delivered, a
statement signed by an appropriate officer of SHFC to that effect; or, if no
Subsequent Disclosure Schedule is necessary, a statement signed by an
appropriate officer of SHFC and dated as of the Closing Date to such effect; and
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(vi) resignations of the Board of Directors of the Association,
effective as of the Effective Time of the Company Merger, pursuant to Section
5.07 of this Agreement.
(b) At the Closing, Acquiror shall deliver to SHFC:
(i) a certificate signed by an appropriate officer of Acquiror
stating that all of the conditions set forth in Sections 6.02(a), (b), (c) and
(d) of this Agreement (but, as to Section 6.02(d), excluding the approval of
SHFC's Board of Directors and shareholders) have been satisfied;
(ii) a certified copy of the resolutions of Acquiror's Board of
Directors authorizing the execution of this Agreement and the consummation of
the transactions contemplated hereby;
(iii) a certified copy of the resolutions of Acquisition
Subsidiary's Board of Directors and sole shareholder, authorizing the execution
of the Plan of Merger and the consummation of the transactions contemplated
hereby and thereby; the Plan of Merger, executed by Acquisition Subsidiary; and
a Certificate of Merger for the Company Merger, executed by Acquisition
Subsidiary and in proper form for filing with the Ohio Secretary of State; and
(iv) a legal opinion from counsel for Acquiror, in the form
attached hereto as Exhibit F hereto.
ARTICLE TWO
REPRESENTATIONS AND WARRANTEES OF SHFC AND THE ASSOCIATION
SHFC and the Association hereby make the following representations and
warranties:
Section 2.01. Organization and Capital Stock.
(a) SHFC is a corporation organized under the OGCL and the Association is
a stock-form savings and loan association, organized under Chapter 1151 of the
Ohio Revised Code, and each is duly organized, validly existing and in good
standing under the laws of the State of Ohio with full corporate power and all
necessary governmental authorizations to own all of its properties and assets,
to incur all of its liabilities and to carry on its business as presently
conducted. The minute books of each contain complete and accurate records of all
meetings and other corporate actions of their respective Boards of Directors and
shareholders, as well as actions by committees of their respective Boards of
Directors, either in committee minutes or in the minutes of the meetings of the
Boards of Directors, except for minutes of meetings within the preceding month
for which draft minutes have not been reviewed and approved by the Board.
Attached as Section 2.01(a) of that certain confidential writing delivered by
SHFC to Acquiror concurrently with the delivery and execution of this Agreement
(the "Disclosure Schedule") are copies of the Articles of Incorporation of SHFC
and the Association certified by the Secretary of State of the State of Ohio, a
copy of the Code of Regulations of SHFC certified by the Secretary of SHFC and
copies of the Constitution and Bylaws of the Association certified by the Ohio
Division of Financial Institutions (the "Division"), including all amendments.
(b) The authorized capital stock of SHFC consists of one million
(1,000,000) common shares of SHFC, no par value, of which, as of the date
hereof, five hundred thirty-six thousand four hundred seventy-two (536,472)
shares are issued and outstanding, of which two thousand one hundred fifteen
(2,115) shares are unallocated shares in the Seven Hills Savings Association
Recognition and Retention Plan). All of the issued and outstanding shares of
SHFC Common are duly and validly issued and outstanding and are fully paid and
non-assessable, except for the shares of SHFC Common which are held by the
Association ESOP (as defined in Section 5.06) and which are not allocated to the
accounts of the participants, but as to which the Association ESOP has all of
the rights of a shareholder. None of the outstanding shares of SHFC Common has
been issued in violation of any preemptive rights of the current or past
shareholders of SHFC. Each Certificate representing shares of SHFC Common issued
by SHFC in replacement of any certificate theretofore issued by it which was
claimed by the record holder thereof to have been lost, stolen or destroyed, if
any, was issued by SHFC only upon receipt of an affidavit of lost stock
certificate and a bond sufficient to indemnify SHFC against any claim that may
be made against it on account of the alleged loss, theft or destruction of any
such certificate or the issuance of such replacement Certificate.
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The authorized capital stock of the Association consists of five million
(5,000,000) shares of the Association Common, par value One Dollar ($ 1.00) per
share, of which five hundred sixty-four thousand seven hundred seven (564,707)
shares are issued and outstanding and held by SHFC. Such shares are held by SHFC
free and clear of all liens, encumbrances, rights of first refusal, options or
other restrictions of any nature whatsoever. The deposits of the Association are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The
Association is a member of the Federal Home Loan Bank of Cincinnati ("FHLB
Cincinnati"). The Association is a "domestic building and loan association" as
defined in Section 7701(a)(19) of the Code and a "qualified thrift lender" as
defined in 12 U.S.C. Section 1467a(m) and the Thrift Regulations.
(c) Except as set forth in Section 2.01(b) of this Agreement, and except
for the forty-nine thousand four hundred six (49,406) shares of SHFC Common
subject to options granted under the SHFC Stock Option Plan, there are no shares
of capital stock or other equity securities of SHFC or the Association
outstanding and no outstanding options, warrants, rights to subscribe for,
calls, or commitments of any character whatsoever relating to, or securities or
rights convertible in or exchangeable for, shares of the capital stock of SHFC
or the Association, or contracts, commitments, understandings or arrangements by
which SHFC or the Association is or may be obligated to issue additional shares
of its capital stock or options, warrants or rights to purchase or acquire any
additional shares of its capital stock.
Section 2.02. Authorization; No Defaults.
(a) The Board of Directors of SHFC and the Board of Directors of the
Association each has, by all appropriate action, approved this Agreement and
authorized the execution and delivery hereof on its behalf by its duly
authorized officers and the performance by SHFC and the Association of its
respective obligations here under.
(b) This Agreement has been duly and validly executed and delivered by
SHFC and the Association and, subject to (i) the approval of the SHFC
shareholders of an amendment to Article EIGHTH of the SHFC Articles of
Incorporation and approval of SHFC of an amendment to Article NINTH of the
Association's Articles of Incorporation to permit Acquiror to offer to acquire
and to acquire all of the outstanding shares of SHFC (the "Amendment"), (ii) the
approval of the OTS of the offer to acquire SHFC, as evidenced by this
Agreement, and (iii) the approval of the Division of such amendment to Article
NINTH of the Association's Articles of Association, constitutes a legal, valid
and binding obligation of SHFC and the Association, enforceable against each in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, receivership, conservatorship,
moratorium or other laws affecting creditors' rights generally or the rights of
creditors of savings institutions the accounts of which are insured by the FDIC
or laws relating to the safety and soundness of insured financial institutions
and by judicial discretion in applying principles of equity. Neither SHFC nor
the Association is in default under or in violation of any provision of their
respective articles of incorporation, constitution, code of regulations or
bylaws, or any promissory note, indenture or any evidence of indebtedness or
security therefor, lease, contract, purchase or other commitment or any other
agreement of SHFC or the Association, except for defaults and violations which
will not have a material adverse effect on the operations, business or financial
condition of SHFC and the Association, taken as a whole, and except to the
extent that this Agreement may be deemed by a court to be a default under or
violation of Article EIGHTH of the SHFC Articles of Incorporation or Article
NINTH of the Association's Articles of Incorporation. No other corporate
proceeding of SHFC or the Association is required for approval of this Agreement
and the Company Merger or the performance of SHFC's or the Association's
obligations under this Agreement other than adoption of the Amendment, this
Agreement and the Plan of Merger by the holders of at least the minimum portion
of the outstanding shares of SHFC Common required under the OGCL for approval of
the Merger (the "Minimum Portion"). Except for the requisite approvals of the
Division and the OTS ("Regulatory Approvals"), and filings with the OTS, the
Division and the Secretaries of State of Ohio and Delaware, no notice to, filing
with', authorization by, or consent or approval of, any federal or state
regulatory authority or other third party is necessary for the execution and
delivery of this Agreement or consummation of the Merger by SHFC or the
Association.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the Company Merger, nor compliance by SHFC and the Association
with the provisions of this Agreement will (i) conflict with or result in a
breach of the articles of incorporation or constitution, or bylaws or code of
regulations, of SHFC or the Association, except to the extent that this
Agreement may be deemed by a court to be a default under or violation of Article
EIGHTH of the SHFC Articles of Incorporation or Article NINTH of the
Association's Articles of Incorporation; (ii) result in a breach or termination
of or accelerate the performance required by, any note, bond, mortgage, lease,
agreement or other instrument to which SHFC or the Association is a party or may
be bound; or (iii) violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to SHFC or the Association.
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Section 2.03. No Subsidiaries Equity Interests. The term "subsidiary"
means an organization or entity which is consolidated with a party to this
Agreement for financial reporting purposes. Except for the Association, SHFC has
no subsidiaries. The Association has no subsidiaries. Except as set forth in
Section 2.03 of the Disclosure Schedule, and except for shares of the
Association Common owned by SHFC and shares of stock of the FHLB Cincinnati
owned by the Association, neither SHFC nor the Association owns, beneficially or
otherwise, any shares of Equity Securities (as defined below) or similar
interests of any corporation, bank, business trust, association or similar
organization. "Equity Securities" of an issuer means capital stock or other
equity securities of such issuer, options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, shares of any capital stock or other equity
securities of such issuer, or contracts, commitments, understandings or
arrangements by which such issuer is or may become bound to issue additional
shares of its capital stock or other equity securities of such issuer, or
options, warrants, scrip or rights to purchase, acquire, subscribe to, calls on
or commitments for any shares of its capital stock or other equity securities.
Neither SHFC nor the Association is a party to any partnership or joint venture.
Section 2.04. Financial Information. The consolidated balance sheets of
SHFC and its subsidiary as of June 30, 1995 and 1994, and the consolidated
statements of earnings, changes in shareholders' equity and cash flows for each
of the three (3) fiscal years ended as of June 30, 1995, 1994 and 1993, together
with the notes thereto, and the unaudited consolidated balance sheet of SHFC as
of March 31, 1996, and the related unaudited consolidated income statement and
statement of changes in shareholders' equity and cash flows for the nine (9)
months then ended, all of which are included in Section 2.04 of the Disclosure
Schedule (together, the "SHFC Financial Statements"), have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis ("GAAP"), except as disclosed therein, and fairly present in all material
respects the consolidated financial position and the consolidated results of
operations, changes in shareholders' equity and cash flows of SHFC as of the
dates and for the periods indicated (subject, in the case of interim financial
statements, to normal recurring year-end adjustments, none of which are
material, and the absence of footnotes). The books and records of SHFC and the
Association have been and are being maintained in accordance with applicable
legal and accounting requirements. Neither SHFC nor the Association is aware of
any event or circumstances, or series of events or circumstances, which is
reasonably likely to result in a Material Adverse Change (as defined in Section
2.05 of this Agreement) to SHFC or the Association.
Section 2.05. Absence of Changes.
(a) The term "Material Adverse Change" shall mean a material adverse
change in the consolidated financial condition, results of operations, assets,
deposit liabilities (except for decreases in deposit liabilities due to the
withdrawal of funds owned by SHFC held on deposit with the Association for
purposes of paying permitted dividends and expenses) or business (including its
future prospects) of an entity, other than changes resulting from or
attributable to expenses incurred in connection with the transactions
contemplated by this Agreement and the Merger; provided that the term "Material
Adverse Change" shall exclude any reduction in the net income or shareholders'
equity of SHFC attributable to (i) any special assessment levied against the
Association as part of an assessment against financial institutions which are
insured by the SAIF, (ii) any recapture of bad debt reserves of the Association
attributable to any federal legislation eliminating or altering the exclusion
from taxable federal income of bad debt reserves of thrift institutions or (iii)
any accounting adjustment required pursuant to Section 4.05 hereof. Since March
31, 1996, to the date hereof, SHFC on a consolidated basis has not experienced
or suffered a Material Adverse Change.
(b) Since March 31, 1996, neither SHFC nor the Association has, except as
set forth in Section 2.05 of the Disclosure Schedule, (i) issued or sold any
corporate debt securities; (ii) declared or set aside or paid any dividend or
other distribution in respect of its capital stock (or other ownership
interests) other than its regular quarterly dividend of $.09 per share; (iii)
incurred any material obligation or liability (absolute or contingent), except
obligations or liabilities incurred in the ordinary course of business; (iv)
mortgaged, pledged or subjected to lien or encumbrance (other than statutory
liens for taxes not yet delinquent and landlord liens) any of its assets or
properties except pledges to secure government deposits, FHLB advances and in
connection with repurchase or reverse repurchase agreements; (v) discharged or
satisfied any lien or encumbrance or paid any obligation or liability (absolute
or contingent), other than current liabilities included in SHFC's balance sheet
as of March 31, 1996, and current liabilities incurred since the date thereof in
the ordinary course of business; (vi) sold, exchanged or otherwise disposed of
any of its assets other than in the ordinary course of business; (vii) made or
modified any general wage or salary increase other than in the ordinary course
of business consistent with past practices, entered into or modified any
employment contract with any officer or salaried employee or instituted,
modified or changed the contribution level to, any employee welfare, bonus,
stock option, profit sharing, retirement or similar plan or arrangement; (viii)
suffered any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting its business, property or assets or waived
any rights of value that are material in the aggregate, considering its
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business taken as a whole; (ix) entered, or agreed to enter, into any agreement
or arrangement granting any preferential right to purchase any of its assets,
properties or rights or requiring the consent of any party to the transfer and
assignment of any such assets, properties or rights; or (x) entered into any
transaction outside the ordinary course of business, or sold or otherwise
disposed of any of its securities.
Section 2.06. Regulatory Enforcement Matters. Except as disclosed in
Section 2.06 of the Disclosure Schedule, neither SHFC nor the Association is
subject to, or has received any notice or advice that it is not in substantial
compliance with any statute or regulation, or that it is or may become subject
to any order, agreement or memorandum of understanding with any federal or state
agency charged with the supervision or regulation of savings banks or savings
associations or engaged in the insurance of deposits or any other governmental
agency having supervisory or regulatory authority with respect to SHFC or the
Association, and SHFC and the Association have received no notice from any
governmental authority threatening to revoke any license, franchise, permit or
governmental authorization.
Section 2.07. Tax Matters.
(a) SHFC and the Association have filed all federal, state and local tax
returns and reports due with respect to any of their employees, depositors,
borrowers, operations, businesses or properties in a timely fashion and have
paid or made provision for all amounts due or claimed to be due. All such
returns and reports fairly reflect the information required to be presented
therein. All provisions for accrued but unpaid taxes contained in the SHFC
Financial Statements were made in accordance with GAAP and provide for
anticipated tax liabilities including interest and penalties. Except as
disclosed in Section 2.07(a) of the Disclosure Schedule, there are no federal,
state or local tax returns or reports not filed which would be due but for an
extension of time for filing having been granted.
(b) Neither SHFC nor the Association has executed or filed with the
Internal Revenue Service ("IRS") or any state or local tax authority any
agreement extending the period for assessment and collection of any tax, nor is
SHFC or the Association a party to any action or proceeding by any governmental
authority for assessment or collection of taxes, except tax liens or levies
against customers of the Association. There is no outstanding assessment or
claim for collection of taxes against SHFC or the Association. Neither SHFC nor
the Association has, except as disclosed in Section 2.07(b) of the Disclosure
Schedule, received any notice of deficiency, proposed deficiency or assessment
from the IRS or any other governmental agency, with respect to any federal,
state or local taxes. No tax return of SHFC or the Association is currently the
subject of any audit by the IRS or any other governmental agency. No material
deficiencies have been asserted in connection with the tax returns of SHFC or
the Association and SHFC and the Association have no reason to believe that any
deficiency would be asserted relating thereto. Neither SHFC nor the Association
is required to include in income any adjustment pursuant to Section 481(a) of
the Code, by reason of a voluntary change in accounting method (nor to the best
knowledge of SHFC and the Association has the IRS proposed any such adjustment
or change of accounting method). Neither SHFC nor the Association have filed a
consent pursuant to Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply. Except as disclosed in Section 2.07(b) of the
Disclosure Schedule, (i) neither SHFC nor the Association has ever been a member
of an "affiliated group of corporations" (within the meaning of Section 1504(a)
of the Code) filing consolidated returns, other than the affiliated group of
which SHFC is the parent; and (ii) neither SHFC nor the Association is a party
to any tax-sharing agreement.
Section 2.08. Litigation. Except as disclosed in Section 2.08 of the
Disclosure Schedule, there is no litigation, claim or other proceeding pending
or, to the knowledge of SHFC or the Association, threatened, against SHFC or the
Association, or any of their respective directors or officers, or to which the
property of SHFC or the Association is or would be subject. Each of SHFC and the
Association has taken all requisite action (including without limitation the
making of claims and the giving of notices) pursuant to its directors and
officers' liability insurance policy or policies in order to preserve all rights
thereunder with respect to all matters (other than matters arising in connection
with this Agreement and the transactions contemplated hereby) occurring prior to
the Effective Time of the Company Merger that are known to either. Each matter
as to which SHFC or the Association has given notice to the insurer under a
directors and officers liability policy is described in Section 2.08 of the
Disclosure Schedule.
Section 2.09. Employment and Severance Agreements. Except as disclosed in
Section 2.09 of the Disclosure Schedule, neither SHFC nor the Association is a
party to or bound by any agreement or policy for the employment, retention or
engagement of any officer, employee, agent, consultant or other person or
entity, any employment or severance agreement or policy, or agreement, policy or
arrangement to provide post-retirement, post-termination or change-of-control
benefits, by acceleration or otherwise, to any current or former officer,
employee or director. A true, accurate and complete copy of each such agreement,
policy and arrangement is included in Section 2.09 of the Disclosure Schedule.
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Section 2.10. Reports. SHFC and the Association each has filed all reports
and statements, together with any amendments required to be made with respect
thereto, that it was required to file with (i) the OTS, (ii) the FDIC, (iii) any
applicable state securities or banking or savings and loan authorities, and (iv)
any other governmental authority with jurisdiction over SHFC or the Association,
except as may be disclosed in Section 2.10 of the Disclosure schedule or, to
the extent that any report or statement has not been filed, such failure will
not have a material adverse effect on SHFC's or the Association's regulatory
compliance status. As of their respective dates, each of such reports and
documents, including the financial statements, exhibits and schedules thereto,
complied in all material respects with the relevant statutes, rules and
regulations enforced or promulgated by the regulatory authority with which they
were filed, and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
Section 2.11. Investment Portfolio. All United States Treasury securities,
obligations of other United States Government agencies and corporations,
obligations of states and political subdivisions of the United States and other
investment securities held by SHFC or the Association are carried in the
aggregate at no more than cost adjusted for amortization of premiums and
accretion of discounts, except as otherwise required by FAS No. 115 and which
adjustments are disclosed in Section 2.11 of the Disclosure Schedule.
Section 2.12. Loan Portfolio. Except as may be disclosed in Section 2.12
of the Disclosure Schedule, (i) all loans shown on the SHFC Financial Statements
at March 31, 1996, or which were entered into after March 31, 1996, but before
the Effective Time of the Company Merger, were and will be made for good,
valuable and adequate consideration in the ordinary course of the business of
the Association and its subsidiaries, in accordance with sound banking
practices, and are not subject to any known defenses, set-offs or counterclaims,
including without limitation any such as are afforded by usury or truth in
lending laws, except as may be provided by bankruptcy, insolvency or similar
laws or by general principles of equity; (ii) to the knowledge of SHFC and the
Association, the notes or other evidences of indebtedness evidencing such loans
and all forms of pledges, mortgages and other collateral documents and security
agreements are and will be what they purport to be and enforceable in all
material respects in accordance with their terms, subject to bankruptcy,
insolvency fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles; and
(iii) SHFC and the Association have complied with all laws and regulations
relating to such loans, or to the extent there has not been such compliance,
such failure to comply will not materially interfere with the collection of any
such loan.
Section 2.13. Employee Matters and ERISA.
(a) Neither SHFC nor the Association has entered into any collective
bargaining agreement with any labor organization with respect to any group of
employees of SHFC or the Association and, to the knowledge of SHFC and the
Association, there is no present effort nor existing proposal to attempt to
unionize any group of employees of SHFC or the Association.
(b) Except as may be disclosed in Section 2.13(b) of the Disclosure
Schedule, (i) SHFC and the Association are and have been in material compliance
with all applicable laws respecting employment and employment practices, teams
and conditions of employment and wages and hours, including, without limitation,
any such laws respecting employment discrimination and occupational safety and
health requirements, and neither SHFC nor the Association is engaged in any
unfair labor practice; (ii) there are no unfair labor practice charges or other
complaints by any employee or former employee of either SHFC or the Association
pending before any governmental agency and there are no administrative charges
or court complaints against SHFC or the Association concerning alleged
employment discrimination or other employment related matters pending or
threatened before the U.S. Equal Employment Opportunity Commission or any state
or federal court or agency; (iii) there is no labor dispute, strike, slowdown or
stoppage actually pending or, to the knowledge of SHFC and the Association,
threatened against or directly affecting SHFC or the Association; and (iv)
neither SHFC nor the Association has experienced any work stoppage or other
labor difficulty.
(c) Except as may be disclosed in Section 2.13(c) of the Disclosure
Schedule, neither SHFC nor the Association maintains, contributes to or
participates in or has any liability under any employee benefit plans, as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or any nonqualified employee benefit plans or deferred
compensation, bonus, stock or incentive plans, or other employee benefit or
fringe benefit programs for the benefit of former or current directors or
employees of SHFC or the Association (the "Employee Plans"). No present or
former director, employee or fiduciary of SHFC or the Association has been
charged with breaching
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or, to the knowledge of SHFC, has breached a fiduciary duty under any of the
Employee Plans. Except as may be disclosed in Section 2.13(c) of the Disclosure
Schedule, neither the Association nor any of its subsidiaries participates in,
nor has it participated in, nor has it any present or future obligation or
liability under, any multi-employer plan (as defined at Section 3(37) of ERISA).
Except as may be disclosed in Section 2.13(c) of the Disclosure Schedule,
neither the Association nor any of its subsidiaries maintains, contributes to,
or participates in, any plan that provides health, major medical, disability or
life insurance benefits to former employees of SHFC or the Association except as
provided in Section 4980B of the Code.
(d) Except as set forth in Section 2.13(d) of the Disclosure Schedule,
neither SHFC nor the Association maintains, or has maintained during the past
ten (10) years, any Employee Plans subject to Title IV of ERISA or Section 412
of the Code. No reportable event (as defined in Section 4043 of ERISA) has
occurred with respect to any Employee Plans as to which a notice would be
required to be filed with the Pension Benefit Guaranty Corporation. No claim is
pending, and SHFC and the Association have not received notice of any threatened
or imminent claim with respect to any Employee Plan (other than a routine claim
for benefits for which plan administrative review procedures have not been
exhausted) for which the Association or any of its subsidiaries would be liable
after June 30, 1995, except as set forth in Section 2.13(d) of the Disclosure
Schedule. SHFC and the Association do not have any liabilities for excise taxes
under Sections 4971, 4975, 4976, 4977, 4979 or 4980B of the Code or for a fine
under Section 502 of ERISA with respect to any Employee Plan. All Employee Plans
have been operated, administered and maintained in all material respects in
accordance with the terms thereof and in compliance with the requirements of all
applicable laws, including, without limitation, ERISA and the Code to the extent
applicable.
Section 2.14. Title to Properties; Insurance; Personal Property.
(a) Except as disclosed in Section 2.14(a) of the Disclosure Schedule,
SHFC and the Association have marketable title, insurable at standard rates,
free and clear of all liens, charges and encumbrances (except taxes which are a
lien but not yet payable, liens, charges or encumbrances explicitly reflected in
the SHFC Financial Statements and easements, rights-of way, and other
restrictions which do not materially and adversely affect the current use, value
or marketability of the property and further excepting in the case of Real
Estate Owned as such real estate is internally classified on the books of the
Association, rights of redemption under applicable law) to all real properties
reflected on the SHFC Financial Statements or acquired subsequent to the date
thereof. All leasehold interests held by SHFC or the Association in real estate
are held pursuant to lease agreements which are valid add enforceable in
accordance with their terms subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles. All such owned real
properties comply in all material respects with all applicable private
agreements and, to the knowledge of SHFC, all zoning requirements and other
governmental laws and regulations relating thereto and there are no condemnation
proceedings pending or, to the knowledge of either SHFC or the Association,
threatened with respect to such properties. SHFC and the Association each have
valid title or other rights under licenses to all material intangible personal
or intellectual property used in their respective businesses, free and clear of
any claim, defense or right of any other person or entity which is material to
such property, subject only to rights of the licensors pursuant to applicable
license agreements, which rights do not materially adversely interfere with the
use of such property.
(b) All material insurable properties owned or held by SHFC or the
Association are insured in amounts deemed adequate by the senior management of
the Association and against fire and other risks insured against by extended
coverage and public liability insurance, as is customary with thrift
institutions of similar size. SHFC and the Association have delivered to
Acquiror as part of Section 2.14(b) of the Disclosure Schedule true, accurate
and complete copies of all insurance policies and fidelity bonds of SHFC and the
Association. Except as disclosed in Section 2.14(b) of the Disclosure Schedule,
there are no outstanding claims alone or in the aggregate in excess of Ten
Thousand Dollars ($ 10,000) with respect to SHFC or the Association under such
bonds and insurance policies, and neither SHFC nor the Association is aware of
any acts of dishonesty or losses which would form the basis of a material claim
under such bonds or insurance coverage. Each such policy is in full force and
effect, with all premiums due thereon on or prior to the Closing Date having
been paid as and when due. Neither SHFC nor the Association have been notified
that its fidelity or insurance coverage will not be renewed by the carrier on
substantially the same terms as the existing coverage.
(c) Except as set forth in Section 2.14(c) of the Disclosure Schedule,
all of the personal property reflected in the SHFC Financial Statements as being
owned by SHFC or the Association is owned free and clear of any lien,
encumbrance, right of first refusal, options or other restrictions, and all such
personal property other than items with nominal book value, is in good condition
and repair (ordinary wear and tear excepted) and is sufficient to carry on the
business of SHFC or the Association as it is presently conducted.
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Section 2.15. Environmental Matters.
(a) As used in this Agreement, "Environmental Laws" means all local, state
and federal environmental, health and safety laws and regulations as in effect
from time to time in all jurisdictions in which SHFC and the Association have
done business or owned or leased property, including, without limitation, the
Federal Resource Conservation and Recovery Act, the Federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), the Federal
Clean Water Act, the Federal Clean Air Act, and the Federal Occupational Safety
and Health Act.
For purposes of this Agreement, "Hazardous Substances" means (i) any
"hazardous substance" as defined in Section 101(14) of CERCLA or regulations
promulgated thereunder; (ii) any "solid waste," "hazardous waste" or "infectious
waste," as such terms are defined in any Environmental Law; (iii) asbestos, urea
formaldehyde, polychlorinated biphenyls ("PCBs"), nuclear fuel or material,
chemical waste, radioactive material, explosives, known carcinogens, petroleum
products and by-products and other dangerous, toxic or hazardous pollutants,
contaminants, chemicals, materials or substances listed or identified in, or
regulated by, any Environmental Law; and (iv) any additional substances or
materials which are classified or considered to be hazardous or toxic under any
Environmental Law.
(b) Except as disclosed in Section 2.15(b) of the Disclosure Schedule, to
the knowledge of SHFC and the Association neither the conduct nor operation of
SHFC or the Association nor any condition of any property ever owned (including,
without limitation, REO), leased or operated by either of them ("Real Property")
materially violates or materially violated any Environmental Laws and no
condition or event has occurred with respect to any of them or any such property
that, with notice or the passage of time, or both, would constitute a material
violation of Environmental Laws or obligate (or potentially obligate) SHFC or
the Association to remedy, stabilize, neutralize or otherwise alter the
environmental condition of any such property. Except as disclosed in Section
2.15(b) of the Disclosure Schedule, neither SHFC nor the Association has
received any notice from any person or entity that SHFC or the Association or
the operation of any facilities or any property ever owned (including, without
limitation, REO), leased or operated by either of them are or were in violation
of any Environmental Laws or that any of them are responsible (or potentially
responsible) for the cleanup of any pollutants, contaminants or hazardous or
toxic wastes, substances or materials at, on or beneath any such property.
(c) Except as disclosed in Section 2.15(c) of the Disclosure Schedule,
neither SHFC nor the Association has received notice or has knowledge that any
property in which SHFC or the Association has a security interest, lien or other
encumbrance violates or violated Environmental Laws in any material respect.
(d) To the knowledge of SHFC and the Association, neither SHFC nor the
Association has caused any Hazardous Substances to be integrated into the Real
Properties or any component thereof in such manner or quantity as may reasonably
be expected to or in fact would pose an unlawful threat to human health or
materially and adversely affect the value of any such Real Properties. To the
knowledge of SHFC and the Association, none of the Real Properties has been used
by SHFC or the Association for the storage or disposal of Hazardous Substances,
except as disclosed in Section 2.15(d) of the Disclosure Schedule or as
permitted under Environmental Laws. To the knowledge of SHFC and the
Association, neither SHFC nor the Association has any interest, direct or
indirect, in property owned by a third party which is or has been contaminated
by Hazardous Substances, except as permitted under Environmental Laws. To the
knowledge of SHFC and the Association, no property which is subject to such a
security interest is or has been so contaminated except for the properties
listed in Section 2.15(d) of the Disclosure Schedule, except as permitted under
Environmental Laws. To the knowledge of SHFC and the Association, no Real
Property contains or formerly contained underground storage tanks, except as
disclosed in Section 2.15(d) of the Disclosure Schedule.
(e) With respect to each of the nonresidential Real Properties in which
SHFC or the Association has held or currently holds indicia of ownership to
protect a security interest in the facility (as such terms are defined in 42
U.S.C. Section 9601 et seq.), SHFC and the Association have not, to their
knowledge, "participated in the management of the facility" or otherwise acted
in a manner such that SHFC or the Association would lose its statutory exemption
from liability under Section 101 (20)(A) of CERCLA and as further defined in the
currently vacated Environmental Protection Agency's Final Rule on Lender
Liability, 40 C.F.R. Part 300 Subpart L, Section 300.1100, 57 FR 18343, April
29, 1992.
Section 2.16. Compliance with Laws. Except as disclosed in Section 2.16 of
the Disclosure Schedule, SHFC and the Association each have all licenses,
franchises, permits and other governmental authorizations that are legally
required to enable them to conduct their respective businesses in all material
respects and such businesses have been and are being conducted in compliance in
all material respects with all applicable laws and regulations.
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Section 2.17. Brokerage. Except for the amounts payable to Charles Webb &
Co., as disclosed in Section 2.17 of the Disclosure Schedule, there are no
claims or agreements for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
payable by SHFC or the Association.
Section 2.18. Undisclosed Liabilities. Except for (i) liabilities and
obligations fully reflected, disclosed or provided for in the SHFC Financial
Statements as of June 30, 1995, (including related notes), (ii) liabilities and
obligations incurred since June 30, 1995 in the ordinary course of business or
related to the transaction contemplated by this Agreement, and (iii) liabilities
and obligations fully disclosed in Section 2.18 of the Disclosure Schedule,
neither SHFC nor the Association has any material liabilities or obligations,
whether absolute, known or unknown, accrued or unaccrued, contingent or
otherwise, (and there is no asserted or unasserted claim against SHFC or the
Association giving rise to any such liabilities or obligations). For purposes of
this Section 2.18, the term "liabilities" includes without limitation
liabilities as a guarantor and liabilities for taxes in each case material to
the condition of either SHFC or the Association.
Section 2.19. Statements True and Correct. None of the information
supplied or to be supplied by SHFC or the Association for inclusion in (i) the
Proxy Statement (as defined in Section 4.03 hereof) and (ii) any document to be
filed with any regulatory authority in connection with the transactions
contemplated hereby will, at the respective times such documents are filed, and,
with respect to the Proxy Statement, when first mailed to the shareholders of
SHFC, be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the Shareholders' Meeting (as defined in
Section 4.03 hereof), be false or misleading with respect to any material fact,
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that SHFC or the Association is responsible
for filing with any regulatory authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable law and the applicable rules and regulations
thereunder.
Section 2.20. Material Contracts.
(a) Section 2.20 of the Disclosure Schedule contains a complete and
correct list of all written or oral agreements, leases, and other obligations
and commitments of the following types, to which either SHFC or the Association
is a party, or by which any of their respective property is bound, or which has
been authorized by SHFC or the Association:
(i) Promissory note, guaranty, mortgage, security agreement or
other evidence of indebtedness owed by SHFC or the Association in an amount in
excess of Twenty Five Thousand Dollars ($25,000);
(ii) Partnership or joint venture agreements;
(iii) Employee Plans;
(iv) Insurance contracts or policies;
(v) Agreement or commitment for sale or purchase of any asset or
assets for more than Twenty Five Thousand Dollars ($25,000);
(vi) Agreements or commitments for any single capital expenditure
in excess of Five Thousand Dollars ($5,000) or capital expenditures in excess of
Ten Thousand Dollars ($ 10,000) in the aggregate;
(vii) Agreement or other document creating a monetary lien or
security interest in excess of Twenty Five Thousand Dollars ($25,000) or other
encumbrance relating to any real or personal property owned, rented or leased by
SHFC or the Association;
(viii) Lease of, commitment to lease and any other agreements
relating to the lease or rental of, real or personal property by SHFC or the
Association involving an annual payment in excess of Ten Thousand Dollars
($10,000);
(ix) Any direct or indirect loan or guaranty of a loan to any
director, officer, or 5% shareholder of SHFC or the Association or any director
or officer of any of its subsidiaries or a spouse or child of such person, or
any
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partnership, corporation, or other entity in which any such director, officer or
shareholder or a spouse or child of such person holds (directly or indirectly)
an interest of ten percent (10%) or more;
(x) Any contract or agreement (A) that has a remaining term as of
the date of this Agreement in excess of six (6) months, (B) is not terminable by
SHFC or the Association on thirty (30) or fewer days' notice without penalty or
premium and (C) involves a monetary obligation on the part of SHFC or the
Association in excess of Ten Thousand Dollars ($ 10,000); and
(xi) All other material contracts and commitments not made in the
ordinary course of business.
(b) Concurrently with its delivery of the Disclosure Schedule, SHFC and
the Association will deliver complete and correct copies of all written
agreements, leases, policies and commitments listed in the Disclosure Schedule,
together with all amendments thereto, and a complete and correct written
description of all oral agreements listed in Section 2.20 of the Disclosure
Schedule.
Section 2.21. No Sensitive Transactions. Neither SHFC nor the Association
nor, to the knowledge of SHFC or the Association, any employee or agent of
either, nor any shareholder (beneficial or otherwise) of SHFC or the Association
has used funds or other assets of SHFC or the Association directly or indirectly
for (a) illegal contributions, gifts, entertainment or other expenses related to
political activities, (b) payments to or for the benefit of any governmental
official or employee, other than payments required or permitted by law, (c)
illegal payments to or for the benefit of any person, firm, corporation or other
entity, or any officer, employee , agent or representative thereof or (d) the
establishment or maintenance of a secret or unrecorded fund. In addition, to the
knowledge of SHFC and the Association, no employee or agent of SHFC or the
Association has taken any act or omitted to take any act that would cause a
violation of federal currency reporting laws.
Section 2.22. Certain Payments.
Neither the execution nor delivery of this Agreement, nor the consummation
of any of the transactions contemplated hereby, will (i) result in any material
payment (including, without limitation, severance, unemployment compensation or
golden parachute payment) becoming due to any director or employee of SHFC or
the Association from any of such entities, (ii) materially increase any benefit
otherwise payable under any of the SHFC employee benefit plans or (iii), except
for the acceleration of certain benefits under the RRP (as defined in Section
4.09) and the termination of the Association ESOP pursuant to Section 5.06,
result in the acceleration of the time of payment of any such benefit. In
addition, the transactions contemplated by this Agreement would constitute a
change in control for purposes of Section 4(a) of each of the employment
agreements referred to in Section 2.09 of the Disclosure Schedule, as a result
of which, a termination other than for cause during the earlier of the one-year
period following such change in control or the expiration of the term of such
agreements would give rise to severance benefits. No holder of an option to
acquire stock of SHFC has or will have at any time through the Effective Time
the right to receive any cash or other payment (other than as contemplated by
Section I.04(d)(iv) hereof) in exchange for or with respect to all or any
portion of such option. No amounts paid or payable by SHFC, the Association or
Acquiror to or with respect to any employee or former employee of SHFC or the
Association will fail to be deductible for federal income tax purposes by reason
of Section 280G of the Code or otherwise.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror hereby makes the following representations and warranties:
Section 3.01. Organization and Capital Stock.
(a) Acquiror is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware with full corporate power
and authority to carry on its business as it is now being conducted.
(b) Acquiror is duly licensed, as a foreign corporation, to transact
business in the State of Ohio.
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(c) The authorized capital stock of Acquiror consists of (i) 7,250,000
shares of common stock, par value One Cent ($.01) per share ("Acquiror Common"),
of which, as of the date of this Agreement, 2,367,310 shares were issued and
outstanding, and (ii) 250,000 shares of preferred stock, par value One Cent
($0.01) per share, none of which have been issued or are outstanding. All of the
issued and outstanding shares of Acquiror Common are duly and validly issued and
outstanding and are fully paid and non-assessable.
(d) At the Effective Time of the Company Merger, Acquisition Subsidiary
shall be a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Ohio with full corporate power and authority to
carry on its business and perform its obligations under this Agreement and the
Plan of Merger.
Section 3.02. Authorization. (a) The Board of Directors of Acquiror has,
by all appropriate action, approved this Agreement and the Merger and authorized
the execution and delivery hereof on its behalf by its duly authorized officers
and the performance of its obligations hereunder. Except for approval of the
Merger and the Plan of Merger by the Board of Directors and the sole shareholder
of Acquisition Subsidiary (which shall be obtained upon the formation of
Acquisition Subsidiary as provided herein), no other corporate proceeding is
required for the approval by Acquiror of this Agreement or the Merger or the
performance by Acquiror or Acquisition Subsidiary of their obligations under
this Agreement or the Plan of Merger.
(b) This Agreement has been duly and validly executed and delivered by
Acquiror and constitutes a legal, valid and binding obligation of Acquiror,
enforceable against Acquiror in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, conservatorship, moratorium or other laws affecting creditors'
rights generally or the rights of creditors of savings institutions, the
accounts of which savings institutions are insured by the SAIF or laws relating
to the safety and soundness of insured financial institutions and by judicial
discretion in applying principles of equity. Acquiror and each of its
significant subsidiaries (as defined in Section 3.03 of this Agreement) are not
in default under or in violation of any provision of its respective certificate
or articles of incorporation, charter, bylaws or any promissory note, indenture
or any evidence of indebtedness or security there for, lease, contract, purchase
or other commitment or any other agreement of any of them which is material to
Acquiror, except for defaults and violations which will not have a material
adverse effect on the ability of Acquiror to consummate the transaction
contemplated by this Agreement. Except for the Regulatory Approvals and related
filings, no notice to, filing with, authorization by, or consent or approval of,
any federal or state regulatory authority is necessary for the execution and
delivery of this Agreement by Acquiror or consummation of the Merger by Acquiror
or Acquisition Subsidiary.
(c) Neither the execution and delivery of this Agreement or the Plan of
Merger nor the consummation of the Merger, nor compliance by Acquiror with the
provisions of this Agreement and the Plan of Merger, will (i) conflict with or
result in a breach of Acquiror's certificate of incorporation or bylaws; or (ii)
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to Acquiror.
(d) Prior to the Effective Time of the Company Merger, (i) the Board of
Directors of Acquisition Subsidiary shall have, by all appropriate action,
approved the Plan of Merger and the Company Merger and authorized the execution
and delivery thereof on its behalf by its duly authorized officers and the
performance of its obligations thereunder; (ii) Acquiror, as the sole
shareholder of Acquisition Subsidiary, shall have adopted the Plan of Merger;
and (iii) the Plan of Merger shall have been duly and validly executed and
delivered by Acquisition Subsidiary and shall constitute a legal, valid and
binding obligation of Acquisition Subsidiary, enforceable against Acquisition
Subsidiary in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium or other laws affecting creditors' rights generally.
(e) Neither the execution and delivery of the Plan of Merger nor the
consummation of the Merger, nor compliance by Acquisition Subsidiary with the
provisions of this Agreement and the Plan of Merger, will (i) conflict with or
result in a breach of Acquisition Subsidiary's articles of incorporation, code
of regulations or bylaws; or (ii) violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Acquisition
Subsidiary.
Section 3.03. Subsidiaries. Each of Acquiror's significant subsidiaries
(as such term is defined under regulations promulgated by the Securities and
Exchange Commission ("SEC")) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power to own its respective properties and assets, to incur its
respective liabilities and to carry on its business as now being conducted. All
of the outstanding shares of capital stock of each significant subsidiary of
Acquiror are owned by Acquiror, directly or indirectly, free and clear of any
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material liens, encumbrances or security interests of third parties. All of the
issued and outstanding shares of each significant subsidiary are duly and
validly issued and outstanding and are fully paid and nonassessable.
Section 3.04. Financial Information. The consolidated balance sheets of
Acquiror and its subsidiaries as of December 31, 1995 and 1994 and the
consolidated statements of earnings, changes in shareholders' equity and cash
flows for each of the three (3) fiscal years ended June 30, 1995, 1994 and 1993,
together with the notes thereto and the unaudited consolidated balance sheet of
Acquiror as of March 31, 1996, and the related unaudited consolidated income
statement and statement of changes in shareholders' equity and cash flows for
the three (3) months then ended included in Acquiror's Quarterly Report on Form
10-Q for the quarter then ended, as currently on file with the SEC (together,
the "Acquiror Financial Statements"), have been prepared in accordance with GAAP
except as disclosed therein and fairly present in all material respects the
consolidated financial position and the consolidated results of operations,
changes in shareholders' equity and cash flows of Acquiror and its consolidated
subsidiaries as of the dates and for the periods indicated therein (subject to
normal, recurring yearend adjustments, none of which are material, and the
absence of footnotes).
Section 3.05. Absence of Changes. Since December 31, 1995 to the date
hereof, Acquiror, on a consolidated basis, has not experienced or suffered a
Material Adverse Change or entered into any contract, agreement or understanding
which would adversely affect its ability to perform its obligations under this
Agreement.
Section 3.06. Litigation. There is no litigation, claim or other
proceeding pending or, to the knowledge of Acquiror, threatened, against
Acquiror or any of its significant subsidiaries, or to which the property of
Acquiror or any of its significant subsidiaries is or would be subject which, if
adversely determined, would have a material adverse effect on the business of
Acquiror and its subsidiaries taken as a whole.
Section 3.07. Reports. Since, January 1, 1993, Acquiror has filed all
reports and statements, together with any amendments required to be made with
respect thereto, that it was required to file with (i) the OTS, (ii) the FDIC,
(iii) any applicable state or federal securities or banking or savings and loan
authorities and (iv) any other governmental authority with jurisdiction over
Acquiror. As of their respective dates, each of such reports and documents,
including the financial statements, exhibits and schedules thereto, complied in
all material respects with the relevant statutes, rules and regulations enforced
or promulgated by the regulatory authority with which they were filed, and did
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Section 3.08. Compliance With Laws. Acquiror and its significant
subsidiaries have all licenses, franchises, permits and other government
authorizations that are legally required to enable them to conduct their
respective businesses in all material respects and are in compliance in all
material respects with all applicable laws and regulations.
Section 3.09. Statements True and Correct. None of the information
supplied or to be supplied by Acquiror for inclusion in (i) the Proxy Statement
and (ii) any document to be filed with any regulatory authority in connection
with the transactions contemplated hereby, will, at the respective times such
documents are filed, and, with respect to the Proxy Statement, when first mailed
to the shareholders of SHFC, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading, or, in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the Shareholders'
Meeting, be false or misleading with respect to any material fact, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that Acquiror is responsible for filing
with the OTS or any other regulatory authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law and any rules and regulations thereunder.
Section 3.10. Undisclosed Liabilities. Acquiror has no liabilities or
obligations, whether absolute, known or unknown, accrued or unaccrued,
contingent or otherwise (and there is no asserted or unasserted claim against
Acquiror giving rise to any such liabilities or obligations) that could
adversely affect its ability to consummate the transactions contemplated by this
Agreement. For purposes of this Section 3.10, the term "liabilities" includes
without limitation liabilities as guarantor and liabilities for taxes in each
case material to the condition of Acquiror.
Section 3.11. Regulatory Enforcement Matters. Acquiror is not subject to,
nor has it received any notice or advice that it is not in substantial
compliance with any statute or regulation, or that it is or may become subject
to any order, agreement or memorandum of understanding with any federal or state
agency charged with the supervision or regulation of
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savings banks, savings associations or holding companies of savings banks or
savings associations or engaged in the insurance of deposits or any other
governmental agency having supervisory or regulatory authority with respect to
Acquiror, and Acquiror has received no notice from any governmental authority
threatening to revoke any license, franchise, permit or governmental
authorization.
Section 3.12. Tax Matters.
(a) Acquiror has filed all federal, state and local tax returns and
reports due with respect to any of its employees, depositors, borrowers,
operations, businesses or properties in a timely fashion and has paid or made
provision for all amounts due or claimed to be due. All such returns and reports
fairly reflect the information required to be presented therein. All provisions
for accrued but unpaid taxes contained in Acquiror's Financial Statements were
made in accordance with GAAP and do not fail to provide for anticipated tax
liabilities including interest and penalties. There are no federal, state or
local tax returns or reports not filed which would be due but for an extension
of time for filing having been granted.
(b) Acquiror has neither executed nor filed with the IRS or any state or
local tax authority any agreement extending the period for assessment and
collection of any tax, nor is Acquiror a party to any action or proceeding by
any governmental authority for assessment or collection of taxes, except tax
liens or levies against customers of Acquiror. There is no outstanding
assessment or claim for collection of taxes against Acquiror. Acquiror has
received no notice of deficiency, proposed deficiency or assessment from the IRS
or any other governmental agency, with respect to any federal, state or local
taxes. No tax return of Acquiror is currently the subject of any audit by the
IRS or any other governmental agency. No material deficiencies have been
asserted in connection with the tax return of Acquiror and Acquiror has no
reason to believe that any deficiency would be asserted relating thereto.
Section 3.13. Investment Portfolio. All United States Treasury securities,
obligations of other United States Government agencies and corporations,
obligations OF States and political subdivisions of the United States and other
investment securities held by Acquiror are carried in the aggregate at no more
than cost adjusted for amortization of premiums and accretion of discounts,
except as otherwise required by FAS No. 115.
Section 3.14. Stock Ownership. Neither Acquiror nor any of its
"affiliates" or "associates," as such terms are defined in Section 1704.01(C)(1)
of the Ohio Revised Code, are "beneficial owners," as such term is defined in
Section 1704.0I(C)(4) of the Ohio Revised Code, of any of the outstanding shares
of any class of stock of SHFC.
Section 3.15. Availability of Funds. Acquiror has on the date hereof, and
will have at the Effective Time, the financial capacity to consummate the
transactions contemplated hereby.
ARTICLE FOUR
AGREEMENTS OF SHFC AND THE ASSOCIATION
Section 4.01. Business in Ordinary Course.
(a) SHFC and the Association shall not declare or pay any dividend or make
any other distribution with respect to their capital stock or ownership
interests whether in cash, stock or other property, after the date of this
Agreement except (i) payment by SHFC of its regular quarterly cash dividend for
the quarter ended June 30, 1996 in the amount of $.09 (or less) per share of
SHFC Common and (ii) if Closing does not occur by the respective following
quarter ends, then, for the quarters ended September 30, 1996 and December 31,
1996, SHFC may declare and pay an additional regular quarterly dividend in the
amount of $.09 per share of SHFC Common for each such quarter. Notwithstanding
the previous sentence, no dividend will be permitted if it would exceed the net
income of SHFC (excluding any net income arising from any liquidating
distribution received from the ODGF) in the calendar quarter for which such
dividend is declared.
(b) SHFC and the Association shall continue to carry on, after the date
hereof, their respective businesses and the discharge or incurrence of
obligations and liabilities, only in the usual, regular and ordinary course of
business, as heretofore conducted, and by way of amplification and not
limitation, SHFC and the Association will not, without the prior written consent
of Acquiror acting through its Chief Executive Officer or such other officer as
Acquiror may specify in a
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written notice to the Association, provided in the case of subsections (vi),
(vii), (viii), (ix), (xi), (xiii) and (xviii) below such consent shall not be
unreasonably withheld or delayed:
(i) issue any SHFC Common or the Association Common or other capital
stock or any options, warrants or other rights to subscribe for or purchase SHFC
Common or the Association Common or any other capital stock or any securities
convertible into or exchangeable for any capital stock;
(ii) directly or indirectly redeem, purchase or otherwise acquire
any SHFC Common or the Association Common or any other capital stock or
ownership interests of SHFC or the Association;
(iii) effect a reclassification, recapitalization split-up, exchange
of shares, readjustment or other similar change in or to any capital stock or
otherwise reorganize or recapitalize;
(iv) change its Articles of Incorporation or Constitution or Bylaws
or Code of Regulations except in respect of the Amendment;
(v) enter into, modify or renew any employment agreement or
severance agreement or plan; or grant any increase in the compensation payable
or to become payable to any director, officer or employee, except for increases
in salaries consistent with SHFC's and the Association's past practices; grant
any stock options; or, except as required by law, pay or agree to pay any bonus,
adopt or make any change in any bonus, insurance, pension, or other Employee
Plan, payment or arrangement made to, for or with any director, officer or
employees, except for payments of and changes in salaries and bonuses consistent
with SHFC's and the Association's past practices, or promote any persons
employed as of the date hereof or hire any new employees;
(vi) except for FHLB of Cincinnati advances having a maturity of one
year or less (or a longer period if such advances may be prepaid without penalty
or premium) the aggregate amount of which at any time shall not exceed One
Million Dollars ($1,000,000) and deposit-taking in the ordinary course of its
business, borrow or agree to borrow any funds, including but not limited to
repurchase transactions, or indirectly guarantee or agree to guarantee any
obligations of others;
(vii) except pursuant to the Association's outstanding commitment to
the Cincinnati Development Fund, make or commit to make any new loan or letter
of credit or any new or additional discretionary advance under any existing line
of credit, in a principal amount in excess of One Hundred Thousand Dollars
($100,000) or that would increase the aggregate credit outstanding to any one
borrower (or group of affiliated borrowers) to more than One Hundred Thousand
Dollars ($100,000) (excluding for this purpose any accrued interest or
overdrafts); provided, however, that the Association may make one-to-four family
residential mortgage loans that conform to the Association's mortgage lending
policies as of the date hereof in principal amounts of up to Two Hundred Seven
Thousand Dollars ($207,000);
(viii) establish any new lending programs or make any changes in its
policies concerning which persons may approve loans;
(ix) enter into any securities transaction for its own account or
purchase or otherwise acquire any investment security for its own account other
than U.S. Treasury obligations and deposits in an overnight account at the FHLB
of Cincinnati or securities issued or guaranteed by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation;
(x) increase or decrease the rate of interest paid on time deposits
or on certificates of deposit, except in a manner and pursuant to policies
consistent with past practices in relation to rates prevailing in the
Association's market;
(xi) enter into any agreement, contract or commitment out of the
ordinary course of business or having a term in excess of three (3) months and
involving an expenditure in excess of Five Thousand Dollars ($5,000) other than
letters of credit, loan agreements, deposit agreements, and other lending,
credit and deposit agreements and documents made in the ordinary course of
business;
(xii) except in the ordinary' course of business, place on any of
its assets or properties any mortgage, pledge, lien, charge, or other
encumbrance;
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(xiii) cancel or accelerate any material indebtedness owing to SHFC
or the Association or any claims which SHFC or the Association may possess or
waive any rights of material value;
(xiv) sell or otherwise dispose of any real property or any material
amount of any tangible or intangible personal property other than, (a)
properties acquired in foreclosure or otherwise in the ordinary collection of
indebtedness owed to the Association, (b) student loans, or (c) fixed rate loans
which are held for sale upon origination and sold within sixty (60) days
thereafter;
(xv) foreclose upon or otherwise take title to or possession or
control of any real property without first obtaining a Phase One environmental
report thereon which indicates that the property is free of pollutants,
contaminants or hazardous or toxic waste materials; provided, however, that the
Association shall not be required to obtain such a report with respect to single
family, non-agricultural residential property of one acre or less to be
foreclosed upon unless it has reason to believe that such property might contain
any such pollutants, contamination, or waste materials;
(xvi) voluntarily commit any act or omission which will cause a
breach of any material agreement, contract or commitment;
(xvii) violate any law, statute, rule, governmental regulation, or
order, which violation might have a material adverse effect on- SHFC's or the
Association's business, financial condition, or earnings, taken as a whole; or
(xviii) purchase any real or personal property or make any other
capital expenditure where the amount paid or committed therefor is in excess of
Five Thousand Dollars ($5,000).
(c) SHFC and the Association shall promptly notify Acquiror in writing of
the occurrence of any matter or event known to and directly involving SHFC or
the Association (except matters or events that affect the thrift industry
generally) that is materially adverse to the business, operations, properties,
assets, or condition (financial or otherwise) of SHFC or the Association.
(d) Unless and until this Agreement shall have been properly terminated by
a party pursuant to Article Seven hereof and except as provided below in this
Section 4.01(d) hereof, each of SHFC and the Association shall (i) not, directly
or indirectly, through any of their respective officers, directors, agents,
shareholders, or affiliates, solicit, encourage or initiate any negotiations or
discussions with respect to inquiries, offers, or proposals relating to the
possible sale or other disposition of shares of its capital stock by its
shareholders or the possible sale or other disposition (except in the ordinary
course of business) of a substantial portion of its assets to, or merger or
consolidation with, any other person, (ii) not disclose to any person any
information not customarily disclosed publicly or provide access to its
properties, books, or records or otherwise assist or encourage any person in
connection with any of the foregoing, and (iii) give Acquiror prompt notice of
any such inquiries, offers, or proposals. The foregoing shall not apply,
however, to the consideration and facilitation of an inquiry, offer, or proposal
not solicited by SHFC or the Association or any of their respective officers,
directors, shareholders, agents or affiliates which relates to the possible sale
or other disposition of SHFC Common or the Association Common by shareholders or
the possible sale or other disposition of all or substantially all of SHFC's or
the Association's assets TO, or merger or consolidation with, another
corporation or association (an "Unsolicited Acquisition Proposal") if and to the
extent that the Board of Directors of SHFC reasonably determines in good faith
after consultation with its financial advisor and counsel to SHFC that failure
to consider such Unsolicited Acquisition Proposal could reasonably be expected
to constitute a breach of its fiduciary duties to the shareholders of SHFC;
provided, however, that SHFC shall give Acquiror prompt notice of such
Unsolicited Acquisition Proposal and keep Acquiror promptly informed regarding
the substance thereof and the response of the Board of Directors of SHFC
thereto.
(e) SHFC and the Association shall permit representatives of Acquiror to
attend each meeting of its respective board of directors and executive
committee, and shall give reasonable prior notice of all such meetings to
Acquiror; provided, however, that the representatives of Acquiror may be
excluded from portions of such meetings where sensitive matters (including but
not limited to an Unsolicited Acquisition Proposal and discussions with legal
counsel with respect to the transactions contemplated by this Agreement) are
being discussed or voted upon.
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(f) SHFC shall provide to Acquiror such reports on litigation involving
SHFC or the Association as Acquiror shall reasonably request, provided that SHFC
shall not be required to divulge information to the extent that, in the good
faith opinion of its counsel, by doing so, it would waive the attorney-client
privilege.
(g) the Association will use reasonable efforts to prevent the decline in
its level of deposits (except for declines due to withdrawals of deposits of
SHFC held by the Association for payment of permitted dividends and expenses)
and in its mortgage loan portfolio in a manner consistent with the safe and
sound operations of the Association and the terms of this Agreement.
Section 4.02. Breaches. In the event that SHFC or the Association has
knowledge of the occurrence, or impending or threatened occurrence, of any event
or condition which would cause or constitute a breach by either (or would have
caused or constituted a breach had such event occurred or been known prior to
the date hereof) of any representations or agreements contained or referred to
herein, it shall give prompt written notice thereof to Acquiror and use its
reasonable efforts to prevent or promptly remedy the same.
Section 4.03. Submission to Shareholders. SHFC shall cause to be duly
called and held, on a timely basis, a special meeting of its shareholders for
submission of the Amendment, this Agreement and the Plan of Merger for adoption
by such shareholders as required by applicable law (the "Shareholders'
Meeting"). Subject to receipt by SHFC of all information concerning Acquiror and
its significant subsidiaries as SHFC may reasonably request, SHFC shall prepare
a Proxy Statement (the "Proxy Statement"), and, after providing Acquiror and
Acquirors counsel reasonable opportunity to comment on the Proxy Statement, SHFC
shall, within forty-five (45) days of the date of this Agreement, provided that
Acquiror shall not have caused any unreasonable delay, file a draft Proxy
Statement with the SEC. As soon as practicable thereafter, SHFC shall deliver
the Proxy Statement to its shareholders. The Board of Directors of SHFC shall
recommend to its shareholders the adoption of the Amendment, this Agreement and
the Plan of Merger and, subject to the terms of this Agreement, use its best
efforts to obtain such shareholder approval; provided, however, that if the
Board of Directors of SHFC, based (i) solely on an Unsolicited Acquisition
Proposal or (ii) on a refusal by Charles Webb & Company to deliver the Fairness
Opinion required by Section 6.02(f) on or about the dissemination date of the
Proxy Statement, based in whole or in part on an Unsolicited Acquisition
Proposal, shall have reasonably determined in good faith (after consultation
with its counsel) that such recommendation is reasonably likely to constitute a
breach of its fiduciary duties to the shareholders of SHFC, then the Board of
Directors of SHFC shall not be obligated to recommend to its shareholders
adoption of the Amendment, this Agreement and the Plan of Merger, or to present
the Amendment, this Agreement and the Plan of Merger to the shareholders of SHFC
for their adoption at the Shareholders' Meeting or to hold the Shareholders'
Meeting for such purpose, but SHFC shall be subject to Section 7.08 below.
Section 4.04. Consents to Contracts and Leases. SHFC and the Association
shall, subject to the consent of Acquiror, use reasonable efforts to obtain all
necessary consents with respect to all interests of SHFC and the Association in
any material leases, licenses, contracts, instruments and rights which require
the consent of another person for their transfer or assumption pursuant to the
Merger.
Section 4.05. Conforming Accounting and Reserve Policies; Restructuring
Expenses. After the receipt of all approvals set forth in Section 6.01(d) of
this Agreement, and provided that at such time all of the conditions to closing
set forth in Sections 6.01(a), (b), (c), (f), (g) and (h) of this Agreement have
been satisfied, to the extent they are capable of being satisfied as of such
time, and further provided that no basis for termination of this Agreement by
either party pursuant to Article Seven of this Agreement is then extant, at the
request of Acquiror, the Association shall, on or before or effective as of the
date specified by Acquiror, establish and take such reserves and accruals as
Acquiror reasonably shall request to conform the Association's loan, accrual,
reserve and other accounting policies to Acquiror's policies. Notwithstanding
the foregoing, the Association shall not be required to take any action under
this Section 4.05 which it believes, based upon a written opinion of independent
counsel, that will constitute a breach of its fiduciary duties, or, based upon a
written opinion of its independent public accountants, will constitute violation
of GAAP.
Section 4.06. Consummation of Agreement. SHFC and the Association shall
use their best efforts to perform and fulfill all conditions and obligations to
be performed or fulfilled under this Agreement by it and each of its
subsidiaries and to effect the Merger in accordance with the terms and
provisions hereof. The Association shall furnish to Acquiror in a timely manner
all information, data and documents in the possession of SHFC or the Association
requested by Acquiror as may be required to obtain the Regulatory Approvals or
other necessary approvals of the Merger and-shall otherwise cooperate fully with
Acquiror to carry out the purpose and intent of this Agreement.
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Section 4.07. Access to Information. SHFC and the Association shall permit
Acquiror reasonable access to their properties in a manner which will avoid
undue disruption or interference with normal operations and shall disclose and
make available to Acquiror all books, documents, papers and records relating to
assets, stock, ownership, properties, operations, obligations and liabilities,
including but not limited to all books of account (including the general
ledger), tax records, minute books of directors' and shareholders' meetings,
organizational documents, material contracts and agreements, loan files, filings
with any regulatory authority, accountants' workpapers, litigation files, plans
affecting employees, and any other business activities or prospects in which
Acquiror may have a reasonable and legitimate interest in furtherance of the
transactions contemplated by this Agreement. Acquiror will hold any such
information which is nonpublic in confidence in accordance with the provisions
of Section 8.01 hereof.
Section 4.08. Subsequent Disclosure Schedule. If subsequent to the date of
this Agreement and prior to the Effective Time, an event occurs which renders
untrue any representation or warranty of SHFC or the Association made at the
date of this Agreement (a "Trigger Event"), SHFC or the Association shall
deliver to Acquiror in accordance with the following sentence a supplement to
the Disclosure Schedule (a "Subsequent Disclosure Schedule"), which shall
contain a detailed description of any and all such matters. A Subsequent
Disclosure Schedule (if any) shall be delivered by SHFC or the Association to
Acquiror within two (2) business days after SHFC or the Association learns of
the Trigger Event, but in no event later than two (2) business days before the
Closing. If there is no subsequent Disclosure Schedule, SHFC shall deliver a
statement to such effect to Acquiror no later than two (2) business days before
the Closing. The delivery of a Subsequent Disclosure Schedule and the matters
therein contained shall not constitute a default or breach by SHFC or the
Association of any of its representations and warranties under this Agreement
with respect to events occurring subsequent to the date of this Agreement;
provided, however, that all matters therein disclosed, together with all other
events, circumstances and occurrences, may be taken into account by Acquiror in
determining whether SHFC or the Association has experienced a Material Adverse
Change; provided, further, however, that this Section 4.08 is not intended to
permit SHFC or the Association to alter or amend its representations and
warranties as made herein (including the Disclosure Schedule) as of the date of
this Agreement, and any Subsequent Disclosure Schedule shall not cure the
inaccuracy thereof as of the date of this Agreement for any purpose under this
Agreement.
Section 4.09. Unallocated Recognition and Retention Plan Shares. SHFC
shall cause the unallocated shares in its Recognition and Retention Plan ("RRP")
as of the date of the Agreement to be cancel led, retired or returned to
treasury prior to the Effective Time without payment of any consideration
therefor. No such unallocated shares of SHFC Common shall be allocated or
awarded to any person.
Section 4.10 Delivery of Reports. SHFC shall deliver to Acquiror, upon
request, a copy of each report, statement or other filing or document filed with
SEC since the date hereof not previously delivered to Acquiror.
Section 4.11 Report of Funds Received from ODGF. In the event that the
Association receives any payment from the ODGF, the Association shall promptly,
but in no event later than the business day prior to the Closing Date, give to
Acquiror a statement setting forth the date and amount of the payment, the
estimated federal, state and local tax liability of the Association or SHFC
attributable thereto and any out-of-pocket expenses incurred after the date of
this Agreement, including any accounting fees, attributable thereto.
Section 4.12 Amendment of Association Articles of Incorporation. Within
sixty (60) days after the date of this Agreement, SHFC shall seek approval of
the Division for an amendment of Article NINTH of the Articles of Incorporation
of the Association to permit Acquiror to offer to acquire and to acquire all of
the outstanding shares of the Association, and immediately upon receipt of such
approval, SHFC, as the sole shareholder of the Association, shall cause Article
NINTH of the Articles of Incorporation of the Association to be so amended.
ARTICLE FIVE
AGREEMENTS OF ACQUIROR
Section 5.01. Regulatory Approvals and Proxy Statement. Acquiror shall use
its best efforts to file within sixty (60) days after the date hereof all
applications for the Regulatory Approvals required in order to consummate the
Merger. Acquiror shall keep SHFC reasonably informed as to the status of such
applications and make available to SHFC copies of such applications as filed and
any supplementally filed materials. Acquiror shall timely provide all
information reasonably
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requested by SHFC for inclusion in the Proxy Statement and shall fully cooperate
with SHFC in the preparation of the Proxy Statement.
Section 5.02. Breach. In the event that Acquiror has knowledge of the
occurrence, or impending or threatened occurrence, of any event or condition
which would cause or constitute a breach (or would have caused or constituted a
breach had such event occurred or been known prior to the date hereof) of any of
its representations or agreements contained or referred to herein, it shall give
prompt written notice thereof to SHFC and use its best efforts to prevent or
promptly remedy the same.
Section 5.03. Consummation of Agreement. Acquiror shall use its best
efforts to perform and fulfill all conditions and obligations to be performed or
fulfilled by it under this Agreement and to effect the Merger in accordance with
the terms and conditions of this Agreement.
Section 5.04. Directors and Officers' Liability Insurance and
Indemnification.
(a) From the Effective Time of the Company Merger and continuing for a
period of three years thereafter, the current officers and directors of SHFC
shall be indemnified by Acquiror from their acts and omissions occurring prior
to the Effective Time of the Company Merger to the maximum extent permitted by
the Certificate of Incorporation and Bylaws of Acquiror but subject to any
applicable limitations of Delaware law. From the Effective Time of the Company
Merger and continuing for a period of three years thereafter, the current
officers and directors of the Association shall be indemnified by the
Association for their acts and omissions occurring prior to the Effective Time
to the extent permitted by the Thrift Regulations.
(b) Subject to SHFC and the Association providing all requested
information and representations to Acquiror's directors' and officers' liability
insurance carrier, Acquiror shall use its best efforts to add a rider, at
standard rates, to its existing directors' and officers' liability insurance
policy covering the acts and omissions of the officers and directors of SHFC and
the Association occurring prior to the Effective Time and to continue such rider
for a period of three years.
Section 5.05. Employee Benefit and Related Matters. All employees of the
Association immediately prior to the Effective Time of the Company Merger shall
remain employees of the Association at the Effective Time of the Company Merger
and, with respect to employees who are not currently covered by a written
employment agreement with the Association, shall be employed by the Association
as at-will employees at the same salary they are receiving from the Association.
Any employee who is currently covered by a written employment agreement will
continue his or her employment in accordance with the terms of such written
agreement. Acquiror does not intend to impose job eliminations at the
Association as a result of the Merger. All employees of the Association shall
become participants in a medical plan, a life insurance plan, a short term
disability insurance plan and a long term disability insurance plan, each to be
maintained by the Association and each of which shall be the same plans, or
substantially equivalent to the plans, maintained by Acquiror or its subsidiary
for the benefit of the employees of Acquiror's subsidiary, Mayflower Federal
Savings Bank ("Mayflower Federal"). Employees of the Association shall be given
credit for years of service to the Association for the calculation of vacation
and sick time. Upon termination of the Association's employee stock ownership
trust (the "Association ESOP Trust"), the employees of the Association shall
become eligible to participate in the Acquiror's 401(k) plan on the next entry
date and they shall be given credit for their past service with the Association
for purposes of vesting under such plan. Except as specifically provided herein,
no employee of the Association shall be entitled to be eligible for or
participate in any other qualified or non-qualified employee benefit program or
plan maintained by Acquiror or Mayflower Federal.
Section 5.06. The Association's Employee Stock Ownership Plan. Prior to
the Effective Time and without any requirement to make application to the Key
District Office of the IRS in Cincinnati (the "Key District Office"), the
Association may amend the Association's employee stock ownership plan (the
"Association ESOP") to provide for (i) full vesting of benefits by participants
and (ii) elimination of any requirement for a participant to be employed as of
the last day of the year to receive an employer contribution, other annual
additions or allocations, in each case effective as of the Effective Time. From
and after the date of this Agreement, the Association shall make no further
contributions to the Association ESOP, except in an amount to pay any required
installment payment on the Association ESOP loan. From and after the date of
this Agreement and prior to the Effective Time, Acquiror and its
representatives, with the full cooperation of the Association, shall use their
best efforts to (i) submit to the Key District Office an Application for
Determination upon Termination relating to the Association ESOP which discloses
the proposed allocation of the cash remaining in the
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suspense account (after the repayment of the Association ESOP Loan) without
regard to Section 415 of the Code; and (ii) maintain the status of the
Association ESOP as a plan qualified under Section 401(a) and 4975 of the Code.
At the Effective Time or as soon thereafter as is practicable and permissible
under the Code, the Association and Acquiror shall cause the Association ESOP
loan to be repaid with cash proceeds from the sale of SHFC Common received by
the Association ESOP with respect to unallocated shares of SHFC Common. If the
Key District Office issues a favorable determination letter with respect to the
repayment of the Association ESOP loan and proposed allocation of the remaining
suspense account to participants, Acquiror and SHFC shall, as soon thereafter as
practicable, (a) cause the Association ESOP to repay the Association ESOP loan
and make the proposed allocation to participants in accordance with such
favorable determination letter, (b) terminate the Association ESOP and (c)
distribute the Association ESOP benefits to the Association ESOP participants
pursuant to the terms of the Association ESOP. If the Key District Office
determines that it will not issue a favorable determination letter with respect
to the proposed allocation, then the Association ESOP loan shall nevertheless be
repaid and such remaining cash received by the Association ESOP attributable to
unallocated shares of SHFC Common shall remain in the suspense account and, to
the extent that such cash can be allocated to the accounts of participants
without violating the limitations of Section 415 of the Code, the cash shall be
allocated in the current Plan Year in which the Effective Time occurs and during
the next ensuing Plan Year to those participants in the Association ESOP as of
the Effective Time to the maximum extent permitted by Section 415 of the Code
and provided that the continued maintenance of the Association ESOP shall not
adversely affect the tax-qualified status of the Association ESOP. At the
expiration of said subsequent Plan Year, the Association ESOP Trust shall be
terminated with any amounts then remaining in the suspense account, if any,
being transferred to another qualified plan of Acquiror.
Section 5.07. Board of Directors of the Association.
(a) At the Closing, the members of the Board of Directors of the
Association shall submit letters of resignation, effective as of the Effective
Time, to the Acquiror. The Acquiror shall elect the persons listed on Exhibit G
hereto to be Directors of the Association for the terms set forth therein and
shall appoint the person listed on Exhibit H hereto as Director Emeritus.
(b) The Director Emeritus Plan of the Association shall be terminated as
of the Effective Time as to all directors of the Association and shall
thereafter be replaced with a director emeritus plan having identical terms and
conditions to the director emeritus plan of Acquiror.
(c) The director's Death Benefit Plan of the Association shall cease to
accrue any additional benefits on or after the Effective Time, but any
previously accrued benefits shall be payable as and when they would otherwise
have been payable under such plan.
Section 5.08. Managing Officer of the Association. It is the intention of
Acquiror that Diana Bowman D'Amico, the Vice President of the Association, shall
be appointed as President and Managing Officer of the Association on or before
the Closing Date.
Section 5.09 Shareholder Approval for Conversion of SHFC Stock Options;
Registration. At the Annual Meeting, Acquiror shall seek approval from its
shareholders, with the favorable recommendation of its Board of Directors, of
the assumption of the obligations of SHFC under the SHFC Stock Option Plan
consistent with the provisions of Section 1.04(d) hereof. Within ten (10)
business days after the Annual Meeting, unless the shareholders of Acquiror fail
to approve the assumption by Acquiror of the SHFC Stock Option Plan, Acquiror
shall file with the SEC and any required state agency an appropriate
registration statement with respect to the shares of Acquiror common to be
subject to the SHFC Stock Option Plan and shall use reasonable efforts to
maintain the effectiveness of such registration statement or statements for so
long as such options remain outstanding.
Section 5.10 Delivery of Reports. Acquiror shall deliver to SHFC, upon
request, a copy of each report, statement or other filing or document filed with
the SEC since the date hereof not previously provided to SHFC.
Section 5.11 Distribution of RRP Proceeds. All amounts held in the RRP
representing Per Share Merger Consideration for, dividends paid on and earnings
on dividends paid on, allocated SHFC Common shall be distributed to the
participants therein immediately after the Closing.
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ARTICLE SIX
CONDITIONS PRECEDENT TO THE MERGER
Section 6.01. Conditions to Acquiror's Obligations. Acquiror's obligations
under this Agreement are conditioned upon Acquiror's receiving, concurrently
with the execution and delivery of this Agreement by SHFC and the Association,
(i) a Shareholder Agreement in the form attached as Exhibit A executed by each
of the directors of SHFC who is a shareholder of SHFC and (ii) an Optionholder
Agreement in the form attached hereto as Exhibit B executed by each holder of
SHFC Options. Each such agreement and each such consent shall be dated as of the
date of this Agreement and delivered at the time of execution hereof. Acquiror's
obligations to effect the Company Merger shall be subject to the satisfaction
(or waiver by Acquiror) prior to or on the Closing Date of the following
conditions:
(a) The representations and warranties made by SHFC and the Association in
this Agreement shall be true in all material respects on and as of the Closing
Date but as updated by any Subsequent Disclosure Schedule with the same effect
as though such representations and warranties had been made or given on and as
of the Closing Date, and for purposes of satisfying this closing condition
relative to the truth as of the date of this Agreement of any representations of
SHFC or the Association that contains a knowledge qualification, such knowledge
qualification may be disregarded by Acquiror;
(b) SHFC and the Association shall have performed and complied in all
material respects with all obligations and agreements required to be performed
by them prior to the Closing Date under this Agreement;
(c) No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger shall be in effect, nor shall there be pending any proceeding by any
governmental agency or other person seeking any of the foregoing; and there
shall not be any action taken, or any statute, rule, regulation or order
enacted, promulgated, entered, enforced or deemed applicable to the Merger which
makes the consummation of the Merger illegal;
(d) All Regulatory Approvals and other necessary consents, authorizations
and other approvals required by law for consummation of the Merger shall have
been obtained without the imposition of any conditions that Acquiror determines
to be unduly burdensome, and all waiting periods required by law shall have
expired;
(e) Acquiror shall have received all documents reasonably required to be
received from SHFC and the Association on or prior to the Closing Date, all in
form and substance reasonably satisfactory to Acquiror;
(f) SHFC and the Association shall not have experienced a Material Adverse
Change, including but not limited to items contained in any Subsequent
Disclosure Schedule;
(g) Immediately prior to the Effective Time of the Company Merger, the
holders of no more than ten percent (10%) of the outstanding SHFC Common shall
qualify as Dissenting Shareholders;
(h) Immediately prior to the Effective Time of the Company Merger, the
amount of the total equity capital of the Association shall not be less than the
total equity capital of the Association as reported in its Thrift Financial
Report as of March 31, 1996 and the shareholders' equity of SHFC shall not be
less than its shareholders' equity as of March 31, 1996; provided, however, that
for purposes of such calculations, any special exclusions contemplated by the
definition of Material Adverse Change and conforming reserves and accruals
contemplated by Section 4.05 shall not be taken into account; and
(i) Immediately prior to the Effective Time the number of issued and
outstanding shares of SHFC shall be no greater than Five Hundred Thirty-Four
Thousand Three Hundred Fifty-Seven (534,357).
Section 6.02. Conditions to SHFC's Obligations. SHFC's obligations under
this Agreement are conditioned upon its receipt, concurrently with the execution
and delivery of this Agreement by SHFC and the Association, of a written opinion
from Charles Webb & Company that the Per Share Merger Consideration to be
received by the holders of SHFC Common in the Company Merger is fair to such
holders from a financial point of view (the "Fairness Opinion"). SHFC's
obligation to effect the Company Merger shall be subject to the satisfaction (or
waiver by SHFC) prior to or on the Closing Date of the following conditions:
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(a) The representations and warranties made by Acquiror in this
Agreement shall be true in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
or given on the Closing Date;
(b) Acquiror shall have performed and complied in all material respects
with all of its obligations and agreements hereunder required to be performed
prior to the Closing Date under this Agreement;
(c) No Injunction preventing the consummation of the Merger shall be in
effect, nor shall there be pending any proceeding by any thrift regulatory
authority or other governmental agency seeking to prevent or delay the merger;
and there shall not be any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the Merger which makes
the consummation of the Merger illegal;
(d) All Regulatory Approvals and other necessary consents,
authorizations and other approvals, including the requisite approval of the
Amendment, this Agreement and the Plan of Merger by the shareholders of SHFC,
required by law for consummation of the Merger shall have been obtained and all
waiting periods required by law shall have expired;
(e) SHFC shall have received all documents required to be received from
Acquiror on or prior to the Closing Date, all in form and substance reasonably
satisfactory to SHFC.
(f) Charles Webb and Company shall not have refused to deliver to SHFC
a Fairness Opinion dated on or about the date of dissemination of the Proxy
Statement (or a reiteration of the previous Fairness Opinion or a letter that
the previous Fairness Opinion has not been withdrawn), provided that no such
refusal shall be deemed to have been made for purposes of this Section 6.02(f)
unless it is in writing and gives all of the specific reasons therefor.
ARTICLE SEVEN
TERMINATION OR ABANDONMENT
Section 7.01. Mutual Agreement. This Agreement may be terminated by the
mutual written agreement of the parties at any time prior to the Closing Date,
regardless of whether approval of this Agreement and the Plan of Merger by the
shareholders of SHFC shall have been previously obtained.
Section 7.02. Breach of Agreement. In the event that there is a
material breach of any of the representations and warranties or agreements of
Acquiror on the one hand, or SHFC or the Association on the other hand, and such
breach is not cured within ten (10) days after notice to cure such breach is
given by the non-breaching party or, if such breach is not capable of being
cured within ten (10) days, steps are not initiated within ten (10) days to
effect a cure, then the nonbreaching party, regardless of whether shareholder
approval of this Agreement and the Plan of Merger shall have been previously
obtained by SHFC, may terminate and cancel this Agreement by providing written
notice of such action to the other party hereto.
Section 7.03. Failure of Conditions. In the event any of the conditions
to the obligations of (i) Acquiror set forth in Sections 6.01 or (ii) SHFC set
forth in Section 6.02 are not satisfied or waived on or prior to the Closing
Date, and if any applicable cure period provided in Section 7.02 has lapsed,
then Acquiror (in the case of conditions to its obligations) or SHFC (in the
case of conditions to its obligations) may, regardless of whether approval of
the Amendment, this Agreement and the Plan of Merger by the shareholders of SHFC
shall have been previously obtained, terminate and cancel this Agreement by
delivery of written notice of such action to the other party on such date.
Section 7.04. Denial of Regulatory Approval. If any regulatory
application filed pursuant to Section 5.01 should be finally denied or
disapproved by the respective regulatory authority, then this Agreement may be
terminated by any party to this Agreement. It is understood, however, that a
reasonable request for additional information from or undertaking by Acquiror,
as a condition for approval, shall not be deemed to be a denial or disapproval
so long as Acquiror diligently provides the requested information or
undertaking. Notwithstanding the foregoing, Acquiror agrees to promptly and
diligently pursue any appeals available with respect to any such denial if SHFC
shall request the pursuit of such appeals based on advice of counsel to SHFC
that such appeal has a reasonable chance of success.
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Section 7.05. Failure of Shareholders to Adopt.
(a) If SHFC's Board of Directors is excused, pursuant to Section 4.03
of this Agreement, from its obligation to recommend that SHFC's shareholders
vote in favor of the adoption of the Amendment and this Agreement and the Plan
of Merger, to present this Agreement and the Plan of Merger to them for adoption
or to hold the Shareholders' Meeting for such purpose, Acquiror or SHFC may
terminate this Agreement.
(b) In the event that (i) at the Shareholders' Meeting, the holders of
at least the Minimum Portion of the outstanding shares of SHFC Common do not
adopt the Amendment, this Agreement and the Plan of Merger and SHFC's Board of
Directors has recommended that SHFC's shareholders vote in favor of the adoption
of the Amendment and this Agreement and the Plan of Merger or (ii) no
Unsolicited Acquisition Proposal has been received by SHFC and Charles Webb &
Company has refused to issue the Fairness Opinion as required by Section 6.02(f)
on or about the date of dissemination of the Proxy Materials, Acquiror or SHFC
may terminate this Agreement.
Section 7.06. Regulatory Enforcement Matters. In the event that the
Association shall become a party or subject to any written agreement, memorandum
of understanding, cease and desist order, imposition of civil money penalties or
other regulatory enforcement action or proceeding with or by any federal or
state agency charged with the supervision or regulation of savings banks or
savings associations after the date of this Agreement, which is reasonably
determined by Acquiror to be significant to the Association's business,
operations or financial condition, then Acquiror may terminate this Agreement.
Section 7.07. Automatic Termination. If the Closing Date does not occur
on or prior to March 31, 1997, then this Agreement may be terminated by either
party by giving written notice to the other; provided, however, that a party who
is then in breach of any of its representations, warranties, covenants or
agreements under this Agreement in any material respect may not exercise such
right of termination if it has received notice from the non-breaching party that
the non-breaching party is seeking specific performance of the breaching party's
obligations under this Agreement; provided, further, however, that no such
termination shall relieve the breaching party from liability for a breach which
occurs prior to such termination.
Section 7.08. Termination Fee. In the event of termination of this
Agreement pursuant to Section 7.05(a), in consideration of Acquiror's costs and
expenses in connection with this Agreement and the transactions contemplated
hereby, its agreements hereunder, its expenditure of significant management time
and staff resources, its forbearance from consideration and pursuit of other
business alternatives, its loss of a unique and valuable business opportunity,
and the added value to any person acquiring assets or securities of SHFC or
combining with SHFC or the Association resulting from SHFC's dealings with
Acquiror and Acquiror's agreement to proceed with the Company Merger on the
terms and conditions set forth herein, SHFC and the Association shall be jointly
and severably liable to pay Five Hundred Thirty-Five Thousand Dollars ($535,000)
to Acquiror as an agreed-upon termination fee, in immediately available funds
within two (2) business days after the occurrence of such event. If SHFC timely
satisfies its obligations under this Section 7.08, it shall have no liability
under Section 8.06 of this Agreement, nor shall it be liable for specific
performance or injunctive relief under Section 8.15 of this Agreement.
ARTICLE EIGHT
GENERAL
Section 8.01. Confidential Information. The parties acknowledge the
confidential and proprietary nature of the information as hereinafter described
which has heretofore been exchanged and which will be received from each other
hereunder ("Information") and agree to hold and keel the same confidential. Such
Information will include any and all financial, technical, commercial,
marketing, customer or other information concerning the business, operations and
affairs of a party that may be provided to the other, irrespective of the form
of the communications, by such party's employees or agents. Such Information
shall not include information which is or becomes generally available to the
public other than as a result of a disclosure by a party or its representatives
in violation of this Agreement. The parties agree that the Information will be
used solely for the purposes contemplated by this Agreement and that such
Information will not be disclosed to any person other than employees and agents
of a party who are directly involved in evaluating the transaction. The
Information shall not be used in any way detrimental to a party, including use
directly or indirectly in the conduct of the other party's
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business or any business or enterprise in which such party may have an interest,
now or in the future, and whether or not now in competition with such other
party.
Section 8.02. Publicity. Acquiror and SHFC shall cooperate with each
other in the development and distribution of all news releases and other public
disclosures concerning this Agreement and the Merger and shall not issue any
news release or make any other public disclosure without prior review by the
other, unless such may be required by law or upon the written advice of counsel.
Section 8.03. Return of Documents. Upon termination of this Agreement
prior to the Effective Time of the Company Merger, each party shall deliver to
the other originals and all copies of all Information made available to such
party and will not retain any copies, extracts or other reproductions in whole
or in part of such Information.
Section 8.04. Notice. Any notice or other communication shall be in
writing and shall be deemed to have been given or made on the date of delivery,
in the case of hand delivery, or three (3) business days after deposit in the
United States Registered Mail, postage prepaid, or upon receipt if transmitted
by facsimile telecopy or any other means, addressed (in any case) as follows:
(a) if to Acquiror:
C. William Clark, President and
Chief Executive Officer
Western Ohio Financial Corporation
28 E. Main St.
Springfield, Ohio 45502-1205
with a copy to:
Jeffrey M. Werthan, P.C.
Silver, Freedman & Taff, L.L.P.
1100 New York Ave., N.W.
Washington, D.C. 20005
and
(b) if to SHFC or the Association:
Arthur W. Wendel, Jr., President and
Diana Bowman D'Amico, Vice President
Seven Hills Financial Corporation
1440 Main Street
Cincinnati, Ohio 45210
with a copy to:
Cynthia Shafer, Esq.
Vorys, Sater, Seymour and Pease
221 E. Fourth Street
Cincinnati, Ohio 45201-0236
or to such other address as any party may from time to time designate by notice
to the others.
Section 8.05. Liabilities. In the event that this Agreement is
terminated pursuant to the provisions of Article Seven hereof, no party hereto
shall have any liability to any other party for costs, expenses, damages or
otherwise, except (i) as provided in Section 7.08 in the event Section 7.08 is
applicable to such termination and (ii) liability of a breaching party to the
non-breaching party for damages arising from a breach of a party's
representations, warranties, covenants or agreements herein. The termination fee
provided for in Section 7.08 shall be the exclusive fee and remedy for a proper
termination of
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this Agreement pursuant to Section 7.05(a). SHFC shall have no obligation to
Acquiror under this Section 8.05 with respect to a proper termination pursuant
to Section 7.05(a). Except as provided in the preceding sentence, nothing
contained in this Section 8.05 is intended to diminish or restrict a party's
right to specific performance under Section 8.15.
Section 8.06. Expenses. Each of the parties shall bear its own costs,
fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby.
Section 8.07. Nonsurvival of Representations and Warranties. Except as
provided in this Section 8.07, no representation, warranty, covenant or
agreement contained in this Agreement shall survive the Effective Time or the
earlier termination of this Agreement. The agreements set forth in Sections
1.04(c), (d), (e) and (f) and 5.04, 5.05, 5.06, 5.07 and 5.09 shall survive the
Effective Time of the Company Merger and the agreements set forth in Sections
7.08, 8.01, 8.03, 8.05, 8.06 and 8.15 hereof shall survive the earlier
termination of this Agreement.
Section 8.08. Entire Agreement. This Agreement constitutes the entire
agreement among the parties and supersedes and cancels any and all prior
discussions, negotiations, undertakings and agreement between the parties
relating to the subject matter hereof.
Section 8.09. Headings and Captions. The captions of Articles and
Sections hereof are for convenience only and shall not control or affect the
meaning or construction of any of the provisions of this Agreement.
Section 8.10. Waiver Amendment or Modification. The conditions of this
Agreement which may be waived may be waived only by written notice by the party
waiving such condition to the other party or parties. The failure of any party
at any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. This Agreement may
be amended or modified by a written document duly approved by the boards of
directors of the parties, whether before or after approval of this Agreement by
the shareholders of SHFC, provided that any amendment or modification after such
shareholder approval shall not decrease the Per Share Merger Consideration
without the approval thereof of the shareholders of SHFC by at least the Minimum
Portion.
Section 8.11. Rules of Construction. Unless the context otherwise
requires: (a) a term has the meaning assigned to it; (b) an accounting term not
otherwise defined has the meaning assigned to it in accordance with GAAP; (c)
"or" is not exclusive; and (d) words in the singular may include the plural and
in the plural include the singular.
Section 8.12. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
shall be deemed one and the same instrument.
Section 8.13. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Except as provided in Sections 5.04, 5.05 and 5.07,
there shall be no-third party beneficiaries hereof.
Section 8.14. Governing Law; Assignment. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of Ohio and
applicable federal laws and regulations. This Agreement may not be assigned by
either of the parties hereto.
Section 8.15. Specific Performance and Injunctive Relief. Each party to
this Agreement recognizes that, if it fails to perform, observe or discharge any
of its obligations under this Agreement, remedies at law may not provide
adequate relief to the other party or parties. Therefore, each party is hereby
authorized to demand specific performance of this Agreement, and is entitled to
temporary and permanent injunctive relief, in a court of competent jurisdiction
at any time when any other party fails to comply with any of the provisions of
this Agreement applicable to it, in addition to any other remedy which may be
available in law or equity. To the extent permitted by applicable law, each
party hereby irrevocably waives any defense that it might have based on the
adequacy of a remedy at law which might be asserted as a bar to such remedy of
specific performance or injunctive relief. For purposes of this Section 8. 15,
SHFC and the Association shall constitute a single party and either may bind
both as a party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
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WESTERN OHIO FINANCIAL CORPORATION
Attest:
Susan M. Inskeep, Secretary By: David L. Dillahunt, Chairman
Susan M. Inskeep, Secretary By: C. William Clark
President and Chief Executive Officer
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SEVEN HILLS FINANCIAL CORPORATION
Henry C. Gessing, Secretary By: Arthur W. Wendel, Jr., President
SEVEN HILLS SAVINGS ASSOCIATION
Henry C. Gessing, Secretary By: Arthur W. Wendel, Jr., President
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EXHIBITS A AND B HAVE BEEN OMITTED
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<PAGE> 135
EXHIBIT C
AGREEMENT AND PLAN OF MERGER OF
WESTERN OHIO ACQUISITION II CORPORATION
WITH AND INTO SEVEN HILLS FINANCIAL CORPORATION
This AGREEMENT AND PLAN OF MERGER ("Plan of Merger") dated as of 1996,
sets forth the terms of a merger by and between Western Ohio Acquisition II
Corporation ("Acquisition Subsidiary"), an Ohio corporation having its principal
office at 28 East Main Street, Springfield, Ohio 45502, and Seven Hills
Financial Corporation ("Seven Hills"), an Ohio corporation having its principal
office at 1440 Main Street, Cincinnati, Ohio 45210.
W I T N E S S E T H
WHEREAS, Acquisition Subsidiary is a corporation organized under the
laws of the State of Ohio, the authorized capital stock of which consists of
______ shares of common stock, par value _____- per share ("Acquisition
Subsidiary Common Stock") all of which, as of the date hereof, are issued and
outstanding and owned by Western Ohio Financial Corporation, a Delaware
corporation ("Acquiring"); and
WHEREAS, Seven Hills is an Ohio corporation, the authorized capital
stock of which consists of 1,000,000 shares of common stock, no par value
("Seven Hills Common"), ______ shares of which are issued and outstanding as of
the date hereof; and
WHEREAS, the respective Boards of Directors of Acquisition Subsidiary
and Seven Hills deem the merger of Acquisition Subsidiary with and into Seven
Hills, under and pursuant to the terms and conditions herein set forth or
referred to, desirable and in the best interests of the respective corporations
and their respective shareholders, and have adopted resolutions approving this
Plan of Merger; and
WHEREAS, Acquiring, Seven Hills and Seven Hills Savings Association
have entered into an Agreement and Plan of Merger and Reorganization dated June
14, 1996 ("Reorganization Agreement") relating to the transaction contemplated
by this Plan of the Merger; and
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto do hereby agree that the Plan of
Merger shall be as follows:
ARTICLE I
MERGER AND NAME OF SURVIVING CORPORATION
Subject to the terms and conditions of this Plan of Merger, at the
Effective Time (as hereinafter defined), Acquisition Subsidiary shall be merged
with and into Seven Hills pursuant to the provisions of, and with the effect
provided under, Ohio law (the "Merger"). At the Effective Time, the separate
existence of Acquisition Subsidiary shall cease and Seven Hills, as the
surviving entity, shall continue unaffected and unimpaired by the Merger. Seven
Hills as existing on and after the Effective Time is hereinafter sometimes
referred to as the "Surviving Corporation." The name of the Surviving
Corporation shall remain "Seven Hills Financial Corporation."
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ARTICLE II
ARTICLES OF INCORPORATION AND CODE OF REGULATIONS
The Articles of Incorporation and the Code of Regulations of
Acquisition Subsidiary in effect immediately prior to the Effective Date shall
be the Articles of Incorporation and the Code of Regulations of the Surviving
Corporation, in each case until amended in accordance with applicable law.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
At the Effective Time, the Board of Directors of the Surviving
Corporation shall consist of those persons serving as directors of Acquisition
Subsidiary immediately prior to the Effective Time and the officers of the
Surviving Corporation shall be those persons serving as officers of Acquisition
Subsidiary immediately prior to the Effective Time, in each case subject to the
provisions of the Surviving Corporation's Code of Regulations.
ARTICLE IV
CONVERSION AND EXCHANGE OF
ACQUISITION SUBSIDIARY COMMON STOCK
Each share of Acquisition Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall, at the Effective
Time, be converted into one share of the common stock of the Surviving
Corporation.
ARTICLE V
CONVERSION, EXCHANGE AND PAYMENT OF SEVEN HILLS COMMON
1. At the Effective Time, except as provided in paragraphs 2 and 4 of
this Article V, each outstanding share of Seven Hills Common shall, without any
action on the part of the holder thereof, be converted into the right to receive
the Per Share Merger Consideration.
2. At the Effective Time, all shares of Seven Hills Common owned
beneficially by Seven Hills or any Seven Hills Subsidiary (other than in a
fiduciary capacity or in connection with a debt previously contracted) and all
shares of Seven Hills Common owned by Acquiring or owned beneficially by any
subsidiary of Acquiring (other than in a fiduciary capacity or in connection
with a debt previously contracted) shall be cancelled and no cash, stock or
other property shall be delivered in exchange therefor.
3. At the Effective Time, the stock transfer books of Seven Hills shall
be closed and no transfer of Seven Hills Common by any such holder shall
thereafter be made or recognized.
4. Promptly after the Effective Time, shares of Seven Hills Common held
by holders who did not vote in favor of the Company Merger and who otherwise are
entitled to and do perfect their dissenters' rights under the OGCL, shall not be
converted into the right to receive the Per Share Merger Consideration in
accordance with Section 1 of this Article V, but such shares of Seven Hills
Common shall represent only the right to receive the "fair cash value" of such
shares as provided in the OGCL. If any such holder shall have failed to perfect
or shall have effectively withdrawn or lost such dissenters' rights, such shares
of Seven Hills Common shall thereupon be deemed to have been converted into the
right to receive the Per Share Merger Consideration in accordance with Section l
of this Article V as of the Effective Time without any interest thereon.
5. Promptly after the Effective Time, Acquiring shall cause to be
mailed to each registered holder of record of outstanding Seven Hills Common a
letter of transmittal and instructions for use in surrendering their share
certificates ("Certificate(s)") and receiving payment pursuant hereto. Promptly
following surrender to Acquiring or its agent of such Certificates, together
with such letter of transmittal, duly executed and completed in accordance with
the instructions thereto, Acquiring or its agent shall cause to be paid to the
persons entitled thereto a check in the amount to which such persons are
entitled under Article V, Section 1 hereof, after giving effect to required tax
withholdings, if any. No interest shall accrue or be payable with respect to the
consideration to be paid herein. Until so presented and surrendered in
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exchange for the Per Share Merger Consideration for the shares represented
thereby, each Certificate shall be deemed for all purposes to evidence ownership
of the right to receive the Per Share Merger Consideration for the shares
represented thereby. Acquiring shall make available all funds necessary to
satisfy the obligations, if any, owed to dissenters. If payment is to be made to
a person other than the registered holder of the Certificates surrendered, it
shall be a condition of such payment that the Certificate so surrendered shall
be properly endorsed or otherwise in proper form for transfer and that the
person requesting such payment shall pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of the
Certificate surrendered, or establish to the satisfaction of Acquiring that such
tax has been paid or is not applicable.
6. Any other provision of this Plan of Merger notwithstanding, no party
hereto or agent thereof shall be liable to a holder of Seven Hills Common for
any amount paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat, or similar law.
ARTICLE VI
EFFECTIVE TIME OF THE COMPANY MERGER
A Certificate of Merger evidencing the transactions contemplated herein
shall be delivered for filing to the Secretary of State of Ohio. Such filing
shall be made by the parties prior to, on or promptly after the Closing
described in the Reorganization Agreement. The Merger shall be effective at the
time and on the date specified in such Certificate of Merger (the "Effective
Time").
ARTICLE VII
FURTHER ASSURANCES
If at any time the Surviving Corporation shall consider or be advised
that any further assignments, conveyances or assurances are necessary or
desirable to vest, perfect or confirm in the Surviving Corporation title to any
property or rights of Acquisition Subsidiary or Seven Hills, or otherwise carry
out the provisions hereof, the proper officers and directors of Acquisition
Subsidiary or Seven Hills, as of the Effective Time, and thereafter the officers
of the Surviving Corporation, acting on behalf of the Surviving Corporation,
shall execute and deliver any and all property or assignments, conveyances and
assurances, and do all things necessary or desirable to vest, perfect or confirm
title to such property or rights in the Surviving Corporation and otherwise
carry out the provisions hereof.
ARTICLE VIII
CONDITIONS PRECEDENT
The obligations of Acquisition Subsidiary and Seven Hills to effect the
Merger as herein provided shall be subject to satisfaction, unless duly waived,
of the conditions set forth in the Reorganization Agreement.
ARTICLE IX
ABANDONMENT AND TERMINATION
Anything contained in this Plan of Merger to the contrary
notwithstanding, and notwithstanding adoption hereof by the shareholders of
Seven Hills or Acquisition Subsidiary, this Plan of Merger may be terminated and
the Merger abandoned as provided in the Reorganization Agreement.
ARTICLE X
MISCELLANEOUS
1. This Plan of Merger may be amended or supplemented at any time by
Acquisition Subsidiary and Seven Hills. Any such amendment or supplement must be
in writing and approved by their respective Boards of Directors and shall be
subject to the proviso in Section 8.10 of the Reorganization Agreement.
2. Any notice or other communication required or permitted under this
Plan of Merger shall be given, and shall be effective, in accordance with the
provisions of the Reorganization Agreement.
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<PAGE> 138
3, The headings of the several Articles herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Plan of Merger.
4. This Plan of Merger shall be governed by and construed in accordance
with the laws of the State of Ohio applicable to agreements made and entirely to
be performed in such jurisdiction.
5. The provisions of Article V and VII hereof shall survive the
Effective Time.
6. Capitalized terms used but not defined herein shall have the same
meanings as in the Reorganization Agreement.
Attest WESTERN OHIO ACQUISITION II
CORPORATION
- ----------------------------------------- ---------------------------------
, Secretary C. William Clark, President
Attest SEVEN HILLS FINANCIAL CORPORATION
- ----------------------------------------- ---------------------------------
, Secretary ,President
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<PAGE> 139
For purposes of Article V, Section 5 hereof this Plan is joined in and
agreed to by Western Ohio Financial Corporation.
Attest WESTERN OHIO FINANCIAL CORPORATION
------------------------------------- -------------------------------
, Secretary C. William Clark, President and
Chief Executive Officer
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<PAGE> 140
EXHIBITS D, E, F, G AND H HAVE BEEN OMITTED
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<PAGE> 141
Charles Webb & Company
Investment Bankers and Financial Advisors
October 7, 1996
Board of Directors
Seven Hills Financial Corporation
1440 Main Street
Cincinnati, Ohio 45210
Dear Gentlemen:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the shareholders of
Seven Hills Financial Corporation. ("SHFC"), of the consideration to be received
by such shareholders in the merger (the "Merger") between SHFC and Western Ohio
Financial Corporation, a Delaware corporation ("WOFC"). We have not been
requested to opine as to, and our opinion does not in any matter address, SHFC's
underlying business decision to proceed with or effect the Merger.
Pursuant to the terms and conditions of the Agreement and Plan of Merger and
Reorganization, dated June 14, 1996, by and between SHFC and its wholly owned
subsidiary, Seven Hills Savings Association ("Seven Hills"), and WOFC, (the
"Agreement"), at the effective time of the Merger, WOFC will acquire all of
SHFC's issued and outstanding shares of common stock (536,472 shares as of the
date of the Agreement) and the holders of such shares of common stock will
receive $19.65 in cash in exchange for each share of SHFC common stock. In
addition, the holders of unexercised and outstanding options awarded pursuant to
the SHFC Stock Option Plan, will receive, for each share subject to such option,
an option to purchase shares of WOFC common stock in an amount and at an
exercise price determined pursuant to Section 1.04(d) of the Agreement. The
complete terms of the proposed transaction are described in the Agreement, and
this summary is qualified in its entirety by reference thereto.
Charles Webb & Company, as part of its investment banking business, is regularly
engaged in the evaluation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, and distributions of listed
and unlisted securities. We are familiar with the market for common stocks of
publicly traded banks, thrifts and bank and thrift holding companies. On July
31, 1996, Charles Webb & Company became division of Keefe, Bruyette & Woods,
Inc.
221 Bradenton - Dublin, Ohio 43017-3541 - 614-766-8400 - Fax: 614-766-8406
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<PAGE> 142
Seven Hills Financial Corporation
October 7, 1996
Page 2
In January, 1996, you engaged us to advise you in connection with alternative
strategies for enhancing shareholder value and to assist in the implementation
of any such strategy pursued by SHFC, including the provision of a fairness
opinion to be delivered upon execution of an agreement for the acquisition of
SHFC. We reviewed certain financial and other business data supplied to us by
SHFC including audited financial statements for the years ended June 30, 1996,
1995 and 1994, and certain other information we deemed relevant. We discussed
with senior management and the boards of directors of SHFC and Seven Hills, the
current position and prospective outlook for SHFC. We considered historical
quotations and the prices of recorded transactions in SHFC's common stock since
its public offering and conversion to a stock holding company on December 30,
1993. We reviewed financial and stock market data of other thrifts, particularly
in the Midwest region, and the financial and structural terms of several other
recent transactions involving savings and loan mergers and acquisitions or
proposed changes of control of comparably situated companies.
For WOFC, we reviewed the audited financial statements for the fiscal years
ended December 31, 1995 and 1994, quarterly financial statements (unaudited) for
the quarter ending June 30, and March 31, 1996 and certain other information
deemed relevant.
For purposes of this opinion we have relied, without independent verification,
on the accuracy and completeness of the material furnished to us by SHFC and
WOFC and the material otherwise made available to us, including information from
published sources, and we have not made any independent effort to verify such
data. With respect to the financial information, including forecasts and asset
valuations we received from SHFC, we assumed (with your consent) that they had
been reasonably prepared reflecting the best currently available estimates and
judgment of SHFC's management. In addition, we have not made or obtained any
independent appraisals or evaluations of the assets or liabilities, and
potential and/or contingent liabilities of SHFC or WOFC. We have further relied
on the assurances of management of SHFC and WOFC that they are not aware of any
facts that would make such information inaccurate or misleading. We express no
opinion on matters of a legal, regulatory, tax or accounting nature or the
ability of the Merger, as set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to SHFC or the ability to consummate the Merger. Our opinion is
based on the market, economic and other relevant considerations as they exist
and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to SHFC in connection with the Merger and will receive a fee for such
services, a majority of which is contingent upon the consummation of the Merger.
In addition, SHFC has agreed to indemnify us for certain liabilities arising out
of our engagement by SHFC in connection with the Merger. We
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Seven Hills Financial Corporation
October 7, 1996
Page 3
have also performed various investment banking services for SHFC in the past and
have received customary fees for such services.
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the consideration to be received by the shareholders
of SHFC in the Merger is fair, from a financial point of view, to the
shareholders of SHFC.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statements of SHFC used to solicit
shareholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of SHFC in its consideration of the
Agreement, and is not intended to be and does not constitute a recommendation to
any shareholder as to how such shareholder should vote with respect to the
Merger.
Very truly yours,
/s/ Charles Webb & Company
Charles Webb & Company
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ANNEX C
SECTION 1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF SHARES.
(A)(1) A shareholder of a domestic corporation is entitled to relief as
a dissenting shareholder in respect of the proposals in sections 1701.74,
1701.76, and 1701.84 of the Revised Code, only in compliance with this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the shareholder
shall deliver to the corporation a written demand for payment with the same
information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which he seeks relief, the dissenting shareholder, within fifteen
days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located, or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is
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required to be served or substituted service is required to be made in other
cases. On the day fixed for the hearing on the complaint or any adjournment of
it, the court shall determine from the complaint and from such evidence as is
submitted by either party whether the dissenting shareholder is entitled to be
paid the fair cash value of any shares and, if so, the number and class of such
shares. If the court finds that the dissenting shareholder is so entitled, the
court may appoint one or more persons as appraisers to receive evidence and to
recommend a decision on the amount of the fair cash value. The appraisers have
such power and authority as is specified in the order of their appointment. The
court thereupon shall make a finding as to the fair cash value of a share, and
shall render judgment against the corporation for the payment of it, with
interest at such rate and from such date as the court considers equitable. The
costs of the proceeding, including reasonable compensation to the appraisers to
be fixed by the court, shall be assessed or apportioned as the court considers
equitable. The proceeding is a special proceeding, and final orders in it may be
vacated, modified, or reversed on appeal pursuant to the Rules of Appellate
Procedure and, to the extent not in conflict with those rules, Chapter 2505. of
the Revised Code. If, during the pendency of any proceeding instituted under
this section, a suit or proceeding is or has been instituted to enjoin or
otherwise to prevent the carrying out of the action as to which the shareholder
has dissented, the proceeding instituted under this section shall be stayed
until the final determination of the other suit or proceeding. Unless any
provision in division (D) of this section is applicable, the fair cash value of
the shares that is agreed upon by the parties or fixed under this section shall
be paid within thirty days after the date of final determination of such value
under this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined as
of the day prior to the day on which the vote by the shareholders was taken and,
in the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of
the Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this
section, unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not
come to an agreement as to the fair cash value per share, and neither the
shareholder nor the corporation has filed or joined in a complaint under
division (B) of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the
merger or consolidation has become effective and the surviving or new entity is
not a corporation, action required to be taken by the directors of the
corporation shall be taken by the general partners of a surviving or new
partnership or the comparable representatives of any other surviving or new
entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such
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shares, including voting and dividend or distribution rights, are suspended. If
during the suspension, any dividend or distribution is paid in money upon shares
of such class or any dividend, distribution, or interest is paid in money upon
any securities issued in extinguishment of or in substitution for such shares,
an amount equal to the dividend, distribution, or interest which, except for the
suspension, would have been payable upon such shares or securities, shall be
paid to the holder of record as a credit upon the fair cash value of the shares.
If the right to receive fair cash value is terminated other than by the purchase
of the shares by the corporation, all rights of the holder shall be restored and
all distributions which, except for the suspension, would have been made shall
be made to the holder of record of the shares at the time of termination.
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REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SEVEN HILLS FINANCIAL CORPORATION
SEVEN HILLS FINANCIAL CORPORATION SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 1, 1996
The undersigned shareholder of Seven Hills Financial Corporation
("SHFC") hereby constitutes and appoints Diana Bowman D'Amico and Shirley A.
Gluck, or either one of them, as proxy or proxies for the undersigned, each
with full power of substitution and resubstitution, to vote all of the votes
which the undersigned is entitled to cast at the Special Meeting of the
shareholders of SHFC to be held at 4:00 p.m., local time, on November 1, 1996,
at 1440 Main Street, Cincinnati, Ohio 45210, and at any adjournments thereof
(the "Special Meeting"), in the manner specified below on the following
matters, which are described in the accompanying Proxy Statement:
1. The adoption of an Amendment to the amended Articles of Incorporation of SHFC
to delete Article EIGHTH, which prohibits an offer to acquire or the acquisition
of more than 10% of the outstanding common shares of SHFC (the "Amendment").
/ /FOR / /AGAINST / /ABSTAIN
2. The adoption of the Agreement and Plan of Merger and Reorganization dated
June 14, 1996, by and among Western Ohio Financial Corporation ("WOFC"), SHFC
and Seven Hills Savings Association (the "Agreement"), pursuant to which a
wholly-owned subsidiary of WOFC will, upon the satisfaction of certain
conditions, merge with and into SHFC in a transaction in which each outstanding
SHFC common share will be canceled and extinguished in consideration and
exchange for the right to receive a minimum of $19.65 cash and an estimated
maximum of $19.72 cash;
/ /FOR / /AGAINST / /ABSTAIN
3. The adjournment of the Special Meeting in the event that a sufficient number
of votes necessary to adopt the foregoing proposals is not received.
/ /FOR / /AGAINST / /ABSTAIN
4. In their discretion, upon such other matters as may properly come before the
Special Meeting.
This Revocable Proxy, when properly executed, will be voted in the
manner directed herein by the undersigned shareholder. IF NO DIRECTION IS GIVEN,
THIS REVOCABLE PROXY WILL BE VOTED FOR THE ADOPTION OF THE AMENDMENT, FOR THE
ADOPTION OF THE AGREEMENT AND FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY.
<PAGE> 148
Without affecting any vote previously taken, this Revocable Proxy may be
revoked by the undersigned at any time before it is exercised by giving notice
to SHFC in a writing received by Henry C. Gessing, Secretary of SHFC, at SHFC's
offices, by executing a subsequent proxy received by SHFC or by attending the
Special Meeting and giving notice of such revocation in person to the inspector
of election. All proxies previously given by the undersigned are hereby revoked.
The receipt of the Notice of
Special Meeting of Shareholders and the
Proxy Statement of SHFC dated
October 7, 1996, is hereby
acknowledged by the undersigned.
________________________________________
Signature
________________________________________
Print or Type Name
Dated:__________________________________
NOTE: Please sign your name
exactly as it appears on this Proxy.
Jointly held shares require only one
signature. If you are signing this Proxy
as an attorney, administrator, agent,
corporation, officer, executor, trustee
or guardian, etc., please add your full
title to your signature.
IMPORTANT: IF YOU RECEIVE MORE
THAN ONE CARD, PLEASE SIGN AND RETURN
ALL CARDS IN THE ACCOMPANYING ENVELOPE.
