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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number 0-25049
FIRST PLACE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 34-1880130
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
185 E. Market Street, Warren, OH 44482
--------------------------------------
(Address and zip code of principal executive offices)
(330) 373-1221
--------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 20, 1999, the Registrant had 11,241,250 shares of Common Stock
issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $125.1million based upon the last sales price as of September 20,
1999. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the Registrant that such
person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Annual Report to Stockholders for the fiscal year
ended June 30, 1999.
Part III of Form 10-K - Proxy Statement for Annual Meeting of Stockholders to be
held in 1999.
PART I
Item I. Description of Business
First Place Financial Corp. (the Company) was organized in August 1998 at the
direction of the Board of Directors of First Federal Savings and Loan
Association of Warren (the Association) for the purpose of becoming a holding
company to own all of the outstanding capital stock of the Association. The
conversion of the Association from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association was
completed on December 31, 1998.
The Association's principal business consists of accepting retail deposits from
the general public and investing these funds primarily in one- to four-family
residential loans, automobile and home equity loans and, to a lesser extent,
multi-family, commercial real estate and construction loans. Headquartered in
Warren, Ohio, in proximity to Youngstown, Ohio and approximately halfway between
the cities of Cleveland, Ohio and Pittsburgh, Pennsylvania, the Association is a
community-oriented savings institution that was organized in 1922. The
Association currently operates eleven full-service banking facilities and two
loan production offices in Trumbull and Mahoning Counties of Ohio. In addition,
the Association opened four other loan production offices in 1999 in the cities
of Akron, Newark, Mt. Vernon and Medina, Ohio. While deposit gathering is still
primarily concentrated in Trumbull and Mahoning Counties, the Association's
primary lending area now encompasses all of northeast Ohio.
The major employers in the Youngstown/Warren area include Delphi Packard
Electric Systems, General Motors and HM Health Systems. Additionally, MCI
Worldcom announced in August of 1999 that it would locate a worldwide call
center in the area generating an estimated 1,200 new jobs.
Competition
The Association faces significant competition both in making loans and in
attracting deposits. The State of Ohio has a high density of financial
institutions, many which are branches of significantly larger institutions that
have greater financial resources than the Association, all of which are
competitors of the Association to varying degrees. The Association's
competition for loans comes principally from savings banks, savings and loan
associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The
Association faces additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and brokerage firms and
insurance companies. Competition may also increase as a result of the lifting
of restrictions on the interstate operations of financial institutions.
Forward-Looking Statements
When used in this Form 10-K, or, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Association's market area,
changes in policies by regulatory agencies, fluctuation in interest rates,
demand for loans in the Association's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. The Company wishes to advise readers that the factors
listed above could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Lending Activities
General. The Association's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in the Association's primary market area. The Association also originates fixed
rate mortgage loans which, if they qualify, are sold to various investors
including the Federal Home Loan Mortgage Corporation (FHLMC). The Association
also originates automobile and other consumer loans that generally have higher
yields and shorter durations than traditional mortgage loans. The Association
additionally offers multifamily and nonresidential real estate loans.
2
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
At June 30,
-----------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------
Percent Percent Percent
Amount Of Total Amount of Total Amount of Total
-----------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
Real estate mortgage loans:
One- to four family $357,374 76.09% $267,950 73.77% $215,549 73.92%
Multi-family 4,804 1.02 4,481 1.23 2,293 0.79
Commercial real estate 10,192 2.17 8,627 2.37 6,789 2.33
Construction 13,993 2.98 6,301 1.73 5,376 1.84
Home equity 8,944 1.90 9,189 2.53 9,822 3.37
-------- ------ -------- ------ -------- ------
Total real estate mortgage loans 395,307 84.16 296,548 81.64 239,829 82.25
Consumer loans:
Automobiles 53,243 11.34 52,847 14.55 43,172 14.80
Other(1) 19,217 4.09 11,242 3.10 6,521 2.24
-------- ------ -------- ------ -------- ------
Total consumer loans 72,460 15.43 64,089 17.65 49,693 17.04
Commercial loans 1,925 0.41 2,587 0.71 2,068 0.71
-------- ------ -------- ------ -------- ------
Total loans receivable 469,692 100.00% 363,224 100.00% 291,590 100.00%
====== ====== ======
Less:
Net deferred loan origination fees 1,867 1,319 1,316
Loans in process 10,411 5,866 3,339
Allowance for loan losses 3,623 3,027 1,723
-------- -------- --------
Loans receivable, net $453,791 $353,012 $285,212
======== ======== ========
At June 30,
--------------------------------------------------
1996 1995
--------------------------------------------------
Percent Percent
Amount Of Total Amount of Total
--------------------------------------------------
(Dollars in thousands)
--------------------------------------------------
Real estate mortgage loans:
One- to four family $202,697 78.14% $185,270 76.15%
Multi-family 1,397 0.54 1,515 0.62
Commercial real estate 7,159 2.76 8,516 3.50
Construction 2,515 0.97 1,859 0.76
Home equity 6,531 2.52 4,309 1.77
-------- ------ -------- ------
Total real estate mortgage loans 220,299 84.93 201,469 82.80
Consumer loans:
Automobiles 31,234 12.04 32,212 13.24
Other(1) 6,675 2.57 8,262 3.40
-------- ------ -------- ------
Total consumer loans 37,909 14.61 40,474 16.64
Commercial loans 1,188 0.46 1,358 0.56
-------- ------ -------- ------
Total loans receivable 259,396 100.00% 243,301 100.00%
====== ======
Less:
Net deferred loan origination fees 1,517 1,228
Loans in process 1,837 1,221
Allowance for loan losses 1,259 1,186
-------- --------
Loans receivable, net $254,783 $239,666
======== ========
__________
(1) Other consumer loans consists primarily of home equity lines of credit.
3
Loan Originations. The Association's mortgage lending activities are conducted
primarily by its loan personnel operating at its eleven full-service branch
offices and its six loan production offices. All loans originated by the
Association are underwritten by the Association pursuant to the Association's
policies and procedures. The Association originates both adjustable-rate and
fixed-rate mortgage loans, commercial loans and consumer loans. The
Association's ability to originate fixed- or adjustable-rate loans is dependent
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates. It is the general policy
of the Association to retain all loans originated in its portfolio.
The following tables set forth the Association's loan originations and principal
repayments for the periods indicated.
For the Years Ended June 30,
----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(In thousands)
Total loans receivable(1):
Balance outstanding at beginning of period $357,358 $288,251 $257,559
Loans originated(2):
Real estate mortgage loans:
One- to four-family and home equity 152,962 105,184 49,913
Multi-family and commercial real estate 3,675 4,515 5,494
Construction 15,898 7,882 6,415
Consumer loans(3) 46,158 33,457 31,610
Commercial loans 321 62 92
-------- -------- --------
Total loans originated 219,014 151,100 93,524
Less:
Principal repayments 112,546 79,466 61,330
Change in loans in process(4) 4,545 2,527 1,502
-------- -------- --------
Total loans receivable at end of period $459,281 $357,358 $288,251
======== ======== ========
____________________
(1) Total loans receivable does not include unearned discounts, deferred loan
fees and the allowance for loan losses.
(2) Amounts for each period include loans in process at period end.
(3) Consists primarily of originations of automobile loans and disbursements on
equity lines of credit.
(4) Represents change in loans in process, which primarily represent undisbursed
funds on construction loans, from first day to last day of the period.
4
Loan Maturity and Repricing. The following table shows the contractual maturity
of the Association's loan portfolio at June 30, 1999. Demand loans and other
loans having no stated schedule of repayments or no stated maturity are reported
as due in one year or less. The table does not include prepayments, scheduled
principal amortization or enforcement of due-on-sale clauses.
At June 30, 1999
---------------------------------------------------------------------------
Real Total
Estate Loans
Mortgage Consumer Commercial Receivable
---------------------------------------------------------------------------
(In thousands)
Amounts due:
Within one year $ 17,139 $ 1,538 $ 703 $ 19,380
-------- ------- ------ --------
After one year:
More than one year to three years 4,253 12,884 226 17,363
More than three years to five years 7,539 33,758 277 41,574
More than five years to 10 years 25,330 6,944 434 32,708
More than 10 years to 20 years 131,725 17,145 285 149,155
More than 20 years 209,321 191 - 209,512
-------- ------- ------ --------
Total due after June 30, 2000 378,168 70,922 1,222 450,312
-------- ------- ------ --------
Total amount due 395,307 72,460 1,925 469,692
-------- ------- ------ --------
Less:
Net deferred loan origination fees 1,867
Loans in process 10,411
Allowance for loan losses 3,623
--------
Loans receivable, net $453,791
========
5
The following table sets forth at June 30, 1999, the dollar amount of total
loans receivable contractually due after June 30, 2000, and whether such loans
have fixed interest rates or adjustable interest rates.
Due After June 30, 2000
-------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real estate mortgage loans $279,380 $ 98,788 $378,168
Consumer loans 53,832 17,090 70,922
Commercial loans 436 786 1,222
-------- -------- --------
Total loans $333,648 $116,664 $450,312
======== ======== ========
One- to Four-Family Lending. The Association currently offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans with maturities up to 30 years
secured by one- to four-family residences, substantially all of which are
located in the Association's primary market area. One- to four-family mortgage
loan originations are generally obtained from the Association's in-house loan
representatives, from existing or past customers, through advertising, and
through referrals from local builders, real estate brokers and attorneys. At
June 30, 1999 the Association's one- to four-family mortgage loans totaled
$357.4 million, or 76.1%, of total loans.
The Association currently offers fixed-rate one- to four-family mortgage loans
with terms of up to 30 years. These loans have generally been priced
competitively with current market rates for such loans. The Association
currently offers a number of ARM loans with terms of up to 30 years and interest
rates which adjust every year from the outset of the loan or which adjust
annually after a three, five or seven year initial fixed period. The interest
rates for the Association's ARM loans are indexed to the one-year U.S. Treasury
Index. The Association's ARM loans generally provide for periodic (not more
than 2%) and overall (not more than 6%) caps on the increase or decrease in the
interest rate at any adjustment date and over the life of the loan.
The origination of adjustable-rate one- to four-family mortgage loans, as
opposed to fixed-rate one- to four-family mortgage loans, helps reduce the
Association's exposure to increases in interest rates. However, adjustable-rate
loans generally pose credit risks not inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for default. Periodic and lifetime caps on
interest rate increases help to reduce the risks associated with adjustable-rate
loans but also limit the interest rate sensitivity of such loans.
Generally, the Association originates one- to four-family residential mortgage
loans in amounts up to 97% of the appraised value or selling price of the
property, whichever is lower, securing the loan. Private mortgage insurance
("PMI") may be required for such loans with a loan-to-value ("LTV") ratio of
greater than 85%. One- to four-family mortgage loans originated by the
Association generally include due-on-sale clauses which provide the Association
with the contractual right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property without the Association's
consent. Due-on-sale clauses are an important means of adjusting the yields on
the Association's fixed-rate one- to four-family mortgage loan portfolio. The
Association requires fire, casualty, and, in required cases, flood insurance on
all properties securing real estate loans made by the Association.
Commercial Lending. The Association also originates on a very limited basis
commercial loans in the form of term loans and lines of credit to small- and
medium-sized businesses operating in the Association's primary market area.
Since commercial loans are made on such an infrequent basis, the Association
handles each such loan request on an individual basis. At June 30, 1999, the
Association had $1.9 million of commercial loans, which amounted to 0.4% of the
Association's total loans.
6
Unlike mortgage loans, which generally are made on the basis of the borrower's
ability to make repayment from his or her employment, and which are secured by
real property whose value tends to be more easily ascertainable, commercial
loans are of higher risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial loans may be
substantially dependent on the success of the business itself. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.
Consumer Lending. Consumer loans at June 30, 1999 amounted to $72.5 million, or
15.4% of the Association's total loans, and consisted primarily of new and used
automobile loans, and to a lesser extent, home equity lines of credit and
secured and unsecured personal loans. Such loans are generally originated in
the Association's primary market area and generally are secured by real estate,
deposit accounts, personal property and automobiles. Approximately half of the
Association's automobile loans are made on used vehicles; the Association will
generally not make a loan on a vehicle manufactured before 1992. The average
automobile loan is for $13,000. The Association originates automobile loans
through an automobile dealer network, primarily composed of new car dealers
located in the Association's primary market area. The typical loan term is
sixty-six months. At June 30, 1999, personal loans (both secured and unsecured)
totaled $2.0 million and automobile loans totaled $53.2 million, or 11.3% of
total loans and 73.5% of consumer loans.
The Association also offers a variable rate home equity line of credit line
based on the applicant's income and equity in the home. Generally, the credit
line, when combined with the balance of the prior mortgage liens, may not exceed
95% of the appraised value of the property at the time of the loan commitment.
Home equity lines of credit are secured by a mortgage on the underlying real
estate. The Association holds the first mortgage on a substantial majority of
the properties securing such lines of credit. The Association presently charges
no origination fees for these loans. A borrower is required to make monthly
payments of principal and interest. At June 30, 1999, the Association had
outstanding home equity lines of credit of $17.2 million.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, collections on these loans are dependent on the borrower's
continuing financial stability and, therefore, are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans in the event of a default.
Sale of Mortgage Loans. During the year ended June 30, 1999, the Association
began selling one-to-four-family fixed rate mortgage loans to various secondary
market investors. The Association originated $5.3 million of fixed-rate
mortgages during fiscal year 1999 and recorded a gain of $73,000 on the sale of
$4.4 million of these loans. All loans that the Association sells are sold
servicing released.
Loan Approval Procedures and Authority. The Board of Directors of the
Association establishes the lending policies and loan approval limits of the
Association. As such, the Board of Directors has authorized certain officers of
the Association (the "designated officers") to consider and approve all loans
within their designated authority as established by the Board.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans up to $240,000 may be approved by any of the designated officers;
one- to four-family mortgage loans in excess of $240,000 and up to $400,000 may
be approved by two of the designated officers; one- to four-family mortgage
loans in excess of $400,000 to $750,000 must be approved by the Residential Loan
Committee plus one outside Board member; one- to four-family mortgage loans in
excess of $750,000 must be approved by the Directors' Loan Committee which is
comprised of three outside directors and the President. Secured consumer loans,
including home equity lines of credit, may be approved by any of the designated
officers up to $150,000. Consumer loans over $150,000 and up to $400,000 must
be approved by two of the designated officers. Commercial loans up to $200,000
may be approved by any designated officer with joint approval required for loans
from $200,000 to $400,000. Commercial loans between $400,000 and $1,000,000
must
7
be approved by two members of the Commercial Loan Committee plus one outside
Board member. Commercial loans greater than $1,000,000 must be approved by
the Directors' Loan Committee.
With respect to all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency. If necessary, additional financial information may be required. An
appraisal of real estate intended to secure a proposed loan generally is
required to be performed by the Association's "in-house" appraisers or outside
appraisers approved by the Association. The Board annually approves independent
appraisers used by the Association. The Association's policy is to obtain
hazard insurance on all mortgage loans and flood insurance when necessary and
the Association may require borrowers to make payments to a mortgage escrow
account for the payment of property taxes and insurance premiums.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies, Classified Assets and Real Estate Owned. Reports listing all
delinquent accounts are generated and reviewed by management on a monthly basis
and the Board of Directors performs a monthly review of all loans or lending
relationships delinquent 30 days or more. The procedures taken by the
Association with respect to delinquencies vary depending on the nature of the
loan, period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the
Association takes a number of steps to have the borrower cure the delinquency
and restore the loan to current status. The Association generally sends the
borrower a written notice of non-payment after the loan is first past due. The
Association's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment once a loan becomes 60 days past due. When
contact is made with the borrower at any time prior to foreclosure, the
Association will attempt to obtain full payment, offer to work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. Once the loan becomes 90 days past due, the Association notifies the
borrower in writing that if the loan is not brought current within two weeks,
the Association will commence foreclosure proceedings against any real property
that secured the loan. If a foreclosure action is instituted and the loan is
not brought current, paid in full, or refinanced before the foreclosure sale,
the property securing the loan generally is sold at foreclosure and, if
purchased by the Association, becomes real estate owned.
Federal regulations and the Association's internal policies require that the
Association utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Association currently
classifies problem and potential problem assets as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the distinct possibility that the Association will sustain some loss if the
deficiencies are not corrected. Assets classified as Doubtful have all of the
weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that there continuance as assets, without
the establishment of a specific loss reserve, is not warranted. Assets which do
not currently expose the Association to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When the Association classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Association classifies one or more
assets, or portions thereof, as Loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge off such amount.
The Association's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision (OTS) which can order the establishment of additional general or
specific loss allowances. The OTS, in conjunction with the other federal
banking agencies, recently adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate
8
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Association believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that regulators, in reviewing
the Association's loan portfolio, will not request the Association to materially
increase at that time its allowance for possible loan losses, thereby negatively
affecting the Association's financial condition and earnings at that time.
Although management believes that adequate specific and general loan loss
allowances have been established, future provisions are dependent upon future
events such as loan growth and portfolio diversification and, as such, further
additions to the level of specific and general loan loss allowances may become
necessary.
The Association reviews and classifies its assets on a quarterly basis and the
Board of Directors reviews the results of the reports on a quarterly basis. The
Association classifies its assets in accordance with the management guidelines
described above. At June 30, 1999, the Association had $2.0 million, or 0.27%,
of assets designated as Substandard, consisting primarily of mortgage loans
secured by single-family owner-occupied residences. Assets classified as
Doubtful totaled $224,000, consisting primarily of automobile loans, and assets
classified as Loss totaled $90,000 at June 30, 1999. At June 30, 1999, the
Association had $176,000, or 0.02%, of assets designated as Special Mention,
consisting primarily of mortgage loans. At June 30, 1999, these classified
assets totaled $2.5 million, representing 0.55% of loans receivable.
9
The following tables set forth delinquencies in the Association's loan
portfolio past due 30 days or more:
At June 30, 1999
------------------------------------------------------------
30-89 Days 90 Days or More
------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage loans 13 $ 864 37 $1,263
Consumer loans 103 999 45 311
Commercial loans 4 484 - -
---- ------ ------ ------
Total delinquent loans(1) 120 $2,347 82 $1,574
==== ====== ====== ======
Delinquent loans to total loans(1) 0.51% 0.34%
====== ======
At June 30, 1998
------------------------------------------------------------
30-89 Days 90 Days or More
------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage loans 39 $1,298 59 $1,673
Consumer loans 138 1,287 58 470
Commercial loans - - - -
---- ------ ------ ------
Total delinquent loans(1) 177 $2,585 117 $2,143
==== ====== ====== ======
Delinquent loans to total loans(1) 0.73% 0.60%
====== ======
At June 30, 1997
------------------------------------------------------------
30-89 Days 90 Days or More
------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage loans 51 $1,380 82 $1,767
Consumer loans 108 1,053 87 713
Commercial loans - - - -
---- ------ ------ ------
Total delinquent loans(1) 159 $2,433 169 $2,480
==== ====== ====== ======
Delinquent loans to total loans(1) 0.85% 0.86%
====== ======
____________________
(1) Total loans represent gross loans receivable less deferred loan fees and
loans in process.
10
Nonperforming Assets. The following table sets forth information regarding
nonperforming loans and REO. At June 30, 1999, the Association had no troubled-
debt restructured loans within the meaning of SFAS 15, and no REO properties
although the Association had 15 repossessed automobiles with a balance of
$208,000. It is the general policy of the Association to cease accruing
interest on loans 90 days or more past due when, in management's opinion, the
collection of all or a portion of the loan principal has become doubtful and to
fully reserve for all previously accrued interest. For the years ended June 30,
1999, 1998, 1997, 1996 and 1995 the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $90,000, $94,000,
$172,000, $109,000 and $88,000, respectively.
At June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(In thousands)
Nonperforming loans (1):
Real estate mortgage loans $1,263 $1,673 $1,767 $ 825 $ 665
Consumer loans 311 470 713 200 256
Commercial loans - - - 101 71
------ ------ ------ ------ -----
Total nonperforming loans 1,574 2,143 2,480 1,126 992
------ ------ ------ ------ -----
Repossessed automobiles 208 - - - -
Real estate owned, net - - - - -
------ ------ ------ ------ -----
Total nonperforming assets $1,782 $2,143 $2,480 $1,126 $ 992
====== ====== ====== ====== =====
Nonperforming loans as a percent of total loans (2) 0.34% 0.60% 0.86% 0.44% 0.41%
Nonperforming assets as a percent of total assets(3) 0.24 0.35 0.45 0.22 0.21
__________
(1) Nonperforming loans represent non-accrual loans. The Association had no
loans past due greater than 90 days still accruing.
(2) Loans represent loans receivable, net, excluding the allowance for loan
losses.
(3) Nonperforming assets consist of nonperforming loans, REO and repossessed
automobiles.
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for loan losses
based on management's on-going evaluation of the risks inherent in its loan
portfolio in consideration of the trends in its loan portfolio, the national and
regional economies and the real estate market in the Association's primary
lending area. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in its loan portfolio
which are deemed probable and estimable based on information currently known to
management. The Association's loan loss allowance determinations also
incorporate factors and analyses which consider the potential principal loss
associated with the loan, costs of acquiring the property securing the loan
through foreclosure or deed in lieu thereof, the periods of time involved with
the acquisition and sale of such property, and costs and expenses associated
with maintaining and holding the property until sale and the costs associated
with the Association's inability to utilize funds for other income producing
activities during the estimated holding period of the property.
As of June 30, 1999, the Association's allowance for loan losses was $3.6
million, or 0.8% of total loans and 230.2% of nonperforming loans as compared to
$3.0 million, or 0.9%, of total loans and 141.3% of nonperforming loans as of
June 30, 1998. The increased allowance for loan losses was due primarily to the
approximately 28% growth in total loans. The Association had total
nonperforming loans of $1.6 million at June 30, 1999, and nonperforming loans to
total loans of 0.3%. The Association will continue to monitor and modify its
allowance for loan losses as conditions dictate. Management believes that,
based on information currently available, the Association's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time.
11
The following table sets forth activity in the Association's allowance for loan
losses for the periods set forth in the table.
At or For the Years Ended June 30,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------------- -------------- -------------
(Dollars in thousands)
Balance at beginning of period $ 3,027 $ 1,723 $1,259 $ 1,186 $ 1,034
Provision for loan losses 1,062 1,779 590 238 313
Charge-offs:
Real estate mortgage loans:
One- to four-family 6 31 - - -
Consumer 536 484 138 236 205
Commercial - - - - -
------- ------- ------ ------- -------
Total charge-offs 542 515 138 236 205
Recoveries:
Real estate mortgage loans:
One- to four-family 1 2 3 - 12
Consumer 75 38 9 71 32
Commercial - - - - -
------- ------- ------ ------- -------
Total recoveries 76 40 12 71 44
------- ------- ------ ------- -------
Balance at end of period $ 3,623 $ 3,027 $1,723 $ 1,259 $ 1,186
======= ======= ====== ======= =======
Allowance for loan losses as a percent
of loans(1) 0.79% 0.85% 0.60% 0.49% 0.49%
Allowance for loan losses as a percent
of nonperforming loans(2) 230.23 141.25 69.48 111.81 119.56
Net charge-offs as a percent
of average loans 0.12 0.15 0.05 0.07 0.07
______________
(1) Loans receivable, net, excluding the allowance for loan losses.
(2) Nonperforming loans consist of all nonaccrual loans and all other loans 90
days or more past due.
12
The following tables set forth the Association's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of the
categories listed at the dates indicated.
At June 30,
---------------------------------------------------------------------------------
1990 1998
---------------------------------------- -------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
Real estate mortgage loans $1,976 54.54% 84.16% $1,458 48.17% 81.64%
Consumer loans 1,086 29.98 15.43 901 29.77 17.65
Commercial loans 19 0.52 0.41 9 0.30 0.71
Unallocated 542 14.96 -- 659 21.76 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses $3,623 100.00% 100.00% $3,027 100.00% 100.00%
====== ======= ======= ====== ======= =======
At June 30,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------- -------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
Real estate mortgage loans $ 911 52.87% 82.25% $ 836 66.40% 84.86%
Consumer loans 432 25.07 17.04 275 21.84 14.62
Commercial loans 7 0.41 0.71 11 0.87 0.52
Unallocated 373 21.65 -- 137 10.89 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,723 100.00% 100.00% $1,259 100.00% 100.00%
====== ======= ======= ====== ======= =======
At June 30,
-------------------------------------------
1995
-------------------------------------------
Percent of
Percent of Loans in
Allowance Each
to Total Category to
Amount Allowance Total Loans
------ --------- -----------
(Dollars in thousands)
Real estate mortgage loans $ 779 65.68% 82.74%
Consumer loans 286 24.11 16.63
Commercial loans 12 1.01 0.63
Unallocated 109 9.20 --
------ ------ ------
Total allowance for loan losses $1,186 100.00% 100.00%
====== ======= =======
13
Real Estate Owned. At June 30, 1999, the Association had no REO in its
portfolio. When the Association does acquire property through foreclosure or
deed in lieu of foreclosure, it is initially recorded at fair value of the
related assets at the date of foreclosure, less costs to sell. Any initial loss
is recorded as a charge to the allowance for loan losses before being
transferred to REO. Thereafter, if there is a further deterioration in value,
the Association provides for a specific valuation allowance and charges
operations for the diminution in value.
Investment Activities
The Board of Directors of the Association sets the investment policy and
procedures of the Company and the Association. This policy generally provides
that investment decisions will be made based on the safety of the investment,
liquidity requirements and, to a lesser extent, potential return on the
investments. In pursuing these objectives, the Company and the Association
consider the ability of an investment to provide earnings consistent with
factors of quality, maturity, marketability and risk diversification. While the
Board of Directors has final authority and responsibility for the securities
investment portfolio, the Association has established an Investment Committee
comprised of the Chief Executive Officer, the Chief Financial Officer and at
least one member of the Board of Directors to supervise investment activities.
A chief investment officer is appointed annually to oversee daily investment
activities. The Investment Committee meets quarterly and evaluates all
investment activities for safety and soundness, adherence to the Association's
investment policy, and assurance that authority levels are maintained.
The Association currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Similarly, the Association does not invest in
mortgage-related securities which are deemed to be "high risk," or purchase
bonds which are not rated investment grade.
On October 1, 1998, the Company adopted SFAS No, 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 allowed the Company a one-
time reclassification of securities held to maturity to classification as
available for sale or trading. The Association transferred securities with an
amortized cost of $27.0 million previously classified as held to maturity to
available for sale upon adoption. The unrealized gain on the securities
transferred totaled $260,000.
Mortgage-backed securities are created by the pooling of mortgages and issuance
of a security with an interest rate which is less than the interest rate on the
underlying mortgage. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages.
The issuers of such securities (generally U.S. Government agencies and
government-sponsored enterprises, including FNMA, FHLMC and GNMA) pool and
resell the participation interests in the form of securities to investors and
guarantee the payment of principal and interest. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of the
cost of payment guarantees and credit enhancements. In addition, mortgage-
backed securities are usually more liquid than individual mortgage loans and may
be used to collateralize certain liabilities and obligations of the Association.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. The Association estimates prepayments for its
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the mortgage-backed
securities at issue and current mortgage interest rates and to determine the
yield and estimated maturity of its mortgage-backed security portfolio excluding
FHLB stock. The actual maturity of a mortgage-backed security, however, may be
less than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Association may be subject to reinvestment risk
because, to the extent that the Association's mortgage-backed securities prepay
faster than anticipated, the Association may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.
14
Investment Securities. At June 30, 1999, the Association's investment
securities portfolio totaled $34.7 million. Such portfolio primarily consists
of short- to medium-term (maturities of one to five years) U.S. Treasuries,
agency securities and municipal obligations.
The following table sets forth the composition of the Association's investment
and mortgage-backed securities portfolios in dollar amounts and in percentages
at the dates indicated:
At June 30,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------- ---------------------------- -------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------
(Dollars in thousands)
Available for sale:
U.S. Government agencies $ 22,074 8.86% $ 15,797 6.60% $ 33,678 13.60%
Obligations of states and political subdivisions 6,694 2.69 853 0.36 838 0.34
FHLB stock 5,947 2.39 4,415 1.84 4,893 1.98
Marketable equity securities - - - - 2,980 1.20
-------- ------ -------- ------ -------- ------
Total investment securities 34,715 13.94 21,065 8.80 42,389 17.12
-------- ------ -------- ------ -------- ------
Mortgage-backed securities:
GNMA 45,389 18.22 37,714 15.75 39,823 16.09
FNMA 73,755 29.60 50,518 21.09 57,888 23.38
FHLMC 94,636 37.98 100,898 42.13 60,891 24.60
Other mortgage-backed securities 664 0.26 990 0.41 1,686 0.68
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities 214,444 86.06 190,120 79.38 160,288 64.75
-------- ------ -------- ------ -------- ------
Total securities available for sale $249,159 100.00% 211,185 88.18 202,677 81.87
======== -------- --------
Held to maturity:
U.S. Treasury securities - - 6,005 2.52 14,005 5.66
U.S. Government agencies - - 4,147 1.73 4,239 1.71
Obligations of states and political subdivisions - - 364 0.15 405 0.16
-------- ------ -------- ------
Total investment securities - - 10,516 4.40 18,649 7.53
-------- --------
Mortgage-backed securities:
GNMA - - 1,512 0.63 1,943 0.78
FNMA - - 16,267 6.79 24,283 9.82
-------- ------ -------- ------
Total mortgage-backed securities - - 17,779 7.42 26,226 10.60
-------- ------ -------- ------
Total securities held to maturity - - 28,295 11.82 44,875 18.13
-------- ------ -------- ------
Total securities $249,159 100.00% $239,480 100.00% $247,552 100.00%
======== ======== ====== ======== ======
15
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Association's
securities portfolio, excluding FHLB stock.
At June 30, 1999
------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------------------------------------------------------------------------------------
(Dollars in thousands)
Available for sale:
U.S. Government agencies $10,158 6.05% $11,916 5.24% $ - -%
Obligations of state and political subdivisions 336 8.41 3,219 7.68 3,139 7.07
Mortgage-backed securities:
GNMA - - - - 1,146 8.55
FNMA - - - - 18,211 6.33
FHLMC - - 3,566 7.30 12,507 6.47
Other mortgage-backed securities - - - - - -
------- ------- -------
Total securities available for sale $10,494 6.12 $18,701 6.05 $35,003 6.30
======= ======= =======
At June 30, 1999
---------------------------------------------------------
More than Ten Years Total
---------------------------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------------------------------------------------------
(Dollars in thousands)
Available for sale:
U.S. Government agencies $ - -% $ 22,074 5.61%
Obligations of state and political subdivisions - - 6,694 7.43
Mortgage-backed securities:
GNMA 44,243 6.81 45,389 6.85
FNMA 55,545 6.23 73,756 6.25
FHLMC 78,562 6.43 94,635 6.47
Other mortgage-backed securities 664 10.03 664 10.03
-------- -------- -------
Total securities available for sale $179,014 6.48 $243,212 6.40
======== ========
16
Sources of Funds
General. Deposits, loan repayments, cash flows generated from operations
(primarily cash basis net income) and FHLB advances are the primary sources of
the Association's funds for use in lending, investing and for other general
purposes.
Deposits. The Association offers a variety of deposit accounts with a range of
interest rates and terms. The Association's deposit accounts consist of
savings, retail checking/NOW accounts, business checking accounts, money market
accounts, club accounts and certificate of deposit accounts. The Association
offers jumbo certificates and also offers Individual Retirement Accounts
("IRAs") and other qualified plan accounts.
Although the Association has a significant portion of its deposits in core
deposits, management monitors activity on the Association's core deposits and,
based on historical experience and the Association's current pricing strategy,
believes it will continue to retain a large portion of such accounts. The
Association is not limited with respect to the rates it may offer on deposit
products.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Association's deposits are obtained predominantly from the areas in which its
branch offices are located. The Association relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions affect the Association's ability to attract and retain
deposits. The Association uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its primary market area. While jumbo certificates are
accepted by the Association, and may be subject to preferential rates, the
Association does not actively solicit such deposits as such deposits are more
difficult to retain than core deposits. The Association's policies do not
permit the use of brokered deposits.
17
The following table presents the deposit activity of the Association for
the periods indicated.
For the Years Ended
June 30,
-----------------------------------------------
1999 1998 1997
------------- ------------- --------------
(In thousands)
Beginning balance $435,462 $412,934 $391,715
Net deposits (withdrawals) (25,121) 2,579 2,538
Interest credited on deposit accounts 18,884 19,949 18,681
-------- -------- --------
Total increase (decrease] in deposit accounts (6,237) 22,528 21,219
-------- -------- --------
$429,225 $435,462 $412,934
Ending balance ======== ======== ========
At June 30, 1999, the Association had outstanding $50.9 million in certificate
of deposit accounts in amounts of $100,000 or more, maturing as follows:
Weighted
Maturity Period Amount Average Rate
- -------------------------------------------- ---------------- -------------------
(Dollars in thousands)
Three months or less $ 9,505 5.50%
Over three through six months 7,579 5.21
Over six through 12 months 17,874 5.41
Over 12 months 15,896 5.57
-------
Total $50,854 5.48
=======
18
The following table sets forth the distribution of the Association's deposit
accounts at June 30, 1999 and the distribution of the average deposit accounts
for the periods indicated and the weighted average interest rates on each
category of deposits presented.
At June 30, 1999 For the Year Ended June 30, 1999
----------------------------------- -----------------------------------
Percent Weighted Percent Weighted
of Total Average Average of Total Average
Balance Deposits Rate Balance Deposits Rate
------- --------- -------- ------- -------- ---------
(Dollars in thousands)
Noninterest bearing demand $ 5,740 1.34% -% $ 6,027 1.39% -%
NOW and money market 112,776 26.27 3.10 114,876 26.43 3.23
Savings 66,629 15.52 2.02 67,145 15.45 2.18
Certificates of deposit 244,080 56.87 5.26 246,584 56.73 5.56
-------- ------ -------- ------
Total deposits $429,225 100.00% 4.16 $434,632 100.00% 4.69
======== ====== ======== ======
For the Year Ended June 30, 1998 For the Year Ended June 30, 1997
----------------------------------- -----------------------------------
Percent Weighted Percent Weighted
Average of Total Average Average of Total Average
Balance Deposits Rate Balance Deposits Rate
------- --------- -------- ------- -------- ---------
(Dollars in thousands)
Noninterest bearing demand $ 4,560 1.08% -% $ 3,681 0.92% -%
NOW and money market 95,871 22.80 3.44 84,388 21.15 3.20
Savings 68,945 16.40 2.41 72,132 18.08 2.47
Certificates of deposit 251,130 59.72 5.93 238,859 59.85 5.87
-------- ------ -------- ------
Total deposits $420,506 100.00% 4.72 $399,060 100.00% 4.64
======== ====== ======== ======
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
Period to Maturity from June 30, 1999
--------------------------------------------------------------------------------
Less than One to Two to Three Three to Four to Over Five Total at June
One Year Two Years Years Four Years Five Years Years 30, 1999
--------- --------- ------------ -------- ---------- --------- -------------
(Dollars in thousands)
Certificate accounts:
0 to 4.00% $ 7,809 $ 67 $ 916 $1,787 $ - 1,098 $ 11,677
4.01 to 5.00% 46,291 13,861 4,224 656 148 790 65,970
5.01 to 6.00% 79,299 35,168 9,021 1,294 842 4,528 130,152
6.01 to 7.00% 17,011 3,226 1,609 527 485 9,686 32,544
7.01 to 8.00% 1,265 22 - - - 2 1,289
8.01 to 9.00% 2,448 - - - - - 2,448
-------- ------ ------ ------ ------ ------ --------
Total at June 30, 1999 $154,123 $52,344 $15,770 $4,264 $1,475 $16,104 $244,080
======= ======= ======= ====== ====== ======= ========
19
Borrowings. The Association's policy has been to utilize borrowings as an
alternative and/or less costly source of funds. The Association obtains
advances from the FHLB of Cincinnati, which are collateralized by the capital
stock of the Federal Home Loan Bank ("FHLB") of Cincinnati held by the
Association, and certain mortgage loans of the Association. The Association
also borrows funds through reverse repurchase agreements with the FHLB of
Cincinnati and primary broker/dealers. Advances from the FHLB of Cincinnati are
made pursuant to several different credit programs, each of which has its own
interest rate and maturity. The maximum amount that the FHLB of Cincinnati will
advance to member institutions, including the Association, for purposes of other
than meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB of Cincinnati and the OTS. The maximum amount of FHLB of
Cincinnati advances permitted to a member institution generally is reduced by
borrowings from any other source. At June 30, 1999, the Association's FHLB of
Cincinnati advances totaled $94.8 million.
During the year ended June 30, 1999, the Association continued to borrow funds
from primary broker/dealers. The borrowings are collateralized by designated
mortgage-backed securities and investment securities. The total of these
borrowings at June 30, 1999, was $54.4 million. The Association has the right
to freely substitute collateral as long as the margin is at least 95% of all
outstanding borrowings, including accrued interest. The Association has used
these repurchase agreements in arbitrage strategies, using the funds to purchase
a mix of fixed and adjustable rate mortgage-backed securities, to generate a
spread of approximately 100 to 120 basis points, as well as to help reduce the
Association's interest rate risk.
The Association also has an available overnight line-of-credit with the FHLB of
Cincinnati for a maximum of $50.0 million. There was no fee for the line-of-
credit for the year ended June 30, 1999. The Association may continue to
increase borrowings in the future to fund asset growth. To the extent it does
so, the Association may experience an increase in its cost of funds.
Personnel
As of June 30, 1999, the Association had 167 full-time employees and 31 part-
time employees. The employees are not represented by a collective bargaining
unit and the Association considers its relationship with its employees to be
good.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association will report their income on a June 30
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has been audited
by the IRS for the 1992 and 1993 tax years.
Bad Debt Reserve. Historically, savings institutions such as the Association
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which are deducted
in arriving at their taxable income. The Association's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Association's actual loss experience, or a percentage equal to 8% of the
Association's taxable income, computed with certain modifications and reduced by
the amount of any permitted addition to the non-qualifying reserve. Due to the
Association's loss experience, the Association generally recognized a bad debt
deduction equal to 8% of taxable income.
20
In August 1996, the provisions repealing the above thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Association has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Association's
bad debt deduction will be equal to net charge-offs. The new rules allow an
institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase and home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to a provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Association makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Association's taxable income. Non-dividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Association's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for the
Association. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Association makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Association. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Association over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses).
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Association as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
21
Ohio Taxation
The Company is subject to the Ohio corporation franchise tax, which, as applied
to the Company, is a tax measured by both net earnings and net worth. The rate
of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.9% of computed Ohio taxable income in excess of $50,000 and (ii)
0.582% times taxable net worth. Under these alternative measures of computing
tax liability, the states to which a taxpayer's adjusted total net income and
adjusted total net worth are apportioned or allocated are determined by complex
formulas. The minimum tax is $50 per year.
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequence of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In general,
tax liability will be the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 or (ii) 0.40% of taxable net worth. Under these alternative measures of
computing tax liability, the states to which total net income and total net
worth will be apportioned or allocated will continue to be determined by complex
formulas, but the formulas change. The minimum tax will still be $50 per year
and maximum tax liability as measured by net worth will be limited to $150,000
per year. The special litter taxes remain in effect. Various other changes in
the tax law may affect the Company.
The Association is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporation franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Association's
apportioned book net worth, determined in accordance with GAAP, less any
statutory deduction. This rate of tax is scheduled to decrease in each of the
years 1999 and 2000. As a "financial institution," the Association is not
subject to any tax based upon net income or net profits imposed by the State of
Ohio.
Delaware Taxation
As a Delaware holding company, the Company is exempted from Delaware corporate
income tax but is required to file an annual report with and pay an annual
franchise tax to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
REGULATION
General
The Association is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and the Federal Deposit Insurance
Corporation ("FDIC"), as the deposit insurer. The Association is a member of
the FHLB System. The Association's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Association must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Association's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies,
22
whether by the OTS, the FDIC or the Congress, could have a material adverse
impact on the Company, the Association and their operations. Under the holding
company form of organization, the Company is also required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS and
of the SEC under the federal securities laws.
Certain of the regulatory requirements applicable to the Association and to the
Company are referred to below.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1999, the Association was in compliance
with this regulation.
Qualified Thrift Lender Test. The HOLA requires savings institutions to meet a
qualified thrift lender ("QTL") test. Under the QTL test, a savings association
is required to qualify as a "domestic building and loan association" as that
term is defined in the Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least 9 months out of each 12-month period. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of June 30, 1999, the Association met
the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. Effective April 1, 1999, the OTS's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the OTS is required before (i) any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations, (ii) the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, (iii) the institution would be undercapitalized
following the distribution, or (iv) the distribution would otherwise be contrary
to a statute, regulation or agreement with the OTS. If an application is not
required, institutions in a holding company structure must still give advance
notice to the OTS of the capital distribution. If the Association's capital
fell below its regulatory requirements or if the OTS notified it that it was in
need of more than normal supervision, the Association's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution, which would otherwise be permitted by the
regulation, if the OTS determined that the distribution would be an unsafe or
unsound practice.
Liquidity. The Association is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. At June 30, 1999, the Association was in compliance
with the applicable regulatory liquidity requirements.
23
Assessments. Savings institutions are required by regulation to pay assessments
to the OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly Thrift Financial Report.
Branching. OTS regulations permit federally-chartered savings associations to
branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. A savings association
also is prohibited from extending credit to any affiliate engaged in activities
not permitted for a bank holding company and may not purchase the securities of
an affiliate (other than a subsidiary).
Section 22(h) of the FRA restricts a savings association with respect to loans
to directors, executive officers, and principal stockholders. Under Section
22(h), loans to directors, executive officers and stockholders who control,
directly or indirectly, 10% or more of voting securities of a savings
association, and certain related interests of any of the foregoing, may not
exceed, together with all other outstanding loans to such persons and affiliated
entities, the savings association's total capital and surplus. Section 22(h)
also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and shareholders who directly or
indirectly control 10% or more of voting securities of a stock savings
association, and their respective related interests, unless such loan is
approved in advance by a majority of the board of directors of the savings
association. Any "interested" director may not participate in the voting. The
loan amount (which includes all other outstanding loans to such person) as to
which such prior board of director approval is required, is the greater of
$25,000 or 5% of capital and surplus or any loans over $500,000. Further,
pursuant to Section 22(h), loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions to other persons except for extensions of credit made
pursuant to a benefit or compensation program that is widely available to the
institution's employees and does not give preference to insiders over other
employees. Section 22(g) of the FRA places additional limitations on loans to
executive officers.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring action against all
"institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establish criminal penalties for
certain violations.
24
Standards for Safety and Soundness. The FDI Act requires each federal banking
agency to prescribe for all insured depository institutions standards relating
to, among other things, internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") to implement these safety and
soundness standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; asset quality; earnings; and compensation, fees and benefits. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.
Capital Requirements. The OTS capital regulations require savings institutions
to meet three capital standards: a 1.5% tangible capital standard, a 3% leverage
(core capital) ratio and an 8% risk based capital standard. Effective April 1,
1999, however, the minimum leverage ratio increased to 4% for all institutions
except those with the highest rating on the CAMELS financial institutions rating
system. In addition, the prompt corrective action standards discussed below
also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest CAMELS rating),
and, together with the risk-based capital standard itself, a 4% Tier I risk-
based capital standard. Core capital is defined as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-weighting
for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based
25
on that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. For the present time, the OTS has deferred
implementation of the interest rate risk component.
At June 30, 1999, the Association met each of its capital requirements, in each
case on a fully phased-in basis.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has a total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 capital ratio that is less than 4.0% is considered to
be undercapitalized. A savings institution that has a total risk-based capital
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
Assessment rates for SAIF member institutions currently range from 0 basis
points to 27 basis points. The FDIC is authorized to raise the assessment rates
in certain circumstances. The FDIC has exercised this authority several times
in the past and may raise insurance premiums in the future. If such action is
taken by the FDIC, it could have an adverse effect on the earnings of the
Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act, as amended ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for
26
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The FIRREA amended the CRA to require the OTS to provide a written
evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system, which replaced the five-tiered numerical rating
system. The Association's latest CRA rating received from the OTS was
"Satisfactory."
Federal Home Loan Bank System
The Association is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement at June 30, 1999. FHLB advances must be
secured by specified types of collateral and all long-term advances may only be
obtained for the purpose of providing funds for residential housing finance. At
June 30, 1999, the Association had $94.8 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances to
their members. If dividends were reduced, the Association's net interest income
would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Association.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts. The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $47.8
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $47.8 million, the reserve
requirement is $1.4 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustment by the Federal Reserve Board) are
exempted from the reserve requirements. The Association is in compliance with
the foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a non-interest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the Federal Reserve Board, the
effect of this reserve requirement is to reduce the Association's interest-
earning assets. FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company within
the meaning of the HOLA. As such, the Company is subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Association must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Association continues
27
to be a QTL. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have treated
all savings and loan holding companies as bank holding companies and limit the
activities of such companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution, or holding company thereof, without prior
written approval of the OTS; from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Federal Securities Laws
The Company's Common Stock has been registered with the SEC under the Exchange
Act. The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of the Company's Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject
to the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Item 2. Properties
The Association owns its main office building. At June 30, 1999, the
Association owned three of its branch offices. The remaining eight branch
offices and all six of the loan production offices were leased. At June 30,
1999, the net book value of the Association's investment in premises, equipment
and leaseholds, excluding computer equipment and software, was approximately
$6.6 million.
On July 28, 1999, the Company announced plans to construct a new corporate
headquarters in Warren, OH. The Company had been evaluating alternatives to its
existing facility for several years and came to the
28
conclusion that a new facility would be needed to handle anticipated growth and
to provide efficiencies in operations. Final construction plans are still being
evaluated with no timetable established. Based on current designs, the new
facility is estimated to cost $11.9 million.
Item 3. Legal Proceedings
From time to time, the Association is involved either as a plaintiff or
defendant in various legal proceedings which arise during the normal course of
business. Currently, the Association is not involved in any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The information under the caption "Market Prices and Dividends Declared" in the
1999 Annual Report to Shareholders is attached hereto as part of Exhibit 13 and
is herein incorporated by reference.
Item 6. Selected Financial Data
The information contained in the Annual Report to Shareholders under the caption
"Selected Financial Data and Other Data" is attached hereto as part of Exhibit
13 and is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the Annual Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
attached hereto as part of Exhibit 13 and is herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the Annual Report under the caption "Asset and
Liability Management and Market Risk" is attached hereto as part of Exhibit 13
and is herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
See Item 14 of this report for information concerning financial statements and
schedules filed with this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Prior to the year ended June 30, 1998, the Association's financial statements
were audited by Packer, Thomas & Co. As a result of the Association's decision
to convert, the Association decided on June 29, 1998 to dismiss Packer, Thomas &
Co. and to engage Crowe, Chizek and Company LLP as the independent auditors of
the Association. The decision to change auditors was recommended by the Audit
Committee and was approved by the Board of Directors. Accordingly, the
statements of income, retained earnings and cash flows for the year ended June
30, 1997, were audited by Packer, Thomas & Co. The independent auditors' report
on the financial statements for the year ended June 30, 1997 did not contain an
adverse opinion and was not qualified or modified as to uncertainty, audit scope
or accounting principles.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Company and the Association
The following table sets forth certain information regarding executive officers
of the Company and the Association at June 30, 1999 who are not also directors.
Age at Positions Held with Company
Name June 30, 1999 and Association
---- ------------- ---------------------------
Richard K. Smith 41 Vice President and Treasurer of
the Company and Sr. Vice
President of the Association
Dominique K. Stoeber 35 Corporate Secretary of the
Company and Sr. Vice
President of the Association
R. Patrick Wilkinson 51 Sr. Vice President of the Association
Brian E. Hoopes 41 Sr. Vice President of the Association
James H. Ditch 52 Sr. Vice President of the Association
Richard K. Smith, a certified public accountant, joined the Association in 1990
as Assistant Vice President-Financial. In January 1995, he was named Vice
President-Treasurer. His primary areas of responsibility are overseeing
financial and regulatory reporting, investment policy, interest rate risk policy
and internal controls. Mr. Smith has Bachelor of Science degrees in Accounting
and Industrial Management from the University of Akron.
Dominique K. Stoeber joined the Association in 1990 as Personnel Manager. In
July 1992, she was promoted to Director of Human Resources. In December 1998,
she was made Senior Vice President of Administrative Services and was also
promoted to the position of Corporate Secretary of First Place Financial Corp.
Mrs. Stoeber has a Bachelor of Science degree in Human Resource Management from
Ohio State University.
R. Patrick Wilkinson has been with the Association since 1973. He served in
various positions until he was named Vice President of the Retail Division in
1987. His responsibilities are primarily to plan, develop and implement
policies and procedures in support of the Association's retail function,
including branch operations and general services.
Brian E. Hoopes joined the Association in August 1998 as Vice President-Banking
Systems. He was previously employed with Michelin Tire Corporation for the past
18 years in positions responsible for electronic data processing and financial
operations. His most recent position there was Project Manager for the
installation of a new financial software package in North America.
James H. Ditch joined the Association in November 1998 as Sr. Vice President-
Lending and is responsible for all areas of lending. Prior to joining the
Association, he was Senior Vice President of Lending with Signal Bank (formerly
known as First Federal Savings and Loan Association of Wooster) where he had
worked for 26 years. Mr. Ditch has a Bachelor of Business Administration degree
from Ohio University.
30
Directors of the Company and the Association
Information concerning Directors of the Company and the Association is
incorporated herein by reference from the definitive Proxy Statement for the
1999 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission on September 30, 1999.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission on
September 30, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission on September 30, 1999.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
1999 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission on September 30, 1999.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1999, is incorporated by reference in
this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual Report Section Annual Report
- --------------------- -------------
Selected Financial Data and Other Data 1-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-12
Independent Auditors' Report 13
Consolidated Statements of Financial Condition as of
June 30, 1999 and 1998 14
Consolidated Statements of Income for Years Ended
June 30, 1999, 1998 and 1997 15
Consolidated Statements of Changes in Shareholders'
Equity for Years Ended June 30, 1999, 1998 and 1997 16
Consolidated Statements of Cash Flows for Years Ended
June 30, 1999, 1998 and 1997 17-18
Notes to Consolidated Financial Statements 19-36
31
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1999, is not deemed filed as
part of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Consolidated Financial Statements.
(a) (3) Exhibits
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Herein
- ----------- -------- -------------------------
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(i) Articles of Incorporation *
3(ii) Bylaws *
4 Instruments defining the rights of security holders,
including indentures *
9 Voting trust agreement None
10 Material contracts
Executive Compensation Plans and Arrangements *
Employment Contracts *
11 Statement re: computation of per share earnings None
13 Portions of the 1999 Annual Report to stockholders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
20 Proxy Statement for 1999 Annual Meeting of Stockholders **
21 Subsidiaries of registrant 21
22 Published report regarding matters submitted to vote
of security holders None
23 Consents of experts and counsel None
27 Financial Data Schedule 27
* Filed as exhibits to the Company's Form S-1 registration statement filed on
September 9, 1998 (File No. 333-63099) pursuant to the Securities Act of 1933,
as amended. All of such previously filed documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
** Incorporated by reference to the Proxy Statement, to be filed with the
Securities and Exchange Commission on September 30, 1999.
(b) Reports on Form 8-K
During the quarter ended on June 30, 1999, the Company filed a report on
Form 8-K on April 22, 1999, announcing third quarter earnings. On June 30,
1999, the Company filed a report on Form 8-K to declare its first quarterly
dividend.
32
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
First Place Financial
By: /s/ Steven R. Lewis
Steven R. Lewis, President and
------------------------------------
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/ Steven R. Lewis /s/ Richard K. Smith
- ----------------------------------- ------------------------------------
Steven R. Lewis, President, Richard K. Smith, Vice President and
Chief Executive Officer and Director Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: September 23, 1999 Date: September 23, 1999
/s/ George J. Gentithes /s/ Robert S. McGeough
- ----------------------------------- ------------------------------------
George J. Gentithes, Director Robert S. McGeough, Director
Date: September 23, 1999 Date: September 23, 1999
/s/ Robert P. Grace /s/ E. Jeffrey Rossi
- ----------------------------------- ------------------------------------
Robert P. Grace, Director E. Jeffrey Rossi, Director
Date: September 23, 1999 Date: September 23, 1999
/s/ Thomas M. Humphries /s/ Paul A. Watson
- ----------------------------------- ------------------------------------
Thomas M. Humphries, Director Paul A. Watson, Chairman of the Board
Date: September 23, 1999 Date: September 23, 1999
/s/ William W. Watson
------------------------------------
William W. Watson, Director
Date: September 23, 1999
33