Attached files

file filename
EX-8 - EXHIBIT 8 - Versailles Financial Corpdex8.htm
EX-3.1 - EXHIBIT 3.1 - Versailles Financial Corpdex31.htm
EX-3.2 - EXHIBIT 3.2 - Versailles Financial Corpdex32.htm
EX-1.2 - EXHIBIT 1.2 - Versailles Financial Corpdex12.htm
EX-2.1 - EXHIBIT 2.1 - Versailles Financial Corpdex21.htm
EX-10.9 - EXHIBIT 10.9 - Versailles Financial Corpdex109.htm
EX-10.8 - EXHIBIT 10.8 - Versailles Financial Corpdex108.htm
EX-23.2 - EXHIBIT 23.2 - Versailles Financial Corpdex232.htm
EX-10.7 - EXHIBIT 10.7 - Versailles Financial Corpdex107.htm
Table of Contents

As filed with the Securities and Exchange Commission on November 3, 2009

Registration No. 333-161968

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

PRE-EFFECTIVE AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Versailles Financial Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   6712   Being applied for

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

27 East Main Street

Versailles, Ohio 45380

(937) 526-4515

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Mr. Douglas P. Ahlers

President and Chief Executive Officer

27 East Main Street

Versailles, Ohio 45380

(937) 526-4515

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Kip A. Weissman

Richard S. Garabedian

Luse Gorman Pomerenk & Schick, P.C.

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    x

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered

 

Proposed

maximum
offering price

per share

 

Proposed

maximum

aggregate

offering price

  Amount of
registration fee

Common Stock, $0.01 par value per share

  661,250 shares   $10.00   $6,612,500(1)   $369 (2)
 
 
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid $369.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

PROSPECTUS

VERSAILLES FINANCIAL CORPORATION

(Proposed Holding Company for Versailles Savings and Loan Company)

Up to 575,000 Shares of Common Stock

Versailles Financial Corporation, a Maryland corporation, is offering shares of common stock for sale in connection with the conversion of Versailles Savings and Loan Company, an Ohio chartered savings and loan association, from the mutual to the stock form of organization. All shares of common stock are being offered for sale at a price of $10.00 per share. We expect that our common stock will be traded on the OTC Bulletin Board, upon conclusion of the stock offering. There is currently no public market for the shares of our common stock.

We are offering up to 575,000 shares of common stock for sale on a best efforts basis. We may sell up to 661,250 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. We must sell a minimum of 425,000 shares in order to complete the offering.

We are offering the shares of common stock in a “subscription offering.” Depositors of Versailles Savings and Loan Company with aggregate account balances of at least $50 as of the close of business on December 31, 2007 will have first priority rights to buy our shares of common stock. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering.” We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” managed by Keefe, Bruyette & Woods, Inc.

The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be ordered through a single qualifying account is 15,000 shares, and no person by himself or with an associate or group of persons acting in concert may purchase more than 30,000 shares. The offering is expected to expire at 12:00 p.m., Eastern time, on December 15, 2009. We may extend this expiration date without notice to you until January 29, 2010, or such later date as the Ohio Division of Financial Institutions and the Office of Thrift Supervision may approve, which may not be beyond December 21, 2011. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond January 29, 2010, or the number of shares of common stock to be sold is increased to more than 661,250 shares or decreased to fewer than 425,000 shares. If the offering is extended beyond January 29, 2010, or if the number of shares of common stock to be sold is increased to more than 661,250 shares or decreased to fewer than 425,000 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. Funds received during the offering will be held in a segregated account at Versailles Savings and Loan Company, or, in our discretion, at another insured depository institution, and will earn interest at 0.1%, which is our current passbook savings rate.

Keefe, Bruyette & Woods, Inc. will assist us in selling our shares of common stock on a best efforts basis. Keefe, Bruyette & Woods, Inc. is not required to purchase any shares of the common stock that are being offered. Purchasers will not pay a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods, Inc. has advised us that following the offering it intends to make a market in the common stock, but is under no obligation to do so.

This investment involves a degree of risk, including the possible loss of your investment. Please read “Risk Factors” beginning on page 18.

 

 

OFFERING SUMMARY

Price: $10.00 per Share

 

     Minimum    Maximum    Adjusted Maximum

Number of shares

     425,000      575,000      661,250

Gross offering proceeds

   $ 4,250,000    $ 5,750,000    $ 6,612,500

Estimated offering expenses (excluding selling agent fees and expenses)

   $ 427,500    $ 427,500    $ 427,500

Estimated selling agent fees and expenses(1)

   $ 172,500    $ 172,500    $ 172,500

Estimated net proceeds

   $ 3,650,000    $ 5,150,000    $ 6,012,500

Estimated net proceeds per share

   $ 8.59    $ 8.96    $ 9.09

 

(1) See “The Conversion—Marketing and Distribution; Compensation” for a discussion of Keefe, Bruyette & Woods, Inc.’s compensation for this offering.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Ohio Division of Financial Institutions, the Securities and Exchange Commission, the Office of Thrift Supervision, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

For assistance, please call the Stock Information Center, toll free at (877) 860-2091.

KEEFE, BRUYETTE & WOODS

The date of this prospectus is [prospectus date].


Table of Contents

[MAP SHOWING MARKET AREA APPEARS ON INSIDE FRONT COVER]


Table of Contents

TABLE OF CONTENTS

 

     Page

SUMMARY

   1

RISK FACTORS

   18

SELECTED FINANCIAL AND OTHER DATA

   29

RECENT DEVELOPMENTS

   31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS

   33

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

   36

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

   37

OUR POLICY REGARDING DIVIDENDS

   39

MARKET FOR THE COMMON STOCK

   40

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

   41

CAPITALIZATION

   42

PRO FORMA DATA

   43

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VERSAILLES SAVINGS AND LOAN COMPANY

   47

BUSINESS OF VERSAILLES FINANCIAL CORPORATION

   65

BUSINESS OF VERSAILLES SAVINGS AND LOAN COMPANY

   66

TAXATION

   90

SUPERVISION AND REGULATION

   91

MANAGEMENT OF VERSAILLES FINANCIAL CORPORATION

   103

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

   117

THE CONVERSION

   118

RESTRICTIONS ON ACQUISITION OF VERSAILLES FINANCIAL CORPORATION

   142

DESCRIPTION OF CAPITAL STOCK

   149

TRANSFER AGENT

   150

EXPERTS

   150

LEGAL MATTERS

   152

WHERE YOU CAN FIND ADDITIONAL INFORMATION

   152

INDEX TO FINANCIAL STATEMENTS OF VERSAILLES SAVINGS AND LOAN COMPANY

   F-1

 

i


Table of Contents

SUMMARY

The following summary highlights material information in this prospectus. It may not contain all the information that is important to you. For additional information, you should read this entire prospectus carefully, including the Financial Statements and the notes to the Financial Statements.

In this prospectus, the terms “we, “our,” and “us” refer to Versailles Financial Corporation and Versailles Savings and Loan Company unless the context indicates another meaning.

Versailles Savings and Loan Company

Versailles Savings and Loan Company, which we sometimes refer to as Versailles Savings, is an Ohio chartered savings and loan company headquartered in Versailles, Ohio. Versailles Savings and Loan Company was originally chartered in 1887.

Versailles Savings and Loan Company’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in first lien one- to four-family mortgage loans and, to a lesser extent, non-residential real estate loans, including farm loans; consumer loans consisting primarily of automobile loans; commercial business loans and other loans. We also invest in investment securities, primarily consisting of residential mortgage-backed United States government agency securities and mutual funds. Versailles Savings offers a variety of deposit accounts, including savings accounts and certificates of deposit. We provide financial services to individuals, families and businesses through our banking office located in Versailles, Ohio.

Versailles Savings and Loan Company had total assets of $40.8 million, total loans of $34.4 million, total liabilities of $33.4 million, including total deposits of $24.6 million, and equity of $7.4 million as of June 30, 2009. At that date, 66.1% of our assets were one- to four-family residential mortgage loans, 14.3% were non-residential real estate loans, and 2.8% were mortgage-backed securities.

Versailles Savings and Loan Company’s executive and banking offices are located at 27 E. Main Street, Versailles, Ohio 45380. Our telephone number at this address is (937) 526-4515.

Versailles Financial Corporation

Versailles Financial Corporation is a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Versailles Savings upon completion of the mutual-to-stock conversion and the offering. Versailles Financial Corporation has not engaged in any business to date.

Our executive offices are located at 27 E. Main Street, Versailles, Ohio 45380. Our telephone number at this address is (937) 526-4515.

 

 

1


Table of Contents

Our Organizational Structure

Versailles Savings and Loan Company is an Ohio chartered mutual savings and loan association that has no stockholders. Pursuant to the terms of Versailles Savings and Loan Company’s plan of conversion, Versailles Savings and Loan Company will convert from the mutual to the stock form of ownership. As part of the conversion, we are offering for sale in a subscription offering, and, potentially, a community offering and a syndicated community offering, shares of common stock of Versailles Financial Corporation. Upon the completion of the conversion and offering, Versailles Savings will be a wholly owned subsidiary of Versailles Financial Corporation.

Business Strategy

Our business strategy focuses on:

 

   

emphasizing the origination of one- to four-family residential mortgage loans;

 

   

increasing non-residential real estate lending;

 

   

managing interest rate risk;

 

   

establishing a new larger home office;

 

   

introducing new deposit products; and

 

   

maintaining our conservative underwriting guidelines with a goal of maintaining strong asset quality.

A full description of our products and services begins on page 58 of this prospectus under the heading “Business of Versailles Savings and Loan Company.”

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.

Reasons for the Conversion

Our primary reasons for converting and raising additional capital through the offering are:

 

   

to support our internal growth through lending in communities we serve or may serve in the future;

 

 

2


Table of Contents
   

to support the introduction of new financial products and services to enhance our competitive position and customer experience;

 

   

to provide better capital management tools, including the ability to pay dividends and to repurchase shares of our common stock, subject to market conditions and the judgment of our board;

 

   

to retain and attract qualified personnel by establishing stock-based benefit plans for management and employees; and

 

   

to provide additional financial resources to build or acquire a new, larger home office facility.

We believe that the additional capital raised in the offering may enable us to take advantage of business opportunities that may not otherwise be available to us. As of June 30, 2009, Versailles Savings and Loan Company was considered “well capitalized” for regulatory purposes and is not subject to a directive or a recommendation from the Ohio Division of Financial Institutions or the Office of Thrift Supervision to raise capital.

Terms of the Conversion and the Offering

Under Versailles Savings and Loan Company’s plan of conversion, our organization will convert to a fully public stock holding company structure. In connection with the conversion, we are offering between 425,000 and 575,000 shares of common stock of Versailles Financial Corporation to eligible depositors of Versailles Savings and Loan Company, to our employee benefit plans and, to the extent shares remain available, to the general public. The number of shares of common stock to be sold may be increased to up to 661,250 as a result of demand for the shares or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 661,250 or decreased to less than 425,000, or the offering is extended beyond January 29, 2010, subscribers will not have the opportunity to change or cancel their stock orders.

The purchase price of each share of common stock to be issued in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods, Inc., our marketing advisor in the offering, will use its best efforts to assist us in selling shares of our common stock. Keefe, Bruyette & Woods, Inc. is not obligated to purchase any shares of common stock in the offering.

Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock in a “subscription offering” in the following descending order of priority:

 

   

First, to depositors of Versailles Savings and Loan Company with aggregate account balances of at least $50 as of the close of business on December 31, 2007.

 

 

3


Table of Contents
   

Second, to Versailles Savings and Loan Company’s tax-qualified employee benefit plans.

 

   

Third, to depositors of Versailles Savings and Loan Company with aggregate account balances of at least $50 as of the close of business on September 30, 2009.

 

   

Fourth, to depositors of Versailles Savings and Loan Company as of October 31, 2009.

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering,” with a preference given to natural persons residing in Darke and Shelby Counties, Ohio. The community offering may begin concurrently with, during or promptly after the subscription offering as we may determine at any time. If shares remain available for sale following the subscription offering or community offering, we also may offer for sale shares of common stock through a “syndicated community offering” managed by Keefe, Bruyette & Woods, Inc.

We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering. We have not established any set criteria for determining whether to accept or reject a purchase order in the community offering or the syndicated community offering, and, accordingly, any determination to accept or reject purchase orders in the community offering and the syndicated community offering will be based on the facts and circumstances known to us at the time.

To ensure a proper allocation of stock, each subscriber eligible to purchase stock in the subscription offering must list on his or her stock order and certification form all deposit accounts in which he or she had an ownership interest at December 31, 2007, September 30, 2009 or October 31, 2009, as applicable. Failure to list all accounts, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order forms will be final.

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first to subscribers in the subscription offering in the order of priority. A detailed description of share allocation procedures can be found in the section entitled “The Conversion.”

How We Determined the Offering Range

The amount of common stock that we are offering is based on an independent appraisal of the estimated market value of Versailles Financial Corporation, assuming the conversion and the offering are completed. Keller & Company, Inc., our independent appraiser, has estimated that, as of August 19, 2009, this market value ranged from $4.3 million to $5.8 million, with a midpoint of $5.0 million. The market value at the midpoint of the range is based upon the independent appraisal provided by Keller & Company, Inc. The market value range is derived

 

 

4


Table of Contents

from the midpoint in accordance with requirements of the Office of Thrift Supervision. The offering range was determined through this independent appraisal process and the role of the Board of Directors of Versailles Financial Corporation is limited to reviewing the appraisal, establishing the per share price and either approving or not accepting the appraisal. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 425,000 shares to 575,000 shares. The $10.00 per share price was selected by the board of directors primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.

The appraisal is based in part on our financial condition and results of operations, the effect of the additional capital raised by the sale of shares of common stock in the offering and an analysis of a peer group of 10 publicly traded savings bank and thrift holding companies that Keller & Company, Inc. considered comparable to us.

The appraisal peer group consists of the following companies.

 

Company Name and Ticker Symbol

  

Exchange

  

Headquarters

   Total Assets1
               (in thousands)

BCSB Bancorp, Inc. (BCBS)

  

NASDAQ

  

Baltimore, MD

   $ 587,076

Central Bancorp, Inc. (CEBK)

  

NASDAQ

  

Somerville, MA

     560,108

Central Federal Corp (CFBK)

  

NASDAQ

  

Fairlawn, OH

     288,402

Citizens Community Bancorp, Inc. (CZWI)

  

NASDAQ

  

Eau Claire, WI

     546,694

FFD Financial Corp (FFDF)

  

NASDAQ

  

Dover, OH

     189,014

First Advantage Bancorp (FABK)

  

NASDAQ

  

Clarksville, TN

     350,285

First Keystone Financial, Inc. (FKFS)

  

NASDAQ

  

Media, PA

     525,376

Liberty Bancorp, Inc, (LBCP)

  

NASDAQ

  

Liberty, MO

     384,243

Wayne Savings Bancshares, Inc. (WAYN)

  

NASDAQ

  

Wooster, OH

     404,079

WVS Financial Corp. (WVFC)

  

NASDAQ

  

Pittsburg, PA

     419,434

 

1. At June 30, 2009.

The following table presents a summary of selected pricing ratios for Versailles Financial Corporation and the peer group companies identified by Keller & Company, Inc. Ratios are based on core earnings for the twelve months ended June 30, 2009 and book value as of June 30, 2009. Core earnings, for purposes of the appraisal, are defined as net earnings after taxes, excluding the after-tax portion of income from nonrecurring items. Tangible book value is total equity, less intangible assets. Compared to the average pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 6.28% on a price-to-core-earnings basis, a discount of 21.21% on a price-to-book value basis and a discount of 25.08% on a price-to-tangible book value basis. The price-to-book and price-to-tangible book ratios result from our generally having higher levels of equity than the companies in the peer group on a pro forma basis. The price ratios also reflect recent volatile market conditions, particularly for stock of financial institution holding companies, and the effect of such conditions on the trading market for recent mutual-to-stock conversions. Our Board of Directors, in reviewing and approving the valuation, considered the range of price-to-core earnings multiples and the range of price-to-book value ratios and price-to-tangible book value ratios at the different amounts of shares to be sold in the offering. It was the opinion of the Board of Directors that the

 

 

5


Table of Contents

discounts applied to the range of price-to-core earnings multiples and the range of price-to-book value ratios and price-to-tangible book value ratios of the peer group to our pro forma multiples and ratios were reasonable in the context of our size, financial condition and operating performance relative to the peer group, under the current economic environment and market conditions. The appraisal did not consider one valuation approach to be more important than the others.

 

    Price-to-core
earnings multiple
  Price-to-book
value ratio
    Price-to-tangible
book value ratio
 

Versailles Financial Corporation (pro forma)

     

Maximum, as adjusted

  34.12x   52.49   52.49

Maximum

  28.48x   48.57   48.57

Midpoint

  23.94x   44.73   43.14

Minimum

  19.68x   40.40   40.40

Valuation of peer group companies using stock prices as of August 19, 2009

     

Average

  30.39x   61.64   62.66

Median

  15.26x   55.83   61.95

Keller & Company, Inc. advised the Board of Directors that the appraisal was prepared in conformance with the regulatory appraisal methodology. That methodology requires a valuation based on an analysis of the trading prices of comparable public companies whose stocks have traded for at least one year prior to the valuation date, and as a result of this analysis, Keller & Company, Inc. determined that our pro forma price-to-core earnings ratios were higher than the peer group companies and our pro forma price-to-book and price-to-tangible book ratios were lower than the peer group companies. Historically, the most frequently used method for determining the pro forma market value of common stock for thrift institutions by this firm has been the price-to-book value ratio method, due to the volatility of earnings in the thrift industry. As earnings in the thrift industry have decreased in 2008 and 2009, even more emphasis has been placed on the price-to-book method. In determining the pro forma market value of Versailles Financial Corporation, primary emphasis has been placed on the price-to-book value method, with secondary focus on the price-to-core earnings method, recognizing the corporation’s more stable earnings relative to the industry. The price-to-assets method is used less often for valuing ongoing institutions, but becomes more useful in valuing converting institutions when the equity position and earnings performance of the institutions under consideration are different. For each of the valuation methods used in the appraisal, Keller & Company, Inc., applied the adjustments to our pro forma market value discussed and determined in the appraisal. Downward adjustments were made for the liquidity of our stock, dividends, market area, subscription interest and the market of the issue. No adjustments were made for our earning performance, asset, loan and deposit growth or management. An upward adjustment was made for our financial condition. See “—How We Determined the Offering Range.”

Our Board of Directors carefully reviewed the information provided to it by Keller & Company, Inc. through the appraisal process, but did not make any determination regarding whether prior standard mutual-to-stock conversions have been undervalued, nor did the board

 

 

6


Table of Contents

draw any conclusions regarding how the historical data reflected above may affect Versailles Financial Corporation’s appraisal. Instead, we engaged Keller & Company, Inc. to help us understand the regulatory process as it applies to the appraisal and to advise the Board of Directors as to how much capital Versailles Financial Corporation would be required to raise under the regulatory appraisal guidelines.

The independent appraisal does not indicate per share market value. Do not assume or expect that the valuation of Versailles Financial Corporation as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price. Furthermore, the pricing ratios presented above were utilized by Keller & Company, Inc. to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

The independent appraisal will be updated prior to the completion of the conversion. If the appraised value decreases below $4.3 million or increases above $6.6 million, subscribers may be resolicited with the approval of the Ohio Division of Financial Institutions and the Office of Thrift Supervision and be given the opportunity to change or cancel their orders. If you do not respond, we will cancel your stock order and return your subscription funds, with interest, and cancel any authorization to withdraw funds from your deposit accounts for the purchase of shares of common stock. For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion—Determination of Share Price and Number of Shares to be Issued.”

After-Market Stock Price Performance Provided by Independent Appraiser

The following table presents stock price appreciation information for all standard mutual-to-stock conversions completed between January 1, 2008 and August 19, 2009. These companies did not constitute the group of 10 comparable public companies utilized in Keller & Company, Inc.’s valuation analysis.

Mutual-to-Stock Conversion Offerings with Closing Dates

between January 1, 2008 and August 19, 2009

 

               Percentage Price Appreciation (Depreciation)
From Initial Trading Date
 

Company Name and Ticker Symbol

   Conversion
Date
   Exchange    One Day     One Week     One Month     Through August 19,
2009
 
               %     %     %     %  

Territorial Bancorp Inc. (TBNK)

   7/13/09    NASDAQ    49.90      47.50      48.00      56.00   

St. Joseph Bancorp, Inc. (SJBA)1

   2/2/2009    OTCBB    0.00      0.00      0.00      0.00   

Hibernia Homestead Bancorp, Inc. (HIBE)

   1/28/2009    OTCBB    0.00      5.00      5.00      40.00   

First Savings Financial Group, Inc. (FSFG)

   10/7/2008    NASDAQ    (1.00   (0.10   (8.00   1.90   

Home Bancorp, Inc. (HBCP)

   10/3/2008    NASDAQ    14.90      9.20      2.40      24.00   

Cape Bancorp, Inc. (CBNJ)

   2/1/2008    NASDAQ    0.50      0.10      (3.00   (13.00

Danvers Bancorp, Inc. (DNBK)

   1/10/2008    NASDAQ    (2.60   (3.10   2.60      27.10   

Average

               19.43   

Median

               24.00   

 

1 There were no reported trades during these periods that affected the initial offering price at the dates indicated.

 

 

7


Table of Contents

Stock price appreciation is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the company’s assets, and the company’s market area. In its discussions with our Board of Directors, Keller & Company, Inc. noted that during the past year, market conditions in general and for publicly-traded financial institution stocks in particular have declined significantly. Specifically, during the past year, the average price-to-book value ratio and average price-to-tangible book value ratio for publicly-traded thrift institution stocks have declined approximately 19 percent and 21 percent, respectively; and the average price per share for publicly-traded thrift institution stocks has declined by approximately 24 percent. This decline is a reflection of the instability of the financial markets that began in late 2008 and continued into the first half of 2009. This instability affected the number of institutions seeking to accomplish a mutual to stock conversion. For example, for the previous comparable period (January 1, 2007 to August 19, 2008), there were 18 mutual to stock conversions that were completed. The easing of the financial crisis in the second half of 2009 is reflected in the table as some of the institutions began to show price appreciation. The companies listed in the table above may not be similar to Versailles Financial Corporation, the pricing ratios for their stock offerings were in some cases different from the pricing ratios for Versailles Financial Corporation’s common stock and the market conditions in which these offerings were completed were, in some cases, different from current market conditions. Any or all of these differences may cause our stock to perform differently from these other offerings.

There can be no assurance that our stock price will not trade below $10.00 per share, as has been the case for many mutual-to-stock conversions. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled “Risk Factors” beginning on page 17.

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25 shares. Generally, no individual, or individuals exercising subscription rights through a single qualifying account held jointly, may purchase more than 15,000 shares ($150,000) of common stock. If any of the following persons purchases shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 30,000 shares ($300,000):

 

   

your spouse or relatives of you or your spouse living in your house;

 

   

most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior management position; or

 

   

other persons who may be your associates or persons acting in concert with you.

 

 

8


Table of Contents

See the detailed descriptions of “acting in concert” and “associate” in “The Conversion—Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock

In the subscription offering and community offering, you may pay for your shares only by:

 

   

personal check, bank check or money order, made payable to Versailles Financial Corporation; or

 

   

authorizing us to withdraw funds from the types of Versailles Savings and Loan Company deposit accounts permitted on the stock order and certification form.

Versailles Savings and Loan Company is not permitted to knowingly lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use a check drawn on a Versailles Savings and Loan Company line of credit or a third-party check to pay for shares of common stock.

You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order and certification form, together with full payment or authorization to withdraw from one or more of your Versailles Savings deposit accounts, so that it is received (not postmarked) before 12:00 p.m., Eastern time, on December 15, 2009, which is the expiration of the offering period. For orders paid for by check or money order, the funds will be cashed promptly and held in a segregated account at Versailles Savings and Loan Company, or in our discretion at another insured depository institution. We will pay interest on those funds calculated at Versailles Savings and Loan Company’s current passbook savings rate from the date funds are received until completion or termination of the conversion and the offering. Withdrawals from certificates of deposit to purchase shares of common stock in the offering may be made without incurring an early withdrawal penalty; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will be transferred to a savings account and earn interest at our passbook savings rate subsequent to the withdrawal. All funds authorized for withdrawal from deposit accounts with Versailles Savings must be in the accounts at the time the stock order is received. However, funds will not be withdrawn from the accounts until the completion of the conversion and offering and will earn interest at the applicable deposit account rate until that time. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. After we receive your order, your order cannot be changed or canceled unless the number of shares of common stock to be offered is increased to more than 661,250 shares or decreased to fewer than 425,000 shares, or the offering is extended beyond January 29, 2010.

By signing the stock order and certification form, you are acknowledging receipt of a prospectus and that the shares of common stock are not deposits or savings accounts that are federally insured or otherwise guaranteed by Versailles Financial Corporation, Versailles Savings and Loan Company, the Federal Deposit Insurance Corporation or any other government agency.

 

 

9


Table of Contents

You may be able to subscribe for shares of common stock using funds in your individual retirement account, or IRA. However, shares of common stock must be purchased through and held in a self-directed retirement account, such as those offered by a brokerage firm. By regulation, Versailles Savings and Loan Company’s individual retirement accounts are not self-directed, so they cannot be used to purchase or hold shares of our common stock. If you wish to use some or all of the funds in your Versailles Savings individual retirement account to purchase our common stock, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. It will take time to transfer your Versailles Savings individual retirement account to an independent trustee, so please allow yourself sufficient time to take this action. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the December 15, 2009 expiration of the offering period, for assistance with purchases using your Versailles Savings individual retirement account or any other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on time constraints and, possibly, limitations imposed by the brokerage firm or institution where the funds are held.

Delivery of Stock Certificates

Certificates representing shares of common stock sold in the offering will be mailed to the persons entitled thereto at the certificate registration address noted by them on the order form, as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. It is possible that, until certificates for the common stock are delivered, purchasers might not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading.

How We Intend to Use the Proceeds From the Offering

Assuming we sell 575,000 shares of common stock in the stock offering at the maximum of the offering range, and we have net proceeds of $5.2 million, we intend to distribute the net proceeds as follows:

 

   

$2.6 million (50.0% of the net proceeds) will be invested in Versailles Savings and Loan Company;

 

   

$460,000 (8.0% of the gross proceeds) will be loaned to our employee stock ownership plan to fund its purchase of our shares of common stock; and

 

 

10


Table of Contents
   

$2.1 million (50% of the net proceeds remaining after funding the loan to the employee stock ownership plan) will be retained by Versailles Financial Corporation.

We may use the funds we retain for investments, to pay cash dividends, to repurchase shares of common stock and for other general corporate purposes. Versailles Savings may use the proceeds it receives to build or lease a new home office, and to support increased lending and other products and services, and to repay short-term borrowings. The net proceeds retained by Versailles Financial Corporation and Versailles Savings and Loan Company also may be used for future business expansion through acquisitions of banks, thrifts and other financial services companies, and opening or acquiring branch offices. We have no current arrangements or agreements with respect to any such acquisitions. Initially, a substantial portion of the net proceeds will be invested in short-term investments and mortgage-backed securities consistent with our investment policy.

Please see the section of this prospectus entitled “How We Intend to Use the Proceeds From the Offering” for more information on the proposed use of the proceeds from the offering.

You May Not Sell or Transfer Your Subscription Rights

Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. When completing your stock order and certification form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription priority than you do. In addition, the stock order and certification form requires that you list all deposit or loan accounts, giving all names on each account and the account number at the applicable eligibility record date. Your failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your subscription.

Deadline for Orders of Common Stock

If you wish to purchase shares of common stock in the offering, we must receive a properly completed original stock order and certification form, together with full payment for the shares of common stock, at either the Stock Information Center or the office of Versailles Savings no later than 12:00 p.m., Eastern time, on December 15, 2009. A postmark prior to December 15, 2009 will not entitle you to purchase shares of common stock unless we receive the envelope by 12:00 p.m., Eastern time on December 15, 2009. You may submit your stock order and certification form by mail using the order reply envelope provided, by overnight courier to the Stock Information Center address indicated on the order form, or by hand delivery to our office, located at 27 E. Main Street, Versailles, Ohio 45380. Once we receive it, your order is irrevocable unless the offering is terminated or extended beyond January 29, 2010 or the

 

 

11


Table of Contents

number of shares of common stock to be sold is decreased to less than 425,000 shares or increased to more than 661,250 shares. If the offering is extended beyond January 29, 2010, or if the number of shares of common stock to be sold is decreased to less than 425,000 shares or is increased to more than 661,250 shares, we will, with the approval of the Ohio Division of Financial Institutions and the Office of Thrift Supervision, resolicit subscribers, giving them the opportunity to confirm, cancel or change their stock orders during a specified resolicitation period.

Although we will make reasonable attempts to provide a prospectus and offering materials to all holders of subscription rights, the subscription offering and all subscription rights will expire at 12:00 p.m., Eastern time, on December 15, 2009, whether or not we have been able to locate each person entitled to subscription rights.

Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 425,000 shares of common stock, we may take steps to issue the minimum number of shares of common stock in the offering range. Specifically, we may:

 

   

increase the purchase limitations; and/or

 

   

seek the approval of the Ohio Division of Financial Institutions and the Office of Thrift Supervision to extend the offering beyond January 29, 2010, so long as we resolicit subscriptions that we have previously received in the offering.

If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit.

Possible Change in the Offering Range

Keller & Company, Inc. will update its appraisal before we complete the offering. If, as a result of demand for the shares, or changes in market conditions, Keller & Company, Inc. determines that our pro forma market value has increased, we may sell up to 661,250 shares in the offering without further notice to you. If our pro forma market value at that time is either below $4.3 million or above $6.6 million, then, after consulting with the Ohio Division of Financial Institutions and the Office of Thrift Supervision, we may:

 

   

terminate the stock offering and promptly return all funds;

 

   

set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of Versailles Financial Corporation’s common stock; or

 

 

12


Table of Contents
   

take such other actions as may be permitted by the Ohio Division of Financial Institutions, the Office of Thrift Supervision and the Securities and Exchange Commission.

 

 

13


Table of Contents

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of members of Versailles Savings and Loan Company that is being called to vote upon the conversion, and at any time after member approval with the approval of the Ohio Division of Financial Institutions and the Office of Thrift Supervision.

We must sell a minimum of 425,000 shares to complete the offering. If we terminate the offering because we fail to sell the minimum number of shares or for any other reason, we will promptly return your funds with interest at our passbook savings rate and we will cancel deposit account withdrawal authorizations.

Purchases by Officers and Directors

We expect our directors and executive officers, together with their associates, to subscribe for 101,500 shares of common stock in the offering, or 23.9% of the shares to be sold at the minimum of the offering range. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any specific number of shares of our common stock. The purchase price paid by our directors and executive officers for their subscribed shares will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Purchases by directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering.

Benefits to Management and Potential Dilution to Stockholders Following the Conversion

We expect our tax-qualified employee stock ownership plan to purchase 8% of the total number of shares of common stock that we sell in the offering, or 46,000 shares of common stock, assuming we sell the maximum of the shares proposed to be sold. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to a total of 8% of the total number of shares of common stock sold in the offering. Purchases by the employee stock ownership plan will be included in determining whether the required minimum number of shares has been sold in the offering. Assuming the employee stock ownership plan purchases 46,000 shares in the offering, we will recognize additional pre-tax compensation expense of $460,000 over a 20-year period, assuming the shares of common stock have a fair market value of $10.00 per share for the full 20-year period. If, in the future, the shares of common stock have a fair market value greater or less than $10.00, the compensation expense will increase or decrease accordingly.

We also intend to implement one or more stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable regulations. If adopted within 12 months following the completion of the conversion, the stock-based benefit plan will reserve a number of shares of common stock equal to not more than 4% of the shares sold in the offering, or up to

 

 

14


Table of Contents

23,000 shares of common stock at the maximum of the offering range, for restricted stock awards to key employees and directors, at no cost to the recipients. If adopted within 12 months following the completion of the conversion, the stock-based benefit plan will also reserve a number of stock options equal to not more than 10% of the shares of common stock sold in the offering, or up to 57,500 shares of common stock at the maximum of the offering range, for key employees and directors. If the stock-based benefit plans are adopted after one year from the date of the completion of the conversion, the 4% and 10% limitations described above will no longer apply, and we may adopt stock-based benefit plans encompassing more than 80,500 shares of our common stock. We have not yet determined whether we will present these plans for stockholder approval within 12 months following the completion of the conversion or whether we will present these plans for stockholder approval more than 12 months after the completion of the conversion.

If 4% of the shares of common stock sold in the offering are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of up to approximately 3.8% in their ownership interest in Versailles Financial Corporation. If 10% of the shares of common stock sold in the offering are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 9.1% in their ownership interest in Versailles Financial Corporation. The dilution will be greater if the plans are adopted more than 12 months after the conversion and the plans exceed the noted 4% and 10% limitations. See “Management of Versailles Financial Corporation—Benefits to be Considered Following Completion of the Stock Offering.”

We intend to enter into employment agreements with our executive officers. See “Management of Versailles Financial Corporation—Benefit Plans and Agreements—Employment Agreements” for a further discussion of Mr. Ahlers’ agreement, including the terms and potential costs, as well as a description of other benefits arrangements.

Market for Common Stock

Due to the relatively small size of our initial public stock offering, our stock will be quoted on the OTC Bulletin Board. The OTC Bulletin Board is a market with generally less liquidity and fewer buyers and sellers than the NASDAQ Stock Market. Even if a liquid market develops for our stock, there is no assurance that it can be maintained. An active, orderly trading market depends on the presence and participation of willing buyers and sellers which neither Versailles Financial Corporation nor the market makers can control. This may affect your ability to sell your shares on short notice, and the sale of a large number of shares at one time could depress the market price. For these reasons, our stock should not be viewed as a short term investment. See “Market for the Common Stock” for a discussion of factors that may affect the trading price.

Under federal income tax regulations, employer securities that are held by participants in an employee stock ownership plan (“ESOP”) and that are not readily tradeable on an established market must include a put option. The put option is a right to demand that the sponsor redeem shares of employer stock held by the participant, for which there is no market, for an established

 

 

15


Table of Contents

cash price. The OTC Bulletin Board which Versailles Financial Corporation will be quoted on does not meet the Internal Revenue Code requirements to be readily tradeable on an established securities market. The Securities Exchange Commission’s Accounting Series Release 268 requires securities held by an ESOP to be reported outside of permanent equity if, by their terms, they can be put to the sponsor for cash.

Our Policy Regarding Dividends

Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors, including the following:

 

   

regulatory capital requirements;

 

   

our financial condition and results of operations;

 

   

tax considerations;

 

   

statutory and regulatory limitations; and

 

   

general economic conditions and forecasts.

Tax Consequences

As a general matter, the conversion will not be a taxable transaction for federal or state income tax purposes to Versailles Savings and Loan Company, Versailles Financial Corporation, or persons eligible to subscribe in the subscription offering. See “The Conversion – Material Income Tax Consequences” for additional information.

Conditions to Completion of the Conversion and the Offering

We cannot complete the conversion and the offering unless:

 

   

the plan of conversion is approved by at least a majority of votes eligible to be cast by members of Versailles Savings and Loan Company. A special meeting of members to consider and vote upon the plan of conversion has been set for December 22, 2009;

 

   

we have received orders to purchase at least the minimum number of shares of common stock offered; and

 

   

we receive final approval of the Ohio Division of Financial Institutions and the Office of Thrift Supervision to complete the conversion and the offering.

 

 

16


Table of Contents

How You Can Obtain Additional Information

Employees of Versailles Savings and Loan Company or its affiliates may assist in the offering in ministerial capacities, providing clerical work in effecting a sales transaction or answering questions of a ministerial nature. However, our employees may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or the offering, please call our Stock Information Center, toll free, at (877) 860-2091, Monday through Friday between 10:00 a.m. and 5:00 p.m., Eastern time. The Stock Information Center will be closed on weekends and bank holidays.

TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF DECEMBER 15, 2009 IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO DECEMBER 15, 2009.

 

 

17


Table of Contents

RISK FACTORS

You should consider carefully the following risk factors in evaluating an investment in our

shares of common stock.

Risks Related to Our Business

The United States Economy Is In a Deep Recession. A Prolonged Economic Downturn, Especially One Affecting Our Geographic Market Area, Would Likely Materially Affect Our Business and Financial Results.

The United States economy entered a recession in the fourth quarter of 2007. Throughout the course of 2008 and in the first two quarters of 2009, economic conditions continued to worsen, due in part to the fallout from the collapse of the sub-prime mortgage market. Negative developments in the global credit and securitization markets also have resulted in uncertainty in the financial markets during the latter half of 2007 and during 2008 and 2009, with the expectation of the general economic downturn continuing through the remainder of 2009 and into 2010. Loan portfolio quality has deteriorated at many institutions, reflecting in part, the deteriorating U.S. economy and rising unemployment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. The continuing real estate slump also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. Financial institution and financial institution holding company stock prices have declined substantially, and it is significantly more difficult for financial institutions and financial institution holding companies to raise capital or borrow in the debt markets. Continued negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability. Further, continued declines in the stock market in general, or for stock of financial institutions and their holding companies, could affect our stock performance.

Economic Conditions in Our Market Area May Negatively Affect Our Business and Financial Results

Our market area consists of northeastern Darke County and western Shelby County in Ohio. These two counties have experienced minimal growth in population and households since 1990. This relatively stable population trend is also reflected in our modest loan growth over the past few years. Housing prices in our market area have also remained relatively stable over the past few years since the practices that contributed to rapidly increase housing prices, such as sub-prime lending, did not take hold in our market area.

While we did not originate or invest in sub-prime mortgages, our lending business is tied, in part, to the real estate market, which has been dramatically weakened by the recession. Although most of our lending is located in the Darke County, Ohio market, which we believe has not been as adversely affected by the real estate crisis as some other areas of the country, we remain vulnerable to adverse changes in the real estate market. Accordingly, the local economic

 

18


Table of Contents

conditions in Darke and Shelby Countiesand the State of Ohio have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans. As such, a decline in real estate valuations would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control could negatively affect our financial results.

An important segment of our employment base is the manufacturing industry which includes automobile production and supporting industries. As of June 30, 2009, the unemployment rate in Darke County, Ohio, our primary market area, was 11.7%, up from 6.3% a year earlier, as compared to the unemployment rate in the State of Ohio of 11.2% and the national rate of 9.7%. Most of the job loss was in the manufacturing industry. The Shelby County unemployment rate went from 5.5% to 13.5% during the same period with employment loss concentrated in the manufacturing industry. We expect that the local unemployment rate will continue to rise in 2009 along with the Ohio and national rates. Adverse changes in the economy also have an adverse effect on employment, which has a negative effect on the ability of our borrowers to make timely repayments of their loans, whether commercial, residential or consumer

The continuing real estate slump has also resulted in reduced demand for the construction of new housing and sales of existing homes and has depressed home prices. These conditions may cause a further reduction in loan demand, and increases in our non-performing assets, net charge-offs and provisions for loan losses. At June 30, 2009, loans secured by real estate in our primary market area represented 91.0% of our total loans.

Based on the above, the economic recession has already had a negative effect on our operations, and if it persists or deepens, could have a further negative effect on us.

We have increased and plan to continue to increase our levels of non-residential real estate loans which in turn increase our exposure to credit risks.

At June 30, 2009, our portfolio of non-residential real estate loans totaled $5.8 million, or 16.9% of our total loans, compared to $4.8 million, or 15.2% of our total loans at June 30, 2008, respectively. We intend to continue to emphasize the origination of these types of loans consistent with safety and soundness.

Non-residential real estate loans generally expose a lender to a greater risk of loss than one- to four-family residential loans. Repayment of such loans generally depends, in large part, on sufficient income from the property or the borrower’s business, respectively, to cover operating expenses and debt service. These types of loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Changes in economic conditions that are beyond the control of the borrower and lender could affect the value of the security for the loan, the future cash flow of the affected property or business, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. As we increase our portfolio of these loans, we may experience higher levels of non-performing assets and/or loan losses.

 

19


Table of Contents

We target our business lending and marketing strategy towards small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations and financial condition may be adversely affected.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. While our allowance for loan losses was 0.76% of total loans at June 30, 2009, future additions to our allowance could materially decrease our net income.

In addition, the Ohio Division of Financial Institutions and the Office of Thrift Supervision periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

Our expenses will increase as a result of increases in Federal Deposit Insurance Corporation insurance premiums, including an emergency assessment imposed in May 2009.

On February 27, 2009, the Federal Deposit Insurance Corporation issued a final rule that alters the way the Federal Deposit Insurance Corporation calculates federal deposit insurance assessment rates beginning in the second quarter of 2009 and thereafter. Under the rule, the Federal Deposit Insurance Corporation first establishes an institution’s initial base assessment rate. This initial base assessment rate ranges, depending on the risk category of the institution, from 12 to 45 basis points. The Federal Deposit Insurance Corporation then adjusts the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate are based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate ranges from 7 to 77.5 basis points of the institution’s deposits.

On May 22, 2009, the Federal Deposit Insurance Corporation announced a one-time special assessment that would impose a special 5 basis points assessment on each FDIC-insured depository institution’s assets, minus its Tier 1 capital on June 30, 2009, which would be collected on September 30, 2009. The special assessment will be capped at 10 basis points of an institution’s domestic deposits. This special assessment has resulted in additional non-interest expense of $16,000 for the fiscal year ended June 30, 2009. In addition, the Federal Deposit Insurance Corporation may assess additional special premiums in the future.

 

20


Table of Contents

The Federal Deposit Insurance Corporation has assumed significant additional obligations in recent years as a result of (i) a significant increase in bank and thrift failures, (ii) an increase in obligations assumed in assisted mergers, (iii) the implementation of the Temporary Liquidity Guarantee Program, (iv) the increase in the deposit insurance maximum to $250,000 through December 31, 2013, (v) Federal legislation providing coverage for newly-issued senior unsecured debt and non-interest bearing transaction and certain NOW accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums until June 30, 2010 and (vi) the FDIC’s new role in guaranteeing financing in the U.S. Treasury’s Public-Private Investment Program. To finance these new obligations, Congress has recently increased the FDIC’s authority to borrow from the U.S. Treasury to $100 billion. Many observers believe the Federal Deposit Insurance Corporation will need to revise its regular assessment rates and/or implement additional special assessments in order to pay for these obligations. These actions will significantly increase our non-interest expense in 2009 and in future years as long as the increased premiums are in place.

On September 29, 2009, the Federal Deposit Insurance Corporation issued a proposed rule pursuant to which all insured depository institutions would be required to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Under the proposed rule, this pre-payment would be due on December 30, 2009. Under the proposed rule, the assessment rate for the fourth quarter of 2009 and for 2010 would be based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 would be equal to the modified third quarter assessment rate plus an additional 3 basis points. In addition, each institution’s base assessment rate for each period would be calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012.

Negative developments in the financial industry and the credit markets may adversely affect our operations and results.

Negative developments in the latter half of 2007 and during 2008 and 2009 in the global credit and securitization markets have resulted in significant uncertainty in the financial markets. Loan portfolio quality has deteriorated at many institutions. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. In the first half of 2009, there were 45 failures of FDIC-insured banks and thrift institutions. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. Specifically, the Federal Deposit Insurance Corporation Quarterly Banking Profile reported that noncurrent assets plus other real estate owned as a percentage of assets rose to 2.77% as of June 30, 2009, compared to 1.89% as of December 31, 2008 and 0.95% as of December 31, 2007. For the year ended December 31, 2008, the Federal Deposit Insurance

 

21


Table of Contents

Corporation Quarterly Banking Profile reported that return on average assets decreased to 0.04% compared to 0.81% for the year ended December 31, 2007. For the six months ended June 30, 2009, the annualized return on average assets was .04%. The NASDAQ Bank Index declined 23.92% between December 31, 2007 and December 31, 2008, and an additional 23.73% between December 31, 2008 and June 30, 2009.

The potential exists for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Actions taken to date, as well as potential actions, may not have the beneficial effects that are intended, particularly with respect to the extreme levels of volatility and limited credit availability currently being experienced. In addition, new laws, regulations, and other regulatory changes may further increase our Federal Deposit Insurance Corporation insurance premiums and may also increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability. Further, continued declines in the stock market in general, or for stock of financial institutions and their holding companies, could affect our stock performance.

Future changes in interest rates could reduce our profits.

Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

 

   

the interest income we earn on our interest-earning assets, such as loans and securities; and

 

   

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

As a result of our focus on one- to four-family residential real estate loans, the interest rates we earn on our loans are generally fixed for a longer period of time. Additionally, many of our securities investments have lengthy maturities with both adjustable and fixed interest rates. Like many savings institutions, our focus on deposit accounts as a source of funds, which have no stated maturity date or shorter contractual maturities, results in our liabilities having a shorter duration than our assets. For example, as of June 30, 2009, 39.9% of our loans had maturities of 10 years or longer, while 56.3% of our certificates of deposits had maturities of six months or less. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets, such as loans and investments, may not increase as rapidly as the interest paid on our liabilities, such as deposits. In a period of declining interest rates, the interest income earned on our assets may decrease more rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest these cash flows at lower interest rates.

 

22


Table of Contents

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. Changes in interest rates also affect the current fair value of our securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At June 30, 2009, the Office of Thrift Supervision “rate shock” analysis indicated that our net portfolio value (the difference between the present value of our assets and the present value of our liabilities) would decrease by $1.5 million or 18.0% if there was an instantaneous 200 basis point increase in market interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

We Depend On Our Management Team To Implement Our Business Strategy And Execute Successful Operations And We Could Be Harmed By The Loss Of Their Services.

We are dependent upon the services of our senior management team. Our strategy and operations are directed by the senior management team. Upon completion of the conversion and offering, our president and chief executive officer and our two other executive officers will enter into employment agreements with Versailles Savings and Loan Company. Any loss of the services of the president and chief executive officer or other members of the management team could impact our ability to implement our business strategy, and have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management of Versailles Financial Corporation— Benefit- Plans and Agreements—Employment Agreement.”

We Will Need to Implement Additional Finance and Accounting Systems, Procedures and Controls in Order to Satisfy Our New Public Company Reporting Requirements. This Will Increase Our Operating Expenses.

In connection with the stock offering, we are becoming a public company. The federal securities laws and regulations of the Securities and Exchange Commission require that we file annual, quarterly and current reports and that we maintain effective disclosure controls and procedures and internal control over financial reporting. We expect that the obligations of being a public company, including substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. These obligations will increase our operating expenses and could divert our management’s attention from our operations. Compliance with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission will require us to certify the adequacy of our internal controls and procedures, which will require us to upgrade our accounting systems, which will increase our operating costs. In addition, such requirements may cause us to hire additional accounting, internal audit and/or compliance personnel.

 

23


Table of Contents

Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Business of Versailles Savings and Loan Company—Market Area and Competition.”

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

A legislative proposal has been introduced that would eliminate our primary federal regulator and require Versailles Financial Corporation to become a bank holding company.

The U.S. Treasury Department recently released a legislative proposal that would implement sweeping changes to the current bank regulatory structure. The proposal would create a new federal banking regulator, and merge the Office of Thrift Supervision, as well as the Office of the Comptroller of the Currency (the primary federal regulator for national banks) into this new federal bank regulator. If this legislation is enacted, the Federal Deposit Insurance Corporation is likely to become our new federal regulator. The proposal would also require thrift holding companies, such as Versailles Financial Corporation, to be regulated as bank holding companies subject to the regulation and supervision of the Federal Reserve Board. Unlike a bank holding company, a thrift holding company is not required to maintain any minimum level of regulatory capital. In the event Versailles Financial Corporation is regulated as a bank holding company in the future, we anticipate it will meet the requirements to be well-capitalized as a bank holding company.

 

24


Table of Contents

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision, and examination by the Ohio Division of Financial Institutions, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. There can be no assurance that proposed laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

Risks Related to this Stock Offering

The future price of the shares of common stock may be less than the purchase price in the stock offering.

If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The purchase price in the offering is determined by an independent, third-party appraisal, pursuant to federal banking regulations and subject to review and approval by the Ohio Division of Financial Institutions and the Office of Thrift Supervision. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. Our aggregate pro forma market value as reflected in the final, approved independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.

The capital we raise in the stock offering will reduce our return on equity. This could negatively affect the trading price of our shares of common stock.

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. For the year ended June 30, 2009, our return on average equity was 1.85%, which is below that of most other financial institutions. Following the stock offering, we expect our equity to increase from $7.4 million to between $10.7 million at the minimum of the offering range and $12.1 million at the maximum of the offering range. Based upon our earnings for the year ended June 30, 2009, and these pro forma equity levels, our return on equity would be 1.29% and 1.15% at the minimum and maximum of the offering range, respectively. We expect our return on equity to remain lower until we are able to leverage the additional capital we receive from the stock offering. Although we believe we will be able to increase net interest income using proceeds of the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher

 

25


Table of Contents

expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plan we intend to adopt. Until we can increase our net interest income and non-interest income, we expect our return on equity to remain at a relatively low level, which may reduce the value of our shares of common stock.

Our stock-based benefit plans will increase our costs, which will reduce our income.

We anticipate that our employee stock ownership plan will purchase 8% of the total shares of common stock sold in the stock offering, with funds borrowed from Versailles Financial Corporation. The cost of acquiring the shares of common stock for the employee stock ownership plan will be between $340,000 and $460,000 at the minimum and maximum of the offering range, respectively. We will record an annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees. See “Management of Versailles Financial Corporation—Employee Stock Ownership Plan.”

We also intend to adopt a stock-based benefit plan after the stock offering that would award participants shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock if these plans are adopted within 12 months after the completion of the conversion. The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan may not exceed 4% and 10%, respectively, of the shares issued in the stock offering (and may be greater if the plans are adopted after 12 months). As discussed in “Pro Forma Data” the implementation of these plans will reduce our pro forma income from $162,000 at the minimum of the offering range to $106,000 and from $173,000 to $96,000 at the maximum of the offering range. In addition, pro forma stockholders’ equity would be reduced from $11.0 million at the minimum of the offering range to $10.5 million and from $12.5 million to $11.8 million at the maximum of the offering range. See “Management of Versailles Financial Corporation—Benefits to be Considered Following Completion of the Stock Offering.”

The implementation of stock-based benefit plans may dilute your ownership interest.

We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) or options to purchase shares of our common stock, following the stock offering. These stock-based benefit plans will be funded through either open market purchases of shares of common stock, if permitted, or from the issuance of authorized but unissued shares of common stock. Stockholders would experience a reduction in ownership interest totaling 12.3% in the event newly issued shares are used to fund stock options or awards of shares of common stock under these plans in an amount equal to 10% and 4%, respectively, of the shares issued in the stock offering. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the stock offering.

 

26


Table of Contents

There Will be a Very Limited Trading Market in Our Common Stock, Which Will Hinder Your Ability to Sell Our Common Stock and May Lower the Market Price of the Stock.

Versailles Financial Corporation has never issued stock and, therefore, there is no current trading market for the shares of common stock. Moreover, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and senior officers and is used as a measurement of shares available for trading, is likely to be quite limited. The limited trading market could also result in a wider spread between the “bid” and “ask” prices for the stock, which could make it more difficult to sell a large number of shares at one time and could mean a sale of a large number of shares at one time could depress the market price.

Due to the relatively small size of our initial public stock offering, we anticipate that our stock will be quoted on the OTC Bulletin Board. The OTC Bulletin Board is a market with less liquidity and fewer buyers and sellers than the NASDAQ Stock Market. Even if a liquid market develops for our stock, the market liquidity may not be maintained and the trading price may be above or below the $10.00 offering price. An active, orderly trading market depends on the presence and participation of willing buyers and sellers which neither Versailles Financial Corporation nor the stock’s market makers can control. This may affect your ability to sell your shares on short notice and the price at which they can be sold, and the sale of a large number of shares at one time could temporarily depress the market price. For these reasons, our stock should not be viewed as a short-term investment. See “Market for the Common Stock.”

Publicly traded stocks, including stocks of financial institutions, have recently experienced substantial market price volatility. In a few recent transactions, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the price at which the shares were sold in the offerings conducted by those companies.

We will enter into employment agreements that may increase our compensation costs.

We will enter into employment agreements with each of Douglas P. Ahlers, President and Chief Executive officer, Cheryl J. Leach, Vice President and Chief Financial Officer and Jerome F. Bey, III, Vice President and Senior Lender. In the event of involuntary or good reason termination of employment, or certain types of termination following a change in control, as set forth in the employment agreements, and assuming the agreements were in effect as of June 30, 2009, the employment agreements provide for cash severance benefits that would cost up to approximately $477,849 in the aggregate based on information as of June 30, 2009. For additional information see “Management of Versailles Financial Corporation—Benefit Plans and Agreements—Employment Agreement.”

We have broad discretion in using the proceeds of the stock offering. Our failure to effectively use such proceeds could reduce our profits.

We will use a portion of the net proceeds to finance the purchase of shares of common stock in the stock offering by the employee stock ownership plan and may use the remaining net proceeds to pay dividends to stockholders, repurchase shares of common stock, purchase

 

27


Table of Contents

investment securities, deposit funds in Versailles Savings and Loan Company or for other general corporate purposes. Versailles Savings and Loan Company may use the proceeds it receives to fund new loans, repay short-term borrowings, build or acquire a new home office, purchase investment securities, or for other general corporate purposes. We have not identified specific amounts of proceeds for any of these purposes and we will have significant flexibility in determining the amount of net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability. We have not established a timetable for the effective deployment of the proceeds and we cannot predict how long we will require to effectively deploy the proceeds, if at all.

Our stock value may be negatively affected by federal regulations that restrict takeovers. In addition, the corporate governance provisions in our articles of incorporation and bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our Board of Directors and may impede takeovers of the company that our board might conclude are not in the best interest of Versailles Financial Corporation or its stockholders.

For three years following the stock offering, Office of Thrift Supervision regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision. See “Restrictions on Acquisition of Versailles Financial Corporation” for a discussion of applicable Office of Thrift Supervision regulations regarding acquisitions.

In addition, provisions in our articles of incorporation and bylaws may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of Versailles Financial Corporation more difficult. For example, our Board of Directors is divided into three staggered classes. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Our articles of incorporation include a provision that no person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock. This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by us. In addition, our articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office. We also can issue additional shares of common and preferred stock without the prior approval of shareholders and such preferred shares may have terms more favorable than our common shares. Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of our stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of our directors. See “Restrictions on Acquisition of Versailles Financial Corporation.”

 

28


Table of Contents

SELECTED FINANCIAL AND OTHER DATA

The following tables set forth selected historical financial and other data of Versailles Savings and Loan Company for the years and at the dates indicated. The information for the years ended June 30, 2009, 2008 and 2007 is derived in part from, and should be read together with, the audited financial statements and notes thereto of Versailles Savings and Loan Company beginning at page F-1 of this prospectus.

 

     At June 30,
     2009     2008     2007
     (In thousands)

Selected Financial Condition Data:

      

Total assets

   $ 40,788      $ 38,857      $ 38,973

Cash and cash equivalents

     2,509        3,517        2,720

Interest-bearing time deposits in other institutions

     824        99        297

Securities available for sale, at fair value

     897        1,204        1,234

Securities held to maturity

     1,124        1,874        1,267

Loans receivable, net

     34,428        31,269        32,577

Foreclosed assets, net

     —          —          —  

Other real estate owned

     —          —          —  

Deposits

     24,585        23,507        23,424

Federal Home Loan Bank of Cincinnati advances

     7,500        7,000        7,500

Other secured borrowings

     —          —          —  

Total equity capital

     7,379        7,427        7,202
     For the Years Ended
June 30,
     2009     2008     2007
     (In thousands)

Selected Operating Data:

      

Interest and dividend income

   $ 2,058      $ 2,265      $ 2,286

Interest expense

     931        1,110        1,064
                      

Net interest income

     1,127        1,155        1,222

Provision for loan losses

     110        —          —  
                      

Net interest income after provision for loan losses

     1,017        1,155        1,222

Noninterest income (loss)

     (49     (66     4

Noninterest expense

     761        700        707
                      

Income before income tax expense

     207        389        519

Income tax expense

     69        130        174
                      

Net income

   $ 138      $ 259      $ 345
                      

 

29


Table of Contents
     At or For the Years Ended
June 30,
 
     2009     2008     2007  

Selected Financial Ratios and Other Data:

      

Performance Ratios:

      

Return on average assets (ratio of net income to average total assets)

   0.35   0.67   0.90

Return on average equity (ratio of net income to average equity

   1.85   3.52   4.79

Interest rate spread (1)

   2.35   2.33   2.62

Net interest margin (2)

   2.93   3.04   3.28

Efficiency ratio (3)

   67.22   60.31   57.60

Non-interest expense to average total assets (1)

   1.93   1.80   1.85

Average interest-earning assets to average interest-bearing liabilities

   123.80   124.27   123.11

Average equity to average total assets

   18.97   19.02   18.85

Asset Quality Ratios:

      

Non-performing assets to total assets

   0.65   0.71   0.21

Non-performing loans to total loans

   0.76   0.87   0.25

Allowance for loan losses to non-performing loans

   99.65   60.61   201.22

Allowance for loan losses to total loans

   0.76   0.53   0.51

Capital Ratios:

      

Total capital (to risk-weighted assets)

   32.67   34.85   32.52

Tier I capital (to risk-weighted assets)

   31.60   34.11   31.81

Tier I capital (to total assets)

   18.91   19.59   18.91

Other Data:

      

Number of full service offices

   1      1      1   

Full time equivalent employees

   7      6      6   

 

(1) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
(3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income, excluding gains or losses on the sale of securities and other-than-temporary impairment loss on securities.

 

30


Table of Contents

RECENT DEVELOPMENTS

The following tables contain certain information concerning the financial position and results of operations of Versailles Savings and Loan Company at the dates and for the periods indicated. The data presented at September 30, 2009 and for the three months ended September 30, 2009 and September 30, 2008 are derived from unaudited financial statements but, in the opinion of management, reflects all adjustments necessary to present fairly the results for these interim periods. These adjustments consist only of normal recurring adjustments. The results of operations for the three months ended September 30, 2009 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2010.

 

     At September 30,
2009
   At June 30,
2009
 
     (In thousands)       

Selected Financial Condition Data:

     

Total assets

   $ 41,617    $ 40,788   

Cash and cash equivalents

     1,879      2,509   

Interest-bearing time deposits in other institutions

     824      824   

Securities available for sale, at fair value

     917      897   

Securities held to maturity

     1,050      1,124   

Loans receivable, net

     35,726      34,428   

Foreclosed assets, net

     —        —     

Other real estate owned

     —        —     

Deposits

     24,360      24,585   

Federal Home Loan Bank of Cincinnati advances

     8,500      7,500   

Other secured borrowings

     —        —     

Total equity capital

     7,447      7,379   
     For the Three Months Ended
September 30,
 
     2009    2008  
     (In thousands)       

Selected Operating Data:

     

Interest and dividend income

   $ 511    $ 497   

Interest expense

     205      248   
               

Net interest income

     306      249   

Provision for loan losses

     —        —     
               

Net interest income after provision for loan losses

     306      249   

Noninterest income (loss)

     1      (1

Noninterest expense

     226      179   
               

Income before income tax expense

     81      69   

Income tax expense

     27      23   
               

Net income

   $ 54    $ 46   
               

 

31


Table of Contents
     At or For the Three Months
Ended September 30,
 
     2009     2008  

Selected Financial Ratios and Other Data:

    

Performance Ratios:

    

Return on average assets (ratio of net income to average total assets)

   0.53   0.47

Return on average equity (ratio of net income to average equity

   2.91   2.47

Interest rate spread (1)

   2.62   1.98

Net interest margin (2)

   3.09   2.62

Efficiency ratio (3)

   73.58   71.47

Non-interest expense to average total assets (1)

   2.21   1.84

Average interest-earning assets to average interest-bearing liabilities

   122.84   124.47

Average equity to average total assets

   18.09   19.13

Asset Quality Ratios:

    

Non-performing assets to total assets

   0.77   1.08

Non-performing loans to total loans

   0.89   1.28

Allowance for loan losses to non-performing loans

   82.56   39.82

Allowance for loan losses to total loans

   0.73   0.51

Capital Ratios:

    

Total capital (to risk-weighted assets)

   31.35   34.92

Tier I capital (to risk-weighted assets)

   30.63   34.19

Tier I capital (to total assets)

   18.67   19.76

Other Data:

    

Number of full service offices

   1      1   

Full time equivalent employees

   8      6   

 

(1) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
(3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income, excluding gains or losses on the sale of securities and other-than-temporary impairment loss on securities.

 

32


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS

Comparison of Financial Condition at September 30, 2009 and June 30, 2009

General. Our total assets increased to $41.6 million at September 30, 2009 from $40.8 million at June 30, 2009. The increase was primarily due to an increase in net loans of $1.3 million, or 3.8%, to $35.7 million at September 30, 2009 from $34.4 million at June 30, 2009.

Loans. The increase in net loans reflected a continued demand for loans in our market area in a low interest rate environment. The largest growth in our loan portfolio during the three months ended September 30, 2009 was in non-residential real estate, which increased to $6.6 million at September 30, 2009 from $5.8 million at June 30, 2009. Our one- to four-family residential real estate loans increased to $27.2 million at September 30, 2009 from $27.0 million showing a continued increase in the origination of this type of loan product.

Investments. Investment securities remained unchanged at $2.0 million at both September 30, 2009 and June 30, 2009. Net paybacks in government securities were offset by unrealized gains for available for sale securities.

Cash and cash equivalents. Cash and cash equivalents decreased to $1.9 million at September 30, 2009 from $2.5 million at June 30, 2009, reflecting normal cash flows and cash used to fund the increase in loans.

Deposits. Deposits decreased $0.2 million, or 0.9%, to $24.4 million at September 30, 2009 from $24.6 million at June 30, 2009. The decrease in deposits was due to a large estate deposit that was disbursed during the quarter.

Borrowings. Federal Home Loan Bank of Cincinnati advances increased to $8.5 million at September 30, 2009 from $7.5 million at June 30, 2009. The proceeds were used to fund loan originations and deposit account withdrawals. We continue to utilize borrowings as an alternative funding source and our borrowings from the Federal Home Loan Bank of Cincinnati consists of advances with laddered terms of up to five years.

Equity. Total equity increased to $7.5 million at September 30, 2009 from $7.4 million at June 30, 2009. The change in equity is a result of net income for the period and the unrealized gain in available for sale securities.

Comparison of Results of Operations for the Three Months Ended September 30, 2009 and the Three Months Ended September 30, 2008.

General. Net income increased to $54,000 for the three months ended September 30, 2009 from $46,000 for the three months ended September 30, 2008. The increase reflected an increase in net interest income, offset by an increase in noninterest expense.

Interest Income. Interest and dividend income increased $14,000, or 2.85%, to $511,000 for the three months ended September 30, 2009 from $497,000 for the three months ended September 30, 2008. The increase reflected an increase in average interest-earning assets

 

33


Table of Contents

to $39.7 million for the three months ended September 30, 2009 compared to $38.0 million for the three months ended September 30, 2008, offset by a decrease in the average yield on interest earning assets to 5.16% for the three months ended September 30, 2009 from 5.23% for the three months ended September 30, 2008.

Interest income on loans increased $35,000, or 7.8%, to $482,000 for the three months ended September 30, 2009 from $447,000 for the three months ended September 30, 2008, reflecting an increase in the average balance of loans to $35.1 million from $31.9 million, which was partially offset by lower average yields on such balances, to 5.48% for the three months ended September 30, 2009 from 5.60% for the three months ended September 30, 2008.

Interest income on investment securities decreased to $18,000 for the three months ended September 30, 2009 from $31,000 for the three months ended September 30, 2008, reflecting a decrease in the average balance of such securities to $2.0 million for the three months ended September 30, 2009 from $2.8 million for the three months ended September 30, 2008, as well as a decrease in the average yield on available for sale securities to 3.70% from 4.41% and a decrease in the average yield on held to maturity securities to 3.66% from 4.46%.

Interest Expense. Interest expense decreased $43,000, or 17.4%, to $205,000 for the three months ended September 30, 2009 from $248,000 for the three months ended September 30, 2008. The decrease reflected a decrease in the average rate paid on deposits, including certificates of deposit, and Federal Home Loan Bank of Cincinnati borrowings in the three months ended September 30, 2009 compared to the three months ended September 30, 2008, which more than offset the increases in the average balance of such deposits and borrowings.

Interest expense on certificates of deposit decreased to $109,000 for the three months ended September 30, 2009 from $152,000 for the three months ended September 30, 2008. An increase in the average balance of such certificates to $17.1 million from $17.0 million was more than offset by a decrease in the average cost of such certificates to 2.56% for the three months ended September 30, 2009 from 3.56% for the three months ended September 30, 2008.

Interest expense on borrowings, consisting of advances from the Federal Home Loan Bank of Cincinnati, increased $2,000, or 1.5%, to $94,000 for the three months ended September 30, 2009 from $92,000 for the three months ended September 30, 2008. The decrease reflected the lower weighted average rate paid on such borrowings to 4.79% for the three months ended September 30, 2009 from 5.40% for the three months ended September 30, 2008, which was partially offset by an increase in the average balance of such borrowings to $7.8 million for the three months ended September 30, 2009 from $6.8 million for the three months ended September 30, 2008.

Net Interest Income. Net interest income increased to $306,000 for the three months ended September 30, 2009 from $249,000 for the three months ended September 30, 2008. This reflected an increase in our interest rate spread to 2.62% from 1.98%, which offset a slight decrease in the ratio of our average interest earning assets to average interest bearing liabilities to 122.84% from 124.47%. Our net interest margin increase to 3.09% from 2.62%.

 

34


Table of Contents

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change or as more information becomes available. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as required in order to maintain the allowance.

No additional provision for loan losses was recorded for the three months ended September 30, 2009 and for the three months ended September 30, 2008. The allowance for loan losses was $264,000, or 0.73% of total loans, at September 30, 2009 and $166,000, or 0.51% of total loans at September 30, 2008. Total non-performing loans were $320,000 at September 30, 2009 compared to $418,000 at September 30, 2008. The allowance for loan losses saw a net increase of $98,000 in the second half of the fiscal year ended June 30, 2009 due to the general downturn in local economic conditions. To the best of our knowledge, we have recorded all probable incurred credit losses for the period ended September 30, 2009 and September 30, 2008.

Noninterest Income. Our noninterest income increased to $1,000 for the three months ended September 30, 2009 from ($1,000) for the three months ended September 30, 2008. The increase was primarily due to no activity in available for sale investment securities during the three months ended September 30, 2009 compared to the $2,000 loss recognized on the sale of available for sale investment securities during the three months ended September 30, 2008.

Noninterest Expense. Non-interest expense increased $47,000, or 26.4%, to $226,000 for the three months ended September 30, 2009 from $179,000 for the three months ended September 30, 2008. The increase was due to increased salaries and employee benefits expense to $113,000 for the three months ended September 30, 2009 from $81,000 for the three months ended September 30, 2008. The number of full time equivalent employees increased to eight in the 2009 period from six in the 2008 period. For the same periods, FDIC insurance premiums increased $5,000 and our legal and accounting expense increased $10,000 as a result of our compliance with the federal securities laws.

Income Tax Expense. The provision for income taxes increased to $27,000 for the three months ended September 30, 2009, compared to $23,000 for the three months ended September 30, 2008, an increase of $4,000, or 17.7%, as a result of the increase in net income before income taxes.

 

35


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

   

general economic conditions, either nationally or in our market area, that are worse than expected;

 

   

competition among depository and other financial institutions;

 

   

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

   

adverse changes in the securities markets;

 

   

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

   

our ability to enter new markets successfully and capitalize on growth opportunities;

 

   

our ability to successfully integrate acquired entities, if any;

 

   

changes in consumer spending, borrowing and savings habits;

 

36


Table of Contents
   

decrease in asset quality;

 

   

future deposit insurance premium levels and special assessments;

 

   

future compliance costs;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

   

changes in our organization, compensation and benefit plans;

 

   

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

   

changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 17.

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $3.7 million and $5.2 million at the maximum of the offering range, or $6.0 million if the offering range is increased by 15%.

We intend to distribute the net proceeds from the stock offering as follows:

 

     Based Upon the Sale at $10.00 Per Share of  
     425,000 Shares     500,000 Shares     575,000 Shares     661,250 Shares (1)  
     Amount    Percent
of Net
Proceeds
    Amount    Percent
of Net
Proceeds
    Amount    Percent
of Net
Proceeds
    Amount    Percent
of Net
Proceeds
 
     (Dollars in thousands)  

Stock offering proceeds

   $ 4,250      $ 5,000      $ 5,750      $ 6,613   

Less offering expenses

     600        600        600        600   
                                    

Net offering proceeds

   $ 3,650    100.0   $ 4,400    100.0   $ 5,150    100.0   $ 6,013    100.0
                                                    

Use of net proceeds:

                    

To Versailles Savings and Loan Company

   $ 1,825    50.00   $ 2,200    50.00   $ 2,575    50.00   $ 3,007    50.00

To fund loan to employee stock ownership plan

     340    9.30        400    9.10        460    8.90        529    8.80   
                                    

Retained by Versailles Financial Corporation

   $ 1,485    40.70   $ 1,800    40.90   $ 2,115    41.10   $ 2,477    41.20
                                    

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

 

37


Table of Contents

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Versailles Savings and Loan Company’s deposits. The net proceeds may vary because the total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.

Versailles Financial Corporation may use the proceeds it retains from the stock offering:

 

   

to fund a loan to the employee stock ownership plan to purchase shares of common stock in the stock offering;

 

   

to invest in mortgage-backed securities and debt securities issued by the United States Government and United States Government-sponsored agencies or entities;

 

   

to pay cash dividends to stockholders;

 

   

to repurchase shares of our common stock; and

 

   

for other general corporate purposes.

With the exception of the funding of the loan to the employee stock ownership plan, Versailles Financial Corporation has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in short-term investments, investment-grade debt obligations and mortgage-backed securities.

Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following the conversion, except to fund equity benefit plans other than stock options or except when extraordinary circumstances exist and with prior regulatory approval.

Versailles Savings and Loan Company may use the net proceeds it receives from the Offering:

 

   

to fund new loans;

 

   

to repay short-term borrowings;

 

   

to expand its banking franchise by establishing or acquiring new branches, although we have no current plans to do so except for a new home office that we plan to build or acquire in late 2010;

 

   

to invest in mortgage-backed securities and debt securities issued by the United States Government and United States Government-sponsored agencies or entities; and

 

38


Table of Contents
   

for other general corporate purposes.

Versailles Savings and Loan Company has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Our short-term and long-term growth plans anticipate that, upon completion of the offering, we will experience growth through increased lending and investment activities and, possibly, acquisitions. We currently have no understandings or agreements to acquire other banks, thrifts, or other financial services companies. There can be no assurance that we will be able to consummate any acquisition.

Initially, the net proceeds we retain will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities.

OUR POLICY REGARDING DIVIDENDS

Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the Board of Directors is expected to take into account a number of factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by the Ohio Division of Financial Institutions and the Office of Thrift Supervision policy and regulations, may be paid in addition to, or in lieu of, regular cash dividends. We will file a consolidated tax return with Versailles Savings and Loan Company. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to Office of Thrift Supervision regulations, during the three-year period following the stock offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock—Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Versailles Savings and Loan Company, because initially we will have no source of funds for the payment of dividends other than proceeds were received from the stock offering and no sources of income other than dividends from Versailles Savings and Loan Company, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in connection with the loan to the employee stock ownership plan. Regulations of the Office of Thrift Supervision impose limitations on “capital distributions” by savings institutions, which includes dividends. See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

 

39


Table of Contents

Any payment of dividends by Versailles Savings and Loan Company to us that would be deemed to be drawn out of Versailles Savings and Loan Company’s bad debt reserves would require a payment of taxes at the then-current tax rate by Versailles Savings and Loan Company on the amount of earnings deemed to be removed from the reserves for such distribution. Versailles Savings and Loan Company does not intend to make any distribution to us that would create such a federal tax liability. See “Taxation—Federal Taxation” and “—State Taxation.”

MARKET FOR THE COMMON STOCK

Versailles Financial Corporation is a newly formed company and has never issued capital stock. Versailles Savings and Loan Company, as a mutual institution, has never issued capital stock. Versailles Financial Corporation anticipates that its common stock will be traded in the over-the-counter market and quoted on the OTC Bulletin Board. Keefe, Bruyette & Woods, Inc. has advised us that it intends to make a market in our common stock following the reorganization and offering, but it is under no obligation to do so.

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

40


Table of Contents

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At June 30, 2009, Versailles Savings and Loan Company exceeded all of the Office of Thrift Supervision regulatory capital requirements. The table below sets forth the historical equity capital and regulatory capital of Versailles Savings and Loan Company at June 30, 2009, and the pro forma regulatory capital of Versailles Savings and Loan Company, after giving effect to the sale of shares of common stock at a $10.00 per share purchase price. The table assumes the receipt by Versailles Savings and Loan Company of at least 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

     Versailles Savings and
Loan Company
Historical at June 30,
2009
    Pro Forma at June 30, 2009, Based Upon the Sale in the Offering of  
       425,000 Shares     500,000 Shares     575,000 Shares     661,250 Shares (1)  
     Amount    Percent of
Assets (2)
    Amount    Percent of
Assets (2)
    Amount    Percent of
Assets (2)
    Amount    Percent of
Assets (2)
    Amount    Percent of
Assets (2)
 
     (Dollars in thousands)  

Equity

   $ 7,379    18.09   $ 8,864    20.80   $ 9,179    21.40   $ 9,494    21.89   $ 9,857    22.51

Tangible capital (3)(4)

   $ 7,789    18.91   $ 9,274    21.56   $ 9,589    22.10   $ 9,904    22.63   $ 10,267    23.23

Tangible requirement

     618    1.50        645    1.50        651    1.50        657    1.50        663    1.50   
                                                                 

Excess

   $ 7,171    17.41   $ 8,629    20.06   $ 8,938    20.60   $ 9,247    21.13   $ 9,604    21.73
                                                                 

Core capital (3)(4)

   $ 7,789    18.91   $ 9,274    21.56   $ 9,589    22.10   $ 9,904    22.63   $ 10,267    23.23

Core requirement

     1,648    4.00        1,721    4.00        1,736    4.00        1,751    4.00        1,768    4.00   
                                                                 

Excess

   $ 6,141    14.91   $ 7,553    17.56   $ 7,853    18.10   $ 8,153    18.63   $ 8,499    19.23
                                                                 

Tier 1 risk-based capital

   $ 7,789    31.60   $ 9,274    37.08   $ 9,589    38.22   $ 9,904    39.36   $ 10,267    40.67

Risk-based requirement (5)

     986    4.00        1,000    4.00        1,003    4.00        1,006    4.00        1,010    4.00   
                                                                 

Excess

   $ 6,803    27.60   $ 8,274    33.08   $ 8,586    34.22   $ 8,898    35.36   $ 9,257    36.67
                                                                 

Total risk-based capital (3)

   $ 8,053    32.67   $ 9,538    38.14   $ 9,853    39.28   $ 10,168    40.41   $ 10,531    41.71

Risk-based requirement

     1,972    8.00        2,001    8.00        2,007    8.00        2,013    8.00        2,020    8.00   
                                                                 

Excess

   $ 6,081    24.67   $ 7,537    30.14   $ 7,846    31.28   $ 8,155    32.41   $ 8,511    33.71
                                                                 

Reconciliation of capital infused into Versailles Savings and Loan Company:

   

                   

Net proceeds

  

  $ 3,650      $ 4,400      $ 5,150      $ 6,013   
                                         

Proceeds to Versailles Savings and Loan Company

   

    1,825        2,200        2,575        3,007   

Less: Common stock acquired by employee stock ownership plan

   

    340        400        460        529   
                                         

Pro forma increase

  

  $ 1,485      $ 1,800      $ 2,115      $ 2,478   
                                         

 

(1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) The current Office of Thrift Supervision core capital requirement for financial institutions is 3% of total adjusted assets for financial institutions that receive the highest supervisory rating for safety and soundness and a 4% to 5% core capital ratio requirement for all other financial institutions.
(3) Tangible and core capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(4) Pro forma capital levels assume that we fund the stock-based benefit plans with purchases in the open market of 4% of the outstanding shares of common stock following the stock offering at a price equal to the price for which the shares of common stock are sold in the stock offering, and that the employee stock ownership plan purchases 8% of the shares of common stock to be outstanding immediately following the stock offering with funds we lend. Pro forma GAAP and regulatory capital have been reduced by the amount required to fund both of these plans. See “Management of Versailles Financial Corporation” for a discussion of the stock-based benefit plans and employee stock ownership plan. We may award shares of common stock under one or more stock-based benefit plans in excess of 4% of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. Accordingly, we may increase the awards beyond current regulatory restrictions and beyond the amounts reflected in this table.
(5) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

41


Table of Contents

CAPITALIZATION

The following table presents the historical capitalization of Versailles Savings and Loan Company at June 30, 2009 and the pro forma consolidated capitalization of Versailles Financial Corporation, after giving effect to the conversion and the offering, based upon the assumptions set forth in the “Pro Forma Data” section.

 

     Versailles
Savings and
Loan Company
Historical at
June 30, 2009
    Versailles Financial Corporation Pro Forma,
Based Upon the Sale in the Offering at $10.00 per Share of
 
       425,000
Shares
    500,000 Shares     575,000 Shares     661,250 Shares
(1)
 
     (Dollars in thousands)  

Deposits (2)

   $ 24,585      $ 24,585      $ 24,585      $ 24,585      $ 24,585   

Borrowings

     7,500        7,500        7,500        7,500        7,500   
                                        

Total deposits and borrowed funds

   $ 32,085      $ 32,085      $ 32,085      $ 32,085      $ 32,085   
                                        

Stockholders’ equity:

          

Preferred stock $0.01 par value, 1,000,000 shares authorized; none issued or outstanding

   $ —        $ —        $ —        $ —        $ —     

Common stock $0.01 par value, 10,000,000 shares authorized; assuming shares outstanding as shown (3)

     —          4        5        6        7   

Additional paid-in capital (4)

     —          3,646        4,395        5,144        6,006   

Retained earnings (5)

     7,789        7,789        7,789        7,789        7,789   

Less:

          

Accumulated other comprehensive loss

     (410     (410     (410     (410     (410

Common stock to be acquired by employee stock ownership plan (6)

     —          (340     (400     (460     (529

Common stock to be acquired by stock-based benefit plans (7)

     —          (170     (200     (230     (265
                                        

Total stockholders’ equity

   $ 7,379      $ 10,519      $ 11,179      $ 11,839      $ 12,598   
                                        

Total stockholders’ equity as a percentage of total assets (2)

     18.09     23.67     24.74     25.77     26.92

 

(1) As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the subscription and community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3) No effect has been given to the issuance of additional shares of Versailles Financial Corporation common stock pursuant to one or more stock-based benefit plans. If these plans are implemented within 12 months following the completion of the stock offering, an amount up to 10% and 4% of the shares of Versailles Financial Corporation common stock sold in the offering will be reserved for issuance upon the exercise of stock options and for issuance as restricted stock awards, respectively. See “Management of Versailles Financial Corporation.”
(4) The sum of the par value of the total shares outstanding and additional paid-in capital equals the net stock offering proceeds at the offering price of $10.00 per share.
(5) The retained earnings of Versailles Savings and Loan Company will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion—Liquidation Rights” and “Supervision and Regulation.”
(6) Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Versailles Financial Corporation. The loan will be repaid principally from Versailles Savings and Loan Company’s contributions to the employee stock ownership plan. Since Versailles Financial Corporation will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no asset or liability will be reflected on Versailles Financial Corporation’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(7) Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Versailles Financial Corporation accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock stock-based benefit plans will require stockholder approval. The funds to be used by the stock-based benefit plans will be provided by Versailles Financial Corporation.

 

42


Table of Contents

PRO FORMA DATA

The following tables summarize historical data of Versailles Savings and Loan Company and pro forma data of Versailles Financial Corporation at and for the year ended June 30, 2009. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds in the tables are based upon the following assumptions:

 

   

all shares of common stock will be sold in the subscription and community offerings;

 

   

101,500 shares of common stock will be purchased by our executive officers and directors, and their associates;

 

   

our employee stock ownership plan will purchase 8% of the shares of common stock sold in the stock offering with a loan from Versailles Financial Corporation. The loan will be repaid in substantially equal payments of principal and interest over a period of 20 years;

 

   

Keefe Bruyette & Woods, Inc. will receive a fee equal to $125,000 for the subscription offering, $30,000 for its advisory services and 2.0% of the dollar amount of the shares of common stock sold in the community offering, with a maximum fee of $180,000 for both offerings; and

 

   

expenses of the stock offering, other than fees and expenses to be paid to Keefe Bruyette & Woods, Inc., will be $427,500.

We calculated pro forma consolidated net income for the year ended June 30, 2009 as if the estimated net proceeds we received had been invested at an assumed interest rate of 1.18% or 0.78%, net of tax. This represents the monthly two-year United States Treasury Note as of June 30, 2009 which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by applicable regulations.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma tables give effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit

 

43


Table of Contents

plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of our outstanding shares of common stock at the same price for which they were sold in the stock offering. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period.

We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $4.15 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 22.7% for the shares of common stock, a dividend yield of 0.0%, an expected option life of ten years and a risk-free interest rate of 3.56%.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.

As discussed under “How We Intend to Use the Proceeds from the Stock Offering,” we intend to contribute at least 50% of the net proceeds from the stock offering to Versailles Savings, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

The pro forma table does not give effect to:

 

   

withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the stock offering;

 

   

our results of operations after the stock offering; or

 

   

changes in the market price of the shares of common stock after the stock offering.

The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with generally accepted accounting principles. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of intangible assets, the liquidation account we will establish in the conversion or tax bad debt reserves in the unlikely event we are liquidated.

 

44


Table of Contents
     At or For the Year Ended June 30, 2009
Based Upon the Sale at $10.00 Per Share of
 
     425,000
Shares
    500,000
Shares
    575,000
Shares
    661,250
Shares (1)
 
     (Dollars in thousands, except per share amounts)  

Gross Proceeds of Offering

   $ 4,250      $ 5,000      $ 5,750      $ 6,613   

Less: expenses

     (600     (600     (600     (600
                                

Estimated net proceeds

     3,650        4,400        5,150        6,013   

Less: Common stock purchased by ESOP (2)

     (340     (400     (460     (529

Less: Common stock awarded under stock-based benefit plans (3)

     (170     (200     (230     (265
                                

Estimated net cash proceeds

   $ 3,140      $ 3,800      $ 4,460      $ 5,219   
                                

For the Year Ended June 30, 2009

        

Consolidated net income:

        

Historical

   $ 138      $ 138      $ 138      $ 138   

Pro forma income on net proceeds

     24        30        35        41   

Pro forma ESOP adjustment(2)

     (11     (13     (15     (17

Pro forma stock award adjustment (3)

     (22     (26     (30     (35

Pro forma stock option adjustment (4)

     (23     (27     (31     (36
                                

Pro forma net income

   $ 106      $ 102      $ 97      $ 91   
                                

Per share net income

        

Historical

   $ 0.37      $ 0.31      $ 0.27      $ 0.24   

Pro forma income on net proceeds

     0.06        0.07        0.07        0.07   

Pro forma ESOP adjustment (2)

     (0.03     (0.03     (0.03     (0.03

Pro forma stock award adjustment (3)

     (0.06     (0.06     (0.06     (0.06

Pro forma stock option adjustment (4)

     (0.06     (0.06     (0.06     (0.06
                                

Pro forma net income per share (5)

   $ 0.28      $ 0.23      $ 0.19      $ 0.16   
                                

Offering price as a multiple of pro forma net earnings per share

     35.71     43.48     52.63     66.67

Number of shares outstanding for pro forma net income per share calculations (5)

     376,550        443,000        509,450        585,868   

At June 30, 2009

        

Stockholders’ equity:

        

Historical

   $ 7,379      $ 7,379      $ 7,379      $ 7,379   

Estimated net proceeds

     3,650        4,400        5,150        6,013   

Less: Common stock acquired by ESOP (2)

     (340     (400     (460     (529

Less: Common stock awarded under stock-based benefit plans (3) (4)

     (170     (200     (230     (265
                                

Pro forma stockholders’ equity

   $ 10,519      $ 11,179      $ 11,839      $ 12,598   
                                

Stockholders’ equity per share:

        

Historical

   $ 17.36      $ 14.76      $ 12.83      $ 11.16   

Estimated net proceeds

     8.59        8.80        8.96        9.09   

Less: Common stock acquired by ESOP (2)

     (0.80     (0.80     (0.80     (0.80

Less: Common stock awarded under stock-based benefit plans (3) (4)

     (0.40     (0.40     (0.40     (0.40
                                

Pro forma stockholders’ equity per share (6)

   $ 24.75      $ 22.36      $ 20.59      $ 19.05   
                                

Offering price as percentage of pro forma stockholders’ equity per share

     40.40     44.73     48.57     52.49

Number of shares outstanding for pro forma book value per share calculations

     425,000        500,000        575,000        661,250   

(footnotes begin on following page)

 

45


Table of Contents

 

(Footnotes from previous page)

(1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Versailles Financial Corporation. Versailles Savings and Loan Company intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Versailles Savings and Loan Company’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans” (“SOP 93-6”), requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Versailles Savings and Loan Company, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 1,700, 2,000, 2,300 and 2,645 shares were committed to be released during the fiscal year at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with SOP 93-6, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations. The committed to be released shares were assumed to be earned evenly throughout the year.
(3) If approved by Versailles Financial Corporation’s stockholders, one or more stock-based benefit plans plan may purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Versailles Financial Corporation or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Versailles Financial Corporation. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-based benefit plans is amortized as an expense during the fiscal year and (iii) the stock-based benefit plans expense reflects an effective combined federal and state tax rate of 34.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.9%. The pro forma net income further assumes that 3,400, 4,000, 4,600 and 5,290 shares were earned during the fiscal year at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, only the stock awards earned during the period were considered outstanding for purposes of income per share calculations. The earned shares were assumed to be earned evenly throughout the year.

The following table shows pro forma earnings per share and stockholders’ equity per share, assuming all the shares to fund the stock awards are obtained from authorized but unissued shares, based on the sale of shares as indicated.

 

For the Year Ended June 30, 2009

   425,000 Shares    500,000 Shares    575,000 Shares    661,250 Shares

Pro forma earnings per share

   $ 0.27    $ 0.22    $ 0.18    $ 0.15

Stockholders’ equity per share

   $ 24.18    $ 21.88    $ 20.18    $ 18.70

 

(4) If approved by Versailles Financial Corporation’s stockholders, one of more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $4.15 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock used to fund stock options (equal to 10% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 10%. All options were assumed to be nonqualified.
(5) Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with SOP 93-6, subtracting the employee stock ownership plan shares that have not been committed for release during the period and subtracting non-vested stock awards granted under one or more stock-based benefit plans. See note 2 and 3, above.
(6) The retained earnings of Versailles Savings and Loan Company will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion—Liquidation Rights” and “Supervision and Regulation.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

 

46


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS OF VERSAILLES SAVINGS AND LOAN COMPANY

This section is intended to help potential investors understand the financial performance of Versailles Savings and Loan Company through a discussion of the factors affecting our financial condition at June 30, 2009 and our results of operations for the years ended June 30, 2009, 2008 and 2007. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this prospectus.

Overview

We have historically operated as a traditional thrift institution. A significant majority of our assets consist of long-term, one- to four-family fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit accounts and Federal Home Loan Bank of Cincinnati advances. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities (including U.S. Government agencies, AMF Short U.S. Government Fund and Government sponsored entities residential mortgage-backed securities) and other interest-earning assets, primarily interest-earning deposits at other financial institutions, and the interest paid on our interest-bearing liabilities, consisting primarily of savings accounts, certificates of deposit, and Federal Home Loan Bank of Cincinnati advances. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts and other income, gains or losses on the sale of available for sale securities and other-than-temporary impairment losses on securities. Non-interest expense currently consists primarily of salaries and employee benefits, occupancy and equipment expenses, data processing, legal, accounting and exam fees and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Other than our loans for the construction of one- to four-family properties, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his or her loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (generally defined as loans having less than full documentation).

All of our residential mortgage-backed securities have been issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae, all of which are U.S. government-sponsored entities. These agencies guarantee the payment of principal and interest on our residential mortgage-backed securities. We do not own any preferred stock issued by Fannie Mae or Freddie Mac. We also do not own any trust preferred securities.

 

47


Table of Contents

Anticipated Increase in Non-Interest Expense Due to Stock Benefit Plans

Following the completion of the conversion and stock offering, we anticipate that our non-interest expense will increase as a result of increased compensation expenses associated with the implementation of our employee stock ownership plan and the implementation of a stock-based incentive plan, if that incentive plan is approved by our stockholders.

Assuming that the maximum number of shares is sold in the offering:

 

   

the employee stock ownership plan will acquire 46,000 shares of common stock with a $460,000 loan that is expected to be repaid over 20 years, resulting in an annual pre-tax expense of approximately $23,000 (assuming that the common stock maintains a value of $10.00 per share);

 

   

the stock-based incentive plan would permit us to grant options to purchase shares equal to 10.0% of the total outstanding shares, or 57,500 shares to eligible participants, which would result in compensation expense over the vesting period of the options. Assuming a five-year vesting period, a Black-Scholes option pricing analysis of $4.15 per option, as described in “Pro Forma Data”, the pre-tax expense associated with the stock options would be approximately $48,000; and

 

   

the stock-based incentive plan would award a number of restricted shares of common stock equal to 4.0% of the outstanding shares, or 23,000 shares, to eligible participants, which would be expensed as the awards vest. Assuming that all shares are awarded under the stock-based incentive plan at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted shares awarded under the stock-based incentive plan would be approximately $46,000.

These estimates are subject to change. The actual expense that will be recorded for the employee stock ownership plan will be determined by the fair market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and any accelerated repayment of the loan will increase the annual employee stock ownership plan expense. Further, the actual expense of the stock awards issued under the stock-based incentive plan will be determined by the fair market value of the stock on the grant date, which might be greater than $10.00 per share. The actual expense of the stock options issued under the stock-based incentive plan will be determined by the grant-date fair value of the options which will depend on a number of factors, including the valuation assumptions used in the Black-Scholes option pricing model.

 

48


Table of Contents

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on income or on the carrying value of certain assets, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Commercial and non-residential real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Securities Impairment. In April 2009, the FASB issued FSP No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary (OTTI) for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this FSP did not have a material impact on the results of operations or financial position.

Deferred Compensation and Supplemental Retirement Plans. The deferred compensation and supplemental retirement plans require management to make estimates on participants’ service periods and earnings on deferred amounts.

 

49


Table of Contents

Retirement Plans. Amounts reported for the pension obligation require management to use estimates that may be subject to significant change in the near term. These estimates are based on projection of the weighted average discount rate, rate of increase in future compensation levels, and weighted average expected long-term rate of return on pension assets. The deferred compensation and supplemental retirement plans require management to make estimates on the participants’ service period and earnings on deferred amounts.

Business Strategy

We have focused primarily on improving the execution of our community oriented retail banking strategy. Highlights of our current business strategy include the following:

 

   

Continue to Focus on Residential Lending. We have been and will continue to be primarily a one- to four-family residential mortgage lender for borrowers in our market area. As of June 30, 2009, $27.0 million, or 77.9%, of our total loan portfolio consisted of one- to four-family residential mortgage loans (including home equity loans). Although we have historically retained in our portfolio all loans that we originate, we will consider in the future whether to hold our originated mortgage loans for investment or to sell the loans to investors, choosing the strategy that we believe is most advantageous to us from a profitability and risk management standpoint.

 

   

Increase Non-residential Real Estate Lending. While we will continue to emphasize one- to four-family residential mortgage loans, we also intend to continue to increase our originations of non-residential real estate loans in order to increase the yield of, and reduce the term to repricing of, our total loan portfolio. We originated $3.0 million of non-residential real estate during the year ended June 30, 2009. At June 30, 2009, $5.8 million, or 16.9%, of our total loan portfolio consisted of non-residential real estate loans. The additional capital raised in the stock offering will increase our commercial lending capacity by enabling us to originate more loans and loans with larger balances. This will permit us to serve commercial borrowers with larger lending needs and to originate larger commercial loans than we have in the past. We have hired a new Senior Lender with substantial commercial lending experience to oversee this effort. See “Business of Versailles Savings and Loan Company—Lending Activities— Non-residential Real Estate Lending.”

 

   

Manage Interest Rate Risk While Maintaining or Enhancing to the Extent Practicable our Net Interest Margin. Subject to market conditions, we have sought to enhance net interest income by emphasizing controls on the cost of funds rather than attempting to maximize asset yields, as loans with high yields often involve greater credit risk or may be repaid during periods of decreasing market interest rates.

 

   

Build or Acquire a Larger Home Office Location and Provide Banking Relationships to a Larger Base of Customers. We were established in 1887 and have been operating continuously in Darke County since that time. Our share of

 

50


Table of Contents
 

FDIC-insured deposits in Darke County as of June 30, 2009 (the latest date for which such information is available) was 2.6%. We will seek to expand our customer base by building or acquiring a new, larger home office in Versailles to replace our existing location, which will facilitate on-site parking, drive-through windows and ATMs. In this way we can offer our products and services to the new base of customers, by using our recognized brand name and the goodwill developed over years of providing timely, efficient banking services.

 

   

Offer New Deposit Products. In connection with the establishment of a new home office location, we plan to offer money market deposit accounts and checking accounts. These products will provide a lower cost funding source and a new source of non-interest income.

 

   

Maintain Strong Asset Quality. We have emphasized maintaining strong asset quality by following conservative underwriting guidelines, sound loan administration, and focusing on loans secured by real estate located within our market area only. Our non-performing assets totaled $265,000 or 0.65% of total assets at June 30, 2009. Our total nonperforming loans to total loans ratio was 0.76% at June 30, 2009.

Comparison of Financial Condition at June 30, 2009 and June 30, 2008

General. Our total assets increased to $40.8 million at June 30, 2009 from $38.8 million at June 30, 2008. The increase was primarily due to an increase in net loans of $3.1 million, or 10.1%, to $34.4 million at June 30, 2009 from $31.3 million at June 30, 2008.

Loans. The increase in net loans reflected steady demand for loans in our market area in a low interest rate environment, particularly for one- to four-family residential real estate loans. The largest growth in our loan portfolio during the year ended June 30, 2009 was in one- to four-family residential real estate loans, which increased to $27.0 million at June 30, 2009 from $24.1 million at June 30, 2008, reflecting our emphasis on the origination of this type of loan product. Non-residential real estate loans increased to $5.8 million at June 30, 2009 from $4.8 million at June 30, 2008. Non-residential real estate loans help us manage interest rate risk as these types of loans have a higher yield and shorter term than one- to four-family residential mortgage loans, but carry a greater credit risk since they are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.

Investments. Investment securities decreased to $2.0 million at June 30, 2009 from $3.1 million at June 30, 2008 reflecting the sale of $250,000 of available for sale securities, an other-than-temporary impairment charge of $52,000 and the net payback of $800,000 in government securities.

Cash and Cash Equivalents. Cash and cash equivalents decreased to $2.5 million at June 30, 2009 from $3.5 million at June 30, 2008, reflecting normal cash flows as well as an increase in loans.

 

51


Table of Contents

Deposits. Deposits increased $1.1 million, or 4.6%, to $24.6 million at June 30, 2009 from $23.5 million at June 30, 2008. The increase in deposits was due to an increase in regular savings and other deposits to $7.5 million at June 30, 2009 from $6.4 million at June 30, 2008, as some investors shifted funds to deposit products from equity-based investments, given the extreme volatility in the stock markets during the year. The increase in deposits was used to fund new loans. We generally do not accept brokered deposits and no brokered deposits were accepted during the 12 months ended June 30, 2009.

Borrowings. Federal Home Loan Bank of Cincinnati advances increased to $7.5 million at June 30, 2009 from $7.0 million at June 30, 2008. We continue to utilize borrowings as an alternative funding source, and our borrowings from the Federal Home Loan Bank of Cincinnati consist of advances with laddered terms of up to five years.

Equity. Total equity of $7.4 million was unchanged at June 30, 2009 and June 30, 2008. Net income was offset by an increase in accumulated other comprehensive loss.

Comparison of Operating Results for the Years Ended June 30, 2009 and June 30, 2008

General. Net income decreased to $138,000 for the year ended June 30, 2009 from $259,000 for the year ended June 30, 2008. The decrease primarily reflected lower net interest income, a higher provision for loan losses of $110,000 and an increase in non-interest expenses, along with an other-than-temporary impairment charge of $52,000 on available for sale securities.

Interest Income. Interest and dividend income decreased $207,000, or 9.1%, to $2.1 million for the year ended June 30, 2009 from $2.3 million for the year ended June 30, 2008. The decrease reflected a decrease in average yield on interest earning assets partially offset by an increase in average interest-earning assets to $38.4 million for the 2009 fiscal year compared to $38.0 million for the 2008 fiscal year. The average yield on interest-earning assets decreased to 5.35% in fiscal 2009 from 5.96% in fiscal 2008, reflecting a decrease in the proportion of higher-yielding loans and investment securities compared to the proportion of lower-yielding loans and investment securities.

Interest income on loans decreased $118,000 or 5.9%, to $1.9 million for the year ended June 30, 2009 from $2.0 million for the year ended June 30, 2008, reflecting an increase in the average balance to $32.8 million from $31.6 million, which was more than offset by lower average yields on such balances, to 5.74% in fiscal 2009 from 6.33% in fiscal 2008. The lower yields reflected the lower interest rate environment.

Interest income on investment securities decreased to $113,000 for the year ended June 30, 2009 from $133,000 for the year ended June 30, 2008, reflecting a decrease in the average balance of such securities to $2.6 million in 2009 from $2.9 million in 2008, as well as a decrease in the average yield on available for sale securities to 4.04% from 4.64% and a decrease in the average yield on held to maturity securities to 4.34% from 4.61%.

Interest Expense. Interest expense decreased $179,000, or 16.1%, to $931,000 for the year ended June 30, 2009 from $1.1 million for the year ended June 30, 2008. The decrease reflected a decrease in the average rate paid on deposits, including certificates of deposit, and Federal Home Loan Bank borrowings in 2009 compared to 2008, which more than offset the increases in the average balance of such deposits and borrowings.

 

52


Table of Contents

Interest expense on certificates of deposit decreased to $563,000 for the year ended June 30, 2009 from $685,000 for the year ended June 30, 2008. An increase in the average balance of such certificates to $17.3 million from $17.0 million was more than offset by a decrease in the average cost of such certificates to 3.25% in fiscal 2009 from 4.02% in fiscal 2008. The increase in average balances of our certificates of deposit resulted primarily from our customers seeking lower-risk investments in lieu of higher volatility equity investments during 2009.

Interest expense on borrowings, consisting of advances from the Federal Home Loan Bank of Cincinnati, decreased $45,000, or 11.3%, to $354,000 for the year ended June 30, 2009 from $399,000 for the year ended June 30, 2008. The decrease reflected the lower weighted average rate paid on such borrowings to 5.25% for the year ended June 30, 2009, from 5.41% for the year ended June 30, 2008, and the decrease in the average balances of such borrowings to $6.8 million for the year ended June 30, 2009 from $7.4 million for the year ended June 30, 2008.

Net Interest Income. Net interest income decreased slightly to $1.1 million for the year ended June 30, 2009 from $1.2 million for the year ended June 30, 2008. This reflected an increase in our interest rate spread to 2.35% from 2.33%, which offset a slight decrease in the ratio of our average interest earning assets to average interest bearing liabilities to 123.80% from 124.27%. Our net interest margin decreased to 2.93% from 3.04%. The increase in our interest rate spread and decrease in our net interest margin reflected a steepening of the United States Treasury yield curve due to significant decreases during 2009 in the Federal Reserve Board’s target federal funds rate, while our average assets increased.

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loans losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change or as more information becomes available. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as required in order to maintain the allowance.

We recorded a provision for loan losses of $110,000 for the year ended June 30, 2009 compared to no provision in 2008. The increase in the provision in 2009 compared to 2008 was due to the general downturn in local economic conditions. The unemployment rate for Darke County increased from 5.6% at June 30, 2008 to 11.7% at June 30, 2009. The provision for loan losses in 2009 also reflected net charge offs of $12,000 for the year ended June 30, 2009 compared to no charge-offs for the year ended June 30, 2008. The allowance for loan losses was $264,000, or 0.76% of total loans at June 30, 2009 compared to $166,000, or 0.53% of total

 

53


Table of Contents

loans at June 30, 2008. Total nonperforming assets were $265,000 at June 30, 2009 compared to $274,000 at June 30, 2008. We used the same methodology in assessing the allowances for both periods. To the best of our knowledge, we have recorded all probable incurred credit losses for the years ended June 30, 2009 and 2008.

Noninterest Income. Our noninterest income increased to ($49,000) for the year ended June 30, 2009 from ($66,000) for the year ended June 30, 2008. The increase in noninterest income was primarily attributable to a lower impairment charge for the other-than-temporary decline in the fair value of a mutual fund during 2009. During 2009, the impairment charge was $52,000, compared to $70,000 in 2008. These losses were partially offset by increased service charges on deposit account to $5,000 from $4,000, reflecting higher balances of deposits.

Noninterest Expense. Noninterest expense increased $61,000, or 8.9%, to $761,000 for the year ended June 30, 2009 from $700,000 for the year ended June 30, 2008. The increase was due to increased salaries and employee benefits expense to $329,000 for the year ended June 30, 2009 from $305,000 for the year ended June 30, 2008, reflecting normal annual salary increases and payouts under our benefit plans. The number of full time equivalent employees increased to seven in the 2009 period from six in the 2008 period, and compensation expense increased $24,000 from the employment of our new senior lender. FDIC insurance premiums increased $20,000, with a remaining $5,000 one-time assessment credit balance to offset against future FDIC insurance premiums. Our legal and accounting expense will increase in future years as a result of our compliance with the federal securities laws. Occupancy and office costs are also expected to increase with our new larger home office under consideration.

Income Tax Expense. The provision for income taxes was $69,000 for the year ended June 30, 2009 compared to $130,000 for the year ended June 30, 2008, reflecting a decrease in pretax income. Our effective tax rate was 33.17% for the year ended June 30, 2009 compared to 33.42% for the year ended June 30, 2008. The decrease in our effective tax rate for 2009 was primarily attributable to the level of tax exempt interest income in comparison to pre-tax income.

The components of other comprehensive income (loss) include unrealized holding gains and losses on available for sale securities, unrealized losses on defined benefit pension plan, the amortization of unrecognized net loss for the defined benefit pension plan, and the amortization of prior service cost for both the defined benefit pension plan and the supplemental retirement plans. Other comprehensive income decreased to a loss of $155,000 for the year ended June 30, 2009 from a loss of $35,000 for the year ended June 30, 2008. The decrease reflected the loss in value of the defined benefit pension plan, which had unrealized losses of $257,000 for the year ended June 30, 2009, compared to unrealized losses of $111,000 during the year ended June 30, 2008. The increase in the unrealized loss on the defined benefit pension plan was due to actual investment return on plan assets being significantly less than the expected return on plan assets for the year.

Comparison of Operating Results for the Years Ended June 30, 2008 and June 30, 2007

General. Net income decreased to $259,000 for the year ended June 30, 2008 from $345,000 for the year ended June 30, 2007. The decrease primarily reflected lower net interest income and noninterest income, which consisted mostly of an other-than-temporary impairment charge of $70,000 on a mutual fund.

 

54


Table of Contents

Interest Income. Interest and dividend income of $2.3 million was unchanged at June 30, 2008 and June 30, 2007. This reflected an increase in average interest-earning assets to $38.0 million for the 2008 period compared to $37.3 million for the 2007 period, offset by a decrease in average yield on interest earning assets. The average yield on interest-earning assets decreased to 5.96% in fiscal 2008 from 6.13% in fiscal 2007, reflecting a decrease in the proportion of higher-yielding loans and investment securities compared to the proportion of lower-yielding loans and investment securities.

Interest income on loans decreased $49,000 or 2.4%, to $2.0 million for the year ended June 30, 2008 from $2.1 million for the year ended June 30, 2007, reflecting a decrease in the average balance to $31.6 million in fiscal 2008 from $32.4 million in fiscal 2007 while the average yield was unchanged at 6.33% in fiscal 2008 and 2007. Interest income on investment securities decreased to $133,000 for the year ended June 30, 2008 from $134,000 for the year ended June 30, 2007, reflecting a increase in the average balance of such securities to $2.9 million in fiscal 2008 from $2.8 million in fiscal 2007, offset by a decrease in the average yield on held for sale securities to 4.64% in fiscal 2008 from 4.87% in fiscal 2007 and a decrease in the average yield on held to maturity securities to 4.61% in fiscal 2008 from 4.74% in fiscal 2007.

Interest Expense. Interest expense increased $45,000, or 4.2%, to $1.1 million for the year ended June 30, 2008 from $1.1 million for the year ended June 30, 2007. The slight increase reflected an increase in the average balance and yield on deposits, in 2008 compared to 2007 and a decrease in the average rate paid on Federal Home Loan Bank borrowings of 5.41% in fiscal 2008 compared to 5.47% in fiscal 2007.

Interest expense on certificates of deposit increased to $685,000 for the year ended June 30, 2008 from $629,000 for the year ended June 30, 2007. The increase was a result of an increase in the average balance of such certificates to $17.0 million in fiscal 2008 from $16.3 million in fiscal 2007 and an increase in the average cost of such certificates to 4.02% from 3.86%. The increase in average balances of our certificates of deposit resulted primarily from our customers seeking lower-risk investments in lieu of higher volatility equity investments during 2008.

Interest expense on borrowings, consisting of advances from the Federal Home Loan Bank of Cincinnati, decreased $2,000, or 0.5%, to $399,000 for the year ended June 30, 2008 from $401,000 for the year ended June 30, 2007. The decrease reflected the lower weighted average rate paid on such borrowings to 5.41% for the year ended June 30, 2008 from 5.47% for the year ended June 30, 2007, partially offset by a slight increase in average balances of such borrowings to $7.4 million for the year ended June 30, 2008 from $7.3 million for the year ended June 30, 2007.

Net Interest Income. Net interest income of $1.2 million was unchanged for the year ended June 30, 2008 and for the year ended June 30, 2007. This reflected an increase in average interest earning assets, but at a lower yield. Interest bearing liabilities increased to some extent

 

55


Table of Contents

at a slightly higher cost. The net interest rate spread decreased to 2.33% in fiscal 2008 from 2.62% in fiscal 2007 while the net interest margin decreased to 3.04% in fiscal 2008 from 3.28% in fiscal 2007.

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loans losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change or as more information becomes available. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as required in order to maintain the allowance.

No additional provision for loan losses was recorded for the year ended June 30, 2008 and the year ended June 30, 2007. No provisions for loan losses were recorded despite the increase in non-performing loans due to the overall decline in the loan portfolio balance. The allowance for loan losses was $166,000, or 0.53% of total loans at June 30, 2008 and 0.51% at June 30, 2007 Total non-performing loans were $274,000 at June 30, 2008 compared to $83,000 at June 30, 2007. We used the same methodology in assessing the allowances for both periods. To the best of our knowledge, we have recorded all probable incurred credit losses for the years ended June 30, 2008 and June 30, 2007.

Noninterest Income. Our noninterest income/(loss) decreased to ($66,000) for the year ended June 30, 2008 from $4,000 for the year ended June 30, 2007. The decrease in noninterest income was primarily attributable to an impairment charge for the other-than-temporary decline in the fair value of a mutual fund during 2008 in the amount of $70,000. The loss was partially offset by service charges on deposit accounts of $4,000 at June 30, 2008 and June 30, 2007.

Noninterest Expense. Noninterest expense decreased $7,000, or 1.0%, to $700,000 for the year ended June 30, 2008 from $707,000 for the year ended June 30, 2007. Due to deferred compensation generated from greater loan volume, salaries and employee benefits expense decreased to $305,000 for the year ended June 30, 2008 from $315,000 for the year ended June 30, 2007. Additionally, data processing expense increased $2,000 to $67,000 for the year ended June 30, 2008 from $65,000 for the year ended June 30, 2007, reflecting new services contracted to keep Versailles Savings in compliance with federal and state regulations.

Income Tax Expense. The provision for income taxes was $130,000 for the year ended June 30, 2008 compared to $174,000 for the year ended June 30, 2007, reflecting a decrease in pretax income. Our effective tax rate was 33.42% for the year ended June 30, 2008 compared to 33.53% for the year ended June 30, 2007. The decrease in our effective tax rate for 2008 was primarily attributable to the level of tax exempt income in comparison to pre-tax income.

 

56


Table of Contents

For the year ended June 30, 2008, the components of other comprehensive income (loss) included unrealized holding gains and losses on available for sale securities, unrealized losses on defined benefit pension plan, the amortization of unrecognized net loss for the defined benefit pension plan, and the amortization of prior service cost for both the defined benefit pension plan and the supplemental retirement plans, while, for the year ended June 30, 2008, the components of other comprehensive income (loss) included only unrealized holding gains and losses on available for sale securities. Beginning with the year ended June 30, 2008, Statement of Financial Accounting Standards No. 158 required that changes in the funded status of a defined benefit postretirement plan be recognized in comprehensive income in the year in which the changes occurred.

Other comprehensive income decreased to a loss of $35,000 for the year ended June 30, 2008 from a gain of $1,000 for the year ended June 30, 2007. The decrease reflected the loss in value of the defined benefit pension plan, which had unrealized losses of $111,000 for the year ended June 30, 2008 due to actual investment return on plan assets being significantly less than the expected return on plan assets for the year. The unrealized loss on the defined benefit pension plan was somewhat offset by net unrealized gains on available for sale securities of $40,000 for the year ended June 30, 2008 compared to unrealized gains of $2,000 for the year ended June 30, 2007.

Analysis of Net Interest Income

Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

 

57


Table of Contents

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

 

           For the year ended June 30,  
     At June 30, 2009     2009     2008  
     Actual
Balance
    Yield/Cost     Average
Balance
    Interest
and
Dividends
   Yield/Cost     Average
Balance
    Interest
and
Dividends
   Yield/Cost  
     (Dollars in thousands)  

Assets:

                  

Interest-earning assets:

                  

Loans

   $ 34,428      5.62   $ 32,809      $ 1,884    5.74   $ 31,636      $ 2,003    6.33

Investment securities available for sale

     897      3.85     1,161        48    4.04     1,245        59    4.64

Investment securities held to maturity

     1,124      4.21     1,485        65    4.34     1,615        74    4.61

FHLB stock

     389      4.50     388        19    4.82     376        23    6.04

Other interest-earning assets

     2,442      1.22     2,579        42    1.64     3,098        106    3.42
                                            

Total interest-earning assets

     39,280      5.26     38,422        2,058    5.35     37,970        2,265    5.96

Noninterest-earning assets

     1,508          1,108             832        
                                    

Total assets

   $ 40,788        $ 39,530           $ 38,802        
                                    

Liabilities and equity:

                  

Interest-bearing liabilities:

                  

Savings deposits

   $ 7,468      0.13   $ 7,030      $ 14    0.20   $ 6,168      $ 26    0.41

Certificates of deposit

     17,117      2.72     17,282        563    3.25     17,027        685    4.02
                                            

Total interest-bearing deposits

     24,585      1.93     24,312        577    2.37     23,195        711    3.06

FHLB advances

     7,500      4.91     6,750        354    5.25     7,375        399    5.41
                                            

Total interest-bearing liabilities

     32,085      2.63     31,062        931    3.00     30,570        1,110    3.63

Other noninterest-bearing liabilities

     1,324          970             852        
                                    

Total liabilities

     33,409          32,032             31,422        

Retained earnings

     7,789          7,764             7,565        

Accumulated other comprehensive income

     (410       (266          (185     
                                    

Total equity

     7,379          7,498             7,380        
                                    

Total liabilities and equity

   $ 40,788        $ 39,530           $ 38,802        
                                    

Net interest income

   $ 1,127          $ 1,127        $ 1,155   
                                

Interest rate spread

            2.35        2.33
                          

Net interest margin

            2.93        3.04
                          

Average interest-earning assets to average interest-bearing liabilities

         123.80          124.27     
                              

 

58


Table of Contents

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of Versailles Savings and Loan Company’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

2009 Compared to 2008    Volume     Rate     Net  
     (In thousands)  

Interest income:

      

Loans receivable

   $ 72      $ (191   $ (119

Investment securities available for sale

     (4     (7     (11

Investment securities held to maturity

     (5     (4     (9

FHLB stock

     1        (5     (4

Other interest-earning assets

     (16     (48     (64
                        

Total

     48        (255     (207

Interest expense:

      

Savings deposits

     1        (14     (12

Certificates of deposit

     11        (133     (122

FHLB advances

     (33     (12     (45
                        

Total

     (20     (159     (179
                        

Increase (decrease) in net interest income

   $ 68      $ (96   $ (28
                        

Management of Market Risk

Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our Board of Directors is responsible for the review and oversight of our asset/liability strategies. The Asset/Liability Committee of the Board of Directors meets quarterly and is charged with developing an asset/liability management plan. Our Board of Directors has established an Asset/Liability Management Committee, consisting of senior management. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

Among the techniques we are currently using to manage interest rate risk are: (i) maintaining a portfolio of adjustable-rate one- to four-family residential loans; (ii) increasing our origination of non-residential real estate loans as they generally reprice more quickly than residential mortgage loans; (iii) reducing the interest rate sensitivity of our liabilities by using fixed-rate certificates of deposit and fixed-rate Federal Home Loan Bank advances with laddered terms; and (iv) maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities.

 

59


Table of Contents

While these strategies have helped reduce our interest rate exposure, they do pose risks. For example, the annual interest rate caps and prepayment options embedded in adjustable-rate one- to four-family residential loans, which allow for early repayment at the borrower’s discretion, may result in prepayment before the loan reaches the fully indexed rate. Conversely, in a falling interest rate environment, borrowers may refinance to fixed rate loans to lock in the then lower rates. In addition, multi-family and non-residential real estate lending generally presents higher credit risks than residential one- to four-family lending.

An important measure of interest rate risk is the amount by which the net present value of an institution’s cash flow from assets, liabilities and off balance sheet items changes in the event of a range of assumed changes in market interest rates. We have utilized the Office of Thrift Supervision net portfolio value model (“NPV”) to provide an analysis of estimated changes in our NPV under the assumed instantaneous changes in the United States treasury yield curve. The financial model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of the NPV. Set forth below is an analysis of the changes to the economic value of our equity that would occur to our NPV as of June 30, 2009 in the event of designated changes in the United States treasury yield curve. At June 30, 2009, our economic value of equity exposure related to these hypothetical changes in market interest rates was within the current guidelines we have established.

 

     Net Portfolio (Dollars in thousands)     NPV as % of PV of Assets

Change in Rates

   $ Amount    $ Change     % Change     NPP Ratio    

Change

+300 bp

   5,816    (2,294   (28 )%    14.81   (443) bp

+200 bp

   6,654    (1,456   (18 )%    16.51   (272) bp

+100 bp

   7,457    (654   (8 )%    18.06   (118) bp

+50 bp

   7,811    (300   (4 )%    18.71   (53) bp

0 bp

   8,110    —        —        19.24   —  

-50 bp

   8,383    273      3   19.70   47 bp

-100 bp

   8,558    448      6   19.99   75 bp

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

 

60


Table of Contents

Liquidity and Capital Resources

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. We also utilize Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

Our cash flows are comprised of three primary classifications: (i) cash flows provided by operating activities, (ii) investing activities, and (iii) financing activities. Net cash flows from operating activities were $420,000 for the year ended June 30, 2009 and $317,000 for the year ended June 30, 2008. Net cash from investing activities consisted primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, and proceeds from maturation and sales of securities. Net cash flows from investing activities were ($3.0 million) for the year ended June 30, 2009 and net cash flows from investing activities were $898,000 for the year ended June 30, 2008. Net cash provided by financing activities consisted of activity in deposits and borrowings. Net cash flows from financing activities were $1.6 million for the year ended June 30, 2009 and net cash flows from financing activities were ($417,000) for the year ended June 30, 2008. The changes in net cash flows provided by financing activities over the periods were primarily due to the repayment of advances from the Federal Home Loan Bank of Cincinnati.

Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At June 30, 2009 and June 30, 2008, cash and short-term investments totaled $2.5 million and $3.5 million, respectively. We may also utilize the sale of securities available-for-sale, federal funds purchased, Federal Home Loan Bank of Cincinnati advances and other borrowings as sources of funds.

At June 30, 2009 and June 30, 2008, we had outstanding commitments to originate loans of $536,000 and $896,000, respectively, and unfunded commitments under lines of credit and standby letter of credit of $38,900 and no commitments, respectively. We anticipate that we will have sufficient funds available to meet our current loan commitments. Loan commitments have, in recent periods, been funded through liquidity and normal deposit flows. Certificates of deposit scheduled to mature in one year or less from June 30, 2009 totaled $12.4 million. Management believes, based on past experience, that a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core deposits and capital, we consider our liquidity and capital resources sufficient to meet our outstanding short-term and long-term needs.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and

 

61


Table of Contents

investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government and agency obligations and residential mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At June 30, 2009, we had $7.5 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $9.0 million. It is anticipated that immediately upon completion of the conversion and offering Versailles Financial Corporation and Versailles Savings and Loan Company’s liquid assets will be increased. See “How We Intend to Use the Proceeds from the Offering.”

We are subject to various regulatory capital requirements. At June 30, 2009, we were in compliance with all applicable capital requirements. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements” and “Pro Forma Data” and Note 12 of the Notes to our Consolidated Financial Statements.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see Note 10 of the Notes to our Financial Statements.

For fiscal year 2009 and the year ended June 30, 2009, we did not engage in any off-balance-sheet transactions other than loan origination commitments in the normal course of our lending activities.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141R, Business Combinations (Revised 2007) which replaces SFAS 141, Business Combinations, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the

 

62


Table of Contents

probable and estimable recognition criteria of SFAS 5, Accounting for Contingencies. SFAS 141R is applicable to Versailles Financial Corporation’s accounting for business combinations closing on or after July 1, 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51 which amends Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 became effective for Versailles Financial Corporation on July 1, 2009 and did not have a significant impact on Versailles Financial Corporation’s financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 became effective for the Company on July 1, 2009 and did not have a significant impact on Versailles Financial Corporation’s financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. SFAS 166 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. SFAS 166 will be effective July 1, 2010 and is not expected to have a significant impact on Versailles Financial Corporation’s financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) amends FIN 46 (Revised December 2003), Consolidation of Variable Interest Entities, to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most

 

63


Table of Contents

significantly impact the entity’s economic performance. SFAS 167 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. SFAS 167 will be effective July 1, 2010 and is not expected to have a significant impact on Versailles Financial Corporation’s financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162 replaces SFAS 162, The Hierarchy of Generally Accepted Accounting Principles which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. SFAS 168 will be effective for Versailles Financial Corporation’s financial statements for periods ending after September 15, 2009. SFAS 168 is not expected have a significant impact on Versailles Financial Corporation’s financial statements.

In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 became effective on July 1, 2009 and did not have a significant impact on Versailles Financial Corporation’s financial statements.

In December 2008, the FASB issued FSP SFAS 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under FSP SFAS 132R-1, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by FSP SFAS 132R-1 will be included in Versailles Financial Corporation’s financial statements beginning with the financial statements for the year-ended June 30, 2010.

In April 2009, the FASB issued FSP SFAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies which amends the guidance in SFAS 141R to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS 5, Accounting for Contingencies, and FASB Interpretation (FIN) No. 14, Reasonable Estimation of the Amount of a Loss. FSP SFAS 141R-1 removes subsequent accounting guidance for assets and liabilities arising

 

64


Table of Contents

from contingencies from SFAS 141R and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. FSP SFAS 141R-1 eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosures required by SFAS 5. FSP SFAS 141R-1 also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with SFAS 141R. FSP SFAS 141R-1 is effective for assets or liabilities arising from contingencies Versailles Financial Corporation acquires in business combinations occurring after July 1, 2009.

BUSINESS OF VERSAILLES FINANCIAL CORPORATION

Versailles Financial Corporation was incorporated in the State of Maryland in September 2009. We have not engaged in any business to date. Upon completion of the conversion, we will own all of the issued and outstanding stock of Versailles Savings and Loan Company. We will retain up to 50% of the net proceeds from the offering and initially invest the remaining net proceeds in Versailles Savings as additional capital of Versailles Savings. Versailles Financial Corporation will use a portion of the net proceeds to make a loan to the employee stock ownership plan. At a later date, we may use the net proceeds to pay dividends to stockholders and may repurchase shares of common stock, subject to regulatory limitations. We will invest our initial capital as discussed in “How We Intend to Use the Proceeds from the Offering.”

In the future, Versailles Financial Corporation, as the holding company of Versailles Savings and Loan Company, will be authorized to pursue other business activities permitted by applicable laws and regulations. See “Supervision and Regulation—Holding Company Regulation” for a discussion of the activities that are permitted for savings and loan holding companies. We may also borrow funds for reinvestment in Versailles Savings and Loan Company.

Following the offering, our cash flow will depend on earnings from the investment of the net proceeds from the offering that we retain, and any dividends we receive from Versailles Savings and Loan Company. Initially, Versailles Financial Corporation will neither own nor lease any property, but will instead pay a fee to Versailles Savings and Loan Company for the use of its premises, equipment and furniture. At the present time, we intend to employ only persons who are officers of Versailles Savings and Loan Company to serve as officers of Versailles Financial Corporation. We will, however, use the support staff of Versailles Savings and Loan Company from time to time. We will pay a fee to Versailles Savings and Loan Company for the time devoted to Versailles Financial Corporation by employees of Versailles Savings and Loan Company. However, these persons will not be separately compensated by Versailles Financial Corporation. Versailles Financial Corporation may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

65


Table of Contents

BUSINESS OF VERSAILLES SAVINGS AND LOAN COMPANY

General

Our principal business consists of attracting retail deposits from the general public in our market and investing those deposits, together with funds generated from operations and, to a lesser extent, borrowings primarily in first lien one- to four-family residential mortgage loans and, to a lesser extent, non-residential real estate loans, including farm loans; consumer loans, consisting primarily of automobile loans; commercial business loans and other loans. We also invest in residential mortgage-backed U.S. Government and federal agency securities and, to a lesser extent, mutual funds that invest in those securities. Our revenues are derived principally from the interest on loans and securities, loan origination fees and fees levied on deposit accounts. Our primary sources of funds are principal and interest payments on loans and securities, deposits and advances from the Federal Home Loan Bank of Cincinnati.

We currently operate out of one office and do not have any automated teller machines, drive-up facilities or participate in an ATM network. In connection with our plans to build or acquire a new home office in Versailles in 2010, we plan to include an ATM and drive-up facilities, as well as participate in an ATM network.

Market Area and Competition

Versailles Savings conducts business from its single office located in Versailles, located in Darke County, Ohio. Versailles Savings’ primary market area is northeastern Darke County and western Shelby County, in west central Ohio, near the Indiana border.

Versailles Savings and Loan’s primary market area has a diversified employment base and a higher level of manufacturing employment than the State of Ohio and the country in general. The major employers include consumer products manufacturers and retailers, health care providers and transportation and distribution companies, as well as governmental entities. The top ten employers in Darke County are Whirlpool Corporation, Midmark Corporation (manufacturer of health care products), Greenville Technology, Inc., Wayne Hospital, Brethren Retirement Community, Honeywell (manufacturer of a wide range of products, including aerospace and technology for buildings), Neff Co. (custom lettering and graphic design), Beauty Systems Group (distributor of hair care and makeup products), Dick Lavy Trucking and Norcold (manufacturer of refrigerators and freezers for RVs, boats and trucks). Darke County is predominantly rural and is one of the top agricultural counties in Ohio.

The unemployment rate in Darke County in June 2009 was 11.7%, compared to 11.2% for the State of Ohio and 9.7% for the United States. The population of Darke County reflected net out-migration from 2000 to 2008, declining from approximately 53,300 to approximately 52,027. The median household income in Darke County increased from $39,307 in 2000 to $46,556 in 2007, or 18.4%, while the median household income in the State of Ohio increased at almost the same rate from $41,499 to $49,099 and median household income in the United States increased at a slightly higher rate, from $42,729 to $50,740.

Shelby County is a slightly smaller county lying northeast of Darke County. The largest city in Shelby County is Sidney, Ohio. The major employers in Shelby County relate to

 

66


Table of Contents

manufacturing including the four largest employers: Honda of America Manufacturing, PlastiPak Packaging, Emerson Climate Technologies and NK Parts. Additional large employers include Griffon Corp/Clopay Corp. (garage doors), Sidney City Board of Education, Superior Metal Products/Am Trim, Wal-Mart Stores, Inc. and Wilson Memorial Hospital.

The economy of Shelby County has experienced higher unemployment in recent months due to its heavy reliance on manufacturing. In June 2009, the unemployment rate in Shelby County was 13.5% versus 11.7% for Darke County. Shelby County population has reflected some modest growth since 2000 increasing from 47,910 to 48,919, or 2.1%. Median household income increased at a slightly slower pace relative to Darke County, increasing 16.4% from $44,507 to $51,841.

We face competition within our market area both in making loans and attracting deposits. The Versailles area has a moderate concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. As of June 30, 2009 our market share of deposits represented 2.7% of FDIC-insured deposits in Darke County, Ohio. To effectively compete, we seek to emphasize our community orientation, local and timely decision making and superior customer service.

Lending Activities

The principal lending activity of Versailles Savings and Loan Company is originating first lien one- to four-family residential mortgage loans and, to a lesser extent, non-residential real estate loans, including farm loans, and consumer loans consisting primarily of automobile loans, commercial business loans and other loans. In recent years we have expanded our non-residential real estate loan portfolio in an effort to diversify our overall loan portfolio, increase the yield of our loans and shorten asset duration. We expect non-residential real estate lending will continue to be an area of loan growth, and we have focused our efforts in this area on borrowers seeking loans in the $200,000 to $750,000 range. We currently retain in our portfolio all the loans we originate, but we are considering selling loans in the future to manage interest rate risk, capital and our liquidity needs. As a long-standing community lender, we believe we can effectively compete for this business by emphasizing superior customer service and local underwriting, which differentiates us from larger commercial banks that have recently commenced operations in our primary market area.

 

67


Table of Contents

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

 

     At June 30,  
     2009     2008  
     Amount     Percent     Amount     Percent  
     (Dollars in thousands)  

Real estate loans:

        

One- to four-family

   $ 26,968      77.88   $ 24,111      76.88

Multi-family

     326      0.94     433      1.38

Non-residential real estate (1)

     5,846      16.88     4,759      15.17

Construction

     1      0.00     449      1.43
                            

Total real estate loans

     33,141      95.70     29,752      94.86

Commercial loans

     356      1.03     329      1.05

Consumer loans

     1,133      3.27     1,282      4.09
                            

Total loans

   $ 34,630      100.00   $ 31,363      100.00
                            

Net deferred loan fees

     62      0.18     72      0.23

Allowance for losses

     (264   0.77     (166   0.53
                            

Loans, net

   $ 34,428        $ 31,269     
                    

 

(1) Includes $4.3 million secured by farm land.

 

68


Table of Contents

Contractual Maturities and Interest Rate Sensitivity. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2009. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Loans are presented net of loans in process.

 

     One- to
Four-Family
Residential
   Multi-Family    Non-
residential
Real Estate
   Construction    Commercial    Consumer    Total
     (Dollars in thousands)

Amounts due in:

                    

One year or less

   $ 2,491    $ 33    $ 596    $ 1    $ 83    $ 501    $ 3,705

More than one to three years

     2,770      34      905      —        134      355      4,198

More than three to five years

     2,770      32      860      —        103      138      3,903

More than five to ten years

     6,931      63      1,863      —        36      124      9,017

More than ten to twenty years

     10,162      137      1,444      —        —        15      11,758

More than twenty years

     1,844      27      178      —        —        —        2,049
                                                

Total

   $ 26,968    $ 326    $ 5,846    $ 1    $ 356    $ 1,133    $ 34,630
                                                

 

69


Table of Contents

The following table sets forth our fixed and adjustable-rate loans at June 30, 2009 that are contractually due after June 30, 2010. Loans are presented net of loans in process.

 

     Due After June 30, 2010
     Fixed    Adjustable    Total
     (In thousands)

Real Estate:

        

One- to four-family

   $ 18,533    $ 5,944    $ 24,477

Multi-family

     106      187      293

Non-residential real estate

     3,377      1,873      5,250

Construction

     —        —        —  
                    

Total real estate loans

     22,016      8,004      30,020

Commercial

     273      —        273

Consumer loans

     632      —        632
                    

Total loans

   $ 22,921    $ 8,004    $ 30,925
                    

Loan Approval Procedures and Authority. The aggregate amount of loans that Versailles Savings and Loan Company is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Versailles Savings and Loan Company’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral”). At June 30, 2009, based on the 15% limitation, Versailles Savings and Loan Company’s loans-to-one-borrower limit was approximately $1.1 million. On the same date, Versailles Savings and Loan Company had no borrowers with outstanding balances in excess of this amount. At June 30, 2009, our largest non-residential real estate loan totaled $479,000 and was secured by a mortgage on a building in our primary market area. At June 30, 2009, this loan was performing in accordance with its terms.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our Board of Directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.

Under our loan policy, the individual processing an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an officer for approval. An officer then reviews these materials and verifies that the requested loan meets our underwriting guidelines described below.

Our president and senior lending officers have approval authority of up to $150,000 for residential mortgage loans, secured commercial loans and secured consumer loans. Our senior lending officers have approval authority of up to $50,000 for unsecured commercial and consumer loans. An aggregate credit commitment of up to $250,000 may be approved by the president and the senior lending officers. Loans above these amounts require approval by the Loan Committee or the Board of Directors.

 

70


Table of Contents

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

One- to Four-Family Residential Real Estate Lending. The cornerstone of our lending program has long been the origination of long-term first lien permanent loans secured by mortgages on owner-occupied one- to four-family residences. At June 30, 2009, $27.0 million, or 77.9% of our total loan portfolio consisted of loans on one- to four-family residences. At that date, our average outstanding one- to four-family residential loan balance was $78,000 and our largest outstanding one- to four-family residential loan had a principal balance of $339,000. Virtually all of the residential loans we originate are secured by properties located in our market area. We currently retain in our portfolio all the loans we originate, but may begin to sell loans in the secondary market within the next 12 months. See “—Originations, Sales and Purchases of Loans.”

Due to consumer demand in the current low interest rate environment, many of our recent originations are 15- to 25-year fixed-rate loans secured by one- to four-family residential real estate. We generally originate our fixed-rate and adjustable rate one- to four-family residential loans in accordance with secondary market standards. At June 30, 2009, we had $11.7 million of fixed-rate residential loans maturing in 10 years or less, $7.4 million of fixed-rate residential loans maturing between 10 and 20 years and $1.3 million of fixed-rate residential loans maturing in excess of 20 years in our portfolio.

In order to reduce the term to repricing of our loan portfolio, we also originate adjustable-rate one- to four-family residential mortgage loans. Our current adjustable-rate mortgage loans carry interest rates that adjust annually at a margin (generally 300 basis points) over the one-year U.S. Treasury constant maturity index. Most of our adjustable-rate one- to four-family residential mortgage loans have fixed rates for initial terms of three or five years. Such loans carry terms to maturity of up to 25 years. The adjustable-rate mortgage loans currently offered by us generally provide for a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over the initial rate.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on many of our adjustable-rate loans do not adjust for the first three or five years. As a result, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates. At June 30, 2009, $6.6 million, or 24.6% of our one- to four-family residential loans, had adjustable rates of interest.

We evaluate both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. Our one- to four-family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not

 

71


Table of Contents

produce negative amortization. Our one- to four-family residential mortgage loans customarily include due-on-sale clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. We currently originate residential mortgage loans for our portfolio with loan-to-value ratios of up to 90% for owner-occupied one- to four-family homes and up to 80% for non-owner occupied homes. We do not require private mortgage insurance for loans in excess of 80%, but charge a higher interest rate and also obtain additional collateral and/or personal guarantees.

At June 30, 2009, we had two one- to four-family residential mortgage loans that were 60 days or more delinquent.

We also originate closed end variable-rate and fixed-rate second mortgage loans secured by a lien on the borrower’s primary residence on a very limited basis. The total balance of these loans at June 30, 2009, which are included in the previous totals, was $0.6 million. We only make such loans on properties where we hold the first lien. Generally, these second mortgages are limited to 80% of the property value less any other mortgages. We use the same underwriting standards for home equity loans as we use for one- to four-family residential mortgage loans. Our variable-rate second mortgage loan product carries an interest rate tied to the same indices we use for purchase money first lien residential mortgages.

Non-residential Real Estate Lending. In recent years, we have sought to increase our non-residential real estate loans. At June 30, 2009, we had $5.8 million in non-residential real estate loans, representing 16.9% of our total loan portfolio. Typically we obtain personal guarantees as well as additional collateral on these loans.

The following table shows the composition of our non-residential real estate portfolio at the dates indicated:

 

     At June 30,

Type of Loan

   2009    2008
     (In thousands)

Office

   $ 71    $ 345

Industrial

     360      403

Retail

     443      447

Developed Building Lots

     32      39

Farm/Agriculture

     4,336      3,394

Mixed use

     480      —  

Other Improved Real Estate

     124      131
             

Total

   $ 5,846    $ 4,759
             

Most of our non-residential real estate loans have amortization periods of up to 20 years. We offer both fixed and variable rate loans. Our variable rate loans typically have initial fixed rates of three or five years. The maximum loan-to-value ratio of our non-residential real estate loans is generally 70%. At June 30, 2009, our largest non-residential real estate loan totaled $479,000 and was secured by a mortgage on retail, residential and farmland properties in our primary market area. At June 30, 2009, this loan was performing in accordance with its terms. At June 30, 2009, $2.0 million of our non-residential real estate loans carried adjustable rates.

 

72


Table of Contents

We consider a number of factors in originating non-residential real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All non-residential real estate loans are appraised by outside independent appraisers approved by the Board of Directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of non-residential real estate borrowers.

Loans secured by non-residential real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Non-residential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including today’s economic recession. We typically require additional collateral or personal guarantees. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At June 30, 2009, we had no non-performing non-residential real estate loans. We also make a limited amount of multi-family loans on the same general terms as non-residential real estate loans.

Commercial Business Lending. From time to time, we originate commercial business loans and lines of credit to small- and medium-sized companies in our primary market area. Our commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. The commercial business loans that we offer are short term fixed-rate loans with generally a one-year term or less. Our commercial business loan portfolio consists primarily of secured loans, along with a small amount of unsecured loans.

At June 30, 2009, Versailles Savings and Loan Company had $356,000 of commercial business loans outstanding, representing 1.0% of the total loan portfolio.

When making commercial business loans, we consider the borrower’s financial statements, lending history, debt service capabilities, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial business loans are generally secured by accounts receivable, inventory and equipment.

Commercial business loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to

 

73


Table of Contents

make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans is likely substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.

At June 30, 2009, our largest commercial business loan relationship was a $187,000 loan to a farming implement dealer secured by real estate and limited personal guarantees by several individuals. At June 30, 2009, this loan was performing in accordance with its terms.

Consumer Lending. To date, our consumer lending has been limited. At June 30, 2009, Versailles Savings and Loan Company had $1.1 million of consumer loans outstanding, representing 3.3% of the total loan portfolio. Consumer loans consist of loans secured by deposits, auto loans and miscellaneous other types of installment loans. At June 30, 2009, we had $386,000 in new and used automobile loans made on a direct basis with our customers. We do not actively market automobile loans. We also plan to offer home equity lines of credit in the future.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 2009, we had no consumer loans that were non-performing.

Originations, Purchases and Sales of Loans

Lending activities are conducted primarily by our salaried loan personnel. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed-rate and adjustable-rate loans. Our ability to originate fixed or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.

We currently retain all the loans we originate. We may, however, sell loans we originate in the future for interest rate risk management, capital management and for liquidity purposes. We also currently do not purchase loans nor have any significant participation interests in loans.

 

74


Table of Contents

The following table shows our loan origination and principal repayment activity for loans originated for our portfolio during the periods indicated. Loans are presented net of loans in process.

 

     Years Ended June 30,  
     2009    2008  
     (In thousands)  

Total loans at beginning of period

   $ 31,269    $ 32,577   

Loans originated:

     

Real estate loans:

     

One- to four-family

     13,256      8,718   

Multi-family

     —        —     

Non-residential real estate

     3,031      583   

Construction

     1,573      1,042   
               

Total real estate loans

     17,860      10,343   

Commercial loans

     142      —     

Consumer loans

     1,151      1,464   
               

Total loans originated

     19,153      11,807   

Deduct:

     

Principal repayments

     15,886      13,115   

Loan sales

     —        —     

Home equity lines of credit, net

     —        —     

Net, other

     108      —     
               

Net loan activity

     3,159      (1,308
               

Total loans at end of period

   $ 34,428    $ 31,269   
               

 

75


Table of Contents

Delinquencies and Non-Performing Assets

Delinquency Procedures. When a borrower fails to make a required monthly loan payment by the due date, a late notice is generated stating the payment and late charges due. Our policies provide that borrowers that become 20 days or more delinquent are contacted by mail and at 30 days we send an additional letter and place a phone call to determine the reason for nonpayment and to discuss future payments. If repayment is not possible or doubtful, the loan will be brought to the Board of Directors for possible foreclosure. Once the Board of Directors declares a loan due and payable, a certified letter is sent to the borrower explaining that the entire balance of the loan is due and payable. The borrower is permitted ten additional days to submit payment. If the loan is made current, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. If the borrower does not respond, we will initiate foreclosure proceedings.

When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Subsequent decreases in the value of the property are charged to operations through the creation of a valuation allowance. After acquisition, all costs in maintaining the property are expensed as incurred. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

 

     At June 30,
     2009    2008
     30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days
or More
Past Due
   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days
or More
Past Due
     (Dollars in thousands)

Real estate loans:

                 

One- to four-family

   $ 87    $ 55    $ 66    $ 401    $ 119    $ —  

Multi-family

     —        —        199      —        —        197

Non-residential real estate

     26      —        —        28      4      —  

Construction

     —        —        —        —        —        —  
                                         

Total real estate loans

     113      55      265      429      123      197

Commercial loans

     —        —        —        —        —        59

Consumer loans

     —        —        —        6      28      18
                                         

Total

   $ 113    $ 55    $ 265    $ 435    $ 151    $ 274
                                         

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not

 

76


Table of Contents

corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies a problem asset as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Ohio Division of Financial Institutions and the Office of Thrift Supervision and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

On the basis of this review of our assets, our classified and special mention assets at the dates indicated were as follows:

 

     At June 30,
     2009    2008
     (In thousands)

Special mention assets

   $ —      $ —  

Substandard assets

     168      380

Doubtful assets

     199      —  

Loss assets

     —        —  
             

Total classified assets

   $ 367    $ 380
             

The increase in loans classified as doubtful between June 30, 2009 and 2008 was due primarily to the transfer of $194,000 in loans from substandard to doubtful and the decrease in loans classified as substandard.

Non-Performing Assets. We cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Funds received on nonaccrual loans generally are applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

 

77


Table of Contents

The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At the dates indicated, we had no real estate acquired through foreclosure or any loans classified as a troubled debt restructuring. The multi-family loan is secured by rental properties consisting of two duplexes and a single family home.

 

     At June 30,  
     2009     2008  
     (Dollars in thousands)  

Non-Accrual:

    

Real estate loans:

    

One- to four-family

   $ 66      $ —     

Multi-family

     199        —     

Non-residential real estate

     —          —     

Construction

     —          —     
                

Total real estate loans

     265        —     

Commercial loans

     —          —     

Consumer loans

     —          —     
                

Total nonaccrual loans

   $ 265      $ —     
                

Accruing loans past due 90 days or more:

    

Real estate loans:

    

One- to four-family

   $ —        $ —     

Multi-family

     —          197   

Non-residential real estate

     —          —     

Construction

     —          —     
                

Total real estate loans

     —          197   

Commercial loans

     —          59   

Consumer loans

     —          18   
                

Total accruing loans past due 90 days or more

     —          274   
                

Total of non-accrual and 90 days or more past due loans

   $ 265      $ 274   
                

Other nonperforming assets

     —          —     
                

Total nonperforming assets

   $ 265      $ 274   
                

Total nonperforming loans to total loans

     0.76     0.87

Total nonperforming assets to total assets

     0.65     0.71

At June 30, 2009, total substandard and doubtful loans were $367,000, of which $265,000 is included in nonperforming loans in the table above. There were no other loans that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

For the year ended June 30, 2009 and the year ended June 30, 2008, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $22,000 and none, respectively.

 

78


Table of Contents

Allowance for Loan Losses

Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (i) specific allowances for identified problem loans; and (ii) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include: (i) the strength of the customer’s personal or business cash flows; (ii) the availability of other sources of repayment; (iii) the amount due or past due; (iv) the type and value of collateral; (v) the strength of our collateral position; (vi) the estimated cost to sell the collateral; and (vii) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as substandard to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectibility of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

In addition, as an integral part of their examination process, the Ohio Division of Financial Institutions and the Office of Thrift Supervision will periodically review our allowance for loan losses, and they may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

 

79


Table of Contents

Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

     At June 30,  
     2009     2008  
     (Dollars in thousands)  

Allowance at beginning of period

   $ 166      $ 166   

Provision for loan losses

     110        —     

Charge offs:

    

Real estate loans

    

One- to four-family

     —          —     

Multi-family

     —          —     

Non-residential real estate

     —          —     

Construction

     —          —     

Commercial

     —          —     

Consumer

     12        —     
                

Total charge-offs

   $ 12      $ —     
                

Recoveries:

    

Real estate loans

    

One- to four-family

     —          —     

Multi-family

     —          —     

Non-residential real estate

     —          —     

Construction

     —          —     

Commercial

     —          —     

Consumer

     —          —     
                

Total recoveries

   $ —        $ —     
                

Net charge-offs (recoveries)

   $ 12      $ —     
                

Allowance at end of period

   $ 264      $ 166   
                

Allowance to nonperforming loans

     99.65     60.61

Allowance to total loans outstanding at the end of the period

     0.76     0.53

Net charge-offs (recoveries) to average loans outstanding during the period

     0.04     0.00

 

80


Table of Contents

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the general allowance to absorb losses in other categories.

 

     At June 30,  
     2009     2008  
     Amount    % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
    Amount    % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
 
     (Dollars in thousands)  

Real estate loans:

              

One- to four-family

   $ 146    55.30   77.88   $ 86    51.81   76.88

Multi-family

     79    29.92      0.94        50    30.12      1.38   

Non-residential real estate

     20    7.58      16.88        11    6.63      15.17   

Construction

     —      —        —          1    .60      1.43   
                                      

Total real estate loans

     245    92.80   95.70     148    89.16   94.86

Commercial loans

     1    0.38      1.03        12    7.23      1.05   

Consumer loans

     18    6.82      3.27        6    3.61      4.09   

Unallocated

     —      —        —          —      —        —     
                                      

Total allowance for loan losses

   $ 264    100.00   100.00   $ 166    100.00   100.00
                                      

At June 30, 2009, our allowance for loan losses represented 0.76% of total loans and 99.65% of nonperforming loans. The allowance for loan losses increased to $264,000 at June 30, 2009 from $166,000 at June 30, 2008, due to the provision for loan losses of $110,000 and charge-offs of $12,000.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Investment Activities

General. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate our interest rate risk, and to generate a favorable return on idle funds within the context of our interest rate and credit risk objectives.

Our Board of Directors is responsible for adopting our investment policy. The investment policy is reviewed annually by management and any changes to the policy are recommended to and subject to the approval of the Board of Directors. Authority to make

 

81


Table of Contents

investments under the approved investment policy guidelines is delegated to our President and Chief Executive Officer and our Chief Financial Officer (all investment decisions require the approval of both investment officers). All investment transactions are reviewed at regularly scheduled quarterly meetings of the Board of Directors.

Our current investment policy permits investments in securities issued by the United States Government and its agencies or government sponsored entities. We also invest in residential mortgage-backed securities and, to a lesser extent, mutual funds that invest in residential mortgage-backed securities. Our investment policy also permits, with certain limitations, investments in bank-owned life insurance, collateralized mortgage obligations, asset-backed securities, real estate mortgage investment conduits, Ohio revenue bonds and municipal securities.

At June 30, 2009, we did not have an investment in the securities of any single non-government issuer that exceeded 10% of equity at that date other than our investment in the AMF Short U.S. Government Fund in which the carrying value of our investment was $694,000.