<PAGE> 1
As filed with the Securities and Exchange Commission on March 13, 1998
Registration No. 333-_______________
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
UNITED COMMUNITY FINANCIAL CORP.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Ohio 6036 34-1856319
- ------------------------------- ----------------------------- --------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or organization) Classification Code Number) identification number)
</TABLE>
275 FEDERAL PLAZA WEST
YOUNGSTOWN, OHIO 44503-1203
(330) 742-0500
-------------------------------------------------------------
(Address, including Zip Code, and telephone number, including
area code, of registrant's principal executive offices)
DOUGLAS M. MCKAY
UNITED COMMUNITY FINANCIAL CORP.
275 FEDERAL PLAZA WEST
YOUNGSTOWN, OHIO 44503-1203
(330) 742-0500
--------------------------------------
(Name, address, including Zip Code, and
telephone number, including area code,
of agent for service)
With copies to:
Terri R. Abare
Kathleen M. Molinsky
Vorys, Sater, Seymour and Pease LLP
Atrium Two, 221 East Fourth Street
Cincinnati, Ohio 45202
(513) 723-4000
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the 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 of the Securities
Act of 1933, check the following box: [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to be offering price aggregate offering Amount of
registered registered per share price(1) registration fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shares,
without par value 34,715,625 $10.00 $347,156,250 $105,199
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
CROSS REFERENCE SHEET
Showing the location in the Prospectus of the Items of Form S-1
<TABLE>
<CAPTION>
Form S-1 Item and Caption Prospectus Heading
- ------------------------- ------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.................................... Cover Page, Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.....................
PROSPECTUS SUMMARY; SELECTED FINANCIAL INFORMATION AND OTHER
DATA; RISK FACTORS
4. Use of Proceeds...................................... USE OF PROCEEDS
5. Determination of Offering Price...................... Cover Page; THE CONVERSION - Pricing and Number of
Common Shares to be Sold
6. Dilution............................................. RISK FACTORS; THE CONVERSION - Tax Considerations; COMPARISON
OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION;
PRO FORMA DATA
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Cover Page; THE CONVERSION - General;
- Subscription Offering; - Community Offering; Public
Offering; and
- Plan of Distribution
9. Description of Securities to be Registered........... DESCRIPTION OF AUTHORIZED SHARES
10. Interest of Named Experts and Counsel................ Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business......................... THE BUSINESS OF THE COMPANY
(b) Description of Property......................... THE BUSINESS OF THE COMPANY - Properties
(c) Legal Proceedings............................... THE BUSINESS OF THE COMPANY - Legal Proceedings
(d) Market Price and Dividends...................... Cover Page; PROSPECTUS SUMMARY - Dividend Policy; MARKET FOR
COMMON SHARES; DIVIDEND POLICY
(e) Financial Statements............................ FINANCIAL STATEMENTS
(f) Selected Financial Data......................... SELECTED FINANCIAL INFORMATION AND OTHER DATA
(g) Supplementary Financial Information............. Not Applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................... CHANGE IN ACCOUNTANTS
(j) Directors and Executive Officers................ MANAGEMENT
(k) Executive Compensation.......................... PROSPECTUS SUMMARY; RISK FACTORS - Potential Awards of Shares
to Directors, Officers and Employees Pursuant to Benefit
Plans; MANAGEMENT - Compensation; and - Stock Benefit Plans
(l) Security Ownership of Certain Beneficial
Owners and Management......................... THE CONVERSION - Intended Purchase by Directors and
Executive Officers; - Limitations on Purchases of Common
Shares; - Restrictions on Transfer of Common Shares by
Directors and Officers
(m) Certain Relationships and Related
Transactions.................................. Not Applicable
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Not Applicable
</TABLE>
<PAGE> 3
PROSPECTUS
UNITED COMMUNITY FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR THE HOME SAVINGS AND LOAN
COMPANY OF YOUNGSTOWN, OHIO)
UP TO 28,937,500 COMMON SHARES, $10 PURCHASE PRICE PER SHARE
United Community Financial Corp., an Ohio corporation (the "Holding
Company"), is hereby offering up to 28,937,500 common shares, without par value
(the "Common Shares"), in connection with the conversion of The Home Savings and
Loan Company of Youngstown, Ohio, (the "Company"), from a mutual savings and
loan association to a permanent capital stock savings and loan association
incorporated under Ohio law (the "Conversion").
Subject to the rights and restrictions established by the Company's
Plan of Conversion (the "Plan"), Common Shares are offered hereby at a price of
$10 per share in a subscription offering (the "Subscription Offering") to (a)
each account holder who, at the close of business on July 31, 1996 (the
"Eligibility Record Date"), had one or more deposit accounts with deposit
balances, in the aggregate, of $50 or more (a "Qualifying Deposit") with the
Company (the "Eligible Account Holders"), (b) the United Community Financial
Corp. Employee Stock Ownership Plan (the "ESOP"), (c) each account holder who,
at the close of business on ___________, 1998 (the "Supplemental Eligibility
Record Date"), had a Qualifying Deposit with the Company (the "Supplemental
Eligible Account Holders"), (d) members of the Company eligible to vote at the
Special Meeting ("Other Eligible Members") and (e) directors, officers and
employees of the Company. ALL SUBSCRIPTION RIGHTS TO PURCHASE COMMON SHARES IN
THE SUBSCRIPTION OFFERING ARE NONTRANSFERABLE AND WILL EXPIRE AT 12:00 NOON,
EASTERN DAYLIGHT TIME, ON _____ ___, 1998 (THE "SUBSCRIPTION EXPIRATION DATE").
PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS OR SUBSCRIBING FOR COMMON
SHARES ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS
AND POSSIBLE FURTHER PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION (THE
"OTS"). SEE "THE CONVERSION - SUBSCRIPTION OFFERING."
To the extent that all of the Common Shares are not subscribed for in
the Subscription Offering, the remaining Common Shares may be offered to the
general public in a direct community offering in which preference will be given
to natural persons residing in Mahoning, Columbiana and Trumbull Counties, Ohio
(the "Community Offering"). See "THE CONVERSION - Community Offering." Shares
not subscribed for in the Subscription Offering and the Community Offering will
be offered to members of the general public in a syndicated public offering (the
"Public Offering"). The Subscription Offering, the Community Offering and the
Public Offering are referred to collectively in this Prospectus as the
"Offering."
(Continued on next page)
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OTS, THE DIVISION OF
FINANCIAL INSTITUTIONS OF THE DEPARTMENT OF COMMERCE OF THE STATE OF OHIO (THE
"DIVISION"), OR THE SECURITIES COMMISSION OF ANY STATE, NOR HAS THE SEC, THE
OTS, THE DIVISION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN
RISKS. FOR A DISCUSSION OF THE RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS
PROSPECTUS.
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION
INFORMATION CENTER AT (___) __________.
<TABLE>
<CAPTION>
============================================================================================================================
Subscription Estimated Expenses and Estimated Net
Price (1) Underwriting Commissions (2) Proceeds
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share Minimum $10.00 $0.15 $9.85
Per share Mid-point $10.00 $0.14 $9.86
Per share Maximum $10.00 $0.13 $9.87
Per share Maximum, as adjusted $10.00 $0.13 $9.87
Total Minimum $212,500,000 $3,172,000 $209,328,000
Total Mid-point $250,000,000 $3,500,000 $246,500,000
Total Maximum $289,375,000 $3,845,000 $285,530,000
Total Maximum, as adjusted $334,656,250 $4,240,000 $330,416,250
============================================================================================================================
</TABLE>
(1) The aggregate Subscription Price is based on an independent appraisal of
the pro forma market value of the Holding Company and the Company, as
converted, reduced to reflect the intended issuance of up to 1,250,000
common shares to the Home Savings Charitable Foundation (the "Foundation").
As of February 24, 1998, the independent appraiser's valuation of the pro
forma value of the Company, as converted, and the Holding Company and
giving effect to the contribution to the Foundation, was $262,500,000,
resulting in a range of values from a minimum of $223,125,000 to a maximum
of $301,875,000, with an adjusted maximum, based on OTS regulations, of
$347,156,250. As a result of the issuance of shares to the Foundation, the
actual amount of the Offering ranges from a minimum of $212,500,000 to a
maximum of $289,375,000 (the "Adjusted Valuation Range"), with an adjusted
maximum of $334,656,250. See "THE CONVERSION - Pricing and Number of Common
Shares to be Sold, and - Contribution to the Foundation" and "COMPARISON OF
VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." The additional
shares available for sale pursuant to the adjusted maximum of the Adjusted
Valuation Range may be sold without the resolicitation of persons who
subscribe for Common Shares in the Subscription Offering and the Community
Offering. The actual number of Common Shares to be sold in connection with
the Conversion will be based upon the final valuation of the Company, as
converted and the Holding Company, as determined by an independent
appraiser upon the completion of the Offering. See "THE CONVERSION Pricing
and Number of Common Shares to be Sold."
(2) Expenses of the Conversion payable by the Company and the Holding Company
include legal, accounting, appraisal, printing, mailing and miscellaneous
expenses. Such expenses also include sales commissions, estimated to be
between $1,819,250 and $2,886,896, and reimbursable expenses payable to
Trident Securities, Inc. ("Trident") and McDonald & Company Securities,
Inc. ("McDonald & Company"). Such sales commissions may be deemed to be
underwriting fees, although Trident and McDonald & Company will solicit
subscriptions for the Common Shares on a "best efforts" basis only and have
no obligation to purchase any of the Common Shares. See "THE CONVERSION -
Plan of Distribution." Actual expenses may vary from the estimates.
TRIDENT SECURITIES, INC. MCDONALD & COMPANY SECURITIES, INC.
The date of this Prospectus is May ___, 1998.
<PAGE> 4
The minimum number of Common Shares any person may purchase in the
Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account
Holder and Other Eligible Member may purchase in the Subscription Offering not
more than 30,000 Common Shares. In connection with the exercise of subscription
rights arising from a single deposit account in which two or more persons have
an interest, however, the aggregate maximum number of Common Shares which the
persons having an interest in such account may purchase in the Subscription
Offering in relation to such account is 30,000 Common Shares. In the event
shares are available for the Community Offering or the Public Offering, each
person, together with any Associate (hereinafter defined) or other persons
Acting in Concert (hereinafter defined), may purchase in the Community Offering
and the Public Offering up to 30,000 Common Shares. Except for the ESOP, which
may purchase up to 10% of the total Common Shares sold in the Offering, no
person, together with his or her Associates and other persons Acting in Concert
with him or her, may purchase more than 1% of the Common Shares sold in the
Offering. Subject to OTS regulations, the purchase limitations may be increased
or decreased after the commencement of the Offering in the sole discretion of
the Boards of Directors of the Holding Company and the Company. If the purchase
limitations are increased after the commencement of the Subscription Offering,
persons who have subscribed for the maximum amount will be given the opportunity
to increase their subscriptions. See "THE CONVERSION - Limitations on Purchases
of Common Shares."
Common Shares may be subscribed for in the Offering only by returning
the accompanying Stock Order Form and Certification Form (the "Stock Order
Form"), along with full payment of the purchase price per share for all Common
Shares subscribed for, so that it is received by the Company no later than 12:00
noon, Eastern Daylight Time, on ______ ___, 1998. Payment for Common Shares may
be made (i) in cash, if delivered in person; (ii) by check, bank draft, or money
order made payable to the Company; or (iii) by authorization of withdrawal from
deposit accounts in the Company. Once tendered, subscription orders cannot be
revoked without the consent of the Company or the Holding Company. No payments
by wire transfer will be accepted and the Holding Company is not obligated to
accept orders submitted on photocopied or telecopied Stock Order Forms. See "THE
CONVERSION - Use of Stock Order Forms; and - Payment for Common Shares."
THE COMPLETION OF THE CONVERSION IS CONTINGENT UPON (I) THE APPROVAL OF
THE PLAN AND THE ADOPTION OF AMENDED ARTICLES OF INCORPORATION AND AN AMENDED
CONSTITUTION BY THE COMPANY'S VOTING MEMBERS AT A SPECIAL MEETING OF MEMBERS OF
THE COMPANY TO BE HELD AT ___:00 __.M., EASTERN DAYLIGHT TIME, ON JUNE ___,
1998, AT _______________________, YOUNGSTOWN, OHIO (THE "SPECIAL MEETING"), (II)
THE SALE OF THE REQUISITE NUMBER OF COMMON SHARES AND (III) CERTAIN OTHER
FACTORS. SEE "THE CONVERSION."
-ii-
<PAGE> 5
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
[MAP]
-iii-
<PAGE> 6
PROSPECTUS SUMMARY
The following information is not complete and is qualified in its
entirety by the detailed information and the financial statements and
accompanying notes appearing elsewhere in this Prospectus. The purchase of the
Common Shares is subject to certain risks. See "RISK FACTORS."
UNITED COMMUNITY FINANCIAL CORP.
The Holding Company was incorporated under Ohio law in February 1998
for the purpose of purchasing all of the capital stock of the Company to be
issued in connection with the Conversion. The Holding Company has not conducted
and will not conduct any business before the completion of the Conversion, other
than business related to the Conversion. Upon the consummation of the
Conversion, the Holding Company will be a unitary savings and loan holding
company, the principal assets of which initially will be the capital stock of
the Company, the investments made with the net proceeds retained from the sale
of Common Shares and a loan to be made by the Holding Company to the ESOP to
fund the ESOP's purchase of Common Shares in the Conversion. See "USE OF
PROCEEDS."
Following the Conversion, the Board of Directors intends to manage the
Holding Company to promote the long-term best interests of the Holding Company
and its shareholders. Initially, following the Conversion, the Company will have
capital in excess of the level required to support its current asset size and
operations. Management believes that the holding company structure and retention
of proceeds could facilitate geographic expansion and diversification into other
activities although there are no present arrangements, agreements or
understandings, written or oral to do so. The holding company structure will
also facilitate the repurchase of shares in the open market, subject to the
discretion of the Holding Company's Board of Directors.
The office of the Holding Company is located at 275 Federal Plaza West,
Youngstown, Ohio 44503-1203, and its telephone number is (330) 742-0500.
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
The Company is a mutual savings and loan association which was
organized under Ohio law in 1889. At December 31, 1997, the Company had total
assets of approximately $1.0 billion, total deposits of $886.8 million and total
equity of $141.4 million, which represented 13.5% of total assets. For the year
ended December 31, 1997, the Company earned approximately $13.0 million, for a
return on average assets of 1.23%.
The Company is a community-oriented institution which operates from 14
offices located throughout Mahoning, Columbiana and Trumbull Counties in
Northeastern Ohio. Nine of the Company's offices are located in Mahoning County,
three are in Columbiana County and two are in Trumbull County. The Company's
home office is located in Youngstown which is approximately 75 miles northwest
of Pittsburgh, Pennsylvania and 75 miles southeast of Cleveland, Ohio.
Approximately 431,000 people live in the Company's primary market area which
makes it the 7th largest metropolitan area in the State of Ohio.
Based on FDIC-published data as of June 30, 1997, the Company had the
largest deposit market share in Mahoning County, the third largest share in
Columbiana County and the eleventh largest share in Trumbull County. The Company
has customer relationships with over 47,000 households in its primary market
area, and in 1997 the Company was the leading originator of purchase money
residential mortgage loans in Mahoning County.
The Company believes that, as competition intensifies in the financial
services industry, customers will gravitate toward quality customer service, and
a prime focus of the Company's competitive strategy is to emphasize personal
service and convenience. Highlights of the Company's strategy include the
following:
-1-
<PAGE> 7
- - Increasing the loan portfolio. The Company is a very traditional savings
and loan company. At December 31, 1997, one- to four-family real estate
loans represented 74.2% of total loans. While the Company intends to remain
committed to financing home ownership, it also believes it must gradually
expand the types of loan products it offers in order to meet the needs of
its market area and to improve profitability. As a result, in 1996, the
Company began to commit substantial resources to the commercial lending
area, which is headed and staffed by individuals with very extensive
commercial banking experience. The Company is also attempting to increase
the loan portfolio by utilizing a newly developed central information file
that captures the necessary customer profile information to more
effectively cross-sell additional services to its existing customer base.
- - Maintaining asset quality. The Company believes that high asset quality is
a critical component of long-term financial success and, therefore, remains
committed to a conservative credit culture. At December 31, 1997,
nonperforming assets as a percentage of total assets were .98%, compared to
1.14% in 1993. Over the past five years this ratio has averaged .89%.
Nonperforming loans as a percentage of total loans were 1.60% at December
31, 1997, compared to 2.04% at December 31, 1993. Over the past five years
this ratio has averaged 1.54%. In addition, total charge-offs have averaged
only $250,000 a year over the past five years.
- - Managing interest rate risk. Although the Company's liabilities are more
sensitive to changes in interest rates than its assets, the Company has
attempted to mitigate this risk and enhance return by maintaining a
relatively large portfolio of high quality investments. At December 31,
1997, total cash and investments (including mortgage-backed securities) was
approximately $396.3 million, or 37.9% of total assets. Of that amount,
approximately $132.8 million consisted of securities classified as
"available for sale."
As an Ohio savings and loan association, the Company is subject to
supervision and regulation by the OTS, the Division and the FDIC. The Company is
a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati and the
deposit accounts of the Company are insured up to applicable limits by the FDIC
in the Savings Association Insurance Fund (the "SAIF"). See "REGULATION."
The main office of the Company is located at 275 Federal Plaza West,
Youngstown, Ohio 44503-1203, and its telephone number is (330) 742-0500.
THE CONVERSION
GENERAL. On December 9, 1997, the Board of Directors of the Company
approved the Plan, which provides for the conversion of the Company from a
mutual savings and loan association to a permanent capital stock savings and
loan association incorporated under the laws of the State of Ohio. The OTS and
the Division have approved the Plan, subject to the approval of the Plan by the
Company's voting members at the Special Meeting, and to the satisfaction of
certain other conditions. See "THE CONVERSION - Conditions and Termination."
The Company has operated as an independent community oriented savings
association since 1889. It is the intention of the Company to continue to
operate as an independent savings association following the Conversion.
OFFERING. Pursuant to the Plan, Common Shares are hereby offered at a
price of $10 per share to (a) Eligible Account Holders, (b) the ESOP, (c)
Supplemental Eligible Account Holders, (d) Other Eligible Members and (e)
directors, officers and employees of the Company. See "THE CONVERSION -
Subscription Offering."
-2-
<PAGE> 8
To the extent Common Shares remain available after the satisfaction of
all subscriptions received in the Subscription Offering, the Holding Company may
offer Common Shares in the Community Offering, subject to certain limitations.
Preference will be given in the Community Offering to natural persons residing
in Mahoning, Columbiana and Trumbull Counties, Ohio. The Boards of Directors of
the Holding Company and the Company have the right to reject, in whole or in
part, any order for Common Shares submitted in the Community Offering. See "THE
CONVERSION - Community Offering."
If Common Shares remain available after the completion of the Community
Offering, the Holding Company may offer Common Shares in the Public Offering for
sale on a best efforts basis by a syndicate of registered broker-dealers to be
formed by Trident and McDonald & Company, subject to certain limitations. The
Board of Directors of the Holding Company and the Company have the right to
reject, in whole or in part, any order for Common Shares submitted in the Public
Offering. See "THE CONVERSION - Public Offering."
PURCHASE LIMITATIONS. The Plan authorizes the Boards of Directors of
the Holding Company and the Company to establish limits on the number of Common
Shares which may be purchased in the Offering. The minimum number of Common
Shares any person may purchase in the Offering is 25. Each Eligible Account
Holder, Supplemental Eligible Account Holder and Other Eligible Member may
purchase in the Subscription Offering not more than 30,000 Common Shares. In
connection with the exercise of subscription rights arising from a single
deposit account in which two or more persons have an interest, however, the
aggregate maximum number of Common Shares which the persons having an interest
in such account may purchase in the Subscription Offering in relation to such
account is 30,000 Common Shares. In the event shares are available for the
Community Offering or the Public Offering, each person, together with any
Associate or other persons Acting in Concert, may purchase in the Community
Offering up to 30,000 Common Shares. Purchases in the Subscription Offering, the
Community Offering and the Public Offering are subject to the additional
limitation that no person, together with his or her Associates and other persons
Acting in Concert with him or her, may purchase more than 1% of the Common
Shares sold in the Offering. Such limitations do not apply to the ESOP, which
intends to purchase up to 8% of the Common Shares sold in the Offering. Subject
to applicable regulations, the purchase limitations may be increased or
decreased after the commencement of the Offering in the sole discretion of the
Boards of Directors. See "THE CONVERSION - Limitations on Purchases of Common
Shares."
In addition to the purchase limitations established by the Plan, OTS
regulations impose restrictions on certain acquisitions of more than 10% of the
outstanding shares of the Company by any person or company, individually or
Acting in Concert with others. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS." The sale of Common Shares
in the Offering will be subject to the approval of the Plan by the voting
members of the Company at the Special Meeting, to the final valuation of the
Common Shares, as determined by the independent appraiser upon the completion of
the Offering, and to certain other conditions. See "THE CONVERSION -
Subscription Offering; - Community Offering; - Public Offering; and - Pricing
and Number of Common Shares to be Sold."
The Subscription Offering will terminate and subscription rights will
expire if not exercised by 12:00 noon, Eastern Daylight Time, on _________,
1998. The Community Offering, if any, will be terminated on or before ____
Eastern Daylight Time __________ ____, 1998, unless extended. Any continuation
of the Community Offering or the Public Offering beyond __________ ___, 1998,
will require the consent of the OTS and the Division, and persons who have
subscribed for Common Shares in the Offering will be given the right to affirm,
increase, decrease or rescind their subscriptions for Common Shares. Persons who
do not affirmatively elect to continue their subscription or who elect to
rescind their subscriptions during any such extension will have all of their
funds promptly refunded with interest. Persons who elect to decrease their
subscriptions will have the appropriate portion of their funds promptly refunded
with interest. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold."
-3-
<PAGE> 9
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON SHARES. To
ensure that Eligible Account Holders and Supplemental Eligible Account Holders
are properly identified as to their stock purchase priorities, such parties MUST
LIST ALL DEPOSIT ACCOUNTS on the order form, giving all names on each deposit
account and the account numbers at the applicable date. THE FAILURE TO PROVIDE
ACCURATE AND COMPLETE ACCOUNT INFORMATION ON THE STOCK ORDER FORM MAY RESULT IN
A REDUCTION OR ELIMINATION OF YOUR ORDER.
Full payment by check, cash (except by mail), money order, bank draft
or withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Stock Order Form. THE HOLDING COMPANY IS NOT OBLIGATED TO
ACCEPT AN ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED STOCK ORDER FORMS. THE
HOLDING COMPANY WILL NOT ACCEPT A STOCK ORDER FORM IF THE CERTIFICATION
APPEARING ON THE REVERSE SIDE OF THE STOCK ORDER FORM IS NOT EXECUTED. THE
HOLDING COMPANY IS NOT REQUIRED TO DELIVER A PROSPECTUS AND STOCK ORDER FORM BY
ANY MEANS OTHER THAN THE U.S. POSTAL SERVICE.
To ensure that each subscriber receives a prospectus at least 48 hours
prior to the applicable expiration date, in accordance with Rule 15C2-8 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no
prospectus will be mailed later than five days or hand delivered any later than
two days prior to the applicable expiration date. Execution of the Stock Order
Form will confirm receipt or delivery of a prospectus under Rule 15C2-8.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. OTS and Ohio regulations
provide that subscription rights are non-transferable. OTS regulations
specifically prohibit any person from transferring or entering into any
agreement or understanding before the completion of the Conversion to transfer
the ownership of the subscription rights issued in the Conversion or the Common
Shares to be issued upon the exercise of such subscription rights. Persons found
to be selling or otherwise transferring their subscription rights or purchasing
Common Shares on behalf of another person will be subject to forfeiture of such
rights and possible further sanctions and penalties imposed by the OTS. THE
COMPANY AND THE HOLDING COMPANY WILL REFER TO THE OTS ANY SITUATIONS THEY
BELIEVE MAY INVOLVE A TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS
KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS. Each person exercising
subscription rights will be required to certify that his or her purchase of
Common Shares is solely for the subscriber's own account and that there is no
agreement or understanding regarding the sale or transfer of such Common Shares.
PRICING OF THE COMMON SHARES. Keller & Company, Inc. ("Keller"), a firm
experienced in valuing thrift institutions, has prepared an independent
valuation of the estimated pro forma market value of the Company, as converted,
and the Holding Company. Keller's valuation of the estimated pro forma market
value of the Company, as converted, and the Holding Company, EXCLUDING the
shares to be issued to the Foundation, is $250,000,000 as of February 24, 1998
(the "Pro Forma Value"). Based on the Pro Forma Value, the Adjusted Valuation
Range established in accordance with the Plan is $212,500,000 to $289,375,000.
Applicable regulations permit the Holding Company to issue up to total of
33,465,625 Common Shares with an aggregate purchase price of $334,656,250. The
Holding Company will issue the Common Shares at a fixed price of $10 per share.
The number of Common Shares to be issued will be determined by dividing the
price per share into the aggregate pro forma value of the Company, as converted,
and the Holding Company at the close of the Offering.
If, due to changing market conditions, the final valuation is less than
$212,500,000 or more than $334,656,250, subscribers will be given written notice
of such final valuation and the right to affirm, increase, decrease or rescind
their subscriptions. Any person who does not affirmatively elect to continue his
subscription or elects to rescind his subscription before the date specified in
the notice will have all of his funds promptly refunded with interest. Any
person who elects to decrease his subscription will have the appropriate portion
of his funds promptly refunded with interest. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold."
-4-
<PAGE> 10
INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
intended purchases by the directors and executive officers of the Company and
the Holding Company:
<TABLE>
<CAPTION>
Name Total shares (1) Aggregate purchase price (1) Percent of total offering (2)
- ---- ------------ ------------------------ -------------------------
<S> <C> <C> <C>
Richard M. Barrett 31,000 $ 310,000 .124%
James E. Bennett, Jr. 1,000 10,000 .004
Charles. B. Cushwa, III 60,000 600,000 .24
Donald R. Inglis 30,000 300,000 .12
Patrick A. Kelly 60,000 600,000 .24
Gary Keller 60,000 600,000 .24
William A. Holdford 10,000 100,000 .04
Douglas M. McKay 80,000 800,000 .32
Herbert F. Schuler, Sr. 90,000 900,000 .36
Clarence R. Smith, Jr. 25,000 250,000 .10
Robert J. Steele, Jr. 10,000 100,000 .04
Donald J. Varner 60,000 600,000 .24
John F. Zimmerman, Jr. 15,000 150,000 .06
------- ---------- ------
All directors and executive 532,000 $5,320,000 2.128%
======= ========== ======
officers as a group (13 persons)
</TABLE>
- -----------------------------
(1) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
(2) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted
Valuation Range, will be sold in connection with the Conversion at $10
per share and that a sufficient number of Common Shares will be
available to satisfy the intended purchases by directors and executive
officers. See "Pricing and Number of Common Shares to be Sold."
All purchases by executive officers and directors of the Company are
being made for investment purposes only and with no present intent to resell.
Directors and executive officers will pay the same $10 per share price for
Common Shares purchased in the Conversion as all other subscribers.
USE OF PROCEEDS. The net proceeds from the sale of Common Shares in the
Conversion are estimated to be $209.3 million, $246.5 million, $285.5 million
and $330.4 million at the minimum, mid-point, maximum and adjusted maximum,
respectively, of the Adjusted Valuation Range. See "PRO FORMA DATA." The Holding
Company will invest 50% of the net proceeds from the Conversion in the capital
stock to be issued by the Company in connection with the Conversion and will
make a loan to the ESOP to acquire 8% of the Common Shares in the Offering. The
Holding Company will retain the remaining 42% of the net proceeds and will use
such funds for general corporate purposes. See "USE OF PROCEEDS." The 50% of the
net proceeds invested in the Company by the Holding Company will initially be
invested in overnight funds and short-term investments with maturities up to
three years and utilized for general corporate purposes, including loan
originations, enhanced customer services and possible acquisitions. See "USE OF
PROCEEDS."
HOME SAVINGS CHARITABLE FOUNDATION
In 1991, the Company established the Foundation, which is an exempt
organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"). Except for 1993, each year since the Foundation was
established, the Company has made annual contributions to the Foundation in
-5-
<PAGE> 11
furtherance of the Company's commitment to the communities that it serves. In
connection with the Conversion, the Holding Company intends to contribute a
number of common shares to the Foundation. The Company and the Holding Company
believe that the contribution of common shares to the Foundation will benefit
the long term value of the Company's community banking franchise by enabling the
communities it serves to share in the potential growth and success of the
Company and the Holding Company over the long term. See "THE CONVERSION -
Contribution to the Foundation; and Structure of the Foundation."
The Holding Company proposes to contribute to the Foundation
immediately following the Conversion, out of authorized but unissued common
shares, a number of shares equal to 5% of the Common Shares issued in the
Conversion, subject to the overall limitation of 1,250,000 common shares. Such
contribution would equal 1,062,500 common shares at the minimum of the Adjusted
Valuation Range and 1,250,000 common shares at the mid-point, maximum and
adjusted maximum of the Adjusted Valuation Range. Such contribution, once made,
will not be revocable by the Holding Company or the Company. Assuming the sale
of Common Shares at the maximum of the Adjusted Valuation Range and the issuance
of 1,250,000 of such shares to the Foundation, the Company will have 30,187,500
shares issued and outstanding, of which the Foundation will own 1,250,000
shares, or 4.14%. THE ISSUANCE OF ADDITIONAL COMMON SHARES TO THE FOUNDATION
WILL RESULT IN DILUTION OF APPROXIMATELY 4.14% TO THE OWNERSHIP AND VOTING
INTERESTS IN THE HOLDING COMPANY OF THE PERSONS PURCHASING SHARES IN THE
CONVERSION.
As a result of the contribution to the Foundation, the Holding Company
will recognize an expense for the full amount of the contribution, offset in
part by a corresponding tax benefit, during the quarter in which the
contribution is made, which is expected to be the second quarter of 1998. Such
expense will reduce earnings and have a material impact on the Holding Company's
earnings for such quarter and for the year. For further discussion of the
Foundation and its impact on purchasers in the Conversion, see "RISK FACTORS -
Contribution to the Foundation," "PRO FORMA DATA," "COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITHOUT THE FOUNDATION" and "THE CONVERSION - Contribution
to the Foundation -- Tax Considerations."
TAX CONSEQUENCES
The consummation of the Conversion is expressly conditioned upon the
receipt by the Holding Company and the Company of a private letter ruling from
the Internal Revenue Service (the "IRS") or an opinion of counsel to the effect
that, for federal income tax purposes, the Conversion will constitute a tax-free
reorganization as defined in Section 368(a) of the Code. The Holding Company and
the Company intend to proceed with the Conversion based upon an opinion received
from Vorys, Sater, Seymour and Pease LLP that states, in part, that (1) no gain
or loss will be recognized by the Company in connection with the Conversion or
the receipt from the Holding Company of proceeds from the sale of the Common
Shares, (2) assuming that the subscription rights received by deposit account
holders in connection with the Conversion have no ascertainable fair market
value, no gain or loss will be recognized to the deposit account holders of the
Company upon issuance to them of subscription rights or interests in the
Liquidation Account (hereinafter defined) and (3) no taxable income will be
realized by deposit account holders as a result of their exercise of such
subscription rights. The Holding Company and the Company have received an
opinion from Keller that the subscription rights have no ascertainable fair
market value, although such opinion is not binding on the IRS. See "THE
CONVERSION - Principal Effects of the Conversion -- Tax Consequences."
MARKET FOR THE COMMON SHARES
The Company and the Holding Company have never issued capital stock to
the public and, consequently, there is no existing market for the Common Shares.
The Holding Company has received conditional approval to have the Common Shares
quoted on The Nasdaq National Market ("Nasdaq") under the symbol "______". One
-6-
<PAGE> 12
of the conditions to the Nasdaq listing is the commitment of at least three
brokerage firms to make a market in the Common Shares. Trident and McDonald &
Company have informed the Holding Company that they intend to make a market in
the Common Shares and expect that additional market makers will be identified.
No assurance can be given, however, that an active or liquid market for the
Common Shares will develop after the completion of the Conversion or, if such
market does develop, that it will continue. There can be no assurance that the
Common Shares may later be resold at the price at which they are purchased in
the Conversion. See "RISK FACTORS - Absence of Established Market for the Common
Shares."
DIVIDEND POLICY
Following the completion of the Conversion, the Board of Directors of
the Holding Company intends to establish a dividend policy. The declaration and
payment of dividends or other capital distributions by the Holding Company will
be subject to the discretion of the Board of Directors of the Holding Company,
to the earnings and financial condition of the Holding Company and the Company
and to general economic conditions. The timing of the payment of dividends and
the annual rate will depend upon a determination by the Board of Directors of
the Holding Company that the net income, capital and financial condition of the
Holding Company and the general economy justify the declaration and payment of
dividends by the Holding Company. No assurance can be given, however, that
dividends will be paid or, if paid, will continue in the future. In accordance
with OTS policy, the Holding Company will not undertake an extraordinary
tax-free return of capital to its shareholders during the first year following
the completion of the Conversion. See "DIVIDEND POLICY" and "REGULATION - Office
of Thrift Supervision -- Limitations on Capital Distributions."
BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING
COMPANY AND THE COMPANY
GENERAL. Among the factors considered by the Board of Directors of the
Company in making the decision to pursue the Conversion is the ability of the
Holding Company and the Company to utilize various types of stock benefit plans
to attract and retain qualified directors and employees. See "THE CONVERSION -
Reasons for the Conversion."
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the
Holding Company has established the ESOP, which intends to use a loan from the
Holding Company to purchase 8% of the Common Shares issued in the Conversion.
The loan will have a term of up to 15 years and an interest rate equal to
_____________________________, which is currently _____%. All full-time
employees of the Holding Company and the Company who meet certain age and years
of service criteria will be eligible to participate in the ESOP. See "MANAGEMENT
- - Stock Benefit Plans -- Employee Stock Ownership Plan," and "RISK FACTORS -
Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; and -
Potential Awards of Shares to Directors, Officers and Employees Pursuant to
Benefit Plans."
STOCK OPTION PLAN. After the completion of the Conversion, the Holding
Company intends to establish a stock option and incentive plan (the "Stock
Option Plan"). The Board of Directors of the Holding Company anticipates that a
number of shares equal to 10% of the Common Shares sold in the Offering will be
reserved for issuance upon the exercise of options granted under the Stock
Option Plan. The Stock Option Plan will be administered by a committee comprised
of not fewer than three directors of the Company or the Holding Company (the
"Stock Option Committee"). Persons eligible for awards under the Stock Option
Plan will consist of directors, officers and employees of the Holding Company or
the Company who hold positions with significant responsibilities or whose
performance or potential contribution, in the judgment of the Stock Option
Committee, will contribute to the future success of the Holding Company or the
Company.
Under OTS regulations, no stock options may be awarded during the first
year after the completion of the Conversion unless the Stock Option Plan is
approved by the shareholders of the Holding Company at an annual
-7-
<PAGE> 13
or a special meeting of shareholders held not less than six months following the
completion of the Conversion. If the Stock Option Plan is approved by the
Holding Company shareholders at such meeting and implemented during the first
year after the completion of the Conversion, the following restrictions will
apply: (i) the number of shares which may be subject to options awarded under
the Stock Option Plan to directors who are not full-time employees of the
Holding Company may not exceed 5% per person and 30% in the aggregate of the
available plan shares; (ii) the number of shares which may be subject to options
awarded under the Stock Option Plan to any individual who is a full-time
employee of the Holding Company or its subsidiaries may not exceed 25% of the
available shares; (iii) stock options must be awarded with an exercise price at
least equal to the fair market value of the common shares of the Holding Company
at the time of the award; and (iv) stock options will become exercisable at the
rate of one-fifth per year commencing no earlier than one year from the date the
Stock Option Plan is approved by the shareholders, subject to acceleration of
vesting only in the event of the death or disability of a participant. No
decision has been made as to anticipated awards under the Stock Option Plan. See
"MANAGEMENT - Stock Benefit Plans -- Stock Option Plan," and "RISK FACTORS -
Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; and
Potential Awards to Directors, Officers and Employees Pursuant to Benefit
Plans."
RECOGNITION AND RETENTION PLAN. After the completion of the Conversion,
the Holding Company intends to establish a recognition and retention plan (the
"RRP"). The Board of Directors of the Holding Company anticipates that a number
of shares equal to 4% of the Common Shares sold in connection with the
Conversion will be purchased by, or issued to, the RRP. See "RISK FACTORS -
Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity" for a
discussion of the possible dilutive effects of the RRP. The RRP will be
administered by a committee comprised of not fewer than three directors of the
Company or the Holding Company (the "RRP Committee"). Persons eligible for
awards under the RRP will consist of directors, directors emeritus, officers and
employees of the Holding Company or the Company who hold positions with
significant responsibilities or whose performance or potential contribution, in
the judgment of the RRP Committee, will contribute to the future success of the
Holding Company or the Company. See "RISK FACTORS - Potential Awards of Shares
to Directors, Officers and Employees Pursuant to Benefit Plans."
Under OTS regulations, no RRP shares may be awarded during the first
year after the completion of the Conversion unless the RRP is approved by the
shareholders of the Holding Company at an annual or a special meeting of
shareholders held not less than six months following the completion of the
Conversion. If the RRP is approved by the Holding Company shareholders at such
meeting and implemented during the first year after the completion of the
Conversion, the following restrictions will apply: (i) the number of shares
awarded under the RRP to directors and directors emeritus who are not full-time
employees of the Holding Company may not exceed 5% per person and 30% in the
aggregate of the available plan shares; (ii) the number of shares awarded under
the RRP to any individual who is a full-time employee of the Holding Company or
its subsidiaries may not exceed 25% of the available shares; and (iii) RRP
awards will vest at the rate of one-fifth per year commencing no earlier than
one year from the date the RRP is approved by the shareholders, subject to
acceleration of vesting only in the event of the death or disability of a
participant. No decision has been made as to anticipated awards under the RRP.
See "MANAGEMENT - Stock Benefit Plans -- Recognition and Retention Plan."
EMPLOYMENT AGREEMENTS. In connection with the Conversion, the Company
will enter into employment agreements with Douglas M. McKay, the President,
Chief Executive Officer, and Chairman of the Board of the Company, Donald J.
Varner, the Secretary and Senior Vice President/Retail Banking Division of the
Company, and Patrick A. Kelly, the Treasurer, Chief Financial Officer and Senior
Vice President/Financial Division of the Company. Each employment agreement will
provide for a term of three years and will also provide for severance payments
in the event the agreement is terminated prior to the expiration of its term
upon a change in control of the Company or for any reason other than just cause,
as defined therein. See "MANAGEMENT - Employment Agreements."
-8-
<PAGE> 14
INVESTMENT RISKS
An investment in the Common Shares involves certain risks, including
the possible loss of principal invested. Special attention should be given to
the matters discussed under "RISK FACTORS - Anticipated Low Return on Equity;
Interest Rate Risk; - Risks Associated with Commercial Lending; - Possible
Adverse Effects of Contribution of Shares to the Foundation; - Competition in
Primary Market Area; - Geographic Concentration of Credit; - Absence of
Established Market for the Common Shares; - Dilutive Impact of Benefit Plans on
Net Earnings and Shareholders' Equity; - Potential Awards of Shares to
Directors, Officers and Employees Pursuant to Benefit Plans; - Legislation and
Regulation Which May Adversely Affect Earnings and Operations; and -
Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium
Prices."
-9-
<PAGE> 15
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
financial condition, earnings and other data regarding the Company at the dates
and for the periods indicated. Such information should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION DATA: At December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $1,044,993 $1,074,736 $1,077,523 $1,018,879 $1,003,975
Cash and cash equivalents 34,497 19,668 41,813 20,601 18,174
Investment securities:
Available for sale 39,402 14,659 32,125 33,415 -
Held to maturity 4,968 27,970 30,119 34,322 68,287
Mortgage-backed securities:
Available for sale 62,423 84,466 100,005 87,935 -
Held to maturity 243,848 286,384 302,107 312,300 438,349
Loans, net 633,236 616,923 546,689 503,413 452,924
FHLB stock 11,136 10,370 9,675 9,043 8,544
Deposits 886,808 932,060 938,856 898,912 894,794
Total equity 141,353 128,131 122,294 107,209 96,152
SUMMARY OF EARNINGS: Year ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- ------- ------- -------
(In thousands)
Interest income $82,685 $81,749 $79,834 $74,639 $77,743
Interest expense 40,463 43,009 41,104 34,898 38,158
------- -------- ------- ------- -------
Net interest income 42,222 38,740 38,730 39,741 39,585
(Recovery of) provision for loan loss
allowances (1,546) - - (100) 535
------- -------- ------- ------- -------
Net interest income after recovery of or
provision for
loan loss allowances 43,768 38,740 38,730 39,841 39,050
Noninterest income 1,564 1,291 1,554 1,018 2,080
Noninterest expense (1) 25,303 30,068 21,995 20,341 19,098
------- -------- ------- ------- -------
Income before provision for
income taxes and cumulative effect
of change in accounting principle 20,029 9,963 18,289 20,518 22,032
Cumulative effect of change in
accounting principle (2) - - - - 729
Provision for income taxes 6,982 3,332 6,707 7,294 8,002
------- -------- ------- ------- -------
Net income $13,047 $ 6,631 $11,582 $13,224 $14,759
======= ======== ======= ======= =======
</TABLE>
- ------------------------------
(1) For the year ended December 31, 1996, noninterest expense included a
$5.9 million one-time assessment imposed on the Company as a result of
legislation to recapitalize the SAIF.
(2) Reflects the cumulative impact of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," for the year ended December 31, 1993.
-10-
<PAGE> 16
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS AND OTHER DATA: At or for the year ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Performance ratios: (1)
Return on average assets (2) 1.23% 0.61% 1.11% 1.30% 1.48%
Return on average equity (3) 9.68 5.28 9.98 12.77 16.14
Interest rate spread (4) 3.53 3.14 3.30 3.64 3.72
Net interest margin (5) 4.09 3.65 3.79 4.01 4.07
Noninterest expense to average assets 2.39 2.77 2.10 2.01 1.91
Efficiency ratio (6) 57.79 75.11 54.60 49.91 45.84
Average interest-earning assets to average
interest-bearing liabilities 114.26 112.82 111.93 110.58 109.06
Capital ratios:
Average equity to average assets 12.74 11.58 11.08 10.21 9.16
Equity to assets at year end 13.53 11.92 11.35 10.52 9.58
Tangible capital 13.47 11.87 11.24 10.70 9.56
Core capital 13.47 11.87 11.24 10.70 9.56
Risk-based capital 28.85 26.15 26.65 25.35 23.52
Asset quality ratios:
Nonperforming loans to total loans at
year end (7) 1.60 1.59 1.11 1.34 2.04
Nonperforming assets to average assets (8) 0.96 0.91 0.59 0.82 1.15
Nonperforming assets to total assets at
year end (8) 0.98 0.92 0.57 0.82 1.14
Allowance for loans losses as a percent of loans 0.94 0.81 0.93 1.01 1.18
Allowance for loans losses as a percent of
nonperforming loans (7) 59.02 51.37 84.18 75.51 58.40
Number of:
Loans 19,173 18,826 17,736 17,027 16,683
Deposits 108,663 108,793 105,987 99,541 95,991
Full-service offices (9) 15 14 14 14 14
</TABLE>
- ----------------------
(1) Performance ratios for 1996 reflect the $5.9 million one-time
assessment imposed on the Company as a result of legislation to
recapitalize the SAIF.
(2) Net income divided by average total assets. The return on average
assets for 1996 includes the effect of the one-time SAIF assessment.
Excluding this one-time only item, the Company's return on average
assets would have been 0.96% for the year ended December 31, 1996.
(3) Net income divided by average total equity. The return on average
equity for 1996 includes the effect of the one-time SAIF assessment.
Excluding this one-time only item, the Company's return on average
equity would have been 8.29% for the year ended December 31, 1996.
(4) Difference between weighted average yield on interest-earning assets
and weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) The efficiency ratio is computed as noninterest expense divided by the
sum of net interest income and noninterest income. The efficiency ratio
for 1996 includes the effect of the one-time SAIF assessment. Excluding
this one-time only item, the Company's efficiency ratio would have been
60.37% for the year ended December 31, 1996.
(7) Nonperforming loans include nonaccrual loans and restructured loans.
(8) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans.
(9) On January 20, 1998, the Company closed a branch located in a
supermarket in Poland, Ohio, reducing the number of full-service
offices to 14.
-11-
<PAGE> 17
RISK FACTORS
INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE
INVESTING, PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING
MATTERS.
ANTICIPATED LOW RETURN ON EQUITY
During the last five years, the Company's return on equity has ranged
from a high of 16.14% for 1993 to a low of 5.28% for 1996, with an average of
10.77%. Excluding the effect of the one-time assessment to recapitalize the
SAIF, the return on equity would have been 8.29% for the year ended December 31,
1996. The increased capital resulting from the Conversion is expected to
significantly reduce the Company's return on equity for a prolonged period after
the Conversion, which may adversely affect the market value of the Common
Shares. Initially, the Conversion proceeds will be invested in short-term
investments which generally have lower yields than loans and longer term
securities, which could also adversely affect the Company's return on equity.
See "USE OF PROCEEDS." In addition, it is further anticipated that the ESOP and,
if approved by the Board of Directors and the shareholders after the Conversion,
the Stock Option Plan and the RRP will increase compensation expense
significantly, further lowering return on equity. See "Potential Impact of
Benefit Plans on Net Earnings and Shareholders' Equity."
INTEREST RATE RISK
The Company's operating results are dependent to a significant degree
on its net interest income, which is the difference between interest income from
loans and investments and interest expense on deposits and borrowings. Like most
thrift institutions, the Company's interest income and interest expense change
as interest rates fluctuate and assets and liabilities reprice. Interest rates
generally may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond the Company's control.
The interest rates on specific assets and liabilities of the Company will change
or "reprice" in accordance with the contractual terms of the asset or liability
instrument and in accordance with customer reaction to general economic trends.
See "THE BUSINESS OF THE COMPANY Lending Activities; and - Deposits and
Borrowings."
In a period of rising interest rates, the interest income earned on the
Company's assets may not increase as rapidly as the interest expense paid on the
Company's liabilities. As a result, the earnings of the Company may be adversely
affected. The degree to which such earnings will be adversely affected depends
upon the rapidity and extent of the increase in interest rates. In addition,
rising interest rates could negatively affect the Company's earnings due to
diminished loan demand. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Asset and Liability Management."
Changes in interest rates also affect the value of the Company's
interest-earning assets, particularly its one- to four-family residential
mortgage loans and mortgage-backed securities portfolio. Typically, the value of
these assets fluctuates inversely with changes in interest rates. At December
31, 1997, the Company's mortgage-backed securities portfolio totaled $306.3
million, including $62.4 million classified as available for sale, and the
Company's loan portfolio included $513.7 million in one- to four-family
residential mortgage loans. Unrealized gains and losses on securities available
for sale are reported as a separate component of equity, net of taxes. Decreases
in the fair value of securities available for sale therefore could have an
adverse effect on shareholders' equity. See "THE BUSINESS OF THE COMPANY -
Investment Activities."
RISKS ASSOCIATED WITH COMMERCIAL LENDING
During 1997 and 1996 the Company has become more active in originating
commercial loans, which amounted to $59.9 million, or 9.1% of the Company's
total loan portfolio, at December 31, 1997.
-12-
<PAGE> 18
Commercial loans are generally considered to entail significantly
greater risk than real estate lending. The repayment of commercial loans is
typically dependent on the income stream and successful operation of a business,
which can be affected by economic conditions. The collateral for commercial
loans, if any, often consists of rapidly depreciating assets. In addition,
commercial lending generally requires substantially greater underwriting and
monitoring efforts compared to residential real estate lending. At December 31,
1997, the Company had $2.1 million of nonperforming commercial loans, which
represented 20.9% of the Company's nonperforming assets.
Although commercial loans present greater risk than real estate loans,
they also typically have higher yields. During 1997 the Company hired two
experienced commercial lending officers, and the Company intends to increase its
volume of commercial loan originations.
POSSIBLE ADVERSE EFFECTS OF CONTRIBUTION OF SHARES TO THE FOUNDATION
DILUTION OF SHAREHOLDERS' INTERESTS. The Holding Company proposes to
contribute to the Foundation common shares in an amount equal to 5% of the
Common Shares sold in connection with the Conversion, not to exceed 1,250,000
common shares, subject to the approval of the contribution by the Company's
members at the Special Meeting. At the minimum of the Adjusted Valuation Range,
the contribution to the Foundation would be 1,062,500 common shares with a value
of $10,625,000, and at the mid-point, maximum and adjusted maximum of the
Adjusted Valuation Range, the contribution to the Foundation would be 1,250,000
common shares, with a value of $12.5 million, based on the $10 purchase price
per share. Upon completion of the Conversion and the contribution of shares to
the Foundation, the Holding Company will have 30,187,500 shares issued and
outstanding at the maximum of the Adjusted Valuation Range, of which the
Foundation will own 1,250,000 shares, or 4.14%. As a result, persons purchasing
Common Shares in the Conversion will have their ownership and voting interests
in the Holding Company diluted by 4.14%. See "PRO FORMA DATA."
IMPACT ON EARNINGS. The contribution of common shares to the Foundation
will have an adverse impact on the Holding Company's earnings in the year in
which the contribution is made. The Holding Company will recognize the full
expense in the amount of the contribution of common shares to the Foundation in
the quarter in which it occurs, which is expected to be the second quarter of
1998. The amount of the contribution will range from $10.6 million to $12.5
million, based on the Adjusted Valuation Range. The contribution expense will be
partially offset by the tax benefit related to the expense. The Company and the
Holding Company have been advised by their independent tax advisors that the
contribution to the Foundation will be tax deductible, subject to an annual
limitation of 10% of the Holding Company's annual taxable income. Management
expects that the funding of the Foundation will have an adverse impact on the
Holding Company's earnings for 1998.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE CONTRIBUTION TO
THE FOUNDATION IS NOT PART OF THE CONVERSION. The intended contribution of
common shares to the Foundation was taken into account by Keller in the Adjusted
Valuation Range. Based upon these considerations, Keller determined the pro
forma value of the Company, as converted, and the Holding Company to be $250.0
million. If the contribution were not being made to the Foundation, Keller has
estimated that the estimated pro forma market value of the Company, as
converted, and the Holding Company would be $280.0 million. The amount of Common
Shares that are being offered in the Conversion at the mid-point of the Adjusted
Valuation Range is therefore approximately $30.0 million less than the estimated
amount of Common Shares that would have been offered in the Conversion without
the Foundation, based on the estimate provided by Keller. Accordingly, fewer
shares will be available for sale to persons having subscription rights, which
could result in subscribers receiving fewer shares, depending on the size of a
depositor's stock order, the amount of the depositor's qualifying deposits in
the Company and the overall level of subscriptions. See "COMPARISON OF VALUATION
AND PRO FORMA INFORMATION WITHOUT FOUNDATION." This estimate by Keller was
prepared solely for purposes of providing information with which to make an
informed decision on the Conversion.
-13-
<PAGE> 19
POTENTIAL ANTI-TAKEOVER EFFECT. Upon completion of the Conversion, the
Foundation will own 4.14% of the total Common Shares outstanding, assuming the
sale of 28,937,500 Common Shares in the Offering and the contribution of
1,250,000 shares to the Foundation. The common shares held by the Foundation
will be voted by the Foundation's independent trustee. However, if the Holding
Company's Board of Directors were given authority to exercise sole voting power
over such shares, management of the Company and the Holding Company may benefit
to the extent that the Board of Directors determines to vote the common shares
held by the Foundation in favor of proposals supported by the Company and the
Holding Company. Furthermore, in such an event, when the Foundation's shares are
combined with shares purchased directly by officers and directors of the Holding
Company, shares expected to be held by the RRP, and shares held by the ESOP
trust, the aggregate of such shares will exceed 20% of the outstanding Common
Shares, which could enable management to defeat shareholder proposals requiring
80% approval. Consequently, such potential voting control might preclude
takeover attempts that certain shareholders deem to be in their best interest,
and might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees of the Company, and because the RRP must
first be approved by shareholders no sooner than six months following completion
of the Conversion, and awards under such proposed plan may be granted to
employees other than executive officers and directors, management of the Holding
Company does not expect to have voting control of all shares covered by the ESOP
and other stock-based benefit plans. See "Anti-Takeover Provisions Which May
Discourage Sales of Common Shares for Premium Prices." Moreover, if the
Foundation sells its Holding Company shares over time, its ownership interest
and voting power in the Holding Company is expected to decrease.
APPROVAL OF MEMBERS. The contribution of common shares to the
Foundation is subject to the approval of a majority of the total outstanding
votes eligible to be cast at the Special Meeting. The contribution to the
Foundation will be considered as a separate matter from approval of the Plan. If
the Company's members approve the Plan, but not the contribution to the
Foundation, the Company intends to complete the Conversion without the
contribution to the Foundation. The elimination of the contribution to the
Foundation may materially increase the pro forma market value of the Company, as
converted, and the Holding Company. See "COMPARISON OF VALUATION AND PRO FORMA
INFORMATION WITH FOUNDATION." If the pro forma market value of the Company, as
converted, and the Holding Company, without the contribution to the Foundation,
is either greater than $334,656,250 or less than $212,500,000, or if the OTS
otherwise requires a resolicitation of subscribers, the Company will establish a
new valuation range and commence a resolicitation of subscribers. Any person who
does not affirmatively elect to continue his subscription or elects to rescind
his subscription will have the appropriate portion of his funds promptly
refunded with interest. Any change in the Adjusted Valuation Range must be
approved by the OTS. See "THE CONVERSION - Pricing and Number of Common Shares
to be Sold."
COMPETITION IN PRIMARY MARKET AREA
Competition in the banking and financial services industry is intense.
In its market area, the Company competes with commercial banks, savings and loan
associations, finance companies, mortgage banking companies, credit unions,
mutual funds and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors have substantially greater resources than
the Company and may offer services that it does not or cannot provide. The
profitability of the Company depends upon its continued ability to successfully
compete in its market area.
GEOGRAPHIC CONCENTRATION OF CREDIT
Most of the Company's loans have been made to borrowers residing in,
and most of its real estate loans are secured by property located in, Mahoning
County, northern Columbiana County and southern Trumbull County in northeast
Ohio. Events which negatively impact the local economy, such as a strike or
lay-offs at the General Motors Plant in Lordstown, Ohio, which is a major
employer in the Company's market area, could result
-14-
<PAGE> 20
in increased defaults on loans made by the Company and decreases in the value of
the Company's collateral, making collection of such loans more difficult.
With regard to several important economic factors, statistics for the
Company's primary market area have in recent years trailed both the State of
Ohio and the United States. In 1996, the per capita annual income of Mahoning
County and the Company's primary market area were lower than the $15,376 and
$16,738 per capita annual income for Ohio and the United States, respectively.
The median annual household income for the Company's primary market area was
$27,404 in 1996, compared to $32,120 for the State of Ohio and $34,530 for the
United States.
ABSENCE OF ESTABLISHED MARKET FOR THE COMMON SHARES
Because the Company and the Holding Company have never issued stock to
the public before, there is no existing market for the Common Shares. The
Holding Company has received conditional approval to have the shares quoted on
Nasdaq under the symbol "________". See "MARKET FOR COMMON SHARES." The
development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Company, the Holding Company, or any market maker. No assurance can be given
that an active or liquid market for the Common Shares will develop after the
completion of the Conversion or, if such a market does develop, that it will
continue. Investors should consider, therefore, the potential long-term nature
of an investment in the Common Shares. The absence of a liquid and active
trading market, or the discontinuance thereof, may have an adverse effect on
both the price and the liquidity of the Common Shares.
The offering price of the Common Shares is based upon an independent
appraisal of the Company, as converted, and the Holding Company. The appraisal
is not a recommendation as to the advisability of purchasing Common Shares, nor
does it represent Keller's opinion as to the price at which the Common Shares
may trade. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." There can be no assurance that the Common Shares may later be resold at
the price at which they are purchased in the Conversion.
DILUTIVE IMPACT OF BENEFIT PLANS ON NET INCOME AND SHAREHOLDERS' EQUITY
In connection with the Conversion, the Holding Company has established
the ESOP, which intends to use a loan from the Holding Company to purchase 8% of
the Common Shares issued in connection with the Conversion. All full-time
employees of the Holding Company and the Company who meet certain age and years
of service criteria will be eligible to participate in the ESOP.
The ESOP loan will be repaid through cash contributions to the ESOP
from the Company and the use of dividends paid on the Common Shares, if any. The
Company currently anticipates that the ESOP loan will be repaid over a period of
up to 15 years. The amount of cash or other assets that can be contributed to
the ESOP each year is limited by certain IRS regulations. Contribution to the
ESOP in the maximum amount permitted by IRS regulations, could result in
repayment of the ESOP loan in fewer than 15 years. A shorter repayment period
could result in increased compensation expense during the years in which
payments are made on the ESOP loan, which would adversely impact the Holding
Company's earnings.
Statement of Position ("SOP") No. 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," published by the American Institute of
Certified Public Accountants (the "AICPA"), requires an employer to record
compensation expense in an amount equal to the fair value of shares committed to
be released to employees from the ESOP as the loan is repaid. See "PRO FORMA
DATA" for pro forma information regarding the effects of SOP 93-6 on net
earnings and shareholders' equity. If the Common Shares acquired by the ESOP
appreciate in value over time, or if the loan is repaid in fewer than 15 years,
the Holding Company
-15-
<PAGE> 21
may incur increased compensation expense relating to the ESOP which would
adversely affect the Holding Company's net earnings.
The ESOP may purchase Common Shares on the open market or may purchase
authorized but unissued shares from the Holding Company. If the ESOP purchases
authorized but unissued shares from the Holding Company, such purchases could
have a dilutive effect on the interests of the Holding Company's shareholders.
Following the consummation of the Conversion, the Holding Company
intends to adopt the Stock Option Plan and the RRP. The Holding Company will
incur compensation expense for RRP shares based on the market value of the
shares at each vesting date. Such expense will reduce the Holding Company's net
income for the years in which awards vest.
The shares issued to participants under the RRP could be newly issued
shares or shares purchased in the market. In the event the shares issued under
the RRP consist of newly issued common shares, the interests of existing
shareholders will be diluted. Shares issued pursuant to the exercise of options
under the Stock Option Plan will be authorized but unissued shares, unless the
Holding Company has treasury shares at the time of exercise and elects to use
the treasury shares. At the adjusted maximum of the Adjusted Valuation Range, if
all shares under these plans were newly issued and the exercise price for the
option shares was equal to the $10 per share purchase price in the Conversion,
the pro forma book value per share of the outstanding common shares at December
31, 1997, would decrease from $12.52 to $11.32. See "PRO FORMA DATA" and
"MANAGEMENT - Stock Benefit Plans."
POTENTIAL AWARDS OF SHARES TO DIRECTORS, OFFICERS AND EMPLOYEES PURSUANT TO
BENEFIT PLANS
The ESOP intends to purchase 8% of the Common Shares sold in the
Offering. After the completion of the Conversion, but not sooner than six months
thereafter, the Holding Company intends to submit the Stock Option Plan and the
RRP for approval by its shareholders. It is anticipated that a number of shares
equal to 10% of the Common Shares sold in the Offering will be reserved out of
authorized but unissued shares for issuance to the directors, officers and
employees of the Holding Company and the Company pursuant to the Stock Option
Plan, and a number of shares equal to 4% of the Common Shares sold in the
Offering will be purchased by the RRP in the open market or directly from the
Holding Company for awards to directors, officers and employees of the Holding
Company and the Company under the RRP. Based on the $10 per share price in the
Offering, the total value of the shares which may be available for awards under
the RRP, at no cost to the recipients of such awards, ranges from $8.5 million
at the minimum of the Adjusted Valuation Range to $13.4 million at the adjusted
maximum of the Adjusted Valuation Range. Awards of shares under the RRP will not
occur until at least six months after completion of the Conversion. As a result,
the value of such shares at the time of such awards, or at the time awarded
shares are distributed to recipients, cannot be estimated. See "THE CONVERSION -
Reasons for the Conversion," and "MANAGEMENT - Stock Benefit Plans."
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT EARNINGS AND OPERATIONS
The Company is subject to extensive regulation by the OTS, the Division
and the FDIC and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. The Holding Company will also
be subject to regulation and examination by the OTS. Such supervision and
regulation of the Company and the Holding Company are primarily for the
protection of the federal deposit insurance fund and not for the maximization of
shareholder value and may limit the ability of the Company and the Holding
Company to engage in various business activities. See "REGULATION."
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. Such legislation, if enacted, could eliminate the OTS, which would
likely subject the Company to more regulation by the FDIC. In addition, the
Holding Company might
-16-
<PAGE> 22
become subject to new or different holding company regulations, including
separate capital requirements and stringent limitations on activities. Although
the Holding Company cannot predict when or whether Congress may pass legislation
regarding the Holding Company's and the Company's regulatory requirements or
charter, it is not anticipated that the current business activities of the
Holding Company or the Company will be materially affected by such legislation.
ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM
PRICES
The Articles of Incorporation and Code of Regulations of the Holding
Company and the Amended Articles of Incorporation of the Company contain certain
provisions that could deter or prohibit non-negotiated changes in the control of
the Holding Company and the Company. Such provisions include (1) a restriction
on the direct or indirect acquisition of more than 10% of the outstanding shares
of the Company by any person during the five-year period following the effective
date of the Conversion, (2) the ability to issue additional common shares
without shareholder approval, and (3) the requirement of a 80% supermajority
voting requirement for the approval of certain matters, including mergers,
acquisitions of a majority of the shares of the Holding Company or the transfer
of substantially all of the assets of the Holding Company, if the Board of
Directors recommends against the approval of any such matter. See "DESCRIPTION
OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS."
The executive officers and directors of the Holding Company and their
Associates are expected to purchase approximately 2.13% of the shares issued in
connection with the Conversion, assuming the sale of 25,000,000 Common Shares at
the midpoint of the Adjusted Valuation Range. In addition, executive officers of
the Holding Company will be able to vote shares allocated to their accounts
under the ESOP, which intends to purchase approximately 8% of the shares issued
in connection with the Conversion. The RRP trustees, who are expected to be
directors of the Company, will vote shares awarded but not distributed under the
RRP in their discretion. In view of the various provisions of the Articles of
Incorporation and the stock benefit plans of the Holding Company and the
Company, the ESOP trustee, the RRP Committee and the directors and officers of
the Holding Company and the Company will have a significant influence over the
vote on any takeover attempt or proxy contest and may be able to defeat such a
proposal. The Boards of Directors of the Holding Company and the Company believe
that such provisions will be in the best interests of shareholders by
encouraging prospective acquirers to negotiate a proposed acquisition with the
directors. Such provisions could, however, adversely affect the market value of
the Common Shares or restrict or eliminate the opportunity for shareholders to
sell their shares for premium prices.
Federal and Ohio law also restrict the acquisition of control of the
Holding Company and the Company, and regulations of the OTS restrict the ability
of any person to acquire the beneficial ownership of more than 10% of any class
of voting equity security of the Company or the Holding Company. Any or all of
these provisions may facilitate the perpetuation of current management and
discourage proxy contests or takeover attempts not first negotiated with the
Board of Directors. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND
THE COMPANY AND ANTI-TAKEOVER PROVISIONS."
-17-
<PAGE> 23
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from
the sale of the Common Shares, based on the Adjusted Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
------- --------- ------- --------------------
<S> <C> <C> <C> <C>
Gross proceeds $212,500,000 $250,000,000 $289,375,000 $334,656,250
Less estimated expenses 3,172,000 3,500,000 3,845,000 4,240,000
------------ ------------ ------------ ------------
Total net proceeds $209,328,000 $246,500,000 $285,530,000 $330,416,250
============ ============ ============ ============
</TABLE>
The net proceeds from the sale of the Common Shares may vary depending
upon financial and market conditions at the time of the completion of the
Offering. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold."
The expenses detailed above are estimated. Actual expenses may be more than or
less than estimated. See "THE CONVERSION Plan of Distribution."
The Holding Company will retain up to 50% of the net proceeds from the
sale of the Common Shares, or approximately $165.2 million at the adjusted
maximum of the Adjusted Valuation Range. Such proceeds will be used to make a
loan to the ESOP to acquire 8% of the Common Shares in the Offering. Based upon
the issuance of 33,465,625 shares at the adjusted maximum of the Adjusted
Valuation Range, the loan to the ESOP would be $26.8 million. See "MANAGEMENT
Stock Benefit Plans -- Employee Stock Ownership Plan." The loan to the ESOP will
have a term of up to 15 years and an interest rate equal to
___________________________, which is currently _____%. The balance of the net
proceeds may be invested initially in investment securities, mortgage-backed
securities, U.S. Government and federal agency securities of various maturities,
deposits in either the Company or other financial institutions, or a combination
thereof.
Ultimately the proceeds retained by the Holding Company may be used for
payments of dividends, repurchases of Common Shares, funding of the RRP and
other general corporate purposes. The Holding Company currently has no specific
plan to repurchase any of the Common Shares. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Shares based on its view of the appropriateness of the price of the
Common Shares as well as the Holding Company's and the Company's investment
opportunities and capital needs. OTS regulations generally prohibit the Holding
Company from repurchasing any of its capital stock for three years following the
date of completion of the Conversion, except as part of an open-market stock
repurchase program during the second and third years following the Conversion
involving no more than 5% of the outstanding capital stock during a twelve-month
period. The OTS may permit a repurchase during the first year following the
completion of the Conversion or may permit the Holding Company to exceed the 5%
limits in the second and third years if exceptional circumstances are
established. In addition, after any repurchase during the three years following
the completion of the Conversion, the Company's regulatory capital must equal or
exceed all regulatory capital requirements. See "THE CONVERSION - Restrictions
on Repurchase of Common Shares."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $165.2 million at the adjusted maximum of the Adjusted
Valuation Range, will be invested by the Holding Company in the capital stock to
be issued by the Company to the Holding Company. The resulting increase in the
regulatory capital of the Company will permit the Company to expand its lending
and investment activities and to enhance customer services. The Company
anticipates that the portion of the net proceeds received by the Company will
initially be invested in overnight funds and short-term investments with
maturities of one to three years and eventually utilized for general corporate
purposes, including loan originations. The Company may also use such funds for
the expansion of its facilities, and, although no such transactions are
specifically being considered at this time, to expand operations through
acquisitions of other financial institutions, branch offices or other
-18-
<PAGE> 24
financial services companies, including those located within the Company's
market area or the establishment of de novo branch offices or loan origination
facilities.
MARKET FOR COMMON SHARES
Neither the Holding Company nor the Company has ever issued capital
stock to the public and, consequently, there is currently no established market
for the Common Shares. The Holding Company has received conditional approval to
have the Common Shares quoted on Nasdaq under the symbol "_____."
One of the conditions to the Nasdaq listing is the commitment
of at least three brokerage firms to make a market in the Common Shares. Trident
and McDonald & Company have informed the Holding Company that they intend to
make a market in the Common Shares, and expect that additional market makers
will be identified. A public trading market for the stock of any issuer,
including the Holding Company, depends upon the presence of both willing buyers
and willing sellers at any given time. Accordingly, the number of active buyers
and sellers of the Common Shares at any particular time may be limited. No
assurance can be given that an active or liquid market for the Common Shares
will develop after the completion of the Conversion or, if such a market does
develop, that it will continue. Investors should consider, therefore, the
potentially long-term nature of an investment in the Common Shares. See "RISK
FACTORS - Absence of Established Market for the Common Shares."
The appraisal of the pro forma market value of the Common Shares is not
a recommendation as to the advisability of purchasing Common Shares, nor does it
represent Keller's opinion as to the price at which the Common Shares may trade.
There can be no assurance that the Common Shares may later be resold at the
price at which they are purchased in the Conversion.
DIVIDEND POLICY
Following the completion of the Conversion, the Board of Directors of
the Holding Company intends to establish a dividend policy. The declaration and
payment of dividends by the Holding Company will be subject to the discretion of
the Board of Directors of the Holding Company, to the earnings and financial
condition of the Holding Company and to general economic conditions. The timing
of payments of dividends and the annual rate will depend upon a determination by
the Board of Directors of the Holding Company, in the exercise of its
discretion, that the net income, capital and consolidated financial condition of
the Holding Company and the general economy justify the declaration and payment
of dividends by the Holding Company, subject to the limitation under Ohio law
that a corporation may pay dividends only out of surplus. There can be no
assurance that dividends will be paid on the Common Shares or, if paid, that
such dividends will continue to be paid in the future. In addition, the Holding
Company will not take any action that would further the payment of a tax-free
return of capital to its shareholders during the first year following the
completion of the Conversion.
Other than earnings on the investment of the proceeds retained by the
Holding Company and interest earned on the loan to the ESOP, the principal
source of income of the Holding Company will be dividends periodically declared
and paid by the Board of Directors of the Company on the common shares of the
Company held by the Holding Company. The declaration and payment of dividends by
the Company to the Holding Company will be subject to the discretion of the
Board of Directors of the Company, to the earnings and financial condition of
the Company, to general economic conditions and to federal and state
restrictions on the payment of dividends by thrift institutions. Under
regulations of the OTS applicable to converted associations, the Company will
not be permitted to pay a cash dividend on its capital stock after the
Conversion if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the Liquidation Account or
the applicable regulatory capital requirement prescribed by the OTS. See "THE
CONVERSION -
-19-
<PAGE> 25
Principal Effects of the Conversion -- Liquidation Account" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources." The Company may not pay a dividend unless such
dividend also complies with an OTS regulation limiting capital distributions by
savings and loan associations. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends,
repurchases, and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association. See "REGULATION - Office of Thrift Supervision -- Limitations on
Capital Distributions."
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical regulatory capital of the
Company at December 31, 1997, and the pro forma regulatory capital of the
Company at such date based on the receipt of 50% of the net proceeds for the
number of Common Shares indicated.
<TABLE>
<CAPTION>
Pro forma capital at December 31, 1997, assuming the sale of:
--------------------------------------------------------------------------------
21,250,000 25,000,000 28,937,500 33,465,625
Common Shares Common Shares Common Shares Common Shares
Historical at (offering price (offering price (offering price (offering price
December 31, 1997 of $10 per share) of $10 per share) of $10 per share) of $10 per share)
------------------ ----------------- ----------------- ----------------- -----------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital: (2) $141,353 $209,574 $221,728 $234,156 $248,448
======== ======== ======== ======== ========
Tangible capital: (3)
Capital level $140,636 13.47% $208,857 18.78% $221,011 19.66% $233,439 20.53% $247,731 21.52%
Requirement 15,661 1.50 16,684 1.50 16,867 1.50 17,053 1.50 17,267 1.50
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess $124,975 11.97% $192,173 17.28% $204,144 18.16% $216,386 19.03% $230,464 20.02%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Core capital: (3)
Capital level $140,636 13.47% $208,857 18.78% $221,011 19.66% $233,439 20.53% $247,731 21.52%
Requirement (4) 31,322 3.00 33,369 3.00 33,733 3.00 34,106 3.00 34,535 3.00
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
Excess $109,314 10.47% $175,488 15.78% $187,278 16.66% $199,333 17.53% $213,196 18.52%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-based capital:
(5)
Capital level $146,461 28.85% $214,682 39.62% $226,836 41.40% $239,264 43.18% $253,556 45.17%
Requirement 40,619 8.00 43,348 8.00 43,834 8.00 44,331 8.00 44,903 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess $105,842 20.85% $171,334 31.62% $183,002 33.40% $194,933 35.18% $208,653 37.17%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- -------------------------------
(1) Based upon total adjusted assets of $1.04 billion at December 31, 1997,
and $1.11 billion, $1.12 billion, $1.14 billion and $1.15 billion, at
the minimum, mid-point, maximum and adjusted maximum of the Adjusted
Valuation Range, respectively, for purposes of tangible and core
capital requirements, and upon risk-weighted assets of $507.7 million
at December 31, 1997, and $541.8 million, $547.9 million, $554.1
million and $561.3 at the minimum, midpoint, maximum and adjusted
maximum of the Adjusted Valuation Range, respectively, for purposes of
the risk-based capital requirement.
(2) The difference between GAAP capital and each of tangible capital and
core capital is the unrealized gain on securities available for sale,
net of taxes.
(3) Tangible and core capital levels are shown as a percentage of adjusted
total assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(4) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital
requirements which would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness and a core capital ratio of 4% to 5% for all
other thrifts.
(5) Assumes reinvestment of net proceeds in 50% risk-weighted assets.
Includes $5.8 million of general valuation allowances, all of which
qualify as supplementary capital. See "REGULATION - Regulatory Capital
Requirements."
-20-
<PAGE> 26
CAPITALIZATION
Set forth below is the historical capitalization of the Company at
December 31, 1997, and the pro forma consolidated capitalization of the Holding
Company at such date, as adjusted to give effect to the sale of Common Shares
based on the Adjusted Valuation Range and estimated expenses. See "USE OF
PROCEEDS" and "THE CONVERSION - Pricing and Number of Common Shares to be Sold."
A change in the number of Common Shares to be issued in the Conversion may
materially affect the pro forma consolidated capitalization of the Holding
Company.
<TABLE>
<CAPTION>
Pro forma capitalization of the Holding Company
at December 31, 1997, assuming the sale of:
------------------------------------------------------------------
21,250,000 25,000,000 28,937,500 33,465,625
Historical Common Common Common Common
capitalization Shares Shares Shares Shares
of the Company at (Offering (Offering (Offering (Offering
December 31, price of price of price of price of
1997 $10 per share) $10 per share) $10 per share) $10 per share)
------------ -------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1) $886,808 $886,808 $886,808 $886,808 $886,808
======== ======== ======== ======== ========
Capital and retained earnings:
Common Shares, no par value per
share: authorized - ________
shares; assumed outstanding - - $ 1 $ 1 $ 1 $ 1
as shown (2)
Additional paid-in capital - 209,327 246,499 285,529 330,415
Shares issued to Foundation (3) - 10,625 12,500 12,500 12,500
Less expense of contribution to
Foundation, net - (6,906) (8,125) (8,125) (8,125)
Less Common Shares acquired by
the ESOP (4) - (17,850) (21,000) (24,150) (27,772)
Less Common Shares acquired by
the RRP (5) - (8,925) (10,500) (12,075) (13,886)
Retained earnings, net,
substantially restricted (6) 140,636 140,636 140,636 140,636 140,636
Unrealized gain on available for
sale securities, net 717 717 717 717 717
-------- -------- -------- -------- --------
Total capital and retained
earnings $141,353 $327,625 $360,728 $395,033 $434,486
======== ======== ======== ======== ========
</TABLE>
- ------------------------------------
(1) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Shares in the Conversion. Any such
withdrawals will reduce pro forma deposits by the amount of such
withdrawals.
(2) The number of Common Shares to be issued will be determined on the
basis of the final valuation of the Company. See "THE CONVERSION -
Pricing and Number of Common Shares to be Sold." The number of Common
Shares assumed outstanding does not reflect the issuance of any common
shares which may be reserved for issuance under the Stock Option Plan.
See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan." Reflects
receipt of the proceeds from the sale of the Common Shares, net of
estimated expenses.
(3) Reflects shares to be contributed to the Foundation at an assumed value
of $10 per share.
(4) Assumes that 8% of the Common Shares sold in the Conversion will be
acquired by the ESOP with funds borrowed by the ESOP from the Holding
Company for a term of 15 years at a rate of ___%. The ESOP loan will be
secured solely by the Common Shares purchased by the ESOP. The Company
has agreed, however, to use its best efforts to fund the ESOP based on
future earnings, which would reduce the Company's total capital and
retained earnings, as reflected in the table. If the ESOP purchases
authorized but unissued shares from the Holding Company, such purchases
would have a dilutive effect of approximately 7.4% on the voting
interests of the Holding Company's shareholders. See "MANAGEMENT -
Stock Benefit Plans -- Employee Stock Ownership Plan."
(5) Assumes that 4% of the Common Shares will be acquired in the open
market by the RRP after the Conversion at a price of $10 per share.
There can be no assurance that a sufficient number of shares will be
available for purchase by the RRP, or that shares could be purchased at
a price of $10 per share. A higher price per share, assuming the
purchase of the entire 4% of the shares, would reduce retained
earnings. The RRP may purchase shares in the open market or may
purchase authorized but unissued shares from the Holding Company. If
authorized but unissued shares are purchased, the voting interests of
existing shareholders would be diluted approximately 3.9%. See
"MANAGEMENT - Stock Benefit Plans -- Recognition and Retention Plan."
(6) Retained earnings include restricted and unrestricted retained
earnings. See "THE CONVERSION - Principal Effects of the Conversion --
Liquidation Account" for information concerning the liquidation account
to be established in connection with the Conversion and "TAXATION -
Federal Taxation" for information concerning restricted retained
earnings for federal tax purposes.
-21-
<PAGE> 27
PRO FORMA DATA
Set forth below are the pro forma consolidated net earnings of the
Holding Company for the year ended December 31, 1997, and the pro forma
consolidated shareholders' equity of the Holding Company at December 31, 1997,
along with the related pro forma earnings per share amounts, giving effect to
the sale of the Common Shares based on the Adjusted Valuation Range. See "THE
CONVERSION - Pricing and Number of Common Shares to be Sold." The pro forma data
is based on the following assumptions: (i) the sale of the Common Shares
occurred at the beginning of the period and yielded the net proceeds indicated;
(ii) such net proceeds were invested at the beginning of the period to yield
annualized after-tax net returns of 3.46%; and (iii) no withdrawals from
existing deposit accounts were made to purchase the Common Shares. The assumed
returns are based on the one-year U.S. Treasury bill yield of 5.32% as of
December 31, 1997. This rate was used as an alternative to the arithmetic
average of the Company's interest-earning assets and interest-bearing deposits.
In calculating pro forma net earnings, a statutory federal income tax rate of
35% has been assumed for all periods. In the opinion of management, the assumed
after-tax yield does not differ materially from the estimated after-tax yield
which will be obtained on the initial investment of the cash proceeds and is
viewed as being more relevant in the current low interest rate environment than
the use of an arithmetic average of the fiscal year 1997 weighted average yield
on interest-earning assets and weighted average rates paid on deposits during
such period. Actual yields may differ, however, from the assumed returns. The
pro forma consolidated net earnings amounts derived from the assumptions set
forth herein should not be considered indicative of the actual results of
operations of the Holding Company that would have been attained for any period
if the Conversion had been actually consummated at the beginning of such period.
As the table demonstrates, pro forma consolidated earnings per share
and pro forma consolidated shareholders' equity per share decrease as the amount
of Common Shares sold moves from the minimum of the Adjusted Valuation Range to
the adjusted maximum of the Adjusted Valuation Range. In addition, the offering
price as a multiple of pro forma earnings per share and as a percent of pro
forma shareholders' equity per share increases as the amount of Common Shares
sold moves from the minimum of the Adjusted Valuation Range to the adjusted
maximum of the Adjusted Valuation Range.
THE PRO FORMA DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. NO
ASSURANCE CAN BE PROVIDED THAT THE ASSUMED YIELDS WILL BE ACHIEVED ON THE
INVESTMENT OF THE CONVERSION PROCEEDS. THE PRO FORMA DATA DOES NOT PURPORT TO
REPRESENT WHAT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS
ACTUALLY WOULD HAVE BEEN HAD THE CONVERSION BEEN COMPLETED AS OF THE DATE OR AT
THE BEGINNING OF THE PERIODS INDICATED, OR TO PROJECT THE HOLDING COMPANY'S
FINANCIAL POSITION OR RESULTS OF OPERATIONS AT ANY FUTURE DATE OR FOR ANY FUTURE
PERIOD.
-22-
<PAGE> 28
<TABLE>
<CAPTION>
Year ended December 31, 1997, assuming the sale of:
-----------------------------------------------------------------------------
21,250,000 25,000,000 28,937,500 33,465,625
Common Shares Common Shares Common Shares Common Shares
(Offering price of (Offering price of (Offering price of (Offering price of
$10 per share) $10 per share) $10 per share) $10 per share)
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Pro forma market capitalization $223,125 $262,500 $301,875 $347,156
Less shares issued to the Foundation 10,625 12,500 12,500 12,500
-------- -------- -------- --------
Gross proceeds 212,500 250,000 289,375 334,656
Estimated expenses (3,172) (3,500) (3,845) (4,240)
-------- -------- -------- --------
Estimated net proceeds 209,328 246,500 285,530 330,416
Less Common Shares acquired by the (17,850) (21,000) (24,150) (27,772)
ESOP (1)
Less Common Shares acquired by the RRP (2) (8,925) (10,500) (12,075) (13,886)
-------- -------- -------- --------
Net cash proceeds $182,553 $215,000 $249,305 $288,758
======== ======== ======== ========
Net income:
Historical $ 13,047 $ 13,047 $ 13,047 $ 13,047
Pro forma income on net proceeds 6,313 7,435 8,621 9,985
Pro forma adjustment for the ESOP (1) (774) (910) (1,047) (1,203)
Pro forma adjustment for the RRP (2) (1,160) (1,365) (1,570) (1,805)
------- ------- ------- -------
Pro forma net income $17,426 $18,207 $19,051 $20,024
======= ======= ======= =======
Earnings per share (3)(4):
Historical $ 0.63 $0.54 $0.47 $0.41
Pro forma income on net proceeds 0.31 0.31 0.31 0.31
Pro forma adjustment for the ESOP(1) (0.04) (0.04) (0.04) (0.04)
Pro forma adjustment for the RRP (2) (0.06) (0.06) (0.06) (.06)
------ ------ ------ -----
Pro forma net earnings per share $ 0.84 $ 0.75 $ 0.68 $0.62
====== ====== ====== =====
Number of shares used in calculating
earnings per share (4) 20,646,500 24,290,000 27,933,500 32,123,502
Shareholders' equity (book value) (5):
Historical $141,353 $141,353 $141,353 $141,353
Estimated net Conversion proceeds 209,328 246,500 285,530 330,416
Plus shares issued to foundation 10,625 12,500 12,500 12,500
Less after tax cost of foundation (6,906) (8,125) (8,125) (8,125)
Less common stock acquired by:
ESOP (17,850) (21,000) (24,150) (27,772)
RRP (8,925) (10,500) (12,075) (13,886)
-------- -------- -------- --------
Pro-forma $327,625 $360,728 $395,033 $434,486
======== ======== ======== ========
Shareholders' equity per share (3)(5):
Historical $ 6.34 $ 5.28 $ 4.68 $ 4.07
Estimated net Conversion proceeds 9.38 9.39 9.46 9.52
Plus shares issued to foundation 0.48 0.48 0.41 0.36
Less after tax cost of foundation (0.31) (0.31) (0.27) (0.23)
Less common stock acquired by:
ESOP (0.80) (0.80) (0.80) (0.80)
RRP (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro-forma $14.69 $13.74 $13.08 $12.52
====== ====== ====== ======
Ratio of offering price to pro forma
shareholders' equity per share (3) 68.07% 72.78% 78.45% 79.87%
Offering price as a multiple of pro
forma earnings per share (3) 11.90x 13.33x 14.71x 15.87x
</TABLE>
- ------------------------------------
(Footnotes on next page)
-23-
<PAGE> 29
(1) Assumes that 8.0% of the shares sold in the Conversion are purchased by
the ESOP and that the funds used to purchase such shares are borrowed
from the Holding Company. The approximate amount expected to be
borrowed by the ESOP is not reflected as a liability, but is reflected
as a reduction of capital. The Company intends to make annual
contributions to the ESOP over a period of up to 15 years in an amount
at least equal to the principal and interest requirement of the debt.
The pro forma net income assumes that: (i) 119,000, 140,000, 161,000
and 185,150 shares at the minimum, mid-point, maximum, and adjusted
maximum of the Adjusted Valuation Range, respectively, were committed
to be released during the year at an average fair value of $10 per
share in accordance with SOP 93-6; (ii) the effective tax rate was 35%
for such periods; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the per share net
earnings. The pro forma shareholders' equity per share calculations
assume all ESOP shares were outstanding, regardless of whether such
shares would have been released. Because the Holding Company will loan
to the ESOP the funds necessary to purchase the Common Shares, only
principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. To the extent the value of the
Common Shares appreciates over time, compensation expense related to
the ESOP will increase in accordance with SOP 93-6. See Note 4 below.
See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership
Plan."
(2) Assumes that 4% of the Common Shares sold in connection with the
Conversion will be purchased by the RRP after the Conversion at a price
of $10 per share and that one-fifth of the purchase price of the RRP
shares will be expensed in each of the first five years after the
Conversion. If the RRP is implemented in the first year after the
completion of the Conversion, it will be subject to various OTS
requirements, including the requirement that the RRP be approved by the
shareholders of the Holding Company. There can be no assurance that the
RRP will be approved by the shareholders, that a sufficient number of
shares will be available for purchase by the RRP or that the shares
could be purchased at $10 per share. A higher per share price, assuming
the purchase of the entire 4% of the shares, would reduce pro forma net
earnings and pro forma shareholders' equity. If an insufficient number
of shares is available in the open market to fund the RRP at the
desired level, the Holding Company may issue additional authorized
shares. The issuance of authorized but unissued shares in an amount
equal to 4% of the Common Shares issued in the Conversion would result
in a 3.9% dilution in existing shareholders' voting interests. If the
RRP purchases authorized but unissued shares, pro forma net earnings
per share would be $0.88, $0.79, $0.72 and $0.67 for the year ended
December 31, 1997, at the minimum, midpoint, maximum and adjusted
maximum of the Adjusted Valuation Range, respectively. In such
circumstance, pro forma shareholders' equity per share would be $14.50,
$13.60, $12.97 and $12.42 at December 31, 1997, at the minimum,
midpoint, maximum and adjusted maximum of the Adjusted Valuation Range,
respectively. See "MANAGEMENT - Stock Benefit Plans -- Recognition and
Retention Plan."
(3) No effect has been given to shares reserved for issuance upon the
exercise of stock options pursuant to the Stock Option Plan. See
"MANAGEMENT - Stock Benefit Plans -- Stock Option Plan."
(4) The pro forma net earnings per share calculations are determined by
adding the number of shares assumed to be sold in the Conversion at the
minimum, the mid-point, the maximum and the adjusted maximum of the
Adjusted Valuation Range, as well as the number of shares contributed
to the Foundation, which is 1,062,500 common shares at the minimum of
the Adjusted Valuation Range and 1,250,000 common shares at the
mid-point, the maximum and the adjusted maximum of the Adjusted
Valuation Range and, in accordance with SOP 93-6, excluding ESOP shares
which would not have been released during the period. Accordingly, for
the year ended December 31, 1997, 1,666,000, 1,960,000, 2,254,000 and
2,595,098 shares have been subtracted from the shares assumed to be
sold at the minimum, mid-point, maximum, and adjusted maximum of the
Adjusted Valuation Range. See Note 1 above.
(5) Pro forma shareholders' equity represents the excess of the carrying
value of the assets of the Holding Company over its liabilities. The
per share calculations are based upon the number of shares issued in
the Conversion, without giving effect to SOP 93-6. The amounts shown do
not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation. The amounts shown
also do not reflect the amounts required to be distributed in the event
of liquidation to Eligible Account Holders and Supplemental Eligible
Account Holders from the Liquidation Account which will be established
upon the consummation of the Conversion. Pro forma shareholders' equity
information is not intended to represent the fair market value of the
Common Shares, the current value of the Company's assets or
liabilities, or the amounts, if any, that would be available for
distribution to shareholders in the event of liquidation. The pro forma
data may be materially affected by a change in the number of Common
Shares to be sold in the Conversion and by other factors. See "TAXATION
- Federal Taxation."
-24-
<PAGE> 30
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION
If the contribution were not being made to the Foundation as part of
the Conversion, Keller has estimated that the pro forma aggregate market
capitalization of the Holding Company would be approximately $280.0 million at
the mid-point of the Adjusted Valuation Range, which is approximately $30.0
million greater than the pro forma market capitalization of the Holding Company
when the contribution to the Foundation is included, and would result in an
increase of 3,000,000 in the amount of Common Shares offered for sale in the
Conversion. The pro forma shareholders' equity per share, the pro forma earnings
per share, the pro forma price to book ratio and the pro forma price to earnings
ratio would be substantially the same with or without the contribution to the
Foundation. There can be no assurance that, if the contribution to the
Foundation is not made, the appraisal prepared at that time would conclude that
the pro forma market capitalization of the Holding Company would be the same as
that estimated herein. Any appraisals prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, mid-point, maximum and
adjusted maximum of the Adjusted Valuation Range, assuming the Conversion had
been completed at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997, assuming the sale of:
----------------------------------------------------------------------------------------------
21,250,000 25,000,000 28,937,500 33,465,625
Common Shares (offering Common Shares (offering Common Shares (offering Common Shares (offering
price of $10 per share) price of $10 per share) price of $10 per share) price of $10 per share)
----------------------- ----------------------- ----------------------- -----------------------
With Without With Without With Without With Without
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross proceeds $212,500 $ 238,000 $ 250,000 $ 280,000 $ 289,375 $ 322,000 $ 334,656 $ 370,300
Pro forma market 223,125 238,000 262,500 280,000 301,875 322,000 347,156 370,300
capitalization
Total assets 1,227,520 1,250,951 1,259,965 1,287,659 1,294,341 1,324,219 1,333,597 1,366,373
Total liabilities 899,895 903,562 899,237 903,679 899,308 903,647 899,111 903,719
Pro forma shareholders' 327,625 347,389 360,728 383,960 395,033 420,572 434,486 462,654
equity
Pro forma consolidated net
earnings 17,426 18,109 18,207 19,010 19,051 19,912 20,024 20,948
Pro forma shareholders'
equity per share 14.69 14.60 13.74 13.71 13.08 13.06 12.52 12.49
Pro forma consolidated net
earnings per share 0.84 0.82 0.75 0.73 0.68 0.67 0.62 0.61
Pro forma pricing ratios:
Price to net earnings per 11.90 x 12.20 x 13.33 x 13.70 x 14.71 x 14.93 x 15.87 x 16.39 x
share
Price to book value per 68.07% 68.49% 72.78% 72.94% 78.45% 76.57% 79.87% 80.06%
share
Price to net assets per 18.18% 19.02% 20.83% 21.75% 23.32% 24.32% 26.03% 27.10%
share
Pro forma financial ratios:
Return on assets 1.42% 1.45% 1.45% 1.48% 1.47% 1.50% 1.50% 1.53%
Return on shareholders' 5.32% 5.21% 5.05% 4.95% 4.82% 4.73% 4.61% 4.53%
equity
Shareholders' equity to 26.69% 27.77% 28.62% 29.82% 30.52% 31.76% 32.58% 33.86%
assets
</TABLE>
-25-
<PAGE> 31
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
STATEMENTS OF INCOME
The following Statements of Income of the Company for the year ended
December 31, 1997, have been audited by Deloitte & Touche LLP, independent
auditors, and for the years ended December 31, 1996 and 1995, by Packer, Thomas
& Co., independent auditors, whose reports thereon appear elsewhere in this
Prospectus. These statements should be read in conjunction with the Financial
Statements and related Notes included elsewhere herein.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 54,148 $ 48,586 $ 43,093
Mortgage-backed securities:
Available for sale 5,122 6,871 6,969
Held to maturity 19,024 21,988 23,827
Investment securities:
Available for sale 2,169 1,226 2,253
Held to maturity 843 1,780 2,185
FHLB stock dividend 766 695 632
Other interest-earning assets 613 603 875
-------- -------- --------
Total interest income 82,685 81,749 79,834
Interest expense:
Deposits 40,463 43,009 41,104
-------- -------- --------
Total interest expense 40,463 43,009 41,104
-------- -------- --------
Net interest income 42,222 38,740 38,730
Recovery of loan loss allowances (1,546) - -
-------- -------- --------
Net interest income after (recovery of)
provision for loan loss allowances 43,768 38,740 38,730
-------- -------- --------
Noninterest income:
Service fees and other charges 1,092 755 681
Net (losses) gains:
Mortgage-backed securities available for sale 80 - 321
Investment securities available for sale - 45 74
Other (losses) gains (34) (45) 9
Other income 426 536 469
-------- -------- --------
Total noninterest income 1,564 1,291 1,554
-------- -------- --------
Noninterest expenses:
Salaries and employee benefits 14,710 12,735 11,033
Occupancy 1,256 1,250 1,194
Equipment and data processing 2,534 2,181 1,768
Deposit insurance premiums 588 2,033 2,064
Federal deposit insurance special assessment - 5,903 -
Franchise tax 1,752 1,643 1,398
Advertising 1,045 1,000 1,162
Other expenses 3,418 3,323 3,376
-------- -------- --------
Total noninterest expenses 25,303 30,068 21,995
-------- -------- --------
Income before income taxes 20,029 9,963 18,289
Income taxes 6,982 3,332 6,707
-------- -------- --------
Net income $ 13,047 $ 6,631 $ 11,582
======== ======== ========
</TABLE>
See Notes to Financial Statements.
-26-
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's net income generally depends upon its net interest
income, which is the difference between the interest and dividend income earned
on its loans and investments and the interest expense on its deposits. The
Company's net interest income is significantly affected by general economic
conditions and policies of regulatory authorities, and unusual events can have
significant, non-recurring effects on net income. Such events may include
regulatory actions, changes in accounting methods and transitional activities in
financial instruments such as asset sales.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND AT DECEMBER 31, 1996
Total assets were $1.0 billion at December 31, 1997, a $29.7 million
decrease compared to December 31, 1996. The decline in total assets was
primarily due to the funding of deposit outflows through principal repayments of
mortgage-backed securities.
Net loans increased $16.3 million, or 2.6%, to $633.2 million at
December 31, 1997, compared to $616.9 million at December 31, 1996. The most
significant increase was in commercial loans, which increased $13.2 million, and
loans secured by one- to four-family residences, which increased $7.6 million
compared to the prior year. These increases were offset by decreases of $1.8
million in nonresidential real estate loans and $3.6 million in one- to
four-family construction loans.
Funds not utilized in lending programs or for operations are held in
investment securities or mortgage-backed securities. Investment securities
increased $1.7 million, or 4.1%, from December 31, 1996, and totaled $44.4
million at December 31, 1997. Investment securities available for sale increased
from $14.7 million to $39.4 million at December 31, 1997, whereas investment
securities held to maturity declined from $28.0 million to $5.0 million from
1996 to 1997. The shift to available for sale investment securities and the
$13.9 million increase in federal funds sold provide the Company with a larger
source of funds to utilize in periods of increased loan origination activity.
Mortgage-backed securities decreased $64.6 million, or 17.4%, to $306.3 million
at December 31, 1997. Proceeds from maturities and repayments of mortgage-backed
securities were primarily used to fund loan growth and deposit outflows.
Total non-earning assets increased by $2.1 million, or 7.6%, from
December 31, 1996, and totaled $30.1 million at December 31, 1997. This increase
was primarily due to an increase of $1.3 million in premises and equipment due
to capital expenditures for the construction of a branch office and an increase
of $932,000 in vault cash.
Total deposits decreased by $45.3 million, or 4.9%, from December 31,
1996, primarily as a result of disintermediation, and totaled $886.8 million at
December 31, 1997. The decrease was primarily due to a $28.4 million decrease in
certificate accounts, a $12.5 million decrease in savings accounts, a $3.5
million decrease in checking and demand accounts, and a $7.9 million decrease in
money market accounts.
Total equity increased $13.2 million, or 10.3%, at December 31, 1997,
compared to December 31, 1996, primarily due to net income of $13.0 million
during the year and a $175,000 increase in the net unrealized gain on securities
available for sale, net of taxes.
-27-
<PAGE> 33
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
NET INCOME. Net income increased $6.4 million, or 96.8%, to $13.0
million for the year ended December 31, 1997, compared to $6.6 million for the
year ended December 31, 1996. The results for 1996 reflect the payment of a $5.9
million one-time assessment to recapitalize the SAIF. Other factors accounting
for the increase in net income from 1996 to 1997 were a $3.5 million increase in
net interest income, a $1.5 million loan loss recovery and a decrease in deposit
insurance premiums, which were partially offset by a $2.0 million increase in
salaries and employee benefits and a $3.7 million increase in federal income
taxes.
NET INTEREST INCOME. Net interest income increased $3.5 million, or
9.0%, to $42.2 million in 1997 from $38.7 million for 1996. The Company's
interest rate spread increased 39 basis points to 3.53% for 1997 from 3.14% for
1996 as the Company experienced a 30 basis point increase in the yield on its
interest-earning assets and a nine basis point decrease in the cost of its
interest-bearing liabilities. The interest rate spread was favorably impacted by
the recovery of delinquent interest on several large loans, discussed below.
Total interest income increased $936,000, or 1.1%, in 1997 from 1996.
Interest income on loans receivable increased $5.6 million, primarily as a
result of an increase of $33.4 million, or 5.7%, in the average balance of net
loans and a recovery of $3.3 million of interest on three previously delinquent
loans. The increase in average loan balances was primarily in higher yielding
commercial loans, although one- to four-family loans also increased year to
year. The Company has emphasized growth in loans, particularly commercial and
consumer loans, in order to achieve a higher net yield and to increase the loan
to deposit ratio. The growth in interest income on loans was partially offset by
a reduction in interest income on mortgage-backed securities, as the Company
reduced the average balance of these lower-yielding investments. The reduction
in the average balance of mortgage-backed securities has resulted from the
repayments and maturities of mortgage-backed securities, the proceeds of which
have been used primarily to fund deposit outflows and the increase in net loan
balances. The average yield on the Company's interest-earning assets, including
the effects of the recovery of delinquent interest discussed below, increased to
8.01% from 7.71%.
Total interest income for 1997 was affected by recoveries of
approximately $3.3 million of interest on three loans that had been nonaccruing
for a significant period of time. Without this recovery of delinquent interest,
the Company's total interest income for 1997 would have been $79.3 million,
resulting in a $2.4 million, or 2.9%, decrease in total interest income compared
to 1996. The resulting average yield on interest-earning assets would have been
7.68% for 1997, approximately 33 basis points below the yield achieved as a
result of the interest recovery and three basis points below the yield for 1996.
Similarly, the Company's interest rate spread would have been 3.20% for 1997
compared to 3.14% for 1996.
Total interest expense decreased $2.5 million, or 5.9%, from 1996 to
1997. The average balance of interest-bearing liabilities decreased $36.4
million, or 3.9%, and the average rate paid decreased to 4.48% in 1997 from
4.57% in 1996. Deposits, primarily certificate of deposits, declined year to
year, primarily as a result of maturing certificates being reinvested in
alternative investments, such as mutual funds. See "-Liquidity and Capital
Resources."
PROVISION FOR LOAN LOSSES. Provisions or recoveries for loan losses are
charged or credited to operations to bring the total allowance for loan losses
to a level considered by management to be adequate to provide for estimated
losses based on management's evaluation of such factors as the delinquency
status of loans, current economic conditions, the net realizable value of the
underlying collateral, changes in the composition of the loan portfolio,
particularly in commercial loans, and prior loan loss experience. See "THE
BUSINESS OF THE COMPANY - Lending Activities -- Allowance for Loan Losses." A
net recovery of $1.5 million was credited to operations in 1997, and no amounts
were recorded as provisions or recoveries in 1996. The recovery recorded in 1997
was due to the significant settlement on several large loans which also affected
the Company's
-28-
<PAGE> 34
total interest income for 1997. See "Net Interest Income." In 1997, the Company
recovered $2.9 million that had been charged off in prior years. Approximately
$2.8 million of the recovery related to a $4.3 million loan.
At December 31, 1997, the Company's allowance for loan losses totaled
$6.0 million, which equaled .9% of total loans. Although management uses the
best information available in assessing the adequacy of the allowance, future
adjustments to the allowance may be necessary due to changes in the economic,
operating, regulatory and other conditions affecting the Company. While the
Company maintains its allowance for loan losses at a level which it considers to
be adequate to provide for estimated losses, there can be no assurance that
further additions will not be made to the allowance for loan losses and that
actual losses will not exceed the estimated amounts.
NONINTEREST INCOME. Noninterest income increased $273,000, or 21.1%, to
$1.6 million for 1997 from $1.3 million for 1996. Substantially all of the
Company's other income is derived from service fees and other charges which
totaled $1.1 million for 1997 compared to $755,000 for 1996. Service fees,
primarily service fees on deposit accounts, increased during the year due to an
increase in service charge fee schedules based on current market conditions.
NONINTEREST EXPENSE. Noninterest expense decreased $4.8 million, or
15.8%, to $25.3 million for 1997 from $30.1 million in 1996. This decrease was
primarily attributable to the $5.9 million one-time SAIF assessment in 1996.
Excluding the SAIF one-time assessment, noninterest expense was $24.2 million
for 1996. As a result of the recapitalization of the SAIF, the FDIC
substantially reduced deposit insurance premiums. Since January 1, 1997, the
Company has paid deposit insurance premiums at the rate of $.063 per $100 of
deposits. Prior to the recapitalization of the SAIF, deposit insurance premiums
were $.23 per $100 of deposits.
Salaries and employee benefits costs increased $2.0 million, or 15.5%,
as a result of normal wage increases and an increase in benefits costs for
health care and postretirement health benefits. The Company anticipates that
other operating expenses will increase following the Conversion as a result of
increased costs associated with operating as a public company and increased
compensation expense as a result of adoption of the ESOP and the RRP. See
"MANAGEMENT Stock Benefit Plans -- Employee Stock Ownership Plan, and --
Recognition and Retention Plan."
FEDERAL INCOME TAXES. Federal income taxes totaled $7.0 million for
1997, an increase of $3.7 million, or 109.5%, compared to $3.3 million in 1996.
Income taxes in 1996 were lower because of the one-time SAIF assessment,
resulting in decreased pre-tax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
NET INCOME. Net income decreased $5.0 million, or 42.7%, to $6.6
million for the year ended December 31, 1996, compared to $11.6 million for the
year ended December 31, 1995. The results of 1996 include the payment of the
$5.9 million one-time SAIF assessment.
NET INTEREST INCOME. Net interest income did not change significantly
in 1996 compared to 1995. The Company's interest rate spread decreased 16 basis
points to 3.14% for 1996 from 3.30% in 1995, as the Company experienced a nine
basis point decrease in the average yield on its interest-earning assets and a
seven basis point increase in the cost of its interest-bearing liabilities.
Total interest income increased $1.9 million, or 2.4%, in 1996 compared
to 1995. Interest income on net loans increased $5.5 million, primarily as a
result of an increase of $64.4 million, or 12.2%, in the average balance of net
loans. The Company achieved growth in most categories of loans, although the
most significant increase occurred in one- to four-family real estate loans.
This growth was based on targeted retail programs and provided the Company with
higher yields than could be obtained on mortgage-backed securities. The
Company's
-29-
<PAGE> 35
average yield on net loans increased three basis points to 8.23% in 1996, and
the net yield on mortgage-backed securities decreased, dropping 43 basis points,
from 7.61% for 1995 to 7.18% for 1996. The average yield on the Company's
interest-earning assets decreased from 7.80% to 7.71% as a result of lower
yields on investment and mortgage-backed securities.
Total interest expense increased $1.9 million, or 4.6%, from 1995 to
1996. The average balance of interest-bearing liabilities increased $26.3
million, or 2.9%, and the average rate paid increased from 4.50% to 4.57%.
Interest expense increased as certificate of deposit average balances increased
due to competitive pricing.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses in
1996 or 1995 as the Company's evaluation of the allowance for loan losses
indicated that it had an adequate reserve for the loan balance in accordance
with generally accepted accounting principles ("GAAP") and the Company's
internal policies.
NONINTEREST INCOME. Noninterest income decreased $263,000, or 16.9%, to
$1.3 million for 1996 from $1.6 million for 1995, primarily as a result of gains
on sales of securities in 1995 of $395,000 which did not recur in 1996. Service
fees and other charges totaled $755,000 for 1996 compared with $681,000 for
1995.
NONINTEREST EXPENSE. Noninterest expense increased $8.1 million, or
36.7%, to $30.1 million for 1996 from $22.0 million in 1995. This increase was
primarily attributable to a one-time SAIF assessment of $5.9 million and an
increase of $1.6 million in computer system conversion-related expenses.
Excluding the one-time SAIF assessment, noninterest expense was $24.2 million
for 1996.
FEDERAL INCOME TAXES. Federal income taxes totaled $3.3 million for
1996, a decrease of $3.4 million, or 50.3%, compared to $6.7 million in 1995,
primarily due to lower pre-tax income as a result of the one-time SAIF
assessment.
YEAR 2000 ISSUE
The Company's operations, like those of most financial institutions,
depend almost entirely on computer systems. See "BUSINESS OF THE COMPANY - Year
2000 Considerations." The Company is addressing the potential problems
associated with the possibility that the computers which control or operate the
Company's operating systems, facilities and infrastructure may not be programmed
to read four-digit date codes and, upon arrival of the year 2000, may recognize
the two-digit code "00" as the year 1900, causing systems to fail to function or
to generate erroneous data. The Company is working with the companies that
supply or service its computer-operated or -dependent systems to identify and
remedy any year-2000 related problems. The Company has established a December
31, 1998 deadline for its third-party data service bureau to be year-2000
compliant.
The Board of Directors reviews the Company's progress in addressing
year-2000 issues quarterly. At this time, the Company has not identified any
specific expenses which are reasonably likely to be incurred by the Company in
connection with year-2000 issues and the Company does not expect to incur
significant expense to implement corrective measures. No assurance can be given
at this time, however, that significant expense will not be incurred in future
periods. In the event that the Company is ultimately required to purchase
replacement computer systems, programs and equipment, or that substantial
expense must be incurred to make the Company's current systems, programs and
equipment year-2000 compliant, the Company's net income and financial condition
could be adversely affected. While the Company is endeavoring to ensure that its
computer-dependent operations are year-2000 compliant, no assurance can be given
that some year-2000 problems will not occur.
In addition to possible expense related to its own systems, the Company
could incur losses if year-2000 issues adversely affect the Company's depositors
or borrowers. Such problems could include delayed loan payments due to year-2000
problems affecting any of the Company's significant borrowers or impairing the
-30-
<PAGE> 36
payroll systems of large employers in the Company's primary market area. Because
the Company's loan portfolio is diversified with regard to individual borrowers
and types of businesses and the Company's primary market area is not
significantly dependent upon one employer or industry, the Company does not
expect any significant or prolonged year-2000 related difficulties that will
affect net earnings or cash flow. See "THE BUSINESS OF THE COMPANY - Loans to
One Borrower Limits, and - Primary Market Area."
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to the
Company's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average balances of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances. Nonaccruing loans have been included in the table
as loans carrying a zero yield. The average balance for securities available for
sale is computed using the carrying value and the average yield on securities
available for sale has been computed using the historical amortized cost average
balance.
-31-
<PAGE> 37
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans (1) $ 623,546 $54,148 8.68% $ 590,128 $48,586 8.23% $ 525,766 $43,093 8.20%
Mortgage-backed
securities:
Available for sale 73,053 5,122 7.01 96,229 6,871 7.14 90,840 6,969 7.67
Held to maturity 267,242 19,024 7.12 305,583 21,988 7.20 313,667 23,827 7.60
Investment securities:
Available for sale 33,883 2,169 6.40 17,903 1,226 6.85 32,358 2,253 6.96
Held to maturity 13,333 843 6.32 29,944 1,780 5.94 36,361 2,185 6.01
Other interest-earning
assets 21,716 1,379 6.35 21,034 1,298 6.17 24,002 1,507 6.28
----------- -------- ---- ---------- ------ ---- ---------- ------- ----
Total interest-earning
assets 1,032,773 82,685 8.01 1,060,821 81,749 7.71 1,022,974 79,834 7.80
Noninterest earning assets 24,985 23,809 23,708
----------- ----------- -----------
Total assets $1,057,758 $1,084,630 $1,046,682
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Checking and
demand accounts 120,962 2,906 2.40 122,993 3,248 2.64 125,466 3,365 2.68
Savings accounts 248,914 7,387 2.97 257,806 7,879 3.06 266,462 8,123 3.05
Certificates of deposit 534,038 30,170 5.65 559,485 31,882 5.70 522,024 29,616 5.67
------- ------ ---- ------- ------ -------- -------- ----
Total deposits 903,914 40,463 4.48 940,284 43,009 4.57 913,952 41,104 4.50
Total interest-bearing
liabilities 903,914 40,463 4.48 940,284 43,009 4.57 913,952 41,104 4.50
------ ---- ------ ---- ------- ----
Noninterest-bearing 19,109 18,744 16,718
liabilities ------------ ------------ ---------
Total liabilities 923,023 959,028 930,670
Equity 134,735 125,602 116,012
----------- ----------- -----------
Total liabilities and
equity $1,057,758 $1,084,630 $1,046,682
========== ========== ==========
Net interest income and
interest rate spread $42,222 3.53% $38,740 3.14% $38,730 3.30%
======= ==== ======= ==== ======= ====
Net yield on interest
earning assets 4.09% 3.65% 3.79%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities 114.26% 112.82% 111.93%
====== ====== ======
</TABLE>
- -------------------
(1) Nonaccrual loans are included in the average balance.
-32-
<PAGE> 38
The following table sets forth, at the date indicated, the weighted
average yields earned on the Company's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities and the interest
rate spread between the weighted average yields and rates at the date presented.
<TABLE>
<CAPTION>
At December 31,
1997
---------------
<S> <C>
Weighted average yield on loans 7.85%
Weighted average yield on investment securities 6.32
Weighted average yield on mortgage-backed securities 7.08
Weighted average yield on FHLB stock 7.25
Weighted average yield on interest-bearing deposits 5.50
Weighted average yield on all interest-earning assets 7.50
Weighted average rate paid on deposits 4.56
Interest rate spread 2.94
</TABLE>
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior period rate), (ii)
changes in rate (change in rate multiplied by prior period volume) and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated in
proportion to the changes due to volume and rate:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------- ----------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
------------------ increase ------------------ increase
Rate Volume (decrease) Rate Volume (decrease)
---- ------ ---------- ---- ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $2,734 $ 2,828 $ 5,562 $ 193 $5,300 $5,493
Mortgage-backed securities:
Available for sale (122) (1,627) (1,749) (682) 584 (98)
Held to maturity (232) (2,732) (2,964) (1,236) (603) (1,839)
Investment securities:
Available for sale (74) 1,017 943 (37) (990) (1,027)
Held to maturity 121 (1,058) (937) (23) (382) (405)
Other interest-earning assets 38 43 81 (25) (184) (209)
------ ------- -------- ------- ------ ------
Total interest-earning assets $2,465 $(1,529) 936 $(1,810) $3,725 $1,915
====== ======= ======== ======= ====== ======
Interest-bearing liabilities:
Savings accounts (225) (267) (492) 21 (265) (244)
Checking accounts (289) (53) (342) (51) (66) (117)
Certificates of deposit (271) (1,441) (1,712) 132 2,134 2,266
------- ------ ------ ------- ------- -------
Total interest-bearing liabilities $ (785) $(1,761) (2,546) $ 102 $1,803 1,905
======= ======= ------ ======= ====== -------
Change in net interest income $ 3,482 $ 10
======= ========
</TABLE>
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK. The principal market risk affecting
the Company is interest rate risk. The Company does not maintain a trading
account for any class of financial instrument, and the Company
-33-
<PAGE> 39
is not affected by foreign currency exchange rate risk or commodity price risk.
Because the Company does not hold any equity securities other than stock in the
FHLB of Cincinnati, the Company is not subject to equity price risk.
The Company, like other financial institutions, is subject to interest
rate risk to the extent that its interest-earning assets reprice differently
than its interest-bearing liabilities. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset values to changes in
interest rates. As part of its efforts to monitor and manage the interest rate
risk of the Company, the Board of Directors has adopted an interest rate risk
policy which charges the Board to review quarterly reports related to interest
rate risk and to set exposure limits for the Company as a guide to senior
management in setting and implementing day to day operating strategies.
QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk
analysis, the Company uses the "net portfolio value" ("NPV") methodology adopted
by the OTS as part of its capital regulations and also considers the OTS
methodology in light of the rate shock estimates contained in the quarterly rate
shock risk reports prepared by an outside consulting firm that specializes in
interest rate risk assessments as well as the sensitivity of earnings to changes
in interest rates and the corresponding impact on net interest income.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV and net
interest income that would result from various levels of theoretical basis point
changes in market interest rates.
The Company uses a net portfolio value and earnings simulation model
prepared by a third party as its primary method to identify and manage its
interest rate risk profile. The model is based on actual cash flows and
repricing characteristics for all financial instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on
future volumes and the prepayment rate of applicable financial instruments.
Assumptions based on the historical behavior of deposit rates and balances in
relation to changes in interest rates are also incorporated into the model.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure NPV or net interest income or precisely predict the impact of
fluctuations in interest rates on net interest rate changes as well as changes
in market conditions and management strategies.
Presented below, as of December 31, 1997, is an analysis of the
Company's interest rate risk as measured by changes in NPV and net interest
income for instantaneous and sustained parallel shifts of 100 basis point
increments in market interest rates. The percentage changes fall within the
policy limits set by the Board of Directors of the Company as the maximum change
in NPV that the Board of Directors deems advisable in the event of various
changes in interest rates.
<TABLE>
<CAPTION>
NPV as % of portfolio Next 12 months
Change Net portfolio value value of assets Net interest income
in rates ------------------------------------- --------------------------- ----------------------
(Basis points) $ Amount $ Change % Change NPV Ratio Change in % $ Change % Change
-------------- -------- -------- -------- --------- ----------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
+400 $121,906 $(67,382) (35.60)% 12.97% (4.95)% $(4,373) (12.37)%
+300 137,047 (52,241) (27.60) 14.17 (3.75) (3,225) (9.12)
+200 154,571 (34,717) (18.34) 15.51 (2.41) (2,064) (5.84)
+100 172,673 (16,615) (8.78) 16.82 (1.10) (961) (2.72)
Static 189,288 - - 17.92 - - -
(100) 196,124 6,836 3.61 18.23 0.31 290 0.82
(200) 192,844 3,557 1.88 17.76 (0.16) (444) (1.26)
(300) 192,561 3,273 1.73 17.52 (0.40) (1,145) (3.24)
(400) 195,076 5,788 3.06 17.48 (0.44) (1,357) (3.84)
</TABLE>
As illustrated in the table, the Company's NPV is more sensitive to
increases in interest rates than to decreases. The Company's sensitivity to
increases in rates occurs principally because, as rates increase,
-34-
<PAGE> 40
borrowers become less likely to prepay fixed-rate loans than when interest rates
are declining, and the majority of the Company's loans have fixed rates of
interest. See "THE BUSINESS OF THE COMPANY - Lending Activities." In addition,
loan demand is adversely affected by increases in interest rates. Thus, in a
rising interest rate environment, the amount of interest the Company would
receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made, while the interest the Company
would pay on its deposits would increase rapidly because deposits generally have
shorter periods to repricing than loans.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and early withdrawal
levels from certificates of deposit may deviate significantly from those assumed
in making risk calculations.
The Board of Directors and management of the Company believe that
certain factors afford the Company the ability to operate successfully despite
its exposure to interest rate risk. The Company manages its interest rate risk
by maintaining capital well in excess of regulatory requirements. See "THE
BUSINESS OF THE COMPANY - Investment Activities." For the quarter ended December
31, 1997, the Company's tangible capital was 13.47% of total assets and its
liquidity ratio was 11.48%. See " - Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing activities.
These activities are summarized below for the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net income $13,047 $ 6,631 $11,582
Adjustments to reconcile net income to net cash from
operating activities 136 (683) 959
------- ------- -------
Net cash from operating activities 13,183 5,948 12,541
Net cash from investing activities 47,035 (20,532) (31,814)
Net cash from financing activities (45,389) (7,562) 40,485
------- ------- -------
Net change in cash and cash equivalents 14,829 (22,146) 21,212
Cash and cash equivalents at beginning of period 19,668 41,814 20,602
------- ------- -------
Cash and cash equivalents at end of period $34,497 $19,668 $41,814
======= ======= =======
</TABLE>
The Company's principal sources of funds are deposits, loan repayments,
maturities of securities, and other funds provided by operations. The Company
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and early
loan prepayments are more influenced by interest rates, general economic
conditions and competition. The Company maintains investments in liquid assets
based upon management's assessment of (1) need for funds, (2) expected deposit
flows, (3) yields available on short-term liquid assets and (4) objectives of
the Company's asset and liability management program. At December 31, 1997,
approximately $350.0 million of the Company's certificates of deposit were
expected to mature within one year. Based on past experience and the Company's
prevailing pricing strategies, management believes that a substantial percentage
of such certificates will be renewed with the Company at maturity, although
there can be no assurance that this will occur.
-35-
<PAGE> 41
OTS regulations presently require the Company to maintain an average
daily balance of investments in United States Treasury, federal agency
obligations and other investments in an amount equal to 4% of the sum of the
Company's average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement is intended to
provide a source of relatively liquid funds upon which the Company may rely, if
necessary, to fund loan originations, deposit withdrawals or other short-term
funding needs. On December 31, 1997, the Company had commitments to originate
mortgage loans totaling $7.7 million. Loan commitments are generally for 30
days. The Company considers its liquidity and capital reserves sufficient to
meet its outstanding short- and long-term needs.
The Company is required by OTS regulations to meet certain minimum
capital requirements, which must be generally as stringent as the requirements
established for banks. Current capital requirements call for tangible capital of
1.5% of adjusted total assets, core capital (which for the Company consists
solely of tangible capital) of 3.0% of adjusted total assets and risk-based
capital (which for the Company consists of core capital and general valuation
allowances) of 8% of risk-weighted assets (assets are weighted at percentage
levels ranging from 0% to 100% depending on their relative risk). The OTS has
proposed to amend the core capital requirement so that those banks that do not
have the highest examination rating and an acceptable level of risk will be
required to maintain core capital of from 4% to 5%, depending on the
institution's examination rating and overall risk. The Company does not
anticipate that it will be adversely affected if the core capital requirements
are amended as proposed.
The following table summarizes the Company's regulatory capital
requirements and actual capital at December 31, 1997.
<TABLE>
<CAPTION>
Excess of actual capital
Actual capital Current requirement over current requirement Applicable
----------------------- --------------------- ------------------------ asset
Amount Percent Amount Percent Amount Percent total
------ ------- ------ ------- ------ ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $140,636 13.47% $15,661 1.50% $124,975 11.97% $1,044,069
Core capital 140,636 13.47 31,322 3.00 109,314 10.47 1,044,069
Risk-based capital 146,461 28.85 40,619 8.00 105,842 20.85 507,736
</TABLE>
At December 31, 1997, the Company had no material commitments for
capital expenditures.
IMPACT OF RECENT ACCOUNTING STANDARDS
ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting
method are required to disclose in a footnote to the financial statements pro
forma net income and, if presented, earnings per share, as if this statement had
been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. Management of the
Company has not completed an analysis of the potential effects of SFAS No. 123
on its financial condition or results of operations, but expects to use the
intrinsic value method upon consummation of the Conversion.
-36-
<PAGE> 42
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES. SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. SFAS No. 125 applies prospectively to
transactions occurring after December 31, 1996, and establishes new standards
that focus on control whereas, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The adoption of SFAS No. 125 did
not have a material impact on the Company's results of operations or financial
position.
DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF SFAS NO. 125.
In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." SFAS No. 127 defers for one year the effective date of portions of
SFAS No. 125 that address secured borrowings and collateral for all
transactions. Additionally, SFAS No. 127 defers for one year the effective date
of transfers of financial assets that are part of repurchase agreements,
securities lending and similar transactions.
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," standardizes
the international calculation for earnings per share and requires companies with
complex capital structures that have publicly held common stock or potential
common stock to present both basic and diluted earnings per share on the face of
the income statement. SFAS No. 128 became effective for periods ending after
December 15, 1997.
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify terms of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassifications of financial statements for earlier periods provided for
comprehensive purposes is required.
SEGMENT INFORMATION. SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" establishes standards for the way public
business enterprises report information about operating segments and establishes
standards for related disclosures about products and services, geographic areas
and major customers. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Information required to be disclosed includes segment
profit or loss, certain specific revenue and expense items, segment assets and
certain other information. SFAS No. 131 is effective for the Holding Company for
financial statements issued for the fiscal year ending December 31, 1998.
PENSION AND POSTRETIREMENT DISCLOSURES. In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 standardizes the disclosures for pensions
and other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for the Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS No. 106, "Employers Accounting for Postretirement benefits Other than
Pensions," were issued. SFAS No. 132 suggests combined formats for presentation
of pension and other postretirement benefit disclosures. SFAS No. 132 does not
change
-37-
<PAGE> 43
the measurement or recognition of those plans. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. Restatements of disclosures for
earlier periods provided for comparative purposes is required. Management does
not believe the adoption of SFAS No. 132 will have a material impact on the
Company's financial condition and results on operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes included herein have been prepared
in accordance with GAAP. GAAP requires the Company to measure financial position
and operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of the Company to a far greater degree than changes in the inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
THE BUSINESS OF THE COMPANY
GENERAL
The Company is a mutual savings and loan association which was
organized under Ohio law in 1889 as "The Home Building and Loan." In 1897, the
name of the Company was changed to "The Home Savings and Loan Company of
Youngstown, Ohio." As an Ohio savings and loan association, the Company is
subject to supervision and regulation by the OTS, the Division and the FDIC. The
Company is a member of the FHLB of Cincinnati, and the deposits of the Company
are insured up to applicable limits by the FDIC in the SAIF. See "REGULATION."
The Company conducts business from its main office located in
Youngstown, Ohio and 13 full-service branches, located in the Northern Ohio
communities of Austintown, Boardman, Canfield, Columbiana, East Palestine,
Liberty, Lisbon, Niles, Poland, Salem and Struthers. The principal business of
the Company is the origination of mortgage loans on one- to four-family
residential real estate located in the Company's primary market area, which
consists of northern Columbiana County, Mahoning County and southern Trumbull
County. The Company also originates loans secured by nonresidential real estate
in its primary market area. In addition to real estate lending, the Company
originates commercial loans and various types of consumer loans, including home
equity loans, education loans, loans secured by savings accounts and motor
vehicles and unsecured loans. See "Lending Activities." The Company invests in
interest-bearing deposits in other financial institutions, federal funds and
U.S. Treasury and agency securities. See "Investment Activities." Funds for
lending and other investment activities are obtained primarily from savings
deposits, which are insured up to applicable limits by the FDIC in the SAIF,
principal repayments of loans and maturities of securities. See "Deposits and
Borrowings."
Interest on loans and other investments is the Company's primary source
of income. The Company's principal expense is interest paid on deposit accounts.
Operating results are dependent to a significant degree on the net interest
income of the Company, which is the difference between interest earned on loans
and other investments and interest paid on deposits. Like most thrift
institutions, the Company's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities. See "RISK FACTORS - Interest Rate Risk" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset and Liability Management."
-38-
<PAGE> 44
PRIMARY MARKET AREA
The Company's primary market area for lending and deposits is Mahoning
County, Ohio, and adjacent areas in southern Trumbull County and northern
Columbiana County. The Company operates nine full service offices in Mahoning
County, three full service offices in northern Columbiana County and two full
service offices in southern Trumbull County. The Company's main office is
located in Youngstown, Ohio, which is the county seat of Mahoning County.
Youngstown is approximately 75 miles northwest of Pittsburgh, Pennsylvania and
75 miles southeast of Cleveland, Ohio.
Mahoning, Columbiana and Trumbull Counties have higher unemployment
rates than either Ohio or the United States. Mahoning County's unemployment rate
declined, however, from 6.1% in 1995 to 5.8% in 1996, compared to 4.3% for the
state and 5% for the United States, and was 5.8% through the first 11 months of
1997. The unemployment rates for Columbiana and Trumbull Counties were 5.2% and
5.1%, respectively, through the first 11 months of 1997. The population of the
counties in the Company's primary market area decreased 0.3% from 432,851 in
1990 to 431,488 in 1996, while the population of Mahoning County decreased 1.3%
from 264,806 to 261,277. Median household income in the Company's primary market
area and Mahoning County rose approximately 7.5% and 10.2%, respectively, from
1990 to 1996, but still trailed the Ohio median by approximately $4,700 and
$6,400, respectively, in 1996. According to the Youngstown/Warren Regional
Chamber of Commerce, major employers in the Company's primary market area
include Delphi Packard Electric Systems, General Motors and HM Health Services.
The Company faces intense competition from many financial institutions
for deposits and loan originations. See "- Competition" and "RISK FACTORS -
Competition in Primary Market Area."
LENDING ACTIVITIES
GENERAL. The Company's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in the Company's primary market area. The Company also originates loans secured
by multifamily and nonresidential real estate and originates loans for the
construction of one- to four-family residences, multifamily properties and
nonresidential real estate projects. In addition to real estate lending, the
Company originates various types of consumer credits, including home equity
loans, education loans, loans secured by savings accounts, motor vehicles, boats
and recreational vehicles, unsecured loans and loans for commercial business
purposes.
-39-
<PAGE> 45
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information regarding the composition of the Company's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------- ------------------ -------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Permanent
One- to four-family $489,677 74.19% $482,089 75.23% $428,213 75.39% $386,663 73.72% $346,183 73.12%
Multifamily 8,944 1.36 8,778 1.37 16,042 2.82 14,838 2.83 17,067 3.60
Nonresidential 33,479 5.07 35,315 5.51 36,845 6.48 43,235 8.24 47,482 10.03
Land 285 0.04 195 0.03 1,280 0.23 1,666 0.32 1,208 0.26
-------- ------ --------- ------ -------- ------ --------- ------ -------- ------
Total permanent 532,385 80.66 526,377 82.14 482,380 84.92 446,402 85.11 411,940 87.01
Construction loans:
One- to four-family 24,044 3.64 27,610 4.31 19,804 3.49 18,200 3.47 15,286 3.23
Multifamily 325 0.05 490 0.08 597 0.11 994 0.19 56 0.01
-------- ------ --------- ------ -------- ------ --------- ------ -------- ------
Total construction 24,369 3.69 28,100 4.39 20,401 3.60 19,194 3.66 15,342 3.24
-------- ------ --------- ------ -------- ------ --------- ------ -------- ------
Total real estate loans 556,754 84.35 554,477 86.53 502,781 88.52 465,596 88.77 427,282 90.25
Consumer loans
Home equity 17,097 2.59 14,581 2.28 11,439 2.01 11,265 2.15 11,613 2.45
Auto 2,457 0.37 3,486 0.54 4,582 0.81 2,339 0.45 1,931 0.41
Education 3,479 0.53 2,701 0.42 2,788 0.49 2,217 0.42 2,130 0.45
Other (1) 20,355 3.08 18,837 2.94 17,384 3.06 15,907 3.03 12,002 2.54
-------- ------ --------- ------ -------- ------ --------- ------ -------- ------
Total consumer 43,388 6.57 39,605 6.18 36,193 6.37 31,728 6.05 27,676 5.85
Commercial loans 59,897 9.08 46,742 7.29 29,043 5.11 27,165 5.18 18,476 3.90
-------- ------ --------- ------ -------- ------ --------- ------ -------- ------
Total loans 660,039 100.00% 640,824 100.00% 568,017 100.00% 524,489 100.00% 473,434 100.00%
====== ====== ====== ====== ======
Less net items 26,803 23,901 21,328 21,076 20,510
-------- -------- -------- -------- --------
Total loans, net $633,236 $616,923 $546,689 $503,413 $452,924
======== ======== ======== ======== ========
</TABLE>
- ----------------------------
(1) Consists of overdraft protection loans and loans to individuals secured
by demand accounts, deposits, automobiles and one- to four-family
residences.
-40-
<PAGE> 46
LOAN MATURITY. The following table sets forth certain information as of
December 31, 1997, regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity. Demand loans
and other loans having no stated schedule of repayments or no stated maturity
are reported as due in one year or less. Mortgage loans originated by the
Company generally include due-on-sale clauses that provide the Company with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers the ownership of the property without the Company's consent.
The table does not include the effects of possible prepayments or scheduled
repayments.
<TABLE>
<CAPTION>
Principal repayments contractually due in the years ended December 31,
--------------------------------------------------------------------------------------
2001 - 2003 - 2008 - 2013 and
1998 1999 2000 2002 2007 2012 thereafter Total
---- ---- ---- ---- ---- ---- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans (1) $52,422 $24,915 $26,051 $54,552 $145,315 $90,749 $129,271 $523,275
Nonresidential real estate 2,078 2,217 2,038 4,301 14,649 8,088 108 33,479
loans
Commercial loans 16,380 5,360 3,886 6,598 12,883 11,967 2,823 59,897
Consumer loans 8,505 5,237 4,137 6,935 16,454 1,132 988 43,388
------- ------- ------- ------- -------- -------- -------- --------
Totals $79,385 $37,729 $36,112 $72,386 $189,301 $111,936 $133,190 $660,039
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
- -------------------
(1) Includes permanent and construction loans for one- to four-family and
multi-family properties and land loans.
The next table sets forth the dollar amount of all loans due after
December 31, 1998, which have predetermined interest rates and have floating or
adjustable interest rates:
<TABLE>
<CAPTION>
Due after December 31, 1998
---------------------------
(In thousands)
<S> <C>
Fixed rate of interest $423,877
Adjustable rate of interest 156,777
--------
$580,654
========
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of the Company is the origination of conventional loans secured by
first mortgages on one- to four-family residences, primarily single-family
homes, located within the Company's primary market area. At December 31, 1997,
the Company's one- to four-family residential real estate loans totaled
approximately $489.7 million, or 74.2% of total loans. At December 31, 1997,
$5.5 million of the Company's one- to four-family loans were nonperforming.
OTS regulations and Ohio law limit the amount which the Company may
lend in relationship to the appraised value of the real estate and improvements
which will secure the loan at the time of loan origination. In accordance with
such regulations, the Company makes loans on one- to four-family residences of
up to 90% of the value of the real estate and improvements thereon (the "LTV"),
though the majority of such loans have LTVs of 80% or less. Loans on
single-family, owner-occupied residences located in low-to-moderate income
census track locations are granted up to 95% LTV; although the Company
self-insures the portion of the principal amount that exceeds 80% of the
appraised value of the property securing the loan. The City of Youngstown and
Columbiana County have been designated as low- to-moderate income census tracks.
The Company currently offers fixed-rate mortgage loans and
adjustable-rate mortgage loans ("ARMs") for terms of up to 30 years. Although
the Company's loan portfolio includes a significant amount of 30-year fixed-rate
loans, most loans currently originated by the Company are 15-year fixed-rate
loans. The interest rate
-41-
<PAGE> 47
adjustment periods on ARMs are typically one or three years. The maximum
interest rate adjustment on most of the ARMs is 2% on any adjustment date and a
total of 6% over the life of the loan. The interest rate adjustments on one-year
and three-year ARMs presently offered by the Company are indexed to the weekly
average rate on the one-year and three-year U.S. Treasury securities,
respectively. Rate adjustments are computed by adding a stated margin, typically
2.75%, to the index. The Company does not offer ARMs to borrowers on one- to
four-family residences with LTVs of 95%.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. Based upon
current market conditions, the Company estimates that as much as 90% of recent
loan originations consisted of fixed-rate loans.
The Company issues standby loan origination commitments to qualified
borrowers primarily for the purchase of single-family residential real estate.
Such commitments are made on specified terms and conditions and are made for
periods of up to 60 days, during which time the interest rate is locked in.
The Company has purchased interests in loans at times when there was
low demand in the Company's primary market area; however, the Company has not
purchased interests in one- to four-family loans during the past 10 years. The
Company's loan portfolio includes 252 participation interests in several groups
of single-family loans located within and outside of the Company's primary
lending area. At December 31, 1997, the outstanding balance of participation
loans purchased, which is included in the one- to four-family loan portfolio,
was $5.5 million, or 1.1% of the Company's total one- to four-family loan
portfolio.
LOANS SECURED BY MULTIFAMILY RESIDENCES. The Company originates loans
secured by multifamily properties which contain more than four units, although
this is not a significant aspect of the Company's lending activities.
Multifamily loans are offered with adjustable rates of interest, which adjust
according to their index, and typically have terms ranging from five to ten
years and LTVs of up to 75%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. The Company attempts to reduce the risk associated with
multifamily lending by evaluating the creditworthiness of the borrower and the
projected income from the project and by obtaining personal guaranties on loans
made to corporations and partnerships. The Company requires borrowers to agree
to submit financial statements annually to enable the Company to monitor the
loan and requires an assignment of rents.
At December 31, 1997, loans secured by multifamily properties totaled
approximately $8.9 million, or 1.4% of total loans. The largest loan had a
principal balance of $1.5 million and was secured by a first mortgage on an
apartment building and real estate.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. The Company originates
loans for the purchase of nonresidential real estate. The Company's
nonresidential real estate loans have adjustable rates, terms of up to 20 years
and generally LTVs of up to 80%. Rate adjustments on ARMs secured by
nonresidential real estate are determined by adding 3.5% to the current one-,
three- and five-year U.S. Treasury indexes. Among the properties securing the
Company's nonresidential real estate loans are shopping centers, hotels, motels
and freezer warehouses. The majority of such properties are located outside of
the Company's primary lending area. The Company has been involved for over 20
years in freezer warehouse financing through a Youngstown area real estate
developer who specializes in the construction of freezer facilities.
-42-
<PAGE> 48
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Company has endeavored to reduce
such risk by requiring personal guarantees and evaluating the credit history of
the borrower, the location of the real estate, the financial condition of the
borrower, the quality and characteristics of the income stream generated by the
property and the appraisals supporting the property's valuation. At December 31,
1997, the Company's largest loan secured by nonresidential real estate was a
participation with a $7.1 million balance and such loan was performing according
to its terms.
At December 31, 1997, approximately $33.4 million, or 5.1%, of the
Company's total loans were secured by mortgages on nonresidential real estate.
CONSTRUCTION LOANS. The Company makes loans for the construction of
one- to four-family residences, multifamily properties and nonresidential real
estate projects. Residential construction loans are made to both owner-occupants
and to builders on a speculative or not pre-sold basis. Construction loans to
owner-occupants are structured as permanent loans with fixed or adjustable rates
of interest and terms of up to 30 years. During the first year, while the
residence is being constructed, the borrower is required to pay interest only at
a fixed rate. Construction loans for one- to four-family residences have LTVs of
up to 80%, and construction loans for commercial, multifamily and nonresidential
properties have LTVs of up to 75%, with the value of the land included as part
of the owner's equity. At December 31, 1997, the Company had approximately $24.7
million, or 3.7% of its total loans, invested in construction and land loans,
including $24.0 million in one- to four-family residential construction and
approximately $600,000 in multifamily construction and land loans. No commercial
construction loans were outstanding at that date.
Approximately 50% of the Company's construction loans to builders are
made on a speculative (unsold) basis. The Company, however, generally limits
speculative loans to builders with whom the Company has a long-standing
relationship and limits the number of outstanding loans on unsold homes under
construction within a specific area.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties because
construction loans are more difficult to appraise and to monitor. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is not always
possible to evaluate accurately the LTVs and the total loan funds required to
complete a project. In the event a default on a construction loan occurs and
foreclosure follows, the Company must take control of the project and attempt
either to arrange for completion of construction or dispose of the unfinished
project.
The Company also originates a limited number of loans secured by vacant
land for the construction of single-family houses. The Company's land loans are
generally fixed-rate loans for terms up to five years and require an LTV of 75%
or less. At December 31, 1997, approximately $285,000, or .04%, of the Company's
total loans were secured by land loans made to developers and to individuals
intending to construct and occupy single-family residences on the properties.
COMMERCIAL LOANS. The Company makes commercial loans to businesses in
its primary market area, including traditional lines of credit, revolving lines
of credit, term loans and acquisition and development loans. The LTV ratios for
commercial loans depend upon the nature of the underlying collateral, but
generally commercial loans are made with LTVs of 70 to 75% and have adjustable
interest rates. Lines of credit and revolving credits are generally priced on an
adjustable rate basis, which is tied to the prime rate or U.S. Treasury bill
rate. Term and time loans are usually adjustable, but can have fixed rates of
interest and terms from one to five years.
-43-
<PAGE> 49
At December 31, 1997, the Company had approximately $59.9 million, or
9.1% of total loans, invested in commercial loans. The majority of these loans
are secured by a security interest in inventory, accounts receivable, machinery,
investment property, vehicles or other assets of the borrower. The Company also
originates unsecured commercial loans, including lines of credit for periods of
less than 12 months, short-term loans and, occasionally, term loans for periods
of up to 36 months. These loans are underwritten based on the credit-worthiness
of the borrowers and the guarantors. As a result of the addition of experienced
loan personnel and the implementation of enhanced underwriting procedures, the
Company intends to increase its unsecured commercial loan volume in the future.
Commercial loans are generally deemed to entail significantly greater
risk than real estate lending. The repayment of commercial loans is typically
dependent on the income stream and successful operation of a business, which can
be affected by economic conditions. The collateral for commercial loans, if any,
often consists of rapidly depreciating assets.
During 1997, the Company hired two commercial loan officers with
extensive experience in the origination of commercial loans. As a result, the
Company anticipates an increase in its commercial loan portfolio in the future.
CONSUMER LOANS. The Company originates various types of consumer credit
loans, including home equity loans, education loans, loans secured by savings
accounts and motor vehicles and unsecured loans. Consumer loans are made at
fixed and adjustable rates of interest and for varying terms based on the type
of loan. Consumer loans secured by a deposit or savings account are made for up
to 90% of the principal balance of the account and generally have adjustable
rates which adjust based on the weekly average yield on U.S. Treasury securities
plus a margin.
For new automobiles, loans are originated for up to 90% of the value of
the car with terms of up to five years, and for used automobiles, loans are made
for up to the average value of the car model and a term of three years. All
automobile loans are originated directly by the Company. At December 31, 1997,
automobile loans amounted to $2.5 million, or 5.7%, of the Company's consumer
loan portfolio.
The Company makes closed-end home equity loans in an amount which, when
added to the prior indebtedness secured by the real estate, does not exceed 90%
of the estimated value of the real estate. Home equity loans are typically
secured by a second mortgage on the real estate. The Company frequently holds
the first mortgage, although the Company will make home equity loans in cases
where another lender holds the first mortgage. The Company also offers home
equity loans with a line of credit feature. Home equity loans are made with
adjustable and fixed rates of interest. Fixed-rate home equity loans have terms
of ten years but can be called after five years. Rate adjustments on adjustable
home equity loans are determined by adding a 3% margin for loans on one- to
four-family residences of up to 80% LTV or by adding a 4% margin for loans on
one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury
index. At December 31, 1997, approximately $17.1 million, or 39.4%, of the
Company's consumer loan portfolio consisted of home equity loans.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment, and other adverse economic conditions. Although
the Company has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase. At December 31,
1997, $404,000 of the Company's consumer loans were nonperforming.
-44-
<PAGE> 50
At December 31, 1997, the Company had approximately $43.4 million, or
6.6% of its total loans, invested in consumer loans. The Company anticipates a
moderate increase in its consumer loan portfolio in the future as a result of
increased cross-selling efforts to existing customers.
LOAN SOLICITATION AND PROCESSING. The lending activities of the Company
are subject to the written, non-discriminatory underwriting standards and loan
origination procedures established by the Company's Board of Directors. Loan
originations are generally obtained from existing customers and members of the
local community and from referrals from real estate brokers, lawyers,
accountants, and current and former customers. The Company also advertises in
the local print media, radio and television.
Each of the Company's 14 offices has loan personnel who can accept loan
applications, which are then forwarded to the Company's Underwriting Department
for processing and approval. In underwriting real estate loans, the Company
typically obtains a credit report, verification of employment and other
documentation concerning the creditworthiness of the borrower. An appraisal of
the fair market value of the real estate that will be given as security for the
loan is prepared by one of the Company's in-house licensed appraisers or an
approved fee appraiser. For certain large nonresidential real estate loans, the
appraisal will be conducted by an outside fee appraiser whose report is reviewed
by the Company's chief appraiser. Upon the completion of the appraisal and the
receipt of information on the credit history of the borrower, the application
for a loan is submitted for review to the appropriate persons. Loans up to
$100,000 require two approvals, and loans up to $200,000 require three
approvals, from members of the Company's underwriting staff, the Senior Loan
Officer, the Lending Operations Officer or any other senior officer of the
Company. Commercial loans up to $200,000 may be approved by one of the Company's
commercial loan officers. Loans of $200,000 or more but less than $1.0 million
must be approved by two members of the Underwriting Department, the Senior Loan
Officer or the Lending Operations Officer and any two of the following officers:
the President, the Chief Financial Officer, the Senior Vice President of Retail
Banking or the Vice President of Facilities Management. In addition to the
approval by the officers described above, loans for over $1.0 million require
the prior approval of a majority of the outside directors of the Company.
Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name the Company as an
insured mortgagee. The Company generally obtains an attorney's opinion of title,
although title insurance may be obtained on larger nonresidential real estate
loans.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Company also evaluates the feasibility of the proposed construction project and
the experience and record of the builder. Once approved, the construction loan
is disbursed in installments based upon periodic inspections of construction
progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan, and the value of the collateral, if any.
LOAN ORIGINATIONS AND PURCHASES. Historically, the Company has
originated substantially all of the loans in its portfolio and has held them
until maturity. Nevertheless, the Company's residential loans are generally made
on terms and conditions and documentation which conform to the secondary market
guidelines for sale to the Federal Home Loan Mortgage Corporation (the "FHLMC")
and other institutional investors in the secondary market. Education loans are
sold, once the borrower has graduated, to the Student Loan Marketing
Association. The Company does not originate first mortgage loans insured by the
Federal Housing Authority or guaranteed by the Veterans Administration, but it
has purchased such loans as well as participation interests in such loans.
-45-
<PAGE> 51
The Company has not sold any loans during the years ended December 31,
1997, 1996 and 1995. The following table presents the Company's total loan
origination and repayment activity for the years indicated:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate:
Permanent:
One- to four-family $ 68,303 $129,074 $ 89,869
Multifamily - 225 90
Nonresidential 218 136 312
-------- -------- --------
Total permanent 68,521 129,435 90,271
Construction:
One- to four-family 25,440 26,545 23,698
Multifamily 1,390 740 1,220
Nonresidential - - -
-------- -------- --------
Total construction 26,830 27,285 24,918
-------- -------- --------
Total real estate loans originated 95,351 156,720 115,189
Consumer 17,038 16,199 16,037
Commercial 20,968 21,731 11,553
-------- -------- --------
Total loans originated 133,357 194,650 142,779
Loans purchased 116 24 4,024
-------- -------- --------
Total loans originated and purchased 133,473 194,674 146,803
Principal repayments 119,120 125,550 105,413
-------- -------- --------
Increase in loan originations before net items $ 14,353 $ 69,124 $ 41,390
======== ======== ========
</TABLE>
At December 31, 1997, the Company had $7.7 million of outstanding
commitments to originate loans and $19.1 million available to borrowers under
consumer and commercial lines of credit. At December 31, 1997, the Company had
$8.2 million in undisbursed funds related to construction loans in process.
LOAN ORIGINATION AND OTHER FEES. The Company realizes loan origination
fees and other fee income from its lending activities. A fee of two percent of
the loan amount, up to $1,000, is charged for fixed-rate residential real estate
loans and the Company charges an origination fee of two percent of the loan
amount, up to $850, for adjustable-rate residential real estate loans. Loan
origination fees for nonresidential real estate loans and commercial loans are
negotiated on an individual basis. In addition, the Company realizes income from
late payment charges and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield for the life of the related loan.
LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the
aggregate amount that a savings association may lend to any one borrower to an
amount equal to 15% of the Company's unimpaired capital and unimpaired surplus
(the "Lending Limit Capital"). A savings association may lend to one borrower an
additional amount not to exceed 10% of the Company's Lending Limit Capital if
the additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral." In
applying this limit, the regulations require that loans to certain related or
affiliated borrowers be aggregated.
-46-
<PAGE> 52
Based on such limits, the Company could lend approximately $22.0
million to any one borrower at December 31, 1997. The largest amount the Company
had outstanding to one borrower at December 31, 1997, was $15.2 million, which
consisted of four loans, secured by first mortgage liens on freezer warehouses.
At December 31, 1997, such loans were performing in accordance with their terms.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The
Company attempts to maintain a high level of asset quality through sound
underwriting policies and aggressive collection practices.
At the beginning of each month, the Collections Department of the
Company receives a report on all delinquent loans, and Company personnel
telephone the delinquent borrowers and mail delinquency notices. When a loan
payment has not been made by the fifteenth of the month, a late notice is sent
and a penalty of five percent of the payment due is assessed. Once a loan is 60
days delinquent, a second notice is sent and the Collections Department contacts
the borrower by telephone. The Collections Department will generally continue to
attempt to bring the loan current through telephone calls or personal visits
until the loan has been delinquent 90 to 120 days. If the loan has not been
brought current by the 120th day, a member of the Collections Department will
present the loan to the Company's Pre-Foreclosure Committee which meets weekly.
If the Pre-Foreclosure Committee agrees to recommend the commencement of
foreclosure proceedings, the loan is presented to the Executive Committee of the
Board, which normally refers the loan to the Company's in-house legal staff. A
decision as to whether and when to initiate foreclosure proceedings is based on
such factors as the amount of the outstanding balance in relation to the
original indebtedness, the extent of the delinquency, the borrower's ability and
willingness to cooperate in curing the delinquency and any environmental issues
that may need to be addressed.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1997 1996
------------------------------------ ---------------------------------
Percent of Percent of
total total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 242 $ 6,895 1.09% 228 $ 7,269 1.18%
60-89 days 132 4,415 .70 117 2,760 .45
90 days or over 298 9,491 1.50 326 9,114 1.48
--- ------- ---- --- ------- ----
Total delinquent loans 672 $20,801 3.29% 671 $19,143 3.11%
=== ======= ==== === ======= ====
</TABLE>
Nonperforming assets include nonaccruing loans, restructured loans,
real estate acquired by foreclosure or by deed-in-lieu thereof, in-substance
foreclosures and repossessed assets.
Loans are reviewed through monthly reports to the Board or weekly
reports to senior management and are placed on nonaccrual status when collection
in full is considered doubtful by management. Interest accrued and unpaid at the
time a loan is placed on nonaccrual status is charged against interest income.
Subsequent cash payments are generally applied to interest income unless, in the
opinion of management, the collection of principal and interest is doubtful. In
those cases, subsequent cash payments would be applied to principal.
-47-
<PAGE> 53
The following table sets forth information with respect to the
Company's nonperforming loans and other assets at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans
Real estate loans:
One- to four-family $ 5,540 $ 5,343 $ 3,542 $ 3,491 $ 3,842
Multifamily and nonresidential 649 704 1,082 104 73
Construction (net of LIP) and land 769 491 7 - -
------- ------- ------- ------- -------
Total real estate loans 6,958 6,538 4,631 3,595 3,915
Consumer 404 517 298 274 311
Commercial 2,129 2,059 260 219 317
------- ------- ------- ------- -------
Total nonaccrual loans 9,491 9,114 5,189 4,088 4,543
Restructured real estate loans 644 698 891 2,681 4,698
------- ------- ------- ------- -------
Total nonperforming loans 10,135 9,812 6,080 6,769 9,241
Real estate acquired through foreclosure and other
repossessed assets 55 29 46 1,570 2,245
------- ------- ------- ------- -------
Total nonperforming assets $10,190 $ 9,841 $ 6,126 $ 8,339 $11,486
======= ======= ======= ======= =======
Nonperforming loans as a percent of total loans 1.60% 1.59% 1.11% 1.34% 2.04%
Nonperforming assets as a percent of total assets 0.98 0.92 0.57 0.82 1.14
Allowance for loan losses as a percent of
nonperforming loans 59.02 51.37 84.18 75.51 58.40
Allowance for loan losses as a percent of total loans
before allowance 0.94 0.81 0.93 1.01 1.18
</TABLE>
For 1997, approximately $585,000 in interest income would have been
recorded had nonaccruing and restructured loans been accruing pursuant to
contractual terms. During 1997 interest collected on such loans and included in
net income was approximately $544,000.
Between 1995 and 1996, the Company experienced an increase of $3.9
million in nonaccrual loans. Approximately $1.9 million of the increase
occurred in the real estate loan portfolio, particularly one- to four-family
loans and construction loans, and $1.8 million occurred in the commercial loan
portfolio. The increase in nonaccrual loans is partly attributable to growth in
the one- to four-family, construction and commercial segments of the Company's
loan portfolio. Another factor contributing to the increase in nonaccrual real
estate loans was a change in the Company's data processing systems, which
resulted in a new methodology in identifying delinquent loans. Due to timing
differences in interpreting data under the Company's old data processing
system, loans which became 90 days delinquent during the month were, in many
cases, not included in the 90 day category of delinquency reports until the end
of the subsequent month, resulting in an underreporting of delinquent loans
prior to 1996. The increase in nonaccrual commercial loans relates to five
loans, the largest of which had a principal balance of $800,000. Because
repayment in full is anticipated on all of the nonaccrual commercial loans, no
write-downs have been charged against the loans. Nonaccrual loans stabilized
substantially from 1996 to 1997.
Real estate acquired in settlement of loans is classified separately on
the balance sheet at fair value as of the date of acquisition. After
foreclosure, the loan is written down to the value of the underlying collateral
by a charge to the allowance for loan losses, if necessary. Any subsequent
write-downs are charged against operating expenses. Operating expenses of such
properties, net of related income or loss on disposition, are included in other
expenses. At December 31, 1997, the carrying value of real estate acquired in
settlement of loans was $55,213, and consisted of four single-family properties.
-48-
<PAGE> 54
The Company classifies its assets, excluding loans in its commercial
loan portfolio, in accordance with federal regulations. Problem assets are
classified as "special mention", "substandard," "doubtful" or "loss."
"Substandard" assets have one or more defined weaknesses and are characterized
by the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected. "Doubtful" assets have the same weaknesses as
"substandard" assets, with the additional characteristics that (i) the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of the Company is not
warranted. Federal regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
The Company classifies its commercial loans on a periodic basis, not
less often than quarterly, according to a nine-level risk rating system that
includes, in addition to the "substandard," "doubtful" and "loss," categories
discussed above, further classifications of "prime," "good," "satisfactory,"
"fair," "watch" and "uncertain."
Commercial loans that are classified "prime," "good," "satisfactory" or
"fair" possess levels of risk, if any, which are generally acceptable to the
Company. "Watch" assets are the equivalent of "special mention" assets discussed
above and a loan which is classified as "unknown" represents a loan for which
there is insufficient current information on the borrower to evaluate the
primary source of payment. A loan may only be maintained as "unknown" for 90
days while additional information is obtained, subject to one 90-day extension
by the Commercial Loan Manager or a higher level officer.
The aggregate amounts of the Company's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------
1997 1996
------ ------
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $9,188 $9,205
Doubtful - -
Loss 151 251
------ ------
Total classified assets $9,339 $9,456
====== ======
</TABLE>
The Company analyzes each classified asset on a quarterly basis to
determine whether changes in the classifications are appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of, and the reasons for, any delinquency, the use of the real estate
securing the loan, the financial condition of the borrower, and the appraised
value of the real estate. As such factors change, the classification of the
asset will change accordingly.
The Company establishes a general allowance for loan losses for any
loan classified as special mention, substandard or doubtful. If an asset, or
portion thereof, is classified as loss, the Company establishes a specific
allowance for loss in the amount of 100% of the portion of the asset classified
loss or charges off the portion of any real estate loan deemed to be
uncollectible.
ALLOWANCE FOR LOAN LOSSES. Management reviews on a quarterly basis the
allowance for loan losses as it relates to a number of relevant factors,
including, but not limited to, growth and changes in the composition of the loan
portfolio, trends in the level of delinquent and problem loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, and possible losses arising from specific problem assets.
-49-
<PAGE> 55
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net income could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. In addition, the Company's determination as to the amount of its
allowance for loan losses is subject to review by the OTS, as part of its
examination process, which may result in the establishment of an additional
allowance based upon the judgment of the OTS after a review of the information
available at the time of the OTS examination.
The following table sets forth an analysis of the Company's allowance
for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 5,040 $5,118 $5,111 $5,397 $4,797
(Recovery of) provision for loan loss
allowances (1,546) - - (100) 535
Charge-offs:
Real estate (403) (28) (373) (170) (43)
Consumer (43) (57) (21) (16) (43)
Commercial - - - (60) -
-------- ------ ------ ------ ------
Total charge-offs (446) (85) (394) ( 246) (86)
-------- ------ ------ ------ ------
Recoveries:
Real estate 2,930 4 365 52 146
Consumer 4 3 10 8 5
Commercial - - 26 - -
-------- ------ ------ ------ ------
Total recoveries 2,934 7 401 60 151
-------- ------ ------ ------ ------
Net recoveries (charge-offs) 2,488 (78) 7 (186) 65
-------- ------ ------ ------ ------
Balance at end of year $ 5,982 $5,040 $5,118 $5,111 $5,397
======== ====== ====== ====== ======
Ratio of net recoveries (charge-offs)
to average net loans 0.40% (0.01)% 0.00% (0.04)% 0.02%
Ratio of net recoveries (charge-offs) to
(recovery of) provision for loan loss
allowances 160.93% N/A N/A (186.00)% 12.15%
</TABLE>
-50-
<PAGE> 56
The following table sets forth the allocation of the allowance for loan
losses by category. The allocations are based on management's assessment of the
risk characteristics of each of the components of the total loan portfolio and
is subject to changes as and when the risk factors of each such component
change. The allocation is not indicative of either the specific amounts or the
loan categories in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $4,242 84.35% $4,561 86.53% $4,585 88.52% $4,593 88.77% $4,711 90.25%
Consumer loans 673 6.57 322 6.18 376 6.37 349 6.05 457 5.85
Commercial loans 1,067 9.08 157 7.29 157 5.11 169 5.18 229 3.90
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $5,982 100.00% $5,040 100.00% $5,118 100.00% $5,111 100.00% $5,397 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
Federal regulations and Ohio law permit the Company to invest in
various types of investment securities, including interest-bearing deposits in
other financial institutions, federal funds, U.S. Treasury and agency
obligations, mortgage-backed securities, and certain other specified
investments. The Board of Directors of the Company has adopted an investment
policy which authorizes management to make investments in U.S. Treasury
obligations, U.S. Federal agency and federally-sponsored corporation
obligations, investment-grade municipal obligations, creditworthy, unrated
securities issued by municipalities in which an office of the Company is
located, investment-grade corporate debt securities, investment-grade
asset-backed securities, certificates of deposit that are fully-insured by the
FDIC, bankers' acceptances, federal funds and interest-bearing time deposits
with other financial institutions. The Company's investment policy is designed
primarily to provide and maintain liquidity within regulatory guidelines, to
maintain a balance of high quality investments to minimize risk, and to maximize
return without sacrificing liquidity and safety. See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Analysis of Financial Condition; and - Liquidity and Capital
Resources." The investment activities of the Company are supervised by the
Company's Investment Committee and investment purchases are monitored weekly by
the Executive Committee of the Company.
The Company maintains a significant portfolio of mortgage-backed
securities in the form of Federal National Mortgage Association (the "FNMA"),
Government National Mortgage Association (the "GNMA") and the FHLMC
participation certificates. Mortgage-backed securities generally entitle the
Company to receive a portion of the cash flows from an identified pool of
mortgages. GNMA securities are guaranteed by the Federal government as to the
timely payment of principal and interest. FNMA securities and a majority of the
Company's FHLMC securities are guaranteed by the issuing agency as to timely
payment of principal and interest. The balance of the Company's FHLMC securities
are guaranteed as to timely payment of interest and eventual payment of
principal.
The Company purchases mortgage-backed securities primarily as an
alternative to originating loans for its portfolio. In recent years, the
Company's funds available for investment have exceeded the volume of loan
originations based on loan demand in the Company's primary market area.
Purchases of mortgage-backed securities enable the Company to generate positive
interest rate spreads with minimal administrative expense and reduced credit
risk due the guarantees provided by the issuer. Mortgage-backed securities
classified as available for sale also provide the Company with an additional
source of liquid funds. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management."
Although the Company's mortgage-backed securities are generally
guaranteed as to repayment of principal and interest, the Company is exposed to
prepayment risk and reinvestment risk to the extent that the issuer redeems the
security or that actual prepayments on the underlying mortgages are greater than
estimated over the life of the security. Although prepayments of underlying
mortgages depend on many factors, the difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Prepayments may require the Company to make adjustments to the amortization of
any premium or accretion of any discount relating to the securities, thereby
changing the net yield on such securities. The Company reviews prepayment
estimates for mortgage-backed securities at purchase to ensure that prepayment
assumptions are reasonable considering the underlying collateral for the
securities at issue and current interest rates and to determine the yield and
estimated maturity of the mortgage-backed security portfolio.
To the extent that the Company's mortgage-backed securities prepay
faster than anticipated in a declining rate environment, the Company may not be
able to reinvest the proceeds of such prepayments at a comparable rate of
return, which could adversely affect net interest income. Conversely, in a
rising interest rate environment, prepayments may occur at a slower than
projected pace, thereby extending the estimated life of the security and
depriving the Company of the ability to reinvest cash flows at higher rates of
interest. In addition, the market value of such securities may be adversely
affected by changes in interest rates. As discussed below, a decline in the
market value of securities classified as available for sale may adversely affect
the Company's retained earnings.
Investment and mortgage-backed securities are classified upon
acquisition as available for sale or held to maturity. Securities classified as
available for sale are carried at estimated fair value with the unrealized
holding gain or loss, net of taxes, reflected as a component of equity.
Securities classified as held to maturity are carried at amortized cost. The
Company recognizes premiums and discounts in interest income over the
-51-
<PAGE> 57
period to maturity by the level yield method and realized gains or losses on the
sale of debt securities based on the amortized cost of the specific securities
sold. Security sales are recorded on a trade date basis.
-52-
<PAGE> 58
The following table sets forth the amortized cost and fair value of the
Company's short-term investments, FHLB stock, investment securities and
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31
------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
Amortized % of Fair % of Amortized % of Fair % of
Cost Total Value Total Cost Total Value Total
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Short-term investments:
Federal funds $ 19,879 5.22% $ 19,879 5.15% $ 5,982 1.39% $ 5,982 1.39%
Overnight repurchase agreement - - - - - - - -
FHLB stock 11,136 2.93 11,136 2.89 10,370 2.42 10,370 2.40
Investment securities:
U.S. treasury obligations 20,072 5.27 20,224 5.24 12,517 2.92 12,613 2.92
U.S. government agency obligations 5,000 1.31 5,038 1.31 - - - -
Corporate notes 14,019 3.68 14,140 3.66 2,026 0.47 2,046 0.47
Mortgage-backed securities
FHLMC 54,039 14.20 54,827 14.21 73,748 17.19 74,420 17.23
FNMA 5,265 1.39 5,345 1.39 7,489 1.75 7,613 1.76
Private issues 2,329 0.62 2,251 0.58 2,513 0.58 2,433 0.57
-------- ------ -------- ------ -------- ------ -------- ------
Total available for sale 131,739 34.62 132,840 34.43 114,645 26.72 115,477 26.74
-------- ------ -------- ------ -------- ------ -------- ------
Held to maturity:
Investment securities:
U.S. treasury obligations 4,968 1.31 5,013 1.30 14,967 3.49 15,051 3.49
Corporate notes - - - - 13,003 3.03 13,057 3.02
Mortgage-backed securities:
GNMA 9,077 2.39 9,492 2.46 11,163 2.60 11,627 2.69
FHLMC 156,988 41.25 158,939 41.19 184,363 42.98 184,838 42.81
FNMA 77,783 20.43 79,555 20.62 90,858 21.18 91,754 21.25
-------- ------ -------- ------ -------- ------ -------- ------
Total held to maturity 248,816 65.38 252,999 65.57 314,354 73.28 316,327 73.26
-------- ------ -------- ------ -------- ------ -------- ------
Total investment portfolio $380,555 100.00% $385,839 100.00% $428,999 100.00% $431,804 100.00%
======== ====== ======== ====== ======== ====== ======== ======
<CAPTION>
-----------------------------------------
1995
-----------------------------------------
Amortized % of Fair % of
Cost Total Value Total
-------- ----- ------- -----
<S> <C> <C> <C> <C>
Available for sale:
Short term investments:
Federal funds $ 6,412 1.29% $ 6,412 1.26%
Overnight repurchase agreement 20,194 4.05 20,194 3.98
FHLB stock 9,675 1.94 9,675 1.91
Investment securities:
U.S. treasury obligations 26,883 5.39 27,382 5.40
U.S. government agency obligations - - - -
Corporate notes 4,678 0.94 4,743 0.94
Mortgage-backed securities
FHLMC 84,768 17.00 86,071 16.97
FNMA 9,204 1.85 9,390 1.85
Private issues 4,544 0.91 4,544 0.90
-------- ------ -------- ------
Total available for sale 166,358 33.37 168,411 33.21
-------- ------ -------- ------
Held to maturity:
Investment securities:
U.S. treasury obligations 14,991 3.01 15,220 3.00
Corporate notes 15,128 3.03 15,209 3.00
Mortgage-backed securities:
GNMA 13,534 2.71 14,166 2.79
FHLMC 183,767 36.86 186,943 36.86
FNMA 104,806 21.02 107,231 21.14
-------- ------ -------- ------
Total held to maturity 332,226 66.63 338,769 66.79
-------- ------ -------- ------
Total investment portfolio $498,584 100.00% $507,180 100.00%
======== ====== ======== ======
</TABLE>
-53-
<PAGE> 59
The maturities of the Company's short-term investments and securities
at December 31, 1997, excluding FHLB stock, are indicated in the following
table:
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------------------------------------
After one through
One year or less five years After five years Total
------------------ ------------------- ------------------- ------------------------------
Amortized Average Amortized Average Amortized Average Amortized Fair Average
cost yield cost yield cost yield cost value yield
---- ----- ---- ----- ---- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments:
Federal funds $ 19,879 5.50% $ - -% $ - -% $ 19,879 $ 19,879 5.50%
Investment securities:
Available for sale 5,004 5.78 29,087 6.32 5,000 6.53 39,091 39,402 6.28
Held to maturity - - 4,968 6.49 - - 4,968 5,013 6.49
-------- ---- -------- ---- -------- ---- -------- -------- ----
Total investment securities 5,004 5.78 34,055 6.34 5,000 6.53 44,059 44,415 6.30
Mortgage-backed securities:
Available for sale 10,153 6.93 31,035 7.11 20,445 7.56 61,633 62,423 7.22
Held to maturity 27,009 7.16 78,566 7.16 138,273 7.08 243,848 247,986 7.11
-------- ---- -------- ---- -------- ---- -------- -------- ----
Total mortgage-backed securities 37,162 7.09 109,601 7.13 158,718 7.14 305,481 310,409 7.13
-------- ---- -------- ---- -------- ---- -------- -------- ----
Total interest-earning assets $ 62,045 6.47% $143,656 6.94% $163,718 7.12% $369,419 $374,703 6.94%
======== ==== ======== ==== ======== ==== ======== ======== ====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the
Company's funds for use in lending and other investment activities. In addition
to deposits, the Company derives funds from interest payments and principal
repayments on loans and income on earning assets. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate in response to general interest rates and money market conditions. The
Company may also borrow from the FHLB as a source of funds.
DEPOSITS. Deposits are attracted principally from within the Company's
primary market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, demand deposits, individual
retirement accounts ("IRAs"), NOW accounts, money market accounts, and
certificates of deposit. Interest rates paid, maturity terms, service fees, and
withdrawal penalties for the various types of accounts are monitored weekly by
the Company's Executive Committee. The Company does not use brokers to attract
deposits. The amount of deposits from outside the Company's primary market area
is not significant.
-54-
<PAGE> 60
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by the Company at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
Percent Weighted Percent Weighted
of total average of total average
Amount deposits rate Amount deposits rate
------ -------- ---- ------ -------- ----0
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts:
Interest-bearing $ 58,707 6.62% 2.03% $ 56,347 6.05% 2.34%
Noninterest-bearing 5,387 0.61 - 4,201 0.45 -
Savings accounts 243,588 27.47 2.99 256,081 27.47 3.08
Money market accounts 56,727 6.40 2.99 64,622 6.93 3.08
-------- ------ -------- ------
Total transaction accounts 364,409 41.10 381,251 40.90
Certificates of deposit:
4.00% or less 448 0.05 745 0.08
4.01% - 6.00% 415,045 46.80 421,302 45.20
6.01% - 8.00% 106,835 12.04 128,697 13.81
8.01% - 10.00% 71 0.01 65 0.01
-------- ------ -------- ------
Certificates of deposit 522,399 58.90 5.78 550,809 59.10 5.74
-------- ------ -------- ------
Total deposits $886,808 100.00% 4.56% $932,060 100.00% 4.60%
======== ====== ======== ======
</TABLE>
Total deposits decreased by $45.3 million, or 4.9%, from December 31,
1996, to December 31, 1997, primarily due to disintermediation.
The following table shows rate and maturity information for the
Company's certificates of deposit at December 31, 1997:
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------------------------------------------
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Thereafter Total
---- -------- ---------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less $ 437 $ - $ - $ 11 $ 448
4.01% to 6.00% 304,184 74,609 27,938 8,314 415,045
6.01% to 8.00% 44,908 7,921 23,302 30,704 106,835
8.01% to 10.00% 71 - - - 71
-------- ------- ------- ------- --------
Total certificates of deposit $349,600 $82,530 $51,240 $39,029 $522,399
======== ======= ======= ======= ========
Percent of total certificates
of deposit 66.92% 15.80% 9.81% 7.47% 100.00%
</TABLE>
At December 31, 1997, approximately $350.0 million of the Company's
certificates of deposit were expected to mature within one year. Based on past
experience and the Company's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will be renewed with the
Company at maturity, although there can be no assurance that this will occur.
If, however, the Company is unable to renew the maturing certificates for any
reason, borrowings of up to $222.7 million are available from the FHLB of
-55-
<PAGE> 61
Cincinnati. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Liquidity and Capital Resources."
The following table presents the amount of the Company's certificates
of deposit of $100,000 or more by the time remaining until maturity at December
31, 1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $14,294
Over 3 months to 6 months 8,810
Over 6 months to 12 months 9,894
Over 12 months 15,717
--------
Total $48,715
=======
</TABLE>
Management believes that a substantial percentage of the above certificates will
be renewed with the Company at maturity.
The following table sets forth the Company's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Beginning balance $932,060 $938,855
Net decrease in deposits (85,868) (49,819)
-------- --------
Net deposits before interest
credited 846,192 889,036
Interest credited 40,616 43,024
-------- --------
Ending balance $886,808 $932,060
======== ========
Net decrease $(45,252) $ (6,795)
======== ========
Percent decrease (4.86)% (0.72)%
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, the Company is authorized to apply for
advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender (the "QTL") test. See "REGULATION - Office of
Thrift Supervision -- Qualified Thrift Lender Test." If an association meets the
QTL test, the Company will be eligible for 100% of the advances it would
otherwise be eligible to receive. If an association does not meet the QTL test,
the association will be eligible for such advances only to the extent it holds
specified QTL test assets. At December 31, 1997, the Company was in compliance
with the QTL test, but had no outstanding advances from the FHLB.
Borrowings of up to $222.7 million are available to the Company from the FHLB of
Cincinnati.
COMPETITION
The Company faces competition for deposits and loans from other savings
and loan associations, credit unions, banks and mortgage originators in the
Company's primary market area. The primary factors in
-56-
<PAGE> 62
competition for deposits are customer service, convenience of office location
and interest rates. The Company competes for loan originations primarily through
the interest rates and loan fees it charges and through the efficiency and
quality of services it provides to borrowers. Competition is affected by, among
other things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors which are
not readily predictable. The Company does not offer all of the products and
services offered by some of its competitors, particularly commercial banks.
PROPERTIES
The following table sets forth certain information at December 31,
1997, regarding the properties on which the main office and the branch offices
of the Company are located:
<TABLE>
<CAPTION>
Owned or Year Net book
Location leased opened value Deposits
- -------- ------ ------ ----- --------
(In thousands)
<S> <C> <C> <C> <C>
275 Federal Plaza West Owned 1919 $1,037 $85,507
Youngstown, Ohio
32 State Street Owned 1916 315 94,633
Struthers, Ohio
4005 Hillman Way Owned 1958 473 114,927
Boardman, Ohio
650 East State Street Owned 1925 185 69,168
Salem, Ohio
6000 Mahoning Avenue Leased 1959 9 78,568
Austintown, Ohio
7525 Market Street Owned 1971 542 104,678
Boardman, Ohio
4259 Kirk Road Owned 1975 603 85,226
Austintown, Ohio
202 South Main Street Owned 1975 236 68,342
Poland, Ohio
3500 Belmont Avenue Owned 1976 331 66,433
Youngstown, Ohio
29 North Broad Street Owned 1977 311 35,058
Canfield, Ohio
980 Great East Plaza Leased 1980 14 22,792
Niles, Ohio
127 North Market Street Owned 1987 140 31,012
East Palestine, Ohio
210 West Lincoln Way Owned 1987 331 16,734
Lisbon, Ohio
148725 South Avenue Ext. Owned 1997 833 2,214
Columbiana, Ohio
1140 Boardman - Poland Road (1) Leased 1986
Poland, Ohio
</TABLE>
- ----------------------------
(1) Closed in January 1998.
-57-
<PAGE> 63
EMPLOYEES
At December 31, 1997, the Company had 391 full-time equivalent
employees and 91 part-time employees. The Company believes that relations with
its employees are excellent. The Company offers health, life and disability
benefits to all employees and has a defined benefit pension plan, a 401(k) plan
and a postretirement health plan for its eligible employees. None of the
employees of the Company is represented by a collective bargaining unit.
LEGAL PROCEEDINGS
The Company is not presently involved in any material legal
proceedings. From time to time, the Company is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by the Company.
YEAR 2000 CONSIDERATIONS
The Company's lending and deposit activities are almost entirely
dependent upon computer systems which process and record transactions, although
the Company can effectively operate for brief periods when its electronic
systems malfunction or cannot be accessed. The Company utilizes the services of
a third-party data processing service bureau. In addition to its basic operating
activities, the Company's facilities and infrastructure, such as security
systems and communications equipment, are dependent to varying degrees upon
computer systems.
The Company is aware of the potential year-2000 related problems that
may affect the computers which control or operate the Company's operating
systems, facilities and infrastructure. In 1997, the Company began the process
of identifying any year-2000 related problems that may be experienced by its
computer-operated or -dependent systems. The Board of Directors reviews the
Company's progress in addressing year-2000 issues quarterly. The Company has
contacted the companies that supply or service the Company's computer-operated
or -dependent systems to obtain confirmation that each such system that is
material to the operations of the Company is either currently year-2000
compliant or is expected to be year-2000 compliant. With respect to systems that
cannot presently be confirmed as year-2000 compliant, the Company will continue
to work with the appropriate supplier or servicer to ensure that all such
systems will be rendered compliant in a timely manner, with minimal expense to
the Company or disruption of the Company's operations. The Company has
established a December 31, 1998 deadline for its third-party data service bureau
to be year-2000 compliant. If, by the end of 1998, any of the Company's
suppliers or servicers is unable to certify year-2000 compliance with respect to
any systems the failure of which would have a material adverse effect on the
Company's operations, financial condition or results, the Company would then
have sufficient time to identify and contract with suppliers and servicers who
are able to certify year-2000 compliance. The expense of such a change in
suppliers or servicers is not expected to be material to the Company.
In addition to possible expense related to its own systems, the Company
could incur losses if loan payments are delayed due to year-2000 problems
affecting any of the Company's significant borrowers or impairing the payroll
systems of large employers in the Bank's primary market area. Because the
Company's loan portfolio is diversified with regard to individual borrowers and
types of businesses and the Company's primary market area is not significantly
dependent upon one employer or industry, the Company does not expect any
significant or prolonged year-2000 related difficulties that will affect net
earnings or cash flow. See "Loans to One Borrower Limits," and "Primary Market
Area." At this time, however, the expense that may be incurred by the Company in
connection with year-2000 issues cannot be determined. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Year
2000 Issue."
-58-
<PAGE> 64
CHANGE IN ACCOUNTANTS
On November 20, 1997, the Board of Directors of the Company approved a
change of the Company's independent auditors from Packer, Thomas & Co. to
Deloitte & Touche LLP. Packer, Thomas & Co. served as the Company's independent
auditors from the fiscal year ended December 31, 1993 through the fiscal year
ended December 31, 1996. The change was made due to Deloitte & Touche LLP's
expertise and familiarity with mutual-to-stock conversion transactions as well
as Deloitte & Touche LLP's overall expertise and resources with respect to
accounting for stock savings and loan associations.
The reports of Packer, Thomas & Co. on the financial statements of the
Company for the fiscal years ended December 31, 1996 and 1995, did not contain
any adverse opinion or disclaimer of opinion, was not qualified or modified as
to audit scope or accounting principles and did not include an explanatory
paragraph for material uncertainties. There has not been any disagreement
between Packer, Thomas & Co. and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure or audit
scope or procedure.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE HOLDING COMPANY. The Board of Directors of the Holding Company
currently consists of nine members divided into three classes. All of the
directors of the Holding Company were initially elected to the Board of
Directors at the time the Holding Company was formed in 1998. The terms of
Richard M. Barrett, Charles B. Cushwa, III and John F. Zimmerman, Jr. will
expire in 1999; the terms of Donald R. Inglis, Gary Keller and Herbert F.
Schuler, Sr. will expire in 2000; and the terms of James E. Bennett, Jr.,
Douglas M. McKay and Clarence R. Smith, Jr. will expire in 2001. The following
persons are officers of the Holding Company: Douglas M. McKay, President and
Chairman of the Board; Patrick A. Kelly, Treasurer; and Donald J. Varner,
Secretary.
THE COMPANY. The Amended Constitution of the Company provides for a
Board of Directors consisting of not less than five directors. The Board of
Directors of the Company currently consists of 11 directors. Each director
serves for a three-year term. The Board of Directors met 16 times during the
year ended December 31, 1997, for regular and special meetings. Mr. Smith
attended fewer than 75% of the aggregate of such meetings and all meetings of
committees of which he was a member due to surgery.
-59-
<PAGE> 65
The following table presents certain information with respect to the
present directors and the executive officers of the Company:
<TABLE>
<CAPTION>
Year of
Position(s) with commencement Term
Name Age (1) the Company of directorship expires
- ---- --- ------------- ---------------- -------
<S> <C> <C> <C> <C>
Richard M. Barrett 58 Director 1976 1999
James E. Bennett, Jr. 79 Director 1964 2001
Charles B. Cushwa, III 63 Director 1975 1999
William A. Holdford 49 Vice President/Loan Administration -
Donald R. Inglis 69 Director 1978 2000
Patrick A. Kelly 39 Director, Treasurer, CFO and Senior Vice 1996 1999
President
Gary Keller 56 Director 1982 2000
Douglas M. McKay 49 Director, Chairman of the Board and 1995 2001
President
Herbert F. Schuler, Sr. 57 Director 1977 2000
Clarence R. Smith, Jr. 69 Director 1976 2001
Robert J. Steele, Jr. 39 Vice President/Savings Administration -
Donald J. Varner 66 Director, Secretary and Senior Vice 1986
President/ Retail Banking 2000
John F. Zimmerman, Jr. 49 Director 1991 1999
</TABLE>
- ----------------------------
(1) As of December 31, 1997
RICHARD M. BARRETT. Prior to his retirement in 1995, Mr. Barrett was
the President of Barrett Cadillac, Inc., an automobile dealership located in
Youngstown, Ohio.
JAMES E. BENNETT, JR. Mr. Bennett is an attorney and, since 1985, has
served as of counsel to the Youngstown, Ohio law firm of Manchester, Bennett,
Powers and Ullman, a Legal Professional Association.
CHARLES B. CUSHWA, III. Mr. Cushwa is a director of the Cushwa Center
for Entrepreneurship at Youngstown State University, a position he has held
since 1988.
WILLIAM A. HOLDFORD. Mr. Holdford is the Vice President of Loan
Administration of the Company, a position he has held since March, 1990.
DONALD R. INGLIS. Mr. Inglis retired from private practice as a
Certified Public Accountant in 1988.
PATRICK A. KELLY. Mr. Kelly was appointed Treasurer of the Company in
April 1992 and named Senior Vice President of the Company in November 1995. Mr.
Kelly has been employed by the Company since February 1983.
GARY KELLER. Mr. Keller is the Chairman, President and Chief Executive
Officer of the Salem China Company and Urfric, Inc., which manufacture, import
and distribute ceramic products and solid brass decorative hardware. Mr. Keller
is also the President and Chief Executive Officer of Sebring Industries, Inc.,
an import business located in Salem, Ohio.
DOUGLAS M. MCKAY. Mr. McKay joined the Company in 1973 as a loan
officer. Since 1995, Mr. McKay has served as Chief Executive Officer and
Chairman of the Board of Directors of the Company and additionally, as President
of the Company since 1996. From 1991 to 1995, Mr. McKay was employed as
Executive Vice President of the Company.
-60-
<PAGE> 66
HERBERT F. SCHULER, SR. Mr. Schuler is the President and Chief
Executive Officer of General Extrusions, Inc., an aluminum parts manufacturer,
and the President and Treasurer of Genex Tool & Die, Inc., a tool and die
company. Mr. Schuler has been employed by each company since the 1960s.
CLARENCE R. SMITH, JR. Mr. Smith is the Chairman of the Board of S-P
Company and subsidiaries, and Diamond Steel Construction-Youngstown.
ROBERT J. STEELE, JR. Mr. Steele was a branch administrator for the
Company from January 1993 to April 1996 and has served as Vice President of
Savings Administration for the Company since April 1996.
DONALD J. VARNER. Mr. Varner, an attorney, has worked for the Company
for the past 41 years, and from 1976 to 1995, he served the Company as Vice
President and Corporate Counsel. Mr. Varner is currently the Corporate Secretary
of the Company and Senior Vice President of the Company's Retail Banking
Division, positions he has held since 1995.
JOHN F. ZIMMERMAN, JR. Mr. Zimmerman, an attorney, is a member of the
law firm of Manchester, Bennett, Powers and Ullman, a Legal Professional
Association, located in Youngstown, Ohio, and has been associated with the firm
since 1974.
COMMITTEES OF DIRECTORS
The Board of Directors of the Company has Executive, Salary, Planning,
Investment, Asset Liability, Benefit, Distribution and Audit Committees.
The Executive Committee is composed of Mr. Kelly, Mr. McKay, Mr. Varner
and one non-employee director of the Company who alternates monthly. The
functions of the Executive Committee include loan approval and review of the
Company's investment activity, although the Executive Committee is authorized to
act on other matters. The Executive Committee met 52 times during the year ended
December 31, 1997.
The Salary Committee is comprised of Mr. Barrett, Mr. Bennett, Mr.
Cushwa, Mr. Inglis, Mr. Keller, Mr. Schuler, Mr. Smith and Mr. Zimmerman. The
functions of the Salary Committee are to determine compensation for the
Company's three senior officers and to make decisions regarding employee
benefits and related matters. The Salary Committee met once during the year
ended December 31, 1997.
The Audit Committee is comprised of Mr. Schuler, Mr. Cushwa and Mr.
Inglis. The Audit Committee reviews audit reports and related matters to ensure
effective compliance with regulatory and internal policies and procedure. The
Audit Committee met seven times in the year ended December 31, 1997.
The Board of Directors of the Holding Company does not currently have
any committees, but will establish appropriate committees upon the completion of
the Conversion.
COMPENSATION
Each director of the Company currently receives a retainer of $10,000
per year and $400 per meeting of the full Board attended. Non-employee directors
receive an additional fee of $400 per committee meeting attended. The Chairmen
of the Audit and Salary Committees receive an additional fee of $200 per
committee meeting. Director compensation is approved by the members of the
Company at the annual meeting of members.
-61-
<PAGE> 67
The following table presents certain information regarding the annual
compensation received by executive officers of the Company who received
compensation exceeding $100,000 for 1997:
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------
Annual compensation (1) Other compensation
- -----------------------------------------------------------------------------------------------------------
Name and principal position Year Salary Bonus
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas M. McKay 1997 $239,934 $120,614 $28,455 (2)
President
- -----------------------------------------------------------------------------------------------------------
Donald J. Varner 1997 $126,588 $ 56,418 $24,823 (3)
Secretary
- -----------------------------------------------------------------------------------------------------------
Patrick A. Kelly 1997 $115,184 $ 54,859 $24,413 (4)
Treasurer
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to the Company of providing
such benefits to each named executive officer was less than 10% of his
cash compensation.
(2) Consists of directors' fees of $16,000 and matching contributions of
$2,375 and $7,220 and a discretionary contribution of $2,860 paid by
the Company to Mr. McKay's account in The Home Savings and Loan Company
of Youngstown, Ohio 401(k) Savings Plan (the "401(k) Plan").
(3) Consists of directors' fees of $15,600 and matching contributions of
$1,466 and $6,311 and a discretionary contribution of $1,446 paid by
the Company to Mr. Varner's account in the 401(k) Plan.
(4) Consists of directors' fees of $16,000 and matching contributions of
$1,266 and $5,861 and a discretionary contribution of $1,285 paid by
the Company to Mr. Kelly's account in the 401(k) Plan.
PENSION PLAN
The Company maintains and administers a defined benefit retirement plan
(the "Pension Plan"). Employees become eligible to participate in the Pension
Plan on the first day of the year coincident with or next following the later of
the date the employee (i) attains age 20, or (ii) completes six months of
continuous employment with the Company. Participants become 100% vested in the
Pension Plan upon completion of five years of service. Upon retirement at age 65
or after five years of service, vested participants are entitled to annual
benefits equal to the sum of: (i) .95% multiplied by the number of years for
which the employee was a participant in the Pension Plan, not to exceed 35
years, multiplied by the average of the highest five consecutive years of the
participant's annual salary during the final 10 years of the participant's
employment prior to retirement (the "Final Average Compensation"); (ii) .65%
multiplied by the number of years for which the employee was a participant in
the Pension Plan, not to exceed 35 years, multiplied by the amount of the Final
Average Compensation in excess of the average of Social Security taxable wage
basis for the 35-year period ending with the year of the employee's Social
Security Retirement Age (the "Covered Compensation"); and (iii) 1.5% multiplied
by the Final Average Compensation multiplied by the number of years for which
the employee was a participant in the Pension Plan in excess of 35 years, but
not to exceed five years. The Pension Plan permits early retirement after age 60
with 15 or more years of service at a reduced benefit level.
The Company's funding policy is to contribute amounts to the Pension
Plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
the Company may determine to be appropriate from time to time. Contributions are
-62-
<PAGE> 68
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
The following table indicates the annual retirement benefit that would
be payable under the Pension Plan upon retirement at age 65 to a participant
electing to receive his retirement benefit in the standard form of benefit:
<TABLE>
<CAPTION>
Years of credited service
Average compensation ---------------------------------------------------------------
(highest 5 years)(1) 15 20 25 30 35
------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
20,000 $2,545 $3,393 $4,242 $5,090 $5,938
30,000 3,818 5,090 6,363 7,635 8,908
40,000 5,538 7,384 9,230 11,076 12,922
50,000 7,681 10,242 12,802 15,363 17,923
60,000 9,824 13,099 16,374 19,649 22,924
70,000 11,968 15,957 19,946 23,935 27,925
100,000 18,398 24,530 30,663 36,795 42,928
150,000 29,114 38,818 48,523 58,227 67,932
</TABLE>
- ----------------------
(1) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Code is $160,000.
Mr. McKay, Mr. Kelly and Mr. Varner have 24.5, 14.92 and 40.83 years of
credited service under the Pension Plan, respectively. Their base salary and
bonuses are reported above in the Summary Compensation Table.
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 401(K) SAVINGS PLAN
The Company maintains the 401(k) Plan for all of its employees who are
age 20 or older and who have completed at least six months of service with the
Company. Pursuant to the 401(k) Plan, participants may elect to contribute up to
15% of their annual compensation on a tax-deferred basis. In addition, in its
sole discretion, the Company may make annual profit sharing contributions and
matching contributions to the 401(k) Plan for the benefit of participants. The
Company's 401(k) Plan expenses, including employer contributions, if any, for
the years ended December 31, 1997 and 1996, were $468,000 and $513,000,
respectively.
In connection with the Conversion, the Board of Directors of the
Company has amended the 401(k) Plan to allow participants to invest in the
Common Shares through the 401(k) Plan.
POSTRETIREMENT BENEFIT PLANS
In addition to the Company's retirement plans, the Company sponsors a
defined benefit health care plan (the "Postretirement Health Plan") that
provides postretirement medical benefits to full-time employees who have worked
15 years and attained age 60, or worked 5 years and attained age 65, while in
service with the Company. The Postretirement Health Plan is contributory and
contains minor cost-sharing features such as deductibles and coinsurance. In
addition, postretirement life insurance coverage is provided for employees who
were participants prior to December 10, 1976. The life insurance plan is
non-contributory. The Company's policy is to pay premiums monthly, with no
pre-funding.
STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. The Holding Company intends to establish
the ESOP for the benefit of employees of the Holding Company and its
subsidiaries, including the Company, who are age 20 or older and
-63-
<PAGE> 69
who have completed at least six months of service with the Holding Company and
its subsidiaries. The Board of Directors of the Holding Company believes that
the ESOP will be in the best interests of the Holding Company and its
shareholders.
The ESOP trust intends to borrow funds from the Holding Company with
which to acquire up to 8% of the Common Shares sold in connection with the
Conversion. Such loan will be secured by the Common Shares purchased with the
proceeds from the loan and will be repaid by the ESOP over a period of
approximately 15 years with contributions to the ESOP and earnings on ESOP
assets. The interest rate paid on the loan will be
___________________________________, which is currently _____%. Common Shares
purchased with such loan proceeds will be held in a suspense account for
allocation among ESOP participants as the loan is repaid.
The amount of cash or other assets that can be contributed to the ESOP
each year is limited by certain IRS regulations. The Company may make the
contribution to the ESOP, to the extent permitted by such regulations, to prepay
the ESOP loan in fewer than 15 years. A shorter repayment period could result in
increased compensation expense during the years in which payments are made on
the ESOP loan. See "PRO FORMA DATA."
Contributions to the ESOP and shares released from the suspense account
will be allocated pro rata to participants on the basis of compensation. Except
for participants who retire, become disabled, or die during the plan year, all
other participants must have completed at least 1,000 hours of service during a
plan year in order to receive an allocation. Benefits become fully vested after
five years of service. Vesting will be accelerated upon retirement or at age 65,
death, disability, termination of the ESOP, or change in control of the Holding
Company or the Company. Shares allocated to the account of a participant whose
employment by the Company terminates prior to such participant having satisfied
the vesting requirement will be forfeited. Forfeitures will be reallocated among
remaining participating employees. Benefits may be paid either in the Holding
Company common shares or in cash. Benefits may be payable upon retirement,
death, disability, or separation from service. Benefits payable under the ESOP
cannot be estimated.
A committee appointed by the Board of Directors of the Holding Company
will administer the ESOP. The Common Shares and other ESOP funds will be held by
a trustee selected and appointed by the Holding Company (the "ESOP Trustee").
The ESOP Committee may instruct the ESOP Trustee regarding investments of funds
contributed to the ESOP. The ESOP Trustee must vote all common shares of the
Holding Company held in the ESOP that are allocated to the accounts of ESOP
participants in accordance with the instructions of such participants. Common
shares held by the ESOP that are not allocated to participants' accounts and
allocated shares for which voting instructions are not received will be voted by
the ESOP Trustee in its sole discretion.
The tax-qualified status of the ESOP and its purchase of the Common
Shares of the Holding Company are subject to the subsequent approval of the
Commissioner of the IRS (the "Commissioner"). The Holding Company will submit to
the Commissioner an application for approval of the ESOP. Although no assurances
can be given, the Holding Company expects that the ESOP will be approved by the
Commissioner.
STOCK OPTION PLAN. After the completion of the Conversion, the Board of
Directors of the Holding Company intends to adopt the Stock Option Plan, subject
to approval by the shareholders of the Holding Company. The purposes of the
Stock Option Plan include retaining and providing incentives to the directors,
officers, and employees of the Holding Company and its subsidiaries by
facilitating their purchase of a stock interest in the Holding Company.
Options granted to the officers and employees under the Stock Option
Plan may be "incentive stock options" within the meaning of Section 422 of the
Code ("ISOs"). Options granted under the Stock Option Plan to directors who are
not full-time employees of the Holding Company or the Company will not qualify
under the Code and thus will not be ISOs ("Non-qualified Options"). Although any
eligible director, officer, or employee
-64-
<PAGE> 70
of the Holding Company or the Company may receive Non-qualified Options, it is
anticipated that the non-employee directors will receive Non-qualified Options
and other eligible participants will receive ISOs.
The option exercise price will be determined by the Stock Option
Committee at the time of grant; provided, however, that the exercise price for
an ISO, or for any option if the Stock Option Plan is implemented by the Holding
Company during the first year following completion of the Conversion, must not
be less than 100% of the fair market value of the shares on the date of the
grant. No stock option will be exercisable after the expiration of ten years
from the date of grant, except that in the case of an ISO granted to an employee
who owns more than 10% of the Holding Company's outstanding common shares at the
time such ISO is granted under the Stock Option Plan, the exercise price of the
ISO may not be less than 110% of the fair market value of the shares on the date
of the grant and the ISO may not be exercisable after the expiration of five
years from the date of grant.
An option recipient cannot transfer or assign an option other than by
will, in accordance with the laws of descent and distribution. "Termination for
cause," as defined in the Stock Option Plan, will result in the termination of
any outstanding options.
The Holding Company will receive no monetary consideration for the
granting of options under the Stock Option Plan. Upon the exercise of options,
the Holding Company will receive a payment of cash, common shares of the Holding
Company, or a combination of cash and common shares from option recipients in
exchange for shares issued.
A number of shares equal to 10% of the Common Shares sold in the
Offering is expected to be reserved for issuance by the Holding Company upon the
exercise of options to be granted to certain directors, officers, and employees
of the Holding Company and its subsidiaries from time to time under the Stock
Option Plan. No determination has been made regarding the recipients of awards
under the Stock Option Plan or the number of shares to be awarded to individual
recipients. The Stock Option Committee may grant options under the Stock Option
Plan to the directors, officers, and employees of the Holding Company and the
Company at such times as they deem most beneficial to the Holding Company on the
basis of the individual participant's responsibility, tenure, and future
potential.
Under OTS regulations, no stock options may be awarded during the first
year after the completion of the Conversion unless the Stock Option Plan is
approved by the shareholders of the Holding Company at an annual or a special
meeting of shareholders held not less than six months following the completion
of the Conversion. If the Stock Option Plan is approved by the Holding Company
shareholders at such meeting and implemented during the first year after the
completion of the Conversion, the following restrictions will apply: (i) the
number of shares which may be subject to options awarded under the Stock Option
Plan to directors who are not full-time employees of the Holding Company may not
exceed 5% per person and 30% in the aggregate of the available shares; (ii) the
number of shares which may be subject to options awarded under the Stock Option
Plan to any individual who is a full-time employee of the Holding Company or its
subsidiaries may not exceed 25% of the available shares; (iii) stock options
must be awarded with an exercise price at least equal to the fair market value
of the common shares of the Holding Company at the time of the award; and (iv)
stock options will become exercisable at the rate of one-fifth per year
commencing no earlier than one year from the date of the award, subject to
acceleration of vesting only in the event of the death or disability of a
participant. The ultimate value of any option granted at fair market value will
depend on future appreciation in the fair market value of the shares to which
the option relates. No decision has been made as to anticipated awards under the
Stock Option Plan.
RECOGNITION AND RETENTION PLAN. After the completion of the Conversion,
the Company intends to adopt the RRP. The purpose of the RRP is to provide
directors, officers, and certain key employees of the Company with an ownership
interest in the Holding Company in a manner designed to compensate such
-65-
<PAGE> 71
directors, directors emeritus, officers, and key employees for services to the
Company. The Company expects to contribute sufficient funds to enable the RRP to
purchase up to 4% of the Common Shares sold in the Offering. The Company will
receive no monetary consideration from the recipients for the awards of shares
under the RRP.
The RRP Committee will administer the RRP and determine the number of
shares to be granted to eligible participants. Each participant granted shares
under the RRP will be entitled to the benefit of any dividends or other
distributions paid on such shares prior to the shares being earned, although
dividends or other distributions on shares held in the RRP Trust will not be
distributed to the participant until the shares are distributed to the
participant. Compensation expense in the amount of the fair market value of the
RRP shares will be recognized as the shares are earned.
No determination has been made regarding recipients of RRP awards or the number
of shares to be awarded to individual recipients. Under OTS regulations, no RRP
shares may be awarded during the first year after the completion of the
Conversion unless the RRP is approved by the shareholders of the Holding Company
at an annual meeting or a special meeting of shareholders held not less than six
months following the completion of the Conversion. If the RRP is approved by the
Holding Company shareholders at such meeting and implemented during the first
year after the completion of the Conversion, the following restrictions will
apply: (i) the number of shares which may be subject to awards under the RRP to
directors and directors emeritus who are not full-time employees of the Holding
Company or its subsidiaries may not exceed 5% per person and 30% in the
aggregate of the available shares; (ii) the number of shares which may be
subject to awards under the RRP to any individual who is a full-time employee of
the Holding Company or its subsidiaries may not exceed 25% of the available
shares; and (iii) RRP awards will be earned at the rate of one-fifth per year
commencing no earlier than one year from the date of the award subject to
acceleration of vesting only in the event of the death or the disability of the
participant.
EMPLOYMENT AGREEMENTS
The Company currently has no employment agreements with any of its
officers. The Company intends to enter into employment agreements with Douglas
M. McKay, Donald J. Varner and Patrick A. Kelly (collectively, the "Employment
Agreements"). Each of the Employment Agreements will provide for a term of three
years and performance reviews by the Board of Directors not less often than
annually at which time the Employment Agreement may be extended for a period of
one year. The Employment Agreements will also provide for the inclusion of the
officers in any formally established employee benefit, bonus, pension, and
profit-sharing plans for which senior management personnel are eligible and for
vacation and sick leave in accordance with the Company's prevailing policies.
The Employment Agreements will be terminable by the Company at any
time. In the event of termination by the Company for "just cause," as defined in
the Employment Agreements, the employee will have no right to receive any
compensation or other benefits for any period after such termination. In the
event of termination by the Company other than for just cause, at the end of the
term of an Employment Agreement or in connection with a "change of control," as
defined in the Employment Agreements, the employee will be entitled to a
continuation of salary payments for a period of time equal to the remaining term
of an Employment Agreement and a continuation of benefits substantially equal to
those being provided at the date of termination of his employment until the
earliest to occur of the end of the term of the Employment Agreement or the date
on which the employee becomes employed full-time by another employer.
Each Employment Agreement also will contain provisions with respect to
the occurrence within one year of a "change of control" of (1) the termination
of the employee's employment for any reason other than just cause, retirement,
or termination at the end of the term of the agreement, or (2) a constructive
termination resulting from change in the capacity or circumstances in which the
employee is employed or a material reduction in his responsibilities, authority,
compensation, or other benefits provided under the Employment
-66-
<PAGE> 72
Agreement without the employee's written consent. In the event of any such
occurrence, the employee will be entitled to payment of an amount equal to three
times the employee's annual compensation immediately preceding the termination
of his employment. In addition, the employee will be entitled to continued
coverage under all benefit plans until the earliest of the end of the term of
his Employment Agreement or the date on which he is included in another
employer's benefit plans as a full-time employee. The maximum which the employee
may receive, however, is limited to an amount which will not result in the
imposition of a penalty tax pursuant to Section 280G(b)(3) of the Code.
"Control," as defined in the Employment Agreements, generally refers to the
acquisition by any person or entity of the ownership or power to vote 10% or
more of the voting stock of the Company or the Holding Company, the control of
the election of a majority of the directors of the Company or the Holding
Company, or the exercise of a controlling influence over the management or
policies of the Company or the Holding Company.
The aggregate payments that would have been made to Messrs. McKay,
Varner and Kelly pursuant to the Employment Agreements, assuming their
termination at December 31, 1997, following a change of control, would have been
approximately $720,000, $380,000 and $246,000, respectively.
CERTAIN TRANSACTIONS WITH THE COMPANY
In accordance with regulations of the OTS and the State of Ohio, the
Company makes loans to executive officers and directors of the Company in the
ordinary course of business and on the same terms and conditions, including
interest rates and collateral, as those generally available to the Company's
customers. All outstanding loans to executive officers and directors comply with
such policy, do not involve more than the normal risk of collectibility or
present other unfavorable features and are current in their payments. Loans to
directors and executive officers of the Company and their related interests
totaled $1.3 million at December 31, 1997.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio,
the Company is subject to regulation, examination and oversight by the OTS and
the Superintendent of the Division (the "Ohio Superintendent"). Because the
Company's deposits are insured by the FDIC, the Company also is subject to
general oversight by the FDIC. The Company must file periodic reports with the
OTS, the Ohio Superintendent and the FDIC concerning its activities and
financial condition. Examinations are conducted periodically by federal and
state regulators to determine whether the Company is in compliance with various
regulatory requirements and is operating in a safe and sound manner. The Company
is a member of the FHLB of Cincinnati.
The Holding Company will be a savings and loan holding company within
the meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently,
the Holding Company will be subject to regulation, examination, and oversight by
the OTS and will be required to submit periodic reports to the OTS. Because the
Holding Company and the Company are corporations organized under Ohio law, they
are also subject to the provisions of the Ohio Revised Code applicable to
corporations generally.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and the Company may
be regulated under federal law as a bank or be required to change its charter.
Such change in regulation or charter would likely change the range of activities
in which the Company may engage and would probably subject the Company to more
regulation by the FDIC. In
-67-
<PAGE> 73
addition, the Holding Company might become subject to different holding company
regulations, including separate capital requirements. At this time, the Holding
Company cannot predict when or whether Congress may actually pass legislation
regarding the Holding Company's and the Company's regulatory requirements or
charter. Although such legislation may change the activities in which either the
Holding Company and the Company may engage, it is not anticipated that the
current activities of the Holding Company or the Company will be materially
affected by those activity limits.
OHIO SAVINGS AND LOAN LAW
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio. Ohio law prescribes the permissible investments and
activities of Ohio savings and loan associations, including the types of lending
that such associations may engage in and the investments in real estate,
subsidiaries, and corporate or government securities that such associations may
make. The ability of Ohio associations to engage in these state-authorized
investments and activities is subject to oversight and approval by the FDIC, if
such investments or activities are not permissible for a federally chartered
savings and loan association.
The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations. The
Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Ohio Superintendent may place an Ohio association in
conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of the Company
approximately once every eighteen months. Such examinations are usually
conducted jointly with one or both federal regulators. The Ohio Superintendent
imposes assessments on Ohio associations based on their asset size to cover the
cost of supervision and examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally chartered
savings and loan associations and all other savings and loan associations the
deposits of which are insured by the FDIC. The OTS issues regulations governing
the operation of savings and loan associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the costs of this supervision and examination. The OTS also
may initiate enforcement actions against savings and loan associations and
certain persons affiliated with them for violations of laws or regulations or
for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings and loan
association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area. The Company has received
a "satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. The Company is required by OTS
regulations to meet certain minimum capital requirements. For information
regarding the Company's regulatory capital at December 31, 1997, and pro forma
regulatory capital after giving effect to the Conversion, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources" and "REGULATORY CAPITAL COMPLIANCE."
-68-
<PAGE> 74
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for the Company consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital (which
for the Company consists of core capital and general valuation allowances) of
8.0% of risk-weighted assets (assets, including certain off-balance sheet items,
are weighted at percentage levels ranging from 0% to 100% depending on the
relative risk).
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the Company's examination rating and overall risk. The Company
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the Company will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset
and Liability Management."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (i) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (ii) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of 8%, core
risk-based capital of 4%, and core capital of 4% (except for associations
receiving the highest examination rating, in which case the level is 3%) but are
not well-capitalized; (iii) undercapitalized associations are those that do not
meet regulatory limits, but that are not significantly undercapitalized; (iv)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital of less than 3% or core capital of less
than 3%; and (v) critically undercapitalized associations are those with core
capital of less than 2% of total assets. In addition, the OTS generally can
downgrade an association's capital category, notwithstanding its capital level,
if, after notice and opportunity for hearing, the association is deemed to be
engaging in an unsafe or unsound practice because it has not corrected
deficiencies that resulted in it receiving a less than satisfactory examination
rating on matters other than capital or it is deemed to be in an unsafe or
unsound condition. An undercapitalized association must submit a capital
restoration plan to the OTS within 45 days after it becomes undercapitalized.
Undercapitalized associations will be subject to increased monitoring and asset
growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Critically
undercapitalized institutions must be placed in conservatorship or receivership
within 90 days of reaching that capitalization level, except under limited
circumstances. The Company's capital at December 31, 1997, meets the standards
for a well-capitalized institution.
Federal law prohibits a savings and loan association from making a
capital distribution to anyone or paying management fees to any person having
control of the association if, after such distribution or payment, the
association would be undercapitalized. In addition, each company controlling an
undercapitalized association
-69-
<PAGE> 75
must guarantee that the association will comply with its capital plan until the
association has been adequately capitalized on an average during each of four
preceding calendar quarters and must provide adequate assurances of performance.
The aggregate liability pursuant to such guarantee is limited to the lesser of
(i) an amount equal to 5% of the association's total assets at the time the
association became undercapitalized or (ii) the amount that is necessary to
bring the association into compliance with all capital standards applicable to
such association at the time the association fails to comply with its capital
restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits,
association's acceptances, and specified United States Government, state or
federal agency obligations) equal to a monthly average of not less than 4% of
its net withdrawable savings deposits plus borrowings payable in one year or
less. Monetary penalties may be imposed upon member institutions failing to meet
liquidity requirements. The eligible liquidity of the Company at December 31,
1997, was approximately $101.7 million, or 11.48%, which exceeded the applicable
4% liquidity requirement by approximately $66.2 million. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources."
QUALIFIED THRIFT LENDER TEST. Prior to September 30, 1996, the QTL test
required savings associations to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include stock issued by any FHLB, the FHLMC or the FNMA. Under this test 65%
of an institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business, and 20% of liquid assets) must
consist of QTI on a monthly average basis in 9 out of every 12 months. Congress
created a second QTL test, effective September 30, 1996, pursuant to which a
savings association may also qualify as a QTL thrift if at least 60% of the
institution's assets (on a tax basis) consist of specified assets (generally
loans secured by residential real estate or deposits, educational loans, cash,
and certain governmental obligations). The OTS may grant exceptions to the QTL
test under certain circumstances. If a savings association fails to meet the QTL
test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL test will not be eligible for new FHLB advances. At December 31, 1997,
the Company met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower or group of related
borrowers to an amount equal to 15% of the association's Lending Limit Capital.
A savings association may lend to one borrower an additional amount not to
exceed 10% of the association's Lending Limit Capital, if the additional amount
is fully secured by certain forms of "readily marketable collateral." Real
estate is not considered "readily marketable collateral." Certain types of loans
are not subject to this limit. In applying this limit, the regulations require
that loans to certain related borrowers be aggregated. An exception to this
limit permits loans of any type to one borrower up to $500,000.
Based on such limits, the Company was able to lend approximately $22.0
million to one borrower at December 31, 1997. The largest amount the Company had
outstanding to one borrower at December 31, 1997, was $15.2 million, which
consisted of four loans secured by first mortgage liens on freezer warehouses.
At December 31, 1997, such loans were performing in accordance with their terms.
See "THE BUSINESS OF THE COMPANY - Lending Activities -- Loan to One Borrower
Limits."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors, and principal shareholders and their related interests must conform
to the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders, and their related
interests cannot exceed the Company's Lending Limit Capital (or 200% of Lending
Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers, and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the Company with any "interested" director not
participating. All loans to directors, executive officers, and principal
shareholders must
-70-
<PAGE> 76
be made on terms substantially the same as offered in comparable transactions
with the general public or as offered to all employees in a company-wide benefit
program, and loans to executive officers are subject to additional limitations.
The Company was in compliance with such restrictions at December 31, 1997.
All transactions between a savings association and its affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with, the savings association. The
Holding Company will be an affiliate of the Company. Generally, Sections 23A and
23B of the FRA (i) limit the extent to which a savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, (ii) limit
the aggregate of all such transactions with all affiliates to an amount equal to
20% of such capital stock and surplus, and (iii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
association, as those provided in transactions with a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee, and other similar types of transactions. In addition to the
limits in Sections 23A and 23B, a savings association may not make any loan or
other extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for a bank holding company and may not purchase or
invest in securities of any affiliate except shares of a subsidiary. The Company
was in compliance with these requirements and restrictions at December 31, 1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends,
repurchases, and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association.
For purposes of the capital distribution regulations, each institution
is categorized in one of three tiers. Tier 1 consists of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of their net
income, current year-to-date, plus 50% of the amount by which the lesser of such
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a tier 2 association. A tier 2
association meets its current minimum, but not fully phased-in capital
requirement before and after a proposed capital distribution. An association in
this category may make capital distributions up to 75% of its net income over
the most recent four quarters. A Tier 3 association is one which does not meet
its current minimum capital requirement and must obtain OTS approval of any
capital distribution. A tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a tier 2 or tier 3
association. The Company meets the requirements for a tier 1 association and has
not been notified of any need for more than normal supervision.
The Company will also be prohibited from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the net worth
of the Company would be reduced below the amount required to be maintained for
the liquidation account established in connection with the Conversion. See "THE
CONVERSION - Principal Effects of the Conversion - Liquidation Account." In
addition, as a subsidiary of the Holding Company, the Company will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the dividend during that 30-day period based on
safety and soundness concerns. Moreover, the OTS may prohibit any capital
distribution otherwise permitted by regulation if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Pursuant to OTS
policy, as a condition to approval of the Conversion, the Company will be
required to state that it will not undertake a tax-free return of capital for a
period of one year following completion of the Conversion.
-71-
<PAGE> 77
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, an association which is not owned by
a holding company and which has an examination rating of 1 or 2 could make a
capital distribution without notice to the OTS, if it remains adequately
capitalized, as described above, after the distribution is made. Any other
association seeking to make a capital distribution that would not cause the
association to fall below the capital levels to qualify as adequately
capitalized or better, would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distributions would be
permitted if it caused the association to become undercapitalized.
HOLDING COMPANY REGULATION. After the Conversion, the Holding Company
will be a savings and loan holding company within the meaning of the HOLA. As
such, the Holding Company will register with the OTS and will be subject to OTS
regulations, examination, supervision, and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings and loan association or savings and loan holding
company, without prior approval of the OTS, or from acquiring or retaining more
than 5% of the voting shares of a savings and loan association or holding
company thereof, which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval of
the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings and loan association for cash without being deemed to
control the association. Except with the prior approval of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Holding Company will be a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies and such companies are the only
financial institution holding companies which may engage in commercial,
securities, and insurance activities without limitation. The broad latitude
under current law can be restricted if the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings and loan association. The OTS
may impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings and loan association; (ii)
transactions between the savings and loan association and its affiliates; and
(iii) any activities of the savings and loan association that might create a
serious risk that the liabilities of the holding company and its affiliates may
be imposed on the savings and loan association. Notwithstanding the foregoing
rules as to permissible business activities of a unitary savings and loan
holding company, if the savings and loan association subsidiary of a holding
company fails to meet the QTL, then such unitary holding company would become
subject to the activities restrictions applicable to multiple holding companies.
At December 31, 1997, the Company met the QTL. See "Qualified Thrift Lender
Test."
Congress is considering legislation which may limit the Holding
Company's ability to engage in these activities and the Holding Company cannot
predict if and in what form these proposals might become law. However, such
limits would not impact the Holding Company's initial activity of holding stock
of the Company.
If the Holding Company were to acquire control of another savings
institution, other than through a merger or other business combination with the
Company, the Holding Company would become a multiple savings and loan holding
company. Unless the acquisition is an emergency thrift acquisition and each
subsidiary savings and loan association meets the QTL, the activities of the
Holding Company and any of its subsidiaries (other than the Company or other
subsidiary savings and loan associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution; (ii) conducting an insurance
-72-
<PAGE> 78
agency or escrow business; (iii) holding, managing or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies; or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies, and which have
been approved by the OTS prior to being engaged in by a multiple holding
company.
The OTS may approve an acquisition resulting in the formation of a
multiple savings and loan holding company that controls savings and loan
associations in more than one state only if the multiple savings and loan
holding company involved controls a savings and loan association that operated a
home or branch office in the state of the Company to be acquired as of March 5,
1987, or if the laws of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions). As under prior law, the OTS may approve
an acquisition resulting in a multiple savings and loan holding company
controlling savings and loan associations in more than one state in the case of
certain emergency thrift acquisitions. Bank holding companies have had more
expansive authority to make interstate acquisitions than savings and loan
holding companies since August 1995.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the banking and
thrift industries. The FDIC administers two separate insurance funds, the Bank
Insurance Fund (the "BIF") for commercial banks and state savings banks and the
SAIF for savings associations. The FDIC is required to maintain designated
levels of reserves in each fund. The Company's deposit accounts are insured by
the FDIC in the SAIF up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including the Company, and
has authority to initiate enforcement actions against federally insured savings
associations if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on the Company and other
institutions in the SAIF.
Federal legislation which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves
to the level required by law. Certain banks holding SAIF deposits are required
to pay the same special assessment on 80% of deposits at March 31, 1995. In
addition, the cost of prior thrift failures, which had previously been paid only
by SAIF members, will also be paid by BIF members. As a result, BIF assessments
-73-
<PAGE> 79
for healthy banks in 1997 were $.013 per $100 in deposits, and SAIF assessments
for healthy institutions in 1997 were $.064 per $100 in deposits.
The Company had $904.4 million in deposits at March 31, 1995. The
Company paid a special assessment of approximately $5.9 million in November
1996, which was accounted for and recorded as of September 30, 1996. This
assessment was tax-deductible but reduced earnings for the year ended December
31, 1996.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8
million (subject to an exemption of up to $4.7 million), and of 10% of net
transaction accounts over $47.8 million. At December 31, 1997, the Company was
in compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See
"THE BUSINESS OF THE COMPANY - Deposits and Borrowings." The Company is a member
of the FHLB of Cincinnati and must maintain an investment in the capital stock
of the FHLB of Cincinnati in an amount equal to the greater of 1% of the
aggregate outstanding principal amount of the Company's residential mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year, and 5% of its advances from the FHLB. The Company is in compliance with
this requirement with an investment in stock of the FHLB of Cincinnati of $11.1
million at December 31, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
U.S. Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the applicable FHLB, if such collateral has a readily ascertainable value and
the FHLB can perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
TAXATION
FEDERAL TAXATION
The Holding Company and the Company are each subject to the federal tax
laws and regulations which apply to corporations generally. In addition to the
regular income tax, the Holding Company and the Company may be subject to an
alternative minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum
-74-
<PAGE> 80
taxable income. Net operating losses can offset no more than 90% of alternative
minimum taxable income. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax. Payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years. The
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1997. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period do
not exceed $7,500,000. In determining if a corporation meets this requirement,
the first year that it achieved small corporation status is not taken into
consideration.
Based on the Company's average gross receipts of approximately $82.9
million for the three tax years ending on December 31, 1997, the Company would
not qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, were allowed deductions for bad debts under methods more
favorable than those granted to other taxpayers. Qualified thrift institutions
could compute deductions for bad debts using either the specific charge off
method of Section 166 of the Code, or one of the two reserve methods of Section
593 of the Code. The reserve methods under Section 593 of the Code permitted a
thrift institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after December 31, 1995. Thrift institutions that would
be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that becomes a
large bank, the amount of the institution's applicable excess reserves generally
is the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its reserve
for losses on nonqualifying loans (all other types of loans) as of the close of
its last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or
-75-
<PAGE> 81
(b) what the thrift's reserves would have been at the close of its last year
beginning before January 1, 1996, had the thrift always used the experience
method.
For taxable years that begin on or after January 1, 1996, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential origination loan requirement if, for
the tax year, the principal origination amount of residential loans made by the
thrift during the year is not less then its base amount. The "base amount"
generally is the average of the principal origination amounts of the residential
loans made by the thrift during the six most recent tax years beginning before
January 1, 1996. A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential real and church
property and certain mobile homes), but only to the extent that the loan is made
to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture in
the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (excess to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by the Company to the
Holding Company is deemed paid out of its pre-1988 reserves under these rules,
the pre-1988 reserves would be reduced and the Company's gross income for tax
purposes would be increased by the amount which, when reduced by the income tax,
if any, attributable to the inclusion of such amount in its gross income, equals
the amount deemed paid out of the pre-1988 reserves. As of December 31, 1997,
the Company's pre-1988 reserves for tax purposes totaled approximately $14.4
million. The Company believes it had approximately $140.0 million of accumulated
earnings and profits for tax purposes as of December 31, 1997, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. See "REGULATION - Office of
Thrift Supervision -- Limitations on Capital Distributions." No representation
can be made as to whether the Company will have current or accumulated earnings
and profits in subsequent years.
The tax returns of the Company have been audited or closed without
audit through fiscal year 1994. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Company.
OHIO TAXATION
The Holding Company is subject to the Ohio corporation franchise tax,
which, as applied to the Holding Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 and (ii) 0.582% times taxable net worth. Under these
alternative measures of computing tax liability, the states to which a
taxpayer's adjusted total net income and adjusted total net worth are
apportioned or allocated are determined by complex formulas. The minimum tax is
$50 per year.
A special litter tax is also applicable to all corporations, including
the Holding Company, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to .014%
times taxable net worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequences of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net
-76-
<PAGE> 82
worth. In general, tax liability will be the greater of (i) 5.1% on the first
$50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income
in excess of $50,000 or (ii) 0.40% of taxable net worth. Under these alternative
measures of computing tax liability, the states to which total net income and
total net worth will be apportioned or allocated will continue to be determined
by complex formulas, but the formulas change. The minimum tax will still be $50
per year and maximum tax liability as measured by net worth will be limited to
$150,000 per year. The special litter taxes remain in effect. Various other
changes in the tax law may affect the Holding Company.
The Company is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Company's apportioned book net worth, determined in accordance with GAAP, less
any statutory deduction. This rate of tax is scheduled to decrease in each of
the years 1999 and 2000. As a "financial institution," the Company is not
subject to any tax based upon net income or net profits imposed by the State of
Ohio.
THE CONVERSION
THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE
APPROVAL OF THE PLAN BY THE MEMBERS OF THE COMPANY ENTITLED TO VOTE ON THE PLAN
AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS
AND THE DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN.
GENERAL
On December 9, 1997, the Board of Directors of the Company unanimously
adopted the Plan and recommended that the voting members of the Company approve
the Plan at the Special Meeting. During and upon completion of the Conversion,
the Company will continue to provide the services presently offered to
depositors and borrowers, will maintain its existing offices, and will retain
its existing management and employees.
Based on the current Adjusted Valuation Range, between 21,250,000 and
28,937,500 Common Shares are expected to be offered in the Subscription Offering
and the Community Offering at a price of $10 per share. Applicable regulations
permit the Holding Company to issue up to 33,465,625 Common Shares with an
aggregate purchase price of $334,656,250. Federal regulations require, with
certain exceptions, that shares offered in connection with the Conversion must
be sold up to at least the minimum point of the Adjusted Valuation Range in
order for the Conversion to become effective. The actual number of Common Shares
sold in connection with the Conversion will be determined upon completion of the
Offering based on the final valuation of the Company, as converted, and the
Holding Company. See "Pricing and Number of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering to the ESOP and
certain present and former depositors of the Company. Any Common Shares not
subscribed for in the Subscription Offering will be offered to the general
public in the Community Offering in a manner which will seek to achieve the
widest distribution of the Common Shares, but which will give preference to
natural persons residing in Columbiana, Mahoning and Trumbull, Counties, Ohio.
Under OTS regulations, the Community Offering must be completed within 45 days
after completion of the Subscription Offering, unless such period is extended by
the Company with the approval of the OTS and the Division. Shares not subscribed
for in the Subscription Offering or the Community Offering will be offered to
the general public in the Public Offering. If the Community Offering and the
Public Offering are determined not to be feasible, an occurrence that is not
currently anticipated, the Boards of Directors of the Holding Company and the
Company will consult with the OTS and the Division to determine
-77-
<PAGE> 83
an appropriate alternative method of selling unsubscribed Common Shares up to
the minimum of the Adjusted Valuation Range. No alternative sales methods are
currently planned.
OTS and Ohio regulations require the completion of the Conversion
within 24 months after the date of the approval of the Plan by the voting
members of the Company. The commencement and completion of the Conversion will
be subject to market conditions and other factors beyond the Company's control.
Due to changing economic and market conditions, no assurance can be given as to
the length of time that will be required to complete the sale of the Common
Shares. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Company. In such circumstances, the
Company may also incur substantial additional printing, legal and accounting
expenses in completing the Conversion. In the event the Conversion is not
successfully completed, the Company will be required to charge all Conversion
expenses against current earnings.
REASONS FOR THE CONVERSION
The principal factors considered by the Company's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion were the numerous
competitive advantages which the stock form of organization offers, including
growth opportunities, employee retention through the use of stock-based benefit
plans, and increased capital levels.
If the Company is to continue to grow and prosper, the mutual form of
organization is the least desirable form from a competitive standpoint. The
opportunities for a mutual to expand through mutual-to-mutual mergers or
acquisitions are limited. Although the Company does not have any specific
acquisitions planned at this time, the Conversion will position the Company to
take advantage of any acquisition opportunities which may present themselves.
Because a conversion to stock form is a time-consuming and complex process, the
Company cannot wait until an acquisition is imminent to embark on the conversion
process.
As an increasing number of the Company's competitors convert to stock
form and acquire the ability to use stock-based compensation programs, the
Company, in mutual form, would be at a disadvantage when it comes to attracting
and retaining qualified management. The Company believes that the ESOP, the
Stock Option Plan and the RRP are important tools in achieving such goals. See
"MANAGEMENT - Stock Benefit Plans."
CONTRIBUTION TO THE FOUNDATION
GENERAL. The Plan provides that the Holding Company and the Company may
contribute common shares to the Foundation. The Company believes that the
contribution to the Foundation will enhance the long-term value of the Company's
community banking franchise by enhancing the Company's visibility and reputation
in the communities that it serves. The Foundation is dedicated to charitable
purposes within the communities served by the Company, including community
development activities.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. The
Foundation was formed in 1991 to augment the Company's community activities. The
Foundation is dedicated exclusively to community activities and the promotion of
charitable causes, and may be able to support such activities in ways that are
not currently available to the Company. The Board of Directors believes that the
contribution of common shares to the Foundation is consistent with the Company's
commitment to community service and to the Company's CRA responsibilities.
Funding of the Foundation with Common Shares will enable the communities served
by the Company to share in the growth and success of the Company and the Holding
Company long after completion of the Conversion. The Foundation enables the
Company and the Holding Company to develop a unified charitable donation
strategy with centralized responsibility for administration and allocation of
corporate charitable funds and enables the Company to provide a consistent level
of community support in future years, regardless of future earnings. The
-78-
<PAGE> 84
Company, however, does not expect the contribution to the Foundation to take the
place of the Company's traditional community lending activities.
STRUCTURE OF THE FOUNDATION. The Foundation is a charitable trust
established exclusively for charitable purposes, including community
development, as set forth in Section 501(c)(3) of the Code. The trust agreement
provides that no part of the net earnings of the Foundation will inure to the
benefit of any private shareholder or individual.
The authority for the administration of the Foundation is vested in an
independent trustee. The Company has the power to direct the trustee with
respect to distributions by the Foundation, consistent with the purposes for
which the Foundation was established.
The Holding Company proposes to contribute to the Foundation
immediately following the Conversion, out of authorized but unissued common
shares, a number of shares equal to 5% of the Common Shares issued in the
Conversion, subject to the overall limitation of 1,250,000 common shares. Such
contribution would equal 1,062,500 common shares at the minimum of the Adjusted
Valuation Range and 1,250,000 common shares at the mid-point, maximum and
adjusted maximum of the Adjusted Valuation Range, which would have a market
value of $10,625,000 and $12,500,000, respectively, based on the purchase price
of $10 per share. The Company and the Holding Company determined to fund the
Foundation with common shares to enhance the ties between the Company and the
communities it serves by allowing the communities to share in the growth and
success of the Company and the Holding Company over the long term. The funding
of the Foundation with Common Shares also provides the Foundation with a
potentially larger endowment than if the Holding Company contributed cash to the
Foundation since, as a shareholder, the Foundation will share in the growth and
success of the Holding Company. The contribution of Common Shares to the
Foundation has the potential to provide a self-sustaining funding mechanism to
enable the Company to maintain a consistent level of charitable grants and
donations regardless of the Company's income.
The Foundation will receive working capital from any dividends that may
be paid on the Common Shares in the future. Subject to applicable federal and
state laws, the Foundation may also obtain funds through loans collateralized by
the Common Shares or from the proceeds of the sale of any of the Common Shares
in the open market from time to time to provide the Foundation with additional
liquidity. As a private foundation under Section 501(c)(3) of the Code, the
Foundation will be required to distribute annually in grants or donations, a
minimum of 5% of the average fair market value of its net investment assets.
Upon completion of the Conversion and the contribution of shares to the
Foundation immediately following the Conversion, the Holding Company would have
22,312,500, 26,250,000, 30,187,500 and 34,715,265 shares issued and outstanding
at the minimum, mid-point, maximum and adjusted maximum of the Adjusted
Valuation Range, respectively. Because the Company will have an increased number
of shares outstanding, the voting and ownership interests of shareholders in the
Holding Company's Common Shares would be diluted as compared to their interests
in the Holding Company if the Foundation were not established. Assuming the sale
of Common Shares at the maximum of the Adjusted Valuation Range and the issuance
of 1,250,000 common shares to the Foundation, there will be a dilution of
approximately 4.14% to the membership and voting interests in the Holding
Company of the persons purchasing Common Shares in the Conversion. For
additional discussion of the dilutive effect, see "PRO FORMA DATA."
TAX CONSIDERATIONS. The Foundation qualifies as a Section 501(c)(3)
exempt organization under the Code, and is classified as a private foundation.
Under the Code, the Holding Company is generally allowed a deduction
for charitable contributions made to qualifying donees within the taxable year
of up to 10% of its taxable income (with certain modifications) for such year.
Charitable contributions made by the Holding Company in excess of the annual
deductible amount will be deductible over each of the five succeeding taxable
years, subject to certain limitations. The Company
-79-
<PAGE> 85
and the Holding Company believe that the Conversion presents a unique
opportunity to establish and fund the Foundation given the substantial amount of
additional capital being raised in the Conversion. In making such a
determination, the Company and the Holding Company considered the dilutive
impact of the contribution of Common Shares to the Foundation on the amount of
Common Shares available to be offered for sale in the Conversion. Based on such
consideration, the Company and Holding Company believe that the contribution to
the Foundation in excess of the 10% annual deduction limitation is justified
given the Company's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation to the communities served by the Company. In this regard,
assuming the sale of the Common Shares at the mid-point of the Adjusted
Valuation Range, the Holding Company would have pro forma shareholders' equity
of $360.7 million, or 28.6% of pro forma consolidated assets, and the Company's
pro forma tangible, core and total risk-based capital ratios would be 18.78%,
18.78% and 39.62%, respectively. See "REGULATORY CAPITAL COMPLIANCE,"
"CAPITALIZATION," AND "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
FOUNDATION." The amount of the contribution will not adversely impact the
financial condition of the Company and the Holding Company, and the Company and
the Holding Company therefore believe that the amount of the charitable
contribution is reasonable and is safe and sound given the Company's and the
Holding Company's pro forma capital positions.
The Company and the Holding Company have received an opinion of their
independent tax advisors that the Holding Company's contribution of its own
shares to the Foundation would not constitute an act of self-dealing, and that
the Holding Company will be entitled to a deduction in the amount of the fair
market value of the shares at the time of the contribution, subject to the
annual deduction limitation described above. The Holding Company, however, will
be able to carry forward any unused portion of the deduction for five years
following the contribution, subject to certain limitations. The Company's and
the Holding Company's independent tax advisors, however, have not rendered
advice as to the fair market value for purposes of determining the amount of the
tax deduction. The Holding Company is permitted under the Code to carry over the
excess contribution over the five-year period following the contribution to the
Foundation. Assuming the close of the Offering at the mid-point of the Adjusted
Valuation Range, the Holding Company estimates that all of the deduction should
be deductible over the six-year period. Neither the Company nor the Holding
Company expect to make any further contributions to the Foundation within the
first five years following the initial contribution. After that time, the
Company and the Holding Company may consider future contributions to the
Foundation. Any such decisions would be based on an assessment of, among other
factors, the financial condition of the Company and the Holding Company at that
time, the interests of shareholders of the Holding Company and the depositors of
the Company, and the financial condition and operations of the Foundation.
As a private foundation, earnings and gains, if any, from the sale of
common shares or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2%. The Foundation is required to make an annual
filing with the IRS within four and one-half months after the close of the
Foundation's fiscal year to maintain its tax-exempt status. The Foundation will
be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. The contribution to
the Foundation is expected to be subject to certain conditions agreed to by the
Foundation in writing as a condition to receiving OTS approval of the
Conversion.
APPROVAL OF THE FOUNDATION BY MEMBERS. The contribution of common
shares to the Foundation is subject to the approval of a majority of the total
outstanding votes eligible to be cast at the Special Meeting. If
-80-
<PAGE> 86
the Company's members approve the Plan, but not the contribution to the
Foundation, the Company intends to complete the Conversion without the
contribution to the Foundation. The elimination of the contribution to the
Foundation may materially increase the pro forma market value of the Company, as
converted, and the Holding Company. See "COMPARISON OF VALUATION AND PRO FORMA
INFORMATION WITHOUT FOUNDATION."
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Deposit holders who are members of the Company in its
mutual form will have no voting rights in the Company as converted and will not
participate, therefore, in the election of directors or otherwise control the
Company's affairs. Voting rights in the Holding Company will be held exclusively
by its shareholders, and voting rights in the Company will be held exclusively
by the Holding Company as the sole shareholder of the Company. Each holder of
the Holding Company's common shares will be entitled to one vote for each share
owned on any matter to be considered by the Holding Company's shareholders. See
"DESCRIPTION OF AUTHORIZED SHARES."
DEPOSIT ACCOUNTS AND LOANS. Deposit accounts in the Company, as
converted, will be equivalent in amount, interest rate and other terms to the
present deposit accounts in the Company, and the existing FDIC insurance on such
accounts will not be affected by the Conversion. The Conversion will not affect
the terms of loan accounts or the rights and obligations of borrowers under
their individual contractual arrangements with the Company.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by the Company of a private letter ruling from the IRS or
an opinion of counsel to the effect that the Conversion will constitute a
tax-free reorganization as defined in Section 368(a) of the Code. The Company
intends to proceed with the Conversion based upon an opinion received from its
special counsel, Vorys, Sater, Seymour and Pease LLP, to the following effect:
(1) The Conversion constitutes a reorganization within the
meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will
be recognized by the Company in its mutual form or in its stock form as
a result of the Conversion. The Company in its mutual form and the
Company in its stock form will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by the Company upon the
receipt of money from the Holding Company in exchange for the capital
stock of the Company, as converted;
(3) The assets of the Company will have the same basis in its
hands immediately after the Conversion as they had in its hands
immediately prior to the Conversion, and the holding period of the
assets of the Company after the Conversion will include the period
during which the assets were held by the Company before the Conversion;
(4) No gain or loss will be recognized by the deposit account
holders of the Company upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in the Company immediately
prior to the Conversion, of withdrawable deposit accounts in the
Company immediately after the Conversion, in the same dollar amount as
their withdrawable deposit accounts in the Company immediately prior to
the Conversion, plus, in the case of Eligible Account Holders and
Supplemental Eligible Account Holders, the interests in the Liquidation
Account of the Company, as described below;
(5) The basis of the withdrawable deposit accounts in the
Company held by its deposit account holders immediately after the
Conversion will be the same as the basis of their deposit accounts in
the Company immediately prior to the Conversion. The basis of the
interests in the Liquidation
-81-
<PAGE> 87
Account received by the Eligible Account Holders and Supplemental
Eligible Account Holders will be zero. The basis of the nontransferable
subscription rights received by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Eligible Members will be zero
(assuming that at distribution such rights have no ascertainable fair
market value);
(6) No gain or loss will be recognized by Eligible Account
Holders, Supplemental Eligible Account Holders or Other Eligible
Members upon the distribution to them of nontransferable subscription
rights to purchase Common Shares (assuming that at distribution such
rights have no ascertainable fair market value), and no taxable income
will be realized by such Eligible Account Holders, Supplemental
Eligible Account Holders or Other Eligible Members as a result of their
exercise of such nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of the
Company pursuant to the exercise of subscription rights will be the
purchase price thereof (assuming that such rights have no ascertainable
fair market value and that the purchase price is not less than the fair
market value of the shares on the date of such exercise), and the
holding period of such shares will commence on the date of such
exercise. The basis of the Common Shares purchased other than by the
exercise of subscription rights will be the purchase price thereof
(assuming in the case of the other subscribers that the opportunity to
buy in the Subscription Offering has no ascertainable fair market
value), and the holding period of such shares will commence on the day
after the date of the purchase;
(8) For purposes of Section 381 of the Code, the Company will
be treated as if there had been no reorganization. The taxable year of
the Company will not end on the effective date of the Conversion.
Immediately after the Conversion, the Company in its stock form will
succeed to and take into account the tax attributes of the Company in
its mutual form immediately prior to the Conversion, including the
Company's earnings and profits or deficit in earnings and profits;
(9) The bad debt reserves of the Company in its mutual form
immediately prior to the Conversion will not be required to be restored
to the gross income of the Company in its stock form as a result of the
Conversion and immediately after the Conversion such bad debt reserves
will have the same character in the hands of the Company in its stock
form as they would have had if there had been no Conversion. The
Company in its stock form will succeed to and take into account the
dollar amounts of those accounts of the Company in its mutual form
which represent bad debt reserves in respect of which the Company in
its mutual form has taken a bad debt deduction for taxable years ending
on or before the Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of the Company available for the subsequent
distribution of dividends within the meaning of Section 316 of the
Code. The creation of the Liquidation Account on the records of the
Company will have no effect on its taxable income, deductions for
additions to reserves for bad debts under Section 593 of the Code or
distributions to stockholders under Section 593(e) of the Code.
For Ohio tax purposes, the tax consequences of the Conversion
will be as follows:
(1) The Company is a "financial institution" for State of Ohio
tax purposes, and the Conversion will not change such status;
(2) The Company is subject to the Ohio corporate franchise tax
on "financial institutions," which is imposed annually at a rate of
1.5% of the Company's equity capital determined in accordance with
GAAP, and the Conversion will not change such status;
-82-
<PAGE> 88
(3) As a "financial institution," the Company is not subject
to any tax based upon net income or net profit imposed by the State of
Ohio, and the Conversion will not change such status;
(4) The Conversion will not be a taxable transaction to the
Company in its mutual or stock form for purposes of the Ohio corporate
franchise tax. As a consequence of the Conversion, however, the annual
Ohio corporate franchise tax liability of the Company will increase if
the taxable net worth of the Company (i.e., book net worth computed in
accordance with GAAP at the close of the Company's taxable year for
federal income tax purposes) increases thereby; and
(5) The Conversion will not be a taxable transaction to any
deposit account holder or borrower member of the Company in its mutual
or stock form for purposes of the Ohio corporate franchise tax and the
Ohio personal income tax.
The Company has received an opinion from Keller to the effect that the
subscription rights have no ascertainable fair market value because the rights
are received by specified persons at no cost, may not be transferred and are of
short duration. The IRS could challenge the assumption that the subscription
rights have no ascertainable fair market value.
Each Eligible Account Holder, Supplemental Eligible Account Holder and
Other Eligible Member is urged to consult his or her own tax advisor with
respect to the effect of such tax consequences on his or her own particular
facts and circumstances.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Company in its present mutual form, each depositor in the Company would
receive a pro rata share of any assets of the Company remaining after payment of
the claims of all creditors, including the claims of all depositors to the
withdrawable value of their deposit accounts. A depositor's pro rata share of
such remaining assets would be the same proportion of such assets as the value
of such depositor's accounts bears to the total aggregate value of all deposits
in the Company at the time of liquidation.
In the event of a complete liquidation of the Company in its stock form
after the Conversion, each depositor would have a claim of the same general
priority as the claims of all other general creditors of the Company. Except as
described below, each depositor's claim would be solely in the amount of the
balance in such depositor's account plus accrued interest. The depositor would
have no interest in the assets of the Company above that amount. Such assets
would be distributed to the Holding Company as the sole shareholder of the
Company.
For the purpose of granting a limited priority claim to the assets of
the Company in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain
deposit accounts at the Company after the Conversion, the Company will, at the
time of Conversion, establish a liquidation account in an amount equal to the
net worth of the Company as of December 31, 1997 (the "Liquidation Account").
The Liquidation Account will not operate to restrict the use or application of
any of the regulatory capital of the Company.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date.
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, as the case
-83-
<PAGE> 89
may be, and the denominator of which is the total amount of all Qualifying
Deposits of Eligible Account Holders and Supplemental Eligible Account Holders
on the corresponding record date. The balance of each Subaccount may be
decreased but will never be increased. If, at the close of business on the last
day of each fiscal year of the Holding Company subsequent to the respective
record dates, the balance in the deposit account to which a Subaccount relates
is less than the lesser of (i) the deposit balance in such deposit account at
the close of business on the last day of any other annual closing date
subsequent to the Eligibility Record Date or the Supplemental Eligibility Record
Date, or (ii) the amount of the Qualifying Deposit as of the Eligibility Record
Date or the Supplemental Eligibility Record Date, the balance of the Subaccount
for such deposit account shall be adjusted proportionately to the reduction in
such deposit account balance. In the event of any such downward adjustment, such
Subaccount balance shall not be subsequently increased notwithstanding any
increase in the deposit balance of the related deposit account. If any deposit
account is closed, its related Subaccount shall be reduced to zero upon such
closing.
In the event of a complete liquidation of the converted Company (and
only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder shall receive from the Liquidation Account a distribution equal
to the current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to the Holding Company as the sole
shareholder of the Company. Any assets remaining after satisfaction of such
liquidation rights and the claims of the Company's creditors would be
distributed to the Holding Company as the sole shareholder of the Company. No
merger, consolidation, purchase of bulk assets or similar combination or
transaction with another financial institution, the deposits of which are
insured by the FDIC, will be deemed to be a complete liquidation for this
purpose and, in any such transaction, the Liquidation Account shall be assumed
by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of the Holding Company and the Company will be final. The
Plan may be amended by the Boards of Directors of the Holding Company and the
Company at any time with the concurrence of the OTS and the Division. If the
Company and the Holding Company determine, upon advice of counsel and after
consultation with the OTS and the Division, that any such amendment is material,
subscribers will be notified of the amendment and will be provided the
opportunity to affirm, increase, decrease or cancel their subscriptions. Any
person who does not affirmatively elect to continue his subscription or elects
to rescind his subscription before the date specified in the notice will have
all of his funds promptly refunded with interest. Any person who elects to
decrease his subscription will have the appropriate portion of his funds
promptly refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan and
the adoption of the Amended Articles of Incorporation and the Amended
Constitution by the voting members of the Company at the Special Meeting and the
completion of the sale of the requisite amount of Common Shares within 24 months
following the date of such approval. If these conditions are not satisfied, the
Plan will automatically terminate and the Company will continue its business in
the mutual form of organization. The Plan may be voluntarily terminated by the
Board of Directors at any time before the Special Meeting and at any time
thereafter with the approval of the OTS and the Division.
-84-
<PAGE> 90
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, EASTERN STANDARD
TIME, ON _____ __, 1998. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE ___:00 __.M.,
EASTERN STANDARD TIME, ON _____ __, 1998, WILL BE VOID, WHETHER OR NOT THE
COMPANY HAS BEEN ABLE TO LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION
RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST
REPRESENT TO THE COMPANY THAT HE OR SHE IS PURCHASING SUCH SHARES FOR HIS OR HER
OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER
PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO ATTEMPTS TO
TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES AND
SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS.
The number of Common Shares which a person who has subscription rights
may purchase will be determined, in part, by the total number of Common Shares
to be issued and the availability of Common Shares for purchase under the
preference categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the voting members of the Company at the Special Meeting.
The preference categories and preliminary purchase limitations which
have been established by the Plan, in accordance with applicable regulations,
for the allocation of Common Shares are as follows:
(a) Each Eligible Account Holder shall receive, without
payment therefor, a nontransferable right to purchase in the
Subscription Offering up to the greater of (i) 30,000 Common Shares,
(ii) .10% of the total number of Common Shares sold in connection with
the Conversion, and (iii) 15 times the product (rounded down to the
next whole number) obtained by multiplying the total number of Common
Shares sold in connection with the Conversion by a fraction, the
numerator of which is the amount of the Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Eligible Account Holders, in each case on
the Eligibility Record Date, subject to the overall purchase
limitations set forth in Section 11 of the Plan and subject to
adjustment by the Board of Directors of the Holding Company and the
Company as set forth in Section 11 of the Plan. If the exercise of
subscription rights by Eligible Account Holders results in an
over-subscription, Common Shares will be allocated among subscribing
Eligible Account Holders in a manner which will, to the extent
possible, make the total allocation of each subscriber equal 100 shares
or the amount subscribed for, whichever is less. Any Common Shares
remaining after such allocation has been made will be allocated among
the subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Eligibility Record Date bears to the total
Qualifying Deposits of all Eligible Account Holders on such date.
Notwithstanding the foregoing, Common Shares in excess of 28,937,500,
the maximum of the Adjusted Valuation Range, may be sold to the ESOP
before fully satisfying the subscriptions of Eligible Account Holders.
No fractional shares will be issued. For purposes of this paragraph
(a), increases in the Qualifying Deposits of directors and executive
officers of the Company during the twelve months preceding the
Eligibility Record Date shall not be considered.
(b) The ESOP shall receive, without payment therefor, a
nontransferable right to purchase in the Subscription Offering an
aggregate amount of up to 10% of the Common Shares sold in the
Conversion, provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders up to the maximum of
the Adjusted Valuation Range pursuant to paragraph (a) above. Although
the Plan and OTS regulations permit the ESOP to purchase up to 10% of
the Common Shares,
-85-
<PAGE> 91
the Holding Company anticipates that the ESOP will purchase 8% of the
Common Shares. If the ESOP is unable to purchase all or part of the
Common Shares for which it subscribes, the ESOP may purchase Common
Shares on the open market or may purchase authorized but unissued
Common Shares. If the ESOP purchases authorized but unissued Common
Shares, such purchases could have a dilutive effect on the interests of
the Holding Company's shareholders. See "RISK FACTORS - Potential
Impact of Benefit Plans on Net Earnings and Shareholders' Equity."
(c) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders and the ESOP pursuant
to paragraphs (a) and (b) above each Supplemental Eligible Account
Holder will receive, without payment therefor, a nontransferable right
to purchase up to the greater of (i) 30,000 Common Shares, (ii) .10% of
the total number of Common Shares sold in connection with the
Conversion, and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of Common Shares
sold in connection with the Conversion by a fraction, the numerator of
which is the amount of the Supplemental Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in
each case on the Supplemental Eligibility Record Date, subject to the
overall purchase limitations set forth in Section 11 of the Plan and
subject to adjustment by the Board of Directors of the Holding Company
and the Company as set forth in Section 11 of the Plan. If the exercise
of subscription rights by Supplemental Eligible Account Holders results
in an oversubscription, Common Shares will be allocated among
subscribing Supplemental Eligible Account Holders in a manner which
will, to the extent possible, make the total allocation of each
subscriber equal 100 shares or the amount subscribed for, whichever is
less. Any Common Shares remaining after such allocation has been made
will be allocated among the subscribing Supplemental Eligible Account
Holders whose subscriptions remain unfilled in the proportion which the
amount of their respective Qualifying Deposits on the Supplemental
Eligibility Record Date bears to the total Qualifying Deposits of all
Supplemental Eligible Account Holders on such date. No fractional
shares will be issued.
(d) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders pursuant to paragraphs (a), (b)
and (c) above, each Other Eligible Member, other than an Eligible
Account Holder or Supplemental Eligible Account Holder, shall receive,
without payment therefor, a nontransferable right to purchase up to the
greater of (i) 30,000 Common Shares, and (ii) .10% of the total number
of Common Shares sold in connection with the Conversion, subject to
adjustment by the Boards of Directors of the Company and the Holding
Company. In the event of an oversubscription by Other Eligible Members,
the available Common Shares will be allocated among subscribing Other
Eligible Members in the same proportion that their subscriptions bear
to the total amount of subscriptions by all Other Eligible Members;
provided, however, that, to the extent sufficient Common Shares are
available, each subscribing Other Eligible Member shall receive 25
Common Shares before the remaining available Common Shares are
allocated.
(e) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders and Other Eligible Members pursuant to
paragraphs (a), (b), (c) and (d), above, the directors, officers and
employees of the Company shall receive, without payment therefor,
nontransferable rights to purchase an aggregate of up to 15% of the
Common Shares sold in connection with the Conversion subject to the
overall purchase limitations set forth in Section 11 of the Plan and
subject to adjustment by the Boards of Directors of the Company and the
Holding Company as set forth in Section 11 of the Plan. The ability of
directors, officers and employees to purchase Common Shares under this
paragraph is in addition to rights which are otherwise available to
them under the Plan.
-86-
<PAGE> 92
If the exercise of subscription rights by directors, officers and
employees of the Company results in an oversubscription, Common Shares will be
allocated among subscribing directors, officers and employees on an equitable
basis to be determined by the Board of Directors of the Company by giving weight
to an individual's period of service, compensation and position at the Company.
For information as to the number of shares proposed to be purchased by the
directors and executive officers, see "Intended Purchases by Directors and
Executive Officers."
The Board of Directors may reject any one or more subscriptions if,
based upon the Board of Directors' interpretation of applicable regulations,
such subscriber is not entitled to the shares for which he or she has subscribed
or if the sale of shares subscribed for would be in violation of any applicable
statutes, regulations, or rules.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons having subscription
rights reside. However, no such person will be offered or receive any Common
Shares under the Plan who resides in a foreign country or in a state of the
United States with respect to which each of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares under the Plan
resides in such country or state; (ii) under the securities laws of such country
or state, the granting of subscription rights or the offer or sale of Common
Shares to such persons would require the Holding Company or its officers or
directors to register as a broker or dealer or to register or otherwise qualify
its securities for sale in such country or state; and (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise.
The term "resident," as used herein with respect to the Subscription
Offering, means any person who, on the date of submission of a Stock Order Form,
maintained a bona fide residence within a jurisdiction in which the Common
Shares are being offered for sale. If a person is a business entity, the
person's residence shall be the location of the principal place of business. If
the person is a personal benefit plan, the residence of the beneficiary shall be
the residence of the plan. In the case of all other benefit plans, the residence
of the trustee shall be the residence of the plan. In all cases, the
determination of a subscriber's residency shall be in the sole discretion of the
Company and the Holding Company.
COMMUNITY OFFERING
To the extent Common Shares remain available after the satisfaction of
all subscriptions received in the Subscription Offering, the Company is hereby
offering Common Shares in the Community Offering subject to the limitations set
forth below. If subscriptions are received in the Subscription Offering for up
to 33,465,625 Common Shares, Common Shares may not be available in the Community
Offering. All sales of the Common Shares in the Community Offering will be at
the same price per share as in the Subscription Offering.
THE COMMUNITY OFFERING WILL BE TERMINATED ON OR BEFORE___________,
1998, UNLESS EXTENDED BY THE COMPANY AND THE HOLDING COMPANY WITH THE APPROVAL
OF THE OTS AND THE DIVISION, IF NECESSARY. IN ACCORDANCE WITH THE PLAN, THE
OFFERING MAY NOT BE EXTENDED BEYOND ______________, 1998.
In the event shares are available for the Community Offering, each
person, together with any Associate or groups Acting in Concert, may purchase in
the Community Offering up to 30,000 Common Shares. If an insufficient number of
Common Shares is available to fill all of the orders received in the Community
Offering, the available Common Shares will be allocated in a manner to be
determined by the Boards of Directors of the Holding Company and the Company,
subject to the following:
(i) Preference will be given to natural persons who are
residents of Columbiana, Mahoning and Trumbull Counties, Ohio, the
county in which the offices of the Company are located;
-87-
<PAGE> 93
(ii) Orders received in the Community Offering will first be
filled up to 2% of the total number of Common Shares offered, with any
remaining shares allocated on an equal number of shares per order basis
until all orders have been filled; and
(iii) The right of any person to purchase Common Shares in the
Community Offering is subject to the right of the Holding Company and
the Company to accept or reject such purchases in whole or in part.
The term "resident," as used herein with respect to the Community
Offering, means any natural person who, on the date of submission of a Stock
Order Form, maintains a bona fide residence within, as appropriate, Columbiana,
Mahoning and Trumbull Counties, Ohio, or a jurisdiction in which the Common
Shares are being offered for sale.
PUBLIC OFFERING
As a final step in the Conversion, the Plan provides that all Common
Shares not purchased in the Subscription Offering and the Community Offering may
be offered for sale to the general public in the Public Offering through a
syndicate of registered broker-dealers to be formed by Trident and McDonald &
Co. The Company and the Holding Company expect to market any Common Shares which
remain unsubscribed after the Subscription Offering and the Community Offering
through the Public Offering. The Company and the Holding Company have the right
to reject orders in whole or part in their sole discretion in the Public
Offering. Neither Trident, McDonald & Company nor any registered broker-dealer
shall have any obligation to take or purchase any Common Shares in the Public
Offering; however, Trident and McDonald & Company have agreed to use their best
efforts in the sale of Common Shares in the Public Offering.
The price at which Common Shares are sold in the Public Offering will
be the same price at which Common Shares are offered and sold in the
Subscription Offering and the Community Offering. No person will be permitted to
subscribe in the Public Offering for more than 30,000 Common Shares, subject to
the maximum purchase limitations. See "- Limitations on Purchases of Common
Shares."
LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of Common Shares. To the extent Common Shares are available, the
minimum number of Common Shares that may be purchased by any party is 25, or
$250. No fractional shares will be issued. Purchases in the Offering are further
subject to the limitation that no person, together with his or her Associates
and other persons Acting in Concert with him or her, may purchase more than
30,000 Common Shares in the Offering. In connection with the exercise of
subscription rights arising from a deposit account in which two or more persons
have an interest, the aggregate maximum number of Common Shares which the
persons having an interest in such account may purchase in the Subscription
Offering in relation to such account is 15,000 Common Shares. Such limitations
do not apply to the ESOP. Subject to applicable regulations, the purchase
limitation may be increased or decreased after the commencement of the Offering
by the Boards of Directors.
"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal whether
or not pursuant to an express agreement" or "a combination or pooling of voting
or other interests in the securities of an issuer for a common purpose pursuant
to any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise." Persons shall be presumed to be Acting in Concert
with each other, subject to rebuttal through a filing with the OTS, if: (i) both
are purchasing Common Shares in the Conversion and (a) are certain executive
officers, including the president, chief executive officer, chief operating
officer or vice president, directors, trustees, partners, persons who perform,
or whose nominees or representatives perform, similar policy making functions at
a company (other than the Company
-88-
<PAGE> 94
or the Holding Company), a principal business unit or subsidiary of a
company, a partnership, a joint venture or a similar organization; (b) are
persons who directly or indirectly own or control 10% or more of the stock of a
company (other than the Company or the Holding Company); or (c) constitute a
group under the beneficial ownership reporting rules under Section 13 or the
proxy rules under Section 14 of the Exchange Act; or (ii) one person provides
credit to the other for the purchase of Common Shares or is instrumental in
obtaining that credit. Companies (other than the Company or the Holding
Company), partnerships, joint ventures and similar organizations shall be
presumed to be acting in concert with their executive officers, directors,
trustees, trusts for which they serve as trustee, partners, agents who perform,
or whose nominees or representatives perform, similar policy making functions
and persons who directly or indirectly own or control 10% or more of their
stock if both are purchasing Common Shares in the Conversion. In addition, if a
person is presumed to be Acting in Concert with another person, company or
similar organization, then such person is presumed to be Acting in Concert with
anyone else who is, or is presumed to be, Acting in Concert with such other
person, company or similar organization.
For purposes of the Plan, (i) the directors of the Company or the
Holding Company are not deemed to be Acting in Concert solely by reason of their
membership on the Board of Directors of the Company or the Holding Company; (ii)
an associate of a person (an "Associate") is (a) any corporation or organization
(other than the Company or the Holding Company) of which such person is an
officer, partner or, directly or indirectly, the beneficial owner of 10% or more
of any class of equity securities; (b) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of
such person, or relative of such spouse, who either has the same home as such
person or who is a director or officer of the Bank or the Holding Company.
Purchases of Common Shares in the Offering are also subject to the
change in control regulations of the OTS which restrict direct and indirect
purchases of 10% or more of the stock of any savings association by any person
or group of persons acting in concert, under certain circumstances. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND RELATED
ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation."
After the Conversion, Common Shares, except for Common Shares purchased
by affiliates of the Holding Company and the Company, will be freely
transferable, subject to OTS and Division regulations.
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available at the offices of the Company. See "ADDITIONAL
INFORMATION." Officers and directors of the Company will be available to answer
questions about the Conversion and may also hold informational meetings for
interested persons. Such officers and directors will not be permitted to make
statements about the Holding Company or the Company unless such information is
also set forth in this Prospectus, nor will they render investment advice. The
Holding Company will rely on Rule 3a4-1 under the Exchange Act, and sales of
Common Shares will be conducted within the requirements of Rule 3a4-1, which
will permit officers, directors and employees of the Holding Company and the
Company to participate in the sale of Common Shares. No officer, director or
employee of the Holding Company or the Company will be compensated in connection
with his participation by the payment of commissions or other remuneration based
either directly or indirectly on the transactions in the Common Shares.
To assist the Holding Company and the Company in marketing the Common
Shares, the Holding Company and the Company have retained Trident and McDonald &
Company (the "Underwriters"), broker-dealers registered with the SEC and members
of the National Association of Securities Dealers, Inc. ("NASD"). The
Underwriters will assist the Company in (i) training and educating the Company's
employees regarding the mechanics and regulatory requirements of the conversion
process; (ii) conducting information meetings for subscribers and other
potential purchasers; and (iii) keeping records of all stock subscriptions. For
providing
-89-
<PAGE> 95
these services, the Company has agreed to pay the Underwriters a commission
equal to .95% of the aggregate dollar amount of Common Shares sold in the
Subscription Offering and the Community Offering, excluding shares sold by
Selected Dealers (hereinafter defined), if any, and shares purchased by the ESOP
and directors, officers, and employees of the Company and their affiliates.
The Company has also agreed to reimburse the Underwriters for all
reasonable legal fees and expenses not to exceed $50,000 and reasonable
out-of-pocket expenses not to exceed $10,000. The Company and the Holding
Company have also agreed to indemnify the Underwriters, under certain
circumstances, against liabilities and expenses (including legal fees) arising
out of or based upon untrue statements or omissions contained in the materials
used in the Offering or in various documents submitted to regulatory authorities
in respect of the Conversion, including liabilities under the Securities Act of
1933, as amended (the "Act"), unless such untrue statement or omission, or
alleged untrue statement or omission, was made in reliance upon certain
information furnished to the Company by the Underwriters expressly for use in
the Summary Proxy Statement or this Prospectus.
If Common Shares remain available after the satisfaction of all
subscriptions received in the Subscription Offering, the Underwriters may enter
into an agreement with other NASD member firms ("Selected Dealers") to assist in
the sale of Common Shares in the Community Offering and the Public Offering, if
conducted. If Selected Dealers are used, the Company will pay a fee for shares
sold by Selected Dealers in an amount to be agreed upon jointly by the
Underwriters and the Company to reflect market requirements at the time of the
Community Offering. During the Community Offering and the Public Offering,
Selected Dealers may only solicit indications of interest from their customers
to place orders with the Company as of a certain date (the "Order Date") for the
purchase of Common Shares. When and if the Company believes that enough
indications of interest and orders have been received in the Community Offering
and the Public Offering, if necessary, to consummate the Conversion, the
Underwriters will request, as of the Order Date, Selected Dealers to submit
orders to purchase shares for which they have previously received indications of
interest from the customers. Selected Dealers will send confirmations of the
orders to such customers on the next business day after the Order Date. Selected
Dealers will debit the accounts of their customers on the date which will be
three business days from the Order Date (the "Settlement Date"). On the
Settlement Date, funds received by Selected Dealers will be remitted to the
Company. It is anticipated that the Conversion will be consummated on the
Settlement Date. However, if consummation is delayed after payment has been
received by the Company from Selected Dealers, funds will earn interest at the
current passbook savings account rate, which is currently ____%, with an annual
percentage yield of ____%, until the completion of the offering. Funds will be
returned promptly in the event the Conversion is not consummated.
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond ____________, 1998, persons
who have subscribed for Common Shares in the Subscription Offering or in the
Community Offering will receive a written notice that prior to a date specified
in the notice, they have the right to affirm, increase, decrease or rescind
their subscriptions for Common Shares. Persons who do not affirmatively elect to
continue their subscription or who elect to rescind their subscriptions during
any such extension will have all of their funds promptly refunded with interest.
Persons who elect to decrease their subscriptions will have the appropriate
portion of their funds promptly refunded with interest.
USE OF STOCK ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and in the
Community Offering may be made only by completing and submitting a Stock Order
Form. Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to the Company by mail or in person, prior to
12:00 noon, Eastern Standard Time, on ____________, 1998, a properly executed
and completed Stock Order Form,
-90-
<PAGE> 96
together with full payment of the subscription price of $10 for each Common
Share for which subscription is made. ANY STOCK ORDER FORM WHICH IS NOT RECEIVED
BY THE COMPANY PRIOR TO 12:00 NOON, EASTERN STANDARD TIME, ON _____ ______,
1998, OR FOR WHICH FULL PAYMENT HAS NOT BEEN RECEIVED BY THE COMPANY PRIOR TO
SUCH TIME, WILL NOT BE ACCEPTED. PHOTOCOPIES, TELECOPIES OR OTHER REPRODUCTIONS
OF STOCK ORDER FORMS WILL NOT BE ACCEPTED. See "ADDITIONAL INFORMATION."
AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE HOLDING COMPANY, MAY
NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE HOLDING
COMPANY, UNLESS (i) THE COMMUNITY OFFERING IS NOT COMPLETED BY __________, 1998,
OR (ii) THE FINAL VALUATION OF THE COMPANY, AS CONVERTED, AND THE HOLDING
COMPANY IS LESS THAN $212,500,000 OR MORE THAN $334,652,500. IF EITHER OF THOSE
EVENTS OCCUR, PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION
OFFERING OR ORDERED COMMON SHARES IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN
NOTICE THAT THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR
SUBSCRIPTIONS OR ORDERS PRIOR TO A DATE SPECIFIED IN THE NOTICE. ANY PERSON WHO
DOES NOT AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND
HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY
REFUNDED WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS SUBSCRIPTION
DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF HIS FUNDS
PROMPTLY REFUNDED WITH INTEREST. IN ADDITION, IF THE PURCHASE LIMITATIONS ARE
INCREASED, PERSONS WHO HAVE SUBSCRIBED FOR THE MAXIMUM AMOUNT WILL BE GIVEN THE
OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS. SUBSCRIBERS SHOULD UNDERSTAND THAT
IN THE EVENT OF ANY EXTENSION, SIGNIFICANT DELAYS COULD OCCUR BETWEEN THE
EXPIRATION DATE AND THE FINAL CLOSING DATE OF THE CONVERSION.
PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany a completed Stock Order Form in order for
subscriptions or orders to be valid. Payment for Common Shares may be made (i)
in cash, if delivered in person; (ii) by check, bank draft, or money order made
payable to the Company; or (iii) by authorization of withdrawal from deposit
accounts in the Company (other than non-self-directed IRAs). No payments by wire
transfer will be accepted. The Company cannot lend money or otherwise extend
credit to any person to purchase Common Shares.
Payments made in cash or by check, bank draft, or money order will be
placed in a segregated savings account insured by the FDIC up to applicable
limits until the Conversion is completed or terminated. Interest will be paid by
the Company on such account at the then current passbook savings account rate,
which is currently ____% with an annual percentage yield of ____%, from the date
payment is received until the Conversion is completed or terminated. Payments
made by check will not be deemed to have been received until the check has
cleared for payment.
Instructions for authorizing withdrawals from deposit accounts,
including certificates of deposit, are provided in the Stock Order Form. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase Common Shares,
unless the Conversion is terminated. All sums authorized for withdrawal will
continue to earn interest at the contract rate for such account or certificate
until the completion or termination of the Conversion. Interest penalties for
early withdrawal applicable to certificate accounts will be waived in the case
of withdrawals authorized for the purchase of Common Shares. If a partial
withdrawal from a certificate account results in a balance less than the
applicable minimum balance requirement, the certificate will be canceled and the
remaining balance will earn interest at the Company's passbook rate subsequent
to the withdrawal.
In order to utilize funds in an IRA maintained at the Company, the
funds must be transferred to a self-directed IRA that permits the funds to be
invested in stock. There will be no early withdrawal or IRS penalties for such
transfer. The beneficial owner of the IRA must direct the trustee of the account
to use funds from such account to purchase Common Shares in connection with the
Conversion. THIS CANNOT BE DONE THROUGH THE
-91-
<PAGE> 97
MAIL. Persons who are interested in utilizing IRAs at the Company to subscribe
for Common Shares should contact the Conversion Information Center at (330)
___-___ for instructions and assistance.
Subscriptions will not be filled by the Company until subscriptions
have been received in the Offering for up to 21,250,000 Common Shares, the
minimum point of the Adjusted Valuation Range. If the Conversion is terminated,
all funds delivered to the Company for the purchase of Common Shares will be
returned with interest, and all charges to deposit accounts will be rescinded.
If subscriptions are received for at least 21,250,000 Common Shares, subscribers
and other purchasers will be notified by mail, promptly upon completion of the
sale of the Common Shares, of the number of shares for which their subscriptions
have been accepted. The funds on deposit with the Company for the purchase of
Common Shares will be withdrawn and paid to the Holding Company in exchange for
the Common Shares. Certificates representing Common Shares will be delivered
promptly thereafter. The Common Shares will not be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes but may pay for such Common Shares upon consummation of
the Conversion.
INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
intended purchases by the directors and executive officers of the Company and
the Holding Company:
<TABLE>
<CAPTION>
Name Total shares (1) Aggregate purchase price (1) Percent of total offering (2)
- ---- ------------ ------------------------ -------------------------
<S> <C> <C> <C>
Richard M. Barrett 31,000 $ 310,000 .124%
James E. Bennett, Jr. 1,000 10,000 .004
Charles. B. Cushwa, III 60,000 600,000 .24
Donald R. Inglis 30,000 300,000 .12
Patrick A. Kelly 60,000 600,000 .24
Gary Keller 60,000 600,000 .24
William A. Holdford 10,000 100,000 .04
Douglas M. McKay 80,000 800,000 .32
Herbert F. Schuler, Sr. 90,000 900,000 .36
Clarence R. Smith, Jr. 25,000 250,000 .10
Robert J. Steele, Jr. 10,000 100,000 .04
Donald J. Varner 60,000 600,000 .24
John F. Zimmerman, Jr. 15,000 150,000 .06
------- ---------- ------
All directors and executive 532,000 $5,320,000 2.128%
officers as a group (13 persons) ======= ========== ======
</TABLE>
- -----------------------------
(1) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
(2) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted
Valuation Range, will be sold in connection with the Conversion at $10
per share and that a sufficient number of Common Shares will be
available to satisfy the intended purchases by directors and executive
officers. See "Pricing and Number of Common Shares to be Sold."
All purchases by executive officers and directors of the Company are
being made for investment purposes only and with no present intent to resell.
Directors and executive officers will pay the same $10 per share price for
Common Share purchased in the Conversion as all other subscribers.
-92-
<PAGE> 98
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares will be based on the
pro forma market value of the shares as determined by an independent appraisal
of the Company, as converted, and the Holding Company. Keller, a firm which
evaluates and appraises financial institutions, has been retained by the Company
to prepare an appraisal of the estimated pro forma market value of the Company
as converted, and the Holding Company. Keller will receive a fee of $27,000 for
its appraisal and one update and will not be reimbursed for out-of-pocket
expenses.
Keller was selected by the Board of Directors of the Company because
Keller has extensive experience in the valuation of thrift institutions,
particularly in the mutual-to-stock conversion context. The Board of Directors
reviewed the credentials of Keller's appraisal personnel and obtained references
and recommendations from other companies which have engaged Keller. Keller is
certified by the OTS as a mutual-to-stock conversion appraiser. The Company and
Keller have no relationships which would affect Keller's independence.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the economic and demographic conditions in the Company's primary market area;
the quality and depth of the Company's management and personnel; certain
historical financial and other information relating to the Company; a
comparative evaluation of the operating and financial statistics of the Company
with those of other thrift institutions; the aggregate size of the Offering; the
impact of the Conversion on the Company's regulatory capital and earnings
potential; the trading market for stock of comparable thrift institutions and
thrift holding companies; and general conditions in the markets for such stocks.
The Boards of Directors of the Holding Company and the Company reviewed and
deemed appropriate the assumptions and methodology used by Keller in preparing
the appraisal.
The Pro Forma Value, determined by Keller, is $250,000,000 as of
February 24, 1998. The Adjusted Valuation Range established in accordance with
the Plan is $212,500,000 to $289,375,000 which, based upon a per share offering
price of $10, will result in the sale of between 21,250,000 and 28,937,500
Common Shares. Applicable regulations permit the Holding Company to issue up to
a total of 33,465,625 Common Shares with an aggregate purchase price of
$334,656,250. The total number of Common Shares sold in the Conversion will be
based on the Adjusted Valuation Range. Pro forma shareholders' equity per share
and pro forma earnings per share decrease moving from the low end to the high
end of the Adjusted Valuation Range. See "PRO FORMA DATA."
If, due to changing market conditions, the final valuation is less than
$212,500,000 or more than $334,656,250, subscribers will be given the right to
affirm, increase, decrease or rescind their subscriptions. Any person who does
not affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES
OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF THE AUDITED FINANCIAL
STATEMENTS AND STATISTICAL INFORMATION PROVIDED BY THE COMPANY. KELLER DID NOT
INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY
THE COMPANY, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE
COMPANY OR THE HOLDING COMPANY. THE VALUATION CONSIDERS THE COMPANY ONLY AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION
VALUE OF THE COMPANY. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON SHARES WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT THE CONVERSION
PURCHASE PRICE.
-93-
<PAGE> 99
A copy of the complete appraisal is on file and open for inspection at
the office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the
Central Regional Office of the OTS, 200 West Madison Street, Suite 1300,
Chicago, Illinois 60606; at the office of the Division, 77 S. High Street,
Columbus, Ohio 43215; and at the offices of the Company.
RESTRICTIONS ON REPURCHASE OF COMMON SHARES
OTS regulations generally prohibit the Holding Company from
repurchasing any of its capital stock for three years following the date of
completion of the Conversion, except as part of an open-market stock repurchase
program during the second and third years following the Conversion involving no
more than 5% of the outstanding capital stock during a twelve-month period. The
OTS may permit a repurchase during the first year following the completion of
the Conversion or may permit the Holding Company to exceed the 5% limits in the
second and third years if exceptional circumstances are established. In
addition, any repurchase during the three years following the completion of the
Conversion, the Company's regulatory capital must equal or exceed all regulatory
capital requirements. Before the commencement of a repurchase program, the
Holding Company must provide notice to the OTS, and the OTS may disapprove the
program if the OTS determines that it would adversely affect the financial
condition of the Company or if it determines that there is no valid business
purpose for such repurchase. Such repurchase restrictions would not prohibit the
ESOP or the RRP from purchasing Common Shares during the first year following
the Conversion.
Ohio regulations prohibit the Holding Company from repurchasing shares
during the first year after the Conversion if the effect thereof would cause the
Company not to meet its capital requirements.
RESTRICTIONS ON TRANSFER OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors and executive officers of the
Holding Company will be subject to the restriction that such shares may not be
sold for a period of one year following completion of the Conversion, except in
the event of the death of the shareholder. The certificates evidencing Common
Shares issued by the Holding Company to directors and executive officers will
bear a legend giving appropriate notice of the restriction imposed upon them. In
addition, the Holding Company will give appropriate instructions to the transfer
agent (if any) for the Holding Company's common shares in respect of the
applicable restriction on transfer of any restricted shares. Any shares issued
as a stock dividend, stock split or otherwise in respect of restricted shares
will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following
the Conversion, no director or officer of the Holding Company or the Company, or
any of their Associates, may purchase any common shares of the Holding Company
without the prior written approval of the OTS, except through a broker-dealer
registered with the SEC. This restriction will not apply, however, to negotiated
transactions involving more than 1% of a class of outstanding common shares of
the Holding Company or shares acquired by any stock benefit plan of the Holding
Company or the Company.
The Common Shares, like the stock of most public companies, are subject
to the registration requirements of the Act. Accordingly, the Common Shares may
be offered and sold only in compliance with such registration requirements or
pursuant to an applicable exemption from registration. Common Shares received in
the Conversion by persons who are not "affiliates" of the Holding Company may be
resold without registration. Common Shares received by affiliates of the Holding
Company will be subject to resale restrictions. An "affiliate" of the Holding
Company, for purposes of Rule 144, is a person who directly, or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, the Holding Company. Rule 144 generally requires that there
be publicly available certain information concerning the Holding Company and
that sales subject to Rule 144 be made in routine brokerage transactions or
through a market maker. If the
-94-
<PAGE> 100
conditions of Rule 144 are satisfied, each affiliate (or group of persons acting
in concert with one or more affiliates) is generally entitled to sell in the
public market, without registration, in any three-month period, a number of
shares which does not exceed the greater of (i) 1% of the number of outstanding
shares of the Holding Company or (ii) if the shares are admitted to trading on a
national securities exchange or reported through the automated quotation system
of a registered securities association, such as The Nasdaq Stock Market, the
average weekly reported volume of trading during the four weeks preceding the
sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves the Plan may obtain review of such action
by filing in the Court of Appeals of the United States for the circuit in which
the principal office or residence of such person is located or in the United
States Court of Appeals for the District of Columbia, a written petition praying
that the final action of the OTS be modified, terminated, or set aside. Such
petition must be filed within 30 days after the date of mailing of proxy
materials to the voting members of the Company or within 30 days after the date
of publication in the Federal Register of notice of approval of the Plan by the
OTS, whichever is later.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS
GENERAL
Federal law and regulations, Ohio law, the Articles of Incorporation
and Code of Regulations of the Holding Company, the Amended Articles of
Incorporation and Amended Constitution of the Company, and certain employee
benefit plans to be adopted by the Holding Company and the Company contain
certain provisions which may deter or prohibit a change of control of the
Holding Company and the Company. Such provisions are intended to encourage any
acquirer to negotiate the terms of an acquisition with the Board of Directors of
the Holding Company, thereby reducing the vulnerability of the Holding Company
to takeover attempts and certain other transactions which have not been
negotiated with and approved by the Board of Directors.
Anti-takeover devices and provisions may, however, have the effect of
discouraging sudden and other hostile takeover attempts which are not approved
by the Board of Directors, even under circumstances in which shareholders may
deem such takeovers to be in their best interests or in which shareholders may
receive a substantial premium for their shares over then current market prices.
As a result, shareholders who might desire to participate in such a transaction
may not have an opportunity to participate by virtue of such devices and
provisions. Such provisions may also benefit management by discouraging changes
of control in which incumbent management would be removed from office. The
following is a summary of certain provisions of such laws, regulations and
documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The Federal Deposit Insurance Act (the
"FDIA") provides that no person, acting directly or indirectly or in concert
with one or more persons, shall acquire control of any insured savings
association or holding company unless 60 days' prior written notice has been
given to the OTS, and the OTS has not issued a notice disapproving the proposed
acquisition. Control, for purposes of the FDIA, means the power, directly or
indirectly, to direct the management or policies of an insured institution or to
vote 25% or more of any class of securities of such institution. This provision
of the FDIA is implemented by the OTS in accordance with the Regulations for
Acquisition of Control of an Insured Institution, 12 C.F.R. Part 574 (the
"Control Regulations"). Control, for purposes of the Control Regulations, exists
in situations in which the
-95-
<PAGE> 101
acquiring party has direct or indirect voting control of at least 25% of the
institution's voting shares or controls in any manner the election of a majority
of the directors of such institution or the Director of the OTS determines that
such person exercises a controlling influence over the management or policies of
such institution. In addition, control is presumed to exist, subject to
rebuttal, if the acquiring party (which includes a group "acting in concert")
has voting control of at least 10% of the institution's voting stock and any of
eight control factors specified in the Control Regulations exists. There are
also rebuttable presumptions in the Control Regulations concerning whether a
group "acting in concert" exists, including presumed action in concert among
members of an "immediate family." The Control Regulations apply to acquisitions
of Common Shares in connection with the Conversion and to acquisitions after the
Conversion.
CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. A regulation of the OTS
provides that, for a period of three years after the date of the completion of
the Conversion, no person shall, directly or indirectly, offer to acquire or
acquire beneficial ownership of more than 10% of any class of equity security of
the Holding Company or the Company without the prior written approval of the
OTS. In addition to the actual ownership of more than 10% of a class of equity
securities, a person shall be deemed to have acquired beneficial ownership of
more than 10% of the equity securities of the Holding Company or the Company if
the person holds any combination of stock and revocable and/or irrevocable
proxies of the Holding Company under circumstances that give rise to a
conclusive control determination or rebuttable control determination under the
Control Regulations. Such circumstances include (i) holding any combination of
voting shares and revocable and/or irrevocable proxies representing more than
25% of any class of voting stock of the Holding Company enabling the acquirer
(a) to elect one-third or more of the directors, (b) to cause the Holding
Company or the Company's shareholders to approve the acquisition or corporate
reorganization of the Holding Company, or (c) to exert a controlling influence
on a material aspect of the business operations of the Holding Company or the
Company, and (ii) acquiring any combination of voting shares and irrevocable
proxies representing more than 25% of any class of voting shares.
The three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to the Holding Company or the Company or
any underwriter or selling group acting on behalf of the Holding Company or the
Company, (ii) unless made applicable by the OTS by prior written advice, to any
offer or announcement of an offer which, if consummated, would result in the
acquisition by any person, together with all other acquisitions by any such
person of the same class of securities during the preceding 12-month period, of
not more than 1% of the class of securities, or (iii) to any offer to acquire or
the acquisition of beneficial ownership of more than 10% of any class of equity
security of the Holding Company or the Company by a corporation whose ownership
is or will be substantially the same as the ownership of the Holding Company or
the Company if made more than one year following the date of the Conversion. The
foregoing restriction does not apply to the acquisition of the capital stock of
the Holding Company or the Company by one or more tax-qualified employee stock
benefit plans, provided that the plan or plans do not have the beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Holding Company or the Company.
HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings
and loan holding company, without prior approval of the Director of the OTS,
from (i) acquiring control of any other savings association or savings and loan
holding company, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
Holding Company. Except with the prior approval of the Director of the OTS, no
director or officer of the savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's
-96-
<PAGE> 102
voting shares may acquire control of any savings institution, other than a
subsidiary institution or any other savings and loan holding company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has a merger moratorium statute
regulating certain takeover bids affecting certain public corporations which
have significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder") for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the exceptions referred to above applies, (2)
the holders of at least two-thirds of the voting shares, and of at least a
majority of the voting shares not beneficially owned by the Interested
Shareholder, approve the business combination at a meeting called for such
purpose, or (3) the business combination meets certain statutory criteria
designed to ensure that the issuing public corporation's remaining shareholders
receive fair consideration for their shares.
An Ohio corporation, under certain circumstances, may "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. The
statute still prohibits for 12 months, however, any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of the Holding Company do not opt out of the
protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of
the Holding Company (a "Control Share Acquisition") must be approved in advance
by the holders of at least a majority of the outstanding voting shares
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting,
excluding the voting shares owned by the acquiring shareholder. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation. Such statute provides that no offeror
may make a takeover bid unless (i) at least 20 days prior thereto the offeror
announces publicly the terms of the proposed takeover bid and files with the
Ohio Division of Securities (the "Securities Division") and provides the target
company with certain information in respect of the offeror, his ownership of the
company's shares and his plans for the company, and (ii) within ten days
following such filing either (a) no hearing is required by the Securities
Division, (b) a hearing is requested by the target company within such time but
the Securities Division finds no cause for hearing exists, or (c) a hearing is
ordered and upon such hearing the Securities Division adjudicates that the
offeror proposes to make full, fair and effective disclosure to offerees of all
information material to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
-97-
<PAGE> 103
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
ARTICLES OF INCORPORATION OF THE HOLDING COMPANY
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The
Articles of Incorporation of the Holding Company permit the Board of Directors
of the Holding Company to issue additional common shares. The ability of the
Board of Directors to issue such additional shares may create impediments to
gaining, or otherwise discourage persons from attempting to gain, control of the
Holding Company.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the
Articles of Incorporation of the Holding Company provides that, in the event the
Board of Directors recommends against the approval of any of the following
matters, the holders of at least 80% of the voting shares of the Holding Company
are required to approve any such matters:
(1) A proposed amendment to the Articles of Incorporation
of the Holding Company;
(2) A proposed Amendment to the Code of Regulations of
the Holding Company;
(3) A proposal to change the number of directors by
action of the shareholders;
(4) An agreement of merger or consolidation providing for
the proposed merger or consolidation of the Holding
Company with or into one or more other corporations;
(5) A proposed combination or majority share acquisition
involving the issuance of shares of the Holding
Company and requiring shareholder approval;
(6) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets,
with or without the goodwill, of the Holding Company;
or
(7) A proposed dissolution of the Holding Company.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides that shareholders of a for profit corporation which is not a
savings and loan association and which is incorporated under Ohio law must
initially be granted the right to cumulate votes in the election of directors.
The right to cumulate votes in the election of directors will exist at a meeting
of shareholders if notice in writing is given by any shareholder to the
President, a Vice President or the Secretary of an Ohio corporation, not less
than 48 hours before a meeting at which directors are to be elected, that the
shareholder desires that the voting for the election of directors shall be
cumulative and if an announcement of the giving of such notice is made upon the
convening of such meeting by the Chairman or Secretary or by or on behalf of the
shareholder giving such notice. If cumulative voting is invoked, each
shareholder would have a number of votes equal to the number of directors to be
elected, multiplied by the number of shares owned by him, and would be entitled
to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio
corporation may eliminate cumulative voting in the election of directors after
the expiration of 90 days after the date of initial incorporation by filing with
the Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of the Holding
Company have been amended to eliminate cumulative voting. The elimination of
cumulative voting may make it more difficult for shareholders to elect as
directors persons whose election is not supported by the Board of Directors of
the Holding Company.
-98-
<PAGE> 104
EMPLOYEE BENEFIT PLANS
The Stock Option Plan, the ESOP and the RRP also may be deemed to have
certain anti-takeover effects. See "DESCRIPTION OF AUTHORIZED SHARES" and
"MANAGEMENT - Employee Stock Ownership Plan; - Stock Option Plan; and -
Recognition and Retention Plan."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of the Holding Company will authorize the
issuance of 100 million common shares, and 25 million preferred shares. Neither
of the common shares and the preferred shares authorized by the Holding
Company's Articles of Incorporation have par value. Upon receipt by the Holding
Company of the purchase price therefor and subsequent issuance thereof, each
Common Share issued in the Conversion will be fully paid and nonassessable.
Notwithstanding the foregoing, until payments are received by the Holding
Company from the ESOP in accordance with the terms of a loan agreement to be
entered into by and between the Holding Company and the ESOP, Common Shares
issued to the ESOP for which payment in money has not been received will not be
fully paid and non-assessable. The Common Shares will represent nonwithdrawable
capital and will not and cannot be insured by the FDIC. Each Common Share will
have the same relative rights and will be identical in all respects to every
other Common Share.
None of the preferred shares of the Holding Company will be issued in
connection with the Conversion. The Board of Directors of the Holding Company is
authorized, without shareholder approval, to issue preferred shares and to fix
and state the designations, preferences or other special rights of such shares
and the qualifications, limitations and restrictions thereof. The preferred
shares may rank prior to the common shares as to dividend rights, liquidation
preferences or both. Each holder of preferred shares will be entitled to one
vote for each preferred share held of record on all matters submitted to a vote
of shareholders. The issuance of preferred shares and any conversion rights
which may be specified by the Board of Directors for the preferred shares could
adversely affect the voting power of holders of the common shares. The Board of
Directors has no present intention to issue any of the preferred shares.
The following is a summary description of the rights of the common
shares of the Holding Company, including the material express terms of such
shares as set forth in the Holding Company's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of the Holding
Company, the holders of the Common Shares will be entitled to receive all assets
of the Holding Company available for distribution, in cash or in kind, after
payment or provision for payment of (i) all debts and liabilities of the Holding
Company, (ii) any accrued dividend claims, and (iii) any interests in the
Liquidation Account payable as a result of a liquidation of the Company. See
"THE CONVERSION - Liquidation Account."
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights
in the Holding Company. Each holder of Common Shares will be entitled to one
vote for each share held of record on all matters submitted to a vote of holders
of common shares. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND
THE COMPANY AND ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of the
Holding Company -- Elimination of Cumulative Voting."
-99-
<PAGE> 105
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state statutory
and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION - Office of
Thrift Supervision -- Limitations on Capital Distributions" and "TAXATION -
Federal Taxation" for a description of restrictions on the payment of cash
dividends.
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of the Holding
Company will have, as a matter of right, the preemptive right to purchase or
subscribe for shares of any class, now or hereafter authorized, or to purchase
or subscribe for securities or other obligations convertible into or
exchangeable for such shares or which by warrants or otherwise entitle the
holders thereof to subscribe for or purchase any such share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for
a description of the limitations on the repurchase of stock by the Holding
Company; "THE CONVERSION - Restrictions on Transfer of Common Shares by
Directors and Officers" for a description of certain restrictions on the
transferability of Common Shares purchased by officers and directors; and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND
ANTI-TAKEOVER PROVISIONS" for information regarding regulatory restrictions on
acquiring Common Shares.
REGISTRATION REQUIREMENTS
The Holding Company will register its common shares pursuant to Section
12(g) of the Exchange Act prior to or promptly upon the completion of the
Conversion and will not deregister such shares for a period of three years
following the completion of the Conversion. Upon such registration, the proxy
and tender offer rules, insider trading restrictions, annual and periodic
reporting and other requirements of the Exchange Act will apply to the Holding
Company.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal
and Ohio tax consequences of the Conversion are being passed upon for the
Holding Company and the Company by Vorys, Sater, Seymour and Pease LLP,
Cincinnati, Ohio. Certain legal matters are being passed upon for Trident by its
counsel, Luse Lehman Gorman Pomerenck & Schick, A Professional Corporation,
Washington, D.C.
EXPERTS
Keller has consented to the publication herein of the summary of its
letter to the Company setting forth its opinion as to the estimated pro forma
market value of the Company as converted and to the use of its name and
statements with respect to it appearing herein.
-100-
<PAGE> 106
The financial statements of the Company as of December 31, 1997, and
for the year then ended included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of the Company as of December 31, 1996, and
for each of the two years then ended included in this Prospectus have been
audited by Packer, Thomas & Co., independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form S-1 (File No. ______________) under the Act with respect to the Common
Shares offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. Such information may be
inspected at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC at
prescribed rates. Such information may also be inspected on the SEC's internet
website, at www.sec.gov.
The Company has filed an Application for Conversion (the "Application")
with the OTS and the Division. This Prospectus omits certain information
contained in the Application. The Application may be inspected at the offices of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the Central Regional
Office of the OTS, 200 West Madison, Suite 1300, Chicago, Illinois 60606; and at
the offices of the Division, 77 S. High Street, Columbus, Ohio 43215.
-101-
<PAGE> 107
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE HOLDING COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITY, OTHER THAN THE
COMMON SHARES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM DELIVERY OF
THIS PROSPECTUS WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..............................................1
SELECTED FINANCIAL INFORMATION AND OTHER DATA..................10
RISK FACTORS...................................................13
USE OF PROCEEDS................................................19
MARKET FOR COMMON SHARES.......................................20
DIVIDEND POLICY................................................20
REGULATORY CAPITAL COMPLIANCE..................................21
CAPITALIZATION.................................................22
PRO FORMA DATA.................................................23
COMPARISON OF VALUATION AND PRO FORMA
INFORMATION WITHOUT FOUNDATION...............................26
THE HOME SAVINGS AND LOAN COMPANY OF
YOUNGSTOWN, OHIO STATEMENTS OF INCOME........................27
MANAGEMENT'S DISCUSSION AND ANALYSIS...........................28
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............28
THE BUSINESS OF THE ASSOCIATION................................39
CHANGE IN ACCOUNTANTS..........................................60
MANAGEMENT.....................................................60
REGULATION.....................................................68
TAXATION.......................................................75
THE CONVERSION.................................................78
RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY AND THE ASSOCIATION AND RELATED
ANTI-TAKEOVER PROVISIONS.....................................96
DESCRIPTION OF AUTHORIZED SHARES..............................100
REGISTRATION REQUIREMENTS.....................................101
LEGAL MATTERS.................................................101
EXPERTS.......................................................101
ADDITIONAL INFORMATION........................................102
FINANCIAL STATEMENTS..........................................F-1
</TABLE>
UNTIL 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-102-
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
The Home Savings And Loan Company
of Youngstown, Ohio
We have audited the accompanying statements of financial condition of The Home
Savings and Loan Company of Youngstown, Ohio as of December 31, 1997, and the
related statements of income, equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on those financial statements based
on our audit. The financial statements of The Home Savings and Loan Company of
Youngstown, Ohio for the years ended December 31, 1996 and 1995 were audited by
other auditors whose report, dated February 28, 1997, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1997 financial statements present fairly, in all material
respects, the financial position of The Home Savings and Loan Company of
Youngstown, Ohio at December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
CLEVELAND, OHIO
February 27, 1998
F-1
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
We have audited the accompanying statements of financial condition of The Home
Savings and Loan Company of Youngstown, Ohio as of December 31, 1996, and the
related statements of income, retained earnings, and cash flows for the two
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Home Savings and Loan
Company of Youngstown, Ohio at December 31, 1996, and the results of its
operations and its cash flows for the two years then ended in conformity with
generally accepted accounting principles.
Packer, Thomas & Co.
Youngstown, Ohio
February 28, 1997
F-2
<PAGE> 110
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS:
Cash and deposits with banks $ 14,618 $ 13,686
Federal funds sold and other 19,879 5,982
---------- ----------
Total cash and cash equivalents 34,497 19,668
---------- ----------
Investment securities:
Available for sale (amortized cost of $39,091 and $14,543,
respectively) 39,402 14,659
Held to maturity, (fair value of $5,013 and $28,108, 4,968 27,970
respectively)
Mortgage-backed securities:
Available for sale (amortized cost of $61,633 and $83,750, 62,423 84,466
respectively)
Held to maturity (fair value of $247,986 and $288,219,
respectively) 243,848 286,384
Loans, net (including allowance for loan losses
of $5,982 and $5,040, respectively) 633,236 616,923
Federal Home Loan Bank stock 11,136 10,370
Premises and equipment 7,930 6,596
Accrued interest receivable 6,414 6,450
Real estate owned 55 29
Other assets 1,084 1,221
---------- ----------
TOTAL ASSETS $1,044,993 $1,074,736
========== ==========
LIABILITIES AND EQUITY:
LIABILITIES:
Deposits $ 886,808 $ 932,060
Advance payments by borrowers for taxes and insurance 3,715 3,852
Accrued interest payable 845 1,000
Post-retirement benefit obligation 7,647 7,326
Accrued expenses and other liabilities 4,625 2,367
---------- ----------
Total liabilities 903,640 946,605
---------- ----------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Retained earnings (substantially restricted) 140,636 127,589
Net unrealized gain on available for sale securities, net of
taxes of $385 and $291, respectively 717 542
---------- ----------
TOTAL EQUITY 141,353 128,131
---------- ----------
TOTAL LIABILITIES AND EQUITY $1,044,993 $1,074,736
========== ==========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 111
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 54,148 $ 48,586 $ 43,093
Mortgage-backed securities:
Available for sale 5,122 6,871 6,969
Held to maturity 19,024 21,988 23,827
Investment securities:
Available for sale 2,169 1,226 2,253
Held to maturity 843 1,780 2,185
FHLB stock dividend 766 695 632
Other interest-earning assets 613 603 875
-------- -------- --------
Total interest income 82,685 81,749 79,834
INTEREST EXPENSE:
Interest expense on deposits 40,463 43,009 41,104
-------- -------- --------
NET INTEREST INCOME 42,222 38,740 38,730
RECOVERY OF LOAN LOSS ALLOWANCES (1,546)
-------- -------- --------
NET INTEREST INCOME AFTER RECOVERY OF
LOAN LOSS ALLOWANCES 43,768 38,740 38,730
-------- -------- --------
NONINTEREST INCOME:
Service fees and other charges 1,092 755 681
Net (losses) gains:
Mortgage-backed securities available for sale 80 321
Investment securities available for sale 45 74
Other (losses) gains (34) (45) 9
Other income 426 536 469
-------- -------- --------
Total noninterest income 1,564 1,291 1,554
-------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 14,710 12,735 11,033
Occupancy 1,256 1,250 1,194
Equipment and data processing 2,534 2,181 1,768
Deposit insurance premiums 588 2,033 2,064
Federal deposit insurance special assessment 5,903
Franchise tax 1,752 1,643 1,398
Advertising 1,045 1,000 1,162
Other expenses 3,418 3,323 3,376
-------- -------- --------
Total noninterest expenses 25,303 30,068 21,995
-------- -------- --------
Income before income taxes 20,029 9,963 18,289
Income taxes 6,982 3,332 6,707
-------- -------- --------
NET INCOME $ 13,047 $ 6,631 $ 11,582
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 112
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,047 $ 6,631 $ 11,582
Adjustments to reconcile net income to net cash
provided by operating activities:
Recovery of loan loss allowances (1,546)
Net (gains) losses (46) (404)
Accretion of discounts and amortization of premiums (1,090) (1,499) (2,018)
Depreciation 1,080 1,016 671
FHLB stock dividends (766) (695) (632)
Decrease (increase) in interest receivable 36 1,312 (89)
(Decrease) increase in interest payable (155) (18) 512
Increase in post retirement benefit obligation 321 312 221
Decrease (increase) in prepaid and other assets 137 (182) (109)
Increase (decrease) in other liabilities 2,165 (929) 2,807
--------- --------- ---------
Net cash provided by operating activities 13,183 5,948 12,541
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity 42,885 46,034 41,023
Mortgage-backed securities available for sale 19,101 23,014 13,705
Investment securities held to maturity 23,000 2,000 15,700
Investment securities available for sale 6,312 3,653 2,596
Proceeds from sale of:
Mortgage-backed securities available for sale 3,065 9,711
Investment securities available for sale 21,004 16,353
Purchases of:
Mortgage-backed securities held to maturity (30,031) (43,884)
Mortgage-backed securities available for sale (8,110) (16,334)
Investment securities available for sale (30,876) (7,544) (16,487)
Investment securities held to maturity (11,704)
Principal collected on loans 119,120 125,550 105,413
Loans originated and acquired (133,473) (194,674) (146,803)
Proceeds from disposal of real estate owned 315 81 385
Purchases of premises and equipment (2,414) (1,516) (1,488)
Proceeds from disposal of premises and equipment 7
--------- --------- ---------
Net cash provided by (used in) investing activities 47,035 (20,532) (31,814)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Now, Savings and Money Market Accounts (16,842) (241) (54,150)
Net (decrease) increase of Certificates of Deposit (28,410) (6,554) 94,093
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (137) (767) 542
--------- --------- ---------
Net cash provided (used in) by financing activities (45,389) (7,562) 40,485
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 14,829 (22,146) 21,212
Cash and cash equivalents, beginning of year 19,668 41,814 20,602
--------- --------- ---------
Cash and cash equivalents, end of year $ 34,497 $ 19,668 $ 41,814
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 113
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
On Retained
Securities Earnings Total Equity
---------- -------- ------------
(In thousands)
<S> <C> <C> <C>
Balance, January 1, 1995 $ (2,167) $ 109,376 $ 107,209
Change in net unrealized gain on securities, net of taxes 3,502 3,502
Net income 11,582 11,582
--------- --------- ---------
Balance, December 31, 1995 1,335 120,958 122,293
--------- --------- ---------
Change in net unrealized loss on securities, net of taxes (793) (793)
Net income 6,631 6,631
--------- --------- ---------
Balance, December 31, 1996 542 127,589 128,131
--------- --------- ---------
Change in net unrealized gain on securities, net of taxes 175 175
Net income 13,047 13,047
--------- --------- ---------
Balance, December 31, 1997 $ 717 $ 140,636 $ 141,353
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 114
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of The Home Savings & Loan Company of Youngstown,
Ohio, a state chartered savings and loan company, (the "Company"), conform
to generally accepted accounting principles and prevailing practices within
the banking and thrift industry. A summary of the more significant
accounting policies follows:
NATURE OF OPERATIONS
The Company is an Ohio Corporation organized as a savings and loan
association. The business of the Company is providing consumer and business
banking services to its market area in northeastern Ohio. At the end of
1997, the Company was doing business through 14 full service banking
branches. Loans and deposits are primarily generated from the areas where
banking branches are located. The Company's income is derived predominantly
from interest on loans, securities, and to a lesser extent, noninterest
income. The Company's principal expenses are interest paid on deposits and
normal operating costs. The Company's operations are principally in the
savings and loan industry, which constitutes a single industry segment.
PLAN OF CONVERSION
On December 9, 1997, the Board of Directors of the Company adopted a Plan
of Conversion to convert from a state chartered mutual savings and loan
association to a state of Ohio chartered capital stock savings and loan
association with the concurrent formation of a holding company, subject to
approval by regulatory authorities and depositors of the Company. The
conversion is expected to be accomplished through the adoption of a state
stock charter for the Company, the sale of all of the Company's stock to
the holding company and the sale of the holding company's common stock to
the public. A subscription offering of the shares of common stock will be
offered initially to eligible account holders, employee benefit plans of
the Company, supplemental eligible account holders, other members and
directors, officers and employees of the Company. Any shares of common
stock not sold in the subscription offering are expected to be offered for
sale to the general public.
At the time of the conversion, the Company will establish a liquidation
account in an amount equal to its retained earnings as of the date of the
latest balance sheet appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their
accounts at the Company after the conversion. The liquidation account will
be reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore
an eligible or supplemental eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Company,
each eligible account holder and supplemental eligible account holder will
be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held.
Subsequent to the conversion, the Company may not declare or pay cash
dividends on or repurchase any of its shares of common stock, if the effect
thereof would cause equity to be reduced below applicable regulatory
capital maintenance requirements or if such declaration and payment would
otherwise violate regulatory requirements.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will
be charged as an expense. As of December 31, 1997, conversion costs have
not been significant.
F-7
<PAGE> 115
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Securities are classified as available for sale or held to maturity upon
their acquisition. Securities classified as available for sale are carried
at estimated fair value with the unrealized holding gain or loss reflected
as a component of equity, net of taxes. Securities classified as held to
maturity are carried at amortized cost. Premiums and discounts are
recognized in interest income over the period to maturity by the level
yield method. Realized gains or losses on the sale of debt securities are
recorded based on the amortized cost of the specific securities sold.
Security sales are recorded on a trade date basis.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances. For balance sheet presentation, the
balances are presented net of deferred fees or costs on originated loans or
unamortized premiums or discounts on purchased loans. Discounts and
premiums are accreted or amortized using the interest method over the
remaining period to contractual maturity. Unamortized net fees or costs are
recognized upon early repayment of the loans. Unamortized net fees or costs
on loans sold are included in the basis of the loans in calculating gains
and losses.
Loans intended for sale are carried at the lower of cost or estimated
market value determined on an aggregate basis. Net unrealized losses are
recognized through a valuation allowance by a charge to income. Gains or
losses on the sale of loans are determined under the specific
identification method.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures," which impose certain requirements on
the measurement of impaired loans. The Company has previously measured such
loans in accordance with the methods prescribed in SFAS No. 114.
Consequently, no additional loss provisions were required by the adoption
of these statements. SFAS No. 114 also requires that impaired loans for
which foreclosure is probable should continue to be accounted for as loans.
The adoption of SFAS No. 114 and SFAS No. 118 did not have a material
effect on the Company's results of operations.
A loan (including a loan impaired under SFAS No. 114) is classified as
nonaccrual when collectability is in doubt (this is generally when the
borrower is 90 days past due on contractual principal or interest
payments). A loan may be considered impaired, but remain on accrual status,
when the borrower demonstrates (by continuing to make payments) a
willingness to keep the loan current and by reducing the delinquency to
less than 90 days. When a loan is placed on nonaccrual status, unpaid
interest is reversed and an allowance is established by a charge to
interest income equal to all accrued interest. Income is subsequently
recognized only to the extent that cash payments are received. Cash
receipts received on impaired loans are generally applied first to escrow
requirements, then to delinquent interest, with any remainder to the
principal balance. Loans are returned to full accrual status when the
borrower has the ability and intent to make periodic principal and interest
payments (this generally requires that the loan be brought current in
accordance with its original contractual terms). Loans are classified as
restructured when concessions are made to borrowers with respect to the
principal balance, interest rate or the terms due to the inability of the
borrower to meet the obligation under the original terms.
F-8
<PAGE> 116
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. In
general, the Company considers a loan on income-producing properties to be
impaired when the debt service ratio is less than 1.0 and it is not
probable that all payments will be received in accordance with contractual
terms. Loans on non-income producing properties are considered impaired
whenever fair value of the underlying collateral is less than book value of
the outstanding loan. The Company performs a review of all loans over
$500,000 to determine if the impairment criteria have been met. If the
impairment criteria have been met, a reserve is calculated, including all
collection costs, according to the provisions of the SFAS No. 114. Most of
the Company's loan portfolios are excluded from the scope of SFAS No. 114
because the pronouncement is generally not applicable to large groups of
smaller-balance homogeneous loans such as residential mortgage, and other
consumer loans. For loans which are individually not significant ($500,000
or less) and represent a homogeneous population, the Company evaluates
impairment based on the level and extent of delinquencies in the portfolio
and the Company's prior charge-off experience with those delinquencies. The
Company charges principal off at the earlier of (i) when a total loss of
principal has been deemed to have occurred as a result of the book value
exceeding the fair value, or (ii) when collection efforts have ceased.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based upon
estimates derived from an analysis of individual credits, prior and current
loss experience, loan portfolio delinquency levels, overall growth in the
loan portfolio and current economic conditions. Consequently, these
estimates are particularly susceptible to changes that could result in a
material adjustment to results of operations. The provision for loan losses
represents a charge against current earnings in order to maintain the
allowance for loan losses at an appropriate level.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method over the useful lives (or term of the lease, if
shorter) of the related assets.
REAL ESTATE OWNED
Real estate owned, including property acquired in settlement of foreclosed
loans, is carried at the lower of cost or estimated fair value less
estimated cost to sell after foreclosure. Costs relating to the development
and improvement of real estate owned are capitalized, whereas costs
relating to holding and maintaining the property are charged to expense.
LOAN FEES
Loan origination fees received for loans, net of direct origination costs,
are deferred and amortized to interest income over the contractual lives of
the loans using the level yield method. Fees received for loan commitments
that are expected to be drawn, based on the Company's experience with
similar commitments, are deferred and amortized over the lives of the loans
using the level yield method. Fees for other loan commitments are deferred
and amortized over the loan commitment period on a straight-line basis.
Unamortized deferred loan fees or costs related to loans paid off are
included in income. Unamortized net fees or costs on loans sold are
included in the basis of the loans in calculating gains and losses.
Amortization of net deferred fees is discontinued for loans that are deemed
to be nonperforming.
F-9
<PAGE> 117
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
INCOME TAXES
The provision for federal income taxes is based upon earnings reported for
financial statement purposes rather than amounts reported on the Company's
income tax returns. Deferred income taxes, which result from temporary
differences in the recognition of income and expense for financial
statement and tax return purposes, are included in the calculation of
income tax expense. The effect on deferred tax assets and liabilities of a
change in income tax rates is recognized in income in the period that
includes the enactment date.
POSTRETIREMENT BENEFITS
The Company accrues estimated costs of retiree health care and life
insurance benefits over the years employees render the services necessary
to earn those benefits. The Company elected to recognize the accumulated
postretirement benefit obligation when SFAS No. 106 "Employers' Accounting
for Postretirement Benefits other than Pensions" was adopted.
STATEMENTS OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a term of three months or less to be cash
equivalents.
LONG-LIVED ASSETS
Effective October 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of." SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangible assets and
goodwill related to those assets to be held and used and for long-lived
assets to be held and certain intangible assets to be disposed of. The
adoption of SFAS No. 121 did not have a material impact on the Company's
financial conditions or results of operations.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Company's profitability depends to a large extent on its net interest
income, which is the difference between interest income from loans and
investments and interest expense on deposits. Like most financial
institutions, the Company's short-term interest income and interest expense
are significantly affected by changes in market interest rates and other
economic factors beyond its control. The Company's interest earning assets
consist primarily of long-term, fixed rate and adjustable rate mortgage
loans and investments which adjust more slowly to changes in interest rates
than its interest bearing liabilities which are deposits. Accordingly, the
Company's earnings could be adversely affected during periods of rising
interest rates.
NEW ACCOUNTING STANDARDS
On January 1, 1997 the Company adopted SFAS No. 125. SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," amends portions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," amends
and extends to all servicing assets and liabilities the accounting
standards for mortgage servicing rights now in SFAS No. 65, and supersedes
SFAS No. 122. SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. Those standards are based upon consistent application
of a financial components approach that focuses on control. The statement
also defines accounting treatment for servicing assets and other retained
interests in the assets that are transferred. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is required to be applied
prospectively. The adoption of this statement has not had a material effect
on the Company's financial condition or results of operations. The
Financial Accounting Standards Board has issued
F-10
<PAGE> 118
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS
No. 125," that defers the effective date of certain provisions of SFAS No.
125 related to secured borrowings and collateral, repurchase agreements,
dollar rolls, securities lending, and similar transactions until after
December 31, 1997. Management has determined that the impact of adopting
this statement is not material to the financial statements.
SFAS No. 130, "Reporting Comprehensive Income," issued in July 1997,
establishes standards for reporting and presentation of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. It requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No.
130 requires that companies (i) classify terms of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the
statement of financial condition. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassifications of financial
statements for earlier periods provided for comprehensive purposes is
required.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement
standardizes the disclosure for pensions and other postretirement benefits
to the extent practicable, requires additional information on changes in
the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
as useful as they were when SFAS No. 87 "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for the Settlement and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," and SFAS No. 106, "Employers Accounting for Postretirement
Benefits Other than Pensions," were issued. SFAS No. 132 suggests combined
formats for presentation of pension and other postretirement benefit
disclosures. It does not change the measurement or recognition of those
plans. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. Restatements of disclosures for earlier periods provided for
comparative purposes is required. Management does not believe the adoption
of this statement will have a material impact on the Company's financial
condition and results on operations.
RECLASSIFICATIONS
Certain items in the financial statements for 1996 and 1995 have been
reclassified to conform to the 1997 presentation.
2. CASH AND CASH EQUIVALENTS
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. These reserves, which consisted
of vault cash and deposits at the Federal Reserve Bank, totaled $2.534
million and $2.22 million at December 31, 1997 and 1996, respectively.
F-11
<PAGE> 119
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and agency securities $25,072 $ 190 $ -- $25,262
Corporate notes 14,019 121 -- 14,140
------- ------- ------- -------
Total investment securities available for sale 39,091 311 -- 39,402
HELD TO MATURITY
U.S. Treasury and agency securities 4,968 45 -- 5,013
------- ------- ------- -------
Total investment securities held to maturity 4,968 45 -- 5,013
------- ------- ------- -------
Total investment securities $44,059 $ 356 $ -- $44,415
======= ======= ======= =======
<CAPTION>
December 31, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasure and agency securities $12,517 $ 96 $ -- $12,613
Corporate notes 2,026 21 1 2,046
------- ------- ------- -------
Total investment securities available for sale 14,543 117 1 14,659
HELD TO MATURITY
U.S. Treasury and agency securities 14,967 84 15,051
Corporate notes 13,003 55 1 13,057
------- ------- ------- -------
Total investment securities held to maturity 27,970 139 1 28,108
------- ------- ------- -------
Total investment securities $42,513 $ 256 $ 2 $42,767
======= ======= ======= =======
</TABLE>
The weighted average interest rate on investment securities was 6.39% and
6.34% at December 31, 1997 and 1996, respectively.
Investment securities available for sale by contractual maturity, repricing
or expected call date are shown below:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
Amortized Cost Fair Value
-------------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less $ 5,004 $ 5,011
Due after one year through five years 29,087 29,354
Due after five years through ten years 5,000 5,037
Due after ten years - -
------- -------
Total $39,091 $39,402
======= =======
</TABLE>
F-12
<PAGE> 120
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
Investment securities held to maturity by contractual maturity, repricing
or expected call date are shown below:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
Amortized Cost Fair Value
-------------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 4,968 5,013
Due after five years through ten years - -
Due after ten years - -
------ ------
Total $4,968 $5,013
====== ======
</TABLE>
Proceeds on sales of investment securities were $21,004,000 and $16,353,000
for the years ended December 31, 1996 and 1995. There were realized gains
of approximately $155,000 and $74,000 for the years ended December 31, 1996
and 1995, respectively. Realized losses were approximately $110,000 for the
year ended December 31, 1996, and there were no realized losses for year
ended December 31, 1995. There were no sales of investment securities
during the year ended December 31, 1997.
Securities pledged for public funds deposits were approximately $3,763,000
and $2,888,000 at December 31, 1997 and 1996, respectively.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities were summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues $ 59,304 $ 1,073 $ 205 $ 60,172
Private issues 2,329 - 78 2,251
-------- -------- -------- --------
Total mortgage-backed securities
available for sale 61,633 1,073 283 62,423
-------- -------- -------- --------
HELD TO MATURITY
Participation certificates:
Government and government agency issues 243,848 4,672 534 247,986
-------- -------- -------- --------
Total mortgage-backed securities $305,481 $ 5,745 $ 817 $310,409
-------- -------- -------- --------
</TABLE>
F-13
<PAGE> 121
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues $ 81,237 $ 1,655 $ 859 $ 82,033
Private issues 2,513 - 80 2,433
-------- -------- -------- --------
Total mortgage-backed securities
available for sale 83,750 1,655 939 84,466
-------- -------- -------- --------
HELD TO MATURITY
Participation certificates:
Government and government agency issues 286,384 4,519 2,684 288,219
-------- -------- -------- --------
Total mortgage-backed securities $370,134 $ 6,174 $ 3,623 $372,685
======== ======== ======== ========
</TABLE>
Mortgage-backed securities are classified by type of interest payment as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996
------------------------- -------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Adjustable rate:
Private issues $ 762 $ 762 $ 919 $ 919
-------- -------- -------- --------
Total adjustable rate 762 762 919 919
-------- -------- -------- --------
Fixed rate:
Participation certificates:
Government agency issues 59,304 60,172 81,237 82,033
Private issues 1,567 1,489 1,594 1,514
-------- -------- -------- --------
Total fixed rate 60,871 61,661 82,831 83,547
-------- -------- -------- --------
Total available for sale 61,633 62,423 83,750 84,466
-------- -------- -------- --------
HELD TO MATURITY
Adjustable rate:
Participation certificates:
Government agency Issues 955 969 1,113 1,124
-------- -------- -------- --------
Total adjustable rate 955 969 1,113 1,124
-------- -------- -------- --------
Fixed rate:
Participation certificates:
Government and government
agency issues 242,893 247,017 285,271 287,095
-------- -------- -------- --------
Total fixed rate 242,893 247,017 285,271 287,095
-------- -------- -------- --------
Total held to maturity 243,848 247,986 286,384 288,219
-------- -------- -------- --------
Total mortgage-backed securities $305,481 $310,409 $370,134 $372,685
======== ======== ======== ========
</TABLE>
Proceeds on sales of mortgage-backed securities were $3,065,000 and $9,711,000
for the years ended December 31, 1997 and 1995, respectively. These were
realized gains of $80,000 and $325,000 for the years ended December 31,
F-14
<PAGE> 122
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
1997 and 1995, respectively, and realized losses for the year ended December 31,
1995 were $4,000. There were no sales of mortgage-backed securities during the
year ended December 31, 1996.
5. LOANS
Loans held for portfolio consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Real Estate:
Permanent:
One-to-four family $489,677 $482,089
Multifamily 8,944 8,778
Non-residential 33,479 35,315
Land 285 195
Construction:
One-to-four family 24,044 27,610
Multifamily 325 490
-------- --------
Total real estate 556,754 554,477
Consumer 43,388 39,605
Commercial 59,897 46,742
-------- --------
Total loans 660,039 640,824
-------- --------
Less:
Loans in process 16,485 14,700
Allowance for loan losses 5,982 5,040
Deferred loan fees, net 4,336 4,161
-------- --------
Total 26,803 23,901
-------- --------
Loans, net $633,236 $616,923
======== ========
</TABLE>
Loans with adjustable rates included above totaled $180.6 million and
$177.0 million at December 31, 1997 and 1996, respectively. Substantially
all such loans have contractual interest rates that increase or decrease at
periodic intervals no greater than three years, or have original terms to
maturity of three years or less. Adjustable-rate loans reprice primarily
based upon U.S. Treasury security rates.
The Bank's primary lending area is within the northeast, Ohio. At December
31, 1997 and 1996, substantially all of the Company's gross loans were to
borrowers in Ohio.
The Company originates or purchases commercial real estate and business
loans. These loans are considered by management to be of somewhat greater
risk of uncollectibility than single-family residential real estate loans
due to the dependency on income production or future development of real
estate. The following table sets forth the Company's commercial
non-residential real estate portfolios by type of collateral.
F-15
<PAGE> 123
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1997 1996
------------------------ --------------------
Percent Percent
Amount of Total Amount of Total
------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Strip shopping centers $ 1,736 5.19% $ 1,886 5.34%
Office buildings 9,160 27.36 9,922 28.10
Warehouses 17,853 53.33 18,610 52.70
Hotel property 4,373 13.06 4,504 12.75
Other 357 1.06 393 1.11
------- --------- ------- -----
Total $33,479 100.00% $35,315 100.00%
======= ========= ======= ======
</TABLE>
Commercial loans are collateralized by accounts receivable, inventory and
other assets used in the borrowers' business. Substantially all of the
consumer loans, including consumer lines of credit, are secured by equity
in the borrowers' residence.
At December 31, 1997, 1996 and 1995, loans serviced for the benefit of
others, not included in the detail above, totaled $6.6 million, $7.0
million and $7.6 million, respectively.
Loan commitments are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments
extend over various periods of time with the majority of such commitments
disbursed within a ninety day period. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Commitments to extend credit at fixed rates exposes the Company to
some degree of interest rate risk. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The type or amount of collateral
obtained varies and is based on management's credit evaluation of the
potential borrower. The Company normally has outstanding a number of
commitments to extend credit. At December 31, 1997, there were outstanding
commitments to originate $5,708,000 of fixed-rate mortgage loans and other
loans and $1,992,000 of adjustable-rate loans, all at market rates. Terms
of the commitments extend up to nine months, but are generally less than
two months.
At December 31, 1997, there were also outstanding unfunded consumer lines
of credit of $16,068,000 and commercial lines of credit of $3,047,000.
Substantially all lines of credit are adjustable-rate based on the one-year
U.S. Treasury index and are generally renewable on an annual basis. The
Company does not expect all of these lines to be used by the borrowers.
The Company's business activity is principally with customers located in
Ohio. Except for residential loans in the Company's market area, the
Company has no other significant concentrations of credit risk.
F-16
<PAGE> 124
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 5,040 $ 5,118 $ 5,111
Recovery of loan loss allowances (1,546) - -
Amounts charged off (446) (85) (394)
Recoveries 2,934 7 401
------- ------- -------
Balance, end of year $ 5,982 $ 5,040 $ 5,118
======= ======= =======
</TABLE>
Nonperforming loans (loans 90 days past due and restructured loans) were
$10.2 million, $9.8 million and $6.1 million at December 31, 1997, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
As of or for the year ended
December 31,
--------------------
1997 1996
------ ------
(In thousands)
<S> <C> <C>
Impaired loans on which no valuation allowance was provided $9,340 $8,863
Impaired loans on which specific valuation allowance was provided 151 251
------ ------
Total impaired loans at year-end 9,491 9,114
Specific valuation allowances on impaired loans at year-end 157 254
Average impaired loans during year 8,390 7,349
Interest income recognized on impaired loans during year 544 522
Interest income potential based on original contract terms of
impaired loans 585 584
</TABLE>
Directors and officers of the Company are customers of the institution in
the ordinary course of business. Deposits and loans of directors and
officers have terms consistent with those offered to other customers. At
December 31, 1997 and 1996, loans to officers or directors of the Company
totaled approximately $1,345,000 and $1,227,000, respectively.
6. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Land and land improvements $ 1,952 $ 1,066
Buildings 9,992 8,900
Leasehold improvements 325 771
Furniture and equipment 4,773 4,134
------- -------
17,042 14,871
Less allowances for depreciation and amortization 9,112 8,275
------- -------
Total $ 7,930 $ 6,596
======= =======
</TABLE>
F-17
<PAGE> 125
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
7. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1997 1996
------------------------ ----------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
------ ------------ ------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Checking accounts:
Interest-bearing $ 58,707 2.03% $ 56,347 2.34%
Noninterest-bearing 5,387 4,201
Savings accounts 243,588 2.99 256,081 3.08
Money market accounts 56,727 2.99 64,622 3.08
Certificates of deposit 522,399 5.78 550,809 5.74
-------- ------ -------- ------
Total deposits $886,808 4.56% $932,060 4.60%
======== ====== ======== ======
</TABLE>
A summary of certificates of deposit by maturity follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
(In thousands)
<S> <C>
Within 12 months $349,600
12 months to 24 months 82,530
24 months to 36 months 51,240
36 months to 48 months 14,780
Over 48 months 24,249
--------
Total $522,399
========
</TABLE>
At December 31, 1997, deposit accounts with balances of $100,000 and
greater totaled approximately $48.7 million. Deposits in excess of $100,000
are not federally insured. The Company has not accepted brokered deposits
for the years ended December 31, 1997 and 1996.
Directors and officers of the Company are customers of the institution in
the ordinary course of business. Deposits and loans of directors and
officers have terms consistent with those offered to other customers. At
December 31, 1997 and 1996, deposits from officers or directors of the
Company totaled approximately $2,467,000 and $2,484,000, respectively.
8. INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred
income tax assets and liabilities are computed annually for differences
between financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
based on the weight of available evidence, when it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
Income tax expense is the tax payable or refundable for the period adjusted
for the change during the period in deferred tax assets and liabilities.
F-18
<PAGE> 126
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
The provision for federal income taxes consists of the following
components:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current $6,807 $3,055 $5,875
Deferred 175 277 832
------ ------ ------
Total $6,982 $3,332 $6,707
====== ====== ======
</TABLE>
A reconciliation from tax at the statutory rate to the income tax provision
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995
------ ------ ----
Dollars Rate Dollars Rate Dollars Rate
------- ---- ------- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $7,010 35.00% $3,487 35.00% $6,401 35.00%
Increase (decrease) due to:
Other (28) (.14) (155) (1.55) 306 1.67
------ ----- ------ ----- ------ -----
Income tax provision $6,982 34.86% $3,332 33.45% $6,707 36.67%
====== ===== ====== ===== ====== =====
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows. No valuation allowance was considered necessary for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 2,093 $ 1,764
Post-retirement benefits 2,676 2,564
Deferred loan fees 1,518 1,457
Interest on non-accrual loans 205 204
------- -------
Net deferred tax assets 6,492 5,989
------- -------
Deferred tax liabilities:
Accelerated depreciation 479 560
Pension benefit obligations 461 493
Original issue discount 1,408 877
FHLB stock dividends 2,093 1,833
Post 1987 tax bad debts 2,152 2,152
Mark-to-market 385 291
------- -------
Net deferred tax liabilities 6,978 6,206
------- -------
Net deferred tax liability $ (486) $ (217)
======= =======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including the Company, to use the
percentage-of-taxable income bad debt accounting method, if more favorable
than the specific charge-off method, for federal income tax purposes. The
excess reserves (deduction based on the percentage-of-taxable
F-19
<PAGE> 127
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
income less the deduction based on the specific charge-off method)
accumulated post-1987 are required to be recaptured ratably over a six-year
period beginning in 1996. The recapture has no effect on the Company's
statement of income as income taxes were provided for in prior years in
accordance with generally accepted accounting principles. The timing of
this recapture may be delayed for a one or two-year period to the extent
that the Company originates more residential loans than the average
originations in the past six years. The Company met the origination
requirement for 1996 and 1997 and, therefore, will delay recapture at least
until the six-year period beginning in 1998. The recapture amount of
approximately $6.1 million will result in payments totaling approximately
$2.1 million and have been previously accrued. The pre-1988 reserve
provisions are subject only to recapture requirements in the case of
certain excess distributions to, and redemptions of shareholders or if the
Company no longer qualifies as a "bank." Tax bad debt deductions
accumulated prior to 1988 by the Company are approximately $14.4 million.
No deferred income taxes have been provided on these bad debt deductions
and no recapture of these amounts is anticipated.
9. REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. The
regulations require the Company to meet specific capital adequacy
guidelines and the regulatory framework for prompt corrective action that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Core and
Tangible capital (as defined in the regulations) to adjusted total assets
(as defined) and of total capital (as defined) to risk-weighted assets (as
defined).
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------------
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
------------------- ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted
assets) $146,461 28.85% $40,619 8.00% $50,774 10.00%
Tier 1 capital (to risk-weighted
assets) 140,636 27.70 * * 30,464 6.00
Core (Tier 1) capital (to
adjusted total assets) 140,636 13.47 31,322 3.00 52,203 5.00
Tangible capital (to adjusted
total assets) 140,636 13.47 15,661 1.50 * *
<CAPTION>
As of December 31, 1996
----------------------------------------------------------------------
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
------------------- ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted
assets) $132,374 26.15% $40,496 8.00% $50,620 10.00%
Tier 1 capital (to risk-weighted
assets) 127,589 25.21 * * 30,372 6.00
Core (Tier 1) capital (to
adjusted total assets) 127,589 11.87 32,247 3.00 53,745 5.00
Tangible capital (to adjusted
total assets) 127,589 11.87 16,124 1.50 * *
<FN>
* Ratio is not required under regulations.
</TABLE>
F-20
<PAGE> 128
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
The following is a reconciliation of the Company's equity reported in the
financial statements under generally accepted accounting principles to OTS
regulatory capital requirements.
<TABLE>
<CAPTION>
Tangible Core (Tier 1) Risk-Based
Capital Capital Capital
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
DECEMBER 31, 1997
Total equity as reported in the financial statements $ 141,353 $ 141,353 $ 141,353
General allowance for loan losses - - 5,825
Net unrealized gain on available for sale securities (717) (717) (717)
--------- --------- ---------
Regulatory Capital $ 140,636 $ 140,636 $ 146,461
========= ========= =========
DECEMBER 31, 1996
Total equity as reported in the financial statements $ 128,131 $ 128,131 $ 128,131
General allowance for loan losses - - 4,785
Net unrealized gain on available for sale securities (542) (542) (542)
--------- --------- ---------
Regulatory Capital $ 127,589 $ 127,589 $ 132,374
========= ========= =========
</TABLE>
As of December 31, 1997 and 1996, the Office of Thrift Supervision
categorized the Company as well capitalized under the regulatory framework
for Prompt Corrective Action. To be categorized as well capitalized, the
Company must maintain minimum Core, Tier 1 and total capital ratios as set
forth in the table above. There are no conditions or events since that
notification that have changed the Company's category.
Management believes, as of December 31, 1997, that the Company meets all
capital requirements to which it is subject. Events beyond management's
control, such as fluctuations in interest rates or a downturn in the
economy in areas in which the Company's loans and securities are
concentrated, could adversely affect future earnings and, consequently, the
Company's ability to meet its future capital requirements.
10. BENEFIT PLANS
RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all
of its full-time employees. The benefits are based on years of service and
the employee's compensation during the last five years of employment.
Participants become 100% vested upon completion of five years of service.
The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Company may determine to be appropriate from time to time.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
F-21
<PAGE> 129
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 376 $ 357 $ 290
Interest cost on projected benefit obligation 530 544 466
Actual return on plan assets (1,013) (525) (425)
Net amortization and deferral 500 (39) (60)
------- ------- -------
Net periodic pension expense $ 393 $ 337 $ 271
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1996
------ ------
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested benefits $5,004 $5,227
Nonvested benefits 236 196
------ ------
Actuarial present value of accumulated benefit obligations $5,240 $5,423
====== ======
</TABLE>
The following tables present the pension plan's funded status and amounts
recognized in the Company's financial statements:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1997 1996
------- --------
(In thousands)
<S> <C> <C>
Plan assets at fair value, primarily stock and bond funds $ 7,445 $ 7,264
Less: projected benefit obligation for service rendered to date (8,612) (8,350)
------- -------
Excess of projected benefit obligation over plan assets (1,167) (1,086)
Unrecognized net loss from past experience different from that
assumed and effect of changes in assumptions 1,544 1,745
Unrecognized net transition asset (161)
Unrecognized prior service cost 367 410
------- -------
Prepaid pension cost included in prepaid expenses and other assets $ 744 $ 908
======= =======
</TABLE>
Assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Weighted average discount rate 7.00% 7.25%
Rates of increase in future compensation levels 6.00 6.00
Expected long-term rate of return on plan assets 8.00 8.00
</TABLE>
The prior service cost is being amortized using the straight-line method
over the average remaining service period of participants expected to
receive benefits.
F-22
<PAGE> 130
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
The Company has a defined contribution 401(K) savings plan, which covers
substantially all employees. Under the provisions of the plan, the
Company's matching contribution is discretionary and may be changed from
year to year. For 1997 and 1996, the Company match was 25% of pre-tax
contributions, up to a maximum of 6% of the employees' base pay. In
addition, in 1997, 1996 and 1995 the Company paid a 1% discretionary
contribution to all employees who were eligible to participate in the plan.
Also in 1996, the Company implemented a discretionary profit sharing pool
as a part of the 401(K) plan which is based upon a formula involving the
average net income of the Company over a three year period. Participants
become 100% vested in the Company contributions upon completion of five
years of service. For the years ended 1997, 1996 and 1995, the expense
related to this plan was approximately $468,000, $513,000 and $107,000,
respectively.
OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's retirement plans, the Company sponsors a
defined benefit health care plan that provides postretirement medical
benefits to full-time employees who have worked 15 years and attained age
60, or worked 5 years and attained age 65, while in service with the
Company. The plan is contributory and contains minor cost-sharing features
such as deductibles and coinsurance. In addition, postretirement life
insurance coverage is provided for employees who were participants prior to
December 10, 1976. The life insurance plan is non-contributory. The
Company's policy is to pay premiums monthly, with no pre-funding.
The following tables present the other postretirement benefit plan's
funded status and amounts recognized in the Company's financial statements
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost $208 $189 $165
Interest cost 332 316 296
Net amortization and deferral (134) (128) (177)
---- ---- ----
Net periodic post-retirement benefit cost $406 $377 $284
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $1,738 $1,709
Fully eligible active plan participants 252 483
Other active plan participants 3,260 2,592
------- -------
Accumulated post-retirement benefit obligation 5,250 4,784
Unrecognized net gain 2,028 2,147
Unrecognized prior service cost 369 395
------- -------
Accrued post-retirement benefit obligation $7,647 $7,326
======= =======
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost
of coverage benefits (i.e., health care cost trend rate) used in the 1997
and 1996 actuarial valuations is 9 percent through 1997 and is assumed to
decrease 1 percent per year to 6 percent for the year 2000 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rate by one percentage point for each year
would increase the accumulated postretirement benefit obligation as of
December 31, 1997, by approximately $1,015,000, and the aggregate of
F-23
<PAGE> 131
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
the service and interest cost components of net periodic postretirement
benefit cost for 1997 by approximately $120,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7 percent and 7.25 percent at
December 31, 1997 and 1996, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Cash, Cash Equivalents, Accrued Interest Receivable and Payable and Advance
Payments by Borrowers for Taxes and Insurance - The carrying amounts as
reported in the Statements of Financial Condition are a reasonable estimate
of fair value due to their short-term nature.
Mortgage-Backed and Investment Securities - Fair values are based on quoted
market prices, dealer quotes and prices obtained from independent pricing
services.
Loans - The fair value is estimated by discounting the future cash flows
using the current market rates for loans of similar maturities with
adjustments for market and credit risks.
Federal Home Loan Bank Stock - The fair value is estimated to be the
carrying value, which is par. All transactions in the capital stock of the
Federal Home Loan Bank are executed at par.
Deposits - The fair value of demand deposits, savings accounts and money
market deposit accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using rates currently offered for deposits of similar remaining maturities.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, a significant asset
not considered a financial asset is premises and equipment. In addition,
tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these
F-24
<PAGE> 132
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 34,497 $ 34,497 $ 19,668 $ 19,668
Investment securities:
Held to maturity 4,968 5,013 27,970 28,108
Available for sale 39,402 39,402 14,659 14,659
Mortgage-backed securities:
Held to maturity 243,848 247,986 286,384 288,219
Available for sale 62,423 62,423 84,466 84,466
Loans 633,236 640,354 616,923 614,723
Federal Home Loan Bank stock 11,136 11,136 10,370 10,370
Accrued interest receivable 6,414 6,414 6,450 6,450
Liabilities:
Deposits:
Checking, savings and money
market accounts 364,409 364,409 381,251 381,251
Certificates of deposit 522,399 522,051 550,809 550,433
Advance payments by borrowers
for taxes and insurance 3,715 3,715 3,852 3,852
Accrued interest payable 845 845 1,000 1,000
</TABLE>
12. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $40,618 $43,026 $40,592
Income taxes 5,500 4,425 4,311
Supplemental schedule of noncash activities:
Loans exchanged for mortgage-backed securities 224
Securities transferred from held to maturity to
available for sale 13,934
Transfers from loans to real estate owned 372 71 311
</TABLE>
13. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the President signed into law an omnibus
appropriations act for fiscal year 1997 that included, among other things,
the recapitalization of the Savings Association Insurance Fund ("SAIF") in
a section entitled the Deposit Insurance Funds Act of 1996 ("ACT"). The Act
included a provision where all insured depository institutions would be
charged a one-time special assessment on their SAIF assessable deposits as
of March 31, 1995. The Company recorded a pretax charge of $5,903,000
($3,837,000 after tax),
F-25
<PAGE> 133
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
which represented 65.7 basis points of the March 31, 1995 assessable
deposits. This charge was recorded upon enactment of the Act on September
30, 1996, and paid on November 29, 1996. The annual deposit insurance rate
in effect after this recapitalization has been reduced to 6.5 basis
points of insured deposits.
F-26
<PAGE> 134
Up to 28,937,500 Common Shares
UNITED COMMUNITY
FINANCIAL CORP.
----------
PROSPECTUS
----------
TRIDENT SECURITIES, INC.
MCDONALD & COMPANY SECURITIES, INC.
, 1998
<PAGE> 135
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- -------- -------------------------------------------
<TABLE>
<S> <C>
* Legal Fees and expenses......................................$200,000
* Postage, printing, Edgar and mailing..........................500,000
* Appraisal and business plan fees and expenses..................38,000
* Accounting fees and expenses.................................110,000
* SEC filing fees...............................................105,199
* OTS filing fees................................................14,400
* Nasdaq filing fees.............................................95,000
* Conversion agent fees and expenses.............................75,000
* Transfer agent fees and expenses...............................45,000
* Other expenses................................................189,401
** Underwriting fees and expenses..............................2,128,000
----------
Total estimated expenses............................... $3,500,000
==========
<FN>
- -----------------------------
* Estimated.
** To assist the Holding Company and the Company in marketing the Common
Shares, the Holding Company and the Company have retained Trident
Securities, Inc. ("Trident") and McDonald & Company Securities, Inc.
("McDonald") (collectively, the "Underwriters"). The Underwriters are
broker-dealers registered with the SEC and members of the NASD.
For its services, the Underwriters will receive a marketing fee of .95%
of the aggregate purchase price of the Common Shares sold other than
(i) Common Shares purchased by the directors, officers and employees of
the Company and the Holding Company and their affiliates, (ii) Common
Shares purchased by the ESOP, and (iii) Common Shares sold by Selected
Dealers (hereinafter defined).
Depending on market conditions, the Common Shares, if any, not
initially subscribed for in the Subscription Offering or the Community
Offering may be offered for sale to the general public on a best
efforts basis in a syndicated community offering by a selling group of
broker-dealers ("Selected Dealers") to be formed by the Underwriters.
If Selected Dealers are employed, the Selected Dealers will be paid a
commission to be agreed to by the Underwriters, the Company and the
Holding Company.
The estimated underwriting fees are based on the following assumptions:
(i) 25,000,000 Common Shares will be sold in the Offering; (ii)
approximately 600,000 Common Shares sold in the Offering will be
purchased by directors, officers and employees of the Company and the
Holding Company and their affiliates; (iii) 2,000,000 Common Shares
sold in the Offering will be purchased by the ESOP; and (iv) the
remaining 22,400,000 Common Shares sold in the Offering will be sold to
persons other than the ESOP and the Company's directors, executive
officers and employees and affiliates, with sales commissions of .95%
of the aggregate dollar amount of such Common Shares.
The Company will also reimburse the Underwriters for all reasonable
fees and expenses of its legal counsel, not to exceed $60,000.
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
- -------- ------------------------------------------
(a) OHIO REVISED CODE
Division (E) of Section 1701.13 of the Ohio Revised Code
governs indemnification by a corporation and provides as follows:
(E)(1) A corporation may indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative,
II-1
<PAGE> 136
or investigative, other than an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, or agent of another corporation, domestic
or foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise, against expenses, including attorney's fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any of the following:
(a) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation unless, and only to the extent that
the court of common pleas or the court in which such action or suit
was brought determines upon application that, despite the
adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity
for such expenses as the court of common pleas or such other court
shall deem proper;
(b) Any action or suit in which the only liability asserted
against a director is pursuant to section 1701.95 of the Revised
Code.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in divisions (E)(1) and (2) of this section, or
in defense of any claim, issue, or matter therein, he shall be indemnified
against expenses, including attorney's fees, actually and reasonably incurred by
him in connection with the action, suit, or proceeding.
(4) Any indemnification under divisions (E)(1) and (2) of this
section, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, trustee, officer, employee, or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in divisions
(E)(1) and (2) of this section. Such determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of
the indemnifying corporation who were not and are not parties to or
threatened with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this
section is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm having
associated with it an attorney, who has been retained by or who has
performed services for the corporation or any person to be
indemnified within the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the court in which such
action, suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which action or suit was brought to review the reasonableness of such
determination.
II-2
<PAGE> 137
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or proceeding
upon receipt of an undertaking by or on behalf of the director in which he
agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or
failure to act involved an act or omission undertaken with deliberate
intent to cause injury to the corporation or undertaken with reckless
disregard for the best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director,
trustee, officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, may be paid
by the corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is determined
that he is not entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles, the regulations or any agreement,
vote of shareholders or disinterested directors, or otherwise, both as to action
in their official capacities and as to action in another capacity while holding
their offices and positions, and shall continue as to a person who has ceased to
be a director, trustee, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of credit,
or self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or profit, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against such liability under this section. Insurance may be purchased from
or maintained with a person in which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
divisions (E)(1) and (2) of this section does not limit the payment of expenses
as they are incurred, indemnification, insurance, or other protection that may
be provided pursuant to divisions (E)(5), (6), and (7) of this section.
Divisions (E)(1) and (2) of this section do not create any obligation to repay
or return payments made by the corporation pursuant to division (E)(5), (6), or
(7).
(9) As used in this division, references to "corporation" include all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee, or
agent of such a constituent corporation, or is or was serving at the request of
such constituent corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
he would if he had served the new or surviving corporation in the same capacity.
II-3
<PAGE> 138
(B) THE HOLDING COMPANY'S CODE OF REGULATIONS
Article Five of the Holding Company's Code of Regulations
provides for the indemnification of officers and directors as follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall
indemnify any officer or director of the corporation who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, any action threatened or instituted by or in the
right of the corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee or agent of
another corporation (domestic or foreign, nonprofit or for profit), partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, he had no reasonable cause to believe his conduct was unlawful. A
person claiming indemnification under this Section 5.01 shall be presumed, in
respect of any act or omission giving rise to such claim for indemnification, to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal matter, to have had no reasonable cause to believe his conduct was
unlawful, and the termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption.
SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything
contained in the Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer
or director of the corporation who was a party to any completed action or suit
instituted by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, trustee, officer, employee or agent of another corporation
(domestic or foreign, nonprofit or for profit), partnership, joint venture,
trust or other enterprise, in respect of any claim, issue or matter asserted in
such action or suit as to which he shall have been adjudged to be liable for
acting with reckless disregard for the best interests of the corporation or
misconduct (other than negligence) in the performance of his duty to the
corporation unless and only to the extent that the Court of Common Pleas of
Mahoning County, Ohio, or the court in which such action or suit was brought
shall determine upon application that, despite such adjudication of liability,
and in view of all the circumstances of the case, he is fairly and reasonably
entitled to such indemnity as such Court of Common Pleas or such other court
shall deem proper; and
(B) the corporation shall promptly make any such
unpaid indemnification as is determined by a court to be proper as contemplated
by this Section 5.02.
SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained
in the Regulations or elsewhere to the contrary notwithstanding, to the extent
that an officer or director of the corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
SECTION 5.04 DETERMINATION REQUIRED. Any indemnification
required under Section 5.01 and not precluded under Section 5.02 shall be made
by the corporation only upon a determination that such indemnification of the
officer or director is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 5.01. Such determination may
be made only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority of a quorum of disinterested directors so directs, in a written opinion
by independent legal counsel other than an attorney, or a firm having associated
with it an attorney, who has been retained by or who has performed services for
the corporation, or any person to be indemnified, within the past five years, or
(C) by the shareholders, or (D) by the Court of Common Pleas of Mahoning County,
Ohio, or (if the corporation is a party thereto) the court in which such action,
suit or proceeding was brought, if any; any such determination may be made by a
court under division (D) of this Section 5.04 at any time including, without
limitation, any time before, during or after the time when any such
determination may be requested of, be under consideration by or have been denied
or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04; and no failure for any reason to
II-4
<PAGE> 139
make any such determination, and no decision for any reason to deny any such
determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by shareholders under division
(C) of this Section 5.04 shall be evidence in rebuttal of the presumption
recited in Section 5.01. Any determination made by the disinterested directors
under division (A) or by independent legal counsel under division (B) of this
Section 5.04 to make indemnification in respect of any claim, issue or matter
asserted in an action or suit threatened or brought by or in the right of the
corporation shall be promptly communicated to the person who threatened or
brought such action or suit, and within ten (10) days after receipt of such
notification such person shall have the right to petition the Court of Common
Pleas of Mahoning County, Ohio, or the court in which such action or suit was
brought, if any, to review the reasonableness of such determination.
SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including,
without limitation, attorneys' fees, filing fees, court reporters' fees and
transcript costs) incurred in defending any action, suit or proceeding referred
to in Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf of the officer or
director promptly as such expenses are incurred by him, but only if such officer
or director shall first agree, in writing, to repay all amounts so paid in
respect of any claim, issue or other matter asserted in such action, suit or
proceeding in defense of which he shall not have been successful on the merits
or otherwise:
(A) if it shall ultimately be determined as
provided in Section 5.04 that he is not entitled to be indemnified by the
corporation as provided under Section 5.01; or
(B) if, in respect of any claim, issue or other
matter asserted by or in the right of the corporation in such action or suit, he
shall have been adjudged to be liable for acting with reckless disregard for the
best interests of the corporation or misconduct (other than negligence) in the
performance of his duty to the corporation, unless and only to the extent that
the Court of Common Pleas of Mahoning County, Ohio, or the court in which such
action or suit was brought shall determine upon application that, despite such
adjudication of liability, and in view of all the circumstances, he is fairly
and reasonably entitled to all or part of such indemnification.
SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification
provided by this Article Five shall not be deemed exclusive of any other rights
to which any person seeking indemnification may be entitled under the Articles
or the Regulations or any agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be an officer or director of the corporation and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
SECTION 5.07. INSURANCE. The corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee, or agent of another
corporation (domestic or foreign, nonprofit or for profit), partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the obligation or the power to
indemnify him against such liability under the provisions of this Article Five.
SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this
Article Five, and as examples and not by way of limitation:
(A) A person claiming indemnification under this
Article 5 shall be deemed to have been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Section 5.01, or in
defense of any claim, issue or other matter therein, if such action, suit or
proceeding shall be terminated as to such person, with or without prejudice,
without the entry of a judgment or order against him, without a conviction of
him, without the imposition of a fine upon him and without his payment or
agreement to pay any amount in settlement thereof (whether or not any such
termination is based upon a judicial or other determination of the lack of merit
of the claims made against him or otherwise results in a vindication of him);
and
(B) References to an "other enterprise" shall
include employee benefit plans; references to a "fine" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" within the meaning
of that term as used in this Article Five.
II-5
<PAGE> 140
SECTION 5.09. VENUE. Any action, suit or proceeding to
determine a claim for indemnification under this Article Five may be maintained
by the person claiming such indemnification, or by the corporation, in the Court
of Common Pleas of Mahoning County, Ohio. The corporation and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Mahoning County, Ohio, in any
such action, suit or proceeding.
(C) INSURANCE POLICIES
The Company currently maintains a directors' and officers'
liability policy providing for insurance of directors and officers for liability
incurred in connection with performance of their duties as directors and
officers. Such policy does not, however, provide insurance for losses resulting
from willful or criminal misconduct.
(D) INDEMNIFICATION AGREEMENTS
(I) AGREEMENT WITH KELLER & CO., INC.
The Company has agreed to indemnify Keller & Co., Inc.
("Keller"), the firm retained by the Company to provide the appraisal of the pro
forma market value of the Company, as converted, and the Holding Company, in
connection with certain matters related to the appraisal. The Company will
indemnify Keller and its affiliates and employees for certain costs and
expenses, including reasonable legal fees, in connection with claims or
litigation relating to the appraisal and arising out of any misstatement or
untrue statement of a material fact in the information supplied to Keller by the
Company or by an intentional omission by the Company to state a material fact in
the information so provided, except where Keller has been negligent or at fault.
(II) AGREEMENT WITH TRIDENT
In general, the agreement with Trident (the "Agency
Agreement") provides that the Company will indemnify and hold harmless Trident's
directors, officers, employees, agents and any controlling person against any
and all loss, liability, claim, damage or expense (including the reasonable fees
and disbursements of counsel) arising out of any untrue statement, or alleged
untrue statement, of a material fact contained in the Summary Proxy Statement or
the Prospectus, any application to regulatory authorities, any "blue sky"
application, or any other related document prepared or executed by or on behalf
of the Company with its consent in connection with, or in contemplation of, the
transactions contemplated by the Agency Agreement, or any omission therefrom of
a material fact required to be stated therein, unless such untrue statement or
omission, or alleged untrue statement or omission, was made in reliance upon,
and in conformity with, written information regarding Trident furnished to the
Company by Trident expressly for use in the Summary Proxy Statement or the
Prospectus.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
- -------- ----------------------------------------
No securities of the Holding Company have been sold by the Holding
Company without registration pursuant to the Act, except as follows:
On February 2, 1998, in connection with the incorporation of the
Holding Company, 100 common shares, without par value, of the Holding Company
(the "Securities") were sold for an aggregate purchase price of $100 pursuant to
Section 4(2) of the Act in a transaction not involving any public offering. The
Securities were sold to Douglas M. McKay, the President of the Holding Company,
who had access to all material information about the Holding Company. The
Securities were offered without the use of any form of general solicitation or
advertising. No underwriter was involved in the transaction, and no commission,
discount or other remuneration was paid or given in connection with the sale of
the Securities. Under the terms of the Subscription Agreement between the
Holding Company and Mr. McKay, the Securities will be repurchased by the Holding
Company for $100 on the effective date of the Conversion.
II-6
<PAGE> 141
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
- -------- -------------------------------------------
(a) EXHIBITS
<TABLE>
<CAPTION>
The exhibits filed as a part of this Registration Statement
are as follows:
<S> <C>
1.1 Engagement letter with Trident Securities, Inc.
*1.2 Form of Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion
3.1 Articles of Incorporation of United Community Financial Corp.
*3.2 Code of Regulations of United Community Financial Corp.
5 Opinion of Vorys, Sater, Seymour and Pease LLP regarding
legality of securities being registered
8.1 Opinion of Vorys, Sater, Seymour and Pease LLP regarding tax
matters
8.2 Opinion of Keller & Company, Inc. regarding the value of
subscription rights for tax purposes.
*10.1 United Community Financial Corp. 1998 Stock Option and
Incentive Plan (proposed)
10.2 United Community Financial Corp. Recognition and Retention
Plan and Trust Agreement (proposed)
*10.3 United Community Financial Corp. Employee Stock Ownership
Plan and Trust (proposed)
10.4 Form of Employment Agreement between The Home Savings and Loan
Company of Youngstown, Ohio and certain executive officers
(proposed)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Packer, Thomas & Co.
23.3 Consent of Keller & Company, Inc.
23.4 Consent of Vorys, Sater, Seymour and Pease LLP
27 Financial Data Schedule
99.1 Summary Proxy Statement
*99.2 Order Form and Form of Certification
99.3 Form of Proxy
99.4 Solicitation and Marketing Material (proposed)
99.5 Appraisal Agreement between The Home Savings and Loan Company
of Youngstown, Ohio and Keller & Company, Inc.
**99.6 Appraisal Report prepared by Keller & Company, Inc.
*99.7 Form of Home Savings Charitable Foundation Gift Instrument
<FN>
----------------------
* To be filed supplementally or by amendment
**To be filed pursuant to hardship exemption.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES:
No financial statement schedules are filed because the
required information is not applicable or is included in the financial
statements or related notes.
II-7
<PAGE> 142
ITEM 17. UNDERTAKINGS.
- -------- --------------
(a) The undersigned, the Holding Company, hereby
undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts
or events arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information
with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change
to such information in the Registration Statement.
(2) That, for the purpose of determining any
liability under the Act, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
Holding Company, pursuant to the foregoing provisions or otherwise, the Holding
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Holding
Company of expenses incurred or paid by a director, officer or controlling
person of the Holding Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Holding Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-8
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, duly authorized to do so, in the City of
Youngstown, State of Ohio, on March 10, 1998.
UNITED COMMUNITY FINANCIAL CORP.
By: /s/ Douglas M. McKay
------------------------------
Douglas M. McKay
its President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed below by the following
persons in the capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director
- -----------------------------------------
Richard M. Barrett
/s/ James E. Bennett, Jr. Director March 10, 1998
- ------------------------------------------
James E. Bennett, Jr.
/s/Charles B. Cushwa, III Director March 10, 1998
- -------------------------------
Charles B. Cushwa, III
Director
- ------------------------------------------
Donald R. Inglis
Director
- ------------------------------------------
Gary Keller
/s/ Patrick A. Kelly Treasurer (principal financial and accounting March 10, 1998
- ------------------------------------------ officer)
Patrick A. Kelly
/s/ Douglas M. McKay Director, President and Chairman (principal March 10, 1998
- ------------------------------------------- executive officer)
Douglas M. McKay
/s/Herbert F. Schuler Director March 10, 1998
- -------------------------------------------
Herbert F. Schuler
/s/Clarence R. Smith, Jr. Director March 10, 1998
- -------------------------------------------
Clarence R. Smith, Jr.
/s/Donald J. Varner Secretary March 10, 1998
- -------------------------------------------
Donald J. Varner
Director
- -------------------------------------------
John F. Zimmerman, Jr.
II-9
</TABLE>
<PAGE> 1
Exhibit 1.1
September 4, 1997
Board of Directors
The Home Savings and Loan
Company of Youngstown
275 Federal Plaza West
Youngstown, Ohio 44501
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and The Home Savings and Loan Company of
Youngstown, Ohio (the "Company") concerning our investment banking services in
connection with the conversion of the Company from a mutual to a capital stock
form of organization.
Trident is prepared to assist the Company in connection with the offering of its
shares of common stock during the subscription offering and community offering
as such terms are defined in the Company's Plan of Conversion. The specific
terms of the services contemplated hereunder shall be set forth in a definitive
sales agency agreement (the "Agreement") between Trident and the Company to be
executed on the date the prospectus is declared effective by the appropriate
regulatory authorities. The price of the shares during the subscription offering
and community offering will be the price established by the Company's Board of
Directors, based upon an independent appraisal as approved by the appropriate
regulatory authorities, provided such price is mutually acceptable to Trident
and the Company.
In connection with the subscription offering and community offering, Trident
will act as financial advisor and exercise its best efforts to assist the
Company in the sale of its common stock during the subscription offering and
community offering. Additionally, Trident may enter into agreements with other
National Association of Securities Dealers, Inc., ("NASD") member firms to act
as selected dealers, assisting in the sale of the common stock. Trident and the
Company will determine the selected dealers to assist the Company during the
community offering. At the appropriate time, Trident in conjunction with its
counsel, will conduct an examination of the relevant documents and records of
the Company as Trident deems necessary and appropriate. The Company will make
all documents, records and other information deemed necessary by Trident or its
counsel available to them upon request.
For its services hereunder, Trident will receive the following compensation and
reimbursement from the Company:
1. A commission equal to ninety five basis points (0.95%) of the
aggregate dollar amount of capital stock sold in the subscription
and direct community offerings, excluding any shares of conversion
stock sold to the Company's directors, executive officers and any
employee benefit plans. Additionally, commissions will be excluded
on those shares "associates" of the
<PAGE> 2
Board of Director
September 4, 1997
Page 2
Company's directors and executive officers. The term "associates"
as used herein shall have the same meaning as that found in the
Company's Plan of Conversion.
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed
upon jointly by Trident and the Company to reflect market
requirements at the time of the stock allocation in a Syndicated
Community Offering.
3. The foregoing fees and commissions are to be payable to Trident at
closing as defined in the Agreement to be entered into between the
Company and Trident.
4. Trident shall be reimbursed for allocable expenses incurred by
them, including legal fees, whether or not the Agreement is
consummated. Trident's out-of-pocket expenses will not exceed
$10,000 and its legal fees, exclusive of disbursements will not
exceed $50,000. The Company will forward to Trident a check in the
amount of $5,000 as an advance payment to defray the allocable
expenses of Trident.
It further is understood that the Company will pay all other expenses of the
conversion including but not limited to its attorneys' fees, NASD filing fees,
and filing and registration fees and fees of either Trident's attorneys or the
attorneys relating to any required state securities law filings, telephone
charges, air freight, rental equipment, supplies, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, the
Company warrants that: (a) the Company has not privately placed any securities
within the last 18 months; (b) there have been no material dealings within the
last 12 months between the Company and any NASD member or any person related to
or associated with any such member; (c) none of the officers or directors of the
Company has any affiliation with the NASD; (d) except as contemplated by this
engagement letter with Trident, the Company has no financial or management
consulting contracts outstanding with any other person; (e) the Company has not
granted Trident a right of first refusal with respect to the underwriting of any
future offering of the Company stock; and (f) there has been no intermediary
between Trident and the Company in connection with the public offering of the
Company's shares, and no person is being compensated in any manner for providing
such service.
The Company agrees to indemnify and hold harmless Trident and each person, if
any, who controls the firm against all losses, claims, damages or liabilities,
joint or several and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof (collectively, "Losses"),
to which they may become subject under the securities laws or under the common
law, that arise out of or are based upon the conversion or the engagement
hereunder of Trident. If the foregoing indemnification is unavailable for any
reason, the Company agrees to contribute to such Losses in the proportion that
its financial interest in the conversion bears to that of the indemnified
parties. If the Agreement is entered into with respect to the common stock to be
issued in the conversion, the Agreement will provide for indemnification, which
will be in addition to any rights that Trident or any other indemnified party
may have at common law or otherwise. The indemnification provision of this
paragraph will be superseded by the indemnification provisions of the Agreement
entered into by the Company and Trident.
<PAGE> 3
Board of Director
September 4, 1997
Page 3
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Company agree in principle to the contents hereof and propose to proceed
promptly, and in good faith, to work out the arrangements with respect to the
proposed offering, any legal obligations between Trident and the Company shall
be only as set forth in a duly executed Agreement. Such Agreement shall be in
form and content satisfactory to Trident and the Company, as well as their
counsel, and Trident's obligations thereunder shall be subject to, among other
things, there being in Trident's opinion on material adverse change in the
condition or obligations of the Company or no market conditions which might
render the sale of the shares by the Company hereby contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter along with the advance payment of
$5,000. This propose is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By:/s/ Timothy Lavelle
-------------------
Timothy E. Lavelle
Managing Director
Agreed and accepted to this 9th day
of December, 1997
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN
By: /s/ Douglas M. McKay
---------------------
Douglas M. McKay
Chairman and CEO
<PAGE> 1
Exhibit 2
<TABLE>
<CAPTION>
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
PLAN OF CONVERSION
Table of Contents
<S> <C> <C>
1. Introduction.......................................................................................................1
2. Definitions........................................................................................................1
3. Procedures for the Conversion......................................................................................4
4. Initial Purchase Price of Common Shares and Number of Common Shares to be Offered..................................5
5. Subscription Rights of Eligible Account Holders....................................................................6
6. Subscription Rights of Tax-Qualified Employee Stock Benefit Plans..................................................6
7. Subscription Rights of Supplemental Eligible Account Holders.......................................................7
8. Subscription Rights of Other Eligible Members......................................................................7
9. Subscription Rights of Directors, Officers and Employees...........................................................7
10. Community Offering, Public Offering and Other Offerings............................................................8
11. Additional Limitations on Purchases................................................................................8
12. Procedures for the Offerings......................................................................................10
13. Payment for Common Shares.........................................................................................10
14. Expiration of Subscription Rights.................................................................................11
15. Compliance with Securities Laws...................................................................................12
16. Rights of Shareholders After Completion of Conversion.............................................................12
17. Liquidation Account...............................................................................................12
18. Accounts in Converted Company.....................................................................................13
19. Restrictions on Purchases and Sales of Common Shares by Officers and Directors Following Conversion...............13
20. Restrictions on Acquisition of the Company or the Holding Company.................................................13
21. Consummation of Conversion........................................................................................14
22. Adoption of Amended Articles and Amended Constitution.............................................................14
23. Tax Rulings/Opinions..............................................................................................14
24. Directors and Officers of the Company.............................................................................14
25. Stock Benefit Plans...............................................................................................14
26. Registration of Common Shares; Market for Common Shares...........................................................14
27. Establishment and Funding of Charitable Foundation................................................................15
28. Expenses of Conversion............................................................................................15
29. Amendment or Termination of this Plan.............................................................................15
30. Interpretation of this Plan.......................................................................................15
</TABLE>
A-i
<PAGE> 2
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
PLAN OF CONVERSION
------------------
1. INTRODUCTION.
The Board of Directors of The Home Savings and Loan Company of
Youngstown, Ohio (the "Company") believes that a conversion of the Company from
a mutual savings and loan association incorporated under Ohio law to a permanent
capital stock savings and loan association incorporated under Ohio law (the
"Conversion") pursuant to this Plan of Conversion (this "Plan") is in the best
interests of the Company, its members, depositors, customers, employees and the
communities it serves. In connection with the conversion to stock form, the
Company will form a holding company (the "Holding Company") which will provide
the Company with greater organizational and operational flexibility, including
increased versatility for effecting mergers and acquisitions of other financial
institutions. The Holding Company will own all of the issued and outstanding
common stock of the Company.
Through the sale of common shares of the Holding Company, the
Conversion will provide increased capital levels to support and enhance lending
and investment activities, diversification into additional financial services
activities and growth. The increased capital from the Conversion will further
enhance the Company's ability to meet the borrowing and other financial needs of
the communities it currently serves.
To further demonstrate the commitment of the Company to the communities
it serves, the Plan provides that the Company may establish or contribute to a
charitable foundation in connection with the Conversion. The contribution of
funds to a charitable foundation would allow the communities served by the
Company to benefit from the growth and profitability of the Company and the
Holding Company. The foundation would be funded either through a contribution of
cash by the Company prior to the Conversion or through the donation of common
shares of the Holding Company immediately after the Conversion, or a combination
thereof.
This Plan is subject to the approval of the Ohio Department of
Commerce, Division of Financial Institutions, and the Office of Thrift
Supervision and must be adopted by a majority of the members of the Company
eligible to vote at a special meeting of members.
2. DEFINITIONS.
As used in this Plan, the following terms have the following meanings:
ACTING IN CONCERT means (a) knowing participation in a joint activity
or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or (b) a combination
or pooling of voting or other interests in the securities of an issuer
for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or
otherwise.
ACTUAL PURCHASE PRICE means the actual uniform price per share at
which Common Shares are ultimately sold by the Holding Company in the
Offerings in accordance with the terms hereof.
AFFILIATE, when used to indicate a relationship with a specified
Person, means a Person who directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control
with the specified Person.
AMENDED ARTICLES means the Amended Articles of Incorporation of the
Company which are in the form attached hereto as Exhibit I and which
authorize the issuance of capital stock and which will be filed with
the Ohio Secretary of State on the date on which the Conversion
becomes effective.
AMENDED CONSTITUTION means the Amended Constitution of the Company
which is in the form attached hereto as Exhibit II and which will be
filed with the Division on the date on which the Conversion becomes
effective.
APPLICATION means the Application for Conversion on Form AC to be
filed by the Company with the OTS pursuant to Title 12, Code of
Federal Regulations, Part 563b and with the Division pursuant to Ohio
Administrative Code Section 1301:2-1-16.
1
<PAGE> 3
ASSOCIATE, when used to indicate a relationship with any Person, means
(i) any corporation or organization (other than the Company, the
Holding Company or a majority-owned subsidiary of the Company or the
Holding Company) of which such Person is an Officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities, (ii) any trust or other estate in which
such Person has a substantial beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity, except
that such term will not include a Tax-Qualified Employee Stock Benefit
Plan, or a non-tax-qualified employee stock benefit plan and (iii) any
relative or spouse of such Person, or any relative of such spouse, who
has the same home as such Person or who is a Director or an Officer.
BROKER means any Person engaged in the business of effecting
transactions in securities for the account of others.
CODE means the Internal Revenue Code of 1986, as amended.
COMMON SHARES means the common shares of the Holding Company to be
offered and sold by the Holding Company in connection with the
Conversion, but shall not include shares, if any, issued to a
charitable foundation pursuant to Section 27 hereof.
COMMUNITY MEMBER means any natural person who, on the date of
submission of an Order Form, is a resident of a county in Ohio in
which the Company has an office.
COMMUNITY OFFERING means the offering of Common Shares not subscribed
for in the Subscription Offering, to (i) Community Members, and (ii)
such other Persons who are not Community Members as may be selected by
the Holding Company and the Company within their sole discretion. The
Community Offering may be conducted with or without the assistance of
a syndicate of broker-dealers.
COMPANY means The Home Savings and Loan Company of Youngstown, Ohio,
in its mutual form or stock form, as appropriate.
CONVERSION means the change in the form of the Company from the mutual
to the permanent capital stock form upon (i) the adoption and filing
of the Amended Articles and the Amended Constitution; (ii) the sale
and issuance of Common Shares by the Holding Company in the Offerings,
and (iii) the purchase by the Holding Company of the capital stock of
the Company.
DEALER means any Person who engages either for all or part of such
person's time, directly or indirectly, as an agent, Broker or
principal, in the business of offering, buying, selling or otherwise
dealing or trading in securities issued by another Person.
DIRECTOR means a director of the Holding Company, the Company or any
subsidiary.
DIVISION means the Division of Financial Institutions of the
Department of Commerce of the State of Ohio.
ELIGIBILITY RECORD DATE means the close of business on July 31, 1996,
the record date set by the Company for determining Eligible Account
Holders.
ELIGIBLE ACCOUNT HOLDER means any Person holding a Qualifying Deposit
in the Company on the Eligibility Record Date.
EMPLOYEE means an employee of the Company or any subsidiary.
ESTIMATED PRICE RANGE means the range of the estimated aggregate pro
forma market value of the total Common Shares to be offered in the
Conversion, as determined by the Independent Appraiser in accordance
with Section 4 of this Plan.
FDIC means the Federal Deposit Insurance Corporation, an agency of the
United States Government, or any successor thereto.
FOUNDATION means the charitable foundation, described in Section 27 of
this Plan, which will qualify as an exempt organization under Section
501(c)(3) of the Code.
2
<PAGE> 4
HOLDING COMPANY means the corporation to be formed at the direction of
the Company for the purpose of becoming a savings and loan holding
company through the acquisition of all of the capital stock to be
issued by the Company in connection with the Conversion.
INDEPENDENT APPRAISER means the firm employed by the Company to
determine the estimated pro forma market value of the Common Shares.
INITIAL PURCHASE PRICE means the price per share to be paid initially
for Common Shares subscribed for in the Subscription Offering or
ordered in the Community Offering.
LIQUIDATION ACCOUNT means the account established in accordance with
Section 17 of this Plan for Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain a Savings Account at
the Company after the Conversion.
MEMBER means any Person qualifying as a member of the Company under
its articles of incorporation and constitution in effect on the date
of the Special Meeting.
OFFERINGS means the Subscription Offering, the Community Offering and
the Public Offering, if any.
OFFICER means the Chairman of the Board of Directors, the President, a
Vice President, the Secretary, the Treasurer or principal financial
officer, or the comptroller or principal accounting officer of the
Holding Company or the Company and any other person performing similar
functions for the Holding Company or the Company.
ORDER FORMS means the original forms which will be sent to
Participants to exercise their Subscription Rights in accordance with
this Plan and which may be sent to Persons in the Community Offering
and the Public Offering to order Common Shares.
OTHER ELIGIBLE MEMBER means a Voting Member, other than an Eligible
Account Holder or a Supplemental Eligible Account Holder.
OTS means the Department of the Treasury, Office of Thrift
Supervision, an agency of the United States Government.
PARTICIPANT means any Eligible Account Holder, Tax-Qualified Employee
Stock Benefit Plan, Supplemental Eligible Account Holder, Other
Eligible Member or Director, Officer or Employee.
PERSON means an individual, a corporation, a partnership, an
association, a joint-stock company, a trust, any unincorporated
organization, or a government or political subdivision thereof.
PLAN means this Plan of Conversion as adopted by the Boards of
Directors of the Company and the Holding Company and any amendment
hereto approved as provided herein.
PROSPECTUS means the document or documents describing the terms and
conditions of the Offerings, including a complete description of the
business and affairs of the Company and the Holding Company.
PROXY means the form of authorization by which a Person is, or may be
deemed to be, designated to act for a Voting Member in the exercise of
his or her voting rights in the affairs of the Company.
PROXY MATERIALS means the Notice of Special Meeting, the Proxy
Statement and the form of Proxy used in connection with soliciting
Proxies from Members for use at the Special Meeting.
PUBLIC OFFERING means an underwritten firm commitment offering of
Common Shares to the public through one or more underwriters.
QUALIFYING DEPOSIT means the aggregate balance of all Savings Accounts
owned by an Eligible Account Holder or a Supplemental
3
<PAGE> 5
Eligible Account Holder at the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record
Date, respectively; provided, however, that Savings Accounts with
an aggregate deposit balance of less than $50 will not constitute
a Qualifying Deposit.
SAVINGS ACCOUNT has the same meaning as specified in Title 12, Code of
Federal Regulations, Part 561, as in effect on the date this Plan is
adopted by the Board of Directors of the Company, and includes
certificates of deposit.
SEC means the Securities and Exchange Commission, an agency of the
United States Government.
SPECIAL MEETING means the meeting of the Voting Members of the Company
called for the specific purpose of submitting this Plan to the Voting
Members for approval.
SUBSCRIPTION OFFERING means the offering of Common Shares to the
holders of Subscription Rights.
SUBSCRIPTION RIGHTS means the nontransferable rights issued by the
Company to Participants to purchase Common Shares in the Subscription
Offering pursuant to this Plan.
SUPPLEMENTAL ELIGIBILITY RECORD DATE means the last day of the
calendar quarter preceding the approval of the Application by the OTS
and the record date used for determining Supplemental Eligible Account
Holders. Such date shall be required by this Plan if the Eligibility
Record Date is more than 15 months prior to the date of the latest
amendment to the Application filed prior to approval of the
Application by the OTS.
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER means any Person holding a
Qualifying Deposit at the close of business on the Supplemental
Eligibility Record Date, except Officers and Directors and their
Associates.
TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN means any defined benefit
plan or defined contribution plan of the Holding Company or the
Company, such as an employee stock ownership plan, stock bonus plan,
profit sharing plan or other plan which, with its related trust, meets
the requirements for qualification under Section 401 of the Code.
VOTING MEMBER means any Member of the Company eligible to vote at the
Special Meeting.
VOTING RECORD DATE means the record date fixed by the Board of
Directors of the Company in accordance with Ohio law and the articles
of incorporation and constitution of the Company for determining the
eligibility of Members to vote on this Plan at the Special Meeting.
3. PROCEDURES FOR THE CONVERSION.
The following procedures will be followed to effect the Conversion:
(a) Promptly after the adoption of this Plan by a vote of at least
two-thirds of the members of the Board of Directors of the Company, the Company
will publish a notice of the adoption of this Plan in an English language
newspaper having general circulation in each community in which an office of the
Company is located. Copies of this Plan will also be made available for
inspection by Members at the offices of the Company.
(b) The Company will submit this Plan for approval, together with all
other requisite materials, to the OTS and the Division in the form of the
Application. After the filing of the Application with the OTS and the Division,
the Company (i) will prominently post in each of the offices of the Company and
publish in an English language newspaper having general circulation in each
community in which an office of the Company is located a notice to the effect
that the Company has filed the Application with the OTS, and (ii) when advised
by the Division, will prominently post in each of the offices of the Company and
publish in an English language newspaper having general circulation in each
community in which an office of the Company is located a notice to the effect
that the Company has filed the Application with the Division.
(c) The Holding Company will be incorporated, after which the Board of
Directors of the Holding Company will consent to the Plan by at least a
two-thirds vote. As soon as practicable after the adoption of the Plan by the
Board of Directors of the Holding Company, the Holding Company will submit or
cause to be submitted to the OTS such applications as may be required for
approval of the Holding Company's acquisition of the Company. In addition, the
Holding Company will file a registration statement with the SEC to register the
Common Shares under the Securities Act of 1933, as amended.
4
<PAGE> 6
The Holding Company will also register the Common Shares under any applicable
state securities laws, subject to Section 15 hereof.
(d) After the OTS and the Division approve the Application and the SEC
approves the registration statement, the Company will mail Proxy Materials to
each of the Voting Members at his or her last known address appearing on the
records of the Company for the purpose of soliciting the Proxies of Voting
Members for use at the Special Meeting. The approval of this Plan requires the
affirmative vote, cast in person or by Proxy, of a majority of the total
outstanding votes entitled to be cast at the Special Meeting. The Company may,
at its option, mail to all Voting Members a proxy statement in either long or
summary form describing this Plan. If the Company provides a summary form proxy
statement, the Company shall also mail to all Eligible Account Holders and
Supplemental Eligible Account Holders who are not Voting Members a letter
informing them of their right to receive a Prospectus and an Order Form and
other materials relating to the Conversion by returning a postage-paid card
which will be distributed with the Proxy Materials or such letter.
(e) Subject to the approval of this Plan by the Voting Members at the
Special Meeting, Common Shares will be offered simultaneously to Participants in
the respective priorities set forth in Sections 5, 6, 7, 8 and 9 of this Plan.
All sales of Common Shares to Participants will be completed at the earliest
practicable date following expiration of the Subscription Rights provided for in
this Plan. Notwithstanding anything in this Plan to the contrary, the Company,
in its sole discretion, may commence the Subscription Offering concurrently with
or at any time after the mailing to the Voting Members of the Proxy Materials
and may complete the Subscription Offering before the Special Meeting, provided
that the offer and sale of Common Shares shall be conditioned upon the approval
of this Plan by the Voting Members. In the event that the Company elects, in its
discretion, to commence the Subscription Offering after the Special Meeting, the
Subscription Offering will be commenced not later than 45 days after the date on
which the Special Meeting is adjourned, except as may otherwise be approved by
the OTS. Concurrently with, following the commencement of or following the
completion of the Subscription Offering, the Company may also offer Common
Shares in the Community Offering, subject to the prior satisfaction of the
Subscription Rights of the Participants. Following the completion of the
Community Offering, the Company may offer any remaining Common Shares in a
Public Offering.
(f) The Holding Company will use a portion of the net proceeds from
the Offerings to purchase all of the capital stock of the Company to be
outstanding upon the consummation of the Conversion.
(g) All other steps considered necessary or desirable by the Boards of
Directors of the Company and the Holding Company to effect the Conversion will
be taken pursuant to applicable laws and regulations.
4. INITIAL PURCHASE PRICE OF COMMON SHARES AND NUMBER OF COMMON SHARES TO
BE OFFERED.
(a) The Initial Purchase Price will be determined by the Boards of
Directors of the Company and the Holding Company before the commencement of the
Subscription Offering, subject to adjustment as described below. The Actual
Purchase Price and the number of Common Shares to be sold in connection with the
Conversion will be determined by the Boards of Directors of the Company and the
Holding Company before the completion of all sales of Common Shares contemplated
by this Plan on the basis of the estimated pro forma market value of the
Company, as converted. No fractional shares will be issued in connection with
the Conversion.
(b) The estimated pro forma market value of the Company, as converted,
will be determined by the Independent Appraiser, based upon such factors as the
Independent Appraiser deems appropriate and as are consistent with the
regulations of the OTS and the Division. Immediately before the commencement of
the Subscription Offering, the Estimated Price Range will be established. The
maximum of the Estimated Price Range shall be 15% above the pro forma market
value of the Company and the minimum of the Estimated Price Range shall be 15%
below the pro forma market value of the Company. The Independent Appraiser will
review, from time to time as appropriate or as required by law or regulation,
developments subsequent to its valuation to determine whether the estimated pro
forma market value of the Company, as converted, should be revised.
(c) If, after the commencement of the Subscription Offering, the
Independent Appraiser determines that the estimated pro forma market value of
the Company, as converted, has increased or decreased due to subsequent
developments, the Conversion may be completed without notifying Persons who have
subscribed for Common Shares and without a resolicitation of subscriptions from
such Persons if such estimated pro forma market value is not less than the
minimum of the
5
<PAGE> 7
Estimated Price Range and does not exceed the maximum of the Estimated Price
Range by more than 15%. If, however, as a result of any such change, the
estimated pro forma market value of the Company is less than the minimum of the
Estimated Price Range or exceeds the maximum of the Estimated Price Range by
more than 15%, a new Estimated Price Range may be established and the Board of
Directors may, with the approval of the OTS and the Division, elect to increase
or decrease the number of Common Shares to be sold in connection with the
Conversion or increase or decrease the Initial Purchase Price, in which case
Persons who have subscribed for Common Shares will be notified and will be given
the opportunity to increase, decrease or rescind their subscriptions.
5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS.
(a) Each Eligible Account Holder will receive, without payment
therefor, nontransferable Subscription Rights to purchase a number of Common
Shares up to the greater of (i) the amount which may be purchased in the Public
Offering or the Community Offering, (ii) one-tenth of one percent (.10%) of the
total number of Common Shares to be sold in connection with the Conversion, and
(iii) 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of Common Shares to be sold in connection with the
Conversion by a fraction, the numerator of which is the amount of the Eligible
Account Holder's Qualifying Deposit and the denominator of which is the total
amount of Qualifying Deposits of all Eligible Account Holders, in each case on
the Eligibility Record Date, subject to the overall purchase limitations set
forth in Section 11 of this Plan and subject to adjustment by the Boards of
Directors of the Company and the Holding Company as set forth in Section 11 of
this Plan.
(b) In the event that subscriptions for Common Shares are received
from Eligible Account Holders upon the exercise of Subscription Rights pursuant
to paragraph (a) of this Section 5 in excess of the number of Common Shares
available for such subscriptions, the Common Shares available for purchase will
be allocated among the subscribing Eligible Account Holders in a manner by which
each subscribing Eligible Account Holder, to the extent possible, will be
permitted to subscribe for a number of shares sufficient to make such Eligible
Account Holder's total allocation of Common Shares equal to the lesser of (i)
100 shares and (ii) the number of shares subscribed for by such Eligible Account
Holder. Any shares remaining after such allocation will be allocated among the
subscribing Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion which the amount of each Eligible Account Holder's Qualifying
Deposit bears to the total of the Qualifying Deposits of all subscribing
Eligible Account Holders. No fractional shares will, however, be issued in
connection with the Conversion.
(c) The Subscription Rights of the Eligible Account Holders are
subordinate to the limited priority rights of the Tax-Qualified Employee Stock
Benefit Plans of the Company as set forth in Section 6 of this Plan. For
purposes of paragraph (b) of this Section 5, Subscription Rights held by
Eligible Account Holders who are also Officers or Directors, and their
Associates, to the extent that they are attributable to increased deposits
during the one-year period preceding the Eligibility Record Date, will be
subordinated to the Subscription Rights of all other Eligible Account Holders.
6. SUBSCRIPTION RIGHTS OF TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS.
The Tax-Qualified Employee Stock Benefit Plans of the Company will
receive non-transferable Subscription Rights to purchase up to 10% of the Common
Shares to be sold in connection with the Conversion, subject to adjustment by
the Boards of Directors of the Company and the Holding Company as set forth in
Section 11 of this Plan. The Subscription Rights of the Tax-Qualified Employee
Stock Benefit Plans are subordinate to the Subscription Rights of Eligible
Account Holders pursuant to Section 5 of this Plan, except that if the final pro
forma market value of the Company exceeds the maximum of the Estimated Price
Range determined pursuant to Section 4 of this Plan, the Tax-Qualified Employee
Stock Benefit Plans shall have first priority with respect to the amount of
Common Shares sold in excess of the maximum of the Estimated Price Range. Common
Shares purchased by an individual participant (a "Plan Participant") in a
Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the
exercise of Subscription Rights granted to such Plan Participant in his
individual capacity as an Eligible Account Holder or Supplemental Eligible
Account Holder and purchases by such Plan Participant in the Community Offering
or the Public Offering shall not be deemed to be purchases by a Tax-Qualified
Employee Stock Benefit Plan for purposes of calculating the maximum amount of
Common Shares that Tax-Qualified Employee Stock Benefit Plans may purchase
pursuant to the first sentence of this Section 6, if the individual Plan
Participant controls or directs the investment authority with respect to such
account or subaccount.
6
<PAGE> 8
7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS.
(a) In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Application filed prior
to OTS approval of the Application, then, and only in that event, each
Supplemental Eligible Account Holder will receive, without payment therefor,
nontransferable Subscription Rights to purchase a number of Common Shares up to
the greater of (i) the amount which may be purchased in the Public Offering or
the Community Offering, (ii) one-tenth of one percent (.10%) of the total number
of Common Shares to be sold in connection with the Conversion, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of Common Shares to be sold in connection with the
Conversion by a fraction, the numerator of which is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of Qualifying Deposits of all Supplemental Eligible
Account Holders, in each case on the Supplemental Eligibility Record Date,
subject to the overall purchase limitations set forth in Section 11 of this Plan
and subject to adjustment by the Boards of Directors of the Company and the
Holding Company as set forth in Section 11 of this Plan.
(b) In the event that subscriptions for Common Shares are received
from Supplemental Eligible Account Holders upon the exercise of Subscription
Rights pursuant to paragraph (a) of this Section 7 in excess of the number of
Common Shares available for such subscriptions, the Common Shares available for
purchase will be allocated among the subscribing Supplemental Eligible Account
Holders in a manner by which each subscribing Supplemental Eligible Account
Holder, to the extent possible, will be permitted to subscribe for a number of
Common Shares sufficient to make such Supplemental Eligible Account Holder's
total allocation of Common Shares equal to the lesser of (i) 100 shares and (ii)
the number of Common Shares subscribed for by such Supplemental Eligible Account
Holder. Any Common Shares remaining after such allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion which the amount of each such Supplemental
Eligible Account Holder's Qualifying Deposit bears to the total amount of the
Qualifying Deposits of all such subscribing Supplemental Eligible Account
Holders. No fractional shares will be issued, however, in connection with the
Conversion.
(c) Subscription Rights received pursuant to this Section 7 are
subordinate to the Subscription Rights of Eligible Account Holders and the
Tax-Qualified Employee Stock Benefit Plans pursuant to Sections 5 and 6 of this
Plan. Any Subscription Rights received by an Eligible Account Holder pursuant to
Section 5 of this Plan will be applied in partial satisfaction of Subscription
Rights received pursuant to this Section 7.
8. SUBSCRIPTION RIGHTS OF OTHER ELIGIBLE MEMBERS.
(a) Each Other Eligible Member will receive, without payment therefor,
nontransferable Subscription Rights to purchase a number of Common Shares up to
the greater of (i) the amount of Common Shares which may be purchased in the
Public Offering or the Community Offering, and (ii) one-tenth of one percent
(.10%) of the total number of Common Shares to be sold in connection with the
Conversion, subject to the overall purchase limitations set forth in Section 11
of this Plan and subject to adjustment by the Boards of Directors of the Company
and the Holding Company as set forth in Section 11 of this Plan.
(b) In the event that subscriptions for Common Shares are received
from Other Eligible Members upon the exercise of Subscription Rights pursuant to
paragraph (a) of this Section 8 in excess of the number of Common Shares
available for such subscriptions, the Common Shares available for purchase will
be allocated among the subscribing Other Eligible Members in the same proportion
that their respective subscriptions bear to the aggregate subscriptions of all
Other Eligible Members; provided, however, that, to the extent sufficient Common
Shares are available, each subscribing Other Eligible Member shall be permitted
to purchase 25 Common Shares before the remaining available Common Shares are
allocated. No fractional shares will be issued, however, in connection with the
Conversion.
(c) Subscription Rights received by Other Eligible Members pursuant to
this Section 8 are subordinate to the Subscription Rights received by Eligible
Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental
Eligible Account Holders pursuant to Sections 5, 6 and 7 of this Plan.
9. SUBSCRIPTION RIGHTS OF DIRECTORS, OFFICERS AND EMPLOYEES.
(a) Directors, Officers and Employees of the Company shall receive,
without payment therefor, non-transferable Subscription Rights to purchase, in
the aggregate, up to 15% of the Common Shares to be sold in connection with the
Conversion, subject to the overall purchase limitations set forth in Section 11
of this Plan and subject to adjustment by the Boards of Directors of the Company
and the Holding Company as set forth in Section 11 of this Plan.
7
<PAGE> 9
(b) In the event that subscriptions for Common Shares are received
from Directors, Officers and Employees upon the exercise of Subscription Rights
pursuant to paragraph (a) of this Section 9 in excess of the number of Common
Shares available for such subscriptions, the Common Shares available for
purchase will be allocated among the individual Directors, Officers and
Employees of the Company on an equitable basis to be determined by the Board of
Directors of the Company by giving weight to a Person's period of service,
compensation and position. If any such Director, Officer or Employee does not
subscribe for his or her full allocation of Common Shares, any Common Shares not
subscribed for may be purchased by other Directors, Officers and Employees of
the Company in proportion to their respective Subscription Rights. No fractional
shares shall be issued, however, in connection with the Conversion.
(c) Subscription Rights received by Directors, Officers and Employees
of the Company pursuant to this Section 9 are subordinate to the Subscription
Rights received by Eligible Amount Holders, the Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders and Other Eligible Members
pursuant to Sections 5, 6, 7 and 8 of this Plan.
10. COMMUNITY OFFERING, PUBLIC OFFERING AND OTHER OFFERINGS.
(a) Any Common Shares not subscribed for in the Subscription Offering
may be offered and sold in the Community Offering. If conducted, the Community
Offering may be conducted concurrently with or at any time after the
commencement or completion of the Subscription Offering and will be conducted in
a manner which will give Community Members a preference in the purchase of
Common Shares and will seek to achieve the widest distribution of Common Shares.
The Company or the Holding Company may retain a Broker or a syndicate of
broker-dealers to assist in selling the Common Shares in the Community Offering.
The Community Offering must be completed within 45 days after the completion of
the Subscription Offering, unless extended by the Holding Company and the
Company with any required regulatory approval.
(b) The maximum number of Common Shares which may be subscribed for or
purchased in the Community Offering by any Person, together with any Associates
or group of Persons Acting in Concert, will be 30,000 Common Shares, subject to
the overall purchase limitations set forth in Section 11 of this Plan and
subject to adjustment by the Boards of Directors of the Company and the Holding
Company as set forth in Section 11 of this Plan. Orders for Common Shares in the
Community Offering will first be filled up to a maximum of two percent (2%) of
the Common Shares and thereafter any remaining shares will be allocated on an
equal number of shares per order basis until all orders for Common Shares have
been filled, subject to the limitations provided in Section 11 of this Plan. The
Company and the Holding Company reserve the right to reject, in whole or in
part, any order to purchase Common Shares from any Person in the Community
Offering.
(c) The Holding Company and the Company may sell any Common Shares
remaining following the Subscription Offering and the Community Offering in a
Public Offering. The provisions of Section 11 hereof shall not be applicable to
the sales to underwriters for purposes of the Public Offering but shall be
applicable to sales by the underwriters to the public. The price to be paid by
the underwriters in such an offering shall be equal to the Actual Purchase Price
less an underwriting discount to be negotiated among such underwriters and the
Company and the Holding Company, subject to any required regulatory approval or
consent.
(d) If for any reason a Public Offering of Common Shares not sold in
the Subscription Offering and the Community Offering cannot be effected, or in
the event that any insignificant residue of Common Shares is not sold in the
Subscription Offering and the Community Offering, the Holding Company and the
Company shall use their best efforts to obtain other purchasers for such shares
in such manner and upon such conditions as may be satisfactory to the OTS and
the Division.
11. ADDITIONAL LIMITATIONS ON PURCHASES
(a) A minimum of 25 Common Shares must be purchased by each Person
purchasing Common Shares in connection with the Conversion to the extent Common
Shares are available; provided, however, that if the Actual Purchase Price is
greater than $20 per share, the minimum number of Common Shares to which a
Person may subscribe will be adjusted in a manner by which the aggregate Actual
Purchase Price required to be paid for such minimum number of Common Shares does
not exceed $500. No fractional shares will be issued, however, in connection
with the Conversion.
(b) If a Qualifying Deposit is held in the name of more than one
Person, the aggregate amount of Common Shares which may be subscribed for or
purchased by all Persons having an interest in such Qualifying Deposit shall be
subject to the applicable purchase limitations set forth in Sections 5, 7, 8, 9
and 10 of this Plan.
8
<PAGE> 10
(c) Participants may purchase Common Shares in the Community Offering
subject to the purchase limitations set forth in Section 10 of this Plan;
provided, however, that the maximum amount of Common Shares which may be
subscribed for or purchased in connection with the Conversion by any Person,
together with any Associate or group of Persons Acting in Concert, will be one
percent (1%) of the Common Shares to be sold in connection with the Conversion,
except that any one or more of the Tax-Qualified Employee Stock Benefit Plans
may purchase in the aggregate not more than 10% of the Common Shares to be sold
in connection with the Conversion and will be entitled to purchase such amount
regardless of the number of Common Shares purchased by other Persons. Common
Shares held by one or more Tax-Qualified Employee Stock Benefit Plans or
non-tax-qualified employee stock benefit plans and attributed to a Person will
not be aggregated with Common Shares purchased directly by or otherwise
attributable to such Person. Common Shares purchased by a Plan Participant in a
Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the
exercise of Subscription Rights granted to such Plan Participant in his
individual capacity as a Participant and for purchases by such Plan Participant
in the Community Offering or the Public Offering shall be aggregated with Common
Shares purchased directly by or otherwise attributable to such Person. For the
purpose of this Section 11, the members of the Boards of Directors of the
Company and the Holding Company will not be deemed to be Associates or a group
of Persons Acting in Concert solely as a result of their membership on such
Boards of Directors.
(d) The Officers and Directors of the Company and their Associates may
purchase in the Conversion, in the aggregate, up to 25% of the total number of
Common Shares to be sold in connection with the Conversion. Common Shares held
by one or more Tax-Qualified Employee Stock Benefit Plans or non-tax-qualified
employee stock benefit plans and attributed to a Person will not be aggregated
with Common Shares purchased directly by or otherwise attributable to such
Person. Common Shares purchased by Plan Participants in a Tax-Qualified Employee
Stock Benefit Plan using funds therein pursuant to the exercise of Subscription
Rights granted to such Plan Participant in his individual capacity as a
Participant or purchases by a Plan Participant in the Community Offering or the
Public Offering shall be aggregated with Common Shares purchased directly by or
otherwise attributable to such Person.
(e) Subject to any required regulatory approval and the requirements
of applicable laws and regulations, but without further approval of the Members
or resolicitation of subscribers, the purchase limitations set forth in Sections
10 and 11 of this Plan may be increased or decreased at the sole discretion of
the Boards of Directors of the Company and the Holding Company at any time. If
such limitation is increased after the commencement of the Subscription
Offering, persons who subscribed for the maximum amount will be given the
opportunity to increase their subscriptions up to the then applicable limit,
subject to the rights and preferences of any person who has priority
Subscription Rights. The Boards of Directors of the Company and the Holding
Company may, in their sole discretion, increase such maximum purchase limitation
up to 9.99%; provided, however, that orders for Common Shares exceeding 5% of
the Common Shares to be sold in connection with the Conversion shall not exceed,
in the aggregate, 10% of the Common Shares to be sold in connection with the
Conversion. In the event that the purchase limitation is decreased after
commencement of the Subscription Offering, the order of any Person who
subscribed for the maximum number of Common Shares shall be decreased by the
minimum amount necessary so that such Person shall be in compliance with the
then maximum number of Common Shares permitted to be subscribed for by such
Person. The maximum purchase limitation for Eligible Account Holders,
Supplemental Eligible Account Holders and Other Eligible Members shall not be
decreased below one-tenth of one percent (.10%) of the total number of Common
Shares to be issued in connection with the Conversion.
(f) The purchase limitations set forth in this Section 11 shall not
apply to the common shares, if any, contributed to the Foundation in accordance
with the provisions of Section 27 of this Plan, nor shall such common shares be
deemed Common Shares.
(g) The Subscription Rights granted under this Plan are
nontransferable. Each Subscription Right may be exercised only by the Person to
whom it is issued and only for such Person's own account. Each Person exercising
Subscription Rights will be required to certify that he or she is purchasing for
his or her own account and that he or she has no agreement or understanding for
the sale or transfer of the Common Shares for which he or she subscribes. The
Board of Directors of the Company may reject any subscription which it
reasonably believes involves an impermissible transfer of a Subscription Right.
The Board of Directors of the Company may require any Person who the Board
reasonably believes to be involved in an impermissible transfer of a
Subscription Right to provide such information or assurances as the Board may
request to verify the validity of a Subscription Right.
9
<PAGE> 11
12. PROCEDURES FOR THE OFFERINGS.
(a) At the time the Proxy Materials are mailed to the Voting Members
at their last known addresses appearing on the records of the Company, pursuant
to the authorization of the OTS and the Division, the Company and the Holding
Company may commence the Subscription Offering and the Community Offering. The
Holding Company and the Company may elect to mail a Prospectus and an Order Form
only to those Participants who request such materials by returning a
postage-paid card by a date specified in the letter informing them of their
Subscription Rights. Under such circumstances, the Subscription Offering shall
not be closed until the expiration of 30 days after the mailing by the Holding
Company and the Company of the postage-paid card to Participants.
(b) The Prospectus will contain all the information required by the
OTS, the Division, the SEC and all applicable laws and regulations necessary to
enable the recipients of the Order Forms to make informed investment decisions
regarding the purchase of Common Shares.
(c) The Order Forms will contain all the information required by the
OTS, the Division and all applicable laws and regulations. Order Forms which
have been photocopied or reproduced in any other manner will not be accepted.
(d) The offer of Common Shares to Participants, to Community Members
and to others will be conditioned upon the approval of this Plan by the Voting
Members at the Special Meeting.
(e) The Subscription Offering and the Community Offering may be closed
before the Special Meeting.
13. PAYMENT FOR COMMON SHARES.
(a) Full payment for all Common Shares subscribed for must be received
by the Company, together with properly completed and manually signed original
Order Forms therefor, before the expiration time, which will be specified on the
Order Forms, unless such date is extended by the Company and the Holding
Company. The amount of the required payment will be the amount which equals the
Initial Purchase Price (which will be specified in the Order Forms or
accompanying materials), multiplied by the number of Common Shares subscribed
for in accordance with the terms of this Plan.
(b) Payment for Common Shares ordered in the Subscription Offering
will be permitted to be made:
(i) In cash, if delivered in person;
(ii) By check, bank draft, money order or negotiable order of
withdrawal; provided, however, that any payment by check
will be accepted subject to payment of such check by the
drawee of such check;
(iii) By appropriate authorization of withdrawal from any Savings
Account at the Company; or
(iv) By appropriate authorization of funds held for such Person's
benefit by a Tax-Qualified Employee Stock Benefit Plan to
the extent that such plan allows participants or any related
trust established for the benefit of such Person to direct
that some or all of such Person's individual accounts or
subaccounts be invested in Common Shares.
(c) For the purpose of determining the withdrawal balance of any
Savings Account, such withdrawals will be deemed to have been made upon receipt
of appropriate authorization therefor, but interest at the rates applicable to
such accounts will be paid by the Company on the amounts deemed to have been
withdrawn until the date on which the Conversion is completed or terminated, at
which time the authorized withdrawal actually will be made. Interest will be
paid by the Company on payments for Common Shares paid in cash or by check,
negotiable order of withdrawal or money order at an annual rate equal to the
passbook account rate at the Company or such higher rate as may be determined by
the Company. Such interest will be paid from the date payments are received by
the Company until consummation or termination of the Conversion.
(d) The Order Forms will contain appropriate means by which
authorization of withdrawals from Savings Accounts may be made to pay for
subscribed Common Shares. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be withdrawn from the designated Savings
Account (except by the Company as payment for Common Shares) while this Plan
remains in effect. Savings Accounts will be permitted to be established for the
purpose of making payment for subscribed Common Shares. Notwithstanding any
regulatory provisions regarding penalties for early
10
<PAGE> 12
withdrawal from certificate accounts and minimum qualifying balances for such
accounts, payment for Common Shares will be permitted through authorization of
withdrawals from such accounts without the assessment of such penalties. If,
after such withdrawal, the applicable minimum balance requirement ceases to be
met, such certificate account will be canceled and the remaining balance thereof
will earn interest only at the passbook account rate at the Company.
(e) The Company may not lend funds or otherwise extend credit to any
Person to purchase Common Shares.
(f) If the Actual Purchase Price is less than the Initial Purchase
Price, the Company shall refund the difference to all Participants and other
Persons, unless the Holding Company and the Company choose to provide
Participants and other Persons the opportunity on the Order Form to elect to
have such difference applied to the purchase of additional whole Common Shares,
subject to applicable purchase limits. If the Actual Purchase Price is more than
the Initial Purchase Price, the Company shall reduce the number of Common Shares
ordered by Participants and other Persons and refund any remaining amount which
is attributable to a fractional share interest, unless the Company and the
Holding Company choose to provide Participants and other Persons the opportunity
to increase their payments for Common Shares subscribed for or ordered, subject
to applicable purchase limits.
14. EXPIRATION OF SUBSCRIPTION RIGHTS.
(a) All Subscription Rights provided for in this Plan, including,
without limitation, the Subscription Rights of all Persons whose Order Forms are
returned by the United States Post Office as undeliverable, will expire at a
specified time on a specified date which will be not less than 20 days nor more
than 45 days following the date on which Order Forms are first sent to
Participants. If the Holding Company and the Company elect to mail a Prospectus
and an Order Form only to those Participants who request such materials by
returning a postage-paid card by a date specified in the letter informing them
of their Subscription Rights, the Subscription Offering shall not be closed
until the expiration of 30 days after the mailing of the postage-paid card to
Participants.
(b) If the Company is unable to locate particular persons granted
Subscription Rights under this Plan, or if Order Forms (i) are returned as
undeliverable by the United States Post Office, (ii) are not received by the
Company prior to the expiration date specified thereon, (iii) are defectively
filled out or executed, or (iv) are not, when received by the Company,
accompanied by the full required payment for the Common Shares subscribed for
(including cases in which Savings Accounts from which withdrawals are authorized
contain insufficient funds to satisfy the required payment or the check, bank
draft, negotiable order of withdrawal or money order is not paid by the drawee
thereof), the Subscription Rights will lapse as though the Person to whom such
rights have been granted failed to return the completed Order Form within the
time period specified thereon. In any such case as discussed in this paragraph
(b), all payments accompanying the Order Forms will be refunded and, in the case
of payments authorized through withdrawal from Savings Accounts as permitted by
Section 13 of this Plan, such withdrawals will not be made.
(c) The Company may, but will not be obligated to, waive any
irregularity on any Order Form or require the submission of a corrected Order
Form or waive the remittance of full payment for shares subscribed for by such
date as it may specify. An executed Order Form, once received by the Company,
may not be modified, amended or rescinded without the consent of the Company,
unless (i) the Community Offering is not completed within 45 days after the
expiration time of the Subscription Offering, or (ii) the final valuation of the
Company, as converted, is less than the minimum of the Estimated Price Range
established by the Independent Appraiser before the commencement of the
Subscription Offering or exceeds the maximum of the Estimated Price Range by
more than 15%. If either of those events occurs, persons who have subscribed for
Common Shares will receive written notice that they have a right to affirm,
increase, decrease or rescind their subscriptions. Subject to the authority of
the OTS and the Division, all interpretations by the Company and the Holding
Company of the terms and conditions of this Plan and of the Order Forms will be
final.
(d) The sale of all Common Shares must be completed within 45 days
after the termination of the Subscription Offering, unless extended by the
Company with the consent of the OTS and the Division, and within 24 months of
approval of this Plan by the Voting Members at the Special Meeting. The 24-month
period may not be extended by the Company, the OTS or the Division.
11
<PAGE> 13
15. COMPLIANCE WITH SECURITIES LAWS.
The Company and the Holding Company will make reasonable efforts to
comply with the securities laws of the United States and all other jurisdictions
in which Participants reside. No Person, however, will be offered any
Subscription Rights or sold any Common Shares under this Plan if such Person
resides in a foreign country or in any jurisdiction of the United States in
respect of which (a) the granting of Subscription Rights or the offer or sale of
Common Shares under this Plan to such Person would require the Company, the
Holding Company or their Directors, Officers or employees to register under the
securities laws of such jurisdiction as a Broker, Dealer or agent or to register
or otherwise qualify the Common Shares for sale in such state; (b) there are few
Participants otherwise eligible to subscribe for Shares under this Plan who
reside in such jurisdiction; or (c) the Company determines that compliance with
the securities laws of such jurisdiction would be impracticable or unduly
burdensome for reasons of cost or otherwise. No payments will be made in lieu of
the granting of Subscription Rights to such Participants.
16. RIGHTS OF SHAREHOLDERS AFTER COMPLETION OF CONVERSION.
After the Conversion, the Holding Company will be the sole shareholder
of the Company and will exercise all rights attendant to owning the shares of
the Company. Voting rights in respect of the Holding Company will be held and
exercised exclusively by the holders of the issued and outstanding common shares
of the Holding Company. Neither borrowers from the Company nor holders of
Savings Accounts in the Company will have any voting rights in the Company or
the Holding Company on the basis of such borrowings or Savings Accounts. The
shareholders of the Holding Company will have the exclusive rights, subject to
the rights of Eligible Account Holders and Supplemental Eligible Account Holders
in the Liquidation Account provided for in Section 17 of this Plan, to receive
the distribution of any assets remaining after payment of creditors' claims,
including the claims of Savings Account holders to the withdrawal value of their
accounts, in the event of any voluntary or involuntary liquidation of the
Company after the Conversion.
17. LIQUIDATION ACCOUNT.
(a) For purposes of granting a limited priority claim to the assets of
the Company in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain a
Savings Account at the Company after the Conversion, the Company will, at the
time of the Conversion, establish the Liquidation Account in an amount equal to
the retained earnings of the Company as set forth in its latest statement of
financial condition contained in the Prospectus for the sale of Common Shares.
The Liquidation Account will not operate to restrict the use or application of
any of the regulatory capital of the Company.
(b) Each Eligible Account Holder and Supplemental Eligible Account
Holder will have a separate inchoate interest in a portion of the Liquidation
Account for each Savings Account making up such account holder's Qualifying
Deposit (herein referred to as the "Subaccount").
(c) The initial balance of each Subaccount will be an amount
determined by multiplying the amount in the Liquidation Account by a fraction,
the numerator of which is the amount of the account holder's Qualifying Deposits
as of the close of business on the Eligibility Record Date or the Supplemental
Eligibility Record Date, as the case may be, and the denominator of which is the
total amount of all Qualifying Deposits of Eligible Account Holders and
Supplemental Eligible Account Holders on the corresponding record date. For
Savings Accounts in existence on both the Eligibility Record Date and the
Supplemental Eligibility Record Date, separate Subaccounts will be determined on
the basis of the Qualifying Deposits in such Savings Accounts on each such date.
The balance of each Subaccount will never be increased above the initial
balance. If the balance in the Savings Account to which a Subaccount relates, at
the close of business on the last day of each fiscal year of the Holding Company
subsequent to the respective record dates, is less than the lesser of (i) the
deposit balance in such Savings Account at the close of business on the last day
of each fiscal year of the Holding Company subsequent to the Eligibility Record
Date or the Supplemental Eligibility Record Date and (ii) the amount of the
Qualifying Deposit as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, the balance of the Subaccount for such Savings Account
will be adjusted in proportion to the reduction in such Savings Account balance.
In the event of any such downward adjustment, such Subaccount balance will not
be subsequently increased notwithstanding any increase in the deposit balance of
the related Savings Account. If any Savings Account is closed, its related
Subaccount will be reduced to zero upon such closing. The Subaccount of an
account holder will be maintained for as long as the account holder maintains
the related Savings Account with the same Social Security or tax identification
number.
(d) In the event of a complete liquidation of the converted
Company (and only in such event), each Eligible Account Holder and
Supplemental Eligible Account Holder will be entitled to receive from the
Liquidation Account a
12
<PAGE> 14
distribution equal to the current adjusted balance in each of such account
holder's Subaccounts before any liquidation distribution may be made to any
holders of the capital stock of the Company. No merger, consolidation, sale of
bulk assets or similar combination or transaction with another savings
association, the accounts of which are insured by the FDIC, will be deemed to be
a complete liquidation for this purpose and, in any such transaction, the
Liquidation Account will be assumed by the surviving insured institution.
18. ACCOUNTS IN CONVERTED COMPANY.
Each Savings Account in the Company at the time of the Conversion will
constitute, without payment or further action by the account holder, a Savings
Account in the Company as converted, equal in withdrawable amount to the
withdrawal value (as adjusted to give effect to any withdrawal made for the
purchase of Common Shares), and subject to the same terms and conditions, except
as to voting and liquidation rights, as such Savings Account in the Company
immediately before the Conversion.
19. RESTRICTIONS ON PURCHASES AND SALES OF COMMON SHARES BY OFFICERS AND
DIRECTORS FOLLOWING CONVERSION.
(a) All Common Shares purchased by Officers or Directors of the
Holding Company or the Company or their Associates pursuant to this Plan will be
subject to the restriction that no such shares will be sold for a period of one
year following the date of purchase of such shares, except in the event of the
death of the Officer, Director or Associate or pursuant to any merger or similar
transaction approved by the OTS.
(b) With respect to all Common Shares subject to the restriction on
subsequent disposition pursuant to paragraph (a) of this Section 19, each of the
following provisions will apply:
(i) Each certificate representing such shares will bear the
following legend prominently stamped thereon giving notice
of such restriction on transfer:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD
BY THE REGISTERED HOLDER HEREOF FOR A PERIOD OF NOT LESS
THAN ONE YEAR FROM THE DATE OF ISSUANCE HEREOF, EXCEPT IN
THE EVENT OF THE DEATH OF THE REGISTERED HOLDER OF SUCH
SHARES.
(ii) Instructions will be given to the transfer agent for the
Holding Company, if any, not to recognize or effect any
transfer of any certificates representing such shares or
any change of record ownership thereof in violation of such
restriction on transfer; and
(iii) Any shares of capital stock of the Holding Company issued
as a stock dividend, stock split or otherwise with respect
to outstanding Common Shares subject to restrictions on
transfer hereunder will be subject to the same restrictions
as are applicable to the Common Shares with respect to
which such shares of stock are issued.
(c) For a period of three years following the Conversion, no Officer
or Director, or any Associates of such Officer or Director shall, without the
prior written approval of the OTS, purchase the capital stock of the Holding
Company other than from a Broker or Dealer registered with the SEC. This
provision will not apply to (i) negotiated transactions involving more than one
percent of a class of outstanding capital stock of the Holding Company or (ii)
purchases of shares of capital stock made by and held by any one or more
tax-qualified or non-tax-qualified employee stock benefit plans which may be
attributable to individual Officers or Directors.
The foregoing restrictions on purchases of common shares of the
Holding Company shall be in addition to any restrictions that may be imposed by
federal and state securities laws.
20. RESTRICTIONS ON ACQUISITION OF THE COMPANY OR THE HOLDING COMPANY.
Acquisition of the capital stock of the Company or the Holding Company
after the Conversion will be subject to various restrictions contained in the
Amended Articles, the Amended Constitution, the articles of incorporation of the
Holding Company, the code of regulations of the Holding Company and various
state and federal laws and regulations. In addition, the articles of
incorporation of the Holding Company or the Amended Articles may include the
limitation that, for a period of up to five years
13
<PAGE> 15
from the date of completion of the Conversion of the Company from mutual to
stock form, no Person may directly or indirectly offer to acquire or acquire
beneficial ownership of more than 10% of any class of an equity security of the
Company or the Holding Company.
21. CONSUMMATION OF CONVERSION.
The Conversion of the Company from mutual to stock form will be deemed
to have taken place and to be effective at the time and date provided in the
regulations of the OTS and the Division. The Conversion must be completed within
24 months of the approval of this Plan by the Members.
22. ADOPTION OF AMENDED ARTICLES AND AMENDED CONSTITUTION
As part of the Conversion, the Company shall take all appropriate
steps to adopt the Amended Articles and the Amended Constitution and to present
the Amended Articles and the Amended Constitutions to the Voting Members for
their approval.
23. TAX RULINGS/OPINIONS.
The Conversion is expressly conditioned upon the prior receipt by the
Company and the Holding Company of either rulings from the Internal Revenue
Service and the appropriate Ohio taxing authorities or opinions of legal counsel
or other tax advisors to the Company in form and substance satisfactory to the
Company and to the effect, among other things, that the Conversion will
constitute a tax-free "reorganization" as defined in Section 368(a) of the
Internal Revenue Code of 1986, as amended, and comparable provisions of
applicable state law, or that consummation of the transactions provided for in
this Plan will not otherwise result in any federal, state or other tax
consequences to the Company or the converted Company deemed materially adverse
by the Board of Directors of the Company or the Board of Directors of the
Holding Company.
24. DIRECTORS AND OFFICERS OF THE COMPANY.
It is not intended that the Conversion will result in any change in
the Directors or Officers of the Company. The persons serving as Officers on the
date the Application is filed with the OTS and the Division will continue to
serve at the discretion of the Board of Directors of the Company in their
respective capacities as Officers of the converted the Company. The persons
serving as Directors of the Company on the date the Application is filed with
the OTS and the Division will continue to serve as Directors following the
Conversion until their terms expire or their earlier death, resignation or
removal from office.
25. STOCK BENEFIT PLANS.
Following the completion of the Conversion, the Company or the Holding
Company may establish one or more stock option plans and management recognition
plans to the extent permitted by OTS regulations. The Company and the Holding
Company may make scheduled or discretionary contributions to one or more stock
benefit plans maintained by the Company or the Holding Company for the benefit
of the Directors, Officers or employees of the Company or the Holding Company,
provided such contributions do not cause the Company to fail to meet its
regulatory capital requirement.
26. REGISTRATION OF COMMON SHARES; MARKET FOR COMMON SHARES.
(a) Before or promptly following the Conversion, the Holding Company
will register the Common Shares with the SEC pursuant to the Securities Exchange
Act of 1934 and will not deregister such shares for a period of three years
thereafter.
(b) The Holding Company will use its best efforts to encourage and
assist a market maker to establish and maintain a market for the Common Shares
and will use its best efforts to cause such shares to be quoted on The Nasdaq
Stock Market (or any comparable quotation system which may hereafter be
developed) or listed on a national or regional securities exchange.
14
<PAGE> 16
27. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, the Holding Company and the Company may
establish or contribute to the Foundation. To fund the Foundation, the Company
would contribute funds prior to completion of the Conversion or, immediately
subsequent to the Conversion, the Holding Company would contribute unissued
common shares in an amount not to exceed eight percent (8%) of the number of
Common Shares issued in the Conversion, or a combination of cash and common
shares, subject to the receipt of any required regulatory approval or consent.
The purpose of the contribution to the Foundation is to complement the Company's
existing community reinvestment activities and to share the Company's financial
success as a locally-based, community-oriented, financial services institution.
The Foundation would be dedicated to the promotion of charitable
purposes including community development, grants, or donations to support
housing assistance and affordable housing programs, not-for-profit community
groups and other similar types of organizations and projects. In order to serve
the purposes for which it would be formed and in order to maintain its
qualification under Section 501(c)(3) of the Code, the Foundation might sell, on
an annual basis, a portion of the common shares contributed to it by the Holding
Company, if any.
The Board of Directors of the Foundation may be comprised of
individuals who are Officers or Directors of the Company or the Holding Company.
The Board of Directors of the Foundation would be responsible for establishing
the policies of the Foundation with respect to grants or donations, consistent
with the stated purposes of the Foundation.
28. EXPENSES OF CONVERSION.
The Company and the Holding Company will use their best efforts to
ensure that the expenses incurred in connection with the Conversion will be
reasonable.
29. AMENDMENT OR TERMINATION OF THIS PLAN.
If deemed necessary or desirable by the Boards of Directors of the
Company and the Holding Company, this Plan may be amended by the Boards of
Directors of the Company and the Holding Company in their sole discretion at any
time prior to the solicitation of Proxies from Voting Members entitled to vote
on this Plan and at any time thereafter with the concurrence of the OTS and the
Division. The Conversion pursuant to this Plan may be terminated by the Boards
of Directors of the Company and the Holding Company in their sole discretion at
any time prior to the Special Meeting and at any time thereafter with the
concurrence of the OTS and the Division.
30. INTERPRETATION OF THIS PLAN.
The Boards of Directors of the Company and the Holding Company will
interpret this Plan. To the extent permitted by law, all interpretations of this
Plan and applications of its terms shall be made by a majority of the Directors
of the Company and the Holding Company and, subject to the authority of the OTS
and the Division, such interpretation will be final.
15
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
UNITED COMMUNITY FINANCIAL CORP.
The undersigned, desiring to form a corporation for profit under
Chapter 1701 of the Ohio Revised Code, does hereby certify:
FIRST: The name of the corporation shall be United Community Financial
Corp.
SECOND: The place in Ohio where the principal office of the corporation
is to be located is the City of Youngstown, County of Mahoning.
THIRD: The purpose for which the corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under Section
1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: The authorized shares of the corporation shall be eight hundred
and fifty (850) common shares, each without par value. The directors of the
corporation may adopt an amendment to the Articles of Incorporation of the
corporation in respect of any unissued or treasury shares of any class and
thereby fix or change: the division of such shares into series and the
designation and authorized number of each series; the dividend rate; the dates
of payment of dividends and the dates from which they are cumulative; the
liquidation price; the redemption rights and price; the sinking fund
requirements; the conversion rights; and the restrictions on the issuance of
shares of any class or series.
FIFTH: (A) The board of directors of the corporation shall have the
power to cause the corporation from time to time and at any time to purchase,
hold, sell, transfer or otherwise deal with (i) shares of any class or series
issued by it, (ii) any security or other obligation of the corporation which may
confer upon the holder thereof the right to convert the same into shares of any
class or series authorized by the Articles of Incorporation of the corporation,
and (iii) any security or other obligation which may confer upon the holder
thereof the right to purchase shares of any class or series authorized by the
Articles of Incorporation of the corporation.
(B) The corporation shall have the right to repurchase, if and when any
shareholder desires to sell, or on the happening of any event is required to
sell, shares of any class or series issued by the corporation.
<PAGE> 2
(C) The authority granted in this Article Fifth shall not limit the
plenary authority of the directors to purchase, hold, sell, transfer or
otherwise deal with shares of any class or series, securities or other
obligations issued by the corporation or authorized by the Articles of
Incorporation of the corporation.
SIXTH: Notwithstanding any provision of the Ohio Revised Code requiring
for any purpose the vote, consent, waiver or release of the holders of shares of
the corporation entitling them to exercise any proportion of the voting power of
the corporation or of any class or classes thereof, such action, unless
expressly otherwise provided by statute, may be taken by the vote, consent,
waiver or release of the holders of shares entitling them to exercise not less
than a majority of the voting power of the corporation or of such class or
classes; provided, however, that if the board of directors of the corporation
shall recommend against the approval of any of the following matters, the
affirmative vote of the holders of shares entitling them to exercise not less
than eighty percent (80%) of the voting power of any class or classes of shares
of the corporation which entitle the holders thereof to vote in respect of any
such matter as a class shall be required to adopt:
(A) A proposed amendment to the Articles of Incorporation of the
corporation;
(B) A proposed amendment to the Code of Regulations of the
corporation;
(C) A proposal to change the number of directors by action of the
shareholders;
(D) An agreement of merger or consolidation providing for the
proposed merger or consolidation of the corporation with or
into one or more other corporations;
(E) A proposed combination or majority share acquisition involving
the issuance of shares of the corporation and requiring
shareholder approval;
(F) A proposal to sell, exchange, transfer or otherwise dispose of
all, or substantially all, of the assets, with or without the
goodwill, of the corporation; or
(G) A proposed dissolution of the corporation.
SEVENTH: No shareholder of the corporation shall have, as a matter of
right, the pre-emptive right to purchase or subscribe for shares of any class,
now or hereafter authorized, or to purchase or subscribe for securities or other
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitle the holders thereof to subscribe for or purchase
any such shares.
<PAGE> 3
IN WITNESS WHEREOF, I have hereunto signed my name this 26th day of
January, 1998.
/s/ Douglas M. McKay
--------------------
Douglas M. McKay, Incorporator
<PAGE> 1
Exhibit 5
(513) 723-4000
March 12, 1998
Board of Directors
United Community Financial Corp.
275 Federal Plaza West
Youngstown, OH 44503-1203
Gentleman:
We are familiar with the proceedings taken and proposed to be
taken by United Community Financial Corp. (the "Holding Company") in connection
with the issuance and sale by the Holding Company of up to 34,715,625 of its
common shares, without par value (the "Common Shares"). The Common Shares are
being offered by the Holding Company in connection with the conversion of The
Home Savings and Loan Company of Youngstown, Ohio (the "Company") from a mutual
savings and loan association incorporated under the laws of the State of Ohio to
a permanent capital stock savings and loan association incorporated under the
laws of the State of Ohio (the "Conversion").
The Holding Company has been incorporated for the purpose of
purchasing all of the capital stock to be issued by the Company in connection
with the Conversion. We have assisted with matters related to the incorporation
and organization of the Holding Company. In addition, we have collaborated in
the preparation of the Registration Statement on Form S-1 (the "Registration
Statement") to be filed by the Holding Company with the Securities and Exchange
Commission for the registration of the Common Shares under the Securities Act of
1933, as amended. In connection therewith, we have examined, among other things,
such records and documents as we have deemed necessary in order to express the
opinions hereinafter set forth.
<PAGE> 2
Board of Directors
United Community Financial Corp.
March 12, 1998
Page 2
Based upon the foregoing, we are of the opinion that the
Holding Company is a duly organized and legally existing corporation under the
laws of the State of Ohio. Assuming compliance with applicable federal and state
securities laws, we are also of the opinion that the Common Shares to be issued
and sold by the Holding Company, when purchase orders have been accepted and the
purchase price for the Common Shares has been paid in money as specified in the
Registration Statement when it shall become effective, will be validly issued
and outstanding, fully paid and non-assessable. Notwithstanding the foregoing,
until payments are received by the Holding Company from the United Community
Financial Corp. Employee Stock Ownership Plan (the "ESOP") in accordance with
the terms of a loan agreement to be entered into by and between the Holding
Company and the ESOP, shares for which payment in money has not been received,
and including shares contributed by the Holding Company to the Home Savings
Charitable Foundation, will not be fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us in the Prospectus
included therein.
Very truly yours,
Vorys, Sater, Seymour and Pease LLP
<PAGE> 1
Exhibit 8.1
(513) 723-4000
March 12, 1998
Board of Directors
United Community Financial Corp.
275 Federal Plaza West
Youngstown, Ohio 44503-1203
and
Board of Directors
The Home Savings and Loan Company of Youngstown, Ohio
275 Federal Plaza West
Youngstown, Ohio 44503-1203
Re: Conversion from a Mutual Savings and Loan Association to a
Stock Savings and Loan Association - Federal and State Tax Matters
------------------------------------------------------------------
Gentlemen:
You have requested our opinion regarding certain federal income and
state tax consequences resulting from the proposed conversion (the "Conversion")
of The Home Savings and Loan Company of Youngstown, Ohio (the "Company") from a
mutual savings and loan association to a stock savings and loan association (the
"Stock Company") incorporated under the laws of the State of Ohio and the
simultaneous acquisition by United Community Financial Corp., an Ohio
corporation (the "Holding Company"), of all the capital stock to be issued by
the Stock Company upon the Conversion.
We have reviewed the Plan of Conversion adopted by the Company's Board
of Directors on December 9, 1997 (the "Plan"), the Application for Conversion on
Form AC (the "Application") filed with the Office of Thrift Supervision (the
"OTS") and the Ohio Department of Commerce, Division of Financial Institutions
(the "Division"), the Application H-(e)1 filed with the OTS and the Summary
Proxy Statement, the Prospectus and other solicitation materials included in the
Application, and we have examined such other legal and factual matters as we
<PAGE> 2
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 2
considered appropriate. Unless otherwise indicated, defined terms in this letter
have the same meaning as in the Plan and the Prospectus.
We have not requested on your behalf nor have we received any rulings
from the Internal Revenue Service ("IRS") in connection with the Conversion or
the attendant federal income tax consequences.
FACTS
- -----
A. The Company
-----------
The Company is a mutual savings and loan association which was
organized under Ohio law in 1889. As a savings and loan association, the Company
is subject to supervision and regulation by the OTS, the Division and the
Federal Deposit Insurance Corporation ("FDIC"). The Company is a member of the
Federal Home Loan Bank of Cincinnati. The deposits of the Company are insured up
to applicable limits by the FDIC in the Savings Bank Insurance Fund ("SAIF").
The principal business of the Company is the origination of permanent
mortgage loans secured by first mortgages on one- to four-family residential
real estate located in the Company's primary market area. The Company also
originates loans secured by multifamily real estate (over four units) and
nonresidential real estate and loans for the construction of one- to four-family
residences and permanent mortgage loans secured by multi-family and
non-residential real estate in its primary market area. In addition to real
estate lending, the Company originates secured and unsecured consumer loans. The
Company invests in interest-bearing deposits in other financial institutions,
U.S. Treasury securities, and other investments permitted by applicable law.
Funds for lending and other investment activities are obtained primarily from
savings deposits, which are insured up to applicable limits by the FDIC, and
principal repayments on loans and maturities of investment securities.
The Company conducts business from its main office located at 275
Federal Plaza West, Youngstown, Ohio 44503-1203, and 13 full-service branch
offices located in Northeastern Ohio.
B. United Community Financial Corp.
--------------------------------
The Holding Company was incorporated under Ohio law in February 1998
for the purpose of purchasing all of the capital stock of the Company to be
issued in connection with the Conversion. The Holding Company has not conducted
and will not conduct any business other than business related to the Conversion
prior to the completion of the Conversion. Upon the consummation of the
Conversion, the Holding Company will be a unitary savings and loan
<PAGE> 3
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 3
holding company, and its principal asset initially will be the capital stock of
the Stock Company and the investments made with the net proceeds retained from
the sale of common shares of the Holding Company (the "Common Shares") in
connection with the Conversion.
The office of the Holding Company is located at 275 Federal Plaza West,
Youngstown, Ohio 44503-1203.
C. The Plan of Conversion
----------------------
On December 9, 1997, the Board of Directors of the Company adopted the
Plan and recommended that the Voting Members of the Company approve the Plan at
the Special Meeting. Under the Plan, (i) the Company will be converted under
Ohio law from a mutual savings and loan association to a stock savings and loan
association, and (ii) the Common Shares will be offered for sale and issued to
eligible persons in the Subscription Offering and to the general public in the
Community Offering, with preference being given to residents of Columbiana,
Mahoning and Trumbull Counties, Ohio. If Common Shares remain unsold after the
Community Offering, the Common Shares will be offered to members of the general
public in the Public Offering through a syndicate of registered broker-dealers.
The aggregate purchase price at which the Common Shares will be offered
and sold pursuant to the Plan will be based upon the estimated pro forma market
value of the Stock Company, as determined by an independent appraisal of the
Stock Company and the Holding Company. Keller & Co., Inc. ("Keller"), a firm
experienced in valuing thrift institutions, has prepared an independent
appraisal of the pro forma market value of the Stock Company. Keller's valuation
of the estimated pro forma market value of the Stock Company, as converted, and
the Holding Company, and giving effect to the contribution of up to 1,250,000
common shares of the Holding Company to the Home Savings Charitable Foundation
(the "Foundation"), is $262,500,000 as of February 24, 1998. The Adjusted
Valuation Range established in accordance with the Plan is $212,500,000 to
$289,375,000, which, based upon a per share offering price of $10.00, will
result in the sale of between 21,250,000 and 28,937,500 Common Shares. The total
number of Common Shares sold in the Conversion will be determined based on the
Adjusted Valuation Range. Applicable regulations permit the Holding Company to
issue up to a total of 33,465,625 Common Shares with an aggregate purchase price
of $334,656,250.
The Holding Company intends to contribute to the Foundation immediately
following the Conversion, out of authorized but unissued common shares, a number
of common shares equal to 5% of the Common Shares issued in the Conversion,
subject to the overall limitation of 1,250,000 common shares. The Foundation is
a charitable trust which is an exempt organization under Section 501(c)(3) of
the Internal Revenue Code of 1986, as amended (the "Code"). The Foundation was
established in 1991 exclusively for charitable purposes including community
development and the Foundation's trust agreement provides that no part of the
net earnings of the
<PAGE> 4
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 4
Foundation will inure to the benefit of any private shareholder or individual.
Following the Conversion, the Foundation will continue to be dedicated to the
promotion of charitable purposes in the communities served by the Company. The
Foundation will annually distribute total grants or donations of not less than
5% of the average fair market value of the Foundation's net investment assets.
In order to maintain its Section 501(c)(3) qualification the Foundation may
sell, on an annual basis, a limited number of the common shares contributed to
it by the Holding Company.
In the event the contribution of common shares to the Foundation is not
approved by the members of the Company at the Special Meeting, the Company may
determine to complete the Conversion without the Foundation
D. Liquidation Account
-------------------
In the event of a complete liquidation of the Company in its present
mutual form, each depositor in the Company would receive a pro rata share of any
assets of the Company remaining after payment of the claims of all creditors,
including the claims of all depositors to the withdrawable value of their
savings accounts. A depositor's pro rata share of such remaining assets would be
the same proportion of such assets as the value of such depositor's savings
deposits bears to the total aggregate value of all savings deposits in the
Company at the time of liquidation.
In the event of a complete liquidation of the Stock Company after the
Conversion, each savings depositor would have a claim of the same general
priority as the claims of all other general creditors of the Stock Company.
Except as described below, each depositor's claim would be solely in the amount
of the balance in such depositor's savings account plus accrued interest. The
depositor would have no interest in the assets of the Stock Company above that
amount. Such assets would be distributed to the Holding Company as the sole
shareholder of the Stock Company.
For the purpose of granting a limited priority claim to the assets of
the Stock Company in the event of a complete liquidation thereof to Eligible
Account Holders and Supplemental Eligible Account Holders who maintain their
savings accounts at the Stock Company following the Conversion, the Company
will, at the time of Conversion, establish the Liquidation Account in an amount
equal to the regulatory capital of the Company as of December 31, 1997. The
Liquidation Account will not operate to restrict the use or application of any
of the regulatory capital of the Stock Company.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a Subaccount. The balance of each initial Subaccount shall be an
amount determined by multiplying the amount in the Liquidation Account by a
fraction, the numerator of which is the
<PAGE> 5
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 5
closing balance in the account holder's account as of the close of business on
the applicable record date and the denominator of which is the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders on the applicable record date. The balance of each
Subaccount may be decreased but will never be increased. If, at the close of
business on any annual closing date of the Stock Company subsequent to the
respective record dates, the balance in the savings account to which a
Subaccount relates is less than the lesser of (i) the deposit balance in such
savings account at the close of business on any other annual closing date
subsequent to the applicable record date or (ii) the amount of the Qualifying
Deposit as of the applicable record date, the balance of the Subaccount for such
savings account shall be adjusted proportionately to the reduction in such
savings account balance. In the event of any such downward adjustment, such
Subaccount balance shall not be subsequently increased notwithstanding any
increase in the deposit balance of the related savings account. If any savings
account is closed, its related Subaccount shall be reduced to zero upon such
closing.
In the event of a complete liquidation of the Stock Company (and only
in such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive from the Liquidation Account a distribution equal to the
current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to the shareholders of the Stock Company.
Any assets remaining after satisfaction of such liquidation rights and the
claims of the Stock Company's creditors would be distributed to the Holding
Company as the sole shareholder of the Stock Company. No merger, consolidation,
purchase of bulk assets or similar combination or transaction with another
financial institution, the deposits of which are insured by the FDIC, will be
deemed to be a complete liquidation for this purpose and, in any such
transaction, the Liquidation Account shall be assumed by the surviving financial
institution.
E. Issuance of Shares
------------------
1. Subscription Offering
---------------------
Nontransferable subscription rights to purchase Common Shares
will be granted at no cost to all eligible persons and entities in accordance
with the preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. Each person subscribing for shares must
represent to the Stock Company that he or she is purchasing such shares for his
or her own account and that he or she has no agreement or understanding with any
other person for the sale or transfer of such shares.
The number of Common Shares which a person who has
subscription rights may purchase will be determined, in part, by the total
number of Common Shares to be issued and the availability of Common Shares for
purchase under the preference categories set forth in the Plan and certain other
limitations. The sale of any Common Shares pursuant to subscriptions received
<PAGE> 6
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 6
is contingent upon approval of the Plan by the Voting Members of the Company at
the Special Meeting.
The preference categories which have been established by the
Plan, in accordance with applicable regulations, for the allocation of Common
Shares are as follows:
(a) Each Eligible Account Holder shall
receive, without payment therefor, a nontransferable right to purchase in the
Subscription Offering up to the greater of (i) 30,000 Common Shares, (ii) .10%
of the total number of Common Shares sold in connection with the Conversion, and
(iii) 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of Common Shares sold in connection with the
Conversion by a fraction, the numerator of which is the amount of the Eligible
Account Holder's Qualifying Deposit and the denominator of which is the total
amount of Qualifying Deposits of all Eligible Account Holders, in each case on
the Eligibility Record Date, subject to the overall purchase limitations set
forth in Section 11 of the Plan and subject to adjustment by the Board of
Directors of the Holding Company and the Company as set forth in Section 11 of
the Plan. If the exercise of subscription rights by Eligible Account Holders
results in an over-subscription, Common Shares will be allocated among
subscribing Eligible Account Holders in a manner which will, to the extent
possible, make the total allocation of each subscriber equal 100 shares or the
amount subscribed for, whichever is less. Any Common Shares remaining after such
allocation has been made will be allocated among the subscribing Eligible
Account Holders whose subscriptions remain unfilled in the proportion which the
amount of their respective Qualifying Deposits on the Eligibility Record Date
bears to the total Qualifying Deposits of all Eligible Account Holders on such
date. Notwithstanding the foregoing, Common Shares in excess of 28,937,500, the
maximum of the Adjusted Valuation Range, may be sold to the ESOP before fully
satisfying the subscriptions of Eligible Account Holders. No fractional shares
will be issued. For purposes of this paragraph (a), increases in the Qualifying
Deposits of directors and executive officers of the Company during the twelve
months preceding the Eligibility Record Date shall not be considered.
(b) The ESOP shall receive, without payment therefor,
a nontransferable right to purchase in the Subscription Offering an aggregate
amount of up to 10% of the Common Shares sold in the Conversion, provided that
shares remain available after satisfying the subscription rights of Eligible
Account Holders up to the maximum of the Valuation Range pursuant to paragraph
(a) above. Although the Plan and OTS regulations permit the ESOP to purchase up
to 10% of the Common Shares, the Holding Company anticipates that the ESOP will
purchase 8% of the Common Shares. If the ESOP is unable to purchase all or part
of the Common Shares for which it subscribes, the ESOP may purchase Common
Shares on the open market or may purchase authorized but unissued Common Shares.
If the ESOP purchases authorized but unissued Common Shares, such purchases
could have a dilutive effect on the interests of the Holding Company's
shareholders.
<PAGE> 7
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 7
(c) Provided that shares remain available after
satisfying the subscription rights of Eligible Account Holders and the ESOP
pursuant to paragraphs (a) and (b) above each Supplemental Eligible Account
Holder will receive, without payment therefor, a nontransferable right to
purchase up to the greater of (i) 30,000 Common Shares, (ii) .10% of the total
number of Common Shares sold in connection with the Conversion, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of Common Shares sold in connection with the
Conversion by a fraction, the numerator of which is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of Qualifying Deposits of all Supplemental Eligible
Account Holders, in each case on the Supplemental Eligibility Record Date,
subject to the overall purchase limitations set forth in Section 11 of the Plan
and subject to adjustment by the Board of Directors of the Holding Company and
the Company as set forth in Section 11 of the Plan. If the exercise of
subscription rights by Supplemental Eligible Account Holders results in an
oversubscription, Common Shares will be allocated among subscribing Supplemental
Eligible Account Holders in a manner which will, to the extent possible, make
the total allocation of each subscriber equal 100 shares or the amount
subscribed for, whichever is less. Any Common Shares remaining after such
allocation has been made will be allocated among the subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled in the proportion
which the amount of their respective Qualifying Deposits on the Supplemental
Eligibility Record Date bears to the total Qualifying Deposits of all
Supplemental Eligible Account Holders on such date. No fractional shares will be
issued.
(d) Provided that shares remain available after
satisfying the subscription rights of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders pursuant to paragraphs (a), (b) and (c)
above, each Other Eligible Member, other than an Eligible Account Holder or
Supplemental Eligible Account Holder, shall receive, without payment therefor, a
nontransferable right to purchase up to the greater of (i) 30,000 Common Shares,
and (ii) .10% of the total number of Common Shares sold in connection with the
Conversion, subject to adjustment by the Boards of Directors of the Company and
the Holding Company. In the event of an oversubscription by Other Eligible
Members, the available Common Shares will be allocated among subscribing Other
Eligible Members in the same proportion that their subscriptions bear to the
total amount of subscriptions by all Other Eligible Members; provided, however,
that, to the extent sufficient Common Shares are available, each subscribing
Other Eligible Member shall receive 25 Common Shares before the remaining
available Common Shares are allocated.
(e) Provided that shares remain available after
satisfying the subscription rights of Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other Eligible Members pursuant to
paragraphs (a), (b), (c) and (d), above, the directors, officers and employees
of the Company shall receive, without payment therefor,
<PAGE> 8
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 8
nontransferable rights to purchase an aggregate of up to 15% of the Common
Shares sold in connection with the Conversion subject to the overall purchase
limitations set forth in Section 11 of the Plan and subject to adjustment by the
Boards of Directors of the Company and the Holding Company as set forth in
Section 11 of the Plan. The ability of directors, officers and employees to
purchase Common Shares under this paragraph is in addition to rights which are
otherwise available to them under the Plan.
2. Community Offering
------------------
To the extent Common Shares remaining available after the
satisfaction of all subscriptions received in the Subscription Offering, the
Company is hereby offering Common Shares in the Community Offering subject to
the limitations set forth below. If subscriptions are received in the
Subscription Offering for up to 33,465,625 Common Shares, Common Shares may not
be available in the Community Offering. All sales of the Common Shares in the
Community Offering will be at the same price per share as in the Subscription
Offering.
In the event shares are available for the Community Offering,
each person, together with any Associate or groups Acting in Concert, may
purchase in the Community Offering up to 30,000 Common Shares. If an
insufficient number of Common Shares is available to fill all of the orders
received in the Community Offering, the available Common Shares will be
allocated in a manner to be determined by the Boards of Directors of the Holding
Company and the Company, subject to the following:
(i) Preference will be given to natural
persons who are residents of Columbiana, Mahoning and Trumbull
Counties, Ohio, the counties in which the offices of the
Company are located;
(ii) Orders received in the Community
Offering will first be filled up to 2% of the total number of
Common Shares offered, with any remaining shares allocated on
an equal number of shares per order basis until all orders
have been filled; and
(iii) the right of any person to purchase
Common Shares in the Community Offering is subject to the
right of the Holding Company and the Company to accept or
reject such purchases in whole or in part.
3. Public Offering
---------------
As a final step in the Conversion, the Plan provides that all Common
Shares not purchased in the Subscription Offering and the Community Offering may
be offered for sale to the general public in the Public Offering through a
syndicate of registered broker-dealers to be
<PAGE> 9
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 9
formed. The Company and the Holding Company expect to market any Common Shares
which remain unsubscribed after the Subscription Offering and the Community
Offering through the Public Offering. The Company and the Holding Company have
the right to reject orders in whole or part in their sole discretion in the
Public Offering.
The price at which Common Shares are sold in the Public Offering will
be the same price at which Common Shares are offered and sold in the
Subscription Offering and the Community Offering. In the event shares are
available for the Public Offering, each person, together with any Associate or
groups Acting in Concert, may purchase in the Public Offering up to 30,000
Common Shares.
F. Results of Conversion
---------------------
Savings account holders and borrowers who are members of the Company
will have no voting rights in the Stock Company and will not participate,
therefore, in the election of directors or otherwise control the Stock Company's
affairs. After the Conversion, voting rights in the Stock Company will be vested
exclusively in the Holding Company as the sole shareholder of the Stock Company.
Each holder of Common Shares will be entitled to one vote for each share owned
on any matter to be considered by the shareholders of the Stock Company.
The Conversion will not interrupt the business of the Company. During
and upon completion of the Conversion, the Company will continue to provide the
services presently offered to depositors and borrowers, will maintain its
existing offices and will retain its existing management and employees. All
savings accounts in the Stock Company will be equivalent in amount, interest
rate and other terms to the present savings accounts in the Company, and the
existing FDIC insurance of such deposits will not be affected by the Conversion.
The Conversion will not affect the terms of loan accounts or the rights and
obligations of borrowers under their individual contractual arrangements with
the Company.
ADDITIONAL REPRESENTATIONS
- --------------------------
You have made the following additional representations upon which we
have relied:
(1) Neither the Holding Company nor the Stock Company has any
plan or intention to redeem or otherwise acquire any of the Common Shares to be
issued in connection with the Conversion.
(2) Immediately following the consummation of the Conversion,
the Stock Company will possess the same assets and liabilities as the Company
held immediately prior to the Conversion, plus proceeds from the sale of the
Common Shares to the Holding Company in
<PAGE> 10
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 10
exchange for 50% of the net proceeds of the Conversion. Assets used to pay
expenses of the Conversion and all distributions (except for regular, normal
interest payments made by the Company immediately preceding the Conversion) will
in the aggregate constitute less than one percent of the net assets of the
Company and any such expenses and distributions will be paid by the Company and
the Holding Company from the proceeds of the Offering.
(3) Following the Conversion, the Stock Company will continue
to engage in its business in substantially the same manner as engaged in by the
Company prior to the Conversion and it has no plan or intention to sell or
otherwise dispose of any of its assets except in the ordinary course of
business.
(4) The Company is not under the jurisdiction of a court in
any Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
(5) The aggregate fair market value of the Qualifying Deposits
held by Eligible Account Holders and Supplemental Eligible Account Holders as of
the close of business on the Eligibility Record Date and the Supplemental
Eligibility Record Date, respectively, will equal or exceed ninety-nine percent
(99%) of the aggregate fair market value of all savings accounts (including
those accounts with less than $50) in the Company as of the close of business on
such dates. No Common Shares will be issued to or purchased by
depositor-employees at a discount or as compensation in the Conversion.
(6) No cash or property will be given to Eligible Account
Holders, Supplemental Eligible Account Holders or Other Eligible Members in lieu
of (a) nontransferable subscription rights or (b) an interest in the Liquidation
Account of the Stock Company.
(7) The Company utilizes a reserve for bad debts in accordance
with Section 593 of the Code and, following the Conversion, the Stock Company
shall likewise utilize a reserve for bad debts in accordance with Section 593 of
the Code.
(8) The Holding Company has no plan or intention to sell or
otherwise dispose of the shares of the Stock Company purchased by it in the
Conversion.
(9) The Company's savings depositors will pay the expenses of
the Conversion solely attributable to them, if any. The Holding Company will pay
the expenses of the transaction and will not pay any expenses solely
attributable to the savings depositors or to the Holding Company's shareholders.
(10) No amount of savings accounts or deposits as of the
Eligibility Record Date or the Supplemental Eligibility Record will be excluded
from participation in the Liquidation Account.
<PAGE> 11
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 11
(11) The fair market value of the withdrawable savings
accounts plus interests in the Liquidation Account of the Stock Company to be
constructively received under the Plan will in each instance be equal to the
fair market value of the withdrawable savings accounts of the Company
surrendered in exchange therefor. All proprietary rights in the Company form an
integral part of the withdrawable savings accounts being surrendered in the
exchange.
(12) The Board, as defined in Section 368(a)(3)(D)(iii) of the
Code, has not made the certification described in Section 368(a)(3)(D)(ii), nor
will such certification be made prior to or otherwise in connection with the
Conversion.
STATEMENT OF LAW
- ----------------
In Revenue Ruling 80-105, 1980-1 C.B. 78, the IRS ruled that a
conversion of a federal mutual savings and loan association into a state stock
savings and loan association constituted a tax-free reorganization under Section
368(a)(1)(F) of the Code. Subsequently, the IRS consistently issued letter
rulings that conversions of savings and loans qualify as tax-free
reorganizations under the Code, with the attendant tax consequences to the
depositors and shareholders that follow from such transactions. Although private
rulings may not be relied upon by taxpayers other than those to whom the ruling
is directed, such rulings do indicate the administrative position of the IRS.
OPINION OF COUNSEL
- ------------------
Based upon both our understanding of the facts and your representations
set forth above, and in reliance thereon, we are of the opinion that for federal
income tax purposes:
(1) The Conversion of the Company from a mutual savings and
loan association incorporated under the laws of the State of Ohio to a stock
savings and loan association incorporated under the laws of the State of Ohio
will constitute a reorganization within the meaning of Section 368(a)(1)(F) of
the Code, and no gain or loss will be recognized to the Company or to the Stock
Company as a result of the Conversion. The Company and the Stock Company will
each be a "party to a reorganization" within the meaning of Section 368(b) of
the Code.
(2) No gain or loss will be recognized to the Stock Company
upon the receipt of money from the Holding Company in exchange for shares of the
Stock Company.
(3) The assets of the Stock Company will have the same basis
in its hands immediately after the Conversion as they had in the hands of the
Company immediately prior to
<PAGE> 12
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 12
the Conversion, and the holding period of the assets of the Stock Company after
the Conversion will include the period during which the assets were held by the
Company before the Conversion.
(4) No gain or loss will be recognized to the deposit account
holders of the Company upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in the Company immediately prior to the
Conversion, of withdrawable deposit accounts in the Stock Company immediately
after the Conversion, in the same dollar amount as their withdrawable deposit
accounts in the Company immediately prior to the Conversion, plus, in the case
of Eligible Account Holders and Supplemental Eligible Account Holders, the
interests in the Liquidation Account of the Stock Company, as described above.
(5) The basis of the withdrawable deposit accounts in the
Stock Company held by the deposit account holders of the Stock Company
immediately after the Conversion will be the same as the basis of their deposit
accounts in the association immediately prior to the Conversion. The basis of
the interests in the Liquidation Account received by the Eligible Account
Holders and Supplemental Eligible Account Holders will be zero. The basis of the
nontransferable subscription rights received by members will be zero (assuming
that at distribution such rights have no ascertainable fair market value).
(6) No gain or loss will be recognized to Eligible Account
Holders, Supplemental Eligible Account Holders, Other Eligible Members, or
directors, officers and employees of the Company upon the distribution to them
of nontransferable subscription rights to purchase Common Shares (assuming that
such rights have no readily ascertainable fair market value), and no taxable
income will be realized by such Eligible Account Holders, Supplemental Eligible
Account Holders, Other Eligible Members and officers, directors and employees of
the Company as a result of their exercise of such nontransferable subscription
rights.
(7) The basis of the Common Shares purchased by Eligible
Account Holders, Supplemental Eligible Account Holders, Other Eligible Members
and officers, directors and employees of the Company pursuant to the exercise of
subscription rights will be the purchase price thereof (assuming the
subscription rights have no ascertainable fair market value and that the
purchase price is no less than the fair market value of the shares on the date
of such exercise), and the holding period of such Common Shares will commence on
the date of such exercise. The basis of the Common Shares purchased in the
Community Offering will be the purchase price thereof and the holding period of
such Common Shares will commence on the day after the date of the purchase. The
basis of the Common Shares purchased in the Public Offering will be the purchase
price thereof and the holding period of such Common Shares will commence on the
day after the date of the purchase.
(8) For purposes of Section 381 of the Code, the Company will
be treated as if there had been no reorganization. The taxable year of the
Company will not end on the effective
<PAGE> 13
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 13
date of the Conversion, and immediately after the Conversion, the Stock Company
will succeed to and take into account the tax attributes of the association
immediately prior to the Conversion, including the Company's earnings and
profits or deficit in earnings and profits.
(9) The bad debt reserves of the Company immediately prior to
the Conversion will not be required to be restored to the gross income of the
Company or the Stock Company as a result of the Conversion, and immediately
after the Conversion, such bad debt reserves will have the same character in the
hands of the Stock Company that they would have if there had been no Conversion.
The Stock Company will succeed to and take into account the dollar amounts of
those accounts of the Company which represent bad debt reserves in respect of
which the Company has taken a bad debt deduction for taxable years ending on or
before the Conversion.
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated earnings
and profits of the Company available for the subsequent distribution of
dividends within the meaning of Section 316 of the Code. The creation of the
Liquidation Account on the records of the Stock Company will have no effect on
its taxable income, deductions for additions to reserves for bad debts under
Section 593 of the Code or distributions to shareholders under Section 593(e).
For Ohio tax purposes, we are of the opinion that:
(1) The Company is a "financial institution" for State of Ohio
tax purposes, and the Conversion will not change such status.
(2) The Company is subject to the Ohio corporate franchise tax
on "financial institutions," which is currently imposed annually at a rate of
1.5% of the Company's apportioned book net worth, determined in accordance with
GAAP, less any statutory deductions, and the Conversion will not change such
status. This rate of tax is scheduled to decrease in each of tax years 1999 and
2000.
(3) As a "financial institution," the Company is not subject
to any tax based upon net income or net profit imposed by the State of Ohio, and
the Conversion will not change such status.
(4) The Conversion will not be a taxable transaction to the
Company or the Stock Company for purposes of the Ohio corporate franchise tax;
however, as a consequences of the Conversion, the annual Ohio corporate
franchise tax liability of the Stock Company could be affected if the taxable
net worth of the Stock Company (i.e., apportioned book net worth computed in
accordance with GAAP at the close of the Stock Company's taxable year for
federal income tax purposes) increases or decreases thereby.
<PAGE> 14
United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
March 12, 1998
Page 14
(5) The Conversion will not be a taxable transaction to any
deposit account holder of the Company or the Stock Company for purposes of the
Ohio corporate franchise tax and the Ohio personal income tax.
Unlike private rulings, an opinion of counsel is not binding on the IRS
or the Ohio Department of Taxation, and the IRS or the Department could disagree
with the conclusions reached in the opinion. In the event of such disagreement,
there can be no assurance that the Service or the Department would not prevail
in a judicial proceeding, although counsel believes that the positions expressed
in its opinion should prevail if the matters are litigated.
Very truly yours,
Vorys, Sater, Seymour and Pease LLP
<PAGE> 1
Exhibit 8.2
[KELLER & COMPANY, INC. LETTERHEAD]
March 10, 1998
The Board of Directors
The Home Savings and Loan Company of Youngstown, Ohio
275 Federal Plaza, W.
Box 1111
Youngstown, OH 44501-1111
Re: Subscription Rights - Conversion of The Home Savings and Loan Company
of Youngstown, Ohio
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of United Community
Financial Corp. (the "Corporation"), Youngstown, Ohio in regard to the
conversion of The Home Savings and Loan Company of Youngstown, Ohio ("Home" or
the "Company") from a state-chartered mutual savings bank to a state-chartered
stock savings bank.
Because of the Subscription Rights to purchase shares of Common Stock in United
Community Financial Corp., which are to be issued to the depositors of The Home
Savings and Loan Company of Youngstown, Ohio, and the other members of the
Company and will be acquired by such recipients without cost, will be
nontransferable and of short duration and will afford the recipients the right
only to purchase shares of Common Stock at the same price as will be paid by
members of the general public in a Direct Community Offering, we are of the
opinion that:
(1) The Subscription Rights will have no ascertainable fair market
value, and;
(2) The price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of the exercise.
Further, it is our opinion that the Subscription Rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
Michael R. Keller
President
<PAGE> 1
Exhibit 10.2
UNITED COMMUNITY FINANCIAL CORP.
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below. Wherever
appropriate, the masculine pronoun shall include the feminine pronoun and the
singular shall include the plural:
1.01 "Agreement" means the United Community Financial Corp. Recognition
and Retention Plan and Trust Agreement.
1.02 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.03 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.04 "Board" means the Board of Directors of the Corporation.
1.05 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.06 "Common Shares" means common shares of the Corporation.
1.07 "Company" means The Home Savings and Loan Company of Youngstown,
Ohio, a savings and loan association organized under the laws of the State of
Ohio.
1.08 "Conversion" means the conversion of the Company from mutual to
stock form.
1.09 "Corporation" means the United Community Financial Corp., a
savings and loan holding company incorporated under the laws of the State of
Ohio for the purpose of holding all of the common shares of the Company issued
in connection with the Conversion, or any successor thereto.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Company or a Subsidiary or a director emeritus
of the Corporation, the Company or a Subsidiary.
<PAGE> 2
1.11 "Employee" means any person who is employed by the Corporation,
the Company or a Subsidiary.
1.12 "Person" means an individual, corporation, partnership, trust,
Company, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.13 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.14 "Plan Shares" means the Common Shares held pursuant to the Trust
or which may be purchased by the Trustee pursuant to Section 5.02 of this
Agreement.
1.15 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
1.16 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.17 "Subsidiary" means a subsidiary of the Company, if any, which,
with the consent of the Board, agrees to participate in the Plan.
1.18 "Trust" means the trust established by this Agreement.
1.19 "Trustee" means the person or persons or entity approved by the
Board pursuant to Sections 4.01 and 4.02 to hold legal title to the assets of
the Plan for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Corporation hereby establishes a Recognition and Retention
Plan and Trust upon the terms and subject to the conditions set forth in this
Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Company and the Subsidiaries by providing such
Directors and Employees
2
<PAGE> 3
with an equity interest in the Corporation as reasonable compensation for their
contributions to the Corporation, the Company and any Subsidiary.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board. The Committee shall have all of the powers set forth in this Plan.
The interpretation and construction by the Committee of any provisions of this
Agreement or of any Award granted hereunder shall be final, conclusive and
binding. The Committee shall act by the vote, or the written consent, of a
majority of its members. The Committee shall report actions and decisions with
respect to the Plan to the Board upon request by the Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by and shall serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add one or more Trustees.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Company shall indemnify such member against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such member in connection with
such action, suit or proceeding if such member acted in good faith and in a
manner such member reasonably believed to be in or not opposed to the best
interests of the Corporation, the Company and any Subsidiary and, with respect
to any criminal action or proceeding, had no reasonable cause to believe such
member's conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts, or the method of computing the amounts, to be contributed by the
Corporation or the Company to the Trust. Such amounts shall be paid to the
Trustee at the time of contribution. No contributions to the Trust by Directors
or Employees shall be permitted.
3
<PAGE> 4
5.02 INVESTMENT OF TRUST ASSETS. The Trust shall not purchase a number
of Common Shares greater than four percent (4%) of the number of Common Shares
issued in connection with the Conversion. After such investment, the Common
Shares purchased shall be held by the Trustee in the Plan Share Reserve until
such Common Shares are subject to one or more Awards. Any funds held by the
Trust shall be invested by the Trustee in such accounts at the Company or
elsewhere or such other instruments or investments as the Trustee shall
determine to be appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards pursuant to Section 6.02 of this
Agreement, or the decision of the Committee to return Plan Shares to the
Corporation, the Plan Share Reserve shall be reduced by the number of Plan
Shares so allocated or returned. Any Plan Shares subject to an Award which is
forfeited by the Recipient pursuant to Section 7.01(b) of this Agreement shall
be retained in the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine in its sole discretion
which of the Directors and Employees will be granted Awards and the number of
Plan Shares covered by each Award; provided, however, if this Plan is
implemented prior to the first anniversary of the effective date of the
Conversion, the following restrictions shall apply: (a) the aggregate number of
Plan Shares covered by Awards to any one Employee shall not exceed 25% of the
total number of Plan Shares, (b) no more than 5% of the Plan Shares shall be
awarded to any Director who is not an Employee, and (c) no more than 30% of the
Plan Shares shall be awarded in the aggregate to Directors who are not
Employees. In the event that Plan Shares are forfeited for any reason, the
Committee may, from time to time, determine which of the Employees and Directors
will be granted additional Awards to be awarded from forfeited Plan Shares.
In selecting the Directors and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the Corporation, the Company and any
Subsidiary and any other factors the Committee may deem relevant.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of Plan Shares covered by the Award and the terms upon
which the Plan Shares subject to the Award may be earned. The date on which the
Committee determines that an Award is to be made or a later date designated
4
<PAGE> 5
by the Committee shall be considered the date of grant of the Award. The
Committee shall maintain records as to all grants of Awards.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award. The Committee may, with the approval of the Board, and shall,
if so directed by the Board, return all Common Shares and other assets in the
Plan Share Reserve to the Corporation at any time and thereafter cease issuing
Awards.
6.05 SHAREHOLDER APPROVAL. If this Plan is implemented prior to the
first anniversary of the effective date of the Conversion, this Agreement shall
be submitted to the shareholders of the Corporation for approval at an annual or
special meeting to be held no sooner than six months after the effective date of
the Conversion and no Awards shall be granted hereunder until the shareholders
of the Corporation approve this Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares covered by each
Award shall become earned and non-forfeitable by a Recipient over a period of
five years at the rate of one-fifth per year commencing on the date which is one
year after the date of the grant of such Award, if this Plan is implemented
prior to the first anniversary of the effective date of the Conversion. As Plan
Shares become earned and non-forfeitable, any cash dividends, returned capital
and earnings thereon shall also become earned and non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by applicable
laws and regulations, any Plan Shares and any cash dividends, returned capital
and earnings thereon that have not become earned and non-forfeitable in
accordance with Section 7.01(a) of this Agreement shall be forfeited in the
event that a Recipient is no longer a Director or an Employee, except as
otherwise provided in subsection (c) of this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
All Plan Shares and cash dividends, returned capital and earnings thereon
subject to an Award held by a Recipient whose service as a Director or Employee
terminates due to (i) death or (ii) disability (as determined by the Committee)
shall be deemed fully earned and non-forfeitable as of the later of the
Recipient's last day of service as a Director or as an Employee and shall be
distributed as soon as practicable thereafter.
5
<PAGE> 6
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Agreement, Plan Shares shall be distributed to the
Recipient or his or her Beneficiary, as the case may be, as soon as practicable
after they become earned and non-forfeitable, together with any cash
distributions, returned capital and earnings with respect to such Plan Shares.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made pursuant to this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares which have become earned and non-forfeitable. The Trustee shall pay over
to the Company, the Corporation or the Subsidiary which employs or employed such
Recipient or which the Recipient serves or served as a Director, any such amount
withheld from or paid by the Recipient or Beneficiary.
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management and control of the Trust. The Trustee
shall have the power to do all things and execute such instruments as may be
deemed necessary or proper with respect to the duties of the Trustee hereunder,
including the following powers:
6
<PAGE> 7
(a) To invest up to 100% of all Trust assets in Common
Shares without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. In making such
investment, the Trustee is authorized to purchase Common Shares from
the Corporation or from any other source. Such Common Shares so
purchased may be outstanding, newly issued or treasury shares;
(b) To invest any Trust assets not otherwise invested in
Common Shares in such other investments as the Trustee considers
appropriate. Such investments may include deposit accounts and
certificates of deposit issued by the Company;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
rights, duties and obligations of the Trustee hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether in a
segregated account or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the
7
<PAGE> 8
generality of the foregoing, any earnings on cash dividends or returned capital
received with respect to Plan Shares shall be allocated (a) to accounts for
Recipients, if such shares which are the subject of outstanding Awards, and
shall become earned and distributed as specified in Article VII of this
Agreement or (b) otherwise to the Plan Share Reserve if such Plan Shares are not
the subject of outstanding awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Company.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
or the Company all or any part of the assets of the Trust, including Common
Shares held in the Plan Share Reserve, as well as Common Shares and other assets
subject to Awards which are not yet earned by the Directors or Employees to whom
they are allocated; provided, however, that the termination of the Trust shall
not affect a Recipient's right to earn Awards and to the distribution of Common
Shares relating thereto, including earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Company or any Subsidiary be subject to any claim for benefits
hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the
Corporation, the Company or any Subsidiary.
8
<PAGE> 9
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Company or any Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this
Agreement shall be effective as of the ___ day of ____________, 1998.
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Corporation under the provisions of
Section 671, ET SEQ., of the Internal Revenue Code of 1986, as amended (26
U.S.C. Section 671 et seq.).
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the ___ day of _________________, 1998.
By: ___________________________ (Trustee)
By: ___________________________ (Trustee)
9
<PAGE> 10
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and duly attested, all as of the ___ day
of _________________, 1998.
UNITED COMMUNITY FINANCIAL CORP.
By:______________________________________
Douglas M. McKay
its President
ATTEST:
- ----------------------------------
- ----------------------------------
its_______________________________
10
<PAGE> 1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), is entered into this ____ day of ____________, 1998, by and
between The Home Savings and Loan Company of Youngstown, Ohio, a savings and
loan association incorporated under Ohio law (hereinafter referred to as the
"COMPANY"), and _______________, an individual (hereinafter referred to as the
"EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the _______________ of
the COMPANY;
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Board of Directors of the COMPANY desires to retain the services
of the EMPLOYEE as the _______________ of the COMPANY;
WHEREAS, the EMPLOYEE desires to continue to serve as the
_______________ of the COMPANY; and
WHEREAS, the EMPLOYEE and the COMPANY desire to enter into this
AGREEMENT to set forth the terms and conditions of the employment relationship
between the COMPANY and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the COMPANY and the EMPLOYEE hereby agree as follows:
1. EMPLOYMENT AND TERM.
(a) TERM. Upon the terms and subject to the conditions of this AGREEMENT, the
COMPANY hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts employment,
as the _______________ of the COMPANY. The term of this AGREEMENT shall commence
on ____________, 1998, and shall end on ____________, 2001, unless extended by
the COMPANY, with the consent of the EMPLOYEE, as provided in subsection (b) of
this Section 1 (hereinafter referred to, together with such extensions, as the
"TERM").
(b) EXTENSION. On or before each anniversary of the date of this
AGREEMENT, the Board of Directors of the COMPANY shall review this AGREEMENT
and, upon approval by the Board of Directors, shall extend the term of this
AGREEMENT for a one-year period beyond the then effective expiration date. Any
such extension shall be subject to the written consent of the EMPLOYEE.
<PAGE> 2
2. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall serve as
the _______________ of the COMPANY. Subject to the direction of the Board of
Directors of the COMPANY, the EMPLOYEE shall perform all duties and shall have
all powers which are commonly incident to the office of _______________ or
which, consistent therewith, are delegated to him by the Board of Directors.
(b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE COMPANY. The
EMPLOYEE shall devote his entire productive time, ability and attention during
normal business hours throughout the TERM to the faithful performance of his
duties under this AGREEMENT. The EMPLOYEE shall not directly or indirectly
render any services of a business, commercial or professional nature to any
person or organization other than the COMPANY, United Community Financial Corp.
(hereinafter referred to as the "HOLDING COMPANY"), the sole shareholder of the
COMPANY, or any subsidiary of the COMPANY or the HOLDING COMPANY without the
prior written consent of the Board of Directors of the COMPANY; provided,
however, that the EMPLOYEE shall not be precluded from (i) vacations and other
leave time in accordance with Section 3(d) below, (ii) reasonable participation
in community, civic, charitable or similar organizations, (iii) reasonable
participation in industry-related activities, including, but not limited to,
attending state and national trade association meetings and serving as an
officer, director or trustee of a state or national trade association or Federal
Home Loan Bank, (iv) serving as an officer or director of the HOLDING COMPANY or
any subsidiary of the COMPANY or the HOLDING COMPANY and receiving a salary,
director's fees or other compensation or benefits, as appropriate, or (v)
pursuing personal investments which do not interfere or conflict with the
performance of the EMPLOYEE's duties to the COMPANY.
3. COMPENSATION.
(a) BASE SALARY. The EMPLOYEE shall receive during the TERM an annual
salary payable in equal installments not less often than monthly. The amount of
such annual salary shall be $__________ until changed by the Board of Directors
of the COMPANY in accordance with Section 3(b) below.
(b) ANNUAL SALARY REVIEW. On or before each anniversary of the date of
this AGREEMENT, the annual salary of the EMPLOYEE shall be reviewed by the Board
of Directors of the COMPANY and shall be set at an amount not less than
$__________, based upon the EMPLOYEE's individual performance and such other
factors as the Board of Directors may deem appropriate (hereinafter referred to
as the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in
the minutes of the Board of Directors of the COMPANY.
(c) EMPLOYEE BENEFIT PROGRAMS. During the TERM, the EMPLOYEE shall be
entitled to participate in all formally established employee benefit, bonus,
pension and profit sharing plans and similar programs that are maintained by the
COMPANY or the HOLDING COMPANY from time to time and all employee benefit plans
or programs hereafter adopted in
2
<PAGE> 3
writing by the Board of Directors of the COMPANY or the HOLDING COMPANY for
which senior management personnel of the COMPANY are eligible, including any
employee stock ownership plan, stock option plan or other stock benefit plan
(hereinafter collectively referred to as "BENEFIT PLANS"), in accordance with
the terms and conditions of such BENEFIT PLANS. Notwithstanding any statement to
the contrary contained elsewhere in this AGREEMENT, the COMPANY may at any time
discontinue or terminate any BENEFIT PLAN now existing or hereafter adopted, to
the extent permitted by the terms of such BENEFIT PLAN, and shall not be
required to compensate the EMPLOYEE for such discontinuance or termination.
(d) VACATION AND SICK LEAVE. The EMPLOYEE shall be entitled, without
loss of pay, to be absent voluntarily from the performance of his duties under
this AGREEMENT, in accordance with the policies periodically established by the
Board of Directors of the COMPANY for senior management officials of the
COMPANY. The EMPLOYEE shall be entitled to annual sick leave as established by
the Board of Directors of the COMPANY for senior management officials of the
COMPANY.
(e) EXPENSES. In addition to any compensation received under
Section 3(d), the COMPANY shall pay or reimburse the EMPLOYEE for all reasonable
travel, entertainment and miscellaneous expenses incurred in connection with the
performance of his duties under this AGREEMENT, including participation in
industry-related activities.
4. TERMINATION OF EMPLOYMENT.
(a) GENERAL. The employment of the EMPLOYEE shall terminate at any time
during the TERM (i) at the option of the COMPANY, upon the delivery by the
COMPANY of written notice of termination to the EMPLOYEE, or (ii) at the option
of the EMPLOYEE, upon delivery by the EMPLOYEE of written notice of termination
to the COMPANY if, in connection with a CHANGE OF CONTROL (hereinafter defined),
the present capacity or circumstances in which the EMPLOYEE is employed are
materially adversely changed (including, but not limited to, a material
reduction in responsibilities or authority or the assignment of duties or
responsibilities substantially inconsistent with those normally associated with
the EMPLOYEE's position described in Section 2(a) of this AGREEMENT, change of
title or removal as a director of the COMPANY or the HOLDING COMPANY, the
requirement that the EMPLOYEE regularly perform his principal executive
functions more than thirty-five (35) miles from his primary office immediately
preceding the CHANGE OF CONTROL or the EMPLOYEE's compensation or other benefits
provided under this AGREEMENT are reduced, unless the benefit reductions are
part of a Company-wide reduction. For purposes of this AGREEMENT, an event shall
be deemed to have occurred "in connection with a CHANGE OF CONTROL" if such
event occurs within one year before or after a CHANGE OF CONTROL. The following
subsections (A), (B) and (C) of this Section 4(a) shall govern the obligations
of the COMPANY to the EMPLOYEE upon the occurrence of the events described in
such subparagraphs:
(A) TERMINATION FOR CAUSE. In the event that the COMPANY terminates the
employment of the EMPLOYEE during the TERM because of the EMPLOYEE's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit,
3
<PAGE> 4
intentional failure or refusal to perform the duties and responsibilities
assigned in this AGREEMENT, willful violation of any law, rule or regulation
(other than traffic violations or other minor offenses), or final
cease-and-desist order or material breach of any provision of this AGREEMENT
(hereinafter collectively referred to as "CAUSE"), the EMPLOYEE shall not
receive, and shall have no right to receive, any compensation or other benefits
for any period after such termination.
(B) TERMINATION IN CONNECTION WITH CHANGE OF CONTROL. In the event that
the employment of the EMPLOYEE is terminated by the COMPANY in connection with a
CHANGE OF CONTROL for any reason other than CAUSE or is terminated by the
EMPLOYEE as provided in Section 4(a)(ii) above, then the following shall occur:
(I) The COMPANY shall promptly pay to the EMPLOYEE or to his
beneficiaries, dependents or estate an amount equal to the product of 2.99
multiplied by the EMPLOYEE's "base amount" as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder (hereinafter collectively referred to as "SECTION 280G");
(II) The EMPLOYEE, his dependents, beneficiaries and estate
shall continue to be covered at the COMPANY's expense under all health, life,
disability and other benefit plans of the COMPANY in which the EMPLOYEE was a
participant prior to the effective date of the termination of his employment as
if the EMPLOYEE were still employed under this AGREEMENT until the earlier of
the expiration of the TERM or the date on which the EMPLOYEE is included in
another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by seeking other employment
or otherwise, nor shall any amounts received from other employment or otherwise
by the EMPLOYEE offset in any manner the obligations of the COMPANY hereunder,
except as specifically stated in subparagraph (II) above.
(C) TERMINATION NOT IN CONNECTION WITH CHANGE OF CONTROL. In the event
that the employment of the EMPLOYEE is terminated before the expiration of the
TERM for any reason other than death, termination for CAUSE or termination in
connection with a CHANGE OF CONTROL, then the following shall occur:
(I) The COMPANY shall be obligated to continue to pay on a
monthly basis, until the expiration of the TERM, to the EMPLOYEE, his designated
beneficiaries or his estate, the annual salary in effect at the time of
termination pursuant to Section 3 above, plus a cash bonus equal to the cash
bonus, if any, paid to the EMPLOYEE in the twelve month period prior to the
termination of employment;
(II) The COMPANY shall continue to provide to the EMPLOYEE,
at the COMPANY's expense, health, life, disability and other benefits
substantially equal to those being provided to the EMPLOYEE at the date of
termination of his employment until the earliest
4
<PAGE> 5
to occur of the expiration of the TERM or the date on which the EMPLOYEE is
included in another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the amount
of any payment provided for in this AGREEMENT by seeking other employment or
otherwise, nor shall any amounts received from other employment or otherwise by
the EMPLOYEE offset in any manner the obligations of the COMPANY hereunder,
except as specifically stated in subparagraph II above.
(b) DEATH OF THE EMPLOYEE. The TERM shall automatically expire upon the
death of the EMPLOYEE. In such event, the EMPLOYEE's estate shall be entitled to
receive the compensation due the EMPLOYEE through the last day of the calendar
month in which the death occurred, except as otherwise specified herein.
(c) "GOLDEN PARACHUTE" PROVISION. In the event that any payments
pursuant to this Section 4 would result in the imposition of a penalty tax
pursuant to SECTION 280G, such payments shall be reduced to the maximum amount
which may be paid under SECTION 280G without exceeding such limits. Payments
pursuant to this Section 4. Any payments made to the EMPLOYEE pursuant to this
AGREEMENT are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean
any one of the following events; (i) the acquisition of ownership or power to
vote more than 25% of the voting stock of the COMPANY or the HOLDING COMPANY;
(ii) the acquisition of the ability to control the election of a majority of the
directors of the COMPANY or the HOLDING COMPANY; (iii) during any period of
three or less consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease
for any reason to constitute at least a majority thereof; provided, however,
that any individual whose election or nomination for election as a member of the
Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote
of at least two-thirds of the directors then in office shall be considered to
have continued to be a member of the Board of Directors of the COMPANY or the
HOLDING COMPANY; or (iv) the acquisition by any person or entity of "conclusive
control" of the COMPANY within the meaning of 12 C.F.R. ss.574.4(a), or the
acquisition by any person or entity of "rebuttable control" within the meaning
of 12 C.F.R. ss.574.4(b) that has not been rebutted in accordance with 12 C.F.R.
ss.574.4(c); or (v) an event that would be required to be reported in response
to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended (hereinafter referred to as
the "EXCHANGE ACT"), or any successor thereto, whether or not any class of
securities of the Corporation is registered under the EXCHANGE ACT. For purposes
of this paragraph, the term "person" refers to an individual or corporation,
partnership, trust, association or other organization, but does not include the
EMPLOYEE and any person or persons with whom the EMPLOYEE is "acting in concert"
within the meaning of 12 C.F.R. Part 574.
5
<PAGE> 6
5. SPECIAL REGULATORY EVENTS. Notwithstanding the provisions of Section
4 of this AGREEMENT, the obligations of the COMPANY to the EMPLOYEE shall be as
follows in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the COMPANY's affairs by a notice served under
section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter
referred to as the "FDIA"), the COMPANY's obligations under this AGREEMENT shall
be suspended as of the date of service of such notice, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the COMPANY
shall pay the EMPLOYEE all or part of the compensation withheld while the
obligations in this AGREEMENT were suspended and reinstate, in whole or in part,
any of the obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the COMPANY's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under
this AGREEMENT shall terminate as of the effective date of such order; provided,
however, that vested rights of the EMPLOYEE shall not be affected by such
termination;
(c) If the COMPANY is in default, as defined in section 3(x)(1) of the
FDIA, all obligations under this AGREEMENT shall terminate as of the date of
default; provided, however, that vested rights of the EMPLOYEE shall not be
affected;
(d) All obligations under this AGREEMENT shall be terminated, except to
the extent of a determination that the continuation of this AGREEMENT is
necessary for the continued operation of the COMPANY, (i) by the Director of the
Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or
her designee, at the time that the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the COMPANY under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director of the
OTS, or his or her designee, at any time the Director of the OTS approves a
supervisory merger to resolve problems related to the operation of the COMPANY
or when the COMPANY is determined by the Director of the OTS to be in an unsafe
or unsound condition; provided, however that no vested rights of the EMPLOYEE
shall not be affected by any such termination; and
(e) The provisions of this Section 5 are governed by the requirements
of 12 C.F.R. Section 563.39(b) and in the event that any statements in this
Section 5 are inconsistent with 12 C.F.R. Section 563.39(b), the provisions of
12 C.F.R. Section 563.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall
preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging
into, or transferring all, or substantially all, of their assets to another
corporation that assumes all of their obligations and undertakings hereunder.
Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as
used herein, shall mean such other corporation or entity, and this AGREEMENT
shall continue in full force and effect.
<PAGE> 7
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information regarding
the COMPANY and its customers and businesses. The EMPLOYEE agrees and covenants
not to disclose or use for his own benefit, or the benefit of any other person
or entity, any confidential information, unless or until the COMPANY consents to
such disclosure or use or such information is otherwise legally in the public
domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized
person any confidential information relating to the COMPANY, its subsidiaries,
or affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the
COMPANY. The EMPLOYEE shall not otherwise knowingly act or conduct himself to
the material detriment of the COMPANY, its subsidiaries, or affiliates or in a
manner which is inimical or contrary to the interests of the COMPANY.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder
shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives
without the COMPANY's prior written consent; provided, however, that nothing in
this Section 8 shall preclude the EMPLOYEE from designating a beneficiary to
receive any benefits payable hereunder upon his death or the executors,
administrators or other legal representatives of the EMPLOYEE or his estate from
assigning any rights hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under
this AGREEMENT shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to
the benefit of, the EMPLOYEE and the COMPANY and their respective permitted
successors and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been
waived, nor shall there be an estoppel against the enforcement of any provision
of this AGREEMENT, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver,
unless specifically stated therein, and each waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than the act specifically
waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held
invalid, such invalidity shall not affect the other provisions of this AGREEMENT
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full
7
<PAGE> 8
force and effect. If this AGREEMENT is held invalid or cannot be enforced, then
any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the
EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as if
this AGREEMENT had not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of the State of Ohio, except to the extent that federal law
is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the COMPANY or any predecessor of the COMPANY and the EMPLOYEE.
17. NOTICES. Any notice or other communication required or permitted pursuant to
this AGREEMENT shall be deemed delivered if such notice or communication is in
writing and is delivered personally or by facsimile transmission or is deposited
in the United States mail, postage prepaid, addressed as follows:
If to the COMPANY:
The Home Savings and Loan Company
of Youngstown, Ohio
275 Federal Plaza West
P.O. Box 1111
Youngstown, Ohio 44501-1111
If to the EMPLOYEE:
-------------------
-------------------
-------------------
8
<PAGE> 9
IN WITNESS WHEREOF, the COMPANY has caused this AGREEMENT to be
executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: The Home Savings and Loan Company
of Youngstown, Ohio
By:
- ---------------------------- ---------------------------------
-------------------------
its Chairman of the Board
Attest:
- ---------------------------- -----------------------------------
[EMPLOYEE]
9
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of United
Community Financial Corp. on Form S-1 of our report dated February 27, 1998,
appearing in the Prospectus, which is part of such Registration Statement.
We also consent to the reference to us under the headings "The Home
Savings & Loan Company of Youngstown, Ohio Statements of Income," and "Experts"
in such Prospectus.
Deloitte & Touche LLP
Cleveland, Ohio
March 11, 1998
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of United
Community Financial Corp. on Form S-1 of our report dated February 28, 1997,
appearing in the Prospectus, which is part of such Registration Statement.
We also consent to the reference to us under the headings "The Home
Savings & Loan Company of Youngstown, Ohio Statements of Income," "Change in
Accountants," and "Experts"
in such Prospectus.
Packer, Thomas & Co.
Youngstown, Ohio
March 11, 1998
<PAGE> 1
Exhibit 23.3
KELLER & COMPANY, INC.
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426
(614) 766-1459 FAX
March 10, 1998
Re: Valuation Appraisal of United Community Financial Corp.
The Home Savings and Loan Company of Youngstown, Ohio
Youngstown, Ohio
We hereby consent to the use of our firm's name, Keller & Company, Inc.
("Keller"), and the reference to our firm as experts in the Application for
Conversion on Form AC to be filed by The Home Savings and Loan Company of
Youngstown, Ohio and any amendments thereto and references to our opinion
regarding subscription rights filed as an exhibit to the applications referred
to hereafter. We also consent to the use of our firm's name in the Form S-1 to
be filed by United Community Financial Corp. with the Securities and Exchange
Commission and any amendments thereto, and to the statements with respect to us
and the references to our Valuation Appraisal Report and in the said Form AC and
any amendments thereto and in the notice and Application for Conversion filed by
The Home Savings and Loan Company of Youngstown, Ohio.
Very truly yours,
KELLER & COMPANY, INC.
By: /s/Michael R. Keller
----------------------
Michael R. Keller
President
<PAGE> 1
Exhibit 23.4
(513) 723-4000
CONSENT
-------
Board of Directors
United Community Financial Corp.
275 Federal Plaza
Youngstown, Ohio 44503-1203
Ladies and Gentlemen:
We hereby consent to the use of our firm's name in the
Registration Statement on Form S-1 (the "Form S-1"), including all amendments
thereto, filed by United Community Financial Corp. (the "Company") to register
34,715,625 common shares, without par value, of the Company, pursuant to the
Securities Act of 1933; to the statements with respect to our firm appearing
under the headings "Prospectus Summary", "Legal Matters" and "Principal Effects
of the Conversion" in the Prospectus which is included in the Form S-1; and to
the filing of our opinion regarding the legality of the common shares, included
as Exhibit 5 to the Form S-1, and our opinion regarding federal and state tax
matters, included as Exhibit 8 to the Form S-1.
Very truly yours,
VORYS, SATER, SEYMOUR AND PEASE LLP
Cincinnati, Ohio
March 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,618
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,879
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,825
<INVESTMENTS-CARRYING> 248,816
<INVESTMENTS-MARKET> 252,999
<LOANS> 639,218
<ALLOWANCE> 5,982
<TOTAL-ASSETS> 1,044,993
<DEPOSITS> 886,808
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,832
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 141,353
<TOTAL-LIABILITIES-AND-EQUITY> 1,044,993
<INTEREST-LOAN> 54,148
<INTEREST-INVEST> 27,924
<INTEREST-OTHER> 613
<INTEREST-TOTAL> 82,685
<INTEREST-DEPOSIT> 40,463
<INTEREST-EXPENSE> 40,463
<INTEREST-INCOME-NET> 42,222
<LOAN-LOSSES> (1,546)
<SECURITIES-GAINS> 80
<EXPENSE-OTHER> 25,303
<INCOME-PRETAX> 20,029
<INCOME-PRE-EXTRAORDINARY> 20,029
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,047
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.09
<LOANS-NON> 9,491
<LOANS-PAST> 0
<LOANS-TROUBLED> 644
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,040
<CHARGE-OFFS> (446)
<RECOVERIES> 2,934
<ALLOWANCE-CLOSE> 5,982
<ALLOWANCE-DOMESTIC> 5,982
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
275 FEDERAL PLAZA WEST
YOUNGSTOWN, OHIO 44503-1203
(330) 742-0500
NOTICE OF SPECIAL MEETING OF MEMBERS
Notice is hereby given that a Special Meeting of Members of The Home
Savings and Loan Company of Youngstown, Ohio (the "Company") will be held at
______________________________, Youngstown, Ohio, on ______ ___, 1998, at __:00
__.m. Eastern Standard Time (the "Special Meeting"), for the following purposes,
all of which are more completely set forth in the accompanying Summary Proxy
Statement:
1. To consider and act upon a resolution to approve the Plan of
Conversion (the "Plan"), a copy of which is attached to the Summary
Proxy Statement as Exhibit A, pursuant to which the Company would
convert from a mutual savings and loan association incorporated under
the laws of the State of Ohio to a permanent capital stock savings and
loan association incorporated under the laws of the State of Ohio (the
"Conversion") and become a wholly-owned subsidiary of United Community
Financial Corp., an Ohio corporation organized for the purpose of
acquiring all of the capital stock to be issued by the Company in the
Conversion;
2. To consider and act upon a resolution to adopt the Amended
Articles of Incorporation of the Company, a copy of which is attached to
the Plan as Exhibit I;
3. To consider and act upon a resolution to adopt the Amended
Constitution of the Company, a copy of which is attached to the Plan as
Exhibit II;
4. To consider and act upon a resolution to approve the
contribution of up to 1,250,000 common shares of United Community
Financial Corp. to the Home Savings Charitable Foundation, a tax-exempt
organization established by the Company in 1991 in furtherance of the
Company's commitment to the communities it services; and
5. To transact such other business as may properly come before
the Special Meeting and any adjournments thereof.
Only those members of the Company who have a savings deposit at the
Company at the close of business on ________, 1998, are members of the Company
entitled to notice of and to vote at the Special Meeting and any adjournments
thereof. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, WE URGE YOU TO
CONSIDER THE ACCOMPANYING SUMMARY PROXY STATEMENT CAREFULLY, TO COMPLETE THE
ENCLOSED PROXY CARD(S) AND TO RETURN THE COMPLETED PROXY CARD(S) TO THE COMPANY
IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE AS SOON AS POSSIBLE TO ASSURE THAT
YOUR VOTE(S) WILL BE COUNTED.
Youngstown, Ohio By Order of the Board of Directors
_______ ___, 1998
Douglas M. McKay,
President
<PAGE> 2
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
275 FEDERAL PLAZA WEST
YOUNGSTOWN, OHIO 44503-1203
(330) 742-0500
SUMMARY PROXY STATEMENT
INTRODUCTION
The enclosed proxy (the "Proxy") is being solicited by the Board of
Directors of The Home Savings and Loan Company of Youngstown, Ohio (the
"Company") for use at a Special Meeting of Members of the Company to be held at
______________________________, Youngstown, Ohio, on ________ ___, 1998, at
__:00 __.m. Eastern Standard Time, and at any adjournments thereof (the "Special
Meeting"). The Special Meeting is being held for the following purposes:
1. To consider and act upon a resolution to approve the Plan of
Conversion (the "Plan"), a copy of which is attached hereto as Exhibit
A, pursuant to which the Company would convert from a mutual savings and
loan association incorporated under the laws of the State of Ohio to a
permanent capital stock savings and loan association incorporated under
the laws of the State of Ohio (the "Conversion") and become a
wholly-owned subsidiary of United Community Financial Corp. (the
"Holding Company"), an Ohio corporation organized for the purpose of
acquiring all of the capital stock to be issued by the Company in the
Conversion;
2. To consider and act upon a resolution to adopt the Amended
Articles of Incorporation of the Company (the "Amended Articles"), a
copy of which is attached to the Plan as Exhibit I;
3. To consider and act upon a resolution to adopt the Amended
Constitution of the Company (the "Amended Constitution"), a copy of
which is attached to the Plan as Exhibit II;
4. To consider and act upon a resolution to approve the
contribution of up to 1,250,000 common shares of the Holding Company
(the "Contribution") to the Home Savings Charitable Foundation (the
"Foundation"), a tax-exempt organization established by the Company in
1991 in furtherance of the Company's commitment to the communities it
services; and
5. To transact such other business as may properly come before
the Special Meeting.
The Board of Directors of the Company adopted the Plan on December 9,
1997. The Plan has also been approved by the Office of Thrift Supervision (the
"OTS") and the Ohio Department of Commerce, Division of Financial Institutions
(the "Division"), subject to the approval of the Plan by the members of the
Company at the Special Meeting and the satisfaction of certain other conditions.
The approval of the Plan will have the effect of (i) terminating the
voting rights of the present members of the Company and (ii) modifying, and
eventually eliminating, their right to receive any surplus in the event of a
complete liquidation of the Company. Except for certain rights in the special
liquidation account established by the Plan (the "Liquidation Account"), such
voting and liquidation rights after the Conversion will vest exclusively in the
holders of the common shares of the Holding Company. See "THE CONVERSION -
Principal Effects of the Conversion -- Liquidation Account."
During and upon the completion of the Conversion, the Company will
continue to provide services to depositors and borrowers pursuant to its current
policies, at its existing offices. In addition, the Company will continue to be
a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati and savings
accounts at the Company will continue to be insured up to applicable limits by
the Federal Deposit Insurance Corporation (the "FDIC") in the Savings
Association Insurance Fund (the "SAIF").
<PAGE> 3
This Summary Proxy Statement is dated ________ ___, 1998, and is first
being mailed to members of the Company, together with the Prospectus of the
Holding Company dated __________ ___, 1998 (the "Prospectus"), on or about
_________ ___, 1998.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
All depositors at the Company having a savings account of record with
the Company on ____________, 1998 (the "Voting Record Date"), are members of the
Company eligible to vote at the Special Meeting and at any adjournments thereof
("Voting Members"). Voting Members will be entitled to cast one vote for each
$100, or fraction thereof, of the withdrawable value of their savings accounts
on the Voting Record Date.
A savings account in which one or more persons has an interest shall be
deemed to be held by only one Voting Member for the purpose of voting at the
Special Meeting. Any questions as to the eligibility of a member to vote, the
number of votes allocated to each Voting Member or any other matter relating to
voting will be resolved at the time of the Special Meeting by reference to the
records of the Company.
The Company records disclose that, as of the Voting Record Date, there
were ____________ votes entitled to be cast at the Special Meeting, a majority
of which are required to approve the Plan and the Contribution to the
Foundation. A vote of three-fifths of the votes cast in person or by proxy at
the Special Meeting is required to adopt the Amended Articles and the Amended
Constitution of the Company.
PROXIES
Voting Members may vote in person or by proxy at the Special Meeting.
For Voting Members wishing to vote by proxy at the Special Meeting, the enclosed
Proxy may be completed and given in accordance with this Summary Proxy
Statement. Any other proxy held by the Company will not be used by the Company
for the Special Meeting.
A Proxy will be voted in the manner indicated thereon or, in the absence
of specific instructions, will be voted FOR the approval of the Plan, FOR the
adoption of the Amended Articles, FOR the adoption of the Amended Constitution
and FOR the Contribution to the Foundation. Without affecting any vote
previously taken, a Voting Member may revoke a proxy at any time before such
proxy is exercised by executing and delivering a later dated proxy or by giving
the Company notice of revocation in writing or in open meeting at the Special
Meeting.
Attendance at the Special Meeting will not, of itself, revoke a proxy.
Proxies may be solicited by the directors, officers and employees of the
Company in person or by telephone, telegraph or mail, for use only at the
Special Meeting and any adjournments thereof and will not be used for any other
meeting. The cost of soliciting Proxies will be borne by the Company.
MANAGEMENT'S RECOMMENDATIONS AND REASONS FOR CONVERSION
THE BOARD OF DIRECTORS RECOMMENDS THAT MEMBERS VOTE FOR THE APPROVAL OF
THE PLAN AND FOR THE ADOPTION OF THE AMENDED ARTICLES AND THE AMENDED
CONSTITUTION OF THE COMPANY.
The principal factors considered by the Company's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion were the numerous
competitive advantages which the stock form of organization offers, including
growth opportunities, employee retention, and increased capital levels.
If the Company is to continue to grow and prosper, the mutual form of
organization is the least desirable form from a competitive standpoint. The
opportunities for a mutual savings and loan association to expand through
mutual-to-mutual mergers or cash acquisitions are limited. Although the Company
does not have any specific acquisitions planned at this time, the Conversion
will position the Company to take advantage of any acquisition opportunities
which may present themselves. Because a conversion to stock form is a
time-consuming and complex process, the Company cannot wait until a prospective
acquisition arises to embark on the conversion process.
2
<PAGE> 4
As an increasing number of the Company's competitors convert to stock
form and acquire the ability to use stock-based compensation programs, the
Company, in mutual form, would be at a disadvantage when it comes to attracting
and retaining qualified management. The Company believes that the Holding
Company's employee stock ownership plan (the "ESOP"), stock option plan (the
"Stock Option Plan") and recognition and retention plan (the "RRP") are
important tools in achieving such goals, even though the Holding Company will be
required to wait until at least six months after the Conversion to implement the
Stock Option Plan and the RRP. See "MANAGEMENT Stock Benefit Plans" in the
Prospectus.
MANAGEMENT'S RECOMMENDATION AND REASONS
FOR THE CONTRIBUTION TO THE FOUNDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT MEMBERS VOTE FOR THE APPROVAL OF
THE CONTRIBUTION TO THE FOUNDATION.
The Plan provides that the Holding Company and the Company may
contribute common shares of the Holding Company to the Foundation. The
Foundation is dedicated to charitable purposes within the communities served by
the Company, including community development activities.
The purpose of the Foundation is to provide funding to support
charitable causes and community development activities. The Company believes
that the contribution to the Foundation will enhance the long-term value of the
Company's community banking franchise by enhancing the Company's visibility and
reputation in the communities that it serves. Funding of the Foundation with
Common Shares will enable the communities served by the Company to share in the
growth and success of the Company and the Holding Company long after completion
of the Conversion. The Foundation enables the Company and the Holding Company to
develop a unified charitable donation strategy with centralized responsibility
for administration and allocation of corporate charitable funds and enables the
Company to provide a consistent level of community support in future years,
regardless of future earnings. The Company, however, does not expect the
contribution to the Foundation to take the place of the Company's traditional
community lending activities.
THE BUSINESS OF THE HOLDING COMPANY
The Holding Company was incorporated under Ohio law in February 1998
for the purpose of purchasing all of the capital stock of the Company to be
issued in connection with the Conversion. The Holding Company has not conducted
and will not conduct any business before the completion of the Conversion, other
than business related to the Conversion. Upon the consummation of the
Conversion, the Holding Company will be a unitary savings and loan holding
company, the principal assets of which initially will be the capital stock of
the Company, cash, the investments made with the net proceeds retained from the
sale of common shares of the Holding Company in connection with the Conversion
(the "Common Shares") and a loan to be made by the Holding Company to the ESOP
to facilitate the ESOP's purchase of Common Shares in the Conversion. See "USE
OF PROCEEDS."
The office of the Holding Company is located at 275 Federal Plaza West,
Youngstown, Ohio 44503-1203, and its telephone number is (330) 743-0500.
THE BUSINESS OF THE COMPANY
The Company is a mutual savings and loan association which was
organized under Ohio law in 1889 as "The Home Building and Loan." In 1897, the
name of the Company was changed to "The Home Savings and Loan Company of
Youngstown, Ohio." As an Ohio savings and loan association, the Company is
subject to supervision and regulation by the OTS, the Division and the FDIC. The
Company is a member of the FHLB of Cincinnati, and the deposits of the Company
are insured up to applicable limits by the FDIC in the SAIF. See "REGULATION" in
the Prospectus.
3
<PAGE> 5
The Company conducts business from its main office located in
Youngstown, Ohio and 13 full-service branches, located in the Northern Ohio
communities of Austintown, Boardman, Canfield, Columbiana, East Palestine,
Liberty Township, Lisbon, Niles, Poland, Salem and Struthers. The principal
business of the Company is the origination of mortgage loans on one- to
four-family residential real estate located in the Company's primary market
area, which consists of northern Columbiana County, Mahoning County and southern
Trumbull County. The Company also originates loans secured by nonresidential
real estate in its primary market area. In addition to real estate lending, the
Company originates commercial loans and various types of consumer loans,
including home equity loans, education loans, loans secured by savings accounts,
motor vehicles, boats and recreational vehicles and unsecured loans. See "THE
BUSINESS OF THE COMPANY - Lending Activities" in the Prospectus. The Company
invests in interest-bearing deposits in other financial institutions, federal
funds and U.S. Treasury and agency Securities. See "THE BUSINESS OF THE COMPANY
"Investment Activities." Funds for lending and other investment activities are
obtained primarily from savings deposits, which are insured up to applicable
limits by the FDIC in the SAIF, principal repayments of loans and maturities of
securities. See "THE BUSINESS OF THE COMPANY Deposits and Borrowings," in the
Prospectus.
The main office of the Company is located at 275 Federal Plaza West,
Youngstown, Ohio 44503-1203, and its telephone number is (330) 743-0500.
THE CONVERSION
THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE
APPROVAL OF THE PLAN BY THE MEMBERS OF THE COMPANY ENTITLED TO VOTE ON THE PLAN
AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS
AND THE DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN.
GENERAL
On December 9, 1997, the Board of Directors of the Company unanimously
adopted the Plan and recommended that the voting members of the Company approve
the Plan at the Special Meeting. During and upon completion of the Conversion,
the Company will continue to provide the services presently offered to
depositors and borrowers, will maintain its existing offices, and will retain
its existing management and employees.
Based on an independent appraisal of the pro forma market value of the
Holding Company and the Company, as converted, and as a result of the issuance
of shares to the Foundation (the "Adjusted Valuation Range"), between 21,250,000
and 28,937,500 Common Shares are expected to be offered in a subscription
offering (the "Subscription Offering") and a community offering (the "Community
Offering") at a price of $10 per share. Applicable regulations permit the
Holding Company to issue up to 33,465,625 Common Shares with an aggregate
purchase price of $334,656,250. Federal regulations require, with certain
exceptions, that shares offered in connection with the Conversion must be sold
up to at least the minimum point of the Adjusted Valuation Range in order for
the Conversion to become effective. The actual number of Common Shares sold in
connection with the Conversion will be determined upon completion of the
Offering based on the final valuation of the Company, as converted. See "Pricing
and Number of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering, subject
to the rights and restrictions established by the Plan, to (a) eligible
depositors of the Company as of July 31, 1996 (the "Eligibility Record Date")
who had deposit accounts with balances, in the aggregate, of $50 or more (a
"Qualifying Deposit"), (b) the ESOP, (c) eligible depositors of the Company who
had Qualifying Deposits as of __________________ (the "Supplemental Eligibility
Record Date"), (d) members of the Company eligible to vote at the Special
Meeting ("Other Eligible Members"), and (e) directors, officers and employees of
the Company.
Any Common Shares not subscribed for in the Subscription Offering will
be offered to the general public in the Community Offering in a manner which
will seek to achieve the widest distribution of the Common Shares, but which
will give preference to natural persons residing in Columbiana, Mahoning and
Trumbull, Counties, Ohio. Under OTS regulations, the Community Offering must be
completed within 45 days after completion of the Subscription Offering, unless
such period is extended by the Company with the approval of the OTS and the
4
<PAGE> 6
Division. If the Community Offering is determined not to be feasible, an
occurrence that is not currently anticipated, the Boards of Directors of the
Holding Company and the Company will consult with the OTS and the Division to
determine an appropriate alternative method of selling unsubscribed Common
Shares up to the minimum of the Valuation Range. No alternative sales methods
are currently planned.
The minimum number of Common Shares any person may purchase in the
Offering is 25. Each Eligible Account Holder (hereafter defined), Supplemental
Eligible Account Holder (hereafter defined) and Other Eligible Member may
purchase in the Subscription Offering not more than 30,000 Common Shares. In
connection with the exercise of subscription rights arising from a single
deposit account in which two or more persons have an interest, however, the
aggregate maximum number of Common Shares which the persons having an interest
in such account may purchase in the Subscription Offering in relation to such
account is 30,000 Common Shares. Except for the ESOP, which may purchase up to
10% of the total Common Shares sold in the Offering, no person, together with
his or her Associates (hereafter defined) and other persons Acting in Concert
(hereafter defined) with him or her, may purchase more than 1.0% of the Common
Shares sold in the Offering. Subject to OTS regulations, the purchase
limitations may be increased or decreased after the commencement of the Offering
in the sole discretion of the Boards of Directors of the Holding Company and the
Company. If the purchase limitations are increased after the commencement of the
Subscription Offering, persons who have subscribed for the maximum amount will
be given the opportunity to increase their subscriptions. See "Limitations on
Purchases of Common Shares."
OTS and Ohio regulations require the completion of the Conversion
within 24 months after the date of the approval of the Plan by the voting
members of the Company. The commencement and completion of the Conversion will
be subject to market conditions and other factors beyond the Company's control.
Due to changing economic and market conditions, no assurance can be given as to
the length of time that will be required to complete the sale of the Common
Shares. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Company. In such circumstances, the
Company may also incur substantial additional printing, legal and accounting
expenses in completing the Conversion. In the event the Conversion is not
successfully completed, the Company will be required to charge all Conversion
expenses against current earnings.
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Deposit holders who are members of the Company in its
mutual form will have no voting rights in the Company as converted and will not
participate, therefore, in the election of directors or otherwise control the
Company's affairs. Voting rights in the Holding Company will be held exclusively
by its shareholders, and voting rights in the Company will be held exclusively
by the Holding Company as the sole shareholder of the Company. Each holder of
the Holding Company's common shares will be entitled to one vote for each share
owned on any matter to be considered by the Holding Company's shareholders. See
"DESCRIPTION OF AUTHORIZED SHARES."
DEPOSIT ACCOUNTS AND LOANS. Deposit accounts in the Company, as
converted, will be equivalent in amount, interest rate and other terms to the
present deposit accounts in the Company, and the existing FDIC insurance on such
accounts will not be affected by the Conversion. The Conversion will not affect
the terms of loan accounts or the rights and obligations of borrowers under
their individual contractual arrangements with the Company.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by the Company of a private letter ruling from the IRS or
an opinion of counsel to the effect that the Conversion will constitute a
tax-free reorganization as defined in Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Company intends to proceed with the
Conversion based upon an opinion received from its special counsel, Vorys,
Sater, Seymour and Pease LLP, to the following effect:
(1) The Conversion constitutes a reorganization within the
meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will
be recognized by the Company in its mutual form or in its stock form as
a result of the Conversion. The Company in its mutual form and the
Company in its stock form will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by the Company upon the
receipt of money from the Holding Company in exchange for the capital
stock of the Company, as converted;
5
<PAGE> 7
(3) The assets of the Company will have the same basis in its
hands immediately after the Conversion as they had in its hands
immediately prior to the Conversion, and the holding period of the
assets of the Company after the Conversion will include the period
during which the assets were held by the Company before the Conversion;
(4) No gain or loss will be recognized by the deposit account
holders of the Company upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in the Company immediately
prior to the Conversion, of withdrawable deposit accounts in the
Company immediately after the Conversion, in the same dollar amount as
their withdrawable deposit accounts in the Company immediately prior to
the Conversion, plus, in the case of eligible depositors of the Company
as of the Eligibility Record Date who had Qualifying Deposits (the
"Eligible Account Holders") and eligible depositors of the Company as
of the Supplemental Eligibility Record Date who had Qualifying Deposits
(the "Supplemental Eligible Account Holders"), the interests in the
Liquidation Account of the Company, as described below;
(5) The basis of the withdrawable deposit accounts in the
Company held by its deposit account holders immediately after the
Conversion will be the same as the basis of their deposit accounts in
the Company immediately prior to the Conversion. The basis of the
interests in the Liquidation Account received by the Eligible Account
Holders and Supplemental Eligible Account Holders will be zero. The
basis of the nontransferable subscription rights received by Eligible
Account Holders, Supplemental Eligible Account Holders and Other
Eligible Members will be zero (assuming that at distribution such
rights have no ascertainable fair market value);
(6) No gain or loss will be recognized by Eligible Account
Holders, Supplemental Eligible Account Holders or Other Eligible
Members upon the distribution to them of nontransferable subscription
rights to purchase Common Shares (assuming that at distribution such
rights have no ascertainable fair market value), and no taxable income
will be realized by such Eligible Account Holders, Supplemental
Eligible Account Holders or Other Eligible Members as a result of their
exercise of such nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of the
Company pursuant to the exercise of subscription rights will be the
purchase price thereof (assuming that such rights have no ascertainable
fair market value and that the purchase price is not less than the fair
market value of the shares on the date of such exercise), and the
holding period of such shares will commence on the date of such
exercise. The basis of the Common Shares purchased other than by the
exercise of subscription rights will be the purchase price thereof
(assuming in the case of the other subscribers that the opportunity to
buy in the Subscription Offering has no ascertainable fair market
value), and the holding period of such shares will commence on the day
after the date of the purchase;
(8) For purposes of Section 381 of the Code, the Company will
be treated as if there had been no reorganization. The taxable year of
the Company will not end on the effective date of the Conversion.
Immediately after the Conversion, the Company in its stock form will
succeed to and take into account the tax attributes of the Company in
its mutual form immediately prior to the Conversion, including the
Company's earnings and profits or deficit in earnings and profits;
(9) The bad debt reserves of the Company in its mutual form
immediately prior to the Conversion will not be required to be restored
to the gross income of the Company in its stock form as a result of the
Conversion and immediately after the Conversion such bad debt reserves
will have the same character in the hands of the Company in its stock
form as they would have had if there had been no Conversion. The
Company in its stock form will succeed to and take into account the
dollar amounts of those accounts of the Company in its mutual form
which represent bad debt reserves in respect of which the Company in
its mutual form has taken a bad debt deduction for taxable years ending
on or before the Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of the Company available for the
6
<PAGE> 8
subsequent distribution of dividends within the meaning of Section 316
of the Code. The creation of the Liquidation Account on the records of
the Company will have no effect on its taxable income, deductions for
additions to reserves for bad debts under Section 593 of the Code or
distributions to stockholders under Section 593(e) of the Code.
For Ohio tax purposes, the tax consequences of the Conversion
will be as follows:
(1) The Company is a "financial institution" for State of
Ohio tax purposes, and the Conversion will not change such status;
(2) The Company is subject to the Ohio corporate franchise
tax on "financial institutions," which is imposed annually at a rate
of 1.5% of the Company's equity capital determined in
accordance with generally accepted accounting standards ("GAAP"), and
the Conversion will not change such status;
(3) As a "financial institution," the Company is not
subject to any tax based upon net income or net profit imposed by the
State of Ohio, and the Conversion will not change such status;
(4) The Conversion will not be a taxable transaction to
the Company in its mutual or stock form for purposes of the Ohio
corporate franchise tax. As a consequence of the Conversion, however,
the annual Ohio corporate franchise tax liability of the Company will
increase if the taxable net worth of the Company (i.e., book net worth
computed in accordance with GAAP at the close of the Company's taxable
year for federal income tax purposes) increases thereby; and
(5) The Conversion will not be a taxable transaction to
any deposit account holder or borrower member of the Company in its
mutual or stock form for purposes of the Ohio corporate
franchise tax and the Ohio personal income tax.
The Company has received an opinion from Keller & Company, Inc.
("Keller"), a firm experienced in valuing thrift institutions, to the effect
that the subscription rights have no ascertainable fair market value because the
rights are received by specified persons at no cost, may not be transferred and
are of short duration. The IRS could challenge the assumption that the
subscription rights have no ascertainable fair market value.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Company in its present mutual form, each depositor in the Company would
receive a pro rata share of any assets of the Company remaining after payment of
the claims of all creditors, including the claims of all depositors to the
withdrawable value of their deposit accounts. A depositor's pro rata share of
such remaining assets would be the same proportion of such assets as the value
of such depositor's accounts bears to the total aggregate value of all deposits
in the Company at the time of liquidation.
In the event of a complete liquidation of the Company in its stock form
after the Conversion, each depositor would have a claim of the same general
priority as the claims of all other general creditors of the Company. Except as
described below, each depositor's claim would be solely in the amount of the
balance in such depositor's account plus accrued interest. The depositor would
have no interest in the assets of the Company above that amount. Such assets
would be distributed to the Holding Company as the sole shareholder of the
Company.
For the purpose of granting a limited priority claim to the assets of
the Company in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain
deposit accounts at the Company after the Conversion, the Company will, at the
time of Conversion, establish a liquidation account in an amount equal to the
net worth of the Company as of December 31, 1997 (the "Liquidation Account").
The Liquidation Account will not operate to restrict the use or application of
any of the regulatory capital of the Company.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date.
7
<PAGE> 9
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, as the case may be, and the denominator of which is the total
amount of all Qualifying Deposits of Eligible Account Holders and Supplemental
Eligible Account Holders on the corresponding record date. The balance of each
Subaccount may be decreased but will never be increased. If, at the close of
business on the last day of each fiscal year of the Holding Company subsequent
to the respective record dates, the balance in the deposit account to which a
Subaccount relates is less than the lesser of (i) the deposit balance in such
deposit account at the close of business on the last day of any other annual
closing date subsequent to the Eligibility Record Date or the Supplemental
Eligibility Record Date, or (ii) the amount of the Qualifying Deposit as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, the balance
of the Subaccount for such deposit account shall be adjusted proportionately to
the reduction in such deposit account balance. In the event of any such downward
adjustment, such Subaccount balance shall not be subsequently increased
notwithstanding any increase in the deposit balance of the related deposit
account. If any deposit account is closed, its related Subaccount shall be
reduced to zero upon such closing.
In the event of a complete liquidation of the converted Bank (and only
in such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive from the Liquidation Account a distribution equal to the
current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to the Holding Company as the sole
shareholder of the Company. Any assets remaining after satisfaction of such
liquidation rights and the claims of the Company's creditors would be
distributed to the Holding Company as the sole shareholder of the Company. No
merger, consolidation, purchase of bulk assets or similar combination or
transaction with another financial institution, the deposits of which are
insured by the FDIC, will be deemed to be a complete liquidation for this
purpose and, in any such transaction, the Liquidation Account shall be assumed
by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of the Holding Company and the Company will be final. The
Plan may be amended by the Boards of Directors of the Holding Company and the
Company at any time with the concurrence of the OTS and the Division. If the
Company and the Holding Company determine, upon advice of counsel and after
consultation with the OTS and the Division, that any such amendment is material,
subscribers will be notified of the amendment and will be provided the
opportunity to affirm, increase, decrease or cancel their subscriptions. Any
person who does not affirmatively elect to continue his subscription or elects
to rescind his subscription before the date specified in the notice will have
all of his funds promptly refunded with interest. Any person who elects to
decrease his subscription will have the appropriate portion of his funds
promptly refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan and
the adoption of the Amended Articles of Incorporation and the Amended
Constitution by the voting members of the Company at the Special Meeting and the
completion of the sale of the requisite amount of Common Shares within 24 months
following the date of such approval. If these conditions are not satisfied, the
Plan will automatically terminate and the Company will continue its business in
the mutual form of organization. The Plan may be voluntarily terminated by the
Board of Directors at any time before the Special Meeting and at any time
thereafter with the approval of the OTS and the Division.
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, EASTERN STANDARD
TIME, ON _____ __, 1998. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE 12:00 NOON,
EASTERN STANDARD TIME, ON _____ __, 1998, WILL BE VOID, WHETHER OR NOT THE
COMPANY HAS BEEN ABLE TO LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION
RIGHTS.
8
<PAGE> 10
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST
REPRESENT TO THE COMPANY THAT HE OR SHE IS PURCHASING SUCH SHARES FOR HIS OR HER
OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER
PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO ATTEMPTS TO
TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES AND
SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS.
The number of Common Shares which a person who has subscription rights
may purchase will be determined, in part, by the total number of Common Shares
to be issued and the availability of Common Shares for purchase under the
preference categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the voting members of the Company at the Special Meeting.
The preference categories and preliminary purchase limitations which
have been established by the Plan, in accordance with applicable regulations,
for the allocation of Common Shares are as follows:
(a) Each Eligible Account Holder shall receive, without
payment therefor, a nontransferable right to purchase in the
Subscription Offering up to the greater of (i) 30,000 Common Shares,
(ii) .10% of the total number of Common Shares sold in connection with
the Conversion, and (iii) 15 times the product (rounded down to the
next whole number) obtained by multiplying the total number of Common
Shares sold in connection with the Conversion by a fraction, the
numerator of which is the amount of the Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Eligible Account Holders, in each case on
the Eligibility Record Date, subject to the overall purchase
limitations set forth in Section 11 of the Plan and subject to
adjustment by the Board of Directors of the Holding Company and the
Company as set forth in Section 11 of the Plan. If the exercise of
subscription rights by Eligible Account Holders results in an
over-subscription, Common Shares will be allocated among subscribing
Eligible Account Holders in a manner which will, to the extent
possible, make the total allocation of each subscriber equal 100 shares
or the amount subscribed for, whichever is less. Any Common Shares
remaining after such allocation has been made will be allocated among
the subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Eligibility Record Date bears to the total
Qualifying Deposits of all Eligible Account Holders on such date.
Notwithstanding the foregoing, Common Shares in excess of 28,750,000,
the maximum of the Valuation Range, may be sold to the ESOP before
fully satisfying the subscriptions of Eligible Account Holders. No
fractional shares will be issued. For purposes of this paragraph (a),
increases in the Qualifying Deposits of directors and executive
officers of the Company during the twelve months preceding the
Eligibility Record Date shall not be considered.
(b) The ESOP shall receive, without payment therefor, a
nontransferable right to purchase in the Subscription Offering an
aggregate amount of up to 10% of the Common Shares sold in the
Conversion, provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders up to the maximum of
the Valuation Range pursuant to paragraph (a) above. Although the Plan
and OTS regulations permit the ESOP to purchase up to 10% of the Common
Shares, the Holding Company anticipates that the ESOP will purchase 8%
of the Common Shares. If the ESOP is unable to purchase all or part of
the Common Shares for which it subscribes, the ESOP may purchase Common
Shares on the open market or may purchase authorized but unissued
Common Shares. If the ESOP purchases authorized but unissued Common
Shares, such purchases could have a dilutive effect on the interests of
the Holding Company's shareholders. See "RISK FACTORS - Potential
Impact of Benefit Plans on Net Earnings and Shareholders' Equity."
(c) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders and the ESOP pursuant
to paragraphs (a) and (b) above each Supplemental Eligible Account
Holder will receive, without payment therefor, a nontransferable right
to purchase up to the greater of (i) 30,000 Common Shares, (ii) .10% of
the total number of Common Shares sold in connection with the
Conversion, and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of Common Shares
sold in connection with the Conversion by a fraction, the numerator of
which is the amount of the Supplemental Eligible Account Holder's
Qualifying
9
<PAGE> 11
Deposit and the denominator of which is the total amount of Qualifying
Deposits of all Supplemental Eligible Account Holders, in each case on
the Supplemental Eligibility Record Date, subject to the overall
purchase limitations set forth in Section 11 of the Plan and subject to
adjustment by the Board of Directors of the Holding Company and the
Company as set forth in Section 11 of the Plan. If the exercise of
subscription rights by Supplemental Eligible Account Holders results in
an oversubscription, Common Shares will be allocated among subscribing
Supplemental Eligible Account Holders in a manner which will, to the
extent possible, make the total allocation of each subscriber equal 100
shares or the amount subscribed for, whichever is less. Any Common
Shares remaining after such allocation has been made will be allocated
among the subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled in the proportion which the amount of
their respective Qualifying Deposits on the Supplemental Eligibility
Record Date bears to the total Qualifying Deposits of all Supplemental
Eligible Account Holders on such date. No fractional shares will be
issued.
(d) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders pursuant to paragraphs (a), (b)
and (c) above, each Other Eligible Member, other than an Eligible
Account Holder or Supplemental Eligible Account Holder, shall receive,
without payment therefor, a nontransferable right to purchase up to the
greater of (i) 30,000 Common Shares, and (ii) .10% of the total number
of Common Shares sold in connection with the Conversion, subject to
adjustment by the Boards of Directors of the Company and the Holding
Company. In the event of an oversubscription by Other Eligible Members,
the available Common Shares will be allocated among subscribing Other
Eligible Members in the same proportion that their subscriptions bear
to the total amount of subscriptions by all Other Eligible Members;
provided, however, that, to the extent sufficient Common Shares are
available, each subscribing Other Eligible Member shall receive 25
Common Shares before the remaining available Common Shares are
allocated.
(e) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders and Other Eligible Members pursuant to
paragraphs (a), (b), (c) and (d), above, the directors, officers and
employees of the Company shall receive, without payment therefor,
nontransferable rights to purchase an aggregate of up to 15% of the
Common Shares sold in connection with the Conversion subject to the
overall purchase limitations set forth in Section 11 of the Plan and
subject to adjustment by the Boards of Directors of the Company and the
Holding Company as set forth in Section 11 of the Plan. The ability of
directors, officers and employees to purchase Common Shares under this
paragraph is in addition to rights which are otherwise available to
them under the Plan.
If the exercise of subscription rights by directors, officers and
employees of the Company results in an oversubscription, Common Shares will be
allocated among subscribing directors, officers and employees on an equitable
basis to be determined by the Board of Directors of the Company by giving weight
to an individual's period of service, compensation and position at the Company.
For information as to the number of shares proposed to be purchased by the
directors and executive officers, see "Shares to be Purchased by Management
Pursuant to Subscription Rights."
The Board of Directors may reject any one or more subscriptions if,
based upon the Board of Directors' interpretation of applicable regulations,
such subscriber is not entitled to the shares for which he or she has subscribed
or if the sale of shares subscribed for would be in violation of any applicable
statutes, regulations, or rules. In connection with the exercise of subscription
rights arising from a deposit account in which two or more persons have an
interest, the aggregate maximum number of Common Shares which the person having
an interest in such account may purchase in the Subscription Offering in
relation to such account is 30,000 Common Shares.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons having subscription
rights reside. However, no such person will be offered or receive any Common
Shares under the Plan who resides in a foreign country or in a state of the
United States with respect to which each of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares under the Plan
resides in such country or state; (ii) under the securities laws of such country
or state, the granting of subscription rights or the offer or sale of Common
Shares to such persons would require the Holding Company or its officers or
directors to register as a broker or dealer or to register or otherwise qualify
its securities for sale in such country or state; and (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise.
10
<PAGE> 12
The term "resident," as used herein with respect to the Subscription
Offering, means any person who, on the date of submission of a Stock Order Form,
maintained a bona fide residence within a jurisdiction in which the Common
Shares are being offered for sale. If a person is a business entity, the
person's residence shall be the location of the principal place of business. If
the person is a personal benefit plan, the residence of the beneficiary shall be
the residence of the plan. In the case of all other benefit plans, the residence
of the trustee shall be the residence of the plan. In all cases, the
determination of a subscriber's residency shall be in the sole discretion of the
Company and the Holding Company.
COMMUNITY OFFERING
To the extent Common Shares remain available after the satisfaction of
all subscriptions received in the Subscription Offering, the Company is hereby
offering Common Shares in the Community Offering subject to the limitations set
forth below. If subscriptions are received in the Subscription Offering for up
to 33,465,625 Common Shares, Common Shares may not be available in the Community
Offering. All sales of the Common Shares in the Community Offering will be at
the same price per share as in the Subscription Offering.
THE COMMUNITY OFFERING WILL BE TERMINATED ON OR BEFORE 12:00 NOON,
EASTERN STANDARD TIME, ___________ 1998, UNLESS EXTENDED BY THE COMPANY AND THE
HOLDING COMPANY WITH THE APPROVAL OF THE OTS AND THE DIVISION, IF NECESSARY. IN
ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED BEYOND
______________, 1998.
In the event shares are available for the Community Offering, each
person, together with any Associate or groups Acting in Concert, may purchase in
the Community Offering up to 30,000 Common Shares. If an insufficient number of
Common Shares is available to fill all of the orders received in the Community
Offering, the available Common Shares will be allocated in a manner to be
determined by the Boards of Directors of the Holding Company and the Company,
subject to the following:
(i) Preference will be given to natural persons who are
residents of Columbiana, Mahoning and Trumbull Counties, Ohio, the
county in which the offices of the Company are located;
(ii) Orders received in the Community Offering will first be
filled up to 2% of the total number of Common Shares offered, with any
remaining shares allocated on an equal number of shares per order basis
until all orders have been filled; and
(iii) The right of any person to purchase Common Shares in the
Community Offering is subject to the right of the Holding Company and
the Company to accept or reject such purchases in whole or in part.
The term "resident," as used herein with respect to the Community
Offering, means any natural person who, on the date of submission of a Stock
Order Form, maintains a bona fide residence within, as appropriate, Columbiana,
Mahoning and Trumbull Counties, Ohio, or a jurisdiction in which the Common
Shares are being offered for sale.
11
<PAGE> 13
PUBLIC OFFERING
As a final step in the Conversion, the Plan provides that all Common
Shares not purchased in the Subscription Offering and the Community Offering may
be offered for sale to the general public in a public offering (the "Public
Offering") through a syndicate of registered broker-dealers to be formed. The
Company and the Holding Company expect to market any Common Shares which remain
unsubscribed after the Subscription Offering and the Community Offering through
the Public Offering. The Company and the Holding Company have the right to
reject orders in whole or part in their sole discretion in the Public Offering.
Neither Trident, McDonald & Company nor any registered broker-dealer shall have
any obligation to take or purchase any Common Shares in the Public Offering;
however, Trident and McDonald & Company have agreed to use their best efforts in
the sale of Common Shares in the Public Offering.
The price at which Common Shares are sold in the Public Offering will
be the same price at which Common Shares are offered and sold in the
Subscription Offering and the Community Offering. No person will be permitted to
subscribe in the Public Offering for more than 30,000 Common Shares, subject to
the maximum purchase limitations. See "- Limitations on Purchases of Common
Shares."
LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of Common Shares. To the extent Common Shares are available, the
minimum number of Common Shares that may be purchased by any party is 25, or
$250. No fractional shares will be issued. Purchases in the Offering are further
subject to the limitation that no person, together with his or her Associates
and other persons Acting in Concert with him or her, may purchase more than
30,000 Common Shares in the Offering. In connection with the exercise of
subscription rights arising from a deposit account in which two or more persons
have an interest, the aggregate maximum number of Common Shares which the
persons having an interest in such account may purchase in the Subscription
Offering in relation to such account is 15,000 Common Shares. Such limitations
do not apply to the ESOP. Subject to applicable regulations, the purchase
limitation may be increased or decreased after the commencement of the Offering
by the Boards of Directors.
The minimum number of Common Shares any person may purchase in the
Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account
Holder and Other Eligible Member may purchase in the Subscription Offering not
more than 30,000 Common Shares. In connection with the exercise of subscription
rights arising from a single deposit account in which two or more persons have
an interest, however, the aggregate maximum number of Common Shares which the
persons having an interest in such account may purchase in the Subscription
Offering in relation to such account is 30,000 Common Shares. Except for the
ESOP, which may purchase up to 10% of the total Common Shares sold in the
Offering, no person, together with his or her Associates and other persons
Acting in Concert with him or her, may purchase more than 1.0% of the Common
Shares sold in the Offering. Subject to OTS regulations, the purchase
limitations may be increased or decreased after the commencement of the Offering
in the sole discretion of the Boards of Directors of the Holding Company and the
Company. If the purchase limitations are increased after the commencement of the
Subscription Offering, persons who have subscribed for the maximum amount will
be given the opportunity to increase their subscriptions. See "Limitations on
Purchases of Common Shares."
Purchases of Common Shares in the Offering are also subject to the
change in control regulations of the OTS which restrict direct and indirect
purchases of 10% or more of the stock of any savings association by any person
or group of persons acting in concert, under certain circumstances. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND RELATED
ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation" in the Prospectus.
After the Conversion, Common Shares, except for Common Shares purchased
by affiliates of the Holding Company and the Company, will be freely
transferable, subject to OTS and Division regulations.
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available at the offices of the Company. See "ADDITIONAL
INFORMATION." Officers and directors of the Company will be
12
<PAGE> 14
available to answer questions about the Conversion and may also hold
informational meetings for interested persons. Such officers and directors will
not be permitted to make statements about the Holding Company or the Company
unless such information is also set forth in this Prospectus, nor will they
render investment advice. The Holding Company will rely on Rule 3a4-1 under the
Securities Exchange Act of 1934 (the "Exchange Act"), and sales of Common Shares
will be conducted within the requirements of Rule 3a4-1, which will permit
officers, directors and employees of the Holding Company and the Company to
participate in the sale of Common Shares. No officer, director or employee of
the Holding Company or the Company will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Shares.
To assist the Holding Company and the Company in marketing the Common
Shares, the Holding Company and the Company have retained Trident, a
broker-dealer registered with the SEC and a member of the National Association
of Securities Dealers, Inc. ("NASD"). Trident will assist the Company in (i)
training and educating the Company's employees regarding the mechanics and
regulatory requirements of the conversion process; (ii) conducting information
meetings for subscribers and other potential purchasers; and (iii) keeping
records of all stock subscriptions. For providing these services, the Company
has agreed to pay Trident a commission equal to .95% of the aggregate dollar
amount of Common Shares sold in the Subscription Offering and the Community
Offering, excluding shares sold by Selected Dealers, if any, and shares
purchased by the ESOP and directors, officers, and employees of the Company and
their affiliates.
The Company has also agreed to reimburse Trident for its reasonable
legal fees and expenses not to exceed $50,000 and its reasonable out-of-pocket
expenses not to exceed $10,000. The Company and the Holding Company have also
agreed to indemnify Trident, under certain circumstances, against liabilities
and expenses (including legal fees) arising out of or based upon untrue
statements or omissions contained in the materials used in the Offering or in
various documents submitted to regulatory authorities in respect of the
Conversion, including liabilities under the Securities Act of 1933, as amended
(the "Act"), unless such untrue statement or omission, or alleged untrue
statement or omission, was made in reliance upon certain information furnished
to the Company by Trident expressly for use in the Summary Proxy Statement or
this Prospectus.
If Common Shares remain available after the satisfaction of all
subscriptions received in the Subscription Offering, Trident and McDonald &
Company may enter into an agreement with other NASD member firms ("Selected
Dealers") to assist in the sale of Common Shares in the Community Offering. If
Selected Dealers are used, the Company will pay a fee for shares sold by
Selected Dealers in an amount to be agreed upon jointly by Trident and McDonald
& Company and the Company to reflect market requirements at the time of the
Community Offering. During the Community Offering, Selected Dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date (the "Order Date") for the purchase of Common
Shares. When and if the Company believes that enough indications of interest and
orders have been received in the Community Offering to consummate the
Conversion, Trident and McDonald & Company will request, as of the Order Date,
Selected Dealers to submit orders to purchase shares for which they have
previously received indications of interest from the customers. Selected Dealers
will send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on the date which will be three business days from the Order Date (the
"Settlement Date"). On the Settlement Date, funds received by Selected Dealers
will be remitted to the Company. It is anticipated that the Conversion will be
consummated on the Settlement Date. However, if consummation is delayed after
payment has been received by the Company from Selected Dealers, funds will earn
interest at the current passbook savings account rate, which is currently ____%,
with an annual percentage yield of ____%, until the completion of the offering.
Funds will be returned promptly in the event the Conversion is not consummated.
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond ____________, 1998, persons
who have subscribed for Common Shares in the Subscription Offering or in the
Community Offering will receive a written notice that prior to a date specified
in the notice, they have the right to affirm, increase, decrease or rescind
their subscriptions for Common Shares. Persons who do not affirmatively elect to
continue their subscription or who elect to rescind their subscriptions during
any such extension will have all of their funds promptly refunded with interest.
Persons who elect to decrease their subscriptions will have the appropriate
portion of their funds promptly refunded with interest.
13
<PAGE> 15
USE OF STOCK ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and in the
Community Offering may be made only by completing and submitting a Stock Order
Form. Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to the Company by mail or in person, prior to
12:00 noon, Eastern Standard Time, on ____________, 1998, a properly executed
and completed Stock Order Form, together with full payment of the subscription
price of $10 for each Common Share for which subscription is made. ANY STOCK
ORDER FORM WHICH IS NOT RECEIVED BY THE COMPANY PRIOR TO 12:00 NOON, EASTERN
STANDARD TIME, ON _____ ______, 1998, OR FOR WHICH FULL PAYMENT HAS NOT BEEN
RECEIVED BY THE COMPANY PRIOR TO SUCH TIME, WILL NOT BE ACCEPTED. PHOTOCOPIES,
TELECOPIES OR OTHER REPRODUCTIONS OF STOCK ORDER FORMS WILL NOT BE ACCEPTED. See
"ADDITIONAL INFORMATION."
AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE HOLDING COMPANY, MAY
NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE HOLDING
COMPANY, UNLESS (I) THE COMMUNITY OFFERING IS NOT COMPLETED BY __________, 1998,
OR (II) THE FINAL VALUATION OF THE COMPANY, AS CONVERTED, IS LESS THAN
$212,500,000 OR MORE THAN $334,652,500. IF EITHER OF THOSE EVENTS OCCUR, PERSONS
WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR ORDERED
COMMON SHARES IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT THEY
HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR SUBSCRIPTIONS OR
ORDERS PRIOR TO A DATE SPECIFIED IN THE NOTICE. ANY PERSON WHO DOES NOT
AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS
SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY
REFUNDED WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS SUBSCRIPTION
DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF HIS FUNDS
PROMPTLY REFUNDED WITH INTEREST. IN ADDITION, IF THE PURCHASE LIMITATIONS ARE
INCREASED, PERSONS WHO HAVE SUBSCRIBED FOR THE MAXIMUM AMOUNT WILL BE GIVEN THE
OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS.
PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany a completed Stock Order Form in order for
subscriptions or orders to be valid. Payment for Common Shares may be made (i)
in cash, if delivered in person; (ii) by check, bank draft, or money order made
payable to the Company; or (iii) by authorization of withdrawal from deposit
accounts in the Company (other than non-self-directed IRAs). No payments by wire
transfer will be accepted. The Company cannot lend money or otherwise extend
credit to any person to purchase Common Shares.
Payments made in cash or by check, bank draft, or money order will be
placed in a segregated savings account insured by the FDIC up to applicable
limits until the Conversion is completed or terminated. Interest will be paid by
the Company on such account at the then current passbook savings account rate,
which is currently ____% with an annual percentage yield of ____%, from the date
payment is received until the Conversion is completed or terminated. Payments
made by check will not be deemed to have been received until the check has
cleared for payment.
Instructions for authorizing withdrawals from deposit accounts,
including certificates of deposit, are provided in the Stock Order Form. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase Common Shares,
unless the Conversion is terminated. All sums authorized for withdrawal will
continue to earn interest at the contract rate for such account or certificate
until the completion or termination of the Conversion. Interest penalties for
early withdrawal applicable to certificate accounts will be waived in the case
of withdrawals authorized for the purchase of Common Shares. If a partial
withdrawal from a certificate account results in a balance less than the
applicable minimum balance requirement, the certificate will be canceled and the
remaining balance will earn interest at the Company's passbook rate subsequent
to the withdrawal.
In order to utilize funds in an IRA maintained at the Company, the
funds must be transferred to a self-directed IRA that permits the funds to be
invested in stock. There will be no early withdrawal or IRS penalties for such
transfer. The beneficial owner of the IRA must direct the trustee of the account
to use funds from such account to purchase Common Shares in connection with the
Conversion. THIS CANNOT BE DONE THROUGH THE MAIL. Persons who are interested in
utilizing IRAs at the Company to subscribe for Common Shares should contact the
Conversion Information Center at (330) ___-___ for instructions and assistance.
14
<PAGE> 16
Subscriptions will not be filled by the Company until subscriptions
have been received in the Offering for up to 21,250,000 Common Shares, the
minimum point of the Adjusted Valuation Range. If the Conversion is terminated,
all funds delivered to the Company for the purchase of Common Shares will be
returned with interest, and all charges to deposit accounts will be rescinded.
If subscriptions are received for at least 21,250,000 Common Shares, subscribers
and other purchasers will be notified by mail, promptly upon completion of the
sale of the Common Shares, of the number of shares for which their subscriptions
have been accepted. The funds on deposit with the Company for the purchase of
Common Shares will be withdrawn and paid to the Holding Company in exchange for
the Common Shares. Certificates representing Common Shares will be delivered
promptly thereafter.
The Common Shares will not be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes but may pay for such Common Shares upon consummation of
the Conversion.
INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
intended purchases by the directors and executive officers of the Company and
the Holding Company:
<TABLE>
<CAPTION>
Name Total shares (1) Percent of total offering (2) Aggregate purchase price (1)
- ---- ------------ ------------------------- ------------------------
<S> <C> <C> <C>
Richard M. Barrett
James E. Bennett, Jr.
Charles. B. Cushwa, III
Donald R. Inglis
Patrick A. Kelly
Gary Keller
William A. Holdford
Douglas B. McKay
Herbert F. Schuler, Sr.
Clarence R. Smith, Jr.
Robert J. Steele, Jr.
Donald J. Varner
John F. Zimmerman, Jr.
All directors and executive
officers as a group (13 persons)
<FN>
- -----------------------------
(1) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
(2) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted
Valuation Range, will be sold in connection with the Conversion at $10
per share and that a sufficient number of Common Shares will be
available to satisfy the intended purchases by directors and executive
officers. See "Pricing and Number of Common Shares to be Sold."
</TABLE>
All purchases by executive officers and directors of the Company are
being made for investment purposes only and with no present intent to resell.
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares will be based on the
pro forma market value of the shares as determined by an independent appraisal
of the Company, as converted, and the Holding Company. Keller, a firm which
evaluates and appraises financial institutions, has been retained by the Company
to prepare an appraisal of the estimated pro forma market value of the Company
as converted, and the Holding Company. Keller will receive a fee of $27,000 for
its appraisal and one update and will not be reimbursed for out-of-pocket
expenses.
15
<PAGE> 17
Keller was selected by the Board of Directors of the Company because
Keller has extensive experience in the valuation of thrift institutions,
particularly in the mutual-to-stock conversion context. The Board of Directors
reviewed the credentials of Keller's appraisal personnel and obtained references
and recommendations from other companies which have engaged Keller. Keller is
certified by the OTS as a mutual-to-stock conversion appraiser. The Company and
Keller have no relationships which would affect Keller's independence.
The appraisal was prepared by Keller in reliance upon the information
contained herein and in the Prospectus. Keller also considered the following
factors, among others: the economic and demographic conditions in the Company's
primary market area; the quality and depth of the Company's management and
personnel; certain historical financial and other information relating to the
Company; a comparative evaluation of the operating and financial statistics of
the Company with those of other thrift institutions; the aggregate size of the
Offering; the impact of the Conversion on the Company's regulatory capital and
earnings potential; the trading market for stock of comparable thrift
institutions and thrift holding companies; and general conditions in the markets
for such stocks. The Boards of Directors of the Holding Company and the Company
reviewed and deemed appropriate the assumptions and methodology used by Keller
in preparing the appraisal.
The Pro Forma Value, determined by Keller, is $250,000,000 as of
February 24, 1998. The Adjusted Valuation Range established in accordance with
the Plan is $212,500,000 to $289,375,000 which, based upon a per share offering
price of $10, will result in the sale of between 21,250,000 and 28,937,500
Common Shares. Applicable regulations permit the Holding Company to Common
Shares in an amount not to exceed issue up to a total of 33,465,625 Common
Shares with an aggregate purchase price of $334,656,250. The total number of
Common Shares sold in the Conversion will be based on the Valuation Range. Pro
forma shareholders' equity per share and pro forma earnings per share decrease
moving from the low end to the high end of the Valuation Range. See "PRO FORMA
DATA."
If, due to changing market conditions, the final valuation is less than
$212,500,000 or more than $334,656,250, subscribers will be given the right to
affirm, increase, decrease or rescind their subscriptions. Any person who does
not affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES
OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF THE AUDITED FINANCIAL
STATEMENTS AND STATISTICAL INFORMATION PROVIDED BY THE COMPANY. KELLER DID NOT
INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY
THE COMPANY, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE
COMPANY OR THE HOLDING COMPANY. THE VALUATION CONSIDERS THE COMPANY ONLY AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION
VALUE OF THE COMPANY. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON SHARES WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT THE CONVERSION
PURCHASE PRICE.
A copy of the complete appraisal is on file and open for inspection at
the office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the
Central Regional Office of the OTS, 200 West Madison Street, Suite 1300,
Chicago, Illinois 60606; at the office of the Division, 77 S. High Street,
Columbus, Ohio 43215; and at the offices of the Company.
16
<PAGE> 18
RESTRICTIONS ON REPURCHASE OF COMMON SHARES
OTS regulations generally prohibit the Holding Company from
repurchasing any of its capital stock for three years following the date of
completion of the Conversion, except as part of an open-market stock repurchase
program during the second and third years following the Conversion involving no
more than 5% of the outstanding capital stock during a twelve-month period. The
OTS may permit a repurchase during the first year following the completion of
the Conversion or may permit the Holding Company to exceed the 5% limits in the
second and third years if exceptional circumstances are established. In
addition, any repurchase during the three years following the completion of the
Conversion, the Company's regulatory capital must equal or exceed all regulatory
capital requirements. Before the commencement of a repurchase program, the
Holding Company must provide notice to the OTS, and the OTS may disapprove the
program if the OTS determines that it would adversely affect the financial
condition of the Company or if it determines that there is no valid business
purpose for such repurchase. Such repurchase restrictions would not prohibit the
ESOP or the RRP from purchasing Common Shares during the first year following
the Conversion.
Ohio regulations prohibit the Holding Company from repurchasing shares
during the first year after the Conversion if the effect thereof would cause the
Company not to meet its capital requirements.
RESTRICTIONS ON TRANSFER OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors and executive officers of the
Holding Company will be subject to the restriction that such shares may not be
sold for a period of one year following completion of the Conversion, except in
the event of the death of the shareholder. The certificates evidencing Common
Shares issued by the Holding Company to directors and executive officers will
bear a legend giving appropriate notice of the restriction imposed upon them. In
addition, the Holding Company will give appropriate instructions to the transfer
agent (if any) for the Holding Company's common shares in respect of the
applicable restriction on transfer of any restricted shares. Any shares issued
as a stock dividend, stock split or otherwise in respect of restricted shares
will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following
the Conversion, no director or officer of the Holding Company or the Company, or
any of their Associates, may purchase any common shares of the Holding Company
without the prior written approval of the OTS, except through a broker-dealer
registered with the SEC. This restriction will not apply, however, to negotiated
transactions involving more than 1% of a class of outstanding common shares of
the Holding Company or shares acquired by any stock benefit plan of the Holding
Company or the Company.
The Common Shares, like the stock of most public companies, are subject
to the registration requirements of the Act. Accordingly, the Common Shares may
be offered and sold only in compliance with such registration requirements or
pursuant to an applicable exemption from registration. Common Shares received in
the Conversion by persons who are not "affiliates" of the Holding Company may be
resold without registration. Common Shares received by affiliates of the Holding
Company will be subject to resale restrictions. An "affiliate" of the Holding
Company, for purposes of Rule 144, is a person who directly, or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, the Holding Company. Rule 144 generally requires that there
be publicly available certain information concerning the Holding Company and
that sales subject to Rule 144 be made in routine brokerage transactions or
through a market maker. If the conditions of Rule 144 are satisfied, each
affiliate (or group of persons acting in concert with one or more affiliates) is
generally entitled to sell in the public market, without registration, in any
three-month period, a number of shares which does not exceed the greater of (i)
1% of the number of outstanding shares of the Holding Company or (ii) if the
shares are admitted to trading on a national securities exchange or reported
through the automated quotation system of a registered securities association,
such as The Nasdaq Stock Market, the average weekly reported volume of trading
during the four weeks preceding the sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves the Plan may obtain review of such action
by filing in the Court of Appeals
17
<PAGE> 19
of the United States for the circuit in which the principal office or residence
of such person is located or in the United States Court of Appeals for the
District of Columbia, a written petition praying that the final action of the
OTS be modified, terminated, or set aside. Such petition must be filed within 30
days after the date of mailing of proxy materials to the voting members of the
Company or within 30 days after the date of publication in the Federal Register
of notice of approval of the Plan by the OTS, whichever is later.
OTHER
THE PLAN IS ATTACHED TO THIS SUMMARY PROXY STATEMENT AS EXHIBIT A AND
SHOULD BE REVIEWED CAREFULLY. ALL STATEMENTS MADE IN THIS SUMMARY PROXY
STATEMENT AND THE PROSPECTUS ARE HEREBY QUALIFIED IN THEIR ENTIRETY BY REFERENCE
TO THE PLAN. THE ADOPTION OF THE PLAN BY THE VOTING MEMBERS AT THE SPECIAL
MEETING WILL AUTHORIZE THE BOARDS OF DIRECTORS OF THE HOLDING COMPANY AND THE
COMPANY TO AMEND OR TERMINATE THE PLAN. IF THE BOARDS OF DIRECTORS OF THE
HOLDING COMPANY AND THE COMPANY DETERMINE, UPON ADVICE OF COUNSEL AND AFTER
CONSULTATION WITH THE OTS AND THE DIVISION, THAT ANY SUCH AMENDMENT IS MATERIAL,
SUBSCRIBERS WILL BE NOTIFIED OF THE AMENDMENT AND WILL BE PROVIDED THE
OPPORTUNITY TO AFFIRM, INCREASE, DECREASE OR CANCEL THEIR SUBSCRIPTIONS.
THE FOUNDATION
GENERAL
The Plan provides that the Holding Company and the Company may
contribute common shares to the Foundation. The Company believes that the
contribution to the Foundation will enhance the long-term value of the Company's
community banking franchise by enhancing the Company's visibility and reputation
in the communities that it serves. The Foundation is dedicated to charitable
purposes within the communities served by the Company, including community
development activities.
PURPOSE OF THE FOUNDATION
The purpose of the Foundation is to provide funding to support
charitable causes and community development activities. The Foundation was
formed in 1991 to augment the Company's community activities. The Foundation is
dedicated exclusively to community activities and the promotion of charitable
causes, and may be able to support such activities in ways that are not
currently available to the Company. The Board of Directors believes the
establishment of a charitable foundation is consistent with the Company's
commitment to community service and to the Company's CRA responsibilities.
Funding of the Foundation with Common Shares will enable the communities served
by the Company to share in the growth and success of the Company and the Holding
Company long after completion of the Conversion. The Foundation enables the
Company and the Holding Company to develop a unified charitable donation
strategy with centralized responsibility for administration and allocation of
corporate charitable funds and enables the Company to provide a consistent level
of community support in future years, regardless of future earnings. The
Company, however, does not expect the contribution to the Foundation to take the
place of the Company's traditional community lending activities.
STRUCTURE OF THE FOUNDATION
The Foundation is a charitable trust established exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Code. The trust agreement provides that no part of the net
earnings of the Foundation will inure to the benefit of any private shareholder
or individual.
The authority for the administration of the Foundation is vested in an
independent trustee. The Company has the power to direct the trustee with
respect to distributions by the Foundation, consistent with the purposes for
which the Foundation was established.
The Holding Company proposes to contribute to the Foundation
immediately following the Conversion, out of authorized but unissued common
shares, a number of shares equal to 5.0% of the Common Shares issued in the
Conversion, subject to the overall limitation of 1,250,000 common shares. Such
contribution would equal 1,062,500
18
<PAGE> 20
Common Shares at the minimum of the Adjusted Valuation Range and 1,250,000
common shares at the mid-point, maximum and adjusted maximum of the Adjusted
Valuation Range, which would have a market value of $10,625,000 and $12,500,000,
respectively, based on the purchase price of $10.00 per share. The Company and
the Holding Company determined to fund the Foundation with Common Shares to
enhance the ties between the Company and the communities it serves by allowing
the communities to share in the growth and success of the Company and the
Holding Company over the long term. The funding of the Foundation with Common
Shares also provides the Foundation with a potentially larger endowment than if
the Holding Company contributed cash to the Foundation since, as a shareholder,
the Foundation will share in the growth and success of the Holding Company. The
contribution of Common Shares to the Foundation has the potential to provide a
self-sustaining funding mechanism to enable the Company to maintain a consistent
level of charitable grants and donations regardless of the Company's income.
The Foundation will receive working capital from any dividends that may
be paid on the Common Shares in the future. Subject to applicable federal and
state laws, the Foundation may also obtain funds through loans collateralized by
the Common Shares or from the proceeds of the sale of any of the Common Shares
in the open market from time to time to provide the Foundation with additional
liquidity. As a private foundation under Section 501(c)(3) of the Code, the
Foundation will be required to distribute annually in grants or donations, a
minimum of 5% of the average fair market value of its net investment assets.
Upon completion of the Conversion and the contribution of shares to the
Foundation immediately following the Conversion, the Holding Company would have
22,312,500, 26,250,000, 30,187,500 and 34,715,265 shares issued and outstanding
at the minimum, mid-point, maximum and adjusted maximum of the Valuation Range,
respectively. Because the Company will have an increased number of shares
outstanding, the voting and ownership interests of shareholders in the Holding
Company's Common Shares would be diluted as compared to their interests in the
Holding Company if the Foundation were not established. Assuming the sale of
Common Shares at the maximum of the Adjusted Valuation Range and the issuance of
1,250,000 common shares to the Foundation, there will be a dilution of
approximately 4.14% to the membership and voting interests in the Holding
Company of the persons purchasing Common Shares in the Conversion. For
additional discussion of the dilutive effect, see "PRO FORMA DATA" in the
Prospectus.
TAX CONSIDERATIONS
The Foundation qualifies as a Section 501(c)(3) exempt organization
under the Code, and is classified as a private foundation.
Under the Code, the Holding Company is generally allowed a deduction
for charitable contributions made to qualifying donees within the taxable year
of up to 10% of its taxable income (with certain modifications) for such year.
Charitable contributions made by the Holding Company in excess of the annual
deductible amount will be deductible over each of the five succeeding taxable
years, subject to certain limitations. The Company and the Holding Company
believe that the Conversion presents a unique opportunity to establish and fund
the Foundation given the substantial amount of additional capital being raised
in the Conversion. In making such a determination, the Company and the Holding
Company considered the dilutive impact of the contribution of Common Shares to
the Foundation on the amount of Common Shares available to be offered for sale
in the Conversion. Based on such consideration, the Company and Holding Company
believe that the contribution to the Foundation in excess of the 10% annual
deduction limitation is justified given the Company's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the communities served by the
Company. In this regard, assuming the sale of the Common Shares at the mid-point
of the Valuation Range, the Holding Company would have pro forma shareholders'
equity of $356.3 million, or ____% of pro forma consolidated assets, and the
Company's pro forma tangible, core and total risk-based capital ratios would be
____%, ____% and ____%, respectively. See "REGULATORY CAPITAL COMPLIANCE,"
"CAPITALIZATION," AND "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
FOUNDATION" in the Prospectus. The amount of the contribution will not adversely
impact the financial condition of the Company and the Holding Company, and the
Company and the Holding Company therefore believe that the amount of the
charitable contribution is reasonable and is safe and sound given the Company's
and the Holding Company's pro forma capital positions.
The Company and the Holding Company have received an opinion of their
independent tax advisors that the Holding Company's contribution of its own
shares to the Foundation would not constitute an act of self-dealing, and that
the Holding Company will be entitled to a deduction in the amount of the fair
market value of the shares at the
19
<PAGE> 21
time of the contribution, subject to the annual deduction limitation described
above. The Holding Company, however, will be able to carry forward any unused
portion of the deduction for five years following the contribution, subject to
certain limitations. The Company's and the Holding Company's independent tax
advisors, however, have not rendered advice as to the fair market value for
purposes of determining the amount of the tax deduction. If the Foundation would
have been established in 1997, the Holding Company would have received a tax
benefit of approximately $_____ million (based on the Company's pre-tax income
for 1997, an assumed marginal tax rate of __% and a deduction for the
contribution of Common Shares equal to $____ million). The Holding Company is
permitted under the Code to carry over the excess contribution over the
five-year period following the contribution to the Foundation. Assuming the
close of the Offering at the mid-point of the Valuation Range, the Holding
Company estimates that all of the deduction should be deductible over the
six-year period. Neither the Company nor the Holding Company expect to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Company and the Holding Company
may consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of the
Company and the Holding Company at that time, the interests of shareholders of
the Holding Company and the depositors of the Company, and the financial
condition and operations of the Foundation.
As a private foundation, earnings and gains, if any, from the sale of
common shares or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation is required to make an annual
filing with the IRS within four and one-half months after the close of the
Foundation's fiscal year to maintain its tax-exempt status. The Foundation will
be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION
The contribution to the Foundation is expected to be subject to the
following conditions being agreed to by the Foundation in writing as a condition
to receiving OTS approval of the Conversion.
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from
the sale of the Common Shares, based on the Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
------- --------- ------- --------------------
<S> <C> <C> <C> <C>
Gross proceeds $212,500,000 $250,000,000 $289,375,000 $334,656,250
Less estimated expenses 3,172,000 3,500,000 3,845,000 4,240,000
------------ ------------ ------------ ------------
Total net proceeds $209,328,000 $246,500,000 $285,530,000 $330,416,250
============ ============ ============ ============
</TABLE>
The net proceeds from the sale of the Common Shares may vary depending
upon financial and market conditions at the time of the completion of the
Offering. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold."
The expenses detailed above are estimated. Actual expenses may be more than or
less than estimated. See "THE CONVERSION - Plan of Distribution."
The Holding Company will retain up to 50% of the net proceeds from the
sale of the Common Shares, or approximately $165.2 million at the adjusted
maximum of the Adjusted Valuation Range. Such proceeds will be used to lend up
to 8% of the proceeds of the Offering to the ESOP to acquire Common Shares in
the Offering. Based upon the issuance of 33,465,625 shares at the adjusted
maximum of the Adjusted Valuation Range, the loan to the ESOP would be $26.8
million. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership
Plan." The loan to the ESOP will have a term of up to 15 years and an interest
rate equal to ___________________________, which is currently _____%. The
balance of the net proceeds may be invested
20
<PAGE> 22
initially in investment securities, mortgage-backed securities, U.S. Government
and federal agency securities of various maturities, deposits in either the
Company or other financial institutions, or a combination thereof.
Ultimately the proceeds retained by the Holding Company may be used for
payments of dividends, repurchases of Common Shares, funding of the RRP and
other general corporate purposes. The Holding Company currently has no specific
plan to repurchase any of the Common Shares. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Shares based on its view of the appropriateness of the price of the
Common Shares as well as the Holding Company's and the Company's investment
opportunities and capital needs. OTS regulations generally prohibit the Holding
Company from repurchasing any of its capital stock for three years following the
date of completion of the Conversion, except as part of an open-market stock
repurchase program during the second and third years following the Conversion
involving no more than 5% of the outstanding capital stock during a twelve-month
period. The OTS may permit a repurchase during the first year following the
completion of the Conversion or may permit the Holding Company to exceed the 5%
limits in the second and third years if exceptional circumstances are
established. In addition, after any repurchase during the three years following
the completion of the Conversion, the Company's regulatory capital must equal or
exceed all regulatory capital requirements. See "THE CONVERSION - Restrictions
on Repurchase of Common Shares."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $165.2 million at the adjusted maximum of the Valuation
Range, will be invested by the Holding Company in the capital stock to be issued
by the Company to the Holding Company. The resulting increase in the regulatory
capital of the Company will permit the Company to expand its lending and
investment activities and to enhance customer services. The Company anticipates
that the portion of the net proceeds received by the Company will initially be
invested in overnight funds and short-term investments with maturities of one to
three years and eventually utilized for general corporate purposes, including
loan originations. The Company may also use such funds for the expansion of its
facilities, and, although no such transactions are specifically being considered
at this time, to expand operations through acquisitions of other financial
institutions, branch offices or other financial services companies, including
those located within the Company's market area or the establishment of de novo
branch offices or loan origination facilities.
MARKET FOR COMMON SHARES
Neither the Holding Company nor the Company has ever issued capital
stock to the public and, consequently, there is currently no established market
for the Common Shares. The Holding Company received conditional approval to have
the Common Shares listed on Nasdaq under the symbol "_____." One of the
conditions to the Nasdaq listing is the commitment of at least three brokerage
firms to make a market in the Common Shares. Trident and McDonald & Company have
informed the Holding Company that they intend to make a market in the Common
Shares and expect that additional market makers will be identified.
A public trading market for the stock of any issuer, including the
Holding Company, depends upon the presence of both willing buyers and willing
sellers at any given time. Accordingly, the number of active buyers and sellers
of the Common Shares at any particular time may be limited. No assurance can be
given that an active or liquid market for the Common Shares will develop after
the completion of the Conversion or, if such a market does develop, that it will
continue. Investors should consider, therefore, the potentially long-term nature
of an investment in the Common Shares.
The appraisal of the pro forma market value of the Common Shares is not
a recommendation as to the advisability of purchasing Common Shares, nor does it
represent Keller's opinion as to the price at which the Common Shares may trade.
There can be no assurance that the Common Shares may later be resold at the
price at which they are purchased in the Conversion. See "RISK FACTORS - Absence
of Established Market for the Common Shares" in the Prospectus.
21
<PAGE> 23
DIVIDEND POLICY
Following the completion of the Conversion, the Board of Directors of
the Holding Company intends to establish a dividend policy. The declaration and
payment of dividends by the Holding Company will be subject to the discretion of
the Board of Directors of the Holding Company, to the earnings and financial
condition of the Holding Company and to general economic conditions. The timing
of payments of dividends and the annual rate will depend upon a determination by
the Board of Directors of the Holding Company, in the exercise of its
discretion, that the net income, capital and consolidated financial condition of
the Holding Company and the general economy justify the declaration and payment
of dividends by the Holding Company, subject to the limitation under Ohio law
that a corporation may pay dividends only out of surplus. There can be no
assurance that dividends will be paid on the Common Shares or, if paid, that
such dividends will continue to be paid in the future. In addition, the Holding
Company will not take any action that would further the payment of a tax-free
return of capital to its shareholders during the first year following the
completion of the Conversion.
Other than earnings on the investment of the proceeds retained by the
Holding Company and interest earned on the loan to the ESOP, the principal
source of income of the Holding Company will be dividends periodically declared
and paid by the Board of Directors of the Company on the common shares of the
Company held by the Holding Company. The declaration and payment of dividends by
the Company to the Holding Company will be subject to the discretion of the
Board of Directors of the Company, to the earnings and financial condition of
the Company, to general economic conditions and to federal and state
restrictions on the payment of dividends by thrift institutions. Under
regulations of the OTS applicable to converted associations, the Company will
not be permitted to pay a cash dividend on its capital stock after the
Conversion if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the Liquidation Account or
the applicable regulatory capital requirement prescribed by the OTS. See "THE
CONVERSION - Principal Effects of the Conversion -- Liquidation Account" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources" in the Prospectus. The Company may
not pay a dividend unless such dividend also complies with an OTS regulation
limiting capital distributions by savings and loan associations. Capital
distributions, for purposes of such regulation, include, without limitation,
payments of cash dividends, repurchases, and certain other acquisitions by an
association of its shares and payments to stockholders of another association in
an acquisition of such other association. See "REGULATION - Office of Thrift
Supervision -- Limitations on Capital Distributions" in the Prospectus.
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
Articles of Incorporation of the Holding Company authorize the issuance
of __________ common shares, and ____ preferred shares. Neither the common
shares nor the preferred shares authorized by the Holding Company's Articles of
Incorporation have par value. Upon receipt by the Holding Company of the
purchase price therefor and subsequent issuance thereof, each Common Share
issued in the Conversion will be fully paid and nonassessable. Notwithstanding
the foregoing, until payments are received by the Holding Company from the ESOP
in accordance with the terms of a loan agreement to be entered into by and
between the Holding Company and the ESOP, Common Shares issued to the ESOP for
which payment in money has not been received will not be fully paid and
non-assessable. The Common Shares will represent nonwithdrawable capital and
will not and cannot be insured by the FDIC. Each Common Share will have the same
relative rights and will be identical in all respects to every other Common
Share.
None of the preferred shares of the Holding Company will be issued in
connection with the Conversion. The Board of Directors of the Holding Company is
authorized, without shareholder approval, to issue preferred shares and to fix
and state the designations, preferences or other special rights of such shares
and the qualifications, limitations and restrictions thereof. The preferred
shares may rank prior to the common shares as to dividend rights, liquidation
preferences or both. Each holder of preferred shares will be entitled to one
vote for each preferred share held of record on all matters submitted to a vote
of shareholders. The issuance of preferred shares and any conversion rights
which may be specified by the Board of Directors for the preferred shares could
adversely affect the voting power of holders of the common shares. The Board of
Directors has no present intention to issue any of the preferred shares.
22
<PAGE> 24
The following is a summary description of the rights of the common
shares of the Holding Company, including the material express terms of such
shares as set forth in the Holding Company's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of the Holding
Company, the holders of the Common Shares will be entitled to receive all assets
of the Holding Company available for distribution, in cash or in kind, after
payment or provision for payment of (i) all debts and liabilities of the Holding
Company, (ii) any accrued dividend claims, and (iii) any interests in the
Liquidation Account payable as a result of a liquidation of the Company. See
"THE CONVERSION - Liquidation Account."
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights
in the Holding Company. Each holder of Common Shares will be entitled to one
vote for each share held of record on all matters submitted to a vote of holders
of common shares. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND
THE BANK AND ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of the Holding
Company -- Elimination of Cumulative Voting" in the Prospectus.
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state statutory
and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION - Office of
Thrift Supervision -- Limitations on Capital Distributions" and "TAXATION -
Federal Taxation" in the Prospectus for a description of restrictions on the
payment of cash dividends.
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of the Holding
Company will have, as a matter of right, the preemptive right to purchase or
subscribe for shares of any class of the Holding Company, now or hereafter
authorized, or to purchase or subscribe for securities or other obligations
convertible into or exchangeable for such shares or which by warrants or
otherwise entitle the holders thereof to subscribe for or purchase any such
share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for
a description of the limitations on the repurchase of stock by the Holding
Company; "THE CONVERSION - Restrictions on Transfer of Common Shares by
Directors and Officers" for a description of certain restrictions on the
transferability of Common Shares purchased by officers and directors; and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK AND
ANTI-TAKEOVER PROVISIONS" for information regarding regulatory restrictions on
acquiring Common Shares.
EXPERTS
Keller has consented to the publication herein of the summary of its
opinion as to the estimated pro forma market value of the Company, as converted,
and the Holding Company and to the use of its name and statements with respect
to it appearing herein.
23
<PAGE> 25
LEGAL PROCEEDINGS
The Company is not presently involved in any material legal
proceedings. From time to time, the Company is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by the Company.
ADDITIONAL INFORMATION AND STOCK ORDER FORMS
The Prospectus contains the following: audited financial statements of
the Company, including statements of income and retained earnings, for the three
fiscal years ended December 31, 1997, management's discussion and analysis of
financial condition and results of operations; selected financial information of
the Company for the five fiscal years ended December 31, 1997; information
concerning the capitalization of the Company; a description of the Company's
lending, savings and investment activities; and additional information about the
business and financial condition of the Company. A copy of the Prospectus
accompanies this Summary Proxy Statement. To obtain an additional copy of the
Prospectus, contact the Company's Conversion Information Center at (330)
____________.
The Subscription Offering will commence on _________ ___, 1998, and end
at 12:00 noon, Eastern Standard Time, on _______ ____, 1998. Stock Order Forms
for purchases of Common Shares in the Subscription Offering must be received by
the Company on or before noon, Eastern Standard Time, on ______ ___, 1998.
24
<PAGE> 1
Exhibit 99.3
REVOCABLE PROXY
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
The undersigned member of The Home Savings and Loan Company of
Youngstown, Ohio, a savings and loan association incorporated under Ohio law
(the "Company"), hereby nominates, constitutes and appoints ____________ and
_______________, or either one of them, as proxy or proxies for the undersigned
member, each with full power of substitution and resubstitution, to vote all of
the votes which the undersigned member is entitled to cast at the Special
Meeting of the Members of the Company to be held at ____ __.m., Eastern Standard
Time, on _______________, 1998, at __________________, Youngstown, Ohio, and at
any adjournments thereof (the "Special Meeting"), on the following matters and
in the manner specified below:
1. The approval of the Plan of Conversion, a copy of which is
attached as Exhibit A to the Summary Proxy Statement mailed to the
undersigned member in connection with the Special Meeting.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. The adoption of the Amended Articles of Incorporation of the
Company, a copy of which is attached to the Plan of Conversion as
Exhibit I.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. The adoption of the Amended Constitution of the Company, a copy of
which is attached to the Plan of Conversion as Exhibit II.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. The approval of the contribution of up to 1,250,000 common shares
of United Community Financial Corp. (the "Contribution") to the
Home Savings Charitable Foundation (the "Foundation"), a
tax-exempt organization established by the Company in 1991 in
furtherance of the Company's commitment to the communities it
serves.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
IMPORTANT: PLEASE SIGN AND DATE THIS
REVOCABLE PROXY ON THE REVERSE SIDE.
<PAGE> 2
PROXY
5. In their discretion, upon such other matters as may properly come
before the Special Meeting.
This Revocable Proxy will be voted as directed by the undersigned
member. IF NO DIRECTION IS GIVEN, THIS REVOCABLE PROXY WILL BE VOTED FOR THE
APPROVAL OF THE PLAN OF CONVERSION, FOR THE ADOPTION OF THE AMENDED ARTICLES OF
INCORPORATION, FOR THE ADOPTION OF THE AMENDED CONSTITUTION AND FOR THE APPROVAL
OF THE CONTRIBUTION TO THE FOUNDATION.
Without affecting any vote previously taken, this Revocable Proxy may
be revoked by the undersigned at any time before it is exercised by (i)
executing and delivering to the Company a later dated proxy, or (ii) giving
notice of revocation in writing to the Secretary of the Company or in open
meeting to the inspectors of election.
Receipt of the Summary Proxy Statement of the Company and the
Prospectus of United Community Financial Corp. dated ________________, 1998, is
hereby acknowledged by the undersigned.
-----------------------------------
Signature
Dated: _____________________, 1998
NOTE: Please sign your name exactly as it appears on this Revocable Proxy. Joint
accounts require only one signature. If you are signing this Revocable Proxy as
an attorney, administrator, agent, corporation, officer, executor, trustee or
guardian, etc., please add your full title to your signature.
IMPORTANT: IF YOU RECEIVE MORE THAN ONE CARD, PLEASE SIGN AND RETURN ALL CARDS
IN THE ACCOMPANYING ENVELOPE.
<PAGE> 1
Exhibit 99.4
UNITED COMMUNITY FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR THE HOME SAVINGS AND
LOAN COMPANY OF YOUNGSTOWN, OHIO )
YOUNGSTOWN, OHIO
PROPOSED MARKETING MATERIALS
DRAFT MARCH 9, 1998
<PAGE> 2
Marketing Materials for
The Home Savings and Loan Company of Youngstown, Ohio
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Examples
II. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
III. Officer and Director Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. Counter Cards, Lobby Posters and a Tombstone Announcement
A. Explanation
B. Quantity
C. Examples
V. Community Meeting Invitation and Prospect Letters
A. Explanation
B. Examples
VI. IRA Mailing
F. Explanation
G. Example
VII. Letters
G. Explanation
H. Example
VIII. Proxygram
A. Explanation
B. Example
<PAGE> 3
I. Press Releases
A. Explanation
In an effort to ensure that all customers, community members, and other
interested investors receive prompt accurate information in a
simultaneous manner, Trident Securities, Inc. advises The Home Savings
and Loan Company to forward press releases to national and regional
publications, newspapers, radio stations, etc., at various points
during the conversion process.
Only press releases approved by Conversion Counsel will be forwarded
for publication in any manner.
B Press Releases
1. Approval of Conversion by the Office of Thrift Supervision
and the Securities and Exchange Commission (mid to late May 1998)
2. Close of Stock Offering
C. Distribution Lists (see attached) (Note: Distribution to be
coordinated with PR firm)
D. Examples (see attached)
<PAGE> 4
National Media Distribution List
--------------------------------
American Banker
- ---------------
One State Street Plaza
New York, New York 10004
Michael Weinstein
Business Wire
- -------------
212 South Tryon
Suite 1460
Charlotte, North Carolina 28281
Wall Street Journal
- -------------------
World Financial Center
200 Liberty
New York, New York 10004
SNL Securities
- -----------------
Post Office Box 2124
Charlottesville, Virginia 22902
Barrons
- -------
Dow Jones & Company
Barron's Statistical Information
200 Burnett Road
Chicopee, Massachusetts 01020
Investors Business Daily
- ------------------------
12655 Beatrice Street
Post Office Box 661750
Los Angeles, California 90066
Local Media List
--------------------
(Provided by PR Firm)
<PAGE> 5
D. Press Release
FOR IMMEDIATE RELEASE
---------------------------
For More Information Contact:
Douglas M. McKay, President
Telephone: (330) 742-0500
THE HOME SAVINGS AND LOAN COMPANY STOCK SALE APPROVED
-------------------------------------------------------
Youngstown, Ohio, _________, 1998 - Mr. Douglas M. McKay, President and
Chief Executive Officer of The Home Savings and Loan Company, Youngstown, Ohio,
announced today that The Home Savings and Loan Company has received approval
from the Office of Thrift Supervision and the Division of Financial Institutions
of the Department of Commerce of the State of Ohio to convert from a state
chartered mutual savings and loan association to a permanent capital stock
savings and loan association. In connection with the Conversion, The Home
Savings and Loan Company has formed a holding company, United Community
Financial Corp. to hold all of the outstanding capital stock of The Home Savings
and Loan Company.
A Prospectus and Proxy Statement describing the Plan of Conversion will
be mailed to certain members of The Home Savings and Loan Company on or about
_________, 1998. Under the Plan of Conversion, United Community Financial Corp.
is offering an estimated 25,000,000 shares of common stock at $10.00 per share.
Certain of The Home Savings and Loan Company's past and present members will
have the opportunity to purchase stock through a subscription offering that
closes on _________, 1998. Shares that are not subscribed for during the
subscription offering, if any, will be offered to the general public, with
preference given to natural persons who are residents of Columbiana, Mahoning
and Trumbull Counties, Ohio, in a community offering. The offerings are being
managed by Trident Securities, Inc., of Raleigh, North Carolina and McDonald &
Company Securities, Inc., Cleveland, Ohio.
As a result of the Conversion, The Home Savings and Loan Company will
be structured in the stock form, just like all commercial banks and an
increasing number of savings institutions, and will become a subsidiary of
United Community Financial Corp.
According to Mr. McKay, "Our day to day operations will not change as
a result of the Conversion and deposits will continue to be insured by the FDIC
up to the applicable legal limits".
The Home Savings and Loan Company is headquartered in Youngstown, Ohio.
The Bank was organized in 1889. At December 31, 1997, The Home Savings and Loan
Company had total assets of $1.0 billion and total equity of $141.4 million.
Customers or interested members of the community with questions
concerning the stock offering should call the institution at (330)_______ or
visit any Home Savings and Loan Company office.
<PAGE> 6
D. Press Release FOR IMMEDIATE RELEASE
---------------------------------
Contact: Douglas M. McKay, President
Telephone: (330) 742-0500
UNITED COMMUNITY FINANCIAL CORP. HOLDING COMPANY FOR
----------------------------------------------------
THE HOME SAVINGS AND LOAN COMPANY,
----------------------------------
COMPLETES INITIAL STOCK OFFERING
--------------------------------
Youngstown, Ohio _________, 1998 - Douglas M. McKay, President and
Chief Executive Officer of The Home Savings and Loan Company, Youngstown, Ohio,
announced today that United Community Financial Corp., the proposed holding
company for The Home Savings and Loan Company, has completed its initial common
stock offering. In connection with the stock offering, United Community
Financial Corp. sold a total of _______ shares at $10 per share. It is
anticipated that the common stock of United Community Financial Corp. will begin
trading on the NASDAQ National Market System on _________, 1998 under the symbol
"____". Trident Securities, Inc. and McDonald & Company Securities, Inc. will be
market makers in the stock.
The net proceeds contributed to The Home Savings and Loan Company upon
conversion will substantially increase its capital. The Home Savings and Loan
Company will use the funds contributed to it for general corporate purposes,
including, initially, local lending and investment in short-term U.S. Government
and agency obligations.
On _______, 1998, The Home Savings and Loan Company's Plan of
Conversion was approved by The Home Savings and Loan Company's depositor and
borrower members at a Special Meeting that was held at the main office of the
institution.
Mr. McKay stated, "The Officers and Board of Directors of The Home
Savings and Loan Company express their thanks for the response by customers and
the community to the stock
<PAGE> 7
offering. The Home Savings and Loan Company looks forward to serving the needs
of its customers as a stock institution."
<PAGE> 8
II. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves to answer some of the most commonly asked
questions in "plain, everyday language." Although most of the answers
are taken verbatim from the Prospectus and Proxy Statement, it assists
the individual in finding answers to simple questions.
Conversion Counsel approves the language for each Question and Answer.
Trident Securities, Inc. and The Home Savings and Loan Company and it's
advertising agency will be responsible for any introductory or
concluding remarks, design, layout, color, and paper stock. This will
be coordinated through Trident Securities, Inc. in conjunction with the
financial printer.
B. Method of Distribution
There are three primary methods of distribution of the Question and
Answer brochure. However, regardless of the method of distribution, the
brochure is always accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial
mailing to all members of The Home Savings and Loan Company.
2. Question and Answer brochures are available in The Home Savings and
Loan Company's offices.
3. Question and Answer brochures are sent out in a standard
information packet to all interested investors who phone the
Conversion Information Center requesting information.
C. Example
<PAGE> 9
THE HOME SAVINGS AND LOAN COMPANY
YOUNGSTOWN, OHIO
Questions and Answers Regarding the Subscription and Community Offering
MUTUAL TO STOCK CONVERSION
--------------------------
THE HOME SAVINGS AND LOAN COMPANY'S Board of Directors has unanimously voted to
convert THE HOME SAVINGS AND LOAN COMPANY from its present mutual form to a
stock institution, subject to approval of the conversion by THE HOME SAVINGS AND
LOAN COMPANY'S members and regulatory authorities. Complete details on the
conversion, including reasons for conversion, are contained in the Prospectus
and Proxy Statement. We urge you to read them carefully.
This brochure is provided to answer basic questions you might have about the
conversion. Remember, the conversion will not affect the rate on any of your
savings accounts, deposit certificates, or loans.
1. Q. WHAT IS A "CONVERSION"?
A. Conversion is a change in the legal form of organization. THE
HOME SAVINGS AND LOAN COMPANY currently operates as a
state-chartered mutual savings and loan association with no
shareholders. Through the conversion, THE HOME SAVINGS AND
LOAN COMPANY will form a holding company, UNITED COMMUNITY
FINANCIAL CORP., which will ultimately own all of the
outstanding stock of the THE HOME SAVINGS AND LOAN COMPANY.
UNITED COMMUNITY FINANCIAL CORP. will issue common stock in
the conversion, as described below, and will be a
publicly-owned company.
2. Q. WHY IS THE HOME SAVINGS AND LOAN COMPANY CONVERTING?
A. As a permanent capital stock savings and loan association, THE
HOME SAVINGS AND LOAN COMPANY does not have stockholders and
has no authority to issue stock. By converting to the stock
form of organization, THE HOME SAVINGS AND LOAN COMPANY will
be structured in the form used by all commercial banks, most
business entities and a growing number of savings
institutions. The Conversion will be important to the future
growth and performance of THE HOME SAVINGS AND LOAN COMPANY by
providing a larger capital base from which it may operate,
enhance future access to capital markets and, if desired,
enhance THE HOME SAVINGS AND LOAN COMPANY'S ability to
diversify and
<PAGE> 10
expand it's financial service-related activities. Currently,
THE HOME SAVINGS AND LOAN COMPANY has no specific plans,
agreements, arrangements or understandings regarding such
diversification.
3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS ACCOUNTS,
CERTIFICATES OF DEPOSIT OR LOANS WITH THE HOME SAVINGS AND
LOAN COMPANY?
A. No. The conversion will not change the amount, interest rate
or withdrawal rights of any savings and checking accounts or
certificates of deposit. The rights and obligations of
borrowers under their loan agreements will not be affected.
However, upon consummation of the conversion, THE HOME SAVINGS
AND LOAN COMPANY'S deposit account holders will no longer have
voting rights in THE HOME SAVINGS AND LOAN COMPANY, and will
not have voting rights in UNITED COMMUNITY FINANCIAL CORP.
unless they purchase common stock.
4. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR
MANAGEMENT?
A. No. The conversion will not cause any changes in personnel or
management. The normal day-to-day operations will continue as
before.
5. Q. DID THE BOARD OF DIRECTORS OF THE HOME SAVINGS AND LOAN
COMPANY APPROVE THE CONVERSION?
A. Yes. The Board of Directors unanimously adopted the Plan of
Conversion on December 9, 1997.
6 Q. HOW WILL THE COMMUNITY BENEFIT FROM THE CONVERSION?
A. In 1991, the Company established the Home Savings Charitable
Foundation, which is an exempt organization under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"). Each year since the Foundation was established,
the Company has made annual contributions to the Foundation in
furtherance of the Company's commitment to the communities
that it serves. In connection with the Conversion, the Holding
Company intends to contribute to the Foundation approximately
5.0% of the number of Common Shares issued in the Conversion,
subject to the overall limitation of 1,250,000 common shares.
The Company and the Holding Company believe that the
contribution of common shares to the Foundation will benefit
the long term value of the Company's community banking
franchise by enabling the communities it serves to share in
the potential growth and success of the Company and the
Holding Company over the long term.
THE SUBSCRIPTION AND COMMUNITY OFFERING
---------------------------------------
<PAGE> 11
7. Q. WHO IS ENTITLED TO SUBSCRIBE UNITED COMMUNITY FINANCIAL CORP.
COMMON STOCK?
A. Rights to subscribe for common stock will be given in order of
priority to (i) each account holder, who, at the close of
business on July 31, 1996 (the "Eligibility Record Date"), had
one or more deposit accounts with deposit balances, in the
aggregate, of $50 or more (a "Qualifying Deposit") with the
Company (the "Eligible Account Holders"), (ii) the United
Community Financial Corp. Employee Stock Ownership Plan (the
"ESOP"), (iii) each account holder who, at the close of
business on March 31, 1998 (the "Supplemental Eligibility
Record Date"), had a Qualifying Deposit with the Company (the
"Supplemental Eligible Account Holders"), (iv) members of the
Company eligible to vote at the Special Meeting ("Other
Eligible Members") and (v) directors, officers and employees
of the Company.
IT IS THE RESPONSIBILITY OF EACH SUBSCRIBER QUALIFYING AS AN
ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER
OR OTHER MEMBER TO LIST COMPLETELY ALL ACCOUNT NUMBERS FOR
QUALIFYING SAVINGS ACCOUNTS AS OF THE QUALIFYING DATE ON THE
STOCK ORDER FORM. FAILURE TO DO SO MAY RESULT IN A REDUCTION
OR ELIMINATION OF A SUBSCRIBER'S ORDER.
Shares that are not subscribed for during the Subscription
Offering, if any, may be offered to the general public through
a Community Offering with preference given to natural persons
who are residents of Mahoning, Columbiana and Trumbull
Counties, Ohio (the "Local Community"). It is anticipated that
any shares not subscribed for in the Subscription and
Community Offerings will be offered to certain members of the
general public through a syndicate of registered broker
dealers pursuant to selected dealers agreements in a
Syndicated Community Offering.
8. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. Eligible subscribers wishing to exercise their subscription
rights must return the enclosed Stock Order Form to THE HOME
SAVINGS AND LOAN COMPANY. The Stock Order Form must be
completed and returned along with full payment or appropriate
instructions authorizing a withdrawal from a deposit account
at THE HOME SAVINGS AND LOAN COMPANY on or prior to the close
of the Subscription Offering which will be 12:00 noon, Eastern
Daylight Time, on ___________, 1998, unless extended.
9. Q. HOW CAN I PAY FOR MY SUBSCRIPTION STOCK ORDER?
A. First, you may pay for your order in cash (if delivered in
person to THE HOME SAVINGS AND LOAN COMPANY) or by check or
money order. Subscription
<PAGE> 12
funds will earn interest at THE HOME SAVINGS AND LOAN
COMPANY'S passbook rate from the day we receive them until the
completion or termination of the conversion.
<PAGE> 13
Second, you may authorize us to withdraw funds from your THE
HOME SAVINGS AND LOAN COMPANY savings account or certificate
of deposit without early withdrawal penalty. These funds will
continue to earn interest at the rate in effect for your
account until completion of the offering at which time your
funds will be withdrawn for your purchase. Funds remaining in
this account (if any) will continue at the contractual rate
unless the withdrawal reduces the account balance below the
applicable minimum in which case you will receive interest at
the passbook rate. A hold will be placed on your account for
the amount you specify for stock payment. You will not have
access to these funds from the day we receive your order until
the completion or termination of the conversion.
If you want to use funds in your Individual Retirement Account
held at THE HOME SAVINGS AND LOAN COMPANY to subscribe for
stock, call our Conversion Information Center at (330)
________ for assistance. There will be no early withdrawal or
IRS penalties incurred by these transactions. It takes several
days to process the necessary IRA forms and, therefore, it is
necessary that you make arrangements by ___________, 1998, to
accommodate your order.
10. Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED?
A. UNITED COMMUNITY FINANCIAL CORP. is offering up to 28,937,500
shares of common stock at a price of $10.00 per share. The
number of shares may be decreased to 21,250,000 or increased
to 33,465,625 in response to the independent appraiser's final
determination of the consolidated pro forma market value of
UNITED COMMUNITY FINANCIAL CORP. and THE HOME SAVINGS AND LOAN
COMPANY, as converted.
11. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT I CAN
PURCHASE DURING THE OFFERING PERIOD?
A. The minimum number of common shares any person may purchase is
25 shares. No Stock Order Form will be accepted for less than
$250. Each Eligible Account Holder, Supplemental Eligible
Account Holder and Other Eligible Member may purchase in the
Subscription Offering not more than 30,000 common shares.
<PAGE> 14
12. Q. HOW WAS IT DETERMINED THAT BETWEEN 21,250,000 SHARES AND
28,937,500 SHARES OF STOCK WOULD BE ISSUED AT $10.00 PER
SHARE?
A. The share range was determined through an appraisal of UNITED
COMMUNITY FINANCIAL CORP. and THE HOME SAVINGS AND LOAN
COMPANY, as converted, by Keller & Company, Inc., an
independent appraisal firm specializing in the thrift
industry.
13. Q. MUST I PAY A COMMISSION ON THE STOCK FOR WHICH I SUBSCRIBE?
A. No. You will not pay a commission on stock purchased in the
Subscription Offering, the Community Offering, if any, or
Syndicated Community Offering, if any.
14. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR STOCK PURCHASES?
A. Yes. THE HOME SAVINGS AND LOAN COMPANY will pay its current
passbook rate from the date funds are received (with a
completed Stock Order Form) during the subscription and
Community Offerings until completion of the conversion.
15. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM, WHAT SHOULD I DO?
A. THE HOME SAVINGS AND LOAN COMPANY will mail you another order
form, or you may obtain one from any HOME SAVINGS AND LOAN
COMPANY'S office. If you need assistance in obtaining or
completing a Stock Order Form, please call or visit the
Conversion Information Center at (330) ________.
16. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE STOCK?
A. Following the completion of the Conversion, the Board of
Directors of the Holding Company intends to establish a
dividend policy. The declaration and payment of dividends or
other capital distributions by the Holding Company will be
subject to the discretion of the Board of Directors of the
Holding Company, to the earnings and financial condition of
the Holding Company and the Company and to general economic
conditions. The timing of the payment of dividends and the
annual rate will depend upon a determination by the Board of
Directors of the Holding Company that the net income, capital
and financial condition of the Holding Company and the general
economy justify the declaration and payment of dividends by
the Holding Company. No assurance can be given, however, that
dividends will be paid or, if paid, will continue in the
future. In accordance with OTS policy, the Holding Company
will not undertake an extraordinary tax-free return of capital
to its shareholders during the first year following the
completion of the Conversion.
<PAGE> 15
17. Q. HOW MUCH STOCK DO THE DIRECTORS AND OFFICERS OF THE HOME
SAVINGS AND LOAN COMPANY INTEND TO PURCHASE THROUGH THE
SUBSCRIPTION OFFERING?
A. Directors and executive officers intend to purchase
approximately $____ million of the stock to be offered in the
conversion (approximately ____% if _________ shares are sold
in the offering). The purchase price paid by directors and
officers will be the same as that paid by customers and the
general public.
18. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY?
A. No. Pursuant to federal regulations, subscription rights
granted to Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members may be exercised only by the
person(s) to whom they are granted. Any person found to be
transferring or selling subscription rights will be subject to
forfeiture of such rights and other penalties.
19. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD ME
THAT I AM STILL ELIGIBLE TO BUY STOCK. IS THAT TRUE?
A. If you were an account holder on the Eligibility Record Date
(July 31, 1996) the Supplemental Eligibility Record Date
(_______, 1998) or the Voting Record Date (_________, 1998)
you are entitled to purchase stock regardless of whether or
not you continue to hold your THE HOME SAVINGS AND LOAN
COMPANY account.
20. Q. MAY I OBTAIN A LOAN FROM THE HOME SAVINGS AND LOAN COMPANY
USING STOCK AS COLLATERAL TO PAY FOR MY SHARES?
A. No. Federal regulations do not allow THE HOME SAVINGS AND LOAN
COMPANY to make loans for this purpose, but another financial
institution may make a loan for this purpose.
21. Q. WILL THE FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) INSURE
THE SHARES OF STOCK?
A. No. The shares will not be insured by the FDIC. However, the
Savings Association Insurance Fund of the FDIC will continue
to insure savings accounts and certificates of deposit up to
the applicable limits allowed by law.
22. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION?
A. UNITED COMMUNITY FINANCIAL CORP. has never issued stock
before, and consequently there is no established market for
its common stock. UNITED
<PAGE> 16
COMMUNITY FINANCIAL CORP. has received conditional approval to
have the common stock listed on the NASDAQ National Market
System under the symbol "____". Trident Securities, Inc. and
McDonald & Company Securities, Inc. intends to make a market
in the common stock. However, purchasers of common stock
should recognize that no assurance can be given that an active
and liquid trading market will develop or, if developed, will
be maintained.
<PAGE> 17
23. Q. CAN I PURCHASE STOCK USING FUNDS IN A THE HOME SAVINGS AND
LOAN COMPANY IRA ACCOUNT?
A. Yes. Contact the Conversion Information Center at (330)
________ for additional information. It takes several days to
process the necessary IRA forms and, therefore, it is
necessary that you make arrangements by ________, 1998, to
accommodate your order.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
-----------------------------------------
24. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO
BE HELD TO CONSIDER THE PLAN OF CONVERSION?
A. At the Special Meeting of Members to be held on ________,
1998, you are eligible to vote if you are one of the "Voting
Members," who are holders of THE HOME SAVINGS AND LOAN
COMPANY'S deposits or other authorized accounts as of
________, 1998, the "Voting Record Date" for the Special
Meeting. However, members of record as of the close of
business on the Voting Record Date who cease to be depositors
prior to the date of the Special Meeting are no longer members
and will not be entitled to vote at the Special Meeting. If
you are a Voting Member, you should have received a proxy
statement and proxy card with which to vote.
25. Q. HOW MANY VOTES DO I HAVE AS A VOTING MEMBER?
A. The Home Savings and Loan Company's charter provides that each
account holder is entitled to one vote for each $100, or
fraction thereof, on deposit in such account. Borrowers of THE
HOME SAVINGS AND LOAN COMPANY are entitled to 1 vote for each
loan outstanding as of ________, which continues to be
outstanding as of _______. No member may cast more than 1,000
votes.
26. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS
APPROVED, WILL I BE PROHIBITED FROM BUYING STOCK DURING THE
SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts
you from purchasing stock in either the Subscription Offering
or the Community Offering.
27. Q. WHAT HAPPENS IF THE HOME SAVINGS AND LOAN COMPANY DOES NOT
GET ENOUGH VOTES TO APPROVE THE PLAN OF CONVERSION?
A. The Conversion would not take place and THE HOME SAVINGS AND
LOAN COMPANY would remain a mutual savings and loan
association.
<PAGE> 18
28. Q. AS A VOTING MEMBER OF THE HOME SAVINGS AND LOAN COMPANY, AM I
REQUIRED TO VOTE?
A. No. However, failure to return your proxy card will have the
same effect as a vote "Against" the Plan of Conversion.
29. Q. WHAT IS A PROXY CARD?
A. A Proxy Card gives you the ability to vote without attending
the Special Meeting in person. However, you may attend the
meeting and vote in person, even if you have previously
returned your proxy card.
30. Q. HOW DOES THE CONVERSION AFFECT ME?
A. The conversion is intended, among other things, to assist THE
HOME SAVINGS AND LOAN COMPANY in maintaining and expanding its
many services to THE HOME SAVINGS AND LOAN COMPANY'S customers
and community. By purchasing stock, you will also have the
opportunity to invest in UNITED COMMUNITY FINANCIAL CORP., the
proposed holding company for THE HOME SAVINGS AND LOAN
COMPANY. However, there is no obligation to purchase stock.
The purchase of stock is strictly optional.
31. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK
OFFERING?
A. You may call the Conversion Information Center, at (330)
________ for further information or a copy of the Prospectus,
Stock Order Form, Proxy Statement and Proxy Card.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. A PROSPECTUS CAN BE
OBTAINED AT A THE HOME SAVINGS AND LOAN COMPANY OFFICE OR BY CALLING THE
CONVERSION INFORMATION CENTER. THERE SHALL BE NO SOLICITATION OF AN OFFER OR
SALE OF STOCK IN ANY JURISDICTION IN WHICH ANY OFFER, SOLICITATION OF AN OFFER
OR SALE OF STOCK WOULD BE UNLAWFUL.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY
INSURED OR GUARANTEED.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have established a
Conversion Information Center to answer your questions. Please call :
(330) ________
<PAGE> 19
III. Officer and Director Brochure (optional)
A. Explanation
An Officer and Director Brochure merely highlights the intended stock
purchases shown in the Prospectus.
B. Method of Distribution
There are three primary methods of distribution of Officer and Director
Brochures. However, regardless of the method of distribution, they are
always accompanied by a Prospectus.
1. An Officer and Director Brochure is sent out in the initial
mailing to all members of the The Home Savings and Loan
Company.
2. Officer and Director Brochures will be available in any of The
Home Savings and Loan Company's offices.
3. Officer and Director Brochures are sent out in a standard
information packet to all interested investors who telephone
the Conversion Information Center requesting information.
<PAGE> 20
OFFICER AND DIRECTOR STOCK PURCHASE COMMITMENTS
<TABLE>
<CAPTION>
Aggregate Percent of
Total Shares Purchase Price Total Offering (1)
------------ -------------- ------------------
<S> <C> <C> <C>
Name and Position
- -------------------------
Richard M. Barrett
James E. Bennett, Jr.
Charles B. Cushwa, III
Donald R. Inglis
Patrick A. Kelly
Gary Keller
William A. Holdford
Douglas M. McKay
Herbert F. Schuler, Sr.
Clarence R. Smith, Jr.
Robert J. Steele, Jr.
Donald J. Varner
John F. Zimmerman, Jr.
All directors and executive officers
as a group (13 persons)
TOTAL
<FN>
- -------------------
(1) At the midpoint and assumes enough shares will be available to satisfy
all subscriptions.
</TABLE>
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO
SOLICITATION OF AN OFFER OR SALE OF STOCK IN ANY JURISDICTION IN WHICH
ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE UNLAWFUL.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR
GUARANTEED.
<PAGE> 21
IV. Counter Cards, Lobby Posters and the Tombstone Announcement
A. Explanation
Counter cards, lobby posters and the tombstone announcement serve three
purposes: (1) As a notice to The Home Savings and Loan Company's
customers and members of the local community that the stock sale is
underway; (2) to remind the customers of the end of the Subscription
Offering; and (3) to invite members of the community to an
informational meeting, if applicable. Trident has learned in the past
that many people need reminding of the deadline for subscribing and
therefore we suggest the use of these simple reminders.
B. Quantity
Approximately 3 - 4 counter cards may be used at The Home Savings and
Loan Company's offices, at teller windows and on customer service
representatives' desks. These counter cards will be exact duplicates of
the lobby poster and will be no larger than 8-1/2" x 11".
Approximately 1 - 2 lobby posters may be used at the offices of The
Home Savings and Loan Company. These posters will be approximately 2' x
3'.
Tombstone announcements may be used for placement in local newspapers.
The advertisements will run no more than twice each in the local
newspaper. The ads will be no larger than 8-1/2" x 11".
C. Examples enclosed
<PAGE> 22
POSTER
The Home Savings and Loan Company of Youngstown
STOCK OFFERING MATERIALS
AVAILABLE HERE
Customer Priority Rights for the Stock Offering
by United Community Financial Corp.
Expire on ________, 1998
<PAGE> 23
Poster
For the first time ever, you can own stock in The Home Savings and Loan Company.
Customers of The Home Savings and Loan Company have the opportunity to invest in
The Home Savings and Loan Company by purchasing common stock in the newly-formed
holding company, United Financial Corporation.
The common stock is being offered in a Subscription Offering to eligible deposit
account and borrower members of The Home Savings and Loan Company until
__________, 1998.
A Proxy Statement and Prospectus relating to these securities were recently
mailed to all eligible customers. Additional Prospectuses, relating to these
securities, are available at any of our branch offices or by calling our
Conversion Information Center at (330) ________.
Your Subscription Rights expire on ___________, 1998.
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This announcement shall not constitute an offer to sell or a solicitation of
an offer to buy stock. The offer is made only by the Prospectus. There shall
be no sale of stock in any state in which any offer, solicitation
of an offer or sale of stock would be unlawful.
<PAGE> 24
- ------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an
offer to buy these securities. The offer is made only by the Prospectus.
These shares have not been approved or disapproved by the Securities
and Exchange Commission, the Office of Thrift Supervision or the
Federal Deposit Insurance Corporation, nor has such Commission, Office
or Corporation passed upon the accuracy or adequacy of the Prospectus.
Any representation to the contrary is a criminal offense.
NEW ISSUE , 1998
- --------- ---------
UP TO 28,937,500 SHARES
These shares are being offered pursuant
to a Plan of Conversion whereby
THE HOME SAVINGS AND LOAN COMPANY
of Youngstown, Ohio will convert
from a state mutual savings and loan association
to a permanent capital stock savings and loan association
and become the wholly-owned subsidiary of
UNITED COMMUNITY FINANCIAL CORP.
COMMON STOCK
---------------
PRICE $10.00 PER SHARE
---------------
Copies of the Prospectus may be obtained in any State in which
this announcement is circulated from such of the undersigned or other
brokers and dealers as may legally offer these
securities in such state.
TRIDENT SECURITIES, INC.
MCDONALD & COMPANY SECURITIES, INC.
For a copy of the Prospectus call (330) ________.
- -------------------------------------------------------------------------------
<PAGE> 25
V. Community Meeting Materials
A. Explanation
In order to educate the public about the stock offering, Trident
suggests holding Community meetings in various locations. In an effort
to target a group of interested investors, Trident requests that each
Director and Executive Officer of The Home Savings and Loan Company
submit a list of acquaintances that he or she would like to invite to a
Community meeting.
B. Method of Distribution of Invitations and Prospect Letters
Each Director and/or Officer submits his list of prospects.
Invitations are sent to each Director's prospects through the mail. All
invitations are preceded by a Prospectus and all attendees are given a
Prospectus at the meeting.
<PAGE> 26
PROSPECT INVITATION
==============================================================================
The Directors and Officers
of
The Home Savings and Loan Company of Youngstown
cordially invite you to attend a brief
presentation regarding the stock offering of
United Community Financial Corp., our proposed holding company.
Please join us at one of the following meetings:
Place Place Place
Address Address Address
Date Date Date
at ____ p.m. at ____ p.m. at ____ p.m.
Hors d'oeuvres will be served.
Space is Limited so Please call (330) ________ if You Plan to Attend.
===============================================================================
<PAGE> 27
VI. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of
the Company in order to alert the customers that funds held in an IRA
can be used to purchase stock. Since this transaction is not as simple
as designating funds from a certificate of deposit like a normal stock
purchase, this letter informs the customer that this process is
slightly more detailed and cannot be done through the mail.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of The
Home Savings and Loan Company. These letters would be mailed following
OTS approval for the conversion and after each customer has received
the initial mailing containing a Proxy Statement and a Prospectus.
C. Example - Enclosed
<PAGE> 28
The Home Savings and Loan Company Letterhead
________, 1998
Dear Individual Retirement Account Participant:
As you know, The Home Savings and Loan Company is in the process of
converting from a state chartered mutual savings and loan association to a
permanent capital stock savings and loan association and has formed United
Community Financial Corp. to hold all of the stock of The Home Savings and Loan
Company (the "Conversion"). Through the Conversion, certain current and former
depositors of The Home Savings and Loan Company have the opportunity to purchase
shares of common stock of United Community Financial Corp. in a Subscription
Offering. United Community Financial Corp. currently is offering up to _________
shares of common stock, subject to adjustment, at a price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at The Home
Savings and Loan Company, you may use your IRA funds to subscribe for stock. If
you desire to purchase shares of common stock of United Community Financial
Corp. through your IRA, The Home Savings and Loan Company can assist you in
self-directing those funds. This process can be done without an early withdrawal
penalty and generally without a negative tax consequence to your IRA.
If you are interested in receiving more information on self-directing
your IRA, please contact our Conversion Information Center at (330) ________.
Because it takes several days to process the necessary IRA forms, a response
must be received by _______, 1998 to accommodate your interest.
Sincerely,
Douglas M. McKay
President
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the
<PAGE> 29
Prospectus. There shall be no sale of stock in any state in which any offer,
solicitation of an offer or sale of stock would be unlawful.
VII. Letters
A. Explanation
Cover letters to accompany offering materials.
B. Method of Distribution
Enclosed with the initial mailing.
C. Examples
<PAGE> 30
(Trident Letterhead)
___________, 1998
To Members and Friends of The Home Savings and Loan Company:
Trident Securities, Inc. and McDonald & Company Securities, Inc.,
members of the National Association of Securities Dealers, Inc., are assisting
The Home Savings and Loan Company in its conversion to a capital stock savings
bank and the concurrent offering of shares of common stock by United Community
Financial Corp. (the "Company"), an Ohio corporation recently formed for the
purpose of acquiring all of the stock of The Home Savings and Loan Company.
At the request of The Home Savings and Loan Company, we are enclosing
materials explaining the conversion process and your right to subscribe for
common shares of the Company. Please read the enclosed offering materials
carefully before subscribing for stock.
If you have any questions, please call the Conversion Information
Center at (330) ________.
Sincerely,
TRIDENT SECURITIES, INC.
Enclosures
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE> 31
(The Home Savings and Loan Company Letterhead)
___________, 1998
Dear Valued Customer:
The Home Savings and Loan Company is pleased to announce that we have
received regulatory approval to proceed with our plan to convert to a permanent
capital stock savings and loan association, conditioned upon receipt of approval
by The Home Savings and Loan Company's members, among other things. This stock
conversion is the most significant event in the history of The Home Savings and
Loan Company in that it allows customers, directors and employees an opportunity
to subscribe for stock in United Community Financial Corp., the proposed holding
company for The Home Savings and Loan Company.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at The
Home Savings and Loan Company, or the terms or conditions of any loans to
existing borrowers under their individual contract arrangements with The Home
Savings and Loan Company. Let us also assure you that the stock Conversion will
not result in any changes in the management, personnel or the Board of Directors
of The Home Savings and Loan Company.
A special meeting of the members of The Home Savings and Loan Company
will be held on ___________, 1998 at _______, Eastern Daylight Time, at The Home
Savings and Loan Company's main office to consider and vote upon The Home
Savings and Loan Company's Plan of Conversion. Enclosed is a proxy card. Your
Board of Directors solicits your vote "FOR" The Home Savings and Loan Company's
Plan of Conversion. A vote in favor of the Plan of Conversion does not obligate
you to purchase stock. If you do not plan to attend the special meeting, please
sign and return your proxy card promptly. Your vote is important to us.
As one of our valued members, you have the opportunity to invest in The
Home Savings and Loan Company's future by purchasing stock in United Community
Financial Corp. during the Subscription Offering, without paying a sales
commission.
If you decide to exercise your subscription rights to purchase shares,
you must return a properly completed stock order form together with full payment
for the subscribed shares so that it is received by The Home Savings and Loan
Company not later than 12:00 Noon, Eastern Daylight Time on _________, 1998.
We also have enclosed a Prospectus and Proxy Statement which fully
describes the conversion and provides financial and other information about
United Community Financial Corp. and The Home Savings and Loan Company. Please
review these materials carefully before you vote or invest. For your convenience
we have established a Conversion Information Center. If you have any questions,
please call the Conversion Information Center at (330)___________.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Douglas M. McKay
President
Enclosures
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE> 32
(Optional)
(The Home Savings and Loan Company Letterhead)
____________, 1998
Dear Interested Investor:
The Home Savings and Loan Company is pleased to announce that we have
received regulatory approval to proceed with our plan to convert to a permanent
capital stock savings and loan association, conditioned upon receipt of approval
by The Home Savings and Loan Company's members, among other things. This stock
conversion is the most significant event in the history of The Home Savings and
Loan Company in that it allows customers, community members, directors and
employees an opportunity to subscribe stock in United Community Financial Corp.,
the proposed holding company for The Home Savings and Loan Company.
We want to assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of The Home
Savings and Loan Company.
Enclosed is a Prospectus which fully describes The Home Savings and
Loan Company, its management, board and financial condition. Please review it
carefully before you make an investment decision. If you decide to invest,
please return to The Home Savings and Loan Company a properly completed stock
order form together with full payment for shares at your earliest convenience.
For your convenience we have established a Conversion Information Center. If you
have any questions, please call the Conversion Information Center at (330)
________.
Sincerely,
Douglas M. McKay
President
Enclosures
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE> 33
(The Home Savings and Loan Company Letterhead)
____________, 1998
Dear Friend:
The Home Savings and Loan Company is pleased to announce that we have
received regulatory approval to proceed with our plan to convert to a permanent
capital stock savings and loan association, conditioned upon receipt of approval
by The Home Savings and Loan Company's members, among other things. This stock
conversion is the most significant event in the history of The Home Savings and
Loan Company in that it allows customers, directors and employees an opportunity
to subscribe stock in United Community Financial Corp., the proposed holding
company for The Home Savings and Loan Company.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at The
Home Savings and Loan Company, or the terms or conditions of any loans to
existing borrowers under their individual contract arrangements with The Home
Savings and Loan Company. Let us also assure you that the Conversion will not
result in any changes in the management, personnel or the Board of Directors of
The Home Savings and Loan Company.
Our records indicate that you were a depositor of The Home Savings and
Loan Company on July 31, 1996. Therefore, under applicable law, you are entitled
to subscribe for Common Stock in The Home Savings and Loan Company's
Subscription Offering. Orders submitted by you and others in the Subscription
Offering are contingent upon the current members' approval of the Plan of
Conversion at a special meeting of members to be held on __________, 1998 and
upon receipt of all required regulatory approvals.
If you decide to exercise your subscription rights to purchase shares,
you must return a properly completed stock order form together with full payment
for the subscribed shares so that it is received at The Home Savings and Loan
Company not later than 12:00 Noon, Eastern Daylight Time on __________, 1998.
Enclosed is a Prospectus which fully describes The Home Savings and
Loan Company, its management, board and financial condition. Please review it
carefully before you invest. For your convenience, we have established a
Conversion Information Center. If you have any questions, please call the
Conversion Information Center at (330) ________.
Sincerely,
Douglas M. McKay
President
Enclosures
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE> 34
(Optional)
(The Home Savings and Loan Company Letterhead)
___________, 1998
Dear Member:
As a qualified member of The Home Savings and Loan Company (the
"Bank"), you have the right to vote upon the Bank's proposed Plan of Holding
Company Conversion and also generally have the right to subscribe for shares of
common stock of United Community Financial Corp., the proposed holding company
for The Home Savings and Loan Company through the mutual to stock conversion of
The Home Savings and Loan Company. However, the proposed plan of Holding Company
Conversion provides that United Community Financial Corp. will not offer stock
in any state in which compliance with the securities laws would be impracticable
for reasons of cost or otherwise. Unfortunately, the securities laws of your
state would require The Home Savings and Loan Company, Inc. to register its
common stock and /or its employees in order to sell the common stock to you.
Such registration would be prohibitively expensive or otherwise impracticable in
light of the few members residing in your state.
You may vote on the proposed Plan of Holding Company Conversion and we
urge you to read the enclosed Summary Proxy Statement and execute the enclosed
Revocable Proxy. Questions regarding the execution of the Revocable Proxy should
be directed to The Home Savings and Loan Company's Conversion Information Center
at (330)___________.
Sincerely,
Douglas M. McKay
President
Enclosures
The shares of common stock offered in the conversion are not
savings accounts or deposits and will not be insured by the
Federal Deposit Insurance Corporation or any other government
agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE> 35
VIII. Proxy Reminder
A. Explanation
A proxygram is used when the majority of votes needed to adopt the Plan
of Conversion is still outstanding. The proxygram is mailed to those
"target vote" depositors who have not previously returned their signed
proxy.
The target vote depositors are determined by the conversion agent.
B. Example enclosed
<PAGE> 36
B. Example
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
P R O X Y G R A M
(LOGO)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
VOTING AGAINST THE PLAN OF CONVERSION.
VOTING FOR THE PLAN OF CONVERSION WILL NOT AFFECT THE INSURANCE COVERAGE OF YOUR
ACCOUNTS. ALL ACCOUNTS WILL CONTINUE TO BE INSURED UP TO THE LEGAL LIMIT
($100,000 PER ACCOUNT AS DEFINED BY LAW) BY THE SAVINGS ASSOCIATION INSURANCE
FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION, AN AGENCY OF THE U.S.
GOVERNMENT.
REMEMBER, VOTING FOR THE PLAN OF CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR
DELIVER IT TO A THE HOME SAVINGS AND LOAN COMPANY OFFICE.
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION.
THANK YOU!
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE BOARD OF DIRECTORS OF THE
HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN
<PAGE> 37
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
STATEMENTS OF INCOME
The following Statements of Income of the Company for the year ended
December 31, 1997, have been audited by Deloitte & Touche LLP, independent
auditors, and for the years ended December 31, 1996 and 1995, by packer, Thomas
& Co., independent auditors, whose reports thereon appear elsewhere in this
Prospectus. These Statements should be read in conjunction with the Financial
Statements and related Notes included elsewhere herein.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 54,148 $ 48,586 $ 43,093
Mortgage-backed securities:
Available for sale 5,122 6,871 6,969
Held to maturity 19,024 21,988 23,827
Investment securities:
Available for sale 2,169 1,226 2,253
Held to maturity 843 1,780 2,185
FHLB stock dividend 766 695 632
Other interest-earning assets 613 603 875
-------- -------- --------
Total interest income 82,685 81,749 79,834
-------- -------- --------
Interest expense:
Deposits 40,463 43,009 41,104
-------- -------- --------
Total interest expense 40,463 43,009 41,104
-------- -------- --------
Net interest income 42,222 38,740 38,730
Recovery of loan loss allowances (1,546) -- --
-------- -------- --------
Net interest income after (recovery of)
provision for loan allowances 43,768 38,740 38,730
-------- -------- --------
Noninterest income:
Service fees and other charges 1,092 755 681
Net (losses) gains:
Mortgage-backed securities 80 -- 321
Investment securities -- 45 74
Other (losses) gains (34) (45) 9
Other income 426 536 469
-------- -------- --------
Total noninterest income 1,564 1,291 1,554
-------- -------- --------
Noninterest expenses:
Salaries and employee benefits 14,710 12,735 11,033
Occupancy 1,256 1,250 1,194
Equipment and data processing 2,534 2,181 1,768
Deposit insurance premiums 588 2,033 2,064
Federal deposit insurance special assessment -- 5,903 --
Franchise tax 1,752 1,643 1,398
Advertising 1,045 1,000 1,162
Other 3,418 3,323 3,376
-------- -------- --------
Total noninterest expenses 25,303 30,068 21,995
======== ======== ========
Income before income taxes 20,029 9,963 18,289
Income taxes 6,982 3,332 6,707
-------- -------- --------
Net income $ 13,047 $ 6,631 $ 11,582
======== ======== ========
</TABLE>
See Notes to Financial Statements.
26
<PAGE> 1
Exhibit 99.5
March 11, 1998
The Board of Directors
The Home Savings and Loan Company
275 Federal Plaza W.
Box 1111
Youngstown, Ohio 44503-1203
Re: Conversion Valuation Agreement
Attn.: Douglas M. McKay, President
Keller & Company, Inc. (hereinafter referred to as KELLER) hereby
proposes to prepare an independent conversion appraisal of The Home Savings and
Loan Company, Youngstown, Ohio (hereinafter referred to as HOME), relating to
the conversion of HOME from a mutual to a stock institution. KELLER will provide
a pro forma valuation of the market value of the shares to be sold in the
proposed conversion of HOME.
KELLER is a financial consulting firm that primarily serves the
financial institution industry. KELLER is experienced in evaluating and
appraising thrift institutions and thrift institution holding companies. KELLER
is an experienced conversion appraiser for filings with the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), and
is also approved by the Internal Revenue Service as an expert in bank and thrift
stock valuations.
KELLER agrees to prepare the conversion appraisal in the format
required by the OTS in a timely manner for prompt filing with the OTS and the
Securities and Exchange Commission and also agrees to prepare an analysis of the
effect of the establishment of a charitable foundation in connection with the
conversion in the conversion appraisal. KELLER will provide any additional
information as requested and will complete appraisal updates in accordance with
regulatory requirements.
The appraisal report will provide a detailed description of HOME,
including its financial condition, operating performance, asset quality, rate
sensitivity position,
<PAGE> 2
liquidity level and management qualifications. The appraisal will include a
description of HOME's market area, including both economic and demographic
characteristics and trends. An analysis of other publicly-traded thrift
institutions will be performed to determine a comparable group, and adjustments
to the appraised value will be made based on a comparison of HOME with the
comparable group.
In making its appraisal, KELLER will rely upon information in the
Subscription and Community Offering Circular (Prospectus), including the
financial statements. Among other factors, KELLER will also consider the
following: the present and projected operating results and financial condition
of HOME; the economic and demographic conditions in Home's existing marketing
area; pertinent historical financial and other information relating to HOME; a
comparative evaluation of the operating and financial statistics of HOME with
those of other thrift institutions; the proposed price per share; the aggregate
size of the offering of common stock; the impact of the conversion on HOME's
capital position and earnings potential; HOME's proposed dividend policy; and
the trading market for securities of comparable institutions and general
conditions in the market for such securities. In preparing the appraisal, KELLER
will rely solely upon, and assume the accuracy and completeness of, financial
and statistical information provided by HOME, and will not independently value
the assets or liabilities of HOME in order to prepare the appraisal.
Upon completion of the conversion, KELLER will make a presentation to
the board of directors of HOME to review the content of the appraisal, the
format and the assumptions. A written presentation will be provided to each
board member as a part of the overall presentation.
For its services in making this appraisal, KELLER's fee will be
$27,000, including our-of-pocket expenses. The appraisal fee will include the
preparation of one valuation update and any requested analysis regarding the
financial impact of a charitable foundation in the conversion appraisal. All
additional valuation updates will be subject to an additional fee of $1,000
each. Upon the acceptance of this proposal, KELLER shall be paid a retainer of
$3,000 to be applied to the total appraisal fee of $27,000, the balance of which
will be payable at the time of the completion of the appraisal.
HOME agrees, by the acceptance of this proposal, to indemnify KELLER
and its employees and affiliates for certain costs and expenses, including
reasonable legal fees, in connection with claims or litigation relating to the
appraisal and arising our of any misstatement or untrue statement of a material
fact in information supplied to KELLER by HOME or by an intentional omission by
HOME to state a material fact in the information so provided, except where
KELLER or its employees and affiliates have been negligent or at fault.
KELLER agrees to indemnify HOME and its employees and affiliates for
certain cost and expenses, including reasonable legal fees, in connection with
claims or litigation
-2-
<PAGE> 3
relating to or based upon the negligence or willful misconduct of KELLER or its
employees or affiliates.
This proposal will be considered accepted upon the execution of the two
enclosed copies of this agreement and the return of one executed copy to KELLER,
accompanied by the specified retainer.
KELLER & COMPANY, INC.
By:
------------------------------
Michael R. Keller
President
THE HOME SAVINGS AND LOAN
COMPANY
By:
------------------------------
Douglas M. McKay
President
Date:
------------------------------
-3-
