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Files Pursuant to Rule 424(b)(3)
File No. 333-47957
PROSPECTUS SUPPLEMENT
UNITED COMMUNITY FINANCIAL CORP.
THE HOME SAVINGS AND LOAN COMPANY
401(k) SAVINGS PLAN
This Prospectus Supplement relates to the offer and sale to
participants (the "Participants") in The Home Savings and Loan Company 401(k)
Savings Plan of participation interests and common shares, without par value, of
United Community Financial Corp. (the "Common Shares"), as set forth herein.
In connection with the proposed conversion of The Home Savings and Loan
Company of Youngstown, Ohio (the "Company" or the "Employer") from a mutual
savings and loan association to a stock savings and loan association
incorporated under Ohio law (the "Conversion"), United Community Financial
Corp., the proposed holding company for the Company (the "Holding Company"),
has been formed. The Board of Directors of the Company modified the adoption
agreement of The Home Savings and Loan Company 401(k) Savings Plan (the "Plan"
or the "401(k) Plan") to permit the investment of Plan assets in Common Shares.
The Plan will permit Participants to direct the trustee of the Plan (the
"Trustees") to purchase Common Shares with amounts in the Plan attributable to
such Participants. This Prospectus Supplement relates to the initial election
of a Participant to direct the purchase of Common Shares in connection with the
Conversion. This Prospectus Supplement does not cover reoffers or resales of
the Common Shares. See "Restrictions on Resales."
The Prospectus of the Holding Company dated May 15, 1998 (the
"Prospectus"), which you received with this Prospectus Supplement, includes
detailed information regarding the Conversion, the Common Shares and the
financial condition, results of operation and business of the Company and the
Holding Company. This Prospectus Supplement, which provides detailed information
regarding the Plan, should be read only in conjunction with the Prospectus.
Terms not otherwise defined in this Prospectus Supplement are defined in the
Plan or the Prospectus.
A Participant's eligibility to purchase Common Shares in connection
with the Conversion is subject to the Participant's general eligibility to
purchase Common Shares in the Conversion and the minimum and maximum purchase
limitations set forth in the Amended Plan of Conversion of the Company. See
"THE CONVERSION - Subscription Offering; Community Offering; - Public Offering
and - Limitations on Purchases of Common Shares" in the Prospectus.
AN INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. FOR A
DISCUSSION OF SUCH RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THE
PROSPECTUS.
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THESE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
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 FDIC, THE DIVISION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is May 15, 1998.
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No person has been authorized to give any information or to make any
representations other than as contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Holding Company, the Company or
the Plan. This Prospectus Supplement does not constitute an offer to sell, or
the solicitation of an offer to buy, any securities, 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 Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached hereto and should be
retained for future reference.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
THE OFFERING......................................................................................................1
Securities Offered.............................................................................................1
Election to Purchase Common Shares in the Conversion...........................................................1
Value of Participation Interests...............................................................................1
Method of Directing Transfer...................................................................................1
Time for Directing Transfer....................................................................................2
Irrevocability of Transfer Direction...........................................................................2
Direction to Purchase Common Shares After the Conversion.......................................................2
Purchase Price of Common Shares................................................................................2
Nature of a Participant's Interest in the Common Shares........................................................3
Voting and Tender Rights of Common Shares......................................................................3
DESCRIPTION OF THE PLAN...........................................................................................3
Introduction...................................................................................................3
Eligibility and Participation..................................................................................4
Contributions Under the Plan...................................................................................4
Limitations on Contributions...................................................................................6
Investment of Contributions....................................................................................8
Benefits Under the Plan.......................................................................................11
Withdrawals and Distributions from the Plan ..................................................................11
Administration of the Plan....................................................................................13
Reports to Plan Participants..................................................................................13
Plan Administrator............................................................................................14
Amendment and Termination.....................................................................................14
Merger, Consolidation or Transfer.............................................................................14
Federal Income Tax Consequences...............................................................................14
ERISA and Other Qualifications................................................................................17
Restrictions on Resale........................................................................................17
SEC Reporting and Short-Swing Profit Liability................................................................18
LEGAL OPINIONS...................................................................................................19
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan
and up to 14,070,000 Common Shares, at the purchase price of $10.00 per Common
Share, which may be acquired by the Plan for the accounts of employees of the
Company participating in the Plan. The Holding Company is the issuer of the
Common Shares. Information regarding the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Company and the Holding
Company is contained in the Prospectus. The address of the principal office of
the Company is 275 Federal Plaza West, Youngstown, Ohio 44503-1203. The
Company's telephone number is (330) 742-0500.
ELECTION TO PURCHASE COMMON SHARES IN THE CONVERSION
In connection with the Conversion, the Company has modified the Plan to
permit each Participant to direct the Trustee of the Plan to transfer all or
part of the funds which represent his or her beneficial interest in the assets
of the Plan to an employer stock fund (the "Employer Stock Fund") and to use
such funds to purchase Common Shares. The Employer Stock Fund will consist of
investments in the Common Shares made on or after the effective date of the
Conversion. Funds not transferred to the Employer Stock Fund will remain in the
other investment funds of the Plan as directed by the Participant. A
Participant's ability to transfer funds to the Employer Stock Fund in the
Conversion is subject to the Participant's general eligibility to purchase
Common Shares in the Conversion. For information as to the ability of
Participants to purchase Common Shares in the Conversion, see "THE CONVERSION -
Subscription Offering; - Community Offering; and - Public Offering" in the
Prospectus.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan will be valued on an ongoing basis and each
Participant will be informed of the value of his or her beneficial interest in
the Plan on a quarterly basis. This value represents the market value of past
contributions to the Plan by the Company and by the Participants and earnings
thereon, less previous withdrawals and loans outstanding.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to
direct a transfer to the Employer Stock Fund (the "Investment Election Form").
If a Participant wishes to transfer all or part of his or her beneficial
interest in the assets of the Plan to the Employer Stock Fund to purchase Common
Shares in the Conversion, he or she should indicate that election in the "Change
of Current Investment Choices" part of the Investment Election Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
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TIME FOR DIRECTING TRANSFER
You will be subsequently informed as to the deadline for submitting a
direction to transfer amounts to the Employer Stock Fund in order to purchase
Common Shares issued in connection with the Conversion. Such date will be no
later than June 17, 1998. The Investment Election Form should be returned to the
Human Resource Department Company no later than 12:00 noon, Eastern Daylight
Time, on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase Common Shares in connection with the Conversion shall be irrevocable.
Participants, however, will be able to direct the reinvestment of their accounts
under the Plan ("401(k) Accounts") after the Conversion as explained below.
DIRECTION TO PURCHASE COMMON SHARES AFTER THE CONVERSION
After the Conversion, a Participant will be able to direct that a
certain percentage of such Participant's interests in the trust assets (the
"Trust") be transferred to the Employer Stock Fund and invested in Common
Shares, or to the other investment funds available under the Plan.
Alternatively, a Participant may direct that a certain percentage of such
Participant's interest in the Employer Stock Fund be transferred from the
Employer Stock Fund to the other investment funds available under the Plan.
Participants will be permitted to direct that future contributions made to the
Plan by or on their behalf be invested in Common Shares. Following the initial
election, the allocation of a Participant's interest in the Employer Stock Fund
may be changed by the Participant as allowed by the Plan. Special restrictions
apply to transfers directed by those Participants who are executive officers,
directors and principal shareholders of the Holding Company who are subject to
the provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). See "Restrictions on Resale" and "THE CONVERSION -
Restrictions on Transfer of Common Shares by Directors and Officers" in the
Prospectus.
PURCHASE PRICE OF COMMON SHARES
The funds transferred to the Employer Stock Fund for the purchase of
Common Shares in the Conversion will be used by the Trustee to purchase Common
Shares. The price paid for such Common Shares purchased in the Conversion will
be $10.00 per share, the same price paid by all other persons who purchase
Common Shares in the Conversion.
The prices paid by the Trustee for Common Shares purchased in the open
market will not exceed "adequate consideration" as defined in Section 3(18) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
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NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON SHARES
The Common Shares will be held in the name of the Trustee for the Plan,
as trustee. Each Participant has an allocable interest in the investment funds
of the Plan but not in any particular assets of the Plan. Accordingly, a
specific number of Common Shares will not be directly attributable to the 401(k)
Account of any Participant. Net earnings or losses will be allocated to the
401(k) Account of a Participant based on the particular investment designations
of the Participants. Therefore, a Participant's 401(k) Account earnings should
not be affected by the investment designations (including investments in Common
Shares) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON SHARES
The Trustee generally will exercise voting and tender rights
attributable to all Common Shares held by the Trust as directed by the
Administrator of the Plan.
DESCRIPTION OF THE PLAN
INTRODUCTION
The Plan has been in effect since January 1993. In May 1998, the Plan
was modified to allow the employees of the Company to invest in the Common
Shares through the Plan. The Plan is a profit sharing plan with a cash or
deferred arrangement established in accordance with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code").
The Company intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Company
will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable U.S. Treasury
regulations. The Plan is qualified under Section 401(a) of the Code and that it
satisfies the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
The Plan is an "individual account plan" other than a "money purchase
pension plan" within the meaning of ERISA. As such, the Plan is subject to all
of the provisions of Title I (Protection of Employee Benefit Rights) and Title
II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of
ERISA, except the funding requirements contained in Part 3 of Title l of ERISA
which by their terms do not apply to an individual account plan (other than a
money purchase pension plan). The Plan is not subject to Title IV (Plan
Termination Insurance) of ERISA. Neither the funding requirements contained in
Part 3 of Title I of ERISA nor the plan termination insurance provisions
contained in Title IV of ERISA will be extended to Participants or beneficiaries
under the Plan.
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APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE COMPANY. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE COMPANY OR AFTER TERMINATION OF
EMPLOYMENT.
The following statements are summaries of certain material provisions
of the Plan. They are not complete and are qualified in their entirety by the
full text of the Plan. Copies of the Plan are available to all employees by
filing a request with the Plan Administrator. Each employee is urged to read
carefully the full text of the Plan.
ELIGIBILITY AND PARTICIPATION
Any employee of the Company who is age 20 or older is eligible to
participate in the Plan and will become a Participant in the Plan on the first
day of the Plan year quarter immediately following the completion of six months
of service with the Company. The Plan fiscal year is the calendar year (the
"Plan Year"). Employees who are Limited Service Employees (as defined in the
Plan) or covered by a collective bargaining agreement which does not expressly
provide for their coverage under the Plan, and employees who are nonresident
aliens and who received no earned income from the Company which constitutes
income from sources within the United States, are not eligible to participate in
the Plan. Directors who are not employees of the Company are not eligible to
participate in the Plan.
As of April 30, 1998, there were approximately 402 employees eligible
to participate in the Plan, and approximately 360 employees had elected to
contribute to the Plan.
CONTRIBUTIONS UNDER THE PLAN
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (hereinafter defined) pursuant
to a salary reduction agreement by an amount not less than $5.00 per pay period
nor more than 15% and have that amount contributed to the Plan on such
Participant's behalf ("Deferred Compensation"). Such amounts are credited to the
Participant's 401(k) Account. For purposes of the Plan, "Compensation" means a
Participant's salary as reported on their W-2 ("Basic Salary"). The annual
compensation of each Participant taken into account under the Plan is limited to
$160,000 (adjusted for cost of living as permitted by the Code). A Participant
may elect quarterly to modify the amount contributed to the Plan under such
Participant's salary reduction agreement. Deferred Compensation contributions
are generally transferred by the Company to the Trustee of the Plan monthly. A
Participant is always 100% vested in the Deferred Compensation amounts in his
401(k) Account.
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Profit Sharing Contributions. The Company may make a discretionary
contribution to the Plan annually in an amount not to exceed 15% of the total
Compensation received by all Participants (a "Profit Sharing Contribution"). All
contributions, including Deferred Compensation amounts are counted towards the
15% maximum. The Company may choose not to make a Profit Sharing Contribution in
any given Plan Year. The total Profit Sharing Contribution made by the Company
during a Plan Year is allocated among Participants in the same proportion as
each Participant's Compensation bears to the total Compensation paid to
Participants during the Plan year. A Participant must be an employee of the
Company on the last day of the Plan Year to receive an Employer contribution. A
Participant is 100% vested in the Profit Sharing Contributions to his 401(k)
Account after five years of service with the Company.
Matching Contributions. The Company may make discretionary matching
contributions ("Matching Contributions") to the Plan on behalf of Participants
who make elective deferrals to the Plan. The Company may contribute an amount to
a Participant's 401(k) Account each year based on a percentage of a
Participant's Deferred Compensation amount. A Participant is 100% vested in the
Matching Contributions in his 401(k) Account after five years of service with
the Company.
Qualified Matching Contributions. The Company may make "qualified"
matching contributions ("Qualified Matching Contributions") to the Plan on
behalf of all Participants who are not Highly-Compensated Employees (hereinafter
defined) and who are not officers of the Company. The Company's discretionary
contribution will be based on a percentage of a Participant's Deferred
Compensation amount. A Participant is always 100% vested in the Qualified
Matching Contribution amounts in his 401(k) Account.
Qualified Non-Elective Contributions. The Company may make
discretionary qualified non-elective contributions ("Qualified Non-Elective
Contributions") to the Plan. Allocations of Qualified Non-Elective Contributions
are made to the 401(k) Accounts of Participants who are not Highly-Compensated
Employees or officers of the Company and are based on the ratio each
Participant's Compensation for the Plan Year bears to the total Compensation of
all Participants for the Plan Year. A Participant is always 100% vested in the
Qualified Non-Elective Contribution amounts in his 401(k) Account.
Rollover Amount from Other Plans. An employee who has received a
distribution from another plan qualified under Section 401(a) of the Code may,
in accordance with Section 402(c) of the Code and procedures approved at the
discretion of the Trustee, transfer the distribution received from the other
plan to the Trustee. Any amounts rolled over from another plan will be
contributed to the employee's "Rollover Account."
Transfers from Other Plans. An employee who has cash, or other property
representing an interest in another plan qualified under Section 401(a) of the
Code may, in accordance with Section 402(c) of the Code and procedures approved
at the discretion of the Trustee, transfer the cash or other property from the
other plan to the Trustee in a Trustee-to-Trustee, Custodian-to-
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Trustee or Custodian-to-Custodian transfer. Any amounts transferred from another
plan will be contributed to the Participant's 401(k) Account.
LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Participant's 401(k) Account during any Plan Year
may not exceed the lesser of 25% of the Participant's "Section 415 Compensation"
for the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's "Section 415 Compensation" is a
Participant's Compensation, excluding any Employer contribution to the Plan or
to any other plan of deferred compensation or any distributions from a plan of
deferred compensation. In addition, annual additions shall be limited to the
extent necessary to prevent the limitations set forth in the Code for all of the
qualified defined benefit plans and defined contribution plans maintained by the
Company from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions to the Plan with respect to a
Participant, such excess will be disposed of in accordance with procedures set
forth in the Plan.
However, if the annual addition limitations are exceeded with respect
to a Participant in both the Plan and the defined benefit pension plan and
employee stock ownership plan maintained by the Company, the Participant's
annual additions under the Plan will be reduced.
Limitation on 401(k) Plan Contributions. The annual amount of Deferred
Compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax deferred annuity) may not exceed $10,000, adjusted for increases
in the cost of living as permitted by the Code. Contributions in excess of this
limitation ("Excess Deferrals") will be included in the Participant's gross
income for federal income tax purposes in the year they are made. In addition,
any such Excess Deferral will again be subject to federal income tax when
distributed by the Plan to the Participant, unless the Excess Deferral (together
with any income allocable thereto) is distributed to the Participant not later
than the first April 15th following the close of the taxable year in which the
Excess Deferral is made. Any income on the Excess Deferral that is distributed
not later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the Excess
Deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of Deferred Compensation
that may be contributed to the Plan in any Plan Year on behalf of Highly
Compensated Employees in relation to the amount of Deferred Compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a plan year (i.e.,
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of Deferred Compensation credited to the
401(k) Account of such eligible employee by such eligible employees compensation
for the Plan Year) of the Highly Compensated Employees may not exceed the
greater of (a) 125% of the actual deferral percentage of all other eligible
employees, or (b) the lesser of (i) 200% of the actual deferral percentage of
all other
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eligible employees, or (ii) the actual deferral percentage of all other eligible
employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who,
during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or indirectly more than 5% of the shares of the Employer or
shares possessing more than 5% of the total combined voting power of all stock
of the Employer) or (2) for the preceding year (a) received compensation from
the Employer in excess of $80,000 (as adjusted periodically under applicable
Code provisions), and (b) if the Employer elects the application of this clause
for such preceding year, was in the top-paid group of employees for such
preceding year. An employee is in the top-paid group of employees for any year
if such employee is in the group consisting of the top 20% of employees when
ranked on the basis of compensation paid during such year. Such amounts are
adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amounts
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("Excess Contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Company will be
subject to a 10% excise tax on any Excess Contributions unless such Excess
Contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first two and a half
months following the Plan Year to which such Excess Contributions related.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a
Top-Heavy Plan (hereinafter defined), then (i) the Company may be required to
make certain minimum contributions to the Plan on behalf of Non-Key Employees
(hereinafter defined), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan or employee stock ownership plan
maintained by the Company.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any
Plan Year if, as of the last day of the preceding Plan Year, the aggregate
balance of the Accounts of Participants who are Key Employees exceeds 60% of the
aggregate balance of the Accounts of all Participants. "Key Employees" generally
include any employee who, at any time during the Plan Year or any of the four
preceding Plan Years, is (l) an officer of the Company having annual
compensation in excess of the amount under Section 415(b)(1)(A) of the Code
($65,000 for 1998) who is in an administrative or policy-making capacity, (2)
one of the ten employees having annual compensation in excess of $30,000 and
owning, directly or indirectly, the largest interests in the Employer; (3) a 5%
owner of the Employer, (i.e., owns directly or indirectly more than 5% of the
shares of the Employer, or shares possessing more than 5% of the total combined
voting power of all stock of the Employer or (4) a 1% owner of the Employer
having annual compensation in excess of $165,000 (for 1998).
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INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' 401(k) Accounts under the Plan
are held in a custodial account (the "Custodial Account") of which McDonald &
Company Securities, Inc. is the Custodian (the "Custodian"). The Custodian is
appointed by the Trustee. The Plan provides that a Participant may direct the
Trustee to invest all or a portion of his Accounts in various managed investment
portfolios, described below. A Participant may elect to change his investment
directions regarding both past contributions and for more additions to the
Participant's accounts invested in these investment alternatives, as allowed by
the Plan.
Under the Plan, prior to the effective date of the Conversion, the
401(k) Account of a Participant held in the Trust will be invested by the
Trustee at the direction of the Participant in the following managed portfolios:
AIM Balanced Fund The fund seeks to provide the highest
return possible consistent with
preservation of capital, by investing in
a broadly diversified portfolio of
high-yielding securities, including
common stocks, preferred stocks,
convertible securities and bonds.
Although equity securities are purchased
primarily for capital appreciation and
fixed income securities purchased
primarily for income purposes, income and
capital appreciation potential are
considered with all investments.
AIM Charter Fund The primary investment objective of the
fund is capital appreciation; current
income is a secondary objective. The fund
invests primarily in dividend-paying
common stocks which have prospects for
both growth of capital and dividend
income.
AIM Income Fund The fund seeks a high level of current
income consistent with reasonable concern
for safety of principal, by investing
primarily in fixed-rate corporate debt
and U.S. Government obligations. The fund
may also invest in preferred stock issues
and convertible corporate debt. The
percent of the fund's assets in various
types of securities will vary in light of
the fund's investment objective and
existing conditions. The fund may invest
up to 40% of its assets in securities
issued by foreign entities.
AIM International Equity The investment objective is to seek to
provide long-term growth of capital by
investing in a diversified portfolio of
international equity securities
considered to have strong earnings
momentum. Any income realized by the fund
will be incidental. Under normal market
conditions the fund will invest at least
80% of its total assets in marketable
equity securities of foreign companies
which, with their predecessors, have been
in continuous
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operation for three years or more and
which are listed on a recognized foreign
securities exchange or traded in a
foreign over-the counter market. It is
expected that the fund's portfolio will
generally be comprised of two basic
categories of foreign companies: "core"
companies, which AIM considers to have
experienced consistent long-term growth
in earnings and to have strong prospects
for outstanding future growth, and
companies that AIM believes are currently
experiencing a greater than anticipated
increase in earnings.
AIM Value Fund AIM Value Fund seeks long-term growth of
capital. It will invest primarily in
equity securities judged to be
undervalued relative to the investment
advisor's appraisal of the current or
projected earnings of the companies
issuing the securities, or relative to
current market values of assets owned by
the companies issuing the securities, or
relative to the equity market generally.
Income is a secondary objective. The
primary thrust of AIM's search for
undervalued equity securities is in four
categories: (1) out-of-favor cyclical
growth companies; (2) established growth
companies that are undervalued; (3)
companies with evidence of improving
prospects; and (4) companies whose equity
securities are selling at prices that do
not reflect the current market value of
their assets.
AIM Money Market Fund This is a money market fund which is very
similar to a savings account. The only
source of growth is interest earned on
your balance. A money market fund is
generally regarded as a short-term
investment to be used prior to utilizing
a more long-term investment alternative
such as a stock fund or bond fund.
Additionally, a money fund may be
utilized as a small portion of a balanced
approach to investing your account. The
trust's portfolio represents a
high-quality selection of money market
instruments such as U.S. Treasury bills,
commercial paper and certificates of
deposit. Because of the very short-term
nature of these investments, this is the
most conservative investment option.
Consequently, it is also the investment
option that may provide the least
opportunity for the growth of an account.
Effective upon the Conversion, a Participant may invest all or a
portion of his Accounts in the portfolios described above and in the fund,
described below:
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United Community Financial Employer Stock Fund which invests in
Corp. Common Stock Fund common shares, without par value, of
United Community Financial Corp., the
holding company of the Employer, an Ohio
savings and loan association.
A Participant may elect (in amounts not less than $5.00) to have both
past and future contributions and additions to the Participant's 401(k) Account
invested either in the Employer Stock Fund or in such other managed portfolios
listed above. These elections will generally be effective the business day
coinciding with or next following the day of the plan administrator's receipt of
such investment directions. Any amounts credited to a Participant's 401(k)
Accounts for which investment directions are not given will be invested in the
AIM Money Market Fund. Because investment allocations only are required to be
made in increments of 1%, Participants can invest their 401(k) Accounts in each
of the available investment funds.
The net gain (or loss) in the 401(k) Accounts from investments other
than the Employer Stock Fund (including interest payments, dividends, realized
and unrealized gains and losses on securities, and expenses paid from the Trust)
are determined daily during the Plan Year. Net gain (or loss) in the 401(k)
Account from investments (including interest, dividends, realized and unrealized
gain and expenses paid) from the Employer Stock Fund will be determined
quarterly. For purposes of such allocations, all assets of the Trust are valued
at their fair market value.
A. Funds under the Plan Prior to the Conversion.
Prior to the Conversion, contributions under the Plan were invested in
the five funds listed below. The annual percentage of returns on these funds,
calculated prior to any fees being charged to the portfolio for 1997, 1996 and
1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
A. AIM Balanced Fund 24.41% 19.25% 34.98%
B. AIM Charter Fund 24.73 19.58 35.68
C. AIM Income Fund 11.92 8.58 22.03
D. AIM International Equity 5.70 18.98 16.41
E. AIM Value Fund 23.95 14.52 34.85
</TABLE>
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Shares
made on and after the effective date of the Conversion. Any cash dividends paid
on Common Shares held in the Employer Stock Fund will be credited to a cash
dividend subaccount for each Participant investing in the Employer Stock Fund.
The Trustee will, to the extent practicable, use all amounts held by it in the
Employer Stock Fund (except the amounts credited to cash dividend subaccounts)
to purchase Common Shares. It is expected that all purchases will be made at
prevailing market prices. Under certain circumstances, the Trustee may be
required to limit the
-10-
<PAGE> 15
daily volume of shares purchased. Pending investment in Common Shares, assets
held in the Employer Stock Fund will be placed in bank deposits and other
short-term investments.
When Common Shares are purchased or sold, the cost or net proceeds will
be charged or credited to the 401(k) Accounts of Participants affected by the
purchase or sale. The Company expects that Participants will pay any brokerage
commissions, transfer fees and other expenses incurred in the sale and purchase
of Common Shares for the Employer Stock Fund. A Participant's 401(k) Account
will be adjusted to reflect changes in the value of Common Shares resulting from
stock dividends, stock splits and similar changes.
To the extent dividends are not paid on Common Shares held in the
Employer Stock Fund, the return on any investment in the Employer Stock Fund
will consist only of the market value appreciation of the Common Shares
subsequent to their purchase. Following the Conversion, the Board of Directors
of the Holding Company may consider a policy of paying dividends on the Common
Shares, however, no decision has been made by the Board of Directors of the
Holding Company regarding the amount or timing of dividends, if any. See
"DIVIDEND POLICY" in the Prospectus.
As of the date of this Prospectus Supplement, with the exception of 100
Common Shares issued to the President of the Holding Company for incorporation
purposes, none of the Common Shares have been issued or are outstanding and
there is no established market for the Common Shares. Accordingly, there is no
record of the historical performance of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain special
risks associated with investments in Common Shares of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" beginning on page 12 in
the Prospectus.
BENEFITS UNDER THE PLAN
Vesting. A Participant has at all times a fully vested, nonforfeitable
interest in all of the Deferred Compensation, Qualified Matching Contributions
and Qualified Non-Elective Contributions in his 401(k) Account and Rollover
Account and the earnings thereon under the Plan. Generally a Participant is not
vested in any part of his interest in his Matching Contribution and Profit
Sharing Contributions in his 401(k) Account until after five years of service to
the Company at which time the Participant is 100% vested in these interests.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON
THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT UNDER
THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2 UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE COMPANY.
-11-
<PAGE> 16
Withdrawals Prior to Termination of Employment. In certain
circumstances, a Participant may make a withdrawal from his 401(k) Account under
the Plan pursuant to the hardship distribution rules under the Plan. These rules
are intended to insure that Participants have a true financial need before a
withdrawal may be made. A Participant may also make a withdrawal of Deferred
Compensation from his 401(k) Account after the age of 59-1/2.
Loans to Participants. The Plan allows Participants to borrow money
from the Plan. No loan to any Participant can be made to the extent that such
loan, when added to the outstanding balance of all other loans to the
Participant, would exceed the lesser of (1) $50,000 reduced by the highest
outstanding balance of loans during the one-year period ending on the day before
the loan is made, or (2) one-half of the present value of the non-forfeitable
accrued benefit of the Participant's 401(k) Account. Each loan has a term of not
more than 5 years and is payable not less frequently than quarterly, unless the
purpose of the loan is the purchase of a residence which within a reasonable
period of time from the date of the loan is to be used as the Participant's
principal residence. The interest rate charged for each loan is established as
of the loan date and is the rate as may be required by applicable law and
determined by reference to the prevailing interest rates charged by commercial
lenders under similar circumstances. Required payments on the loan cannot be
deducted from a 401(k) Account and must be paid in cash, even if a Participant's
employment with the Company terminates. The Plan requires the Plan Administrator
to take legal action against a Participant if he fails to comply with the terms
of the Loan.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment, generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an
in-kind distribution of Common Shares of the Holding Company credited to the
Participant's Account. A Participant may elect, in lieu of a lump sum payment,
to be paid in payments over a period certain in monthly, quarterly, semi-annual
or annual cash installments. Benefit payments ordinarily shall be made not later
than 60 days following the end of the Plan Year in which occurs the later of the
Participant's (i) termination of employment; (ii) attainment of age 65; or (iii)
10th anniversary of commencement of participation in the Plan; but in no event
later than the April 1, following the calendar year in which the Participant
attains age 70-1/2. However, if the vested portion of the Participant's 401(k)
Account balances exceeds $5,000, no distribution shall be made from the Plan
prior to the Participant's attaining age 65 unless the Participant consents to
an earlier distribution. Special restrictions apply to the distribution of
Common Shares of the Holding Company to those Participants who are executive
officers, directors and principal shareholders of the Holding Company who are
subject to the provisions of Section 16(b) of the Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date or retirement, disability or termination of employment, and
who has a surviving spouse, shall have 100% of benefits, regardless of the
number of years worked, paid to the surviving spouse in a lump sum by the end of
the fifth Plan year following the date of his death, or the surviving spouse may
elect another form of payment upon the death of the Participant. Notwithstanding
-12-
<PAGE> 17
the foregoing, if the payment of the Participant's benefit had commenced before
his death, such payments will continue in accordance with the distribution
method in effect at death. With respect to an unmarried Participant, and in the
case of a married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary of a deceased Participant
shall be made in the form of a lump-sum payment in cash or in Common Shares, or,
if the payment of his benefit had commenced before his death, in accordance with
the distribution method in effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment,
bankruptcy, pledge, encumbrance, attachment charge, garnishment, execution, or
levy of any kind, either voluntary or involuntary, and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or
otherwise dispose of any rights to benefits payable under the Plan shall be
void.
ADMINISTRATION OF THE PLAN
Trustee. The Trustee with respect to the Plan is the named fiduciary of
the Plan for purposes of Section 402 of ERISA. The current trustee of the Plan
is Riggs Bank, N.A.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust assets and income therefrom. The
Trustee has the authority to invest and reinvest the Trust assets and may sell
or otherwise dispose of Trust investments at any time and may hold trust funds
uninvested. The Trustee has authority to invest the assets of the Trust in "any
type of property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the
Trust in person or by proxy, provided, however, that the Plan Administrator
shall direct the Trustee as to voting and tendering of all Common Shares held in
the Employer Stock Fund.
The Trustee is entitled to reasonable compensation for its services and
is also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Company.
The Trustee must render at least annual reports to the Company and to
the Participants in such form and containing information that the Trustee deems
necessary.
REPORTS TO PLAN PARTICIPANTS
The Custodian will furnish to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end of
that period, (ii) the amount of
-13-
<PAGE> 18
contributions allocated to such Participant's Account for that period, and (iii)
the adjustments to such Participant's Account to reflect earnings or losses (if
any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan Administrator is the Board
of Directors of the Company. The Administrator is responsible for the
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Participants, beneficiaries
and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
The Company may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his Account. The Company reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of the
Participants or their beneficiaries.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan had then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan or the
other plan had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of the material federal income
tax aspects of the Plan which are of general application under the Code and is
not intended to be a complete or definitive description of the federal income
tax consequences of participating in or receiving distributions from the Plan.
The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
-14-
<PAGE> 19
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
The IRS has determined that the Plan is qualified under Section 401(a)
and 401(k) of the Code, and that the related Trust is exempt from tax under
Section 501(a) of the Code. A plan that is "qualified" under these sections of
the Code is afforded special tax treatment which include the following: (l) the
sponsoring employer is allowed an immediate tax deduction for the amount
contributed to the Plan each year: (2) participants pay no current income tax on
amounts contributed by the employer on their behalf: and (3) earnings of the
Plan are tax-exempt thereby permitting the tax-free accumulation of income and
gains on investments. The Plan will be administered to comply in operation with
the requirements of the Code as of the applicable effective date of any change
in the law.
Assuming that the Plan is administered in accordance with the
requirements of the Code, participation in the Plan under existing federal
income tax laws will have the following effects;
(a) Amounts contributed to a Participant's 401(k) Account and the
investment earnings on this Account are not includable in a
Participant's federal taxable income until such contributions
or earnings are actually distributed or withdrawn from the
Plan. Special tax treatment may apply to the taxable portion
of any distribution that includes Common Shares or qualifies
as a Lump Sum Distribution (hereinafter defined).
(b) Income earned on assets held by the Trust will not be taxable
to the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59-1/2; and (iii) consists of the balance to the
credit of the Participant under the Plan and all other profit-sharing plans, if
any, maintained by the Company. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes (the "total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit-sharing plans maintained by
the Company which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, a Participant who has
completed at least five years of participation in the Plan before the taxable
year in which the distribution is made, or a beneficiary who receives a Lump Sum
Distribution on account of the Participant's death (regardless of the period of
the Participant's participation in the Plan or any other profit-sharing plan
maintained by the Employer), may elect for distributions made prior to January
1, 2000, to have the ordinary
-15-
<PAGE> 20
income portion of such Lump Sum Distribution taxed according to a special
averaging rule ("five-year averaging"). The election of the special averaging
rules may apply only to one Lump Sum Distribution received by the Participant or
beneficiary, provided such amount is received on or after the Participant turns
59-1/2 and the recipient elects to have any other Lump Sum Distribution from a
qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfather rule, individuals who turned 50 by
1986 may elect to have their Lump Sum Distribution taxed under either the
five-year averaging rule or under the prior law ten-year averaging rule. Such
individuals also may elect to have that portion of the Lump Sum Distribution
attributable to the Participant's pre-1974 participation in the Plan taxed at a
flat 20% rate as gain from the sale of a capital asset.
Common Shares Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Shares, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Shares, i.e., the excess of the value of such Common Shares at the time of the
distribution over its cost to the Plan. The tax basis of such Common Shares to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Shares at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Shares to the extent
of the amount of net unrealized appreciation at the time of distribution will be
considered long-term capital gain regardless of the holding period of such
Common Shares. Any gain on a subsequent sale or other taxable disposition of the
Common Shares in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Shares. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Virtually all distributions from the Plan may be rolled over to
another qualified plan or to an IRA without regard to whether the distribution
is a Lump Sum Distribution or a Partial Distribution. Participants have the
right to elect to have the Trustee transfer all or any portion of an "eligible
rollover distribution" directly to another plan qualified under Section 401(a)
of the Code or to an IRA. If the Participant does not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to a mandatory federal withholding tax
equal to 20% of the taxable distribution. An "eligible rollover distribution"
means any amount distributed from the Plan except: (l) a distribution that is
(a) one of a series of substantially equal periodic payments made (not less
frequently than annually) over the Participant's life or the joint life of the
Participant and the Participant's designated beneficiary, or (b) for a specified
period of ten years or more; (2) any amount that is required to be distributed
under the minimum distribution rules; and (3) any other distributions excepted
under applicable federal law. The tax law change described above did not modify
the special tax treatment of Lump Sum Distributions that are not rolled over or
transferred i.e., forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation discussed earlier.
-16-
<PAGE> 21
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary; (iv)
made to the Participant after separation from service after attainment of age
55; (v) made to pay medical expenses to the extent deductible for federal income
tax purposes; (vi) pursuant to a qualified domestic relations order; or (vii)
made to effect the distribution of excess contributions or excess deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of ERISA and
the IRS has determined that the Plan is qualified under Section 401(a) of the
Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF THE MATERIAL FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Common Shares received by executive officers of the Holding Company
under the Plan 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. 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.
-17-
<PAGE> 22
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 under the Plan by persons who are not "affiliates" of the Holding
Company may be resold without registration. Common Shares received under the
Plan 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 National Market, the
average weekly reported volume of trading during the four weeks preceding the
sale.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Exchange Act imposes reporting and liability
requirements on executive officers, directors and persons beneficially owning
more than ten percent of public companies such as the Holding Company. Section
16(a) of the Exchange Act requires the filing of reports of beneficial
ownership. Within ten days of becoming a person subject to the reporting
requirements of Section 16(a), a Form 3 reporting initial beneficial ownership
must be filed with the SEC. Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days after
the close of the Holding Company's fiscal year. Participation in the Employer
Stock Fund of the Plan by executive officers, directors and persons beneficially
owning more than ten percent of Common Stock of the Holding Company must be
reported to the SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section
16(b) of the Exchange Act provides for the recovery by the Holding Company of
profits realized by any officer, director or any person beneficially owning more
than ten percent of the Holding Company's Common Shares ("Section 16(b)
Persons") resulting from the purchase and sale or sale and purchase of the
Holding Company's Common Shares within any six-month period.
The SEC has adopted rules that provides exemption from the profit
recovery provisions of Section 16(b) for Participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon the
timing of elections to acquire or dispose of employer Securities for the
accounts of Section 16(b) Persons.
-18-
<PAGE> 23
Except for distributions of Common Shares due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order under the Plan, Section 16( b) Persons are required to hold Common Shares
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution. Finally, the Plan
provides that Section 16(b) Persons who terminate their participation in the
Plan may not rejoin the Plan for six months following the date of their
termination. These Plan restrictions conform with the rules issued by the SEC to
exempt transactions in the Plan from becoming subject to the profit-recovery
rules of Section 16(b) of the Exchange Act.
LEGAL OPINIONS
Certain legal matters pertaining to the Common Shares are being passed
upon for the Holding Company by Vorys, Sater, Seymour and Pease LLP, Cincinnati,
Ohio.
-19-
<PAGE> 24
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
Amended 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 March 31, 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 JUNE 17, 1998 (THE "SUBSCRIPTION EXPIRATION DATE"). PERSONS
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 may
be offered to members of the general public in a syndicated public offering (the
"Public 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 FEDERAL DEPOSIT INSURANCE
CORPORATION (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 (330) 747-1111.
<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 Company, as converted, and the Holding
Company, reduced to reflect the intended contribution by the Company 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 by the Company 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 contribution
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"), CIBC Oppenheimer Corp. ("CIBC
Oppenheimer") and McDonald & Company Securities, Inc. ("McDonald &
Company"). Such sales commissions may be deemed to be underwriting fees,
although Trident, McDonald & Company and CIBC Oppenheimer 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.
CIBC OPPENHEIMER CORP.
MCDONALD & COMPANY SECURITIES, INC.
The date of this Prospectus is May 15, 1998.
<PAGE> 25
The Subscription Offering, the Community Offering and the Public Offering are
referred to collectively in this Prospectus as 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 35,000 Common Shares, regardless of the number of accounts held by
such person. 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 35,000 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
35,000 Common Shares. Except for the ESOP, which may purchase up to 10% of the
total Common Shares sold in the Offering and contributed to the Foundation, 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 June 17, 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. 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 3:00 P.M., EASTERN DAYLIGHT TIME, ON JUNE 23, 1998, AT
7525 MARKET STREET, BOARDMAN, OHIO (THE "SPECIAL MEETING"), (II) THE SALE OF THE
REQUISITE NUMBER OF COMMON SHARES AND (III) CERTAIN OTHER FACTORS. SEE "THE
CONVERSION."
-ii-
<PAGE> 26
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
[MAP OF STATE OF OHIO WITH COUNTIES OUTLINED ABOVE AN
ENLARGED MAP OF TRUMBULL, MAHONING AND COLUMBIANA COUNTIES
SHOWING THE LOCATIONS OF THE COMPANY'S OFFICES
AND LISTING THE ADDRESSES OF THE OFFICES]
-iii-
<PAGE> 27
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. 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 OTS regulations and 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 13.53% 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.
-1-
<PAGE> 28
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:
o 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.
o 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 $251,400 a year over the past
five years.
o 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 cash equivalents, investment
securities and mortgage-backed securities was approximately $385.1
million, or 36.9% of total assets. Of that amount, approximately $101.8
million consisted of investment securities and mortgage-backed
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. The Board of Directors of the Company initially adopted the
Plan on December 9, 1997, and amended it on May 6, 1998. The Plan 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
-2-
<PAGE> 29
Members and (e) directors, officers and employees of the Company. See "THE
CONVERSION - Subscription Offering."
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 who have a
bona fide residence 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, CIBC Oppenheimer and McDonald & Company (collectively, the
"Underwriters") 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 35,000 Common Shares,
regardless of the number of accounts held by such person. 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 35,000 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 or the Public Offering
up to 35,000 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 shares to be
purchased by the Company and contributed to the Foundation or to the ESOP, which
intends to purchase up to 8% of the total Common Shares sold in the Offering and
contributed to the Foundation. Subject to applicable regulations, the purchase
limitations may be increased or decreased after the commencement of the Offering
at 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 June 17, 1998.
The Community Offering, if any, will be terminated on or before 12:00 noon
Eastern Daylight Time June 17, 1998, unless extended. Any continuation of the
Community Offering or the Public Offering beyond August 1, 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
-3-
<PAGE> 30
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 at the Conversion Rate (hereinafter defined). Persons who elect to
decrease their subscriptions will have the appropriate portion of their funds
promptly refunded with interest at the Conversion Rate. See "THE CONVERSION -
Pricing and Number of Common Shares to be Sold."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON SHARES.
Eligible Account Holders and Supplemental Eligible Account Holders MUST LIST ON
THE STOCK ORDER FORM ALL DEPOSIT ACCOUNTS IN WHICH THEY CLAIM AN INTEREST,
giving all names on each deposit account and the account numbers at the
applicable date in order to protect their purchase priorities. Deposit accounts
include savings accounts and non-interest-bearing demand deposits. 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 (only if delivered in person), money order,
bank draft or withdrawal authorization must accompany an original Stock Order
Form. Payments by wire transfer will not be accepted. THE HOLDING COMPANY IS NOT
OBLIGATED TO ACCEPT AN ORDER SUBMITTED ON A PHOTOCOPIED OR TELECOPIED STOCK
ORDER FORM. 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
SIGNED. 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 contributed by the Company 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,
-4-
<PAGE> 31
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. See "THE CONVERSION -
Pricing and Number of Common Shares to be Sold."
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 Aggregate Percent
- ---- Total shares (1) purchase price (1) of total offering (2)
------------ -------------- -----------------
<S> <C> <C> <C>
Richard M. Barrett 70,000 $700,000 .28%
James E. Bennett, Jr. 1,000 10,000 --
Charles. B. Cushwa, III 70,000 700,000 .28
William A. Holdford 10,000 100,000 .04
Donald R. Inglis 60,000 600,000 .24
Gary Keller 70,000 700,000 .28
Patrick A. Kelly 70,000 700,000 .28
Douglas M. McKay 140,000 1,400,000 .56
Herbert F. Schuler, Sr. 105,000 1,050,000 .42
Clarence R. Smith, Jr. 25,000 250,000 .10
Robert J. Steele, Jr. 10,000 100,000 .04
Donald J. Varner 70,000 700,000 .28
John F. Zimmerman, Jr. 35,000 350,000 .14
------- ---------- ----
All directors and executive 736,000 $7,360,000 2.94%
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, after offering expenses, 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 approximately 55% 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 total Common Shares sold in the Offering and contributed to the Foundation.
The Holding Company will retain the remaining net proceeds and will use such
funds for general corporate purposes. See "USE OF PROCEEDS." 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."
-5-
<PAGE> 32
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
furtherance of the Company's commitment to the communities that it serves. In
connection with the Conversion, the Company intends to purchase from the Holding
Company and contribute to the Foundation up to 1,250,000 common shares of the
Holding Company. The Company believes 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 Company proposes to purchase from the Holding Company and
contribute to the Foundation 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 Company. The Company does not anticipate
making any other contributions to the Foundation during 1998 or the first five
years following the Conversion. The Company may make donations to charitable
institutions in an aggregate amount not to exceed $80,000 per year consistent
with past practice. During 1996 and 1997, the Company directly donated
approximately $57,000 and $64,000, respectively, to charitable institutions in
its community. Assuming the sale of Common Shares at the maximum of the Adjusted
Valuation Range and the contribution by the Company of 1,250,000 shares to the
Foundation, the Holding Company will have 30,187,500 shares issued and
outstanding, of which the Foundation will own 1,250,000 shares, or 4.14%. THE
CONTRIBUTION OF COMMON SHARES TO THE FOUNDATION WILL RESULT IN DILUTION OF
APPROXIMATELY 4.14% TO THE OWNERSHIP INTERESTS IN THE HOLDING COMPANY OF THE
PERSONS PURCHASING SHARES IN THE CONVERSION.
Keller, an independent appraiser of financial institutions, considered
the effect of the contribution of shares to the Foundation when determining the
pro forma market value of the Company, as converted, and the Holding Company.
Keller determined that the contribution would dilute the equity and earnings of
the initial shareholders of the Holding Company and that the contribution would
result in a charge to the Company's earnings, therefore resulting in a lower pro
forma market value of the Company, as converted, and the Holding Company. See
"RISK FACTORS - Contribution to the Foundation." As a result of the contribution
to the Foundation and its impact on the pro forma market value of the Company,
as converted, and the Holding Company, as converted, the Holding Company will
offer 2,550,000, 3,000,000, 3,262,500 and 3,564,375 fewer shares at the minimum,
mid-point, maximum and adjusted maximum of the Adjusted Valuation Range,
respectively, than if such contribution were not being made. Based on the $10
price per share, the Holding Company will receive $25.5 million, $30.0 million,
$32.6 million and $35.6 million less in gross proceeds than it would have
received if the contribution to the Foundation were not being made. See
"COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION."
Notwithstanding the impact of the contribution on the Offering, the Company and
the Holding Company determined to contribute common shares to the Foundation 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.
As a result of the contribution to the Foundation, the Company will
recognize an expense for the full amount of the contribution 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
Company's earnings for such quarter and for the year, offset in part by a
corresponding tax benefit. For further discussion of the Foundation and its
impact on purchasers in the Conversion, see "RISK FACTORS - Contribution to the
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<PAGE> 33
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 "UCFC". 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. The Underwriters 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. In the aggregate, a number of shares equal to 22% of the total
Common Shares sold in the Offering and contributed to the Foundation may be
allocated, awarded or granted to directors, officers and employees of the
Company or the Holding Company, pursuant to the ESOP, the Stock Option Plan
-7-
<PAGE> 34
(hereinafter defined) and the RRP (hereinafter defined). Based on the purchase
price of $10 per share in the Conversion, the aggregate market value of shares
which could be awarded under the ESOP and the RRP would be between $31.5 million
and $40.2 million, based on the Adjusted Valuation Range. Awards under the RRP
and allocations pursuant to the ESOP will be made at no cost to recipients. The
value of the shares received by employees, officers and directors pursuant to
options granted under the Stock Option Plan cannot be determined at this time.
Awards under the Stock Option Plan can be made no earlier than six months after
the completion of the Conversion and will 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 award. The value of the shares received pursuant to Stock Option
Plan awards will depend on the difference between the exercise price and the
value of the shares on the date of exercise by individual recipients. Based on
their stock ownership under these stock benefit plans, 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. See "RISK FACTORS - Anti-Takeover Provisions Which
May Discourage Sales of Common Shares For Premium Prices." The Board of
Directors has determined that the ability of the Holding Company and the Company
to utilize various types of stock benefit plans will assist the Company in
attracting and retaining 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 total Common Shares sold in the Conversion
and contributed to the Foundation. The loan will have a term of up to 15 years
and an interest rate equal to the base rate on corporate loans, posted by at
least 75% of the nation's 30 largest banks, as reported in The Wall Street
Journal (the "Prime Rate") less 1/2%. Based on the Prime Rate as of May 14,
1998, the ESOP rate would be 8.0%. 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 and
contributed to the Foundation 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. Awards of options under the Stock
Option Plan will be made at no cost to recipients. 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. Stock options will 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 award.
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 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 not more than
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."
-8-
<PAGE> 35
RECOGNITION AND RETENTION PLAN. After the completion of the Conversion,
the Board of Directors of the Holding Company intends to establish a recognition
and retention plan (the "RRP") and anticipates that a number of shares equal to
4% of the total Common Shares sold in the Conversion and contributed to the
Foundation, with a total value ranging from $8.9 million at the minimum of the
Adjusted Valuation Range to $13.9 million at the adjusted maximum of the
Adjusted Valuation Range, 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
shares will be awarded at no cost to the recipients. 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 or 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 eligible 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 eligible shares; and (iii) RRP awards
will vest at the rate of not more than 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."
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; - Risks Associated
with Economic Conditions in the Company's Market Area; - Geographic
Concentration of Credit; - Competition in Primary Market Area; - Absence of
Established Market for the Common Shares; - Potential Material 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> 36
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. For information concerning the Company's financial condition and
results of operations for the quarter ended March 31, 1998, see "RECENT
DEVELOPMENTS."
<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 886,808 932,060 938,855 898,912 894,794
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 expenses (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> 37
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
As 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. Excluding the effect of the
one-time SAIF assessment, 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. Excluding the effect of
the one one-time SAIF assessment, 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) Noninterest expense divided by the sum of net interest income and
noninterest income. Excluding the effect of the one-time SAIF
assessment, the Company's efficiency ratio would have been 60.37% for
the year ended December 31, 1996.
(7) Nonperforming loans consist of 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> 38
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> 39
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 3.5% of total commercial loans and 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 Company proposes to purchase
from the Holding Company and 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 $10.6 million, 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 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 Company's earnings in the year in which the
contribution is made. The 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 has been advised by its
independent tax advisors that the contribution to the Foundation will be tax
deductible, subject to an annual limitation of 10% of the Company's annual
taxable income. Management expects that the contribution to the Foundation will
have an adverse impact on the 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 $262.5
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. Consequently, the
amount of Common Shares that are being offered in the Conversion at the
mid-point of the Adjusted Valuation Range (excluding the shares to be
contributed to the Foundation) is approximately $30.0 million less than the
estimated amount of Common Shares that would have been offered in the Conversion
without the contribution to 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> 40
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 shares of the Holding Company held by
the Foundation will be voted by the Foundation's independent trustee (the
"Trustee"). The Company proposes to amend the trust document that governs the
Foundation to provide that the shares of the Holding Company held by the
Foundation must be voted by the Trustee on all matters submitted to a vote of
the shareholders of the Holding Company in the same proportion as votes cast by
all other shareholders of the Holding Company. Based on their stock ownership
under various stock benefit plans, the directors and officers of the Holding
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. See "RISK FACTORS -
Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium
Prices." Pro rata voting by the Trustee will have an anti-takeover effect on the
Holding Company to the extent such voting is influenced by the voting of the
directors and officers of the Company and the Holding Company.
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 Holding Company and 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 at the Conversion Rate. 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."
RISKS ASSOCIATED WITH ECONOMIC CONDITIONS IN THE COMPANY'S MARKET AREA
The Company's market area consists of Mahoning, Columbiana and Trumbull
Counties in Northeastern Ohio. Nine of the Company's offices are located in
Mahoning County, including the Company's main office in the City of Youngstown,
three offices are in Columbiana County and two offices are in Trumbull County.
With regard to several important economic factors, statistics for the Company's
primary market area in recent years have trailed both the State of Ohio and the
United States.
In 1996, the per capita annual income of $13,099 for the Company's
primary market area was 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. The
unemployment rates for the Company's market area and the City of Youngstown have
exceeded both the Ohio and national rates in the recent past. In 1997, the
unemployment rate in the Company's market area counties averaged 5.7%, compared
to 4.3% for Ohio and 4.4% for the United States. The City of Youngstown
experienced an unemployment rate of 11.0%, which was significantly higher than
the 6.3% rate for Mahoning County generally.
A decline in the local economy could result in an increase in the level
of defaults by borrowers in the repayment of existing loans and could suppress
demand for new loans. Similarly, a decline in the local economy could result in
a decline in core deposits as customers would have fewer discretionary funds for
savings. If these conditions occurred, they could adversely affect the Company's
net income. Moreover,
-14-
<PAGE> 41
the absence of a robust local economy could limit the Company's potential for
growth in its current 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 Northeastern
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 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. See "Risks
Associated with Economic Conditions in the Company's Market Area."
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.
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 "UCFC." 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.
POTENTIAL MATERIAL 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 total Common Shares sold in the Conversion and contributed to the
Foundation. 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
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<PAGE> 42
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 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 $11.37. See "PRO FORMA DATA" and
"MANAGEMENT - Stock Benefit Plans."
POTENTIAL AWARDS OF SHARES TO DIRECTORS, OFFICERS AND EMPLOYEES PURSUANT TO
BENEFIT PLANS
In the aggregate, a number of shares equal to 22% of the total Common
Shares sold in the Offering and contributed to the Foundation may be allocated,
awarded or granted to directors, officers and employees of the Company or the
Holding Company pursuant to the ESOP, the Stock Option Plan and the RRP. The
ESOP intends to purchase 8% of the total Common Shares sold in the Offering and
contributed to the Foundation. The ESOP shares will be allocated to management
and employees at no cost to the recipients and may be voted by the recipients
upon allocation. 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 total Common Shares sold in the Offering and
contributed to the Foundation 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. Stock options will 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 award. In addition, a number
of shares equal to 4% of the total Common Shares sold in the Offering and
contributed to the Foundation 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
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<PAGE> 43
$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 $8.9 million at the minimum of the Adjusted Valuation Range to $13.9
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." Based on their stock ownership under these stock benefit
plans, 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. See "RISK FACTORS -
Anti-Takeover Provisions Which May Discourage Sales of Common Shares For Premium
Prices."
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 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 75% 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 2.94% 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 total common
shares sold in the Conversion and contributed to the Foundation. 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
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<PAGE> 44
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."
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>
Maximum,
Minimum Mid-point 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 approximately $152.7 million, or 46%,
of the net proceeds from the sale of the Common Shares 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 total Common Shares sold in the Offering and
contributed to the Foundation. 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 the Prime Rate less 1/2%, currently 8.0%. 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 general corporate purposes, which may include acquisitions of other
financial institutions, other financial services companies or other businesses
which a savings and loan holding company is permitted to own, the payment of
dividends, a tax-free return of capital, repurchases of Common Shares and
funding of the RRP. The Holding Company and the Company, however, will not take
any action that would further the payment of
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<PAGE> 45
a tax-free return of capital to the Holding Company shareholders during the
first year following the completion of the Conversion.
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 $177.7 million, or 54%, 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 up to three years and eventually utilized for general corporate
purposes, including increased loan origination activity and a modest increase in
investments in corporate notes and U.S. Government and federal agency
securities. During the next three years, the Company intends to concentrate on
increasing its consumer and commercial loan portfolios, but during the first
year following the Conversion, the Company anticipates an increase in
construction and one- to four-family loans. The Company may also use the
Conversion proceeds 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 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 "UCFC."
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. The
Underwriters 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
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<PAGE> 46
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 or other 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 to general
economic conditions. The timing of payments of dividends or other distributions
and the amount 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 or other distributions
by the Holding Company, subject to the limitation under Ohio law that a
corporation may pay dividends or other distributions only out of surplus. There
can be no assurance that dividends will be paid on the Common Shares or, if
paid, that such dividends or other distributions will continue to be paid in the
future. In addition, the Holding Company and the Company will not take any
action that would further the payment of a tax-free return of capital to the
Holding Company 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." 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."
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<PAGE> 47
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, giving effect to the Conversion:
<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 $219,242 $233,103 $247,893 $264,903
======== ======== ======== ======== ========
Tangible capital: (3)
Capital level $140,636 13.47% $218,525 19.48% $232,386 20.46% $247,176 21.48% $264,186 22.63%
Requirement 15,661 1.50 16,829 1.50 17,037 1.50 17,259 1.50 17,514 1.50
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess $124,975 11.97% $201,696 17.98% $215,349 18.96% $229,917 19.98% $246,672 21.13%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Core capital: (3)
Capital level $140,636 13.47% $218,525 19.48% $232,386 20.46% $247,176 21.48% $264,186 22.63%
Requirement (4) 31,322 3.00 33,659 3.00 34,075 3.00 34,518 3.00 35,029 3.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess $109,314 10.47% $184,866 16.48% $198,311 17.46% $212,658 18.48% $229,157 19.63%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-based capital: (5)
Capital level $146,461 28.85% $224,350 41.04% $238,211 43.03% $253,001 45.10% $270,011 47.41%
Requirement 40,619 8.00 43,734 8.00 44,289 8.00 44,880 8.00 45,561 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess $105,842 20.85% $180,616 33.04% $193,922 35.03% $208,121 37.10% $224,450 39.41%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- -------------------------
(1) Based upon total adjusted assets of $1.04 billion at December 31, 1997,
and $1.12 billion, $1.14 billion, $1.15 billion and $1.17 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 $546.7 million, $553.6 million, $561.1
million and $569.5 million 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 generally accepted accounting principles
("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."
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<PAGE> 48
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 and the 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 consolidated 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:
Preferred shares, no par value;
authorized 1,000,000 shares -
none outstanding $ - $ - $ - $ - $ -
Common shares, no par value per
share: authorized - 499,000,000
shares; assumed outstanding -
as shown(2) - - - - -
Additional paid-in capital - 209,328 246,500 285,530 330,416
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 total Common Shares sold in the Conversion and
contributed to the Foundation will be acquired by the ESOP with funds
borrowed by the ESOP from the Holding Company for a term of 15 years at
the Prime Rate less 1/2%, which is currently 8.0%. 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 the
voting interests of the Holding Company's shareholders would be diluted
approximately 7.4%. See "MANAGEMENT - Stock Benefit Plans -- Employee
Stock Ownership Plan."
(5) Assumes that a number of shares equal to 4% of the total Common Shares
sold in the Conversion and contributed to the Foundation 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 the Holding Company's 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.
-22-
<PAGE> 49
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.
-23-
<PAGE> 50
<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 contributed 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
ESOP(1) (17,850) (21,000) (24,150) (27,772)
Less Common Shares acquired by the
RRP(2) (8,925) (10,500) (12,075) (13,886)
-------- -------- -------- --------
Estimated net proceeds, as adjusted $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 earnings 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) (0.06)
------ ------ ------ ------
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 contributed to the 10,625 12,500 12,500 12,500
Foundation
Less after tax cost of Foundation (6,906) (8,125) (8,125) (8,125)
Less Common Shares acquired by
the ESOP (17,850) (21,000) (24,150) (27,772)
Less Common Shares acquired by
the RRP (8,925) (10,500) (12,075) (13,886)
-------- -------- -------- --------
Pro-forma shareholders' equity $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 contributed to the
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 Shares acquired by
the ESOP (0.80) (0.80) (0.80) (0.80)
Less Common Shares acquired by
the RRP (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro-forma shareholders' equity
per share $14.69 $13.64 $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 16.13x
</TABLE>
- ------------------------------------
(Footnotes on next page)
-24-
<PAGE> 51
(1) Assumes that 8.0% of the Common Shares sold in the Conversion and
contributed to the Foundation 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 net earnings per share. 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 total Common Shares sold in the Conversion and
contributed to the Foundation 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 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, mid-point, 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,
mid-point, 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."
-25-
<PAGE> 52
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION
If the Company were not purchasing Common Shares and contributing them
to the Foundation as part of the Conversion, Keller has estimated that the pro
forma market value of the Company, as converted, and the Holding Company would
be approximately $280.0 million, which is approximately $30.0 million greater
than the pro forma market value of the Company, as converted, and the Holding
Company when the contribution by the Company 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 by the Company to the Foundation were not made, the appraisal
prepared at that time would conclude that the pro forma market value of the
Company, as converted, and 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 relevant valuation range, assuming the Conversion had
been completed at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997,
----------------------------------------------------------------------------------------------------
At the minimum At the mid-point At the maximum At the adjusted maximum
(offering (offering (offering (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
value 223,125 238,000 262,500 280,000 301,875 322,000 347,156 370,300
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'
equity 327,625 347,389 360,728 383,980 395,033 420,572 434,486 462,654
Pro forma consolidated net
income 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 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 share 11.90x 12.20x 13.33x 13.70x 14.71x 14.93x 15.87x 16.39x
Price to book value
per share 68.07% 68.49% 72.78% 72.94% 76.45% 76.57% 79.87% 80.06%
Price to net assets
per share 18.18% 19.02% 20.83% 21.75% 23.32% 24.32% 26.03% 27.10%
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'
equity 5.32% 5.21% 5.05% 4.95% 4.82% 4.73% 4.61% 4.53%
Shareholders' equity
to assets 26.69% 27.77% 28.62% 29.82% 30.52% 31.76% 32.58% 33.86%
</TABLE>
-26-
<PAGE> 53
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for
the Company at March 31, 1998, and December 31, 1997, and selected earnings data
for the Company for the three months ended March 31, 1998 and 1997. Financial
data as of and for the three months ended March 31, 1998, and March 31, 1997, is
derived from unaudited information. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results have been made. The results of operations presented
below are not necessarily indicative of the results that may be expected for any
other period. This information should be read in conjunction with the financial
statements and notes thereto included herein.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION DATA: At March 31, 1998 At December 31, 1997
----------------- --------------------
(In thousands)
<S> <C> <C>
Total assets $1,049,459 $1,044,993
Cash and cash equivalents 25,611 34,497
Investment securities 56,290 44,370
Mortgage-backed securities 298,715 306,271
Loans, net 635,295 633,236
FHLB stock 11,335 11,136
Deposits 888,471 886,808
Total equity 144,120 141,353
</TABLE>
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------------
SUMMARY OF EARNINGS: 1998 1997
---- ----
(In thousands)
<S> <C> <C>
Interest income $19,678 $20,001
Interest expense 9,556 10,211
------- -------
Net interest income 10,122 9,790
Provision for loan loss allowances 250 -
------- -------
Net interest income after provision for loan loss
allowances 9,872 9,790
Noninterest income 378 298
Noninterest expense 6,095 6,005
------- -------
Income before provision for income taxes 4,155 4,083
Provision for income taxes 1,454 1,360
------- -------
Net income $ 2,701 $ 2,723
======= =======
</TABLE>
-27-
<PAGE> 54
<TABLE>
<CAPTION>
At or for the three months ended
March 31,
---------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1) 1998 1997
---- ----
<S> <C> <C>
Performance ratios:
Return on average assets (2) 1.03% 1.02%
Return on average equity (3) 7.59 8.48
Interest rate spread (4) 3.38 3.23
Net interest margin (5) 3.96 3.74
Noninterest expense to average assets 2.33 2.25
Efficiency ratio (6) 58.05 59.53
Average interest-earning assets to average
interest-bearing liabilities 115.50 113.32
Capital ratios:
Average equity to average assets 13.60 12.01
Equity to assets, end of period 13.73 12.23
Tangible capital 13.67 12.25
Core capital 13.67 12.25
Risk-based capital 28.24 27.13
Asset quality ratios:
Nonperforming loans to total loans at end of period (7) 1.39 1.44
Nonperforming assets to average assets (8) 0.84 0.83
Nonperforming assets to total assets at end of
period (8) 0.84 0.84
Allowance for loan losses as a percent of loans 0.96 0.79
Allowance for loan losses as a percent of nonperforming
loans (7) 70.14 55.02
Number of:
Loans 19,231 18,812
Deposits 109,556 108,882
Full service offices 14 14
</TABLE>
- -------------------
(1) Ratios for the three-month periods are annualized where appropriate.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(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) Noninterest expense divided by the sum of net interest income and
noninterest income.
(7) Nonperforming loans consists of nonaccrual loans and restructured
loans.
(8) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
Total assets increased $4.4 million, or .4%, from December 31, 1997, to
March 31, 1998. The primary reason for the increase was that loans increased
$2.0 million mostly due to increased originations.
-28-
<PAGE> 55
Total liabilities increased $1.7 million, or .2%, primarily as a result
of an increase in deposits of approximately $1.7 million. The Company had no
borrowings at March 31, 1998.
Total equity increased $2.7 million, or 2.0%, to $144.1 million at
March 31, 1998, from $141.4 million at December 31, 1997, due mainly to net
income of $2.7 million.
Nonaccrual and restructured loans decreased approximately $1.3 million
to $8.8 million at March 31, 1998, from $10.1 million at December 31, 1997.
Nonaccrual one- to four-family mortgage loans, construction loans and commercial
loans decreased $596,000, $317,000 and $268,000, respectively. At March 31,
1998, total nonaccrual and restructured loans accounted for 1.39% of net loans
receivable, compared to 1.60% at December 31, 1997. Total non-performing assets
were .84% of total assets, a decrease of .14% from .98% at December 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997
NET INCOME. Net income decreased $22,000, or .8%, to $2.7 million for
the three months ended March 31, 1998 from $2.7 million for the three months
ended March 31, 1997. The slight decrease was due to an increase in the
provisions for loan loss allowances and an increase in the provision for income
taxes, which offset the increase in net interest income.
NET INTEREST INCOME. Net interest income increased $332,000, or 3.4%,
for the first quarter of 1998 compared to the first quarter of 1997, primarily
due to a more rapid rate of decrease in the cost of deposits than in the yield
on interest-earning assets.
PROVISION FOR LOAN LOSSES. The provision for loan loss allowances
increased $250,000 in the first quarter of 1998, as a result of an increase in
the total loan portfolio, particularly in commercial and consumer loans that
generally have greater inherent risk than residential first mortgage loans.
During the three months ended March 31, 1998, the Company had charge-offs of
$60,000 and recoveries of $4,000. At March 31, 1998, the Company's allowance for
loan losses totaled $6.2 million, which was .96% of total loans.
NONINTEREST INCOME. Noninterest income increased $80,000, or 26.8%, to
$378,000 for the three months ended March 31, 1998, from $298,000 for the three
months ended March 31, 1997. The increase was primarily due to increases in
service charges and miscellaneous fees.
NONINTEREST EXPENSE. Total noninterest expense increased $90,000, or
1.5%, for the first quarter of 1998 compared to the first quarter of 1997,
primarily as a result of increases in salaries and employee benefits expenses.
FEDERAL INCOME TAXES. The provision for federal income taxes increased
$94,000, or 6.9%, for the first quarter of 1998 compared to the first quarter of
1997, due to an increase in pre-tax income.
-29-
<PAGE> 56
CONDENSED STATEMENTS OF INCOME
The following are condensed statements of income of the Company for
each of the years in the three year period ended December 31, 1997.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest and dividend income $ 82,685 $81,749 $79,834
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 1,564 1,291 1,554
Noninterest expenses (1) 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>
(1) For the year ended December 31, 1996, noninterest expenses include the
$5.9 million one-time assessment imposed on the Company as a result of
legislation to recapitalize the SAIF.
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
-30-
<PAGE> 57
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.
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,
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<PAGE> 58
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 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."
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<PAGE> 59
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 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 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.
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<PAGE> 60
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 OTS recently completed an examination of the Company's year 2000
policies and plans and found the Company's actions to be satisfactory.
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
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.
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<PAGE> 61
<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 1,022,994 79,834 7.80
Noninterest earning assets 24,985 23,809 23,708
---------- ---------- ----------
Total assets $1,057,758 $1,084,630 $1,046,702
========== ========== ==========
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
liabilities 19,109 18,744 16,718
---------- ---------- ----------
Total liabilities 923,023 959,028 930,670
Equity 134,735 125,602 116,012
---------- ---------- ----------
Total liabilities and $1,057,758 $1,084,630 $1,046,682
========== ========== ==========
equity
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.
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<PAGE> 62
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.
At December 31,
1997
---------------
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
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
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<PAGE> 63
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,
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<PAGE> 64
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. The Company also invests
generally in short maturity medium-term corporate notes of investment grade. The
notes, which include debentures and collateralized notes, generally provide a
spread above the risk-free rate afforded by comparable maturity U.S. Treasury
securities. 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.
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<PAGE> 65
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.
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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
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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."
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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.
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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
---- ---- ----
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <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%
Multifamily 8,944 1.36 8,778 1.37 16,042 2.82
Nonresidential 33,479 5.07 35,315 5.51 36,845 6.48
Land 285 0.04 195 0.03 1,280 0.23
-------- ------ -------- ------ -------- ------
Total permanent 532,385 80.66 526,377 82.14 482,380 84.92
Construction loans:
One- to four-family 24,044 3.64 27,610 4.31 19,804 3.49
Multifamily 325 0.05 490 0.08 597 0.11
-------- ------ -------- ------ -------- ------
Total construction 24,369 3.69 28,100 4.39 20,401 3.60
-------- ------ -------- ------ -------- ------
Total real estate loans 556,754 84.35 554,477 86.53 502,781 88.52
Consumer loans
Home equity 17,097 2.59 14,581 2.28 11,439 2.01
Auto 2,457 0.37 3,486 0.54 4,582 0.81
Education 3,479 0.53 2,701 0.42 2,788 0.49
Other (1) 20,355 3.08 18,837 2.94 17,384 3.06
-------- ------ -------- ------ -------- ------
Total consumer 43,388 6.57 39,605 6.18 36,193 6.37
Commercial loans 59,897 9.08 46,742 7.29 29,043 5.11
-------- ------ -------- ------ -------- ------
Total loans 660,039 100.00% 640,824 100.00% 568,017 100.00%
====== ====== ======
Less net items 26,803 23,901 21,328
-------- -------- --------
Total loans, net $633,236 $616,923 $546,689
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1994 1993
---- ----
Percent of Percent of
Amount total loans Amount total loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Real estate loans:
Permanent
One- to four-family $386,663 73.72% $346,183 73.12%
Multifamily 14,838 2.83 17,067 3.60
Nonresidential 43,235 8.24 47,482 10.03
Land 1,666 0.32 1,208 0.26
-------- ------ -------- ------
Total permanent 446,402 85.11 411,940 87.01
Construction loans:
One- to four-family 18,200 3.47 15,286 3.23
Multifamily 994 0.19 56 0.01
-------- ------ -------- ------
Total construction 19,194 3.66 15,342 3.24
-------- ------ -------- ------
Total real estate loans 465,596 88.77 427,282 90.25
Consumer loans
Home equity 11,265 2.15 11,613 2.45
Auto 2,339 0.45 1,931 0.41
Education 2,217 0.42 2,130 0.45
Other (1) 15,907 3.03 12,002 2.54
-------- ------ -------- ------
Total consumer 31,728 6.05 27,676 5.85
Commercial loans 27,165 5.18 18,476 3.90
-------- ------ -------- ------
Total loans 524,489 100.00% 473,434 100.00%
====== ======
Less net items 21,076 20,510
-------- --------
Total loans, net $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.
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<PAGE> 70
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
loans 2,078 2,217 2,038 4,301 14,649 8,088 108 33,479
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:
Due after December 31, 1998
---------------------------
(In thousands)
Fixed rate of interest $423,877
Adjustable rate of interest 156,777
--------
$580,654
========
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
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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 $4.9 million, or 1.0% 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 guarantees 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.
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<PAGE> 72
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.
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<PAGE> 73
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. At December 31, 1997, $2.1
million of the Company's commercial loans were nonperforming.
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.
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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.
-48-
<PAGE> 75
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.
-49-
<PAGE> 76
Based on such limits, the Company could lend approximately $21.0
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.
-50-
<PAGE> 77
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.
-51-
<PAGE> 78
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:
At December 31,
--------------------------
1997 1996
---- ----
(In thousands)
Classified assets:
Substandard $9,188 $9,205
Doubtful - -
Loss 151 251
------- -------
Total classified assets $9,339 $9,456
====== ======
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.
-52-
<PAGE> 79
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>
-53-
<PAGE> 80
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 to 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. The Company also invests generally in short maturity
medium-term corporate notes of investment grade. The notes, which
-54-
<PAGE> 81
include debentures and collateralized notes, generally provide a spread above
the risk-free rate afforded by comparable maturity U.S. Treasury securities. 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 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.
-55-
<PAGE> 82
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%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31
----------------------------------------
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>
-56-
<PAGE> 83
OP
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 37,162 7.09 109,601 7.13 158,718 7.14 305,481 310,409 7.13
securities ------- ---- -------- ---- -------- ---- -------- -------- ----
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.
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<PAGE> 84
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
------ -------- -------- ------ -------- --------
(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
-58-
<PAGE> 85
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:
Maturity Amount
(In thousands)
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
=======
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:
Year ended December 31,
---------------------------------
1997 1996
---- ----
(Dollars in thousands)
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)%
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
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<PAGE> 86
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.
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<PAGE> 87
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. The OTS
recently completed an examination of the Company's Year 2000 policies and plans
and found the Company's actions to be satisfactory.
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."
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<PAGE> 88
CHANGE IN ACCOUNTANTS
As a result of the Company's decision to convert from a mutual savings
and loan association to a permanent capital stock savings and loan association,
the Company decided on November 20, 1997, to replace Packer, Thomas & Co. and to
engage Deloitte & Touche LLP as independent auditors. 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 decision to change
independent auditors was approved by the Board of Directors upon recommendation
by the Audit Committee of the Board of Directors.
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 the Company and Packer, Thomas & Co. for the years ended December 31,
1996 and 1995 and through November 20, 1997, or with Deloitte & Touche LLP for
the year ended December 31, 1997, 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 five members: Richard M. Barrett, Gary Keller, Douglas M.
McKay, Herbert F. Schuler, Sr. and John F. Zimmerman, Jr. Each director is
elected for a one-year term and until his or her successor is elected or until
his or her earlier resignation, removal from office or death. 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.
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<PAGE> 89
The following table presents certain information with respect to the
present directors and the executive officers of the Company:
<TABLE>
<CAPTION>
Year of
commencement Term
Name Age (1) Position(s) with 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
Gary Keller 56 Director 1982 2000
Patrick A. Kelly 39 Director, Treasurer, CFO and Senior Vice 1996 1999
President
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.
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.
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.
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
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<PAGE> 90
additionally, as President of the Company since 1996. From 1991 to 1995, Mr.
McKay was employed as Executive Vice President of the Company.
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.
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 during the year ended December 31, 1997. Upon
completion of the Conversion, the Audit Committee will become a committee of the
Holding Company in accordance with the requirements of Nasdaq and will have a
majority of outside directors.
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.
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<PAGE> 91
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:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------------------------------
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 $24,412 (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.
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<PAGE> 92
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
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
35,000 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 approximately 25, 15 and 41
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.
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<PAGE> 93
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 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 total Common Shares sold in connection with the
Conversion and contributed to the Foundation. 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 the
Prime Rate less 1/2%. Based on the Prime Rate as of May 14, 1998, the ESOP rate
would be 8.0%. 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
contributions 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.
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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 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 or 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 total Common Shares sold in the
Conversion and contributed to the Foundation 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 not more than 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
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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, directors emeritus, officers, and certain key employees of the
Company with an ownership interest in the Holding Company in a manner designed
to compensate such 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 total Common Shares sold in the
Offering and contributed to the Foundation. 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 or 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 eligible 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 eligible shares; and (iii) RRP awards will be earned at the rate of not
more than 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 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 the 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
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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 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 $346,000, respectively.
In recent years, the Company has paid annual bonuses to members of
management on a discretionary basis as determined by the non-employee directors
of the Company. Following the completion of the Conversion, the Board of
Directors of the Company anticipates establishing a formalized bonus plan that
provides for bonus payments to management based on performance-related criteria.
At this time, the Board has not determined such criteria.
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
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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 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
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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."
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
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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 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
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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 $21.0
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 -- Loans 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 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
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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.
In January 1998, the OTS issued a proposal to amend the distributions
limits. Under that proposal, an association owned by a holding company would
still be required to provide either a notice or an application to the OTS,
although under certain circumstances a savings association without a holding
company having an examination rating of 1 or 2 could make a capital distribution
without notice to the OTS, if it would remain adequately capitalized, after the
distribution is made.
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
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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 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 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
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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.
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. 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, 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.
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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 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
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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 (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 than 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
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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
consequence of legislative reforms enacted July 1, 1997. Tax liability, however,
continues to be measured by both net income and net worth. In general, tax
liability will be the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.40% of taxable net worth. Under these alternative measures of computing
tax liability, the states to which total net income and total net worth will be
apportioned or allocated will continue to be determined by complex formulas, but
the formulas change. The minimum tax will still be $50 per year and maximum tax
liability as measured by net worth will be limited to $150,000 per year. The
special litter taxes remain in effect. Various other changes in the tax law may
affect the 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
The Board of Directors of the Company has 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 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
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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 who maintain a bona fide residence in Columbiana, Mahoning or
Trumbull County, 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 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 intends to purchase
from the Holding Company up to 1,250,000 common shares which will then be
contributed to the Foundation. The Board of Directors believes that the
purchase of common shares from the Holding Company and the contribution of such
shares to the Foundation will benefit the long-term value of the Company's
community banking franchise by enhancing the Company's visibility and reputation
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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 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. 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. The contribution of Common Shares to the
Foundation 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
utilize a unified charitable donation strategy with centralized responsibility
for administration and allocation of corporate charitable funds and enables the
Company to provide community support in future years, regardless of the
Company's earnings. The contribution to the Foundation will not 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 business of the Foundation is conducted by an independent trustee,
which is currently National City Bank, Northeast, located at 20 Federal Plaza,
Youngstown, Ohio 44503. 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, through a distribution committee of the
Company. The committee consists of Douglas M. McKay, the Chairman of the Board,
President and Chief Executive Officer of the Company, Donald J. Varner, the
Secretary, Senior Vice President of Retail Banking and a director of the Company
and Patrick A. Kelly, the Chief Financial Officer, Treasurer, Senior Vice
President and a director of the Company. In connection with the Conversion,
Messrs. McKay, Varner and Kelly have indicated an intent to purchase, together
with their Associates, 140,000, 70,000 and 70,000 shares, respectively, or .56%,
.28% and .28%, respectively, of the total number of shares sold in the
Conversion, assuming the sale of 25,000,000 Common Shares at the mid-point of
the Adjusted Valuation Range. See "Intended Purchases by Directors and Executive
Officers." Each director, officer and employee of the Company, as well as any
person who has the power to direct the management or policies of the Company or
any other person who owes a fiduciary duty to the Company, must comply with the
regulations of the OTS regarding conflicts of interest if such person is also a
trustee of the Foundation, a member of the distribution committee or an employee
of the Foundation.
The Company proposes to purchase from the Holding Company and
contribute to the Foundation a number of shares of the Holding Company equal to
5% of the Common Shares sold in the Conversion, subject to the overall
limitation of 1,250,000 common shares. The contribution by the Company to the
Foundation 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 shares would have a
market value of $10,625,000 and $12,500,000, respectively, based on the purchase
price of $10 per share. Keller, an independent appraiser of financial
institutions, considered the effect of the contribution of shares to the
Foundation when determining the pro forma market value of the Company, as
converted, and the Holding Company. Keller determined that the contribution of
common shares by the Company would dilute the equity and earnings of the initial
shareholders of the Holding Company and that the contribution by the Company
would result in a charge to the Company's earnings, therefore resulting in a
lower pro forma market value of the Company, as converted, and the Holding
Company. See "RISK FACTORS - Contribution to the Foundation." As a result of the
contribution by the Company to the Foundation and its impact on the pro forma
market value of the Company, as converted, and the Holding Company, the Holding
Company will offer 2,550,000, 3,000,000, 3,262,500 and 3,564,375 fewer shares at
the
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minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation
Range, than if it had not made such contribution. Based on the $10 price per
share, the Holding Company will receive $25.5 million, $30.0 million, $32.6
million and $35.6 million less in gross proceeds than it would have if the
contribution to the Foundation were not made. See "COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITHOUT FOUNDATION."
Notwithstanding the impact of the contribution on the Offering, the
Company and the Holding Company determined to fund the Foundation with common
shares of the Holding Company 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 a cash contribution since, as a shareholder,
the Foundation will share in the growth and success of the Company and 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 income 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, 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
Holding 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 purchase and contribution by the
Company of 1,250,000 common shares to the Foundation, there will be a dilution
of approximately 4.14% to the ownership 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 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 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 increase the funding of 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 by the Company 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 by the Company to the Foundation 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 20.46%,
20.46% and 43.03%, respectively. See "REGULATORY CAPITAL COMPLIANCE,"
"CAPITALIZATION," AND "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH
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NO FOUNDATION." The amount of the contribution by the Company 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 has been advised by its independent tax advisor that the
Company's contribution of shares to the Foundation would not constitute an act
of self-dealing, and that the Company will be entitled to a deduction in the
amount of the $10 purchase price per share, subject to the annual deduction
limitation described above. The 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 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 Company estimates that all of the
deduction should be deductible over the six-year period. The Company does not
anticipate making any further contributions to the Foundation during 1998 or
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. does expect to continue its practice of making small donations,
directly to 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. The
Company may make donations to charitable institutions in an aggregate amount not
to exceed $80,000 per year consistent with its past practices. During 1996 and
1997, the Company directly donated approximately $57,000 and $64,000,
respectively, to charitable institutions in its community.
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 tax. 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 is
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 subject to the following conditions of the OTS approval of the
Conversion: (i) the Foundation will be subject to examination by the OTS; (ii)
the Foundation must comply with supervisory directives imposed by the OTS; (iii)
the Foundation must provide annual reports to the OTS describing the grants made
and grant recipients; (iv) the Committee will operate in accordance with written
policies adopted by the Board of Directors, including a conflict of interest
policy; the Foundation shall not engage in self-dealing and shall comply with
all laws necessary to maintain its tax exempt status under the Code; (vi) any
common shares held by the Foundation must be voted in the same ratio as all
other outstanding common shares on all proposals considered by shareholders of
the Holding Company; provided, however, that, consistent with the condition, the
OTS would waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause a violation of the law
of the State of Ohio and the OTS determines that federal law would not preempt
the application of the laws of Ohio to the Foundation; (b) would cause the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) would cause the Foundation to
be subject to an excise tax under Section 4941 of the Code; (vii) an operating
plan for the Foundation acceptable to the OTS Regional Director must be
submitted to the OTS prior to the consummation of the Conversion; (viii) any
common shares subsequently purchased by the Foundation will be aggregated with
any shares repurchased by the Company or the Holding Company for purposes of
calculating the number of shares which may be repurchased during the three-year
period subsequent to the Conversion; and (ix) any compensation paid to the
Foundation's Trustee and employees, if any, will be subject to review of the OTS
Regional Director. In order for the OTS to waive the pro rata voting condition
described above, the Holding Company's or the Foundation's legal counsel would
be required to render an opinion satisfactory to the OTS. While there is no
current intention for the Holding Company or the Foundation to seek a
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waiver from the OTS from such restrictions, there can be no assurances that a
legal opinion addressing these issues could be rendered, or if rendered, that
the OTS would grant an unconditional waiver of the voting restriction. In no
event would the voting restriction survive the sale of common shares held by the
Foundation.
APPROVAL OF THE FOUNDATION BY MEMBERS. The Company's purchase of common
shares from the Holding Company and contribution of such 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 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
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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 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.
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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;
(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.
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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 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 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 at the Conversion Rate. Any
person who elects to decrease his subscription will have the appropriate portion
of his funds promptly refunded with interest at the Conversion Rate.
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
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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 DAYLIGHT
TIME, ON JUNE 17, 1998. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE 12:00 NOON,
EASTERN DAYLIGHT TIME, ON JUNE 17, 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) 35,000 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
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Qualifying Deposits of directors and executive officers of the Company
during the twelve months preceding the Eligibility Record Date shall
not be considered in the event of an oversubscription.
(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 total Common Shares sold in the
Conversion and contributed to the Foundation, 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, 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) 35,000 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) 35,000 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
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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 "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 JUNE 17, 1998, UNLESS
EXTENDED BY THE COMPANY AND THE HOLDING COMPANY. IN ACCORDANCE WITH THE PLAN,
THE OFFERING MAY NOT BE EXTENDED BEYOND AUGUST 1, 1998, WITHOUT THE APPROVAL OF
THE OTS AND THE DIVISION.
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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 35,000 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 maintains
a bona fide residence in Columbiana, Mahoning or Trumbull County, 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.
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 the Underwriters. 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 the Underwriters, nor any registered broker-dealer shall have any
obligation to take or purchase any Common Shares in the Public Offering;
however, the Underwriters 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, together with any
Associate or group Acting in Concert, will be permitted to subscribe in the
Public Offering for more than 35,000 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. Each Eligible Account Holder,
Supplemental Eligible Account Holder and Other Eligible Member may purchase in
the Subscription Offering not more than 35,000 Common Shares, regardless of the
number of accounts held by such person. 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 35,000 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 and the Public Offering up to
35,000
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Common Shares in the aggregate. 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 Foundation or
the ESOP, which intends to purchase up to 8% of the total Common Shares sold in
the Conversion and contributed to the Foundation. 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.
"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 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
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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 the Underwriters, who
are 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 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 and officers
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 the Settlement Date,
funds will earn interest at the current passbook savings account rate (the
"Conversion Rate"), which is currently 2.48%, with an annual percentage yield of
2.5%, until the completion of the Offering. Funds will be returned promptly in
the event the Conversion is not consummated.
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EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond August 1, 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 at the Conversion Rate.
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 Daylight Time, on June 17, 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 DAYLIGHT
TIME, ON JUNE 17, 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."
In the event that (a) a Stock Order Form is not delivered and is
returned to the Holding Company by the United States Postal Service, (b) the
Holding Company is unable to locate the addressee, or (c) the Stock Order Form
is not received, is received after 12:00 noon, Eastern Daylight Time, on June
17, 1998, is defectively completed or executed, or is not accompanied by full
payment for the shares subscribed for (including instances where a savings
account balance from which withdrawal is authorized is insufficient to fund the
amount of such required payment or funds that have been wired to such account
for the purpose of purchasing shares), the subscription rights for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed Stock Order Form within the time period specified. The
Holding Company may, but will not be required to, waive any irregularity on any
Stock Order Form or require the submission of corrected Stock Order Forms or the
remittance of full payment for subscribed shares by such date as the Holding
Company specify. The waiver of an irregularity on a Stock Order Form in no way
obligates the Holding Company to waive any other irregularity on that, or any
irregularity on any other Stock Order Form. Waivers will be considered on a case
by case basis. Photocopies of Stock Order Forms, payments from private third
parties, or electronic transfers of funds will not be accepted. The Holding
Company's interpretation of the terms and conditions of the Plan and of the
acceptability of the Stock Order Forms will be final. The Company and the
Holding Company have the right to investigate any irregularity on any Stock
Order Form. Qualifying deposits will be split in the case of multiple orders.
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 AUGUST 1, 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 AT THE CONVERSION RATE. ANY PERSON WHO ELECTS TO DECREASE
HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF
HIS FUNDS PROMPTLY REFUNDED WITH INTEREST AT THE CONVERSION RATE. IN ADDITION,
IF THE PURCHASE
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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, including wire transfers to an existing account. The
Company cannot lend money or otherwise extend credit to any person to purchase
Common Shares.
Payments made in cash (if delivered in person) 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 Conversion Rate,
which is currently 2.48% with an annual percentage yield of 2.5%, 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) 747-1111 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 at the Conversion Rate, and all charges to deposit
accounts will be rescinded. If the Conversion is completed, 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. Purchasers may not be able to sell the Common Shares which
they purchased until certificates for the Common Shares are available and
delivered to them, even though trading for the Common Shares may have commenced.
Allocations of Common Shares, if any, will be deemed final only
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upon shareholder receipt of the certificate representing the Common Shares. 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>
Position with the Percent of
Holding Company Total Aggregate total
Name and the Company (1) shares (2) purchase price (2) offering (3)
- ---- --------------- ------ -------------- --------
<S> <C> <C> <C> <C>
Richard M. Barrett Director 70,000 $ 700,000 .28%
James E. Bennett, Jr.(4) - 1,000 10,000 -
Charles. B. Cushwa, III(4) - 70,000 700,000 .28
William A. Holdford(5) - 10,000 100,000 .04
Donald R. Inglis(4) - 60,000 600,000 .24
Gary Keller Director 70,000 700,000 .28
Patrick A. Kelly(6) Treasurer 70,000 700,000 .28
Douglas M. McKay Chairman of 140,000 1,400,000 .56
the Board and President
Herbert F. Schuler, Sr. Director 105,000 1,050,000 .42
Clarence R. Smith, Jr.(4) - 25,000 250,000 .10
Robert J. Steele, Jr.(7) - 10,000 100,000 .04
Donald J. Varner(8) Secretary 70,000 700,000 .28
John F. Zimmerman, Jr. Director 35,000 350,000 .14
------- ---------- ----
All directors and executive
officers as a group (13
persons) 736,000 $7,360,000 2.94%
======= ========== ====
</TABLE>
- -----------------------------
(1) Unless otherwise noted, the individual holds the same position with
both the Company and the Holding Company.
(2) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
(3) 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."
(4) Messrs. Bennett, Cushwa, Inglis and Smith are directors of the
Company.
(5) Mr. Holdford is the Vice President of Loan Administration of the
Company.
(6) Mr. Kelly is the Treasurer, Chief Financial Officer, Senior Vice
President and a director of the Company.
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(7) Mr. Steele is the Vice President of Savings Administration of the
Company.
(8) Mr. Varner is the Secretary, Senior Vice President of Retail Banking
and a director of the Company.
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.
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. Pro forma shareholders' equity per share and pro forma earnings
per share decrease moving from the minimum to the adjusted maximum 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 at the Conversion Rate. Any person who elects to
decrease his subscription will have the appropriate portion of his funds
promptly refunded with interest at the Conversion Rate.
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
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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.
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, after such a repurchase, 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 and their associates 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.
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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 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 RELATED 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.
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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 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
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<PAGE> 128
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 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
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<PAGE> 129
Securities (the "Securities Division") and provides the target company with
certain information in respect of the offeror, his ownership of the company's
shares and his plans for the company, and (ii) within ten days following such
filing either (a) no hearing is required by the Securities Division, (b) a
hearing is requested by the target company within such time but the Securities
Division finds no cause for hearing exists, or (c) a hearing is ordered and upon
such hearing the Securities Division adjudicates that the offeror proposes to
make full, fair and effective disclosure to offerees of all information material
to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
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 75% 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.
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<PAGE> 130
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.
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 499,000,000 common shares, and 1,000,000 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.
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."
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<PAGE> 131
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."
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 the
Underwriters by their counsel, Luse Lehman Gorman Pomerenck & Schick, A
Professional Corporation, Washington, D.C.
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<PAGE> 132
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.
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. 333-47957) 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.
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<PAGE> 133
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
PAGE
----
PROSPECTUS SUMMARY..............................................1
SELECTED FINANCIAL INFORMATION AND OTHER DATA..................10
RISK FACTORS...................................................12
USE OF PROCEEDS................................................18
MARKET FOR COMMON SHARES.......................................19
DIVIDEND POLICY................................................20
REGULATORY CAPITAL COMPLIANCE..................................21
CAPITALIZATION.................................................22
PRO FORMA DATA.................................................23
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITHOUT FOUNDATION.............................................26
RECENT DEVELOPMENTS............................................27
THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
CONDENSED STATEMENTS OF INCOME.................................30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............30
THE BUSINESS OF THE COMPANY....................................41
CHANGE IN ACCOUNTANTS..........................................62
MANAGEMENT.....................................................62
REGULATION.....................................................70
TAXATION.......................................................77
THE CONVERSION.................................................80
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND
THE COMPANY AND RELATED ANTI-TAKEOVER PROVISIONS..............100
DESCRIPTION OF AUTHORIZED SHARES..............................104
REGISTRATION REQUIREMENTS.....................................105
LEGAL MATTERS.................................................105
EXPERTS.......................................................106
ADDITIONAL INFORMATION........................................106
FINANCIAL STATEMENTS..........................................F-i
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.
Up to 28,937,500 Common Shares
UNITED COMMUNITY
FINANCIAL CORP.
------------
PROSPECTUS
------------
TRIDENT SECURITIES, INC.
CIBC OPPENHEIMER CORP.
MCDONALD & COMPANY SECURITIES, INC.
May 15, 1998
<PAGE> 134
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
Page
----
Independent Auditors' Reports......................................... F-1, 2
Statements of Financial Condition as of December 31, 1997 and 1996.... F-3
Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995..................... F-4
Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995..................... F-5
Statements of Equity for the
Years Ended December 31, 1997, 1996 and 1995..................... F-6
Notes to Financial Statements......................................... F-7
* * *
All financial statement schedules are omitted as the required
information either is not applicable or is included in the Financial
Statements or related Notes.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets,
liabilities (contingent or otherwise), revenues or expenses.
<PAGE> 135
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 these 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> 136
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, equity, and cash flows for each of 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 each of the two years then ended in conformity
with generally accepted accounting principles.
Packer, Thomas & Co.
Youngstown, Ohio
February 28, 1997
F-2
<PAGE> 137
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> 138
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> 139
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 (133,357) (194,650) (142,779)
Loans acquired (116) (24) (4,024)
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> 140
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> 141
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.
The Company formed a charitable foundation (the "Foundation") in 1991 to
further the commitment to the communities it serves. At the time of the
conversion, the Company plans to contribute to the Foundation 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.
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.
F-7
<PAGE> 142
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
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.
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
F-8
<PAGE> 143
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
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.
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> 144
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 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,
F-10
<PAGE> 145
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
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> 146
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
======= ==== === =======
</TABLE>
<TABLE>
<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. The corporate notes
consist primarily of medium-term notes issued by corporations with
investment grade ratings.
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> 147
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 available for sale 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> 148
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 available for sale 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
F-14
<PAGE> 149
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
ended December 31, 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> 150
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 (with interest rates that ranged from 7 1/4% to 8 1/2%) 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> 151
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 specific 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 the 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.
F-17
<PAGE> 152
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
6. PREMISES AND EQUIPMENT AND OTHER ASSETS
Premises and equipment consist of the following:
<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>
Accrued interest receivable consists of the following:
December 31,
----------------------------
1997 1996
---- ----
(In thousands)
Investment securities $ 639 $ 314
Mortgage-backed securities 2,252 2,758
Loans 3,523 3,378
------ ------
Total $6,414 $6,450
====== ======
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>
F-18
<PAGE> 153
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
<TABLE>
<CAPTION>
Interest expense on deposits is summarized as follows:
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest-bearing checking $ 1,165 $ 1,154 $ 1,058
Savings accounts 7,387 7,879 8,123
Money market accounts 1,741 2,094 2,307
Certificates of deposit 30,170 31,882 29,616
------- ------- -------
$40,463 $43,009 $41,104
======= ======= =======
</TABLE>
A summary of certificates of deposit by maturity follows:
December 31, 1997
-----------------
(In thousands)
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
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.
The provision for federal income taxes consists of the following
components:
Year ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Current $6,807 $3,055 $5,875
Deferred 175 277 832
------ ------ ------
Total $6,982 $3,332 $6,707
====== ====== ======
F-19
<PAGE> 154
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
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 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
F-20
<PAGE> 155
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
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 $146,461 28.85% $40,619 8.00% $50,774 10.00%
assets)
Tier 1 capital (to risk-weighted 140,636 27.70 * * 30,464 6.00
assets)
Core (Tier 1) capital (to 140,636 13.47 31,322 3.00 52,203 5.00
adjusted total assets)
Tangible capital (to adjusted
total assets) 140,636 13.47 15,661 1.50 * *
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)
Total capital (to risk-weighted $132,374 26.15% $40,496 8.00% $50,620 10.00%
assets)
Tier 1 capital (to risk-weighted 127,589 25.21 * * 30,372 6.00
assets)
Core (Tier 1) capital (to 127,589 11.87 32,247 3.00 53,745 5.00
adjusted total assets)
Tangible capital (to adjusted
total assets) 127,589 11.87 16,124 1.50 * *
</TABLE>
* Ratio is not required under regulations.
F-21
<PAGE> 156
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-22
<PAGE> 157
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>
As of December 31,
-----------------------
1997 1996
---- ----
(In thousands)
<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-23
<PAGE> 158
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 the
service and interest cost components of net periodic postretirement benefit
cost for 1997 by approximately $120,000.
F-24
<PAGE> 159
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
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 financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
F-25
<PAGE> 160
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
<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), 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
