<PAGE>
As filed with the Securities and Exchange Commission on June 4, 1999
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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UNITED COMMUNITY FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
OHIO 6035 34-1856319
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(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
275 Federal Plaza West
Youngstown, Ohio 44503
(330) 742-0500
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(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
Copies to:
DOUGLAS M. MCKAY KATHLEEN M. MOLINSKY, ESQ. THOMAS C. BLANK, ESQ.
United Community Vorys, Sater, Seymour and Werner & Blank Co.,
Financial Corp. Pease L.P.A.
275 Federal Plaza West 221 E. Fourth Street 7205 West Central Avenue
Youngstown, Ohio 44503 Suite 2100, Atrium Two Toledo, Ohio 43617
(330)742-9801 Cincinnati, Ohio 45202 (419) 841-8051
(513) 723-4089
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement has become
effective and all other conditions to the consummation of the transactions have
been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------
<TABLE>
<CAPTION>
Title of each Proposed maximum
class of securities Amount to be offering price per Proposed maximum Amount of
to be registered registered unit (1) aggregate price registration fee
- ------------------- ---------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, 1,700,000 shares $ 12.47 $21,196,875 $5,893
no par value of Common Stock
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f) on the basis of the market value of a common share of
United Community Financial Corp. on June 1, 1999, as determined pursuant
to Rule 457(c).
<PAGE>
PROSPECTUS PROXY STATEMENT
UNITED COMMUNITY BUTLER WICK CORP.
FINANCIAL CORP. for
for issuance of up to Special Meeting of Shareholders
1,700,000 Common Shares
The boards of directors of United Community Financial Corp. and Butler Wick
Corp. have agreed to a merger transaction in which United Community will acquire
Butler Wick. After the merger, Butler Wick will be a wholly-owned subsidiary of
United Community. United Community will issue its common shares in exchange for
the outstanding Butler Wick shares.
If the merger is completed and you do not dissent from the merger, the
number of United Community shares you will receive for each of your Butler Wick
shares will depend on the average of the daily closing sales prices of United
Community shares reported on the Nasdaq National Market for the 20 consecutive
full trading days ending on the trading day before the completion of the merger.
- If the average of the closing sales prices over the 20 trading day
period is less than or equal to $15.00, you will receive, for each
Butler Wick share you own, a number of common shares equal to 1.7
million divided by the number of Butler Wick shares issued and
outstanding immediately before the completion of the merger. For
example, if the merger had been completed on __________, 1999, the day
before we printed this prospectus/proxy statement, you would have
received _________ United Community shares for each of your Butler
Wick shares, based on the 88,970 Butler Wick shares outstanding and
the average sales price of $________, computed as of _________, 1999.
If the average sales price is less than $10.00, the board of directors
of Butler Wick has the right to terminate the merger.
- If the average of the closing sales prices over the 20 trading day
period is greater than $15.00, you will receive, for each Butler Wick
share you own, a number of common shares equal to the quotient of (A)
$25.5 million divided by the average price over the prior 20 day
trading period, (B) divided by the number of Butler Wick shares
outstanding immediately before the completion of the merger. For
example, if the average sales price of United Community shares was
$16.00 and there were 88,970 Butler Wick shares outstanding at the
time of the completion of the merger, at United Community's option,
you would receive approximately 17.9 United Community shares for each
share of Butler Wick you own multiplied by the total number of Butler
Wick shares you own.
The merger cannot be completed unless the holders of at least 44,486
Butler Wick shares approve it. The board of directors of Butler Wick has
scheduled a special meeting for its shareholders to vote on the merger. The
date, time and place of the special meeting are as follows:
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United Community shares are listed on Nasdaq under the symbol "UCFC." On
________, 1999, the date before we printed this prospectus/proxy statement,
United Community shares closed at $______ on Nasdaq.
This prospectus/proxy statement provides detailed information about the
merger. We encourage you to read this entire document carefully.
Butler Wick shareholders who dissent from the merger and follow procedures
specified on page _______ of this prospectus/proxy statement will be entitled to
dissenters' rights if the proposed merger is completed.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE UNITED COMMUNITY SHARES TO BE ISSUED IN THE MERGER
OR DETERMINED IF THIS PROSPECTUS/PROXY STATEMENT IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE UNITED COMMUNITY
SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
Prospectus/Proxy Statement dated __________, 1999, and first mailed
to shareholders of Butler Wick Corp. on or about ________, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Per share market price information. . . . . . . . . . . . . . . . . . . . . . 2
Special meeting of Butler Wick shareholders. . . . . . . . . . . . . . . . . 3
Background and reasons for the merger . . . . . . . . . . . . . . . . . . . . 3
Recommendation to shareholders. . . . . . . . . . . . . . . . . . . . . . . . 3
Opinion of Austin Associates, Inc.. . . . . . . . . . . . . . . . . . . . . . 3
Interests of directors and executive officers . . . . . . . . . . . . . . . . 3
Rights of dissenting shareholders . . . . . . . . . . . . . . . . . . . . . . 4
Tax consequences of the merger. . . . . . . . . . . . . . . . . . . . . . . . 4
Termination and amendment of the merger agreement . . . . . . . . . . . . . . 4
Accounting treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Comparative stock prices and dividends . . . . . . . . . . . . . . . . . . . . . 5
Selected consolidated financial data of United Community . . . . . . . . . . . . 7
Selected consolidated financial data of Butler Wick. . . . . . . . . . . . . . . 9
Comparative per share data . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purpose of this document . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Background and reasons for the merger . . . . . . . . . . . . . . . . . . . . 11
Opinion of Austin Associates. . . . . . . . . . . . . . . . . . . . . . . . . 12
Recommendation of the board of directors of Butler Wick . . . . . . . . . . . 14
Conversion of Butler Wick shares. . . . . . . . . . . . . . . . . . . . . . . 14
Fractional shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exchange of certificates for Butler Wick shares . . . . . . . . . . . . . . . 15
Representations and warranties. . . . . . . . . . . . . . . . . . . . . . . . 15
Conduct of business pending the merger; other agreements. . . . . . . . . . . 16
Conditions to the completion of the merger. . . . . . . . . . . . . . . . . . 18
Effective time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Termination, amendment and modification . . . . . . . . . . . . . . . . . . . 19
Interests of certain persons in the merger. . . . . . . . . . . . . . . . . . 19
Resale of United Community common shares. . . . . . . . . . . . . . . . . . . 22
Income tax consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Accounting treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Rights of dissenting shareholders. . . . . . . . . . . . . . . . . . . . . . . . 23
The special meeting of Butler Wick shareholders. . . . . . . . . . . . . . . . . 25
Time, date and place. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Purpose of the meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Shares outstanding and entitled to vote; record date. . . . . . . . . . . . . 25
Votes required. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Voting and solicitation and revocation of proxies . . . . . . . . . . . . . . 25
Unaudited pro forma condensed combined consolidated statement of financial
condition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Unaudited pro forma condensed combined consolidated statements of income . . . . 28
United Community management's discussion and analysis of financial condition
and results of operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Comparison of financial condition at March 31, 1999 and December 31, 1998. . 30
Comparison of operating results for the three months ended March 31, 1999
and March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Comparison of financial condition at December 31, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Comparison of operating results for the years ended December 31, 1998
and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Comparison of operating results for the years ended December 31, 1997
and December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Asset and liability management and market risk . . . . . . . . . . . . . . . 38
Liquidity and capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Effect of recent accounting pronouncements . . . . . . . . . . . . . . . . . 41
1998 Quarterly financial data. . . . . . . . . . . . . . . . . . . . . . . . 42
Year 2000 issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Business of United Community . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Lending activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Investment activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Regulation of United Community . . . . . . . . . . . . . . . . . . . . . . . . . 63
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Security ownership of United Community . . . . . . . . . . . . . . . . . . . . . 72
Management of United Community . . . . . . . . . . . . . . . . . . . . . . . . . 73
Description of United Community shares . . . . . . . . . . . . . . . . . . . . . 78
Butler Wick management's discussions and analysis of financial condition and
results of operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Changes in financial condition for the nine months ended March 31, 1999. . . 80
Comparison of Operating Results for the Nine Months ending March 31, 1999
and March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Comparison of financial condition at June 26, 1998 and June 27, 1997 . . . . 82
Comparison of operating results for the years ended June 26, 1998 and
June 27, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Business of Butler Wick. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Security ownership of Butler Wick. . . . . . . . . . . . . . . . . . . . . . . . 86
Executive compensation of Butler Wick. . . . . . . . . . . . . . . . . . . . . . 87
Comparison of rights of holders of United Community common
shares and holders of Butler Wick shares . . . . . . . . . . . . . . . . . . . . 87
Authorized shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Board of directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Voting rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Preemptive rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Antitakeover statutes applicable to United Community . . . . . . . . . . . . . . 88
Director and officer liability and indemnification . . . . . . . . . . . . . . . 89
Legal matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Financial Statements of United Community and Butler Wick . . . . . . . . . . . . F-1
</TABLE>
<TABLE>
<S> <C>
ANNEX A Agreement and Plan of Merger dated as of April 15, 1999, between
Butler Wick Corp. and United Community
ANNEX B Opinion of Austin Associates, Inc. dated April 15, 1999
ANNEX C Ohio Revised Code Section 1701.59
</TABLE>
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS/PROXY
STATEMENT. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS REFERRED
TO IN THIS DOCUMENT TO FULLY UNDERSTAND THE MERGER. PAGE REFERENCES ARE
INCLUDED IN THIS SUMMARY TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF TOPICS
DISCUSSED IN THIS DOCUMENT.
THE COMPANIES (PAGE ___)
United Community Financial Corp.
275 Federal Plaza West
Youngstown, Ohio 44503
(330) 742-0500
United Community Financial Corp. is an Ohio corporation whose primary
activity is holding the common shares of The Home Savings and Loan Company of
Youngstown, Ohio, an Ohio savings and loan association. As of March 31, 1999,
United Community had assets of approximately $1.3 billion and shareholders'
equity of approximately $467.0 million.
Home Savings currently conducts business from its main office in
Youngstown, Ohio and 14 full service branches which serve its primary market
area of northeastern Ohio. The principal business of Home Savings is the
origination of first mortgage loans in its primary market area. Interest earned
on loans is Home Savings' primary source of revenue.
Butler Wick Corp.
City Center One, Suite 700
Youngstown, Ohio 44501
Butler Wick Corp., an Ohio corporation, is the parent company for three
wholly-owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset
Management Company and Butler Wick Trust Company. Through these subsidiaries,
Butler Wick's business includes investment brokerage, which it has conducted for
over 70 years, and a network of integrated financial services including asset
management, trust and estate services, public finance and insurance. Butler
Wick and its subsidiaries have ten offices throughout northeastern Ohio and
western Pennsylvania.
After the merger, Butler Wick will be a wholly-owned subsidiary of United
Community and will continue to operate under the name "Butler Wick Corp."
THE MERGER (PAGES ____ THROUGH ____)
United Community and Butler Wick have executed an Agreement and Plan of
Merger providing for the merger of Butler Wick with a subsidiary of United
Community. The merger agreement must be adopted by the shareholders of Butler
Wick. Even if the Butler Wick shareholders adopt the merger agreement, the
board of directors of Butler Wick may decide not to complete the merger if the
average closing sales price of a United Community common share on Nasdaq during
the 20 trading day period before the merger is completed falls below $10.00.
If the merger is completed and you do not dissent from the merger, the
number of United Community shares you will receive in exchange for your Butler
Wick shares will depend on whether the average of the daily closing sales prices
of United Community shares for the 20 consecutive full trading days ending on
the trading day before the completion of the merger is less than or greater than
$15.00.
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<PAGE>
- If the average of the closing sale prices over the 20 trading day
period is less than or equal to $15.00, you will receive, for each
Butler Wick share you own, a number of common shares equal to 1.7
million divided by the number of Butler Wick shares issued and
outstanding immediately before the completion of the merger. For
example, if the merger had been completed on __________, 1999, the day
before we printed this prospectus/proxy statement, you would have
received _________ United Community shares for each of your Butler
Wick shares, based on the 88,970 Butler Wick shares outstanding and
the average sales price of $________, computed as of ___________,
1999, for one share of United Community.
- If the average of the closing sales price over the 20 trading day
period is greater than $15.00, you will receive a number of common
shares equal to the quotient of (A) $25.5 million divided by the
average sales price over the prior 20 day trading period, (B) divided
by the number of Butler Wick shares issued and outstanding immediately
before the completion of the merger. For example, if the average
sales price of United Community shares was $16.00 and there were
88,970 Butler Wick shares outstanding at the time of the completion of
the merger, at United Community's option, you would receive
approximately 17.9 United Community shares for each share of Butler
Wick you own multiplied by the total number of Butler Wick shares you
own.
BECAUSE THE MARKET PRICE OF UNITED COMMUNITY SHARES FLUCTUATES, WE CANNOT
PREDICT THE MARKET VALUE OF THE UNITED COMMUNITY SHARES YOU WILL RECEIVE IN THE
MERGER. WE URGE YOU TO OBTAIN CURRENT PRICE QUOTATIONS FOR THE UNITED COMMUNITY
SHARES BEFORE CASTING YOUR VOTE REGARDING THE MERGER. YOU MAY OBTAIN CURRENT
STOCK QUOTATIONS FOR UNITED COMMUNITY SHARES FROM NEWSPAPERS, THE INTERNET OR
YOUR BROKER.
We have attached the merger agreement to this document as Annex A, and we
incorporate it by reference into this prospectus/proxy statement. Please read
the merger agreement. It is the legal document that governs the merger.
PER SHARE MARKET PRICE INFORMATION (PAGE _____)
United Community shares are traded on Nasdaq. On April 15, 1999, the last
full trading day before the public announcement of the proposed merger, United
Community shares closed at $11.50. On ____________, 1999, the day before we
printed this prospectus/proxy statement, United Community shares closed at
$_______.
Butler Wick shares are not listed on an exchange or quoted on Nasdaq. The
last known sale of Butler Wick shares occurred on February 18, 1999, when Butler
Wick repurchased 400 shares from an employee who had resigned. The purchase
price was $105.21 per share, which was the value determined by the Butler Wick
board of directors based on the book value of Butler Wick as of December 31,
1998.
If the merger had occurred on _______, 1999, you would have received ____
United Community shares for each Butler Wick share you owned, based on an
average sales price of $_____ during the 20 trading day period ending on
_____________, 1999. The market value of the United Community shares you would
have received for each Butler Wick share would have been $__________.
SPECIAL MEETING OF BUTLER WICK SHAREHOLDERS (PAGES ____ AND ____)
The Butler Wick special meeting of shareholders will take place at _______
on _____________, 1999. You are entitled to cast one vote at the special
meeting for each Butler Wick share you owned on ___________, 1999. To adopt the
merger agreement, the holders of 44,486 shares, which is a majority of the
outstanding Butler Wick shares, must vote in favor of the merger agreement.
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<PAGE>
Each of the directors and executive officers of Butler Wick and its
subsidiaries has agreed to vote all of his Butler Wick shares for the adoption
of the merger agreement. As of May 1, 1999, the directors and executive
officers had the power to vote, in the aggregate, 44,086 Butler Wick shares,
which represents 49.6% of the outstanding shares and 99.1% of the shares needed
to adopt the merger agreement.
BACKGROUND AND REASONS FOR THE MERGER (PAGES ___ THROUGH __)
After careful review and consideration, the board of directors of United
Community unanimously concluded on April 15, 1999, that the terms of the merger
were fair to, and in the best interests of, the shareholders of United
Community. The board of directors based this conclusion on a variety of
factors, including the opportunity to increase the level of noninterest income
of the company and to cross-sell the deposit and loan products of Home Savings.
The board of directors of Butler Wick determined that the merger was in the
best interests of its shareholders due to the more liquid nature of the common
shares of United Community which are traded on Nasdaq, the potential ability of
Butler Wick to expand through acquiring other securities firms and hiring
additional personnel and the opinion of its financial advisor that the terms of
the merger were fair from a financial point of view to Butler Wick shareholders.
The board of directors approved the adoption and the execution of the merger
agreement on April 14, 1999.
RECOMMENDATION TO SHAREHOLDERS (PAGE __)
The board of directors of Butler Wick believes that the merger is in the
best interest of Butler Wick and its shareholders and unanimously recommends
that you vote in favor of the proposal to adopt the merger agreement.
OPINION OF AUSTIN ASSOCIATES, INC. (PAGES __ THROUGH ___)
In deciding to approve the merger, the Butler Wick board of directors
considered the oral opinion of its financial advisors, Austin Associates, Inc.
Austin Associates issued its written opinion supporting its conclusion on April
15, 1999, that the exchange ratio was fair to Butler Wick shareholders from a
financial point of view. The opinion is attached as Annex B to this
prospectus/proxy statement. You should read the opinion completely to
understand the assumptions made, matters considered and limitations of the
review undertaken by Austin Associates in providing the opinion.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS
Some of the directors and officers of Butler Wick and its subsidiaries have
interests in the merger that are different from, or in addition to, their
interests as shareholders of Butler Wick.
- Thomas J. Cavalier, currently Chairman of the board of directors and
President of Butler Wick, will be appointed to the United Community
board of directors and will continue to be the Chairman of the board
of directors and President of Butler Wick.
- Thomas J. Cavalier, Franklin S. Bennett, Jr., currently the Secretary
and General Counsel of Butler Wick, Ralph T. Meacham, currently the
Treasurer and Chief Financial Officer of Butler Wick, and James H.
Sisek, currently the President and a director of Butler Wick Trust
Company, a subsidiary of Butler Wick, will enter into three year
employment agreements that entitle these individuals to certain salary
and other payments upon certain terminations of employment.
- United Community has agreed to establish a retention program for key
employees of Butler Wick. This program will be funded by United
Community with $3.7 million in cash.
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<PAGE>
- Following the merger, United Community will indemnify and provide
insurance for the officers and directors of Butler Wick for events
occurring before the merger, including events related to the merger
agreement.
RIGHTS OF DISSENTING SHAREHOLDERS (PAGES __ THROUGH __)
Under Ohio law, you have the right to dissent from the merger and be paid
cash equal to the fair cash value of your Butler Wick shares. To exercise this
right, you must satisfy each of the following conditions:
- You must be a shareholder of record of Butler Wick on _____________,
1999;
- You must not vote in favor of the merger at the special meeting of
shareholders; and
- You must deliver a written demand for the fair cash value of your
Butler Wick shares which complies with Ohio law to Franklin S.
Bennett, Jr., the Secretary and General Counsel of Butler Wick, by
______________, 1999.
TAX CONSEQUENCES OF THE MERGER (PAGES ___ AND ___)
In most cases, Butler Wick's shareholders who exchange their Butler Wick
shares for United Community shares will not recognize a gain or loss for federal
income tax purposes. If you exchange a fractional Butler Wick share for cash or
if you dissent from the merger and receive cash in exchange for your Butler Wick
shares, the Internal Revenue Service will treat the payment as a distribution in
redemption of your Butler Wick shares subject to Section 302 of the Internal
Revenue Code of 1986, as amended.
Vorys, Sater, Seymour and Pease LLP, counsel to United Community, has
issued a tax opinion in connection with the merger. Determining the actual tax
consequences of the merger to you as an individual taxpayer, however, will
depend on your specific situation and other variables that are not within United
Community's or Butler Wick's control. You should consult a tax advisor for a
complete understanding of the merger's tax consequences to you.
TERMINATION AND AMENDMENT OF THE MERGER AGREEMENT (PAGE __)
We may agree to terminate the merger agreement at any time before the
completion of the merger, even if you have voted to adopt the merger agreement.
Also, either of us can decide, without the consent of the other, to abandon the
merger if any of the following occurs:
- Any federal or state regulatory authority denies an approval we need
to complete the merger (in a final and nonappealable way), requests
the permanent withdrawal of any application required to complete the
merger or subjects the approval of the merger to conditions we deem
unreasonable.
- We have not completed the merger by December 31, 1999 (other than
because of a knowing breach of the merger agreement by the party that
wants to terminate it).
- The other party breaches the merger agreement in a material way and
does not (or cannot) correct the breach in 30 days.
- Butler Wick's shareholders vote not to adopt the merger agreement.
In addition, United Community may abandon the merger if Butler Wick's board
of directors withdraws its recommendation to you to adopt the merger agreement
or modifies its recommendation in certain ways. If the
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<PAGE>
merger is not completed because the Butler Wick board withdrew its
recommendation after it solicited or encouraged inquiries or proposals, or
provided confidential information or engaged in negotiations concerning a
sale of or merger with another company, Butler Wick will have to pay $1.25
million to United Community.
Butler Wick may decide not to complete the merger, without penalty, if the
average closing sales price of a United Community share on Nasdaq during the 20
trading day period before the merger is completed falls below $10.00.
We may amend the merger agreement by the mutual agreement of our boards of
directors at any time before or after Butler Wick's shareholders vote to adopt
the merger agreement. However, if the Butler Wick shareholders have already
adopted the merger agreement, we may not amend the merger agreement without
their approval if the amendment would materially and adversely affect their
rights as shareholders.
ACCOUNTING TREATMENT (PAGE ___)
We expect the merger to qualify as a pooling of interests. This means we
will treat our companies as if they had always been combined for accounting and
financial reporting purposes.
COMPARATIVE STOCK PRICES AND DIVIDENDS
United Community shares are listed on Nasdaq under the symbol "UCFC."
Butler Wick shares are not actively traded, have no established public market
and are not listed on any national exchange or quotation system.
As of _____, 1999, there were 34,715,625 United Community shares issued and
held by approximately _____ holders of record. The following table shows the
high and low bid prices for United Community shares as reported by Nasdaq, and
the cash dividends per United Community share declared between July 8, 1999, the
date United Community first issued shares to the public, and ____________, 1999.
<TABLE>
<CAPTION>
CASH DIVIDEND
CALENDAR YEAR 1998 HIGH LOW DECLARED
- ------------------ ---- --- -------------
<S> <C> <C> <C>
Third Quarter $18.13 $13.50 N/A
Fourth Quarter 15.00 12.88 $.075
CALENDAR YEAR 1999
- ------------------
First Quarter
Second Quarter (through
____________, 1999)
</TABLE>
As of ____________, 1999, there were 88,970 common shares of Butler Wick
outstanding and held by approximately 44 shareholders of record. Butler Wick
has not paid a cash dividend on its shares since June 1987. The last known sale
of Butler Wick shares was on February 18, 1999, when Butler Wick repurchased 400
shares from an employee who had resigned. The purchase price was $105.21, which
was the value established by the Butler Wick board of directors based on the
book value of Butler Wick as of December 31, 1998.
-5-
<PAGE>
The following table shows (a) the last reported sales prices as of April
15, 1999, the last trading day before the public announcement of the signing of
the merger agreement, (b) the last reported sales price as of ____________,
1999, the last practicable trading day before the date of this prospectus/proxy
statement, for United Community shares and Butler Wick shares, and (c) the
equivalent pro forma price of Butler Wick shares, determined by multiplying the
last reported sales price of United Community shares on April 15, 1999 by an
exchange ratio of 19.11, and the last reported sales price of United Community,
shares on ____________, 1999 by an exchange ratio of ___________. The exchange
ratio of 19.11 is the exchange ratio that would apply based on the 88,970 Butler
Wick shares outstanding on April 15, 1999, and the average closing sales price
of $11.45 for UCFC shares over the 20 trading day period ending on April 15.
The exchange ratio of ________ for _________, 1999, is the exchange ratio that
would apply based on the 88,970 Butler Wick shares outstanding on ________,
1999, and the average closing sales price of $_______ for the 20 trading day
period ending on ________, 1999.
<TABLE>
<CAPTION>
Price per Price per Equivalent price per
United Community share Butler Wick share Butler Wick share
---------------------- ----------------- --------------------
<S> <C> <C> <C>
April 15, 1999 $11.50 $105.21 $219.77
___________, 1999
</TABLE>
-6-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF UNITED COMMUNITY
The tables below contain information regarding the financial condition
and earnings of United Community for the five years ended December 31, 1998,
based on the audited consolidated financial statements of United Community.
United Community derived the historical consolidated financial data as of
March 31, 1999, and for the three months ended March 31, 1999 and 1998, from
its unaudited consolidated financial statements. In the opinion of United
Community management, however, United Community has made all normal,
recurring adjustments necessary for a fair presentation of consolidated
financial condition and results of operations. Results from the three months
ended March 31, 1999 are not necessarily indicative of the expected results
for the full year. Please read these tables together with the consolidated
financial statements, including the related notes, and other financial
information of United Community included elsewhere in this prospectus/proxy
statement.
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------- ----------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA: 1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $1,263,155 $1,049,459 $1,257,305 $1,044,993 $1,074,736 $1,077,523 $1,018,879
Cash and cash equivalents 165,494 25,611 170,508 34,497 19,668 41,813 20,601
Investment securities:
Available for sale 129,221 51,316 110,888 39,402 14,659 32,125 33,415
Held to maturity - 4,974 4,993 4,968 27,970 30,119 34,322
Mortgage-backed securities:
Available for sale 97,127 58,938 98,890 62,416 84,466 100,005 87,935
Held to maturity 166,996 239,777 182,999 243,848 286,384 302,107 312,300
Loans, net 670,865 635,295 657,498 633,236 616,923 546,689 503,413
Federal Home Loan Bank stock 12,164 11,335 11,958 11,136 10,370 9,675 9,043
Deposits 781,301 888,471 777,583 886,808 932,060 938,855 898,912
Total shareholders' equity 467,039 144,120 464,645 141,353 128,131 122,294 107,209
<CAPTION>
Three months ended
March 31, Year ended December 31,
----------------------- ---------------------------------------------------------------
SUMMARY OF EARNINGS: 1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -----------
(In thousands)
except per share data
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $21,598 $19,678 $85,881 $82,685 $81,749 $79,834 $74,639
Interest expense 7,507 9,556 35,755 40,463 43,009 41,104 34,898
------- ------- ------- ------- ------- ------- -------
Net interest income 14,091 10,122 50,126 42,222 38,740 38,730 39,741
Provision for (recovery of) loan loss
allowances 75 250 650 (1,546) - - (100)
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for (recovery of) loan loss
allowances 14,016 9,872 49,476 43,768 38,740 38,730 39,841
Noninterest income 390 378 2,289 1,564 1,291 1,554 1,018
Noninterest expenses (1)(2) 7,113 6,095 38,217 25,303 30,068 21,995 20,341
------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes 7,293 4,155 13,548 20,029 9,963 18,289 20,518
Provision for income taxes 2,582 1,454 4,849 6,982 3,332 6,707 7,294
------- ------- ------- ------- ------- ------- -------
Net income $ 4,711 $ 2,701 $ 8,699 $13,047 $ 6,631 $11,582 $13,224
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Basic and diluted earnings per share(3) $ .15 N/A $ .08 N/A N/A N/A N/A
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Dividends per share $ .075 N/A $ .075 N/A N/A N/A N/A
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------------
(1) For the year ended December 31, 1998, noninterest expense included $11.8
million as a result of the contribution of 1.2 million shares of United
Community to the Home Savings Charitable Foundation.
(Footnotes continued on next page)
(2) For the year ended December 31, 1996, noninterest expense included a $5.9
million one-time assessment imposed on Home Savings as a result of
legislation to recapitalize the Savings Association Insurance Fund.
(3) For the purpose of displaying six months earnings per share for the year
ended December 31, 1998, it is assumed that the conversion of Home Savings
from mutual to stock form was completed on July 1, 1998.
-7-
<PAGE>
<TABLE>
<CAPTION>
At or for the three months
ended March 31, At or for the year ended December 31,
-------------------------- ----------------------------------------------------
SELECTED FINANCIAL RATIOS AND 1999 1998 1998 1997 1996 1995 1994
OTHER DATA: ---------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Performance ratios: (1)
Return on average assets (2) 1.49% 1.03% 0.73% 1.23% 0.61% 1.11% 1.30%
Return on average equity (3) 4.04 7.59 3.03 9.68 5.28 9.98 12.77
Interest rate spread (4) 3.12 3.38 3.32 3.53 3.14 3.30 3.64
Net interest margin (5) 4.58 3.96 4.33 4.09 3.65 3.79 4.01
Noninterest expense to average
assets 2.26 2.33 3.21 2.39 2.77 2.10 2.01
Efficiency ratio (6) 49.12 58.05 72.91 57.79 75.11 54.60 49.91
Average interest-earning
assets to average
interest-bearing liabilities 159.79 115.50 132.69 114.26 112.82 111.93 110.58
Capital ratios:
Average equity to average 36.95 13.60 24.13 12.74 11.58 11.08 10.21
assets
Equity to assets at period end 36.97 13.73 36.96 13.53 11.92 11.35 10.52
Tangible capital 26.97 13.67 26.80 13.47 11.87 11.24 10.70
Core capital 26.97 13.67 26.80 13.47 11.87 11.24 10.70
Risk-based capital 51.19 28.24 51.51 28.85 26.15 26.65 25.35
Asset quality ratios:
Nonperforming loans to total 1.00 1.39 1.15 1.60 1.59 1.11 1.34
loans at period end (7)
Nonperforming assets to 0.54 0.84 0.64 0.96 0.91 0.59 0.82
average assets (8)
Nonperforming assets to total 0.54 0.84 0.61 0.98 0.92 0.57 0.82
assets at period end (8)
Allowance for loans losses as 0.95 0.96 0.96 0.94 0.81 0.93 1.01
a percent of loans
Allowance for loans losses as
a percent of nonperforming 96.75 70.14 84.62 59.02 51.37 84.18 75.51
loans (7)
</TABLE>
- -----------------------------
(1) Performance ratios for 1998 reflect the $11.8 million contribution to the
Home Savings Charitable Foundation and performance ratios for 1996 reflect
the $5.9 million one-time assessment imposed on Home Savings as a result of
legislation to recapitalize the Savings Association Insurance Fund. Ratios
for the three month periods are annualized.
(2) Net income divided by average total assets. Excluding the effect of the
contribution to the Home Savings Charitable Foundation, the return on
average assets would have been 1.37% for the year ended December 31, 1998.
Excluding the effect of the one-time Savings Association Insurance Fund
assessment, Home Savings' 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
contribution to the Home Savings Charitable Foundation, the return on
average equity would have been 5.63% for the year ended December 31, 1998.
Excluding the effect of the one-time Savings Association Insurance Fund
assessment, Home Savings' 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.
(Footnotes continued on next page)
-8-
<PAGE>
(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 contribution to the Home
Savings Charitable Foundation, the efficiency ratio would have been 50.33%
for the year ended December 31, 1998. Excluding the effect of the one-time
Savings Association Insurance Fund assessment, the efficiency ratio would
have been 60.37% for the year ended December 31, 1996.
(7) Nonperforming loans include nonaccrual loans and restructured loans.
(8) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans.
SELECTED CONSOLIDATED FINANCIAL DATA OF BUTLER WICK
The tables below contain information regarding the financial condition
and earnings of Butler Wick for the five years ended June 26, 1998, based on
the audited consolidated financial statements of Butler Wick. Butler Wick
derived the historical consolidated financial data as of March 31, 1999 and
for the nine months ended March 31, 1999 and 1998, from its unaudited
consolidated financial statements. In the opinion of Butler Wick management,
the unaudited consolidated historical financial statements reflect all
normal, recurring adjustments necessary for a fair presentation of
consolidated financial condition and results of operations. Results from the
nine months ended March 31, 1999, are not necessarily indicative of the
expected results for the full year. Please read these tables together with
the consolidated financial statements, including the related notes, and other
financial information of Butler Wick included elsewhere in this
prospectus/proxy statement.
<TABLE>
<CAPTION>
39 weeks ended Fiscal year ended(1),
------------------------- --------------------------------------------------------------
March 26, March 27,
STATEMENT OF FINANCIAL CONDITION DATA: 1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $33,714 $24,281 $28,287 $18,321 $15,306 $11,175 $12,197
Shareholders' equity 9,766 8,299 8,788 7,457 6,166 5,468 5,229
SUMMARY OF EARNINGS:
Revenues $15,902 $14,600 $20,144 $16,544 $14,716 $11,475 $13,957
Income before income taxes 1,566 1,426 2,115 1,709 1,180 325 1,232
Net Income 1,020 892 1,380 1,125 824 245 856
SELECTED OTHER DATA:
Net income per share $11.42 $9.94 $15.39 $12.56 $9.33 $2.74 $9.56
Average common shares outstanding 89,281 89,742 89,649 89,552 88,338 89,500 89,576
</TABLE>
- --------------------------
(1) The financial information presented for Butler Wick is for the years
ended June 26, 1998, June 27, 1997, June 28, 1996, June 30, 1995 and
June 24, 1994.
COMPARATIVE PER SHARE DATA
Presented below are the book value per share and net earnings per share of
(a) United Community on a historical basis, (b) Butler Wick on a historical
basis, (c) United Community on a pro forma basis and (d) Butler Wick on an
equivalent pro forma basis adjusted to reflect the completion of the merger as
of the beginning of each of the periods indicated. The information listed as
"pro forma equivalent" was obtained for Butler Wick by multiplying the pro forma
combined amounts for United Community by an exchange ratio of 19.11. The
assumed exchange ratio of 19.11 is based on the average closing sales price of
$11.45 for a United Community share over the 20 trading day period ending on
April 15, 1999, the last trading day before we announced the merger. The actual
exchange ratio will not be known until the day we complete the merger. See
"Unaudited pro forma condensed combined consolidated statements of financial
condition" on page __ and "Unaudited pro forma
-9-
<PAGE>
condensed combined statements of income" on pages __ and __. The pro forma
information in the following table is not necessarily indicative of the
results which actually would have been obtained if we had completed the
merger before the periods indicated.
<TABLE>
<CAPTION>
13 weeks ended Fiscal year(1)
------------------------ -------------------------------------
March 26, March 27,
1999 1998 1998 1997 1996
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
UNITED COMMUNITY HISTORICAL
Earnings per share (2) $ .15 N/A $ .08 N/A N/A
Book value per share 14.52 N/A 14.46 N/A N/A
BUTLER WICK HISTORICAL
Earnings per share $ 4.63 $ 2.72 $ 15.39 $ 12.56 $ 9.33
Book value per share 109.77 92.86 98.33 82.93 73.85
UNITED COMMUNITY PRO FORMA COMBINED
Earnings per share(3) $ .15 N/A $ .10 N/A N/A
Book value per share 14.08 N/A 14.01 N/A N/A
BUTLER WICK PRO FORMA EQUIVALENT
Earnings per share $ 2.89 N/A $ 1.91 N/A N/A
Book value per share 269.07 N/A 267.73 N/A N/A
</TABLE>
- -------------------------
(1) The financial information presented for Butler Wick is for the years ended
June 26, 1998, June 27, 1997 and June 28, 1996.
(2) For purposes of presenting earnings per share information for the 1998
fiscal year, it is assumed that the conversion of Home Savings from mutual
to stock form was completed on July 1, 1998.
(3) For the 1998 fiscal year, United Community pro forma combined earnings
per share is computed using net income of Butler Wick for the six month
period ended June 26, 1998.
PURPOSE OF THIS DOCUMENT
This prospectus/proxy statement serves as both a prospectus of United
Community for the issuance of up to 1.7 million United Community shares in
connection with the merger and a proxy statement of Butler Wick for the
solicitation of proxies by the board of directors of Butler Wick for the Butler
Wick special meeting of shareholders. We will mail this prospectus/proxy
statement to Butler Wick shareholders on or about _______, 1999.
United Community and Home Savings provided all information in this
prospectus/proxy statement relating to them, and Butler Wick provided all
information relating to it and its subsidiaries. Each party is responsible for
the accuracy of its information.
YOU SHOULD RELY ONLY ON THE INFORMATION WHICH IS CONTAINED IN THIS DOCUMENT
OR WHICH IS REFERRED TO IN THIS DOCUMENT. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THE MERGER
The following is a summary of the material provisions of the merger
agreement. We urge you to read the merger agreement attached as Annex A
carefully for details of the merger and the terms and conditions of the merger
agreement.
-10-
<PAGE>
BACKGROUND AND REASONS FOR THE MERGER
UNITED COMMUNITY. In July 1998, United Community completed its initial
public offering and the conversion of Home Savings from a mutual to a stock
savings association. One of United Community's anticipated uses of the proceeds
from the sale of its shares was to acquire other financial institutions and
financial services companies. In pursuing a merger, United Community sought a
company which could increase the core loan origination business of Home Savings
through cross-selling opportunities and provide additional services and products
to be offered to Home Savings' current customer base. In addition, the
directors and management of United Community desired to create a stable source
of non-interest income to mitigate the impact of interest rate swings on
operating results. Currently, the operating results of United Community are
dependent to a significant degree on the net interest income of Home Savings,
which is the difference between interest earned on loans and other investments
and interest paid on deposits. Diversifying its sources of revenue by
increasing its levels of noninterest income through asset management and other
fee-based services will not only improve the consistency and stability of its
earnings, but also create new opportunities for enhanced growth.
This merger is part of United Community's overall strategy to build a
diversified financial services company while recognizing that many of its
core strengths lie in the relationships Home Savings has developed with its
community retail customers and its commercial banking corporate customers.
Through cross-marketing between Home Savings and Butler Wick, United
Community can utilize the strengths of its existing client relationships by
offering customers the kinds of financial products and services that meet
their needs. The merger will enhance Home Savings' product mix by providing
complementary expertise in areas such as private client brokerage, asset
management, trust services and public finance underwriting.
The competitive environment within which United Community and Butler Wick
currently operate has been rapidly changing. United Community believes that the
merger will make United Community more competitive in this changing environment.
Based upon all of the reasons discussed above, the directors of United
Community concluded that the terms of the merger contained in the merger
agreement were fair to, and in the best interests of, the shareholders of United
Community and, on April 15, 1999, adopted a resolution approving the merger
agreement.
BUTLER WICK. The decision of the Butler Wick board of directors to sign
the merger agreement and recommend that shareholders approve the merger is the
result of the board's assessment of the opportunities to enhance shareholder
value resulting from the proposed merger.
During the 1990s, increasing legislative and regulatory attention has
been paid to modernizing the financial services industry in the United
States. Congress has been considering proposals to modify or eliminate
long-standing restrictions on the ability of financial institutions to engage
in underwriting corporate debt and equity securities and other
securities-related activities and to allow for the affiliation of commercial
and investment banking. Many such affiliations have occurred in the
financial sector within the past few years. In addition to its review of
industry developments, management also gave attention to various alternatives
to independence. Butler Wick's knowledge of Home Savings and United
Community, relationships with the management of Home Savings and United
Community and the prospects of a combined company led to discussions between
management of Butler Wick and United Community.
In November 1998, representatives from both Butler Wick and United
Community met to discuss the structure and potential pricing of an affiliation
of the companies. Over the ensuing months, additional meetings and discussions
were held which resulted in the receipt by Butler Wick of a nonbinding
expression of interest letter from United Community on March 2, 1999, outlining
basic terms of the merger. At a meeting on March 3, 1999, the board of
directors of Butler Wick determined that the terms as outlined by United
Community were sufficient to enter into more definitive discussions.
-11-
<PAGE>
Over the next few weeks, due diligence investigations occurred at the
offices of Butler Wick and United Community. Concurrently, specific terms of
the merger agreement were negotiated between the parties. At a board meeting
held on April 14, 1999, the board of directors of Butler Wick met with legal and
financial advisers and considered the terms of the merger agreement. The board
unanimously approved adoption and execution of the merger agreement at that
meeting. On April 15, 1999, the board of directors of United Community met to
consider the merger agreement. The board of directors of United Community
unanimously approved adoption and execution of the merger agreement. The merger
agreement was executed on April 15, 1999.
In the course of reaching the decision to approve the merger agreement, the
board of directors of Butler Wick considered numerous factors including:
- the economic conditions and prospects for the business in which Butler
Wick operates, including competitive pressures in the securities
industry in general;
- the ability of Butler Wick shareholders to receive fair value in
shares of United Community in the merger,
- the ability of Butler Wick shareholders to receive a more liquid
security;
- the prospects for Butler Wick through United Community to complete
additional acquisitions of securities companies and related businesses
and to expand into new markets;
- the ability of Butler Wick through United Community to recruit
additional brokers with competitive compensation, stock options and
other employee benefits; and
- the opinion of Austin Associates to the effect that as of April 14,
1999, the terms of the merger were fair from a financial point of view
to Butler Wick shareholders.
This discussion represents a summary of the factors considered by the
Butler Wick board of directors in reaching its decision to enter into the merger
agreement.
OPINION OF AUSTIN ASSOCIATES
Austin Associates is a recognized consulting and investment banking firm
regularly engaged in the valuation of financial institutions and other
businesses and their securities in connection with mergers and acquisitions and
for other purposes. Butler Wick selected Austin Associates to serve as its
financial advisor in connection with the merger on the basis of its reputation
and qualifications in valuing financial institutions and in mergers and
acquisitions.
Austin Associates has rendered a written opinion to the board of directors
of Butler Wick to the effect that the terms of the merger are fair, from a
financial point of view, to the shareholders of Butler Wick. A copy of Austin
Associates' fairness opinion is attached as Appendix B to this prospectus/proxy
statement and should be read in its entirety. In arriving at its opinion,
Austin Associates, among other things performed the following:
- reviewed the financial statements and other financial information
concerning Butler Wick set forth in this prospectus/proxy statement;
- reviewed certain other internal financial information concerning
Butler Wick;
- received financial information of comparable securities companies;
- analyzed the financial terms, to the extent publicly available, of
certain comparable transactions;
-12-
<PAGE>
- discussed with the management of Butler Wick and United Community the
operations of their respective companies and the strategic objectives
of the merger;
- analyzed the pro forma impact of the merger on the combined company's
financial performance; and
- performed such other analyses and considered such other factors as it
deemed relevant.
The terms of the merger agreement were determined by Butler Wick and United
Community, and their representatives, through arms-length negotiations between
the parties. Austin Associates participated in the negotiations on behalf of
Butler Wick.
In connection with rendering its opinion, Austin Associates performed a
variety of financial analyses, which are summarized below. Austin Associates
believes its analyses must be considered as a whole and that selecting portions
of such analyses and the factors considered therein, without considering all
factors and analyses, could create an incomplete view of the analyses and the
process underlying the Austin Associates opinion. The preparation of a fairness
opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analyses or summary description. In its
analyses, Austin Associates made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond Butler Wick's control. Any estimates contained in Austin Associates'
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than the estimates.
COMPARATIVE TRANSACTIONS. Austin Associates reviewed a comparison of
prices paid for securities companies in general over the last two years.
Specifically, Austin Associates reviewed a list of five transactions
announced since 1997. The consideration paid to shareholders in the five
comparable transactions had an average price-to-book ratio of 271%, a median
price-to-pre-tax earnings multiple of 9.7 and a median price-to-revenue
multiple of 1.2. Assuming a price of $12.75 for a UCFC share, the market
value of the consideration to be received by Butler Wick shareholders will be
approximately $21.7 million. The $21.7 million market value of the
consideration to be received by Butler Wick shareholders is estimated at 222%
of Butler Wick's book value at March 31, 1999. The market value of the
estimated consideration is equal to 10.4 times Butler Wick's annualized
pre-tax earnings for the nine months ending March 31, 1999. The estimated
transaction value is .99 times Butler Wick's annualized revenue through March
31, 1999.
VALUE OF UNITED COMMUNITY SHARES. During the last 20 trading days, United
Community's common shares have traded between $12.25 and $13.25 per share with a
current stock price of $12.75, as of May 21, 1999. United Community reported
earnings per share of $.15 in the first quarter of 1999. At an annualized rate
of $.60 per share, United Community's common shares trade at 21.3 times earnings
and 88% of March 31, 1999 tangible book value. Austin Associates compared
United Community's stock trading multiples to 15 thrift organizations with
similar financial characteristics and assets ranging from $540.0 million to $2.6
billion. As of May 21, 1999, the median price-to-tangible book multiple for
that 15-member peer group was 116% compared to United Community's multiple of
88% The median price-to-earnings multiple for the peer group was 16.5 compared
to United Community's multiple of 21.3. The median dividend yield for the peer
group was 2.5% compared to United Community's dividend yield of 2.4%. The
median return on average assets of the peer group for the three months ended
March 31, 1999, was 1.21% compared to United Community's return on average
assets of 1.49% for the three months ended March 31, 1999. The median return on
average equity of the peer group for the three months ended March 31, 1999, was
7.2% compared to United Community's return on average equity of 4.0%. The
median leverage ratio of the peer group as of March 31, 1999, was 16.0% compared
to United Community's leverage ratio of 37.0%.
CONTRIBUTION ANALYSIS. Austin Associates compared the pro forma ownership
interest in United Community that Butler Wick shareholders would receive, in the
aggregate, to the contribution by Butler Wick of
-13-
<PAGE>
the equity and net income of the combined organization. Assuming an exchange
of 1.7 million shares, Butler Wick shareholders would own approximately 5.0%
of United Community on a pro forma basis. Butler Wick's contribution to total
equity equaled 2.1% at March 31, 1999, and the contribution to net income for
the three months ended March 31, 1999 equaled 8.1%.
PRO FORMA MERGER ANALYSIS. Austin Associates also reviewed the pro forma
effect of the merger on Butler Wick's earnings per share, book value per share
and dividends per share at March 31, 1999. Butler Wick recorded earnings per
share in the first quarter of 1999 of $4.63 and a book value of $109.38 per
share as of March 31, 1999. Giving effect to the merger, the equivalent Butler
Wick earnings per share would have equaled $2.89, a decrease of 38% over actual
results. Book value per share would have increased to $269.07 per share, an
increase of 146% over actual book value. Equivalent dividends to Butler Wick
shareholders would have been $1.43 per share for the three-month period ending
March 31, 1999. Butler Wick has not historically paid cash dividends.
The summary set forth above does not purport to be a complete description
of the analyses performed by Austin Associates and its discussions with the
board of directors of Butler Wick. Austin Associates has assumed that the
conditions to the merger contained in the merger agreement would be satisfied
and that the merger would be consummated on a timely basis in the manner
contemplated by the merger agreement. No limitations were imposed by Butler
Wick or United Community on the scope of Austin Associates' investigation nor
were any specific instructions given to Austin Associates in connection with its
fairness opinion.
For Austin Associates' services as financial advisor, Butler Wick has paid
Austin Associates a total of $20,000 through the date of this prospectus/proxy
statement. In addition, Austin Associates will be paid additional fees through
closing based upon the total value of the transaction. It is estimated that
Austin Associates will be paid additional fees of approximately $105,000.
THE FULL TEXT OF THE OPINION OF AUSTIN ASSOCIATES, WHICH IS ATTACHED AS
ANNEX B TO THIS PROSPECTUS/PROXY STATEMENT, SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED, AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY AUSTIN
ASSOCIATES, AND SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF
AUSTIN ASSOCIATES IN THIS PROSPECTUS/PROXY STATEMENT IS QUALIFIED BY ITS FULL
TEXT.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF BUTLER WICK
The board of directors of Butler Wick unanimously recommends that the
Butler Wick shareholders vote FOR the adoption of the merger agreement. The
board of directors believes that the terms of the merger are fair to, and in the
best interests of, Butler Wick's shareholders.
CONVERSION OF BUTLER WICK SHARES
If the merger is completed, each Butler Wick share, which is issued and
outstanding immediately before the completion of the merger, will be converted
as follows:
- If the average of the closing sales prices of United Community shares
as reported on Nasdaq for the 20 consecutive full trading days ending
at the close of trading on the day immediately preceding the
completion of the merger is less than or equal to $15.00, each Butler
Wick share will be converted into the right to receive a number of
shares equal to 1.7 million divided by the number of Butler Wick
shares issued and outstanding immediately before the completion of the
merger. For example, if the merger had been completed on __________,
1999, the day before we printed this prospectus/proxy statement, you
would have received ___ United Community shares for each of your
Butler Wick shares, based on the 88,970 Butler Wick shares outstanding
and the average sales price of $______, computed as of ______, 1999.
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- If the average of the closing sales prices of United Community shares
as reported on Nasdaq for the 20 consecutive full trading days ending
at the close of trading on the day immediately preceding the
completion of the merger is greater than $15.00, you will receive, for
each Butler Wick share you own, a number of shares equal to the
quotient of (A) $25.5 million divided by the average sales price over
the 20 day trading period, (B) divided by the number of Butler Wick
shares outstanding immediately before the completion of the merger.
For example, if the average closing sales price over the 20 trading
day period is $16.00 and there are 88,970 Butler Wick shares
outstanding, at United Community's option, you would receive
approximately 17.9 United Community shares for each share of Butler
Wick you own multiplied by the total number of Butler Wick shares you
own.
FRACTIONAL SHARES
United Community will not issue fractional shares in the merger. Instead,
United Community will pay to each Butler Wick shareholder who otherwise would be
entitled to receive a fraction of a United Community common share, cash based on
the average closing sales price of a share of United Community on Nasdaq over
the 20 trading day period ending on the day before the merger.
EXCHANGE OF CERTIFICATES FOR BUTLER WICK SHARES
Promptly after the merger is effective, United Community will mail a form
letter of transmittal to each person who owns Butler Wick shares. The letter of
transmittal will contain instructions for exchanging your Butler Wick shares for
United Community shares. When you deliver a properly executed letter of
transmittal, you will be entitled to receive a certificate for the number of
United Community shares to which you are entitled under the merger agreement.
Until you deliver your executed letter of transmittal, United Community will not
pay you any dividends or other distributions and you will not be able to vote as
a shareholder of United Community.
If you have questions about the number of Butler Wick shares you own, you
should immediately call Franklin S. Bennett, Jr., the Secretary and General
Counsel to Butler Wick at (330) 744-4351.
REPRESENTATIONS AND WARRANTIES
Each of Butler Wick and United Community has made representations and
warranties in the merger agreement regarding:
- corporate organization, authority and standing;
- corporate power to carry on business;
- authorization, execution, delivery and enforceability of the merger
agreement;
- required regulatory approvals or filings for the merger;
- capital structure and securities;
- subsidiaries;
- financial statements; and
- the conduct of business in the ordinary course and the absence of
adverse changes and material adverse effects.
In addition, Butler Wick has made representations and warranties regarding:
- existing contracts;
- compliance with applicable laws, registration and licensing
requirements;
- property and equity security holdings;
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- litigation and liabilities;
- labor matters;
- employment matters and employee benefit plans;
- environmental matters;
- internal accounting controls;
- intellectual property;
- insurance coverage;
- broker's fees; and
- the accuracy of its books and records.
CONDUCT OF BUSINESS PENDING THE MERGER; OTHER AGREEMENTS
Butler Wick agreed in the merger agreement to refrain from taking the
following actions before the completion of the merger, without the prior written
consent of United Community:
- conducting its business other than in the ordinary and usual course or
failing to use its reasonable best efforts to preserve its business
organization, assets and relationships, or engaging in any new lines
of business;
- issuing any additional shares or permitting any additional Butler Wick
shares to become subject to new grants of employee or director stock
options, or similar stock-based employee rights;
- declaring or paying any dividend or making any distribution other than
dividends from wholly-owned subsidiaries of Butler Wick to Butler
Wick;
- adjusting, splitting, combining, redeeming, reclassifying or acquiring
any Butler Wick shares;
- entering into, amending or renewing any employment, consulting,
severance or similar agreement with any director, officer or employee,
or granting any salary or wage increase or increasing any employee
benefit, except for normal individual compensation increases in the
ordinary course of business consistent with past practice and except
as contemplated in the merger agreement;
- entering into, establishing, adopting or amending any employee
benefit, incentive or welfare contract, plan or arrangement, for any
director, officer or employee, or taking any action to accelerate the
vesting or exercisability of stock options, restricted stock or other
compensation or benefits payable under any plans, contracts or
arrangements;
- selling, transferring, mortgaging, leasing, encumbering or disposing
of or discontinuing any material portion of its assets, business or
properties;
- merging or consolidating with, or acquiring all or any material
portion of the assets of, any other entity;
- amending its articles of incorporation or code of regulations or the
articles and codes of any of its subsidiaries;
- implementing or adopting any change in its accounting principles,
practices or methods, other than as may be required by generally
accepted accounting principles;
- entering into, renewing, terminating, amending or modifying any
material contract except in the ordinary course of business consistent
with past practice;
- settling any material claim, action or proceeding;
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- taking any action reasonably likely to prevent or impede the merger
from qualifying as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended;
- knowingly taking any action that is intended or is reasonably likely
to result in any of its representations and warranties in the merger
agreement being untrue in any material respect at any time at or prior
to the completion of the merger;
- knowingly taking any action that is intended or is reasonably likely
to result in any of the conditions to the merger not being satisfied;
- knowingly taking any action that is intended or is reasonably likely
to result in a material violation of any provision of the merger
agreement except, in each case, as may be required by applicable law;
- except as required by applicable law, implementing or adopting any
material change in Butler Wick's risk management policies, procedures
or practices or failing to use commercially reasonable means to avoid
any material increase in Butler Wick's aggregate exposure to risk from
general United States securities markets;
- authorizing or making any capital expenditures, other than budgeted
amounts previously disclosed to United Community or in the ordinary
course of business consistent with past practice in amounts not
exceeding $25,000 in the aggregate;
- making or changing any material tax election, changing any annual tax
accounting period, adopting or changing any method of tax accounting,
filing any amended tax return, entering into any material closing
agreement, settling any material tax claim or assessment, surrendering
or compromising any right to claim a material tax refund, or
consenting to any extension or waiver of the limitations period
applicable to any material tax claim or assessment;
- initiating any new business activity that would be impermissible for a
"bank holding company" under the Bank Holding Company Act of 1956, as
amended; and
- agreeing or committing to do any of the foregoing without first
receiving United Community's consent.
United Community agreed in the merger agreement to refrain from taking the
following actions before the completion of the merger, without the prior written
consent of Butler Wick:
- taking any action reasonably likely to prevent or impede the merger
from qualifying as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended, or as a
"pooling of interests" for accounting purposes;
- knowingly taking any action that is intended or is reasonably likely
to result in any of its representations and warranties in the merger
agreement being or becoming untrue in any material respect at any time
before the completion of the merger;
- knowingly taking any action that is intended or is reasonably likely
to result in any of the conditions to the merger in the merger
agreement not being satisfied;
- knowingly taking any action that is intended or is reasonably likely
to result in a material breach of any provisions of the merger
agreement, except, in each case, as may be required by applicable law;
and
- declaring any extraordinary dividend.
United Community and Butler Wick also have agreed to use their reasonable
best efforts to take all actions and to do all things necessary, proper or
desirable to complete the merger as soon as possible. United
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Community and Butler Wick have each further agreed to give the other party
reasonable access to all of their respective properties, books, personnel and
records and to such other information as the other party may reasonably
request.
CONDITIONS TO THE COMPLETION OF THE MERGER
United Community and Butler Wick can complete the merger only if the merger
agreement is adopted by holders of a majority of the outstanding Butler Wick
shares and the 30-day waiting period required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 has expired. In addition, United Community will not be
required to complete the merger unless the following conditions are satisfied:
- the truth of all of Butler Wick's representations and warranties in
the merger agreement;
- Butler Wick's satisfaction, in all material respects, of its
obligations in the merger agreement;
- the execution of employment agreements by Franklin S. Bennett, Jr.,
Thomas J. Cavalier, Ralph Meacham and James H. Sisek;
- the exercise of dissenters' rights by the holders of not more than 5%
of the outstanding Butler Wick shares; and
Butler Wick will not be required to complete the merger unless the
following conditions are satisfied:
- the truth of all of United Community's representations and warranties
in the merger agreement;
- United Community's satisfaction, in all material respects, of its
obligations in the merger agreement;
- the execution of employment agreements by Franklin S. Bennett, Jr.,
Thomas J. Cavalier, Ralph Meacham and James H. Sisek; and
- UCFC has established and funded a retention plan for key employees of
Butler Wick.
EFFECTIVE TIME
Following the satisfaction or waiver of all conditions in the merger
agreement, we will file a Certificate of Merger as soon as practicable with the
Ohio Secretary of State in order to complete the merger. We anticipate that we
will complete the merger in ______ 1999.
TERMINATION, AMENDMENT AND MODIFICATION
Either United Community or Butler Wick may terminate the merger agreement
or the merger under the circumstances described below, whether or not the Butler
Wick shareholders already have voted to adopt the merger agreement. Termination
may occur by the mutual agreement of United Community and Butler Wick, or by
either party if:
- any federal or state regulatory authority denies an approval we need
to complete the merger (in a final and nonappealable way), requests
the permanent withdrawal of any application required to complete the
merger or subjects the approval of the merger to conditions we deem
unreasonable or takes certain other negative actions regarding any
approval;
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- we do not complete the merger by December 31, 1999 (other than because
of a knowing breach of the merger agreement by the party that wants to
terminate it);
- the other party breaches the merger agreement in a material way and
does not (or cannot) correct the breach in 30 days; or
- Butler Wick's shareholders vote not to adopt the merger agreement.
In addition, United Community may abandon the merger if Butler Wick's board
of directors withdraws its recommendation to you to adopt the merger agreement
or modifies its recommendation in certain ways. If the merger is not completed
because the Butler Wick board withdrew its recommendation after it solicited or
encouraged inquiries or proposals, or provided confidential information or
engaged in negotiations concerning a sale of or merger with another company,
Butler Wick will have to pay $1.25 million to United Community.
The board of directors of Butler Wick may decide not to complete the
merger, without penalty, if the average closing sales price of United Community
shares on the Nasdaq during the 20 trading day period before the merger is
completed falls below $10.00.
We may amend or modify the merger agreement by the mutual agreement of our
boards of directors at any time before or after the Butler Wick special meeting
of shareholders. An amendment of the merger agreement which materially and
adversely affects the rights of the shareholders of Butler Wick and which takes
place after the Butler Wick special meeting of shareholders, however, will not
be effective without further approval of the Butler Wick shareholders. If
necessary, Butler Wick will seek approval at a subsequent meeting of
shareholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Butler Wick's management have interests in the merger in
addition to their interests solely as Butler Wick shareholders.
BOARD OF UNITED COMMUNITY. Thomas J. Cavalier will be appointed to the
United Community board of directors.
EMPLOYMENT AGREEMENTS. In connection with the merger, Butler Wick will
enter into employment agreements with Franklin S. Bennett, Jr., Thomas J.
Cavalier and Ralph T. Meacham, and Butler Wick Trust Company a subsidiary of
Butler Wick, will enter into an employment agreement with James H. Sisek. 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 which senior management personnel are eligible and for vacation and sick
leave in accordance with the prevailing policies.
The employment agreements will be terminable by Butler Wick or Butler Wick
Trust Company at any time. In the event of termination 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 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 term of the employment
agreement or the date on which the employee becomes employed full-time by
another employer.
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Each employment agreement also will contain provisions with respect to the
occurrence of a "change of control" and (1) the termination of the employee's
employment for any reason other than just cause, 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 2.99 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 Internal
Revenue Code of 1986, as amended.
INCENTIVE PLAN. The merger agreement provides that United Community
will seek the approval of its shareholders regarding the adoption of an
incentive plan for key employees of United Community and its subsidiaries
prior to the completion of the merger. The shareholders of United Community
will be asked to approve an incentive plan at a special meeting on July 12,
1999. Pursuant to the incentive plan, the maximum number of United Community
shares that may be issued pursuant to awards of stock options, stock
appreciation rights, restricted shares, performance awards or other forms of
stock-based incentive awards will be 3,471,562. If all shares reserved for
issuance pursuant to the awards granted under the incentive plan are issued,
the voting power of existing shareholders will be diluted by approximately
9.1%, and the influence of directors and officers of United Community over
the outcome of the vote on any matters submitted to United Community
shareholders, including changes in control, will increase.
If an incentive plan is approved, United Community will grant options to
purchase not less than 165,000 common shares of United Community to officers
and employees of Butler Wick and its subsidiaries. No options will be granted
prior to completion of the merger.
The incentive plan will be administered by a committee of directors
composed of two or more directors of United Community who are not employees of
United Community or Home Savings. The benefit committee may grant options under
the incentive plan at such times as it deems most beneficial to United Community
and its subsidiaries on the basis of the individual participant's position and
duties and the value of the individual's services and responsibilities to United
Community and it s subsidiaries.
Without further approval of the shareholders, the board of directors may at
any time terminate the incentive plan or may amend it from time to time as the
board of directors may deem advisable, except that the board of directors may
not, without the approval of the shareholders, make any amendment which would
(a) increase the aggregate number of common shares that may be issued under the
incentive plan (except for adjustments to reflect certain changes in the
capitalization of United Community), (b) materially modify the requirements as
to eligibility for participation in the incentive plan, or (c) materially
increase the benefits accruing to participants under the incentive plan.
Notwithstanding the foregoing, the board of directors may amend the incentive
plan to take into account changes in applicable securities, federal income tax
and other applicable laws.
Options granted to the officers and employees under the incentive plan may
be "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or may be options which do not qualify under
Section 422 of the Code. Options granted under the incentive plan to directors
who are not employees of United Community or a subsidiary will be non-qualified
stock options. No individual may be granted options to purchase more than 25%
of the shares that may be issued pursuant to the incentive plan.
The exercise price of each option granted under the incentive plan will be
determined by the benefit committee at the time the option is granted; provided,
however, that the exercise price of an option may not be less than 100% of the
fair market value of the shares on the date of the grant. In addition, the
exercise price of an incentive stock option may not be less than 110% of the
fair market value of the shares on the date of the grant if
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the recipient owns more than 10% of the outstanding common shares of United
Community. The benefit committee will fix the term of each option, except
that an incentive stock option will not be exercisable after the expiration
of ten years from the date it is granted; provided, however, that if a
recipient of an incentive stock option owns a number of shares representing
more than 10% of United Community shares outstanding at the time the
incentive stock option is granted, the term of the incentive stock option
will not exceed five years. If the fair market value of shares awarded
pursuant to incentive stock options that are exercisable for the first time
during any calendar year by a participant under the incentive plan exceeds
$100,000, the incentive stock options will be non-qualified stock options to
the extent of such excess.
An option recipient cannot transfer or assign an option other than by will
or in accordance with the laws of descent and distribution. Termination of an
option recipient's employment for cause, as defined in the incentive plan, will
result in the annulment of any outstanding exercisable options. Any outstanding
options that have not yet been exercised will terminate upon the resignation,
removal or retirement of a director of United Community or a subsidiary, or
upon the termination of employment of an officer or employee of United Community
or a subsidiary, except in the case of death, disability or retirement between
ages 60 and 64 with 15 years of service to United Community or a subsidiary, or
retirement at age 65, of the recipient or a change in control of United
Community or Home Savings, as defined in the incentive plan.
United Community will receive no monetary consideration for the granting of
options under the incentive plan. Upon the exercise of options, United
Community will receive payment of cash or, if acceptable to the benefit
committee, common shares of United Community or the surrender of outstanding
stock options.. The holding period for such additional shares will commence as
of the date of exercise or such other relevant date.
RETENTION PROGRAM. In an effort to retain key employees of Butler Wick and
its subsidiaries after the completion of the merger, United Community will
establish a retention plan, funded with $3.7 million, prior to the completion of
the merger. Participants in the retention plan will become vested in their
benefits after five years of service, subject to acceleration in the event of a
change in control of United Community or Butler Wick. If a participant
voluntarily leaves the employ of Butler Wick or a subsidiary, or is fired for
cause, before the expiration of the five-year vesting period, the participant
will forfeit all funds in the plan. If a participant dies, becomes disabled or
retires at or after age 65 and prior to the expiration of the five-year vesting
period, the participant, or the participant's estate, will be entitled to
receive the funds allocated to him or her under the plan, increased for any
earnings or reduced for any loss on such funds, at the end of the five-year
vesting period.
INDEMNIFICATION AND INSURANCE. After the completion of the merger, Butler
Wick will continue to indemnify its directors, agents and employees to the
extent permitted by its articles of incorporation and code of regulations for
claims arising out of matters existing before or after the completion of the
merger. United Community has also agreed to purchase directors' and officers'
liability insurance to cover the directors and officers of Butler Wick and its
subsidiaries for three years following the completion of the merger.
RESALE OF UNITED COMMUNITY SHARES
United Community has registered the common shares to be issued to Butler
Wick shareholders with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The United Community shares will be freely
transferable, except for shares received by persons who may be considered to be
affiliates of Butler Wick or United Community. The term "affiliate" is defined
in Rule 145 issued under the Securities Act and generally includes executive
officers and directors. Affiliates may not sell their United Community shares,
except if there is effective registration statement under the Securities Act
covering their United Community shares or in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act.
In addition, all directors, officers and affiliates of Butler Wick have agreed
not to dispose of their United Community shares if the disposition would prevent
United Community from treating the merger as a pooling of interests for
accounting purposes.
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INCOME TAX CONSEQUENCES
United Community and Butler Wick have received an opinion of Vorys, Sater,
Seymour and Pease LLP that the merger will produce the following material
federal income tax consequences for Butler Wick and the shareholders of Butler
Wick:
- The merger will constitute a tax-free reorganization under Sections
368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended;
- No gain or loss will be recognized by Butler Wick as a result of the
merger;
- You will not recognize gain or loss when you receive United Community
shares in exchange for your Butler Wick shares;
- Your basis in the United Community shares you receive will be the same
as your basis in the Butler Wick shares you surrendered, decreased by
the amount of cash you received for fractional shares surrendered and
increased by the amount of gain, if any, you recognized because of the
exchange of shares;
- The holding period for the United Community shares you receive after
the merger will include the period during which you held the Butler
Wick shares you surrendered as long as you held the Butler Wick shares
as a capital asset; and
- If you received a cash payment instead of fractional United Community
shares, the cash payment will be treated as a distribution in
accordance with Section 302 of the Internal Revenue Code.
For federal income tax purposes, any cash you receive instead of a
fractional United Community share will be treated as received in exchange for
the fractional share and gain or loss will be recognized for federal income tax
purposes, measured by the difference between the amount of cash you received and
the portion of the basis of the United Community common share allocable to the
fractional share. Any gain or loss should be long-term capital gain or loss if
you held your Butler Wick share as a capital asset for more than one year at the
effective time of the merger. Generally, any long-term capital gain resulting
from your receipt of cash instead of a fractional United Community common share
will be taxed at a maximum rate of 20%.
If you exercise dissenters' rights and receive a cash payment of the fair
cash value of your Butler Wick shares, you will be treated as having received
the payment in redemption of your shares. This redemption will be governed by
Section 302 of the Internal Revenue Code, including the attribution rules of
Section 318 of the Internal Revenue Code. In general, if you hold Butler Wick
shares as a capital asset when the merger is completed and dissent from the
merger, you will recognize capital gain or loss measured by the difference
between the amount of cash you received and the basis for your shares. If,
however, you own, either actually or constructively, any other Butler Wick
shares, the payment made to you could be treated as dividend income. In
general, under the constructive ownership rules of the Internal Revenue Code, a
holder may be considered to own stock that is owned, and in some cases
constructively owned, by related individuals or entities, as well as stock that
the holder (or related individuals or entities) has the right to acquire by
exercising an option or converting a convertible security. If you contemplate
exercising dissenters' rights, you should consult your own tax advisor regarding
the federal and other tax consequences of the merger.
BECAUSE OF THE COMPLEXITIES OF THE FEDERAL, STATE AND LOCAL TAX LAWS, WE
RECOMMENDED THAT YOU CONSULT YOUR OWN TAX ADVISOR.
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With respect to United Community:
- The merger will constitute a tax-free reorganization under Sections
368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code; and
- No gain or loss will be recognized by United Community or its wholly
owned subsidiary that merges with Butler Wick upon the receipt of
assets of Butler Wick in exchange for United Community shares.
ACCOUNTING TREATMENT
The merger is expected to be treated as a pooling of interests for
accounting purposes. Accordingly, the assets and liabilities of Butler Wick
will be combined with those of United Community and carried forward at
historical cost. In addition, the statements of operations of Butler Wick
will be retroactively combined with the statements of operations of United
Community on a consolidated basis.
RIGHTS OF DISSENTING SHAREHOLDERS
If you are not in favor of the merger, you are entitled to relief as a
dissenting shareholder under Ohio Revised Code Section 1701.85. You will be
entitled to such relief, however, only if you comply strictly with all of the
procedural and other requirements of Section 1701.85. The following summary is
not a complete statement of the method of compliance with Section 1701.85. A
copy of Section 1701.85 is attached to this prospectus/proxy statement as Annex
C. We urge you to read Annex C.
If you wish to perfect your dissenting shareholder's rights in the event
the merger agreement is adopted, you must satisfy the following conditions:
- you must have been a record holder of Butler Wick shares on
____________, 1999;
- you must NOT vote in favor of adoption of the merger agreement; and
- you must deliver to Butler Wick by ____________, 1999, a writing that
lists your name, address, the number of Butler Wick shares you own and
the amount you claim as the fair cash value of your Butler Wick
shares.
Your vote against the adoption of the merger agreement will not satisfy the
requirements of a written demand for payment. You must send a written demand
to: Butler Wick Corp., City Center One, Suite 700, Youngstown, Ohio 44501,
Attention: Franklin S. Bennett, Jr., Secretary and General Counsel. Because
your written demand must be received by Butler Wick by ____________, 1999, we
recommend that you use certified or registered mail, return receipt requested,
to confirm that you have made a timely delivery.
If you wish to exercise dissenters' rights you must either (a) not sign and
return your proxy or, (b) if you sign and return your proxy, vote against or
abstain from voting. If you sign a proxy but do not provide voting
instructions, your proxy will be voted in favor of the adoption of the merger
agreement and you will not be entitled to exercise dissenter rights.
Upon receipt of appropriate notice from a dissenting shareholder, Butler
Wick will make a notation of such dissent in its shareholder records.
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Unless you and Butler Wick agree on the fair cash value per share of your
Butler Wick shares, either you or Butler Wick may, within three months after the
delivery of your written demand, file a petition in the Court of Common Pleas of
Mahoning County, Ohio. If the court finds that you are entitled to be paid the
fair cash value of any shares, the court may appoint one or more appraisers to
receive evidence and to recommend a decision on the amount of the fair cash
value.
The determination of "fair cash value" will be made according to the
following guidelines:
- it will be determined as of ____________, 1999, the day before the
special meeting of Butler Wick shareholders;
- it will be the amount a willing seller and willing buyer would accept
or pay with neither being under compulsion to sell or buy;
- it will not exceed the amount specified in your written demand; and
- it will exclude any appreciation or depreciation in market value
resulting from the merger.
The court will make a finding as to the fair cash value of a share and
render judgment against Butler Wick for the payment of the fair cash value with
interest at the rate and from the date that the court considers equitable. The
costs of proceedings shall be assessed or apportioned as the court considers
equitable.
Your rights as a dissenting shareholder will terminate if:
- You do not fully comply with Section 1701.85, unless the Butler Wick
board of directors waives your failure to comply;
- Butler Wick abandons or is enjoined or prevented from carrying out, or
the shareholders of Butler Wick rescind their adoption of, the merger
agreement;
- You withdraw your written demand; or
- You and Butler Wick have not agreed upon the fair cash value per share
of your Butler Wick shares and neither you nor Butler Wick have timely
filed or joined in a petition in an appropriate court for a
determination of the fair cash value of your shares.
THE SPECIAL MEETING OF BUTLER WICK SHAREHOLDERS
TIME, DATE AND PLACE
The Butler Wick special meeting of shareholders will be held at ______
__.m., Eastern Time, on ____________, 1999, at _________________________,
Youngstown, Ohio.
PURPOSE OF THE MEETING
At the special meeting of shareholders, you will be asked to consider and
vote upon a proposal to adopt the merger agreement.
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SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE
Only shareholders of record on ____________, 1999, will be entitled to
notice of and to vote at the special meeting of shareholders. At the close of
business on ____________, 1999, there were 88,970 Butler Wick shares outstanding
and entitled to vote. The Butler Wick shares were held of record by
approximately 44 shareholders. Each Butler Wick share entitles the holder to
one vote on all matters properly presented at the special meeting of
shareholders.
VOTES REQUIRED
The holders of a majority of the outstanding Butler Wick shares, or 44,486
shares, must vote in favor of the merger agreement. As of May 1, 1999, the
directors and executive officers of Butler Wick and its subsidiaries owned or
had voting power, in the aggregate, with respect to 44,086 Butler Wick shares,
or 49.6% of the outstanding Butler Wick shares, and had agreed to vote all of
their Butler Wick shares for the adoption of the merger agreement. The
affirmative vote of the holders of an additional 400 shares, representing
approximately an additional .5% of the outstanding Butler Wick shares, will be
necessary to adopt the merger agreement.
A quorum, consisting of the holders of 50.1% of the outstanding Butler Wick
shares, or 44,486 shares, must be present in person or by proxy at the special
meeting before any action can be taken.
Under Ohio law, shares which are held by a nominee for a beneficial owner
and which are represented in person or by proxy at the special meeting will be
counted as being present for purposes of establishing a quorum. If you abstain
or fail to vote your shares, it will be the same as a vote against the adoption
of the merger agreement. If your proxy is signed and dated, but no vote is
specified, it will be voted "FOR" the adoption of the merger agreement.
VOTING AND SOLICITATION AND REVOCATION OF PROXIES
With each copy of this prospectus/proxy statement mailed to Butler Wick
shareholders, we have included a form of proxy for use at the special meeting
of shareholders. This proxy is solicited by the Butler Wick board of
directors. Whether or not you attend the special meeting, the Butler Wick
board of directors urges you to use the enclosed proxy. Your attendance at
the special meeting will not, by itself, revoke your proxy. If you have
executed a proxy, you may revoke it at any time before the vote by:
- filing with Butler Wick, at City Center One, Suite 700, Youngstown,
Ohio 44501, written notice of revocation;
- executing and returning a later-dated proxy; or
- attending the special meeting and giving notice of revocation in
person.
We do not expect any matter other than the merger to be brought before the
special meeting of shareholders. If any other matters are brought before the
meeting, the persons named as proxies will use their best judgment in voting on
any such matters.
Butler Wick will pay its expenses incurred in connection with preparing and
mailing this prospectus/proxy statement, the accompanying proxy and any other
related materials and all other costs incurred in connection with the
solicitation of proxies on behalf of the Butler Wick board of directors. United
Community will pay the costs and expenses incurred by United Community in
connection with preparing and printing this prospectus/proxy statement. Proxies
will be solicited by mail and may be further solicited, for no additional
compensation, by officers, directors or employees of Butler Wick. Butler Wick
will also pay the standard charges and expenses of brokerage houses, voting
trustees, banks, associations and other custodians, nominees and
-25-
<PAGE>
fiduciaries, who are record holders of Butler Wick shares not beneficially
owned by them, for forwarding the proxy materials to, and obtaining proxies
from, the beneficial owners of Butler Wick shares entitled to vote at the
special meeting of shareholders.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
The following unaudited pro forma condensed combined statement of
financial condition as of March 31, 1999, combines components of the
historical consolidated statements of financial condition of United Community
and its subsidiary, and Butler Wick and its subsidiaries, as if the merger
has been completed on March 31, 1999, after giving effect to certain pro
forma adjustments described in the accompanying notes. The following
unaudited pro forma condensed combined statements of income for the
three-month periods ended March 31, 1999 and 1998, and for each of the years
in the three-year period ended December 31, 1998, present the combined
historical results of operations of United Community and its subsidiaries and
Butler Wick and its subsidiaries, as if the merger had been completed on
January 1, 1996. Since Butler Wick has a fiscal year end as of the last
Friday in June, all financial information for Butler Wick is stated as of the
year ended June 26, 1998, June 27, 1997 and June 28, 1996. Butler Wick
reported revenues, net income and income per share for the six months ended
December 31, 1998, of $10.1 million, $606,000 and $6.78, respectively. Pro
forma per share amounts are based on an exchange ratio of 19.11 shares of
United Community for each share of Butler Wick.
The unaudited pro forma condensed combined financial statements and
related footnotes account for the merger using the pooling of interests
method of accounting. Under the pooling of interest method of accounting,
the recorded assets, liabilities, stockholders' equity, income and expenses
of United Community and Butler Wick are combined and recorded at their
historical cost-based amounts, except as noted in the footnotes.
The unaudited pro forma condensed combined financial statements are
intended for informational purposes and are not necessarily indicative of the
future consolidated financial position or future results of operations of the
combined entity that would have been achieved had the merger been completed
as of the date or at the beginning of the periods presented. The unaudited
pro forma condensed combined statements of income do not reflect the cost to
effect the merger and to combine operations, or any expected cost savings
from the merger. These statements should be read in conjunction with, and
are qualified in their entirety by, the separate historical consolidated
financial statements and notes thereto of United Community and Butler Wick,
which are included at the back of this document.
-26-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------------------------------
United Butler
Community, Wick, as Pro forma Combined
as reported reported adjustments pro forma
------------ --------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and deposits with banks $ 13,357 $ 1,310 $ (625)(2) $ 14,042
Federal funds sold and other 152,137 - - 152,137
Investment securities:
Available for sale - at market 129,221 2,943 - 132,164
Mortgage-backed securities:
Available for sale - at market 97,127 - - 97,127
Held to maturity - at cost 166,996 - - 166,996
Loans, net 670,865 - - 670,865
Federal Home Loan Bank stock 12,164 - - 12,164
Premises and equipment 7,416 1,623 - 9,039
Accrued interest receivable 7,132 - - 7,132
Real estate owned 196 - - 196
Other assets 6,544 27,838 - 34,382
------------ --------- ------------ ----------
TOTAL ASSETS $1,263,155 $ 33,714 $ (625) $1,296,244
------------ --------- ------------ ----------
------------ --------- ------------ ----------
LIABILITIES
Deposits $ 781,301 $ - $ - $ 781,301
Advance payments by borrowers for taxes and insurance 2,321 - - 2,321
Accrued interest payable 683 - - 683
Accrued expenses and other liabilities 11,811 12,225 - 24,036
Notes payable - 11,723 - 11,723
------------ --------- ------------ ----------
TOTAL LIABILITIES 796,116 23,948 - 820,064
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - - - -
Common stock and paid-in capital 342,921 3,129 (97)(1) 345,953
Retained earnings 149,235 6,734 (625)(2) 155,344
Treasury stock - (97) 97(1) 0
Other comprehensive income 289 - - 289
Unearned compensation (25,406) - - (25,406)
------------ --------- ------------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,263,155 $33,714 $ (625) $1,296,244
------------ --------- ------------ ----------
------------ --------- ------------ ----------
</TABLE>
- -----------------------------
(1) Due to the elimination of Butler Wick's treasury shares.
(2) Transaction costs (primarily investment banker and other professional fees)
are expected to be in the range of $500,000 to $750,000.
The unaudited pro forma condensed combined statements of income do not
reflect these charges. The unaudited pro forma condensed combined
statement of financial condition reflects these charges at the mid-point of
the expected range ($625,000). It is anticipated that these
charges will be incurred and recognized prior to September 30, 1999.
-27-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
United Butler United Butler
Community, Wick, Combined Community, Wick Combined
as reported as reported pro forma as reported as reported pro forma
----------- ----------- ------------ ----------- ----------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Interest income $21,598 $ 448 $22,046 $19,678 $ 375 $20,053
Interest expense 7,507 195 7,702 9,556 175 9,731
----------- ----------- ------------ ----------- ----------- ----------
Net interest income 14,091 253 14,344 10,122 200 10,322
Provision for loan loss allowances 75 - 75 250 - 250
----------- ----------- ------------ ----------- ----------- ----------
Net interest income after provision
for loan loss allowances 14,016 253 14,269 9,872 200 10,072
Noninterest income 390 5,360 5,750 378 4,513 4,891
Noninterest expense 7,113 4,980 12,093 6,095 4,312 10,407
----------- ------------ ----------- ----------- ----------
Income before income taxes 7,293 633 7,926 4,155 401 4,556
Provision for income taxes 2,582 219 2,801 1,454 157 1,611
----------- ----------- ------------ ----------- ----------- ----------
Net income $ 4,711 $ 414 $ 5,125 $ 2,701 $ 244 $ 2,945
----------- ----------- ------------ ----------- ----------- ----------
----------- ----------- ------------ ----------- ----------- ----------
Earnings per share $ .15 $ 4.63 $ .15 N/A $ 2.72 N/A
----------- ----------- ------------ ----------- ----------
----------- ----------- ------------ ----------- ----------
Weighted average shares 32,152,489 89,281 33,852,489 N/A 89,742 N/A
----------- ----------- ------------ ----------- ----------
----------- ----------- ------------ ----------- ----------
</TABLE>
-28-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------
1998 1997
--------------------------------------- -----------------------------------------
United Butler United Butler
Community, Wick, Combined Community, Wick, Combined
as reported as reported(2) pro forma as reported as reported(2) pro forma
----------- ----------- ---------- ----------- ----------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Interest income $85,881 $ 1,426 $87,307 $82,685 $ 1,001 $83,686
Interest expense 35,755 533 36,288 40,463 317 40,780
Net interest income 50,126 893 51,019 42,222 684 42,906
Provision for (recovery of) loan loss
allowances 650 - 650 (1,546) - (1,546)
---------- ----------- ---------- --------- ----------- ----------
Net interest income after provision for
(recovery of) loan loss allowances 49,476 893 50,369 43,768 684 44,452
Noninterest income 2,289 18,717 21,006 1,564 15,543 17,107
Noninterest expense 38,217 17,495 55,712 25,303 14,518 39,821
---------- ----------- ---------- --------- ----------- ----------
Income before income taxes 13,548 2,115 15,663 20,029 1,709 21,738
Provision for income taxes 4,849 735 5,584 6,982 584 7,566
---------- ----------- ---------- --------- ----------- ----------
Net income $ 8,699 $ 1,380 $10,079 $13,047 $ 1,125 $14,172
---------- ----------- ---------- --------- ----------- ----------
---------- ----------- ---------- --------- ----------- ----------
Earnings per share(1) $ .08 $15.39 $.10 N/A $12.56 N/A
Weighted average shares 32,083,400 89,649 33,783,400 N/A 89,552 N/A
Year ended December 31,
---------------------------------------------
1996
---------------------------------------------
United Butler
Community, Wick, Combined
as reported as reported pro forma
------------ ---------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income $81,749 $ 1,002 $82,751
Interest expense 43,009 368 43,377
Net interest income 38,740 634 39,374
Provision for (recovery of) loan loss
allowances - - -
------------ ---------- -----------
Net interest income after provision for
(recovery of) loan loss allowances 38,740 634 39,374
Noninterest income 1,291 13,715 15,006
Noninterest expense 30,068 13,169 43,237
------------ ---------- -----------
Income before income taxes 9,963 1,180 11,143
Provision for income taxes 3,322 356 3,688
------------ ---------- -----------
Net income $ 6,631 $ 824 $ 7,455
------------ ---------- -----------
------------ ---------- -----------
Earnings per share N/A $ 9.33 N/A
Weighted average shares N/A 88,338 N/A
</TABLE>
- ---------------------------
(1) For purposes of presenting earnings per share information for the 1998
fiscal year, it is assumed that the conversion of Home Savings from mutual
to stock form was completed on July 1, 1998. Accordingly, combined pro
forma earnings information is computed using net income of Butler Wick for
the six month period ended June 30, 1998.
(2) The financial information for Butler Wick is for the years ended June 26,
1998, June 27, 1997 and June 28, 1996.
-29-
<PAGE>
UNITED COMMUNITY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
United Community was incorporated for the purpose of owning all of the
outstanding shares of Home Savings.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets increased $5.9 million from December 31, 1998 to March 31,
1999. The primary reason for the increase in total assets was a result of an
increase in net loans of $13.4 million which was partially offset by decreases
of $4.4 million in the investment portfolio and $5.0 million in cash and cash
equivalents.
Net loans increased $13.4 million, or 2.03% to $670.9 million at March 31,
1999, compared to $657.5 million at December 31, 1998. The most significant
increases were in loans secured by one- to four-family residences, which
increased $7.7 million and commercial loans, which increased $8.9 million,
compared to December 31, 1998. These increases were offset by decreases of $1.0
million in nonresidential real estate loans and $0.9 million in consumer loans.
Funds that are not currently needed for general corporate purposes,
including loan originations, enhanced customer services and possible
acquisitions, are invested at this time in overnight funds, investment
securities and mortgage backed securities. Overnight funds decreased $1.7
million to $152.1 million at March 31, 1999, from $153.8 million at December
31, 1998. Securities available for sale, which includes investment
securities and mortgage backed securities, increased $16.6 million since
December 31, 1998. Securities held to maturity, which include investment
securities and mortgage backed securities, decreased $21.0 million since
December 31, 1998. Securities available for sale and overnight funds enable
United Community to fully employ excess funds while providing a great deal of
liquidity and flexibility as United Community pursues alternative other
investment opportunities.
Nonaccrual loans decreased approximately $873,000 to $4.9 million at
March 31, 1999, from $5.7 million at December 31, 1998. Nonaccrual
commercial loans decreased $714,000, primarily attributable to one loan
becoming current. At March 31, 1999, total nonaccrual and restructured loans
accounted for 1.00% of net loans receivable, compared to 1.15% at December
31, 1998. Total nonperforming assets were 0.54% of total assets as of March
31, 1999, a decrease of 0.07% from 0.61% as of December 31, 1998.
Total deposits increased $3.7 million from December 31, 1998. The primary
reason for this increase was the introduction of a new market rate account that
provides for the interest rate to be tiered to the dollar amount maintained in
the account.
Shareholders' equity increased $2.4 million to $467.0 million at March
31, 1999, from $464.6 million at December 31, 1998, primarily due to first
quarter earnings which were partially offset by the first quarter dividend of
$0.075 per share paid on March 31, 1999. Book value per share was $14.52 as
of March 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
MARCH 31, 1998
NET INCOME. Net income for the three months ended March 31, 1999, was
$4.7 million, or $0.15 per common share. Net income for the comparable period
in 1998 was $2.7 million. The increase of $2.0 million, or 74.42%, for the
three months ended March 31, 1999, compared to the same period in 1998 was
primarily due to an increase in net interest income. United Community's
annualized return on average assets and return on average equity were 1.49% and
4.04%, respectively, for the three months ended March 31, 1999. The annualized
return
-29-
<PAGE>
on average assets and return on average equity for the comparable period in
1998 were 1.03% and 7.59%, respectively.
NET INTEREST INCOME. Net interest income increased $4.0 million or 39.21%
for the first quarter of 1999 compared to the first quarter of 1998. Two
factors contributed to this increase in net interest income. The first was an
increase in interest-earning assets for the three months ended March 31, 1999,
compared to the three months ended March 31, 1998, due to the stock conversion.
The second was a decrease in interest-bearing deposits, which resulted from the
withdrawal of deposits to purchase United Community shares, combined with a
reduction in interest rates of the interest bearing liabilities as a result of
the interest rate environment for the first quarter 1999 versus the first
quarter 1998.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged 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 and prior loan loss experience. The
provision for loan loss allowance was $75,000 for the first quarter of 1999, as
a result of continuing growth of the loan portfolio, compared to the first
quarter of 1998 provision of $250,000. The decrease in the provision is
attributed to a decrease in nonperforming loans, delinquency rates and an
improvement in the local economy. Home Savings' allowance for loan losses
totaled $6.5 million at March 31, 1999, which represented 0.95% of total loans.
NONINTEREST INCOME. Noninterest income increased $12,000, or 3.2%, to
$390,000 at March 31, 1999, compared to $378,000 at March 31, 1998, primarily
due to a $52,000 loss recognized in 1998 due to the sale of real estate owned.
NONINTEREST EXPENSE. Total noninterest expense increased $1.0 million,
or 16.70%, to $7.1 million for the first quarter 1999 from $6.1 million for
the first quarter 1998. The primary reason for the increase was employee
compensation expense for the employee stock ownership plan of approximately
$581,000.
FEDERAL INCOME TAXES. The provision for federal income taxes increased
$1.1 million, or 77.6%, for the first quarter of 1999, compared to the first
quarter of 1998, primarily due to the higher pre-tax income for the first
quarter of 1999 compared to the first quarter of 1998.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets were $1.3 billion at December 31, 1998, a $212.3 million, or
20.3%, increase compared to December 31, 1997. The increase in total assets
was primarily attributable to the sale of United Community's shares in
connection with the conversion of Home Savings from mutual to stock form.
Total loans increased $39.8 million, or 6.0%, to $699.8 million at December
31, 1998, compared to $660.0 million at December 31, 1997. The most significant
increases were in loans secured by one- to four-family residences, which
increased $27.1 million and commercial loans, which increased $15.2 million,
compared to the prior year. These increases were offset by decreases of $2.2
million in nonresidential real estate loans and $1.6 million in consumer loans.
Funds not currently utilized for general corporate purposes, including
loan originations, enhanced customer services and possible acquisitions, are
invested in overnight funds, investment securities and mortgage-backed
securities. Overnight funds increased $133.9 million to $153.8 million at
December 31, 1998 from $19.9 million at December 31, 1997 investment
securities and mortgage-backed securities available for sale increased $71.5
million and $36.5 million, respectively, since December 31, 1997. These
increases reflect the investment of the conversion proceeds in overnight
funds and investment and mortgage-backed securities available for sale
-30-
<PAGE>
which provide a great deal of liquidity and flexibility as United Community
pursues alternative investment opportunities.
Total deposits decreased $109.2 million, or 12.3%, from December 31, 1997.
This reduction was primarily due to deposits withdrawn for the purchase of
United Community shares in connection with the conversion of Home Savings from
mutual to stock form. The deposit decrease included an $18.7 million reduction
in savings accounts and a $90.6 million decrease in certificate accounts.
Transaction accounts increased by $160,000.
Total equity increased $323.3 million at December 31, 1998, compared to
December 31, 1997, primarily due to the conversion. Book value per share was
$14.46 as of December 31, 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
NET INCOME. Net income for the year ended December 31, 1998, was $8.7
million, compared to $13.0 million for the year ended December 31, 1997. The
decline in net income resulted primarily from the contribution of $11.8 million
to the Home Savings Charitable Foundation in 1998. United Community believes
that the contribution of common shares to the Home Savings Charitable Foundation
will benefit the long-term value of Home Savings' community banking franchise by
enabling the communities served by Home Savings to share in the potential growth
and success of Home Savings and United Community. Also contributing to the
decline in the current year was a recovery in 1997 of $3.3 million of interest
and a loan loss recovery of $2.8 million in connection with three loans that had
previously been charged off. These charges were partially offset by a $3.2
million increase in total interest income and $4.7 million decrease in interest
expense.
Earnings per share since the conversion from mutual to stock form, for the
six-month period ended December 31, 1998, was $0.08. Without the contribution
to the Home Savings Charitable Foundation earnings per share for the same period
would have been $0.32. There are no comparable per share earnings for 1997 as
Home Savings was a mutual association.
Core earnings, defined as pre-tax earnings adjusted for securities sales
transactions and unusual or nonrecurring expense or income items, for the year
ended December 31, 1998, were $25.2 million compared to $15.0 million in 1997.
The $10.2 million increase resulted primarily from an increase in net interest
income. The following table summarizes the components of adjusted pre-tax core
earnings:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
Net interest income $50,126 $38,914
Provision for loan losses 650 700
Noninterest income 2,104 1,518
Noninterest expense 26,383 24,703
-------- -------
Adjusted pre-tax core earnings $25,197 $15,029
-------- -------
-------- -------
</TABLE>
NET INTEREST INCOME. Net interest income increased $7.9 million, or
18.70%, to $50.1 million in 1998 from $42.2 million for 1997. Total interest
income increased $3.2 million and interest expense declined $4.7 million.
The increase in total interest income was primarily due to an increase in
interest-earning assets as a result of the investment of proceeds from the
conversion. The average balance of interest-earning assets was $124.8 million
higher for the year ended December 31, 1998 compared to 1997. The decrease
in interest expense was due to a decline in the weighted average interest
rate and a reduction in the average balance due to the withdrawal of funds to
purchase stock in the conversion. The interest rate spread decreased 21
basis points to 3.32% for 1998
-31-
<PAGE>
from 3.53% for 1997 as United Community experienced a 59 basis point decrease
in the yield on its interest-earning assets and a 38 basis point decrease in
the cost of its interest-bearing liabilities. The interest rate spread was
also impacted by the recovery of delinquent interest discussed above.
Total interest income increased $3.2 million, or 3.9%, in 1998 from
1997. The average yield on interest-earning assets, including the effects of
the recovery of delinquent interest in 1997 discussed above, decreased to
7.42% in 1998 from 8.01% in 1997. Without the $3.3 million recovery of
delinquent interest, total interest income for 1997 would have been $79.3
million resulting in a $6.6 million, or 8.3%, increase in total interest
income when comparing 1998 to 1997. The resulting average yield in
interest-earning assets would have been 7.68% for 1997 absent the $3.3
million recovery, approximately 33 basis points below the yield achieved as a
result of the interest recovery and 26 basis points above the yield for 1998.
Similarly, the interest rate spread would have been 3.20% for 1997 compared
to 3.32% for 1998.
Interest income on loans receivable decreased $1.1 million in 1998,
primarily as a result of the recovery of interest in 1997 without the 1997
recovery of interest, interest income on loans receivable would have increased
$2.2 million from 1997 to 1998. The average yield on loans receivable without
the recovery would have been 8.15% for 1997, compared to 8.26% for 1998. The
average balance of net loans receivable increased $18.6 million for the year
ended December 31, 1998 compared to 1997.
The average balances of investment securities and other interest-earning
assets increased by $161.5 million in 1998 compared to 1997, resulting in an
additional $8.7 million of interest income for 1998. As previously stated, much
of the proceeds from the conversion were invested primarily in these instruments
for liquidity and flexibility. The average balance of mortgage-backed
securities decreased by $55.3 million during 1998 compared to 1997, resulting in
a reduction of interest income of $4.5 million. The reduction in the average
balance of mortgage-backed securities was due to repayments and maturities of
mortgage-backed securities.
Total interest expense decreased $4.7 million, or 11.6%, from 1997 to 1998.
The average balance of interest-bearing liabilities decreased $31.5 million, or
3.5%, primarily due to the withdrawal of deposits to purchase United Community
shares. The average rate paid decreased to 4.10% in 1998 from 4.48% in 1997.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged 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 and prior loan loss experience. The
provision for loan loss allowance was $650,000 in 1998, as a result of
continuing growth in the loan portfolio, particularly in commercial loans, at
December 31, 1998, compared a net recovery of $1.5 million in 1997 due to the
loan recovery discussed above. Home Savings' allowance for loan losses totaled
$6.4 million at December 31, 1998, which was .96% of total loans.
NONINTEREST INCOME. Noninterest income increased $725,000, or 46.4%, to
$2.3 million for the year ended December 31, 1998, from $1.6 million for the
year ended December 31, 1997. The increase was primarily due to a gain of
approximately $253,000 on the sale of mortgage-backed securities along with
approximately $375,000 in fees and commissions related to check services during
the conversion. The level of noninterest income was also impacted by an
increase in automated teller machine service charges and NOW non-sufficient
funds fees of approximately $84,000, and a rebate of approximately $29,000 from
the Ohio Bureau of Workers' Compensation.
NONINTEREST EXPENSE. Noninterest expense increased $12.9 million to $38.2
million for 1998, from $25.3 million in 1997. This increase was primarily
attributable to the charitable donation of $11.8 million to the Home Savings
Charitable Foundation and an increase of $921,000 in salary and employee
benefits primarily as a result of the implementation of the Employee Stock
Ownership Plan.
-32-
<PAGE>
FEDERAL INCOME TAXES. Federal income taxes decreased $2.1 million, or
30.6%, in 1998 compared to 1997, primarily due to bower pre-tax income as a
result of the contribution to the Home Savings Charitable Foundation in 1998 and
the recovery on the three loans in 1997 stated above.
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 Savings Association Insurance
Fund. Other factors accounting for the increase in net income from 1996 to 1997
were a $3.3 million increase in net interest income, a $2.8 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. Home Savings'
interest rate spread increased 39 basis points to 3.53% for 1997 from 3.14%
for 1996 as Home Savings 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. Home Savings 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 Home Savings
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 Home Savings' 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, Home
Savings' total interest income for 1997 would have been $79.3 million, resulting
in a $2.4 million, or 2.9%, decrease in total interest income compared to 1996.
The resulting average yield on interest-earning assets would have been 7.68% for
1997, approximately 33 basis points below the yield achieved as a result of the
interest recovery and three basis points below the yield for 1996. Similarly,
the Home Savings' 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.
PROVISION FOR LOAN 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, a net recovery of $1.5 million was credited to operations in 1997,
and no amounts were recorded as provisions or recoveries in
-33-
<PAGE>
1996. The recovery recorded in 1997 was due to the significant settlement of
several large loans which also affected Home Savings' total interest income
for 1997. In 1997, Home Savings 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, Home Savings' allowance for loan
losses totaled $6.0 million, which equaled .9% of total loans.
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 Home
Savings' 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 Savings Association
Insurance Fund assessment in 1996. Excluding the Savings Association Insurance
Fund one-time assessment, noninterest expense was $24.2 million for 1996. As a
result of the recapitalization of the Savings Association Insurance Fund, the
Federal Deposit Insurance Company substantially reduced deposit insurance
premiums. Since January 1, 1997, Home Savings has paid deposit insurance
premiums at the rate of $.063 per $100 of deposits. Prior to the
recapitalization of the Savings Association Insurance Fund, 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.
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 Savings Association
Insurance Fund assessment, resulting in decreased pre-tax income.
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to United
Community'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 loan 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 average
balance.
-34-
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------- ------------------------------
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) $ 642,168 $53,063 8.26% $ 623,546 $54,148 8.68% $ 590,128 $48,586 8.23%
Mortgage-backed securities:
Available for sale 66,450 4,351 6.55 73,053 5,122 7.01 96,229 6,871 7.14
Held to maturity 218,510 15,344 7.2 267,242 19,024 7.12 305,583 21,988 7.20
Investment securities:
Available for sale 70,810 4,194 5.92 33,883 2,169 6.40 17,903 1,226 6.85
Held to maturity 4,859 319 6.57 13,333 843 6.32 29,944 1,780 5.94
Other interest-earning assets 154,784 8,610 5.56 21,716 1,379 6.35 21,034 1,298 6.17
---------- ------- ------ ---------- ------- ------ ---------- ------- ------
Total interest-earning 1,157,581 85,881 7.42 1,032,773 82,685 8.01 1,060,821 81,749 7.71
assets
Noninterest-earning assets 32,575 24,985 23,809
---------- ---------- ----------
Total assets $1,190,156 $1,057,758 $1,084,630
---------- ---------- ----------
---------- ---------- ----------
Interest-bearing liabilities:
Checking and demand accounts $ 123,742 2,619 2.21 $ 120,962 2,906 2.40 $ 122,993 3,248 2.64
Savings accounts 243,765 7,114 2.60 248,914 7,387 2.97 257,806 7,879 3.06
Certificates of deposit 474,912 26,022 5.48 534,038 30,170 5.65 559,485 31,882 5.70
---------- ------- ------ ---------- ------- ------ ---------- -------
Total 872,419 35,755 4.10 903,914 40,463 4.48 940,284 43,009 4.57
Total interest-bearing
liabilities 872,419 35,755 4.10 903,914 40,463 4.48 940,284 43,009 4.57
------- ------ ------- ------ ------- ------
Noninterest-bearing liabilities 30,521 19,109 18,744
---------- ---------- ----------
Total liabilities 902,940 923,023 959,028
Equity 287,216 134,735 125,602
---------- ---------- ----------
Total liabilities and equity $1,190,156 $1,057,758 $1,084,630
---------- ---------- ----------
---------- ----------
Net interest income and
interest rate spread $50,126 3.32% $42,222 3.53% $38,740 3.14%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Net yield on interest-earning
assets 4.33% 4.09% 3.65%
------ ------ ------
------ ------ ------
Average interest-earning assets
to average interest-bearing
liabilities 132.69% 114.26% 112.82%
------ ------ ------
------ ------ ------
</TABLE>
- -----------------------------
(1) Nonaccrual loans are included in the average balance.
-35-
<PAGE>
The following table presents the total dollar amounts of interest income
and interest expense on the indicated amounts of average interest-earning assets
or interest-bearing liabilities together with the weighted average interest
rates for the three-month periods ended March 31, 1999 and 1998. Average
balance calculations are based on daily balances.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans (1) $ 664,260 $13,254 7.98% $ 633,096 $13,072 8.26%
Mortgage-backed securities:
Available for sale 95,528 1,452 6.08 60,966 1,043 6.84
Held to maturity 175,140 3,050 6.97 245,353 4,311 7.03
Investment securities:
Available for sale 118,200 1,675 5.67 49,510 748 6.04
Held to maturity 4,940 78 6.32 5,163 79 6.12
Other interest-earning assets 171,948 2,089 4.86 27,667 425 6.14
---------- ------- ------ ---------- ------- ------
Total interest-earning 1,230,016 21,598 7.02 1,021,755 19,678 7.70
assets
Noninterest-earning assets 31,437 25,440
---------- ----------
Total assets $1,261,453 $1,047,195
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Checking and demand accounts $ 115,024 649 2.26 $ 119,711 666 2.23
Savings accounts 225,430 1,376 2.44 244,776 1,639 2.68
Certificates of deposit 429,325 5,482 5.11 520,119 7,251 5.58
---------- ------- ------ ---------- ------- ------
Total interest-bearing
liabilities 769,779 7,507 3.90 884,606 9,556 4.32
------ ------- ------
Noninterest-bearing liabilities 25,588 20,152
---------- ----------
Total liabilities 795,367 904,758
Equity 466,086 142,427
---------- ----------
Total liabilities and equity $1,261,453 $1,047,195
---------- ----------
---------- ----------
Net interest income and
interest rate spread $14,091 3.12% $10,122 3.38%
------- ------ ------- ------
------- ------ ------- ------
Net yield on interest-earning
assets 4.58% 3.96%
------ ------
------ ------
Average interest-earning assets
to average interest-bearing
liabilities 159.79% 115.50%
------ ------
------ ------
</TABLE>
- -----------------------------
(1) Nonaccrual loans are included in the average balance.
-36-
<PAGE>
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 Home Savings' 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>
For the three months
ended March 31, Year ended December 31,
----------------------------- -------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
----------------------------- ----------------------------- -----------------------------
Increase Total Increase Total Increase Total
(decrease) due increase (decrease) due increase (decrease) due increase
to to to
--------------- --------------- ---------------
Rate Volume (decrease) Rate Volume (decrease) Rate Volume (decrease)
------ ------ ---------- ------ ------ ---------- ------ ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $(393) $ 575 $ 182 $(2,828) $ 1,743 $(1,085) $2,734 $ 2,828 $ 5,562
Mortgage-backed securities:
Available for sale (100) 509 409 (326) (445) (771) (122) (1,627) (1,749)
Held to maturity (38) (1,223) (1,261) (255) (3,425) (3,680) (232) (2,732) (2,964)
Investment securities:
Available for sale (13) 940 927 (149) 2,174 2,025 (74) 1,017 943
Held to maturity 3 (4) (1) 34 (558) (524) 121 (1,058) (937)
Other interest-earning assets (75) 1,739 1,664 (149) 7,380 7,231 38 43 81
----- ------- ------- ------- ------- ------- ------ ------- -------
Total interest-earning
assets $(616) $ 2,536 $ 1,920 $(3,673) $ 6,869 $ 3,196 $2,465 $(1,529) 936
----- ------- ------- ------- ------- ------- ------ ------- -------
----- ------- ------- ------- ------- ------- ------ -------
Interest-bearing liabilities:
Savings accounts $(139) $ (124) $ (263) $(1,384) $ 1,112 $ (272) (225) (267) (492)
Checking accounts (29) 12 (17) (356) 69 (287) (289) (53) (342)
Certificates of deposit (575) (1,194) (1,769) (888) (3,261) (4,149) (271) (1,441) (1,712)
----- ------- ------- ------- ------- ------- ------ ------- -------
Total interest-bearing
liabilities $(743) $(1,306) $(2,049) $(2,628) $(2,080) $(4,708) $ (785) $(1,761) (2,546)
----- ------- ------- ------- ------- ------- ------ ------- -------
----- ------- ------- ------- ------- ------- ------ ------- -------
Change in net interest income $ 3,969 $ 7,904 $ 3,482
------- ------- -------
------- ------- -------
</TABLE>
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK. The principal market risk affecting
Home Savings is interest rate risk. Home Savings does not maintain a trading
account for any class of financial instrument, and Home Savings is not affected
by foreign currency exchange rate risk or commodity price risk. Because Home
Savings does not hold any equity securities other than stock in the Federal Home
Loan Bank of Cincinnati, Home Savings is not subject to equity price risk.
Home Savings, 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 Home Savings, 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 Home Savings 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, Home Savings uses the "net portfolio value" methodology adopted by the
Office of Thrift Supervision as part of its capital regulations and also
considers the Office of Thrift Supervision 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, net portfolio value 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.
-37-
<PAGE>
The application of the methodology attempts to quantify interest rate risk as
the change in the net portfolio value and net interest income that would
result from various levels of theoretical basis point changes in market
interest rates.
Home Savings 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 net portfolio value 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 is an analysis of Home Savings' interest rate risk as
measured by changes in net portfolio value 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 Home Savings as the maximum change in net portfolio
value that the board of directors deems advisable in the event of various
changes in interest rates.
<TABLE>
<CAPTION>
Year ended December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
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 $269,636 $(75,189) (21.80)% 26.74% (3.65)% $(2,907) (6.59)%
+300 287,238 (57,587) (16.70) 27.67 (2.72) (2,098) (4.75)
+200 307,696 (37,129) (10.77) 28.73 (1.66) (1,259) (2.85)
+100 327,953 (16,872) (4.89) 29.70 (0.69) (507) (1.15)
Static 344,825 - - 30.39 - - -
(100) 344,333 (492) (0.14) 30.00 (0.39) (553) (1.25)
(200) 337,232 (7,593) (2.20) 29.19 (1.20) (2,345) (5.32)
(300) 332,677 (12,148) (3.52) 28.54 (1.85) (4,068) (9.22)
(400) 330,958 (13,867) (4.02) 28.05 (2.34) (5,158) (11.69)
</TABLE>
As illustrated in the table, Home Savings' net portfolio value is more
sensitive to increases in interest rates than to decreases. Home Savings'
sensitivity to increases in rates occurs principally because, as rates increase,
borrowers become less likely to prepay fixed-rate loans than when interest rates
are declining, and the majority of Home Savings' loans have fixed rates of
interest. In addition, loan demand is adversely affected by increases in
interest rates. Thus, in a rising interest rate environment, the amount of
interest Home Savings 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 Home Savings 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 net portfolio value 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.
-38-
<PAGE>
The Board of Directors and management of Home Savings believe that certain
factors afford Home Savings the ability to operate successfully despite its
exposure to interest rate risk. Home Savings manages its interest rate risk by
maintaining capital well in excess of regulatory requirements.
LIQUIDITY AND CAPITAL
Home Savings' 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 three months ended March 31, 1999,
and for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Three months Years ended December 31,
ended March 31, ---------------------------------------------
1999 1998 1997 1996
--------------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Net income $ 4,711 $ 8,699 $ 13,047 $ 6,631
Adjustments to reconcile net income to net cash from
operating activities 382 5,754 136 (683)
-------- -------- -------- --------
Net cash from operating activities 5,093 14,453 13,183 5,948
Net cash from investing activities (9,782) (71,048) 47,035 (20,532)
Net cash from financing activities (325) 192,606 (45,389) (7,562)
-------- -------- -------- --------
Net change in cash and cash equivalents (5,014) 136,011 14,829 (22,146)
Cash and cash equivalents at beginning of period 170,508 34,497 19,668 41,814
-------- -------- -------- --------
Cash and cash equivalents at end of period $165,494 $170,508 $ 34,497 $ 19,668
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The principal sources of funds for United Community and Home Savings are
deposits, loan repayments, maturities of securities, and other funds provided by
operations. Home Savings also has the ability to borrow from the Federal Home
Loan Bank. 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.
Investments in liquid assets maintained by United Community and Home Savings are
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 asset and liability management program. At March 31, 1999, approximately
$281.8 million of Home Savings' certificates of deposit were expected to mature
within one year. Based on past experience and Home Savings' prevailing pricing
strategies, management believes that a substantial percentage of such
certificates will be renewed with Home Savings at maturity, although there can
be no assurance that this will occur.
Office of Thrift Supervision regulations presently require Home Savings 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 Home Savings' 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 Home Savings
may rely, if necessary, to fund loan originations, deposit withdrawals or other
short-term funding needs. As of March 31, 1999 Home Savings' liquidity rate was
51.66%.
Home Savings is required by Office of Thrift Supervision 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
Home Savings consists solely of tangible capital) of 3.0% of adjusted total
assets and risk-based capital (which for Home Savings 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).
-39-
<PAGE>
The following table summarizes Home Savings' regulatory capital
requirements and actual capital at March 31, 1999.
<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 $303,666 26.97% $16,888 1.50% $286,778 25.47% $1,125,836
Core capital 303,666 26.97 33,775 3.00 269,891 23.97 1,125,836
Risk-based capital 310,031 51.19 48,455 8.00 261,576 43.19 605,685
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
A discussion of recently issued accounting pronouncements and their impact
on United Community's Consolidated Financial Statements is provided at pages ___
and ___ in Note 1 to the Notes to Consolidated Financial Statements.
1998 QUARTERLY FINANCIAL DATA
The following table presents summarized quarterly data for each of the
years indicated.
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1998:
Total interest income $19,678 $21,017 $23,212 $21,974 $85,881
Total interest expense 9,556 9,960 8,462 7,777 35,755
Net interest income 10,122 11,057 14,750 14,197 50,126
Provision for loan loss
allowances 250 150 100 150 650
Noninterest income 378 684 745 482 2,289
Noninterest expense 6,095 6,263 18,613 7,246 38,217
Income taxes 1,454 1,866 (1,196) 2,725 4,849
Net income (loss) 2,701 3,462 (2,022) 4,558 8,699
Earnings (loss) per share:
Basic N/A N/A (0.06) 0.14 $0.08
Diluted N/A N/A (0.06) 0.14 $0.08
1997:
Total interest income $20,001 $23,082 $20,040 $19,562 $82,685
Total interest expense 10,211 10,165 10,089 9,998 40,463
Net interest income 9,790 12,917 9,951 9,564 42,222
Provision for (recovery of)
loan loss allowances - (2,246) - 700 (1,546)
Noninterest income 298 376 386 504 1,564
Noninterest expense 6,005 6,228 6,097 6,973 25,303
Income taxes 1,360 3,187 1,338 1,097 6,982
Net income 2,723 6,124 2,902 1,298 13,047
</TABLE>
-40-
<PAGE>
YEAR 2000 ISSUE
With the year 2000 approaching, there is concern that the change of date
could affect any system that relies on computers, computer software programs or
computer chips. Many computer systems have been designed to store and recognize
the year in two digits rather than four digits and to assume that the first two
digits are 19. Beginning in the year 2000, therefore, the possibility exists
that some computers may misinterpret "00" as 1900 instead of 2000. If not
remedied, such a scenario could expose Home Savings and United Community to
business risks resulting from the interruption or shut-down of normal business
operations.
To prepare for the change, Home Savings formed a Year 2000 compliance
initiative committee to oversee all necessary corrective actions. A Year 2000
Project Plan was initiated to identify potential operational and business risks,
assess systems and equipment, perform and test all renovations, and implement
renovated systems. If the disruption of any system could inhibit Home Savings
from interacting with or serving its customers, then it has been identified as
"mission critical". The year 2000 compliance committee has determined that the
greatest potential impact upon Home Savings and United Community is the effect
of the year 2000 problem on Home Savings' core transaction processing system
which is managed by an outside data processing service bureau. The outside
service bureau, working in conjunction with Home Savings, has installed and
successfully tested a year 2000 compliant processing system.
In addition to comprehensive internal preparations, Home Savings is
developing contingency plans for all "mission critical" systems which could be
disrupted by year 2000 failures outside of its control. The impact of various
external failures is being analyzed, including disruption of utilities and
essential services. Alternative procedures are being developed, documented and
tested which would enable Home Savings to maintain delivery of products and
services to customers. Such contingency plans include automated and manual
procedures for controlling cash reserves, recording customers account
transactions, providing back-up voice and data communications, reacting to
utility interruptions, engaging external check processing services, ensuring
adequate or increased security levels, and maintaining other necessary daily
operations.
As of March 31, 1999, Home Savings had incurred costs of approximately
$257,000. Additional costs to complete this project are currently estimated to
be $103,000.
BUSINESS OF UNITED COMMUNITY
United Community was incorporated in the State of Ohio in February 1998 for
the purpose of owning all of the outstanding capital stock of Home Savings
issued upon the conversion of Home Savings from a mutual savings association to
a permanent capital stock savings association, which was completed on July 8,
1998.
Home Savings was organized as a mutual savings association under Ohio law
in 1889. As an Ohio savings association, Home Savings is subject to supervision
and regulation by the Office of Thrift Supervision, the Ohio Department of
Commerce, Division of Financial Institutions and the Federal Deposit Insurance
Corporation. Home Savings is a member of the Federal Home Loan Bank of
Cincinnati and the deposits of Home Savings are insured up to applicable limits
by the Federal Deposit Insurance Corporation in the Savings Association
Insurance Fund.
As a savings and loan holding company, United Community is subject to
regulation, supervision and examination by the Office of Thrift Supervision.
United Community's activities have been limited primarily to holding the common
stock of Home Savings since acquiring such common stock in the Conversion.
Consequently, the following discussion focuses primarily on the business of Home
Savings.
-41-
<PAGE>
Home Savings conducts business from its main office located in
Youngstown, Ohio and 13 full-service branches, located in northeastern Ohio.
The principal business of Home Savings is the origination of mortgage loans
on one- to four-family residential real estate located in Home Savings'
primary market area, which consists of northern Columbiana County, Mahoning
County and southern Trumbull County. Home Savings also originates loans
secured by nonresidential real estate in its primary market area. In
addition to real estate lending, Home Savings originates commercial loans and
various types of consumer loans, including home equity loans, education
loans, loans secured by savings accounts, motor vehicles, boats and
recreational vehicles and unsecured loans. For liquidity and interest rate
risk management purposes, Home Savings invests in interest-bearing deposits
in other financial institutions, federal funds and U.S. Treasury and agency
securities. Funds for lending and other investment activities are obtained
primarily from savings deposits, which are insured up to applicable limits by
the Federal Deposit Insurance Corporation in the Savings Association
Insurance Fund, principal repayments of loans and maturities of securities.
Interest on loans and other investments is Home Savings' primary source of
income. Home Savings' principal expense is interest paid on deposit accounts.
Operating results are dependent to a significant degree on the net interest
income of Home Savings, which is the difference between interest earned on loans
and other investments and interest paid on deposits. Like most thrift
institutions, Home Savings' interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
LENDING ACTIVITIES
GENERAL. Home Savings' principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in Home Savings' primary market area. Home Savings 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, Home
Savings originates commercial loans and various types of consumer credits,
including home equity loans, education loans, loans secured by savings accounts,
motor vehicles, boats and recreational vehicles and unsecured loans.
-42-
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information regarding the composition of Home Savings' loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
At March 31, 1999 1998 1997 1996
--------------------- ------------------- -------------------- ---------------------
Percent of Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans Amount total loans
--------- ----------- -------- ----------- -------- ----------- ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Permanent
One- to four-family $524,485 73.40% $516,767 73.84% $489,677 74.19% $482,089 75.23%
Multifamily 8,160 1.14 8,172 1.17 8,944 1.36 8,778 1.37
Nonresidential 30,281 4.24 31,308 4.47 33,479 5.07 35,315 5.51
Land 151 0.02 190 0.03 285 0.04 195 0.03
--------- ----------- -------- ----------- -------- ----------- ------- -----------
Total permanent 563,077 78.80 556,437 79.51 532,385 80.66 526,377 82.14
Construction loans:
One- to four-family 25,985 3.64 25,691 3.67 24,044 3.64 27,610 4.31
Multifamily and
non-residential 721 0.10 833 0.12 325 0.05 490 0.08
--------- ----------- -------- ----------- -------- ----------- ------- -----------
Total construction 26,706 3.74 26,524 3.79 24,369 3.69 28,100 4.39
--------- ----------- -------- ----------- -------- ----------- ------- -----------
Total real estate loans 589,783 82.54 582,961 83.30 556,754 84.35 554,477 86.53
Consumer loans
Home equity 17,705 2.48 18,321 2.62 17,097 2.59 14,581 2.28
Auto 1,443 0.20 1,603 0.23 2,457 0.37 3,486 0.54
Education 4,306 0.60 3,993 0.57 3,479 0.53 2,701 0.42
Other (1) 17,372 2.43 17,856 2.55 20,355 3.08 18,837 2.94
--------- ----------- -------- ----------- -------- ----------- ------- -----------
Total consumer 40,826 5.71 41,773 5.97 43,388 6.57 39,605 6.18
Commercial loans 83,946 11.75 75,085 10.73 59,897 9.08 46,742 7.29
--------- ----------- -------- ----------- -------- ----------- ------- -----------
Total loans 714,555 100.00% 699,819 100.00% 660,039 100.00% 640,824 100.00%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Less net items 43,690 42,321 26,803 23,901
--------- --------- --------- ---------
Total loans, net $670,865 $657,498 $633,236 $616,923
--------- --------- --------- ---------
--------- --------- --------- ---------
At December 31,
--------------------------------------------
1995 1994
-------------------- ---------------------
Percent of Percent of
Amount total loans Amount total loans
-------- ----------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Permanent
One- to four-family $428,213 75.39% $386,663 73.72%
Multifamily 16,042 2.82 14,838 2.83
Nonresidential 36,845 6.48 43,235 8.24
Land 1,280 0.23 1,666 0.32
-------- ----------- -------- -----------
Total permanent 482,380 84.92 446,402 85.11
Construction loans:
One- to four-family 19,804 3.49 18,200 3.47
Multifamily and
non-residential 597 0.11 994 0.19
-------- ----------- -------- -----------
Total construction 20,401 3.60 19,194 3.66
-------- ----------- -------- -----------
Total real estate loans 502,781 88.52 465,596 88.77
Consumer loans
Home equity 11,439 2.01 11,265 2.15
Auto 4,582 0.81 2,339 0.45
Education 2,788 0.49 2,217 0.42
Other (1) 17,384 3.06 15,907 3.03
-------- ----------- -------- -----------
Total consumer 36,193 6.37 31,728 6.05
Commercial loans 29,043 5.11 27,165 5.18
-------- ----------- -------- -----------
Total loans 568,017 100.00% 524,489 100.00%
----------- -----------
----------- -----------
Less net items 21,328 21,076
-------- --------
Total loans, net $546,689 $503,413
-------- --------
-------- --------
</TABLE>
- ----------------------------
(1) Consists of overdraft protection loans and loans to individuals secured by
demand accounts, deposits, automobiles, boats and one- to four-family
residences.
-43-
<PAGE>
LOAN MATURITY. The following table sets forth certain information as of
December 31, 1998, regarding the dollar amount of loans maturing in Home
Savings' 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 Home
Savings generally include due-on-sale clauses that provide Home Savings with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers the ownership of the property without Home Savings' consent.
The table does not include the effects of possible prepayments. Management
expects prepayments will cause maturities to be shorter.
<TABLE>
<CAPTION>
Principal repayments contractually due in the years ended December 31,
-----------------------------------------------------------------------------------
2002 - 2004 - 2009 - 2014 and
1999 2000 2001 2003 2008 2013 thereafter Total
---- ---- ---- -------- -------- ------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans (1) $51,255 $28,596 $28,164 $58,142 $152,271 $106,188 $126,655 $551,271
Nonresidential real estate loans 968 901 870 5,493 14,600 5,790 3,068 31,690
Commercial loans 27,867 7,703 3,145 11,568 10,661 7,604 6,537 75,085
Consumer loans 5,394 4,178 3,795 5,443 18,808 866 3,289 41,773
--------- --------- --------- --------- ---------- --------- --------- ---------
Total $85,484 $41,378 $35,974 $80,646 $196,340 $120,448 $139,549 $699,819
--------- --------- --------- --------- ---------- --------- --------- ---------
--------- --------- --------- --------- ---------- --------- --------- ---------
</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, 1999, which have fixed or adjustable interest rates:
<TABLE>
<CAPTION>
Due after December 31, 1999
---------------------------
(In thousands)
<S> <C>
Fixed rate of interest $473,037
Adjustable rate of interest 141,298
---------
$614,335
---------
---------
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of Home Savings is the origination of conventional loans secured by
first mortgages on one- to four-family residences, primarily single-family
homes, located within Home Savings' primary market area. At March 31, 1999,
Home Savings' one- to four-family residential real estate loans totaled
approximately $524.5 million, or 73.4% of total loans. At March 31, 1999, $3.4
million, or 0.6%, of Home Savings' one-to four-family loans were nonperforming.
Office of Thrift Supervision regulations and Ohio law limit the amount
which Home Savings 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, Home Savings makes loans on
one- to four-family residences of up to 90% of the value of the real estate and
improvements thereon, though the majority of such loans have loan to value
ratios of 80% or less. Loans on single-family, owner-occupied residences
located in low-to-moderate income census track locations are granted up to a 95%
loan to value ratio, although Home Savings requires private mortgage insurance
on the portion of the principal amount that exceeds 80% of the appraised value
of the property securing the loan.
Home Savings currently offers fixed-rate mortgage loans and
adjustable-rate mortgage loans for terms of up to 30 years. Although Home
Savings' loan portfolio includes a significant amount of 30-year fixed-rate
loans, most loans currently originated by Home Savings are 15-year fixed-rate
loans. The interest rate adjustment periods on adjustable-rate mortgage
loans are typically one or three years. The maximum interest rate adjustment
-44-
<PAGE>
on most of the adjustable-rate mortgage loans is 2.0% on any adjustment date
and a total of 6.0% over the life of the loan. The interest rate adjustments
on one-year and three-year adjustable-rate mortgage loans presently offered
by Home Savings 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. Home
Savings does not offer adjustable-rate mortgage loans to borrowers on one- to
four-family residences with loan to value ratios of 95%.
Home Savings 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.
Home Savings has purchased interests in loans at times when there was low
demand in Home Savings' primary market area, although Home Savings has not
purchased interests in one- to four-family loans during the past 10 years. Home
Savings' loan portfolio includes 215 participation interests in several groups
of single-family loans located within and outside of Home Savings primary
lending area. At March 31, 1999, the outstanding balance of participation loans
purchased, which is included in the one- to four-family loan portfolio, was $3.3
million, or 0.6% of Home Savings' total one- to four-family loan portfolio.
LOANS SECURED BY MULTIFAMILY RESIDENCES. Home Savings originates loans
secured by multifamily properties which contain more than four units, although
this is not a significant component of Home Savings' lending activities.
Multifamily loans are offered with adjustable rates of interest, which adjust
according to a specified index, and typically have terms ranging from five to
ten years and loan to value ratios 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. Home Savings attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guaranties on loans made to
corporations and partnerships. Home Savings requires borrowers to submit
financial statements annually to enable Home Savings to monitor the loan and
requires an assignment of rents.
At March 31, 1999, loans secured by multifamily properties totaled
approximately $8.2 million, or 1.1% of total loans. The largest loan had a
principal balance of $1.4 million.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Home Savings originates loans
for the purchase of nonresidential real estate. Home Savings' nonresidential
real estate loans have adjustable rates, terms of up to 20 years and generally
loan to value ratios of up to 80%. Rate adjustments on adjustable-rate mortgage
loans secured by nonresidential real estate are determined by adding 3.5% to the
current U.S. Treasury index. Among the properties securing Home Savings'
nonresidential real estate loans are shopping centers, hotels, motels and
freezer warehouses. The majority of such properties are located outside of Home
Savings' primary lending area. Home Savings 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.
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. Home Savings has endeavored to reduce
such risk by 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
-45-
<PAGE>
supporting the property's valuation. At March 31, 1999, Home Savings'
largest loan secured by nonresidential real estate was a participation with
an $5.1 million balance and such loan was performing according to its terms.
At March 31, 1999, approximately $30.3 million, or 4.2%, of Home Savings'
total loans were secured by mortgages on nonresidential real estate.
CONSTRUCTION LOANS. Home Savings 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 (unsold) 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 loan to value ratios of up to 80%, and
construction loans for commercial, multifamily and nonresidential properties
have loan to value ratios of up to 75%, with the value of the land included
as part of the owner's equity. At March 31, 1999, Home Savings had
approximately $26.7 million, or 3.7% of its total loans, invested in
construction loans, including $26.0 million in one- to four-family
residential construction and approximately $700,000 in multifamily
construction loans. No commercial construction loans were outstanding at
that date.
Approximately 50% of Home Savings' construction loans to builders are made
for homes as to which the builder does not have a contract with a buyer. Home
Savings, however, generally limits speculative loans to builders with whom Home
Savings 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 loan to value ratios and the total loan
funds required to complete a project. In the event a default on a construction
loan occurs and foreclosure follows, Home Savings must take control of the
project and attempt either to arrange for completion of construction or dispose
of the unfinished project.
Home Savings also originates a limited number of loans secured by vacant
land for the construction of single-family houses. Home Savings' land loans are
generally fixed-rate loans for terms up to five years and require a loan to
value ratio of 75% or less. At March 31, 1999, approximately $151,000, or
0.02%, of Home Savings' 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. Home Savings 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 loan to value
ratio for commercial loans depend upon the nature of the underlying collateral,
but generally commercial loans are made with loan to value ratios 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.
At March 31, 1999, Home Savings had approximately $83.9 million, or
11.8% 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.
Home Savings also originates unsecured commercial loans including lines of
credit for periods of less than 12 months, short-term
-46-
<PAGE>
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. In the last five years, Home Savings has more than doubled
its commercial loan portfolio, and Home Savings intends continue 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.
CONSUMER LOANS. Home Savings originates various types of consumer credit
loans, including home equity loans, education loans, loans secured by savings
accounts, 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 Home Savings. At March 31, 1999,
automobile loans amounted to $1.4 million, or .20%, of Home Savings' consumer
loan portfolio.
Home Savings 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. Home Savings frequently holds
the first mortgage, although Home Savings will make home equity loans in cases
where another lender holds the first mortgage. Home Savings 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 3.0% margin for loans on one- to
four-family residences of up to 80% loan to value ratio or by adding a 4.0%
margin for loans on one- to four-family residences of up to 90% loan to value
ratio to the one-year U.S. Treasury index. At March 31, 1999, approximately
$17.7 million, or 2.5%, of Home Savings' 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
Home Savings has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At March 31, 1999, Home Savings had approximately $40.8 million, or 5.7% of
its total loans, invested in consumer loans. Home Savings 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 Home Savings
are subject to the written, non-discriminatory underwriting standards and loan
origination procedures approved by Home Savings' board of directors. Loan
originations are generally obtained from existing customers and members of the
local community and from referrals by real estate brokers, lawyers, accountants,
and current and former customers. Home Savings also advertises in the local
print media, radio and television.
-47-
<PAGE>
Each of Home Savings' 14 offices has loan personnel who can accept loan
applications, which are then forwarded to Home Savings' Underwriting Department
for processing and approval. In underwriting real estate loans, Home Savings
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 Home Savings' 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 Home Savings' 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. Nonresidential
real estate loans up to $100,000 require two approvals, loans up to $200,000
require three approvals, and loans of $200,000 up to $1.0 million require five
approvals from a member of Home Savings' underwriting staff, the Senior Loan
Officer, the Lending Operations Officer or any other senior officer of Home
Savings. Commercial loans up to $200,000 may be approved by one of Home
Savings' commercial loan officers. Commercial 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 Home Savings.
Borrowers are required to carry satisfactory fire and casualty insurance
and flood insurance, if applicable, and to name Home Savings as an insured
mortgagee. Home Savings 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. Home
Savings 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, Home Savings has originated
substantially all of the loans in its portfolio and has held them until
maturity. Nevertheless, Home Savings' 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 Company and other
institutional investors in the secondary market. Education loans are sold, once
the borrower has graduated, to the Student Loan Marketing Association. Home
Savings 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>
Home Savings has not sold any loans for the three month period ended
March 31, 1999 and during the years ended December 31, 1998, 1997 and 1996.
The following table presents Home Savings' total loan origination and
repayment activity for the years indicated:
<TABLE>
<CAPTION>
Three months ended Year ended December 31,
March 31, 1999 1998 1997 1996
------------------ ------------ ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Loans originated:
Real estate:
Permanent:
One- to four-family $33,061 $140,344 $68,303 $129,074
Multifamily - - - 225
Nonresidential 23 340 218 136
Land - 810 - -
------------ ------------ ----------- ------------
Total permanent 33,084 141,494 68,521 129,435
Construction:
One- to four-family 6,292 28,226 25,440 26,545
Multifamily 340 180 1,390 740
------------ ------------ ----------- ------------
Total construction 6,632 28,406 26,830 27,285
------------ ------------ ----------- ------------
Total real estate loans originated 39,716 169,900 95,351 156,720
Consumer 2,811 15,535 17,038 16,199
Commercial 14,015 44,050 20,968 21,731
------------ ------------ ----------- ------------
Total loans originated 56,542 229,485 133,357 194,650
Loans purchased - 11 116 24
------------ ------------ ---------- -----------
Total loans originated and purchased 56,542 229,496 133,473 194,674
Principal repayments 43,288 205,791 119,120 125,550
------------ ------------ ----------- ------------
Net increase in loans $13,254 $ 23,705 $ 14,353 $ 69,124
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
</TABLE>
At March 31, 1999, Home Savings had $18.9 million of outstanding
commitments to originate loans and $22.5 million available to borrowers under
consumer and commercial lines of credit. At March 31, 1999, Home Savings had
$10.2 million in undisbursed funds related to construction loans in process.
LOAN ORIGINATION AND OTHER FEES. Home Savings realizes loan origination
fees and other fee income from its lending activities. A fee of 2.0% of the
loan amount, up to $1,000 is charged for fixed-rate residential real estate
loans and Home Savings 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, Home Savings 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 Statement of
Financial Accounting Standards No. 91 as an adjustment to yield for the life of
the related loan.
LOANS TO ONE BORROWER LIMITS. Office of Thrift Supervision regulations
generally limit the aggregate amount that a savings association may lend to any
one borrower to an amount equal to 15.0% of Home Savings' unimpaired capital and
unimpaired surplus. A savings association may lend to one borrower an
additional amount not to exceed 10.0% of Home Savings' unimpaired capital and
unimpaired surplus if the additional amount is fully
-49-
<PAGE>
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.
Based on such limits, Home Savings could lend approximately $46.5 million
to one borrower at March 31, 1999. The largest amount Home Savings had
outstanding to one borrower at March 31, 1999, was $11.9 million, which
consisted of three loans primarily secured by a first mortgage on a freezer
warehouse. At March 31, 1999, this loan was performing in accordance with its
terms.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Home Savings
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 Home Savings
receives a report on all delinquent loans, and Home Savings' 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 Home Savings' 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
Home Savings (Executive Committee) of the Board, which normally refers the loan
to Home Savings' 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,
--------------------------------------------------------------
At March 31, 1999 1998 1997
----------------------------- ---------------------------- -----------------------------
Percent Percent Percent
of of of
Number Amount total Number Amount total Number Amount total
loans loans loans
-------- -------- --------- -------- -------- --------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 196 $ 5,480 .82% 232 $ 8,236 1.25% 242 $ 6,895 1.09%
60-89 days 97 2,234 .33 89 2,462 0.37 132 4,415 0.70
90 days or over 167 4,856 .72 189 5,729 0.87 298 9,491 1.50
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Total delinquent loans 460 $12,570 1.87% 510 $16,427 2.49% 672 $20,801 3.29%
-------- -------- --------- -------- -------- --------- -------- -------- ---------
-------- -------- --------- -------- -------- --------- -------- -------- ---------
</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 of directors 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.
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<PAGE>
The following table sets forth information with respect to Home Savings'
nonperforming loans and other assets at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
At March 31, ----------------------------------------------
1999 1998 1997 1996 1995 1994
------------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans
Real estate loans:
One- to four-family $3,361 $3,655 $ 5,540 $5,343 $3,542 $3,491
Multifamily and nonresidential 431 378 649 704 1,082 104
Construction (net of Loan In Process)
and land 174 233 769 491 7 -
------ ------ ------- ------ ------ ------
Total real estate loans 3,966 4,266 6,958 6,538 4,631 3,595
Consumer 458 317 404 517 298 274
Commercial 432 1,146 2,129 2,059 260 219
------ ------ ------- ------ ------ ------
Total nonaccrual loans 4,856 5,729 9,491 9,114 5,189 4,088
Restructured real estate loans 1,823 1,832 644 698 891 2,681
------ ------ ------- ------ ------ ------
Total nonperforming loans 6,679 7,561 10,135 9,812 6,080 6,769
Real estate acquired through foreclosure
and other repossessed assets 196 78 55 29 46 1,570
------ ------ ------- ------ ------ ------
Total nonperforming assets $6,875 $7,639 $10,190 $9,841 $6,126 $8,339
====== ====== ======= ====== ====== ======
Nonperforming loans as a percent of loans 1.00% 1.15% 1.60% 1.59% 1.11% 1.34%
Nonperforming assets as a percent of total
assets 0.54 0.61 0.98 0.92 0.57 0.82
Allowance for loan losses as a percent of
nonperforming loans 96.75 84.62 59.02 51.37 84.18 75.51
Allowance for loan losses as a percent of
total loans before allowance 0.95 0.96 0.94 0.81 0.93 1.01
</TABLE>
For the three months ended March 31, 1999, approximately $344,000 in
interest income would have been recorded had nonaccruing and restructured loans
been accruing pursuant to contractual terms. During that period interest
collected on such loans and included in net income was approximately $47,000.
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
March 31, 1999, the carrying value of real estate acquired in settlement of
loans was $196,000, and consisted of five single-family properties and one
commercial property.
Home Savings classifies its assets 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 Home Savings 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 as "loss" is considered uncollectible
and of such little value that its continuance as an asset of Home Savings is not
warranted. Federal regulations also contain a "special mention" category,
consisting of assets which do not
-51-
<PAGE>
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.
Home Savings 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 Home
Savings. "Watch" assets are the equivalent of "special mention" assets
discussed above and a loan which is classified as "uncertain" 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 "uncertain" 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 Home Savings' classified assets at March 31, 1999
was as follows:
<TABLE>
<CAPTION>
At March 31,
1999
------------
<S> <C>
Classified assets:
Substandard $7,451
Doubtful -
Loss 95
-------
Total classified assets $7,546
=======
</TABLE>
Home Savings 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.
Home Savings 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, Home Savings 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 economic
conditions in the primary lending area, past loss experience, and possible
losses arising from specific problem assets.
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, Home Savings' determination as to the amount of its
allowance for loan losses is subject to review by the Office of Thrift
Supervision, as part of its examination process, which may result in the
establishment of an additional allowance based upon the judgment of the Office
of Thrift Supervision after a review of the information available at the time of
the Office of Thrift Supervision examination.
-52-
<PAGE>
The following table sets forth an analysis of Home Savings' allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
Three months Year ended December 31,
ended March 31, ----------------------------------------------
1999 1998 1997 1996 1995 1994
------------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $6,398 $5,982 $5,040 $5,118 $5,111 $5,397
Provision for (recovery of) loan loss 75 650 (1,546) - - (100)
allowances
Charge-offs:
Real estate (6) (47) (403) (28) (373) (170)
Consumer (16) (72) (43) (57) (21) (16)
Commercial - (151) - - - (60)
------- ------- ------- ------- ------- -------
Total charge-offs (22) (270) (446) (85) (394) (246)
------- ------- ------- ------- ------- -------
Recoveries:
Real estate 6 25 2,930 4 365 52
Consumer 2 10 4 3 10 8
Commercial 1 1 - - 26
------- ------- ------- ------- ------- -------
Total recoveries 9 36 2,934 7 401 60
------- ------- ------- ------- ------- -------
Net recoveries (charge-offs) (13) (234) 2,488 (78) 7 (186)
------- ------- ------- ------- ------- -------
Balance at end of period $6,460 $6,398 $5,982 $5,040 $5,118 $5,111
======= ======= ======= ======= ======= =======
Ratio of net recoveries (charge-offs)
to average net loans (0.00)% (0.04)% 0.40% (0.01)% 0.00% (0.04)%
Ratio of net recoveries (charge-offs) to
provision for (recovery of) loan loss 17.33% 36.00% 160.93% N/A N/A (186.00)%
allowances
</TABLE>
-53-
<PAGE>
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
are subject to change as and when the risk factors of each 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,
At March 31, -----------------------------------------------------------------------
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- ---------------------
Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each
category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans
------ ------------- ------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $4,220 82.54% $4,220 83.30% $4,242 84.35% $4,561 86.53%
Consumer loans 598 5.71 611 5.97 673 6.57 322 6.18
Commercial loans 1,643 11.75 1,567 10.73 1,067 9.08 157 7.29
------ ------ ------ ----- ------- ------- ------ ------
Total $6,461 100.00% $6,398 100.00% $5,982 100.00% $5,040 100.00%
====== ====== ====== ====== ====== ====== ====== ======
At December 31,
---------------------- ----------------------
1995 1994
---------------------- ----------------------
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans $4,585 88.52% $4,593 88.77%
Consumer loans 376 6.37 349 6.05
Commercial loans 157 5.11 169 5.18
------ ------- ------ -------
Total $5,118 100.00% $5,111 100.00%
====== ======= ====== =======
</TABLE>
-54-
<PAGE>
INVESTMENT ACTIVITIES
Federal regulations and Ohio law permit Home Savings 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
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 Home Savings
is located, investment-grade corporate debt securities, investment-grade
asset-backed securities, certificates of deposit that are fully-insured by the
Federal Deposit Insurance Corporation, bankers' acceptances, federal funds,
money market funds and interest-bearing time deposits with other financial
institutions. Home Savings' 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. The investment activities of Home Savings
are supervised by Home Savings' Investment Committee and investment purchases
are monitored weekly by the Executive Committee.
Home Savings maintains a significant portfolio of mortgage-backed
securities in the form of Federal National Mortgage Association, Government
National Mortgage Association and Federal Home Loan Mortgage Company
participation certificates. Mortgage-backed securities generally entitle Home
Savings to receive a portion of the cash flows from an identified pool of
mortgages. Government National Mortgage Association securities, Federal
National Mortgage Association securities and a majority of Home Savings' Federal
Home Loan Mortgage Company securities are guaranteed by the issuing agency as to
timely payment of principal and interest. The balance of Home Savings' Federal
Home Loan Mortgage Company securities are guaranteed as to timely payment of
interest and eventual payment of principal.
Home Savings purchases mortgage-backed securities primarily as an
alternative to originating loans for its portfolio. In recent years, Home
Savings' funds available for investment have exceeded the volume of loan
originations based on loan demand in Home Savings' primary market area.
Purchases of mortgage-backed securities enable Home Savings to generate positive
interest rate spreads with minimal administrative expense and reduce credit risk
due to the guarantees provided by the issuer. Mortgage-backed securities
classified as available for sale also provide Home Savings with an additional
source of liquid funds. Home Savings 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.
Although Home Savings' mortgage-backed securities are generally guaranteed
as to repayment of principal and interest, Home Savings 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 the 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 Home Savings 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. Home Savings 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.
-55-
<PAGE>
To the extent that Home Savings' mortgage-backed securities prepay faster
than anticipated in a declining rate environment, Home Savings 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 Home
Savings 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 Home Savings'
retained earnings.
Since the conversion, funds not currently utilized by United Community for
general corporate purposes, including possible acquisitions, are invested in
similar investments previously discussed as authorized Home Savings'
investments. In addition, United Community invested in Eurodollars, which is a
short-term investment. These type of investments provide a great deal of
liquidity and flexibility as United Community pursues alternative investment
opportunities.
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 other
comprehensive income. Securities classified as held to maturity are carried
at amortized cost. Home Savings 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.
-56-
<PAGE>
The following table sets forth the amortized cost and fair value of United
Community and Home Savings' short-term investments, Federal Home Loan Bank
stock, equity investments, investment securities and mortgage-backed securities
at the dates indicated.
<TABLE>
<CAPTION>
At December 31
At March 31, ---------------------------------------
1999 1998
-------------------------------------- --------------------------------------
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 $ 24,435 4.39% $ 24,435 4.36% $ 12,798 2.28% $12,798 2.25%
Money market fund 3,754 0.67 3,754 0.67 5,002 0.89 5,002 0.88
Eurodollars 121,761 21.85 121,761 21.71 133,813 23.79 133,813 23.58
Other 2,187 0.39 2,187 0.39 2,162 0.38 2,162 0.38
Federal Home Loan Bank stock 12,164 2.18 12,164 2.17 11,958 2.13 11,958 2.11
Equity investments 1,274 0.23 1,221 0.22 - - - -
Investment securities:
U.S. Treasury obligations 12,539 2.25 12,759 2.28 15,045 2.68 15,376 2.71
U.S. Government agency 33,048 5.93 33,004 5.89 13,000 2.31 13,060 2.30
obligations
Corporate notes 82,162 14.75 82,237 14.66 82,249 14.63 82,452 14.53
Mortgage-backed securities
FHLMC 35,540 6.38 36,074 6.43 38,732 6.89 39,450 6.95
FNMA 18,637 3.35 18,586 3.31 19,691 3.50 19,811 3.49
Private issues 2,056 0.37 1,980 0.35 2,106 0.37 2,029 0.36
Collateralized mortgage
obligations
FNMA 11,219 2.01 11,222 2.00 13,075 2.32 13,046 2.30
Private issues 29,428 5.28 29,265 5.22 24,753 4.40 24,554 4.33
-------- ------- -------- ------- -------- ------- -------- -------
Total available for sale 390,204 70.03 390,649 69.66 374,384 66.57 375,511 66.17
-------- ------- -------- ------- -------- ------- -------- -------
Held to maturity:
Investment securities:
U.S. Treasury obligations - 0.00 - 0.00 4,993 0.89 5,016 0.88
Corporate notes - 0.00 - 0.00 - - - -
Mortgage-backed securities:
GNMA 6,261 1.13 6,579 1.17 7,057 1.25 7,413 1.30
FHLMC 104,551 18.76 106,242 18.95 114,208 20.31 116,443 20.52
FNMA 56,184 10.08 57,306 10.22 61,734 10.98 63,154 11.13
-------- ------- -------- ------- -------- ------- -------- -------
Total held to maturity 166,996 29.97 170,127 30.34 187,992 33.43 192,026 33.83
-------- ------- -------- ------- -------- ------- -------- -------
Total investment portfolio $557,200 100.00% $560,776 100.00% $562,376 100.00% $567,537 100.00%
======== ======= ======== ======= ======== ======= ======== =======
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%
Money market fund - - - - - - - -
Eurodollars - - - - - - - -
Other - - - - - - - -
Federal Home Loan Bank stock 11,136 2.93 11,136 2.89 10,370 2.42 10,370 2.40
Equity investments - - - - - - - -
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 5,000 1.31 5,038 1.31 - - - -
obligations
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 2,322 0.62 2,244 0.58 2,499 0.58 2,419 0.57
Collateralized mortgage
obligations
FNMA - - - - - - - -
Private issues - - - - - - - -
-------- ------- -------- ------- -------- ------- -------- -------
Total available for sale 131,372 34.62 132,833 34.43 114,631 26.72 115,463 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 9,072 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 $380,548 100.00% 385,832 100.00% $428,985 100.00% $431,790 100.00%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
-57-
<PAGE>
The maturities of United Community and Home Savings' short-term investments
and investment securities at March 31, 1999, excluding Federal Home Loan Bank
stock, are indicated in the following table:
<TABLE>
<CAPTION>
At March 31, 1999
----------------------------------------------------------------------
After one through
One year or less five years Total
------------------- ------------------ -----------------------------
Amortized Average Amortized Average Amortized Fair Average
cost yield cost yield cost value Yield
---------- ------- --------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments:
Federal funds $ 24,435 4.73% $ - -% $ 24,435 $ 24,435 4.73%
Eurodollars 121,761 4.73 - - 121,761 121,761 4.73
Money market fund 3,754 4.04 - - 3,754 3,754 4.04
Liquid cash 2,187 4.72 - - 2,187 2,187 4.72
--------- ----- -------- ------- -------- -------- ----
Total short-term investments $152,137 4.71% $ - -% $152,137 $152,137 4.71%
======== ===== ======== ======= ======== ======== ====
Investment securities:
Available for sale $ 36,203 5.44% $91,546 5.71% $127,749 $128,000 5.63%
Held to maturity - - - - - - -
--------- ----- -------- ------- -------- -------- ----
Total investment securities $ 36,203 5.44% $91,546 5.71% $127,749 $128,000 5.63%
======== ===== ======== ======= ======== ======== ====
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of Home
Savings' funds for use in lending and other investment activities. In addition
to deposits, Home Savings derives funds from interest payments and principal
repayments on loans and income on earning assets. 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. Home Savings
may also borrow from the Federal Home Loan Bank as a source of funds.
DEPOSITS. Deposits are attracted principally from within Home Savings'
primary market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, demand deposits, individual
retirement accounts, 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
Executive Committee. Home Savings does not use brokers to attract deposits.
The amount of deposits from outside Home Savings' primary market area is not
significant.
-58-
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Home Savings at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
At March 31, --------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ----------------------------
Percent Weighted Percent Weighted Percent Weighted
of total average of total average of total average
Amount deposits rate Amount deposits rate Amount deposits rate
------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing $ 68,375 8.75% 1.87% $ 69,284 8.91% 1.86% $ 58,707 6.62% 2.03%
Noninterest-bearing 6,730 0.86 - 6,933 0.89 5,387 0.61
Savings accounts 226,606 29.00 2.50 224,840 28.92 2.50 243,588 27.47 2.99
Money market accounts 49,453 6.33 2.94 44,764 5.76 2.57 56,727 6.40 2.99
-------- -------- -------- -------- ---------- --------
Total transaction accounts 351,164 44.94 - 345,821 44.48 - 364,409 41.10 -
Certificates of deposit:
4.00% or less 297 0.04 - 506 0.06 - 448 0.05 -
4.01% - 6.00% 373,858 47.85 - 374,090 48.11 - 415,045 46.80 -
6.01% - 8.00% 55,982 7.17 - 57,166 7.35 - 106,835 12.04 -
8.01% - 10.00% - - - - - - 71 0.01 -
-------- -------- ---- -------- -------- ---- --------- ------- ----
Total certificates of
deposit 430,137 55.06 5.21 431,762 55.52 5.35 522,399 58.90 5.78
-------- ------- -------- ------- --------- -------
Total deposits $781,301 100.00% 3.94% $777,583 100.00% 4.02% $886,808 100.00% 4.56%
======== ====== ======== ====== ======== ======
</TABLE>
The following table shows rate and maturity information for Home Savings'
certificates of deposit at March 31, 1999:
<TABLE>
<CAPTION>
At March 31, 1999
---------------------------------------------------------------
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 $ 259 $ 3 $ 4 $ 31 $ 297
4.01% to 6.00% 268,378 58,827 26,396 20,257 373,858
6.01% to 8.00% 13,173 14,883 12,122 15,804 55,982
-------- --------- ---------- ---------- --------
Total certificates of deposit $281,810 $73,713 $38,522 $36,092 $430,137
======== ========= ========== ========== ========
Percent of total certificates
of deposit 65.52% 17.14% 8.95% 8.39% 100.00%
</TABLE>
At March 31, 1999, approximately $281.8 million of Home Savings'
certificates of deposit mature within one year. Based on past experience and
Home Savings' prevailing pricing strategies, management believes that a
substantial percentage of such certificates will be renewed with Home Savings
at maturity. If, however, Home Savings is unable to renew the maturing
certificates for any reason, borrowings of up to $243.0 million are available
from the Federal Home Loan Bank of Cincinnati.
-59-
<PAGE>
The following table presents the amount of Home Savings' certificates of
deposit of $100,000 or more by the time remaining until maturity at March 31,
1999:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 9,594
Over 3 months to 6 months 7,405
Over 6 months to 12 months 8,109
Over 12 months 13,136
--------
Total $38,244
========
</TABLE>
Management believes that a substantial percentage of the above certificates
will be renewed with Home Savings at maturity.
The following table sets forth Home Savings' deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Three months Year ended December 31,
ended March 31, ---------------------------
1999 1998 1997
--------------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $777,583 $ 886,808 $ 932,060
Net decrease in deposits (3,778) (145,153) (85,868)
---------- ----------- -----------
Net deposits before interest
credited 773,805 741,655 846,192
Interest credited 7,496 35,928 40,616
---------- ----------- -----------
Ending balance $781,301 $ 777,583 $ 886,808
========== =========== ===========
Net increase/(decrease) $ 3,718 $(109,225) $ (45,252)
========== =========== ===========
Percent increase/(decrease) 0.48% (12.32)% (4.86)%
</TABLE>
BORROWINGS. The Federal Home Loan Bank system functions as a central
reserve bank providing credit for its member institutions and certain other
financial institutions. As a member in good standing of the Federal Home
Loan Bank of Cincinnati, Home Savings is authorized to apply for advances
from the Federal Home Loan Bank of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association
must meet certain qualifications to be eligible for Federal Home Loan Bank
advances. The extent to which an association is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Qualified
Thrift Lender test. If an association meets the Qualified Thrift Lender test,
Home Savings will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the Qualified Thrift
Lender test, the association will be eligible for such advances only to the
extent it holds specified Qualified Thrift Lender test assets. At March 31,
1999, Home Savings was in compliance with the Qualified Thrift Lender test.
Although Home Savings may borrow up to $243.0 million from the Federal Home
Loan Bank, there are no outstanding advances.
COMPETITION
Home Savings faces competition for deposits and loans from commercial
banks, savings and loan associations, mortgage bankers (especially those
affiliated with local residential real estate brokers), credit unions, money
market funds, insurance companies and a growing list of other local, regional
and national institutions which offer financial services. The primary
factors in competition for deposits are customer service, convenience of
office location and interest rates. Home Savings
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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. Home Savings does not offer all of the products and
services offered by some of its competitors, particularly commercial banks.
EMPLOYEES
At March 31, 1999, Home Savings had 417 full-time equivalent employees.
Home Savings believes that relations with its employees are good. Home
Savings offers health, life and disability benefits to all employees, a
401(k) plan, an employee stock ownership plan and a post-retirement health
plan for its eligible employees. Home Savings has a defined benefit pension
plan; however, as of December 31, 1998, the plan was amended to freeze
benefit accruals. None of the employees of Home Savings is represented by a
collective bargaining unit.
DESCRIPTION OF PROPERTY
The following table shows certain information at March 31, 1999,
regarding the properties on which the main office and the branch offices of
Home Savings 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 $1,004 $70,532
Youngstown, Ohio
32 State Street Owned 1916 301 83,788
Struthers, Ohio
4005 Hillman Way Owned 1958 495 98,214
Boardman, Ohio
650 East State Street Owned 1925 174 62,528
Salem, Ohio
6000 Mahoning Avenue Leased 1959 16 71,386
Austintown, Ohio
7525 Market Street Owned 1971 521 95,549
Boardman, Ohio
4259 Kirk Road Owned 1975 580 77,170
Austintown, Ohio
202 South Main Street Owned 1975 221 65,519
Poland, Ohio
3500 Belmont Avenue Owned 1976 314 55,193
Youngstown, Ohio
29 North Broad Street Owned 1977 290 30,177
Canfield, Ohio
980 Great East Plaza Leased 1980 12 19,312
Niles, Ohio
127 North Market Street Owned 1987 126 30,181
East Palestine, Ohio
210 West Lincoln Way Owned 1987 317 16,467
Lisbon, Ohio
148725 South Avenue Ext. Owned 1997 800 5,285
Columbiana, Ohio
</TABLE>
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REGULATION OF UNITED COMMUNITY
GENERAL
As a savings and loan association incorporated under the laws of Ohio,
Home Savings is subject to regulation, examination and oversight by the
Office of Thrift Supervision and the Division. Because Home Savings'
deposits are insured by the Federal Deposit Insurance Corporation, Home
Savings is also subject to general oversight by the Federal Deposit Insurance
Corporation. Home Savings must file periodic reports with the Office of
Thrift Supervision, the Division and the Federal Deposit Insurance
Corporation concerning its activities and financial condition. Examinations
are conducted periodically by federal and state regulators to determine
whether Home Savings is in compliance with various regulatory requirements
and is operating in a safe and sound manner. Home Savings is a member of the
Federal Home Loan Bank of Cincinnati.
United Community is a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended. Consequently, United
Community is subject to regulation, examination, and oversight by the Office
of Thrift Supervision and is required to submit periodic reports to the
Office of Thrift Supervision. Because United Community and Home Savings are
corporations organized under Ohio law, they are also subject to the
provisions of the Ohio Revised Code applicable to corporations generally,
including laws which restrict takeover bids, tender offer and control-share
acquisitions involving public companies which have significant ties to Ohio.
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the
Office of Thrift Supervision and Home Savings 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
Home Savings may engage and would probably subject Home Savings to more
regulation by the Federal Deposit Insurance Corporation. In addition, United
Community might become subject to different holding company regulations
limiting the activities in which United Community may engage and subjecting
United Community to additional regulatory requirements, including separate
capital requirements. At this time, United Community cannot predict when or
whether Congress may actually pass legislation regarding United Community's
and Home Savings' regulatory requirements or charter. Although such
legislation may change the activities in which either United Community and
Home Savings may engage, it is not anticipated that the current activities of
United Community or Home Savings will be materially affected by those
activity limits.
OHIO SAVINGS AND LOAN LAW
The Ohio Division of Financial Institutions 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 Federal Deposit Insurance Corporation, if such
investments or activities are not permissible for a federally chartered
savings and loan association.
The Ohio Division of Financial Institutions also has approval authority
over any mergers or acquisitions of control of Ohio savings and loan
associations. The Ohio Division of Financial Institutions may initiate
certain supervisory measures or formal enforcement actions against Ohio
associations. Ultimately, if the grounds provided by law exist, the Ohio
Division of Financial Institutions may place an Ohio association in
conservatorship or receivership.
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The Ohio Division of Financial Institutions conducts regular
examinations of Home Savings approximately once every eighteen months. Such
examinations are usually conducted jointly with one or both federal
regulators. The Ohio Division of Financial Institutions imposes assessments
on Ohio associations based on their asset size to cover the cost of
supervision and examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The Office of Thrift Supervision 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
Federal Deposit Insurance Corporation. The Office of Thrift Supervision
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 Office of Thrift Supervision also may initiate
enforcement actions against savings and loan associations and certain persons
affiliated with them for violations of laws or regulations or for engaging in
unsafe or unsound practices. If the grounds provided by law exist, the
Office of Thrift Supervision 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. Home Savings
has received a "satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. Home Savings is required by Office of
Thrift Supervision regulations to meet certain minimum capital requirements.
Current capital requirements call for tangible capital of 1.5% of adjusted
total assets, core capital (which for Home Savings consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital
(which for Home Savings 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 Office of Thrift Supervision 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 Office of Thrift Supervision. If the measured
interest rate risk is above the level deemed normal under the regulation,
Home Savings 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 Office of Thrift
Supervision has the authority to impose a higher individualized capital
requirement on any savings association it deems to have excess interest rate
risk. The Office of Thrift Supervision also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due
to concentrations of credit and non-traditional activities.
The Office of Thrift Supervision 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
Office of Thrift Supervision has less flexibility in determining how to
resolve the problems of the institution. In addition, the Office of Thrift
Supervision 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
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it is deemed to be in an unsafe or unsound condition. An undercapitalized
association must submit a capital restoration plan to the Office of Thrift
Supervision 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. Home Savings' capital at March 31, 1999 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. Office of Thrift Supervision 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 Home Savings at March 31, 1999, was approximately $399.1
million, or 51.66%, which exceeded the applicable 4% liquidity requirement by
approximately $368.2 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments, which are generally related to domestic
residential real estate and manufactured housing and include stock issued by
any Federal Home Loan Bank, the Federal Home Loan Mortgage Company or the
Federal National Mortgage Association. 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 qualifying thrift investments on a monthly average basis in 9
out of every 12 months. Effective September 30, 1996, a savings association
may also qualify as a qualified thrift lender by meeting the definition of
"domestic building and loan association" under the Internal Revenue Code of
1986, as amended. In order to be considered a domestic building and loan
association under the Internal Revenue Code of 1986, as amended, at least 60%
of the institution's assets must consist of specified assets (generally loans
secured by residential real estate or deposits, educational loans, cash, and
certain governmental obligations). The Office of Thrift Supervision may
grant exceptions to the qualified thrift lender test under certain
circumstances. If a savings association fails to meet the qualified thrift
lender test, the association and its holding company become subject to
certain operating and regulatory restrictions. A savings association that
fails to meet the qualified thrift lender test will not be eligible for new
Federal Home Loan Bank advances. At March 31, 1999, Home Savings met the
Qualified Thrift Lender test.
LENDING LIMIT. Office of Thrift Supervision regulations generally limit
the aggregate amount that a savings association can lend to one borrower to
an amount equal to 15% of the association's Lending Limit Capital. A savings
association may lend to one borrower an additional amount not to exceed 10%
of the association's Lending Limit Capital, if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is
not considered "readily marketable collateral." Certain types of loans are
not subject to this limit. In applying the limit on loans to one borrower,
the regulations require that loans to certain related borrowers be
aggregated. A general exception to the 15% limit permits loans of any type
to one borrower up to $500,000.
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Based on such limits, Home Savings was able to lend approximately $46.5
million to one borrower at March 31, 1999. The largest amount Home Savings
had outstanding to one borrower at March 31, 1999, was $11.9 million, which
consisted of three loans primarily secured by a first mortgage lien on a
freezer warehouse. At March 31, 1999, such loan was performing in accordance
with its terms.
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 Home Savings' 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 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. Home Savings was in compliance with
such restrictions at March 31, 1999.
All transactions between a savings association and its affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act. 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. United
Community is an affiliate of Home Savings. 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. Home Savings was in compliance with
these requirements and restrictions at March 31, 1999.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The Office of Thrift Supervision
imposes various restrictions or requirements on the ability of associations
to make capital distributions, including dividend payments. An association
which has converted from mutual to stock form is prohibited from declaring or
paying any dividends or from repurchasing any of its stock if, as a result,
the net worth of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with
its mutual to stock conversion. Office of Thrift Supervision regulations
also establish a three-tier system limiting capital distributions according
to ratings of associations based on their capital level and supervisory
condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations
in this category may make capital distributions during any calendar year up
to the greater of (i) 100% of net income, current year-to-date, plus 50% of
the amount by which the lesser of the association's tangible, core or
risk-based capital exceeds its fully phased-in capital requirement for such
capital component, as measured at the beginning of the calendar year, and
(ii) the amount authorized for a Tier 2 association. A Tier 1 association
deemed to be in need of more than normal supervision by the Office of Thrift
Supervision may be downgraded to a Tier 2 or Tier 3 association. Home Savings
meets the requirements for a Tier 1 association and has not been notified of
any need for more than normal supervision.
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions
of up to 75% of net income over the most recent four quarters. Tier 3
associations do not meet
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current minimum capital requirements and must obtain Office of Thrift
Supervision approval of any capital distribution. Tier 2 associations that
propose to make a capital distribution in excess of the noted safe harbor
level must also obtain Office of Thrift Supervision approval. Tier 2
associations proposing to make a capital distribution within the safe harbor
provisions and Tier 1 associations proposing to make any capital distribution
need only submit written notice to the Office of Thrift Supervision 30 days
prior to such distribution.
As a subsidiary of United Community, Home Savings is required to give
the Office of Thrift Supervision 30 days' notice prior to declaring any
dividend on its stock. The Office of Thrift Supervision may object to the
distribution during such 30-day period based on safety and soundness
concerns. Home Savings did not pay any dividends to United Community in 1998
or during the three months ended March 31, 1999.
HOLDING COMPANY REGULATION. United Community is a savings and loan
holding company within the meaning of the Home Owner's Loan Act. As such,
United Community has registered with the Office of Thrift Supervision and is
subject to Office of Thrift Supervision regulations, examination,
supervision, and reporting requirements.
The Home Owner's Loan Act 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 Office of Thrift
Supervision, 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 Office of Thrift
Supervision, 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 Office of
Thrift Supervision, 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.
United Community is 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 Office of Thrift Supervision 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 Office of Thrift Supervision 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 United Community 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 Qualified Thrift Lender test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At December 31, 1998, Home Savings met the
Qualified Thrift Lender test.
If United Community were to acquire control of another savings
institution, other than through a merger or other business combination with
Home Savings, United Community 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 qualified thrift
lender test, the activities of United Community and any of its subsidiaries
(other than Home Savings or other subsidiary savings and loan associations)
would thereafter be subject to activity restrictions.
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The Office of Thrift Supervision 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 Home
Savings 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 Office of Thrift Supervision 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.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF UNITED COMMUNITY AND
HOME SAVINGS. In addition to the Ohio law limitations on the merger with,
and acquisition of, United Community, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent
federal law and regulations, no person, directly or indirectly, or acting in
concert with others, may acquire control of Home Savings or United Community
without 60 days' prior notice to the Office of Thrift Supervision. "Control"
is generally defined as having more than 25% ownership or voting power;
however, ownership or voting power of more than 10% may be deemed "control"
if certain factors are in place. If the acquisition of control is by a
company, the acquiror must obtain approval, rather than give notice, of the
acquisition as a savings and loan holding company.
In addition, any merger of Home Savings must be approved by the Office
of Thrift Supervision as well as the Ohio Division of Financial Institutions.
Further, any merger of United Community in which United Community is not the
resulting company must also be approved by both the Office of Thrift
Supervision and the Ohio Division of Financial Institutions.
FEDERAL DEPOSIT INSURANCE CORPORATION REGULATIONS
DEPOSIT INSURANCE AND ASSESSMENTS. The Federal Deposit Insurance
Corporation 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 Federal Deposit Insurance Corporation administers two separate insurance
funds, the Bank Insurance Fund for commercial banks and state savings banks
and the Savings Association Insurance Fund for savings associations. The
Federal Deposit Insurance Corporation is required to maintain designated
levels of reserves in each fund. Home Savings' deposit accounts are insured
by the Federal Deposit Insurance Corporation in the Savings Association
Insurance Fund up to the prescribed limits. The Federal Deposit Insurance
Corporation has examination authority over all insured depository
institutions, including Home Savings, and has authority to initiate
enforcement actions against federally insured savings associations if the
Federal Deposit Insurance Corporation does not believe the Office of Thrift
Supervision has taken appropriate action to safeguard safety and soundness
and the deposit insurance fund.
The Federal Deposit Insurance Corporation is required to maintain
designated levels of reserves in each fund. The Federal Deposit Insurance
Corporation 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 Federal Deposit Insurance Corporation has established a
risk-based assessment system for both Savings Association Insurance Fund and
Bank Insurance Fund members. Under this system, assessments vary based on
the risk the institution poses to its deposit insurance fund. The risk level
is determined based on the institution's capital level and the Federal
Deposit Insurance Corporation's level of supervisory concern about the
institution.
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FEDERAL RESERVE BANK REGULATIONS
Federal Reserve Bank regulations currently require savings associations
to maintain reserves of 3% of net transaction accounts (primarily NOW
accounts) up to $46.5 million (subject to an exemption of up to $4.9
million), and of 10% of net transaction accounts over $46.5 million. At
March 31, 1999, Home Savings was in compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks provide credit to their members in the form
of advances. Home Savings is a member of the Federal Home Loan Bank of
Cincinnati and must maintain an investment in the capital stock of the
Federal Home Loan Bank of Cincinnati in an amount equal to the greater of 1%
of the aggregate outstanding principal amount of Home Savings' residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, and 5% of its advances from the Federal Home Loan
Bank. Home Savings is in compliance with this requirement with an investment
in stock of the Federal Home Loan Bank of Cincinnati of $12.2 million at
March 31, 1999.
Federal Home Loan Bank advances to member institutions who meet the
Qualified Thrift Lender Test are generally limited to the lower of (i) 50% of
the member's assets or (ii) 20 times the member's investment in Federal Home
Loan Bank stock. At March 31, 1999, Home Savings' maximum limit on advances
was approximately $243.0 million. The granting of advances is also subject
to the Federal Home Loan Bank's collateral and credit underwriting guidelines.
Upon the origination or renewal of a loan or advance, the Federal Home
Loan Bank 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 Federal Home Loan Bank; or other real estate related collateral (up to
30% of the member association's capital) acceptable to the applicable Federal
Home Loan Bank, if such collateral has a readily ascertainable value and the
Federal Home Loan Bank can perfect its security interest in the collateral.
Each Federal Home Loan Bank is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the Federal Home Loan Banks. 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 Federal Home Loan Bank must be made only to provide funds for
residential housing finance.
TAXATION
FEDERAL TAXATION
United Community and Home Savings are each subject to the federal tax
laws and regulations which apply to corporations generally. In addition to
the regular income tax, United Community and Home Savings 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 these preference items 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
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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, 1998.
Based on Home Savings average gross receipts of approximately $85.2
million for the three tax years immediately proceeding, Home Savings would
not qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (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 Internal Revenue Code of 1986, as
amended, or one of the two reserve methods of Section 593 of the Internal
Revenue Code of 1986, as amended. The reserve methods under Section 593 of
the Internal Revenue Code of 1986, as amended 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 Internal Revenue Code of
1986, as amended requires certain amounts to be recaptured with respect to
such change. Generally, the amounts to be recaptured will be determined
solely with respect to the "applicable excess reserves" of the taxpayer. The
amount of the applicable excess reserves will be taken into account ratably
over a six-taxable year period, beginning with the first taxable year
beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the
amount of the institution's applicable excess reserves generally is the
excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its
reserve for losses on nonqualifying loans (all other types of loans) as of
the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., 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
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<PAGE>
taken into account as Internal Revenue Code of 1986, as amended Section
481(a) adjustment for the year will be suspended. A thrift meets the
residential origination loan requirement if, for the tax year, the principal
origination amount of residential loans made by the thrift during the year is
not less then its base amount. The "base amount" generally is the average of
the principal origination amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996. A
residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of
the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture
in the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except 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 Home
Savings to United Community is deemed paid out of its pre-1988 reserves under
these rules, the pre-1988 reserves would be reduced and Home Savings 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 March 31, 1999, Home Savings' pre-1988 reserves for tax purposes
totaled approximately $14.4 million. Home Savings believes it had
approximately $165 million of accumulated earnings and profits for tax
purposes as of March 31, 1999, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. No representation can be made as to whether Home Savings
will have current or accumulated earnings and profits in subsequent years.
The tax returns of Home Savings 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 Home Savings.
OHIO TAXATION
United Community is subject to the Ohio corporation franchise tax,
which, as applied to United Community, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first
$50,000 of computed Ohio taxable income and 8.9% of computed Ohio taxable
income in excess of $50,000 and (ii) 0.582% times taxable net worth. For
returns filed in 1999 and thereafter the rate of tax is 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) .400% times taxable
net worth, not to exceed $150,000.
A special litter tax is also applicable to all corporations, including
United Community, subject to the Ohio corporation franchise tax other than
"financial institutions." Where the franchise tax is paid on the net income
basis, the litter tax is equal to 0.11% of the first $50,000 of computed Ohio
taxable income and 0.22% of computed Ohio taxable income in excess of $50,000.
United Community, effective for its 1999 Ohio franchise tax return, has
elected to be taxed as a qualified holding company in the State of Ohio. In
order to be taxed as a qualified holding company, certain requirements must
be satisfied. A qualified holding company is exempt from the net worth base
of the franchise tax but is not exempt from the net income base.
Home Savings 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 Home
Savings' apportioned book net worth, determined in accordance with GAAP, less
any statutory deduction. For tax year 1999, however, the franchise tax on
financial institutions will be 1.4% of the taxable book net worth and for tax
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<PAGE>
year 2000 and years thereafter the tax will be 1.3% of the taxable book net
worth. As a "financial institution," Home Savings is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.
SECURITY OWNERSHIP OF UNITED COMMUNITY
The following table shows stock ownership information for the only
person known to United Community to own beneficially more than five percent
of the outstanding shares of United Community as of May 1, 1999:
<TABLE>
<CAPTION>
Amount and nature of Percent of
Name and address beneficial ownership shares outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
United Community Financial Corp.
Employee Stock Ownership Plan 2,677,250 (1) 7.71%
5700 RiverTech Court
Riverdale, Maryland 20737
</TABLE>
- --------------------------
(1) Includes 2,586,161 unallocated shares with respect to which Riggs Bank
N.A., as the Trustee for the United Community Financial Corp. Employee
Stock Ownership Plan, has shared voting power.
The following table shows beneficial stock ownership information for
each director and for the directors and executive officers of United
Community as a group as of May 1, 1999:
<TABLE>
<CAPTION>
Amount and nature of
beneficial ownership
--------------------------------------------
Sole voting and Shared voting and Percent of
Name and address (1) investment power investment power shares outstanding
- -------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
Richard M. Barrett 17,770 17,529 0.11%
Douglas M. McKay 35,007 78,764 0.33
Herbert F. Schuler, Sr. 9,684 40,860 0.15
Donald J. Varner 17,164 32,838 0.14
John F. Zimmerman, Jr. 590 11,480 0.03
All directors and executive
officers as a group (6 persons) 109,997 204,000 0.90%
- --------------------------
</TABLE>
(1) Each of the persons listed in this table may be contacted at the address of
United Community.
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<PAGE>
MANAGEMENT OF UNITED COMMUNITY
DIRECTORS
The following table presents information regarding the directors of United
Community:
<TABLE>
<CAPTION>
Director of
Director of United Home Savings
Name Age (1) Positions held Community since (2) and Loan since
- ---- ------- -------------- ------------------- --------------
<S> <C> <C> <C> <C>
Richard M. Barrett 60 Director 1998 1976
Douglas M. McKay 51 Director, Chairman of the 1998 1995
Board and President
Herbert F. Schuler, Sr. 59 Director 1998 1977
Donald J. Varner 67 Director and Secretary 1999 1987
John F. Zimmerman, Jr. 51 Director 1998 1991
</TABLE>
- -----------------------------
(1) As of May 1, 1999.
(2) Except for Mr. Varner, each person became a director of United Community in
connection with the conversion of Home Savings from mutual to stock form
and the formation of United Community as the holding company for Home
Savings. Mr. Varner was appointed to the board in 1999 to fill the vacancy
created by the death of Gary Keller, and he was re-elected to the board in
April 1999.
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.
DOUGLAS M. MCKAY. Mr. McKay joined Home Savings in 1971. Since 1995, Mr.
McKay has served as Chief Executive Officer and Chairman of the Board of Home
Savings and, since 1996, has also served as President of Home Savings. From
1991 to 1995, Mr. McKay was the Executive Vice President of Home Savings.
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. Mr. Schuler has been employed
by each company since the 1960s.
DONALD J. VARNER. Mr. Varner, an attorney, has worked for Home Savings for
the past 41 years, and from 1976 to 1995, he served Home Savings as Vice
President and Corporate Counsel. Mr. Varner is currently the Corporate
Secretary of Home Savings and Senior Vice President of Home Savings' Retail
Banking Division. Mr. Varner has been a director of Home Savings since 1987.
JOHN F. ZIMMERMAN, JR. Mr. Zimmerman, an attorney, is a partner in 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.
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<PAGE>
EXECUTIVE OFFICERS
In addition to Mr. McKay, the President of United Community and Home
Savings, and Mr. Varner, the Secretary of United Community and a Senior Vice
President of Home Savings, the following person is an executive officer of
United Community and holds the designated positions:
<TABLE>
<CAPTION>
Name Age (1) Position(s) held
- ---- ------- ----------------
<S> <C> <C>
Patrick A. Kelly 40 Treasurer of United Community,
Treasurer, Chief Financial Officer and
Senior Vice President of Home Savings
- --------------------------
</TABLE>
(1) As of May 1, 1999.
PATRICK A. KELLY. Mr. Kelly was appointed Treasurer of Home Savings in
April 1992 and named Senior Vice President of Home Savings in November 1995.
Mr. Kelly has been employed by Home Savings since February 1983, and has been a
director of Home Savings since 1996.
EXECUTIVE COMPENSATION
The following table presents certain information regarding the compensation
paid to the chief executive officer of United Community and each executive
officer of United Community who received cash and cash equivalent compensation
in excess of $100,000 from United Community and Home Savings for services
rendered to United Community and Home Savings during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual compensation
--------------------------------------
Name and principal Year Salary ($)(1) Bonus ($) All other
position compensation ($)
- -------------------------------- ------------------ ------------------- ------------------ ----------------------------
<S> <C> <C> <C> <C>
Douglas M. McKay 1998 $300,000 $185,481 $41,717 (2)
President 1997 239,934 120,614 28,455 (3)
Donald J. Varner 1998 $135,800 $76,671 $41,795 (4)
Secretary 1997 126,588 56,418 24,823 (5)
Patrick A. Kelly 1998 $133,700 $76,057 $41,738 (6)
Treasurer 1997 115,184 54,859 24,412 (7)
- -------------------------------- ------------------ ------------------- ------------------ ----------------------------
</TABLE>
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to Home Savings of providing such
benefits to each named executive officer was less than 10% of his cash
compensation.
(2) Consists of directors' fees of $16,800, a matching contribution of $2,500
paid by Home Savings to Mr. McKay's account in The Home Savings Company
401(k) Savings Plan and the $22,417 value at December 31, 1998, of 1,507
shares allocated to Mr. McKay's ESOP account.
(Footnotes continued on next page)
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<PAGE>
(3) Consists of directors' fees of $16,000, a matching contribution of $9,595
and a discretionary contribution of $2,860 paid by Home Savings to Mr.
McKay's account in the 401(k) Plan.
(4) Consists of directors' fees of $17,200, a matching contribution of $2,178
paid by Home Savings to Mr. Varner's account in the 401(k) Plan and the
$22,417 value at December 31, 1998, of 1,507 shares allocated to Mr.
Varner's ESOP account.
(5) Consists of directors' fees of $15,600, a matching contribution of $7,777
and a discretionary contribution of $1,446 paid by Home Savings to Mr.
Varner's account in the 401(k) Plan.
(6) Consists of directors' fees of $17,200, a matching contribution of $2,121
paid by Home Savings to Mr. Kelly's account in the 401(k) Plan and the
$22,417 value at December 31, 1998, of 1,507 shares allocated to Mr.
Kelly's ESOP account.
(7) Consists of directors' fees of $16,000, a matching contribution of $7,127
and a discretionary contribution of $1,285 paid by Home Savings to Mr.
Kelly's account in the 401(k) Plan.
EMPLOYMENT AGREEMENTS
On December 17, 1998, Home Savings entered into employment agreements with
Douglas M. McKay, Donald J. Varner and Patrick A. Kelly (collectively,
Employment Agreements). Each of the Employment Agreements 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 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 Home Savings' prevailing policies.
The Employment Agreements are terminable by Home Savings at any time. In
the event of termination by Home Savings for "cause," as defined in the
Employment Agreements, the employee has no right to receive any compensation or
other benefits for any period after such termination. In the event of
termination by Home Savings other than for cause or in connection with a "change
of control," as defined in the Employment Agreements, the employee is entitled
to a continuation of salary payments for a period of time equal to the remaining
term of the Employment Agreement, a continuation of benefits substantially equal
to those being provided at the date of termination of his employment until the
earliest to occur of the end of the term of the Employment Agreement or the date
on which the employee becomes employed full-time by another employer, and a cash
bonus equal to the cash bonus, if any, paid to the employee in the twelve-month
period prior to the termination of his employment.
In the event of termination in connection with a "change in control," the
employee is entitled to payment of an amount equal to 2.99 times the employee's
annual compensation immediately preceding the termination of his employment. In
addition, the employee is entitled to continued coverage under 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 Internal Revenue Code of 1986, as amended. "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 Home Savings or United Community, the control of the election of a
majority of the directors of Home Savings or United Community, or the exercise
of a controlling influence over the management or policies of Home Savings or
United Community.
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<PAGE>
The aggregate payments that would have been made to Messrs. McKay, Varner
and Kelly pursuant to the Employment Agreements, assuming their termination at
January 1, 1999, following a change of control, would have been approximately
$923,910, $418,223 and $411,756, respectively.
PENSION PLAN
Home Savings maintains and currently administers a defined benefit
retirement plan (Pension Plan). Prior to December 31, 1998, employees became
eligible to participate in the Pension Plan on the first day of the plan year
coincident with or next following the later of the date the employee (i)
attained age 20, or (ii) completed six months of continuous employment with
Home Savings. In May 1999, the board of directors adopted a resolution
terminating the Pension Plan due to the implementation of the ESOP.
Participants become 100% vested in the Pension Plan upon completion of five
years of service or upon termination of the Pension Plan. Upon retirement at
age 65, vested participants are entitled to annual benefits equal to the sum of:
(i) .95% of the average of a participant's highest five of the last ten
consecutive years of service (the Final Average Compensation), multiplied by the
number of years of credited service, not to exceed 35 years; plus (ii) .65% of
the Final Average Compensation in excess of the Social Security taxable wage
base multiplied by the participant's credited service, not to exceed 35 years;
plus (iii) 1.5% of the Final Average Compensation multiplied by the
participant's credited service 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.
Home Savings 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 Home
Savings 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 Internal Revenue Code of
1986, as amended is $160,000.
Mr. McKay, Mr. Kelly and Mr. Varner have approximately 26, 16 and 42 years
of credited service under the Pension Plan, respectively. Their base salary and
bonuses are reported above in the Summary Compensation Table.
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<PAGE>
COMPENSATION COMMITTEE REPORT
The business of United Community consists principally of holding the stock
of Home Savings. The functions of the executive officers of United Community,
who are also executive officers of Home Savings, pertain primarily to the
operations of Home Savings. The executive officers receive their compensation,
therefore, from Home Savings, rather than from United Community. The Salary
Committee of the Home Savings Board of Directors has furnished the following
report concerning executive compensation.
PROCESS FOR DETERMINING COMPENSATION
The compensation of the executive officers is reviewed annually by the
Salary Committee. The Salary Committee utilizes industry survey data and takes
into consideration asset bases and geographic location. In addition, the Salary
Committee assesses each executive officer's contribution to United Community and
Home Savings, the skills and experiences required for each officer's position
and potential contributions of the officer to the future of United Community and
Home Savings. Based on these assessments, the Salary Committee makes a
recommendation to the Board of Directors of Home Savings. The Board reviews the
recommendations of the Salary Committee, except that the executive officers that
also serve as Board members do not participate in discussions or decisions
relative to their own compensation.
COMPENSATION POLICIES
The executive compensation program of United Community and Home Savings is
designed to attract and retain key executives by providing comparable
compensation opportunities to those offered by peer group companies. The
program includes a pay-for-performance component that is intended to provide
rewards to executive officers for corporate performance and to motivate the
officers to reach specific strategic business objectives.
DETERMINATION OF CEO'S COMPENSATION
The Salary Committee recommended and the Board approved the 1998
compensation of Mr. McKay, the President and Chief Executive Officer of United
Community and Home Savings, pursuant to the policies described above for
executive officers. The increase in Mr. McKay's compensation was based on
comparative salary data gathered from various industry compensation surveys, as
well as the Salary Committee's assessment of the performance of Mr. McKay, Home
Savings and United Community during 1998.
Submitted by the Salary Committee of Home Savings' Board of Directors:
Richard M. Barrett Charles B. Cushwa, III Herbert F. Schuler, Sr.
John F. Zimmerman, Jr.
James E. Bennett Donald R. Inglis Clarence R. Smith, Jr.
DIRECTOR COMPENSATION
No fees are paid for service as a director of United Community. Each
director of Home Savings currently receives a retainer of $10,000 per year and
$400 per meeting of the full Board attended. Non-employee directors of Home
Savings receive an additional fee of $400 per committee meeting attended and
$600 per committee meeting if they serve as chairman of the committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, no member of the Salary Committee was a current or former
executive officer or employee of United Community or Home Savings or had a
reportable business relationship with United Community or Home Savings.
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<PAGE>
[Performance graph represented by the following chart.]
<TABLE>
<CAPTION>
Period Ending
----------------------------------------------------------------------------------
Index 7/9/98 7/31/98 8/31/98 9/30/98 10/31/98 11/30/98 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C>
United Community Financial Corp. 100.0 113.33 93.33 93.33 93.33 87.97 99.70
NASDAQ - Total US 100.0 96.75 77.78 88.52 92.14 101.22 114.17
SNL Thrift Index 100.0 91.68 70.11 76.33 79.36 83.47 82.99
</TABLE>
CERTAIN TRANSACTIONS
Home Savings makes loans to executive officers and directors of Home
Savings and United Community in the ordinary course of business and on the same
terms and conditions, including interest rates and collateral, as those of
comparable loans to other persons. All outstanding loans to executive officers
and directors were made pursuant to such policy, do not involve more than the
normal risk of collectibility or present other unfavorable features and are
current in their payments.
DESCRIPTION OF UNITED COMMUNITY SHARES
GENERAL
Holders of United Community shares have no conversion rights or other
rights to subscribe for additional shares. There are no redemption or sinking
fund provisions with respect to any outstanding United Community shares aside
from any provision required by law.
The following is a summary description of the rights of the common shares
of the United Community including the material express terms of such shares as
set forth in the United Community's articles of incorporation.
AUTHORIZED CAPITAL STOCK
United Community's authorized capital stock consists of 499 million common
shares and one million preferred shares, each without par value. As of
____________, 1999, the date before the printing of this prospectus/proxy
statement, 34,715,625 common shares were issued. No preferred shares have ever
been issued.
VOTING RIGHTS
The holders of United Community shares possess exclusive voting rights in
United Community. Each holder of common shares is entitled to one vote for each
share held of record on all matters submitted to a vote of holders of common
shares. Article Sixth of the articles of incorporation of United Community
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 United Community are required to approve any such matters:
- A proposed amendment to the articles of incorporation of United
Community;
- A proposed amendment to the code of regulations of United Community;
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<PAGE>
- A proposal to change the number of directors by action of the
shareholders;
- An agreement of merger or consolidation providing for the proposed
merger or consolidation of United Community with or into one or more
other corporations;
- A proposed combination or majority share acquisition involving the
issuance of shares of United Community and requiring shareholder
approval;
- A proposal to sell, exchange, transfer or otherwise dispose of all, or
substantially all, of the assets, with or without the goodwill, of
United Community; or
- A proposed dissolution of United Community.
The articles of incorporation of United Community have been amended to
eliminate cumulative voting.
DIVIDENDS
The holders of United Community shares are 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.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of United
Community, the holders of its common shares will be entitled to receive all
assets of United Community available for distribution, in cash or in kind, after
payment or provision for payment of the following
- all debts and liabilities of United Community,
- any accrued dividend claims, and
- any interests in a liquidation account created in connection with
the conversion of Home Savings from mutual to stock form payable
as a result of a liquidation of Home Savings.
PREEMPTIVE RIGHTS
No United Community shareholder has, as a matter of right, the preemptive
right to purchase or subscribe for shares of any class, 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.
BUTLER WICK
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal assets of Butler Wick are receivables from customers,
consisting of fully secured margin accounts, and securities owned. Marketable
securities, primarily municipal bonds, are owned as active inventory to
accommodate client demand for these securities. The principal liabilities of
Butler Wick are short-term
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<PAGE>
borrowings, payable to customers, consisting of credit balances on client
accounts and, for selected large clients, direct obligations of Butler Wick &
Co., Inc., and accrued compensation and profit sharing contributions.
Butler Wick's revenues are derived primarily from commissions, principal
transactions, underwriting and investment banking activities, interest and
dividends and service fees. Operating expenses include employee compensation
and benefits, occupancy and equipment costs and other operating expenses.
Butler Wick's fiscal year ends on the last Friday in June each year.
CHANGES IN FINANCIAL CONDITION FOR THE NINE MONTHS ENDED MARCH 31, 1999
Total assets increased by $5.4 million, or 19.2%, since June 26, 1998, to
$33.7 million at March 31, 1999. The increase in total assets was primarily
attributable to a $5.2 million, or 24.3%, increase in receivable from customers,
continuing the trend that began in prior periods. Receivable from customers,
which totalled $26.7 million at March 31, 1999, consist of fully-secured margin
accounts. Internet stocks have attracted considerable investor interest over
the past nine months. Because Internet stocks are very volatile, management has
restricted the margin ratio on these issues relative to more seasoned stocks.
At March 31, 1999, marketable securities owned increased to $2.9 million,
up approximately 8% from $2.7 million at June 26, 1998. Marketable securities,
which are primarily municipal bonds, are owned as active inventory to
accommodate client demand for these securities. Average inventory in fiscal
1998 was $1.7 million. When compared to average inventory, municipal bond
inventory turned every 2.4 days. Total municipal securities sales for the nine
months ended March 31, 1999, were $143.9 million, compared to $199.2 million for
the comparable period during 1998. Included in 1999 sales were underwritings
totaling $41.2 million, compared to $111.1 million in the first nine months of
1998. Firm municipal trading increased in total securities bought and sold by
8% to $96.4 million in 1999 from $89.2 million in 1998. This higher level of
activity is not indicative of any major changes in the market.
A significant investment was made during fiscal 1998 in equipment and
facilities due primarily to the firm-wide installation of a new network system
and office expansion. The upgrades and improvements continued through the first
nine months of fiscal 1999. Expenditures for furniture, fixtures and equipment
totaled $417,000 for the nine months ended March 31, 1999. Enhancements to
information technology equipment accounted for $205,000 of the total, as that
project nears completion. Other capital expenditures for the nine months ended
March 31, 1999 relate primarily to office renovation, relocation and expansion.
Butler Wick's growth during the nine months ended March 31, 1999, was
funded by an increase of $2.4 million in short-term borrowings, an increase of
$1.9 million in payable to customers and period earnings of $1.0 million.
Payable to customers includes credit balances on client accounts and, for
selected large clients, interest-bearing direct obligations of Butler Wick.
Bank borrowing was reduced from $9.3 million at June 26, 1998 to $6.1 million at
March 31, 1999. Stock loans were $5.4 million at March 31, 1999. There were no
stock loans at June 26, 1998.
Total equity of Butler Wick increased by year to date income of $1.0
million, and was reduced by additional treasury stock, in the amount of $42,000,
resulting from the resignation of a shareholder. All of Butler Wick's
shareholders are Butler Wick employees, and they are required to sell their
shares back to Butler Wick when they terminate their employment.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDING MARCH 31, 1999 AND
MARCH 31, 1998
GENERAL. Total income for the nine months ended March 31, 1999, was $1.0
million, an increase of $128,000, or 14.3%, over the nine months ended March 31,
1998. An increase of $1.3 million or 8.9%, in total
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revenues was offset somewhat by an increase of $1.2 million, or 8.8%, in
total expenses. Commissions, interest and service fees contributed to the
increase in revenues, while insurance revenues declined.
COMMISSION INCOME. Commissions on securities transactions grew from
$7.1 million to $7.9 million, an increase of 12.5%, reflecting the increase
in trade volume handled by Butler Wick reflecting the continuing strength in
the securities markets.
PRINCIPAL TRANSACTIONS. Butler Wick's principal transactions are
municipal and government bond transactions for clients and stock trades where
Butler Wick acts as a principal rather than as an agent. The continued rise
in the stock market caused investors to move away from bonds to equities for
overall return. This resulted in a reduced volume of bond transactions and
virtually no growth in revenues from this source from March 31, 1998 to
March 31, 1999. To a lesser extent, Butler Wick acts as principal in equity
trades, primarily involving selected stocks of local financial institutions.
To limit risk, Butler Wick has otherwise refrained from market making in
equities.
UNDERWRITING AND INVESTMENT BANKING FEES. Underwriting and investment
banking fees are derived from Butler Wick's municipal bond activities. The
amount and timing of these fees is contingent upon the transactions being
brought to market and, therefore, vary in each accounting period. From March
31, 1998 to March 31, 1999, underwriting fees increased approximately 2.7%,
to $658,000 from $641,000. In each nine-month period, three issues were
underwritten by Butler Wick.
INTEREST AND DIVIDEND INCOME. Interest and dividend income is primarily
derived from interest on client margin accounts and interest from securities
held in inventory. The significant growth in margin accounts from March 31,
1998 to March 31, 1999, caused interest income to increase by 26.4% to $1.3
million.
INSURANCE. The insurance group of Butler Wick & Company, Inc. provides
investment insurance products, primarily annuities, to clients through
registered representatives with the appropriate insurance licenses. The
products offered are not proprietary products of Butler Wick, but are
underwritten by major insurance companies. As a result of the relative
attractiveness of equity products, revenue from sales of insurance products
were down markedly from $678,000 to $441,000, a decrease of 35%.
SERVICE FEES. Services fees are derived primarily from fees charged by
Butler Wick's asset management subsidiary and its trust company subsidiary.
Service fees increased 25%, from $1.4 million to $1.7 million for the nine
months ended March 31, 1998 and 1999, respectively due to growth in the asset
management and trust company subsidiaries. Service fees represented 9% of
total revenues for the nine months ended March 31, 1998, and 11% for the nine
months ended March 31, 1999.
TOTAL EXPENSES. Total expenses through March 31, 1999, closely matched
the increase in total revenues, with expenses increasing by 8.8% as revenues
increased by 8.9%. As a percentage of revenues to expenses, expenses were
90% of revenues in both 1998 and 1999.
EMPLOYEE COMPENSATION AND BENEFITS. The largest component of
compensation is broker commissions. With the increase in trading volume,
commissions increased accordingly. Compensation increased by 8.7% in the
nine months ending March 31, 1999, over the comparable period in 1998, from
$8.9 million to $9.7 million. Total employees in the asset management
company and trust company remained constant over the two periods, while the
number of broker/dealer employees increased by one income-producing person
and five support employees.
EXECUTION CHARGES AND OTHER OPERATING EXPENSE. In addition to
compensation, other categories of expense vary directly with trading volume.
As a self-clearing broker, execution charges are fees Butler Wick pays for
transacting trades. These charges were 3% of total revenues for the periods
ended March 31, 1998 and March 31, 1999. With the increase in commissions,
execution charges increased by 15.7%, from $382,000 for the
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nine months ended March 31, 1998 to $442,000 for the nine months ended
March 31, 1999. Other operating expense includes service bureau fees,
professional fees, research, advertising, and other miscellaneous expenses.
These expenses increased by 1.4% to $2.0 million over the nine months ended
March 31, 1998. Other expenses were 13% of total revenues, which was consistent
with prior periods. The consistency over the two periods is indicative of the
continued effort of Butler Wick to control costs, while trading volumes
increase and new information systems are brought on line.
OCCUPANCY AND EQUIPMENT COSTS. Between March 31, 1998 and March 31,
1999, the renovations of the Youngstown offices were substantially completed,
the Salem office was relocated, the Canton office was relocated to new
construction, and the Canfield office was opened. All of these events
resulted in higher lease payments for rental space, since more space was
leased usually at a higher cost per square foot. All offices are leased.
Butler Wick continued to replace all computers, the bulk of which were
installed in fiscal 1998. The computers include network servers and
attendant communications lines.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$12,600, or 2.4%, primarily as a result of the increase in income before
income taxes. The effective tax rate was 34.9% and 37.4% for March 31, 1999
and March 31, 1998, respectively.
COMPARISON OF FINANCIAL CONDITION AT JUNE 26, 1998 AND JUNE 27, 1997
Total assets increased $10.0 million, or 54.4%, during the 1998 fiscal
year. The increase occurred primarily in customer borrowings, which
increased by $8.7 million, or 67.2%, over the prior year. The continuing
climb in the stock market generally and the United Community initial public
offering were the primary reasons for the increased borrowings. Many Butler
Wick customers who are Home Savings depositors used their Butler Wick margin
accounts as a source of funds for purchasing United Community stock.
The balance of the increase in total assets occurred in securities
owned, which increased $691,000, or 32.5%, and furniture, equipment and
leasehold improvements, which increased $623,000, or 88.1%.
At fiscal 1998 year end, marketable securities owned totaled $2.7
million, a 27% increase over the $2.1 million balance at June 27, 1997.
Average inventory in fiscal 1998 was $1.7 million. When compared to average
inventory, municipal bond inventory turned every 2.4 days. Total municipal
securities sales for the year ending June 26, 1998 were $280 million,
compared to $158 million in 1997. Included in fiscal 1998 sales were
underwritings totaling $160 million. During fiscal 1997, underwritings
totaled $26.3 million. Total securities bought and sold decreased $7.4
million, or 7% to $117.6 million at June 26, 1998, from $125 million at
June 27, 1997. The decrease was attributable to the market preference for
equities over bonds.
The increase in furniture, equipment and leasehold improvements of
$623,000, or 88.1%, related to the firm-wide installation of a new computer
system. In addition to placing considerable information and research
capabilities at each employee's desk, the new system is Year 2000 compliant.
The Youngstown office was also renovated to accommodate current space needs
and to permit future growth.
The increase in client margin accounts was funded by an increase of $2.1
million in short-term secured bank borrowings and an increase of $6.3 million
in payables to customers. Payables to customers includes credit balances on
client accounts and, for selected large clients, interest-bearing direct
obligations of Butler Wick.
Butler Wick's stockholders' equity consists primarily of $3.1 million of
common stock and $5.7 million in retained earnings. Retained earnings was
enhanced by the addition of 1998 net earnings of $1.38 million. During
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1998, treasury shares increased by $49,000 as a result of the resignation of
a shareholder from Butler Wick. All of the Butler Wick shareholders are
Butler Wick employees, and they are required to sell their shares back to
Butler Wick when they terminate their employment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 26, 1998 AND JUNE 27,
1997
GENERAL. During the 1998 fiscal year, total revenues increased by $3.6
million, or 21.8%, over the prior fiscal year, to $20.1 million. Every
category of revenue showed significant growth except revenues for principal
transactions on securities and insurance.
COMMISSION INCOME. Commissions on securities transactions grew from
$7.9 million to $9.7 million, an increase of 23.4%, reflecting the increase
in trade volume handled by Butler Wick.
PRINCIPAL TRANSACTIONS. Income from principal transactions, which
consist primarily of municipal and government bond transactions, declined
slightly during fiscal 1998. The continued rise in the stock market caused
investors to move away from bonds and into equities for overall return. The
resulting decline in transaction volume adversely affected revenues from this
source in fiscal 1998. To a much lesser extent, income from principal
transactions is derived from stock trades where Butler Wick acted as a
principal rather than as agent. Butler Wick acts as principal only in equity
trades of selected stocks of local financial institutions. To limit risk,
Butler Wick has otherwise refrained from market-making in equities.
UNDERWRITING AND INVESTMENT BANKING FEES. Underwriting and investment
banking fees are derived from Butler Wick's municipal bond activities. The
amount and timing of these fees is contingent upon the transactions being
brought to market and, therefore, vary in each accounting period. From
fiscal 1997 to fiscal 1998, underwriting fees doubled to $1.3 million,
corresponding to increased underwriting activity in 1998.
INTEREST AND DIVIDEND INCOME. Interest and dividend income is primarily
derived from interest on client margin accounts and interest from securities
held in inventory. The significant growth in margin accounts during fiscal
1998 caused interest income to increase by 42.5% over the prior year, to $1.4
million at June 26, 1998.
INSURANCE. The insurance group of Butler Wick & Company, Inc. provides
investment insurance products, primarily annuities, to clients through
registered and licensed representatives. Again, given the relative
attractiveness of equity products, revenue from sales of annuity products
were down slightly from the prior year, from $916,000 to $834,000, a decrease
of 9%.
SERVICE FEES. Service fees increased by $712,000, or 44.2%, in fiscal
1998 due to growth of the trust company and asset management company
subsidiaries.
TOTAL EXPENSES. Total expenses for fiscal 1998 closely matched the
increase in total revenues, increasing by 21.5%, compared to a 21.8% increase
in total revenues. As a percentage of revenues to expenses, expenses
remained at 90% of revenues in both 1997 and 1998.
EMPLOYEE COMPENSATION AND BENEFITS. The largest component of
compensation is broker commissions. With the increase in trading volume,
commissions increased accordingly. Compensation increased by $1.9 million,
or 18.9%, in fiscal 1998 over 1997, to $9.7 million. The total number of
employees increased over this period from 147 to 159, although the number of
brokers and other income-producing personnel remained constant.
EXECUTION CHARGES AND OTHER OPERATING EXPENSE. In addition to
compensation, other categories of expense vary directly with trading volume.
As a self-clearing broker, execution charges are fees Butler Wick pays for
transacting trades. These charges increased by $39,000, or 10.1%, to
$424,000 in 1998. Other operating
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expense includes service bureau fees, professional fees, research,
advertising, and other miscellaneous expenses. These expenses increased by
$770,000, or 36.9%, in 1998, to $2.9 million. In 1997, other operating
expenses were 13% of total revenues, increasing to 14% of total revenues in
1998. The consistency between the two periods is indicative of the continued
effort to control costs while trading volumes increase and the new
information systems are brought on line.
OCCUPANCY AND EQUIPMENT COSTS. During fiscal 1998, the Youngstown
headquarters were completely renovated. The firm occupied an additional
2,350 square feet in City Centre One, providing additional space for brokers,
operations, and asset management. The Salem office moved to larger, more
modern space, providing the possibility for future growth. All of Butler
Wick's offices are leased.
Butler Wick continued to replace all computers, the bulk of which were
installed in fiscal 1998. Capital expenditures of $956,000 in 1998 caused
depreciation expense to increase by $103,000, or 52.1%, in 1998. Capital
expenditures were $208,000, in fiscal 1997. Management expects that capital
requirements will be reduced in future years.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$151,000, or 25.9%, primarily as a result of the increase in income before
income taxes. The effective tax rates were 34.7% and 33.6% for fiscal 1998
and fiscal 1997, respectively.
MARKET RISK
The categories of Butler Wick's primary market risk exposures are
limited. Butler Wick is not subject to foreign currency exchange rate risk or
commodity price risk; these areas are not part of the business of Butler
Wick. Butler Wick is not a market maker in equity securities, and therefore
does not have exposure in this area. Butler Wick does have exposure to
interest rate risk in its investment portfolio and funding of Butler Wick,
and principal risk in its investment portfolio. As an underwriter of
municipal securities, Butler Wick incurs certain underwriting risks.
INTEREST RATE RISK
To support customer margin account balances, Butler Wick must borrow
funds. To fund these balances, Butler Wick borrows on a daily basis from a
commercial bank, clients, and securities lending activity. On margin
accounts, customers are charged a rate of interest which is subject to change
by Butler Wick without prior notice. This rate of interest is based on the
broker call rate, published daily and subject to change daily. This rate in
fact has not changed in 1999. Butler Wick is able to adjust interest income
to accommodate its interest expense each day.
Butler Wick carries an inventory of municipal securities to meet the
needs of clients. These securities are almost entirely state and municipal
obligations of Ohio and Pennsylvania. During fiscal 1998, these bonds turned
in inventory every 2.4 days. Since bond inventory is constantly changing,
interest rate risk is minimized.
PRINCIPAL RISK
With interest risk managed, the principal value of the securities is not
subject to adverse changes. Further, the securities carried in inventory are
of high quality, making the chance of defalcation remote. Bond inventory is
carefully monitored by experienced bond traders on a daily basis.
UNDERWRITING RISK
There are several risks associated with bond underwriting. The
underwriter may not be able to market all bonds committed to in the offering.
The underwriter may be obligated to make a market in the bonds in
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the secondary market. Butler Wick has been successful in pre-selling all
bonds in underwritten issues. At times, bonds have been intentionally
retained in inventory expressly for subsequent sale to clients. Butler Wick
does not obligate itself to make a market in the bonds it underwrites.
LIQUIDITY RISK
The majority of Butler Wick's assets are highly liquid and short-term in
nature. Cash and liquid assets, principally receivables from customers,
receivables from brokers and dealers, and securities owned, represented
approximately 93% of Butler Wick's assets at March 31, 1999. These assets
are financed by a number of sources, including payables to clients and
brokers, short-term borrowings, and equity capital.
CAPITAL REQUIREMENTS
Certain minimum amount of capital must be maintained by Butler Wick's
subsidiary, Butler, Wick & Co., Inc., to satisfy the regulatory requirements
of the Securities and Exchange Commission and the National Association of
Securities Dealers. The regulatory requirements represent Uniform Net
Capital Rules designed to measure the general financial integrity and
liquidity of registered broker/dealers and to provide minimum acceptable net
capital levels to meet the continuing commitments to customers. Net capital,
as defined, changes from day to day. At March 26, 1999, Butler, Wick & Co.,
Inc. was in compliance with Uniform Net Capital Rules with net capital of
$5.9 million, which was $5.4 million in excess of the minimum required.
YEAR 2000 ISSUE
The problems associated with the ability of computers to recognize the
year 2000 have been brought to the attention of the public and, more
importantly, the regulators of Butler Wick. Butler Wick has devoted the
resources necessary to assure continued operations in the year 2000. Both
financial and human assets have been allocated. A committee was formed
during 1998, comprised of managers and operations personnel, to study the
impact and propose solutions to the Year 2000 issue. This committee has made
periodic reports to the board of Butler Wick. All hardware, software and
imbedded computer chips were identified and evaluated for readiness, as well
as Butler Wick's physical plant and equipment. A plan was developed and
implemented, including contingency plans, to address the required changes.
Butler Wick has contacted its third-party vendors, including providers of
software, hardware, facilities and other services, to determine their Year
2000 readiness, and has obtained written assurances from these vendors where
possible. Either direct or proxy testing was conducted on the critical
systems and equipment to assure Year 2000 readiness.
The securities industry has conducted widespread testing of mission
critical systems, with great success. Butler Wick has satisfied its various
regulators that it has taken the appropriate steps to be Year 2000 compliant.
Management personnel have attended industry conferences and have served on
committees to assure that Butler Wick is taking a comprehensive approach to
this issue. To inform clients of its progress, Butler Wick has sent letters
reporting on its efforts.
In 1998, Butler Wick began replacing its internal computer systems.
This program included installing a network system throughout Butler Wick
utilizing Year 2000 compliant personal computers, network servers and
software. The cost to date of this project has exceeded $600,000.
BUSINESS OF BUTLER WICK
Butler Wick is a holding company for three subsidiaries: Butler, Wick &
Co., Inc., Butler Wick Asset Management Company, and Butler Wick Trust
Company. Through its subsidiaries, Butler Wick Corp. is involved in retail
investment brokerage, public finance underwriting, municipal trading, asset
management, and trust services. Butler, Wick & Co., Inc. was founded as a
partnership in 1926 and incorporated under the laws of
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the State of Ohio in June 1983. Butler Wick Asset Management Company was
incorporated under the laws of the State of Ohio in July 1989, and Butler
Wick Trust Company was incorporated under the laws of the State of Ohio in
January 1998. Butler Wick was formed as a holding company and incorporated
under the laws of the State of Ohio in June 1989. Butler Wick Corp. has ten
offices throughout northeastern Ohio and western Pennsylvania, including its
principal office in Youngstown, Ohio.
Throughout its history, Butler Wick has enjoyed consistent profitability
and financial stability. For the fiscal year ended June 26, 1998,
approximately 73% of total revenues were derived from agency commissions,
principal transactions, and insurance products and services, 14% from trust,
asset management, service and other fees, 7% from interest and dividend
income and 6% from underwriting and investment banking.
Butler, Wick & Co., Inc. is a member of the Chicago Stock Exchange, NASD
and SIPC.
The address of the principal executive office of Butler Wick is City
Centre One Bldg., Suite 700, Youngstown, Ohio 44503.
SECURITY OWNERSHIP OF BUTLER WICK
The following table shows stock ownership information for the only
persons known to Butler Wick to own beneficially more than five percent of
the outstanding common shares of Butler Wick as of May 1, 1999:
<TABLE>
<CAPTION>
Amount and nature of
beneficial ownership
-----------------------------------------
Sole voting and Shared voting and Percent of
Name and address(1) investment power investment power shares outstanding
- ---------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
Thomas J. Cavalier 5,000 - 5.62%
Thomas D. Kepler 6,100 - 6.86
George C. Ward, Jr. 7,232 - 8.13
</TABLE>
- -------------------------
(1) Each of the persons listed in this table may be contacted at the address of
Butler Wick.
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The following table shows beneficial stock ownership information for each
director and for all directors and executive officers of Butler Wick as a group
as of May 1, 1999:
<TABLE>
<CAPTION>
Amount and nature of
Name and address (1) beneficial ownership
- ------------------- -----------------------------------------
Sole voting and Shared voting and Percent of
investment power investment power shares outstanding
---------------- ----------------- ------------------
<S> <C> <C> <C>
Thomas J. Cavalier 5,000 - 5.62
Keith E. Downard 2,700 - 3.03
Thomas D. Kepler 6,100 - 6.86
William R. Liber 3,200 - 3.60
Robert A. Perrier 3,630 - 4.08
John P. Peters 200 - .22
George C. Ward, Jr. 7,232 - 8.13
Directors and executive officers of 28,662 32.22%
Butler Wick as a group (10 persons)
- -----------------------
</TABLE>
(1) Each of the persons listed in this table may be contacted at the address of
Butler Wick.
THOMAS J. CAVALIER. After the completion of the merger, Mr. Cavalier will
be appointed a director of United Community. Mr. Cavalier, who presently serves
as the President and Chairman of the board of Butler Wick, is 46 years old. Mr.
Cavalier has been a director of Butler Wick since June 1989, a director of
Butler Wick Asset Management since July 1989, a director of Butler Wick & Co.,
Inc. since September 1985, and a director of Butler Wick Trust Company since
January 1998.
EXECUTIVE COMPENSATION OF BUTLER WICK
The following table presents certain information regarding the compensation
paid to Thomas J. Cavalier during 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------- ------------------------ ------------------------------------------------- ------------------------
Annual compensation
-------------------------------------------------
Name and principal Year Salary ($) Bonus($) All other
position compensation ($)
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
Thomas J. Cavalier 1998 $174,400 $191,963 $175,228(1)
President 1997 145,500 148,545 135,499(2)
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
</TABLE>
(1) Consists of $161,554 for expense allowances and commissions, $11,174 which
was contributed on Mr. Cavalier's behalf to Butler Wick's profit sharing
plan and a matching contribution of $2,500 to Butler Wick's 401(k) plan.
(Footnotes continued on next page)
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(2) Consists of $123,179 for expense allowances and commissions, $9,945 which
was contributed on Mr. Cavalier's behalf to Butler Wick's profit sharing
plan and a matching contribution of $2,375 to Butler Wick's 401(k) plan.
CERTAIN TRANSACTIONS
Mr. Cavalier and other officers of Butler Wick and their associates are
customers of and have had transactions with Butler Wick from time to time in the
ordinary course of business. Such transactions have been made on substantially
the same terms, including interest rates and collateral on loans, as those
prevailing at the time for comparable transactions with other persons and did
not and will not involve more than the normal risk of collectibility or present
other unfavorable features. Similar transactions may be expected to take place
in the ordinary course of business in the future.
COMPARISON OF RIGHTS OF HOLDERS OF UNITED COMMUNITY SHARES
AND HOLDERS OF BUTLER WICK SHARES
As a result of the merger, all of the Butler Wick shareholders will become
shareholders of United Community, except for those Butler Wick shareholders who
exercise dissenters' rights. The rights of holders of United Community shares
and those of holders of Butler Wick shares are similar in most material
respects, but there are some differences.
AUTHORIZED SHARES
The amended articles of incorporation of United Community authorize 499
million common shares and one million preferred shares. Butler Wick's amended
articles of incorporation authorize 200,000 common shares and no preferred
shares.
BOARD OF DIRECTORS
GENERAL. United Community's code of regulations provides for a board of
directors consisting of between five and thirteen persons. Presently there are
five directors of United Community and they each serve a one-year term. The
code of regulations states that if the number of directors is six, seven or
eight, there will be two classes of directors and each director will be elected
for a term of two years. After the merger is completed, the number of directors
will be increased to six and Thomas J. Cavalier, President and Chairman of the
Board of Butler Wick, will become a director of United Community. Therefore it
would take two annual elections to replace a majority of the board. The code of
regulations require that any shareholder nomination for the election of
directors must be received on or before the sixtieth day before the anniversary
of the most recent annual meeting.
Butler Wick's code of regulations provides for a board of directors
consisting of at least three directors, unless the number of shareholders is
less than three. There are currently seven directors of Butler Wick. Each
director serves for a one-year term.
REMOVAL. The directors of United Community may be removed only by the vote
of the holders of 75% of the United Community shares entitled to vote at an
election of directors.
The directors of Butler Wick may be removed only by the vote of the holders
of a majority of the shares entitled to vote at an election of directors.
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VACANCIES. United Community's and Butler Wick's codes of regulations
provide that vacancies on the board of directors may be filled by one
affirmative vote of a majority of the remaining directors. Any director chosen
to fill a vacancy will serve until the next election of the class in which the
director is a member.
VOTING RIGHTS
CUMULATIVE VOTING. The holders of United Community shares do not have
cumulative voting rights. The Butler Wick shareholders may cumulate their votes
in the election of directors.
SPECIAL VOTING REQUIREMENTS. The holders of at least 75% of the voting
shares of United Community are required to adopt any of the following matters if
the directors of United Community recommend against approval:
- a proposed amendment to United Community's articles of incorporation;
- a proposed amendment to the code of regulations of United Community;
- a proposal to change the number of directors by action of the
shareholders;
- an agreement of merger or consolidation providing for the proposed
merger or consolidation of United Community with or into one or more
other corporations;
- a proposed combination or majority share acquisition involving the
issuance of United Community shares and requiring shareholder
approval;
- a proposal to sell, exchange, transfer or otherwise dispose of all, or
substantially all, of the assets, with or without the goodwill, of
United Community; or
- a proposed dissolution of United Community.
Amendments to Butler Wick's articles of incorporation and code of
regulations must be approved by a majority of the outstanding Butler Wick
shares.
PREEMPTIVE RIGHTS
None of the shareholders of United Community or Butler Wick have preemptive
rights.
ANTITAKEOVER STATUTES APPLICABLE TO UNITED COMMUNITY
The following Ohio laws apply to United Community and are intended to
discourage takeovers:
OHIO CONTROL SHARE ACQUISITION ACT. The Ohio Control Share Acquisition Act
provides that specified notice and informational filings and special
shareholder meetings and voting procedures must occur before consummation of a
proposed "control share acquisition," which is defined as any acquisition of an
issuer's shares that would entitle the acquirer to exercise or direct the voting
power of the issuer in the election of directors within any of the following
ranges: (a) one-fifth or more but less than one-third of the voting power; (b)
one-third or more but less than a majority of the voting power; or (c) a
majority or more of such voting power. Assuming compliance with the notice and
information filing requirements prescribed by the statute, the proposed control
share acquisition may take place only if, at a duly convened special meeting of
shareholders, the acquisition is approved by both a majority of the voting power
of the issuer represented at the meeting and a majority of the voting power
remaining after excluding the combined voting power of the intended acquirer and
the directors and
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officers of the issuer. The Control Share Acquisition Act does not apply to
a corporation whose articles of incorporation or regulations so provide.
United Community and Butler Wick have not opted out of the application of The
Control Share Acquisition Act.
OHIO MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
prohibits specified business combinations and transactions between an "issuing
public corporation" and a beneficial owner of 10% or more of the shares of the
corporation, an "interested shareholder," for at least three years after the
interested shareholder attains 10% ownership, unless the board of directors of
the issuing public corporation approves the transaction before the interested
shareholders attains 10% ownership. An "issuing public corporation" is defined
as an Ohio corporation with 50 or more stockholders that has its principal place
of business, principal executive offices, or substantial assets within the State
of Ohio, and as to which no close corporation agreement exists. Examples of
transactions regulated by the merger moratorium provisions include the
disposition of assets, mergers, consolidations, voluntary dissolutions, and the
transfer of shares. Subsequent to the three-year period, a moratorium
transaction may take place provided that certain conditions are satisfied,
including that (a) the board of directors approves the transaction, (b) the
transaction is approved by the holders of shares with at least two-thirds of the
voting power of the corporation (or a different proportion set forth in the
articles of incorporation), including at least a majority of the outstanding
shares after excluding shares controlled by the interested shareholder, or (c)
the business combination results in stockholders, other than the interested
shareholder, receiving a fair price plus interest for their shares. Although
the merger moratorium provisions may apply, a corporation may elect not to be
covered by the merger moratorium provisions, or subsequently elect to be
covered, with an appropriate amendment to its articles of incorporation. The
merger moratorium provisions apply to United Community and Butler Wick and they
have not taken any corporate action to opt out of the Ohio merger moratorium
statute.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
The code of regulations of United Community provides that United Community
shall indemnify its directors or officers against expenses, judgments, fines,
and amounts paid in settlement by reason of the fact that they are or were
directors, officers, employees or agents of the corporation or, at the request
of United Community, were serving another organization in a similar capacity, if
the directors or officers acted in good faith and in a manner they reasonably
believed to be in the best interests of the corporation. With regard to
criminal matters, directors and officers must be indemnified by the corporation
if the directors or officers had no reasonable cause to believe their conduct
was unlawful. Directors or officers claiming indemnification shall be presumed
to have acted in good faith and in a manner they reasonably believed to be not
opposed to the best interests of the corporation and, with respect to any
criminal matter, to have had no reasonable cause to believe their conduct was
unlawful.
United Community may not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted by (or in
the right of) the corporation for any matter asserted in the action as to which
the officer or director shall have been adjudged to be liable for acting with
reckless disregard for the best interests of the corporation or misconduct
(other than negligence) in the performance of his duty to the corporation.
However, should the court in which the action was brought determine that the
officer or director is fairly and reasonably entitled to indemnity, United
Community shall indemnify the officer or director to the extent permitted by the
court.
Any indemnification not precluded by judgment shall be made by the
corporation only upon a determination that the director has met the applicable
standard of conduct. This determination may be made only (a) by a majority vote
of a quorum of disinterested directors, (b) if the quorum is not obtainable or
if a majority of a quorum of disinterested directors so directs, in a written
opinion by independent legal counsel, (c) by the shareholders or (d) by the
court, if any, in which the action was brought. Expenses incurred in defending
any action, suit or proceeding shall be paid by United Community in advance upon
receipt of an undertaking by or on
-89-
<PAGE>
behalf of the director or officer to repay the amount if the director or
officer is not entitled to be indemnified by the corporation.
United Community has agreed to indemnify each of its directors and officers
against expenses, judgments, fines, and amounts paid in settlement by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation or, at the request of United Community, was serving another
organization in a similar capacity, if the director or officer acted in good
faith and in a manner he reasonably believed to be in the best interests of the
corporation and if, with respect to any criminal action or proceeding, the
director or officer had no reason to believe that his conduct was unlawful.
Indemnification shall be made, however, only upon a determination by the
directors or shareholders of United Community, the Court of Common Pleas of
Mahoning County or written opinion of legal counsel appointed by United
Community that the director or officer has adhered to the appropriate standard
of conduct.
Butler Wick's code of regulations provide that Butler Wick will indemnify
each director, officer and member of a committee of Butler Wick, and any person
who may have served at the request of Butler Wick as a director, officer or
member of a committee of any other corporation in which Butler Wick is a
creditor, and his heirs, executors and administrators, against all costs and
expenses reasonably incurred concerning, or in connection with, the defense of
any claim asserted or suit or proceeding brought against him by reason of his
conduct or actions as a director, officer or members of a committee of Butler
Wick, or as a director, officer or member of a committee of another corporation
in which Butler Wick is a creditor, whether or not he continues to serve in that
capacity at the time he incurs the costs or expenses. Butler Wick will not
indemnify anyone who was acting willfully derelict in the performance of his
duties. A person will not be considered to have acted willfully derelict unless
it is determined in an adjudication or by a majority of the disinterested
directors or a committee of disinterested shareholders that he was acting in a
willfully derelict manner. Butler Wick will pay for the cost of reasonable
settlements, judgments, attorney fees, cost of suit, fines and penalties and
other liabilities.
LEGAL MATTERS
The validity of the issuance of United Community shares being offered by
this document and the federal income tax consequences of the merger have been
passed upon by Vorys, Sater, Seymour and Pease LLP, Suite 2100, Atrium Two, 221
East Fourth Street, P.O. Box 0236, Cincinnati, Ohio 45201-0236.
EXPERTS
The consolidated financial statements of United Community as of December
31, 1998 and 1997, and for each of the two years then ended, 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
Deloitte & Touche LLP, given upon their authority as experts in accounting and
auditing.
The financial statements of Home Savings as of December 31, 1996, and for
the year then ended, have been audited by Packer, Thomas & Co., independent
auditors, as stated in their report appearing herein, and have been included in
reliance upon the report of Packer, Thomas & Co., given upon their authority as
experts in accounting and auditing.
The financial statements of Butler Wick at June 26, 1998 and June 27, 1997,
and for each of the two years then ended, have been audited by Packer, Thomas &
Co., independent auditors, as stated in their report included in this document,
and have been included in reliance upon the report of Packer, Thomas & Co.,
given upon their authority as experts in accounting and auditing.
-90-
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999 June 26, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 907,724.11 $ 1,505,232.00
Deposits with clearing organizations 402,521.43 402,092.00
Receivable from customers 26,756,614.55 21,533,537.00
Receivable from brokers and dealers 583,087.60 113,600.00
Securities owned:
Marketable 2,943,375.33 2,717,134.00
Not readily marketable - 100,000.00
Furniture, equipment and leasehold improvements, net of
accumulated depreciation and amortization
of $1,444,631.40 and $1,174,618.00 at March 31, 1999 and
June 26, 1998, respectively 1,622,908.82 1,329,919.00
Other assets 497,556.27 585,305.00
--------------- ---------------
TOTAL ASSETS $ 33,713,788.11 $ 28,286,819.00
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Short-term borrowings $ 11,722,528.10 $ 9,295,000.00
Payable to brokers and dealers 208,200.27 162,606.00
Payable to customers 9,606,279.76 7,739,923.00
Securities sold, but not yet purchased, at market value - 161,590.00
Accrued compensation and profit sharing contribution 992,464.83 1,611,962.00
Accounts payable, accrued expenses and other liabilities 1,418,291.87 527,454.00
--------------- ---------------
TOTAL LIABILITIES 23,947,764.83 19,498,535.00
--------------- ---------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 200,000 shares authorized; 89,370 and 88,970
shares issued and outstanding at March 27, 1998 and March 26, 199 ,
respectively, after deducting 630 and 1,030 treasury shares,
respectively 3,105,325.17 3,105,325.00
Additional paid-in capital 23,834.90 23,835.00
Retained earnings 6,733,670.31 5,713,847.00
Less common stock in treasury, at cost (96,807.10) (54,723.00)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 9,766,023.28 8,788,284.00
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,713,788.11 $ 28,286,819.00
--------------- ---------------
--------------- ---------------
</TABLE>
F-1
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended March 31,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES
Commissions $ 7,999,705.53 $ 7,108,530.86
Principal transactions 3,331,081.20 3,290,786.24
Underwriting and investment banking 658,473.90 641,156.37
Interest and dividends 1,309,762.63 1,035,869.94
Insurance 440,890.31 677,752.33
Service fees 1,699,329.53 1,359,970.34
Other 463,077.95 486,172.73
--------------- ---------------
TOTAL REVENUES 15,902,321.05 14,600,238.81
--------------- ---------------
EXPENSES
Employee compensation and benefit 9,708,223.59 8,931,861.48
Execution charges 442,250.19 381,635.53
Communications 806,452.16 727,068.89
Occupancy and equipment costs 815,885.04 732,422.34
Interest 551,230.76 417,970.04
Other operating expenses 2,011,865.72 1,983,772.76
--------------- ---------------
TOTAL EXPENSES 14,335,907.46 13,174,731.04
--------------- ---------------
INCOME BEFORE INCOME TAXES 1,566,413.59 1,425,507.77
PROVISION FOR INCOME TAXES (546,590.00) (533,987.00)
--------------- ---------------
NET INCOME $ 1,019,823.59 $ 891,520.77
--------------- ---------------
--------------- ---------------
</TABLE>
F-2
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 1,019,824 $ 891,520
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 270,013 114,477
Loss (gain) on disposition of fixed assets - -
Changes in assets and liabilities:
(Increase) in deposits with clearing organizations (429) (441)
(Increase) in receivable from customers (5,223,078) (3,285,158)
(Increase) in receivable from brokers & dealers (469,487) 2,963
(Increase) in securities owned (126,241) (1,045,888)
Decrease (increase) in other assets 87,749 187,018
(Decrease) increase in payable to brokers & dealers 45,594 292,579
Increase (decrease) in payable to customers 1,866,357 1,147,701
Increase (decrease) in securities sold, but not yet purchased (161,590) -
Increase in accounts payable, accrued expenses and other 271,341 164,962
----------- ------------
liabilities
NET CASH (USED IN ) OPERATIONS (2,419,947) (1,530,265)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (563,003) (605,577)
Proceeds from sale of fixed assets - -
----------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES (563,003) (605,577)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term borrowings 2,427,528 3,512,180
Purchase of treasury stock (42,084) (48,717)
Proceeds from sale of treasury stock - -
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,385,444 3,463,463
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (597,506) 1,327,621
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,505,232 1,370,924
----------- ------------
CASH AND CASH EQUIVALENTS AT MARCH 31, 1999 $ 907,724 $2,698,545
----------- ------------
----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 551,231 $ 392,381
Income taxes 546,590 491,407
</TABLE>
F-3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Butler Wick Corp. and subsidiaries (the "Company") pursuant to the
rules of the Securities and Exchange Commission ("SEC") and, in the opinion of
the Company, include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of financial position, results of operations
and cash flows. Certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's annual
financial statements and footnotes, which describe the Company's summary of
significant accounting policies. The unaudited consolidated statement of net
income for the 39 weeks ended March 31, 1999, is not necessarily indicative of
the results to be expected for the full year.
2. SUBSEQUENT EVENTS
On April 15, 1999, United Community Financial Corp., the holding company of
The Home Savings and Loan Company of Youngstown, Ohio, and the Company entered
into an agreement and Plan of Merger (the "Agreement") to merge in a
stock-for-stock exchange. The merger, which would be accounted for as a pooling
of interests, is expected to close near the end of the third quarter of 1999.
The Agreement has been approved by the boards of directors of both companies,
however, the transaction requires the approval of the shareholders of Butler
Wick.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
REPORT OF INDEPENDENT AUDITORS F-6
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of financial condition F-7
Consolidated statement of income F-8
Consolidated statement of changes in stockholders' equity F-9
Consolidated statement of cash flows F-10
Notes to consolidated financial statements F-11 to F-16
</TABLE>
F-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS
BUTLER WICK CORP.
We have audited the accompanying consolidated statement of financial condition
of Butler Wick Corp. and Subsidiaries as of June 26, 1998 and June 27, 1997, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Butler Wick Corp.
and Subsidiaries as of June 26, 1998 and June 27, 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Packer Thomas & Co.
Youngstown, Ohio
July 27, 1998
F-6
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 26, June 27,
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,505,232 $ 1,370,924
Deposits with clearing organizations 402,092 401,514
Receivable from customers 21,533,537 12,878,486
Receivable from brokers and dealers 113,600 68,000
Securities owned:
Marketable 2,717,134 2,125,775
Not readily marketable 100,000 -
Furniture, equipment and leasehold improvements (at cost), net of
accumulated depreciation and amortization of $1,174,618 and
$1,061,458 at June 26, 1998 and June 27, 1997, respectively 1,329,919 706,793
Other assets 585,305 769,174
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,286,819 $ 18,320,666
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term borrowings $ 9,295,000 $ 7,185,000
Payable to brokers and dealers 162,606 324,052
Payable to customers 7,739,923 1,487,299
Securities sold, but not yet purchased, at market value 161,590 -
Accrued compensation and profit sharing contribution 1,511,962 1,317,139
Accounts payable, accrued expenses and other liabilities 627,454 550,531
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 19,498,535 10,864,021
- ---------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, no par value, 200,000 shares authorized; 89,370 and 89,920
shares issued and outstanding at June 26, 1998 and June 27, 1997,
respectively, after
deducting 630 and 80 treasury shares, respectively 3,105,325 3,105,325
Additional paid-in capital 23,835 23,835
Retained earnings 5,713,847 4,333,491
Less common stock in treasury, at cost (54,723) (6,006)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,788,284 7,456,645
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,286,819 $ 18,320,666
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 26, June 27,
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Commissions $ 9,708,750 $ 7,868,862
Principal transactions 4,180,196 4,187,002
Underwriting and investment banking 1,299,423 630,475
Interest and dividends 1,426,460 1,001,192
Insurance 834,202 916,163
Service fees 2,323,071 1,611,530
Other 371,838 329,228
- --------------------------------------------------------------------------------------------------------
TOTAL REVENUES 20,143,940 16,544,452
- --------------------------------------------------------------------------------------------------------
EXPENSES
Employee compensation and benefits 12,217,123 10,277,633
Execution charges 423,541 384,769
Communications 989,774 954,338
Occupancy and equipment costs 1,006,519 812,863
Interest 533,233 317,087
Other operating expenses 2,858,764 2,088,606
- --------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 18,028,954 14,835,296
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,114,986 1,709,156
PROVISION FOR INCOME TAXES 734,630 584,250
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 1,380,356 $ 1,124,906
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE--BASIC $ 15.39 $ 12.56
--DILUTED $ 15.39 $ 12.56
AVERAGE NUMBER OF SHARES OUTSTANDING 89,649 89,552
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE--JUNE 28, 1996 $ 3,105,325 $ 5,759 $ 3,208,585 $ (153,816)
Purchase of 1,080 shares of
treasury stock - - - (76,166)
Sale of 3,450 shares of
treasury stock - 18,076 - 223,976
Net income for year ended
June 27, 1997 - - 1,124,906 -
------------------------------------------------------------------------------
BALANCE--JUNE 27, 1997 3,105,325 23,835 4,333,491 (6,006)
Purchase of 5,950 shares of
treasury stock - - - (534,123)
Sale of 5,400 shares of
treasury stock - - - 485,406
Net income for year ended
June 26, 1998 - - 1,380,356 -
- -----------------------------------------------------------------------------------------------------------------------
BALANCE--JUNE 26, 1998 $ 3,105,325 $ 23,835 $ 5,713,847 $ (54,723)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 26, June 27,
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 1,380,356 $ 1,124,906
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 301,124 197,919
Loss (gain) on disposition of fixed assets 758 (210)
Changes in assets and liabilities:
(Increase) in deposits with clearing organizations (578) (25,521)
(Increase) in receivable from customers (8,655,051) (2,438,120)
(Increase) in receivable from brokers and dealers (45,600) (68,000)
(Increase) in securities owned (691,359) (42,887)
Decrease (increase) in other assets 214,353 (180,641)
(Decrease) increase in payable to brokers and dealers (161,446) 178,961
Increase (decrease) in payable to customers 6,252,624 (101,032)
Increase (decrease) in securities sold, but not yet purchased 161,590 (19,682)
Increase in accounts payable, accrued
expenses and other liabilities 271,746 480,931
- ------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) OPERATIONS (971,483) (893,376)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (956,292) (208,046)
Proceeds from sale of fixed assets 800 210
- ------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (955,492) (207,836)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term borrowings 2,110,000 1,185,000
Purchase of treasury stock (534,123) (76,166)
Proceeds from sale of treasury stock 485,406 242,052
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,061,283 1,350,886
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 134,308 249,674
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,370,924 1,121,250
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,505,232 $ 1,370,924
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 533,200 $ 329,000
------------------------------------
------------------------------------
Income taxes $ 710,000 $ 550,584
------------------------------------
------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly owned subsidiaries, Butler, Wick & Co., Inc.,
Butler Wick Asset Management Co. and Butler Wick Trust Co. (both Ohio and
Pennsylvania corporations). Intercompany transactions and balances have been
eliminated in consolidation.
BUTLER WICK TRUST CO.
On November 28, 1995, the Company formed Butler Wick Trust Co., incorporated in
the Commonwealth of Pennsylvania to provide trust management services. Because
of a change in Ohio bank laws, a new trust company was formed and certified by
the state of Ohio as a state-chartered bank on January 5, 1998. The Pennsylvania
trust company is in the process of being dissolved and substantially all assets
have been transferred to Butler Wick Corp. and all customer trust accounts have
been transferred to the Ohio trust company.
NATURE OF OPERATIONS
The Company, through its subsidiaries, is engaged in the businesses of a
securities broker and dealer and trust company.
FISCAL YEAR
The Company's fiscal year is the 52 or 53 week period ending on the last Friday
in June. The trust companies' year end is June 30.
REVENUE RECOGNITION
Securities transactions and related commission revenue and expense are recorded
on a settlement date basis, generally the third business day following the trade
date. The effect on the financial statements of using the settlement date basis
rather than the trade date basis is not material.
Underwriting and investment banking revenues are recognized as earned, which is
generally the settlement date of the underlying securities issue.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, in banks, and cash
equivalents with maturities of three months or less when purchased.
SECURITIES OWNED AND SECURITIES SOLD
Marketable securities are valued at market value and securities not readily
marketable are valued at fair value as determined by management. The resulting
difference between cost and market (or fair value) is included in income.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation is provided under the straight-line and accelerated methods, using
an estimated useful life of five to ten years. Leasehold improvements are
amortized over the life of the lease or the useful life of the improvement,
whichever is less. Depreciation and amortization charged to operations was
$301,124 and $197,919 for the years ended June 26, 1998 and June 27, 1997,
respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
DEFERRED INCOME TAXES
Deferred income taxes are provided for the temporary differences between
financial and tax reporting in accordance with the liability method under the
provisions of Financial Accounting Standard No. 109, Accounting for Income
Taxes. Temporary differences giving rise to the deferred tax asset result from
the difference of accounting for the allowance for doubtful note between
financial reporting and tax purposes.
NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of common
shares outstanding during the year. Diluted net income per share is based on the
weighted average number of common shares and common share equivalents
outstanding during the year.
F-11
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
USE OF ESTIMATES
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are carried
at market value or at amounts which, because of the short-term nature of the
financial instruments, approximate current fair value.
RECLASSIFICATION
Certain amounts from the prior year have been reclassified to conform with the
current year presentation.
NOTE B--ORGANIZATIONAL COSTS
Organizational costs incurred in the state of Ohio totaled $33,025. These
costs have been capitalized and are being amortized on the straight line
method over 5 years. Amortization expenses charged to operations for the
period January 5, 1998 to June 26, 1998 was $2,996.
NOTE C--RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Accounts receivable from and payable to customers include amounts due on cash
and margin transactions. Securities owned by customers are held as collateral
for receivables. Such collateral is not reflected in the financial statements.
The receivable from customers also includes trust fee receivables representing
management fees periodically charged to trust accounts.
NOTE D--SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED
Marketable securities owned and sold but not yet purchased consist of trading
and investment securities at quoted market values or fair values at June 26,
1998 and June 27, 1997, as follows:
<TABLE>
<CAPTION>
June 26, 1998 June 27, 1997
--------------------------------------------------------------------
Sold but Sold but
not yet not yet
Owned purchased Owned purchased
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable securities:
U.S. government obligations $ 203,461 $ - $ 115,304 $ -
State and municipal
obligations 2,355,577 - 1,992,773 -
Corporate stocks and warrants 158,096 161,590 17,698 -
- ------------------------------------------------------------------------------------------------------------
Totals $ 2,717,134 $ 161,590 $ 2,125,775 $ -
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Securities not readily marketable include investment securities (a) for which
there is no market on a securities exchange or no independent publicly quoted
market, (b) that cannot be publicly offered or sold unless registration has been
effected under the Securities Act of 1933, or (c) that cannot be offered or sold
because of other arrangements, restrictions, or conditions applicable to the
securities or to the Company.
At June 26, 1998, these securities at estimated fair value consist of
certificates of deposit at $100,000.
In order to qualify as a fiduciary in both the state of Ohio and the
Commonwealth of Pennsylvania, Butler Wick Trust Co., deposited United States
Government Obligations having a principal value of $100,000 with the Federal
Reserve Bank, for each state incorporation. The amount for the Pennsylvania
trust company will remain on deposit until the company is completely dissolved.
F-12
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
NOTE E--NOTE RECEIVABLE
On June 30, 1992, Butler Wick Asset Management Co. loaned $250,000 to a limited
partnership. The loan is due in July 2002. Payments are due monthly including
interest at prime plus two percent. The loan is collateralized by security
interests in real estate of the limited partnership. The terms were adjusted to
interest only payments for one year effective in April 1993. The loan principal
balance of $238,511 is fully reserved by an allowance for doubtful note at June
26, 1998 and June 27, 1997. No payments of principal or interest have been
received since April 1994.
NOTE F--FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of the cost and accumulated depreciation on furniture, equipment and
leasehold improvements is as follows:
<TABLE>
<CAPTION>
JUNE 26, June 27,
- ----------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 606,032 $ 406,934
Furniture and equipment 1,898,505 1,361,317
--------------------------------
TOTAL FURNITURE,
EQUIPMENT AND
LEASEHOLD
IMPROVEMENTS 2,504,537 1,768,251
Less accumulated depreciation (1,174,618) (1,061,458)
- ----------------------------------------------------------------------
NET FURNITURE,
EQUIPMENT AND
LEASEHOLD
IMPROVEMENTS $ 1,329,919 $ 706,793
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
NOTE G--SHORT-TERM BORROWINGS
Short-term bank loans outstanding at June 26, 1998 and June 27, 1997 bear
interest at the federal funds rate plus 1% and are payable on demand. The loans
are fully collateralized by marketable securities valued at $22,721,419 and
$11,932,000 at June 26, 1998 and June 27, 1997, respectively. Such collateral
includes $20,360,869 and $10,127,000 of customers' margin account securities and
$2,360,550 and $1,805,000 of securities owned by Butler, Wick & Co., Inc. at
June 26, 1998 and June 27, 1997, respectively. The interest rate on June 26,
1998 is 6.470%.
As of June 26, 1998 and June 27, 1997 Butler, Wick & Co., Inc. had short-term
borrowings available to the extent of the loan value of the marketable
securities.
NOTE H--PROFIT SHARING PLAN
Butler, Wick & Co., Inc. contributes to a profit sharing plan for the benefit of
employees meeting certain eligibility requirements. Under the plan Butler, Wick
& Co., Inc.'s contribution is determined annually by the Board of Directors. The
amounts charged to operations for the years ended June 26, 1998 and June 27,
1997 were $450,000 and $296,000, respectively.
The Butler, Wick & Co., Inc. profit sharing plan also includes a 401(k) feature.
Participants may contribute a percentage of compensation, but not in excess of
the maximum allowed under the Internal Revenue Code. The plan provides for a
partial matching contribution by Butler, Wick & Co., Inc. which amounted to
$101,309 and $80,406 for the years ended June 26, 1998 and June 27, 1997,
respectively.
NOTE I--ADVERTISING
Advertising expense for the years ended June 26, 1998 and June 27, 1997 was
$289,629 and $267,442, respectively.
NOTE J--COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company enters into commitments resulting
from transactions incidental to its securities business.
F-13
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
NOTE J--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company is a defendant in various lawsuits incidental to its securities
business, and in the opinion of management, liability, if any, resulting from
such litigation, will not have a material adverse effect on the Company's
financial condition.
Aggregate commitments under operating leases for office space with remaining
noncancellable terms in excess of one year at June 26, 1998, are approximately
as follows:
<TABLE>
<CAPTION>
Minimum
Years ended Lease
June Payments
- -----------------------------------------------------------------
<S> <C>
1999 $ 366,000
2000 355,000
2001 238,000
2002 146,000
2003 58,000
- -----------------------------------------------------------------
Total minimum
lease payments $ 1,163,000
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
In the normal course of business, operating leases are generally renewed or
replaced with other leases. Rental expense amounted to approximately $487,000
and $413,000 for the years ended June 26, 1998 and June 27, 1997, respectively.
NOTE K--RELATED PARTY TRANSACTIONS
Trading accounts of directors and officers are included in amounts receivable
from and payable to customers since they are subject to normal terms and
regulations as to payment and are not significant in the aggregate.
NOTE L--STOCKHOLDERS' EQUITY
The majority of shares of the Company are subject to the provisions in the stock
redemption agreement that, upon the occurrence of certain events as specified in
the stock redemption agreement, the Company is obligated to purchase certain
stockholders' shares at book value, as defined.
NOTE M--NET CAPITAL REQUIREMENTS
The Company is subject to the Securities and Exchange Commission's Uniform Net
Capital Rule (rule 15c3-1), which requires the maintenance of minimum net
capital. The Company has elected to use the alternative method, permitted by
rule, which requires that the Company and its subsidiaries maintain minimum net
capital, as defined, equal to the greater of $250,000 or 2 percent of aggregate
debit balances arising from customer transactions, as defined. (The net capital
rule of the "applicable" exchange also provides that equity capital may not be
withdrawn or cash dividends paid if resulting net capital would be less than 5
percent of aggregate debits.) At June 25, 1998, the Company had net capital of
$5,133,739, which was 24.0 percent of aggregate debit balances and $4,711,455 in
excess of required net capital.
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET AND CREDIT RISK
In the normal course of business, the Company's activities involve the
execution, settlement, and financing of various securities transactions. These
activities may expose the Company to risk in the event the customer is unable to
fulfill its contractual obligations. The Company maintains cash and margin
accounts for its customers located primarily in northeastern Ohio and western
Pennsylvania.
F-14
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET AND CREDIT RISK (continued)
The Company, as a part of its normal brokerage activities, may assume short
positions on securities. The establishment of short positions exposes the
Company to off balance sheet risk in the event prices change, as the Company may
be obligated to cover such positions at a loss.
The Company enters into security sales transactions as principal. If the
securities subject to such transactions are not in the possession of the
Company, the Company may incur a loss if the related security is not received
and the market value has fluctuated from the contract amount of the transaction.
As a securities broker and dealer, a substantial portion of the Company's
transactions are collateralized. The Company's exposure to credit risk
associated with nonperformance in fulfilling contractual obligations pursuant to
securities transactions can be directly impacted by volatile trading markets,
which may impair the customer's ability to satisfy its obligations to the
Company.
The Company seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margin levels
daily and pursuant to such guidelines, requires the customers to deposit
additional collateral, or reduce securities positions, when necessary.
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such commitments at June 26, 1998 and June
27, 1997 were subsequently settled and had no material effect on financial
position.
NOTE O--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 26, June 27,
- ----------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Federal income tax:
Current $ 734,630 $ 584,250
- ----------------------------------------------------------------------
Total provision for
income taxes $ 734,630 $ 584,250
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
The reconciliation of federal income tax at statutory rates to the total
provision for income tax is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 26, June 27,
- ----------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Federal income tax at statutory
rates $ 719,095 $ 581,113
Increases (reductions) in tax
resulting from:
Net tax exempt income (12,620) (21,342)
Other items, net 28,155 24,479
- ----------------------------------------------------------------------
Total provisions for
income tax $ 734,630 $ 584,250
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
Amounts for deferred tax assets and liabilities are as follows:
<TABLE>
<S> <C> <C>
Deferred tax asset $ 81,000 $ 81,000
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Deferred tax liability $ - $ -
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
NOTE P--PARENT COMPANY FINANCIAL STATEMENTS
Below is condensed financial information of Butler Wick Corp. (parent company
only). In this information, the parent's investments in subsidiaries are stated
at cost plus equity in undistributed earnings of subsidiaries since acquisition.
This information should be read in conjunction with the consolidated financial
statements.
F-15
<PAGE>
BUTLER WICK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
NOTE-P--PARENT COMPANY FINANCIAL STATEMENTS (continued)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 26, June 27,
- ---------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 371 $ 50,016
Investment in subsidiaries 8,836,766 7,240,119
Accounts receivable--subsidiary 229,180 263,777
Organizational cost--subsidiary 30,485 -
Other assets 58,883 -
- ---------------------------------------------------------------------
TOTAL ASSETS $ 9,155,685 $ 7,553,912
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
LIABILITIES
Accounts payable and
accrued expenses $ 193,975 $ 91,117
Accounts payable--subsidiary 3,426 6,150
Note payable--subsidiary 170,000 -
- ---------------------------------------------------------------------
TOTAL LIABILITIES 367,401 97,267
- ---------------------------------------------------------------------
STOCKHOLDERS'
EQUITY
Common stock 3,105,325 3,105,325
Additional paid in capital 23,835 23,835
Retained earnings 5,713,847 4,333,491
Treasury stock (54,723) (6,006)
- ---------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY 8,788,284 7,456,645
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $ 9,155,685 $ 7,553,912
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 26, June 27,
- ---------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
INCOME FROM
SUBSIDIARIES
Dividends $ - $ 50,000
Equity in undistributed .
earnings of subsidiaries 1,451,968 1,120,608
- ---------------------------------------------------------------------
TOTAL INCOME
FROM
SUBSIDIARIES 1,451,968 1,170,608
- ---------------------------------------------------------------------
OTHER INCOME
(EXPENSE)
Interest - 192
Other expenses (114,812) (69,394)
- ---------------------------------------------------------------------
TOTAL OTHER INCOME
(EXPENSE) (114,812) (69,202)
- ---------------------------------------------------------------------
INCOME BEFORE INCOME
TAXES 1,337,156 1,101,406
INCOME TAX BENEFITS 43,200 23,500
- ---------------------------------------------------------------------
NET INCOME $ 1,380,356 $ 1,124,906
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 26, June 27,
- ----------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM
OPERATIONS
Net income $ 1,380,356 $ 1,124,906
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Decrease (increase) in
accounts receivable 34,597 (127,065)
(Increase) in other assets (58,883) -
Earnings from subsidiaries (1,596,647) (1,170,608)
Increase in accounts
payable and accrued
expenses 100,134 6,800
- ----------------------------------------------------------------------
NET CASH (USED IN)
OPERATIONS (140,443) (165,967)
- ----------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Dividends received from
subsidiary - 50,000
Capital expenditures (30,485) -
- ----------------------------------------------------------------------
NET CASH (USED IN)
PROVIDED
BY INVESTING
ACTIVITIES (30,485) 50,000
- ----------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Short-term financing 170,000 -
Purchase of treasury stock (534,123) (76,166)
Proceeds from sale of
treasury stock 485,406 242,052
- ----------------------------------------------------------------------
NET CASH PROVIDED
BY FINANCING
ACTIVITIES 121,283 165,886
- ----------------------------------------------------------------------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS (49,645) 49,919
CASH AND CASH
EQUIVALENTS
AT BEGINNING OF YEAR 50,016 97
- ----------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS
AT END OF YEAR $ 371 $ 50,016
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and deposits with banks $ 13,357 $ 16,733
Federal funds sold and other 152,137 153,775
----------- -----------
Total cash and cash equivalents 165,494 170,508
----------- -----------
Investment securities:
Available for sale (amortized cost of $129,023 and $110,294, respectively) 129,221 110,888
Held to maturity (fair value of $0 and $5,016, respectively) -- 4,993
Mortgage-backed securities:
Available for sale (amortized cost of $96,880 and $98,357, respectively) 97,127 98,890
Held to maturity (fair value of $170,127 and $187,010, respectively) 166,996 182,999
Loans, net (including allowance for loan losses of $6,461 and $6,398, respectively) 670,865 657,498
Federal Home Loan Bank stock 12,164 11,958
Premises and equipment 7,416 7,523
Accrued interest receivable 7,132 7,259
Real estate owned 196 78
Other assets 6,544 4,711
----------- -----------
TOTAL ASSETS $ 1,263,155 $ 1,257,305
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 781,301 $ 777,583
Advance payments by borrowers for taxes and insurance 2,321 3,954
Accrued interest payable 683 672
Accrued expenses and other liabilities 11,811 10,451
----------- -----------
TOTAL LIABILITIES 796,116 792,660
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock-no par value; 1,000,000 shares authorized and unissued
at March 31, 1999 -- --
Common stock-no par value; 499,000,000 shares authorized; 34,715,625
shares issued-and 32,175,008 outstanding at March 31, 1999 342,921 342,840
Retained earnings 149,235 146,934
Other comprehensive income 289 733
Unearned compensation (25,406) (25,862)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 467,039 464,645
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,263,155 $ 1,257,305
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-17
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------------------
1999 1998
----------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
INTEREST INCOME
Loans $ 13,254 $ 13,072
Mortgage-backed securities:
Available for sale 1,452 1,043
Held to maturity 3,050 4,311
Investment securities:
Available for sale 1,675 748
Held to maturity 78 79
FHLB stock dividend 206 199
Other interest-earning assets 1,883 226
----------------- -----------------
Total interest income 21,598 19,678
INTEREST EXPENSE
Interest expense on deposits 7,507 9,556
----------------- -----------------
NET INTEREST INCOME 14,091 10,122
PROVISION FOR LOAN LOSS ALLOWANCES 75 250
----------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSS ALLOWANCES 14,016 9,872
----------------- -----------------
NONINTEREST INCOME
Service fees and other charges 273 280
Net gains (losses):
Mortgage-backed securities - 13
Other 1 (52)
Other income 116 137
----------------- -----------------
Total noninterest income 390 378
----------------- -----------------
NONINTEREST EXPENSES
Salaries and employee benefits 4,183 3,581
Occupancy 301 313
Equipment and data processing 646 603
Deposit insurance premiums 117 139
Franchise tax 462 479
Advertising 275 255
Other expenses 1,129 725
----------------- -----------------
Total noninterest expenses 7,113 6,095
----------------- -----------------
INCOME BEFORE INCOME TAXES 7,293 4,155
INCOME TAXES 2,582 1,454
----------------- -----------------
NET INCOME $ 4,711 $ 2,701
----------------- -----------------
----------------- -----------------
Earnings per share:
Basic $ 0.15 N/A
Diluted $ 0.15 N/A
Average common shares outstanding 32,152,489 N/A
</TABLE>
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
F-18
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1999 1998
---------------- ----------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,711 $ 2,701
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss allowances 75 250
Net (gains) losses (1) 39
Accretion of discounts and amortization of premiums (178) (333)
Depreciation 250 274
FHLB stock dividends (206) (199)
Decrease (increase) in interest receivable 127 (28)
Increase in interest payable 11 79
Increase in post retirement benefit obligation 83 93
Increase in prepaid and other assets (1,832) (1,051)
Increase in other liabilities 1,516 1,332
Change in unearned compensation 537 -
---------------- ----------------
Net cash provided by operating activities 5,093 3,157
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity 15,911 12,004
Mortgage-backed securities available for sale 8,419 3,552
Investment securities held to maturity 5,000 -
Investment securities available for sale 2,500 153
Proceeds from sale of:
Mortgage-backed securities available for sale - 114
Mortgage-backed securities held to maturity - 119
Purchases of:
Investment securities available for sale (20,057) (17,949)
Equity securities available for sale (1,274) -
Mortgage-backed securities available for sale (6,894) -
Mortgage-backed securities held to maturity - (8,047)
Principal collected on loans 43,288 37,672
Loans originated (56,542) (39,709)
Purchases of premises and equipment (143) (132)
Other 10 21
---------------- ----------------
Net cash used in investing activities (9,782) (12,202)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in NOW, savings and money market accounts 5,341 3,551
Net decrease in certificates of deposit (1,623) (1,860)
Net decrease in advance payments by borrowers
for taxes and insurance (1,633) (1,532)
Dividends paid (2,410) -
---------------- ----------------
Net cash (used in) provided by financing activities (325) 159
---------------- ----------------
Decrease in cash and cash equivalents (5,014) (8,886)
Cash and cash equivalents, beginning of year 170,508 34,497
---------------- ----------------
Cash and cash equivalents, end of period $ 165,494 $ 25,611
---------------- ----------------
---------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 7,496 $ 9,477
Income taxes 2,021 -
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned 128 29
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-19
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
United Community Financial Corp. (UCFC) was incorporated under Ohio law in
February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home
Savings) in connection with the conversion of Home Savings from an Ohio
mutual savings and loan association to an Ohio capital stock savings and loan
association, the issuance of Home Savings' stock to UCFC and the offer and
sale of UCFC's common stock (Conversion). Upon consummation of the Conversion
on July 8, 1998, UCFC became the unitary savings and loan holding company for
Home Savings. See Note 2 for a more detailed description of the Conversion.
The accompanying consolidated financial statements of UCFC have been prepared
in accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for fair
statement of results for the interim periods.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999. The consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1998, contained in UCFC's Form 10-K
for the year ended December 31, 1998.
2. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On December 9, 1997, the Board of Directors of Home Savings adopted a Plan of
Conversion to convert from an Ohio mutual savings and loan association to an
Ohio capital stock savings and loan association. The Conversion was
accomplished through the formation of UCFC in February 1998, the adoption of
an Ohio stock charter by Home Savings, the sale of all of Home Savings' stock
to UCFC on July 8, 1998 and the issuance of UCFC's stock to the public on
July 8, 1998.
UCFC issued 34,715,625 shares in connection with the Conversion. Gross
proceeds from the offering were $347,156,250, which includes the $10 value of
the 2,677,250 shares issued to the United Community Financial Corp. Employee
Stock Ownership Plan (ESOP) and the 1,183,438 shares sold to Home Savings for
contribution to the Home Savings Charitable Foundation. Conversion costs
amounted to $4.6 million.
Home Savings issued all of its outstanding capital stock to UCFC in exchange
for approximately one-half of the net proceeds from the Conversion. UCFC
accounted for the purchase in a manner similar to a pooling of interests
whereby assets and liabilities of Home Savings maintain their historical cost
basis in the consolidated company.
3. EARNINGS PER COMMON SHARE
Earnings per share has been computed for the quarter ended March 31, 1999,
based upon weighted average common shares outstanding of 32,152,489. Earnings
per share for all prior periods are not presented as there was no common
stock issued or outstanding.
F-20
<PAGE>
4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" was issued in June 1997 and became effective on January
1, 1998. SFAS No. 130 requires companies to report all items that are
recognized as components of comprehensive income under accounting standards.
UCFC's comprehensive income for the three months ended March 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------
1999 1998
-------------------- ---------------------
(In thousands)
<S> <C> <C>
Net income $4,711 $2,701
Unrealized holding gains (losses) arising
during the period, net of tax effect of
($239) and $39, respectively (444) 71
Reclassification adjustment for gains (losses)
included in net income, net of tax effect of ($3),
for 1998 - (5)
-------------------- ---------------------
Comprehensive income $4,267 $2,767
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
5. SALE OF HELD TO MATURITY MORTGAGE-BACKED SECURITIES
There were no sales of mortgage-backed securities held to maturity during the
three month period ended March 31, 1999. In January 1998, Home Savings sold
approximately $114 thousand of mortgage-backed securities held to maturity
with outstanding balances less than 15% of the principal outstanding since
acquisition. A gain of approximately $6 thousand was recorded on the sale.
6. SUBSEQUENT EVENT
In April 1999, the board of directors of UCFC entered into a definitive
agreement to acquire Butler Wick Corp., a full service investment and
financial service provider headquartered in Youngstown, Ohio. Under the terms
of the agreement, UCFC will issue, in a tax-free exchange, 1,700,000 shares
of UCFC common stock for all the issued and outstanding common shares of
Butler Wick Corp., subject to possible adjustments based upon the market
price of UCFC shares. In addition, UCFC will establish a $3.7 million
retention program for certain investment brokers and senior managers, subject
to a five-year vesting schedule. The transaction will be accounted for as a
pooling of interests and is expected to close during the third quarter of
1999, subject to shareholder approval and regulatory filings.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
[LOGO]
To the Shareholders and Board of Directors
United Community Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of United Community Financial Corp. and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1998. 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. The financial statements of The Home Savings and
Loan Company of Youngstown, Ohio (subsidiary of United Community Financial
Corp.) for the year ended December 31, 1996 were audited by other auditors whose
report, dated February 28, 1997, expressed an unqualified opinion on those
statements.
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, such 1998 and 1997 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
CLEVELAND, OHIO
January 29, 1999
F-22
<PAGE>
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 of each of the two years then ended in
conformity with generally accepted accounting principles.
/s/ Packer, Thomas & Co.
Youngstown, Ohio
February 28, 1997
F-23
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash and deposits with banks $ 16,733 $ 14,618
Federal funds sold and other 153,775 19,879
- ------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 170,508 34,497
- ------------------------------------------------------------------------------------------------------------------------
Investment securities:
Available for sale (amortized cost of $110,294 and $39,091,
respectively) 110,888 39,402
Held to maturity (fair value of $5,016 and $5,013, respectively) 4,993 4,968
Mortgage-backed securities:
Available for sale (amortized cost of $98,357 and $61,626, respectively) 98,890 62,416
Held to maturity (fair value of $187,010 and $247,986, respectively) 182,999 243,848
Loans, net (including allowance for loan losses of $6,398 and $5,982, respectively) 657,498 633,236
Federal Home Loan Bank stock 11,958 11,136
Premises and equipment 7,523 7,930
Accrued interest receivable 7,259 6,421
Real estate owned 78 55
Other assets 4,711 1,084
- ------------------------------------------------------------------------------------------------------------------------
Total assets $1,257,305 $1,044,993
- ------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits $ 777,583 $ 886,808
Advance payments by borrowers for taxes and insurance 3,954 3,715
Accrued interest payable 672 845
Accrued expenses and other liabilities 10,451 12,272
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 792,660 903,640
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued
at December 31, 1998
Common stock--no par value; 499,000,000 shares authorized; 34,715,625
shares issued--and 32,129,463 outstanding at December 31, 1998 342,840
Retained earnings 146,934 140,636
Other comprehensive income 733 717
Unearned compensation (25,862)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 464,645 141,353
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,257,305 $1,044,993
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-24
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Loans $53,063 $54,148 $48,586
Mortgage-backed securities:
Available for sale 4,351 5,122 6,871
Held to maturity 15,344 19,024 21,988
Investment securities:
Available for sale 4,194 2,169 1,226
Held to maturity 319 843 1,780
FHLB stock dividend 822 766 695
Other interest-earning assets 7,788 613 603
- -------------------------------------------------------------------------------------------------------------
Total interest income 85,881 82,685 81,749
Interest expense
Interest expense on deposits 35,755 40,463 43,009
- -------------------------------------------------------------------------------------------------------------
Net interest income 50,126 42,222 38,740
Provision for (recovery of) loan loss allowances 650 (1,546)
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for
(recovery of) loan loss allowances 49,476 43,768 38,740
- -------------------------------------------------------------------------------------------------------------
Noninterest income
Service fees and other charges 1,186 1,092 755
Net gains (losses):
Mortgage-backed securities available for sale 147 80
Mortgage-backed securities held to maturity 106
Investment securities available for sale 45
Other (68) (34) (45)
Other income 918 426 536
- -------------------------------------------------------------------------------------------------------------
Total noninterest income 2,289 1,564 1,291
- -------------------------------------------------------------------------------------------------------------
Noninterest expenses
Salaries and employee benefits 15,631 14,710 12,735
Occupancy 1,324 1,256 1,250
Equipment and data processing 2,573 2,534 2,181
Deposit insurance premiums 631 588 2,033
Federal deposit insurance special assessment 5,903
Franchise tax 1,917 1,752 1,643
Advertising 1,181 1,045 1,000
Other expenses 3,116 2,811 2,715
Charitable contributions 11,844 607 608
- -------------------------------------------------------------------------------------------------------------
Total noninterest expenses 38,217 25,303 30,068
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 13,548 20,029 9,963
Income taxes 4,849 6,982 3,332
- -------------------------------------------------------------------------------------------------------------
Net income $ 8,699 $13,047 $ 6,631
- -------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic $ 0.08
- --------------------------------------------------------------------------------
Diluted $ 0.08
- --------------------------------------------------------------------------------
Average common shares outstanding 32,083,400
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Unearned
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Stock Earnings Income Compensation Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1996 $120,958 $ 1,335 $122,293
Comprehensive income:
Net income 6,631 6,631
Change in net unrealized gain (loss) on
securities, net of tax and reclassification
adjustment (793) (793)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income 5,838
Balance December 31, 1996 127,589 542 128,131
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 13,047 13,047
Change in net unrealized gain (loss) on
securities, net of tax and reclassification
adjustment 175 175
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income 13,222
Balance December 31, 1997 140,636 717 141,353
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 8,699 8,699
Change in net unrealized gain (loss) on
securities, net of tax and reclassification
adjustment 16 16
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income 8,715
Issuance of 34,715,625 common shares $342,602 $(26,773) 315,829
Shares distributed by ESOP trust 238 911 1,149
Dividends paid, $0.075 per share (2,401) (2,401)
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $342,840 $146,934 $ 733 $(25,862) $464,645
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 8,699 $ 13,047 $ 6,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan loss allowances 650 (1,546)
Net gains (185) (46)
Accretion of discounts and amortization of premiums (1,425) (1,090) (1,499)
Depreciation 1,022 1,080 1,016
FHLB stock dividends (822) (766) (695)
(Increase) decrease in interest receivable (838) 43 1,319
Decrease in interest payable (173) (155) (18)
Increase in post retirement benefit obligation 320 321 312
(Increase) decrease in prepaid and other assets (3,627) 137 (182)
(Decrease) increase in other liabilities (2,151) 2,165 (929)
Change in unearned compensation 1,149
Charitable contribution of stock 11,834
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,453 13,190 5,955
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity 66,328 42,885 46,034
Mortgage-backed securities available for sale 19,452 19,094 23,007
Investment securities held to maturity 23,000 2,000
Investment securities available for sale 11,114 6,312 3,653
Proceeds from sale of:
Mortgage-backed securities available for sale 13,145 3,065
Mortgage-backed securities held to maturity 2,764
Investment securities available for sale 21,004
Purchases of:
Mortgage-backed securities held to maturity (8,047) (30,031)
Mortgage-backed securities available for sale (69,119) (8,110)
Investment securities available for sale (82,466) (30,876) (7,544)
Principal collected on loans 205,791 119,120 125,550
Loans originated (229,485) (133,357) (194,650)
Purchases of premises and equipment (621) (2,414) (1,516)
Other 96 199 64
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (71,048) 47,028 (20,539)
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in Now, Savings and Money Market Accounts (18,590) (16,842) (241)
Net decrease of Certificates of Deposit (90,637) (28,410) (6,554)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 239 (137) (767)
Net proceeds from the sale or issuance of common shares 303,995
Dividends paid (2,401)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 192,606 (45,389) (7,562)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 136,011 14,829 (22,146)
Cash and cash equivalents, beginning of year 34,497 19,668 41,814
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $170,508 $ 34,497 $ 19,668
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of United Community Financial Corp., a unitary
savings and loan holding company (UCFC) and The Home Savings & Loan Company of
Youngstown, Ohio, a state chartered savings and loan company, (Home Savings),
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
UCFC was incorporated under Ohio law in February 1998 by Home Savings in
connection with the conversion of Home Savings from an Ohio mutual savings and
loan association to an Ohio capital stock savings and loan association, the
issuance of Home Savings' stock to UCFC and the offer and sale of UCFC's common
stock by UCFC (Conversion). Upon consummation of the Conversion on July 8, 1998,
UCFC became the unitary savings and loan holding company for Home Savings. The
business of Home Savings and, therefore, the primary business of UCFC is
providing consumer and business banking service to its market area in
northeastern Ohio. At the end of 1998, Home Savings was doing business through
14 full service banking branches. Loans and deposits are primarily generated
from the areas where banking branches are located. Home Savings' income is
derived predominantly from interest on loans, securities, and to a lesser
extent, noninterest income. Home Savings' principal expenses are interest paid
on deposits and normal operating costs. Home Savings' operations are principally
in the savings and loan industry. Consistent with internal reporting Home
Savings' operations are reported in one operating segment, which is retail
banking.
CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
UCFC issued 34,715,625 common shares in connection with the Conversion.
Gross proceeds from the offering were $347,156,250, which includes 2,677,250
shares issued to the United Community Financial Corp. Employee Stock Ownership
Plan and 1,183,438 shares sold to Home Savings for transfer to the Home Savings
Charitable Foundation. Conversion costs amounted to $4.6 million.
Home Savings issued all its outstanding common stock to UCFC in exchange
for approximately one-half of the net proceeds. UCFC accounted for the purchase
in a manner similar to a pooling of interests whereby assets and liabilities of
Home Savings maintain their historical cost basis in the consolidated company.
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.
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
F-28
<PAGE>
recognized only to the extent that cash payments are received. Cash
receipts received on impaired loans are generally applied first to escrow
requirements, then to delinquent interest, with any remainder to the principal
balance. Loans are returned to full accrual status when the borrower has the
ability and intent to make periodic principal and interest payments (this
generally requires that the loan be brought current in accordance with its
original contractual terms). Loans are classified as restructured when
concessions are made to borrowers with respect to the principal balance,
interest rate or the terms due to the inability of the borrower to meet the
obligation under the original terms.
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, Home
Savings 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. Home
Savings performs a review of all loans over $500 thousand 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 Home Savings' 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 thousand or less) and represent a homogeneous population,
Home Savings evaluates impairment based on the level and extent of delinquencies
in the portfolio and Home Savings prior charge-off experience with those
delinquencies. Home Savings 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 Home Savings' 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.
INCOME TAXES
The provision for federal income taxes is based upon earnings reported
for financial statement purposes rather than amounts reported on Home Savings'
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.
Deferred income tax assets and liabilities are recorded annually for
differences between financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, based on the weight of available evidence, when it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. Income tax expense is the tax payable or refundable for the period
adjusted for the change during the period in deferred tax assets and
liabilities.
F-29
<PAGE>
EARNINGS PER SHARE
Basic "Earnings Per Share" (EPS) is based on the weighted average number
of common shares outstanding during the year. Diluted EPS is based on the
weighted average number of common shares and common share equivalents
outstanding during the year. See further discussion at Note 16.
POSTRETIREMENT BENEFITS
Home Savings accrues estimated costs of retiree health care and life
insurance benefits over the years employees render the services necessary to
earn those benefits. Home Savings 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, Home Savings considers all
highly liquid investments with a term of three months or less to be cash
equivalents.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
Home Savings' 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,
Home Savings' short-term interest income and interest expense are significantly
affected by changes in market interest rates and other economic factors beyond
its control. Home Savings' 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, Home Savings' earnings could be
adversely affected during periods of rising interest rates.
NEW ACCOUNTING STANDARDS
On January 1, 1997 Home Savings adopted SFAS No. 125. SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. 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
Home Savings 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, 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.
On January 1, 1998, Home Savings adopted SFAS No. 130, "Reporting
Comprehensive Income," which 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 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
On January 1, 1998, Home Savings adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
reportable operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement requires that a public enterprise report financial and
descriptive information about its operating segments. 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. The
adoption of the statement did not change Home Savings' segment reporting. Home
Savings continues to report its operations as one industry segment, retail
banking.
Home Savings adopted SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," in 1998. 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 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. It does not
F-30
<PAGE>
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for financial statements for years beginning after
June 15, 1999. Management does not believe the adoption of this statement will
have a material impact on Home Savings' financial condition and results of
operations.
RECLASSIFICATIONS
Certain items in the financial statements for 1997 and 1996 have been
reclassified to conform to the 1998 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 approximately $3.7
million and $2.5 million at December 31, 1998 and 1997, respectively.
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------
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 $ 28,045 $391 $ $ 28,436
Corporate notes 82,249 331 128 82,452
- ---------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 110,294 722 128 110,888
Held to Maturity
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities 4,993 23 5,016
- ---------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity 4,993 23 5,016
- ---------------------------------------------------------------------------------------------------------------
Total investment securities $115,287 $745 $128 $115,904
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
<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
Corporate notes 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>
The weighted average interest rate on investment securities was 6.01% and
6.39% at December 31, 1998 and 1997, 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, 1998
- --------------------------------------------------------------------------------
AMORTIZED COST FAIR VALUE
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 12,552 $ 12,600
Due after one year through five years 97,742 98,288
Due after five years through ten years
Due after ten years
- --------------------------------------------------------------------------------
Total $110,294 $110,888
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Investment securities held to maturity by contractual maturity, repricing
or expected call date are shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
AMORTIZED COST FAIR VALUE
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 4,993 $ 5,016
Due after one year through five years
Due after five years through ten years
Due after ten years
- --------------------------------------------------------------------------------
Total $ 4,993 $ 5,016
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
There were no sales of investment securities during the years ended
December 31, 1998 and 1997. Proceeds on sales of investment securities available
for sale were approximately 21.0 million for the year ended December 31, 1996.
There were realized gains of approximately $155 thousand and realized losses of
approximately $110 thousand for the year ended December 31, 1996. There were no
sales of investment securities held to maturity during the year ended December
31, 1996.
Securities pledged for public funds deposits were approximately $2.1
million and $3.8 million at December 31, 1998 and 1997, respectively.
F-32
<PAGE>
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities were summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for Sale
- ----------------------------------------------------------------------------------------------------------
Participation certificates:
Government agency issues $ 58,423 $ 893 $ 55 $ 59,261
Private issues 2,106 77 2,029
Collateralized Mortgage Obligations:
Government agency issues 13,075 5 34 13,046
Private issues 24,753 199 24,554
- ----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
available for sale 98,357 898 365 98,890
Held to Maturity
- ----------------------------------------------------------------------------------------------------------
Participation certificates:
Government and government agency issues 182,999 4,071 60 187,010
- ----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $281,356 $4,969 $425 $285,900
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1997
- ----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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 2,322 78 2,244
- ----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
available for sale 61,626 1,073 283 62,416
Held to Maturity
- ----------------------------------------------------------------------------------------------------------
Participation certificates:
Government and government agency issues 243,848 4,672 534 247,986
- ----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $305,474 $5,745 $817 $310,402
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-33
<PAGE>
Mortgage-backed securities are classified by type of interest payment as
follows:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------
Adjustable rate:
Private issues $ 571 $ 571 $ 757 $ 757
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustable rate 571 571 757 757
- ---------------------------------------------------------------------------------------------------------------------------
Fixed rate:
Participation certificates:
Government agency issues 58,423 59,261 59,304 60,172
Private issues 1,535 1,458 1,565 1,487
Collateralized Mortgage Obligations:
Government agency issues 13,075 13,046
Private issues 24,753 24,554
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed rate 97,786 98,319 60,869 61,659
- ---------------------------------------------------------------------------------------------------------------------------
Total available for sale 98,357 98,890 61,626 62,416
- ---------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
Adjustable rate:
Participation certificates:
Government agency Issues 718 712 955 969
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustable rate 718 712 955 969
- ---------------------------------------------------------------------------------------------------------------------------
Fixed rate:
Participation certificates:
Government and government agency issues 182,281 186,298 242,893 247,017
Total fixed rate 182,281 186,298 242,893 247,017
- ---------------------------------------------------------------------------------------------------------------------------
Total held to maturity 182,999 187,010 243,848 247,986
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $281,356 $285,900 $305,474 $310,402
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds on sales of mortgage-backed securities available for sale were
$13.1 million and $3.1 million for the years ended December 31, 1998 and 1997,
respectively. There were realized gains of $147 thousand and $80 thousand for
the years ended December 31, 1998 and 1997, respectively, and no realized losses
for 1998 or 1997. Proceeds on sales of mortgage-backed securities held to
maturity for the year ended December 31, 1998 were $2.8 million with an
amortized cost of $2.7 million. Mortgage-backed securities sold from the held to
maturity portfolio were less than 15% of the principal outstanding at
acquisition. There were realized gains of $106 thousand and no realized losses
for the year ended December 31, 1998. There were no sales of mortgage-backed
securities held to maturity during the year ended December 31, 1997. There were
no sales of mortgage-backed securities available for sale or held to maturity
during the year ended December 31, 1996.
F-34
<PAGE>
5. LOANS
Loans consists of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Real Estate:
Permanent:
One-to-four family $516,767 $489,677
Multifamily 8,172 8,944
Non-residential 31,308 33,479
Land 190 285
Construction:
One-to-four family 25,691 24,044
Multifamily and non-residential 833 325
- --------------------------------------------------------------------------------
Total real estate 582,961 556,754
Consumer 41,773 43,388
Commercial 75,085 59,897
- --------------------------------------------------------------------------------
Total loans 699,819 660,039
- --------------------------------------------------------------------------------
Less:
Loans in process 31,026 16,485
Allowance for loan losses 6,398 5,982
Deferred loan fees, net 4,897 4,336
- --------------------------------------------------------------------------------
Total 42,321 26,803
- --------------------------------------------------------------------------------
Loans, net $657,498 $633,236
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Loans with adjustable rates included above totaled $161.1 million and
$180.6 million at December 31, 1998 and 1997, 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.
Home Savings' primary lending area is within the northeast, Ohio. At
December 31, 1998 and 1997, substantially all of Home Savings' gross loans were
to borrowers in Ohio.
Home Savings 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 Home Savings' commercial non-residential real estate
portfolios by type of collateral.
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
PERCENT Percent
AMOUNT OF TOTAL Amount of Total
- -----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Strip shopping centers $ 1,614 5.16% $ 1,736 5.19%
Office buildings 8,230 26.29 9,160 27.36
Warehouses 17,050 54.46 17,853 53.33
Hotel property 4,111 13.12 4,373 13.06
Other 303 0.97 357 1.06
- -----------------------------------------------------------------------------------------------
Total $31,308 100.00% $33,479 100.00%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
F-35
<PAGE>
Commercial real estate loans are typically collateralized by the
property. 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, 1998, 1997 and 1996, loans serviced for the benefit of
others, not included in the detail above, totaled $6.0 million, $6.6 million and
$7.0 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 Home Savings to some degree of interest
rate risk. Home Savings 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. Home Savings
normally has a number of outstanding commitments to extend credit. At December
31, 1998, there were outstanding commitments to originate $23.6 million of
fixed-rate mortgage loans and other loans (with interest rates that ranged from
6.5% to 9.0%), $1.0 million of adjustable-rate loans, all at market rates, and
$14.0 million of commercial loans. Terms of the commitments extend up to nine
months, but are generally less than two months.
At December 31, 1998, there were also outstanding unfunded consumer lines
of credit of $19.6 million and commercial lines of credit of $1.8 million.
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. Home Savings does
not expect all of these lines to be used by the borrowers.
Home Savings' business activity is principally with customers located in
Ohio. Except for residential loans in Home Savings' market area, Home Savings
has no other significant concentrations of credit risk.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $5,982 $ 5,040 $5,118
Provision for (recovery of) loan loss allowances 650 (1,546)
Amounts charged off (270) (446) (85)
Recoveries 36 2,934 7
- ---------------------------------------------------------------------------------------------
Balance, end of year $6,398 $ 5,982 $5,040
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Nonperforming loans (loans 90 days past due and restructured loans)
were $7.6 million, $10.2 million and $9.8 million at December 31, 1998, 1997
and 1996, respectively.
<TABLE>
<CAPTION>
As of or for the
Year Ended
December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Impaired loans on which no specific valuation allowance was provided $5,677 $9,340
Impaired loans on which specific valuation allowance was provided 52 151
- ------------------------------------------------------------------------------------------------------------
Total impaired loans at year-end 5,729 9,491
Specific valuation allowances on impaired loans at year-end 52 157
Average impaired loans during year 6,830 8,390
Interest income recognized on impaired loans during the year 343 544
Interest income potential based on original contract terms of impaired loans 349 585
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
Directors and officers of Home Savings are customers of the institution
in the ordinary course of business. Loans of directors and officers have terms
consistent with those offered to other customers. At December 31, 1998 and 1997,
loans to officers or directors of Home Savings totaled approximately $1.4
million and $1.3 million, respectively.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements $ 1,952 $ 1,952
Buildings 10,103 9,992
Leasehold improvements 273 325
Furniture and equipment 5,221 4,773
- --------------------------------------------------------------------------------
17,549 17,042
Less allowances for depreciation and amortization 10,026 9,112
- --------------------------------------------------------------------------------
Total $ 7,523 $ 7,930
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
7. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Checking accounts:
Interest-bearing $ 69,284 1.86% $ 58,707 2.03%
Noninterest-bearing 6,933 5,387
Savings accounts 224,840 2.50 243,588 2.99
Money market accounts 44,764 2.57 56,727 2.99
Certificates of deposit 431,762 5.35 522,399 5.78
- -----------------------------------------------------------------------------------------------
Total deposits $777,583 4.02% $886,808 4.56%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing checking $ 1,279 $ 1,165 $ 1,154
Savings accounts 7,114 7,387 7,879
Money market accounts 1,340 1,741 2,094
Certificates of deposit 26,022 30,170 31,882
- --------------------------------------------------------------------------------
Total $35,755 $40,463 $43,009
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
F-37
<PAGE>
A summary of certificates of deposit by maturity follows:
<TABLE>
<CAPTION>
December 31, 1998
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
Within 12 months $271,550
12 months to 24 months 83,246
24 months to 36 months 34,580
36 months to 48 months 26,576
Over 48 months 15,810
- --------------------------------------------------------------------------------
Total $431,762
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, deposit accounts with balances of $100 thousand and
greater totaled approximately $37.6 million. Deposits in excess of $100 thousand
are not federally insured. Home Savings does not have brokered deposits for the
years ended December 31, 1998 and 1997.
8. INCOME TAXES
The provision for federal income taxes consists of the following
components:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current $ 8,774 $6,807 $3,055
Deferred (3,925) 175 277
- --------------------------------------------------------------------------------
Total $ 4,849 $6,982 $3,332
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation from tax at the statutory rate to the income tax
provision is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Dollars Rate Dollars Rate Dollars Rate
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $4,888 35.00% $7,010 35.00% $3,487 35.00%
Increase (decrease) due to:
Other (39) (.35) (28) (.14) (155) (1.55)
- -------------------------------------------------------------------------------------------------------------------------
Income tax provision $4,849 34.65% $6,982 34.86% $3,332 33.45%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-38
<PAGE>
Significant components of the deferred tax assets and liabilities are as
follows. No valuation allowance was considered necessary for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Charitable contribution $ 3,286
Loan loss reserves 2,239 $ 2,093
Postretirement benefits 2,776 2,676
Deferred loan fees 1,714 1,518
Interest on non-accrual loans 122 205
- -------------------------------------------------------------------------
Net deferred tax assets 10,137 6,492
- -------------------------------------------------------------------------
Deferred tax liabilities:
ESOP compensation 128
Accelerated depreciation 379 479
Pension benefit obligations 309 461
Original issue discount 1,637 1,408
FHLB stock dividends 2,374 2,093
Post 1987 tax bad debts 1,614 2,152
Mark-to-market 394 385
- -------------------------------------------------------------------------
Net deferred tax liabilities 6,835 6,978
- -------------------------------------------------------------------------
Net deferred tax asset (liability) $ 3,302 $ (486)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</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 Home Savings, 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 Home Savings' statement of income as income taxes were provided
for in prior years in accordance with generally accepted accounting principles.
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 Home Savings no longer qualifies as a "bank." Tax bad debt deductions
accumulated prior to 1988 by Home Savings 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.
In December 1998, Home Savings made a charitable contribution of
1,183,438 shares of UCFC stock to the Home Savings Charitable Foundation in the
amount of approximately $11.8 million. Charitable contributions can only be
deducted to the extent of 10% of Home Savings' taxable income for the period in
which the contribution is made. Any excess may be carried forward for a period
of five years to be offset against future taxable income. A deferred tax asset
in the amount of $3.3 million has been established to account for the
contribution carryforward. No valuation allowance is deemed necessary as it is
anticipated that Home Savings will have sufficient taxable income over the next
five years to fully utilize this carryforward amount.
9. STOCKHOLDERS' EQUITY
DIVIDENDS
UCFC's source of funds for dividends to its stockholders are earnings on
its investments and dividends from Home Savings. During the year ended December
31, 1998, UCFC paid dividends in the amount of $2.4 million. However Home
Savings primary regulator, the OTS has regulations that impose certain
restrictions on payments of dividends to UCFC.
F-39
<PAGE>
OTS regulations provide that an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
could, after prior notice to the OTS (approval is not required), make capital
distributions during the calendar year of up to 100 percent of its net income to
date during the calendar year plus 50% of its surplus capital at the beginning
of the calendar year. Any capital distributions in excess of this amount would
require prior regulatory approval. During the year ended December 31, 1998, Home
Savings did not make any distributions.
OTHER COMPREHENSIVE INCOME
Other comprehensive income included in the Consolidated Statements of
Stockholders' Equity consists solely of unrealized gains and losses on available
for sale securities. The change in net unrealized gain on available for sale
securities includes reclassification adjustments to reclassify gains or losses
for sales of the related security of $96 thousand, $52 thousand and $29 thousand
for the year ended December 31, 1998, 1997 and 1996, respectively.
LIQUIDATION ACCOUNT
In accordance with federal regulations, at the time Home Savings
converted from a mutual savings and loan association to a capital stock savings
and loan association, Home Savings established a liquidation account which
amounted to approximately $141.4 million at the time of the conversion. The
liquidation account is maintained for the benefit of eligible account holders
who continue to maintain their accounts at Home Savings. The liquidation account
is reduced annually to the extent that eligible account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holders interest in the liquidation account. In the event of a complete
liquidation of Home Savings, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to their current adjusted qualifying balance before any distribution may be made
to UCFC as the sole shareholder of Home Savings. Under current regulations, Home
Savings is not permitted to pay dividends on its stock if the effect would
reduce its regulatory capital below the liquidation account.
10. REGULATORY CAPITAL REQUIREMENTS
Home Savings 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 Home Savings' financial statements. The regulations require
Home Savings to meet specific capital adequacy guidelines and the regulatory
framework for prompt corrective action that involve quantitative measures of
Home Savings' assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Home Savings' 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 Home Savings 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, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $305,919 51.51% $47,513 8.00% $59,391 10.00%
Tier 1 capital (to risk-weighted assets) 299,617 50.45 * * 35,635 6.00
Core (Tier 1) capital (to adjusted
total assets) 299,617 26.80 33,534 3.00% 55,890 5.00
Tangible capital (to adjusted
tangible assets) 299,617 26.80 16,767 1.50% * *
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $146,461 28.85% $40,619 8.00% $50,774 10.00%
Tier 1 capital (to risk-weighted assets) 140,636 27.70 * * 30,464 6.00
Core (Tier 1) capital (to adjusted
total assets) 140,636 13.47 31,322 3.00 52,203 5.00
Tangible capital (to adjusted
tangible assets) 140,636 13.47% 15,661 1.50% * *
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*RATIO IS NOT REQUIRED UNDER REGULATIONS.
As of December 31, 1998 and 1997, the Office of Thrift Supervision
categorized Home Savings as well capitalized under the regulatory framework for
Prompt Corrective Action. To be categorized as well capitalized, Home Savings
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 Home Savings' category.
Management believes, as of December 31, 1998, that Home Savings 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 Home Savings' loans and securities are concentrated, could adversely
affect future earnings and, consequently, Home Savings' ability to meet its
future capital requirements.
11. BENEFIT PLANS
RETIREMENT PLANS
Home Savings 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. Home
Savings' 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 Home Savings 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. As of December 31 1998, Home Savings amended the
defined benefit pension plan to freeze benefit accruals effective December 31,
1998. A curtailment gain recognized as a result of freezing the plan was not
significant.
OTHER POSTRETIREMENT BENEFIT PLANS
In addition to Home Savings' retirement plans, Home Savings 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 Home Savings. 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. Home Savings' policy is to pay premiums monthly, with
no pre-funding.
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 1998
valuation was 8 percent and 1997 valuation was 9 percent and was 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. A one-percentage point change in assumed health
care cost trend rates would have the following effects:
F-41
<PAGE>
<TABLE>
<CAPTION>
1 Percentage 1 Percentage
Point Increase Point Decrease
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 130 $ (98)
Effect on the postretirement benefit obligation $1,100 $(880)
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLAN PLAN PLAN PLAN
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 8,612 $ 5,250 $ 8,350 $ 4,785
Service cost 435 229 376 208
Interest cost 557 325 530 332
Actuarial (gain)/loss 2,529 (110) (585) 10
Benefit paid (178) (319) (59) (85)
Curtailment (4,119)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of the year $ 7,836 $ 5,375 $ 8,612 $ 5,250
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 7,445 $ 5,991
Actual return of plan assets 1,016 1,013
Employer contribution 575 500
Benefits paid (178) (59)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of the year $ 8,858 $ 0 $ 7,445 $ 0
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Funded status of the plan $ 1,022 $(5,375) $(1,167) $(5,250)
Unrecognized net (gain)/loss from past
experience different from that assumed and
effects of changes in assumptions (2,249) 1,544 (2,028)
Prior service cost not yet recognized in net
periodic pension cost (343) 367 (369)
- ---------------------------------------------------------------------------------------------------------------------------
(Accrued)/prepaid pension cost included in
other liabilities $ 1,022 $(7,967) $ 744 $(7,647)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-42
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
DEFINED POST- Defined Post- Defined Post-
BENEFIT RETIREMENT Benefit retirement Benefit retirement
PLAN PLAN Plan Plan Plan Plan
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 435 $ 229 $ 376 $ 208 $ 357 $ 189
Interest cost 557 325 530 332 544 316
Expected return on plan assets (609) (495) (525)
Net amortization of prior service cost 43 (26) (92) (26) (118) (26)
Recognized net actuarial loss/(gain) 10 (123) 74 (108) 79 (102)
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 436 $ 405 $ 393 $ 406 $ 337 $ 377
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assumption used in the valuations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
DEFINED POST- Defined Post- Defined Post-
BENEFIT RETIREMENT Benefit retirement Benefit retirement
PLAN PLAN Plan Plan Plan Plan
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount rate 5.50% 6.50% 7.00% 7.00% 7.25% 7.25%
Rate of increase in future compensation levels N/A N/A 6.00 N/A 6.00 N/A
Expected long-term rate of return on plan assets 8.00 N/A 8.00 N/A 8.00 N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</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.
401(k) SAVINGS PLAN
Home Savings also sponsors a defined contribution 401(k) savings plan,
which covers substantially all employees. Under the provisions of the plan, Home
Savings' matching contribution is discretionary and may be changed from year to
year. For 1998 and 1997, Home Savings' match was 25% of pre-tax contributions,
up to a maximum of 6% of the employees' base pay. In addition, in 1997 and 1996
Home Savings paid a 1% discretionary contribution to all employees who were
eligible to participate in the plan. Also in 1996, Home Savings 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 Home Savings over a three
year period. Participants become 100% vested in Home Savings contributions upon
completion of five years of service. For the years ended 1998, 1997 and 1996,
the expense related to this plan was approximately $134 thousand, $468 thousand
and $513 thousand, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the conversion, UCFC established an Employee Stock
Ownership Plan (ESOP) for the benefit of the employees of UCFC and Home Savings.
All full-time employees who meet certain age and years of service criteria are
eligible to participate in the ESOP. An ESOP is a tax-qualified retirement plan
designed to invest primarily in the stock of UCFC. The ESOP borrowed $26.8
million from UCFC to purchase 2,677,250 shares in conjunction with the
conversion. The term of the loan will be 15 years and will be repaid primarily
with contributions from Home Savings to the ESOP.
F-43
<PAGE>
The loan is collateralized by the shares of common stock held by the
ESOP. As the note is repaid, shares are released from collateral based on the
proportion of the payment in relation to total payments required to be made on
the loan. The shares released from collateral are then allocated to participants
on the basis of compensation as described in the plan. Compensation expense is
determined by multiplying the per share market price of UCFC's stock during the
period by the number of shares to be released. UCFC recognized approximately
$1.3 million in compensation expense for the year ended December 31, 1998
related to the ESOP. Unallocated shares are considered neither outstanding
shares for computation of basic earnings per share nor potentially dilutive
securities for computation of diluted earnings per share. Dividends on
unallocated ESOP shares are reflected as a reduction in the loan (and Home
Savings' contribution is reduced accordingly). Shares released or committed to
be released for allocation during the year ended December 31, 1998 totaled
91,088. Shares remaining not released or committed to be released for allocation
at December 31, 1998 totaled 2,586,162 and had a market value of approximately
$39.8 million. No shares have been specifically allocated as of December 31,
1998.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined
by Home Savings 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 Home Savings 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 Home Savings' entire holdings of a particular
financial instrument. Because no market exists for a significant portion of Home
Savings' 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, 1998 and 1997. 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-44
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $170,508 $170,508 $ 34,497 $ 34,497
Investment securities:
Held to maturity 4,993 5,016 4,968 5,013
Available for sale 110,888 110,888 39,402 39,402
MORTGAGE-BACKED SECURITIES:
Held to maturity 182,999 187,010 243,848 247,986
Available for sale 98,890 98,890 62,416 62,416
Loans 657,498 668,600 633,236 640,354
Federal Home Loan Bank stock 11,958 11,958 11,136 11,136
Accrued interest receivable 7,259 7,259 6,414 6,414
LIABILITIES:
Deposits:
Checking, savings and money
market accounts 345,821 345,821 364,409 364,409
Certificates of deposit 431,762 434,716 522,399 522,051
Advance payments by borrowers
for taxes and insurance 3,954 3,954 3,715 3,715
Accrued interest payable 672 672 845 845
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
13. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $35,928 $40,618 $43,026
Income taxes 9,100 5,500 4,425
Supplemental schedule of noncash activities:
Loans exchanged for mortgage-backed securities 224
Transfers from loans to real estate owned 191 372 71
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
14. 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 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. Home Savings recorded a pretax charge
of $5.9 million ($3.8 million 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-45
<PAGE>
15. PARENT COMPANY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1998
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and deposits with banks $ 98
Federal funds sold and other 138,815
- --------------------------------------------------------------------------------
Total cash and cash equivalents 138,913
Note receivable 26,235
Investment in subsidiary 300,350
Other assets 20
- --------------------------------------------------------------------------------
Total assets $465,518
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 873
- --------------------------------------------------------------------------------
Total liabilities 873
Total stockholders' equity 464,645
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $465,518
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENT OF INCOME DECEMBER 31, 1998
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
INCOME
Interest income $ 3,711
- --------------------------------------------------------------------------------
Total income 3,711
EXPENSES
Interest expense 883
Other expenses 273
- --------------------------------------------------------------------------------
Total expenses 1,156
- --------------------------------------------------------------------------------
Income before income taxes 2,555
Income taxes 1,040
- --------------------------------------------------------------------------------
Income before undistributed net earnings of subsidiary 1,515
Equity in undistributed net earnings of subsidiary 7,184
Net income $ 8,699
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
F-46
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,699
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of the subsidiary (7,184)
Increase in other assets (20)
Increase in other liabilities 873
Issuance of stock for Charitable Foundation 11,834
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 14,202
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital stock of subsidiary (177,218)
ESOP loan repayment 335
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (176,883)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the sale or issuance of common shares 303,995
Dividends paid (2,401)
- ----------------------------------------------------------------------------------------
Net cash provided by financing activities 301,594
- ----------------------------------------------------------------------------------------
Increase in cash and cash equivalents 138,913
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 0
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 138,913
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
16. EARNINGS PER SHARE
For the purpose of computing weighted average shares outstanding, shares
issued in the conversion on July 8, 1998 were assumed to have been outstanding
since July 1, 1998. Earnings per share for all prior periods are not presented
as there was no common stock issued or outstanding for the years ended December
31, 1997 and 1996. Earnings per share has been computed for the year ended
December 31, 1998 as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<S> <C>
BASIC:
Net income applicable to common stock* $ 2,536
Average common shares outstanding 32,083
Net income per common share--basic $ 0.08
DILUTED :
Net income applicable to common stock* $ 2,536
Average common shares outstanding 32,083
Net income per common share--diluted $ 0.08
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
*NET INCOME IS FOR THE SIX MONTHS ENDED 12/31/98.
F-47
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF APRIL 15, 1999
BETWEEN
BUTLER WICK CORP.
AND
UNITED COMMUNITY FINANCIAL CORP.
<PAGE>
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated as of April
15, 1999, between Butler Wick Corp. ("BWC") and United Community Financial Corp.
("UCFC").
RECITALS
WHEREAS, BWC is an Ohio corporation, having its principal place of business
in Ohio; and
WHEREAS, UCFC is an Ohio corporation, having its principal place of
business in Ohio; and
WHEREAS, subject to the terms and conditions contained in this Agreement,
the parties intend to effect the merger of a subsidiary of UCFC to be formed to
facilitate the acquisition of BWC with and into BWC; and
WHEREAS, it is the intention of the parties to this Agreement that the
business combination contemplated hereby be treated as a "reorganization" under
Section 368(a) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the respective Boards of Directors of each of UCFC and BWC have
determined that it is in the best interests of their respective companies and
their shareholders to consummate the transactions provided for in this
Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties agree as follows:
ARTICLE I
DEFINITIONS; INTERPRETATION
1.01 DEFINITIONS. The following terms, as used in this Agreement, have the
meanings set forth below:
"Acquisition Proposal" has the meaning assigned in Section 6.05.
"Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling, controlled by or under common control with
such specified person. For the purposes of this definition, "control" when used
with respect to any specified person means the power to direct the management
and policies of such person, directly or indirectly, whether through the
ownership of voting securities, by Contract or otherwise; and the terms
"controlling" and "controlled" have correlative meanings to the foregoing.
-2-
<PAGE>
"Agreement" means this Agreement, as amended or modified from time to time
in accordance with Section 9.02.
"Average Closing Price" means as of any date, the average of the daily last
sale prices of UCFC Shares as reported on the Nasdaq National Market (as
published in THE WALL STREET JOURNAL or, if not published therein, in another
authoritative source) for the 20 consecutive full trading days ending at the
close of trading on the full trading day immediately preceding such date.
"BWC" means Butler Wick Corp.
"BWC Articles" means the articles of incorporation of BWC, as amended.
"BWC Board" means the Board of Directors of BWC.
"BWC Certificates" means the certificates that represented issued and
outstanding BWC Shares prior to the Effective Time.
"BWC Code of Regulations" means the Code of Regulations of BWC, as amended.
"BWC Meeting" has the meaning assigned in Section 6.02.
"BWC Shares" means the common shares, without par value, of BWC.
"Client" means any person to which BWC or any of its Subsidiaries provides
products or services under any Contract.
"Code" means the Internal Revenue Code of 1986, as amended.
"Compensation Plans" has the meaning assigned in Section 4.17(a).
"Contract" means any agreement, indenture, undertaking, debt instrument,
contract, lease or other commitment to which such person or any of its
Subsidiaries is a party or by which any of them is bound or to which any of
their properties is subject.
"DOL" means the United States Department of Labor.
"Derivatives Contracts" has the meaning assigned in Section 4.20.
"Disclosure Schedule" means the schedule which BWC has delivered to UCFC,
on or prior to the date hereof, setting forth, among other things, items the
disclosure of which is necessary or appropriate either (1) in response to an
express informational requirement contained in or requested by a provision
hereof, or (2) as an exception to one or more representations or warranties
contained in Article IV, or to one or more of its covenants contained in Article
VI.
-3-
<PAGE>
"Dissenting Shares" means any BWC Shares as to which the shareholder
exercises the right of dissent under Section 1701.59 of the OGCL.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has, with respect to any person, the meaning assigned in
Section 4.17(c).
"ERISA Plans" has the meaning assigned in Section 4.17(b).
"Effective Date" means the date on which the Effective Time occurs.
"Effective Time" means the date and time at which the Merger becomes
effective.
"Employment Agreement" means the employment agreements to be entered into
by BWC, or a BWC Subsidiary, and the persons listed on Schedule C. Each of the
Employment Agreements has been agreed as to form by UCFC and the applicable
employee as of the date of this Agreement.
"Environmental Laws" means any federal, state or local law, regulation,
order, decree, permit, authorization, common law or agency requirement with
force of law relating to: (1) the protection or restoration of the environment,
health or safety (in each case as relating to the environment) or natural
resources, or (2) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" means Registrar & Transfer Company in such capacity, and
including any successor that may from time to time be appointed by UCFC.
"Exchange Fund" has the meaning assigned in Section 2.06.
"Exchange Ratio" has the meaning assigned in Section 2.02.
"Executive Management" means each member of the board of directors of
Butler Wick & Co., Inc., and James Sisek, Ronald Rzonca and Ralph Meacham.
"Federal Reserve System" means the Board of Governors of the Federal
Reserve System and the Federal Reserve Banks.
"Financial Statements" means, as to any party, the statements of financial
condition, statements of income, statements of cash flow and statements of
changes in shareholders' equity, including any related notes and schedules.
-4-
<PAGE>
"GAAP" means generally accepted accounting principles.
"Governmental Authority" means any court, administrative agency or
commission or other foreign, federal, state or local governmental authority or
instrumentality.
"Hazardous Substance" means any hazardous or toxic substance, material or
waste, including those substances, materials and wastes listed in the United
States Department of Transportation Hazardous Materials Table (49 C.F.R. section
172.101), or by the United States Environmental Protection Agency as hazardous
substances (40 C.F.R. Part 302) and amendments thereto, petroleum products or
other such substances, materials and wastes that are or become regulated under
any applicable local, state or federal law.
"Home Savings" means The Home Savings and Loan Company of Youngstown, Ohio,
a savings association organized under Ohio law which is a wholly-owned
subsidiary of UCFC.
"IRS" means the Internal Revenue Service.
"Insurance Policies" has the meaning assigned in Section 4.22.
"Investment Advisers Act" means the Investment Advisers Act of 1940, as
amended, and the rules and regulations thereunder.
"Investment Company" has the meaning assigned for purposes of the
Investment Company Act that is sponsored, organized, advised or managed by BWC
or one of its Subsidiaries.
"Investment Company Act" means the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.
"Liens" means any charge, mortgage, pledge, security interest, restriction,
claim, lien, or encumbrance.
"Litigation" has the meaning assigned in Section 4.15.
"Material" means, with respect to any fact, circumstance, event or thing,
that such fact, circumstance, event or thing is material to (1) the financial
position, results of operations, assets, properties or business of (a) UCFC and
its Subsidiaries, taken as a whole, (b) BWC and its Subsidiaries, taken as a
whole, or (c) the Surviving Corporation and its Subsidiaries, taken as a whole,
as the case may be, or (2) the ability of either UCFC or BWC timely to perform
its obligations under this Agreement or otherwise to consummate the transactions
contemplated by this Agreement, other than any fact, circumstance, event or
thing (i) generally affecting the securities industry or the banking industry,
or resulting from general economic or market conditions (including changes in
interest rates), changes in accounting principles or changes in laws,
regulations or regulatory policies of general applicability (or interpretations
thereof), or (ii)
-5-
<PAGE>
resulting from actions or omissions of a party hereto taken with the prior
written consent of the other party in contemplation of the transactions
contemplated hereby.
"Merger" means the merger of BWC and Merger Corp. in which BWC shall be the
surviving corporation and the separate corporate existence of Merger Corp. shall
cease.
"Merger Agreement" means the form of Merger Agreement attached to this
Agreement as Annex A to be entered into by BWC and Merger Corp.
"Merger Consideration" has the meaning assigned in Section 2.04.
"Merger Corp." means the Ohio corporation to be formed as a wholly-owned
subsidiary of UCFC and which will merge with and into BWC.
"MSRB" means the Municipal Securities Rulemaking Board.
"Multiemployer Plans" has the meaning assigned in Section 4.17(b).
"NASD" means the National Association of Securities Dealers, Inc.
"OGCL" means the General Corporation Law of the State of Ohio.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Pension Plan" has, with respect to any person, the meaning assigned in
Section 4.17(b).
"Person" means any individual, bank, corporation, partnership, association,
joint-stock company, business trust or unincorporated organization.
"Previously Disclosed" means information set forth in the Disclosure
Schedule, whether in response to an express informational requirement or as an
exception to one or more representations or warranties or covenants, in each
case, that is contained in a correspondingly enumerated portion of such
Disclosure Schedule.
"Proxy Statement" has the meaning assigned in Section 6.03(a).
"Registration Statement" has the meaning assigned in Section 6.03(a).
"Representatives" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Rights" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the
-6-
<PAGE>
value of which is determined in whole or in part by reference to the market
price or value of, shares of capital stock of such Person.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning assigned in Section 5.07(a).
"Scheduled Closing Date" has the meaning assigned in Section 2.03.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Securities Laws" means, collectively, the Securities Act, the Exchange
Act, the Investment Advisers Act, the Investment Company Act and any state
securities and "blue sky" laws.
"Self-Regulatory Organization" means the NASD, the New York Stock Exchange,
the American Stock Exchange, the MSRB, the Midwest Stock Exchange, the Chicago
Stock Exchange and the Philadelphia Stock Exchange, or other commission, board,
agency or body that is not a Governmental Authority but is charged with the
supervision or regulation of brokers, dealers, securities underwriting or
trading, stock exchanges, commodities exchanges, insurance companies or agents,
investment companies or investment advisers, or to the jurisdiction of which BWC
or one of its Subsidiaries is otherwise subject.
"Shareholder Agreement" means an agreement in the form attached hereto as
Annex B pursuant to which the directors and officers of BWC identified on
Schedule A agree to vote their BWC Shares for the approval of the Merger and the
adoption of this Agreement.
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
them in Rule 1-02 of SEC Regulation S-X.
"Surviving Corporation" means BWC at and after the Effective Time.
"Taxes" means all federal, state, local and foreign taxes, levies or other
assessments, however denominated, including, without limitation, all net income,
gross income, gross receipts, sales, use, ad valorem, goods and services,
capital, transfer, franchise, profits, license, withholding, payroll,
employment, employer health, excise, estimated, severance, stamp, occupation,
property or other taxes, and custom duties, together with any interest and any
penalties, additions to tax or additional amounts imposed by any taxing
authority.
"Tax Returns" means, collectively, all returns, declarations, reports,
estimates, information returns and statements required to be filed under
federal, state, local or any foreign tax laws.
"Termination Fee" has the meaning assigned in Section 8.03.
-7-
<PAGE>
"Treasury Shares" means BWC Shares owned by BWC or a Subsidiary of BWC.
"UCFC Certificates" means the certificates to be issued to former holders
of BWC Certificates as a result of the Merger.
"UCFC Shares" means the common shares, without par value, of UCFC.
ARTICLE II
THE MERGER
2.01 THE MERGER. Merger Corp. and BWC shall enter into the Merger
Agreement. At the Effective Time, the business combination contemplated by this
Agreement shall occur and in furtherance thereof:
(a) Structure and Effects of the Merger. Pursuant to the Merger
Agreement, Merger Corp. shall merge with and into BWC, and the separate
corporate existence of Merger Corp. shall thereupon cease. BWC shall be the
Surviving Corporation in the Merger and shall continue to be governed by the
laws of the State of Ohio, and the separate corporate existence of BWC with all
its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger. The Merger shall have the effects specified in the
OGCL.
(b) Right to Revise Structure. At UCFC's election, the Merger may
alternatively be structured so that (1) BWC is merged with and into any direct
or indirect wholly owned subsidiary of UCFC, or (2) any direct or indirect
wholly owned subsidiary of UCFC is merged with and into BWC; provided, however,
that no such change shall (A) alter or change the amount or kind of the
consideration to be issued to BWC's shareholders in the Merger or under such
alternative structure, (B) adversely affect the tax treatment to BWC's
shareholders as a result of the Merger or prevent the parties from obtaining the
opinion of counsel referred to in Sections 7.01(h), or (C) materially impede or
delay consummation of the Merger. In the event of such an election, the parties
agree to execute an appropriate amendment to this Agreement in order to reflect
any such election.
(c) Articles Of Incorporation. The articles of incorporation of the
Surviving Corporation shall be the articles of incorporation of BWC as in effect
immediately prior to the Effective Time, until duly amended in accordance with
the terms thereof and the OGCL.
(d) Code of Regulations. The Code of Regulations of the Surviving
Corporation shall be the Code of Regulations of BWC as in effect immediately
prior to the Effective Time, until duly amended in accordance with the terms
thereof.
-8-
<PAGE>
(e) Directors. The directors of the Surviving Corporation shall be
the persons set forth on Schedule B, and such directors shall hold such office
until such times as their successors shall be duly elected and qualified.
(f) Officers. The officers of BWC as of the Effective Time shall be
the officers of the Surviving Corporation.
2.02 MERGER CONSIDERATION. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any stockholder, the following shall occur:
(a) Outstanding BWC Shares. Each of the BWC Shares, excluding
Treasury Shares, issued and outstanding immediately prior to the Effective Time
shall become and be converted into the right to receive a number of UCFC Shares
which is the quotient, rounded to the nearest hundreth, of 1,700,000 divided by
the number of BWC Shares issued and outstanding immediately prior to the
Effective Time (subject to adjustment pursuant to Section 2.07 and to the
proviso to this Section 2.02(a), the "Exchange Ratio"); provided, that if the
Average Closing Price is greater than $15.00, then, at the option of UCFC, by
providing written notice to BWC, the Exchange Ratio shall equal (for all
purposes of this Agreement) the quotient, rounded to the nearest hundreth, of
(i) $25,500,000 divided by the Average Closing Price, (ii) divided by the number
of BWC Shares issued and outstanding immediately prior to the Effective Time.
Notwithstanding the foregoing, if the Average Closing Price is greater than
$15.00 and after the date hereof but prior to the Effective Time (i) a third
party has commenced a tender offer for greater than 50% of the UCFC Shares; (ii)
a proposal for the acquisition of all of the UCFC Shares or all of the
outstanding shares of Home Savings, whether through merger, consolidation or
other business combination involving UCFC or Home Savings by a bona fide third
party has been publicly announced; or (iii) UCFC has entered into a letter of
intent or a definitive agreement for a merger, consolidation or other business
combination involving UCFC or Home Savings in which UCFC or Home Savings, as the
case may be, would not be the surviving entity; then in any of such cases, the
adjustment set forth in the proviso above reducing the total number of UCFC
Shares below 1,700,000 shall not apply.
(b) Outstanding UCFC Common Stock. Each UCFC Share issued and
outstanding immediately prior to the Effective Time shall be unchanged and shall
remain issued and outstanding as one UCFC Share.
(c) Treasury Shares. Each Treasury Share shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
2.03 EFFECTIVE TIME. The Merger shall become effective upon the filing, in
the office of the Secretary of State of the State of Ohio, of a certificate of
merger in accordance with Section 1701.78 of the OGCL, or at such later date and
time as may be set forth in such certificate. Subject to the terms of this
Agreement, the parties shall cause the Merger to become effective (1) on the
date that is the fifth business day (the "Scheduled Closing Date") to occur
after the last of the conditions set forth in Article VII (other than conditions
relating solely to the
-9-
<PAGE>
delivery of documents dated the Effective Date) shall have been satisfied or
waived in accordance with the terms of this Agreement (or, at the election of
UCFC, on the last business day of the month in which such day occurs), or (2)
on such other date as the parties may agree in writing.
2.04 RIGHTS AS STOCKHOLDERS; STOCK TRANSFERS. At the Effective Time,
holders of BWC Shares shall cease to be shareholders of BWC, and shall have no
rights as shareholders of BWC other than the right to receive, upon compliance
with the requirements of Section 2.06, certificates for the UCFC Shares, and
cash in lieu of fractional shares, into which the BWC Shares shall have been
converted as a result of the Merger (the "Merger Consideration"). Following the
Effective Time, there shall be no transfers of BWC Shares on the stock transfer
books of BWC or the Surviving Corporation.
2.05 FRACTIONAL SHARES. Notwithstanding any other provision in this
Agreement, no fractional UCFC Shares and no certificates or scrip therefor, or
other evidence of ownership thereof, will be issued in the Merger. UCFC shall
pay to each holder of BWC Shares who otherwise would be entitled to a fractional
UCFC Share (after taking into account all BWC Certificates delivered by such
holder) an amount in cash (without interest) determined by multiplying such
fraction by the Average Closing Price as of the Effective Date.
2.06 EXCHANGE PROCEDURES. (a) At or prior to the Effective Time, UCFC
shall deposit, or shall cause to be deposited, with the Exchange Agent for the
benefit of the holders of BWC Certificates, for exchange in accordance with this
Article II, UCFC Certificates to be issued, and an estimated amount of cash to
be paid, as Merger Consideration (such cash and UCFC Certificates, together with
any dividends or distributions with a record date occurring after the Effective
Time with respect thereto (without any interest on any such cash, dividends or
distributions), being hereinafter referred to as the "Exchange Fund").
(b) Promptly after the Effective Date, UCFC shall send or cause to
be sent to each former holder of record of BWC Shares (other than Treasury
Shares) immediately prior to the Effective Time transmittal materials for use in
exchanging such shareholder's BWC Certificates for the Merger Consideration.
UCFC will cause UCFC Certificates and any check in respect of any fractional
share interests or dividends or distributions that a former holder of BWC Shares
is entitled to receive to be delivered to such shareholder upon delivery to the
Exchange Agent of the BWC Certificates (or indemnity satisfactory to UCFC and
the Exchange Agent, if any BWC Certificates are lost, stolen or destroyed),
together with properly completed transmittal materials; provided that such UCFC
Certificates and any such check shall not be issued to any BWC Affiliate unless
and until such BWC Affiliate has delivered an agreement pursuant to Section
6.06. No interest will be paid on any Merger Consideration, including cash to
be paid in lieu of fractional share interests, or in respect of dividends or
distributions which any such person may be entitled to receive pursuant to this
Article II.
(c) Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to any former holder of BWC Shares for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
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(d) No dividends or other distributions on UCFC Shares with a record
date occurring after the Effective Time shall be paid to the holder of any
unsurrendered BWC Certificate until the holder thereof shall be entitled to
receive UCFC Certificates in exchange therefor in accordance with this Article
II, and no such shareholder shall be eligible to vote such UCFC Shares until the
holder of such BWC Certificates is entitled to receive UCFC Certificates in
accordance with this Article II.
(e) Any portion of the Exchange Fund that remains unclaimed by
holders of BWC Certificates for six months after the Effective Time shall be
returned to UCFC. Any holders of BWC Certificates who have not theretofore
complied with this Article II shall thereafter look only to UCFC, and not the
Exchange Agent, for payment of any Merger Consideration, and any unpaid
dividends and distributions on UCFC Common Stock to which such stockholder is
entitled under this Section 2.06, in each case, without any interest thereon.
2.07 ADJUSTMENT OF EXCHANGE RATIO. If, after the date of this Agreement
but prior to the Effective Time, the issued and outstanding UCFC Shares shall,
through a reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar change (regardless of the
method of effectuation of any of the foregoing, including by way of a merger or
otherwise) in the capitalization of UCFC, increase or decrease in number or be
changed into or exchanged of a different kind or number of securities, then an
appropriate and proportionate adjustment shall be made to the Exchange Ratio and
to each of the prices referred to in Section 8.01(f) and the proviso to Section
2.02(a). The Exchange Ratio shall, in all instances, be rounded to the nearest
hundreth.
ARTICLE III
ACTIONS PENDING THE EFFECTIVE TIME
3.01 FORBEARANCES OF BWC. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement, without the prior written
consent of UCFC (which consent shall not be unreasonably withheld), BWC will
not, and will cause each of its Subsidiaries not to:
(a) Ordinary Course. (1) Conduct the business of BWC or any of its
Subsidiaries other than in the ordinary and usual course; (2) fail to use
reasonable best efforts to preserve intact any of their business organizations
and assets and maintain their rights, franchises and existing relations with
clients, customers, suppliers, employees and business associates; or (3) engage
in any new lines of business.
(b) Capital Stock. Issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of stock or any
Rights, or enter into any contract, option or warrant with respect to the
foregoing.
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(c) Dividends. (1) Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on, any BWC
Shares other than dividends from wholly owned Subsidiaries to BWC, or (2)
directly or indirectly adjust, split, combine, redeem, reclassify, purchase or
otherwise acquire, any shares of its capital stock.
(d) Compensation; Employment Agreements. Enter into, amend, modify
or renew any Contract regarding employment, consulting, severance or similar
arrangements with any directors, officers, employees, or independent contractors
of BWC or its Subsidiaries, or grant any salary, wage or other increase in
compensation or increase in any employee benefit (including incentive or bonus
payments), except for normal individual increases in compensation to employees
in the ordinary and usual course of business consistent with past practice. BWC
shall be entitled to pay bonuses to employees for the fiscal year ending June
30, 1999, in accordance with prior practice.
(e) Benefit Plans. Enter into, establish, adopt, amend or modify
any Compensation Plans for any directors, officers, employees or independent
contractors of BWC or its Subsidiaries, including taking any action that
accelerates the vesting or exercisability of any compensation or benefits
payable thereunder. This provision shall not prohibit BWC from adopting the
retention program as set forth in Section 6.10 hereof.
(f) Dispositions. Sell, transfer, mortgage, lease, encumber or
otherwise dispose of or discontinue any material portion of its assets, business
or properties.
(g) Acquisitions. Merge or consolidate with, or acquire a material
portion of the assets of, any other Person.
(h) Governing Documents. Amend the BWC Articles, the BWC Code of
Regulations or the articles of incorporation or code of regulations (or similar
governing documents) of any of BWC's Subsidiaries.
(i) Accounting Methods. Implement or adopt any change in accounting
principles, practices or methods, other than as may be required by generally
accepted accounting principles.
(j) Contracts. Except in the ordinary course of business consistent
with past practice, enter into, renew or terminate any material Contract or
amend or modify in any material respect any of its existing material Contracts.
(k) Claims. Settle any Material claim, action or proceeding.
(l) Adverse Actions. (1) Take any action reasonably likely to
prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code or as a "pooling of interests" for
accounting purposes, or (2) knowingly take any action that is intended or is
reasonably likely to result in (A) any of its representations and warranties set
forth in this Agreement being or becoming untrue in any material respect at any
time at or
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prior to the Effective Time, (B) any of the conditions to the Merger set forth
in Article VII not being satisfied, or (C) a material breach of any provision
of this Agreement; except, in each case, as may be required by applicable law.
(m) Capital Expenditures. Authorize or make any capital
expenditures, other than (1) budgeted amounts Previously Disclosed, or (2) in
the ordinary and usual course of business consistent with past practice in
amounts not exceeding $25,000 in the aggregate.
(n) Risk Management. Except as required by applicable law or
regulation, (1) implement or adopt any change in the risk management policies,
procedures or practices of BWC which, individually or in the aggregate with all
such other changes, would be Material, or (2) fail to use commercially
reasonable means to avoid any material increase in the aggregate exposure of BWC
to risk from the general United States securities markets.
(o) Tax Matters. Make or change any material tax election, change
any annual tax accounting period, adopt or change any method of tax accounting,
file any amended Tax Return, enter into any material closing agreement, settle
any material Tax claim or assessment, surrender or compromise any right to claim
a material Tax refund, consent to any extension or waiver of the limitations
period applicable to any material Tax claim or assessment.
(p) Regulated Activities. Initiate any new business activity that
would be impermissible for a "savings and loan holding company" or a "bank
holding company" under the Bank Holding Company Act of 1956, as amended.
(q) Commitments. Agree or commit to do anything that would be
precluded by clauses (a) through (p) without first obtaining UCFC's consent.
3.02 FORBEARANCES OF UCFC. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement, without the prior written
consent of BWC, UCFC will not, and will cause each of its Subsidiaries not to
(1) take any action reasonably likely to prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code
or as a "pooling of interests" for accounting purposes, or (2) knowingly take
any action that is intended or is reasonably likely to result in (A) any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the Effective Time,
(B) any of the conditions to the Merger set forth in Article VII not being
satisfied, or (C) a material breach of any provision of this Agreement; except,
in each case, as may be required by applicable law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BWC
4.01 ORGANIZATION, STANDING AND AUTHORITY. BWC is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Ohio, and is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property
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or assets or the conduct of its business requires it to be so qualified. BWC
and each of its Subsidiaries has the corporate power and authority to carry on
its business as it is now being conducted and to own or lease all of its
properties and assets.
4.02 CORPORATE AUTHORITY AND ACTION. BWC has the requisite corporate power
and authority, and has taken all corporate action necessary (1) to authorize the
execution and delivery of, and performance of its obligations under, this
Agreement and (2) subject only to receipt of the requisite approval of this
Agreement by the holders of a majority of the outstanding BWC Shares, to
consummate the transactions contemplated by this Agreement. This Agreement is a
valid and legally binding obligation of BWC, enforceable in accordance with its
terms (except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws of general applicability relating to
or affecting creditors' rights or by general equity principles).
4.03 REGULATORY FILINGS; NO DEFAULTS. (a) No consents or approvals of, or
filings or registrations with, any Governmental Authority, Self-Regulatory
Organization or with any third party are required to be made or obtained by BWC
in connection with the execution, delivery or performance by BWC of this
Agreement, or to consummate the Merger, except for (i) the filing of a change of
control notice with the Ohio Division of Financial Institutions regarding Butler
Wick Trust Company and the Pennsylvania Department of Banking regarding Butler
Wick Trust Company (Penn.); (ii) the SEC, the NASD, any state securities
administrators and the Chicago Stock Exchange regarding Butler Wick & Co., Inc.;
and (iii) the filing of a certificate of merger with the Secretary of State of
the State of Ohio pursuant to the OGCL.
(b) Subject only to the approval by the holders of a majority of the
outstanding BWC Shares, the receipt of the regulatory approvals referred to in
Section 4.03, the expiration of applicable waiting periods and the making of
required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (1) constitute a breach or
violation of, or a default under, or give rise to any Lien, any acceleration of
remedies or any right of termination (with or without the giving of notice,
passage of time or both) under, any law, rule or regulation or any judgment,
decree, order, governmental or non-governmental permit or license, or Contract
of BWC or of any of its Subsidiaries or to which BWC or any of its Subsidiaries
or its or their properties is subject or bound, (2) constitute a breach or
violation of, or a default under, the BWC Articles or the BWC Code of
Regulations or similar governing documents of any of its Subsidiaries, or (3)
require any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental or non-governmental permit or license or Contract.
4.04 COMPANY STOCK. As of the date hereof, the authorized capital stock of
BWC consists solely of 200,000 common shares, of which 88,970 shares are
outstanding as of the date hereof. As of the date hereof, 1,030 BWC Shares are
held as Treasury Shares. The outstanding BWC Shares have been duly authorized
and are validly issued and outstanding, fully paid and nonassessable, and
subject to no preemptive rights and were not issued in violation of any
subscriptive or preemptive rights. As of the date hereof, there are no BWC
Shares authorized
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and reserved for issuance, BWC does not have any Rights issued or outstanding
with respect to BWC Shares, and BWC does not have any commitment to authorize,
issue or sell any BWC Shares or Rights, except pursuant to this Agreement.
4.05 SUBSIDIARIES. (a) BWC has Previously Disclosed a list of all its
Subsidiaries, including the states in which such Subsidiaries are organized, a
brief description of such Subsidiaries' principal activities, and if any of such
Subsidiaries is not wholly owned by BWC or one of its Subsidiaries, the
percentage owned by BWC or any such Subsidiary and the names, addresses and
percentage ownership of any other owner. No equity securities of any of BWC's
Subsidiaries are or may become required to be issued (other than to BWC or a
wholly owned Subsidiary of BWC) by reason of any Rights with respect thereto.
There are no Contracts by which any of BWC's Subsidiaries is or may be bound to
sell or otherwise issue any shares of its capital stock, and there are no
Contracts relating to the rights of BWC to vote or to dispose of such shares.
All of the shares of capital stock of each of BWC's Subsidiaries are fully paid
and nonassessable and subject to no subscription or preemptive rights or Rights
and are owned by BWC free and clear of any Liens. Each of BWC's Subsidiaries is
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized and is duly qualified to do business and
in good standing in each jurisdiction where its ownership or leasing of property
or the conduct of its business requires it to be so qualified.
4.06 FINANCIAL STATEMENTS.
(a) Each of BWC's statements of financial condition, including the
related notes and schedules, fairly present the consolidated financial condition
of BWC and its Subsidiaries as of the date of such statement of financial
condition, and each of the statements of income, cash flows and changes in
shareholders' equity, including any related notes and schedules, fairly
presented the consolidated results of operations, cash flows and shareholders'
equity, as the case may be, of BWC and its Subsidiaries for the periods set
forth therein (subject, in the case of unaudited statements, to normal year-end
audit adjustments), in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved (except
as may be noted therein and except that such unaudited statements include no
notes).
(b) There are no material liabilities of BWC or any of its
Subsidiaries of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances known to BWC which could reasonably be
expected to result in such a liability that is not included in the Financial
Statements.
4.07 ABSENCE OF CERTAIN CHANGES. Since June 26, 1998, the business of BWC,
and its respective Subsidiaries has been conducted in the ordinary and usual
course, consistent with past practice, and there has not been:
(a) any event, occurrence, development or state of circumstances or
facts which has had or could reasonably be expected to constitute or result in a
Material adverse
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change in the financial condition, results of operations, business, assets,
properties or shareholders' equity of BWC and its Subsidiaries, taken as a
whole;
(b) any amendment of any term of any outstanding security of BWC or
any of its Subsidiaries or to BWC or any of its Subsidiaries' articles of
incorporation or code of regulations (or similar governing documents);
(c) any incurrence, assumption or guarantee by BWC or any of its
Subsidiaries of any indebtedness for borrowed money, or assumption, guarantee,
endorsement or otherwise by BWC of any obligations of any other person, other
than in the ordinary and usual course of business, consistent with past
practice, and in amounts and on terms consistent with past practices;
(d) any creation or assumption by BWC or any of its Subsidiaries of
any Lien on any Material asset other than in the ordinary and usual course of
business consistent with past practices;
(e) the making of any loan, advance or capital contributions to or
investment in any person, other than in the ordinary and usual course of
business consistent with past practice;
(f) any change in any accounting policies or practices by BWC or any
of its Subsidiaries; or
(g) any (1) Compensation Plans entered into, established or
amended, (2) grant of any severance or termination pay to any director, officer,
consultant, partner or employee of BWC or any of its Subsidiaries, or (3) change
in compensation or other benefits payable to any director, officer, consultant,
partner or employee of BWC or any of its Subsidiaries, except in the ordinary
course of business or as required by Contract or applicable law with respect to
employees of the Company or any of its Subsidiaries.
4.08 CONTRACTS. (a) BWC has Previously Disclosed each of the following
Contracts to which either BWC or any of its Subsidiaries is a party, or by
which any of them is bound or to which any of their properties is subject:
(1) any lease of real property;
(2) any agreement for the purchase of materials, supplies,
goods, services, equipment or other assets that provides for either (A) annual
payments of $10,000 or more or (B) aggregate payments of $25,000 or more;
(3) any partnership, joint venture or other similar agreement or
arrangement, or any options or rights to acquire from any person any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or voting securities or such person, entered into other than in
the ordinary course of business;
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(4) any executory agreement relating to the acquisition or
disposition of any business (whether by merger, sale of stock, sale of assets or
otherwise);
(5) any outstanding indenture, mortgage, promissory note, loan
agreement, guarantee or other agreement or commitment for the borrowing of money
by BWC or any of its Subsidiaries or the deferred purchase price of property
(whether incurred, assumed, guaranteed or secured by any asset);
(6) any agreement that creates future payment obligations in
excess of $25,000 in the aggregate and which by its terms does not terminate or
is not terminable without penalty upon notice of 60 days or less;
(7) any license, franchise or similar agreement Material to BWC
or any of its Subsidiaries or any agreement relating to any trade name or
intellectual property right that is Material to BWC or any of its Subsidiaries;
(8) any exclusive dealing agreement or any agreement that
materially limits the freedom of BWC or any of its Subsidiaries to compete in
any line of business or with any person or in any area or that would so limit
their freedom after the Effective Date;
(9) any compensation, employment, severance, supplemental
retirement or other similar agreement or arrangement with any employee or former
employee of BWC or any of its Subsidiaries; and
(10) any other Contract , if any, that is a "material
contract" as defined in Item 601(b)(10) of SEC Regulation S-K.
(b) Each Contract that has been, or is required to be Previously
Disclosed pursuant to this Section, is a valid and binding agreement of BWC or
one or more of its Subsidiaries, as applicable, and is in full force and effect,
and BWC or its Subsidiaries which are parties thereto are not in default or
breach in any material respect under the terms of any such Contract.
4.09 CONTRACTS WITH CLIENTS. (a) Each of BWC and its Subsidiaries is in
material compliance with the terms of each Contract with any Client, and each
such Contract is in full force and effect with respect to the applicable Client.
Except as Previously Disclosed, there are no disputes pending or threatened with
any Client under the terms of any such Contract or with any former Client. BWC
has made available to UCFC true and complete copies of all advisory, sub-
advisory and similar agreements with any Clients.
(b) Each extension of credit by BWC or any of its Subsidiaries to
any Client (1) is in material compliance with Regulation T of the Federal
Reserve System or any substantially similar regulation of any governmental or
regulatory agency or authority, (2) is
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fully secured and (3) BWC or one or more of its Subsidiaries has a first
priority perfected security interest in the collateral securing such extension
of credit.
4.10 REGISTRATIONS AND LICENSES. BWC has Previously Disclosed each
Government Authority and Self-Regulatory Organization with which BWC is licensed
or registered, or is required to be licensed or registered, or by which BWC is
subject to regulation or examination. Except as Previously Disclosed, neither
BWC nor any of its Subsidiaries or Affiliates is subject to regulation under the
Investment Advisers Act or the Investment Company Act. BWC and its Subsidiaries
and each of their employees which are or who are required to be registered as a
broker/dealer, an investment advisor, a registered representative, an insurance
agent or a sales person (or in similar capacity) with the SEC, the securities
commission of any state or foreign jurisdiction or any Self-Regulatory
Organization are duly registered as such and such registrations are in full
force and effect. All federal, state and foreign registration requirements have
been complied with in all material respects and such registrations, as currently
filed, and all periodic reports required to be filed with respect thereto, are
accurate and complete in all material respects.
4.11 COMPLIANCE WITH LAWS. Each of BWC and its Subsidiaries, and, to the
best of BWC's knowledge, each of their respective officers and employees:
(a) is in material compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable to the conduct of its businesses or to the
employees conducting such businesses, and the rules of all Self-Regulatory
Organizations applicable thereto;
(b) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Authorities and Self-Regulatory Organizations that are required in
order to permit them to own or lease their properties and to conduct their
businesses as presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and are current
and, to the best of BWC's knowledge, no suspension or cancellation of any of
them is threatened or is reasonably likely; are in good standing with all
relevant Governmental Authorities and are members in good standing with all
relevant Self-Regulatory Organizations;
(c) has received, since January 1, 1996, no notification or written
communication (or, to the knowledge of BWC, any other communication) from any
Governmental Authority or Self-Regulatory Organization (1) asserting non-
compliance with any of the statutes, regulations, rules or ordinances that such
Governmental Authority or Self-Regulatory Organization enforces, (2) threatening
to revoke any license, franchise, seat on any exchange, permit, or governmental
authorization (nor, to BWC's knowledge, do any grounds for any of the foregoing
exist), (3) requiring any of them (including any of BWC's or its Subsidiary's
directors or controlling persons) to enter into a cease and desist order,
agreement, or memorandum of understanding (or requiring the board of directors
thereof to adopt any resolution or policy), or (4) restricting or disqualifying
their activities (except for restrictions generally imposed by rule, regulation
or administrative policy on brokers or dealers generally);
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(d) is not aware of any pending or threatened investigation, review
or disciplinary proceedings by any Governmental Authority or Self-Regulatory
Organization against BWC, any of its Subsidiaries or any officer, director or
employee thereof;
(e) is not, nor is any Affiliate of any of them, subject to a
"statutory disqualification" as defined in Section 3(a)(39) of the Exchange Act
or is subject to a disqualification that would be a basis for censure,
limitations on the activities, functions or operations of, or suspension or
revocation of the registration of any broker-dealer Subsidiary as a broker-
dealer, municipal securities dealer, government securities broker or government
securities dealer under Section 15, Section 15B or Section 15C of the Exchange
Act and there is no reasonable basis for, or proceeding or investigation,
whether formal or informal, or whether preliminary or otherwise, that is
reasonably likely to result in, any such censure, limitations, suspension or
revocation;
(f) is not required to be registered as an investment company,
commodity trading advisor, commodity pool operator, futures commission merchant,
introducing broker, insurance agent, or transfer agent under any federal, state,
local or foreign statutes, laws, rules or regulations;
(g) in the conduct of its business with respect to employee benefit
plans subject to Title I of ERISA, has not (A) breached any applicable fiduciary
duty under Part 4 of Title I of ERISA which would subject it to liability under
Sections 405 or 409 of ERISA and (B) engaged in a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975(c) of the Code which
would subject it to liability or Taxes under Sections 409 or 502(i) of ERISA or
Section 4975(a) of the Code;
(h) is subject to regulation under the Investment Advisers Act or
the Investment Company Act; has complied in all material respects with all
federal, state and foreign registration requirements and such registrations as
currently filed, and all periodic reports required to be filed with respect
thereto, are accurate and complete in all material respects. BWC has made
available to UCFC true and correct copies of (A) each Form G-37/G-38 filed with
the MSRB since January 1, 1996 and (B) all records required to be kept by BWC
under Rule G- 8(a)(xvi) of the MSRB. Since January 1, 1996, there have been no
contributions or payments, and there is no other information, that would be
required to be disclosed by BWC or any of BWC's Subsidiaries; and
(i) is not subject to any cease-and-desist or other order issued by,
or a party to any written agreement, consent agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or subject to any order or directive by, a recipient of any supervisory
letter from or has adopted any board resolutions at the request of, any
Governmental Authority or Self-Regulatory Organization, or been advised since
January 1, 1996, by any Governmental Authority or Self-Regulatory Organization
that it is considering issuing or requesting any such agreement or other action
or have knowledge of any pending or threatened regulatory investigation.
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4.12 REGULATORY REPORTS. Since January 1, 1996, BWC and each of its
Subsidiaries has timely filed all reports, registrations and statements,
together with any amendments required to be made with respect thereto, that were
required to be filed under any applicable law, regulation or rule, with (A) any
applicable Governmental Authority and (B) any Self-Regulatory Organization
(collectively, the "BWC Reports"). As of their respective dates, the BWC
Reports complied, in all material respects, with the applicable statutes, rules,
regulations and orders enforced or promulgated by the regulatory authority with
which they were filed.
4.13 PROPERTIES; SECURITIES. (a) Except as reserved against in BWC's
Financial Statements dated before the date hereof, BWC and its Subsidiaries have
good and marketable title, free and clear of all Liens (other than Liens for
current taxes not yet delinquent) to all of the Material properties and assets,
tangible or intangible, reflected in such Financial Statements as being owned by
BWC and its Subsidiaries as of the dates thereof. To the best of BWC's
knowledge, all buildings and all the Material fixtures, equipment, and other
property and assets held under leases or subleases by any of BWC and its
Subsidiaries are held under valid leases or subleases enforceable in accordance
with their respective terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and to general equity principles). BWC
has Previously Disclosed, as of the date hereof, a list of all real estate owned
by it or a BWC Subsidiary. Each of BWC and its Subsidiaries has good and
marketable title to all securities held by it (except securities held in any
fiduciary or agency capacity), free and clear of any Lien, except to the extent
such securities are pledged in the ordinary course of business consistent with
prudent business practices to secure obligations of each of BWC or any of its
Subsidiaries. Such securities are valued on the books of BWC or its
Subsidiaries in accordance with generally accepted accounting practices.
(b) BWC has Previously Disclosed, as of the date hereof, a list of
all equity securities it or a BWC Subsidiary holds for its own account
involving, in the aggregate, ownership or control of 5% or more of any class of
the issuer's voting securities or 25% or more of the issuer's equity (treating
subordinated debt as equity) and, as of the Effective Time, no additional
persons will need to be included on such a list. BWC has Previously Disclosed a
list, as of the date hereof, of all partnerships, limited liability companies,
joint ventures or similar entities in which it is a general partner, manager,
managing member or holds some other similar position or owns or controls any
interest, directly or indirectly, of 5% or more and the nature and amount of
each such interest and, as of the Effective Time, no additional persons will
need to be included on such a list.
4.14 TAXES. (a) All Tax Returns with respect to BWC or its subsidiaries
including consolidated United States federal income tax returns of it and its
subsidiaries, have been timely filed, or requests for extensions have been
timely filed and have not expired, and such Tax Returns were true, complete and
accurate in all material respects;
(b) all Taxes shown to be due on such Tax Returns have been paid in
full or adequate reserves have been established in accordance with GAAP for the
payment of such Taxes;
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(c) all Taxes due with respect to completed and settled examinations
have been paid in full or adequate reserves have been established in accordance
with GAAP for the payment of such Taxes;
(d) no issues have been raised by the relevant taxing authority in
connection with the examination of any such Tax Returns; and
(e) no currently effective waivers of statutes of limitations have
been given by or requested in writing (or to the best knowledge of BWC, any
other communication) with respect to any Taxes of it or any of its subsidiaries.
4.15 LITIGATION. Except as Previously Disclosed, no litigation,
proceeding, investigation or controversy ("Litigation") before any court,
arbitrator, mediator, Governmental Authority or Self-Regulatory Organization is
pending against BWC or any of its Subsidiaries, and, to the best of BWC's
knowledge, no such Litigation has been threatened.
4.16 EMPLOYEES; LABOR MATTERS. (a) Each of BWC and its Subsidiaries is in
material compliance with all currently applicable laws regarding employment and
employment practices, terms and conditions of employment and wages and hours,
and related matters. None of BWC nor any of its Subsidiaries is engaged in any
unfair labor practice and there is no unfair labor practice complaint pending or
threatened against BWC or any of its Subsidiaries before the National Labor
Relations Board.
(b) Neither BWC nor any of its Subsidiaries (i) is a party to, or is
bound by, any collective bargaining agreement, Contract or other agreement or
understanding with any labor union or organization, (ii) has agreed to recognize
any union or other collective bargaining unit. No union or other collective
bargaining unit has been certified as representing any of the employees of any
of BWC or its Subsidiaries. Neither BWC nor any of its Subsidiaries is the
subject of a proceeding under the National Labor Relations Act or any other
federal, state or local law relating to labor organizations or collective
bargaining. There are no pending or, to the best knowledge of BWC's Executive
Management, threatened charges or complaints alleging sexual or other harassment
or other discrimination by BWC, any of its Subsidiaries or any of their
employees, agents or representatives .
4.17 EMPLOYEE BENEFIT PLANS. (a) BWC has Previously Disclosed a complete
list of all bonus, deferred compensation, consulting, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock and stock option plans, all employment or severance
Contracts, all medical, dental, health and life insurance plans, all other
employee benefit plans, Contracts or arrangements maintained or contributed to
by it or any of BWC Subsidiaries for the benefit of current or former employees
or directors or their beneficiaries (the "Compensation Plans"). True and
complete copies of all Compensation Plans, including, but not limited to, any
trust instruments and/or insurance Contracts, if any, forming a part thereof,
and all amendments thereto have been made available to UCFC.
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(b) All "employee benefit plans" within the meaning of Section 3(3)
of ERISA, other than "multiemployer plans" within the meaning of Section 3(37)
of ERISA ("Multiemployer Plans"), covering employees or former employees of BWC
and BWC Subsidiaries (the "ERISA Plans"), to the extent subject to ERISA, are in
substantial compliance with ERISA. Each ERISA Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA ("Pension
Plan") and which is intended to be qualified, under Section 401(a) of the Code,
has received a favorable determination letter from the IRS with respect to "TRA"
(as defined in Section 1 of IRS Revenue Procedure 93-39), and BWC is not aware
of any circumstances reasonably likely to result in the revocation or denial of
any such favorable determination letter. There is no pending or, to the
knowledge of BWC, threatened litigation relating to the ERISA Plans. Neither
BWC nor any of its Subsidiaries has engaged in a transaction with respect to any
ERISA Plan that would subject BWC or any of its Subsidiaries to a tax or penalty
imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an
amount which would be Material.
(c) No liability under Subtitle C or D of Title IV of ERISA has been
or is reasonably expected to be incurred by BWC or any of its Subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan", within the
meaning of Section 4001 of ERISA, currently or formerly maintained by any of
them, or the single-employer plan of any entity which is considered one employer
with BWC under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate"). Neither BWC nor any of its Subsidiaries has contributed or been
obligated to contribute to a Multiemployer Plan at any time. No notice of a
"reportable event", within the meaning of Section 4043 of ERISA for which the
30-day reporting requirement has not been waived, has been required to be filed
for any Pension Plan or by any ERISA Affiliate within the past 12-month period.
(d) All contributions required to be made under the terms of any
ERISA Plan have been timely made. Neither any Pension Plan nor any single-
employer plan of an ERISA Affiliate has an "accumulated funding deficiency"
(whether or not waived) within the meaning of Section 412 of the Code or Section
302 of ERISA. Neither BWC nor any of its Subsidiaries has provided, or is
required to provide, security to any Pension Plan or to any single-employer plan
of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(e) Under each Pension Plan, as of the last day of the most recent
plan year, the actuarially determined present value of all "benefit
liabilities," within the meaning of Section 4001(a)(16) of ERISA (as determined
on the basis of the actuarial assumptions contained in the plan's most recent
actuarial valuation) did not exceed the then current value of the assets of such
plan, and there has been no adverse change in the financial condition of such
plan since the last day of the most recent plan year.
(f) Neither BWC nor any of its Subsidiaries has any obligations for
retiree health and life benefits under any plan, except for health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA.
There are no restrictions on the rights of BWC or any of its Subsidiaries to
amend or terminate any such plan without incurring any liability thereunder.
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(g) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (1) result in any
payment (including severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or any employee of BWC or any of its
Subsidiaries under any Compensation Plan or otherwise from BWC or any of its
Subsidiaries, (2) increase any benefits otherwise payable under any Compensation
Plan, or (3) result in any acceleration of the time of payment or vesting of any
such benefit.
4.18 ENVIRONMENTAL MATTERS. (a) To the best knowledge of the Executive
Management of BWC, BWC and its Subsidiaries have complied at all times with
applicable Environmental Laws. To the best knowledge of the Executive
Management of BWC, no property (including buildings and any other structures)
currently or formerly owned or operated (or which BWC or any of its Subsidiaries
would be deemed to have owned or operated under any Environmental Law) by BWC or
any of its Subsidiaries or in which BWC or any of its Subsidiaries (whether as
fiduciary or otherwise) has a Lien, has been contaminated with, or has had any
release of, any Hazardous Substance in such form or substance so as to create
any liability for BWC or its Subsidiaries. To the best knowledge of the
Executive Management of BWC, BWC is not subject to liability for any Hazardous
Substance disposal or contamination on any other third-party property. BWC and
its Subsidiaries are not aware of any reasonably likely liability relating to
environmental circumstances or conditions (including the presence of asbestos,
underground storage tanks, lead products or polychlorinated biphenyls) involving
BWC or one of its Subsidiaries, any currently or formerly owned or operated
property (whether as fiduciary or otherwise), or any reasonably likely liability
related to any Lien held by BWC or one of its Subsidiaries.
(b) Within the last six years, BWC and its Subsidiaries have not
received any notice, demand letter, claim or request for information alleging
any violation of, or liability of BWC under, any Environmental Law. BWC and its
Subsidiaries are not subject to any order, decree, injunction or other agreement
with any Governmental Authority or any third party relating to any Environmental
Law.
(c) BWC has made available to UCFC copies of all environmental
reports, studies, sampling data, correspondence, filings and other environmental
information in its possession or reasonably available to it relating to BWC or
one of its Subsidiaries or any currently or formerly owned or operated property
or any property in which BWC or one of its Subsidiaries (whether as fiduciary or
otherwise) has held a Lien.
4.19 INTERNAL CONTROLS. BWC and its Subsidiaries have devised and
maintained systems of internal accounting controls sufficient to provide
reasonable assurances that (a) transactions are executed in accordance with
management's general or specific authorizations, (b) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principals and to maintain accountability for
assets, (c) access to assets is permitted only in accordance with management's
general or specific
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authorization, and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
4.20 DERIVATIVES; ETC. Except as Previously Disclosed, BWC has no
exchange-traded, over-the-counter or other swaps, caps, floors, collars, option
agreements, futures and forward contracts and other similar arrangements or
Contracts (collectively, "Derivatives Contracts"), whether entered into for
BWC's own account, or for the account of one or more of BWC's Subsidiaries or
their customers. Any Derivatives Contracts, were entered into (1) in accordance
with prudent business practices and all applicable laws, rules, regulations and
regulatory policies and (2) with counterparties reasonably believed to be
financially responsible at the time. Each of the Derivatives Contracts
constitutes the valid and legally binding obligation of BWC or one of its
Subsidiaries, enforceable in accordance with its terms (except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles), and are in full
force and effect. Neither BWC nor its Subsidiaries, nor, to the best of BWC's
knowledge, any other party thereto, is in breach of any of its obligations under
any such agreement or arrangement. BWC's Financial Statements disclose the
value of such agreements and arrangements on a mark-to-market basis in
accordance with GAAP and, since June 27, 1998, there has not been a material
change in such value.
4.21 NAMES AND TRADEMARKS. BWC and its Subsidiaries have the right to use
the names, service-marks, trademarks and other intellectual property currently
used by them in the conduct of their businesses, free and clear of any Liens.
To the best knowledge of the Executive Management of BWC, no other person has
the right to use such names, service-marks or trademarks in any such state.
Each of such names, service-marks, trademarks and other intellectual property
has been Previously Disclosed.
4.22 INSURANCE. BWC has Previously Disclosed all of the insurance
policies, binders, or bonds maintained by BWC or its Subsidiaries ("Insurance
Policies"). BWC and its Subsidiaries are insured with reputable insurers
against such risks and in such amounts as is prudent in accordance with industry
practices. All of the Insurance Policies are in full force and effect, BWC and
its Subsidiaries are not in material default thereunder, and no claims are
pending thereunder.
4.23 NO BROKERS. No action has been taken by BWC that would give rise to
any valid claim against any party hereto for a brokerage commission, finder's
fee or other like payment with respect to the transactions contemplated by this
Agreement, excluding the fees to be paid by BWC to Austin Associates, Inc. in
amounts and on terms Previously Disclosed.
4.24 BOOKS AND RECORDS. BWC has made available, or will promptly make
available, to UCFC true and accurate copies of the BWC Articles and the BWC Code
of Regulations and has granted UCFC access to all records of all meetings and
other corporate actions occurring before the Effective Time by the BWC
Shareholders, the BWC Board and committees of the BWC Board. Each of the BWC
Subsidiaries has made available, or will promptly make available, to UCFC true
and accurate copies of its articles of incorporation, code of regulations
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and bylaws, and has granted or will grant to UCFC access to all records of all
meetings and other corporate actions occurring before the Effective Time by the
respective shareholders, boards of directors and committees of the boards of
directors of the BWC Subsidiaries. The minute books of BWC and each of the BWC
Subsidiaries contain, in all material respects, complete and accurate records of
all meetings and other corporate actions of their respective shareholders,
boards of directors and committees of the boards of directors.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF UCFC
5.01 ORGANIZATION, STANDING AND AUTHORITY. UCFC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio, and is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or assets or the
conduct of its business requires it to be so qualified.
5.02 CORPORATE POWER. UCFC has the corporate power and authority to carry
on its business as it is now being conducted and to own all its properties and
assets.
5.03 CORPORATE AUTHORITY. UCFC has the requisite corporate power and
authority, and has taken all corporate action necessary to authorize the
execution and delivery of, and performance of its obligations under, this
Agreement and to consummate the transactions contemplated by this Agreement.
This Agreement is a valid and legally binding agreement of UCFC, enforceable in
accordance with its terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general equity principles).
5.04 REGULATORY APPROVALS; NO DEFAULTS. (a) No consents or approvals of,
or filings or registrations with, any Governmental Authority, Self-Regulatory
Organization or with any third party are required to be made or obtained by UCFC
or any of its Subsidiaries in connection with the execution, delivery or
performance by UCFC of this Agreement, or to consummate the Merger, except for
(1) the filing of applications and notices, as applicable, with the Federal
Trade Commission and the Department of Justice; (2) approval of the listing on
the Nasdaq of the UCFC Shares to be issued as Merger Consideration; (3) the
filing and declaration of effectiveness of the Registration Statement; (4) the
filing of a certificate of merger with the Secretary of State of the State of
Ohio pursuant to the OGCL; (5) such filings as are required to be made or
approvals as are required to be obtained under the securities or "Blue Sky" laws
of various states in connection with the issuance of UCFC Shares in the Merger;
and (6) such filings as may be required by the Office of Thrift Supervision. As
of the date hereof, UCFC is not aware of any reason why the approvals of all
Governmental Authorities necessary to permit consummation of the transactions
contemplated hereby will not be received without the imposition of a condition
or requirement described in Section 7.01(b).
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(b) Subject only to receipt of the regulatory approvals referred to
in Section 5.04(a), the expiration of applicable waiting periods and the making
of all required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (1) constitute a breach or
violation of, or a default under, or give rise to any Lien, any acceleration of
remedies or any right of termination under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or Contract of UCFC or
Home Savings or to which UCFC or Home Savings or properties is subject or bound,
(2) constitute a breach or violation of, or a default under, the certificate of
incorporation or code of regulations (or similar governing documents) of UCFC or
Home Savings, or (3) require any consent or approval under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or Contract.
5.05 UCFC SHARES. (a) As of the date hereof, the authorized capital stock
of UCFC consists solely of 499,000,000 common shares, without par value, of
which 34,715,625 shares were outstanding as of the date hereof, and 1,000,000
preferred shares, of which no shares are outstanding.
(b) The UCFC Shares to be issued as Merger Consideration, when
issued in accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and not in violation of any
preemptive rights.
5.06 HOME SAVINGS. Home Savings has been duly organized, is validly
existing and is in good standing under the laws of the State of Ohio, and its
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation in the Savings Association Insurance Fund.
5.07 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) UCFC has provided or made
available to BWC copies of UCFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and all other reports, registration statements,
definitive proxy statements or information statements filed or to be filed by
UCFC or any of its Subsidiaries under the Securities Act, or under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, filed with the SEC and will
provide or make available any materials filed with the SEC prior to the
Effective Date (collectively, the "SEC Documents"). As of their respective
dates (and without giving effect to any amendments or modification filed after
the date of this Agreement) each of the SEC Documents, including the financial
statements, exhibits, and schedules thereto, filed or circulated prior to the
date hereof complied (and each of the SEC Documents filed after the date of this
Agreement will comply) as to form with applicable Securities Laws and did not
(or, in the case of reports, statements, or circular filed after the date of
this Agreement, will not) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) Each of UCFC's statements of financial condition included in or
incorporated by reference into the SEC Documents, including the related notes
and schedules, fairly presented (or, in the case of SEC Documents filed after
the date of this Agreement, will fairly present) the consolidated financial
condition of UCFC and its Subsidiaries as of the date of such statement of
financial condition and each of the statements of income, cash flows and
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changes in shareholders' equity included in or incorporated by reference into
the SEC Documents, including any related notes and schedules, fairly presented
(or, in the case of SEC Documents filed after the date of this Agreement, will
fairly present) the consolidated results of operations, cash flows and
shareholders' equity, as the case may be, of UCFC and its Subsidiaries for the
periods set forth therein (subject, in the case of unaudited statements, to
normal year-end audit adjustments), in each case in accordance with GAAP
consistently applied during the periods involved (except as may be noted therein
and except that such unaudited statements include no notes).
5.08 ABSENCE OF CERTAIN CHANGES. Since January 1, 1999, there has not been
any event, occurrence, development or state of circumstances or facts which has
had or could reasonably be expected to constitute or result in a Material
adverse change in the financial condition, results of operations, business,
assets, properties or shareholders' equity of UCFC and its Subsidiaries, taken
as a whole.
ARTICLE VI
COVENANTS
6.01 REASONABLE BEST EFFORTS. (a) Subject to the terms and conditions of
this Agreement, each of BWC and UCFC agrees to use its reasonable best efforts
in good faith to take, or cause to be taken (including causing any of its
Subsidiaries to take), all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, to permit
consummation of the Merger as promptly as reasonably practicable and otherwise
to enable consummation of the transactions contemplated hereby and shall
cooperate fully with the other party hereto to that end.
(b) Without limiting the generality of Section 6.01(a), BWC agrees
to use its reasonable best efforts to obtain the consent or approval of all
Persons party to a Contract with BWC, to the extent such consent or approval is
required in order to consummate the Merger or for UCFC to receive the benefits
thereof.
6.02 SHAREHOLDER APPROVALS. BWC agrees to take, in accordance with
applicable law, the BWC Articles and the BWC Code of Regulations, all action
necessary to convene, and shall hold, the BWC Meeting to consider and vote upon
the approval and adoption of this Agreement and any other matters required to be
approved by BWC's shareholders for consummation of the Merger as promptly as
practicable after the Registration Statement is declared effective. Unless the
BWC Board, after having consulted with and considered the written advice of
outside counsel, has determined in good faith that it is otherwise required in
order to discharge properly the directors' fiduciary duties in accordance with
the OGCL, the BWC Board shall recommend such approval, and BWC shall take all
reasonable, lawful action to solicit such approval by its shareholders.
6.03 REGISTRATION STATEMENT. (a) UCFC agrees to prepare a registration
statement on Form S-4 (the "Registration Statement"), to be filed by UCFC with
the SEC in connection with
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the issuance of UCFC Shares in the Merger (including the proxy statement and
prospectus and other proxy solicitation materials of BWC constituting a part
thereof (the "Proxy Statement") and all related documents). BWC agrees to
cooperate, and to cause its Subsidiaries to cooperate, with UCFC, its counsel
and its accountants, in the preparation of the Registration Statement and the
Proxy Statement. Provided that BWC and its Subsidiaries have cooperated as
required above, UCFC agrees to file the Registration Statement with the SEC as
soon as reasonably practicable following the execution of this Agreement. The
Proxy Statement shall be provided to BWC and its counsel for review and comment
prior to filing with the SEC. Each of BWC and UCFC agrees to use all reasonable
best efforts to cause the Registration Statement to be declared effective under
the Securities Act as promptly as reasonably practicable after filing thereof.
UCFC also agrees to use all reasonable best efforts to obtain all necessary
state securities law or "blue sky" permits and approvals required to carry out
the transactions contemplated by this Agreement. BWC agrees to furnish to UCFC
all information concerning BWC, its Subsidiaries, officers, directors and
shareholders as may be reasonably requested in connection with the foregoing.
(b) Each of BWC and UCFC agrees, as to itself and its Subsidiaries,
that none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (1) the Registration Statement will, at the time
the Registration Statement and each amendment or supplement thereto, if any,
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (2) the Proxy
Statement and any amendment or supplement thereto will, at the date of mailing
to shareholders and at the time of the BWC Meeting, contain any untrue statement
which, at the time and in the light of the circumstances under which such
statement is made, will be false or misleading with respect to any material
fact, or which will omit to state any material fact necessary in order to make
the statements therein not false or misleading or necessary to correct any
statement in any earlier statement in the Proxy Statement or any amendment or
supplement thereto. Each of BWC and UCFC further agrees that if it shall become
aware prior to the Effective Date of any information furnished by it that would
cause any of the statements in the Proxy Statement to be false or misleading
with respect to any material fact, or to omit to state any material fact
necessary to make the statements therein not false or misleading, to promptly
inform the other party thereof and to take the necessary steps to correct the
Proxy Statement.
(c) UCFC agrees to advise BWC, promptly after UCFC receives notice
thereof, of (i) the time when the Registration Statement has become effective or
any supplement or amendment has been filed, (ii) the issuance of any stop order
or the suspension of the qualification of UCFC Shares for offering or sale in
any jurisdiction, (iii) the initiation or threat of any proceeding for any such
purpose, or (iv) any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
6.04 ACCESS; INFORMATION. (a) Each of BWC and UCFC agrees that upon
reasonable notice and subject to applicable laws relating to the exchange of
information, it shall afford the other party and the other party's officers,
employees, counsel, accountants and other authorized representatives, such
access during normal business hours and at such other times as are
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reasonably necessary throughout the period prior to the Effective Time to the
books, records (including Tax Returns and work papers of independent auditors),
properties, personnel and to such other information as any party may reasonably
request and, during such period, it shall furnish promptly to such other party
(1) a copy of each material report, schedule and other document filed by it
pursuant to the requirements of federal or state securities or banking laws and
(2) all other information concerning the business, properties and personnel of
it as the other may reasonably request.
(b) Each of BWC and UCFC agrees that it will not, and will cause its
representatives not to, use any information obtained pursuant to this Section
6.04 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Subject to the requirements of law, each party
will keep confidential, and will cause its representatives to keep confidential,
all information and documents obtained pursuant to this Section 6.04 unless such
information (1) was already known to such party, (2) becomes available to such
party from other sources not known by such party to be bound by a
confidentiality obligation, (3) is disclosed with the prior written approval of
the party to which such information pertains, or (4) is or becomes readily
ascertainable from published information or trade sources. In the even that
this Agreement is terminated or the transactions contemplated by this Agreement
shall otherwise fail to be consummated, each party shall promptly cause all
copies of documents or extracts thereof containing information and data as to
another party hereto to be returned to the party which furnished the same. No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant or
agreement in this Agreement, or the conditions to either party's obligation to
consummate the transactions contemplated by this Agreement.
6.05 ACQUISITION PROPOSALS. BWC agrees that it shall not, and shall cause
its Subsidiaries and its and its Subsidiaries' officers, directors, agents,
advisors and affiliates not to, solicit or encourage inquiries or proposals with
respect to, or engage in any negotiations concerning, or provide any
confidential information to, or have any discussions with, any person relating
to, any tender or exchange offer, proposal for a merger, consolidation or other
business combination involving BWC or any of its Subsidiaries or any proposal or
offer to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets or operations of, BWC or any of its
Subsidiaries, other than the transactions contemplated by this Agreement (any of
the foregoing, an "Acquisition Proposal"); provided, that, if BWC is not
otherwise in violation of this Section 6.05, the BWC Board may provide
information to, and may engage in such negotiations or discussions with, a
person, directly or through representatives, if (1) the BWC Board, after having
consulted with and considered the written advice of outside counsel to the BWC
Board, has determined in good faith that the provision of such information or
the engaging in such negotiations or discussions is necessary in order to
discharge properly the directors' fiduciary duties in accordance with the OGCL
and (2) BWC has received from such person a confidentiality agreement on
substantially the same terms as entered into by UCFC. BWC also agrees
immediately to cease and cause to be terminated any activities, discussions or
negotiations conducted prior to the date of this Agreement with any parties
other than UCFC, with respect to any of the foregoing. BWC shall promptly
advise UCFC on a current basis following the receipt by it of any Acquisition
Proposal and the substance thereof (including the identity of the person
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making such Acquisition Proposal), and advise UCFC of any developments with
respect to such Acquisition Proposal promptly upon the occurrence thereof.
6.06 AFFILIATE AGREEMENTS. Not later than the 15th day prior to the
mailing of the Proxy Statement, BWC shall deliver to UCFC a schedule of each
person that, to BWC's knowledge, is or is reasonably likely to be, as of the
date of the BWC Meeting, deemed to be an "affiliate" of BWC as that term is used
in Rule 145 under the Securities Act or SEC Accounting Series Releases 130 and
135. BWC agrees to use its reasonable best efforts to cause each person who may
be deemed to be an affiliate of BWC to execute and deliver to BWC and UCFC on or
before the date of mailing of the Proxy Statement an agreement in the form of
Annex C.
6.07 TAKEOVER LAWS. No party shall take any action that would cause the
transactions contemplated by this Agreement to be subject to requirements
imposed by any takeover law and each of them shall take all necessary steps
within its control to exempt (or ensure the continued exemption of) the
transactions contemplated by this Agreement from, or if necessary challenge the
validity or applicability of, any applicable takeover law, as now or hereafter
in effect.
6.08 NASDAQ LISTING. UCFC shall use its reasonable best efforts to list,
prior to the Effective Date, on the Nasdaq, subject to official notice of
issuance, the UCFC Shares to be issued to the holders of BWC Shares in the
Merger.
6.09 REGULATORY APPLICATIONS. (a) UCFC and BWC and their respective
Subsidiaries shall cooperate and use their respective reasonable best efforts to
prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and Governmental
Authorities necessary to consummate the transactions contemplated by this
Agreement as promptly as reasonably practicable. Each of UCFC and BWC shall
have the right to review in advance, and to the extent practicable each will
consult with the other, in each case subject to applicable laws relating to the
exchange of information, with respect to all material written information
submitted to any third party or any Governmental Authority in connection with
the transactions contemplated by this Agreement. In exercising the foregoing
right, each of UCFC and BWC agrees to act reasonably and as promptly as
practicable. Each of UCFC and BWC agrees that it will consult with the other
party hereto with respect to obtaining of all material permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each party will keep the other party apprised of the status of
material matters relating to the completion of the transactions contemplated
hereby.
(b) Each of UCFC and BWC agrees, upon request, to furnish the other
party with all information concerning itself, its Subsidiaries, directors,
officers and shareholders and such other matters as maybe reasonably necessary
or advisable in connection with any filing, notice or application made by or on
behalf of such other party or any of its Subsidiaries to any third party or
Governmental Authority.
6.10 RETENTION PROGRAM. (a) At the Effective Time, UCFC will have
established a retention program on terms acceptable to BWC to be used to retain
certain employees of BWC.
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Such retention program shall be set forth in a written document to be finalized
prior to the Effective Date. The retention plan shall provide for funding of
such plan in the amount of $3,700,000. The funds shall be invested at the
discretion of the UCFC Board. The UCFC Board will consult with the management
of BWC in establishing an investment policy for the retention plan.
(b) The retention plan shall provide for a five-year cliff vesting
for all participants, subject to acceleration of vesting upon a change of
control of UCFC, BWC or any Subsidiary by which such participant is employed.
The retention plan will permit each participant to elect a method of
distribution of such funds when the funds become fully vested. Except as set
forth below, in the event that a participant is terminated for cause or
voluntarily leaves the employ of BWC, UCFC or any Subsidiary, as the case may
be, before the expiration of the five-year vesting period, the participant shall
forfeit all funds allocated to him or her under the retention plan. The
participant shall be eligible to receive all or part of the funds allocated to
the participant under the retention plan if the participant's employment
terminates before the end of the five-year vesting period, under the following
circumstances:
(i) If a participant dies or becomes disabled prior to the
expiration of the five-year vesting period, the participant, or the
participant's estate, shall receive the funds allocated to the participant
in the plan, increased for any earnings or reduced for any loss on such
funds; provided, however, that in the case of disability, the participant
shall execute a non-compete agreement to be entitled to receive a
distribution. Any payments to be made to participants under the foregoing
circumstances shall be made at the end of the five-year vesting period.
(ii) If a participant retires at or after age 65 prior to the
expiration of the five-year vesting period, the participant shall be
entitled to receive the funds allocated to him or her under the retention
plan, increased for any earnings or reduced for any loss on such funds;
provided, however, that the participant shall execute a non-compete
agreement to be entitled to receive his or her distribution. Any payments
to be made to participants under the foregoing circumstances shall be made
at the end of the five-year vesting period.
(iii) If a participant retires before age 65 and prior to the
expiration of the five-year vesting period, the participant shall be
entitled to receive a portion of the funds allocated to him or her under
the retention plan, prorated as of the last day of the participant's
employment based on the number of days for which the participant was
employed between the Effective Date and his or her termination date, with
no increase for any earnings but with a reduction for any loss on such
funds; provided, however, that the participant shall execute a non-compete
agreement to be entitled to receive such distribution. Any payments to be
made to participants under the foregoing circumstances shall be made at the
end of the five-year vesting period.
(iv) If a participant is involuntarily terminated by BWC or a
Subsidiary without cause prior to the end of the five-year vesting period,
the participant shall be
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entitled to receive the funds allocated to him or her under the retention
plan, increased for any earnings or reduced for any loss on such funds.
Any payments to be made to participants under the foregoing circumstances
shall be made at the end of the five-year vesting period.
Any amounts forfeited under the plan shall revert to UCFC.
6.11 STOCK OPTION PLAN. UCFC commits that it will seek the approval of its
shareholders regarding the adoption of a stock option plan for the key employees
of UCFC and its subsidiaries prior to the Effective Time. In the event that
such a stock option plan is approved by the shareholders of UCFC, UCFC shall
make available for issuance to senior officers, key producers and additional
recruits of BWC and its Subsidiaries options to purchase not less than 165,000
common shares of UCFC. UCFC will consider the recommendations from the
management of BWC in determining the allocations of such shares under the plan
and future modifications to the plan including an increase in the number of
options available to employees of BWC or its Subsidiaries.
6.12 CERTAIN EMPLOYEE BENEFITS. At the Effective Time, BWC will maintain
the Compensation Plans and employment arrangements currently provided by BWC.
UCFC shall honor, pursuant to the terms of the Previously Disclosed Compensation
Plans, and to the extent consistent with applicable law, all employee benefit
obligations to current and former employees of BWC under such plans. Nothing in
this Section 6.12 shall prevent BWC or UCFC from amending or terminating any
Compensation Plans of BWC or UCFC (or its Subsidiaries) or any other contracts,
arrangements, commitments or understandings, in accordance with their terms and
applicable law, with the consent of the Board of Directors of BWC.
6.13 INDEMNIFICATION. After the Effective Time, the Surviving Corporation
shall continue to indemnify the directors, officers, agents and employees of BWC
and its Subsidiaries, to the extent such persons would be entitled to
indemnification under the BWC Articles or the BWC Code of Regulations. Such
indemnification shall include claims arising out of matters existing or
occurring at or prior to the Effective Time, whether asserted or claimed prior
to, at or after the Effective Time, and UCFC shall cause director and officer
liability insurance to be maintained in effect for not less than three years
from the Effective Time for the benefit of the directors and officers of BWC and
its Subsidiaries as of the Effective Time.
6.14 NOTIFICATION OF CERTAIN MATTERS. (a) Each of BWC and UCFC shall give
prompt notice to the other of any fact, event or circumstance known to it that
is reasonably likely, individually or taken together with all other facts,
events and circumstances known to it, to result in a material breach of any of
its representations, warranties, covenants or agreements contained herein.
(b) BWC and each of its Subsidiaries shall promptly notify UCFC, and
UCFC shall promptly notify BWC, of:
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(1) any notice in writing (or to the knowledge of BWC, any other
communication) from any Person alleging that the consent of such Person is or
may be required as a condition to the Acquisition;
(2) any notice or other written communications from any client
(A) terminating or threatening to terminate any Material Contract with BWC or
any of its Subsidiaries relating to the rendering of services to such client, or
(B) relating to any Material dispute with such client; or
(3) any notice or other communication from any Governmental
Authority or Self-Regulatory Organization in connection with the transactions
contemplated by this Agreement.
6.15 PRESS RELEASES. Each of BWC and UCFC agrees that it will not, without
the prior approval of the other party, issue any press release or written
statement for general circulation relating to the transactions contemplated
hereby, except as otherwise required by applicable law or regulation or the
rules of any applicable Self-Regulatory Organization.
6.16 CERTAIN POLICIES OF BWC. (a) Upon the request of UCFC, BWC shall,
consistent with GAAP and regulatory accounting principles, use its reasonable
best efforts to record certain accounting adjustments intended to conform the
litigation and other accrual and reserve policies of BWC so as to reflect the
policies of UCFC; provided, however, that BWC shall not be obligated to record
any such accounting adjustments pursuant to this Section 6.15(a) unless and
until BWC shall be satisfied that the conditions to the obligation of the
parties to consummate the Merger will be satisfied or waived on or before the
Effective Time and (b) in no event until the day prior to the Effective Date.
BWC's representations, warranties and covenants contained in this Agreement
shall not be deemed to be untrue or breached in any respect for any purpose as a
consequence of any modifications or changes undertaken solely on account of this
Section 6.15.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each of UCFC and BWC to consummate the Merger is
subject to the fulfillment or written waiver by UCFC and BWC prior to the
Effective Time of each of the following conditions:
(a) Stockholder Approval. This Agreement shall have been duly
adopted by the requisite vote of the holders of outstanding BWC Shares entitled
to vote thereon in accordance with Section 1701.78 of the OGCL, other applicable
law and the BWC Articles and the BWC Code of Regulations.
(b) Governmental and Regulatory Consents. All approvals and
authorizations of, filings and registrations with, and notifications to, all
Governmental Authorities and Self-
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Regulatory Organizations required for the consummation of the Merger shall have
been obtained or made and shall be in full force and effect and all waiting
periods required by law shall have expired; provided, however, that none of the
preceding shall be deemed obtained or made if it shall be subject to any
condition or restriction the effect of which would have been such that UCFC
would not reasonably have entered into this Agreement had such condition or
restriction been known as of the date hereof.
(c) Third Party Consents. All consents or approvals of all persons,
other than Governmental Authorities, required for or in connection with the
execution, delivery and performance of this Agreement and the consummation of
the Merger shall have been obtained and shall be in full force and effect,
unless the failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a Material adverse effect on
the Surviving Corporation.
(d) No Injunction. No Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits
consummation of the transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
(f) Blue Sky Approvals. All permits and other authorizations under
state securities laws necessary to consummate the transactions contemplated
hereby and to issue the UCFC Shares to be issued in the Merger shall have been
received and be in full force and effect.
(g) Listing. The UCFC Shares to be issued in the Merger shall have
been approved for listing on the Nasdaq, subject to official notice of issuance.
(h) Tax Opinions. UCFC and BWC shall have received an opinion of
Vorys, Sater, Seymour and Pease LLP, counsel to UCFC, substantially to the
effect that, based on the facts and assumptions stated therein, for United
States federal income tax purposes, (i) the Merger qualifies as a
"reorganization" within the meaning of Section 368(a) of the Code; (ii) no gain
or loss will be recognized for federal income tax purposes by shareholders of
BWC upon conversion of the BWC Shares into the UCFC Shares, except for those
shareholders who receive cash in lieu of fractional shares or with respect to
Dissenting Shares; (iii) the tax basis of the UCFC Shares received by the
shareholders of BWC will be the same as the tax basis of the BWC Shares
surrendered by the shareholders; and (iv) the holding period of the UCFC Shares
received by shareholders of BWC will include the holding period of the BWC
Shares surrendered by shareholders, provided that the BWC Shares are held as a
capital asset by shareholders on the Effective Date. In rendering its opinion,
Vorys, Sater, Seymour and Pease LLP may rely as to factual matters on the
representations made in this Agreement and in separate certificates
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addressed to such counsel by both BWC and UCFC. In addition, such opinion may
be subject to customary qualifications.
7.02 CONDITIONS TO OBLIGATION OF BWC. The obligation of BWC to consummate
the Merger is also subject to the fulfillment or written waiver by BWC prior to
the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of UCFC set forth in this Agreement shall be true and correct as of
the date of this Agreement and as of the Effective Date as though made on and as
of the Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be true
and correct only as of such date), and BWC shall have received a certificate,
dated the Effective Date, signed on behalf of UCFC by the President of UCFC to
such effect.
(b) Performance of Obligations of UCFC. UCFC shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Time, and BWC shall have received a
certificate, dated the Effective Date, signed on behalf of UCFC by the President
of UCFC to such effect.
(c) Fairness Opinion. BWC shall have received the written opinion
of Austin Associates, Inc. that the Merger Consideration is fair to the
shareholders of BWC from a financial point of view.
(d) Employment Agreements. The employees of BWC identified on
Schedule C shall have entered into the Employment Agreements.
(e) Retention Plan. The retention program document described in
Section 6.10 of this Agreement shall have been finalized.
7.03 CONDITIONS TO OBLIGATION OF UCFC. The obligation of UCFC to
consummate the Merger is also subject to the fulfillment or written waiver by
UCFC prior to the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of BWC set forth in this Agreement shall be true and correct as of
the date of this Agreement and as of the Effective Date as though made on and as
of the Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be true
and correct only as of such date) and UCFC shall have received a certificate,
dated the Effective Date, signed on behalf of BWC by the Chief Executive Officer
and the Chief Financial Officer of BWC to such effect.
(b) Performance of Obligations of BWC. BWC shall have performed in
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and UCFC shall have received, prior
to the Effective Time, a certificate,
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dated the Effective Date, signed on behalf of BWC by the Chief Executive Officer
and the Chief Financial Officer of BWC to such effect.
(c) Employment Agreements. The employees of BWC identified on
Schedule C shall have entered into the Employment Agreements.
(d) Fairness Opinion. UCFC shall have received the written opinion
of Trident Securities, Inc., that the Merger Consideration is fair to the
shareholders of UCFC from a financial point of view.
(e) Dissenting Shares. No more than 5% of the BWC Shares shall be
Dissenting Shares.
ARTICLE VIII
TERMINATION
8.01 TERMINATION. This Agreement may be terminated, and the Merger may be
abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of UCFC and BWC.
(b) Breach. At any time prior to the Effective Time, by UCFC or BWC
in the event of either: (1) a breach by the other party of any representation or
warranty contained herein (subject to the standard set forth in Section 9.09(b),
which breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach, or (2) a breach by the
other party of any of the covenants or agreements contained herein, which breach
cannot be or has not been cured within 30 days after the giving of written
notice to the breaching party of such breach and which breach would be
reasonably likely, individually or in the aggregate, to have a Material adverse
effect on the breaching party or the Surviving Corporation.
(c) Delay. At any time prior to the Effective Time, by UCFC or BWC
in the event that the Merger is not consummated by December 31, 1999, except to
the extent that the failure of the Merger then to be consummated arises out of
or results from the knowing action or inaction of the party seeking to terminate
pursuant to this Section 8.01(c).
(d) No Approval. By BWC or UCFC in the event (1) the approval of
any Governmental Authority required for consummation of the Merger and the other
transactions contemplated by this Agreement shall have been denied by final
nonappealable action of such Governmental Authority, or such Governmental
Authority shall have requested the permanent withdrawal of any application
therefor, or any such approval shall be made subject to any condition or
restriction described in the proviso to Section 8.01(b), or (2) any stockholder
approval required by Section 8.01(a) is not obtained at the BWC Meeting.
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(e) Failure to Recommend. By UCFC, if at any time prior to the BWC
Meeting the BWC Board shall have failed to make its recommendation referred to
in Section 6.02, withdrawn such recommendation or modified or changed such
recommendation in a manner adverse to the interests of UCFC (whether in
accordance with Section 6.02 or otherwise).
(f) Stock Price of UCFC. By BWC if the Average Closing Price is
less than $10.00.
(g) Shareholder Agreements. By UCFC, if a Shareholder Agreement has
not been signed by each of the persons listed on Schedule A on or before April
30, 1999.
8.02 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
no party to this Agreement shall have any liability or further obligation to any
other party hereunder except (1) as set forth in Sections 8.03, 9.01 and 9.05
and (2) that termination will not relieve a breaching party from liability for
any willful breach of this Agreement.
8.03 TERMINATION FEE. If UCFC terminates this Agreement pursuant to
Section 8.01(e) following receipt by BWC of an Acquisition Proposal, then,
within five business days of such termination, BWC shall pay UCFC by wire
transfer in immediately available funds a fee of $1,250,000 (the "Termination
Fee").
ARTICLE IX
MISCELLANEOUS
9.01 SURVIVAL. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time or the termination
of this Agreement if this Agreement is terminated prior to the Effective Time;
provided, however, that (a) the agreements of the parties contained in Section
6.12 and in this Article IX shall survive the Effective Time and (b) if this
Agreement is terminated prior to the Effective Time, the agreements of the
parties contained in Sections 6.04(b), 8.02 and 8.03 and in this Article IX
shall survive such termination.
9.02 WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Agreement may be (1) waived by the party benefited by the provision, or (2)
amended or modified at any time, by an agreement in writing between the parties
hereto approved or authorized by their respective Boards of Directors and
executed in the same manner as this Agreement, except that, after approval of
the Merger by the shareholders of BWC, no amendment may be made which under
applicable law requires further approval of such shareholders without obtaining
such required further approval.
9.03 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
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9.04 GOVERNING LAW. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of Ohio applicable to contracts made
and to be performed entirely within such State.
9.05 EXPENSES. Except or provided in Section 8.03, each party hereto will
bear all expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby.
9.06 NOTICES. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given
(a) on the date of delivery, if personally delivered or telecopied
(with confirmation),
(b) on the first business day following the date of dispatch, if
delivered by a recognized next-day courier service, or
(c) on the fifth business day following the date of mailing, if
mailed by registered or certified mail (return receipt requested), in each case
to such party at its address or telecopy number set forth below or such other
address or numbers as such party may specify by notice to the parties hereto.
If to UCFC, to:
United Community Financial Corp.
275 Federal Plaza West
Youngstown, Ohio 44503
Attention: Douglas M. McKay
Facsimile: (330) 742-0532
With a copy to:
Terri Reyering Abare
Vorys, Sater, Seymour and Pease LLP
221 East Fourth Street
Suite 2100, Atrium Two
Cincinnati, Ohio 45202
Facsimile: (513) 723-4056
If to BWC, to:
Butler Wick Company
City Center One, Suite 700
Youngstown, Ohio 44501
Attention: Thomas J. Cavalier
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Facsimile: (330) 743-7911
With a copy to:
Thomas C. Blank
Werner & Blank
7205 West Central Avenue
Toledo, Ohio 43617
Facsimile: (419) 841-8380
9.07 ENTIRE UNDERSTANDING. This Agreement (together with the Disclosure
Schedule) represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and this Agreement supersedes
any and all other oral or written agreements heretofore made.
9.08 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed or
implied, is intended to confer upon any person, other than the parties hereto or
their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.09 INTERPRETATION.
(a) When a reference is made in this Agreement to Sections, Annexes
or Schedules, such reference shall be to a Section, Annex or Schedule to this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and are not part of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." No rule of construction against the draftsperson shall be
applied in connection with the interpretation or enforcement of this Agreement.
Whenever this Agreement shall require a party to take an action, such
requirement shall be deemed to constitute an undertaking by such party to cause
its Subsidiaries, and to use its reasonable best efforts to cause its other
Affiliates, to take appropriate action in connection therewith.
(b) No representation or warranty of BWC or UCFC contained in
Article IV or Article V shall be deemed untrue or incorrect, and no party hereto
shall be deemed to have breached a representation or warranty, as a consequence
of the existence of any fact, event, or circumstance that should have been
disclosed as an exception to one or more representations or warranties, unless
such fact, event or circumstance (individually or taken together with all other
facts, events or circumstances that should have been so disclosed with respect
to any representation or warranty contained in Article IV or Article V) is not
Previously Disclosed and would be Material with respect to BWC or UCFC,
respectively.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
BUTLER WICK CORP.
By: /s/ Thomas J. Cavalier
--------------------------
Name: Thomas J. Cavalier
Title: Chairman of the Board
UNITED COMMUNITY FINANCIAL CORP.
By: /s/ Douglas M. McKay
--------------------------
Name: Douglas M. McKay
Title: Chairman of the Board
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ANNEXES A,B and C and SCHEDULES A, B and C
OMITTED
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ANNEX B
7205 West Central Avenue
AUSTIN ASSOCIATES, INC. Toledo, OH 43617
FINANCIAL INSTITUTION CONSULTANTS (419) 841-8521
an AAI Affiliated Company FAX: (419) 841-8380
April 15, 1999
CONFIDENTIAL
Board of Directors
Butler Wick Corp.
City Centre One Building
Suite 700
Youngstown, Ohio 44501
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Butler Wick Corp. ("BWC") and its shareholders of the terms of the
Agreement and Plan of Merger dated as of April 15, 1999 ("Agreement") between
BWC and United Community Financial Corp. ("UCFC").
In consideration of the Merger, shareholders of BWC shall receive, in a tax-free
exchange for BWC shares, 1,700,000 shares of UCFC common stock, in the
aggregate, subject to possible adjustments based on the Average Closing Price of
UCFC stock (as defined in the Agreement). If the Average Closing Price is less
than $10.00 per share, BWC may terminate the Agreement.
In carrying out our engagement, we have reviewed and analyzed material bearing
upon the financial and operating condition of BWC and UCFC, including but not
limited to the following: (i) the Agreement; (ii) the audited financial
statements of BWC for the periods ending June 26, 1998, June 27, 1997 and June
18, 1996; (iii) the unaudited financial statements of BWC for the period ending
February 28, 1999; (iv) the audited financial statements of UCFC as of December
31, 1997; (v) unaudited financial statements of UCFC dated December 31, 1998 and
March 31, 1999; (vi) publicly available information regarding the performance of
certain other companies whose business activities were believed by Austin
Associates to be generally comparable to those of BWC and UCFC; (vii) the
financial terms, to the extent publicly available, of certain comparable
transactions; and (viii) such other analysis and information as we deemed
relevant.
<PAGE>
Board of Directors
Butler Wick Corp.
April 15, 1999
Page 2
In our review and analysis, we relied upon and assumed the accuracy and
completeness of the financial and other information provided to us or publicly
available, and have not attempted to verify the same. We have made no
independent verification as to the status of individual loans made by UCFC or
the adequacy of UCFC's loan loss reserve. We have instead relied upon
representations and information concerning loans of UCFC and the adequacy of the
loan loss reserve, in the aggregate. In addition, we have assumed in the course
of obtaining the necessary regulatory approvals for the transaction, no
condition will be imposed that will have a material adverse effect on the
contemplated benefits of the transaction to BWC and its shareholders.
Based upon our analysis and subject to the qualifications described herein, we
believe that as of the date of this letter, the terms of the Agreement are fair,
from a financial point of view, to BWC and its shareholders.
For our services in rendering this opinion, BWC will pay us a fee and indemnify
us against certain liabilities.
AUSTIN ASSOCIATES, INC.
<PAGE>
ANNEX C
Section 1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH
VALUE OF SHARES.
(A) (1) A shareholder of a domestic corporation is entitled to relief as
a dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the
date on which the vote on the proposal was taken at the meeting of the
shareholders, the dissenting shareholder shall deliver to the corporation a
written demand for payment to him of the fair cash value of the shares as to
which he seeks relief, which demand shall state his address, the number and
class of such shares, and the amount claimed by him as the fair cash value of
the shares.
(3) The dissenting shareholder entitled to relief under division (C)
of section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled to
relief under division (E) of section 1701.84 of the Revised Code in the case of
a merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which he seeks relief, the dissenting shareholder, within fifteen
days from the
<PAGE>
date of the sending of such request, shall deliver to the corporation the
certificates requested so that the corporation may forthwith endorse on them a
legend to the effect that demand for the fair cash value of such shares has been
made. The corporation promptly shall return such endorsed certificates to the
dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on
<PAGE>
motion of the petitioner, shall enter an order fixing a date for a hearing on
the complaint and requiring that a copy of the complaint and a notice of the
filing and of the date for hearing be given to the respondent or defendant in
the manner in which summons is required to be served or substituted service is
required to be made in other cases. On the day fixed for the hearing on the
complaint or any adjournment of it, the court shall determine from the complaint
and from such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value of any shares and, if so,
the number and class of such shares. If the court finds that the dissenting
shareholder is so entitled, the court may appoint one or more persons as
appraisers to receive evidence and to recommend a decision on the amount of the
fair cash value. The appraisers have such power and authority as is specified
in the order of their appointment. The court thereupon shall make a finding as
to the fair cash value of a share and shall render judgment against the
corporation for the payment of it, with interest at such rate and from such date
as the court considers equitable. The costs of the proceeding, including
reasonable compensation to the appraisers to be fixed by the court, shall be
assessed or apportioned as the court considers equitable. The proceeding is a
special proceeding and final orders in it may be vacated, modified, or reversed
on appeal pursuant to the Rules of Appellate Procedure and, to the extent not in
conflict with those rules, Chapter 2505. of the Revised Code. If, during the
pendenc of any proceeding instituted under this section, a suit or proceeding is
or has been instituted to enjoin or otherwise to prevent the carrying out of the
action as to which the shareholder has dissented, the proceeding instituted
under this section shall be stayed until the final determination of the other
suit or proceeding. Unless any provision in division (D) of this section is
applicable, the fair cash value of the shares that is agreed upon by the parties
or fixed under this section shall be paid within thirty days after the date of
final determination of such value under this division, the effective date of
the amendment to the articles, or the consummation of the other action involved,
whichever occurs last. Upon the occurrence of the last such event, payment
shall be made immediately to a holder of uncertificated securities entitled to
such payment. In the case of holders of shares represented by certificates,
payment shall be made only upon and simultaneously with the surrender to the
corporation of the certificates representing the shares for which the payment is
made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined as
of the day prior to the day on which the vote by the shareholders was taken
and, in the case of a
<PAGE>
merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the Revised Code,
fair cash value as to shareholders of a constituent subsidiary corporation shall
be determined as of the day before the adoption of the agreement of merger by
the directors of the particular subsidiary corporation. The fair cash value of
a share for the purposes of this section is the amount that a willing seller who
is under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but in no
event shall the fair cash value of a share exceed the amount specified in the
demand of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come
to an agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B) of
this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the
demand until either the termination of the rights and obligations arising from
it or the purchase of the shares by the corporation, all other rights accruing
from such shares, including
<PAGE>
voting and dividend or distribution rights, are suspended. If during the
suspension, any dividend or distribution is paid in money upon shares of such
class or any dividend, distribution, or interest is paid in money upon any
securities issued in extinguishment of or in substitution for such shares, an
amount equal to the dividend, distribution, or interest which, except for the
suspension, would have been payable upon such shares or securities, shall be
paid to the holder of record as a credit upon the fair cash value of the shares.
If the right to receive fair cash value is terminated other than by the purchase
of the shares by the corporation, all rights of the holder shall be restored and
all distributions which, except for the suspension, would have been made shall
be made to the holder of record of the shares at the time of termination.
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
- -------- ------------------------------------------
(a) OHIO REVISED CODE
Division (E) of Section 1701.13 of the Ohio Revised Code governs
indemnification by a corporation and provides as follows:
(E)(1) A corporation may indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit, or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit, or proceeding by
judgment, order, settlement, or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any of the following:
(a) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless, and only to
the extent that the court of common pleas or the court in which
such action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common
pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability asserted
against a director is pursuant to section 1701.95 of the Revised
Code.
(3) To the extent that a director, trustee, officer, employee,
or agent has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in divisions (E)(1) and (2) of this
section, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the action, suit, or proceeding.
(4) Any indemnification under divisions (E)(1) and (2) of this
section, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, trustee, officer, employee, or agent is proper in the circumstances
because he has
II-1
<PAGE>
met the applicable standard of conduct set forth in divisions (E)(1) and (2)
of this section. Such determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors
of the indemnifying corporation who were not and are not parties
to or threatened with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this
section is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm
having associated with it an attorney, who has been retained by
or who has performed services for the corporation or any person
to be indemnified within the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the court in which such
action, suit, or proceeding was brought.
Any determination made by the disinterested directors under
division (E)(4)(a) or by independent legal counsel under division (E)(4)(b) of
this section shall be promptly communicated to the person who threatened or
brought the action or suit by or in the right of the corporation under division
(E)(2) of this section, and within ten days after receipt of such notification,
such person shall have the right to petition the court of common pleas or the
court in which action or suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a director's act or omission that
is the subject of an action, suit, or proceeding referred to in divisions (E)(1)
and (2) of this section, the articles or the regulations of a corporation state
by specific reference to this division that the provisions of this division do
not apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or proceeding
upon receipt of an undertaking by or on behalf of the director in which he
agrees to do both of the following:
(i) Repay such amount if it is proved by clear and
convincing evidence in a court of competent jurisdiction
that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury
to the corporation or undertaken with reckless disregard for
the best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning
the action, suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director,
trustee, officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, may be paid
by the corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is determined
that he is not entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles, the regulations or any agreement,
vote of shareholders or disinterested directors, or otherwise, both as to action
in their official capacities and as to action in another capacity while holding
their offices and positions, and shall continue as to a
II-2
<PAGE>
person who has ceased to be a director, trustee, officer, employee, or agent
and shall inure to the benefit of the heirs, executors, and administrators of
such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of credit,
or self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or profit, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against such liability under this section. Insurance may be purchased from
or maintained with a person in which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant
to divisions (E)(1) and (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other protection
that may be provided pursuant to divisions (E)(5), (6), and (7) of this section.
Divisions (E)(1) and (2) of this section do not create any obligation to repay
or return payments made by the corporation pursuant to division (E)(5), (6), or
(7).
(9) As used in this division, references to "corporation"
include all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, shall stand in
the same position under this section with respect to the new or surviving
corporation as he would if he had served the new or surviving corporation in the
same capacity.
(b) UNITED COMMUNITY FINANCIAL CORP.'S CODE OF REGULATIONS
The Code of Regulations of United Community Financial Corp.
("United Community") provide that United Community shall indemnify its directors
or officers against expenses (including, without limitation, attorneys' fees,
filing fees, court reporters' fees and transcript costs), judgments, fines, and
amounts paid in settlement by reason of the fact that they are or were
directors, officers, employees or agents of the corporation or, at the request
of United Community, were serving another organization in a similar capacity, if
the directors or officers acted in good faith and in a manner they reasonably
believed to be in the best interest of the corporation. With regard to criminal
matters, directors and officers must be indemnified by the corporation if the
directors or officers had no reasonable cause to believe their conduct was
unlawful. Directors or officers claiming indemnification shall be presumed to
have acted in good faith and in a manner they reasonably believed to be not
opposed to the best interests of the corporation and, with respect to any
criminal matter, to have had no reasonable cause to believe their conduct was
unlawful.
United Community shall not indemnify any officer or director of
the corporation who was a party to any completed action or suit instituted by
(or in the right of) the corporation for any matter asserted in such action as
to which the officer or director shall have been adjudged to be liable for
acting with reckless disregard for the best interests of the corporation or
misconduct (other than negligence) in the performance of his duty to the
corporation. However, should the court in which such action was brought
determine that the officer or director is fairly and reasonably entitled to such
indemnity, United Community shall indemnify such officer or director to the
extent permitted by the court.
Any indemnification not precluded by judgment shall be made by
the corporation only upon a determination that the director has met the
applicable standard of conduct. Such determination may be made only (a) by a
majority vote of a quorum of disinterested directors, (b) if such a quorum is
not obtainable or if a majority of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel, (c) by the
shareholders or (d) by the court, if any, in which such action was brought.
Expenses incurred in defending any action, suit or proceeding shall be paid by
United Community in advance upon receipt of an undertaking by or on
II-3
<PAGE>
behalf of the director or officer to repay such amount if the director or
officer is not entitled to be indemnified by the corporation.
In addition, United Community has agreed to indemnify each of its
directors and officers against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs),
judgments, fines, and amounts paid in settlement by reason of the fact that he
is or was a director, officer, employee or agent of the corporation or, at the
request of United Community, was serving another organization in a similar
capacity, if the director or officer acted in good faith and in a manner he
reasonably believed to be in the best interest of the corporation and if, with
respect to any criminal action or proceeding, such director or officer had no
reason to believe that his conduct was unlawful. Such indemnification shall be
made, however, only upon a determination by the directors or shareholders of
United Community, the Court of Common Pleas of Mahoning County or written
opinion of legal counsel appointed by United Community that the director or
officer has adhered to the appropriate standard of conduct.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
- -------- -------------------------------------------
(a) EXHIBITS
--------
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger dated April 15, 1999, by
and between United Community and Butler Wick Corp.
2.2 Merger Agreement dated _, 1999, by and between UCFC
Merger Corp. and Butler Wick Corp.
3.1 Articles of Incorporation, as amended, of United
Community
3.2 Code of Regulations, as amended, of United Community
4 Articles Sixth, Seventh and Eighth of the Articles of
Incorporation of United Community and Sections 1.02,
1.04, 1.05, 1.06, 1.09, 1.10, 1.11 of Article One,
Section 2.02, 2.03 and 2.04 of Article Two, Sections
4.01 and 4.04 of Article Fourth, and Section 6.02 of
Article Sixth of the Code of Regulations of United
Community, defining the rights of United Community
shareholders
5 Opinion of Vorys, Sater, Seymour and Pease LLP
regarding the legality of the shares of United
Community being registered
8 Opinion of Vorys, Sater, Seymour and Pease LLP
regarding the tax consequences of the merger
10.1 The Home Savings and Loan Company of Youngstown, Ohio
Employee Stock Ownership Plan
10.2 Employment Agreement between The Home Savings and Loan
Company of Youngstown, Ohio and Douglas M. McKay,
dated December 17, 1998
10.3 Employment Agreement between The Home Savings and Loan
Company of Youngstown, Ohio and Donald J. Varner,
dated December 17, 1998
II-4
<PAGE>
Exhibit No. Description
- ----------- -----------
10.4 Employment Agreement between The Home Savings and Loan
Company of Youngstown, Ohio and Patrick A. Kelly,
dated December 17, 1998
10.5 Form of employment agreement between Butler Wick Corp.
and Thomas J. Cavalier
10.6 Form of Retention Plan to be adopted by United
Community
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP regarding the report
on United Community's financial statements
23.2 Consent of Packer, Thomas & Co. regarding the report
on Butler Wick's financial statements
23.3 Consent of Austin Associates, Inc.
23.4 Consent of Vorys, Sater, Seymour and Pease LLP
23.5 Consent of Packer, Thomas & Co. regarding the report on
United Community's financial statements
99.1 Form of Proxy for Butler Wick special meeting of shareholders
(b) FINANCIAL STATEMENT SCHEDULES
-----------------------------
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under related instructions or are inapplicable and, therefore, have
been omitted.
(c) OPINION OF AUSTIN ASSOCIATES, INC.
----------------------------------
The Opinion of Austin Associates, Inc. has been provided as part
of the Prospectus/Proxy Statement as Annex C.
ITEM 22. UNDERTAKINGS
- -------- ------------
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant
II-5
<PAGE>
to Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is part of this registration statement, by any person
or party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
3. The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph 2 immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
4. Insofar as indemnification for liabilities arising under the Act,
as amended may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
5. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
6. The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Youngstown, State of Ohio
on May 20, 1999.
United Community Financial Corp.
By: /s/ Douglas M. McKay
---------------------------
Douglas M. McKay,
President and a Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been duly signed below by the following persons in
the capacities and on the dates indicated.
By: /s/ Richard M. Barrett By: /s/ Patrick A. Kelly
---------------------------- -----------------------------
Richard M. Barrett, Director Patrick A. Kelly, Treasurer
(Principal Financial Officer)
Date: May 20, 1999 Date: May 20, 1999
By: /s/ Douglas M. McKay By: /s/ Herbert F. Schuler, Sr.
---------------------------- -----------------------------
Douglas M. McKay, Director Herbert F. Schuler, Sr.,
Director and President Director
Date: May 20, 1999 Date: May 20, 1999
By: /s/ Donald J. Varner By: /s/ John F. Zimmerman, Jr.
----------------------------- -----------------------------
Donald J. Varner, John F. Zimmerman, Jr.,
Director and Secretary Director
Date: May 20, 1999 Date: May 20, 1999
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2.1 Agreement and Plan of Merger dated April 15, 1999, by and between Included as Annex A to the Prospectus/Proxy Statement
United Community and Butler Wick
2.2 Merger Agreement dated May 28, 1999, by and between UCFC
Merger Corp. and Butler Wick Corp.
3.1 Articles of Incorporation, as amended, of United Community Incorporated by reference to the Registration
Statement on Form S-1 filed by United Community on
March 13, 1998, ("S-1") with the Securities and
Exchange Commission ("SEC"), Exhibit 3.1
3.2 Code of Regulations, as amended, of United Community Incorporated by reference to the annual report on the
Form 10-K filed by United Community with the SEC on
March 31, 1999 (the "1998 10-K"), Exhibit 3.2
4 Articles Sixth, Seventh and Eighth of the Articles of Included in Exhibits 3.1 and 3.2
Incorporation of United Community and Sections 1.02, 1.04, 1.05,
1.06, 1.09, 1.10, 1.11 of Article One, Section 2.02, 2.03 and 2.04
of Article Two, Sections 4.01 and 4.04 of Article Fourth, and
Section 6.02 of Article Sixth of the Code of Regulations of United
Community, defining the rights of United Community shareholders
5 Opinion of Vorys, Sater, Seymour and Pease LLP regarding the
legality of the shares of United Community being registered
8 Opinion of Vorys, Sater, Seymour and Peas LLP regarding the tax
consequences of the merger
10.1 The Home Savings and Loan Company of Youngstown, Ohio Employee Incorporated by reference to the Pre-Effective
Stock Ownership Plan Amendment to the S-1 filed by United Community with
the SEC on May 6, 1998 (the "Pre-Effective
Amendment") Exhibit 10.3
10.2 Employment Agreement between United Community, and Douglas M. Incorporated by reference to the 1998 10-K, Exhibit
McKay, dated December 17, 1998 10.2
10.3 Employment Agreement between United Community and Donald J. Incorporated by reference to the 1998 10-K, Exhibit
Varner, dated December 17, 1998 10.3
10.4 Employment Agreement between United Community and Patrick A. Incorporated by reference to the 1998 10-K, Exhibit
Kelly, dated December 17, 1998 10.4
-9-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.5 Form of employment agreement between Butler Wick and Thomas J.
Cavalier
10.6 Form of Retention Plan to be adopted by United Community
21 Subsidiaries of the Registrant Incorporated by reference to the 1998 10-K, Exhibit
21
23.1 Consent of Deloitte & Touche LLP regarding the report on
United Community's financial statements
23.2 Consent of Packer, Thomas & Co. regarding the report on Butler
Wick's financial statements
23.3 Consent of Austin Associates, Inc.
23.4 Consent of Vorys, Sater, Seymour and Pease LLP
23.5 Consent of Packer, Thomas & Co. regarding the report on
United Community's financial statements
99.1 Form of Proxy for Butler Wick for special meeting of shareholders
</TABLE>
-10-
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT (this "Agreement") is made and entered into on
the 28th day of May, 1999, by and between UCFC Merger Corp., an Ohio corporation
("Merger Corp."), and a wholly-owned subsidiary of United Community Financial
Corp., an Ohio corporation ("UCFC"), and Butler Wick Corp. ("BWC"), an Ohio
corporation;
WITNESSETH:
WHEREAS, UCFC and BWC are parties to an Agreement and Plan of Merger
dated April 15, 1999 (the "Plan of Merger"), pursuant to which BWC will merge
with Merger Corp.;
WHEREAS, the authorized capital of Merger Corp. consists of 850 common
shares, each without par value, all of which are issued and outstanding and are
owned of record by UCFC;
WHEREAS, the authorized capital of BWC consists of 200,000 common
shares, each without par value, 88,970 of which are issued and outstanding and
owned of record by 44 shareholders; and
WHEREAS, the Boards of Directors of Merger Corp. and BWC believe that
the merger of BWC with Merger Corp. is in the best interest of BWC and Merger
Corp.;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, BWC and Merger Corp., each
intending to be legally bound, hereby agree that the terms of the merger shall
be as follows:
ARTICLE ONE
SECTION 1.01. At the Effective Time (hereinafter defined), BWC shall
merge with Merger Corp. (the "Merger") and BWC shall be the continuing,
surviving and resulting company in the Merger, shall continue to exist as an
Ohio corporation and shall be the only one of Merger Corp. and BWC to continue
its separate corporate existence at and after the Effective Time. As used in
this Agreement, the term "Surviving Corporation" refers to BWC at and after the
Effective Time. The name of the Surviving Corporation shall be "Butler Wick
Corp." Notwithstanding the foregoing, the structure of the Merger may be
changed in accordance with Section 2.01(b) of the Plan of Merger.
SECTION 1.02. Except as provided in Sections 1.03 and 1.04 of this
Article, each common share of BWC issued and outstanding prior to the Merger
shall, by virtue of the Merger and without any action on the part of the parties
hereto, be converted at the Effective Time into the right to receive a number of
UCFC common shares, each
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without par value, which is the quotient of 1,700,000 divided by the number
of BWC common shares issued and outstanding immediately prior to the
Effective Time, subject to adjustment pursuant to Section 2.07 of the Plan of
Merger and to the proviso to Section 2.02(a) of the Plan of Merger (the
"Exchange Ratio"). Notwithstanding any other provision herein, the Exchange
Ratio will be rounded to the nearest hundredth.
SECTION 1.03. Any common shares of BWC held in the treasury of BWC
immediately prior to the Effective Time shall be retired, canceled and
extinguished. Each common share of Merger Corp. issued and outstanding
immediately prior to the Effective Time shall be converted into one common
share of the Surviving Corporation.
SECTION 1.04. Promptly after the Effective Time, BWC common shares
held by holders who did not vote in favor of the Merger and who otherwise are
entitled to and do perfect their dissenters' rights under Ohio law, shall not be
converted into the right to receive the Exchange Ratio in accordance with
Section 1.02 of this Article, but such BWC common shares shall represent only
the right to receive the "fair cash value" of such dissenting shares as provided
under Ohio law. If a dissenting shareholder shall have failed to perfect or
shall have effectively withdrawn or lost such dissenters' rights, such BWC
common shares shall thereupon be deemed to have been converted into the right to
receive the Exchange Ratio in accordance with Section 1.02 of this Article as of
the Effective Time without any interest thereon.
ARTICLE TWO
SECTION 2.01. Notwithstanding any other provision of this Agreement,
the obligation of Merger Corp. and BWC to effect the Merger shall be subject to:
(i) the satisfaction at or before the Effective Time of each of the conditions
set forth in Article Seven of the Plan of Merger; and (ii) the approval of this
Agreement by UCFC as the sole shareholder of Merger Corp. at a meeting of
shareholders duly called and held (or by consent in lieu thereof).
SECTION 2.02. Notwithstanding anything to the contrary in this
Agreement and notwithstanding the adoption of the Plan of Merger by the
shareholders of BWC and Merger Corp., this Agreement may be terminated and the
Merger abandoned as provided in the Plan of Merger.
ARTICLE THREE
SECTION 3.01. A Certificate of Merger evidencing the transactions
contemplated herein shall be delivered for filing to the Secretary of State of
Ohio in accordance with the Plan of Merger. The Merger shall be effective at
the time and on the date specified in such Certificate Of Merger (the "Effective
Time").
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SECTION 3.02. In the event of the termination of the Plan of Merger
in accordance with Article Eight thereof, this Agreement shall terminate and
shall thereafter be of no further force or effect.
ARTICLE FOUR
SECTION 4.01. This Agreement may be executed in two or more
counterparts which shall be deemed to constitute a single Agreement.
SECTION 4.02. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, Merger Corp. and BWC have caused this Agreement to
be signed by their duly authorized officers on the date first above written.
ATTEST: UCFC Merger Corp.
/s/ Donald J. Varner By: /s/ Douglas M. McKay
- ----------------------- ------------------------
Donald J. Varner Douglas M. McKay
Secretary President
ATTEST: BUTLER WICK CORP.
/s/ Franklin S. Bennett By: /s/ Thomas J. Cavalier
- ----------------------- ------------------------
Franklin S. Bennett, Jr. Thomas J. Cavalier
Secretary President
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(513) 723-4000
March 3, 1999
Board of Directors
United Community Financial Corp.
275 Federal Plaza West
Youngstown, OH 44503
Gentlemen:
We are familiar with the proceedings taken and proposed to be taken by
United Community Financial Corp. ("UCFC") in connection with the issuance and
sale by UCFC of up to 1.7 million of its common shares, without par value (the
"Shares"), in connection with the merger of UCFC Merger Corp., a wholly-owned
subsidiary of UCFC, with and into Butler Wick Corp., an Ohio corporation (the
"Merger").
We have collaborated in the preparation of the Registration Statement on
Form S-4 (the "Registration Statement") filed by UCFC with the Securities and
Exchange Commission for registration of the Shares under the Securities Act of
1933, as amended. In connection therewith, we have examined, among other
things, such records and documents as we have deemed necessary in order to
express the opinions hereinafter set forth.
Based upon the foregoing, we are of the opinion that UCFC is a duly
organized and legally existing corporation under the laws of the State of Ohio.
In addition, we are of the opinion that the Shares will be legally issued,
fully-paid and non-assessable assuming: (i) the Merger has been declared
effective, (ii) all applicable state and federal securities laws have been
complied with and (iii) certificates representing the Shares have been duly
executed, countersigned and registered and duly delivered in accordance with the
Agreement and Plan of Merger dated as of April 15, 1999, by and between UCFC and
Butler Wick Corp.
Very truly yours,
Vorys, Sater, Seymour and Pease LLP
<PAGE>
(513) 723-4000
June 4, 1999
United Community Financial Corp.
275 Federal Plaza West
Youngstown, Ohio 44503
Attention: Douglas M. McKay
Ladies and Gentlemen:
Pursuant to Section 7.01(h) of the Agreement and Plan of Merger
dated as of April 15, 1999 (the "Agreement"), by and between United Community
Financial Corp., an Ohio corporation ("UCFC") and Butler Wick Corp., an Ohio
corporation ("BWC"), we hereby render our opinion as to certain of the
federal income tax consequences of the merger of BWC with and into Merger
Corp., Inc., an Ohio corporation to be formed as a wholly owned subsidiary of
UCFC ("Merger Corp.") solely for the purpose of carrying out the merger of
Merger Corp. with and into BWC (the "Merger") in accordance with the
Agreement.
In rendering this opinion, we have examined the originals or
certified, conformed, or reproduction copies of, and have relied upon the
accuracy of, without independent verification or investigation, (i) the
Agreement, (ii) the United Community Financial Corp. Officer's Certificate
dated as of June 4, 1999, (iii) the Butler Wick Corp. Officer's Certificate
dated as of June 4, 1999, and (iv) the Shareholders Agreement (as defined in
the Agreement).
In connection with our review of the Agreement, the officers'
certificates identified above (collectively, the "Officers' Certificates"),
and the other documents identified above, we have assumed the genuineness of
all signatures, the authenticity of all items submitted to us as originals,
the uniformity with authentic originals of all items submitted to us as
copies, and the conformity to final versions of all items submitted to us in
draft version. We also have assumed, without independent verification or
investigation, that (i) we have been provided with true, correct, and
complete copies of all such documents, (ii) none of such documents has been
amended or modified, (iii) all such documents are in full force and effect in
accordance with the terms thereof, (iv) there are no other documents which
affect the opinions hereinafter set forth, and (v) the documents reviewed by
us reflect the entire agreement of the parties thereto with respect to the
subject matter thereof.
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United Community Financial Corp.
June 4, 1999
Page 2
DESCRIPTION OF THE MERGER
The Agreement provides that the Merger will constitute a merger,
under the laws of the State of Ohio, of Merger Corp. with and into BWC.
Immediately after the Effective Time (as defined in the Agreement), BWC will
be the surviving corporation (the "Surviving Corporation"), and the separate
corporate existence of Merger Corp. will cease.
As described in Section 2.02 of the Agreement, pursuant to the Merger:
1. Each of the shares of BWC stock held by existing BWC shareholders,
excluding shares of BWC treasury shares, issued and outstanding
immediately prior to the effective time specified in the Agreement
(the "Effective Time") for the Merger (hereinafter, the "BWC Shares")
shall become and be converted into the right to receive a number of
UCFC Shares which is the quotient, rounded to the nearest hundredth,
of 1,700,000 divided by the number of BWC Shares issued and
outstanding immediately prior to the Effective Time (subject to
certain adjustments specified in Sections 2.02(a) and 2.07 of the
Agreement);
2. Each UCFC Share issued and outstanding immediately prior to the
Effective Time shall be unchanged and shall remain issued and
outstanding as one UCFC Share; and
3. Each of the BWC treasury shares (the "Treasury Shares) shall be
canceled and retired at the Effective Time and no consideration shall
be issued in exchange therefor.
Any BWC Shares with respect to which the holder has demanded and
perfected dissenters' rights in accordance with the laws of the State of Ohio
(and as of the Effective Time has not withdrawn or lost such dissenters'
rights) shall not be exchanged, or represent a right to receive UCFC Shares.
The holder shall be entitled to only such rights as are granted by the laws
of the State of Ohio. Furthermore, pursuant to Section 7.03(e) of the
Agreement, the obligation of UCFC to consummate the Merger is subject to the
fulfillment or written waiver by UCFC prior to the Effective Time of the
requirement that BWC shareholders shall not have demanded and perfected
dissenters' rights with respect to more than five percent (5%) of the BWC
Shares. We assume for purposes of our opinion that dissenting BWC
shareholders will not hold more than five percent (5%) of the BWC Shares.
Fractional UCFC Shares will not be issued by UCFC in the Merger.
In lieu thereof, each holder of BWC Shares entitled to receive a fractional
UCFC Share shall receive an
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United Community Financial Corp.
June 4, 1999
Page 3
amount in cash (without interest) determined by multiplying such fraction by
the Average Closing Price (as defined in the Agreement) of the UCFC Shares.
REPRESENTATIONS
In connection with the Merger, the Officers' Certificates set forth
the following representations:
1. The Merger is being effected for bona fide business reasons.
2. The Merger will qualify as a statutory merger under the laws
of the State of Ohio.
3. UCFC does not own, nor has it owned during the past five
years, any shares of stock of BWC.
4. Prior to the Merger, UCFC will be in control of Merger Corp.
within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as
amended (the "Code").
5. The fair market value of the UCFC Shares to be received by
each shareholder of UCFC will be approximately equal to the fair market value
of the BWC Shares exchanged therefor.
6. In the Merger, shares of BWC stock representing control of
BWC, as defined in Section 368(c) of the Code, will be exchanged solely for
voting stock of UCFC.
7. There is no intercorporate indebtedness existing between UCFC
and BWC or between Merger Corp. and BWC that was issued, acquired, or will be
settled, at a discount.
8. Neither BWC nor UCFC is an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
9. BWC is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
10. To the best knowledge of BWC, the shareholders of BWC have no
plan or intention to sell, exchange, or otherwise dispose of a number of UCFC
Shares received in the transaction to UCFC or a person related to UCFC that
would reduce the BWC shareholders' ownership of UCFC to a number of shares
having a value, as of the date of the transaction, of less than fifty percent
(50%) of the value of all formerly outstanding stock of BWC as of the
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United Community Financial Corp.
June 4, 1999
Page 4
same date. For purposes of this representation, any BWC Shares surrendered by
dissenters or exchanged for cash in lieu of fractional UCFC Shares will be
treated as outstanding on the date of the transaction. Furthermore, any
redemptions or extraordinary distributions by BWC, prior to and in connection
with the Merger, will be considered in making this representation. Finally,
any acquisitions of BWC Shares by a person related to BWC, prior to and in
connection with the Merger, with consideration other than stock of either
UCFC or BWC, will be considered in making this representation.
11. BWC has no plan or intention to issue additional shares of its
stock that would result in UCFC losing control of BWC within the meaning of
Section 368(c) of the Code.
12. To the knowledge of the officers of UCFC, neither UCFC nor a
related person has any plan or intention to reacquire any UCFC Shares issued
in the Merger.
13. UCFC has no plan or intention to liquidate BWC; to merge BWC
with or into another corporation; to sell or otherwise dispose of the stock
of BWC except for transfers of stock to corporations controlled by UCFC; or
to cause BWC to sell or otherwise dispose of any of its assets or any of the
assets acquired from Merger Corp., except for dispositions made in the
ordinary course of business or transfers described in Section 368(a)(2)(C) of
the Code.
14. UCFC, Merger Corp., and the shareholders of BWC will pay their
respective expenses, if any, incurred in connection with the Merger. BWC
will pay its expenses incurred in connection with the transaction except for
those paid or assumed by UCFC. To the extent that UCFC pays or assumes
expenses of BWC, UCFC will pay or assume only those expenses of BWC that are
solely and directly related to the Merger in accordance with the guidelines
established in Rev. Rul. 73-54, 1973-1 C.B. 187.
15. On the date of the Merger, the fair market value of the assets
of BWC will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
16. On the date of the Merger, BWC will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in BWC that, if exercised or
converted, would affect UCFC's acquisition or retention of control of BWC, as
defined in Section 368(c) of the Code.
17. Merger Corp. will have no liabilities assumed by BWC, and will
not transfer to BWC any assets subject to liabilities, in the Merger.
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United Community Financial Corp.
June 4, 1999
Page 5
18. None of the compensation received by any shareholder-employee
of BWC will be separate consideration for, or allocable to, any of their BWC
Shares; none of the UCFC Shares received by any shareholder-employees will be
separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any shareholder-employees will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
19. The payment of cash in lieu of fractional UCFC Shares is
solely for the purpose of avoiding the expense and the inconvenience to UCFC
of issuing fractional shares and does not represent separately bargained for
consideration. The total cash that will be paid in the Merger to the
shareholders of BWC instead of issuing fractional UCFC Shares will not exceed
one percent (1%) of the total consideration that will be issued in the Merger
to the BWC shareholders in exchange for their BWC Shares. The fractional
share interests of each BWC shareholder will be aggregated, and no
shareholder will receive cash in an amount equal to or greater than the value
of one full UCFC Share.
20. Following the Merger, UCFC or a related person will continue
the historic business of UCFC or use a significant portion of BWC's historic
assets in a business.
21. Following the Merger, BWC will hold at least 90 percent of the
fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets and at least 90 percent of the fair market
value of Merger Corp.'s net assets and at least 70 percent of the fair market
value of Merger Corp.'s gross assets held immediately prior to the Merger.
For purposes of this representation, amounts paid by BWC or Merger Corp. to
dissenters, amounts paid by BWC or Merger Corp. to shareholders who receive
cash or other property, amounts used by BWC or Merger Corp. to pay
reorganization expenses or other expenses incurred in connection with the
Merger, amounts used by BWC to make payments to employees for severance and
termination of employment contracts, and all redemptions and distributions
(except for regular, normal dividends) made by BWC will be included as assets
of BWC or Merger Corp., respectively, immediately prior to the Merger.
DISCUSSION
Section 368(a)(1)(A) of the Code defines a tax-free reorganization
to include a statutory merger. Section 368(a)(2)(E) of the Code provides
that a transaction otherwise qualifying under paragraph (1)(A) shall not be
disqualified by reason of the fact that stock of a corporation (referred to
as the "controlling corporation"), which before the Merger was in control of
the merged corporation, is used in the transaction, if (i) after the
transaction, the corporation surviving the merger holds substantially all of
its properties and substantially all of the properties of the merged
corporation; and (ii) in the transaction, former shareholders of the
surviving
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United Community Financial Corp.
June 4, 1999
Page 6
corporation exchange, solely for voting stock of the controlling corporation,
an amount of stock in the surviving corporation which constitutes control of
such corporation. For this purpose, (a) "substantially all" means at least
ninety percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets of the
surviving corporation and of the merged corporation; and (b) "controlling" or
"control" means the ownership of stock possessing at least eighty percent
(80%) of the total combined voting power of all classes of stock entitled to
vote and at least eighty percent (80%) of the total number of shares of each
class of non-voting stock of the corporation.
Pursuant to the representations in the Officers' Certificates, the
Merger will be a statutory merger under the laws of the State of Ohio; UCFC
will be in control of Merger Corp. prior to the Merger; BWC will hold
substantially all of its properties and substantially all of the properties
of Merger Corp. after the Merger; and BWC shareholders will exchange an
amount of BWC Shares constituting control of BWC solely for UCFC Shares.
Section 368(b) of the Code defines "a party to the reorganization"
to include both corporations, in the case of a reorganization resulting from
the acquisition by one corporation of stock or properties of another.
Section 368(b) also includes the controlling corporation as "a party to the
reorganization" for purposes of Section 368(a)(2)(E). Accordingly, UCFC,
BWC, and Merger Corp. each will be a "party to the reorganization" within the
meaning of Section 368(b) of the Code.
Certain non-statutory requirements have been imposed by the courts
and by the Treasury Department in determining whether reorganizations are in
compliance with Section 368 of the Code. These include requirements that
there be a business purpose for the reorganization, that there be a
continuity of the business enterprise of the target corporation, and that the
shareholders of the target corporation emerge with some continuing
proprietary interest in the entity resulting from the reorganization.
Section 1.368-2(g) of the Regulations provides that a
reorganization must be undertaken for reasons germane to the continuance of
the business of a corporation which is a party to the reorganization. As
indicated in the Officers' Certificates, the Merger is being effected for
bona fide business reasons. Accordingly, the Merger satisfies the business
purpose requirement as set forth in the Regulations.
Section 1.368-1(b) of the Regulations provides that a continuity of
business enterprise is a prerequisite to a reorganization. Section
1.368-1(d) of the Regulations provides that continuity of business enterprise
requires that the issuing corporation or a related person either continue the
target corporation's historic business or use a significant portion of the
target corporation's historic assets in a business. UCFC's representations
confirm that UCFC or a
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United Community Financial Corp.
June 4, 1999
Page 7
related person will continue the historic business of BWC or use a
significant portion of BWC's historic assets in a business after the Merger.
Accordingly, the continuity of business enterprise requirement is met with
regard to the Merger.
The Treasury Department has issued final and temporary regulations
providing rules for satisfying the continuity of interest requirement. These
regulations substantially liberalize the historic rules, generally providing
that continuity of interest is satisfied if a substantial part of the value
of the proprietary interest in the target corporation is preserved in the
reorganization. In determining whether a substantial part of the value of
the proprietary interest is preserved, the following transactions, in
connection with the reorganization, are considered:
(i) Under Section 1.368-1 of the Regulations, any acquisition
by the issuing corporation of target corporation stock for consideration
other than stock, or, in connection with the reorganization, the redemption
of issuing corporation stock received by the shareholders of the target
corporation (or the purchase of such issuing corporation stock by a person
related to the issuing corporation), will be considered in determining
whether a substantial proprietary interest is preserved;
(ii) Under Section 1.368-1T of the Regulations, the acquisition
by the target corporation, prior to and in connection with the plan of
reorganization, of the stock of the target corporation with consideration
other than stock of the target corporation or an extraordinary distribution
made by the target corporation with respect to its stock, will be considered
in determining whether a substantial proprietary interest is preserved; and
(iii) Under Section 1.368-1T of the Regulations, the acquisition
by a person related to the target corporation, prior to and in connection
with the plan of reorganization, of the stock of the target corporation with
consideration other than stock of the target corporation or stock of the
issuing corporation, will be considered in determining whether a substantial
proprietary interest is preserved.
Generally, two corporations are related persons either if the corporations
are members of the same affiliated group (without regard to the exceptions in
Section 1504(b) of the Code) or the purchase of stock of one corporation by
another corporation would result in the purchase being treated as a
redemption of stock of the first corporation under Section 304(a)(2) of the
Code (determined without regard to Section 1.1502-80(b) of the Regulations).
Sales by the shareholders of the target corporation of stock of the issuing
corporation received in the transaction to unrelated persons occurring before
or after a reorganization are disregarded.
The Merger will satisfy the continuity of interest requirement.
All BWC Shares outstanding immediately prior to the Merger will be exchanged
solely for UCFC Shares, except
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United Community Financial Corp.
June 4, 1999
Page 8
for cash paid to dissenters or in lieu of fractional shares. As indicated
above, we have assumed that dissenting BWC shareholders will not hold more
than five percent (5%) of the BWC Shares. BWC and UCFC have represented that
cash paid in lieu of fractional shares will not exceed, in the aggregate, one
percent (1%) of the total consideration that will be issued in the Merger to
the BWC shareholders in exchange for their BWC Shares. To the knowledge of
the officer of UCFC who is signing the UCFC officer's certificate, neither
UCFC nor a related person has any plan or intention, in connection with the
plan of reorganization, to reacquire any UCFC Shares issued in the Merger.
BWC has represented that, to its best knowledge, the shareholders of BWC have
no plan or intention to sell, exchange or otherwise dispose of UCFC Shares to
UCFC or a related person. In addition, BWC has represented that neither BWC
nor a related person has any plan or intention, prior to and in connection
with the plan of reorganization, to redeem, acquire, or make an extraordinary
distribution with respect to BWC's stock for consideration other than stock
of BWC (or in the case of a related person, for consideration other than
stock of BWC or stock of UCFC), that would cause a substantial part of the
value of the proprietary interest in BWC not to be preserved.
Even though the Merger qualifies as a tax-free reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, BWC shareholders receive
UCFC Shares tax free only to the extent provided by Section 354 of the Code.
Because BWC shareholders will be exchanging BWC Shares solely for UCFC
Shares, no gain or loss will be recognized under Section 354(a) of the Code.
If a BWC shareholder holding BWC Shares dissents to the Merger and
receives solely cash in exchange for such shareholder's BWC Shares, such cash
will be treated as having been received by such shareholder as a distribution
in redemption of such shareholder's BWC Shares, subject to the provisions and
limitations of Section 302 of the Code. Unless the redemption is treated as
a dividend under Section 302(d) of the Code, such shareholder will recognize
gain or loss measured by the difference between the amount of cash received
and the tax basis of the BWC Shares so redeemed. This gain or loss will be
capital gain or loss if the BWC Shares were held by such shareholder as a
capital asset at the time of the Merger. If, on the other hand, the
redemption is treated as a dividend under Section 302(d) of the Code, the
full amount of cash received by such shareholder will be treated as ordinary
income to the extent of BWC's current or accumulated earnings and profits.
Under the tests of Section 302 of the Code, the redemption of a
dissenting BWC shareholder's BWC Shares generally will be treated as a
dividend unless the redemption (i) results in a "complete termination" of
such shareholder's direct or indirect stock interest in UCFC under Section
302(b)(3) of the Code, (ii) is "substantially disproportionate" with respect
to such shareholder under Section 302(b)(2) of the Code or (iii) is "not
essentially equivalent to a dividend" with respect to such shareholder under
Section 302(b)(1) of the Code.
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United Community Financial Corp.
June 4, 1999
Page 9
In order to determine whether there has been a complete
termination, a substantially disproportionate redemption or a redemption not
essentially equivalent to a dividend with respect to a dissenting BWC
shareholder, it is necessary to consider the UCFC Shares owned by persons
from whom ownership is attributed to such shareholder under the rules of
Section 318 of the Code. Under Section 318 of the Code, a shareholder is
considered to own shares that are directly or indirectly owned by certain
members of such shareholder's family or by certain trusts, partnerships or
corporations in which such shareholder has an ownership or beneficial
interest. Such shareholder is also considered to own any shares with respect
to which he holds exercisable options. In certain cases, a dissenting BWC
shareholder may be deemed to own constructively the UCFC Shares held by
persons who do not exercise dissenters' rights.
Notwithstanding the foregoing, if BWC is legally obligated to pay a
dividend that has accrued at the time of the redemption, the proceeds first
will be applied to discharge the dividend and will be taxed accordingly.
Payment of cash to a BWC shareholder in lieu of a fractional UCFC
Share will be treated as if such fractional share were distributed as part of
the exchange and then redeemed by UCFC. The payment received by a BWC
shareholder will be treated as having been received as a distribution in full
payment and exchange for the fractional share redeemed as provided in
Section 302(a) of the Code, unless such distribution is essentially equivalent
to a dividend within the meaning of Section 302(b)(1) of the Code.
Finally, BWC will recognize no gain or loss as a result of its
receipt of cash from UCFC in the Merger and the use of that cash in
connection with the Merger to pay certain BWC creditors. Section 361(b)(3)
of the Code.
OPINIONS
Therefore, based on the description of the Merger in the Agreement,
the representations set forth in the Officers' Certificates, the Shareholders
Agreement, the foregoing legal authorities, and the assumptions stated above,
our opinion of the federal income tax consequences of the Merger is as
follows:
1. The Merger of Merger Corp. with and into BWC will constitute a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E)
of the Code. UCFC, Merger Corp. and BWC each will be a "party to the
reorganization" within the meaning of Section 368(b) of the Code.
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United Community Financial Corp.
June 4, 1999
Page 10
2. No gain or loss will be recognized by BWC upon the receipt of
the assets of Merger Corp. in exchange for BWC Shares. No gain or loss will
be recognized by BWC upon the receipt of cash from UCFC in the Merger and the
use of that cash in connection with the Merger to pay certain BWC creditors.
3. No gain or loss will be recognized by Merger Corp. upon the
transfer of its assets to BWC in exchange for Exchanged Securities.
4. No gain or loss will be recognized by UCFC upon the receipt of
BWC Shares solely in exchange for Merger Corp. common shares.
5. No gain or loss will be recognized by shareholders of BWC
holding BWC Shares upon the exchange of BWC Shares solely for UCFC Shares
(including fractional share interests).
6. The basis of the UCFC Shares (including fractional share
interests) to be received by BWC shareholders holding BWC Shares will be the
same as the basis of the BWC Shares surrendered in exchange therefor.
7. The holding period of the UCFC Shares (including fractional
share interests) to be received by BWC shareholders holding BWC Shares will
include the holding period of the BWC Shares surrendered in exchange
therefor, provided that such BWC Shares are held as a capital asset at the
time of the exchange.
8. Where a cash payment is received by a BWC shareholder holding
BWC Shares in lieu of a fractional share interest of UCFC, the cash payment
will be treated as received by the BWC shareholder as a distribution in full
payment and exchange for the fractional share redeemed as provided in Section
302(a) of the Code, unless such distribution is essentially equivalent to a
dividend within the meaning of Section 302(b)(1) of the Code.
9. Where cash is received by a dissenting BWC shareholder holding
BWC Shares who perfects his dissenter's rights, the cash will be treated as
having been received by the shareholder in redemption of his BWC Shares,
subject to the provisions and limitations of Section 302 of the Code. Where,
after the receipt of such cash, such a dissenting BWC shareholder is not
deemed to own any UCFC Shares under the constructive ownership rules of
Section 318(a) of the Code, the redemption will be a complete termination of
such shareholder's interest in BWC within the meaning of Section 302(b)(3) of
the Code and will be treated as a distribution in full payment in exchange
for the BWC Shares.
* * *
<PAGE>
United Community Financial Corp.
June 4, 1999
Page 11
Our opinion is limited to the foregoing federal income tax
consequences of the Merger, which are the only matters as to which you have
requested our opinion. In rendering our opinion as to the federal income
consequences of exchanging BWC Shares for UCFC Shares, our opinion does not
address the federal income tax consequences of any alternative transaction
pursuant to a Revised Structure, as allowed pursuant to Section 2.01(b) of
the Agreement. Finally, our opinion does not address any federal income tax
consequences of the Merger that may be relevant to a BWC shareholder in light
of that shareholder's particular status or circumstances, including, without
limitation, BWC shareholders who are (i) foreign persons, (ii) insurance
companies, (iii) tax-exempt entities, (iv) retirement plans, (v) dealers in
securities, (vi) persons subject to the alternative minimum tax, (vii)
persons whose shares of BWC stock were acquired pursuant to the exercise of
employee stock options or otherwise as compensation, or (viii) persons who
receive UCFC Shares other than in exchange for BWC stock or employee stock
options.
We do not address other matters of federal law and have not
considered matters (including state or local tax consequences) arising under
the laws of any jurisdiction other than matters of federal law arising under
the laws of the United States.
Our opinion is based on the understanding that the relevant facts
are, and will be on the Effective Time, as set forth in this letter. If this
understanding is incorrect or incomplete in any respect, our opinion could be
affected. Our opinion is also based on the Code, Regulations, case law, and
rulings of the Internal Revenue Service (the "Service") as they now exist.
These authorities are all subject to change and such change may be made with
retroactive effect. We can give no assurance that after any such change, our
opinion would not be different. Our opinion is not binding on the Service,
and no ruling has been, or will be, requested from the Service as to any
federal income tax consequence described above. We undertake no
responsibility to update or supplement this opinion.
The opinion expressed herein is furnished specifically for you and
your respective shareholders, and may not be relied upon, assigned, quoted,
or otherwise used in any manner or for any purpose by any other person or
entity without our specific prior written consent.
Respectfully,
Vorys, Sater, Seymour and Pease LLP
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into this ____ day
of ____________, 1999, by and between Butler Wick Corp., an Ohio corporation
(the "Employer"), and Thomas J. Cavalier, an individual (the "Employee");
WITNESSETH:
WHEREAS, the Employee is currently employed as the President and Chief
Executive Officer of the Employer, of Butler, Wick & Co., Inc., and of Butler
Wick Asset Management Co. (the latter two companies being wholly-owned
subsidiaries of Employer);
WHEREAS, the Employer and United Community Financial Corp., an Ohio
corporation ("UCFC"), have entered into an Agreement and Plan of Merger dated
April 15, 1999 (the "Merger Agreement"), pursuant to which UCFC will acquire all
of the stock of the Employer;
WHEREAS, the Employer and UCFC desire to be ensured of Employee's continued
active participation in the business of Employer and its subsidiaries; and
WHEREAS, in order to induce Employee to remain in the employ of Employer
and in consideration of Employee agreeing to remain in the employ of Employer,
the parties desire to specify the terms of such employment;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Employer and the Employee hereby agree as follows:
1. EMPLOYMENT AND TERM.
(a) TERM. Upon the terms and subject to the conditions of this
Agreement, the Employer hereby employs the Employee, and the Employee hereby
accepts employment, as the President and Chief Executive Officer of the
Employer, of Butler, Wick & Co., Inc., and of Butler Wick Asset Management Co.
The term of this Agreement shall commence on ____________, 1999, and shall end
on ____________, 2002, unless extended by the Employer, with the consent of the
Employee, as provided in subsection (b) of this Section 1 (together with such
extensions, the "Term").
(b) EXTENSION. On or before each anniversary of the date of this
Agreement, the board of directors of the Employer (the "Board") shall review
this Agreement and, upon approval by the Board, shall extend the Term of this
Agreement for a one-year period beyond the then effective expiration date. Any
such extension shall be subject to the written consent of the Employee. The
Board shall document its reasons for extending the Term of this Agreement in the
minutes of the meeting at which such action is taken.
<PAGE>
2. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The Employee shall serve as
the President and Chief Executive Officer of the Employer, of Butler, Wick &
Co., Inc., and of Butler Wick Asset Management Co. Subject to the direction of
the Board, the Employee shall perform all duties and shall have all powers which
are commonly incident to the offices of President and Chief Executive Officer or
which, consistent therewith, are delegated to him by the Board. Such duties may
include, but shall not be limited to, developing policies and strategic growth
and business plans and objectives, directing and coordinating corporate
programs, supervising and evaluating senior management members.
(b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE EMPLOYER. The
Employee shall devote his entire productive time, ability and attention during
normal business hours throughout the Term to the faithful performance of his
duties under this Agreement. The Employee shall not directly or indirectly
render any services of a business, commercial or professional nature to any
person or organization other than the Employer, UCFC, or any subsidiary of the
Employer or UCFC without the prior written consent of the Board; provided,
however, that the Employee shall not be precluded from (i) vacations and other
leave time in accordance with Section 3(f) below, (ii) reasonable participation
in community, civic, charitable or similar organizations, (iii) reasonable
participation in industry-related activities, including, but not limited to,
attending state and national trade association or Young Presidents' Organization
meetings and serving as an officer, director or trustee of a state or national
trade association or the Young Presidents' Organization, (iv) serving as an
officer or director of the Employer, UCFC or any subsidiary of the Employer or
UCFC and receiving a salary, director's fees or other compensation or benefits,
as appropriate, or (v) pursuing personal investments which do not interfere or
conflict with the performance of the Employee's duties to the Employer and UCFC.
(c) REPORTING OBLIGATIONS. The Employee shall report directly to the
Board.
3. COMPENSATION.
(a) ANNUAL SALARY. The Employee shall receive an annual salary of
not less than $200,000, payable in equal installments not less often than
monthly.
(b) ANNUAL REVIEW. On or before ________________ of each year,
commencing in 2000, the salary of the Employee shall be reviewed by the Board
and shall be set at an amount not less than $200,000, based upon the Employee's
individual performance and such other factors as the Board may deem appropriate
(the "Annual Review"). The results of the Annual Review shall be reflected in
the minutes of the Board.
(c) BONUS PAYMENT. During the Term, the Employee shall be entitled
to receive a bonus, payable not less often than annually, equal to the sum of
the following components: (1) 2% of the first $500,000 of the Employer's
operating profit; (2) 6% of the next $250,000 of the Employer's operating
profit; (3) 8% of the next $250,000 of the Employer's operating profit; (4) 10%
of the next $250,000 of the Employer's operating profit; (5) 12% of the
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<PAGE>
next $250,000 of the Employer's operating profit; (6) 8% of the next $250,000 of
the Employer's operating profit; and (7) 10% of any amount of the Employer's
operating profit over $2.0 million.
For purposes of this provision, the term "operating profit" shall
mean the sum of the profits or losses of each of the Employer's subsidiaries,
less the amount of bonuses paid to members of the Municipal Department of
Butler, Wick & Co., Inc., the Capital Markets Group of Butler, Wick & Co., Inc.
and the administrative and operations department of the Employer.
(d) COMMISSIONS. The Employee shall be entitled to any and all
commissions and fees earned on client accounts in accordance with the formally
established commission and fee programs of the Employer or its applicable
subsidiary.
(e) EMPLOYEE BENEFIT PROGRAMS. During the Term, the Employee shall
be entitled to participate in all formally established employee benefit, bonus,
pension, insurance and profit sharing plans and similar programs that are
maintained by the Employer from time to time and all employee benefit plans or
programs hereafter adopted in writing by the Board for which senior management
personnel of the Employer are eligible (collectively, "Benefit Plans"), in
accordance with the terms and conditions of such Benefit Plans. Notwithstanding
any statement to the contrary contained elsewhere in this Agreement, the
Employer may at any time discontinue or terminate any Benefit Plan now existing
or hereafter adopted, to the extent permitted by the terms of such Benefit Plan,
and shall not be required to compensate the Employee for such discontinuance or
termination to the extent such discontinuance or termination pertains to all
employees of the Employer who are eligible participants at the time.
(f) VACATION AND SICK LEAVE. The Employee shall be entitled, without
loss of pay, to be absent voluntarily from the performance of his duties under
this Agreement, in accordance with the policies periodically established by the
Board for senior management officials of the Employer. The Employee shall be
entitled to annual sick leave as established by the Board for senior management
officials of the Employer.
(g) EXPENSES. The Employer shall pay or reimburse the Employee in
the amount of $666.67 per month for all reasonable travel, entertainment and
miscellaneous expenses incurred by Employee, in connection with the performance
of his duties under this Agreement, including, but not limited to, up to $8,000
in expenses related to membership in the Youngstown Country Club.
4. TERMINATION OF EMPLOYMENT.
(a) GENERAL. The employment of the Employee shall terminate at any
time during the Term (i) at the option of the Employer, upon the delivery by the
Employer of written notice of termination to the Employee, or (ii) at the option
of the Employee, upon delivery by the Employee of written notice of termination
to the Employer if the present capacity or circumstances in which the Employee
is employed are materially adversely changed (including, but not limited to, a
material reduction in responsibilities or authority or the assignment of duties
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<PAGE>
or responsibilities substantially inconsistent with those normally associated
with the Employee's position described in Section 2(a) of this Agreement, change
of title or removal as a director of UCFC, the Employer or any subsidiary of the
Employer, the requirement that the Employee regularly perform his principal
executive functions more than thirty-five (35) miles from his primary office as
of the date of this Agreement or the Employee's benefits provided under this
Agreement are reduced, unless the benefit reductions are part of a company-wide
reduction). The following subsections (A), (B) and (C) of this Section 4(a)
shall govern the obligations of the Employer to the Employee upon the occurrence
of the events described in such subparagraphs:
(A) TERMINATION FOR CAUSE. In the event that the Employer terminates
the employment of the Employee during the Term because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure or refusal to perform the duties
and responsibilities assigned in this Agreement, willful violation of any law,
rule or regulation (other than traffic violations or other minor offenses), or
final cease-and-desist order or material breach of any provision of this
Agreement ("Cause"), the Employee shall not receive, and shall have no right to
receive, any compensation or other benefits for any period after such
termination.
(B) TERMINATION IN CONNECTION WITH CHANGE OF CONTROL. In the event
that the employment of the Employee is terminated by the Employer in connection
with a Change of Control (hereinafter defined) for any reason other than Cause
or is terminated by the Employee as provided in Section 4(a)(ii) above, then the
following shall occur:
(I) The Employer shall promptly pay to the Employee or to his
beneficiaries, dependents or estate an amount equal to the product of 2.99
multiplied by the Employee's "base amount" as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder ("Section 280G");
(II) The Employee shall continue to be covered at the Employer's
expense under all health, life and disability plans of the Employer, as
described in Section 3(c) of this Agreement, in which the Employee was a
participant prior to the effective date of the termination of his employment as
if the Employee were still employed under this Agreement until the earlier of
the expiration of the Term or the date on which the Employee is included in
another employer's benefit plans as a full-time employee; and
(III) The Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise, nor shall any amounts received from other employment or otherwise by
the Employee offset in any manner the obligations of the Employer hereunder,
except as specifically stated in subparagraph (II) above.
(C) TERMINATION NOT IN CONNECTION WITH CHANGE OF CONTROL. In the
event that the employment of the Employee is terminated by the Employer before
the expiration of the
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<PAGE>
Term for any reason other than death, disability, termination for Cause or
termination in connection with a Change of Control, then the following shall
occur:
(I) The Employee shall continue to participate in the retention
plan established pursuant to Section 6.10 of the Merger Agreement;
(II) The Employer shall be obligated to continue to pay on at
least a monthly basis, until the expiration of the Term, to the Employee, his
designated beneficiaries or his estate, the total compensation in effect at the
time of termination pursuant to Section 3 above;
(III) The Employer shall continue to provide to the Employee, at
the Employer's expense, health, life and disability benefits, as described in
Section 3(e) of this Agreement, substantially equal to those being provided to
the Employee at the date of termination of his employment until the earliest to
occur of the expiration of the Term or the date on which the Employee is
included in another employer's benefit plans as a full-time employee; and
(IV) The Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise, nor shall any amounts received from other employment or otherwise by
the Employee offset in any manner the obligations of the Employer hereunder,
except as specifically stated in subparagraph III above.
(b) DEATH OF THE EMPLOYEE. The Term shall automatically expire upon
the death of the Employee. In such event, the Employee's estate shall be
entitled to receive the compensation due the Employee through the last day of
the calendar month in which the death occurred, except as otherwise specified
herein.
(c) "GOLDEN PARACHUTE" PROVISION. In the event that any payments
pursuant to this Section 4 would result in the imposition of a penalty tax
pursuant to Section 280G, such payments shall be reduced to the maximum amount
which may be paid under Section 280G without exceeding such limits.
(d) DEFINITION OF "CHANGE OF CONTROL." A "Change of Control" shall
mean any one of the following events:
(i) the acquisition of ownership or power to vote more than 25% of the
voting stock of the Employer or UCFC;
(ii) the acquisition of the ability to control the election of a
majority of the directors of the Employer or UCFC;
(iii) prior to ____________, 2002, individuals who constitute the
Board of Directors of the Employer or UCFC as of the date of this
Agreement cease for any reason to constitute at least a majority
thereof; provided, however, that any
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<PAGE>
individual whose election or nomination for election as a member of
the Board of Directors of the Employer or UCFC was approved by a vote
of at least two-thirds of the directors then in office shall be
considered to have continued to be a member of the Board of Directors
of the Employer or UCFC and no effect shall be given to changes in the
composition of the Board due to the death, disability, retirement or
resignation of any such person; or
(iv) an event that would be required to be reported in response to
Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor thereto, whether or not any class of
securities of UCFC is registered under the Exchange Act.
Notwithstanding the foregoing, the acquisition by UCFC of the stock of the
Employer in accordance with the Merger Agreement shall not constitute a Change
of Control.
For purposes of this Agreement, an event shall be deemed to have
occurred "in connection with a Change of Control" if such event occurs within
one year before or after a Change of Control.
(e) TERMINATION BY EMPLOYEE. If the Employee terminates this
Agreement without the written consent of the Employer, other than pursuant to
Section 4(a)(ii) of this Agreement, the Employee hereby agrees that during the
unexpired Term: (i) he will not, and will not permit any of his affiliates to,
alone, together or in association with others, either as principal, agent,
owner, shareholder, officer, director, partner, lender, investor, independent
contractor, consultant or in any other capacity, engage in, have a financial
interest in or be in any way connected or affiliated with, or render advice or
services to any person that engages in a business that would compete with the
principal business of the Employee or UCFC or any of their subsidiaries within
Mahoning, Trumbull, Columbiana, Portage, Cuyahoga, Medina or Stark Counties,
Ohio, Mercer or Venango Counties, Pennsylvania, or any contiguous counties in
which the Employer or UCFC is doing business; and (ii) he will not, and will not
permit any affiliate, directly or indirectly, to solicit, divert, take away or
interfere with, the relationship of the Employer with any person who is or was a
customer, or employee or supplier of the Employer at any time during the last
twenty-four (24) month period immediately prior to the date of this Agreement.
For purposes of this provision, the term "affiliate" of any specified
person shall mean (i) a person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such specified person; (ii) any relative or spouse of such person, or any
relative of such spouse, any one of whom has the same home as such person; (iii)
any trust or estate in which such person or any of the persons specified in (ii)
collectively own ten percent or more of the total beneficial interest or of
which any of such persons serve as trustee, executor or in any similar capacity;
or (iv) any corporation or other organization in which such person or any of the
persons specified in (ii) are the beneficial owners collectively of ten percent
or more of any class of equity securities or ten percent or more of the equity
interest. For
6
<PAGE>
the purposes of this definition, "control" when used with respect to any
specified person means the power to direct the management and policies of such
person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings relative to the foregoing.
For purposes of this provision, the term "person" refers to an individual
or corporation, partnership, trust, association or other organization.
This provision shall not apply in the event of the termination of the
employment of the Employee by the Employer prior to the expiration of the Term
or the termination of the employment of the Employee by the Employee pursuant to
Section 4(a)(ii) of this Agreement.
5. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement shall
preclude the Employer or UCFC from consolidating with, merging into, or
transferring all, or substantially all, of their assets to another corporation
that assumes all of their obligations and undertakings hereunder. Upon such a
consolidation, merger or transfer of assets, and subject to the provisions
pertaining to a Change of Control contained herein, the term "Employer" as used
herein, shall mean such other corporation or entity, and this Agreement shall
continue in full force and effect.
6. CONFIDENTIAL INFORMATION. The Employee acknowledges that during his
employment he will learn and have access to confidential information regarding
the Employer and UCFC and its customers and businesses ("Confidential
Information"). The Employee agrees and covenants not to disclose or use for his
own benefit, or the benefit of any other person or entity, any Confidential
Information, unless or until the Employer and UCFC consent in writing to such
disclosure or use or the Confidential Information is otherwise legally in the
public domain. The Employee shall not knowingly disclose or reveal to any
unauthorized person any Confidential Information relating to the Employer or
UCFC, their subsidiaries, or affiliates, or to any of the businesses operated by
them, and the Employee confirms that the Confidential Information constitutes
the exclusive property of the Employer or UCFC. The Employee shall not
otherwise knowingly act or conduct himself to the material detriment of the
Employer or UCFC, their subsidiaries, or affiliates or in a manner which is
inimical or contrary to the interests of the Employer or UCFC.
7. NON-ASSIGNABILITY. Neither this Agreement nor any right or interest
hereunder shall be assignable by the Employee, his beneficiaries or legal
representatives without the Employer's prior written consent; provided, however,
that nothing in this Section 7 shall preclude the Employee from designating a
beneficiary to receive any benefits payable hereunder upon his death or the
executors, administrators or other legal representatives of the Employee or his
estate from assigning any rights hereunder to the person or persons entitled
thereto.
8. NO ATTACHMENT. Except as required by law, no right to receive payment
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
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<PAGE>
9. BINDING AGREEMENT. This Agreement shall be binding upon, and inure to the
benefit of, the Employee and the Employer and their respective permitted
successors and assigns.
10. AMENDMENT OF AGREEMENT. This Agreement may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
11. WAIVER. No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver, unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the act specifically waived.
12. SEVERABILITY. If, for any reason, any provision of this Agreement is held
invalid, such invalidity shall not affect the other provisions of this Agreement
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full force and effect. If this
Agreement is held invalid or cannot be enforced, then any prior Agreement
between the Employer (or any predecessor thereof) and the Employee shall be
deemed reinstated to the full extent permitted by law, as if this Agreement had
not been executed.
13. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
14. GOVERNING LAW. This Agreement has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of the State of Ohio.
15. EFFECT OF PRIOR AGREEMENTS. This Agreement contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the Employer or any predecessor of the Employer and the
Employee.
16. NOTICES. Any notice or other communication required or permitted pursuant
to this Agreement shall be deemed delivered if such notice or communication is
in writing and is delivered personally or by facsimile transmission or is
deposited in the United States mail, postage prepaid, addressed as follows:
If to the Employer:
Butler Wick Corp.
City Center One, Suite 700
Youngstown, Ohio 44501
Attention: Secretary
8
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With a copy to:
United Community Financial Corp.
275 Federal Plaza West
Youngstown, Ohio 44501
Attention: Chairman of the Board
If to the Employee:
Thomas J. Cavalier
8371 Misty Ridge Trail
Poland, Ohio 44514
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
by its duly authorized officer, and the Employee has signed this Agreement, each
as of the day and year first above written.
Attest: Butler Wick Corp.
- --------------------------- By:------------------------------
------------------------------
its---------------------------
Attest:
- --------------------------- ---------------------------------
Thomas J. Cavalier
9
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
RETENTION PLAN
ARTICLE I
DEFINITIONS
The following words and phrases, when used in this Plan with an initial
capital letter, shall have the meanings set forth below, unless the context
clearly indicates otherwise. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural:
1.01 "ACCOUNT" means an individual account established for each
Participant pursuant to Article V.
1.02 "AWARD" means an allocation made to a Participant's Account under
the Plan pursuant to Section 5.03.
1.03 "BWC" means Butler Wick Corp.
1.04 "BENEFICIARY" means the person or persons designated by a
Participant to receive any benefits payable under this Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Board and may be changed from time to
time by similar written notice to the Board. In the absence of a written
designation, the Beneficiary shall be the Participant's estate.
1.05 "BOARD" means the Board of Directors of the Corporation.
1.06 "CAUSE" means the termination of the employment of an Employee
because of his personal dishonesty, incompetence, misconduct, breach of
fiduciary duty involving personal profit, a failure to perform the duties and
responsibilities assigned to him, the violation of any law, rule, regulation or
final cease-and-desist order (other than traffic violations or similar
offenses), or the conviction of a felony or for fraud or embezzlement.
1.07 "CODE" means the Internal Revenue Code of 1986, as amended.
1.08 "COMMITTEE" means the Retention Plan Committee, if any, appointed
by the Board pursuant to Article III hereof.
1.09 "COMPANY" means The Home Savings and Loan Company of Youngstown,
Ohio.
1.10 "CORPORATION" means United Community Financial Corp.
1.11 "EFFECTIVE DATE" means __________________, 1999.
1.12 "EMPLOYEE" means any person who is employed by the Corporation,
the Company or a Subsidiary.
<PAGE>
1.13 "OTS" means the Office of Thrift Supervision, Department of the
Treasury.
1.14 "PARTICIPANT" means any Employee who receives an Award under the
Plan.
1.15 "PLAN" means the United Community Financial Corp. Retention Plan,
as evidenced by this document and any amendments thereto.
1.16 "RETIREMENT" means the retirement of an Employee between ages 60
and 64 with 15 or more years of service to the Corporation, the Company or a
Subsidiary, or the retirement of an Employee at age 65 or older.
1.17 "SUBSIDIARIES" means subsidiaries of the Corporation or the
Company, including, but not limited to, BWC.
1.18 "TRUST" means any trust established by the Board to provide for
the payment of benefits under the Plan.
1.19 "TRUSTEE(s)" means the person(s) or entity approved by the Board
to serve in capacity as the trustee of the Trust.
ARTICLE II
ESTABLISHMENT AND PURPOSE OF THE PLAN
2.01 ESTABLISHMENT OF PLAN. The Corporation hereby establishes a
Retention Plan upon the terms and subject to the conditions set forth in this
document.
2.02 ESTABLISHMENT OF TRUST. The Corporation shall establish a Trust
to provide benefits to Participants and, where applicable, to their
Beneficiaries, under the Plan pursuant to the terms of a separate trust
agreement. Once the Trust has been established, the Trustee shall accept the
Trust and agree to hold the Trust assets and all additions and accretions
thereto.
2.03 PURPOSE. The purpose of the Plan is to reward and retain
Employees who are in key positions of responsibility by providing such Employees
with additional compensation; provided they remain employed by the Corporation,
the Company or any of the Subsidiaries for a specified period of time.
ARTICLE III
ADMINISTRATION OF THE PLAN
3.01 ROLE OF THE BOARD. The interpretation and construction by the
Board of any provisions of this Plan or of any Award granted hereunder shall be
final, conclusive and binding. The Board may, in its discretion, appoint a
Committee to administer this Plan.
3.02 LIMITATION ON LIABILITY. No member of the Board, nor any Trustee,
shall be liable for any determination made in good faith with respect to the
Plan or any Awards granted under the Plan. If
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a member of the Board or of the Committee is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of anything done or not done by such member in such capacity under or with
respect to this Plan, the Corporation shall indemnify such member against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such member in connection with
such action, suit or proceeding if such member acted in good faith and in a
manner such member reasonably believed to be in or not opposed to the best
interests of the Corporation, the Company and the Subsidiaries and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such member's conduct was unlawful.
ARTICLE IV
CONTRIBUTIONS AND INVESTMENTS
4.01 AMOUNT AND TIMING OF CONTRIBUTIONS. Within ___ business days of
the Effective Date, the Corporation shall contribute $3,700,000 to the Trust in
order to provide benefits under the Plan. No contributions to the Trust by
Participants shall be permitted.
4.02 INVESTMENT OF TRUST ASSETS. Subject to the provisions of the
agreement establishing the Trust, all amounts contributed pursuant to Section
4.01 shall be invested in the discretion of the Board. In carrying out its
responsibilities under this Section 4.02, the Board shall establish a written
investment policy which shall be developed by the Board in consultation with the
management of BWC.
ARTICLE V
ELIGIBILITY; ACCOUNTS AND ALLOCATIONS
5.01 ELIGIBILITY. Employees are eligible to receive Awards within the
sole discretion of the Board. Each Employee who is eligible to be a Participant
(and the effective date of such participation) is designated as such in Exhibit
A which is attached hereto and made a part hereof.
5.02 ESTABLISHMENT OF ACCOUNTS. At the time that each Employee becomes
a Participant, the Board shall establish an Account for him under the Plan.
Allocations of Awards (Section 5.03) and investment gains (Section 5.04) shall
be credited to such Account from time to time and allocations of investment
losses (Section 5.04) and distributions (Article VI) shall be debited to such
Account.
5.03 ALLOCATIONS OF AWARDS. Within ___ business days of the Effective
Date, the Board shall credit each Participant's Account with an Award equal to a
portion of the amount specified in Section 4.01. The amount of each Award
credited to each Participant shall be determined in the sole discretion of the
Board; provided, that the sum of all Awards granted pursuant to this Section
5.03 shall be equal to $3,700,000, the amount designated in Section 4.01.
5.04 ALLOCATIONS OF INVESTMENT GAINS AND LOSSES. As of the last day of
each calendar quarter, the Account of each Participant shall be credited with
the amount of any investment gains of the Trust for such calendar quarter or
debited for the amount of any investment losses of the Trust for such calendar
quarter. The portion of any such investment gain or loss allocated to a
Participant's Account shall be determined by the Board, on a pro-rata basis,
based upon such Participant's Account balance as
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of the first day of such calendar quarter in relation to the sum of all
Participant Account balances as of that day.
5.05 PARTICIPANTS' RIGHTS IN ACCOUNT. A Participant's only right with
respect to his Account (and amounts allocated thereto) will be to receive
payments in accordance with the provisions of Article VI of this Plan.
ARTICLE VI
VESTING AND DISTRIBUTIONS
6.01 VESTING OF ACCOUNTS.
(a) GENERAL RULES. Subject to the remaining provisions of this
Article VI, a Participant shall become vested in all amounts credited to his
Account after he has completed five (5) years of service with the Corporation,
the Company or any Subsidiary, beginning on the Effective Date. Unless
otherwise provided elsewhere herein, if a Participant's employment is terminated
prior to his completing five (5) years of service, he shall forfeit all rights
to his entire Account under the Plan.
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH, DISABILITY OR
RETIREMENT AT OR AFTER AGE 65. An Account of a Participant whose service as an
Employee terminates due to (i) death, (ii) disability (as determined by the
Board), or (iii) Retirement at or after age 65 shall be deemed fully vested and
non-forfeitable as of the Participant's last day of service as an Employee. The
Account of a Participant described in this paragraph (b) shall continue to
receive allocations of investment gains and losses pursuant to Section 5.04
until such Account is completely distributed under the relevant provisions of
Article VI.
(c) EXCEPTION FOR CHANGE IN CONTROL. Notwithstanding any other
provision of this Plan and subject to the determination of the Board at the time
of a change in control or imminent change in control, all Participant Accounts
shall be deemed to be immediately 100% vested and non-forfeitable in the event
of a change in control or imminent change in control of the Corporation or the
Company; provided, however, that in the event that any distribution of a
Participant Account in connection with a change in control or imminent change in
control of the Corporation or the Company alone, or in the aggregate with any
other payments made to a Participant, would result in the imposition of a
penalty tax pursuant to Section 280G of the Code, such Participant Account shall
remain subject to the vesting provisions of paragraph (a) of this Section 6.01.
For purposes of this Section 6.01(c), "change in control" shall mean: (i) the
execution of an agreement for the sale of all, or a material portion, of the
assets of the Corporation of the Company; (ii) the execution of an agreement for
a merger or recapitalization of the Corporation of the Company or any merger or
recapitalization whereby the Corporation of the Company is not the surviving
entity; (iii) a change of control of the Corporation or the Company, as defined
or determined by the OTS; or (iv) the acquisition, directly or indirectly, of
the beneficial ownership (within the meaning of the terms "beneficial ownership"
as defined under Section 13(d) of the Securities Exchange Act of 1934 and the
rules promulgated thereunder) of twenty-five percent (25%) or more of the
outstanding voting securities of the Corporation or the Company by any person,
trust, entity or group. For purposes of this Section 6.01(c), "imminent change
in control" shall refer to any offer or announcement, oral or written, by any
party, to acquire control of the Corporation or the Company as to which an
application or notice has been filed with the OTS and such application has
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been approved or such notice has not been disapproved, if such acquisition of
the Corporation or the Company has not been approved by the Board.
(d) EXCEPTION FOR RETIREMENT PRIOR TO AGE 65. An Account of a
Participant whose service as an Employee terminates due to his Retirement prior
to age 65 shall be deemed partially vested and nonforfeitable as of the
Participant's last day of service an Employee. For this purpose, the portion of
the Participant's Account which shall be deemed vested and nonforfeitable shall
be equal to (i) the amount of the Award allocated to his Account pursuant to
Section 5.03, pro-rated as of the last day of his employment based upon the
number of days during which the Participant was employed by the Corporation, the
Company or any Subsidiary between the Effective Date and his date of termination
of employment; less (ii) any investment losses debited to his Account pursuant
to Section 5.04 as of his date of termination of employment. The Account of a
Participant described in this paragraph (d) shall not continue to receive
allocations of investment gains or losses pursuant to Section 5.04 after its
value has been determined pursuant to the preceding sentence.
(e) EXCEPTION FOR INVOLUNTARY TERMINATION OF EMPLOYMENT. An
Account of a Participant whose service as an Employee is involuntarily
terminated for reasons other than Cause prior to the completion of the service
period required under paragraph (a) of this Section 6.01 shall be deemed fully
vested and nonforfeitable as of the Participant's last day of service as an
Employee. The Account of a Participant described in this paragraph (e) shall
continue to receive allocations of investment gains and losses pursuant to
Section 5.04 until such Account is completely distributed under the relevant
provisions of Article VI.
(f) EXCEPTION FOR TERMINATION OF EMPLOYMENT FOR CAUSE.
Notwithstanding any other provision of this Plan, the Account of a Participant
whose service as an Employee is terminated for Cause, either before or after the
Participant has satisfied the service requirement contained in paragraph (a) of
this Section 6.01, shall be entirely forfeited as of the Participant's last day
of service as an Employee.
(g) TREATMENT OF FORFEITURES. Any amounts forfeited from
Participant Accounts pursuant to the provisions of this Section 6.01 shall be
distributed from the Trust by the Trustee to the Corporation, as soon as
practicable following the occurrence of the event causing such forfeiture.
6.02 DISTRIBUTION OF VESTED ACCOUNT BALANCES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Plan, the vested portion of a Participant's Account
(as determined under the applicable paragraph of Section 6.01) shall be
distributed to the Participant or his Beneficiary, as the case may be, as soon
as practicable after the end of the five (5) year period described in Section
6.01(a). Notwithstanding the previous sentence, in the event of a change in
control (as defined in paragraph (c) of Section 6.01), the Participant's vested
Account shall be distributed within thirty (30) days of the occurrence of such
change in control.
(b) FORM OF DISTRIBUTION. If a Participant is entitled to
receive a distribution of his vested Account pursuant to the applicable
provisions of this Article VI, such Participant may elect to receive such
distribution in either (i) a single lump sum payment; or (ii) in substantially
equal annual installments over a period of time not to exceed five (5) years.
Notwithstanding the preceding sentence,
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a Participant's vested Account under the Plan may be paid in equal annual
installments only if the Participant makes an election, in writing, to receive
such installment payments at least twelve (12) months prior to the end of the
five (5) year period described in Section 6.01(a). To the extent that a
Participant's vested Account is to be paid in installment payments, the
undistributed portion of his Account shall continue to be credited with
investment gains and debited with investment losses pursuant to Section 5.04
until the final amount is distributed from the Plan. In the case of a
Participant's death prior to the complete distribution of his Account under the
Plan, the entire remaining undistributed amount of such Account shall be
distributed, in a single lump sum payment, to the Participant's Beneficiary,
within sixty (60) days following the date of the Participant's death.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Participant or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering any Plan
distribution. The Trustee shall pay over to the Corporation, the Company or the
Subsidiary which employs or employed such Participant, any such amount withheld
from or paid by the Participant or Beneficiary.
(d) NONCOMPETITION AGREEMENTS. Notwithstanding anything to the
contrary in this Plan, no distributions shall be made from the Plan to any
Participant described in either paragraph (b) (disability or Retirement at or
after age 65) or (d) (Retirement prior to age 65) of Section 6.01, unless such
Participant executes a non-competition agreement, the terms and conditions of
which are satisfactory to the Board.
ARTICLE VII
CLAIMS PROCEDURE
7.01 FILING CLAIMS. A Participant or his Beneficiary, if entitled to
benefits under the Plan, may file a claim request with the Board.
7.02 NOTIFICATION TO CLAIMANT. If a claim request is filed and it is
wholly or partially denied, the Board will furnish to the claimant a notice of
the decision within ninety (90) days in writing and in a manner calculated to be
understood by the claimant, which notice will contain the following information:
(i) The specific reason or reasons for the denial;
(ii) Specific reference to pertinent Plan provisions upon which the
denial is based;
(iii) A description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(iv) An explanation of the Plan's claims review procedure describing
the steps to be taken by a claimant who wishes to submit his
claims for review.
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7.03 REVIEW PROCEDURE. A claimant or his authorized representative
may, with respect to any denied claim:
(i) Request a review upon a written application filed within
sixty (60) days after receipt by the claimant of written
notice of the denial of his claim;
(ii) Review of pertinent documents; and
(iii) Submit issues and comments in writing.
Any request or submission will be in writing and will be directed to the Board
(or its designee). The Board (or its designee) will have the sole
responsibility for the review of any denied claim and will take all steps
appropriate in the light of its findings.
7.04 DECISION ON REVIEW. The Board (or its designee) will render a
decision upon review. If special circumstances (such as the need to hold a
hearing on any matter pertaining to the denied claim) warrant additional time,
the decision will be rendered as soon as possible, but not later than one
hundred twenty (120) days after receipt of the request for review. Written
notice of any such extension will be furnished to the claimant prior to the
commencement of the extension. The decision on review will be in writing and
will include specific reasons for the decision, written in a manner calculated
to be understood by the claimant, as well as specific references to the
pertinent provisions of the Plan on which the decision is based. If the
decision on review is not furnished to the claimant within the time limits
prescribed above, the claim will be deemed denied on review.
ARTICLE VIII
MISCELLANEOUS
8.01 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan or direct the Trustee to return to the
Corporation all or any part of the assets of the Trust, provided, however, that
the termination of the Trust shall not affect a Participant's right to become
vested in his Account balance derived from Awards already granted and to the
distribution of such Account in accordance with the terms of this Plan.
8.02 NONTRANSFERABLE. Accounts under this Plan shall not be
transferable by a Participant. No Participant or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Company or any Subsidiary be subject to any claim for benefits
hereunder.
8.03 EMPLOYMENT RIGHTS. Neither this Plan nor any grant of an Award
hereunder nor any action taken by the Trustee, the Committee or the Board in
connection with the Plan shall create any right, either express or implied, on
the part of any Employee to continue in the employ of the Corporation, the
Company or a Subsidiary.
8.04 GOVERNING LAW. This Plan shall be governed by and construed under
the laws of the State of Ohio.
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8.05 TERM OF PLAN. The Plan shall remain in effect until the earlier
of (a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust.
8.06 TAX STATUS OF TRUST. It is intended that the Trust to be
established for this Plan is to be treated as a grantor trust of the Company
under the provisions of Section 671, ET SEQ., of the Code. Further, any
Participant or Beneficiary entitled to receive any benefit under the Plan shall
be considered as an unsecured general creditor of the Corporation and the
Company for purposes of receiving such benefit.
IN WITNESS WHEREOF, the Corporation has caused this Plan to be executed
by its duly authorized officer and duly attested, all as of the ___ day of
____________, 1999
UNITED COMMUNITY FINANCIAL CORP.
______________________________ By: ______________________________
Donald J. Varner Douglas M. McKay
its Secretary its President and Chairman of the Board
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EXHIBIT A
UNITED COMMUNITY FINANCIAL CORP.
RETENTION PLAN
The following individuals and their effective date of participation shall
be designated as Participants in the Plan:
Name Effective Date of Participation
- ---- -------------------------------
[To Be Completed]
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of United Community
Financial Corp. on Form S-4 of our report dated January 29, 1999, appearing in
the Prospectus, which is part of this Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
June 4, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENTS AUDITORS CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 27, 1998, with respect to the financial statements
of Butler Wick Corp., included in the Registration Statement on Form S-4 and the
related Prospectus of United Community Financial Corp. for the issuance of up to
1,700,000 common shares and the Proxy Statement of Butler Wick Corp. for special
meeting of shareholders.
Packer, Thomas & Co.
Youngstown, Ohio
June 4, 1999
<PAGE>
AUSTIN ASSOCIATES, INC. 7205 West Central Avenue
FINANCIAL INSTITUTION CONSULTANTS Toledo, OH 43617
an AAI Affiliated Company (419) 841-8521
FAX: (419) 841-8380
We consent to the inclusion in this Registration Statement on Form S-4 of
United Community Financial Corp. of our opinion set forth as Annex B to the
Prospectus and Proxy Statement, which is part the Registration Statement, and
to the reference to our firm and summarization of our opinion in the
Prospectus and Proxy Statement under the captions "Opinion of Austin
Association, Inc."
Austin Associates, Inc.
Toledo, Ohio
June 4, 1999
<PAGE>
CONSENT
Board of Directors
United Community Financial Corp.
275 Federal Plaza West
Youngstown, OH 44503
Gentlemen:
We hereby consent to the use of our firm's name in the Registration
Statement on Form S-4 (the "Registration Statement") filed by United Community
Financial Corp. ("UCFC") with the Securities and Exchange Commission for
registration of up to 1.7 million shares of its common stock, each without par
value (the "Shares"), in connection with UCFC's acquisition of Butler Wick
Corp., to the statements with respect to our firm appearing under the heading
"Legal matters" in the Prospectus/Proxy Statement which is included in the Form
S-4 (the "Prospectus"); to the reference to our firm name under the heading "The
Merger - Income tax consequences" in the Prospectus/Proxy Statement; and to the
filing of our opinions which concern tax matters and the legality of the Shares
being registered, as exhibits to the Form S-4.
Very truly yours,
Vorys, Sater, Seymour and Pease LLP
Cincinnati, Ohio
June 3, 1999
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 28, 1997, with respect to the financial
statements of The Home Savings and Loan Company, included in the Registration
Statement on Form S-4 and the related Prospectus of United Community Financial
Corp. for the issuance of up to 1,700,000 common shares and the Proxy Statement
of Butler Wick Corp. for special meeting of shareholders.
Packer, Thomas & Co.
Youngstown, Ohio
June 4, 1999
<PAGE>
EXHIBIT 99.1
REVOCABLE PROXY
BUTLER WICK CORP.
SPECIAL MEETING OF SHAREHOLDERS
_______________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF BUTLER WICK CORP.
The undersigned shareholder of Butler Wick Corp. ("BWC") hereby nominates,
constitutes and appoints Thomas J. Cavalier and Franklin S. Bennett, Jr., acting
singly in the absence of the others, or by majority if more than one is present,
as proxy or proxies for the undersigned, each with full power of substitution
and resubstitution, to vote all of the common shares of BWC that the undersigned
is entitled to vote at the Special Meeting of the Shareholders of BWC to be held
at ___________________, Youngstown, Ohio, on _______, 1999, at __:00 _.m., and
at any adjournments thereof (the "Special Meeting"), on the following proposal
which is described in the accompanying Proxy Statement:
The adoption of the Agreement and Plan of Merger dated as of April 15,
1999, between BWC and United Community Financial Corp.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS OF BWC UNANIMOUSLY RECOMMENDS A VOTE FOR THE
PROPOSAL.
PLEASE SIGN AND DATE THIS REVOCABLE PROXY ON THE REVERSE SIDE.
UNLESS THIS PROXY IS REVOKED, THE SHARES OF COMMON STOCK REPRESENTED BY THIS
PROXY WILL BE VOTED AS DIRECTED. WHERE NO INSTRUCTIONS ARE INDICATED, PROXIES
SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR THE PROPOSAL.
<PAGE>
All Proxies previously given by the undersigned are hereby revoked.
Receipt of the Notice of the Special Meeting of Shareholders of BWC and of the
accompanying Prospectus/Proxy Statement is hereby acknowledged.
Please sign exactly as your name appears on the shareholders' records of
BWC. Executors, Administrators, Trustees, Guardians, Attorneys and Agents
should give their full titles. If shares are held jointly, each shareholder
named should sign.
____________________________ ______________________________
Signature Signature
____________________________ ______________________________
Print or Type Name Print or Type Name
Dated: _____________________ Dated: _______________________
TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO VOTE, SIGN, DATE
AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE PAID ENVELOPE
ENCLOSED FOR THAT PURPOSE. FAILURE TO VOTE OR AN ABSTENTION WILL, IN EFFECT, BE
A VOTE AGAINST THE PROPOSAL. EVEN IF YOU HAVE GIVEN YOUR PROXY, THE PROXY MAY
BE REVOKED AT ANY TIME PRIOR TO EXERCISE BY (1) FILING WITH BWC WRITTEN NOTICE
OF REVOCATION, (2) EXECUTING AND RETURNING A LATER-DATED PROXY OR (3) ATTENDING
THE SPECIAL MEETING AND GIVING NOTICE OF REVOCATION IN PERSON.
