Selected Financials from the Annual Report EX-13

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N99wadx//Iar9+12Pv4ouDO7wssj+r3KBCpDR/EEIkScjAppd6YcD1PMPTa9iP6x jdtfqPPF8WOXrFqYLUZf0Q== 0000950152-02-002563.txt : 20020415 0000950152-02-002563.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-002563 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMMUNITY FINANCIAL CORP CENTRAL INDEX KEY: 0000707886 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 341856319 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-24399 FILM NUMBER: 02593161 BUSINESS ADDRESS: STREET 1: 275 FEDERAL PLAZA WEST CITY: YOUNGSTOWN STATE: OH ZIP: 44503-1203 BUSINESS PHONE: 3307420500 10-K405 1 l92920ae10-k405.txt UNITED COMMUNITY FINANCIAL CORP. FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to___________________ Commission File Number: 0-024399 UNITED COMMUNITY FINANCIAL CORP. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1856319 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 275 Federal Plaza West, Youngstown, Ohio 44503 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (330) 742-0500 -------------- Securities registered pursuant to Section 12(b) of the Act: None None - ------------------------ ------------------------------------------- (Title of Class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common shares, no par value per share ------------------------------------------ (Title of Class) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last reported sale on March 25, 2002 was $255.0 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of March 25, 2002, there were 35,567,586 of the Registrant's Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-K - Portions of 2001 Annual Report to Shareholders Part III of Form 10-K - Portions of Proxy Statement for the 2002 Annual Meeting of Shareholders

PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL United Community Financial Corp. (United Community) was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) issued upon the conversion of Home Savings from a mutual savings association to a permanent capital stock savings association (Conversion). The Conversion was completed on July 8, 1998. On August 12, 1999, Butler Wick Corp. (Butler Wick) became a wholly-owned subsidiary of United Community. Home Savings was organized as a mutual savings association under Ohio law in 1889. Home Savings is subject to supervision and regulation by the Office of Thrift Supervision (OTS), the Ohio Department of Commerce, Division of Financial Institutions (Division) and the Federal Deposit Insurance Corporation (FDIC). Home Savings is a member of the Federal Home Loan Bank (FHLB) of Cincinnati and the deposits of Home Savings are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (SAIF). As a savings and loan holding company, United Community is subject to regulation, supervision and examination by the OTS, the Division and the Securities and Exchange Commission (SEC). United Community's primary activity is holding the common stock of Home Savings and Butler Wick. Consequently, the following discussion focuses primarily on the business of Home Savings and Butler Wick. Home Savings conducts business from its main office located in Youngstown, Ohio, 28 full-service branches, located in the Northern Ohio communities of Austintown, Boardman, Canfield, Columbiana, East Palestine, Howland, Liberty, Lisbon, Niles, Poland, Salem, Struthers, Youngstown, Ashland, Bellevue, Clyde, Findlay, Fremont, Lexington, Norwalk, Sandusky, Tiffin, and Willard and four loan production offices located in Canton, Cleveland, Mentor and Stow. 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 Ashland, Columbiana, Erie, Hancock, Huron, Mahoning, Richland, Sandusky, Seneca and Trumbull Counties. Home Savings also originates loans secured by nonresidential real estate. 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 various financial instruments discussed in the investment section. Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC, 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 and borrowed funds. 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. Butler Wick is the parent company for three wholly-owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Butler Wick conducts business from its main office located in Youngstown, Ohio, eight offices located in the northeastern Ohio communities of Alliance, Cleveland, Canfield, Canton, Columbus, Kent, Warren, and Salem and two offices in the western Pennsylvania communities of Franklin and Sharon. Butler Wick primarily sells common and preferred stocks, but also offers an array of government, corporate and municipal bonds, unit trusts, mutual funds, IRA's, money market accounts and certificates of deposit. Butler Wick also offers investments in precious metals and a full line of life insurance and annuity products, personal and corporate financial planning, estate planning, pension and profit sharing. DISCUSSION OF FORWARD-LOOKING STATEMENTS When used in this Form 10-K or in future filings by United Community with the SEC, in United Community's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," 1 "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in United Community's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings' market area, demand for investments in Butler Wick's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community's financial performance and could cause United Community's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. LENDING ACTIVITIES GENERAL. 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. 2 LOAN PORTFOLIO COMPOSITION. The following table presents certain information regarding the composition of United Community's loan portfolio at the dates indicated:

- ---------------------------- (1) Consists of overdraft protection loans and loans to individuals secured by demand accounts, deposits, boats and one- to four-family residences. 3 LOAN MATURITY. The following table sets forth certain information as of December 31, 2001, 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 or scheduled repayments.

(1) Includes permanent and construction loans for one- to four-family and multifamily properties and land loans. The next table sets forth the dollar amount of all loans due after December 31, 2002, which have fixed or adjustable interest rates: Due after December 31, 2002 --------------------------- (In thousands) Fixed rate $ 975,411 Adjustable rate 342,712 ------------- $ 1,318,123 ============= 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 December 31, 2001, Home Savings' one- to four-family residential real estate loans totaled approximately $978.5 million, or 65.4% of total loans. At December 31, 2001, $5.8 million, or 0.6%, of Home Savings' one-to four-family loans were nonperforming. OTS 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 97% of the value of the real estate and improvements thereon (LTV), although the majority of such loans have LTVs of 80% or less. Loans on single-family, owner-occupied residences located in low-income or moderate-income census tracts are granted up to a 97% LTV, although Home Savings requires private mortgage insurance on the portion of the principal amount that exceeds 85% of the appraised value of the property securing the loan. Home Savings currently offers fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs) 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 ARMs are typically one or three years. The maximum interest rate adjustment on most of the ARMs 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 ARMs 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 to the index. Home Savings does not offer ARMs to borrowers on one- to four-family residences with LTVs in excess of 95%. 4 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. LOANS SECURED BY MULTIFAMILY RESIDENCES. Home Savings originates loans secured by multifamily properties which contain more than four units. 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 LTVs of up to 75%. Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. 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 December 31, 2001, loans secured by multifamily properties totaled approximately $60.7 million, or 4.1% of total loans. The largest loan had a principal balance of $1.8 million and was performing according to its terms. There was approximately $165,000 in multifamily loans that were considered nonperforming at December 31, 2001. LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Home Savings originates loans secured by nonresidential real estate. Home Savings' nonresidential real estate loans have adjustable rates, terms of up to 25 years and generally LTVs of up to 80%. 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 within 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 supporting the property's valuation. At December 31, 2001, Home Savings' largest loan secured by nonresidential real estate had a balance of $6.9 million and was performing according to its terms. At December 31, 2001, approximately $153.4 million, or 10.2%, of Home Savings' total loans were secured by mortgages on nonresidential real estate, of which $610,000 was considered nonperforming at December 31, 2001. 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. Construction loans for one- to four-family residences have LTVs of up to 95%, and construction loans for commercial, multifamily and nonresidential properties have LTVs of up to 75%, with the value of the land included as part of the owner's equity. At December 31, 2001, Home Savings had approximately $142.7 million, or 9.5% of its total loans, invested in construction loans, including $115.8 million in one- to four-family residential construction and approximately $26.9 in multifamily and nonresidential construction loans. Approximately 30% of Home Savings' construction loans to builders are made for homes for 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. In the event a default on a construction loan occurs and foreclosure follows, 5 Home Savings must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. Nonperforming construction loans at December 31, 2001 amounted to $3.4 million. 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 LTV of 75% or less. At December 31, 2001, approximately $11.4 million, or 0.8%, of Home Savings' total loans were secured by land loans made 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 LTV ratios for commercial loans depend upon the nature of the underlying collateral, but generally commercial loans are made with LTVs of 50 to 85% and have adjustable interest rates. Lines of credit and revolving credits are generally priced on a floating 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 have terms of one to five years. At December 31, 2001, Home Savings had approximately $39.2 million, or 2.6% 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 loans and, occasionally, term loans for periods of up to 36 months. These loans are underwritten based on the creditworthiness of the borrowers and the guarantors. As a result of the addition of experienced loan personnel and the implementation of enhanced underwriting procedures, Home Savings intends to increase its unsecured commercial loan volume in the future. Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependent on the income stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial loans, if any, often consists of rapidly depreciating assets. Nonperforming commercial loans at December 31, 2001 amounted to $469,000. CONSUMER LOANS. Home Savings originates various types of consumer loans, including home equity loans, education loans, loans secured by savings accounts, vehicle loans 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 100% 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 100% of the MSRP value of the car with terms of up to 66 months, and for used automobiles, loans are made for up to the average trade value of the car model and a term of up to five years. All automobile loans are originated indirectly by approved auto dealerships. At December 31, 2001, automobile loans amounted to $21.7 million, or 19.6 %, 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% LTV or by adding a 4.0% margin for loans on one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury index. At December 31, 2001, approximately $48.7 million, or 43.9%, 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 6 increase. Nonperforming consumer loans as a percentage of outstanding consumer loans amounted to 0.39%, 0.79% and 0.31% at December 31, 2001, 2000 and 1999, respectively. At December 31, 2001, Home Savings had approximately $110.7 million, or 7.4% 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 (Board). 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. Each of Home Savings' 29 offices and 4 loan production offices have 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. Commercial, residential and nonresidential real estate loans up to $1.0 million may be approved by an authorized executive officer. Loan requests of $1.0 million to $15.0 million require the approval of the Loan Committee. All loans of $15.0 million or more require approval by three executive officers and a majority of the Board of Directors. 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 AND SALE OF MORTGAGE LOANS. 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 (FHLMC) and other institutional investors in the secondary market. Education loans are sold, once the borrower leaves school, 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. During 2001, Home Savings became active in the secondary market. In October, 2001, $110.9 million in fixed rate one- to- four family residential mortgage loans held in the portfolio were securitized and sold to reduce interest rate risk and provide liquidity. In addition to the $110.9 million securitization and sale of portfolio loans, an additional $57.9 million of mortgages originated during 2001 were sold. Home Savings' loan production offices are expected to provide high levels of salable loans in 2002. Home Savings generally retains servicing on the sale of loans originated in its primary market area and sells loans servicing released on loans originated out of the primary market area. At December 31, 2001, Home Savings had $46.6 million of outstanding commitments to originate loans and $45.5 million available to borrowers under consumer and commercial lines of credit. At December 31, 2001, Home Savings had $66.0 million in undisbursed funds related to construction loans in process. 7 LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the aggregate amount that Home Savings may lend to any one borrower to an amount equal to 15.0% of Home Savings' unimpaired capital and unimpaired surplus (Lending Limit Capital). A savings association may lend to one borrower an additional amount not to exceed 10.0% of Home Savings' Lending Limit Capital if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. Based on such limits, Home Savings could lend approximately $26.7 million to one borrower at December 31, 2001. The largest amount Home Savings had outstanding to one borrower at December 31, 2001, was $11.0 million, which consisted of several loans secured by first mortgages on commercial buildings. At December 31, 2001, these loans were performing in accordance with their 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. When a loan payment has not been made by the fifteenth of the month, a late notice is sent and a penalty of up to 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 the Board of Home Savings (Executive Committee) 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:

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 and 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 are applied to principal. 8 The following table sets forth information with respect to Home Savings' nonperforming loans and other assets at the dates indicated:

For 2001, approximately $523,000 in interest income would have been recorded had nonaccruing and restructured loans been accruing pursuant to contractual terms. During 2001 interest collected on such loans and included in net income was approximately $412,000. Nonperforming assets increased approximately $2.8 million, or 28.0%, to $12.9 million at December 31, 2001, from $10.1 million at December 31, 2000. The primary reasons for the increase are the restructuring of a relationship with one borrower, the delinquency of several loans to one borrower, and the acquisition of Industrial in 2001. At December 31, 2001, total nonaccrual and restructured loans accounted for 0.89% of net loans receivable, compared to 1.10% at December 31, 2000. Total nonperforming assets were 0.67% of total assets as of December 31, 2001, a decrease of 0.10% from 0.77% as of December 31, 2000. Real estate acquired in settlement of loans is classified separately on the balance sheet at the lower of cost or fair value as of the date of acquisition. After foreclosure, the loan is written down to the value of the underlying collateral by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income or loss on disposition, are included in other expenses. At December 31, 2001, the carrying value of real estate acquired in settlement of loans was $477 and consisted of seven single-family properties. 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 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. 9 Home Savings classifies its commercial loans on a periodic basis, not less often than annually, 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. 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 the dates indicated were as follows: At December 31, ------------------------- 2001 2000 ---- ----- (In thousands) Classified assets: Substandard $ 9,515 $ 10,259 Doubtful 100 - Loss 1,517 433 -------- -------- Total classified assets $ 11,132 $ 10,692 ======== ======== Home Savings analyzes each classified asset quarterly 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 establishes the allowance for loan losses at a level it believes adequate to absorb probable losses inherent in the loan portfolio. Management bases its determination of the adequacy of the allowance 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. In determining the adequacy of the allowance for loan loss, management reviews and evaluates on a quarterly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Review Committee and allocated to the loan. Other loans not specifically reviewed by management are evaluated using the historical charge-off experience ratio calculated by type of loan. The historical charge-off experience ratio factors into account the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied and any other known factors which may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed quarterly and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends or actual principal charge-off. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentration and the effect changing economic conditions have on Home Savings. 10 The following table sets forth an analysis of Home Savings' allowance for loan losses for the periods indicated:

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.

INVESTMENT ACTIVITIES GENERAL. Investment and mortgage-related securities are classified upon acquisition as available for sale, held to maturity, or trading. 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 retained earnings. Securities classified as held to maturity are carried at amortized cost. Securities classified as trading are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of income. United Community, Home Savings and Butler Wick recognize premiums and discounts 11 in interest income over the period to maturity or call 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. HOME SAVINGS INVESTMENT ACTIVITY. Federal regulations and Ohio law permit Home Savings to invest in various types of marketable securities, including interest-bearing deposits in other financial institutions, federal funds, U.S. Treasury and agency obligations, mortgage-related 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, mortgage-related securities issued or sponsored by Federal National Mortgage Association (FNMA), FHLMC, Government National Mortgage Association (GNMA), as well as private issuers, 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 FDIC, bankers' acceptances, federal funds and money market funds. 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-related securities and CMOs, which are rated the highest credit quality by a nationally recognized rating agency. Mortgage-related securities are issued by FNMA, GNMA and FHLMC. Mortgage-related securities generally entitle Home Savings to receive a portion of the cash flows from an identified pool of mortgages. GNMA securities, FNMA securities and a majority of Home Savings' FHLMC securities are guaranteed by the issuing agency as to timely payment of principal and interest. The balance of Home Savings' FHLMC securities are guaranteed as to timely payment of interest and eventual payment of principal. The CMOs are a type of debt security issued by a special-purpose entity that aggregrates pools of mortgages and mortgage-related securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into tranches or classes which have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages, as opposed to pass through mortgage-related securities where cash flows are distributed pro rata to all security holders. In contrast to mortgage-related securities from which cash flow is received (and hence, prepayment risk is shared) pro rata by all securities holders, the cash flow from the mortgages or mortgage-related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage-related securities resulting from unexpected prepayment activity. Home Savings is exposed to prepayment risk and reinvestment risk to the extent that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Mortgage-related securities enable Home Savings to generate positive interest rate spreads with minimal administrative expense and reduce credit risk due to either guarantees provided by the issuer or the high credit rating by the rating agency. Mortgage-related securities classified as available for sale also provide Home Savings with an additional source of liquid funds. Home Savings also invests in investment grade corporate notes which mature within three years or less. 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. BUTLER WICK INVESTMENT ACTIVITY. Butler Wick holds securities in three subsidiaries, Butler Wick & Co., Inc., Butler Wick Trust Company and Butler Wick Asset Management. Butler Wick & Co., Inc. invests in municipal securities and to a lesser extent government agency securities for sale to clients. These securities are held as available for sale. Butler Wick & Co., Inc. does not make markets in equity securities. In order to qualify as a fiduciary in both the State of Ohio and in the Commonwealth of Pennsylvania, Butler Wick Trust Company deposited United States Government obligations having a principal value of $100,000 with the Federal Reserve Bank for each state of incorporation. In addition to these deposits, U.S. Government obligations are owned by Butler Wick Trust Company. All of these securities are classified as held to maturity. UNITED COMMUNITY INVESTMENT ACTIVITIES. Funds maintained by United Community for general corporate purposes, including possible acquisitions, are invested in investment grade corporate notes, federally-sponsored corporate 12 obligations, and equity securities. In addition, United Community invests in Eurodollars, which is a short-term investment. These types of investments provide a great deal of liquidity and flexibility. The maturities of United Community's consolidated available for sale and held to maturity marketable securities at December 31, 2001, excluding FHLB stock, and equity securities, are indicated in the following table:

13 The following table sets forth the amortized cost and fair value of United Community's consolidated available for sale and held to maturity marketable securities, FHLB stock, and mortgage-related securities at the dates indicated.

14 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 other 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 FHLB, as well as other suitable lenders, 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 (IRAs), NOW accounts, money market accounts, and certificates of deposit. Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are monitored weekly by the 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. The following table sets forth the dollar amount of deposits in the various types of accounts offered by Home Savings at the dates indicated:

Total deposits increased by $483.0 million, or 53.6%, from December 31, 2000, to December 31, 2001. 15 The following table shows rate and maturity information for Home Savings' certificates of deposit at December 31, 2001:

At December 31, 2001, approximately $540.9 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 $528.0 million are available from the FHLB of Cincinnati. The following table presents the amount of Home Savings' certificates of deposit of $100,000 or more by the time remaining until maturity at December 31, 2001: Maturity Amount -------- ------ (In thousands) Three months or less $32,987 Over 3 months to 6 months 20,492 Over 6 months to 12 months 59,432 Over 12 months 52,917 ----------- Total $ 165,828 =========== Based on past experience, management believes that a substantial percentage of the above certificates will be renewed with Home Savings at maturity. 16 The following table sets forth Home Savings' deposit account balance activity for the periods indicated: Year ended December 31, 2001 2000 ----------- ------------ (Dollars in thousands) Beginning balance $ 900,413 $ 834,087 Net increase in deposits 434,233 32,301 ----------- --------- Net deposits before interest credited 1,334,646 866,388 Interest credited 48,772 34,025 ----------- --------- Ending balance $ 1,383,418 $ 900,413 =========== ========= Net increase $ 483,005 $ 66,326 =========== ========= Percent increase 53.64% 7.95% BORROWINGS. The FHLB 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 FHLB of Cincinnati, Home Savings is authorized to apply for advances, provided certain standards of creditworthiness have been met. Under current regulations, an association must meet certain qualifications to be eligible for FHLB advances. The extent to which an association is eligible for such advances will depend upon whether it meets the Qualified Thrift Lender (QTL) test. If an association meets the QTL test, the association will be eligible for 100% of the advances it would otherwise be eligible to receive. If an association does not meet the QTL test, the association will be eligible for such advances only to the extent it holds specified QTL test assets. At December 31, 2001, Home Savings was in compliance with the QTL test. Home Savings may borrow up to $528.0 million from the FHLB, and had $228.0 million outstanding advances at December 31, 2001. Butler Wick borrows on a secured basis to fund client receivables. Short-term bank loans bear interest at the federal funds rate plus 1% and are payable on demand. The loans are fully collateralized by marketable securities from both customers' margin accounts and securities owned by Butler Wick. Short-term borrowings also take the form of securities loaned to other broker/dealers. Short-term borrowings are available to Butler Wick to the extent of the loan value of the marketable securities. COMPETITION Home Savings faces competition for deposits and loans from other savings and loan associations, credit unions, banks and mortgage originators in Home Savings' primary market area. The primary factors in competition for deposits are customer service, convenience of office location and interest rates. Home Savings 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. Butler Wick offers retail brokerage, asset management, and trust services to clients primarily in northeastern Ohio and western Pennsylvania. In each of these businesses Butler Wick competes with both regional and national firms. As a full service broker, Butler Wick competes based on personal service rather than price. Butler Wick Asset Management Company and Butler Wick Trust Company are the only such locally owned and managed financial services providers. EMPLOYEES At December 31, 2001, Home Savings and Butler Wick had 553 and 170 full-time equivalent employees, respectively. Home Savings and Butler Wick believe that relations with their employees are good. Home Savings offers health, life and disability benefits to all employees, a 401(k) plan and an employee stock ownership plan for its eligible employees. Home Savings had a defined benefit pension plan, which was terminated effective July 31, 1999. Home Savings offered a post-retirement health plan for its eligible employees. The benefits of this plan were curtailed in 2000. Butler Wick offers health, life and disability benefits to all employees, a 401(k) plan, a profit sharing plan and a retention plan for 17 its eligible employees. None of the employees of Home Savings or Butler Wick are represented by a collective bargaining unit. REGULATION United Community is a unitary savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (HOLA), and is subject to regulation, examination, and oversight by the OTS, although there are generally no restrictions on the activities of United Community unless the OTS determines that there is reasonable cause to believe that an activity constitutes a serious risk to the financial safety, soundness, or stability of Home Savings. Home Savings is subject to regulation, examination, and oversight by the OTS, the Division and the FDIC, and is also subject to certain provisions of the Federal Reserve Act. Butler Wick is subject to regulation by the SEC and NASD Regulation, Inc. United Community, Home Savings and Butler Wick are also subject to the provisions of the Ohio Revised Code applicable to corporations generally, including laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties to Ohio. The OTS, the FDIC, the Division, the SEC and the NASD each have various powers to initiate supervisory measures or formal enforcement actions if United Community or the subsidiary they regulate does not comply with applicable regulations. If the grounds provided by law exist, the OTS, the FDIC or the Division may place Home Savings in conservatorship or receivership. Home Savings is also subject to regulatory oversight under various consumer protection and fair lending laws which 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 Home Savings to open a new branch or engage in a merger. Federal law prohibits Home Savings from making a capital distribution to anyone or paying management fees to any person having control of Home Savings if, after such distribution or payment, Home Savings would be undercapitalized. In addition, Home Savings may not pay any dividends if, as a result, its net worth would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. Home Savings must file an application with, and obtain approval from, the OTS (i) if the proposed distribution would cause total distributions for the calendar year to exceed net income for that year to date plus Home Savings' retained net income for that year to date plus the retained net income for the preceding two years; (ii) if Home Savings would not be at least adequately capitalized following the capital distribution; (iii) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between Home Savings and the OTS or the FDIC, or any condition imposed on Home Savings in an OTS-approved application or notice. If Home Savings is not required to file an application, it must file a notice of the proposed capital distribution with the OTS. Home Savings did not pay any dividends to United Community in 2001. In January, 2000, Home Savings paid a dividend to United Community of $158.0 million, which was used to pay a portion of a $185.0 million loan related to the $6.00 per share special capital distribution in 1999. Loans by Home Savings 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 specified limits. 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. All other transactions between Home Savings and its affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (FRA). United Community and Butler Wick are affiliates of Home Savings for this purpose. Under 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 OTS. "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 OTS as well as the Division. Further, any merger of United Community in which United Community is not the resulting company must also be approved by both the OTS and the Division. 18 ITEM 2. DESCRIPTION OF PROPERTY The following table sets forth certain information at December 31, 2001, regarding the properties on which the main office, the branch offices and the loan production offices of Home Savings are located:

(1) Office facility of appraisal staff. (2) Drive-up facility only. (3) Book value and deposit totals are combined for the two Norwalk offices. 20 The following table sets forth certain information at December 31, 2001, regarding the properties on which the main office and the branch offices of Butler Wick are located: Owned or Year Location Leased opened - -------- ------ ------ City Center One Bldg., Suite 700 Leased 1926 Youngstown, OH 44503 960 W. State Street Leased 1959 Alliance, OH 44601 1284 Liberty Street Leased 1932 Franklin, PA 16322 1 E. State Street Leased 1932 Sharon, PA 16146 25651 Detroit Road Leased 1990 Cleveland, OH 44145 3685 Stutz Drive, Suite 201 Leased 1999 Canfield, OH 44406 149 N Water Street Leased 1981 Kent, OH 44240 Howland Professional Centre Leased 1932 425 Niles-Cortland Road SE Bldg. A, Suite 201 Warren, Ohio Howland Professional Centre Leased 2000 425 Niles-Cortland Road SE Bldg. A, Suite 202 Warren, Ohio 4522 Fulton Drive NW Leased 1990 Canton, OH 44718 100 S. Broadway, 2nd Floor Leased 1956 Salem, OH 44460 ITEM 3. LEGAL PROCEEDINGS United Community is not presently involved in any material legal proceedings. From time to time, United Community is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by Home Savings and incidental to its securities business offered by Butler Wick. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information contained in the 2001 Annual Report to Shareholders of United Community (Annual Report) under the caption "Market Price and Dividends" is incorporated herein by reference and attached hereto as part of Exhibit 13. As of March 19, 2002, there were approximately 14,022 registered holders of United Community stock. ITEM 6. SELECTED FINANCIAL DATA The information contained in the Annual Report under the caption "Selected Financial Data and Other Data" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Annual Report under the caption "Asset and Liability Management and Market Risk" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Consolidated Financial Statements appearing in the Annual Report and the report of Crowe Chizek and Company LLP dated February 8, 2002, are incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the Proxy Statement for the 2002 Annual Meeting of Shareholders of United Community (Proxy Statement), filed with the Securities and Exchange Commission (Commission) on March 26, 2002, under the captions "Proposal One - Election of Directors" and "Executive Officers," is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors - Certain Transactions" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Proxy Statement under the caption "Voting Securities and Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. 22 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 Articles of Incorporation 3.2 Amended Code of Regulations 10 Material Contracts 11 Statement Regarding Computation of Per Share Earnings 13 Portions of the 2001 Annual Report to Shareholders 16 Letter regarding change in certifying accountants 20 Proxy Statement for 2002 Annual Meeting of Shareholders 21 Subsidiaries of Registrant 23.1 Crowe, Chizek and Company LLP Consent 23.2 Deloitte and Touche LLP Consent 99 Independent Auditors' Report from Deloitte and Touche LLP (b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (c) REPORTS ON FORM 8-K. On October 17, 2001 form 8-K was filed for Item 5, Other Events, providing the third quarter financial information news release. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED COMMUNITY FINANCIAL CORP. By: /S/ Douglas M. McKay ------------------------------ Douglas M. McKay, President (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /S/ Douglas M. McKay /S/ Richard M. Barrett ------------------------------------------------ --------------------------------------------------- Douglas M. McKay, President and Director Richard M. Barrett, Director Date: March 29, 2002 Date: March 29, 2002 /S/ John F. Zimmerman, Jr. /S/ Donald J. Varner ------------------------------------------------ --------------------------------------------------- John F. Zimmerman, Jr., Director Donald J. Varner, Director Date March 29, 2002 Date: March 29, 2002 /S/ Herbert F. Schuler, Sr. /S/ Patrick A. Kelly ------------------------------------------------ --------------------------------------------------- Herbert F. Schuler, Sr., Director Patrick A. Kelly, Treasurer (Principal Financial Officer) Date: March 29, 2002 Date: March 29, 2002 /S/ Thomas J. Cavalier ------------------------------------------------ Thomas J. Cavalier, Director Date: March 29, 2002

24
INDEX TO EXHIBITS Exhibit Number - -------------- 3.1 Articles of Incorporation 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 Amended Code of Regulations Incorporated by reference to the 1998 10-K filed by United Community on March 31, 1999, Exhibit 3.2 10.1 The Home Savings and Loan Company of Youngstown, Ohio Employee Stock Ownership Plan 10.2 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed by United and Loan Company of Youngstown, Ohio and Douglas Community on March 30, 2001, Exhibit 10.2 M. McKay, dated December 29, 2000. 10.3 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed by United and Loan Company of Youngstown, Ohio and Donald Community on March 30, 2001, Exhibit 10.3 J. Varner, dated December 29, 2000. 10.4 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed by United and Loan Company of Youngstown, Ohio and Patrick A. Community on March 30, 2001, Exhibit 10.4 Kelly, dated December 29, 2000. 10.5 Employment Agreement between Butler Wick Corp. Incorporated by reference to the 1999 10-K filed by United and Thomas J. Cavalier, dated August 12, 1999 Community on March 29, 2000, Exhibit 10.5 10.6 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed by United and Loan Company of Youngstown, Ohio and David G. Lodge, Community on March 30, 2001, Exhibit 10.6 dated December 29, 2000. 10.7 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed by United and Loan Company of Youngstown, Ohio and Patrick W. Community on March 30, 2001, Exhibit 10.7 Bevack, dated December 29, 2000. 11 Statement Regarding Computation of Per Share Earnings Incorporated by reference to Note 19 to the Financial Statements included in the Annual Report in Exhibit 13 13 Portions of the 2001 Annual Report to Shareholders 20 Proxy Statement for 2002 Annual Meeting of Incorporated by reference to the Proxy Statement, filed with Shareholders the Securities and Exchange Commission on March 26, 2002. 21 Subsidiaries of Registrant 23.1 Crowe, Chizek and Company LLP Consent 23.2 Deloitte and Touche LLP Consent 99 Independent Auditors' Report from Deloitte and Touche LLP
25 EX-10.1 3 l92920aex10-1.txt EX-10.1 EXHIBIT 10.1 EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS
PAGE ---- SECTION 1 - PARTICIPATION..............................................................................2 1.01 Eligibility Requirements.............................................................2 1.02 Service for Eligibility..............................................................2 1.03 Effect of Rehire on Prior Eligibility Service........................................2 SECTION 2 - CONTRIBUTIONS..............................................................................3 2.01 Regular Employer Contributions.......................................................3 2.02 Employer Contribution to Reduce Loan Obligation......................................3 2.03 Rollover Contributions/Participant Contributions.....................................3 2.04 Limitations on Annual Additions......................................................3 2.05 Corrective Adjustments...............................................................4 2.06 Limitation on Reversion of Contributions.............................................5 SECTION 3 - ALLOCATION OF EMPLOYER CONTRIBUTIONS.......................................................6 3.01 Allocation of Regular Contributions and Forfeitures..................................6 3.02 Allocation of Employer Shares Purchased with Proceeds of Plan Loan...................6 3.03 Special Restriction on Allocation....................................................6 SECTION 4 - PARTICIPANTS' ACCOUNTS.....................................................................7 4.01 Establishment of Employer Contributions Accounts.....................................7 4.02 Establishment of Suspense Account (Effective on and after January 1, 1998 and prior to October 15, 1999)...........................................................7 4.02 Establishment of Suspense Account (Effective on and after October 15, 1999)..........7 SECTION 5 - PLAN INVESTMENTS...........................................................................9 5.01 Primary Investment...................................................................9 5.02 Diversification Requirements.........................................................9 SECTION 6 - VALUATION OF PARTICIPANTS' ACCOUNTS.......................................................11 6.01 Valuations..........................................................................11 6.02 Method of Adjustment................................................................11 SECTION 7 - RETIREMENT BENEFITS.......................................................................12 7.01 Eligibility for Retirement..........................................................12
i
SECTION 8 - DEATH BENEFITS............................................................................13 8.01 Eligibility for Death Benefit.......................................................13 8.02 Designation of Beneficiary..........................................................13 8.03 Distribution of Deathz Benefit......................................................14 SECTION 9 - DISABILITY BENEFITS.......................................................................15 9.01 Amount of Disability Benefit........................................................15 9.02 Determination of Total and Permanent Disability.....................................15 SECTION 10 - TERMINATION OF EMPLOYMENT BENEFITS.......................................................16 10.01 Amount of Benefits Upon Termination of Employment...................................16 SECTION 11 - VESTING..................................................................................17 11.01 Determination of Vested Benefits....................................................17 11.02 Full Vesting at Normal Retirement Age...............................................17 11.03 Service for Vesting.................................................................17 11.04 Effect of Break in Service on Vesting...............................................17 11.05 Forfeitures.........................................................................18 SECTION 12 - PAYMENT OF BENEFITS......................................................................19 12.01 Method of Payment...................................................................19 12.02 Timing of Payments..................................................................19 12.03 Distributions After Death...........................................................20 12.04 Consent and Cash-Out Requirements...................................................21 12.05 Eligible Rollover Distributions.....................................................22 12.06 Put Option..........................................................................23 12.07 Right of First Refusal..............................................................24 12.08 Installment Distributions...........................................................24 SECTION 13 - TRUST AGREEMENT..........................................................................26 13.01 Description of Trust Agreement......................................................26 SECTION 14 - PLAN ADMINISTRATION......................................................................27 14.01 Plan Administrator..................................................................27 14.02 Duties of Plan Administrator........................................................27 14.03 Interpretation of Document..........................................................27 SECTION 15 - AMENDMENT AND TERMINATION................................................................28 15.01 Sponsor's Right to Amend or Terminate the Plan......................................28 SECTION 16 - DISTRIBUTIONS ON PLAN TERMINATION........................................................29 16.01 Full Vesting on Plan Termination....................................................29 16.02 Payment on Plan Termination.........................................................29
ii
16.03 Discontinuance of Contributions; Partial Termination of Plan........................29 SECTION 17 - CREDITORS OF PARTICIPANTS................................................................30 17.01 Non-Assignability...................................................................30 17.02 Qualified Domestic Relations Orders.................................................30 SECTION 18 - CLAIMS PROCEDURES........................................................................31 18.01 Filing a Claim for Benefits.........................................................31 18.02 Denial of Claim.....................................................................31 18.03 Remedies Available to Claimants.....................................................31 SECTION 19 - TOP HEAVY RULES..........................................................................33 19.01 Definitions.........................................................................33 19.02 Top Heavy Status....................................................................34 19.03 Minimum Contributions...............................................................35 19.04 Top Heavy Vesting...................................................................35 SECTION 20 - VOTING RIGHTS............................................................................37 20.01 Participant Voting Rights with Respect to Allocated Shares..........................37 20.02 Participant Voting Rights with Respect to Unallocated Shares........................37 SECTION 21 - EXEMPT LOANS.............................................................................38 21.01 Authority to Borrow.................................................................38 21.02 Requirements for Plan Loans.........................................................38 SECTION 22 - MISCELLANEOUS............................................................................40 22.01 Employer's Right to Terminate Employees.............................................40 22.02 Gender and Number...................................................................40 22.03 Merger or Consolidation.............................................................40 22.04 Named Fiduciaries...................................................................40 22.05 Limitations on Payment; Missing Participant.........................................40 22.06 Additional Service Credits..........................................................41 22.07 Uniformed Services Employment and Reemployment Rights Act...........................41 22.08 Nonterminable Protections and Rights................................................41 22.09 Dividends...........................................................................41 22.10 Use of Return of Capital with Respect to Employer Shares............................42 22.11 Minimum Distributions...............................................................42 22.12 Qualified Transportation Fringe Compensation........................................42 22.13 Mistakes or Misstatements...........................................................42 SECTION 23 - DEFINITIONS..............................................................................44
iii UNITED COMMUNITY FINANCIAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN United Community Financial Corp. (the "Sponsor") hereby adopts, as of the Effective Date, the following amended and restated employee stock ownership plan (hereinafter referred to as the "Plan"). The Plan will be maintained for the exclusive benefit of the Employer's eligible Employees and, where applicable, the Beneficiaries of such Employees. It is intended that the Plan, together with the Trust Agreement, will comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act of 1974, as amended. The Plan was originally effective as of January 1, 1998. Unless otherwise provided in the terms of this amended and restated Plan, the vested interest of a Participant who terminated employment is determined by the provisions of the Plan in effect on the date the Participant terminated employment. SECTION 1 - PARTICIPATION 1.01 ELIGIBILITY REQUIREMENTS Each Employee of the Employer who is classified by the Employer as a "part-time employee" shall be eligible to participate in the Plan on the Entry Date coinciding with or first following the date on which he has completed a Year of Eligibility Service and has attained age 20. A part-time Employee shall also be given credit for all Years of Eligibility Service with an Affiliate which is not a participating employer. Each Employee of the Employer who is classified by the Employer as a full-time Employee shall be eligible to participate in the Plan on the Entry Date coinciding with or first following the date on which he has completed 6 months of service and has attained age 20. A full-time employee will be given credit for a month of service if such full-time employee is employed by the Employer or an Affiliate at any time during such month. An individual who ceases to be classified by the Employer as an Employee but who remains actively employed by the Employer or an Affiliate will not be treated as being eligible to receive a distribution from the Plan pursuant to Section 10.01 until his termination of employment from the Employer and all Affiliates. 1.02 SERVICE FOR ELIGIBILITY An Employee will be credited with a "Year of Eligibility Service" on the last day of an Eligibility Computation Period in which he is credited with at least 1,000 Hours of Service. An Employee's "Eligibility Computation Period" is a 12-month period beginning on his Employment Commencement Date or, to the extent necessary, any anniversaries of such Employment Commencement Date. 1.03 EFFECT OF REHIRE ON PRIOR ELIGIBILITY SERVICE A former Participant who is reemployed by the Employer following the termination of his employment with the Employer and all Affiliates will participate in the Plan on the date of his reemployment with the Employer, provided that he is classified as an Employee on such date. 2 SECTION 2 - CONTRIBUTIONS 2.01 REGULAR EMPLOYER CONTRIBUTIONS Subject to its right to terminate or amend the Plan, for each Plan Year, the Employer may contribute and pay to the Trustee of the Trust Fund created for the purpose of carrying out this Plan a contribution in cash or in Employer Shares as the Board of Directors of the Sponsor may in its discretion determine. The amount of such contribution by the Employer to be paid to the Plan in any year will be such amount as the Board of Directors of the Sponsor may in its discretion determine, provided, however, that in any year, the amount contributed pursuant to this section will not exceed the maximum amount deductible from the Employer's income for such year under Section 404(a)(3) of the Code. 2.02 EMPLOYER CONTRIBUTION TO REDUCE LOAN OBLIGATION Subject to its right to terminate or amend the Plan, in addition to the contributions authorized by Section 2.01, the Employer may in its discretion contribute amounts sufficient to enable the Trustee to pay, on or before the due date thereof, each installment of principal and interest on a Plan loan used to acquire Employer Shares, as further described in Section 21, provided that the amounts contributed in any year by the Employer pursuant to this Section 2.02 will not exceed the maximum amount deductible from the Employer's income for such year under Section 404(a)(9) of the Code. 2.03 ROLLOVER CONTRIBUTIONS/PARTICIPANT CONTRIBUTIONS Neither rollover contributions nor Participant contributions to the Plan are permitted. 2.04 LIMITATIONS ON ANNUAL ADDITIONS Annual Additions to each Participant's Account will not exceed the lesser of (a) $30,000, or such increased amount as permitted by the Secretary of the Treasury; or (b) 25% of the Participant's Section 415 Limit Compensation paid or made available for a Limitation Year. If the Annual Additions allocated to a Participant's Account for a Limitation Year is in excess of the limitations set forth in this paragraph, such excess will be considered an "excess Annual Addition." For the purpose of this section, Section 2.04, "Section 415 Limit Compensation" means compensation as defined in Treasury Regulation Section 1.415-2(d)(1)-(3), or one of the alternative definitions of compensation set forth in Treasury Regulation Section 1.415-2(d)(11)(i) or (ii), as selected by the Plan Administrator. 3 For the purpose of this section, Section 415 Compensation will include "elective deferrals," as such term is defined by Section 402(g)(3) of the Code, and amounts contributed or deferred at the election of the Participant by the Employer that are not includable in the gross income of the Participant by reason of Section 125, Section 457, or for Limitation Years commencing on and after January 1, 2001, Section 132(f)(4) of the Code. The following paragraphs of this section are effective for all Limitation Years prior to the first Limitation Year commencing on or next following January 1, 2000. If the Participant is, or was, covered under a defined benefit plan and a defined contribution plan maintained by the Employer or an Affiliate, the sum of the Participant's defined benefit plan fraction and defined contribution plan fraction may not exceed 1.0 in any Limitation Year. The defined benefit plan fraction is a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all defined benefit plans (whether or not terminated) maintained by the Employer or an Affiliate, and the denominator of which is the lesser of (i) 1.25 times the dollar limitation of Code Section 415(b)(1)(A) in effect for the Limitation Year; or (ii) 1.4 times the Participant's average compensation for the three consecutive years that produced the highest average. The defined contribution plan fraction is a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Account under all defined contribution plans maintained by the Employer (whether or not terminated) or an Affiliate for the current and all prior Limitation Years, and the denominator of which is the sum of the lesser of the following amounts determined for such year and for each prior Year of Service with the Employer or an Affiliate: (i) 1.25 times the dollar limitation in effect under Code Section 415(c)(1)(A); or (ii) 1.4 times the amount that may be taken into account under Code Section 415(c)(1)(B). For any years in which the Plan is "top heavy," "1.0" will be substituted for "1.25" in the preceding two paragraphs. If, in any Limitation Year, the sum of the defined benefit plan fraction and the defined contribution plan fraction exceeds 1.0, the rate of benefit accruals under the defined benefit plan will be reduced so that the sum of the fractions equals 1.0. 2.05 CORRECTIVE ADJUSTMENTS If, as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's annual compensation, or under other limited facts and circumstances that the Commissioner will specify, an excess Annual Addition exists, such excess will be disposed of by reducing contributions made by the Employer and allocated to the Participant's Account for the applicable Limitation Year in the next and succeeding Limitation Years until such excess is reduced. If an excess Annual Addition exists at the end of the Limitation Year and the Participant was not covered by the Plan as of the last day of such Limitation Year, such excess will be treated 4 as a forfeiture to be held unallocated in a suspense account and applied to reduce contributions made by the Employer for all remaining Participants in the next and succeeding Limitation Years prior to any contributions being made by the Employer to the Plan for such year. If an excess Annual Addition exists as a result of a Participant being a participant in another defined contribution plan maintained by the Employer or Affiliate, the excess Annual Addition will be treated in accordance with this Section 2.05 unless treated as an excess annual addition in the other plan. 2.06 LIMITATION ON REVERSION OF CONTRIBUTIONS Prior to the satisfaction of all liabilities to Participants and Beneficiaries, except as provided in paragraphs (a) through (d) below, all assets of the Trust Fund will be held for the exclusive benefit of Participants and their Beneficiaries and may not revert to the Employer. (a) In the event any contribution made by the Employer to the Plan is made based upon a mistake of fact, such contribution may be returned to the Employer within one year after the date it was contributed to the Plan. (b) In the event that the Office of District Director of the Internal Revenue Service, upon initial application of the Sponsor for approval of the Plan, and after an opportunity has been given the Sponsor to make any changes to the Plan and Trust Agreement which may be suggested by such office for approval of the Plan and Trust Agreement, rules that the Plan and Trust Agreement fail to qualify as tax exempt under Sections 401 and 501 of the Code, then the Plan and Trust Agreement will become null and void and the then market value of the contributions made by the Employer to the Trust prior to the date of such initial determination as to qualification will be returned by the Trustee within one year of the date of denial of qualification. This paragraph (b) will not be applicable unless the application by the Employer is made by the time prescribed by law for filing the Employer's tax return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. (c) In the event that a contribution made by the Employer to the Plan is disallowed as a tax-deductible expense under Section 404 of the Code, then such contribution, to the extent that the deduction is disallowed, less the net losses, if any, attributed thereto, will be returned to the Employer within one year after the disallowance of the deduction. (d) In the event that the Plan is terminated, all amounts held in a suspense account will be allocated to the Accounts of active Participants in a nondiscriminatory manner, as determined by the Plan Administrator. To the extent that any amounts held in the suspense account cannot be allocated due to the application of Section 415 of the Code, the excess amounts will be treated as a reversion and distributed to the Sponsor or Employer after the payment to Participants and Beneficiaries of their Account. 5 SECTION 3 - ALLOCATION OF EMPLOYER CONTRIBUTIONS 3.01 ALLOCATION OF REGULAR CONTRIBUTIONS AND FORFEITURES As of the last day of each Plan Year, the Employer's regular contribution made pursuant to this Section 3.01, and any Forfeitures available for such year, will be allocated to the Accounts of Participants who are both (a) credited with at least 1,000 Hours of Service during the Plan Year while an Employee; and (b) are actively employed by the Employer on the last day of the Plan Year. The amount allocated to the Account of a Participant entitled to share in the allocation pursuant to this Section 3.01 for the Plan Year will be in the same proportion to the total amounts available for allocation as the Compensation of such eligible Participant for the Plan Year bears to the Compensation of all eligible Participants for such Plan Year. 3.02 ALLOCATION OF EMPLOYER SHARES PURCHASED WITH PROCEEDS OF PLAN LOAN Employer Shares purchased with the proceeds of a Plan loan will be held in a suspense account and allocated to eligible Participants' Employer Contributions Accounts as such loans are reduced and such Shares are released. Each year the number of Employer Shares released under all Plan loans will be allocated to each eligible Participant's Employer Contributions Account in the same manner as the Employer's regular contribution is allocated pursuant to Section 3.01. Employer Shares described in this Section 3.02 will be released pursuant to one of the methods referenced in Section 21.02(f). 3.03 SPECIAL RESTRICTION ON ALLOCATION Notwithstanding any provision contained herein, no portion of the assets of the Plan attributable to Employer Shares acquired by the Plan in a sale to which Section 1042 of the Code applies may be allocated, either directly or indirectly, (a) to the Employer Contributions Account of a Participant who owns, after application of Section 318(a) of the Code, more than 25% of either (i) any class of outstanding stock of the Employer; or (ii) the total value of any outstanding stock of the Employer; or (b) during the "non-allocation period" [as defined in Code Section 409(n)], to the Employer Contributions Account of a Participant who makes an election under Code Section 1042(a) with respect to Employer Shares or to any person "related" to such Participant, within the meaning of Code Section 267(b). 6 SECTION 4 - PARTICIPANTS' ACCOUNTS 4.01 ESTABLISHMENT OF EMPLOYER CONTRIBUTIONS ACCOUNTS The Plan Administrator will establish and maintain an Employer Contributions Account for each Participant to record: (a) his share of the Employer contributions and Forfeitures allocated under Section 3; and (b) his share of the net income, or net losses, resulting from the investment thereof. The Plan Administrator may establish other accounts for the benefit of a Participant to the extent it deems necessary for the proper administration of the Plan. 4.02 ESTABLISHMENT OF SUSPENSE ACCOUNT (EFFECTIVE ON AND AFTER JANUARY 1, 1998 AND PRIOR TO OCTOBER 15, 1999) The Plan Administrator will establish and maintain a suspense account to record the number of Employer Shares encumbered under all outstanding Plan loans. As described in Section 3.02, Employer Shares will be transferred from the suspense account and allocated to the Participants' Employer Contributions Accounts as such Shares are released from encumbrance. 4.02 ESTABLISHMENT OF SUSPENSE ACCOUNT (EFFECTIVE ON AND AFTER OCTOBER 15, 1999) The Plan Administrator shall establish and maintain a suspense account to record the number of Employer Shares, or the proceeds of such shares, encumbered under all outstanding Plan loans. To the extent amounts held in the suspense account represent monies received as a result of a transaction classified by the Sponsor as a "return of capital," the Plan Administrator shall, as soon as administratively practicable after the receipt of such monies, direct the trustee to purchase additional Employer Shares (referred to as "Additional Employer Shares"). Solely for the purpose of Section 21.02(f), to the extent that all monies representing the return of capital have not been used to purchase Employer Shares by the last day of the Plan Year immediately following the date such monies are credited to the suspense account, the "number of encumbered securities held immediately before release" will be deemed to be increased by the number of Employer Shares actually purchased by the monies representing the return of capital (plus earnings and dividends on such amounts) during the period beginning on the first day of the following Plan Year and ending on the last day of second month of such following Plan Year. 7 As described in Section 3.02, Employer Shares shall be transferred from the suspense account and allocated to the Participants' Employer Contributions Account as such Shares are released from encumbrance under the terms of the applicable Plan loans. Additional Employer Shares shall be transferred from the suspense account and allocated to the Participants' Employer Contributions Accounts at the same time and in the same proportion as Employer Shares. 8 SECTION 5 - PLAN INVESTMENTS 5.01 PRIMARY INVESTMENT The Plan is intended to be a stock bonus plan under Section 401(a) of the Code and is hereby designated to be an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code. As an employee stock ownership plan, the Plan will invest primarily in Employer Shares. Any Plan assets not invested in Employer Shares will be invested in accordance with the provisions of the Trust Agreement. To this end, the Plan Administrator shall appoint an investment committee to direct the investment of Plan assets not invested in Employer Shares. 5.02 DIVERSIFICATION REQUIREMENTS (a) A Participant who has completed at least ten years of participation in the Plan and who has attained age 55 may elect, within the first 90 days of each of the six Plan Years immediately following the Plan Year in which he first satisfies such requirements (the "election period"), to direct the Plan as to the investment of up to 25% of the total balance of his Account attributable to Employer Shares (to the extent such 25% portion exceeds the amount to which a prior election under this paragraph applies). In the case of the Plan Year in which the Participant can make his last such election, the preceding sentence will be applied by substituting "50%" for "25%." The Participant's direction will be provided to the Plan Administrator in writing. The Plan Administrator may elect to exclude from the requirements of this Section 5.02: (i) all Employer Shares acquired by the Plan on or before December 31, 1986; or (ii) to the extent the market value of the Employer Shares held on behalf of a Participant in his Account as of a Valuation Date applicable to the election period does not exceed $500, such Employer Shares. (b) To the extent the diversification requirements of this Section 5.02 are applicable to a Participant, the Plan may, notwithstanding Section 409(d) of the Code: (i) distribute the portion of the Participant's Account directed by the Participant within the first 180 days of the Plan Year in which the election is made. Such distribution will be subject to the requirements of Code Section 411(a)(11)(A); (ii) offer at least three investment options (other than Employer Shares) to each Participant and, if the Participant so elects, by investing, within the first 180 days of the Plan Year in which the election is made, the amount of the Participant's diversification election in the option(s) selected by the Participant; or (iii) provide a Participant with the opportunity to transfer a portion of his Account to another qualified defined contribution plan of the Employer 9 that offers at least three (3) investment options (other than Employer Shares) and, if the Participant so elects, by transferring, within the first 180 days of the Plan Year in which the election is made, the amount of the Participant's diversification election in the option(s) selected by the Participant. Such transfer will comply with Code Sections 414(l), 411(d)(6) and 401(a)(11). 10 SECTION 6 - VALUATION OF PARTICIPANTS' ACCOUNTS 6.01 VALUATIONS As of each Valuation Date, the Plan Administrator will obtain the value of the assets of the Trust Fund from the Trustee on the basis of the market value of the assets of the Trust Fund. On the basis of such valuation, the Participants' Accounts will be adjusted as of such Valuation Date to reflect the effect of income received or accrued, realized and unrealized profits and losses, expenses, Forfeitures, payments to Participants and all other transactions in the period since the last preceding Valuation Date. For purposes of obtaining the valuation of Employer Shares under this section and with respect to all other activities carried on by the Plan which require the valuation of Employer Shares, at all times during which the Employer Shares are not readily tradable on an established securities market, such valuations will be made by an "independent appraiser," within the meaning of Section 401(a)(28)(C) of the Code. 6.02 METHOD OF ADJUSTMENT The amount to the credit of each Participant's Account as of each Valuation Date will be adjusted as of each succeeding Valuation Date by the following credits and charges in the order specified below: (a) There will be debited the total amount of all disbursements made from a Participant's Account during the period since the last Valuation Date. (b) There will be credited or debited to a Participant's Account that portion of the net increase or net decrease of the value of the assets of the Trust Fund since the last Valuation Date (including the value of non-distributed dividends on allocated Employer Shares). Such amounts will be allocated to a Participant's Account (after the amounts allocated in Section 6.02(a)) based on the ratio that the balance of his Account bears to the total balance of all Accounts. (c) There will be credited to his Account the Employer's contributions, Forfeitures and Employer Shares that are allocable to a Participant pursuant to Section 3 of this Plan. In allocating Forfeitures, Employer Shares attributable to the loan made pursuant to Section 21 will be allocated only after all other amounts required to be forfeited and allocated to Participants' Accounts for the applicable Plan Year have been allocated. 11 SECTION 7 - RETIREMENT BENEFITS 7.01 ELIGIBILITY FOR RETIREMENT A Participant who terminates his employment with the Employer on or after attaining his Early Retirement Age will become eligible for a retirement benefit equal to the entire value of his Account. Subject to Section 12.04, a Participant who is eligible for a distribution pursuant to this section may elect among the forms of benefits set forth in Section 12.01. 12 SECTION 8 - DEATH BENEFITS 8.01 ELIGIBILITY FOR DEATH BENEFIT The Beneficiary of a Participant who died prior to his termination of employment from the Employer and all Affiliates will be entitled to the entire value of the deceased Participant's Account. The Beneficiary of a Participant who died on or after his termination of employment from the Employer and all Affiliates will be entitled to the vested value of the Participant's Account. 8.02 DESIGNATION OF BENEFICIARY (a) Subject to the provisions of Section 8.03, each Participant will designate, by a written instrument filed with the Plan Administrator, one or more Beneficiaries who, upon the death of the Participant, will be entitled to receive the death benefit described in Section 8.01. If more than one Beneficiary is named, the Participant may specify the sequence and/or proportion in which payments must be made to each Beneficiary. To the extent that the Participant does not specify either the sequence or proportion in which payments are to be made to each Beneficiary, payments will be made in equal shares to all named Beneficiaries then living at the time of the Participant's death. To the extent otherwise consistent with the Plan, a Participant may change his Beneficiary from time to time by written notice delivered to the Plan Administrator in the manner prescribed by the Plan Administrator. If, with regard to all or a portion of a Participant's Account, no Beneficiary has been designated or if no designated Beneficiary is living at the time of the Participant's death, payment of such death benefit, if any, to the extent permitted by law, will be made to the surviving person or persons in the first of the following classes of successive preference of Beneficiaries: (i) Surviving Spouse; (ii) executors or administrators of the estate of such deceased Participant. Any minor's share will be paid to such adult or adults as have, in the opinion of the Plan Administrator, assumed custody and support of such minor. Proof of death satisfactory to the Plan Administrator must be furnished prior to the payment of any death benefit under the Plan. (b) If benefits under the Plan are paid to a Beneficiary pursuant to this Section 8 in a form other than a lump sum, such Beneficiary may name in a writing filed with the Plan Administrator an individual or individuals to receive the remainder of such benefit upon the death of the Beneficiary. In the absence of such a designation by the Beneficiary, such remaining benefit, if any, will be paid to the estate of the Beneficiary. If a Beneficiary is alive at the time of the Participant's death but dies prior to the commencement of benefits to him or her, the death benefit payable to the Beneficiary pursuant to this Section 8 will be paid to the estate of such Beneficiary. 13 8.03 DISTRIBUTION OF DEATH BENEFIT If a Participant dies without a Surviving Spouse and prior to the commencement of his retirement benefits, the death benefit described in Section 8.01 will be distributed to his Beneficiary. Subject to Section 12.04, the Beneficiary may elect among any of the forms of benefits available to Participants as set forth in Section 12.01. If a Participant dies with a Surviving Spouse and prior to the commencement of his retirement benefits, the death benefit described in Section 8.01 will be paid to his Surviving Spouse. Subject to Section 12.04, the Surviving Spouse may elect among any of the forms of benefits available to Participants as set forth in 12.01. However, if the Spouse consents to an alternate Beneficiary to receive the death benefit described in Section 8.01, such death benefit will be distributed to the alternate Beneficiary in accordance with the preceding paragraph. For purposes of the preceding sentence, the consent of the Spouse must (a) be in writing; (b) designate a specific Beneficiary, including any class of beneficiaries or contingent beneficiaries, which may not be changed without the consent of the Spouse (or the Spouse expressly permits designations by the Participant without further consent of the Spouse); (c) acknowledge the effect of such consent; and (d) be witnessed by a Plan representative or notary public. If a Participant dies after the commencement of his retirement benefit and prior to the complete distribution of his Account, his Beneficiary will be entitled to the remaining amount in his Account. In such case, if the Participant either fails to designate a Beneficiary or a Beneficiary is not alive at the time of the Participant's death, such death benefit will be payable to the surviving person or persons in accordance with Section 8.02(a). All distributions made pursuant to this section will also comply with the provisions of Section 12.03. 14 SECTION 9 - DISABILITY BENEFITS 9.01 AMOUNT OF DISABILITY BENEFIT A Participant who becomes "totally and permanently disabled," as defined in Section 9.02 below, will be entitled to the entire value of his Account. A Participant who is eligible for a distribution pursuant to this section may elect among the forms of benefits set forth in Section 12.01. 9.02 DETERMINATION OF TOTAL AND PERMANENT DISABILITY A Participant will be considered to be "totally and permanently disabled" if it is established by a licensed physician selected by the Plan Administrator that, while the Participant is employed by the Employer or an Affiliate, the Participant is not able to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The determination by the Plan Administrator with respect to whether a Participant is totally and permanently disabled will be made in a nondiscriminatory manner. 15 SECTION 10 - TERMINATION OF EMPLOYMENT BENEFITS 10.01 AMOUNT OF BENEFITS UPON TERMINATION OF EMPLOYMENT A Participant who terminates his employment with the Employer and all Affiliates for any reason other than retirement (pursuant to Section 7), death (pursuant to Section 8) or disability (pursuant to Section 9) will be entitled to receive the vested portion of his Account. Such nonforfeitable percentage will be determined in accordance with Section 11.01 of the Plan. A Participant who is eligible for a distribution pursuant to this section may elect among the forms of benefits set forth in Section 12.01. 16 SECTION 11 - VESTING 11.01 DETERMINATION OF VESTED BENEFITS A Participant's vested interest in his Employer Contributions Account will become vested and nonforfeitable based upon his Years of Service in accordance with the following schedule: NONFORFEITABLE YEARS OF SERVICE PERCENTAGE ---------------- -------------- Less than 5 0 5 or more 100% 11.02 FULL VESTING AT NORMAL RETIREMENT AGE Notwithstanding any provision in the Plan to the contrary, all amounts credited to a Participant's Account will become fully vested upon attainment of his Normal Retirement Age if he attains such age prior to the date he terminates his employment with the Employer and all Affiliates. 11.03 SERVICE FOR VESTING Years of Service for vesting purposes will include all Years of Service with the Employer, a predecessor employer (to the extent the Employer maintains the Plan of a predecessor employer) or an Affiliate (excluding service prior to the date an organization became an Affiliate unless otherwise specified below), including service prior to the date the Plan was first effective. 11.04 EFFECT OF BREAK IN SERVICE ON VESTING If a Participant has five or more consecutive One-Year Breaks in Service, (a) all Years of Service after such One-Year Breaks in Service will be disregarded for the purpose of determining whether his Account that accrued before such One-Year Breaks in Service is nonforfeitable; and (b) all Years of Service before such One-Year Breaks in Service will count in determining whether the post-break Account is nonforfeitable only if either (i) he had any nonforfeitable interest in his Account at the time of his termination of employment; or (ii) upon returning to employment, the number of his consecutive One-Year Breaks in Service is less than the number of his Years of Service. Separate Accounts will be maintained for the Participant for pre-break and post-break periods. Both such Accounts will share in the earnings and losses of the Trust Fund. 17 If a Participant does not have five consecutive One-Year Breaks in Service, both pre-break and post-break service will count in determining whether his rights to his pre-break and post-break Accounts are nonforfeitable, subject to the first paragraph of this section. For the purpose of this Section 11.04, the 12-month periods used to determine a separated Participant's consecutive One-Year Breaks in Service will be the 12-month period used to determine a Year of Service. 11.05 FORFEITURES The non-vested portion of a terminated Participant's Account will be treated as a Forfeiture upon the earlier of (a) the date such terminated Participant's Account is distributed from the Plan; or (b) the date on which the terminated Participant incurs five consecutive One-Year Breaks in Service. Forfeitures of Employer Shares allocated pursuant to Section 3.01 will occur only after all other assets in a Participant's Account have been forfeited. For purposes of this section, if a terminated Participant is not vested in any portion of his Account as of the date of his termination of employment, the Participant will be deemed to have received a distribution of his vested Account on the date of his termination of employment. In the event that a terminated Participant who was not 100% vested in his Account (a) received a distribution of the vested portion of his Account; (b) returns to the employment of the Employer before he incurs five consecutive One-Year Breaks in Service; and (c) repays to the Plan the full amount of his distribution within five years after the date he resumes employment, the amount of the non-vested portion of his Account, including all forms of benefits relating to such non-vested portion, that has been treated as a Forfeiture will be restored to his Account first from Forfeitures available in that year, if any, and then from contributions made by the Employer. A Participant who is deemed to have received a distribution of his vested Account upon his termination of employment will be deemed to have repaid the forfeited portion of his Account upon the date he resumes employment with the Employer provided he resumes employment prior to incurring five consecutive One-Year Breaks in Service. For the purpose of this Section 11.05, the 12-month periods used to determine a former Participant's consecutive One-Year Breaks in Service will be the 12-month period used to determine a Participant's Year of Service. Forfeitures from a Participant's Employer Contributions Account, unless required to be restored to a Participant's Account pursuant to this section, will be added to the Employer contribution made pursuant to Section 2 for the year in which such Forfeiture has occurred and allocated to Participants' Accounts in accordance with such section. 18 SECTION 12 - PAYMENT OF BENEFITS 12.01 METHOD OF PAYMENT At the time a Participant or Beneficiary becomes entitled to receive his Account because of the Participant's retirement (pursuant to Section 7), death (pursuant to Section 8), disability (pursuant to Section 9) or termination of employment (pursuant to Section 10), the Trustee, acting in accordance with the written instructions of the Plan Administrator, will make payment from the Trust Fund to the Participant (or his Beneficiary in the case of the Participant's death) in the form of either (a) a lump sum; or (b) in periodic installments payable monthly, quarterly, semi-annually or annually in accordance with Section 12.08. All such payments will be made by the Trustee, at the option of the Participant (or his Beneficiary) in Employer Shares, in cash, or both in cash and in shares. The Employer reserves the right to pay fractional shares in cash. 12.02 TIMING OF PAYMENTS (a) Subject to paragraph (b) below, unless the Participant elects otherwise, the payment of the Participant's benefit pursuant to Section 12.01 will begin not later than 60 days after the end of the Plan Year in which the latest of the following occurs: (i) the Participant attains his Normal Retirement Age; (ii) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (iii) the Participant terminates service with the Employer and all Affiliates. To the extent a Participant who is required to consent to a distribution pursuant to Section 12.04 fails to provide the Plan Administrator with his consent, the Participant will be deemed to have made an election to defer a distribution pursuant to this paragraph (a). (b) In no event will the amount payable to a Participant pursuant to the terms of the Plan be distributed, or commence to be distributed, later than a Participant's Required Beginning Date. "Required Beginning Date" means, for a Participant who is not a 5% Owner, the April 1 of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2; or (ii) the calendar year in which the Participant retires. The Required Beginning Date of a Participant who is a 5% Owner means the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. Notwithstanding the provisions of this paragraph, distribution may also be made to a Participant in accordance with a valid election made by the Participant pursuant to Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982. Distributions that commence pursuant to this paragraph (b) will commence in any form of benefit offered under the Plan, provided that the amount of such distributions and the date such distributions commence comply with Code Section 401(a)(9) and applicable regulations thereunder. After an active Participant who is receiving minimum distributions pursuant to this section terminates employment, such Participant shall be eligible to receive a distribution from the Plan in any form of benefit offered under the Plan. 19 (c) For the purpose of this Section 12.02, a Participant is treated as a 5% Owner if such Participant is a "5% Owner" (as defined in Code Section 416) with respect to the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2. (d) Unless a distribution is required to be made to a Participant or Beneficiary pursuant to Section 12.04, a distribution to a Participant or Beneficiary who is eligible to receive a distribution pursuant to this Section 12 will be made as soon as is administratively practicable after the Participant or Beneficiary completes a benefit election form and returns it to the Plan Administrator, but not earlier than the Valuation Date immediately following the date the Plan Administrator receives the election form. 12.03 DISTRIBUTIONS AFTER DEATH If the distribution of the Participant's benefit under the Plan has commenced pursuant to Section 12 and he dies before his entire Account has been distributed to him, the remaining portion of such Account, if any, will comply with the provisions of Code Section 401(a)(9)(B)(i)(II), which provides that such remaining portion be distributed as rapidly as under the method of distribution in effect prior to the Participant's death. Unless otherwise provided in this Section 12.03, if a Participant dies before the distribution of his Account has commenced in accordance with either the terms of the Plan or Section 12.02(b), the amount payable as a death benefit pursuant to the terms of the Plan (hereinafter referred to as "death benefit") will be distributed: (a) unless otherwise provided in (b) below, not later than by the fifth anniversary of the December 31 coinciding with or next following the date of his death; or (b) provided that the Plan provides for installment or annuity distributions to a Beneficiary and the Participant's death benefit is payable to or on behalf of a designated Beneficiary: (i) over a period not extending beyond the life expectancy of such designated Beneficiary, provided that the distribution of the death benefit commences not later than the first anniversary of the December 31 coinciding with or next following the date of the Participant's death; or (ii) if the designated Beneficiary is the Participant's Surviving Spouse, the date by which the death benefit must commence in (i) above will not be earlier than the later of the December 31 of the calendar year immediately following the calendar year in which the Participant died or the December 31 of the calendar year in which the Participant would have attained age 70 1/2. If the Surviving Spouse dies before distribution to said Spouse begins, this paragraph (ii) will apply as if the Surviving Spouse were the Participant. In addition, any amount paid to a child of the Participant will be treated as if it had been paid to 20 the Surviving Spouse if the amount becomes payable to the Surviving Spouse when the child reaches the age of majority. The designated Beneficiary must elect the method of distribution payable pursuant to this Section 12.03 not later than the earlier of (a) the December 31 of the calendar year in which distributions would be required to begin under this Section 12.03; or (b) the December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated Beneficiary, or if the designated Beneficiary does not elect a method of distribution, distribution of the Participant's death benefit must be completed by the December 31 of the calendar year containing the fifth anniversary of the Participant's death. 12.04 CONSENT AND CASH-OUT REQUIREMENTS If a Participant is eligible to receive a distribution pursuant to Section 7, 8, 9 or 10 and the value of his vested Account does not exceed $5,000, the Participant (or Beneficiary in the case of the Participant's death) will receive a distribution of his vested Account in the form of a lump sum as soon as administratively feasible following the date he is first eligible to receive a distribution from the Plan. If a Participant is eligible to receive a distribution pursuant to Section 7, 8, 9 or 10 or is otherwise eligible to receive a distribution from his Account and the value of his vested Account exceeds $5,000, the Participant must consent to the receipt of a distribution made from the Plan if distributed prior to the later of the date the Participant attains his Normal Retirement Age or age 62, except that the consent of the Participant is not required prior to the commencement of a distribution pursuant to Code Section 401(a)(9) or Code Section 415. A Participant's election to receive a distribution from the Plan prior to his attainment of the later of age 62 or his Normal Retirement Age will not be valid unless (a) the Participant has received a general description of the material features and the relative values of the forms of benefits (hereinafter referred to as "description") under the Plan; and (b) the Participant has been informed that he has the right to postpone a distribution from the Plan. The Participant will be provided with such description not less than 30 days and not more than 90 days prior to the date his benefits are scheduled to commence, provided that a distribution may be made to the Participant prior to such 30-day period, provided the Participant has been informed that he has a right to a period of at least 30 days after receiving the description to consider the decision of whether to elect a distribution from the Plan and the Participant, after receiving such information, affirmatively elects a distribution prior to such 30-day period. 21 If a Participant does not consent to a distribution pursuant to the preceding paragraph, his Account will be maintained by the Plan and will continue to shall share in the earnings of the Trust. Notwithstanding the foregoing, after the later of the date the Participant attains his Normal Retirement Age or age 62, the Plan may require such Participant, in accordance with a uniform policy for all Participants similarly situated, to receive a distribution of his Account from the Plan. 12.05 ELIGIBLE ROLLOVER DISTRIBUTIONS (a) A distributee may elect to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) The following definitions will apply for purposes of this section: (i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: (A) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary; (B) any distribution that is for a specified period of ten years or more; (C) any distribution to the extent such distribution is required under Code Section 401(a)(9); (D) the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); (E) effective for distributions occurring after December 31, 1998 (or such later date as elected by the Plan Administrator in accordance with Notice 99-5), hardship distributions described in Code Section 401(k)(2)(B)(i)(IV) in the amount described in Treasury Regulation 1.401(k)-1(d)(2)(ii); and (F) at the election of the Plan Administrator, any other distribution provided that all distributions in the year are reasonably expected to total less than $200. (ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a) or a qualified trust described in Code Section 401(a) that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the Surviving Spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Spouse or Surviving Spouse of an Employee or 22 former Employee is a distributee with regard to the interest of the Spouse or Surviving Spouse. (iv) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 12.06 PUT OPTION (a) Except as otherwise provided in this Section 12.06, all Employer Shares that are not readily tradable on an established market at the time they are distributed, or are subject to a trading limitation when distributed, will be subject to a put option. The put option will permit the Participant or Beneficiary to put such Employer Shares to the Employer. Put options will be exercisable during a period of not less than 16-months beginning on the date the Employer Shares subject to the put option are distributed. The put option may be exercised by the holder of the Shares by notifying the Employer in writing that the put option is being exercised. The price at which the put option must be exercisable is the fair market value of the Employer Shares. (b) If, pursuant to this section, the Employer is required to repurchase Employer Shares that are distributed within one taxable year in a distribution that represents the balance to the credit of the Participant's Account, the amount to be paid for such Employer Shares will be paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the put option described in this section and not exceeding five years. If, pursuant to this section, the Employer is required to repurchase Employer Shares that are distributed to a Participant as part of an installment distribution, the amount to be paid for such Employer Shares will be paid not later than 30 days after the exercise of the put option described in this section. (c) Under no circumstances may the put option bind the Plan. However, the Plan may assume the rights and obligations of the Employer at the time the put option is exercised. Adequate security will be provided and reasonable interest will be paid on the amounts payable to the individual or entity that exercised the put option. (d) Notwithstanding any provision of this Plan to the contrary, (i) to the extent that the Employer's charter or by-laws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in Code Section 401(a); or (ii) to the extent the Employer is an S corporation, the Plan may require that the individual entitled to receive a distribution from the Plan has a right to receive the distribution in the form of cash, except that the Plan may distribute Employer Shares to such individual subject to a requirement that such securities may be resold to the Employer under the circumstances described in the preceding paragraphs of this Section 12.06. (e) In the case of a Plan established by a bank that is prohibited by law from redeeming or purchasing its own securities, the requirements of this section will not apply, 23 provided that Participants entitled to receive a distribution from the Plan have the right to receive a distribution in the form of cash. 12.07 RIGHT OF FIRST REFUSAL (a) During any period when Employer Shares are not publicly traded, all distributions of Employer Shares to a Participant or his Beneficiary by the Plan will be subject to a "right of first refusal" upon the terms and conditions hereinafter set forth. The "right of first refusal" will provide that prior to any transfer of the Employer Shares, the Participant or Beneficiary must first offer to sell such shares to the Plan; and if the Plan refuses to exercise its right to purchase the Employer Shares, then the Employer will have a "right of first refusal" to purchase such Shares. Neither the Plan nor the Employer will be required to exercise the "right of first refusal." This Section 12.07 will not be operative unless and until the Board of Directors of the Sponsor so directs. (b) The terms and conditions of the "right of first refusal" will be determined as follows: (i) If the Participant or Beneficiary receives a bona fide offer for the purchase of all or any part of his Employer Shares from a third party, the Participant or Beneficiary will deliver (by registered mail, return receipt requested) a copy of any such offer to the Plan Administrator. The Trustee (as directed by the Plan Administrator) or the Employer, as the case may be, will then have 14 days after receipt by the Plan Administrator of the written offer to exercise the right to purchase all or any portion of the Employer Shares. (ii) The selling price and other terms under the "right of first refusal" must not be less favorable to the Participant or Beneficiary than the purchase price and other terms offered by a buyer, other than the Employer or the Plan making a good faith offer to purchase the security. The Employer may require a Participant or Beneficiary who is entitled to a distribution of Employer Shares to execute an appropriate stock transfer agreement evidencing the right of first refusal prior to receiving a certificate for Employer Shares. 12.08 INSTALLMENT DISTRIBUTIONS Notwithstanding any provisions in this Plan to the contrary, if a Participant's entire interest is to be distributed in other than an immediate lump sum, such distribution will be made, unless the Participant elects otherwise, in substantially equal periodic installments (not less frequently than annually) over a period not longer than the greater of: (a) five years; or 24 (b) in the case of a Participant with an Account in excess of $500,000, five years plus one year for each $100,000, or any fraction thereof, by which such balance exceeds $500,000; provided, however, that in no event may installment payments under the Plan exceed 10 years unless the Participant elects otherwise. The dollar limits set forth in this paragraph (b) are adjusted by the Secretary of the Treasury, and the current dollar amount for the applicable Plan Year shall apply; provided, however, that in no event may installment payments under the Plan be made which exceed either: (i) a period certain not extending beyond the life expectancy of the Participant; or (ii) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. If a Participant's Account is to be distributed in other than the form of a lump sum, then the amount to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Participant's Account by the life expectancy of the Participant and designated Beneficiary. If the Participant's Spouse is not the designated Beneficiary, the method of distribution selected must at all times comply with proposed Treasury Regulation 1.401(a)(9)-2. 25 SECTION 13 - TRUST AGREEMENT 13.01 DESCRIPTION OF TRUST AGREEMENT The Sponsor will continue the Trust Agreement with the Trustee to provide for the administration of the Trust Fund. With its continuation, the Trust Agreement will be deemed to form a part of the Plan; and any and all rights or benefits which may accrue to any person under the Plan will be subject to all the terms and provisions of the Trust Agreement. All expenses of the Plan will be paid from the Trust Fund, unless paid by the Employer. In its discretion, the Employer may require the Trustee to reimburse the Employer for expenses of the Plan that the Employer paid on behalf of the Trust, so long as the request for reimbursement is presented by the Employer to the Trustee before the last day of the Plan Year in which the expense was paid by the Employer. Alternatively, the Employer may reimburse the Trust for expenses of the Plan paid by the Trustee. An administration expense paid to the Trust as a reimbursement will not be considered as a contribution made by the Employer. 26 SECTION 14 - PLAN ADMINISTRATION 14.01 PLAN ADMINISTRATOR The Plan will be administered by a Plan Administrator. The Plan Administrator will be appointed by and serve at the pleasure of the Sponsor. 14.02 DUTIES OF PLAN ADMINISTRATOR The Plan Administrator will supervise the maintenance of accounts and records as will be necessary or desirable to show the contributions of the Employer, allocations to Participants' Accounts, payments from Participants' Accounts, valuations of the Trust Fund and all other transactions pertinent to the Plan. The Plan Administrator is authorized to perform, in its discretion, all functions necessary to administer the Plan and will have the power and discretion to construe the terms of the Plan and to determine all questions arising from its operation, including, without limitation, to determine the eligibility and qualification of Employees or Beneficiaries for benefits under the Plan (including the validity of a beneficiary designation); to determine the allocation and vesting of contributions, earnings and profits of the Plan; to determine the amount of benefits payable to Participants and Beneficiaries; unless otherwise provided pursuant to Section 18, to decide all questions or disputes with respect to the rights or obligations of Participants and Beneficiaries; and to adopt regulations and procedures. To the extent provided in the Plan and the Trust, the Plan Administrator or other fiduciary may direct the Trustee as to the investment of the Trust or may select an investment advisor to so direct. The Plan Administrator may employ one or more persons to render advice with regard to any responsibility it has under the Plan, and it may designate others to carry out any of its responsibilities. 14.03 INTERPRETATION OF DOCUMENT The construction and interpretation of the Plan provisions, or any document relating to the administration or operation of the Plan, are vested with the Plan Administrator, in its absolute discretion. The Plan Administrator will endeavor to act, whether by general rules or by particular decisions, so as to treat all persons in similar circumstances without discrimination. All such decisions, determinations and interpretations will be final, conclusive and binding upon all parties having an interest in the Plan. 27 SECTION 15 - AMENDMENT AND TERMINATION 15.01 SPONSOR'S RIGHT TO AMEND OR TERMINATE THE PLAN The Sponsor has the right, at any time, by an instrument in writing, to modify, alter, amend or terminate the Plan in whole or in part. Except as permitted by Code Section 411(d)(6) and applicable regulations thereunder, no amendment to the Plan will reduce the Participant's accrued benefit, decrease the balance of a Participant's Account or eliminate an optional form of distribution with respect to the amount of the Participant's Account accrued as of the date of the amendment. To this end, provisions that affect directly or indirectly the computation of accrued benefits and are amended at the same time and with the same effective date will be treated as one Plan amendment. If an amendment changes the vesting schedule set forth in Section 11.01, and such amendment reduces the nonforfeitable interest of a Participant for any Year of Service to be earned by the Participant, each Participant having not less than three Years of Service may elect, during the period beginning when the amendment is adopted and ending no earlier than the latest of (a) 60 days after the amendment's adoption; (b) 60 days after the amendment's effective date; or (c) 60 days after the Participant is issued a written notice of the amendment, to have the vested amount of his Account computed without regard to such amendment. No amendment may reduce a Participant's nonforfeitable percentage in his Account determined as of the date the amendment is effective or executed, whichever is later. Any Amendment to the Plan shall be executed by any individual authorized by the Board of Directors of the Sponsor. 28 SECTION 16 - DISTRIBUTIONS ON PLAN TERMINATION 16.01 FULL VESTING ON PLAN TERMINATION Upon termination of the Plan, after adjustment of all Accounts maintained under the Plan in accordance with Section 6, including the adjustment of such Accounts for the payment of Plan expenses relating to the termination of the Plan, each affected Participant will be fully vested and will be entitled to receive the entire amount then credited to his Account. The date the Plan is terminated shall be an allocation date for the purpose of making final allocations to the Plan. 16.02 PAYMENT ON PLAN TERMINATION Within a reasonable time after the termination of the Plan, the Plan Administrator will distribute to each Participant or Beneficiary the value of his Account. Such payment will be made in the form of a single lump sum payment. 16.03 DISCONTINUANCE OF CONTRIBUTIONS; PARTIAL TERMINATION OF PLAN Upon the "partial termination" of the Plan, or the "complete discontinuance of contributions" by the Employer to the Plan (with such terms having the meaning by reference to Section 411(d)(3) of the Code and applicable regulations thereunder), the Accounts of all affected Participants will be fully vested as of the date of such partial termination or complete discontinuance of contributions. 29 SECTION 17 - CREDITORS OF PARTICIPANTS 17.01 NON-ASSIGNABILITY Except as otherwise provided in Code Section 401(a)(13), no assignment, pledge or encumbrance of any character of the benefits under the Plan is permitted or recognized under any circumstances; and such benefits will not be subject to claims of creditors, execution, attachment, garnishment or any other legal process. 17.02 QUALIFIED DOMESTIC RELATIONS ORDERS Section 17.01 will also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order unless such order is determined to be a "qualified domestic relations order," as defined in Code Section 414(p). A qualified domestic relations order may provide for an immediate distribution to the "alternate payee" [as defined in Code Section 414(p)(8)] named therein as soon as is administratively practicable after the determination by the Plan Administrator that the order constitutes a qualified domestic relations order, notwithstanding the fact the distribution is made to such alternate payee prior to the Participant attaining his "earliest retirement age," as such term is defined in Code Section 414(p). 30 SECTION 18 - CLAIMS PROCEDURES 18.01 FILING A CLAIM FOR BENEFITS A Participant, Beneficiary or alternate payee, or the Employer acting on behalf of such individual, will notify the Plan Administrator of a claim for benefits under the Plan. Such request will be in writing to the Plan Administrator and will set forth the basis of such claim and will authorize the Plan Administrator to conduct such examinations as may be necessary for the Plan Administrator to determine, in its discretion, the validity of the claim and to take such steps as may be necessary to facilitate the payment of benefits to which the claimant may be entitled under the terms of the Plan. A decision by the Plan Administrator on a claim for benefits under the Plan will be made promptly and not later than 90 days after the Plan Administrator's receipt of such claim, unless special circumstances require an extension of the time for processing; in which case, a decision will be rendered as soon as possible, but not later than 180 days after the initial receipt of the claim for benefits. The claimant will be notified of the extension prior to the expiration of the 90-day period described in this paragraph. If notice of the denial of a claim is not furnished within the time period specified in this paragraph, the claim will be deemed denied. 18.02 DENIAL OF CLAIM Whenever a claim for benefits by a claimant has been denied by the Plan Administrator, in whole or in part, a written notice, prepared in a manner calculated to be understood by such individual, must be provided and must set forth: (a) the specific reason or reasons for the denial; (b) the specific reference to the pertinent Plan provisions on which the denial is based; (c) 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 (d) an explanation of the Plan's claim review procedures. 18.03 REMEDIES AVAILABLE TO CLAIMANTS Upon denial of his claim by the Plan Administrator, the claimant may: (a) request a review upon written application to the Plan; 31 (b) review pertinent Plan documents; and (c) submit issues and comments in writing to a named fiduciary. The claimant will have 60 days after receipt of the written notification of a denial of his or her claim to request a review of such denied claim. A decision by a named fiduciary will be made promptly and not later than 60 days after the named fiduciary's receipt of a request for review, unless special circumstances require an extension of the time for processing; in which case, a decision will be rendered as soon as possible, but not later than 120 days after receipt of a request for review. The claimant will be notified of the extension prior to the expiration of the 60-day period described in this paragraph. If the decision on review is not furnished within the applicable time period, the claim will be deemed denied upon review. The decision on review by a named fiduciary will be in writing and will include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. 32 SECTION 19 - TOP HEAVY RULES 19.01 DEFINITIONS If, for any Plan Year, the Plan is a Top Heavy Plan, the provisions of Section 19.03 and Section 19.04 will be applicable. For the purpose of this section, to the extent necessary, the term "Employer" includes an Affiliate other than an Employer, and the term "Employee" includes an employee of an Affiliate other than an Employee of the Employer. The following definitions are applicable to this Section 19.01. (a) Key Employee: An Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was (i) an officer of the Employer, provided that such individual's annual compensation exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A); (ii) an owner (or considered an owner under Code Section 318) of one of the ten largest interests in the Employer, provided that such individual's annual compensation exceeds the dollar limitation under Code Section 415(c)(1)(A); (iii) a 5% owner of the Employer; or (iv) a 1% owner of the Employer who has annual compensation of more than $150,000. For purposes of this section, "annual compensation" means compensation as defined in Code Section 415(c)(3). The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the regulations thereunder. (b) Non-Key Employee: An Employee or former Employee of the Employer who is not a Key Employee. The Beneficiary of a Non-Key Employee will be treated as a Non-Key Employee, and the Beneficiary of a former Non-Key Employee will be treated as a former Non-Key Employee. (c) Determination Date: For all Plan Years subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year, the last day of such Plan Year. (d) Permissive Aggregation Group: The Required Aggregation Group of plans plus any other plan or plans of the Employer that, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. (e) Required Aggregation Group: (i) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the Plan Year containing the Determination Date and the four preceding Plan Years (regardless of whether the Plan has terminated); and (ii) any other qualified plan of the Employer that enables a plan described in (i) of this paragraph (e) to meet the requirements of Code Sections 401(a)(4) or 410. (f) Top Heavy Plan: The Plan, if in any Plan Year it is top heavy as set forth in Section 19.02. 33 (g) Top Heavy Compensation: Top Heavy Compensation means "compensation" as defined in Section 415(c)(3) and Treasury Regulation 1.415(2)(d)(11)(i) of the Code, and for Limitation Years beginning prior to January 1, 1998, taking into consideration Code Section 414(q)(4)(B). 19.02 TOP HEAVY STATUS The Plan and any other plans aggregated with it will become top heavy pursuant to this Section 19.02 as of the Determination Date if the present value of accrued benefits of Key Employees is more than 60% of the sum of the present value of accrued benefits of all Employees. In the case of more than one plan which is to be aggregated with the Plan, the present value of the accrued benefits of employees in such plan is first determined separately for each plan as of each plan's determination date. The plans will then be aggregated by adding the results of each plan as of the determination dates for such plans that fall within the same calendar year. The combined results will indicate whether the plans are top heavy. For the purpose of determining the present value of the accrued benefits of an Employee (a) the present value of accrued benefits of the Employee will be increased by the aggregate distributions made with respect to such Employee during the five-year period ending on the Determination Date; (b) the accrued benefits of former Key Employees who have not performed services at any time during the five-year period ending on the Determination Date will not be taken into account; and (c) the accrued benefits of Employees who have not performed services at any time during the five-year period ending on the Determination Date for the Employer maintaining the Plan will not be taken into account. Notwithstanding the foregoing, if the Plan is aggregated for top heavy purposes with a defined benefit plan, the present value of accrued benefits will be determined, for the Plan and for such other plan, by using the interest rate and mortality assumptions contained in such other plan. If a Required or Permissive Aggregation Group includes two or more defined benefit plans (a) the same actuarial assumptions will be used with respect to all such plans and must be specified in such plans; and (b) the accrued benefits of Non-Key Employees will be determined under a uniform accrual method or, where there is no such method, as if such benefit accrued not more rapidly than the slowest rate of accrual permitted under the fractional rule of Code Section 411(b)(1)(C). The present value of accrued benefits as of the Determination Date for any applicable Employee or former Employee is the sum of (a) the applicable Employee's Account as of the most recent valuation date occurring within a 12-month period ending on the Determination Date; (b) an adjustment for contributions due as of the Determination Date; and (c) the aggregate distributions made with respect to such individual under the Plan during the five-year period ending on the Determination Date. For a profit sharing plan, the adjustment in (b) is generally the amount of contributions actually made after the valuation date but on or before the Determination Date. In determining whether the Plan is top heavy, it must be aggregated with each plan included in the Required Aggregation Group. In addition, the Employer may aggregate plans included in the Permissive Aggregation Group. 34 19.03 MINIMUM CONTRIBUTIONS For each Plan Year in which the Plan is top heavy, each Participant who is a Non-Key Employee and who is employed on the last day of the Plan Year (including Participants who did not complete 1,000 Hours of Service in the Plan Year) is required to receive an annual allocation of contributions (disregarding Social Security benefits) equal to at least 3% of his Top Heavy Compensation; provided that if the largest percentage of Top Heavy Compensation allocated to a Key Employee for a Plan Year is less than 3%, that largest percentage will be substituted for 3%. Such amount will be referred to in this Section 19.03 as the "top heavy minimum contribution." For each year in which the Employer maintains a defined benefit plan in addition to the Plan, the requirements of this paragraph will be satisfied for all Non-Key Employees who participate in both plans by providing each Non-Key Employee with the 2% minimum annual benefit provided under the top heavy provisions of the defined benefit plan. For each year in which the Employer maintains another defined contribution plan in addition to the Plan, the minimum benefit described in this paragraph may be provided for Non-Key Employees who participate in both plans by such other defined contribution plan or the Plan, as elected by the Plan Administrator. For each Plan Year in which the Plan is required to provide the top heavy minimum contribution, the Employer will contribute to the Account of each Non-Key Employee required to receive an allocation pursuant to the previous paragraph an amount equal to the difference between the amount necessary to provide such Non-Key Employee with the top heavy minimum contribution for such year and the amount previously allocated to such Non-Key Employee's Account for such year. 19.04 TOP HEAVY VESTING For each Plan Year in which the Plan is top heavy, the following vesting schedule will apply to amounts credited to his Account: NONFORFEITABLE YEARS OF SERVICE PERCENTAGE ---------------- -------------- Less than 3 0 3 or more 100% Notwithstanding the foregoing, a Participant's vested interest in his Account will not be decreased as a result of the Plan becoming top heavy and the application of the above vesting schedule. If, at any time after becoming top heavy the Plan should cease to be top heavy, the vesting schedule contained in Section 11 will again be applicable. However, any portion of a Participant's Account that was nonforfeitable before the Plan ceased to be top heavy will remain nonforfeitable. In addition, any Participant with three or more Years of Service at the time that the 35 Plan ceased to be top heavy, may elect, in accordance with Section 15.01, to have the vesting schedule contained in this section remain applicable. 36 SECTION 20 - VOTING RIGHTS 20.01 PARTICIPANT VOTING RIGHTS WITH RESPECT TO ALLOCATED SHARES If the Employer Shares are of a "registration-type class of securities," all Employer Shares held in the Trust Fund and allocated to a Participant's or Beneficiary's Account will be voted by the Trustee pursuant to written instructions received from the Participant or Beneficiary. If the Employer Shares are not of a "registration-type class of securities," all Employer Shares held in the Trust Fund and allocated to a Participant's or Beneficiary's Account will be voted by the Trustee pursuant to written instructions received from the Participant and Beneficiary with respect to all corporate matters relating to the approval of a corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or such similar transaction as the Secretary may provide in regulations. For the purpose of this Section 20.01, "registration-type class of securities" has the meaning as set forth in Code Section 409(e)(4). With respect to allocated Employer Shares for which the Trustee does not receive written instructions from a Participant or Beneficiary, such Shares will be voted by the Trustee in the same proportion as the shares voted by the Participants and Beneficiaries. 20.02 PARTICIPANT VOTING RIGHTS WITH RESPECT TO UNALLOCATED SHARES All Employer Shares held in the Trust Fund and not allocated to the Participant's Account of a Participant will be voted by the Trustee in the same proportion as the Shares voted by Participants. Notwithstanding the foregoing, if at the time Employer Shares are required to be voted no shares have been allocated, the Plan Administrator will vote such shares. 37 SECTION 21 - EXEMPT LOANS 21.01 AUTHORITY TO BORROW The Plan Administrator may direct the Trustee to borrow funds on behalf of the Plan to purchase Employer Shares, provided that any Plan loan is an exempt loan within the meaning of Treasury Regulation Section 54.4975-7(b)(1)(iii). 21.02 REQUIREMENTS FOR PLAN LOANS A loan made to the Plan pursuant to this Section 21 must meet the following requirements: (a) The proceeds of the loan must be used within a reasonable time after their receipt by the Plan to (i) acquire Employer Shares; (ii) repay such loan; or (iii) repay a prior exempt loan. (b) The interest rate on the loan must not be in excess of a reasonable rate of interest. All relevant factors will be considered in determining a reasonable rate of interest, including the amount and duration of the loan, the security and guarantee (if any) involved, the credit standing of the Plan and the guarantor (if any) and the interest rate prevailing for comparable loans. (c) The loan must be for a specific term. Such loan may not be payable at the demand of any person, except in the case of default. (d) The loan must be without recourse against the Plan. Furthermore, the only assets of the Plan that may be given as collateral for the loan are Employer Shares of two classes--those acquired with the proceeds of the loan and those that were used as collateral on a prior exempt loan repaid with the proceeds of the current loan. No person entitled to payment under the exempt loan will have any rights to assets of the Plan other than: (i) collateral given for the loan (or the proceeds of such collateral held in the unallocated suspense account); (ii) contributions (other than contributions of Employer Shares) that are made under the Plan to meet its obligations under the loan; and (iii) earnings attributable to either such collateral or the investment of such contributions. (e) Payments of principal and interest on the loan will be made only from (i) Employer contributions paid in cash; (ii) earnings from such Employer contributions; or (iii) from dividends on Employer Shares financed by the loan, to the extent the Plan Administrator directs that such dividends be used for such purpose. (f) The loan and/or related documents must provide for the release from encumbrance of Plan assets used as collateral for the loan. For each Plan Year during the 38 duration of the loan, the number of securities released shall be determined in accordance with Treasury Regulation 54.4975-8(i) or (ii). If collateral includes more than one class of securities, the number of securities of each class to be released for a Plan Year must be determined by applying the same fraction to each class. (g) In the event of default, the value of Plan assets transferred in satisfaction of the loan must not exceed the amount of default. If the lender is a "disqualified person," within the meaning of Code Section 4975(e)(2), a loan must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the loan. (h) All other requirements of Treasury Regulation Section 54.4975-7(b). 39 SECTION 22 - MISCELLANEOUS 22.01 EMPLOYER'S RIGHT TO TERMINATE EMPLOYEES The right of an Employer to terminate the employment of any of its Employees will not be affected by an Employee's participation in the Plan. 22.02 GENDER AND NUMBER Wherever used in the Plan, a masculine pronoun will refer to both the masculine and feminine; and a singular pronoun will refer to both singular and plural, unless the context clearly requires otherwise. 22.03 MERGER OR CONSOLIDATION The Plan Administrator may authorize the merger, transfer or consolidation of a Participant's Accounts to another qualified plan. In case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant in such other plan would (if the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer that is equal to, or greater than, the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). To the extent required by Code Section 411(d)(6), the Plan will preserve the forms of benefits relating to that portion of a Participant's Account acquired as a result of a merger, consolidation or transfer of assets or liabilities with any other plan. 22.04 NAMED FIDUCIARIES The named fiduciaries of the Plan will be the Plan Administrator, the Sponsor, and the investment committee. 22.05 LIMITATIONS ON PAYMENT; MISSING PARTICIPANT If, in the judgment of the Plan Administrator, a Participant or Beneficiary is legally, physically or mentally incapable of personally receiving and executing a receipt for any distribution or payment due him under the Plan, the distribution or payment may be made to the person's guardian or other legal representative (or, if none is known, to any other person or institution who has custody of the person), and that distribution or payment will constitute a full discharge of any obligation with respect to the amount paid or distributed. 40 If the Plan Administrator cannot locate a Participant or Beneficiary at the time payments are due, the Account of such Participant or Beneficiary may be cancelled and such amounts paid to the Employer. In such case, the Account of the Participant or Beneficiary will be reinstated if such individual subsequently files a claim for his or her benefit under the Plan. 22.06 ADDITIONAL SERVICE CREDITS If a Leased Employee becomes eligible to participate in the Plan, such Employee's service while a Leased Employee, and such service during a period in which the Employee would have been a Leased Employee but for the fact that the Employee did not work for a one-year period as a substantially full-time employee, will be considered in determining any eligibility or vesting service required to be completed by a Participant under the Plan. The Plan Administrator may, on a nondiscriminatory basis, provide that the period of time in which an authorized leave of absence has occurred will be included in any eligibility or vesting service required to be completed by a Participant under the Plan. 22.07 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT This section is effective as of December 12, 1994 or the Plan's initial effective date, if later. Notwithstanding any provisions of the Plan to the contrary, contributions, benefits and years of service with respect to Qualified Military Service will be provided in accordance with Code Section 414(u). 22.08 NONTERMINABLE PROTECTIONS AND RIGHTS Notwithstanding anything contained herein to the contrary, except as provided in Sections 12.06 (put requirements) or 12.07 (right of first refusal) of the Plan, or as otherwise permitted by applicable law, no security acquired with the proceeds of an exempt loan may be subject to a put, call or other option, or buy-sell or similar arrangement while held by and/or distributed from this Plan. The rights and protections specified in the preceding sentence, together with the put option rights provided for in Section 12.06 hereof, will be non-terminable regardless of whether this Plan ceases to be an employee stock ownership plan or an exempt loan is paid in full. 22.09 DIVIDENDS Dividends on Employer Shares held in a Participant's Account shall be allocated as investment earnings of such Participant's Account, and dividends on Shares held in the 41 unallocated suspense account described in Section 4.02 shall be allocated in accordance with procedures established by the Plan Administrator. 22.10 USE OF RETURN OF CAPITAL WITH RESPECT TO EMPLOYER SHARES Amounts received by the Plan as a return of capital on the Employer Shares held in the suspense account described in Section 3.02 may be used to repay the Plan loan which has been used to acquire such shares, or may be held in the suspense account and allocated on a pro rata basis in accordance with the remaining Employer Shares held in suspense, as determined by the Plan Administrator. 22.11 MINIMUM DISTRIBUTIONS With respect to distributions under the Plan made in calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Internal Revenue Code in accordance with the regulations under Section 401(a)(9) that were proposed in January 2001, notwithstanding any provision of the Plan to the contrary. This paragraph shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under Section 401(a)(9) or such other date specified in guidance published by the Internal Revenue Service. 22.12 QUALIFIED TRANSPORTATION FRINGE COMPENSATION To the extent that any provision of the Plan directly or indirectly references the definition of "compensation" set forth in either Section 415(c)(3) or Section 414(s)(2) of the Code, and such provision provides that certain deferred compensation pursuant to Section 415(c)(3)(D) of the Code or Section 414(s)(2) of the Code will be included in the definition of "compensation," then effective for Plan Years or Limitation Years beginning on and after January 1, 2001, the amount of compensation determined pursuant to such provision will include elective amounts that are not includable in the gross income of the Participant by reason of Section 132(f)(4) of the Code. To the extent that the definition of "compensation" which is used for the purpose of determining a Participant's allocation under the Plan includes in such definition certain deferred compensation referenced in either Section 414(s)(2) or 415(c)(3)(D) of the Code, effective for Plan Years beginning on and after January 1, 2001, the amount of compensation determined pursuant to such provision will include elective amounts that are not includable in the gross income of the Participant by reason of Section 132(f)(4) of the Code. 22.13 MISTAKES OR MISSTATEMENTS In the event of a mistake or a misstatement by a Participant or Beneficiary as to any item of information that is furnished pursuant to the terms of the Plan that has an effect on the 42 amount of paid or to be paid to such Participant or Beneficiary, or a mistake by the Plan as to the amount paid or to be paid to a Participant or Beneficiary, the Plan Administrator shall take such action as in its judgment will accord to such person the payment to which he is properly entitled under the Plan. The actions to be taken by the Plan Administrator may include the reduction of future payments to the Participant or Beneficiary, the restatement of such person's accrued benefit on the books and records or the Plan Administrator, a request of the Participant or Beneficiary that the amounts paid in error to such person be repaid, or any other such action as the Plan Administrator deems desirable. 43 SECTION 23 - DEFINITIONS Whenever used herein, the following words and phrases will have the meanings specified below. Additional words and phrases may be defined in the text of the Plan. "ACCOUNT" means a Participant's Employer Contributions Account and any other accounts established for the benefit of a Plan Participant. "Account," when used in the Plan, will also mean, to the extent the context so requires, the aggregate of such accounts. "AFFILIATE" means, except for the purpose of determining the limitations set forth in Section 2.04, any other employer that, together with the Employer, is a member of: (a) a controlled group of corporations or of a commonly controlled trade or business, as defined in Code Sections 414(b) and (c); (b) an affiliated service group as defined in Code Section 414(m); or (c) any other organization described in Code Section 414(o) (to the extent required to be aggregated by the Secretary of Treasury). For the purpose of determining the limitations set forth in Section 2.04, the term "Affiliate" has the meaning as set forth in this definition, as modified by Section 415(h). "ANNUAL ADDITIONS" means the sum of the following amounts for a Limitation Year: (a) Employer contributions and Forfeitures allocated to a Participant's Account pursuant to Section 2. The amount of Annual Additions attributable to Employer contributions that are used to repay an exempt loan (as described in Section 21) may be determined by reference to either the amount of Employer contributions used to repay such loan or the value of the Employer Shares allocated to Participants' Accounts. For any Plan Year in which not more than one-third of the Employer contributions made pursuant to Section 2.02 are allocated to "highly-compensated employees" (within the meaning of Code Section 414(q)), the amount treated as an Annual Addition will be adjusted to exclude Forfeitures on Employer Shares that are acquired with the proceeds of a loan described in Section 21, or Employer contributions that are allocable to interest payments on such loan. For any Plan Year, the Plan Administrator may reallocate the allocation required to be made to Participants' Accounts in accordance with Section 3 by reducing the amounts allocated to the Plan's highly compensated employees in order to satisfy the "one-third" rule. (b) amounts allocated after March 31, 1984 to an individual medical account, as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer; (c) amounts derived from contributions paid or accrued after December 31, 1985 in taxable years ending after such date which are attributable to postretirement medical benefits allocated to the separate account of a "key employee" (as defined in Section 416(i) of the Code) under a welfare benefit fund (as defined in Section 419(e) of the Code) maintained by the Employer. The amounts described under this paragraph (c) will not be subject to the 25% of compensation limit provided in Section 2.04; 44 (d) amounts consisting of Employer contributions (including elective deferral contributions), employee after-tax contributions or forfeitures allocated to any other defined contribution plan or simplified employee pension (other than a salary reduction simplified employee pension) of the Employer or an Affiliate to which the Participant is or was a participant. In determining the amount set forth in paragraph (a) above, an excess annual addition determined in accordance with Section 3.01 that is applied to reduce Employer contributions in a Limitation Year will be considered an Annual Addition for the year in which such contribution is applied. The amounts described in paragraphs (a) and (d) above will include amounts treated as "excess deferrals" within the meaning of Treasury Regulation 1.402(g)-1(e)(1)(iii) (unless distributed in accordance with Treasury Regulation 1.402(g)-1(e)(2) or (3)), "excess contributions" within the meaning of Treasury Regulation 1.401(k)-1(g)(7) or "excess aggregate contributions" within the meaning of Treasury Regulation 1.401(m)-1(f)(8) for a Limitation Year. "BENEFICIARY" means the individual, individuals or trust designated by the Participant or determined in accordance with Section 8 to receive any death benefit payable under the Plan. "CODE" means the Internal Revenue Code of 1986, as may be amended from time to time and corresponding provisions of future federal internal revenue codes. "COMPENSATION" means all amounts paid to the Participant by the Employer for a Plan Year which is treated as wages pursuant to Code Section 3401(a), plus all other payments of compensation which the Employer is required to report on form W-2, plus all amounts excluded from income under Sections 125, 402(e)(3), 402(h)(1)(B), 403(b), or for Limitation Years commencing on and after January 1, 2001, Section 132(f)(4) of the Code; provided compensation paid by the Employer during any Plan Year in excess of the limit set forth in Code Section 401(a)(17)(A), as adjusted by Code Section 401(a)(17)(B), will be excluded. Effective August 19, 1999, amounts realized from the exercise of a nonqualified stock option, or amounts includable in income when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture, shall also be excluded from the definition of compensation. For purposes of a Participant's first Plan Year of eligibility, only Compensation paid to such Participant after the Entry Date on which he begins to participate in the Plan shall be considered for purposes of determining allocations under Section 3 hereof. "EFFECTIVE DATE" for this amended and restated Plan means, except where separately stated, January 1, 1998. "EMPLOYEE" means any person who is an employee in the regular employment of the Employer, excluding: (a) Employees who are members of a collective bargaining unit providing retirement benefits were subject to good-faith negotiation between the Union and the Employer; 45 and (b) Employees who are classified by the Employer as "leased employees." If an individual who is not classified as a common law employee is determined by a court of law or governmental agency to be a common law employee of the Employer, such employee will remain excluded from participation in the Plan unless the Plan is amended to specifically provide for such employee's inclusion. The definition of "Employee" shall also exclude any person acquired in a corporate transaction with Industrial Bancorp, Inc. or one of its affiliated companies who was a participant in the Industrial Bancorp, Inc. Employee Stock Ownership Plan immediately prior to the acquisition date. Notwithstanding the foregoing, the persons who are excluded from participation in this Plan as described in the preceding sentence will become Participants in the Plan on January 1, 2003, provided such persons are Employees on such date. "EMPLOYER" means the Sponsor or Affiliate that adopts the Plan and joins in the Trust Agreement. As of the Effective Date, The Home Savings and Loan Company of Youngstown, Ohio is an Affiliate that participates in the Plan. "EMPLOYER CONTRIBUTIONS ACCOUNT" means the account established for the benefit of a Participant pursuant to Section 4.01. "EMPLOYER SHARES" OR "SHARES" means securities which constitute "employer securities" under Section 409(1) of the Code and "qualifying employer securities" under Section 4975(e)(8) of the Code and Section 407(d)(5) of ERISA. "EMPLOYMENT COMMENCEMENT DATE" means the date on which an Employee first performs an Hour of Service for the Employer or an Affiliate or the date on which an Employee first performs an Hour of Service for the Employer or an Affiliate after a One-Year Break in Service. "ENTRY DATE" means the first day of January, April, July or October following the period described in Section 1.02 in which an Employee satisfied the requirements of Section 1.01, but not earlier than the date the Plan first became effective. "FORFEITURE" means the non-vested amount of a Participant's Account determined in accordance with Section 11 that the Participant is not entitled to receive upon the termination of his employment. "HOUR OF SERVICE" means: (a) each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer or an Affiliate. These hours will be credited to the Employee for the computation period or periods in which the duties are performed; and (b) each hour for which an Employee is paid, or entitled to payment, by the Employer or an Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, absence for maternity or paternity reasons, jury 46 duty, military duty or leave of absence. No more than 501 Hours of Service will be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period) unless such period is a period of Qualified Military Service. An Employee will be credited with Hours of Service for all periods of Qualified Military Service in accordance with the Uniformed Services Employment and Reemployment Rights Act. Hours under this paragraph will be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer or an Affiliate. The same Hours of Service will not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). The hours credited pursuant to this paragraph (c) will be credited to the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made; and (d) if records of actual hours are not maintained for an Employee, an Employee will be given credit for 190 Hours of Service if he is employed at any time during the month. "LATE RETIREMENT DATE" means the first day of the month following the Participant's actual retirement after his Normal Retirement Date. "LIMITATION YEAR" means the Plan Year. "NORMAL RETIREMENT AGE" means the day on which the Participant attains age 65. "NORMAL RETIREMENT DATE" means the first day of the month coincident with or next following the date on which a Participant attains his Normal Retirement Age; provided, however, that the Plan will not be interpreted to require that a Participant retire prior to attaining any specific age. "ONE-YEAR BREAK IN SERVICE" means a 12-month period during which a Participant has not completed more than 500 Hours of Service. In the case of an Employee who is absent from work for maternity or paternity reasons, such Employee will have credited, solely for purposes of determining whether a One-Year Break in Service has occurred for eligibility and vesting, if required, in the year in which the absence begins if necessary to prevent a One-Year Break in Service for such year; or in the following year, the number of hours that would normally have been credited but for such absence; or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. The total number of hours treated as Hours of Service under this paragraph will not exceed 501 hours. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (a) by reason of pregnancy of the Participant; (b) by reason of the birth of a child of the Participant; (c) by reason of the placement of a child with the Participant in connection with the adoption of such child by such Participant; or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. 47 An Employee will not be treated as having a One-Year Break in Service as a result of any periods of Qualified Military Service. "PARTICIPANT" means either (a) an Employee who is participating in the Plan in accordance with Section 1.01 for whom an Account is being maintained; or (b) a former Employee of the Employer for whom an Account is being maintained. "PLAN" means the United Community Financial Corp. Employee Stock Ownership Plan, as amended, as embodied in the Plan document and amendments made hereto from time to time. "PLAN ADMINISTRATOR" means an administrative committee appointed by the Sponsor to perform the functions described in Section 14. In the absence of such appointment, the Sponsor will be the Plan Administrator. Notwithstanding the foregoing, the Sponsor will be the Plan Administrator for purposes of the reporting and disclosure requirements of Employee Retirement Income Security Act of 1974, as it shall be amended from time to time, and of the Code. "PLAN YEAR" means the fiscal year of the Plan beginning on January 1 and ending on December 31. "PROJECTED ANNUAL BENEFIT" means the annual benefit to which the Participant would be entitled under all Employer or Affiliate sponsored defined benefit plans, assuming that the Participant continues employment until his Normal Retirement Date, that the Participant's compensation continues until his Normal Retirement Date at the rate in effect during the current calendar year and that all other factors relevant for determining benefits under the plans remain constant at the level in effect during the current calendar year. "QUALIFIED MILITARY SERVICE" means any service in the "uniformed services" (as defined in Chapter 43 of Title 38 of the United States Code) by an Employee relating to reemployment initiated on or after December 12, 1994, if such Employee is entitled to reemployment rights under such chapter with respect to such service. "SHARES." See "EMPLOYER SHARES." "SPONSOR" means United Community Financial Corp., or any successor employer that assumes the responsibilities and liabilities of the Plan. "SPOUSE" or "SURVIVING SPOUSE" means an individual who is legally married to the Participant, provided that an individual who was formerly married to the Participant will be treated as the Spouse or Surviving Spouse to the extent provided under a qualified domestic relations order, as described in Code Section 414(p). "TRUST" or "TRUST FUND" means the fund established pursuant to the terms of the Trust Agreement, which fund may be comprised of one or more investment funds. 48 "TRUST AGREEMENT" means the agreement by and between the Sponsor and the Trustee for the management, investment and disbursement of assets held in the Trust Fund. "TRUSTEE" means the bank, trust company and/or individual designated by the Sponsor to hold and invest the Trust Fund and to pay benefits and expenses in accordance with the terms and provisions of the agreement by and between the Sponsor and such bank, trust company and/or individual. As of the Effective Date, the Trustee is Riggs Bank, N.A. "VALUATION DATE" means the last day of the Plan Year and any other date or dates fixed by the Plan Administrator for the valuation of assets and adjustments of Accounts. "YEAR(S) OF SERVICE" An Employee will be credited with a Year of Service for each Plan Year (excluding service described in Section 11.03, if any) in which he is credited with at least 1,000 Hours of Service. An Employee who terminates employment before the end of a Plan Year but after being credited with at least 1,000 Hours of Service will be credited with a Year of Service. In determining an Employee's Year(s) of Service, all periods of Qualified Military Service will be included. 49 IN WITNESS WHEREOF, the undersigned has caused this Plan to be executed by a duly authorized individual this 14 day of November, 2001. UNITED COMMUNITY FINANCIAL CORP. By: /S/ DOUGLAS M. MCKAY ---------------------------------------------- Name (Print): DOUGLAS M. MCKAY ---------------------------------------------- Date executed: NOVEMBER 14, 2001 ------------------ Title: PRESIDENT AND CHAIRMAN OF THE BOARD THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By: /S/ DOUGLAS M. MCKAY ---------------------------------------------- Name (Print): DOUGLAS M. MCKAY ---------------------------------------------- Date executed: NOVEMBER 15, 2001 ------------------ Title: CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD

50 EX-13 4 l92920aex13.htm EX-13 SELECTED FINANCIALS FROM ANNUAL REPORT Selected Financials from the Annual Report EX-13

EXHIBIT 13
SELECTED FINANCIAL AND OTHER DATA

Selected financial condition data: At December 31,

2001 2000 1999 1998 1997

(In thousands)

Total assets
$ 1,944,780 $ 1,300,199 $ 1,327,573 $ 1,297,689 $ 1,073,222

Cash and cash equivalents
205,883 45,972 111,445 172,409 36,404

Marketable securities:

Trading
8,352 5,933 7,657 2,804 2,475

Available for sale
51,081 98,445 161,904 112,200 39,545

Held to maturity
1,698 876 1,091 4,993 5,168

Mortgage-related securities:

Available for sale
67,069 91,731 113,559 98,890 62,416

Held to maturity
78,798 107,684 138,079 182,999 243,848

Loans, net
1,406,479 876,653 723,087 657,498 633,236

Loans held for sale, net
20,192 — — — —

FHLB stock
18,760 13,793 12,825 11,958 11,136

Deposits
1,383,418 900,413 834,087 777,583 886,808

Other borrowed funds
271,631 114,317 213,578 26,727 17

Total equity
261,880 261,899 256,868 474,821 150,141

Summary of earnings: Year Ended December 31,

2001 2000 1999 1998 1997

(In thousands)

Interest income
$ 113,989 $ 91,622 $ 89,971 $ 87,755 $ 84,081

Interest expense
57,047 44,104 34,284 36,570 40,996

Net interest income
56,942 47,518 55,687 51,185 43,085

Provision for (recovery of) loan loss allowances
2,495 300 100 650 (1,546 )

Net interest income after provision for (recovery of) loan loss allowances
54,447 47,218 55,587 50,535 44,631

Noninterest income
28,449 24,754 22,721 22,137 20,217

Noninterest expenses (1)(2)(3)
57,708 54,307 61,037 56,931 42,704

Income before provision for income taxes
25,188 17,665 17,271 15,741 22,144

Provision for income taxes
9,509 6,051 6,876 5,612 7,717

Net income
$ 15,679 $ 11,614 $ 10,395 $ 10,129 $ 14,427

(1) For the year ended December 31, 2000, noninterest expense included a $2.9 million gain on postretirement benefits curtailment and a $1.0 million loss on pension termination.

(2) For the year ended December 31, 1999, noninterest expense included $6.4 million compensation expense as a result of the $6.00 per share special capital distribution paid on Recognition and Retention Plan (RRP) shares.

(3) For the year ended December 31, 1998, noninterest expense included $11.8 million as a result of the contribution to the Home Savings and Loan Charitable Foundation (Foundation).

Selected financial ratios and other data: At or for the Year Ended December 31,

2001 2000 1999 1998 1997

Performance ratios: (1)

Return on average assets (2) 0.97 % 0.92 % 0.79 % 0.83 % 1.34 %

Return on average equity (3)
6.03 4.47 2.46 3.41 10.10

Interest rate spread (4)
2.95 2.91 2.98 3.28 3.50

Net interest margin (5)
3.66 3.89 4.38 4.32 4.10

Noninterest expense to average assets
3.56 4.30 4.66 4.66 3.96

Efficiency ratio (6)
71.79 75.14 77.85 77.65 67.46

Average interest-earning assets to Average interest-bearing liabilities
119.23 127.08 152.09 133.59 115.34

Capital ratios:

Average equity to average assets
16.04 20.57 32.25 24.30 13.23

Equity to assets at year end
13.47 20.14 19.35 36.59 13.99

Tangible capital
9.07 14.51 26.75 26.80 13.47

Core capital
9.07 14.51 26.75 26.80 13.47

Risk-based capital
14.70 24.33 50.41 51.51 28.85

Asset quality ratios:

Nonperforming loans to loans at year end (7)
0.89 1.10 0.54 1.15 1.60

Nonperforming assets to average assets (8)
0.80 0.79 0.31 0.63 0.94

Nonperforming assets to total assets at year end (8)
0.67 0.77 0.30 0.59 0.95

Allowance for loan losses as a percent of loans
0.81 0.74 0.88 0.96 0.94

Allowance for loan losses as a percent of nonperforming loans (7)
92.13 67.79 164.86 84.62 59.02

Number of:

Loans
25,636 22,699 20,274 19,628 19,173

Deposits
164,753 115,785 106,196 105,426 108,663

Per share data: (9)

Basic earnings (10) $ 0.49 $ 0.35 $ 0.31 $ 0.10 N/A

Diluted earnings (10)
0.48 0.35 0.30 0.10 N/A

Book value (11)
7.34 7.02 6.80 13.38 N/A

Dividend payout ratio (12)
62.50 % 85.71 % 100.00 % 75.00 % N/A

(1) Performance ratios for 2000 reflect the $2.9 million gain on postretirement benefits curtailment and the $1.0 million loss on pension termination. Performance ratios for 1999 reflect the $6.4 million employee benefit expense related to the $6.00 per share special capital distribution paid on the RRP shares. Performance ratios for 1998 reflect the $11.8 million contribution to the Foundation.

(2) Net income divided by average total assets. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the return on average assets would have been 0.80% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the return on average assets would have been 1.16% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the return on average assets would have been 1.43% for the year ended December 31, 1998.

(3) Net income divided by average total equity. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the return on average equity would have been 3.90% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the return on average equity would have been 3.60% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the return on average equity would have been 5.89% for the year ended December 31, 1998.

(4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.

(5) Net interest income as a percentage of average interest-earning assets.

(6) Noninterest expense divided by the sum of net interest income and noninterest income. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the efficiency ratio would have been 78.22% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the efficiency ratio would have been 69.52% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the efficiency ratio would have been 61.73% for the year ended December 31, 1998.

(7) Nonperforming loans consist of nonaccrual loans and restructured loans.

(8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans.

(9) For purpose of displaying six months earnings per share for 1998, it is assumed the Conversion took place as of July 1, 1998.

(10) Net income divided by average number of shares outstanding. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, basic and diluted earnings per share would have been $0.31for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, basic earnings per share would have been $0.45 and diluted earnings per share would have been $0.44 for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, basic and diluted earnings per share would have been $0.32 for the year ended December 31, 1998.

(11) Equity divided by number of shares outstanding.

(12) Historical per share dividends declared and paid for the year divided by the diluted earnings per share for the year.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
     United Community Financial Corp. (United Community) was incorporated for the purpose of owning all of the outstanding stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings). On August 12, 1999, United Community acquired Butler Wick Corp. (Butler Wick), which was accounted for as a pooling of interests. Accordingly, the consolidated financial statements of United Community for all periods prior to the Butler Wick acquisition have been restated to include the results of Butler Wick. On July 1, 2001, United Community acquired Industrial Bancorp, Inc. (Industrial), which was accounted for as a purchase. Accordingly, the results of Industrial’s operations from the effective date of acquisition have been included in United Community’s 2001 financial statements. See note 2 to the consolidated financial statements for discussion of the acquisitions. The following discussion and analysis of the financial condition and results of operations of United Community and its subsidiaries should be read in conjunction with the consolidated financial statements, and the notes thereto, included in this Annual Report.
Changes in Financial Condition
     Total assets increased $644.6 million, or 49.6%, from $1.30 billion at December 31, 2000 to $1.94 billion at December 31, 2001, primarily as a result of the Industrial acquisition. Net loans increased $529.8 million, or 60.40%, net loans held for sale increased $20.2 million and cash and cash equivalents increased $159.9 million, or 347.8%. Decreases in securities of $97.7 million, or 32.1%, and margin accounts of $12.4 million, or 37.1%, and increases in deposits of $483.0 million, or 53.6%, and other borrowed funds of $157.3 million, or 137.6%, funded the increases in loans and cash and cash equivalents.
     Net loans increased $529.8 million, or 60.4%, to $1.4 billion at December 31, 2001, compared to $876.7 million at December 31, 2000, of which $380.1 million is attributable to the Industrial acquisition. The most significant increases were $360.4 million in real estate loans secured by one- to four-family residences, $36.6 million in multifamily real estate loans, $57.9 million in construction loans secured by one- to four-family residences, and $52.4 million in consumer loans. Home Savings anticipates continued growth in all loan categories, which will increase the risk of loan losses. Non-residential real estate lending is generally considered to involve a higher degree of risk than residential real estate 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 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 real estate portfolios by type of collateral.

December 31,

2001 2000

Percent Percent

Amount of Total Amount of Total

(Dollars in thousands)

Strip shopping centers
$ 37,052 24.16 % $ 29,613 21.46 %

Office buildings
49,323 32.16 52,713 38.21

Warehouses
18,933 12.35 25,418 18.42

Hotel property
6,307 4.11 5,776 4.19

Light industrial manufacturing
14,529 9.47 15,826 11.47

Unimproved land
13,722 8.95 347 0.25

Nursing homes
7,010 4.57 — —

Other
6,492 4.23 8,283 6.00

Total
$ 153,368 100.00 % $ 137,976 100.00 %

     Home Savings became active in the secondary market during 2001. Net loans held for sale were $20.2 million at December 31, 2001 compared to no loans held for sale at December 31, 2000.
     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-related securities. Overnight funds increased $147.8 million, or 657.1%, to $170.3 million at December 31, 2001 compared to $22.5 million at December 31, 2000. Securities available for sale, which include both investment and mortgage-related securities, decreased $72.0 million, or 37.9%. Securities held to maturity, which also consist of investment securities and mortgage-related securities, decreased $28.1 million, or 25.9%. Trading securities, which consist of investment securities, increased $2.4 million, or 40.8%. This net decrease in securities was primarily used to fund an increase in net loans of $529.8 million.

     Total deposits increased $483.0 million, or 53.6%, from $900.4 million at December 31, 2000 to $1.4 billion at December 31, 2001, of which $313.6 million is attributable to the acquisition of Industrial. The increase is primarily due to new savings products introduced by Home Savings that offer competitive rates or other features. The deposit increase included a $294.8 million increase in certificate accounts, a $130.5 million increase in demand accounts and a $57.7 million increase in savings accounts.
     Other borrowed funds increased $157.3 million, or 137.6%, at December 31, 2001 compared to December 31, 2000, of which $30.0 million of borrowed funds is outstanding Federal Home Loan Bank Advances acquired from Industrial. The primary reason for the increase is $87.0 million borrowed from the Federal Home Loan Bank to fund the acquisition of Industrial. Other borrowed funds were used primarily to fund loan growth.
     Total shareholders’ equity decreased $19,000, or 0.01%, from December 31, 2000 to December 31, 2001. The decrease was primarily due to the quarterly dividend payments and treasury stock purchases, offset by earnings for the year and an increase in other comprehensive income. United Community acquired 1,604,126 shares of common stock for $11.0 million during the year ended December 31, 2001. United Community has remaining authorization to purchase 1,688,032 shares as of December 31, 2001. Book value per share was $7.34 as of December 31, 2001.
Comparison of Operating Results for the Years Ended December 31, 2001 and December 31, 2000
Net Income—Net income for the year ended December 31, 2001 was $15.7 million, compared to $11.6 million for the year ended December 31, 2000. The primary reason for the increase was a $9.4 million increase in net interest income and a $3.7 million increase in noninterest income. These increases were partially offset by a $3.4 million increase in noninterest expense and a $2.2 million increase in the provision for loan loss allowances. Diluted earnings per share for the year ended December 31, 2001 were $0.48 compared to diluted earnings per share of $0.35 for the year ended December 31, 2000.
Net Interest Income—Net interest income increased $9.4 million, or 19.8%, to $56.9 million in 2001 from $47.5 million for 2000. Total interest income increased $22.4 million and interest expense increased $12.9 million. The increase in total interest income was primarily due to an increase in interest on loans of $30.1 million, which was partially offset by a decrease in interest earned on securities of $8.1 million and a decrease in income on margin accounts of $1.8 million. The average balance of interest-earning assets increased $335.4 million for the year ended December 31, 2001 compared to 2000. The average yield on interest-earning assets decreased to 7.32% in 2001 compared to 7.50% in 2000. The increase in interest expense was primarily due to an increase in interest expense on deposits of $12.6 million, due to an increase in the weighted average balance of deposits. The average balance of interest-bearing liabilities increased $344.6 million, or 35.8%, and the average rate paid decreased to 4.37% for 2001 from 4.59% for 2000. The interest rate spread increased 4 basis points to 2.95% for 2001 from 2.91% for 2000 as a result of the 22 basis point decrease in the cost of interest-bearing liabilities partially offset by a 18 basis point decrease in the yield on interest-earning assets.
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 possible 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 $2.5 million in 2001 compared to a provision of $300,000 in 2000. The primary reasons for the increase in the provision is the loan growth experienced in 2001, an increase in nonperforming loans of $2.8 million from December 31, 2000 to December 31, 2001, an increase in delinquencies, current economic conditions and loans originated in new market areas. Additional factors that contributed to the increase in the provision during the fourth quarter include a shift in the mix of the portfolio and an increase in loans on the watch list. The allowance for loan losses totaled $11.5 million at December 31, 2001, which was 0.80% of total loans and 92.13% of nonperforming loans.
Noninterest Income—Noninterest income increased $3.7 million, or 14.9%, to $28.4 million for the year ended December 31, 2001, from $24.8 million for the year ended December 31, 2000. The increase was primarily due to an increase of $5.5 million recognized on the sale of loans and a $2.2 million increase in service fees and other charges. These increases were partially offset by a $3.8 million decline in commission income and a $1.1 million decrease in gains recognized on trading securities in 2001.
Noninterest Expense—Noninterest expense increased $3.4 million to $57.7 million for 2001, from $54.3 million in 2000. The primary reasons for the increase are a $1.6 million increase in equipment and data processing, a $1.7 million increase in the amortization of the core deposit intangible related to the Industrial acquisition and a $1.1 million increase in other expenses. These increases were partially offset by a $1.7 million decline in salaries and employee benefits primarily due to lower commissions earned at Butler Wick and a $1.7 million decline in franchise tax due to lower equity for Home Savings in 2001 compared to 2000. A $2.9 million gain on the curtailment of postretirement benefits and a $1.8 million loss on the termination of the Home Savings’ pension plan, which both occurred in 2000, also contributed to the change in noninterest expense.
Federal Income Taxes—Federal income taxes increased $3.5 million, or 57.1%, in 2001 compared to 2000, primarily due to higher pretax income in 2001. The effective tax rate was 38% in 2001 and 34% in 2000. Refer to Note 12 to the consolidated financial statements for a further analysis of the effective tax rate.

Comparison of Operating Results for the Years Ended December 31, 2000 and December 31, 1999
Net Income—Net income for the year ended December 31, 2000 was $11.6 million, compared to $10.4 million for the year ended December 31, 1999. The primary reasons for the increase were a $6.7 million decrease in noninterest expense, primarily due to the recognition in 1999 of a $6.4 million one-time compensation expense for the United Community Recognition and Retention Plan (RRP) due to the special capital distribution and a $2.9 million gain recognized on the curtailment of postretirement benefits in 2000, which were partially offset by a $1.0 million loss due to the termination of the Home Savings pension plan. Another component of the increase in earnings was a $2.0 million increase in noninterest income due to increases in commissions and service fees and other charges. These increases were partially offset by a $8.2 million decrease in net interest income primarily due to increases in interest expense on deposits and other borrowed funds. Diluted earnings per share for the year ended December 31, 2000 were $0.35 compared to diluted earnings per share of $0.30 for the year ended December 31, 1999.
Net Interest Income—Net interest income decreased $8.2 million, or 14.7%, to $47.5 million in 2000 from $55.7 million for 1999. Total interest income increased $1.7 million and interest expense increased $9.8 million. The increase in total interest income was primarily due to an increase in interest on loans of $8.3 million and an increase in interest on margin accounts of $1.4 million, which were partially offset by a decrease in interest earned on securities of $4.1 million and a decrease in income on other interest-earning assets of $4.0 million. The average balance of interest-earning assets decreased $48.6 million for the year ended December 31, 2000 compared to 1999. The average yield on interest-earning assets increased to 7.50% in 2000 compared to 7.08% in 1999. The increase in interest expense was due to an increase in interest expense on deposits of $5.0 million and an increase in expense on borrowed funds of $4.9 million. The increase in deposits was due to increases in the weighted average interest rate and the average balance and the increase in expense on other borrowed funds was due to an increase in the average balance. The average balance of interest-bearing liabilities increased $126.2 million, or 15.1%, and the average rate paid increased to 4.59% for 2000 from 4.10% for 1999. The interest rate spread decreased 7 basis points to 2.91% for 2000 from 2.98% for 1999 as a result of the 49 basis point increase in the cost of interest-bearing liabilities substantially offset by a 42 basis point increase in the yield on interest-earning assets.
Provision for Loan Losses—Due to growth in the loan portfolio and an increase in nonperforming loans and delinquency rates, the provision for loan loss allowance was $300,000 in 2000 compared to a provision of $100,000 in 1999. The allowance for loan losses totaled $6.6 million at December 31, 2000, which was 0.74% of total loans.
Noninterest Income—Noninterest income increased $2.0 million, or 8.9%, to $24.7 million for the year ended December 31, 2000, from $22.7 million for the year ended December 31, 1999. The increase was primarily due to an increase in the commissions and service fees and other charges of $990,000 and $963,000, respectively, primarily due to an increase in securities transactions and trust services to Butler Wick customers. These increases were partially offset by a $340,000 decrease in gains recognized on trading securities in 2000.
Noninterest Expense—Noninterest expense decreased $6.7 million to $54.3 million for 2000, from $61.0 million in 1999. This decrease was primarily attributable to a decrease in salaries and employee benefits of $7.2 million and a gain of $2.9 million on the curtailment of postretirement benefits. The decrease in salaries and employee benefits was primarily due to a $6.4 million one-time expense from the effect of the $6.00 per share special capital distribution on the RRP in 1999 and a decrease in expense related to the Employee Stock Ownership Plan (ESOP) of $1.0 million due to a lower average stock price in 2000. These decreases were partially offset by a one-time $1.0 million loss on the termination of the Home Savings pension plan and an increase in franchise tax expense of $1.8 million due to Home Savings having higher equity on its 2000 return compared to its 1999 return.
Federal Income Taxes—Federal income taxes decreased $825,000, or 12.0%, in 2000 compared to 1999, primarily due to a $400,000 valuation allowance booked in 1999 and tax benefits of filing a consolidated return in 2000. The effective tax rate was 34% in 2000 and 40% in 1999. Refer to Note 12 to the consolidated financial statements for a further analysis of the effective tax rate.
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 loans carrying a zero yield. The average balance for securities available for sale is computed using the carrying value and the average yield on securities available for sale has been computed using the historical amortized average balance.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Year ended December 31,

2001 2000 1999

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)

Interest-earning assets:

Net loans (1)
$ 1,185,202 $ 92,933 7.84 % $ 785,437 $ 62,836 8.00 % $ 689,170 $ 54,564 7.92 %

Net loans held for sale
12,440 886 7.12 — — — — — —

Mortgage-related securities:

Available for sale
86,722 5,200 6.00 103,630 6,737 6.50 112,112 6,994 6.24

Held to maturity
93,777 6,355 6.78 124,900 8,651 6.93 157,108 10,946 6.97

Marketable securities:

Trading
6,359 151 2.37 6,325 145 2.29 4,300 134 3.12

Available for sale
65,935 3,664 5.56 134,355 7,896 5.88 166,465 9,409 5.65

Held to maturity
893 45 5.04 1,009 62 6.14 1,938 115 5.93

Margin accounts
26,637 1,774 6.66 41,288 3,565 8.63 29,297 2,207 7.53

Other interest-earning assets
79,828 2,981 3.73 25,444 1,730 6.80 110,644 5,602 5.06

Total interest-earning assets
1,557,793 113,989 7.32 1,222,388 91,622 7.50 1,271,034 89,971 7.08

Noninterest-earning assets
64,049 41,214 39,116

Total assets
$ 1,621,842 $ 1,263,602 $ 1,310,150

Interest-bearing liabilities:

Deposits:

Checking accounts
$ 184,120 5,446 2.96 $ 145,649 4,167 2.86 $ 128,905 3,131 2.43

Savings accounts
228,485 5,212 2.28 213,342 5,271 2.47 223,438 5,533 2.48

Certificates of deposit
696,633 37,353 5.36 467,823 25,956 5.55 427,937 21,768 5.09

Other borrowed funds
197,294 9,036 4.58 135,108 8,710 6.45 55,438 3,852 6.95

Total interest-bearing liabilities
1,306,532 57,047 4.37 961,922 44,104 4.59 835,718 34,284 4.10

Noninterest-bearing liabilities
55,088 41,699 51,924

Total liabilities
1,361,620 1,003,621 887,642

Equity
260,222 259,981 422,508

Total liabilities and equity
$ 1,621,842 $ 1,263,602 $ 1,310,150

Net interest income and interest rate spread
$ 56,942 2.95 % $ 47,518 2.91 % $ 55,687 2.98 %

Net interest margin
3.66 % 3.89 % 4.38 %

Average interest-earning assets to average interest-bearing liabilities
119.23 % 127.08 % 152.09 %

(1) Nonaccrual loans are included in the average balance.

     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 United Community’s interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior period rate), (ii) changes in rate (change in rate multiplied by prior period volume) and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated in proportion to the changes due to volume and rate:

Year ended December 31,

2001 vs. 2000 2000 vs. 1999

Increase Increase

(decrease) due to Total (decrease) due to Total

increase
increase

Rate Volume (decrease) Rate Volume (decrease)

(In thousands)

Interest-earning assets:

Loans
$ (1,223 ) $ 31,320 $ 30,097 $ 576 $ 7,696 $ 8,272

Loans held for sale
— 886 886

Mortgage-related securities:

Available for sale
(330 ) (1,207 ) (1,537 ) 322 (579 ) (257 )

Held to maturity
(183 ) (2,113 ) (2,296 ) (64 ) (2,231 ) (2,295 )

Marketable securities:

Trading
5 1 6 (14 ) 25 11

Available for sale
(409 ) (3,823 ) (4,232 ) 393 (1,906 ) (1,513 )

Held to maturity
(10 ) (7 ) (17 ) 4 (57 ) (53 )

Margin accounts
(702 ) (1,089 ) (1,791 ) 357 1,001 1,358

Other interest-earning assets
(334 ) 1,585 1,251 3,108 (6,980 ) (3,872 )

Total interest-earning assets
$ 3,186 $ 25,553 22,367 $ 4,682 $ (3,031 ) 1,651

Interest-bearing liabilities:

Checking accounts
145 1,134 1,279 599 437 1,036

Savings accounts
(788 ) 729 (59 ) (13 ) (249 ) (262 )

Certificates of deposit
(840 ) 12,237 11,397 2,066 2,122 4,188

Other borrowed funds
(553 ) 879 326 (257 ) 5,115 4,858

Total interest-bearing liabilities
$ (2,036 ) $ 14,979 12,943 $ 2,395 $ 7,425 9,820

Change in net interest income
$ 9,424 $ (8,169 )

Asset and Liability Management and Market Risk
     Qualitative Aspects of Market Risk. The principal market risk affecting United Community is interest rate risk. United Community 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 a company’s earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk, the Board of Directors of Home Savings, which accounts for most of the assets and liabilities of United Community, has adopted an interest rate risk policy which requires the Home Savings 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.
United Community is subject to minimal equity price risk because its investment in equity securities, other than stock in the FHLB of Cincinnati, is only 0.61% of total assets. United Community is not affected by foreign currency exchange rate risk or commodity price risk.
Quantitative Aspects of Market Risk. As part of its interest rate risk analysis, Home Savings uses the “net portfolio value” (NPV) methodology adopted by the OTS as part of its capital regulations. Home Savings obtains quarterly rate shock risk reports prepared by an outside consulting firm that specializes in interest rate risk assessments. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV and net interest income that would result from various levels of theoretical basis point changes in market interest rates.
     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 NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies.

     Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. The percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income that the Home Savings Board of Directors deems advisable in the event of various changes in interest rates.

Year Ended December 31, 2001

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)

+300
$ 161,540 $ (97,516 ) (37.64 )% 9.22 % (4.42 )% $ (12,781 ) (20.68 )%

+200
197,038 (62,018 ) (23.94 ) 10.93 (2.71 ) (8,487 ) (13.74 )

+100
230,742 (28,314 ) (10.93 ) 12.45 (1.19 ) (4,551 ) (7.36 )

Static
259,056 — — 13.64 — — —

(100)
263,862 4,806 1.86 13.73 0.09 942 1.52

(200)
256,439 (2,617 ) (1.01 ) 13.30 (0.34 ) 806 1.30

(300)
245,353 (13,703 ) (5.29 ) 12.73 (0.91 ) (720 ) (1.16 )

Year Ended December 31, 2000

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)

+300
$ 149,982 $ (64,325 ) (30.02 )% 13.55 % (4.14 )% $ (6,135 ) (14.40 )%

+200
171,431 (42,876 ) (20.01 ) 15.02 (2.67 ) (3,997 ) (9.38 )

+100
193,800 (20,507 ) (9.57 ) 16.46 (1.23 ) (1,928 ) (4.52 )

Static
214,307 — — 17.69 — — —

(100)
221,943 7,636 3.56 17.99 0.30 1,013 2.38

(200)
216,714 2,407 1.12 17.42 (0.27 ) 274 0.64

(300)
214,534 227 0.11 17.06 (0.63 ) (563 ) (1.32 )

     As illustrated in the tables, Home Savings’ NPV 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 NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.
     The Board of Directors and management of 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 in excess of regulatory requirements. See “Liquidity and Capital.”
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 and borrowings. 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 primarily deposits. Accordingly, Home Savings’ earnings could be adversely affected during periods of rising interest rates.

Liquidity and Capital
     United Community’s liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities. These activities are summarized below for the years ended December 31, 2001, 2000 and 1999.

Years ended December 31,

2001 2000 1999

(In thousands)

Net income
$ 15,679 $ 11,614 $ 10,395

Adjustments to reconcile net income to net cash from operating activities
(12,271 ) 6,562 953

Net cash (used in) provided by operating activities
3,408 18,176 11,348

Net cash used in investing activities
(97,329 ) (37,365 ) (89,097 )

Net cash provided by (used in) financing activities
253,832 (46,284 ) 17,320

Net change in cash and cash equivalents
159,911 (65,473 ) (60,429 )

Cash and cash equivalents at beginning of year
45,972 111,445 171,874

Cash and cash equivalents at end of year
$ 205,883 $ 45,972 $ 111,445

     The principal sources of funds for United Community are deposits, loan repayments, maturities of securities, borrowings from financial institutions and other funds provided by operations. Home Savings also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition. Investments in liquid assets maintained by United Community, Home Savings and Butler Wick 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 December 31, 2001, approximately $541 million of Home Savings’ certificates of deposit are 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.
     The Board of Directors has authorized an ongoing program to purchase shares of United Community’s common stock to fund employee benefit programs, stock options and award programs and other corporate purposes. These purchases can be made in the open market or negotiated transactions, from time to time, depending on market conditions. United Community acquired 1,604,126 shares of common stock for $11.0 million and 483,500 shares of common stock for $3.3 million during the years ended December 31, 2001 and 2000, respectively. United Community has remaining authorization to repurchase 1,688,032 shares as of December 31, 2001.
     Home Savings is required by OTS regulations to meet certain minimum capital requirements. Current capital requirements call for tangible capital of 1.5% of adjusted tangible assets, core capital (which for Home Savings consists solely of tangible capital) of 4.0% 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).
     The following table summarizes Home Savings’ regulatory capital requirements and actual capital at December 31, 2001.

Excess of actual capital Applicable

Actual capital Current requirement over current requirement asset base

Amount Percent Amount Percent Amount Percent Total

(Dollars in thousands)

Tangible capital
$ 168,233 9.07 % $ 27,836 1.50 % $ 140,397 7.57 % $ 1,855,702

Core capital
168,233 9.07 74,228 4.00 94,005 5.07 1,855,702

Risk-based capital
178,196 14.70 96,961 8.00 81,235 6.70 1,212,016

Accounting and Reporting Developments
     A discussion of recently issued accounting pronouncements and their impact on United Community’s Consolidated Financial Statements is provided on page 30 in Note 1 of the Notes to Consolidated Financial Statements.

Market Price and Dividends
There were 37,754,086 common shares of United Community stock issued and 35,567,586 shares outstanding as of February 28, 2002. United Community’s common shares traded on The Nasdaq Stock Market® under the symbol UCFC. Quarterly stock prices and dividends declared are shown in the following table.

First Second Third Fourth First Second Third Fourth

Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter

2001:
2000:

High
$ 7.063 $ 8.700 $ 8.200 $ 7.700 High $ 9.938 $ 6.969 $ 6.688 $ 7.031

Low
6.422 6.250 6.800 6.600 Low 6.719 5.500 5.813 6.125

Close
6.625 8.700 7.050 7.200 Close 6.969 6.656 6.563 6.938

Dividends
Dividends

declared
declared

and paid
0.075 0.075 0.075 0.075 and paid 0.075 0.075 0.075 0.075

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31,

2001 2000

(Dollars in thousands)

Assets

Cash and deposits with banks
$ 35,587 $ 23,479

Federal funds sold and other
170,296 22,493

Total cash and cash equivalents
205,883 45,972

Marketable securities:

Trading (amortized cost of $8,352 and $5,927, respectively)
8,352 5,933

Available for sale (amortized cost of $49,960 and $98,267, respectively)
51,081 98,445

Held to maturity (fair value of $1,695 and $900, respectively)
1,698 876

Mortgage-related securities:

Available for sale (amortized cost of $66,033 and $92,059, respectively)
67,069 91,731

Held to maturity (fair value of $80,644 and $108,229, respectively)
78,798 107,684

Loans, net (including allowance for loan losses of $11,480 and $6,553, respectively)
1,406,479 876,653

Loans held for sale, net
20,192 —

Margin accounts
20,979 33,361

Federal Home Loan Bank stock
18,760 13,793

Premises and equipment
17,481 11,939

Accrued interest receivable
9,575 7,701

Real estate owned
477 359

Goodwill
19,664 —

Core deposit intangible
6,312 —

Other assets
11,980 5,752

Total assets
$ 1,944,780 $ 1,300,199

Liabilities and Shareholders’ Equity

Liabilities

Deposits
$ 1,383,418 $ 900,413

Other borrowed funds
271,631 114,317

Advance payments by borrowers for taxes and insurance
5,760 4,152

Accrued interest payable
2,983 2,933

Accrued expenses and other liabilities
19,108 16,485

Total liabilities
1,682,900 1,038,300

Shareholders’ Equity

Preferred stock-no par value; 1,000,000 shares authorized and unissued
— —

Common stock—no par value; 499,000,000 shares authorized; 37,754,086 and 37,316,997 shares issued
136,903 136,967

Retained earnings
160,915 155,026

Other comprehensive income (loss)
1,402 (98 )

Unearned compensation
(22,988 ) (26,674 )

Treasury stock, at cost, 2,086,500 and 483,500 shares, respectively
(14,352 ) (3,322 )

Total shareholders’ equity
261,880 261,899

Total liabilities and shareholders’ equity
$ 1,944,780 $ 1,300,199

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

2001 2000 1999

(Dollars in thousands, except per share data)

Interest income

Loans
$ 92,933 $ 62,836 $ 54,564

Loans held for sale
886 — —

Mortgage-related securities:

Available for sale
5,200 6,737 6,994

Held to maturity
6,355 8,651 10,946

Marketable securities:

Trading
151 145 134

Available for sale
3,664 7,896 9,409

Held to maturity
45 62 115

Margin accounts
1,774 3,565 2,207

FHLB stock dividend
1,078 968 867

Other interest-earning assets
1,903 762 4,735

Total interest income
113,989 91,622 89,971

Interest expense

Interest expense on deposits
48,011 35,394 30,432

Interest expense on other borrowed funds
9,036 8,710 3,852

Total interest expense
57,047 44,104 34,284

Net interest income
56,942 47,518 55,687

Provision for loan loss allowance
2,495 300 100

Net interest income after provision for loan loss allowance
54,447 47,218 55,587

Noninterest income

Commissions
13,411 17,176 16,186

Service fees and other charges
7,757 5,607 4,644

Underwriting and investment banking
1,316 646 636

Net gains (losses):

Mortgage-related securities
140 115 40

Marketable securities
252 36 (62 )

Trading securities
(869 ) 241 581

Loans sold
5,450 — —

Other
37 (2 ) (4 )

Other income
955 935 700

Total noninterest income
28,449 24,754 22,721

Noninterest expenses

Salaries and employee benefits
34,528 36,193 43,348

Gain on postretirement curtailment
— (2,928 ) —

Loss on pension termination
— 1,008 —

Occupancy
2,575 2,093 2,031

Equipment and data processing
7,378 5,807 5,148

Deposit insurance premiums
187 168 458

Franchise tax
2,010 3,710 1,897

Advertising
1,938 1,924 1,455

Amortization of core deposit intangible
1,671 — —

Acquisition expense
— — 478

Other expenses
7,421 6,332 6,222

Total noninterest expenses
57,708 54,307 61,037

Income before income taxes
25,188 17,665 17,271

Income taxes
9,509 6,051 6,876

Net income
$ 15,679 $ 11,614 $ 10,395

Earnings Per Share

Basic
$ 0.49 $ 0.35 $ 0.31

Diluted
$ 0.48 $ 0.35 $ 0.30

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Accumulated

Other

Shares Common Retained Comprehensive Unearned Treasury

Outstanding Stock Earnings Income (loss) Compensation Stock Total

(In thousands, except per share data)

Balance December 31, 1998
36,416 $ 345,872 $ 154,078 $ 733 $ 25,862 $ — $ 474,821

Adjustment to convert Butler Wick to a calendar year end (1)
— — (825 ) — — — (825 )

Balance January 1, 1999
36,416 345,872 153,253 733 (25,862 ) — 473,996

Comprehensive income:

Net income
— — 10,395 — — — 10,395

Change in net unrealized (loss) on securities, net of taxes of ($2,012)
— — — (3,736 ) — — (3,736 )

Comprehensive income
— — 10,395 (3,736 ) — — 6,659

Issuance of common shares for RRP
1,342 16,444 — — (16,444 ) — —

Amortization of restricted common stock compensation
— — — — 10,293 — 10,293

Shares distributed by ESOP trust
— 742 — — 1,822 — 2,564

Special capital distribution, $6.00 per share
— (226,549 ) — — — — (226,549 )

Dividends paid, $0.30 per share
— — (10,095 ) — — — (10,095 )

Balance December 31, 1999
37,758 136,509 153,553 (3,003 ) (30,191 ) — 256,868

Comprehensive income:

Net income
— — 11,614 — — — 11,614

Change in net unrealized (loss) on securities, net of taxes of $1,565
— — — 2,905 — — 2,905

Comprehensive income
— — 11,614 2,905 — — 14,519

Issuance of common shares for RRP
46 295 — — (295 ) — —

Amortization of restricted common stock compensation
— 54 — — 1,964 — 2,018

Forfeiture of restricted common stock
(3 ) (25 ) — — 25 — —

Shares distributed by ESOP trust
— 134 — — 1,823 — 1,957

Purchase of treasury stock
(484 ) — — — — (3,322 ) (3,322 )

Dividends paid, $0.30 per share
— — (10,141 ) — — — (10,141 )

Balance December 31, 2000
37,317 136,967 155,026 (98 ) (26,674 ) (3,322 ) 261,899

Comprehensive income:

Net income
— — 15,679 — — — 15,679

Change in net unrealized gain on securities, net of taxes of $808
— — — 1,500 — — 1,500

Comprehensive income
— — 15,679 1,500 — — 17,179

Amortization of restricted common stock compensation
— 62 — — 1,622 — 1,684

Forfeiture of restricted common stock
(46 ) (290 ) — — 242 — (48 )

Shares distributed by ESOP trust
— 164 — — 1,822 — 1,986

Purchase of treasury stock
(1,604 ) — — — — (11,038 ) (11,038 )

Reissuance of common stock
1 — — — — 8 8

Dividends paid, $0.30 per share
— — (9,790 ) — — — (9,790 )

Balance December 31, 2001
35,668 $ 136,903 $ 160,915 $ 1,402 $ (22,988 ) $ (14,352 ) $ 261,880

(1) Butler Wick reported on a June 25, 1999 fiscal year end. Adjustment reflects Butler Wick activity for the six months ended June 25, 1999.

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2001 2000 1999

(In thousands)

Cash Flows from Operating Activities

Net income
$ 15,679 $ 11,614 $ 10,395

Adjustments to reconcile net income to net cash
Provided by operating activities:

Provision for loan loss allowances
2,495 300 100

Loss on pension termination
— 1,008 —

Gain on postretirement curtailment
— (2,928 ) —

Net (gains) losses
(5,895 ) (149 ) 25

Accretion of discounts and amortization of premiums
(2,095 ) (447 ) (472 )

Depreciation
2,223 1,573 1,356

FHLB stock dividends
(1,078 ) (968 ) (867 )

Decrease (increase) in interest receivable
621 646 (1,032 )

(Decrease) increase in interest payable
(734 ) (1,235 ) 3,404

Increase in other assets
(4,620 ) (907 ) (1,362 )

Increase in other liabilities
3,419 4,580 4,511

(Increase) decrease in trading securities
(2,419 ) 1,724 (4,294 )

Amortization of restricted stock compensation
1,636 2,018 10,293

Decrease (increase) in margin accounts
12,382 (610 ) (13,272 )

Increase in loans held for sale
(20,192 ) — —

ESOP compensation
1,986 1,957 2,563

Net cash provided by operating activities
3,408 18,176 11,348

Cash Flows from Investing Activities

Proceeds from principal repayments and maturities of:

Mortgage-related securities held to maturity
27,385 26,718 44,898

Mortgage-related securities available for sale
37,693 23,464 27,353

Marketable securities held to maturity
1,300 693 5,000

Marketable securities available for sale
69,308 77,632 27,500

Proceeds from sale of:

Mortgage-related securities available for sale
15,839 2,292 4,951

Mortgage-related securities held to maturity
1,454 3,757 —

Marketable securities available for sale
6,596 25,601 23,965

Loans
183,084 — —

Real estate owned
839 — —

Purchases of:

Mortgage-related securities available for sale
(27,555 ) (1,195 ) (50,532 )

Marketable securities available for sale
(15,335 ) (38,212 ) (105,243 )

Marketable securities held to maturity
(2,082 ) (476 ) (691 )

Net cash paid for acquisition
(69,844 ) — —

Net principal disbursed on loans
(312,206 ) (141,391 ) (64,970 )

Loans purchased
(11,036 ) (12,274 ) —

Purchases of premises and equipment
(2,769 ) (4,262 ) (1,565 )

Other
— 288 237

Net cash used in investing activities
(97,329 ) (37,365 ) (89,097 )

Cash Flows from Financing Activities

Net increase (decrease) in Now, savings and money market accounts
97,277 (16,114 ) 33,539

Net increase in certificates of deposit
70,050 82,440 22,966

Net increase in advance payments by borrowers for taxes and insurance
319 114 84

Proceeds from FHLB advances
193,000 — —

Repayment of FHLB advances
(20,000 ) — —

Net (decrease) increase in other borrowed funds
(65,994 ) (99,261 ) 197,375

Special capital distribution
— — (226,549 )

Dividends paid
(9,790 ) (10,141 ) (10,095 )

Proceeds from exercise of stock options
8 — —

Purchase of treasury stock
(11,038 ) (3,322 ) —

Net cash provided by (used in) financing activities
253,832 (46,284 ) 17,320

Increase (decrease) in cash and cash equivalents
159,911 (65,473 ) (60,429 )

Cash and cash equivalents, beginning of year
45,972 111,445 172,409

Adjustment to convert Butler Wick to a calendar year end (1)
— — (535 )

Cash and cash equivalents, end of year
$ 205,883 $ 45,972 $ 111,445

(1) Butler Wick reported on a June 25, 1999 fiscal year end. Adjustment reflects Butler Wick activity for the six months ended June 25, 1999.

See Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     The accounting policies of United Community Financial Corp. (United Community), a unitary savings and loan holding company, The Home Savings and Loan Company of Youngstown, Ohio (Home Savings), an Ohio chartered savings and loan company, and Butler Wick Corp. (Butler Wick), an investment brokerage firm, conform to generally accepted accounting principles and prevailing practices within the banking, thrift and brokerage industries. A summary of the more significant accounting policies follows.
Nature of Operations
     United Community 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 (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. The business of Home Savings is providing consumer and business banking service to its market area in northeastern Ohio. At the end of 2001, Home Savings was doing business through 29 full-service banking branches and 4 loan production offices. Loans and deposits are primarily generated from the areas where banking branches are located. Home Savings derives its income 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. On August 12, 1999, United Community acquired Butler Wick, the parent company for three wholly-owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Butler Wick has 12 office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations throughout northeastern Ohio and western Pennsylvania. Butler Wick’s operations are reported in a separate operating segment, which is investment advisory services.
Basis of Presentation
     The consolidated financial statements include the accounts of United Community and its subsidiaries. All material inter-company transactions have been eliminated. Certain prior period data has been reclassified to conform to current period presentation.
Conversion to Capital Stock Form of Ownership
     United Community issued 34,715,625 common shares in connection with the Conversion. Gross proceeds from the offering were $347,156,250, which included 2,677,250 shares issued to the United Community Financial Corp. Employee Stock Ownership Plan (ESOP) 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 of its outstanding common stock to United Community in exchange for approximately one-half of the net proceeds of the offering. United Community 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-related Securities
     Securities are classified as available for sale, held to maturity or trading 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. Securities classified as trading are carried at estimated fair market value with the market value adjustment reflected on the statement of income. 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. Securities are written down to fair value when a decline in fair value is not temporary. Other securities such as Federal Home Loan Bank stock are carried at cost.
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 Statement of Financial Accounting Standard (SFAS) No. 114) is classified as nonaccrual when collectability is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). A loan may be considered impaired, but remain on accrual status, when the borrower demonstrates (by continuing to make payments) a willingness to keep the loan current and by reducing the delinquency to less than 90 days. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Cash receipts received on impaired loans are generally applied first to escrow requirements, then to delinquent interest, with any remainder to the principal balance. Loans are returned to full accrual status when the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). Loans are classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or the terms due to the inability of the borrower to meet the obligation under the original terms.
     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 reviews all loans over $500,000 to determine if the impairment criteria have been met. If the impairment criteria have been met, a reserve is calculated, including all collection costs, according to the provisions of SFAS No. 114. Most of Home Savings’ loan portfolio is excluded from the scope of SFAS No. 114 because the pronouncement is generally not applicable to large groups of smaller-balance homogeneous loans such as residential mortgage and other consumer loans. For loans which are individually not significant ($500,000 or less) and represent a homogeneous population, 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 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.
     In determining the adequacy of the allowance for loan loss, management reviews and evaluates on a quarterly basis the necessity of a reserve for individual loans classified by management. Management determines the specifically allocated reserve for a classified loan based on its estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to Home Savings. Once a review is completed, the Home Savings Asset Classification Committee determines the need for a specific reserve and allocates the reserve to the loan. Other loans not specifically reviewed by management are evaluated using the loss ratio calculated by type of loan. The loss ratio factors consider the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied and any other known factors which may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed quarterly and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends or actual principal charge-off. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentration and the closely associated effect changing economic conditions have on Home Savings.
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.
Servicing Assets
     Servicing assets represent the allocated value of retained servicing rights on loans sold or securitized. Servicing assets are expensed in proportion to, and over the period of estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates and, secondarily, as to prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market based assumptions. Any impairment of a grouping is reported as a valuation allowance.

Intangibles
     Purchased intangibles, primarily goodwill and core deposit value, are recorded at cost. Core deposit value is amortized over the estimated life of six years. Goodwill is evaluated for impairment on a periodic basis.
Long-term Assets
     Premises and equipment and other long –term assets are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts.
Securitizations
Mortgage loans have been securitized with Freddie Mac. The securitization is recorded as a sale when control has been relinquished, with a gain or loss recorded on the sale. The gain or loss is calculated based on the cash received versus the carrying value of the assets transferred. If some interests, such as servicing assets and cash reserve accounts, are retained, the carrying value of all assets sold and retained is allocated to each asset based on fair value at sale date. Fair values are based on market quotes or on the present value of future expected cash flows using estimates of credit losses, prepayment rates, interest rates, and discount rates.
Stock Compensation
     Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value.
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 United Community’s income tax returns. Deferred income taxes, which result from temporary differences in the recognition of income and expense for financial statement and tax return purposes, are included in the calculation of income tax expense. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date.
     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.
Employee Stock Ownership Plan
     The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.
Earnings Per Share
     Basic Earnings Per Share (EPS) are based on the weighted average number of common shares outstanding during the year. Diluted EPS are based on the weighted average number of common shares and common share equivalents outstanding during the year. See further discussion at Note 20.
Statements of Cash Flows
     For purposes of the statement of cash flows, United Community considers all highly liquid investments with a term of three months or less to be cash equivalents. Net cash flows are reported for loan and deposit transactions.
Loss Contingencies
     Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Fair Value of Financial Instruments
     Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Potential Impact of Financial Instruments with Off-Balance Sheet and Credit Risk
     In the normal course of business, Butler Wick’s activities involve the execution, settlement, and financing of various securities transactions. These activities may expose Butler Wick to risk in the event the customer is unable to fulfill its contractual obligations. Butler Wick maintains cash and margin accounts for its customers located primarily in northeastern Ohio and western Pennsylvania.
     Butler Wick’s customer securities activities are transacted on either a cash or margin basis. In margin transactions, Butler Wick extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in customer’s accounts. In connection with these activities, Butler Wick executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. Such transactions may expose Butler Wick to significant off-balance-sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy its obligations, Butler Wick may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligations. Butler Wick seeks to control the risks associated with its customers’ activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. Butler Wick monitors required margin levels daily and, pursuant to such guidelines, requires the customer to deposit additional collateral or to reduce positions when necessary.
     Butler Wick’s customer financing and securities settlement activities require Butler Wick to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, Butler Wick may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. Butler Wick controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, Butler Wick establishes credit limits for such activities and monitors compliance on a daily basis.
     As a securities broker and dealer, a substantial portion of Butler Wick’s transactions are collateralized. Butler Wick’s exposure to credit risk associated with nonperformance in fulfilling contractual obligations pursuant to securities transaction can be directly impacted by volatile trading markets, which may impair the customer’s ability to satisfy its obligations to Butler Wick.
New Accounting Standards
     In June 2001, FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. United Community completed the acquisition of Industrial Bancorp on July 1, 2001, which it accounted for using the purchase method.
     Also in June 2001, FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this Statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. United Community was required to adopt this Statement on January 1, 2002 and early adoption is not permitted. United Community had goodwill of $19.7 million and core deposit intangible assets of $6.3 million as of December 31, 2001.
2. ACQUISITIONS
     On August 12, 1999, United Community acquired Butler Wick, a full service broker dealer for retail and institutional clients. In connection with the acquisition, United Community issued approximately 1.7 million common shares in exchange for all of Butler Wick’s outstanding shares. The acquisition was accounted for by the pooling-of-interests method. Accordingly, the assets, liabilities and shareholders’ equity of Butler Wick were recorded on the books of United Community at their values as reported on the books of Butler Wick immediately prior to the consummation of the acquisition. This presentation required the restatements of prior periods as if the companies had been combined for all years presented. The restatement for the Butler Wick acquisition was accomplished by combining Butler Wick’s June 25, 1999 fiscal year financial information with United Community’s December 31, 1998 calendar year financial information. In 1999, Butler Wick’s fiscal year was conformed to United Community’s calendar year. As a result of conforming fiscal periods, United Community’s consolidated statements of income for the second half of 1998 and the first half of 1999 include Butler Wick’s net income for the six months ended June 25, 1999 of $825,000. An adjustment to shareholders’ equity removes the effect of including Butler Wick’s financial results for both periods.
On July 1, 2001, United Community acquired all of the capital stock of Industrial Bancorp, Inc., the holding company for The Industrial Savings and Loan Association (Industrial Savings), an Ohio-chartered savings and loan association, through the merger of Home Savings’ subsidiary, UCFC Acquisition Subsidiary, Inc. into Industrial Bancorp, Inc. Industrial Savings was then merged into Home Savings. The assets acquired consisted principally of loans and securities.
Home Savings accounted for the acquisition as a purchase and has included Industrial Bancorp’s results of operations from the effective date of the acquisition in its 2001 financial statements. Based on Industrial Bancorp’s 4,284,751 outstanding shares, the acquisition was valued at $87.3 million, which was paid in cash. The excess of the aggregate purchase price over the fair market value of net assets acquired

(approximately $19.7 million) will not be amortized but will be assessed for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”
In connection with the acquisition, Home Savings acquired all of the equipment and other physical property of Industrial Bancorp. Home Savings intends to continue to use the assets acquired in this transaction in the manner utilized by Industrial Bancorp prior to the acquisition.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

At July 1, 2001

(Dollars in thousands)

Cash and securities
$ 33,493

Loans, net
386,900

Premises and equipment
4,996

Goodwill
19,664

Core deposit intangible
7,983

Other assets
5,675

Total assets acquired
458,711

Deposits
317,196

Other borrowed funds
50,556

Other liabilities
1,278

Total liabilities assumed
369,030

Net assets acquired
$ 89,681

The following summarized unaudited pro forma financial information for the periods ended December 31, 2001 and 2000 assumes the Industrial Bancorp merger occurred as of January 1, 2000:

December 31, 2001 December 31, 2000

(In thousands, except per share data)

Net interest income after provision for loan losses
$ 60,157 $ 58,342

Net income
12,142 12,293

Diluted earnings per share
$ 0.38 $ 0.37

As previously announced on September 6, 2001, United Community Financial Corp. executed a definitive agreement for Home Savings to acquire Potters Financial Corporation (Potters), the holding company for Potters Bank in East Liverpool, Ohio. Subject to approval of regulatory authorities and Potters’ shareholders, Home Savings will pay $22.00 in cash for each Potters common share outstanding. The transaction is anticipated to be completed in the second quarter of 2002. Home Savings will account for the acquisition as a purchase and will include Potters’ results of operations from the effective date of the acquisition in its 2002 financial statements. At December 31, 2001, Potters had total assets of $146.6 million and total deposits of $114.7 million. Based on Potters’ 998,614 outstanding shares and 104,657 stock options, the acquisition is valued at $23.6 million.
3. 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 $15.5 million and $4.1 million at December 31, 2001 and 2000, respectively.

4. MARKETABLE SECURITIES
     Marketable securities are summarized as follows:

December 31, 2001

Gross Gross

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

(In thousands)

Available for Sale

U.S. Treasury and agency securities
$ 24,692 $ 488 $ 20 $ 25,160

Corporate notes
13,805 288 — 14,093

Equity securities
11,463 496 131 11,828

Total marketable securities available for sale
49,960 1,272 151 51,081

Held to Maturity

U.S. Treasury and agency securities
1,698 18 21 1,695

Total marketable securities held to maturity
1,698 18 21 1,695

Total marketable securities
$ 51,658 $ 1,290 $ 172 $ 52,776

December 31, 2000

Gross Gross

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

(In thousands)

Available for Sale

U.S. Treasury and agency securities
$ 45,248 $ 326 $ 132 $ 45,442

Corporate notes
45,723 36 167 45,592

Equity securities
7,296 223 108 7,411

Total marketable securities available for sale
98,267 585 407 98,445

Held to Maturity

U.S. Treasury and agency securities
876 24 — 900

Total marketable securities held to maturity
876 24 — 900

Total marketable securities
$ 99,143 $ 609 $ 407 $ 99,345

     The weighted average interest rate on marketable securities was 5.28% and 5.72% at December 31, 2001 and 2000, respectively. The corporate notes consist primarily of medium-term notes issued by corporations with investment grade ratings.
     Marketable securities available for sale by contractual maturity, repricing or expected call date are shown below:

December 31, 2001

Amortized Cost Fair Value

(In thousands)

Due in one year or less
$ 15,089 $ 15,187

Due after one year through five years
23,408 24,066

Due after five years through ten years
— —

Due after ten years
— —

Total
$ 38,497 $ 39,253

     Equity securities do not have a contractual maturity.

     Marketable securities held to maturity by contractual maturity, repricing or expected call date are shown below:

December 31, 2001

Amortized Cost Fair Value

(In thousands)

Due in one year or less
$ 101 $ 102

Due after one year through five years
1,597 1,593

Due after five years through ten years
— —

Due after ten years
— —

Total
$ 1,698 $ 1,695

     Proceeds on sales of marketable and equity securities available for sale were approximately $6.6 million for the year ended December 31, 2001. There were realized gains of approximately $302,000 and realized losses of approximately $50,000 for the year ended December 31, 2001. Proceeds on sales of marketable and equity securities available for sale were approximately $25.6 million for the year ended December 31, 2000. There were realized gains of approximately $116,000 and realized losses of approximately $80,000 for the year ended December 31, 2000. Proceeds on sales of marketable and equity securities available for sale were approximately $24.0 million for the year ended December 31, 1999. There were realized gains of approximately $176,000 and realized losses of approximately $238,000 for the year ended December 31, 1999. There were no sales of marketable securities held to maturity during the years ended December 31, 2001, 2000 and 1999.
     Securities pledged for public funds deposits were approximately $52.1 million and $27.4 million at December 31, 2001 and 2000, respectively.
     United Community’s trading securities consist of commercial paper, government obligations and an investment in mutual funds for the Butler Wick Retention Plan.
5. MORTGAGE-RELATED SECURITIES
     Mortgage-related securities are summarized as follows:

December 31, 2001

Gross Gross

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

(In thousands)

Available for Sale

Participation certificates:

Government agency issues
$ 25,892 $ 263 $ 31 $ 26,124

Private issues
307 — 15 292

Collateralized mortgage obligations:

Government agency issues
20,804 356 — 21,160

Private issues
19,030 463 — 19,493

Total mortgage-related securities available for sale
66,033 1,082 46 67,069

Held to Maturity

Participation certificates:

Government and government agency issues
78,798 1,937 91 80,644

Total mortgage-related securities
$ 144,831 $ 3,019 $ 137 $ 147,713

December 31, 2000

Gross Gross

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

(In thousands)

Available for Sale

Participation certificates:

Government agency issues
$ 37,110 $ 134 $ 293 $ 36,951

Private issues
380 — 19 361

Collateralized mortgage obligations:

Government agency issues
21,295 — 154 21,141

Private issues
33,274 155 151 33,278

Total mortgage-related securities available for sale
92,059 289 617 91,731

Held to Maturity

Participation certificates:

Government and government agency issues
107,684 1,002 457 108,229

Total mortgage-related securities
$ 199,743 $ 1,291 $ 1,074 $ 199,960

     Mortgage-related securities are classified by type of interest payment as follows:

December 31,

2001 2000

Amortized Fair Amortized Fair

Cost Value Cost Value

(In thousands)

Available for Sale

Adjustable rate:

Private issues
$ 307 $ 292 $ 380 $ 361

Total adjustable rate
307 292 380 361

Fixed rate:

Participation certificates:

Government agency issues
25,892 26,124 37,110 36,951

Collateralized mortgage obligations:

Government agency issues
20,804 21,160 21,295 21,141

Private issues
19,030 19,493 33,274 33,278

Total fixed rate
65,726 66,777 91,679 91,370

Total available for sale
66,033 67,069 92,059 91,731

Held to Maturity

Adjustable rate:

Participation certificates:

Government agency issues
303 305 402 402

Total adjustable rate
303 305 402 402

Fixed rate:

Participation certificates:

Government and government agency issues
78,495 80,339 107,282 107,827

Total fixed rate
78,495 80,339 107,282 107,827

Total held to maturity
78,798 80,644 107,684 108,229

Total mortgage-related securities
$ 144,831 $ 147,713 $ 199,743 $ 199,960

     Proceeds on sales of mortgage-related securities available for sale were $15.8 million for the year ended December 31, 2001. There were realized gains of $79,000 and no realized losses for the year ended December 31, 2001. Proceeds on sales of mortgage-related securities held to maturity were $1.5 million for the year ended December 31, 2001. There were realized gains of $61,000 and no realized losses for the year ended December 31, 2001. Proceeds on sales of mortgage-related securities available for sale were $2.3 million for the year ended December 31, 2000. There were realized gains of $50,000 and realized losses of $2,000 for the year ended December 31, 2000. Proceeds on sales of mortgage-related securities held to maturity were $3.8 million for the year ended December 31, 2000. There were realized gains of $68,000 and realized losses of $1,000 for the year ended December 31, 2000. Proceeds on sales of mortgage-related securities available for sale were $4.9 million for the year ended December 31, 1999. There were realized gains of $40,000 and no realized losses for the year ended December 31, 1999. There were no sales of mortgage-related securities held to maturity during the year ended

December 31, 1999. Mortgage-related securities sold from the held to maturity portfolio were less than 15% of the principal outstanding at acquisition.
6. LOANS
     Loans consist of the following:

December 31,

2001 2000

(In thousands)

Real Estate:

Permanent:

One- to four-family
$ 978,468 $ 618,112

Multifamily
60,691 24,085

Nonresidential
153,368 137,976

Land
11,432 5,172

Construction:

One- to four-family
115,853 57,955

Multifamily and non residential
26,883 11,389

Total real estate
1,346,695 854,689

Consumer
110,749 58,345

Commercial
39,226 34,657

Total loans
1,496,670 947,691

Less:

Loans in process
71,820 59,273

Allowance for loan losses
11,480 6,553

Deferred loan fees, net
6,891 5,212

Total
90,191 71,038

Loans, net
$ 1,406,479 $ 876,653

     Loans with adjustable rates included above totaled $387.4 million and $253.3 million at December 31, 2001 and 2000, 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.
     Nonresidential 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, 2001 and 2000, loans serviced for the benefit of others, not included in the detail above, totaled $178.9 million and $4.9 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 sixty-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 expose 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, 2001, there were outstanding commitments to originate $51.9 million of fixed-rate mortgage loans and other loans (with interest rates that ranged from 5.875% to 9.125%), $2.2 million of adjustable-rate loans, discounted, and $33.1 million of commercial loans. Terms of the commitments extend up to six months, but are generally less than two months.
     At December 31, 2001, there were also outstanding unfunded consumer lines of credit of $44.1 million, which are adjustable-rate based on the one-year U.S. Treasury index, and commercial lines of credit of $48.7 million, which are adjustable rate based on the prime lending index. Generally, all lines of credit are 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:

Year Ended December 31,

2001 2000 1999

(In thousands)

Balance, beginning of year
$ 6,553 $ 6,405 $ 6,398

Acquired from Industrial Bancorp
2,795 — —

Provision for loan loss allowances
2,495 300 100

Amounts charged off
(395 ) (201 ) (125 )

Recoveries
32 49 32

Balance, end of year
$ 11,480 $ 6,553 $ 6,405

     Nonperforming loans (loans 90 days past due and restructured loans) were $12.5 million, $9.7 million and $3.9 million at December 31, 2001, 2000 and 1999, respectively.

As of or for the

Year Ended

December 31,

2001 2000

(In thousands)

Impaired loans on which no specific valuation allowance was provided
$ 1,718 $ 9,458

Impaired loans on which specific valuation allowance was provided
1,169 85

Total impaired loans at year-end
2,887 9,543

Specific valuation allowances on impaired loans at year-end
751 85

Average impaired loans during year
1,953 5,144

Interest income recognized on impaired loans during the year
163 459

Interest income potential based on original contract terms of impaired loans
190 484

     Directors and officers of United Community, Home Savings and Butler Wick are customers of Home Savings in the ordinary course of business. Loans to directors and officers have terms consistent with those offered to other customers. At December 31, 2001 and 2000, loans to officers or directors of United Community, Home Savings and Butler Wick totaled approximately $1.3 million and $1.9 million, respectively.
7. MORTGAGE BANKING ACTIVITES
During 2001, Home Savings became active in the secondary market. Loans serviced for others, which are not reported as assets, totaled $178.9 million at December 31, 2001.
Activity for capitalized mortgage servicing rights was as follows:

Balance, beginning of year
$ —

Additions
1,322

Acquired from Industrial Bancorp
509

Amortized to expense
(204 )

Allowance for impairment
(22 )

Balance, end of year
$ 1,605

8. SECURITIZATIONS
During 2001, $110.6 million in residential mortgage loans were sold in securitization transactions. The securities received in these transactions were then immediately sold. A gain of $4.6 million was recorded on the sale. Home Savings retained servicing responsibilities for the loans, for which it receives annual servicing fees approximating 0.25% of the outstanding balance of the loans.
Approximately $16.5 million of the loans sold had loan to value ratios greater than 80% and did not have mortgage insurance coverage on the delivery date. These loans were sold with recourse to Home Savings. The recourse obligation will terminate for each loan on October 31, 2002, provided that during the preceding 12 months, the loan has not been 30 days or more delinquent. If this criteria is not met, the recourse obligation on that loan will continue until such time as the loan becomes and remains current for a period of 12 consecutive scheduled monthly payments from the date of the last delinquency.
In addition, approximately $63.7 million of the loans sold did not comply with the title insurance or attorney opinion of title requirements of the purchaser. Home Savings has agreed to indemnify the purchaser in the event of any default, loss or delay in enforcement that arises as a result of the failure to comply with the title insurance or attorney opinion of title requirements.

Approximately $8.5 million in loans are included in both the recourse and indemnity agreements.
During 2001, Home Savings securitized one-to- four family residential mortgage loans and retained the rights to service those loans. An analysis of the activity in securitizations serviced by Home Savings during 2001 follows:

(Dollars in thousands)

Balance at December 31, 2000:

Principal balance of loans
$ —

Amortized cost of servicing rights
—

Servicing rights as a % of principal
—

New securitizations during the year:

Principal balance of loans
110,619

Fair value of servicing rights
1,012

Servicing rights as a % of principal
0.91 %

Principal payments received on loans collateralized
8,132

Balance at December 31, 2001:

Principal balance of loans
102,487

Amortized cost of servicing rights
929

Servicing rights as a % of principal
0.91 %

Other information at end of period

Weighted average rate
7.14 %

Weighted average maturity in months
244

Fair value assumptions

Discount rate
8.00 %

Weighted average prepayment assumptions
229PSA

Anticipated delinquency
1.00 %

Cash flows from all securitizations of mortgage loans were as follows in 2001:

(Dollars in thousands)

Securitization proceeds
$ 114,041

Servicing fees received
44

In the securitization transaction, the company retained residual interest in the form of servicing assets totaling $1.0 million. The servicing assets represent the allocated value of retained servicing rights on the loans securitized. The following table indicates how fair value might decline if the assumptions change unfavorably in two different magnitudes:

Fair value at December 31, 2001
$ 929

Weighted average life (in months)
82

Projected fair value based on :

Increase in PSA of 50
882

Increase in PSA of 100
839

The effect of adverse changes are hypothetical and should not be extrapolated to other changes, as the effects are not linear.

9. PREMISES AND EQUIPMENT
     Premises and equipment consist of the following:

December 31,

2001 2000

(In thousands)

Land and improvements
$ 4,180 $ 2,202

Buildings
16,033 11,661

Leasehold improvements
1,208 1,078

Furniture and equipment
14,042 11,001

35,463 25,942

Less allowances for depreciation and amortization
17,982 14,003

Total
$ 17,481 $ 11,939

     Rent expense was $212,000 for 2001, $135,000 for 2000, and $82,000 for 1999. Rent commitments under noncancelable operating leases were as follows, before considering renewal options that generally are present.

(In thousands)

2002
$ 218

2003
138

2004
54

2005
54

2006
—

Thereafter
—

Total
$ 465

10. DEPOSITS
     Deposits consist of the following:

December 31,

2001 2000

Weighted Weighted

Amount Average Rate Amount Average Rate

(Dollars in thousands)

Checking accounts:

Interest-bearing
$ 106,631 1.98 % $ 65,988 1.05 %

Noninterest-bearing
36,176 17,573

Savings accounts
257,417 2.22 199,680 2.28

Money market accounts
151,251 3.50 80,004 4.35

Certificates of deposit
831,943 4.99 537,168 6.07

Total deposits
$ 1,383,418 3.95 % $ 900,413 4.61 %

     Interest expense on deposits is summarized as follows:

Year Ended December 31,

2001 2000 1999

(In thousands)

Interest-bearing demand deposits
$ 5,446 $ 4,166 $ 3,131

Savings accounts
5,212 5,272 5,533

Certificates of deposit
37,353 25,956 21,768

Total
$ 48,011 $ 35,394 $ 30,432

     A summary of certificates of deposit by maturity follows:

December 31, 2001

(In thousands)

Within 12 months
$ 540,859

12 months to 24 months
208,465

24 months to 36 months
30,476

36 months to 48 months
39,702

Over 48 months
12,441

Total
$ 831,943

A summary of certificates of deposit and other deposits with balances of $100,000 or more by maturity is as follows:

December 31, 2001

Certificates of Checking, Savings and

Deposit Money Market Accounts

(In thousands)

Three months or less
$ 32,987 $ 97,676

Over three months to six months
20,492 —

Over six months to twelve months
59,432 —

Over twelve months
52,917 —

Total
$ 165,828 $ 97,676

     Deposits in excess of $100,000 are not federally insured. Home Savings did not have brokered deposits for the years ended December 31, 2001 and 2000.
11. OTHER BORROWED FUNDS
     The following is a summary of FHLB borrowings:

December 31, December 31,

2001 2000

(Dollars in thousands)

Weighted average Weighted average

Year of Maturity Amount rate Amount rate

2001
$ — — % $ 76,500 6.25 %

2002
35,157 4.63 5,000 7.02

2003
20,150 4.69 — —

2004
43,000 4.56 — —

2005
18,000 5.19 — —

2006
112,000 4.73 — —

Total
$ 228,307 $ 81,500

     The following is a summary of other short-term borrowings:

December 31,

2001 2000

(Dollars In thousands)

Weighted Weighted

Amount average rate Amount average rate

Variable interest revolving line of credit
$ 19,326 1.85 % $ 25,334 6.41 %

Securities sold under repurchase agreement
23,998 2.83 % 7,483 5.20 %

Total
$ 43,324 $ 32,817

Home Savings has available credit with the FHLB of $528.0 million, of which $228.0 million was used at December 31, 2001. All advances from the FHLB of Cincinnati are secured by a blanket mortgage collateral agreement for 125% of outstanding advances, amounting

to $285.0 million at December 31, 2001. Butler Wick has a revolving line of credit, which is fully collateralized by marketable securities valued at $4.7 million and $24.6 million at December 31, 2001 and 2000, respectively. Securities worth $32.5 million are being held at the Federal Reserve Bank as collateral for a repurchase agreement as of December 31, 2001.
12. INCOME TAXES
     The provision for income taxes consists of the following components:

Year Ended December 31,

2001 2000 1999

(In thousands)

Current
$ 7,374 $ 5,673 $ 6,822

Deferred
2,135 378 54

Total
$ 9,509 $ 6,051 $ 6,876

     A reconciliation from tax at the statutory rate to the income tax provision is as follows:

Year Ended December 31,

2001 2000 1999

Dollars Rate Dollars Rate Dollars Rate

(Dollars in thousands)

Tax at statutory rate
$ 8,816 35.0 % $ 6,183 35.0 % $ 6,045 35.0 %

Increase (decrease) due to:

Intangible amortization
585 2.3 — — — —

Valuation of temporary differences
— — — — 400 2.3

State taxes
(29 ) (0.1 ) 140 0.8 230 1.3

Other
137 0.6 (272 ) (1.5 ) 201 1.2

Income tax provision
$ 9,509 37.8 % $ 6,051 34.3 % $ 6,876 39.8 %

     Significant components of the deferred tax assets and liabilities are as follows. A valuation allowance has been established as discussed below:

December 31,

2001 2000

(In thousands)

Deferred tax assets:

Charitable contribution
$ 1,734 $ 2,511

Loan loss reserves
4,018 2,293

Postretirement benefits
1,460 1,800

Deferred loan fees
2,456 1,825

Unrealized loss on securities available for sale
— 53

Compensation accruals
1,512 761

Other
442 387

Valuation Allowance
(400 ) (400 )

Deferred tax assets
11,222 9,230

Deferred tax liabilities:

Purchase accounting adjustments
2,186 —

Original issue discount
3,716 1,977

FHLB stock dividends
4,211 3,004

Post 1987 tax bad debts
532 717

Unrealized gain on securities available for sale
755 —

Loan servicing
562 —

Other
420 134

Deferred tax liabilities
12,382 5,832

Net deferred tax (liability) asset
($1,160 ) $ 3,398

     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 SFAS 109, “Accounting for Income Taxes.” The timing of this recapture was delayed for two years because Home Savings originated more residential loans in that period than the average originations in the past six years. Beginning in 1998, Home Savings began to recapture the excess reserves in the amount of $6.1 million resulting in payments totaling $2.1 million, which have been previously accrued. The pre-1988 reserve provisions are subject only to recapture requirements in the case of certain excess distributions to, and redemptions of, shareholders or if Home Savings no longer qualifies as a “bank.” Tax bad debt deductions accumulated prior to 1988 by Home Savings are approximately $18.6 million. A deferred income tax liability of $6.5 million has not 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 United Community’s stock to the Home Savings Charitable Foundation valued at approximately $11.8 million. Charitable contributions can only be deducted to the extent of 10% of taxable income, subject to certain adjustments, 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 $1.7 million is recorded at December 31, 2001. Home Savings provided a deferred tax asset valuation allowance of $400,000 against this amount. This valuation allowance reduced the contribution carryforward to a net amount, which management believes more likely than not that it could be realized based on management’s estimate of its future earnings and the expected timing of temporary difference reversals. The contribution carryforward is set to expire in 2003.
13. SHAREHOLDERS’ EQUITY
Dividends
     United Community’s source of funds for dividends to its shareholders are earnings on its investments and dividends from Home Savings and Butler Wick. During the year ended December 31, 2001, United Community paid regular dividends in the amount of $9.8 million. Home Savings’ primary regulator, the OTS, has regulations that impose certain restrictions on payments of dividends to United Community.
     Home Savings must file an application with, and obtain approval from, the OTS (i) if the proposed distribution would cause total distributions for the calendar year to exceed net income for that year to date plus retained net income for the preceding two years; (ii) if Home Savings would not be at least adequately capitalized following the capital distribution; (iii) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between Home Savings and the OTS or the FDIC, or any condition imposed on Home Savings in an OTS-approved application or notice. If Home Savings is not required to file an application, it must file a notice of the proposed capital distribution with the OTS.
Other Comprehensive Income
     Other comprehensive (loss) income included in the Consolidated Statements of Shareholders’ Equity consists solely of unrealized gains and losses on available for sale securities. The change includes reclassification of gains or losses on sales of securities of $217,000, $80,000, and $14,000 for the year ended December 31, 2001, 2000 and 1999, respectively.
Liquidation Account
     At the time of the Conversion, Home Savings established a liquidation account, which was equal to its regulatory capital as of the latest practicable date prior to the Conversion. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for the accounts then held.
14. 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 United Community. 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).

As of December 31, 2001

Minimum To Be Well Capitalized

Capital Under Prompt Corrective

Actual Requirements Action Provisions

Amount Ratio Amount Ratio Amount Ratio

(Dollars in thousands)

Total capital (to risk-weighted assets)
$ 178,196 14.70 % $ 96,961 8.00 % $ 121,202 10.00 %

Tier 1 capital (to risk-weighted assets)
168,233 13.88 * * 72,721 6.00

Core (Tier 1) capital (to adjusted total assets)
168,233 9.07 74,228 4.00 92,785 5.00

Tangible capital (to adjusted total assets)
168,233 9.07 27,836 1.50 * *

As of December 31, 2000

Minimum To Be Well Capitalized

Capital Under Prompt Corrective

Actual Requirements Action Provisions

Amount Ratio Amount Ratio Amount Ratio

(Dollars in thousands)

Total capital (to risk-weighted assets)
$ 181,460 24.33 % $ 59,656 8.00 % $ 74,570 10.00 %

Tier 1 capital (to risk-weighted assets)
175,340 23.51 * * 44,742 6.00

Core (Tier 1) capital (to adjusted total assets)
175,340 14.51 36,242 3.00 60,403 5.00

Tangible capital (to adjusted total assets)
175,340 14.51 18,121 1.50 * *

*Ratio is not required under regulations.
     As of December 31, 2001 and 2000, the OTS 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, 2001, 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.
     Butler Wick is subject to regulatory capital requirements set forth by the Securities and Exchange Commission’s Uniform Net Capital Rule. Butler Wick has elected to use the alternative method, permitted by rule, which requires Butler Wick to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions, as defined. The Net Capital Rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debits. At December 31, 2001, Butler Wick had net capital of $ 7.5 million, which was 35% of aggregate debit balances and $ 7.1 million in excess of required minimum net capital.
15. BENEFIT PLANS
Defined Benefit Pension Plan
     Home Savings terminated its pension plan, effective July 31, 1999, subject to applicable regulatory approval. During 1999, Home Savings received approval to terminate the plan from the Pension Benefit Guaranty Corporation and Home Savings received final approval from the Internal Revenue Service in 2000. Home Savings settled its pension obligations in July 2000 and recorded a termination loss of $1.0 million.
Other Postretirement Benefit Plans
     In addition to Home Savings’ retirement plans, Home Savings sponsors a defined benefit health care plan that was curtailed in 2000 to provide postretirement medical benefits for employees who have worked 20 years and attained a minimum age of 60 by September 1, 2000, 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 2001 valuation was 8.0 percent and was assumed to decrease 0.5 percent per year to 6 percent for the year 2005 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:

1 Percentage 1 Percentage

Point Increase Point Decrease

(In thousands)

Effect on total of service and interest cost components
$ 20 $ (17 )

Effect on the postretirement benefit obligation
$ 277 $ (239 )

Year Ended December 31,

2001 2000

Postretirement Defined Benefit Postretirement

Plan Plan Plan

(In thousands)

Change in Benefit Obligation:

Benefit obligation at beginning of year
$ 2,442 $ 6,186 $ 5,053

Service cost
13 — 150

Interest cost
194 218 299

Actuarial loss/(gain)
400 — (10 )

Benefit paid
(188 ) (10,623 ) (122 )

Termination loss
— 4,219 —

Curtailment
— — (2,928 )

Benefit obligation at end of the year
$ 2,861 $ — $ 2,442

Change in Plan Assets:

Fair value of plan assets at beginning of year
— $ 10,292 —

Actual return of plan assets
— 331 —

Benefits paid
— (10,623 ) —

Fair value of plan assets at end of the year
$ — $ — $ —

Funded status of the plan
$ (2,861 ) $ — $ (2,442 )

Unrecognized net (gain) from past experience different from that assumed and effects of changes in assumptions
(1,123 ) — (2,692 )

Prior service cost not yet recognized in net periodic benefit cost
(8 ) — (8 )

(Accrued) pension cost
$ (3,992 ) $ — $ (5,142 )

Year Ended December 31,

2001 2000 1999

Post- Defined Post- Defined Post-

retirement Benefit retirement Benefit retirement

Plan Plan Plan Plan Plan

(In thousands)

Service cost
$ 13 $ — $ 151 $ — $ 247

Interest cost
194 218 299 378 327

Expected return on plan assets
— (307 ) — (511 ) —

Net amortization of prior service cost
(1 ) — (18 ) — (26 )

Recognized net actuarial gain
(1,167 ) — (488 ) — (124 )

Loss on termination
— 1,097 — — —

Net periodic benefit cost/(gain)
(961 ) 1,008 (56 ) (133 ) 424

Curtailment
— — (2,928 ) — —

Net periodic benefit cost/(gain) after curtailment
$ (961 ) $ 1,008 $ (2,984 ) $ (133 ) $ 424

     Assumptions used in the valuations were as follows:

Year Ended December 31,

2001 2000 1999

Post- Defined Post- Defined Post-

retirement Benefit retirement Benefit retirement

Plan Plan Plan Plan Plan

(In thousands)

Weighted average discount rate
7.25 % 6.50 % 7.75 % 6.50 % 7.50 %

Expected long-term rate of return on plan assets
N/A 5.50 N/A 5.50 N/A

401(k) Savings Plan
     Home Savings 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 2001 and 2000, Home Savings’ match was 50% of pre-tax contributions, up to a maximum of 6% of the employees’ base pay. Participants become 100% vested in Home Savings contributions upon completion of five years of service. For the years ended 2001, 2000 and 1999, the expense related to this plan was approximately $308,000, $230,000 and $237,000, respectively.
     Butler Wick also sponsors a defined contribution 401(k) savings plan, which covers substantially all employees who have completed one year of service. Under the provisions of the plan, Butler Wick’s matching contribution is discretionary and may be changed from year to year. For 2001, 2000 and 1999, Butler Wick’s match was 25% of pre-tax contributions, up to a maximum of 6% of the employees’ base pay. Participants become 100% vested in Butler Wick contributions upon completion of six years of service. For the years ended 2001, 2000 and 1999, the expense related to this plan was approximately $126,000, $120,000 and $119,000, respectively.
Employee Stock Ownership Plan
     In conjunction with the conversion, United Community established an Employee Stock Ownership Plan (ESOP) for the benefit of the employees of United Community 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 United Community. The ESOP borrowed $26.8 million from United Community to purchase 2,677,250 shares in conjunction with the conversion. The term of the loan is 15 years and is being repaid primarily with contributions from Home Savings to the ESOP.
     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 average per share market price of United Community’s stock during the period by the number of shares to be released. United Community recognized approximately $2.1 million, $2.0 million and $3.0 million in compensation expense for the years ended December 31, 2001, 2000 and 1999, respectively, 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 years ended December 31, 2001, 2000 and 1999 totaled 294,802, 300,679 and 288,926, respectively, and had a combined fair market value of $6.1 million. Shares remaining not released or committed to be released for allocation at December 31, 2001 totaled 3.3 million and had a market value of approximately $23.8 million.
Recognition and Retention Plan
     On July 12, 1999, shareholders approved the United Community Financial Corp. Recognition and Retention Plan (RRP). The purpose of the plan is to reward and retain directors, officers and employees of United Community and Home Savings who are in key positions of responsibility by providing them with an ownership interest in United Community. Under the RRP, recipients are entitled to receive dividends and have voting rights on their respective shares, but are restricted from selling or transferring the shares prior to vesting.
     In August 1999, United Community awarded 1,342,334 common shares to eligible individuals. Approximately one-fifth of the number of shares awarded, or 268,638 shares, vested on the date of grant. The remaining 1,073,696 shares vest ratably on each of the first four anniversary dates of the plan. In August 2000, United Community awarded 46,291 common shares to eligible individuals. Approximately two-fifths of the number of shares awarded, or 18,517 shares, vested on the date of grant. The remaining 27,774 shares vest ratably on each of the first three anniversary dates of the plan. Shares available for future grants at December 31, 2001, 2000 and 1999 were 50,371 shares, 3,960 shares and 46,291 shares, respectively.
     The aggregate fair market value of the unvested RRP shares is considered unearned compensation at the time of grant and is amortized over the vesting period. Compensation expense recognized in 2001, 2000 and 1999 related to the RRP was $1.6 million, $2.0 and $10.3 million, respectively. The expense for 1999 included an accelerated expense of $6.4 million related to the $6.00 per share special capital distribution.

Retention Plan
     In connection with the Butler Wick acquisition, United Community established and funded a $3.7 million retention plan into a Rabbi Trust. Participants in the retention plan 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. Retention plan expense, including fair value adjustments related to the assets in Rabbi Trust, was $(73,000), $1.0 million and $937,000 for 2001, 2000 and 1999, respectively.
Long-Term Incentive Plan
     On July 12, 1999, shareholders approved the United Community Financial Corp. Long-Term Incentive Plan (Incentive Plan). The purpose of the Incentive Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings and Butler Wick, by facilitating their purchase of an ownership interest in United Community.
     The Incentive Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the stock at the grant date. The maximum number of common shares that may be issued under the plan is 3,471,562. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant. A summary of activity in the plan is as follows:

December 31, 2001 December 31, 2000

Weighted Weighted

average average

Shares exercise price Shares exercise price

Outstanding at beginning of year
629,085 $ 6.97 —

Granted
771,390 6.66 638,483 $ 6.97

Exercised
1,126 6.66 —

Forfeited
91,853 6.95 9,398 6.97

Outstanding at end of year
1,307,496 6.79 629,085 6.97

Options exercisable at year end
1,307,496 $ 6.79 629,085 $ 6.97

Weighted-average fair value of options granted during year
$ 1.83 $ 2.44

     United Community applies the Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for this plan been determined consistent with SFAS No. 123, “Accounting for Stock Based Compensation,” United Community’s net income and earnings per share for the year ended December 31, 2001 would have been reduced to the pro forma amounts indicated below:

December 31, 2001 December 31, 2000

As Reported Pro Forma As Reported Pro Forma

(In thousands, except per share data)

Net income
$ 15,679 $ 13,481 $ 11,614 $ 10,278

Basic earnings per share
$ 0.49 $ 0.42 0.35 0.31

Diluted earnings per share
$ 0.48 $ 0.42 0.35 0.31

     Below is a summary of the assumptions used in the calculation:

December 31,

2001 2000

Dividend yield
4.59 % 2.47 %

Expected stock price volatility
33.63 % 89.26 %

Risk-free interest rate
5.08 % 6.62 %

Expected option life (In years)
10 10

16. FAIR VALUE OF FINANCIAL INSTRUMENTS
     The estimated fair values of financial instruments have been determined by United Community 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 United Community 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, Margin Accounts, 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-related 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.
Loans held for sale—The fair value of loans held for sale is based on market quotes.
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.
Other borrowed funds—-The fair value of borrowings is the amount payable on demand at the reporting date.
Off balance sheet commitments-The fair value of commitments is not materially different from the nominal value.
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 United Community’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of United Community’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
     Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
     The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2001 and 2000. 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.

December 31, 2001 December 31, 2000

Carrying Fair Carrying Fair

Value Value Value Value

(In thousands)

Assets:

Cash and cash equivalents
$ 205,883 $ 205,883 $ 45,972 $ 45,972

Marketable securities:

Trading
8,352 8,352 5,933 5,933

Held to maturity
1,698 1,695 876 900

Available for sale
51,081 51,081 98,445 98,445

Mortgage-related securities:

Held to maturity
78,798 80,644 107,684 108,229

Available for sale
67,069 67,069 91,731 91,731

Loans and loans held for sale
1,426,671 1,443,110 876,653 879,109

Margin accounts
20,979 20,979 33,361 33,361

Federal Home Loan Bank stock
18,760 18,760 13,793 13,793

Accrued interest receivable
17,481 17,481 7,701 7,701

Liabilities:

Deposits:

Checking, savings and money market accounts
(551,475 ) (551,475 ) (363,245 ) (363,245 )

Certificates of deposit
(831,943 ) (835,375 ) (537,168 ) (541,690 )

Other borrowed funds
(271,631 ) (275,161 ) (114,317 ) (114,317 )

Advance payments by borrowers for taxes and insurance
(5,760 ) (5,760 ) (4,152 ) (4,152 )

Accrued interest payable
(2,983 ) (2,983 ) (2,933 ) (2,933 )

17. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
     Supplemental disclosures of cash flow information are summarized below:

Year Ended December 31,

2001 2000 1999

(In thousands)

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest on deposits and borrowings
$ 62,963 $ 45,334 $ 30,880

Income taxes
7,471 5,941 6,004

Supplemental schedule of noncash activities:

Loans transferred to held for sale
120,981 — —

Transfers from loans to real estate owned
851 493 313

18.     PARENT COMPANY FINANCIAL STATEMENTS
Condensed Statement of Financial Condition

December 31,

2001 2000

(In thousands)

Assets

Cash and deposits with banks
$ 343 $ 85

Federal funds sold and other
21,555 19,823

Total cash and cash equivalents
21,898 19,908

Marketable securities:

Trading
3,769 4,572

Available for sale
2,795 39,919

Note receivable
22,831 24,056

Accrued interest receivable
2 372

Investment in subsidiary-Home Savings
195,452 175,269

Investment in subsidiary-Butler Wick
13,303 12,944

Other assets
4,176 67

Total assets
$ 264,226 $ 277,107

Liabilities and Shareholders’ Equity

Other borrowed funds
$ — $ 12,000

Accrued expenses and other liabilities
2,346 3,208

Total liabilities
2,346 15,208

Total shareholders’ equity
261,880 261,899

Total liabilities and shareholders’ equity
$ 264,226 $ 277,107

Condensed Statement of Income

Year Ended December 31,

2001 2000 1999

(In thousands)

Income

Interest income
$ 3,752 $ 5,806 $ 8,564

Non-interest income
(862 ) 227 443

Total income
2,890 6,033 9,007

Expenses

Interest expense 385 1,152 2,670

Other expenses
986 1,078 1,520

Total expenses
1,371 2,230 4,190

Income before income taxes
1,519 3,803 4,817

Income taxes
602 1,069 2,060

Income before equity in undistributed net earnings of subsidiary
917 2,734 2,757

Equity in undistributed net earnings of subsidiary
14,762 8,880 7,638

Net income
$ 15,679 $ 11,614 $ 10,395

Condensed Statement of Cash Flows

Year Ended December 31,

2001 2000 1999

(In thousands)

Cash Flows from Operating Activities

Net Income $ 15,679 $ 11,614 $ 10,395

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Equity in undistributed earnings of the subsidiaries
(14,762 ) (8,880 ) (7,638 )

Amortization of premiums and accretion of discounts
(1 ) (22 ) (26 )

Net (gains) losses
(1 ) 19 140

Decrease (increase) in interest receivable
370 719 (1,071 )

Increase in other assets
(4,294 ) (54 ) (285 )

(Decrease) increase in accrued interest payable
— (1,642 ) 2,670

Decrease in other liabilities
(789 ) (254 ) (177 )

Decrease (increase) in trading securities
803 (241 ) (4,331 )

Net cash (used in) provided by operating activities
(2,995 ) 1,259 (323 )

Cash Flows from Investing Activities

Proceeds from principal repayments and maturities of:

Marketable securities available for sale
37,665 25,000 —

Proceeds from sale of:

Marketable securities available for sale
350 473 22,096

Purchases of:

Marketable securities available for sale
(356 ) (924 ) (86,716 )

ESOP loan repayment
146 (37 ) 274

Net cash provided by (used in) investing activities
37,805 24,512 (64,346 )

Cash Flows from Financing Activities

Dividends paid
(9,790 ) (10,141 ) (10,095 )

Special capital distribution
— — (226,549 )

Net (decrease) increase in borrowed funds
(12,000 ) (173,000 ) 185,000

Dividend from subsidiary
— 158,000 —

Purchase of treasury stock
(11,038 ) (3,322 ) —

Exercise of stock options
8 — —

Net cash (used in) provided by financing activities
(32,820 ) (28,463 ) (51,644 )

Increase (decrease) in cash and cash equivalents
1,990 (2,692 ) (116,313 )

Cash and cash equivalents, beginning of year
19,908 22,600 138,913

Cash and cash equivalents, end of year
$ 21,898 $ 19,908 $ 22,600

19. SEGMENT INFORMATION
     SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for the manner in which public enterprises report information about operating segments in financial statements. With the acquisition of Butler Wick in 1999, United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and business banking services. Investment advisory services provide investment brokerage services and a network of integrated financial services. The accounting policies of the segments are the same as those described in Note 1. Condensed statements of income and selected financial information by operating segment for the years ended December 31, 2001, 2000 and 1999 are as follows:

Retail Banking Investment Advisory Services Eliminations Total

(In thousands)

2001

Results of Operations

Total interest income
$ 114,295 $ 1,982 $ 2,288 $ 113,989

Total interest expense
58,516 819 2,288 57,047

Net interest income after provision for loan loss
53,284 1,163 — 54,447

Non-interest income
8,659 19,790 — 28,449

Non-interest expense
37,434 20,274 — 57,708

Income before tax
24,509 679 — 25,188

Income tax
9,263 246 — 9,509

Net income
$ 15,246 $ 433 $ — $ 15,679

Selected Financial Information

Total assets
$ 2,145,275 $ 35,977 $ 236,472 $ 1,944,780

Capital expenditures
2,407 362 — 2,769

Depreciation and amortization
1,675 548 — 2,223

2000

Results of Operations

Total interest income
$ 90,844 $ 3,804 $ 3,026 $ 91,622

Total interest expense
45,001 2,129 3,026 44,104

Net interest income after provision for loan loss
45,543 1,675 — 47,218

Non-interest income
2,590 22,164 — 24,754

Non-interest expense
31,721 22,586 — 54,307

Income before tax
16,412 1,253 — 17,665

Income tax
5,599 452 — 6,051

Net income
$ 10,813 $ 801 $ — $ 11,614

Selected Financial Information

Total assets
$ 1,484,541 $ 41,027 $ 225,369 $ 1,300,199

Capital expenditures
3,743 519 — 4,262

Depreciation and amortization
1,098 475 — 1,573

1999

Results of Operations

Total interest income
$ 89,634 $ 2,415 $ 2,078 $ 89,971

Total interest expense
35,200 1,162 2,078 34,284

Net interest income after provision for loan loss
54,334 1,253 — 55,587

Non-interest income
2,285 20,436 — 22,721

Non-interest expense
40,637 20,400 — 61,037

Income before tax
15,982 1,289 — 17,271

Income tax
6,356 520 — 6,876

Net income
$ 9,626 $ 769 — $ 10,395

Selected Financial Information

Total assets
$ 1,639,856 $ 41,841 $ 354,124 $ 1,327,573

Capital expenditures
1,248 317 — 1,565

Depreciation and amortization
937 419 — 1,356

20. EARNINGS PER SHARE
     Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options and the RRP. No shares of common stock were anti-dilutive for the periods ended December 31, 2001 and 1999. 621,922 shares of common stock were not considered for the diluted earnings per share calculation for the period ended December 31, 2000, as they were anti-dilutive.

2001 2000 1999

(Dollars in thousands, except per share data)

Basic Earnings Per Share:

Net income applicable to common stock
$ 15,679 $ 11,614 $ 10,395

Weighted average common shares outstanding
32,176 33,186 33,907

Basic earnings per share
$ 0.49 $ 0.35 $ 0.31

Diluted Earnings Per Share:

Net income applicable to common stock
$ 15,679 $ 11,614 $ 10,395

Weighted average common shares outstanding
32,176 33,186 33,907

Dilutive effect of restricted stock
154 130 292

Dilutive effect of stock options
35 — —

Weighted average common shares outstanding for dilutive computation
32,365 33,316 34,199

Diluted earnings per share
$ 0.48 $ 0.35 $ 0.30

21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary of Quarterly Financial Information
     The following table presents summarized quarterly data for each of the years indicated.

(Unaudited)

First Second Third Fourth Total

Quarter Quarter Quarter Quarter Year

(In thousands, except per share data)

2001:

Total interest income
$ 24,038 $ 24,645 $ 32,872 $ 32,434 $ 113,989

Total interest expense
11,681 12,244 16,819 16,303 57,047

Net interest income
12,357 12,401 16,053 16,131 56,942

Provision for loan loss allowances
330 250 465 1,450 2,495

Noninterest income
5,788 6,118 5,236 11,307 28,449

Noninterest expense
12,779 13,552 14,518 16,859 57,708

Income taxes
1,834 1,779 2,341 3,555 9,509

Net income
$ 3,202 $ 2,938 $ 3,965 $ 5,574 $ 15,679

Earnings per share:

Basic
0.10 0.09 0.12 0.18 0.49

Diluted
0.10 0.09 0.12 0.17 0.48

Increases of $8.2 million in total interest income and $4.6 million in total interest expense from the second quarter to the third quarter of 2001 are primarily due to the acquisition of Industrial Bancorp.
The increase of $6.1 million in noninterest income in the fourth quarter compared to the third quarter of 2001 is primarily due to a $4.9 million increase in gains on loans sold. A decrease in the loss on trading securities of $636,000 and an increase in underwriting and investment banking of $679,000 also contributed to the increase in noninterest income. Noninterest expense increased $2.3 million in the fourth quarter of 2001 primarily as a result of a $1.9 million increase in salaries and employee benefits.
The provision for loan losses increased in the fourth quarter primarily due to a shift in the mix of the portfolio as a result of the bulk loan sale and an increase of loans on the watch list.

2000:

Total interest income
$ 21,879 $ 22,420 $ 23,236 $ 24,087 $ 91,622

Total interest expense
10,083 10,371 11,443 12,207 44,104

Net interest income
11,796 12,049 11,793 11,880 47,518

Provision for loan loss allowances
— — 150 150 300

Noninterest income
7,255 5,857 5,714 5,928 24,754

Noninterest expense
14,441 13,227 12,740 13,899 54,307

Income taxes
1,508 1,709 1,528 1,306 6,051

Net income
$ 3,102 $ 2,970 $ 3,089 $ 2,453 $ 11,614

Earnings per share:

Basic
0.09 0.09 0.09 0.08 $ 0.35

Diluted
0.09 0.09 0.09 0.08 $ 0.35

INDEPENDENT AUDITORS’ REPORT
To the Shareholders and Board of Directors
United Community Financial Corp.
Youngstown, OH
     We have audited the accompanying consolidated statement of financial condition of United Community Financial Corp. as of December 31, 2001 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of United Community’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The 2000 and 1999 financial statements were audited by other auditors, whose report dated January 24, 2001 expressed an unqualified opinion on those statements.
     We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Community Financial Corp. as of December 31, 2001 and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Crowe, Chizek and Company LLP

Crowe, Chizek and Company LLP

Cleveland, Ohio
February 8, 2002
EX-21 5 l92920aex21.txt EX-21 EXHIBIT 21 ---------- SUBSIDIARIES Name State of Incorporation - ---- ---------------------- The Home Savings and Loan Company of Youngstown, Ohio Ohio Butler Wick Corp Ohio EX-23.1 6 l92920aex23-1.txt EX-23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement on Form S-8 of United Community Financial Corp. of our report dated February 8, 2002, on the consolidated financial statements of United Community Financial Corp. as of December 31, 2001 and for the year then ended which report appears in the Annual Report on Form 10-K of United Community Financial Corp. for the year ended December 31, 2001. Crowe, Chizek and Company LLP Cleveland, Ohio March 26, 2002 EX-23.2 7 l92920aex23-2.txt EX-23.2 EXHIBIT 23.2 ------------ INDEPENDENT AUDITORS' CONSENT United Community Financial Corp. We consent to the incorporation by reference in Registration Statement Nos. 333-38028 and 333-86015 of United Community Financial Corp. on Forms S-8 of our report dated January 24, 2001, incorporated by reference in this Annual Report on Form 10-K of United Community Financial Corp. for the year ended December 31, 2001. /s/ Deloitte and Touche LLP Cleveland, OH March 29, 2002 EX-99 8 l92920aex99.txt EX-99 EXHIBIT 99 ---------- REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors United Community Financial Corp. We have audited the accompanying consolidated statement of financial condition of United Community Financial Corp. and subsidiaries as of December 31, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for the years ended December 31, 2000 and 1999. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain a reasonable assurance about whether the financial statements are free of material misstatements. 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 United Community Financial Corp. and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte and Touche LLP Cleveland, OH January 24, 2001 EX-13 9 l92920aex13pdf.pdf PDF COURTESY COPY OF UNITED COMMUNITY EX-13 begin 644 l92920aex13pdf.pdf M)5!$1BTQ+C(-)>+CS],-"C$T-"`P(&]B:@T\/"`-+TQI;F5A')E9@TP#24E14]`@(`TQ-#4@ M,"!O8FH-/#P@#2]4>7!E("]#871A;&]G(`TO4&%G97,@,3(X(#`@4B`-+TI4 M(#$T,B`P(%(@#3X^(`UE;F1O8FH-,3R";TN: MWJH_:?;6?#9%E4>L:XU&F#/G$P8&V1K!<^S1#`Q,*0I[$GO/-N8X=P1N4SEW9FMYRT,)EH<.'-KW:I5;]_F MKLI=M>H6D+7VWNI5J^'VII)9FZ7Y35I$GP86;I-JO`ADPA0Y-@A$8=[ MB=/FY#YTYOPH['DM.G$Y<^5'UM1M4@7F\P7",+GR%8:LG"HW@284&+I4?KD$ MTGM]/H\BJZ]Z9&[;')Y`N5J3&:G+I4O<9R8>:_9QF5<3)EFZ7:K",=BS+:KP MRE%!=:"LK."SB,(EEP3"FVN7`67QV\A9'*@V# M&H_%)FYKAMA;^+U9(`#D!1SFW^-Q=`+Z.H>!(:VCHP-&,G!T=#0P"@()!@8P MP9:!8*,23&80*:A&"`52WFP!$F8$\94M0()`,XU!-(L'7#,CJEFL$-T24-4, M#!IP+HC%I*0$E@^-@.ME-D:XEX%1T`)$L8&=I8%J$IBE"I2A7:(%.J.&08`A M#$C+`;$B.*V*,?"R&4BSNL@J"G)M85`I8F"X?(#!=`(#;P$#\U0&AI?,+5H* M#+PG&%@DF/-=6[7G%)Q\:Y"@S"0A`-8-$&``NSD_%0UE;F1S=')E86T-96YD M;V)J#3$W-R`P(&]B:@TU-S$@#65N9&]B:@TQ-#8@,"!O8FH-/#P@#2]4>7!E M("]086=E(`TO4&%R96YT(#$R-R`P(%(@#2]297-O=7)C97,@,30W(#`@4B`- M+T-O;G1E;G1S(%L@,34S(#`@4B`Q-34@,"!2(#$U-R`P(%(@,34Y(#`@4B`Q M-C$@,"!2(#$V,R`P(%(@,38W(#`@4B`Q-CD@,"!2(%T@#2]-961I84)O>"!; M(#`@,"`V,3(@,3`P."!=(`TO0W)O<$)O>"!;(#`@,"`V,3(@,3`P."!=(`TO M4F]T871E(#`@#3X^(`UE;F1O8FH-,30W(#`@;V)J#3P\(`TO4')O8U-E="!; M("]01$8@+U1E>'0@72`-+T9O;G0@/#P@+T8R(#$U,2`P(%(@+T8S(#$V-2`P M(%(@+T8V(#$T."`P(%(@/CX@#2]%>'1'4W1A=&4@/#P@+T=3,2`Q-S`@,"!2 M(#X^(`T^/B`-96YD;V)J#3$T."`P(&]B:@T\/"`-+U1Y<&4@+T9O;G0@#2]3 M=6)T>7!E("]4>7!E,2`-+T9I"!;("TQ-C@@+3(Q."`Q,#`P(#DS-2!=(`TO1F]N=$YA;64@+T)' M3D1)1BM4:6UE"]1+UP-=&AR964O;R]P87)E;FQE9G0O4B]+*0TO M1F]N=$9I;&4S(#$W,R`P(%(@#3X^(`UE;F1O8FH-,34P(#`@;V)J#3P\(`TO M5'EP92`O1F]N=$1E7!E("]4>7!E,2`-+T9I06'+X[LV-W:T7;0IL=%@@W8/J**W;Q,%&SN[?[U"B'(F. 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M,CDN,B@@*2TQ,C2E4:@HO1C$R(#$@5&8*,3'!E;G-E2!I;B!U;F1I2!I;B!U;F1I2!O<&5R871I;F<@86-T:79I=&EE6UE;G1S(&%N9"!M871U6UE;G0I+3(P.#4S+C2!<*'5S960@:6Y<*2!I M;G9E2!F:6YA;F-I;F<@86-T:79I=&EE65A"DM,3`S.30H("`I+3(P-#'!E;F1I='5R97,I5&H*150*,"XY,S0@9PHR-#@N.#4@-3,R+C$W M(#(N.#@@+3$Q+C`T(')E"F8*0E0*,3`N,#'!E;G-E M*2TX.#DS+C$H("`I+3(P-#"E4:@I%5`HP+CDS-"!G"C(T."XX-2`S.#`N.3<@,BXX."`M,3$N,#0@2!T:&4@=V5I9VAT960@879E'1'4W1A=&4@/#P@ M+T=3,2`Q-S`@,"!2(#X^(`T^/B`-96YD;V)J#3$R,"`P(&]B:@T\/"`O3&5N M9W1H(#(X.#4W(#X^(`US=')E86T-"C$@9PHO1U,Q(&=S"C$@:2`*,3@N,C$@ M.3@Y+C@U(#4W-2XW-B`M-S$U+C(@&-E<'0@<&5R('-H87)E(&1A=&%<*2E4:@I%5`HP+CDS-"!G M"CDU+C65A2!D=64I5&H* M-3`N,S(Q-"`P(%1$"B@@=&\@82`I5&H*+34P+C,R,30@+3$N,3$Y,B!41`HH M)#0N.2!M:6QL:6]N(&EN8W)E87-E(&EN(&=A:6YS(&]N(&QO86YS('-O;&0N M($$@9&5C2!A"!O M9B!T:&4@<&]R=&9O;&EO(&%S(&$@'1'4W1A=&4@/#P@+T=3,2`Q-S`@,"!2(#X^(`T^/B`-96YD;V)J#3$R,R`P M(&]B:@T\/"`O3&5N9W1H(#$W-S$Q(#X^(`US=')E86T-"C$@9PHO1U,Q(&=S M"C$@:2`*,3@N,C$@.3@Y+C@U(#4W-2XW-B`M.36EN9R!C;VYS;VQI9&%T960@2!&:6YA;F-I86P@0V]R M<"X@87,@;V8@*51J"C`@+3$N,3$Y,B!41`HH1&5C96UB97(@,S$L(#(P,#$@ M86YD('1H92!R96QA=&5D(&-O;G-O;&ED871E9"!S=&%T96UE;G1S(&]F(&EN M8V]M92P@8VAA;F=E65A2!O9B!5;FET960@0V]M;75N:71Y M*51J"B]&,B`Q(%1F"C,Q+C(Q-C(@,"!41`HHDBE4:@HO1C$R(#$@5&8*,"XS M,S,@,"!41`HH2!O=&AE&%M:6YI;F2!M86YA9V5M96YT+"!A2!&:6YA;F-I86P@0V]R<"X@87,@;V8@1&5C96UB M97(@,S$L(#(P,#$@86YD('1H92!R97-U;'1S(&]F(&ET65A2!A M8V-E<'1E9"!I;B!T:&4@56YI=&5D(%-T871EF5K M(&%N9"!#;VUP86YY($Q,4"E4:@I%5`HP+C4@9PHQ-3$N.#D@-3`R+C0Q(#,P M."XT("TP+C0X(')E"F8*0E0*,3`N,#2!,3%`I M5&H*+3$R+C4R-2`M,BXU,C0Q(%1$"BA#;&5V96QA;F0L($]H:6\I5&H*,"`M M,2XQ,3DR(%1$"BA&96)R=6%R>2`X+"`R,#`R("E4:@HR-RXV.3,Q("TR+C8Y M,#<@5$0**"`I5&H*150*96YD7!E("]&;VYT(`TO4W5B='EP92`O5'EP93$@#2]&:7)S=$-H87(@,S(@ M#2],87-T0VAA7!E("]4>7!E,2`-+T9I7!E("]4>7!E,2`-+T9I7!E("]086=E')E9@TP(#$T-"`- M,#`P,#`P,#`P,"`V-34S-2!F#0HP,#`P,#,U.3,P(#`P,#`P(&X-"C`P,#`P M,S8P.#0@,#`P,#`@;@T*,#`P,#`S-C(Q,B`P,#`P,"!N#0HP,#`P,# -----END PRIVACY-ENHANCED MESSAGE-----


Selected financial condition data:		At December 31,

		2001		2000		1999		1998		1997

		(In thousands)
Total assets		$	1,944,780	$	1,300,199	$	1,327,573	$	1,297,689	$	1,073,222




Cash and cash equivalents			205,883		45,972		111,445		172,409		36,404




Marketable securities:




	Trading		8,352		5,933		7,657		2,804		2,475




	Available for sale		51,081		98,445		161,904		112,200		39,545




	Held to maturity		1,698		876		1,091		4,993		5,168




Mortgage-related securities:




	Available for sale		67,069		91,731		113,559		98,890		62,416




	Held to maturity		78,798		107,684		138,079		182,999		243,848




Loans, net			1,406,479		876,653		723,087		657,498		633,236




Loans held for sale, net			20,192		—		—		—		—




FHLB stock			18,760		13,793		12,825		11,958		11,136




Deposits			1,383,418		900,413		834,087		777,583		886,808




Other borrowed funds			271,631		114,317		213,578		26,727		17




Total equity			261,880		261,899		256,868		474,821		150,141


Summary of earnings:	Year Ended December 31,

	2001		2000		1999		1998		1997

	(In thousands)
Interest income	$	113,989	$	91,622	$	89,971	$	87,755	$	84,081




Interest expense		57,047		44,104		34,284		36,570		40,996

Net interest income		56,942		47,518		55,687		51,185		43,085




Provision for (recovery of) loan loss allowances		2,495		300		100		650		(1,546	)

Net interest income after provision for (recovery of) loan loss allowances		54,447		47,218		55,587		50,535		44,631




Noninterest income		28,449		24,754		22,721		22,137		20,217




Noninterest expenses (1)(2)(3)		57,708		54,307		61,037		56,931		42,704

Income before provision for income taxes		25,188		17,665		17,271		15,741		22,144




Provision for income taxes		9,509		6,051		6,876		5,612		7,717

Net income	$	15,679	$	11,614	$	10,395	$	10,129	$	14,427

(1)		For the year ended December 31, 2000, noninterest expense included a $2.9 million gain on postretirement benefits curtailment and a $1.0 million loss on pension termination.




(2)		For the year ended December 31, 1999, noninterest expense included $6.4 million compensation expense as a result of the $6.00 per share special capital distribution paid on Recognition and Retention Plan (RRP) shares.




(3)		For the year ended December 31, 1998, noninterest expense included $11.8 million as a result of the contribution to the Home Savings and Loan Charitable Foundation (Foundation).


Selected financial ratios and other data:		At or for the Year Ended December 31,
		2001			2000			1999			1998			1997

Performance ratios: (1)




	Return on average assets (2)		0.97	%		0.92	%		0.79	%		0.83	%		1.34	%




	Return on average equity (3)		6.03			4.47			2.46			3.41			10.10




	Interest rate spread (4)		2.95			2.91			2.98			3.28			3.50




	Net interest margin (5)		3.66			3.89			4.38			4.32			4.10




	Noninterest expense to average assets		3.56			4.30			4.66			4.66			3.96




	Efficiency ratio (6)		71.79			75.14			77.85			77.65			67.46




	Average interest-earning assets to Average interest-bearing liabilities		119.23			127.08			152.09			133.59			115.34




Capital ratios:




	Average equity to average assets		16.04			20.57			32.25			24.30			13.23




	Equity to assets at year end		13.47			20.14			19.35			36.59			13.99




	Tangible capital		9.07			14.51			26.75			26.80			13.47




	Core capital		9.07			14.51			26.75			26.80			13.47




	Risk-based capital		14.70			24.33			50.41			51.51			28.85




Asset quality ratios:




	Nonperforming loans to loans at year end (7)		0.89			1.10			0.54			1.15			1.60




	Nonperforming assets to average assets (8)		0.80			0.79			0.31			0.63			0.94




	Nonperforming assets to total assets at year end (8)		0.67			0.77			0.30			0.59			0.95




	Allowance for loan losses as a percent of loans		0.81			0.74			0.88			0.96			0.94




	Allowance for loan losses as a percent of nonperforming loans (7)		92.13			67.79			164.86			84.62			59.02




Number of:




	Loans		25,636			22,699			20,274			19,628			19,173




	Deposits		164,753			115,785			106,196			105,426			108,663




Per share data: (9)




	Basic earnings (10)	$	0.49		$	0.35		$	0.31		$	0.10			N/A




	Diluted earnings (10)		0.48			0.35			0.30			0.10			N/A




	Book value (11)		7.34			7.02			6.80			13.38			N/A




	Dividend payout ratio (12)		62.50	%		85.71	%		100.00	%		75.00	%		N/A

(1)		Performance ratios for 2000 reflect the $2.9 million gain on postretirement benefits curtailment and the $1.0 million loss on pension termination. Performance ratios for 1999 reflect the $6.4 million employee benefit expense related to the $6.00 per share special capital distribution paid on the RRP shares. Performance ratios for 1998 reflect the $11.8 million contribution to the Foundation.




(2)		Net income divided by average total assets. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the return on average assets would have been 0.80% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the return on average assets would have been 1.16% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the return on average assets would have been 1.43% for the year ended December 31, 1998.




(3)		Net income divided by average total equity. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the return on average equity would have been 3.90% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the return on average equity would have been 3.60% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the return on average equity would have been 5.89% for the year ended December 31, 1998.




(4)		Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.




(5)		Net interest income as a percentage of average interest-earning assets.




(6)		Noninterest expense divided by the sum of net interest income and noninterest income. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the efficiency ratio would have been 78.22% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the efficiency ratio would have been 69.52% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the efficiency ratio would have been 61.73% for the year ended December 31, 1998.




(7)		Nonperforming loans consist of nonaccrual loans and restructured loans.




(8)		Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans.




(9)		For purpose of displaying six months earnings per share for 1998, it is assumed the Conversion took place as of July 1, 1998.




(10)		Net income divided by average number of shares outstanding. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, basic and diluted earnings per share would have been $0.31for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, basic earnings per share would have been $0.45 and diluted earnings per share would have been $0.44 for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, basic and diluted earnings per share would have been $0.32 for the year ended December 31, 1998.




(11)		Equity divided by number of shares outstanding.




(12)		Historical per share dividends declared and paid for the year divided by the diluted earnings per share for the year.


		December 31,

		2001					2000

				Percent					Percent
		Amount		of Total			Amount		of Total

		(Dollars in thousands)
Strip shopping centers		$	37,052		24.16	%	$	29,613		21.46	%




Office buildings			49,323		32.16			52,713		38.21




Warehouses			18,933		12.35			25,418		18.42




Hotel property			6,307		4.11			5,776		4.19




Light industrial manufacturing			14,529		9.47			15,826		11.47




Unimproved land			13,722		8.95			347		0.25




Nursing homes			7,010		4.57			—		—




Other			6,492		4.23			8,283		6.00

	Total	$	153,368		100.00	%	$	137,976		100.00	%


			Year ended December 31,

			2001 vs. 2000									2000 vs. 1999

			Increase									Increase
			(decrease) due to						Total			(decrease) due to						Total
									increase									increase
			Rate			Volume			(decrease)			Rate			Volume			(decrease)

			(In thousands)
Interest-earning assets:




	Loans		$	(1,223	)	$	31,320		$	30,097		$	576		$	7,696		$	8,272




	Loans held for sale			—			886			886




	Mortgage-related securities:




		Available for sale		(330	)		(1,207	)		(1,537	)		322			(579	)		(257	)




		Held to maturity		(183	)		(2,113	)		(2,296	)		(64	)		(2,231	)		(2,295	)




	Marketable securities:




		Trading		5			1			6			(14	)		25			11




		Available for sale		(409	)		(3,823	)		(4,232	)		393			(1,906	)		(1,513	)




		Held to maturity		(10	)		(7	)		(17	)		4			(57	)		(53	)




	Margin accounts			(702	)		(1,089	)		(1,791	)		357			1,001			1,358




	Other interest-earning assets			(334	)		1,585			1,251			3,108			(6,980	)		(3,872	)

		Total interest-earning assets	$	3,186		$	25,553			22,367		$	4,682		$	(3,031	)		1,651

Interest-bearing liabilities:




	Checking accounts			145			1,134			1,279			599			437			1,036




	Savings accounts			(788	)		729			(59	)		(13	)		(249	)		(262	)




	Certificates of deposit			(840	)		12,237			11,397			2,066			2,122			4,188




	Other borrowed funds			(553	)		879			326			(257	)		5,115			4,858

		Total interest-bearing liabilities	$	(2,036	)	$	14,979			12,943		$	2,395		$	7,425			9,820

Change in net interest income									$	9,424								$	(8,169	)


Year Ended December 31, 2001

									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)
+300	$	161,540	$	(97,516	)		(37.64	)%		9.22	%		(4.42	)%	$	(12,781	)		(20.68	)%




+200		197,038		(62,018	)		(23.94	)		10.93			(2.71	)		(8,487	)		(13.74	)




+100		230,742		(28,314	)		(10.93	)		12.45			(1.19	)		(4,551	)		(7.36	)




Static		259,056		—			—			13.64			—			—			—




(100)		263,862		4,806			1.86			13.73			0.09			942			1.52




(200)		256,439		(2,617	)		(1.01	)		13.30			(0.34	)		806			1.30




(300)		245,353		(13,703	)		(5.29	)		12.73			(0.91	)		(720	)		(1.16	)


Year Ended December 31, 2000

									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)
+300	$	149,982	$	(64,325	)		(30.02	)%		13.55	%		(4.14	)%	$	(6,135	)		(14.40	)%




+200		171,431		(42,876	)		(20.01	)		15.02			(2.67	)		(3,997	)		(9.38	)




+100		193,800		(20,507	)		(9.57	)		16.46			(1.23	)		(1,928	)		(4.52	)




Static		214,307		—			—			17.69			—			—			—




(100)		221,943		7,636			3.56			17.99			0.30			1,013			2.38




(200)		216,714		2,407			1.12			17.42			(0.27	)		274			0.64




(300)		214,534		227			0.11			17.06			(0.63	)		(563	)		(1.32	)


	Years ended December 31,

	2001			2000			1999

	(In thousands)
Net income	$	15,679		$	11,614		$	10,395




Adjustments to reconcile net income to net cash from operating activities		(12,271	)		6,562			953

Net cash (used in) provided by operating activities		3,408			18,176			11,348




Net cash used in investing activities		(97,329	)		(37,365	)		(89,097	)




Net cash provided by (used in) financing activities		253,832			(46,284	)		17,320

Net change in cash and cash equivalents		159,911			(65,473	)		(60,429	)




Cash and cash equivalents at beginning of year		45,972			111,445			171,874

Cash and cash equivalents at end of year	$	205,883		$	45,972		$	111,445


											Excess of actual capital					Applicable
	Actual capital					Current requirement					over current requirement					asset base

	Amount		Percent			Amount		Percent			Amount		Percent			Total

	(Dollars in thousands)
Tangible capital	$	168,233		9.07	%	$	27,836		1.50	%	$	140,397		7.57	%	$	1,855,702




Core capital		168,233		9.07			74,228		4.00			94,005		5.07			1,855,702




Risk-based capital		178,196		14.70			96,961		8.00			81,235		6.70			1,212,016


		First		Second		Third		Fourth			First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter			Quarter		Quarter		Quarter		Quarter

2001:										2000:




High		$	7.063	$	8.700	$	8.200	$	7.700	High	$	9.938	$	6.969	$	6.688	$	7.031




Low			6.422		6.250		6.800		6.600	Low		6.719		5.500		5.813		6.125




Close			6.625		8.700		7.050		7.200	Close		6.969		6.656		6.563		6.938




Dividends										Dividends
	declared									declared
	and paid		0.075		0.075		0.075		0.075	and paid		0.075		0.075		0.075		0.075


											Accumulated
											Other
		Shares			Common			Retained			Comprehensive			Unearned			Treasury
		Outstanding			Stock			Earnings			Income (loss)			Compensation			Stock			Total

		(In thousands, except per share data)
Balance December 31, 1998			36,416		$	345,872		$	154,078		$	733		$	25,862		$	—		$	474,821




Adjustment to convert Butler Wick to a calendar year end (1)			—			—			(825	)		—			—			—			(825	)

Balance January 1, 1999			36,416			345,872			153,253			733			(25,862	)		—			473,996




Comprehensive income:




	Net income		—			—			10,395			—			—			—			10,395




	Change in net unrealized (loss) on securities, net of taxes of ($2,012)		—			—			—			(3,736	)		—			—			(3,736	)

Comprehensive income			—			—			10,395			(3,736	)		—			—			6,659




Issuance of common shares for RRP			1,342			16,444			—			—			(16,444	)		—			—




Amortization of restricted common stock compensation			—			—			—			—			10,293			—			10,293




Shares distributed by ESOP trust			—			742			—			—			1,822			—			2,564




Special capital distribution, $6.00 per share			—			(226,549	)		—			—			—			—			(226,549	)




Dividends paid, $0.30 per share			—			—			(10,095	)		—			—			—			(10,095	)

Balance December 31, 1999			37,758			136,509			153,553			(3,003	)		(30,191	)		—			256,868




Comprehensive income:




	Net income		—			—			11,614			—			—			—			11,614




	Change in net unrealized (loss) on securities, net of taxes of $1,565		—			—			—			2,905			—			—			2,905

Comprehensive income			—			—			11,614			2,905			—			—			14,519




Issuance of common shares for RRP			46			295			—			—			(295	)		—			—




Amortization of restricted common stock compensation			—			54			—			—			1,964			—			2,018




Forfeiture of restricted common stock			(3	)		(25	)		—			—			25			—			—




Shares distributed by ESOP trust			—			134			—			—			1,823			—			1,957




Purchase of treasury stock			(484	)		—			—			—			—			(3,322	)		(3,322	)




Dividends paid, $0.30 per share			—			—			(10,141	)		—			—			—			(10,141	)

Balance December 31, 2000			37,317			136,967			155,026			(98	)		(26,674	)		(3,322	)		261,899




Comprehensive income:




	Net income		—			—			15,679			—			—			—			15,679




	Change in net unrealized gain on securities, net of taxes of $808		—			—			—			1,500			—			—			1,500

Comprehensive income			—			—			15,679			1,500			—			—			17,179




Amortization of restricted common stock compensation			—			62			—			—			1,622			—			1,684




Forfeiture of restricted common stock			(46	)		(290	)		—			—			242			—			(48	)




Shares distributed by ESOP trust			—			164			—			—			1,822			—			1,986




Purchase of treasury stock			(1,604	)		—			—			—			—			(11,038	)		(11,038	)




Reissuance of common stock			1			—			—			—			—			8			8




Dividends paid, $0.30 per share			—			—			(9,790	)		—			—			—			(9,790	)

Balance December 31, 2001			35,668		$	136,903		$	160,915		$	1,402		$	(22,988	)	$	(14,352	)	$	261,880


		At July 1, 2001

		(Dollars in thousands)
Cash and securities		$	33,493




Loans, net			386,900




Premises and equipment			4,996




Goodwill			19,664




Core deposit intangible			7,983




Other assets			5,675

Total assets acquired			458,711

Deposits			317,196




Other borrowed funds			50,556




Other liabilities			1,278

Total liabilities assumed			369,030

	Net assets acquired	$	89,681


	December 31, 2001		December 31, 2000

	(In thousands, except per share data)
Net interest income after provision for loan losses	$	60,157	$	58,342




Net income		12,142		12,293




Diluted earnings per share	$	0.38	$	0.37


		December 31, 2001

				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value

		(In thousands)
Available for Sale
U.S. Treasury and agency securities		$	24,692	$	488	$	20	$	25,160
Corporate notes			13,805		288		—		14,093
Equity securities			11,463		496		131		11,828

	Total marketable securities available for sale		49,960		1,272		151		51,081
Held to Maturity
U.S. Treasury and agency securities			1,698		18		21		1,695

	Total marketable securities held to maturity		1,698		18		21		1,695

Total marketable securities		$	51,658	$	1,290	$	172	$	52,776


		December 31, 2001

		Amortized Cost		Fair Value

		(In thousands)
Due in one year or less		$	15,089	$	15,187
Due after one year through five years			23,408		24,066
Due after five years through ten years			—		—
Due after ten years			—		—

	Total	$	38,497	$	39,253


		As of or for the
		Year Ended
		December 31,

		2001		2000

		(In thousands)
Impaired loans on which no specific valuation allowance was provided		$	1,718	$	9,458
Impaired loans on which specific valuation allowance was provided			1,169		85

	Total impaired loans at year-end		2,887		9,543
Specific valuation allowances on impaired loans at year-end			751		85
Average impaired loans during year			1,953		5,144
Interest income recognized on impaired loans during the year			163		459
Interest income potential based on original contract terms of impaired loans			190		484


Balance, beginning of year		$	—
	Additions		1,322
Acquired from Industrial Bancorp			509
Amortized to expense			(204	)
	Allowance for impairment		(22	)

Balance, end of year		$	1,605


			(Dollars in thousands)
Balance at December 31, 2000:
	Principal balance of loans		$	—
	Amortized cost of servicing rights			—
	Servicing rights as a % of principal			—
New securitizations during the year:
	Principal balance of loans			110,619
	Fair value of servicing rights			1,012
	Servicing rights as a % of principal			0.91	%
Principal payments received on loans collateralized				8,132
Balance at December 31, 2001:
	Principal balance of loans			102,487
	Amortized cost of servicing rights			929
	Servicing rights as a % of principal			0.91	%
Other information at end of period
	Weighted average rate			7.14	%
	Weighted average maturity in months			244
	Fair value assumptions
		Discount rate		8.00	%
		Weighted average prepayment assumptions	229PSA
		Anticipated delinquency		1.00	%


	(Dollars in thousands)
Securitization proceeds	$	114,041
Servicing fees received		44


Fair value at December 31, 2001		$	929
Weighted average life (in months)			82
Projected fair value based on :
	Increase in PSA of 50		882
	Increase in PSA of 100		839


		(In thousands)
2002		$	218
2003			138
2004			54
2005			54
2006			—
Thereafter			—
	Total	$	465


		December 31, 2001

		(In thousands)
Within 12 months		$	540,859
12 months to 24 months			208,465
24 months to 36 months			30,476
36 months to 48 months			39,702
Over 48 months			12,441

	Total	$	831,943


		December 31, 2001

		Certificates of		Checking, Savings and
		Deposit		Money Market Accounts

		(In thousands)
Three months or less		$	32,987	$	97,676
Over three months to six months			20,492		—
Over six months to twelve months			59,432		—
Over twelve months			52,917		—

	Total	$	165,828	$	97,676


	As of December 31, 2001

						Minimum					To Be Well Capitalized
						Capital					Under Prompt Corrective
	Actual					Requirements					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

						(Dollars in thousands)
Total capital (to risk-weighted assets)	$	178,196		14.70	%	$	96,961		8.00	%	$	121,202		10.00	%
Tier 1 capital (to risk-weighted assets)		168,233		13.88			*		*			72,721		6.00
Core (Tier 1) capital (to adjusted total assets)		168,233		9.07			74,228		4.00			92,785		5.00
Tangible capital (to adjusted total assets)		168,233		9.07			27,836		1.50			*		*


	As of December 31, 2000

						Minimum					To Be Well Capitalized
						Capital					Under Prompt Corrective
	Actual					Requirements					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

						(Dollars in thousands)
Total capital (to risk-weighted assets)	$	181,460		24.33	%	$	59,656		8.00	%	$	74,570		10.00	%
Tier 1 capital (to risk-weighted assets)		175,340		23.51			*		*			44,742		6.00
Core (Tier 1) capital (to adjusted total assets)		175,340		14.51			36,242		3.00			60,403		5.00
Tangible capital (to adjusted total assets)		175,340		14.51			18,121		1.50			*		*


	1 Percentage		1 Percentage
	Point Increase		Point Decrease

	(In thousands)
Effect on total of service and interest cost components	$	20	$	(17	)
Effect on the postretirement benefit obligation	$	277	$	(239	)


	December 31, 2001				December 31, 2000

			Weighted				Weighted
			average				average
	Shares		exercise price		Shares		exercise price

Outstanding at beginning of year		629,085	$	6.97		—
Granted		771,390		6.66		638,483	$	6.97
Exercised		1,126		6.66		—
Forfeited		91,853		6.95		9,398		6.97
Outstanding at end of year		1,307,496		6.79		629,085		6.97
Options exercisable at year end		1,307,496	$	6.79		629,085	$	6.97
Weighted-average fair value of options granted during year			$	1.83			$	2.44


	December 31, 2001				December 31, 2000

	As Reported		Pro Forma		As Reported		Pro Forma

	(In thousands, except per share data)
Net income	$	15,679	$	13,481	$	11,614	$	10,278
Basic earnings per share	$	0.49	$	0.42		0.35		0.31
Diluted earnings per share	$	0.48	$	0.42		0.35		0.31