-----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, Ov+rKIUT9e51VbkPflV3FnkcF7mCL7fla3OrLFQvSuGd7pxrVx3PbopkkWDSROUO kplWMnAn1qYKPiwrrybDaA== 0000950152-98-004156.txt : 19980508 0000950152-98-004156.hdr.sgml : 19980508 ACCESSION NUMBER: 0000950152-98-004156 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980506 SROS: NONE 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-47957 FILM NUMBER: 98611981 BUSINESS ADDRESS: STREET 1: 275 FEDERAL PLAZA WEST CITY: YOUNGSTOWN STATE: OH ZIP: 49348 BUSINESS PHONE: 6167922282 S-1/A 1 UNITED COMMUNITY FINANCIAL CORP. 1 As filed with the Securities and Exchange Commission on May 6, 1998 Registration No. 333-47957 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 UNITED COMMUNITY FINANCIAL CORP. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 6036 34-1856319 - --------------------------------- ---------------------------- ---------------------- (State or other jurisdiction (Primary Standard Industrial (I.R.S. employer of incorporation or organization) Classification Code Number) identification number)
275 FEDERAL PLAZA WEST YOUNGSTOWN, OHIO 44503-1203 (330) 742-0500 --------------------------- (Address, including Zip Code, and telephone number, including area code, of registrant's principal executive offices) DOUGLAS M. MCKAY UNITED COMMUNITY FINANCIAL CORP. 275 FEDERAL PLAZA WEST YOUNGSTOWN, OHIO 44503-1203 (330) 742-0500 -------------------------------- (Name, address, including Zip Code, and telephone number, including area code, of agent for service) With copies to: Terri R. Abare Kathleen M. Molinsky Vorys, Sater, Seymour and Pease LLP Atrium Two, 221 East Fourth Street Cincinnati, Ohio 45202 (513) 723-4000 Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box: [X]
CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------------- Title of each class Proposed maximum Proposed maximum of securities to be Amount to be offering price aggregate offering Amount of registered registered per share price(1) registration fee - ----------------------------------------------------------------------------------------------------------------------------- Common shares, without par value 34,715,625 $10.00 $347,156,250 $105,199 - -----------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 2 CROSS REFERENCE SHEET Showing the location in the Prospectus of the Items of Form S-1
Form S-1 Item and Caption Prospectus Heading - ------------------------- ------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.................................... Cover Page, Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges..................... PROSPECTUS SUMMARY; SELECTED FINANCIAL INFORMATION AND OTHER DATA; RISK FACTORS 4. Use of Proceeds...................................... USE OF PROCEEDS 5. Determination of Offering Price...................... Cover Page; THE CONVERSION - Pricing and Number of Common Shares to be Sold 6. Dilution............................................. RISK FACTORS; THE CONVERSION - Tax Considerations; COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION; PRO FORMA DATA 7. Selling Security Holders............................. Not Applicable 8. Plan of Distribution................................. Cover Page; THE CONVERSION - General; - Subscription Offering; - Community Offering; - Public Offering; and - Plan of Distribution 9. Description of Securities to be Registered........... DESCRIPTION OF AUTHORIZED SHARES 10. Interest of Named Experts and Counsel................ Not Applicable 11. Information with Respect to the Registrant (a) Description of Business......................... THE BUSINESS OF THE COMPANY (b) Description of Property......................... THE BUSINESS OF THE COMPANY - Properties (c) Legal Proceedings............................... THE BUSINESS OF THE COMPANY - Legal Proceedings (d) Market Price and Dividends...................... Cover Page; PROSPECTUS SUMMARY - Dividend Policy; MARKET FOR COMMON SHARES; DIVIDEND POLICY (e) Financial Statements............................ FINANCIAL STATEMENTS (f) Selected Financial Data......................... SELECTED FINANCIAL INFORMATION AND OTHER DATA (g) Supplementary Financial Information............. Not Applicable (h) Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... CHANGE IN ACCOUNTANTS (j) Directors and Executive Officers................ MANAGEMENT (k) Executive Compensation.......................... PROSPECTUS SUMMARY; RISK FACTORS - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans; MANAGEMENT - Compensation; and - Stock Benefit Plans (l) Security Ownership of Certain Beneficial Owners and Management......................... THE CONVERSION - Intended Purchases by Directors and Executive Officers; - Limitations on Purchases of Common Shares; - Restrictions on Transfer of Common Shares by Directors and Officers (m) Certain Relationships and Related Transactions.................................. Not Applicable 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities..... Not Applicable
3 PROSPECTUS SUPPLEMENT UNITED COMMUNITY FINANCIAL CORP. THE HOME SAVINGS AND LOAN COMPANY 401(k) SAVINGS PLAN This Prospectus Supplement relates to the offer and sale to participants (the "Participants") in The Home Savings and Loan Company 401(k) Savings Plan of participation interests and common shares, without par value, of United Community Financial Corp. (the "Common Shares"), as set forth herein. In connection with the proposed conversion of The Home Savings and Loan Company of Youngstown, Ohio (the "Company" or the "Employer") from a mutual savings and loan association to a stock savings and loan association incorporated under Ohio law (the "Conversion"), United Community Financial Corp., the proposed holding company for the Company (the "Holding Company"), has been formed. The Board of Directors of the Company has adopted an amendment to the adoption agreement of The Home Savings and Loan Company 401(k) Savings Plan (the "Plan" or the "401(k) Plan") to permit the investment of Plan assets in Common Shares. The Plan will permit Participants to direct the trustee of the Plan (the "Trustees") to purchase Common Shares with amounts in the Plan attributable to such Participants. This Prospectus Supplement relates to the initial election of a Participant to direct the purchase of Common Shares in connection with the Conversion. This Prospectus Supplement does not cover reoffers or resales of the Common Shares. See "Restrictions on Resales." The Prospectus of the Holding Company dated May __, 1998 (the "Prospectus"), which you received with this Prospectus Supplement, includes detailed information regarding the Conversion, the Common Shares and the financial condition, results of operation and business of the Company and the Holding Company. This Prospectus Supplement, which provides detailed information regarding the Plan, should be read only in conjunction with the Prospectus. Terms not otherwise defined in this Prospectus Supplement are defined in the Plan or the Prospectus. A Participant's eligibility to purchase Common Shares in connection with the Conversion is subject to the Participant's general eligibility to purchase Common Shares in the Conversion and the minimum and maximum purchase limitations set forth in the Plan of Conversion. See "THE CONVERSION - Subscription Offering; Community Offering; Public Offering and - Limitations on Purchases of Common Shares" in the Prospectus. AN INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. FOR A DISCUSSION OF SUCH RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE ___ OF THE PROSPECTUS. 4 THESE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"), THE DIVISION OF FINANCIAL INSTITUTIONS OF THE DEPARTMENT OF COMMERCE OF THE STATE OF OHIO (THE "DIVISION"), OR THE SECURITIES COMMISSION OF ANY STATE, NOR HAS THE SEC, THE OTS, THE FDIC, THE DIVISION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus Supplement is ____________________, 1998. 5 No person has been authorized to give any information or to make any representations other than as contained in the Prospectus or this Prospectus Supplement, and, if given or made, such information or representations must not be relied upon as having been authorized by the Holding Company, the Company or the Plan. This Prospectus Supplement does not constitute an offer to sell, or the solicitation of an offer to buy, any securities, to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom delivery of this Prospectus would be unlawful. Neither the delivery of this Prospectus Supplement and the Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein or incorporated by reference is correct as of any time subsequent to the date hereof. This Prospectus Supplement should be read only in conjunction with the Prospectus that is attached hereto and should be retained for future reference. 6
TABLE OF CONTENTS THE OFFERING......................................................................................................1 Securities Offered.............................................................................................1 Election to Purchase Common Shares in the Conversion...........................................................1 Value of Participation Interests...............................................................................1 Method of Directing Transfer...................................................................................1 Time for Directing Transfer....................................................................................2 Irrevocability of Transfer Direction...........................................................................2 Direction to Purchase Common Shares After the Conversion.......................................................2 Purchase Price of Common Shares................................................................................2 Nature of a Participant's Interest in the Common Shares........................................................3 Voting and Tender Rights of Common Shares......................................................................3 DESCRIPTION OF THE PLAN...........................................................................................3 Introduction...................................................................................................3 Eligibility and Participation..................................................................................4 Contributions Under the Plan...................................................................................4 Limitations on Contributions...................................................................................6 Investment of Contributions....................................................................................7 Benefits Under the Plan.......................................................................................11 Administration of the Plan....................................................................................13 Reports to Plan Participants..................................................................................13 Plan Administrator............................................................................................14 Amendment and Termination.....................................................................................14 Merger, Consolidation or Transfer.............................................................................14 Federal Income Tax Consequences...............................................................................14 ERISA and Other Qualifications................................................................................17 Restrictions on Resale........................................................................................17 SEC Reporting and Short-Swing Profit Liability................................................................18 LEGAL OPINIONS...................................................................................................19
7 THE OFFERING SECURITIES OFFERED The securities offered hereby are participation interests in the Plan and up to ___________ Common Shares, at the purchase price of $10.00 per Common Share, which may be acquired by the Plan for the accounts of employees of the Company participating in the Plan. The Holding Company is the issuer of the Common Shares. Information regarding the Plan is contained in this Prospectus Supplement and information with regard to the Conversion and the financial condition, results of operations and business of the Company and the Holding Company is contained in the attached Prospectus. The address of the principal office of the Company is 275 Federal Plaza West, Youngstown, Ohio 44503-1203. The Company's telephone number is (330) 742-0500. ELECTION TO PURCHASE COMMON SHARES IN THE CONVERSION In connection with the Conversion, the Company has adopted the Plan which permits each Participant to direct the Trustee of the Plan to transfer all or part of the funds which represent his or her beneficial interest in the assets of the Plan to an employer stock fund (the "Employer Stock Fund") and to use such funds to purchase Common Shares. The Employer Stock Fund will consist of investments in the Common Shares made on or after the effective date of the Conversion. Funds not transferred to the Employer Stock Fund will remain in the other investment funds of the Plan as directed by the Participant. A Participant's ability to transfer funds to the Employer Stock Fund in the Conversion is subject to the Participant's general eligibility to purchase Common Shares in the Conversion. For information as to the ability of Participants to purchase Common Shares in the Conversion, see "THE CONVERSION - Subscription Offering; and - Community Offering" in the attached Prospectus. VALUE OF PARTICIPATION INTERESTS The assets of the Plan will be valued on an ongoing basis and each Participant will be informed of the value of his or her beneficial interest in the Plan on a quarterly basis. This value represents the market value of past contributions to the Plan by the Company and by the Participants and earnings thereon, less previous withdrawals and loans outstanding. METHOD OF DIRECTING TRANSFER The last page of this Prospectus Supplement is an investment form to direct a transfer to the Employer Stock Fund (the "Investment Form"). If a Participant wishes to transfer all or part of his or her beneficial interest in the assets of the Plan to the Employer Stock Fund to purchase Common Shares in the Conversion, he or she should indicate that election in the Investment Elections part of the Investment Form. If a Participant does not wish to make such an election, he or she does not need to take any action. -1- 8 TIME FOR DIRECTING TRANSFER The deadline for submitting a direction to transfer amounts to the Employer Stock Fund in order to purchase Common Shares issued in connection with the Conversion is ____________, 1998. The Investment Form should be returned to the Human Resource Department Company no later than 12:00 noon, Eastern Daylight Time, on such date. IRREVOCABILITY OF TRANSFER DIRECTION A Participant's direction to transfer amounts credited to such Participant's account in the Plan to the Employer Stock Fund in order to purchase Common Shares in connection with the Conversion shall be irrevocable. Participants, however, will be able to direct the reinvestment of their accounts under the Plan ("401(k) Accounts") after the Conversion as explained below. DIRECTION TO PURCHASE COMMON SHARES AFTER THE CONVERSION After the Conversion, a Participant will be able to direct that a certain percentage of such Participant's interests in the trust assets (the "Trust") be transferred to the Employer Stock Fund and invested in Common Shares, or to the other investment funds available under the Plan. Alternatively, a Participant may direct that a certain percentage of such Participant's interest in the Employer Stock Fund be transferred from the Employer Stock Fund to the other investment funds available under the Plan. Participants will be permitted to direct that future contributions made to the Plan by or on their behalf be invested in Common Shares. Following the initial election, the allocation of a Participant's interest in the Employer Stock Fund may be changed by the Participant as allowed by the Plan. Special restrictions apply to transfers directed by those Participants who are executive officers, directors and principal shareholders of the Holding Company who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See "Restrictions on Resale" and "THE CONVERSION - Restrictions on Transfer of Common Shares by Directors and Officers" in the Prospectus. PURCHASE PRICE OF COMMON SHARES The funds transferred to the Employer Stock Fund for the purchase of Common Shares in the Conversion will be used by the Trustee to purchase Common Shares. The price paid for such Common Shares purchased in the Conversion will be $10.00 per share, the same price paid by all other persons who purchase Common Shares in the Conversion. The prices paid by the Trustee for Common Shares purchased in the open market will not exceed "adequate consideration" as defined in Section 3(18) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). -2- 9 NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON SHARES The Common Shares will be held in the name of the Trustee for the Plan, as trustee. Each Participant has an allocable interest in the investment funds of the Plan but not in any particular assets of the Plan. Accordingly, a specific number of Common Shares will not be directly attributable to the 401(k) Account of any Participant. Net earnings or losses will be allocated to the 401(k) Account of a Participant based on the particular investment designations of the Participants. Therefore, a Participant's 401(k) Account earnings should not be affected by the investment designations (including investments in Common Shares) of other Participants. VOTING AND TENDER RIGHTS OF COMMON SHARES The Trustee generally will exercise voting and tender rights attributable to all Common Shares held by the Trust as directed by the Administrator of the Plan. DESCRIPTION OF THE PLAN INTRODUCTION The Plan has been in effect since January 1993. Effective __, 1998, the Plan allows the employees of the Company to invest in the Common Shares through the Plan. The Plan is a profit sharing plan with a cash or deferred arrangement established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. The Company will adopt any amendments to the Plan that may be necessary to ensure the qualified status of the Plan under the Code and applicable U.S. Treasury regulations. The Company will submit the Plan to the IRS for a determination that the Plan, as amended, is qualified under Section 401(a) of the Code and that it satisfies the requirements for a qualified cash or deferred arrangement under Section 401(k) of the Code. The Plan is an "individual account plan" other than a "money purchase pension plan" within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of ERISA, except the funding requirements contained in Part 3 of Title l of ERISA which by their terms do not apply to an individual account plan (other than a money purchase pension plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the funding requirements contained in Part 3 of Title I of ERISA nor the plan termination insurance provisions contained in Title IV of ERISA will be extended to Participants or beneficiaries under the Plan. -3- 10 APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE COMPANY. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE COMPANY OR AFTER TERMINATION OF EMPLOYMENT. The following statements are summaries of certain material provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan, which has been filed as an exhibit to the registration statement of the Holding Company filed with the SEC. Copies of the Plan are available to all employees by filing a request with the Plan Administrator. Each employee is urged to read carefully the full text of the Plan. ELIGIBILITY AND PARTICIPATION Any employee of the Company who is age 20 or older is eligible to participate in the Plan and will become a Participant in the Plan on the first day of the Plan year quarter immediately following the completion of six months of service with the Company. The Plan fiscal year is the calendar year (the "Plan Year"). Employees who are Limited Service Employees (as defined in the Plan) or covered by a collective bargaining agreement which does not expressly provide for their coverage under the Plan, and employees who are nonresident aliens and who received no earned income from the Company which constitutes income from sources within the United States, are not eligible to participate in the Plan. Directors who are not employees of the Company are not eligible to participate in the Plan. As of April 30, 1998, there were approximately ___ employees eligible to participate in the Plan, and approximately ______ employees had elected to contribute to the Plan. CONTRIBUTIONS UNDER THE PLAN Participant Contributions. Each Participant in the Plan is permitted to elect to reduce such Participant's Compensation (hereinafter defined) pursuant to a salary reduction agreement by an amount not less than $5.00 per pay period nor more than 15% and have that amount contributed to the Plan on such Participant's behalf ("Deferred Compensation"). Such amounts are credited to the Participant's 401(k) Account. For purposes of the Plan, "Compensation" means a Participant's slaray as reported on their W-2 ("Basic Salary"). The annual compensation of each Participant taken into account under the Plan is limited to $160,000 (adjusted for cost of living as permitted by the Code). A Participant may elect quarterly to modify the amount contributed to the Plan under such Participant's salary reduction agreement. Deferred Compensation contributions are generally transferred by the Company to the Trustee of the Plan monthly. A Participant is always 100% vested in the Deferred Compensation amounts in his 401(k) Account. -4- 11 Profit Sharing Contributions. The Company may make a discretionary contribution to the Plan annually in an amount not to exceed 15% of the total Compensation received by all Participants (a "Profit Sharing Contribution"). All contributions, including Deferred Compensation amounts are counted towards the 15% maximum. The Company may choose not to make a Profit Sharing Contribution in any given Plan Year. The total Profit Sharing Contribution made by the Company during a Plan Year is allocated among Participants in the same proportion as each Participant's Compensation bears to the total Compensation paid to Participants during the Plan year. A Participant must be an employee of the company on the last day of the Plan Year to receive an Employer contribution. A Participant is 100% vested in the Profit Sharing Contributions to his 401(k) Account after five years of service with the Company. Matching Contributions. The Company may make discretionary matching contributions ("Matching Contributions") to the Plan on behalf of Participants who make elective deferrals to the Plan. The Company may contribute an amount to a Participant's 401k) Account each year based on a percentage of a Participant's Deferred Compensation amount. A Participant is 100% vested in the Matching Contributions in his 401(k) Account after five years of service with the Company. Qualified Matching Contributions. The Company may make "qualified" matching contributions ("Qualified Matching Contributions") to the Plan on behalf of all Participants who are not Highly-Compensated Employees (hereinafter defined) and who are not officers of the Company. The Company's discretionary contribution will be based on a percentage of a Participant's Deferred Compensation amount. A Participant is always 100% vested in the Qualified Matching Contribution amounts in his 401(k) Account. Qualified Non-Elective Contributions. The Company may make discretionary qualified non-elective contributions ("Qualified Non-Elective Contributions") to the Plan. Allocations of Qualified Non-Elective Contributions are made to the 401(k) Accounts of Participants who are not Highly-Compensated Employees or officers of the Company and are based on the ratio each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. A Participant is always 100% vested in the Qualified Non-Elective Contribution amounts in his 401(k) Account. Rollover Amount from Other Plans. An employee who has received a distribution from another plan qualified under Section 401(a) of the Code may, in accordance with Section 402(c) of the Code and procedures approved at the discretion of the Trustee, transfer the distribution received from the other plan to the Trustee. Any amounts rolled over from another plan will be contributed to the employee's "Rollover Account." Transfers from Other Plans. An employee who has cash, or other property representing an interest in another plan qualified under Section 401(a) of the Code may, in accordance with Section 402(c) of the Code and procedures approved at the discretion of the Trustee, transfer the cash or other property from the other plan to the Trustee in a Trustee-to-Trustee, Custodian-to- -5- 12 Trustee or Custodian-to-Custodian transfer. Any amounts transferred from another plan will be contributed to the Participant's 401(k) Account. LIMITATIONS ON CONTRIBUTIONS Limitations on Annual Additions and Benefits. Pursuant to the requirements of the Code, the Plan provides that the amount of contributions and forfeitures allocated to each Participant's 401(k) Account during any Plan Year may not exceed the lesser of 25% of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (adjusted for increases in the cost of living as permitted by the Code). A Participant's "Section 415 Compensation" is a Participant's Compensation, excluding any Employer contribution to the Plan or to any other plan of deferred compensation or any distributions from a plan of deferred compensation. In addition, annual additions shall be limited to the extent necessary to prevent the limitations set forth in the Code for all of the qualified defined benefit plans and defined contribution plans maintained by the Company from being exceeded. To the extent that these limitations would be exceeded by reason of excess annual additions to the Plan with respect to a Participant, such excess will be disposed of in accordance with procedures set forth in the Plan. However, if the annual addition limitations are exceeded with respect to a Participant in both the Plan and the defined benefit pension plan and employee stock ownership plan maintained by the Company, the Participant's annual additions under the Plan will be reduced. Limitation on 401(k) Plan Contributions. The annual amount of Deferred Compensation of a Participant (when aggregated with any elective deferrals of the Participant under any other employer plan, a simplified employee pension plan or a tax deferred annuity) may not exceed $10,000, adjusted for increases in the cost of living as permitted by the Code. Contributions in excess of this limitation ("Excess Deferrals") will be included in the Participant's gross income for federal income tax purposes in the year they are made. In addition, any such Excess Deferral will again be subject to federal income tax when distributed by the Plan to the Participant, unless the Excess Deferral (together with any income allocable thereto) is distributed to the Participant not later than the first April 15th following the close of the taxable year in which the Excess Deferral is made. Any income on the Excess Deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the Participant in the taxable year in which the Excess Deferral is made. Limitation on Plan Contributions for Highly Compensated Employees. Sections 401(k) and 401(m) of the Code limit the amount of Deferred Compensation that may be contributed to the Plan in any Plan Year on behalf of Highly Compensated Employees in relation to the amount of Deferred Compensation contributed by or on behalf of all other employees eligible to participate in the Plan. Specifically, the actual deferral percentage for a plan year (i.e., the average of the ratios, calculated separately for each eligible employee in each group, by dividing the amount of Deferred Compensation credited to the 401(k) Account of such eligible employee by such eligible employees compensation for the Plan Year) of the Highly Compensated Employees may not exceed the greater of (a) 125% of the actual deferral percentage of all other eligible employees, or (b) the lesser of (i) 200% of the actual deferral percentage of all other -6- 13 eligible employees, or (ii) the actual deferral percentage of all other eligible employees plus two percentage points. In general, a Highly Compensated Employee includes any employee who, during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e., owns directly or indirectly more than 5% of the shares of the Employer or shares possessing more than 5% of the total combined voting power of all stock of the Employer) or (2) for the preceding year (a) received compensation from the Employer in excess of $80,000 (as adjusted periodically under applicable Code provisions), and (b) if the Employer elects the application of this clause for such preceding year, was in the top-paid group of employees for such preceding year. An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20% of employees when ranked on the basis of compensation paid during such year. Such amounts are adjusted annually to reflect increases in the cost of living. In order to prevent the disqualification of the Plan, any amounts contributed by Highly Compensated Employees that exceed the average deferral limitation in any Plan Year ("Excess Contributions"), together with any income allocable thereto, must be distributed to such Highly Compensated Employees before the close of the following Plan Year. However, the Company will be subject to a 10% excise tax on any Excess Contributions unless such Excess Contributions, together with any income allocable thereto, either are recharacterized or are distributed before the close of the first two and a half months following the Plan Year to which such Excess Contributions related. Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy Plan (hereinafter defined), then (i) the Company may be required to make certain minimum contributions to the Plan on behalf of Non-Key Employees (hereinafter defined), and (ii) certain additional restrictions would apply with respect to the combination of annual additions to the Plan and projected annual benefits under any defined benefit plan or employee stock ownership plan maintained by the Company. In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan Year if, as of the last day of the preceding Plan Year, the aggregate balance of the Accounts of Participants who are Key Employees exceeds 60% of the aggregate balance of the Accounts of all Participants. "Key Employees" generally include any employee who, at any time during the Plan Year or any of the four preceding Plan Years, is (l) an officer of the Company having annual compensation in excess of $____________ (for 1998) who is in an administrative or policy-making capacity, (2) one of the ten employees having annual compensation in excess of $30,000 and owning, directly or indirectly, the largest interests in the Employer; (3) a 5% owner of the Employer, (i.e., owns directly or indirectly more than 5% of the shares of the Employer, or shares possessing more than 5% of the total combined voting power of all stock of the Employer or (4) a 1% owner of the Employer having annual compensation in excess of $______ (for 1998). -7- 14 INVESTMENT OF CONTRIBUTIONS All amounts credited to Participants' Accounts under the Plan are held in a custodial account (the "Custodial Account") of which McDonald & Company Securities, Inc. is the Custodian (the "Custodian"). The Custodian is appointed by the Trustee. The Plan provides that a Participant may direct the Trustee to invest all or a portion of his Accounts in various managed investment portfolios, described below. A Participant may elect to change his investment directions regarding both past contributions and for more additions to the Participant's accounts invested in these investment alternatives, as allowed by the Plan. Under the Plan, prior to the effective date of the Conversion, the 401(k) Account of a Participant held in the Trust will be invested by the Trustee at the direction of the Participant in the following managed portfolios: AIM Balanced Fund A The fund seeks to provide the highest return possible consistent with preservation of capital, by investing in a broadly diversified portfolio of high-yielding securities, including common stocks, preferred stocks, convertible securities and bonds. Although equity securities are purchased primarily for capital appreciation and fixed income securities purchased primarily for income purposes, income and capital appreciation potential are considered with all investments. AIM Charter Fund A The primary investment objective of the fund is capital appreciation; current income is a secondary objective. The fund invests primarily in dividend-paying common stocks which have prospects for both growth of capital and dividend income. AIM Income Fund A The fund seeks a high level of current income consistent with reasonable concern for safety of principal, by investing primarily in fixed-rate corporate debt and U.S. Government obligations. The fund may also invest in preferred stock issues and convertible corporate debt. The percent of the fund's assets in various types of securities will vary in light of the fund's investment objective and existing conditions. The fund may invest up to 40% of its assets in securities issued by foreign entities. AIM International Equity A The investment objective is to seek to provide long-term growth of capital by investing in a diversified portfolio of international equity securities considered to have strong earnings momentum. Any income realized by the fund will be incidental. Under normal market conditions the fund will invest at least 80% of its total assets in marketable equity securities of foreign companies which, with their predecessors, have been in continuous -8- 15 operation for three years or more and which are listed on a recognized foreign securities exchange or traded in a foreign over-the counter market. It is expected that the fund's portfolio will generally be comprised of two basic categories of foreign companies: "core" companies, which AIM considers to have experienced consistent long-term growth in earnings and to have strong prospects for outstanding future growth, and companies that AIM believes are currently experiencing a greater than anticipated increase in earnings. AIM Value Fund A AIM Value Fund seeks long-term growth of capital. It will invest primarily in equity securities judged to be undervalued relative to the investment advisor's appraisal of the current or projected earnings of the companies issuing the securities, or relative to current market values of assets owned by the companies issuing the securities, or relative to the equity market generally. Income is a secondary objective. The primary thrust of AIM's search for undervalued equity securities is in four categories: (1) out-of-favor cyclical growth companies; (2) established growth companies that are undervalued; (3) companies with evidence of improving prospects; and (4) companies whose equity securities are selling at prices that do not reflect the current market value of their assets. AIM Money Market Fund This is a money market fund which is very similar to a savings account. The only source of growth is interest earned on your balance. A money market fund is generally regarded as a short-term investment to be used prior to utilizing a more long-term investment alternative such as a stock fund or bond fund. Additionally, a money fund may be utilized as a small portion of a balanced approach to investing your account. The trust's portfolio represents a high-quality selection of money market instruments such as U.S. Treasury bills, commercial paper and certificates of deposit. Because of the very short-term nature of these investments, this is the most conservative investment option. Consequently, it is also the investment option that may provide the least opportunity for the growth of an account. Effective upon the Conversion, a Participant may invest all or a portion of his Accounts in the portfolios described above and in the fund, described below: -9- 16 United Community Financial Employer Stock Fund which invests in Corp. Common Stock common shares, without par value, of United Community Financial Corp., the holding company of the Employer, an Ohio savings and loan association. A Participant may elect (in amounts not less than $5.00) to have both past and future contributions and additions to the Participant's 401(k) Account invested either in the Employer Stock Fund or in such other managed portfolios listed above. These elections will generally be effective the business day coinciding with or next following the day of the plan administrator's receipt of such investment directions. Any amounts credited to a Participant's 401(k) Accounts for which investment directions are not given will be invested in ________________. Because investment allocations only are required to be made in increments of 1%, Participants can invest their 401(k) Accounts in each of the available investment funds. The net gain (or loss) in the 401(k) Accounts from investments other than the Employer Stock Fund (including interest payments, dividends, realized and unrealized gains and losses on securities, and expenses paid from the Trust) are determined daily during the Plan Year. Net gain (or loss) in the 401(k) Account from investments (including interest, dividends, realized and unrealized gain and expenses paid) from the Employer Stock Fund will be determined quarterly. For purposes of such allocations, all assets of the Trust are valued at their fair market value. A. Funds under the Plan Prior to the Conversion. Prior to the Conversion, contributions under the Plan were invested in the five funds listed below. The annual percentage of returns on these funds, calculated prior to any fees being charged to the portfolio for 1995, 1996 and 1997 were:
1997 1996 1995 ---- ---- ---- A. AIM Balanced Fund A 24.41% 19.25% 34.98% B. AIM Charter Fund A 24.73 19.58 35.68 C. AIM Income Fund A 11.92 8.58 22.03 D. AIM International Equity A 5.70 18.98 16.41 E. AIM Value Fund A 23.95 14.52 34.85
B. The Employer Stock Fund. The Employer Stock Fund will consist of investments in Common Shares made on and after the effective date of the Conversion. Any cash dividends paid on Common Shares held in the Employer Stock Fund will be credited to a cash dividend subaccount for each Participant investing in the Employer Stock Fund. The Trustee will, to the extent practicable, use all amounts held by it in the Employer Stock Fund (except the amounts credited to cash dividend subaccounts) to purchase Common Shares. It is expected that all purchases will be made at prevailing market prices. Under certain circumstances, the Trustee may be required to limit the -10- 17 daily volume of shares purchased. Pending investment in Common Shares, assets held in the Employer Stock Fund will be placed in bank deposits and other short-term investments. When Common Shares are purchased or sold, the cost or net proceeds will be charged or credited to the 401(k) Accounts of Participants affected by the purchase or sale. The Company expects that Participants will pay any brokerage commissions, transfer fees and other expenses incurred in the sale and purchase of Common Shares for the Employer Stock Fund. A Participant's 401(k) Account will be adjusted to reflect changes in the value of Common Shares resulting from stock dividends, stock splits and similar changes. To the extent dividends are not paid on Common Shares held in the Employer Stock Fund, the return on any investment in the Employer Stock Fund will consist only of the market value appreciation of the Common Shares subsequent to their purchase. Following the Conversion, the Board of Directors of the Holding Company may consider a policy of paying dividends on the Common Shares, however, no decision has been made by the Board of Directors of the Holding Company regarding the amount or timing of dividends, if any. See "DIVIDEND POLICY" in the Prospectus. As of the date of this Prospectus Supplement, with the exception of 100 Common Shares issued to the President of the Holding Company for incorporation purposes, none of the Common Shares have been issued or are outstanding and there is no established market for the Common Shares. Accordingly, there is no record of the historical performance of the Employer Stock Fund. Investments in the Employer Stock Fund may involve certain special risks associated with investments in Common Shares of the Holding Company. For a discussion of these risk factors, see "RISK FACTORS" beginning on page ___ in the Prospectus. BENEFITS UNDER THE PLAN Vesting. A Participant has at all times a fully vested, nonforfeitable interest in all of the Deferred Compensation, Qualified Matching Contributions and Qualified Non-Elective Contributions in his 401(k) Account and Rollover Account and the earnings thereon under the Plan. Generally a Participant is not vested in any part of his interest in his Matching Contribution and Profit Sharing Contributions in his 401(k) Account until after five years of service to the Company at which time the Participant is 100% vested in these interests. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2 UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE COMPANY. -11- 18 Withdrawals Prior to Termination of Employment. In certain circumstances, a Participant may make a withdrawal from his 401(k) Account under the Plan pursuant to the hardship distribution rules under the Plan. These rules are intended to insure that Participants have a true financial need before a withdrawal may be made. A Participant may also make a withdrawal of Deferred Compensation from his 401(k) Account after the age of 59-1/2. Loans to Participants. The Plan allows Participants to borrow money from the Plan. No loan to any Participant can be made to the extent that such loan, when added to the outstanding balance of all other loans to the Participant, would exceed the lesser of (1) $50,000 reduced by the highest outstanding balance of loans during the one-year period ending on the day before the loan is made, or (2) one-half of the present value of the non-forfeitable accrued benefit of the Participant's 401(k) Account. Each loan has a term of not more than 5 years and is payable not less frequently than quarterly, unless the purpose of the loan is the purchase of a residence which within a reasonable period of time from the date of the loan is to be used as the Participant's principal residence. The interest rate charged for each loan is established as of the loan date and is the rate as may be required by applicable law and determined by reference to the prevailing interest rates charged by commercial lenders under similar circumstances. Required payments on the loan cannot be deducted from a 401(k) Account and must be paid in cash, even if a Participant's employment with the Company terminates. The Plan requires the Plan Administrator to take legal action against a Participant if he fails to comply with the terms of the Loan. Distribution Upon Retirement, Disability or Termination of Employment. Payment of benefits to a Participant who retires, incurs a disability, or otherwise terminates employment, generally shall be made in a lump sum cash payment. At the request of the Participant, the distribution may include an in-kind distribution of Common Shares of the Holding Company credited to the Participant's Account. A Participant may elect, in lieu of a lump sum payment, to be paid in payments over a period certain in monthly, quarterly, semi-annual or annual cash installments. Benefit payments ordinarily shall be made not later than 60 days following the end of the Plan Year in which occurs the later of the Participant's (i) termination of employment; (ii) attainment of age 65; or (iii) 10th anniversary of commencement of participation in the Plan; but in no event later than the April 1, following the calendar year in which the Participant attains age 70-1/2. However, if the vested portion of the Participant's 401(k) Account balances exceeds $5,000, no distribution shall be made from the Plan prior to the Participant's attaining age 65 unless the Participant consents to an earlier distribution. Special restrictions apply to the distribution of Common Shares of the Holding Company to those Participants who are executive officers, directors and principal shareholders of the Holding Company who are subject to the provisions of Section 16(b) of the Exchange Act. Distribution upon Death. A Participant who dies prior to the benefit commencement date or retirement, disability or termination of employment, and who has a surviving spouse, shall have 100% of benefits, regardless of the number of years worked, paid to the surviving spouse in a lump sum by the end of the fifth Plan year following the date of his death, or the surviving spouse may elect another form of payment upon the death of the Participant. Notwithstanding -12- 19 the foregoing, if the payment of the Participant's benefit had commenced before his death, such payments will continue in accordance with the distribution method in effect at death. With respect to an unmarried Participant, and in the case of a married Participant with spousal consent to the designation of another beneficiary, payment of benefits to the beneficiary of a deceased Participant shall be made in the form of a lump-sum payment in cash or in Common Shares, or, if the payment of his benefit had commenced before his death, in accordance with the distribution method in effect at death. Nonalienation of Benefits. Except with respect to federal income tax withholding and as provided with respect to a qualified domestic relations order (as defined in the Code), benefits payable under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, bankruptcy, pledge, encumbrance, attachment charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the Plan shall be void. ADMINISTRATION OF THE PLAN Trustee. The Trustee with respect to the Plan is the named fiduciary of the Plan for purposes of Section 402 of ERISA. The current trustee of the Plan is Riggs Bank, N.A. Pursuant to the terms of the Plan, the Trustee receives and holds contributions to the Plan in trust and has exclusive authority and discretion to manage and control the assets of the Plan pursuant to the terms of the Plan and to manage, invest and reinvest the Trust assets and income therefrom. The Trustee has the authority to invest and reinvest the Trust assets and may sell or otherwise dispose of Trust investments at any time and may hold trust funds uninvested. The Trustee has authority to invest the assets of the Trust in "any type of property, investment or security" as defined under ERISA. The Trustee has full power to vote any corporate securities in the Trust in person or by proxy, provided, however, that the Plan Administrator shall direct the Trustee as to voting and tendering of all Common Shares held in the Employer Stock Fund. The Trustee is entitled to reasonable compensation for its services and is also entitled to reimbursement for expenses properly and actually incurred in the administration of the Trust. The expenses of the Trustee and the compensation of the persons so employed is paid out of the Trust except to the extent such expenses and compensation are paid by the Company. The Trustee must render at least annual reports to the Company and to the Participants in such form and containing information that the Trustee deems necessary. REPORTS TO PLAN PARTICIPANTS The Custodian will furnish to each Participant a statement at least quarterly showing (i) the balance in the Participant's Account as of the end of that period, (ii) the amount of -13- 20 contributions allocated to such Participant's Account for that period, and (iii) the adjustments to such Participant's Account to reflect earnings or losses (if any). PLAN ADMINISTRATOR Pursuant to the terms of the Plan, the Plan Administrator is the Board of Directors of the Company. The Administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of plan records, books of account and all other data necessary for the proper administration of the Plan, and preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the IRS, and for all disclosures required to be made to Participants, beneficiaries and others under Sections 104 and 105 of ERISA. AMENDMENT AND TERMINATION The Company may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, each employee who ceases to be a Participant shall have a fully vested interest in his Account. The Company reserves the right to make, from time to time, any amendment or amendments to the Plan which do not cause any part of the Trust to be used for, or diverted to, any purpose other than the exclusive benefit of the Participants or their beneficiaries. MERGER, CONSOLIDATION OR TRANSFER In the event of the merger or consolidation of the Plan with another plan, or the transfer of the Trust to another plan, the Plan requires that each Participant (if either the Plan or the other plan had then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan or the other plan had then terminated). FEDERAL INCOME TAX CONSEQUENCES The following is only a brief summary of the material federal income tax aspects of the Plan which are of general application under the Code and is not intended to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the Plan. The summary is necessarily general in nature and does not purport to be complete. Moreover, statutory provisions are subject to change, as are their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. -14- 21 PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING DISTRIBUTIONS FROM THE PLAN. The Plan will be submitted to the IRS for a determination that it is qualified under Section 401(a) and 401(k) of the Code, and that the related Trust is exempt from tax under Section 501(a) of the Code. A plan that is "qualified" under these sections of the Code is afforded special tax treatment which include the following: (l) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year: (2) participants pay no current income tax on amounts contributed by the employer on their behalf: and (3) earnings of the Plan are tax-exempt thereby permitting the tax-free accumulation of income and gains on investments. The Plan will be administered to comply in operation with the requirements of the Code as of the applicable effective date of any change in the law. Assuming that the Plan is administered in accordance with the requirements of the Code and that the IRS issues a favorable determination as described in the preceding paragraph, participation in the Plan under existing federal income tax laws will have the following effects; (a) Amounts contributed to a Participant's 401(k) Account and the investment earnings on this Account are not includable in a Participant's federal taxable income until such contributions or earnings are actually distributed or withdrawn from the Plan. Special tax treatment may apply to the taxable portion of any distribution that includes Common Shares or qualifies as a Lump Sum Distribution (hereinafter defined). (b) Income earned on assets held by the Trust will not be taxable to the Trust. Lump Sum Distribution. A distribution from the Plan to a Participant or the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is made: (i) within a single taxable year of the Participant or beneficiary; (ii) on account of the Participant's death or separation from service, or after the Participant attains age 59-1/2; and (iii) consists of the balance to the credit of the Participant under the Plan and all other profit-sharing plans, if any, maintained by the Company. The portion of any Lump Sum Distribution that is required to be included in the Participant's or beneficiary's taxable income for federal income tax purposes (the "total taxable amount") consists of the entire amount of such Lump Sum Distribution less the amount of after-tax contributions, if any, made by the Participant to any other profit-sharing plans maintained by the Company which is included in such distribution. Averaging Rules. The portion of the total taxable amount of a Lump Sum Distribution (the "ordinary income portion") will be taxable generally as ordinary income for federal income tax purposes. However, a Participant who has completed at least five years of participation in the Plan before the taxable year in which the distribution is made, or a beneficiary who receives a Lump Sum Distribution on account of the Participant's death (regardless of the period of the Participant's participation in the Plan or any other profit-sharing plan maintained by the Employer), may elect for distributions made prior to January 1, 2000, to have the ordinary -15- 22 income portion of such Lump Sum Distribution taxed according to a special averaging rule ("five-year averaging"). The election of the special averaging rules may apply only to one Lump Sum Distribution received by the Participant or beneficiary, provided such amount is received on or after the Participant turns 59-1/2 and the recipient elects to have any other Lump Sum Distribution from a qualified plan received in the same taxable year taxed under the special averaging rule. Under a special grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under either the five-year averaging rule or under the prior law ten-year averaging rule. Such individuals also may elect to have that portion of the Lump Sum Distribution attributable to the Participant's pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the sale of a capital asset. Common Shares Included in Lump Sum Distribution. If a Lump Sum Distribution includes Common Shares, the distribution generally will be taxed in the manner described above, except that the total taxable amount will be reduced by the amount of any net unrealized appreciation with respect to such Common Shares, i.e., the excess of the value of such Common Shares at the time of the distribution over its cost to the Plan. The tax basis of such Common Shares to the Participant or beneficiary for purposes of computing gain or loss on its subsequent sale will be the value of the Common Shares at the time of distribution less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of such Common Shares to the extent of the amount of net unrealized appreciation at the time of distribution will be considered long-term capital gain regardless of the holding period of such Common Shares. Any gain on a subsequent sale or other taxable disposition of the Common Shares in excess of the amount of net unrealized appreciation at the time of distribution will be considered either short-term capital gain or long-term capital gain depending upon the length of the holding period of the Common Shares. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of such distribution to the extent allowed by the regulations to be issued by the IRS. Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. Virtually all distributions from the Plan may be rolled over to another qualified plan or to an IRA without regard to whether the distribution is a Lump Sum Distribution or a Partial Distribution. Participants have the right to elect to have the Trustee transfer all or any portion of an "eligible rollover distribution" directly to another plan qualified under Section 401(a) of the Code or to an IRA. If the Participant does not elect to have an "eligible rollover distribution" transferred directly to another qualified plan or to an IRA, the distribution will be subject to a mandatory federal withholding tax equal to 20% of the taxable distribution. An "eligible rollover distribution" means any amount distributed from the Plan except: (l) a distribution that is (a) one of a series of substantially equal periodic payments made (not less frequently than annually) over the Participant's life or the joint life of the Participant and the Participant's designated beneficiary, or (b) for a specified period of ten years or more; (2) any amount that is required to be distributed under the minimum distribution rules; and (3) any other distributions excepted under applicable federal law. The tax law change described above did not modify the special tax treatment of Lump Sum Distributions that are not rolled over or transferred i.e., forward averaging, capital gains tax treatment and the nonrecognition of net unrealized appreciation discussed earlier. -16- 23 Additional Tax on Early Distributions. A Participant who receives a distribution from the Plan prior to attaining age 59-1/2 will be subject to an additional income tax equal to 10% of the taxable amount of the distribution. The 10% additional income tax will not apply, however, to the extent the distribution is rolled over into an IRA or another qualified plan or the distribution is (i) made to a beneficiary (or to the estate of a Participant) on or after the death of the Participant, (ii) attributable to the Participant being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and his beneficiary; (iv) made to the Participant after separation from service after attainment of age 55; (v) made to pay medical expenses to the extent deductible for federal income tax purposes; (vi) pursuant to a qualified domestic relations order; or (vii) made to effect the distribution of excess contributions or excess deferrals. ERISA AND OTHER QUALIFICATIONS As noted above, the Plan is subject to certain provisions of ERISA and will be submitted to the IRS for a determination that the Plan is qualified under Section 401(a) of the Code. THE FOREGOING IS ONLY A BRIEF SUMMARY OF THE MATERIAL FEDERAL INCOME TAX ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN. ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING DISTRIBUTIONS FROM THE PLAN. RESTRICTIONS ON RESALE Common Shares received by executive officers of the Holding Company under the Plan will be subject to the restriction that such shares may not be sold for a period of one year following completion of the Conversion, except in the event of the death of the shareholder. Any shares issued as a stock dividend, stock split or otherwise in respect of restricted shares will be subject to the same restrictions. Subject to certain exceptions, for a period of three years following the Conversion, no director or officer of the Holding Company or the Company, or any of their Associates, may purchase any common shares of the Holding Company without the prior written approval of the OTS, except through a broker-dealer registered with the SEC. This restriction will not apply, however, to negotiated transactions involving more than 1% of a class of outstanding common shares of the Holding Company or shares acquired by any stock benefit plan of the Holding Company or the Company. -17- 24 The Common Shares, like the stock of most public companies, are subject to the registration requirements of the Act. Accordingly, the Common Shares may be offered and sold only in compliance with such registration requirements or pursuant to an applicable exemption from registration. Common Shares received in the Conversion under the Plan by persons who are not "affiliates" of the Holding Company may be resold without registration. Common Shares received under the Plan by affiliates of the Holding Company will be subject to resale restrictions. An "affiliate" of the Holding Company, for purposes of Rule 144, is a person who directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the Holding Company. Rule 144 generally requires that there be publicly available certain information concerning the Holding Company and that sales subject to Rule 144 be made in routine brokerage transactions or through a market maker. If the conditions of Rule 144 are satisfied, each affiliate (or group of persons acting in concert with one or more affiliates) is generally entitled to sell in the public market, without registration, in any three-month period, a number of shares which does not exceed the greater of (i) 1% of the number of outstanding shares of the Holding Company or (ii) if the shares are admitted to trading on a national securities exchange or reported through the automated quotation system of a registered securities association, such as The Nasdaq SmallCap Market, the average weekly reported volume of trading during the four weeks preceding the sale. SEC REPORTING AND SHORT-SWING PROFIT LIABILITY Section 16 of the Exchange Act imposes reporting and liability requirements on executive officers, directors and persons beneficially owning more than ten percent of public companies such as the Holding Company. Section 16(a) of the Exchange Act requires the filing of reports of beneficial ownership. Within ten days of becoming a person subject to the reporting requirements of Section 16(a), a Form 3 reporting initial beneficial ownership must be filed with the SEC. Certain changes in beneficial ownership, such as purchases, sales, gifts and participation in savings and retirement plans must be reported periodically, either on a Form 4 within ten days after the end of the month in which a change occurs, or annually on a Form 5 within 45 days after the close of the Holding Company's fiscal year. Participation in the Employer Stock Fund of the Plan by executive officers, directors and persons beneficially owning more than ten percent of Common Stock of the Holding Company must be reported to the SEC annually on a Form 5 by such individuals. In addition to the reporting requirements described above, Section 16(b) of the Exchange Act provides for the recovery by the Holding Company of profits realized by any officer, director or any person beneficially owning more than ten percent of the Holding Company's Common Shares ("Section 16(b) Persons") resulting from the purchase and sale or sale and purchase of the Holding Company's Common Shares within any six-month period. The SEC has adopted rules that provides exemption from the profit recovery provisions of Section 16(b) for Participant-directed employer security transactions within an employee benefit plan, such as the Plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer Securities for the accounts of Section 16(b) Persons. -18- 25 Except for distributions of Common Shares due to death, disability, retirement, termination of employment or under a qualified domestic relations order under the Plan, Section 16( b) Persons are required to hold Common Shares distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases of units within the Employer Stock Fund for six months after receiving such a distribution. Finally, the Plan provides that Section 16(b) Persons who terminate their participation in the Plan may not rejoin the Plan for six months following the date of their termination. These Plan restrictions conform with the rules issued by the SEC to exempt transactions in the Plan from becoming subject to the profit-recovery rules of Section 16(b) of the Exchange Act. LEGAL OPINIONS Certain legal matters pertaining to the Common Shares are being passed upon for the Holding Company by Vorys, Sater, Seymour and Pease, Cincinnati, Ohio. -19- 26 PROSPECTUS UNITED COMMUNITY FINANCIAL CORP. (PROPOSED HOLDING COMPANY FOR THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO) UP TO 28,937,500 COMMON SHARES, $10 PURCHASE PRICE PER SHARE United Community Financial Corp., an Ohio corporation (the "Holding Company"), is hereby offering up to 28,937,500 common shares, without par value (the "Common Shares"), in connection with the conversion of The Home Savings and Loan Company of Youngstown, Ohio (the "Company"), from a mutual savings and loan association to a permanent capital stock savings and loan association incorporated under Ohio law (the "Conversion"). Subject to the rights and restrictions established by the Company's Amended Plan of Conversion (the "Plan"), Common Shares are offered hereby at a price of $10 per share in a subscription offering (the "Subscription Offering") to (a) each account holder who, at the close of business on July 31, 1996 (the "Eligibility Record Date"), had one or more deposit accounts with deposit balances, in the aggregate, of $50 or more (a "Qualifying Deposit") with the Company (the "Eligible Account Holders"), (b) the United Community Financial Corp. Employee Stock Ownership Plan (the "ESOP"), (c) each account holder who, at the close of business on March 31, 1998 (the "Supplemental Eligibility Record Date"), had a Qualifying Deposit with the Company (the "Supplemental Eligible Account Holders"), (d) members of the Company eligible to vote at the Special Meeting ("Other Eligible Members") and (e) directors, officers and employees of the Company. ALL SUBSCRIPTION RIGHTS TO PURCHASE COMMON SHARES IN THE SUBSCRIPTION OFFERING ARE NONTRANSFERABLE AND WILL EXPIRE AT 12:00 NOON, EASTERN DAYLIGHT TIME, ON _____ ___, 1998 (THE "SUBSCRIPTION EXPIRATION DATE"). PERSONS TRANSFERRING SUBSCRIPTION RIGHTS OR SUBSCRIBING FOR COMMON SHARES ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION (THE "OTS"). SEE "THE CONVERSION - SUBSCRIPTION OFFERING." To the extent that all of the Common Shares are not subscribed for in the Subscription Offering, the remaining Common Shares may be offered to the general public in a direct community offering in which preference will be given to natural persons residing in Mahoning, Columbiana and Trumbull Counties, Ohio (the "Community Offering"). See "THE CONVERSION - Community Offering." Shares not subscribed for in the Subscription Offering and the Community Offering may be offered to members of the general public in a syndicated public offering (the "Public Offering"). (Continued on next page) THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OTS, THE DIVISION OF FINANCIAL INSTITUTIONS OF THE DEPARTMENT OF COMMERCE OF THE STATE OF OHIO (THE "DIVISION"), OR THE SECURITIES COMMISSION OF ANY STATE, NOR HAS THE SEC, THE OTS, THE DIVISION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN RISKS. FOR A DISCUSSION OF THE RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS. FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION INFORMATION CENTER AT (330) 747-1111.
============================================================================================================================ Subscription Estimated Expenses and Estimated Net Price (1) Underwriting Commissions (2) Proceeds - ---------------------------------------------------------------------------------------------------------------------------- Per share Minimum $10.00 $0.15 $9.85 Per share Mid-point $10.00 $0.14 $9.86 Per share Maximum $10.00 $0.13 $9.87 Per share Maximum, as adjusted $10.00 $0.13 $9.87 Total Minimum $212,500,000 $3,172,000 $209,328,000 Total Mid-point $250,000,000 $3,500,000 $246,500,000 Total Maximum $289,375,000 $3,845,000 $285,535,000 Total Maximum, as adjusted $334,656,250 $4,240,000 $330,416,250 ============================================================================================================================
(1) The aggregate Subscription Price is based on an independent appraisal of the pro forma market value of the Holding Company and the Company, as converted, reduced to reflect the intended contribution of up to 1,250,000 common shares to the Home Savings Charitable Foundation (the "Foundation"). As of February 24, 1998, the independent appraiser's valuation of the pro forma value of the Company, as converted, and the Holding Company and giving effect to the contribution to the Foundation, was $262,500,000, resulting in a range of values from a minimum of $223,125,000 to a maximum of $301,875,000, with an adjusted maximum, based on OTS regulations, of $347,156,250. As a result of the contribution of shares to the Foundation, the actual amount of the Offering ranges from a minimum of $212,500,000 to a maximum of $289,375,000 (the "Adjusted Valuation Range"), with an adjusted maximum of $334,656,250. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold; and - Contribution to the Foundation" and "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." The additional shares available for sale pursuant to the adjusted maximum of the Adjusted Valuation Range may be sold without the resolicitation of persons who subscribe for Common Shares in the Subscription Offering and the Community Offering. The actual number of Common Shares to be sold in connection with the Conversion will be based upon the final valuation of the Company, as converted and the Holding Company, as determined by an independent appraiser upon the completion of the Offering. See "THE CONVERSION Pricing and Number of Common Shares to be Sold." (2) Expenses of the Conversion payable by the Company and the Holding Company include legal, accounting, appraisal, printing, mailing and miscellaneous expenses. Such expenses also include sales commissions, estimated to be between $1,819,250 and $2,886,896, and reimbursable expenses payable to Trident Securities, Inc. ("Trident"), McDonald & Company Securities, Inc. ("McDonald & Company") and CIBC Oppenheimer Corp. ("Oppenheimer"). Such sales commissions may be deemed to be underwriting fees, although Trident, McDonald & Company and Oppenheimer will solicit subscriptions for the Common Shares on a "best efforts" basis only and have no obligation to purchase any of the Common Shares. See "THE CONVERSION - Plan of Distribution." Actual expenses may vary from the estimates. TRIDENT SECURITIES, INC. MCDONALD & COMPANY SECURITIES, INC. CIBC OPPENHEIMER CORP. The date of this Prospectus is May ___, 1998. 27 The Subscription Offering, the Community Offering and the Public Offering are referred to collectively in this Prospectus as the "Offering." The minimum number of Common Shares any person may purchase in the Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. In the event shares are available for the Community Offering or the Public Offering, each person, together with any Associate (hereinafter defined) or other persons Acting in Concert (hereinafter defined), may purchase in the Community Offering and the Public Offering up to 35,000 Common Shares. Except for the ESOP, which may purchase up to 10% of the total Common Shares sold in the Offering and contributed to the Foundation, no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1% of the Common Shares sold in the Offering. Subject to OTS regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors of the Holding Company and the Company. If the purchase limitations are increased after the commencement of the Subscription Offering, persons who have subscribed for the maximum amount will be given the opportunity to increase their subscriptions. See "THE CONVERSION - Limitations on Purchases of Common Shares." Common Shares may be subscribed for in the Offering only by returning the accompanying Stock Order Form and Certification Form (the "Stock Order Form"), along with full payment of the purchase price per share for all Common Shares subscribed for, so that it is received by the Company no later than 12:00 noon, Eastern Daylight Time, on June __, 1998. Payment for Common Shares may be made (i) in cash, if delivered in person; (ii) by check, bank draft, or money order made payable to the Company; or (iii) by authorization of withdrawal from deposit accounts in the Company. Once tendered, subscription orders cannot be revoked without the consent of the Company or the Holding Company. No payments by wire transfer will be accepted. The Holding Company is not obligated to accept orders submitted on photocopied or telecopied Stock Order Forms. See "THE CONVERSION - Use of Stock Order Forms; and - Payment for Common Shares." THE COMPLETION OF THE CONVERSION IS CONTINGENT UPON (I) THE APPROVAL OF THE PLAN AND THE ADOPTION OF AMENDED ARTICLES OF INCORPORATION AND AN AMENDED CONSTITUTION BY THE COMPANY'S VOTING MEMBERS AT A SPECIAL MEETING OF MEMBERS OF THE COMPANY TO BE HELD AT ___:00 __.M., EASTERN DAYLIGHT TIME, ON JUNE ___, 1998, AT _______________________, YOUNGSTOWN, OHIO (THE "SPECIAL MEETING"), (II) THE SALE OF THE REQUISITE NUMBER OF COMMON SHARES AND (III) CERTAIN OTHER FACTORS. SEE "THE CONVERSION." -ii- 28 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO [MAP OF STATE OF OHIO WITH COUNTIES OUTLINED ABOVE AN ENLARGED MAP OF TRUMBULL, MAHONING AND COLUMBIANA COUNTIES SHOWING THE LOCATIONS OF THE COMPANY'S OFFICES] -iii- 29 PROSPECTUS SUMMARY The following information is not complete and is qualified in its entirety by the detailed information and the financial statements and accompanying notes appearing elsewhere in this Prospectus. The purchase of the Common Shares is subject to certain risks. See "RISK FACTORS." UNITED COMMUNITY FINANCIAL CORP. The Holding Company was incorporated under Ohio law in February 1998 for the purpose of purchasing all of the capital stock of the Company to be issued in connection with the Conversion. The Holding Company has not conducted and will not conduct any business before the completion of the Conversion, other than business related to the Conversion. Upon the consummation of the Conversion, the Holding Company will be a unitary savings and loan holding company, the principal assets of which initially will be the capital stock of the Company, the investments made with the net proceeds retained from the sale of Common Shares and a loan to be made by the Holding Company to the ESOP to fund the ESOP's purchase of Common Shares in the Conversion. See "USE OF PROCEEDS." Following the Conversion, the Board of Directors intends to manage the Holding Company to promote the long-term best interests of the Holding Company and its shareholders. Following the Conversion, the Company will have capital in excess of the level required to support its current asset size and operations. Management believes that the holding company structure and retention of proceeds could facilitate geographic expansion and diversification into other activities although there are no present arrangements, agreements or understandings, written or oral, to do so. The holding company structure will also facilitate the repurchase of shares in the open market, subject to OTS regulations and the discretion of the Holding Company's Board of Directors. The office of the Holding Company is located at 275 Federal Plaza West, Youngstown, Ohio 44503-1203, and its telephone number is (330) 742-0500. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO The Company is a mutual savings and loan association which was organized under Ohio law in 1889. At December 31, 1997, the Company had total assets of approximately $1.0 billion, total deposits of $886.8 million and total equity of $141.4 million, which represented 13.5% of total assets. For the year ended December 31, 1997, the Company earned approximately $13.0 million, for a return on average assets of 1.23%. The Company is a community-oriented institution which operates from 14 offices located throughout Mahoning, Columbiana and Trumbull Counties in Northeastern Ohio. Nine of the Company's offices are located in Mahoning County, three are in Columbiana County and two are in Trumbull County. The Company's home office is located in Youngstown, which is approximately 75 miles northwest of Pittsburgh, Pennsylvania, and 75 miles southeast of Cleveland, Ohio. Approximately 431,000 people live in the Company's primary market area, which makes it the 7th largest metropolitan area in the State of Ohio. Based on FDIC-published data as of June 30, 1997, the Company had the largest deposit market share in Mahoning County, the third largest share in Columbiana County and the eleventh largest share in Trumbull County. The Company has customer relationships with over 47,000 households in its primary market area, and in 1997 the Company was the leading originator of purchase money residential mortgage loans in Mahoning County. -1- 30 The Company believes that, as competition intensifies in the financial services industry, customers will gravitate toward quality customer service, and a prime focus of the Company's competitive strategy is to emphasize personal service and convenience. Highlights of the Company's strategy include the following: o Increasing the loan portfolio. The Company is a very traditional savings and loan company. At December 31, 1997, one- to four-family real estate loans represented 74.2% of total loans. While the Company intends to remain committed to financing home ownership, it also believes it must gradually expand the types of loan products it offers in order to meet the needs of its market area and to improve profitability. As a result, in 1996, the Company began to commit substantial resources to the commercial lending area, which is headed and staffed by individuals with very extensive commercial banking experience. The Company is also attempting to increase the loan portfolio by utilizing a newly developed central information file that captures the necessary customer profile information to more effectively cross-sell additional services to its existing customer base. o Maintaining asset quality. The Company believes that high asset quality is a critical component of long-term financial success and, therefore, remains committed to a conservative credit culture. At December 31, 1997, nonperforming assets as a percentage of total assets were .98%, compared to 1.14% in 1993. Over the past five years this ratio has averaged .89%. Nonperforming loans as a percentage of total loans were 1.60% at December 31, 1997, compared to 2.04% at December 31, 1993. Over the past five years this ratio has averaged 1.54%. In addition, total charge-offs have averaged $251,400 a year over the past five years. o Managing interest rate risk. Although the Company's liabilities are more sensitive to changes in interest rates than its assets, the Company has attempted to mitigate this risk and enhance return by maintaining a relatively large portfolio of high quality investments. At December 31, 1997, total cash and investments (including mortgage-backed securities) was approximately $396.3 million, or 37.9% of total assets. Of that amount, approximately $132.8 million consisted of securities classified as "available for sale." As an Ohio savings and loan association, the Company is subject to supervision and regulation by the OTS, the Division and the FDIC. The Company is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati and the deposit accounts of the Company are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (the "SAIF"). See "REGULATION." The main office of the Company is located at 275 Federal Plaza West, Youngstown, Ohio 44503-1203, and its telephone number is (330) 742-0500. THE CONVERSION GENERAL. The Board of Directors of the Company initially adopted the Plan on December 9, 1997, and amended it on May 6, 1998. The Plan provides for the conversion of the Company from a mutual savings and loan association to a permanent capital stock savings and loan association incorporated under the laws of the State of Ohio. The OTS and the Division have approved the Plan, subject to the approval of the Plan by the Company's voting members at the Special Meeting, and to the satisfaction of certain other conditions. See "THE CONVERSION - Conditions and Termination." The Company has operated as an independent community oriented savings association since 1889. It is the intention of the Company to continue to operate as an independent savings association following the Conversion. OFFERING. Pursuant to the Plan, Common Shares are hereby offered at a price of $10 per share to (a) Eligible Account Holders, (b) the ESOP, (c) Supplemental Eligible Account Holders, (d) Other Eligible -2- 31 Members and (e) directors, officers and employees of the Company. See "THE CONVERSION - Subscription Offering." To the extent Common Shares remain available after the satisfaction of all subscriptions received in the Subscription Offering, the Holding Company may offer Common Shares in the Community Offering, subject to certain limitations. Preference will be given in the Community Offering to natural persons who have a bona fide residence in Mahoning, Columbiana and Trumbull Counties, Ohio. The Boards of Directors of the Holding Company and the Company have the right to reject, in whole or in part, any order for Common Shares submitted in the Community Offering. See "THE CONVERSION - Community Offering." If Common Shares remain available after the completion of the Community Offering, the Holding Company may offer Common Shares in the Public Offering for sale on a best efforts basis by a syndicate of registered broker-dealers to be formed by Trident, McDonald & Company and Oppenheimer, subject to certain limitations. The Board of Directors of the Holding Company and the Company have the right to reject, in whole or in part, any order for Common Shares submitted in the Public Offering. See "THE CONVERSION - Public Offering." PURCHASE LIMITATIONS. The Plan authorizes the Boards of Directors of the Holding Company and the Company to establish limits on the number of Common Shares which may be purchased in the Offering. The minimum number of Common Shares any person may purchase in the Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. In the event shares are available for the Community Offering or the Public Offering, each person, together with any Associate or other persons Acting in Concert, may purchase in the Community Offering or the Public Offering up to 35,000 Common Shares. Purchases in the Subscription Offering, the Community Offering and the Public Offering are subject to the additional limitation that no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1% of the Common Shares sold in the Offering. Such limitations do not apply to the contribution to the Foundation or to the ESOP, which intends to purchase up to 8% of the total Common Shares sold in the Offering and contributed to the Foundation. Subject to applicable regulations, the purchase limitations may be increased or decreased after the commencement of the Offering at the sole discretion of the Boards of Directors. See "THE CONVERSION Limitations on Purchases of Common Shares." In addition to the purchase limitations established by the Plan, OTS regulations impose restrictions on certain acquisitions of more than 10% of the outstanding shares of the Company by any person or company, individually or Acting in Concert with others. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS." The sale of Common Shares in the Offering will be subject to the approval of the Plan by the voting members of the Company at the Special Meeting, to the final valuation of the Common Shares, as determined by the independent appraiser upon the completion of the Offering, and to certain other conditions. See "THE CONVERSION - Subscription Offering; - Community Offering; - Public Offering; and - Pricing and Number of Common Shares to be Sold." The Subscription Offering will terminate and subscription rights will expire if not exercised by 12:00 noon, Eastern Daylight Time, on June __, 1998. The Community Offering, if any, will be terminated on or before 12:00 noon Eastern Daylight Time June __, 1998, unless extended. Any continuation of the Community Offering or the Public Offering beyond __________ ___, 1998, will require the consent of the OTS and the Division, and persons who have subscribed for Common Shares in the Offering will be given the right to affirm, increase, decrease or rescind their subscriptions for Common Shares. Persons who do not affirmatively -3- 32 elect to continue their subscription or who elect to rescind their subscriptions during any such extension will have all of their funds promptly refunded with interest at the Conversion Rate (hereinafter defined). Persons who elect to decrease their subscriptions will have the appropriate portion of their funds promptly refunded with interest at the Conversion Rate. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON SHARES. Eligible Account Holders and Supplemental Eligible Account Holders MUST LIST ON THE STOCK ORDER FORM ALL DEPOSIT ACCOUNTS IN WHICH THEY CLAIM AN INTEREST, giving all names on each deposit account and the account numbers at the applicable date in order to protect their purchase priorities. Deposit accounts include savings accounts and non-interest-bearing demand deposits. THE FAILURE TO PROVIDE ACCURATE AND COMPLETE ACCOUNT INFORMATION ON THE STOCK ORDER FORM MAY RESULT IN A REDUCTION OR ELIMINATION OF YOUR ORDER. Full payment by check, cash (except by mail), money order, bank draft or withdrawal authorization (payment by wire transfer will not be accepted) must accompany an original Stock Order Form. THE HOLDING COMPANY IS NOT OBLIGATED TO ACCEPT AN ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED STOCK ORDER FORMS. THE HOLDING COMPANY WILL NOT ACCEPT A STOCK ORDER FORM IF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE STOCK ORDER FORM IS NOT EXECUTED. THE HOLDING COMPANY IS NOT REQUIRED TO DELIVER A PROSPECTUS AND STOCK ORDER FORM BY ANY MEANS OTHER THAN THE U.S. POSTAL SERVICE. To ensure that each subscriber receives a prospectus at least 48 hours prior to the applicable expiration date, in accordance with Rule 15C2-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no prospectus will be mailed later than five days or hand delivered any later than two days prior to the applicable expiration date. Execution of the Stock Order Form will confirm receipt or delivery of a prospectus under Rule 15C2-8. NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. OTS and Ohio regulations provide that subscription rights are non-transferable. OTS regulations specifically prohibit any person from transferring or entering into any agreement or understanding before the completion of the Conversion to transfer the ownership of the subscription rights issued in the Conversion or the Common Shares to be issued upon the exercise of such subscription rights. Persons found to be selling or otherwise transferring their subscription rights or purchasing Common Shares on behalf of another person will be subject to forfeiture of such rights and possible further sanctions and penalties imposed by the OTS. THE COMPANY AND THE HOLDING COMPANY WILL REFER TO THE OTS ANY SITUATIONS THEY BELIEVE MAY INVOLVE A TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS. Each person exercising subscription rights will be required to certify that his or her purchase of Common Shares is solely for the subscriber's own account and that there is no agreement or understanding regarding the sale or transfer of such Common Shares. PRICING OF THE COMMON SHARES. Keller & Company, Inc. ("Keller"), a firm experienced in valuing thrift institutions, has prepared an independent valuation of the estimated pro forma market value of the Company, as converted, and the Holding Company. Keller's valuation of the estimated pro forma market value of the Company, as converted, and the Holding Company, excluding the shares to be contributed to the Foundation, is $250,000,000 as of February 24, 1998 (the "Pro Forma Value"). Based on the Pro Forma Value, the Adjusted Valuation Range established in accordance with the Plan is $212,500,000 to $289,375,000. Applicable regulations permit the Holding Company to issue up to total of 33,465,625 Common Shares with an aggregate purchase price of $334,656,250. The Holding Company will issue the Common Shares at a fixed price of $10 per share. The number of Common Shares to be issued will be determined by dividing the price per share into the aggregate pro forma value of the Company, as converted, and the Holding Company at the close of the Offering. If, due to changing market conditions, the final valuation is less than $212,500,000 or more than $334,656,250, subscribers will be given written notice of such final valuation and the right to affirm, increase, -4- 33 decrease or rescind their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the intended purchases by the directors and executive officers of the Company and the Holding Company:
Name Aggregate Percent - ---- Total shares (1) purchase price (1) of total offering (2) ------------ -------------- ----------------- Richard M. Barrett 31,000 $310,000 .12% James E. Bennett, Jr. 1,000 10,000 -- Charles. B. Cushwa, III 60,000 600,000 .24 William A. Holdford 10,000 100,000 .04 Donald R. Inglis 35,000 300,000 .12 Gary Keller 60,000 600,000 .24 Patrick A. Kelly 60,000 600,000 .24 Douglas M. McKay 80,000 800,000 .32 Herbert F. Schuler, Sr. 90,000 900,000 .36 Clarence R. Smith, Jr. 25,000 250,000 .10 Robert J. Steele, Jr. 10,000 100,000 .04 Donald J. Varner 60,000 600,000 .24 John F. Zimmerman, Jr. 15,000 150,000 .06 ------- ---------- ---- All directors and executive 532,000 $5,320,000 2.12% officers as a group (13 persons) ======= ========== ==== - -----------------------------
(1) Includes intended purchases by Associates of directors and executive officers, to the extent known. (2) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted Valuation Range, will be sold in connection with the Conversion at $10 per share and that a sufficient number of Common Shares will be available to satisfy the intended purchases by directors and executive officers. See "Pricing and Number of Common Shares to be Sold." All purchases by executive officers and directors of the Company are being made for investment purposes only and with no present intent to resell. Directors and executive officers will pay the same $10 per share price for Common Shares purchased in the Conversion as all other subscribers. USE OF PROCEEDS. The net proceeds from the sale of Common Shares in the Conversion are estimated to be $209.3 million, $246.5 million, $285.5 million and $330.4 million at the minimum, mid-point, maximum and adjusted maximum, respectively, of the Adjusted Valuation Range. See "PRO FORMA DATA." The Holding Company will invest 50% of the net proceeds from the Conversion in the capital stock to be issued by the Company in connection with the Conversion and will make a loan to the ESOP to acquire 8% of the total Common Shares sold in the Offering and contributed to the Foundation. The Holding Company will retain the remaining 42% of the net proceeds and will use such funds for general corporate purposes. See "USE OF PROCEEDS." The 50% of the net proceeds invested in the Company by the Holding Company will initially be invested in overnight funds and short-term investments with maturities up to three years and utilized for general corporate purposes, including loan originations, enhanced customer services and possible acquisitions. See "USE OF PROCEEDS." -5- 34 HOME SAVINGS CHARITABLE FOUNDATION In 1991, the Company established the Foundation, which is an exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Except for 1993, each year since the Foundation was established, the Company has made annual contributions to the Foundation in furtherance of the Company's commitment to the communities that it serves. In connection with the Conversion, the Company intends to contribute up to 1,250,000 common shares to the Foundation. The Company believes that the contribution of common shares to the Foundation will benefit the long term value of the Company's community banking franchise by enabling the communities it serves to share in the potential growth and success of the Company and the Holding Company over the long term. See "THE CONVERSION - Contribution to the Foundation; and - Structure of the Foundation." The Company proposes to contribute to the Foundation a number of shares equal to 5% of the Common Shares issued in the Conversion, subject to the overall limitation of 1,250,000 common shares. Such contribution would equal 1,062,500 common shares at the minimum of the Adjusted Valuation Range and 1,250,000 common shares at the mid-point, maximum and adjusted maximum of the Adjusted Valuation Range. Such contribution, once made, will not be revocable by the Holding Company or the Company. The Company and the Holding Company do not anticipate making any other contributions to the Foundation during 1998 or the first five years following the Conversion. The Company may make donations to charitable institutions in an aggregate amount not to exceed $80,000 per year consistent with past practice. During 1996 and 1997, the Company directly donated approximately $57,000 and $64,000 to charitable institutions in its community. Assuming the sale of Common Shares at the maximum of the Adjusted Valuation Range and the contribution of 1,250,000 shares to the Foundation, the Holding Company will have 30,187,500 shares issued and outstanding, of which the Foundation will own 1,250,000 shares, or 4.14%. THE CONTRIBUTION OF COMMON SHARES TO THE FOUNDATION WILL RESULT IN DILUTION OF APPROXIMATELY 4.14% TO THE OWNERSHIP INTERESTS IN THE HOLDING COMPANY OF THE PERSONS PURCHASING SHARES IN THE CONVERSION. Keller, an independent appraiser of financial institutions, considered the effect of the contribution of shares to the Foundation when determining the pro forma market value of the Holding Company and the Company, as converted. Keller determined that the contribution would dilute the equity and earnings of the initial shareholders of the Holding Company and that the contribution would result in a charge to the Company's earnings, therefore resulting in a lower pro forma market value of the Holding Company and the Company, as converted. See "RISK FACTORS - Contribution to the Foundation." As a result of the contribution to the Foundation and its impact on the pro forma market value of the Holding Company and the Company, as converted, the Holding Company will offer 2,550,000, 3,000,000, 3,262,500 and 3,564,375 fewer shares at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, than if such contribution were not being made. Based on the $10 price per share, the Holding Company will receive $25.5 million, $30.0 million, $32.6 million and $35.6 million less in gross proceeds than it would have received if the contribution to the Foundation were not being made. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." Notwithstanding the impact of the contribution on the Offering, the Company and the Holding Company determined to contribute common shares to the Foundation to enhance the ties between the Company and the communities it serves by allowing the communities to share in the growth and success of the Company and the Holding Company over the long term. As a result of the contribution to the Foundation, the Company will recognize an expense for the full amount of the contribution, offset in part by a corresponding tax benefit, during the quarter in which the contribution is made, which is expected to be the second quarter of 1998. Such expense will reduce earnings and have a material impact on the Company's earnings for such quarter and for the year. For further discussion of the Foundation and its impact on purchasers in the Conversion, see "RISK FACTORS - Contribution to the -6- 35 Foundation," "PRO FORMA DATA," "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT THE FOUNDATION" and "THE CONVERSION - Contribution to the Foundation -- Tax Considerations." TAX CONSEQUENCES The consummation of the Conversion is expressly conditioned upon the receipt by the Holding Company and the Company of a private letter ruling from the Internal Revenue Service (the "IRS") or an opinion of counsel to the effect that, for federal income tax purposes, the Conversion will constitute a tax-free reorganization as defined in Section 368(a) of the Code. The Holding Company and the Company intend to proceed with the Conversion based upon an opinion received from Vorys, Sater, Seymour and Pease LLP that states, in part, that (1) no gain or loss will be recognized by the Company in connection with the Conversion or the receipt from the Holding Company of proceeds from the sale of the Common Shares, (2) assuming that the subscription rights received by deposit account holders in connection with the Conversion have no ascertainable fair market value, no gain or loss will be recognized to the deposit account holders of the Company upon issuance to them of subscription rights or interests in the shapeType1fFlipH0fFlipV0fFilled0lineWidth25400fShadow0Liquidation Account (hereinafter defined) and (3) no taxable income will be realized by deposit account holders as a result of their exercise of such subscription rights. The Holding Company and the Company have received an opinion from Keller that the subscription rights have no ascertainable fair market value, although such opinion is not binding on the IRS. See "THE CONVERSION - Principal Effects of the Conversion -- Tax Consequences." MARKET FOR THE COMMON SHARES The Company and the Holding Company have never issued capital stock to the public and, consequently, there is no existing market for the Common Shares. The Holding Company has received conditional approval to have the Common Shares quoted on The Nasdaq National Market ("Nasdaq") under the symbol "UCFC". One of the conditions to the Nasdaq listing is the commitment of at least three brokerage firms to make a market in the Common Shares. Trident, McDonald & Company and Oppenheimer have informed the Holding Company that they intend to make a market in the Common Shares and expect that additional market makers will be identified. No assurance can be given, however, that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such market does develop, that it will continue. There can be no assurance that the Common Shares may later be resold at the price at which they are purchased in the Conversion. See "RISK FACTORS - Absence of Established Market for the Common Shares." DIVIDEND POLICY Following the completion of the Conversion, the Board of Directors of the Holding Company intends to establish a dividend policy. The declaration and payment of dividends or other capital distributions by the Holding Company will be subject to the discretion of the Board of Directors of the Holding Company, to the earnings and financial condition of the Holding Company and the Company and to general economic conditions. The timing of the payment of dividends and the annual rate will depend upon a determination by the Board of Directors of the Holding Company that the net income, capital and financial condition of the Holding Company and the general economy justify the declaration and payment of dividends by the Holding Company. No assurance can be given, however, that dividends will be paid or, if paid, will continue in the future. In accordance with OTS policy, the Holding Company will not undertake an extraordinary tax-free return of capital to its shareholders during the first year following the completion of the Conversion. See "DIVIDEND POLICY" and "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions." BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING COMPANY AND THE COMPANY GENERAL. In the aggregate, a number of shares equal to 22% of the total Common Shares sold in the Offering and contributed to the Foundation may be allocated, awarded or granted to directors, officers and employees of the Company or the Holding Company, pursuant to the ESOP, the Stock Option Plan -7- 36 (hereinafter defined) and the RRP (hereinafter defined). Awards under the RRP and allocations pursuant to the ESOP will be made at no cost to the recipients. Stock options will be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of award. Based on their stock ownership under these stock benefit plans, the directors and officers of the Holding Company and the Company will have a significant influence over the vote on any takeover attempt or proxy contest and may be able to defeat such a proposal. See "RISK FACTORS - Anti-Takeover Provisions Which May Discourage Sales of Common Shares For Premium Prices." The Board of Directors has determined that the ability of the Holding Company and the Company to utilize various types of stock benefit plans will assist the Company in attracting and retaining qualified directors and employees. See "THE CONVERSION - - Reasons for the Conversion." EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the Holding Company has established the ESOP, which intends to use a loan from the Holding Company to purchase 8% of the total Common Shares sold in the Conversion and contributed to the Foundation. The loan will have a term of up to 15 years and an interest rate equal to the base rate on corporate loans, posted by at least 75% of the nation's 30 largest banks, as reported in The Wall Street Journal (the "Prime Rate") less 1/2%. Based on the Prime Rate as of May __, 1998, the ESOP rate could be 8.0%. All full-time employees of the Holding Company and the Company who meet certain age and years of service criteria will be eligible to participate in the ESOP. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan," and "RISK FACTORS Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; and - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans." STOCK OPTION PLAN. After the completion of the Conversion, the Holding Company intends to establish a stock option and incentive plan (the "Stock Option Plan"). The Board of Directors of the Holding Company anticipates that a number of shares equal to 10% of the Common Shares sold in the Offering and contributed to the Foundation will be reserved for issuance upon the exercise of options granted under the Stock Option Plan. The Stock Option Plan will be administered by a committee comprised of not fewer than three directors of the Company or the Holding Company (the "Stock Option Committee"). Persons eligible for awards under the Stock Option Plan will consist of directors, officers and employees of the Holding Company or the Company who hold positions with significant responsibilities or whose performance or potential contribution, in the judgment of the Stock Option Committee, will contribute to the future success of the Holding Company or the Company. The Holding Company will receive no monetary consideration for the granting of options under the Stock Option Plan. Upon the exercise of options, the Holding Company will receive a payment of cash, common shares of the Holding Company, or a combination of cash and common shares from option recipients in exchange for shares issued. Stock options will be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of award. Under OTS regulations, no stock options may be awarded during the first year after the completion of the Conversion unless the Stock Option Plan is approved by the shareholders of the Holding Company at an annual or a special meeting of shareholders held not less than six months following the completion of the Conversion. If the Stock Option Plan is approved by the Holding Company shareholders at such meeting and implemented during the first year after the completion of the Conversion, the following restrictions will apply: (i) the number of shares which may be subject to options awarded under the Stock Option Plan to directors who are not full-time employees of the Holding Company may not exceed 5% per person and 30% in the aggregate of the available plan shares; (ii) the number of shares which may be subject to options awarded under the Stock Option Plan to any individual who is a full-time employee of the Holding Company or its subsidiaries may not exceed 25% of the available shares; (iii) stock options must be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of the award; and (iv) stock options will become exercisable at the rate of one-fifth per year commencing no earlier than one year from the date the Stock Option Plan is approved by the shareholders, subject to acceleration of vesting only in the event of the death or disability of a participant. No decision has been made as to anticipated awards under the Stock Option Plan. See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan," and "RISK FACTORS - Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; and Potential Awards to Directors, Officers and Employees Pursuant to Benefit Plans." -8- 37 RECOGNITION AND RETENTION PLAN. After the completion of the Conversion, the Board of Directors of the Holding Company intends to establish a recognition and retention plan (the "RRP") and anticipates that a number of shares equal to 4% of the total Common Shares sold in the Conversion and contributed to the Foundation, with a total value ranging from $8.9 million at the minimum of the Adjusted Valuation Range to $13.9 million at the adjusted maximum of the Adjusted Valuation Range, will be purchased by, or issued to, the RRP. See "RISK FACTORS - Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity" for a discussion of the possible dilutive effects of the RRP. The RRP shares will be awarded at no cost to the recipients. The RRP will be administered by a committee comprised of not fewer than three directors of the Company or the Holding Company (the "RRP Committee"). Persons eligible for awards under the RRP will consist of directors, directors emeritus, officers and employees of the Holding Company or the Company who hold positions with significant responsibilities or whose performance or potential contribution, in the judgment of the RRP Committee, will contribute to the future success of the Holding Company or the Company. See "RISK FACTORS - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans." Under OTS regulations, no RRP shares may be awarded during the first year after the completion of the Conversion unless the RRP is approved by the shareholders of the Holding Company at an annual or a special meeting of shareholders held not less than six months following the completion of the Conversion. If the RRP is approved by the Holding Company shareholders at such meeting and implemented during the first year after the completion of the Conversion, the following restrictions will apply: (i) the number of shares awarded under the RRP to directors or directors emeritus who are not full-time employees of the Holding Company may not exceed 5% per person and 30% in the aggregate of the eligible plan shares; (ii) the number of shares awarded under the RRP to any individual who is a full-time employee of the Holding Company or its subsidiaries may not exceed 25% of the eligible shares; and (iii) RRP awards will vest at the rate of one-fifth per year commencing no earlier than one year from the date the RRP is approved by the shareholders, subject to acceleration of vesting only in the event of the death or disability of a participant. No decision has been made as to anticipated awards under the RRP. See "MANAGEMENT - Stock Benefit Plans -- Recognition and Retention Plan." EMPLOYMENT AGREEMENTS. In connection with the Conversion, the Company will enter into employment agreements with Douglas M. McKay, the President, Chief Executive Officer, and Chairman of the Board of the Company, Donald J. Varner, the Secretary and Senior Vice President/Retail Banking Division of the Company, and Patrick A. Kelly, the Treasurer, Chief Financial Officer and Senior Vice President/Financial Division of the Company. Each employment agreement will provide for a term of three years and will also provide for severance payments in the event the agreement is terminated prior to the expiration of its term upon a change in control of the Company or for any reason other than just cause, as defined therein. See "MANAGEMENT - Employment Agreements." INVESTMENT RISKS An investment in the Common Shares involves certain risks, including the possible loss of principal invested. Special attention should be given to the matters discussed under "RISK FACTORS - Anticipated Low Return on Equity; Interest Rate Risk; - Risks Associated with Commercial Lending; - Possible Adverse Effects of Contribution of Shares to the Foundation; - Risks Associated with Economic Conditions in the Company's Market Area; - Geographic Concentration of Credit; - Competition in Primary Market Area; - Absence of Established Market for the Common Shares; - Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans; - Legislation and Regulation Which May Adversely Affect Earnings and Operations; and - Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium Prices." -9- 38 SELECTED FINANCIAL INFORMATION AND OTHER DATA The following tables set forth certain information concerning the financial condition, earnings and other data regarding the Company at the dates and for the periods indicated. Such information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Prospectus. For information concerning the Company's financial condition and results of operations for the quarter ended March 31, 1998, see "RECENT DEVELOPMENTS."
SELECTED FINANCIAL CONDITION DATA: At December 31, --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Total assets $1,044,993 $1,074,736 $1,077,523 $1,018,879 $1,003,975 Cash and cash equivalents 34,497 19,668 41,813 20,601 18,174 Investment securities: Available for sale 39,402 14,659 32,125 33,415 - Held to maturity 4,968 27,970 30,119 34,322 68,287 Mortgage-backed securities: Available for sale 62,423 84,466 100,005 87,935 - Held to maturity 243,848 286,384 302,107 312,300 438,349 Loans, net 633,236 616,923 546,689 503,413 452,924 FHLB stock 11,136 10,370 9,675 9,043 8,544 Deposits 886,808 932,060 938,855 898,912 894,794 Total equity 141,353 128,131 122,294 107,209 96,152 SUMMARY OF EARNINGS: Year ended December 31, --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Interest income $82,685 $81,749 $79,834 $74,639 $77,743 Interest expense 40,463 43,009 41,104 34,898 38,158 ------- ------- ------- ------- ------- Net interest income 42,222 38,740 38,730 39,741 39,585 (Recovery of) provision for loan loss allowances (1,546) - - (100) 535 ------- ------- ------- ------- ------- Net interest income after recovery of or provision for loan loss allowances 43,768 38,740 38,730 39,841 39,050 Noninterest income 1,564 1,291 1,554 1,018 2,080 Noninterest expenses (1) 25,303 30,068 21,995 20,341 19,098 ------- ------- ------- ------- ------- Income before provision for income taxes and cumulative effect of change in accounting principle 20,029 9,963 18,289 20,518 22,032 Cumulative effect of change in accounting principle (2) - - - - 729 Provision for income taxes 6,982 3,332 6,707 7,294 8,002 ------- ------- ------- ------- ------- Net income $13,047 $ 6,631 $11,582 $13,224 $14,759 ======= ======= ======= ======= =======
- ------------------------------ (1) For the year ended December 31, 1996, noninterest expense included a $5.9 million one-time assessment imposed on the Company as a result of legislation to recapitalize the SAIF. (2) Reflects the cumulative impact of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," for the year ended December 31, 1993. -10- 39
SELECTED FINANCIAL RATIOS AND OTHER DATA: As or for the year ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Performance ratios:(1) Return on average assets(2) 1.23% 0.61% 1.11% 1.30% 1.48% Return on average equity(3) 9.68 5.28 9.98 12.77 16.14 Interest rate spread(4) 3.53 3.14 3.30 3.64 3.72 Net interest margin(5) 4.09 3.65 3.79 4.01 4.07 Noninterest expense to average assets 2.39 2.77 2.10 2.01 1.91 Efficiency ratio(6) 57.79 75.11 54.60 49.91 45.84 Average interest-earning assets to average interest-bearing liabilities 114.26 112.82 111.93 110.58 109.06 Capital ratios: Average equity to average assets 12.74 11.58 11.08 10.21 9.16 Equity to assets at year end 13.53 11.92 11.35 10.52 9.58 Tangible capital 13.47 11.87 11.24 10.70 9.56 Core capital 13.47 11.87 11.24 10.70 9.56 Risk-based capital 28.85 26.15 26.65 25.35 23.52 Asset quality ratios: Nonperforming loans to total loans at year end(7) 1.60 1.59 1.11 1.34 2.04 Nonperforming assets to average assets(8) 0.96 0.91 0.59 0.82 1.15 Nonperforming assets to total assets at year end(8) 0.98 0.92 0.57 0.82 1.14 Allowance for loans losses as a percent of loans 0.94 0.81 0.93 1.01 1.18 Allowance for loans losses as a percent of nonperforming loans(7) 59.02 51.37 84.18 75.51 58.40 Number of: Loans 19,173 18,826 17,736 17,027 16,683 Deposits 108,663 108,793 105,987 99,541 95,991 Full-service offices(9) 15 14 14 14 14
- ---------------------- (1) Performance ratios for 1996 reflect the $5.9 million one-time assessment imposed on the Company as a result of legislation to recapitalize the SAIF. (2) Net income divided by average total assets. Excluding the effect of the one-time SAIF assessment, the Company's return on average assets would have been 0.96% for the year ended December 31, 1996. (3) Net income divided by average total equity. Excluding the effect of one one-time SAIF assessment, the Company's return on average equity would have been 8.29% for the year ended December 31, 1996. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (5) Net interest income as a percentage of average interest-earning assets. (6) Noninterest expense divided by the sum of net interest income and noninterest income. Excluding the effect of the one-time SAIF assessment, the Company's efficiency ratio would have been 60.37% for the year ended December 31, 1996. (7) Nonperforming loans include nonaccrual loans and restructured loans. (8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. (9) On January 20, 1998, the Company closed a branch located in a supermarket in Poland, Ohio, reducing the number of full-service offices to 14. -11- 40 RISK FACTORS INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE INVESTING, PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING MATTERS. ANTICIPATED LOW RETURN ON EQUITY During the last five years, the Company's return on equity has ranged from a high of 16.14% for 1993 to a low of 5.28% for 1996, with an average of 10.77%. Excluding the effect of the one-time assessment to recapitalize the SAIF, the return on equity would have been 8.29% for the year ended December 31, 1996. The increased capital resulting from the Conversion is expected to significantly reduce the Company's return on equity for a prolonged period after the Conversion, which may adversely affect the market value of the Common Shares. Initially, the Conversion proceeds will be invested in short-term investments which generally have lower yields than loans and longer term securities, which could also adversely affect the Company's return on equity. See "USE OF PROCEEDS." In addition, it is further anticipated that the ESOP and, if approved by the Board of Directors and the shareholders after the Conversion, the Stock Option Plan and the RRP will increase compensation expense significantly, further lowering return on equity. See "Potential Impact of Benefit Plans on Net Earnings and Shareholders' Equity." INTEREST RATE RISK The Company's operating results are dependent to a significant degree on its net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Like most thrift institutions, the Company's interest income and interest expense change as interest rates fluctuate and assets and liabilities reprice. Interest rates generally may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond the Company's control. The interest rates on specific assets and liabilities of the Company will change or "reprice" in accordance with the contractual terms of the asset or liability instrument and in accordance with customer reaction to general economic trends. See "THE BUSINESS OF THE COMPANY Lending Activities; and - Deposits and Borrowings." In a period of rising interest rates, the interest income earned on the Company's assets may not increase as rapidly as the interest expense paid on the Company's liabilities. As a result, the earnings of the Company may be adversely affected. The degree to which such earnings will be adversely affected depends upon the rapidity and extent of the increase in interest rates. In addition, rising interest rates could negatively affect the Company's earnings due to diminished loan demand. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Asset and Liability Management." Changes in interest rates also affect the value of the Company's interest-earning assets, particularly its one- to four-family residential mortgage loans and mortgage-backed securities portfolio. Typically, the value of these assets fluctuates inversely with changes in interest rates. At December 31, 1997, the Company's mortgage-backed securities portfolio totaled $306.3 million, including $62.4 million classified as available for sale, and the Company's loan portfolio included $513.7 million in one- to four-family residential mortgage loans. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of taxes. Decreases in the fair value of securities available for sale therefore could have an adverse effect on shareholders' equity. See "THE BUSINESS OF THE COMPANY - Investment Activities." RISKS ASSOCIATED WITH COMMERCIAL LENDING During 1997 and 1996 the Company has become more active in originating commercial loans, which amounted to $59.9 million, or 9.1% of the Company's total loan portfolio, at December 31, 1997. -12- 41 Commercial loans are generally considered to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependent on the income stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial loans, if any, often consists of rapidly depreciating assets. In addition, commercial lending generally requires substantially greater underwriting and monitoring efforts compared to residential real estate lending. At December 31, 1997, the Company had $2.1 million of nonperforming commercial loans, which represented 3.5% of total commercial loans and 20.9% of the Company's nonperforming assets. Although commercial loans present greater risk than real estate loans, they also typically have higher yields. During 1997 the Company hired two experienced commercial lending officers, and the Company intends to increase its volume of commercial loan originations. POSSIBLE ADVERSE EFFECTS OF CONTRIBUTION OF SHARES TO THE FOUNDATION DILUTION OF SHAREHOLDERS' INTERESTS. The Company proposes to contribute to the Foundation common shares in an amount equal to 5% of the Common Shares sold in connection with the Conversion, not to exceed 1,250,000 common shares, subject to the approval of the contribution by the Company's members at the Special Meeting. At the minimum of the Adjusted Valuation Range, the contribution to the Foundation would be 1,062,500 common shares with a value of $10,625,000, and at the mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, the contribution to the Foundation would be 1,250,000 common shares, with a value of $12.5 million, based on the $10 purchase price per share. Upon completion of the Conversion and the contribution of shares to the Foundation, the Holding Company will have 30,187,500 shares issued and outstanding at the maximum of the Adjusted Valuation Range, of which the Foundation will own 1,250,000 shares, or 4.14%. As a result, persons purchasing Common Shares in the Conversion will have their ownership interests in the Holding Company diluted by 4.14%. See "PRO FORMA DATA." IMPACT ON EARNINGS. The contribution of common shares to the Foundation will have an adverse impact on the Company's earnings in the year in which the contribution is made. The Company will recognize the full expense in the amount of the contribution of common shares to the Foundation in the quarter in which it occurs, which is expected to be the second quarter of 1998. The amount of the contribution will range from $10.6 million to $12.5 million, based on the Adjusted Valuation Range. The contribution expense will be partially offset by the tax benefit related to the expense. The Company and the Holding Company have been advised by their independent tax advisors that the contribution to the Foundation will be tax deductible, subject to an annual limitation of 10% of the Company's annual taxable income. Management expects that the contribution to the Foundation will have an adverse impact on the Company's earnings for 1998. COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE CONTRIBUTION TO THE FOUNDATION IS NOT PART OF THE CONVERSION. The intended contribution of common shares to the Foundation was taken into account by Keller in the Adjusted Valuation Range. Based upon these considerations, Keller determined the pro forma value of the Company, as converted, and the Holding Company to be $250.0 million. If the contribution were not being made to the Foundation, Keller has estimated that the estimated pro forma market value of the Company, as converted, and the Holding Company would be $280.0 million. The amount of Common Shares that are being offered in the Conversion at the mid-point of the Adjusted Valuation Range is therefore approximately $30.0 million less than the estimated amount of Common Shares that would have been offered in the Conversion without the Foundation, based on the estimate provided by Keller. Accordingly, fewer shares will be available for sale to persons having subscription rights, which could result in subscribers receiving fewer shares, depending on the size of a depositor's stock order, the amount of the depositor's qualifying deposits in the Company and the overall level of subscriptions. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." This estimate by Keller was prepared solely for purposes of providing information with which to make an informed decision on the Conversion. -13- 42 POTENTIAL ANTI-TAKEOVER EFFECT. Upon completion of the Conversion, the Foundation will own 4.14% of the total Common Shares outstanding, assuming the sale of 28,937,500 Common Shares in the Offering and the contribution of 1,250,000 shares to the Foundation. The shares of the Holding Company held by the Foundation will be voted by the Foundation's independent trustee (the "Trustee"). The Company proposes to amend the trust document that governs the Foundation to provide that the shares of the Holding Company held by the Foundation must be voted by the Trustee on all matters submitted to a vote of the shareholders of the Holding Company in the same proportion as votes cast by all other shareholders of the Holding Company. Based on their stock ownership under various stock benefit plans, the directors and officers of the Holding Company will have a significant influence over the vote on any takeover attempt or proxy contest and may be able to defeat such a proposal. See "RISK FACTORS - Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium Prices." Pro rata voting by the Trustee will have an anti-takeover effect on the Holding Company to the extent such voting is influenced by the voting of the directors and officers of the Company and the Holding Company. APPROVAL OF MEMBERS. The contribution of common shares to the Foundation is subject to the approval of a majority of the total outstanding votes eligible to be cast at the Special Meeting. The contribution to the Foundation will be considered as a separate matter from approval of the Plan. If the Company's members approve the Plan, but not the contribution to the Foundation, the Company intends to complete the Conversion without the contribution to the Foundation. The elimination of the contribution to the Foundation may materially increase the pro forma market value of the Company, as converted, and the Holding Company. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH FOUNDATION." If the pro forma market value of the Company, as converted, and the Holding Company, without the contribution to the Foundation, is either greater than $334,656,250 or less than $212,500,000, or if the OTS otherwise requires a resolicitation of subscribers, the Company will establish a new valuation range and commence a resolicitation of subscribers. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription will have the appropriate portion of his funds promptly refunded with interest at the Conversion Rate. Any change in the Adjusted Valuation Range must be approved by the OTS. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." RISKS ASSOCIATED WITH ECONOMIC CONDITIONS IN THE COMPANY'S MARKET AREA The Company's market area consists of Mahoning, Columbiana and Trumbull Counties in Northeastern Ohio. Nine of the Company's offices are located in Mahoning County, which includes the Company's main office in the City of Youngstown, three offices are in Columbiana County and two offices are in Trumbull County. With regard to several important economic factors, statistics for the Company's primary market area in recent years have trailed both the State of Ohio and the United States. In 1996, the per capita annual income of $13,099 for the Company's primary market area was lower than the $15,376 and $16,738 per capita annual income for Ohio and the United States, respectively. The median annual household income for the Company's primary market area was $27,404 in 1996, compared to $32,120 for the State of Ohio and $34,530 for the United States. The unemployment rates for the Company's market area and the City of Youngstown have exceeded both the Ohio and national rates in the recent past. In 1997, the unemployment rate in the Company's market area counties averaged 5.7%, compared to 4.3% for Ohio and 4.4% for the United States. The City of Youngstown experienced an unemployment rate of 11.0%, which was significantly higher than the 6.3% rate for Mahoning County generally. A decline in the local economy could result in an increase in the level of defaults by borrowers in the repayment of existing loans and could suppress demand for new loans. Similarly, a decline in the local economy could result in a decline in core deposits as customers would have fewer discretionary funds for savings. If these conditions occurred, they could adversely affect the Company's net income. Moreover, -14- 43 the absence of a robust local economy could limit the Company's potential for growth in its current market area. GEOGRAPHIC CONCENTRATION OF CREDIT Most of the Company's loans have been made to borrowers residing in, and most of its real estate loans are secured by property located in, Mahoning County, northern Columbiana County and southern Trumbull County in northeast Ohio. Events which negatively impact the local economy, such as a strike or lay-offs at the General Motors Plant in Lordstown, Ohio, which is a major employer in the Company's market area, could result in increased defaults on loans made by the Company and decreases in the value of the Company's collateral, making collection of such loans more difficult. See "Risks Associated with Economic Conditions in the Company's Market Area." COMPETITION IN PRIMARY MARKET AREA Competition in the banking and financial services industry is intense. In its market area, the Company competes with commercial banks, savings and loan associations, finance companies, mortgage banking companies, credit unions, mutual funds and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources than the Company and may offer services that it does not or cannot provide. The profitability of the Company depends upon its continued ability to successfully compete in its market area. ABSENCE OF ESTABLISHED MARKET FOR THE COMMON SHARES Because the Company and the Holding Company have never issued stock to the public before, there is no existing market for the Common Shares. The Holding Company has received conditional approval to have the shares quoted on Nasdaq under the symbol "UCFC." See "MARKET FOR COMMON SHARES." The development of a public trading market depends upon the existence of willing buyers and sellers, the presence of which is not within the control of the Company, the Holding Company, or any market maker. No assurance can be given that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that it will continue. Investors should consider, therefore, the potential long-term nature of an investment in the Common Shares. The absence of a liquid and active trading market, or the discontinuance thereof, may have an adverse effect on both the price and the liquidity of the Common Shares. The offering price of the Common Shares is based upon an independent appraisal of the Company, as converted, and the Holding Company. The appraisal is not a recommendation as to the advisability of purchasing Common Shares, nor does it represent Keller's opinion as to the price at which the Common Shares may trade. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." There can be no assurance that the Common Shares may later be resold at the price at which they are purchased in the Conversion. DILUTIVE IMPACT OF BENEFIT PLANS ON NET INCOME AND SHAREHOLDERS' EQUITY In connection with the Conversion, the Holding Company has established the ESOP, which intends to use a loan from the Holding Company to purchase 8% of the total Common Shares sold in the Conversion and contributed to the Foundation. All full-time employees of the Holding Company and the Company who meet certain age and years of service criteria will be eligible to participate in the ESOP. The ESOP loan will be repaid through cash contributions to the ESOP from the Company and the use of dividends paid on the Common Shares, if any. The Company currently anticipates that the ESOP loan will be -15- 44 repaid over a period of up to 15 years. The amount of cash or other assets that can be contributed to the ESOP each year is limited by certain IRS regulations. Contribution to the ESOP in the maximum amount permitted by IRS regulations could result in repayment of the ESOP loan in fewer than 15 years. A shorter repayment period could result in increased compensation expense during the years in which payments are made on the ESOP loan, which would adversely impact the Holding Company's earnings. Statement of Position ("SOP") No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans," published by the American Institute of Certified Public Accountants (the "AICPA"), requires an employer to record compensation expense in an amount equal to the fair value of shares committed to be released to employees from the ESOP as the loan is repaid. See "PRO FORMA DATA" for pro forma information regarding the effects of SOP 93-6 on net earnings and shareholders' equity. If the Common Shares acquired by the ESOP appreciate in value over time, or if the loan is repaid in fewer than 15 years, the Holding Company may incur increased compensation expense relating to the ESOP which would adversely affect the Holding Company's net earnings. The ESOP may purchase Common Shares on the open market or may purchase authorized but unissued shares from the Holding Company. If the ESOP purchases authorized but unissued shares from the Holding Company, such purchases could have a dilutive effect on the interests of the Holding Company's shareholders. Following the consummation of the Conversion, the Holding Company intends to adopt the Stock Option Plan and the RRP. The Holding Company will incur compensation expense for RRP shares based on the market value of the shares at each vesting date. Such expense will reduce the Holding Company's net income for the years in which awards vest. The shares issued to participants under the RRP could be newly issued shares or shares purchased in the market. In the event the shares issued under the RRP consist of newly issued common shares, the interests of existing shareholders will be diluted. Shares issued pursuant to the exercise of options under the Stock Option Plan will be authorized but unissued shares, unless the Holding Company has treasury shares at the time of exercise and elects to use the treasury shares. At the adjusted maximum of the Adjusted Valuation Range, if all shares under these plans were newly issued and the exercise price for the option shares was equal to the $10 per share purchase price in the Conversion, the pro forma book value per share of the outstanding common shares at December 31, 1997, would decrease from $12.52 to $11.37. See "PRO FORMA DATA" and "MANAGEMENT - Stock Benefit Plans." POTENTIAL AWARDS OF SHARES TO DIRECTORS, OFFICERS AND EMPLOYEES PURSUANT TO BENEFIT PLANS In the aggregate, a number of shares equal to 22% of the total Common Shares sold in the Offering and contributed to the Foundation may be allocated, awarded or granted to directors, officers and employees of the Company or the Holding Company pursuant to the ESOP, the Stock Option Plan and the RRP. The ESOP intends to purchase 8% of the total Common Shares sold in the Offering and contributed to the Foundation. The ESOP shares will be allocated to management and employees at no cost to the recipients and may be voted by the recipients upon allocation. After the completion of the Conversion, but not sooner than six months thereafter, the Holding Company intends to submit the Stock Option Plan and the RRP for approval by its shareholders. It is anticipated that a number of shares equal to 10% of the total Common Shares sold in the Offering and contributed to the Foundation will be reserved out of authorized but unissued shares for issuance to the directors, officers and employees of the Holding Company and the Company pursuant to the Stock Option Plan. Stock options will be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of award. In addition, a number of shares equal to 4% of the total Common Shares sold in the Offering and contributed to the Foundation will be purchased by the RRP in the open market or directly from the Holding Company for awards to directors, officers and employees of the Holding Company and the Company under the RRP. Based on the -16- 45 $10 per share price in the Offering, the total value of the shares which may be available for awards under the RRP, at no cost to the recipients of such awards, ranges from $8.9 million at the minimum of the Adjusted Valuation Range to $13.9 million at the adjusted maximum of the Adjusted Valuation Range. Awards of shares under the RRP will not occur until at least six months after completion of the Conversion. As a result, the value of such shares at the time of such awards, or at the time awarded shares are distributed to recipients, cannot be estimated. See "THE CONVERSION Reasons for the Conversion," and "MANAGEMENT - Stock Benefit Plans." Based on their stock ownership under these stock benefit plans, the directors and officers of the Holding Company and the Company will have a significant influence over the vote on any takeover attempt or proxy contest and may be able to defeat such a proposal. See "RISK FACTORS - Anti-Takeover Provisions Which May Discourage Sales of Common Shares For Premium Prices." LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT EARNINGS AND OPERATIONS The Company is subject to extensive regulation by the OTS, the Division and the FDIC and is periodically examined by such regulatory agencies to test compliance with various regulatory requirements. The Holding Company will also be subject to regulation and examination by the OTS. Such supervision and regulation of the Company and the Holding Company are primarily for the protection of the federal deposit insurance fund and not for the maximization of shareholder value and may limit the ability of the Company and the Holding Company to engage in various business activities. See "REGULATION." Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations. Such legislation, if enacted, could eliminate the OTS, which would likely subject the Company to more regulation by the FDIC. In addition, the Holding Company might become subject to new or different holding company regulations, including separate capital requirements and stringent limitations on activities. Although the Holding Company cannot predict when or whether Congress may pass legislation regarding the Holding Company's and the Company's regulatory requirements or charter, it is not anticipated that the current business activities of the Holding Company or the Company will be materially affected by such legislation. ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM PRICES The Articles of Incorporation and Code of Regulations of the Holding Company and the Amended Articles of Incorporation of the Company contain certain provisions that could deter or prohibit non-negotiated changes in the control of the Holding Company and the Company. Such provisions include (1) a restriction on the direct or indirect acquisition of more than 10% of the outstanding shares of the Company by any person during the five-year period following the effective date of the Conversion, (2) the ability to issue additional common shares without shareholder approval, and (3) the requirement of a 80% supermajority voting requirement for the approval of certain matters, including mergers, acquisitions of a majority of the shares of the Holding Company or the transfer of substantially all of the assets of the Holding Company, if the Board of Directors recommends against the approval of any such matter. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS." The executive officers and directors of the Holding Company and their Associates are expected to purchase approximately 2.13% of the shares issued in connection with the Conversion, assuming the sale of 25,000,000 Common Shares at the midpoint of the Adjusted Valuation Range. In addition, executive officers of the Holding Company will be able to vote shares allocated to their accounts under the ESOP, which intends to purchase approximately 8% of the total common shares sold in the Conversion and contributed to the Foundation. The RRP trustees, who are expected to be directors of the Company, will vote shares awarded but not distributed under the RRP in their discretion. In view of the various provisions of the Articles of Incorporation and the stock benefit plans of the Holding Company and the Company, the ESOP trustee, the RRP -17- 46 Committee and the directors and officers of the Holding Company and the Company will have a significant influence over the vote on any takeover attempt or proxy contest and may be able to defeat such a proposal. The Boards of Directors of the Holding Company and the Company believe that such provisions will be in the best interests of shareholders by encouraging prospective acquirers to negotiate a proposed acquisition with the directors. Such provisions could, however, adversely affect the market value of the Common Shares or restrict or eliminate the opportunity for shareholders to sell their shares for premium prices. Federal and Ohio law also restrict the acquisition of control of the Holding Company and the Company, and regulations of the OTS restrict the ability of any person to acquire the beneficial ownership of more than 10% of any class of voting equity security of the Company or the Holding Company. Any or all of these provisions may facilitate the perpetuation of current management and discourage proxy contests or takeover attempts not first negotiated with the Board of Directors. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS." USE OF PROCEEDS The following table presents the estimated gross and net proceeds from the sale of the Common Shares, based on the Adjusted Valuation Range:
Maximum, Minimum Mid-point Maximum as adjusted ------- --------- ------- ----------- Gross proceeds $212,500,000 $250,000,000 $289,375,000 $334,656,250 Less estimated expenses 3,172,000 3,500,000 3,845,000 4,240,000 ------------ ------------ ------------ ------------ Total net proceeds $209,328,000 $246,500,000 $285,535,000 $330,416,250 ============ ============ ============ ============
The net proceeds from the sale of the Common Shares may vary depending upon financial and market conditions at the time of the completion of the Offering. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." The expenses detailed above are estimated. Actual expenses may be more than or less than estimated. See "THE CONVERSION Plan of Distribution." The Holding Company will retain up to 50% of the net proceeds from the sale of the Common Shares, or approximately $165.2 million at the adjusted maximum of the Adjusted Valuation Range. Such proceeds will be used to make a loan to the ESOP to acquire 8% of the total Common Shares sold in the Offering and contributed to the Foundation. Based upon the issuance of 33,465,625 shares at the adjusted maximum of the Adjusted Valuation Range, the loan to the ESOP would be $26.8 million. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan." The loan to the ESOP will have a term of up to 15 years and an interest rate equal to the Prime Rate less 1/2%, which is currently 8.0%. The balance of the net proceeds may be invested initially in investment securities, mortgage-backed securities, U.S. Government and federal agency securities of various maturities, deposits in either the Company or other financial institutions, or a combination thereof. Ultimately the proceeds retained by the Holding Company may be used for general corporate purposes, which may include acquisitions of other financial institutions, other financial services companies or other businesses which a savings and loan holding company is permitted to own, the payment of dividends, a tax-free return of capital, repurchases of Common Shares and funding of the RRP. The Holding Company and the Company, however, will not take any action that would further the payment of -18- 47 a tax-free return of capital to the Holding Company shareholders during the first year following the completion of the Conversion. The Holding Company currently has no specific plan to repurchase any of the Common Shares. In the future, the Board of Directors of the Holding Company will make decisions on the repurchase of the Common Shares based on its view of the appropriateness of the price of the Common Shares as well as the Holding Company's and the Company's investment opportunities and capital needs. OTS regulations generally prohibit the Holding Company from repurchasing any of its capital stock for three years following the date of completion of the Conversion, except as part of an open-market stock repurchase program during the second and third years following the Conversion involving no more than 5% of the outstanding capital stock during a twelve-month period. The OTS may permit a repurchase during the first year following the completion of the Conversion or may permit the Holding Company to exceed the 5% limits in the second and third years if exceptional circumstances are established. In addition, after any repurchase during the three years following the completion of the Conversion, the Company's regulatory capital must equal or exceed all regulatory capital requirements. See "THE CONVERSION - Restrictions on Repurchase of Common Shares." The remainder of the net proceeds received from the sale of the Common Shares, approximately $165.2 million at the adjusted maximum of the Adjusted Valuation Range, will be invested by the Holding Company in the capital stock to be issued by the Company to the Holding Company. The resulting increase in the regulatory capital of the Company will permit the Company to expand its lending and investment activities and to enhance customer services. The Company anticipates that the portion of the net proceeds received by the Company will initially be invested in overnight funds and short-term investments with maturities of up to three years and eventually utilized for general corporate purposes, including increased loan origination activity and a modest increase in investments in corporate notes and U.S. Government and federal agency securities. During the next three years, the Company intends to concentrate on increasing its consumer and commercial loan portfolios, but during the first year following the Conversion, the Company anticipates an increase in construction and one- to four-family loans. The Company may also use such funds for the expansion of its facilities, and, although no such transactions are specifically being considered at this time, to expand operations through acquisitions of other financial institutions, branch offices or other financial services companies or the establishment of de novo branch offices or loan origination facilities. MARKET FOR COMMON SHARES Neither the Holding Company nor the Company has ever issued capital stock to the public and, consequently, there is currently no established market for the Common Shares. The Holding Company has received conditional approval to have the Common Shares quoted on Nasdaq under the symbol "UCFC." One of the conditions to the Nasdaq listing is the commitment of at least three brokerage firms to make a market in the Common Shares. Trident, McDonald & Company and Oppenheimer have informed the Holding Company that they intend to make a market in the Common Shares, and expect that additional market makers will be identified. A public trading market for the stock of any issuer, including the Holding Company, depends upon the presence of both willing buyers and willing sellers at any given time. Accordingly, the number of active buyers and sellers of the Common Shares at any particular time may be limited. No assurance can be given that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that it will continue. Investors should consider, therefore, the potentially long-term nature of an investment in the Common Shares. See "RISK FACTORS - Absence of Established Market for the Common Shares." The appraisal of the pro forma market value of the Common Shares is not a recommendation as to the advisability of purchasing Common Shares, nor does it represent Keller's opinion as to the price at which the -19- 48 Common Shares may trade. There can be no assurance that the Common Shares may later be resold at the price at which they are purchased in the Conversion. DIVIDEND POLICY Following the completion of the Conversion, the Board of Directors of the Holding Company intends to establish a dividend policy. The declaration and payment of dividends or other distributions by the Holding Company will be subject to the discretion of the Board of Directors of the Holding Company, to the earnings and financial condition of the Holding Company and to general economic conditions. The timing of payments of dividends or other distributions and the amount will depend upon a determination by the Board of Directors of the Holding Company, in the exercise of its discretion, that the net income, capital and consolidated financial condition of the Holding Company and the general economy justify the declaration and payment of dividends or other distributions by the Holding Company, subject to the limitation under Ohio law that a corporation may pay dividends or other distributions only out of surplus. There can be no assurance that dividends will be paid on the Common Shares or, if paid, that such dividends or other distributions will continue to be paid in the future. In addition, the Holding Company and the Company will not take any action that would further the payment of a tax-free return of capital to the Holding Company shareholders during the first year following the completion of the Conversion. Other than earnings on the investment of the proceeds retained by the Holding Company and interest earned on the loan to the ESOP, the principal source of income of the Holding Company will be dividends periodically declared and paid by the Board of Directors of the Company on the common shares of the Company held by the Holding Company. The declaration and payment of dividends by the Company to the Holding Company will be subject to the discretion of the Board of Directors of the Company, to the earnings and financial condition of the Company, to general economic conditions and to federal and state restrictions on the payment of dividends by thrift institutions. Under regulations of the OTS applicable to converted associations, the Company will not be permitted to pay a cash dividend on its capital stock after the Conversion if its regulatory capital would, as a result of the payment of such dividend, be reduced below the amount required for the Liquidation Account or the applicable regulatory capital requirement prescribed by the OTS. See "THE CONVERSION - Principal Effects of the Conversion -- Liquidation Account" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources." The Company may not pay a dividend unless such dividend also complies with an OTS regulation limiting capital distributions by savings and loan associations. Capital distributions, for purposes of such regulation, include, without limitation, payments of cash dividends, repurchases, and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association. See "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions." -20- 49 REGULATORY CAPITAL COMPLIANCE The following table sets forth the historical regulatory capital of the Company at December 31, 1997, and the pro forma regulatory capital of the Company at such date based on the receipt of 50% of the net proceeds for the number of Common Shares indicated.
Pro forma capital at December 31, 1997, assuming the sale of: ---------------------------------------------------------------------------- 21,250,000 25,000,000 28,937,500 33,465,625 Common Shares Common Shares Common Shares Common Shares Historical at (offering price (offering price (offering price (offering price December 31, 1997 of $10 per share) of $10 per share) of $10 per share) of $10 per share) ----------------- ----------------- ----------------- ----------------- ----------------- Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) ------ --------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- (Dollars in thousands) GAAP capital: (2) $141,353 $219,242 $233,103 $247,893 $264,903 ======== ======== ======== ======== ======== Tangible capital: (3) Capital level $140,636 13.47% $218,525 19.48% $232,386 20.46% $247,176 21.48% $264,186 22.63% Requirement 15,661 1.50 16,829 1.50 17,037 1.50 17,259 1.50 17,514 1.50 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Excess $124,975 11.97% $201,696 17.98% $215,349 18.96% $229,917 19.98% $ 46,671 21.13% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Core capital: (3) Capital level $140,636 13.47% $218,525 19.48% $232,386 20.46% $247,176 21.48% $264,186 22.63% Requirement (4) 31,322 3.00 33,659 3.00 34,075 3.00 34,518 3.00 35,029 3.00 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Excess $109,314 10.47% $184,866 16.48% $198,311 17.46% $212,658 18.48% $229,157 19.63% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Risk-based capital: (5) Capital level $146,461 28.85% $224,350 41.04% $238,211 43.03% $253,001 45.10% $270,011 47.41% Requirement 40,619 8.00 43,734 8.00 44,289 8.00 44,880 8.00 45,561 8.00 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Excess $105,842 20.85% $180,616 33.04% $193,922 35.03% $208,121 37.10% $224,450 39.41% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- ------------------------- (1) Based upon total adjusted assets of $1.04 billion at December 31, 1997, and $1.12 billion, $1.14 billion, $1.15 billion and $1.17 billion, at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, respectively, for purposes of tangible and core capital requirements, and upon risk-weighted assets of $507.7 million at December 31, 1997, and $546.7 million, $553.6 million, $561.1 million and $569.5 million at the minimum, midpoint, maximum and adjusted maximum of the Adjusted Valuation Range, respectively, for purposes of the risk-based capital requirement. (2) The difference between GAAP capital and each of tangible capital and core capital is the unrealized gain on securities available for sale, net of taxes. (3) Tangible and core capital levels are shown as a percentage of adjusted total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (4) The current OTS core capital requirement for savings associations is 3% of total adjusted assets. The OTS has proposed core capital requirements which would require a core capital ratio of 3% of total adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness and a core capital ratio of 4% to 5% for all other thrifts. (5) Assumes reinvestment of net proceeds in 50% risk-weighted assets. Includes $5.8 million of general valuation allowances, all of which qualify as supplementary capital. See "REGULATION - Regulatory Capital Requirements." -21- 50 CAPITALIZATION Set forth below is the historical capitalization of the Company at December 31, 1997, and the pro forma consolidated capitalization of the Holding Company at such date, as adjusted to give effect to the sale of Common Shares based on the Adjusted Valuation Range and estimated expenses. See "USE OF PROCEEDS" and "THE CONVERSION - Pricing and Number of Common Shares to be Sold." A change in the number of Common Shares to be issued in the Conversion may materially affect the pro forma consolidated capitalization of the Holding Company.
Pro forma capitalization of the Holding Company at December 31, 1997, assuming the sale of: --------------------------------------------------------------------- 21,250,000 25,000,000 28,937,500 33,465,625 Historical Common Common Common Common capitalization Shares Shares Shares Shares of the Company at (Offering (Offering (Offering (Offering December 31, price of price of price of price of 1997 $10 per share) $10 per share) $10 per share) $10 per share) ------------ -------------- -------------- -------------- -------------- (In thousands) Deposits (1) $886,808 $886,808 $886,808 $886,808 $886,808 ======== ======== ======== ======== ======== Capital and retained earnings: Preferred shares, no par value; authorized ___________- none outstanding $ - $ - $ - $ - $ - Common shares, no par value per share: authorized - __________; assumed outstanding - as shown(2) - 1 1 1 1 Additional paid-in capital - 209,327 246,499 285,529 330,415 Shares issued to Foundation(3) - 10,625 12,500 12,500 12,500 Less expense of contribution to Foundation, net - (6,906) (8,125) (8,125) (8,125) Less Common Shares acquired by the ESOP(4) - (17,850) (21,000) (24,150) (27,772) Less Common Shares acquired by the RRP(5) - (8,925) (10,500) (12,075) (13,886) Retained earnings, net, substantially restricted(6) 140,636 140,636 140,636 140,636 140,636 Unrealized gain on available for sale securities, net 717 717 717 717 717 -------- -------- -------- -------- -------- Total capital and retained earnings $141,353 $327,625 $360,728 $395,033 $434,486 ======== ======== ======== ======== ========
- ------------------------------------ (1) No effect has been given to withdrawals from savings accounts for the purpose of purchasing Common Shares in the Conversion. Any such withdrawals will reduce pro forma deposits by the amount of such withdrawals. (2) The number of Common Shares to be issued will be determined on the basis of the final valuation of the Company. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." The number of Common Shares assumed outstanding does not reflect the issuance of any common shares which may be reserved for issuance under the Stock Option Plan. See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan." Reflects receipt of the proceeds from the sale of the Common Shares, net of estimated expenses. (3) Reflects shares to be contributed to the Foundation at an assumed value of $10 per share. (4) Assumes that 8% of the total Common Shares sold in the Conversion and contributed to the Foundation will be acquired by the ESOP with funds borrowed by the ESOP from the Holding Company for a term of 15 years at the Prime Rate less 1/2%, which is currently 8.0%. The ESOP loan will be secured solely by the Common Shares purchased by the ESOP. The Company has agreed, however, to use its best efforts to fund the ESOP based on future earnings, which would reduce the Company's total capital and retained earnings, as reflected in the table. If the ESOP purchases authorized but unissued shares from the Holding Company, such purchases would have a dilutive effect of approximately 7.4% on the voting interests of the Holding Company's shareholders. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan." (5) Assumes that a number of shares equal to 4% of the total Common Shares sold in the Conversion and contributed to the Foundation will be acquired in the open market by the RRP after the Conversion at a price of $10 per share. There can be no assurance that a sufficient number of shares will be available for purchase by the RRP, or that shares could be purchased at a price of $10 per share. A higher price per share, assuming the purchase of the entire 4% of the shares, would reduce retained earnings. The RRP may purchase shares in the open market or may purchase authorized but unissued shares from the Holding Company. If authorized but unissued shares are purchased, the voting interests of existing shareholders would be diluted approximately 3.9%. See "MANAGEMENT Stock Benefit Plans -- Recognition and Retention Plan." (6) Retained earnings include restricted and unrestricted retained earnings. See "THE CONVERSION - Principal Effects of the Conversion -- Liquidation Account" for information concerning the liquidation account to be established in connection with the Conversion and "TAXATION - Federal Taxation" for information concerning restricted retained earnings for federal tax purposes. -22- 51 PRO FORMA DATA Set forth below are the pro forma consolidated net earnings of the Holding Company for the year ended December 31, 1997, and the pro forma consolidated shareholders' equity of the Holding Company at December 31, 1997, along with the related pro forma earnings per share amounts, giving effect to the sale of the Common Shares based on the Adjusted Valuation Range. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." The pro forma data is based on the following assumptions: (i) the sale of the Common Shares occurred at the beginning of the period and yielded the net proceeds indicated; (ii) such net proceeds were invested at the beginning of the period to yield annualized after-tax net returns of 3.46%; and (iii) no withdrawals from existing deposit accounts were made to purchase the Common Shares. The assumed returns are based on the one-year U.S. Treasury bill yield of 5.32% as of December 31, 1997. This rate was used as an alternative to the arithmetic average of the Company's interest-earning assets and interest-bearing deposits. In calculating pro forma net earnings, a statutory federal income tax rate of 35% has been assumed for all periods. In the opinion of management, the assumed after-tax yield does not differ materially from the estimated after-tax yield which will be obtained on the initial investment of the cash proceeds and is viewed as being more relevant in the current low interest rate environment than the use of an arithmetic average of the fiscal year 1997 weighted average yield on interest-earning assets and weighted average rates paid on deposits during such period. Actual yields may differ, however, from the assumed returns. The pro forma consolidated net earnings amounts derived from the assumptions set forth herein should not be considered indicative of the actual results of operations of the Holding Company that would have been attained for any period if the Conversion had been actually consummated at the beginning of such period. As the table demonstrates, pro forma consolidated earnings per share and pro forma consolidated shareholders' equity per share decrease as the amount of Common Shares sold moves from the minimum of the Adjusted Valuation Range to the adjusted maximum of the Adjusted Valuation Range. In addition, the offering price as a multiple of pro forma earnings per share and as a percent of pro forma shareholders' equity per share increases as the amount of Common Shares sold moves from the minimum of the Adjusted Valuation Range to the adjusted maximum of the Adjusted Valuation Range. THE PRO FORMA DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. NO ASSURANCE CAN BE PROVIDED THAT THE ASSUMED YIELDS WILL BE ACHIEVED ON THE INVESTMENT OF THE CONVERSION PROCEEDS. THE PRO FORMA DATA DOES NOT PURPORT TO REPRESENT WHAT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS ACTUALLY WOULD HAVE BEEN HAD THE CONVERSION BEEN COMPLETED AS OF THE DATE OR AT THE BEGINNING OF THE PERIODS INDICATED, OR TO PROJECT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD. -23- 52
Year ended December 31, 1997, assuming the sale of: ------------------------------------------------------------------------------- 21,250,000 25,000,000 28,937,500 33,465,625 Common Shares Common Shares Common Shares Common Shares (Offering price of (Offering price of (Offering price of (Offering price of $10 per share) $10 per share) $10 per share) $10 per share) ------------------ ------------------ ------------------ ------------------ (Dollars in thousands, except per share amounts) Pro forma market capitalization $223,125 $262,500 $301,875 $347,156 Less shares contributed to the Foundation 10,625 12,500 12,500 12,500 -------- -------- -------- -------- Gross proceeds 212,500 250,000 289,375 334,656 Estimated expenses (3,172) (3,500) (3,845) (4,240) -------- -------- -------- -------- Estimated net proceeds 209,328 246,500 285,530 330,416 Less Common Shares acquired by the ESOP(1) (17,850) (21,000) (24,150) (27,772) Less Common Shares acquired by the RRP(2) (8,925) (10,500) (12,075) (13,886) -------- -------- -------- -------- Net cash proceeds $182,553 $215,000 $249,305 $288,758 ======== ======== ======== ======== Net income: Historical $ 13,047 $ 13,047 $ 13,047 $ 13,047 Pro forma income on net proceeds 6,313 7,435 8,621 9,985 Pro forma adjustment for the ESOP(1) (774) (910) (1,047) (1,203) Pro forma adjustment for the RRP(2) (1,160) (1,365) (1,570) (1,805) -------- -------- -------- -------- Pro forma net income $ 17,426 $ 18,207 $ 19,051 $ 20,024 ======== ======== ======== ======== Earnings per share (3)(4): Historical $ 0.63 $ 0.54 $ 0.47 $ 0.41 Pro forma income on net proceeds 0.31 0.31 0.31 0.31 Pro forma adjustment for the ESOP(1) (0.04) (0.04) (0.04) (0.04) Pro forma adjustment for the RRP(2) (0.06) (0.06) (0.06) (0.06) ------ ------ ------ ------ Pro forma net earnings per share $ 0.84 $ 0.75 $ 0.68 $ 0.62 ====== ====== ====== ====== Number of shares used in calculating earnings per share(4) 20,646,500 24,290,000 27,933,500 32,123,502 Shareholders' equity (book value) (5): Historical $141,353 $141,353 $141,353 $141,353 Estimated net Conversion proceeds 209,328 246,500 285,530 330,416 Plus shares contributed to the 10,625 12,500 12,500 12,500 Foundation Less after tax cost of Foundation (6,906) (8,125) (8,125) (8,125) Less Common Shares acquired by the ESOP (17,850) (21,000) (24,150) (27,772) Less Common Shares acquired by the RRP (8,925) (10,500) (12,075) (13,886) -------- -------- -------- -------- Pro-forma $327,625 $360,728 $395,033 $434,486 ======== ======== ======== ======== Shareholders' equity per share(3)(5): Historical $ 6.34 $ 5.28 $ 4.68 $ 4.07 Estimated net Conversion proceeds 9.38 9.39 9.46 9.52 Plus shares contributed to the Foundation 0.48 0.48 0.41 0.36 Less after tax cost of Foundation (0.31) (0.31) (0.27) (0.23) Less Common Shares acquired by the ESOP (0.80) (0.80) (0.80) (0.80) Less Common Shares acquired by the RRP (0.40) (0.40) (0.40) (0.40) ------ ------ ------ ------ Pro-forma $14.69 $13.74 $13.08 $12.52 ====== ====== ====== ====== Ratio of offering price to pro forma shareholders' equity per share(3) 68.07% 72.78% 78.45% 79.87% Offering price as a multiple of pro forma earnings per share(3) 11.90x 13.33x 14.71x 16.13x
- ------------------------------------ (Footnotes on next page) -24- 53 (1) Assumes that 8.0% of the Common Shares sold in the Conversion and contributed to the Foundation are purchased by the ESOP and that the funds used to purchase such shares are borrowed from the Holding Company. The approximate amount expected to be borrowed by the ESOP is not reflected as a liability, but is reflected as a reduction of capital. The Company intends to make annual contributions to the ESOP over a period of up to 15 years in an amount at least equal to the principal and interest requirement of the debt. The pro forma net income assumes that: (i) 119,000, 140,000, 161,000 and 185,150 shares at the minimum, mid-point, maximum, and adjusted maximum of the Adjusted Valuation Range, respectively, were committed to be released during the year at an average fair value of $10 per share in accordance with SOP 93-6; (ii) the effective tax rate was 35% for such periods; and (iii) only the ESOP shares committed to be released were considered outstanding for purposes of the per share net earnings. The pro forma shareholders' equity per share calculations assume all ESOP shares were outstanding, regardless of whether such shares would have been released. Because the Holding Company will loan to the ESOP the funds necessary to purchase the Common Shares, only principal payments on the ESOP loan are reflected as employee compensation and benefits expense. To the extent the value of the Common Shares appreciates over time, compensation expense related to the ESOP will increase in accordance with SOP 93-6. See Note 4 below. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan." (2) Assumes that 4% of the total Common Shares sold in the Conversion and contributed to the Foundation will be purchased by the RRP after the Conversion at a price of $10 per share and that one-fifth of the purchase price of the RRP shares will be expensed in each of the first five years after the Conversion. If the RRP is implemented in the first year after the completion of the Conversion, it will be subject to various OTS requirements, including the requirement that the RRP be approved by the shareholders of the Holding Company. There can be no assurance that the RRP will be approved by the shareholders, that a sufficient number of shares will be available for purchase by the RRP or that the shares could be purchased at $10 per share. A higher per share price, assuming the purchase of the entire 4% of the shares, would reduce pro forma net earnings and pro forma shareholders' equity. If an insufficient number of shares is available in the open market to fund the RRP at the desired level, the Holding Company may issue additional authorized shares. The issuance of authorized but unissued shares in an amount equal to 4% of the Common Shares issued in the Conversion would result in a 3.9% dilution in existing shareholders' voting interests. If the RRP purchases authorized but unissued shares, pro forma net earnings per share would be $0.88, $0.79, $0.72 and $0.67 for the year ended December 31, 1997, at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, respectively. In such circumstance, pro forma shareholders' equity per share would be $14.50, $13.60, $12.97 and $12.42 at December 31, 1997, at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, respectively. See "MANAGEMENT - Stock Benefit Plans -- Recognition and Retention Plan." (3) No effect has been given to shares reserved for issuance upon the exercise of stock options pursuant to the Stock Option Plan. See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan." (4) The pro forma net earnings per share calculations are determined by adding the number of shares assumed to be sold in the Conversion at the minimum, the mid-point, the maximum and the adjusted maximum of the Adjusted Valuation Range, as well as the number of shares contributed to the Foundation, which is 1,062,500 common shares at the minimum of the Adjusted Valuation Range and 1,250,000 common shares at the mid-point, the maximum and the adjusted maximum of the Adjusted Valuation Range and, in accordance with SOP 93-6, excluding ESOP shares which would not have been released during the period. Accordingly, for the year ended December 31, 1997, 1,666,000, 1,960,000, 2,254,000 and 2,595,098 shares have been subtracted from the shares assumed to be sold at the minimum, mid-point, maximum, and adjusted maximum of the Adjusted Valuation Range. See Note 1 above. (5) Pro forma shareholders' equity represents the excess of the carrying value of the assets of the Holding Company over its liabilities. The per share calculations are based upon the number of shares issued in the Conversion, without giving effect to SOP 93-6. The amounts shown do not reflect the federal income tax consequences of the potential restoration to income of the bad debt reserves for income tax purposes, which would be required in the event of liquidation. The amounts shown also do not reflect the amounts required to be distributed in the event of liquidation to Eligible Account Holders and Supplemental Eligible Account Holders from the Liquidation Account which will be established upon the consummation of the Conversion. Pro forma shareholders' equity information is not intended to represent the fair market value of the Common Shares, the current value of the Company's assets or liabilities, or the amounts, if any, that would be available for distribution to shareholders in the event of liquidation. The pro forma data may be materially affected by a change in the number of Common Shares to be sold in the Conversion and by other factors. See "TAXATION - Federal Taxation." -25- 54 COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION If the contribution were not being made to the Foundation as part of the Conversion, Keller has estimated that the pro forma aggregate market capitalization of the Holding Company would be approximately $280.0 million at the mid-point of the Adjusted Valuation Range, which is approximately $30.0 million greater than the pro forma market capitalization of the Holding Company when the contribution to the Foundation is included, and would result in an increase of 3,000,000 in the amount of Common Shares offered for sale in the Conversion. The pro forma shareholders' equity per share, the pro forma earnings per share, the pro forma price to book ratio and the pro forma price to earnings ratio would be substantially the same with or without the contribution to the Foundation. There can be no assurance that, if the contribution to the Foundation were not made, the appraisal prepared at that time would conclude that the pro forma market capitalization of the Holding Company would be the same as that estimated herein. Any appraisals prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions. For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios, at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, assuming the Conversion had been completed at December 31, 1997.
At December 31, 1997, ---------------------------------------------------------------------------------------------------- At the minimum At the mid-point At the maximum At the adjusted maximum (offering (offering (offering (offering price of $10 per share) price of $10 per share) price of $10 per share) price of $10 per share) ----------------------- ----------------------- ----------------------- ----------------------- With Without With Without With Without With Without Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Gross proceeds $ 212,500 $ 238,000 $ 250,000 $ 280,000 $ 289,375 $ 322,000 $ 334,656 $ 370,300 Pro forma market capitalization 223,125 238,000 262,500 280,000 301,875 322,000 347,156 370,300 Total assets 1,227,520 1,250,951 1,259,965 1,287,659 1,294,341 1,324,219 1,333,597 1,366,373 Total liabilities 899,895 903,562 899,237 903,679 899,308 903,647 899,111 903,719 Pro forma shareholders' equity 327,625 347,389 360,728 383,980 395,033 420,572 434,486 462,654 Pro forma consolidated net earnings 17,426 18,109 18,207 19,010 19,051 19,912 20,024 20,948 Pro forma shareholders' equity per share 14.69 14.60 13.74 13.71 13.08 13.06 12.52 12.49 Pro forma consolidated net earnings per share 0.84 0.82 0.75 0.73 0.68 0.67 0.62 0.61 Pro forma pricing ratios: Price to net earnings per share 11.90x 12.20x 13.33x 13.70x 14.71x 14.93x 15.87x 16.39x Price to book value per shar 68.07% 68.49% 72.78% 72.94% 76.45% 76.57% 79.87% 80.06% Price to net assets per share 18.18% 19.02% 20.83% 21.75% 23.32% 24.32% 26.03% 27.10% Pro forma financial ratios: Return on assets 1.42% 1.45% 1.45% 1.48% 1.47% 1.50% 1.50% 1.53% Return on shareholders' equity 5.32% 5.21% 5.05% 4.95% 4.82% 4.73% 4.61% 4.53% Shareholders' equity to assets 26.69% 27.77% 28.62% 29.82% 30.52% 31.76% 32.58% 33.86%
-26- 55 RECENT DEVELOPMENTS The following tables set forth selected financial condition data for the Company at March 31, 1998, and December 31, 1997, and selected earnings data for the Company for the three months ended March 31, 1998 and 1997. Financial data as of and for the three months ended March 31, 1998, and March 31, 1997, is derived from unaudited information. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the results have been made. The results of operations presented below are not necessarily indicative of the results that may be expected for any other period. This information should be read in conjunction with the financial statements and notes thereto included herein.
SELECTED FINANCIAL CONDITION DATA: At March 31, 1998 At December 31, 1997 ----------------- -------------------- (In thousands) Total assets $1,049,459 $1,044,993 Cash and cash equivalents 25,611 34,497 Investment securities 56,290 44,370 Mortgage-backed securities 298,715 306,271 Loans, net 635,295 633,236 FHLB stock 11,335 11,136 Deposits 888,471 886,808 Total equity 144,120 141,353
Three months ended March 31, ----------------------------------- SUMMARY OF EARNINGS: 1998 1997 ---- ---- (In thousands) Interest income $19,678 $20,001 Interest expense 9,556 10,211 ------- ------- Net interest income 10,122 9,790 Provision for loan loss allowances 250 - ------- ------- Net interest income after provision for loan loss allowances 9,872 9,790 Noninterest income 378 298 Noninterest expense 6,095 6,005 ------- ------- Income before provision for income taxes 4,155 4,083 Provision for income taxes 1,454 1,360 ------- ------- Net income $ 2,701 $ 2,723 ======= =======
-27- 56
At or for the three months ended March 31, --------------------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA: (1) 1998 1997 ---- ---- Performance ratios: Return on average assets (2) 1.03% 1.02% Return on average equity (3) 7.59 8.48 Interest rate spread (4) 3.38 3.23 Net interest margin (5) 3.96 3.74 Noninterest expense to average assets 2.33 2.25 Efficiency ratio (6) 58.05 59.53 Average interest-earning assets to average interest-bearing liabilities 115.50 113.32 Capital ratios: Average equity to average assets 13.60 12.01 Equity to assets, end of period 13.73 12.23 Tangible capital 13.67 12.25 Core capital 13.67 12.25 Risk-based capital 28.24 27.13 Asset quality ratios: Nonperforming loans to total loans at end of period (7) 1.39 1.44 Nonperforming assets to average assets (8) 0.84 0.83 Nonperforming assets to total assets at end of period (8) 0.84 0.84 Allowance for loan losses as a percent of loans 0.96 0.79 Allowance for loan losses as a percent of nonperforming loans (7) 70.14 55.02 Number of: Loans 19,231 18,812 Deposits 109,556 108,882 Full service offices 14 14
- ------------------- (1) Ratios for the three-month periods are annualized where appropriate. (2) Net income divided by average total assets. (3) Net income divided by average total equity. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (5) Net interest income as a percentage of average interest-earning assets. (6) Noninterest expense divided by the sum of net interest income and noninterest income. (7) Nonperforming loans include nonaccrual loans and restructured loans. (8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997 Total assets increased $4.4 million, or .4%, from December 31, 1997, to March 31, 1998. The primary reason for the increase was that loans increased $2.0 million mostly due to increased originations. -28- 57 Total liabilities increased $1.7 million, or .2%, primarily as a result of an increase in deposits of approximately $1.7 million. The Company had no borrowings at March 31, 1998. Total equity increased $2.7 million, or 2.0%, to $144.1 million at March 31, 1998, from $141.4 million at December 31, 1997, due mainly to net income of $2.7 million. Nonaccrual and restructured loans decreased approximately $1.3 million to $8.8 million at March 31, 1998, from $10.1 million at December 31, 1997. Nonaccrual one- to four-family mortgage loans, construction loans and commercial loans decreased $596,000, $317,000 and $268,000, respectively. At March 31, 1998, total nonaccrual and restructured loans accounted for 1.39% of net loans receivable, compared to 1.60% at December 31, 1997. Total non-performing assets were .84% of total assets, a decrease of .14% from .98% at December 31, 1997. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 NET INCOME. Net income decreased $22,000, or .8%, to $2.7 million for the three months ended March 31, 1998 from $2.7 million for the three months ended March 31, 1997. The slight decrease was due to increased provisions for loan loss allowances and income taxes, which offset the increase in net interest income. NET INTEREST INCOME. Net interest income increased $332,000, or 3.4%, for the first quarter of 1998 compared to the first quarter of 1997, primarily due to a more rapid rate of decrease in the cost of deposits than in the yield on interest-earning assets. PROVISION FOR LOAN LOSSES. The provision for loan loss allowances increased $250,000 in the first quarter of 1998, as a result of an increase in the total loan portfolio, particularly in commercial and consumer loans that generally have greater inherent risk than residential first mortgage loans. During the three months ended March 31, 1998, the Company had charge-offs of $60,000 and recoveries of $4,000. At March 31, 1998, the Company's allowance for loan losses totaled $6.2 million, which was .96% of total loans. NONINTEREST INCOME. Noninterest income increased $80,000, or 26.8%, to $378,000 for the three months ended March 31, 1998, from $298,000 for the three months ended March 31, 1997. The increase was primarily due to increases in service charges and miscellaneous fees. NONINTEREST EXPENSE. Total noninterest expense increased $90,000, or 1.5%, for the first quarter of 1998 compared to the first quarter of 1997, primarily as a result of increases in compensation and related benefits expenses. FEDERAL INCOME TAXES. The provision for federal income taxes increased $94,000, or 6.9%, for the first quarter of 1998 compared to the first quarter of 1997, due to an increase in pre-tax income. -29- 58 CONDENSED STATEMENTS OF INCOME The following are condensed statements of income of the Company for each of the years in the three year period ended December 31, 1997.
Year ended December 31, --------------------------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Interest and dividend income $ 82,685 $81,749 $79,834 Interest expense-deposits 40,463 43,009 41,104 -------- ------- ------- Net interest income 42,222 38,740 38,730 Recovery of loan loss allowances (1,546) -- -- -------- ------- ------- Net interest income after recovery of loan loss allowances 43,768 38,740 38,730 -------- ------- ------- Noninterest income 1,564 1,291 1,554 Noninterest expenses (1) 25,303 30,068 21,995 -------- ------- ------- Income before income taxes 20,029 9,963 18,289 Income taxes 6,982 3,332 6,707 -------- ------- ------- Net income $ 13,047 $ 6,631 $11,582 ======== ======= =======
(1) For the year ended December 31, 1996, noninterest expenses include the $5.9 million one-time assessment imposed on the Company as a result of legislation to recapitalize the SAIF. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's net income generally depends upon its net interest income, which is the difference between the interest and dividend income earned on its loans and investments and the interest expense on its deposits. The Company's net interest income is significantly affected by general economic conditions and policies of regulatory authorities, and unusual events can have significant, non-recurring effects on net income. Such events may include regulatory actions, changes in accounting methods and transitional activities in financial instruments such as asset sales. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND AT DECEMBER 31, 1996 Total assets were $1.0 billion at December 31, 1997, a $29.7 million decrease compared to December 31, 1996. The decline in total assets was primarily due to the funding of deposit outflows through principal repayments of mortgage-backed securities. Net loans increased $16.3 million, or 2.6%, to $633.2 million at December 31, 1997, compared to $616.9 million at December 31, 1996. The most significant increase was in commercial loans, which increased $13.2 million, and loans secured by one- to four-family residences, which increased $7.6 million compared to the prior year. These increases were offset by decreases of $1.8 million in nonresidential real estate loans and $3.6 million in one- to four-family construction loans. Funds not utilized in lending programs or for operations are held in investment securities or mortgage-backed securities. Investment securities increased $1.7 million, or 4.1%, from December 31, 1996, and totaled $44.4 million at December 31, 1997. Investment securities available for sale increased from $14.7 million to $39.4 million at December 31, 1997, whereas investment securities held to maturity declined from $28.0 million -30- 59 to $5.0 million from 1996 to 1997. The shift to available for sale investment securities and the $13.9 million increase in federal funds sold provide the Company with a larger source of funds to utilize in periods of increased loan origination activity. Mortgage-backed securities decreased $64.6 million, or 17.4%, to $306.3 million at December 31, 1997. Proceeds from maturities and repayments of mortgage-backed securities were primarily used to fund loan growth and deposit outflows. Total non-earning assets increased by $2.1 million, or 7.6%, from December 31, 1996, and totaled $30.1 million at December 31, 1997. This increase was primarily due to an increase of $1.3 million in premises and equipment due to capital expenditures for the construction of a branch office and an increase of $932,000 in vault cash. Total deposits decreased by $45.3 million, or 4.9%, from December 31, 1996, primarily as a result of disintermediation, and totaled $886.8 million at December 31, 1997. The decrease was primarily due to a $28.4 million decrease in certificate accounts, a $12.5 million decrease in savings accounts, a $3.5 million decrease in checking and demand accounts, and a $7.9 million decrease in money market accounts. Total equity increased $13.2 million, or 10.3%, at December 31, 1997, compared to December 31, 1996, primarily due to net income of $13.0 million during the year and a $175,000 increase in the net unrealized gain on securities available for sale, net of taxes. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 NET INCOME. Net income increased $6.4 million, or 96.8%, to $13.0 million for the year ended December 31, 1997, compared to $6.6 million for the year ended December 31, 1996. The results for 1996 reflect the payment of a $5.9 million one-time assessment to recapitalize the SAIF. Other factors accounting for the increase in net income from 1996 to 1997 were a $3.5 million increase in net interest income, a $1.5 million loan loss recovery and a decrease in deposit insurance premiums, which were partially offset by a $2.0 million increase in salaries and employee benefits and a $3.7 million increase in federal income taxes. NET INTEREST INCOME. Net interest income increased $3.5 million, or 9.0%, to $42.2 million in 1997 from $38.7 million for 1996. The Company's interest rate spread increased 39 basis points to 3.53% for 1997 from 3.14% for 1996 as the Company experienced a 30 basis point increase in the yield on its interest-earning assets and a nine basis point decrease in the cost of its interest-bearing liabilities. The interest rate spread was favorably impacted by the recovery of delinquent interest on several large loans, discussed below. Total interest income increased $936,000, or 1.1%, in 1997 from 1996. Interest income on loans receivable increased $5.6 million, primarily as a result of an increase of $33.4 million, or 5.7%, in the average balance of net loans and a recovery of $3.3 million of interest on three previously delinquent loans. The increase in average loan balances was primarily in higher yielding commercial loans, although one- to four-family loans also increased year to year. The Company has emphasized growth in loans, particularly commercial and consumer loans, in order to achieve a higher net yield and to increase the loan to deposit ratio. The growth in interest income on loans was partially offset by a reduction in interest income on mortgage-backed securities, as the Company reduced the average balance of these lower-yielding investments. The reduction in the average balance of mortgage-backed securities has resulted from the repayments and maturities of mortgage-backed securities, the proceeds of which have been used primarily to fund deposit outflows and the increase in net loan balances. The average yield on the Company's interest-earning assets, including the effects of the recovery of delinquent interest discussed below, increased to 8.01% from 7.71%. Total interest income for 1997 was affected by recoveries of approximately $3.3 million of interest on three loans that had been nonaccruing for a significant period of time. Without this recovery of delinquent interest, the Company's total interest income for 1997 would have been $79.3 million, resulting in a $2.4 million, -31- 60 or 2.9%, decrease in total interest income compared to 1996. The resulting average yield on interest-earning assets would have been 7.68% for 1997, approximately 33 basis points below the yield achieved as a result of the interest recovery and three basis points below the yield for 1996. Similarly, the Company's interest rate spread would have been 3.20% for 1997 compared to 3.14% for 1996. Total interest expense decreased $2.5 million, or 5.9%, from 1996 to 1997. The average balance of interest-bearing liabilities decreased $36.4 million, or 3.9%, and the average rate paid decreased to 4.48% in 1997 from 4.57% in 1996. Deposits, primarily certificate of deposits, declined year to year, primarily as a result of maturing certificates being reinvested in alternative investments, such as mutual funds. See "-Liquidity and Capital Resources." PROVISION FOR LOAN LOSSES. Provisions or recoveries for loan losses are charged or credited to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for estimated losses based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio, particularly in commercial loans, and prior loan loss experience. See "THE BUSINESS OF THE COMPANY - Lending Activities -- Allowance for Loan Losses." A net recovery of $1.5 million was credited to operations in 1997, and no amounts were recorded as provisions or recoveries in 1996. The recovery recorded in 1997 was due to the significant settlement on several large loans which also affected the Company's total interest income for 1997. See "Net Interest Income." In 1997, the Company recovered $2.9 million that had been charged off in prior years. Approximately $2.8 million of the recovery related to a $4.3 million loan. At December 31, 1997, the Company's allowance for loan losses totaled $6.0 million, which equaled .9% of total loans. Although management uses the best information available in assessing the adequacy of the allowance, future adjustments to the allowance may be necessary due to changes in the economic, operating, regulatory and other conditions affecting the Company. While the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts. NONINTEREST INCOME. Noninterest income increased $273,000, or 21.1%, to $1.6 million for 1997 from $1.3 million for 1996. Substantially all of the Company's other income is derived from service fees and other charges which totaled $1.1 million for 1997 compared to $755,000 for 1996. Service fees, primarily service fees on deposit accounts, increased during the year due to an increase in service charge fee schedules based on current market conditions. NONINTEREST EXPENSE. Noninterest expense decreased $4.8 million, or 15.8%, to $25.3 million for 1997 from $30.1 million in 1996. This decrease was primarily attributable to the $5.9 million one-time SAIF assessment in 1996. Excluding the SAIF one-time assessment, noninterest expense was $24.2 million for 1996. As a result of the recapitalization of the SAIF, the FDIC substantially reduced deposit insurance premiums. Since January 1, 1997, the Company has paid deposit insurance premiums at the rate of $.063 per $100 of deposits. Prior to the recapitalization of the SAIF, deposit insurance premiums were $.23 per $100 of deposits. Salaries and employee benefits costs increased $2.0 million, or 15.5%, as a result of normal wage increases and an increase in benefits costs for health care and postretirement health benefits. The Company anticipates that other operating expenses will increase following the Conversion as a result of increased costs associated with operating as a public company and increased compensation expense as a result of adoption of the ESOP and the RRP. See "MANAGEMENT Stock Benefit Plans -- Employee Stock Ownership Plan, and -- Recognition and Retention Plan." -32- 61 FEDERAL INCOME TAXES. Federal income taxes totaled $7.0 million for 1997, an increase of $3.7 million, or 109.5%, compared to $3.3 million in 1996. Income taxes in 1996 were lower because of the one-time SAIF assessment, resulting in decreased pre-tax income. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 NET INCOME. Net income decreased $5.0 million, or 42.7%, to $6.6 million for the year ended December 31, 1996, compared to $11.6 million for the year ended December 31, 1995. The results of 1996 include the payment of the $5.9 million one-time SAIF assessment. NET INTEREST INCOME. Net interest income did not change significantly in 1996 compared to 1995. The Company's interest rate spread decreased 16 basis points to 3.14% for 1996 from 3.30% in 1995, as the Company experienced a nine basis point decrease in the average yield on its interest-earning assets and a seven basis point increase in the cost of its interest-bearing liabilities. Total interest income increased $1.9 million, or 2.4%, in 1996 compared to 1995. Interest income on net loans increased $5.5 million, primarily as a result of an increase of $64.4 million, or 12.2%, in the average balance of net loans. The Company achieved growth in most categories of loans, although the most significant increase occurred in one- to four-family real estate loans. This growth was based on targeted retail programs and provided the Company with higher yields than could be obtained on mortgage-backed securities. The Company's average yield on net loans increased three basis points to 8.23% in 1996, and the net yield on mortgage-backed securities decreased, dropping 43 basis points, from 7.61% for 1995 to 7.18% for 1996. The average yield on the Company's interest-earning assets decreased from 7.80% to 7.71% as a result of lower yields on investment and mortgage-backed securities. Total interest expense increased $1.9 million, or 4.6%, from 1995 to 1996. The average balance of interest-bearing liabilities increased $26.3 million, or 2.9%, and the average rate paid increased from 4.50% to 4.57%. Interest expense increased as certificate of deposit average balances increased due to competitive pricing. PROVISION FOR LOAN LOSSES. There was no provision for loan losses in 1996 or 1995 as the Company's evaluation of the allowance for loan losses indicated that it had an adequate reserve for the loan balance in accordance with generally accepted accounting principles ("GAAP") and the Company's internal policies. NONINTEREST INCOME. Noninterest income decreased $263,000, or 16.9%, to $1.3 million for 1996 from $1.6 million for 1995, primarily as a result of gains on sales of securities in 1995 of $395,000 which did not recur in 1996. Service fees and other charges totaled $755,000 for 1996 compared with $681,000 for 1995. NONINTEREST EXPENSE. Noninterest expense increased $8.1 million, or 36.7%, to $30.1 million for 1996 from $22.0 million in 1995. This increase was primarily attributable to a one-time SAIF assessment of $5.9 million and an increase of $1.6 million in computer system conversion-related expenses. Excluding the one-time SAIF assessment, noninterest expense was $24.2 million for 1996. FEDERAL INCOME TAXES. Federal income taxes totaled $3.3 million for 1996, a decrease of $3.4 million, or 50.3%, compared to $6.7 million in 1995, primarily due to lower pre-tax income as a result of the one-time SAIF assessment. -33- 62 YEAR 2000 ISSUE The Company's operations, like those of most financial institutions, depend almost entirely on computer systems. See "BUSINESS OF THE COMPANY - Year 2000 Considerations." The Company is addressing the potential problems associated with the possibility that the computers which control or operate the Company's operating systems, facilities and infrastructure may not be programmed to read four-digit date codes and, upon arrival of the year 2000, may recognize the two-digit code "00" as the year 1900, causing systems to fail to function or to generate erroneous data. The Company is working with the companies that supply or service its computer-operated or -dependent systems to identify and remedy any year-2000 related problems. The Company has established a December 31, 1998 deadline for its third-party data service bureau to be year-2000 compliant. The OTS recently completed an examination of the Company's year 2000 policies and plans and found the Company's actions to be satisfactory. The Board of Directors reviews the Company's progress in addressing year-2000 issues quarterly. At this time, the Company has not identified any specific expenses which are reasonably likely to be incurred by the Company in connection with year-2000 issues and the Company does not expect to incur significant expense to implement corrective measures. No assurance can be given at this time, however, that significant expense will not be incurred in future periods. In the event that the Company is ultimately required to purchase replacement computer systems, programs and equipment, or that substantial expense must be incurred to make the Company's current systems, programs and equipment year-2000 compliant, the Company's net income and financial condition could be adversely affected. While the Company is endeavoring to ensure that its computer-dependent operations are year-2000 compliant, no assurance can be given that some year-2000 problems will not occur. In addition to possible expense related to its own systems, the Company could incur losses if year-2000 issues adversely affect the Company's depositors or borrowers. Such problems could include delayed loan payments due to year-2000 problems affecting any of the Company's significant borrowers or impairing the payroll systems of large employers in the Company's primary market area. Because the Company's loan portfolio is diversified with regard to individual borrowers and types of businesses and the Company's primary market area is not significantly dependent upon one employer or industry, the Company does not expect any significant or prolonged year-2000 related difficulties that will affect net earnings or cash flow. See "THE BUSINESS OF THE COMPANY - Loans to One Borrower Limits, and - Primary Market Area." YIELDS EARNED AND RATES PAID The following table sets forth certain information relating to the Company's average balance sheet information and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances. Nonaccruing loans have been included in the table as loans carrying a zero yield. The average balance for securities available for sale is computed using the carrying value and the average yield on securities available for sale has been computed using the historical amortized cost average balance. -34- 63
Year ended December 31, ------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------ ------------------------------ ------------------------------ Average Interest Average Interest Average Interest outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/ balance paid rate balance paid rate balance paid rate ----------- -------- ------ ----------- ------- ------ ----------- ------- ------ (Dollars in thousands) Interest-earning assets: Net loans (1) $ 623,546 $54,148 8.68% $ 590,128 $48,586 8.23% $ 525,766 $43,093 8.20% Mortgage-backed securities: Available for sale 73,053 5,122 7.01 96,229 6,871 7.14 90,840 6,969 7.67 Held to maturity 267,242 19,024 7.12 305,583 21,988 7.20 313,667 23,827 7.60 Investment securities: Available for sale 33,883 2,169 6.40 17,903 1,226 6.85 32,358 2,253 6.96 Held to maturity 13,333 843 6.32 29,944 1,780 5.94 36,361 2,185 6.01 Other interest-earning assets 21,716 1,379 6.35 21,034 1,298 6.17 24,002 1,507 6.28 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Total interest-earning assets 1,032,773 82,685 8.01 1,060,821 81,749 7.71 1,022,994 79,834 7.80 Noninterest earning assets 24,985 23,809 23,708 ---------- ---------- ---------- Total assets $1,057,758 $1,084,630 $1,046,702 ========== ========== ========== Interest-bearing liabilities: Deposits: Checking and demand accounts $ 120,962 2,906 2.40 $ 122,993 3,248 2.64 $ 125,466 3,365 2.68 Savings accounts 248,914 7,387 2.97 257,806 7,879 3.06 266,462 8,123 3.05 Certificates of deposit 534,038 30,170 5.65 559,485 31,882 5.70 522,024 29,616 5.67 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Total deposits 903,914 40,463 4.48 940,284 43,009 4.57 913,952 41,104 4.50 Total interest-bearing liabilities 903,914 40,463 4.48 940,284 43,009 4.57 913,952 41,104 4.50 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Noninterest-bearing liabilities 19,109 18,744 16,718 ---------- ---------- ---------- Total liabilities 923,023 959,028 930,670 Equity 134,735 125,602 116,012 ---------- ---------- ---------- Total liabilities and $1,057,758 $1,084,630 $1,046,682 ========== ========== ========== equity Net interest income and interest rate spread $ 42,222 3.53% $38,740 3.14% $38,730 3.30% ======== ==== ======= ==== ======= ==== Net yield on interest earning assets 4.09% 3.65% 3.79% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities 114.26% 112.82% 111.93% ====== ====== ======
- ------------------- (1) Nonaccrual loans are included in the average balance. -35- 64 The following table sets forth, at the date indicated, the weighted average yields earned on the Company's interest-earning assets, the weighted average interest rates paid on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates at the date presented. At December 31, 1997 --------------- Weighted average yield on loans 7.85% Weighted average yield on investment securities 6.32 Weighted average yield on mortgage-backed securities 7.08 Weighted average yield on FHLB stock 7.25 Weighted average yield on interest-bearing deposits 5.50 Weighted average yield on all interest-earning assets 7.50 Weighted average rate paid on deposits 4.56 Interest rate spread 2.94 The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior period rate), (ii) changes in rate (change in rate multiplied by prior period volume) and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated in proportion to the changes due to volume and rate:
Year ended December 31, -------------------------------------------------------------------------- 1997 vs. 1996 1996 vs. 1995 ---------------------------------- --------------------------------- Increase Increase (decrease) due to Total (decrease) due to Total ------------------ increase ------------------ increase Rate Volume (decrease) Rate Volume (decrease) ---- ------ ---------- ---- ------ ---------- (In thousands) Interest-earning assets: Loans $2,734 $ 2,828 $ 5,562 $ 193 $5,300 $ 5,493 Mortgage-backed securities: Available for sale (122) (1,627) (1,749) (682) 584 (98) Held to maturity (232) (2,732) (2,964) (1,236) (603) (1,839) Investment securities: Available for sale (74) 1,017 943 (37) (990) (1,027) Held to maturity 121 (1,058) (937) (23) (382) (405) Other interest-earning assets 38 43 81 (25) (184) (209) ------ ------- ------- ------- ------ ------- Total interest-earning assets $2,465 $(1,529) 936 $(1,810) $3,725 $ 1,915 ====== ======= ------- ======= ====== ------- Interest-bearing liabilities: Savings accounts (225) (267) (492) 21 (265) (244) Checking accounts (289) (53) (342) (51) (66) (117) Certificates of deposit (271) (1,441) (1,712) 132 2,134 2,266 ------ ------- ------- ------- ------ ------- Total interest-bearing liabilities $ (785) $(1,761) (2,546) $ 102 $1,803 1,905 ====== ======= ------- ======= ====== ------- Change in net interest income $ 3,482 $ 10 ======= =======
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK QUALITATIVE ASPECTS OF MARKET RISK. The principal market risk affecting the Company is interest rate risk. The Company does not maintain a trading account for any class of financial instrument, and the Company -36- 65 is not affected by foreign currency exchange rate risk or commodity price risk. Because the Company does not hold any equity securities other than stock in the FHLB of Cincinnati, the Company is not subject to equity price risk. The Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Interest rate risk is defined as the sensitivity of an institution's earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk of the Company, the Board of Directors has adopted an interest rate risk policy which charges the Board to review quarterly reports related to interest rate risk and to set exposure limits for the Company as a guide to senior management in setting and implementing day to day operating strategies. QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk analysis, the Company uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of its capital regulations and also considers the OTS methodology in light of the rate shock estimates contained in the quarterly rate shock risk reports prepared by an outside consulting firm that specializes in interest rate risk assessments as well as the sensitivity of earnings to changes in interest rates and the corresponding impact on net interest income. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV and net interest income that would result from various levels of theoretical basis point changes in market interest rates. The Company uses a net portfolio value and earnings simulation model prepared by a third party as its primary method to identify and manage its interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies. Presented below, as of December 31, 1997, is an analysis of the Company's interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. The percentage changes fall within the policy limits set by the Board of Directors of the Company as the maximum change in NPV that the Board of Directors deems advisable in the event of various changes in interest rates.
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) +400 $121,906 $(67,382) (35.60)% 12.97% (4.95)% $(4,373) (12.37)% +300 137,047 (52,241) (27.60) 14.17 (3.75) (3,225) (9.12) +200 154,571 (34,717) (18.34) 15.51 (2.41) (2,064) (5.84) +100 172,673 (16,615) (8.78) 16.82 (1.10) (961) (2.72) Static 189,288 - - 17.92 - - - (100) 196,124 6,836 3.61 18.23 0.31 290 0.82 (200) 192,844 3,557 1.88 17.76 (0.16) (444) (1.26) (300) 192,561 3,273 1.73 17.52 (0.40) (1,145) (3.24) (400) 195,076 5,788 3.06 17.48 (0.44) (1,357) (3.84)
As illustrated in the table, the Company's NPV is more sensitive to increases in interest rates than to decreases. The Company's sensitivity to increases in rates occurs principally because, as rates increase, -37- 66 borrowers become less likely to prepay fixed-rate loans than when interest rates are declining, and the majority of the Company's loans have fixed rates of interest. See "THE BUSINESS OF THE COMPANY - Lending Activities." In addition, loan demand is adversely affected by increases in interest rates. Thus, in a rising interest rate environment, the amount of interest the Company would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made, while the interest the Company would pay on its deposits would increase rapidly because deposits generally have shorter periods to repricing than loans. As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations. The Board of Directors and management of the Company believe that certain factors afford the Company the ability to operate successfully despite its exposure to interest rate risk. The Company manages its interest rate risk by maintaining capital well in excess of regulatory requirements. See "THE BUSINESS OF THE COMPANY - Investment Activities." For the quarter ended December 31, 1997, the Company's tangible capital was 13.47% of total assets and its liquidity ratio was 11.48%. See " - Liquidity and Capital Resources." LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities. These activities are summarized below for the years ended December 31, 1997, 1996 and 1995.
Years ended December 31, ------------------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Net income $13,047 $ 6,631 $ 11,582 Adjustments to reconcile net income to net cash from operating activities 136 (683) 959 ------- -------- -------- Net cash from operating activities 13,183 5,948 12,541 Net cash from investing activities 47,035 (20,532) (31,814) Net cash from financing activities (45,389) (7,562) 40,485 ------- -------- -------- Net change in cash and cash equivalents 14,829 (22,146) 21,212 Cash and cash equivalents at beginning of period 19,668 41,814 20,602 ------- -------- -------- Cash and cash equivalents at end of period $34,497 $ 19,668 $ 41,814 ======= ======== ========
The Company's principal sources of funds are deposits, loan repayments, maturities of securities, and other funds provided by operations. The Company also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition. The Company maintains investments in liquid assets based upon management's assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the Company's asset and liability management program. At December 31, 1997, approximately $350.0 million of the Company's certificates of deposit were expected to mature within one year. Based on past experience and the Company's prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with the Company at maturity, although there can be no assurance that this will occur. -38- 67 OTS regulations presently require the Company to maintain an average daily balance of investments in United States Treasury, federal agency obligations and other investments in an amount equal to 4% of the sum of the Company's average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement is intended to provide a source of relatively liquid funds upon which the Company may rely, if necessary, to fund loan originations, deposit withdrawals or other short-term funding needs. On December 31, 1997, the Company had commitments to originate mortgage loans totaling $7.7 million. Loan commitments are generally for 30 days. The Company considers its liquidity and capital reserves sufficient to meet its outstanding short- and long-term needs. The Company is required by OTS regulations to meet certain minimum capital requirements, which must be generally as stringent as the requirements established for banks. Current capital requirements call for tangible capital of 1.5% of adjusted total assets, core capital (which for the Company consists solely of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for the Company consists of core capital and general valuation allowances) of 8% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk). The OTS has proposed to amend the core capital requirement so that those banks that do not have the highest examination rating and an acceptable level of risk will be required to maintain core capital of from 4% to 5%, depending on the institution's examination rating and overall risk. The Company does not anticipate that it will be adversely affected if the core capital requirements are amended as proposed. The following table summarizes the Company's regulatory capital requirements and actual capital at December 31, 1997.
Excess of actual capital Actual capital Current requirement over current requirement Applicable ------------------------ ---------------------- ---------------------- asset Amount Percent Amount Percent Amount Percent total ----- ------- ------ ------- ------ ------- ----- (Dollars in thousands) Tangible capital $140,636 13.47% $15,661 1.50% $124,975 11.97% $1,044,069 Core capital 140,636 13.47 31,322 3.00 109,314 10.47 1,044,069 Risk-based capital 146,461 28.85 40,619 8.00 105,842 20.85 507,736
At December 31, 1997, the Company had no material commitments for capital expenditures. IMPACT OF RECENT ACCOUNTING STANDARDS ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting method are required to disclose in a footnote to the financial statements pro forma net income and, if presented, earnings per share, as if this statement had been adopted. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. Management of the Company has not completed an analysis of the potential effects of SFAS No. 123 on its financial condition or results of operations, but expects to use the intrinsic value method upon consummation of the Conversion. -39- 68 ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. SFAS No. 125 applies prospectively to transactions occurring after December 31, 1996, and establishes new standards that focus on control whereas, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The adoption of SFAS No. 125 did not have a material impact on the Company's results of operations or financial position. DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF SFAS NO. 125. In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 defers for one year the effective date of portions of SFAS No. 125 that address secured borrowings and collateral for all transactions. Additionally, SFAS No. 127 defers for one year the effective date of transfers of financial assets that are part of repurchase agreements, securities lending and similar transactions. EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," standardizes the international calculation for earnings per share and requires companies with complex capital structures that have publicly held common stock or potential common stock to present both basic and diluted earnings per share on the face of the income statement. SFAS No. 128 became effective for periods ending after December 15, 1997. COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income," issued in July 1997, establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 requires that companies (i) classify terms of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial condition. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassifications of financial statements for earlier periods provided for comprehensive purposes is required. SEGMENT INFORMATION. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" establishes standards for the way public business enterprises report information about operating segments and establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Information required to be disclosed includes segment profit or loss, certain specific revenue and expense items, segment assets and certain other information. SFAS No. 131 is effective for the Holding Company for financial statements issued for the fiscal year ending December 31, 1998. PENSION AND POSTRETIREMENT DISCLOSURES. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the disclosures for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for the Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers Accounting for Postretirement benefits Other than Pensions," were issued. SFAS No. 132 suggests combined formats for presentation of pension and other postretirement benefit disclosures. SFAS No. 132 does not change -40- 69 the measurement or recognition of those plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. Restatements of disclosures for earlier periods provided for comparative purposes is required. Management does not believe the adoption of SFAS No. 132 will have a material impact on the Company's financial condition and results on operations. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and notes included herein have been prepared in accordance with GAAP. GAAP requires the Company to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. In management's opinion, changes in interest rates affect the financial condition of the Company to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. THE BUSINESS OF THE COMPANY GENERAL The Company is a mutual savings and loan association which was organized under Ohio law in 1889 as "The Home Building and Loan." In 1897, the name of the Company was changed to "The Home Savings and Loan Company of Youngstown, Ohio." As an Ohio savings and loan association, the Company is subject to supervision and regulation by the OTS, the Division and the FDIC. The Company is a member of the FHLB of Cincinnati, and the deposits of the Company are insured up to applicable limits by the FDIC in the SAIF. See "REGULATION." The Company conducts business from its main office located in Youngstown, Ohio and 13 full-service branches, located in the Northern Ohio communities of Austintown, Boardman, Canfield, Columbiana, East Palestine, Liberty, Lisbon, Niles, Poland, Salem and Struthers. The principal business of the Company is the origination of mortgage loans on one- to four-family residential real estate located in the Company's primary market area, which consists of northern Columbiana County, Mahoning County and southern Trumbull County. The Company also originates loans secured by nonresidential real estate in its primary market area. In addition to real estate lending, the Company originates commercial loans and various types of consumer loans, including home equity loans, education loans, loans secured by savings accounts and motor vehicles and unsecured loans. See "Lending Activities." The Company invests in interest-bearing deposits in other financial institutions, federal funds and U.S. Treasury and agency securities. See "Investment Activities." Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC in the SAIF, principal repayments of loans and maturities of securities. See "Deposits and Borrowings." Interest on loans and other investments is the Company's primary source of income. The Company's principal expense is interest paid on deposit accounts. Operating results are dependent to a significant degree on the net interest income of the Company, which is the difference between interest earned on loans and other investments and interest paid on deposits. Like most thrift institutions, the Company's interest income and interest expense are significantly affected by general economic conditions and by the policies of various regulatory authorities. See "RISK FACTORS - Interest Rate Risk" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset and Liability Management." -41- 70 PRIMARY MARKET AREA The Company's primary market area for lending and deposits is Mahoning County, Ohio, and adjacent areas in southern Trumbull County and northern Columbiana County. The Company operates nine full service offices in Mahoning County, three full service offices in northern Columbiana County and two full service offices in southern Trumbull County. The Company's main office is located in Youngstown, Ohio, which is the county seat of Mahoning County. Youngstown is approximately 75 miles northwest of Pittsburgh, Pennsylvania and 75 miles southeast of Cleveland, Ohio. Mahoning, Columbiana and Trumbull Counties have higher unemployment rates than either Ohio or the United States. Mahoning County's unemployment rate declined, however, from 6.1% in 1995 to 5.8% in 1996, compared to 4.3% for the state and 5% for the United States, and was 5.8% through the first 11 months of 1997. The unemployment rates for Columbiana and Trumbull Counties were 5.2% and 5.1%, respectively, through the first 11 months of 1997. The population of the counties in the Company's primary market area decreased 0.3% from 432,851 in 1990 to 431,488 in 1996, while the population of Mahoning County decreased 1.3% from 264,806 to 261,277. Median household income in the Company's primary market area and Mahoning County rose approximately 7.5% and 10.2%, respectively, from 1990 to 1996, but still trailed the Ohio median by approximately $4,700 and $6,400, respectively, in 1996. According to the Youngstown/Warren Regional Chamber of Commerce, major employers in the Company's primary market area include Delphi Packard Electric Systems, General Motors and HM Health Services. The Company faces intense competition from many financial institutions for deposits and loan originations. See "- Competition" and "RISK FACTORS - Competition in Primary Market Area." LENDING ACTIVITIES GENERAL. The Company's principal lending activity is the origination of conventional real estate loans secured by one- to four-family residences located in the Company's primary market area. The Company also originates loans secured by multifamily and nonresidential real estate and originates loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. In addition to real estate lending, the Company originates various types of consumer credits, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles, unsecured loans and loans for commercial business purposes. -42- 71 LOAN PORTFOLIO COMPOSITION. The following table presents certain information regarding the composition of the Company's loan portfolio at the dates indicated:
At December 31, -------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Percent of Percent of Percent of Amount total loans Amount total loans Amount total loans ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Real estate loans: Permanent One- to four-family $489,677 74.19% $482,089 75.23% $428,213 75.39% Multifamily 8,944 1.36 8,778 1.37 16,042 2.82 Nonresidential 33,479 5.07 35,315 5.51 36,845 6.48 Land 285 0.04 195 0.03 1,280 0.23 -------- ------ -------- ------ -------- ------ Total permanent 532,385 80.66 526,377 82.14 482,380 84.92 Construction loans: One- to four-family 24,044 3.64 27,610 4.31 19,804 3.49 Multifamily 325 0.05 490 0.08 597 0.11 -------- ------ -------- ------ -------- ------ Total construction 24,369 3.69 28,100 4.39 20,401 3.60 -------- ------ -------- ------ -------- ------ Total real estate loans 556,754 84.35 554,477 86.53 502,781 88.52 Consumer loans Home equity 17,097 2.59 14,581 2.28 11,439 2.01 Auto 2,457 0.37 3,486 0.54 4,582 0.81 Education 3,479 0.53 2,701 0.42 2,788 0.49 Other (1) 20,355 3.08 18,837 2.94 17,384 3.06 -------- ------ -------- ------ -------- ------ Total consumer 43,388 6.57 39,605 6.18 36,193 6.37 Commercial loans 59,897 9.08 46,742 7.29 29,043 5.11 -------- ------ -------- ------ -------- ------ Total loans 660,039 100.00% 640,824 100.00% 568,017 100.00% ====== ====== ====== Less net items 26,803 23,901 21,328 -------- -------- -------- Total loans, net $633,236 $616,923 $546,689 ======== ======== ========
At December 31, ---------------------------------------------------- 1994 1993 ---- ---- Percent of Percent of Amount total loans Amount total loans ------ ----------- ------ ----------- Real estate loans: Permanent One- to four-family $386,663 73.72% $346,183 73.12% Multifamily 14,838 2.83 17,067 3.60 Nonresidential 43,235 8.24 47,482 10.03 Land 1,666 0.32 1,208 0.26 -------- ------ -------- ------ Total permanent 446,402 85.11 411,940 87.01 Construction loans: One- to four-family 18,200 3.47 15,286 3.23 Multifamily 994 0.19 56 0.01 -------- ------ -------- ------ Total construction 19,194 3.66 15,342 3.24 -------- ------ -------- ------ Total real estate loans 465,596 88.77 427,282 90.25 Consumer loans Home equity 11,265 2.15 11,613 2.45 Auto 2,339 0.45 1,931 0.41 Education 2,217 0.42 2,130 0.45 Other (1) 15,907 3.03 12,002 2.54 -------- ------ -------- ------ Total consumer 31,728 6.05 27,676 5.85 Commercial loans 27,165 5.18 18,476 3.90 -------- ------ -------- ------ Total loans 524,489 100.00% 473,434 100.00% ====== ====== Less net items 21,076 20,510 -------- -------- Total loans, net $503,413 $452,924 ======== ========
- ---------------------------- (1) Consists of overdraft protection loans and loans to individuals secured by demand accounts, deposits, automobiles and one- to four-family residences. -43- 72 LOAN MATURITY. The following table sets forth certain information as of December 31, 1997, regarding the dollar amount of loans maturing in the Company's portfolio based on their contractual terms to maturity. Demand loans and other loans having no stated schedule of repayments or no stated maturity are reported as due in one year or less. Mortgage loans originated by the Company generally include due-on-sale clauses that provide the Company with the contractual right to deem the loan immediately due and payable in the event the borrower transfers the ownership of the property without the Company's consent. The table does not include the effects of possible prepayments or scheduled repayments.
Principal repayments contractually due in the years ended December 31, 2001 - 2003 - 2008 - 2013 and 1998 1999 2000 2002 2007 2012 thereafter Total ---- ---- ---- ------ ------ ------ ---------- ----- (In thousands) Residential mortgage loans (1) $52,422 $24,915 $26,051 $54,552 $145,315 $90,749 $129,271 $523,275 Nonresidential real estate loans 2,078 2,217 2,038 4,301 14,649 8,088 108 33,479 Commercial loans 16,380 5,360 3,886 6,598 12,883 11,967 2,823 59,897 Consumer loans 8,505 5,237 4,137 6,935 16,454 1,132 988 43,388 ------- ------- ------- ------- -------- -------- -------- -------- Totals $79,385 $37,729 $36,112 $72,386 $189,301 $111,936 $133,190 $660,039 ======= ======= ======= ======= ======== ======== ======== ========
- ------------------- (1) Includes permanent and construction loans for one- to four-family and multi-family properties and land loans. The next table sets forth the dollar amount of all loans due after December 31, 1998, which have predetermined interest rates and have floating or adjustable interest rates: Due after December 31, 1998 --------------------------- (In thousands) Fixed rate of interest $423,877 Adjustable rate of interest 156,777 -------- $580,654 ======== LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending activity of the Company is the origination of conventional loans secured by first mortgages on one- to four-family residences, primarily single-family homes, located within the Company's primary market area. At December 31, 1997, the Company's one- to four-family residential real estate loans totaled approximately $489.7 million, or 74.2% of total loans. At December 31, 1997, $5.5 million of the Company's one- to four-family loans were nonperforming. OTS regulations and Ohio law limit the amount which the Company may lend in relationship to the appraised value of the real estate and improvements which will secure the loan at the time of loan origination. In accordance with such regulations, the Company makes loans on one- to four-family residences of up to 90% of the value of the real estate and improvements thereon (the "LTV"), though the majority of such loans have LTVs of 80% or less. Loans on single-family, owner-occupied residences located in low-to-moderate income census track locations are granted up to 95% LTV; although the Company self-insures the portion of the principal amount that exceeds 80% of the appraised value of the property securing the loan. The City of Youngstown and Columbiana County have been designated as low- to-moderate income census tracks. The Company currently offers fixed-rate mortgage loans and adjustable-rate mortgage loans ("ARMs") for terms of up to 30 years. Although the Company's loan portfolio includes a significant amount of 30-year fixed-rate loans, most loans currently originated by the Company are 15-year fixed-rate loans. The interest rate -44- 73 adjustment periods on ARMs are typically one or three years. The maximum interest rate adjustment on most of the ARMs is 2% on any adjustment date and a total of 6% over the life of the loan. The interest rate adjustments on one-year and three-year ARMs presently offered by the Company are indexed to the weekly average rate on the one-year and three-year U.S. Treasury securities, respectively. Rate adjustments are computed by adding a stated margin, typically 2.75%, to the index. The Company does not offer ARMs to borrowers on one- to four-family residences with LTVs of 95%. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. Based upon current market conditions, the Company estimates that as much as 90% of recent loan originations consisted of fixed-rate loans. The Company issues standby loan origination commitments to qualified borrowers primarily for the purchase of single-family residential real estate. Such commitments are made on specified terms and conditions and are made for periods of up to 60 days, during which time the interest rate is locked in. The Company has purchased interests in loans at times when there was low demand in the Company's primary market area; however, the Company has not purchased interests in one- to four-family loans during the past 10 years. The Company's loan portfolio includes 252 participation interests in several groups of single-family loans located within and outside of the Company's primary lending area. At December 31, 1997, the outstanding balance of participation loans purchased, which is included in the one- to four-family loan portfolio, was $4.9 million, or 1.0% of the Company's total one- to four-family loan portfolio. LOANS SECURED BY MULTIFAMILY RESIDENCES. The Company originates loans secured by multifamily properties which contain more than four units, although this is not a significant aspect of the Company's lending activities. Multifamily loans are offered with adjustable rates of interest, which adjust according to their index, and typically have terms ranging from five to ten years and LTVs of up to 75%. Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. The Company attempts to reduce the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the project and by obtaining personal guarantees on loans made to corporations and partnerships. The Company requires borrowers to agree to submit financial statements annually to enable the Company to monitor the loan and requires an assignment of rents. At December 31, 1997, loans secured by multifamily properties totaled approximately $8.9 million, or 1.4% of total loans. The largest loan had a principal balance of $1.5 million and was secured by a first mortgage on an apartment building and real estate. LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. The Company originates loans for the purchase of nonresidential real estate. The Company's nonresidential real estate loans have adjustable rates, terms of up to 20 years and generally LTVs of up to 80%. Rate adjustments on ARMs secured by nonresidential real estate are determined by adding 3.5% to the current one-, three- and five-year U.S. Treasury indexes. Among the properties securing the Company's nonresidential real estate loans are shopping centers, hotels, motels and freezer warehouses. The majority of such properties are located outside of the Company's primary lending area. The Company has been involved for over 20 years in freezer warehouse financing through a Youngstown area real estate developer who specializes in the construction of freezer facilities. -45- 74 Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. The Company has endeavored to reduce such risk by requiring personal guarantees and evaluating the credit history of the borrower, the location of the real estate, the financial condition of the borrower, the quality and characteristics of the income stream generated by the property and the appraisals supporting the property's valuation. At December 31, 1997, the Company's largest loan secured by nonresidential real estate was a participation with a $7.1 million balance and such loan was performing according to its terms. At December 31, 1997, approximately $33.4 million, or 5.1%, of the Company's total loans were secured by mortgages on nonresidential real estate. CONSTRUCTION LOANS. The Company makes loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. Residential construction loans are made to both owner-occupants and to builders on a speculative or not pre-sold basis. Construction loans to owner-occupants are structured as permanent loans with fixed or adjustable rates of interest and terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only at a fixed rate. Construction loans for one- to four-family residences have LTVs of up to 80%, and construction loans for commercial, multifamily and nonresidential properties have LTVs of up to 75%, with the value of the land included as part of the owner's equity. At December 31, 1997, the Company had approximately $24.7 million, or 3.7% of its total loans, invested in construction and land loans, including $24.0 million in one- to four-family residential construction and approximately $600,000 in multifamily construction and land loans. No commercial construction loans were outstanding at that date. Approximately 50% of the Company's construction loans to builders are made on a speculative (unsold) basis. The Company, however, generally limits speculative loans to builders with whom the Company has a long-standing relationship and limits the number of outstanding loans on unsold homes under construction within a specific area. Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties because construction loans are more difficult to appraise and to monitor. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is not always possible to evaluate accurately the LTVs and the total loan funds required to complete a project. In the event a default on a construction loan occurs and foreclosure follows, the Company must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. The Company also originates a limited number of loans secured by vacant land for the construction of single-family houses. The Company's land loans are generally fixed-rate loans for terms up to five years and require an LTV of 75% or less. At December 31, 1997, approximately $285,000, or .04%, of the Company's total loans were secured by land loans made to developers and to individuals intending to construct and occupy single-family residences on the properties. COMMERCIAL LOANS. The Company makes commercial loans to businesses in its primary market area, including traditional lines of credit, revolving lines of credit, term loans and acquisition and development loans. The LTV ratios for commercial loans depend upon the nature of the underlying collateral, but generally commercial loans are made with LTVs of 70 to 75% and have adjustable interest rates. Lines of credit and revolving credits are generally priced on an adjustable rate basis, which is tied to the Prime Rate or U.S. Treasury bill rate. Term and time loans are usually adjustable, but can have fixed rates of interest and terms from one to five years. -46- 75 At December 31, 1997, the Company had approximately $59.9 million, or 9.1% of total loans, invested in commercial loans. The majority of these loans are secured by a security interest in inventory, accounts receivable, machinery, investment property, vehicles or other assets of the borrower. The Company also originates unsecured commercial loans, including lines of credit for periods of less than 12 months, short-term loans and, occasionally, term loans for periods of up to 36 months. These loans are underwritten based on the credit-worthiness of the borrowers and the guarantors. As a result of the addition of experienced loan personnel and the implementation of enhanced underwriting procedures, the Company intends to increase its unsecured commercial loan volume in the future. Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependent on the income stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial loans, if any, often consists of rapidly depreciating assets. At December 31, 1997, $2.1 million of the Company's commercial loans were nonperforming. During 1997, the Company hired two commercial loan officers with extensive experience in the origination of commercial loans. As a result, the Company anticipates an increase in its commercial loan portfolio in the future. CONSUMER LOANS. The Company originates various types of consumer credit loans, including home equity loans, education loans, loans secured by savings accounts and motor vehicles and unsecured loans. Consumer loans are made at fixed and adjustable rates of interest and for varying terms based on the type of loan. Consumer loans secured by a deposit or savings account are made for up to 90% of the principal balance of the account and generally have adjustable rates which adjust based on the weekly average yield on U.S. Treasury securities plus a margin. For new automobiles, loans are originated for up to 90% of the value of the car with terms of up to five years, and for used automobiles, loans are made for up to the average value of the car model and a term of three years. All automobile loans are originated directly by the Company. At December 31, 1997, automobile loans amounted to $2.5 million, or 5.7%, of the Company's consumer loan portfolio. The Company makes closed-end home equity loans in an amount which, when added to the prior indebtedness secured by the real estate, does not exceed 90% of the estimated value of the real estate. Home equity loans are typically secured by a second mortgage on the real estate. The Company frequently holds the first mortgage, although the Company will make home equity loans in cases where another lender holds the first mortgage. The Company also offers home equity loans with a line of credit feature. Home equity loans are made with adjustable and fixed rates of interest. Fixed-rate home equity loans have terms of ten years but can be called after five years. Rate adjustments on adjustable home equity loans are determined by adding a 3% margin for loans on one- to four-family residences of up to 80% LTV or by adding a 4% margin for loans on one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury index. At December 31, 1997, approximately $17.1 million, or 39.4%, of the Company's consumer loan portfolio consisted of home equity loans. Consumer loans may entail greater credit risk than do residential mortgage loans. The risk of default on consumer loans increases during periods of recession, high unemployment, and other adverse economic conditions. Although the Company has not had significant delinquencies on consumer loans, no assurance can be provided that delinquencies will not increase. At December 31, 1997, $404,000 of the Company's consumer loans were nonperforming. -47- 76 At December 31, 1997, the Company had approximately $43.4 million, or 6.6% of its total loans, invested in consumer loans. The Company anticipates a moderate increase in its consumer loan portfolio in the future as a result of increased cross-selling efforts to existing customers. LOAN SOLICITATION AND PROCESSING. The lending activities of the Company are subject to the written, non-discriminatory underwriting standards and loan origination procedures established by the Company's Board of Directors. Loan originations are generally obtained from existing customers and members of the local community and from referrals from real estate brokers, lawyers, accountants, and current and former customers. The Company also advertises in the local print media, radio and television. Each of the Company's 14 offices has loan personnel who can accept loan applications, which are then forwarded to the Company's Underwriting Department for processing and approval. In underwriting real estate loans, the Company typically obtains a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate that will be given as security for the loan is prepared by one of the Company's in-house licensed appraisers or an approved fee appraiser. For certain large nonresidential real estate loans, the appraisal will be conducted by an outside fee appraiser whose report is reviewed by the Company's chief appraiser. Upon the completion of the appraisal and the receipt of information on the credit history of the borrower, the application for a loan is submitted for review to the appropriate persons. Loans up to $100,000 require two approvals, and loans up to $200,000 require three approvals, from members of the Company's underwriting staff, the Senior Loan Officer, the Lending Operations Officer or any other senior officer of the Company. Commercial loans up to $200,000 may be approved by one of the Company's commercial loan officers. Loans of $200,000 or more but less than $1.0 million must be approved by two members of the Underwriting Department, the Senior Loan Officer or the Lending Operations Officer and any two of the following officers: the President, the Chief Financial Officer, the Senior Vice President of Retail Banking or the Vice President of Facilities Management. In addition to the approval by the officers described above, loans for over $1.0 million require the prior approval of a majority of the outside directors of the Company. Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name the Company as an insured mortgagee. The Company generally obtains an attorney's opinion of title, although title insurance may be obtained on larger nonresidential real estate loans. The procedure for approval of construction loans is the same as for permanent real estate loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. The Company also evaluates the feasibility of the proposed construction project and the experience and record of the builder. Once approved, the construction loan is disbursed in installments based upon periodic inspections of construction progress. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any. LOAN ORIGINATIONS AND PURCHASES. Historically, the Company has originated substantially all of the loans in its portfolio and has held them until maturity. Nevertheless, the Company's residential loans are generally made on terms and conditions and documentation which conform to the secondary market guidelines for sale to the Federal Home Loan Mortgage Corporation (the "FHLMC") and other institutional investors in the secondary market. Education loans are sold, once the borrower has graduated, to the Student Loan Marketing Association. The Company does not originate first mortgage loans insured by the Federal Housing Authority or guaranteed by the Veterans Administration, but it has purchased such loans as well as participation interests in such loans. -48- 77 The Company has not sold any loans during the years ended December 31, 1997, 1996 and 1995. The following table presents the Company's total loan origination and repayment activity for the years indicated:
Year ended December 31, ------------------------------------------ 1997 1996 1995 ---- ---- ---- (In thousands) Loans originated: Real estate: Permanent: One- to four-family $ 68,303 $129,074 $ 89,869 Multifamily - 225 90 Nonresidential 218 136 312 -------- -------- -------- Total permanent 68,521 129,435 90,271 Construction: One- to four-family 25,440 26,545 23,698 Multifamily 1,390 740 1,220 Nonresidential - - - -------- -------- -------- Total construction 26,830 27,285 24,918 -------- -------- -------- Total real estate loans originated 95,351 156,720 115,189 Consumer 17,038 16,199 16,037 Commercial 20,968 21,731 11,553 -------- -------- -------- Total loans originated 133,357 194,650 142,779 Loans purchased 116 24 4,024 -------- -------- -------- Total loans originated and purchased 133,473 194,674 146,803 Principal repayments 119,120 125,550 105,413 -------- -------- -------- Increase in loan originations before net items $ 14,353 $ 69,124 $ 41,390 ======== ======== ========
At December 31, 1997, the Company had $7.7 million of outstanding commitments to originate loans and $19.1 million available to borrowers under consumer and commercial lines of credit. At December 31, 1997, the Company had $8.2 million in undisbursed funds related to construction loans in process. LOAN ORIGINATION AND OTHER FEES. The Company realizes loan origination fees and other fee income from its lending activities. A fee of two percent of the loan amount, up to $1,000, is charged for fixed-rate residential real estate loans and the Company charges an origination fee of two percent of the loan amount, up to $850, for adjustable-rate residential real estate loans. Loan origination fees for nonresidential real estate loans and commercial loans are negotiated on an individual basis. In addition, the Company realizes income from late payment charges and fees for other miscellaneous services. Loan origination fees and other fees are a volatile source of income, varying with the volume of lending, loan repayments and general economic conditions. All nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized in accordance with SFAS No. 91 as an adjustment to yield for the life of the related loan. LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the aggregate amount that a savings association may lend to any one borrower to an amount equal to 15% of the Company's unimpaired capital and unimpaired surplus (the "Lending Limit Capital"). A savings association may lend to one borrower an additional amount not to exceed 10% of the Company's Lending Limit Capital if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. -49- 78 Based on such limits, the Company could lend approximately $21.0 million to any one borrower at December 31, 1997. The largest amount the Company had outstanding to one borrower at December 31, 1997, was $15.2 million, which consisted of four loans, secured by first mortgage liens on freezer warehouses. At December 31, 1997, such loans were performing in accordance with their terms. DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The Company attempts to maintain a high level of asset quality through sound underwriting policies and aggressive collection practices. At the beginning of each month, the Collections Department of the Company receives a report on all delinquent loans, and Company personnel telephone the delinquent borrowers and mail delinquency notices. When a loan payment has not been made by the fifteenth of the month, a late notice is sent and a penalty of five percent of the payment due is assessed. Once a loan is 60 days delinquent, a second notice is sent and the Collections Department contacts the borrower by telephone. The Collections Department will generally continue to attempt to bring the loan current through telephone calls or personal visits until the loan has been delinquent 90 to 120 days. If the loan has not been brought current by the 120th day, a member of the Collections Department will present the loan to the Company's Pre-Foreclosure Committee which meets weekly. If the Pre-Foreclosure Committee agrees to recommend the commencement of foreclosure proceedings, the loan is presented to the Executive Committee of the Board, which normally refers the loan to the Company's in-house legal staff. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding balance in relation to the original indebtedness, the extent of the delinquency, the borrower's ability and willingness to cooperate in curing the delinquency and any environmental issues that may need to be addressed. The following table reflects the amount of loans in a delinquent status as of the dates indicated:
At December 31, ---------------------------------------------------------------------------- 1997 1996 ------------------------------------ ---------------------------------- Percent of Percent of total total Number Amount loans Number Amount loans ------ ------ ---------- ------ ------ ---------- (Dollars in thousands) Loans delinquent for: 30-59 days 242 $ 6,895 1.09% 228 $ 7,269 1.18% 60-89 days 132 4,415 .70 117 2,760 .45 90 days or over 298 9,491 1.50 326 9,114 1.48 --- ------- ---- --- ------- ---- Total delinquent loans 672 $20,801 3.29% 671 $19,143 3.11% === ======= ==== === ======= ====
Nonperforming assets include nonaccruing loans, restructured loans, real estate acquired by foreclosure or by deed-in-lieu thereof, in-substance foreclosures and repossessed assets. Loans are reviewed through monthly reports to the Board or weekly reports to senior management and are placed on nonaccrual status when collection in full is considered doubtful by management. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent cash payments are generally applied to interest income unless, in the opinion of management, the collection of principal and interest is doubtful. In those cases, subsequent cash payments would be applied to principal. -50- 79 The following table sets forth information with respect to the Company's nonperforming loans and other assets at the dates indicated:
At December 31, ---------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) Nonperforming loans: Nonaccrual loans Real estate loans: One- to four-family $ 5,540 $5,343 $3,542 $3,491 $ 3,842 Multifamily and nonresidential 649 704 1,082 104 73 Construction (net of LIP) and land 769 491 7 - - ------- ------ ------ ------ ------- Total real estate loans 6,958 6,538 4,631 3,595 3,915 Consumer 404 517 298 274 311 Commercial 2,129 2,059 260 219 317 ------- ------ ------ ------ ------- Total nonaccrual loans 9,491 9,114 5,189 4,088 4,543 Restructured real estate loans 644 698 891 2,681 4,698 ------- ------ ------ ------ ------- Total nonperforming loans 10,135 9,812 6,080 6,769 9,241 Real estate acquired through foreclosure and other repossessed assets 55 29 46 1,570 2,245 ------- ------ ------ ------ ------- Total nonperforming assets $10,190 $9,841 $6,126 $8,339 $11,486 ======= ====== ====== ====== ======= Nonperforming loans as a percent of total loans 1.60% 1.59% 1.11% 1.34% 2.04% Nonperforming assets as a percent of total assets 0.98 0.92 0.57 0.82 1.14 Allowance for loan losses as a percent of nonperforming loans 59.02 51.37 84.18 75.51 58.40 Allowance for loan losses as a percent of total loans before allowance 0.94 0.81 0.93 1.01 1.18
For 1997, approximately $585,000 in interest income would have been recorded had nonaccruing and restructured loans been accruing pursuant to contractual terms. During 1997 interest collected on such loans and included in net income was approximately $544,000. Between 1995 and 1996, the Company experienced an increase of $3.9 million in nonaccrual loans. Approximately $1.9 million of the increase occurred in the real estate loan portfolio, particularly one- to four-family loans and construction loans, and $1.8 million occurred in the commercial loan portfolio. The increase in nonaccrual loans is partly attributable to growth in the one- to four-family, construction and commercial segments of the Company's loan portfolio. Another factor contributing to the increase in nonaccrual real estate loans was a change in the Company's data processing systems, which resulted in a new methodology in identifying delinquent loans. Due to timing differences in interpreting data under the Company's old data processing system, loans which became 90 days delinquent during the month were, in many cases, not included in the 90 day category of delinquency reports until the end of the subsequent month, resulting in an underreporting of delinquent loans prior to 1996. The increase in nonaccrual commercial loans relates to five loans, the largest of which had a principal balance of $800,000. Because repayment in full is anticipated on all of the nonaccrual commercial loans, no write-downs have been charged against the loans. Nonaccrual loans stabilized substantially from 1996 to 1997. Real estate acquired in settlement of loans is classified separately on the balance sheet at fair value as of the date of acquisition. After foreclosure, the loan is written down to the value of the underlying collateral by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income or loss on disposition, are included in other expenses. At December 31, 1997, the carrying value of real estate acquired in settlement of loans was $55,213, and consisted of four single-family properties. -51- 80 The Company classifies its assets, excluding loans in its commercial loan portfolio, in accordance with federal regulations. Problem assets are classified as "special mention", "substandard," "doubtful" or "loss." "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable and (ii) there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that its continuance as an asset of the Company is not warranted. Federal regulations also contain a "special mention" category, consisting of assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving management's close attention. The Company classifies its commercial loans on a periodic basis, not less often than quarterly, according to a nine-level risk rating system that includes, in addition to the "substandard," "doubtful" and "loss," categories discussed above, further classifications of "prime," "good," "satisfactory," "fair," "watch" and "uncertain." Commercial loans that are classified "prime," "good," "satisfactory" or "fair" possess levels of risk, if any, which are generally acceptable to the Company. "Watch" assets are the equivalent of "special mention" assets discussed above and a loan which is classified as "unknown" represents a loan for which there is insufficient current information on the borrower to evaluate the primary source of payment. A loan may only be maintained as "unknown" for 90 days while additional information is obtained, subject to one 90-day extension by the Commercial Loan Manager or a higher level officer. The aggregate amounts of the Company's classified assets at the dates indicated were as follows: At December 31, -------------------------- 1997 1996 ---- ---- (In thousands) Classified assets: Substandard $9,188 $9,205 Doubtful - - Loss 151 251 ------- ------- Total classified assets $9,339 $9,456 ====== ====== The Company analyzes each classified asset on a quarterly basis to determine whether changes in the classifications are appropriate under the circumstances. Such analysis focuses on a variety of factors, including the amount of, and the reasons for, any delinquency, the use of the real estate securing the loan, the financial condition of the borrower, and the appraised value of the real estate. As such factors change, the classification of the asset will change accordingly. The Company establishes a general allowance for loan losses for any loan classified as special mention, substandard or doubtful. If an asset, or portion thereof, is classified as loss, the Company establishes a specific allowance for loss in the amount of 100% of the portion of the asset classified loss or charges off the portion of any real estate loan deemed to be uncollectible. ALLOWANCE FOR LOAN LOSSES. Management reviews on a quarterly basis the allowance for loan losses as it relates to a number of relevant factors, including, but not limited to, growth and changes in the composition of the loan portfolio, trends in the level of delinquent and problem loans, current and anticipated economic conditions in the primary lending area, past loss experience, and possible losses arising from specific problem assets. -52- 81 While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. In addition, the Company's determination as to the amount of its allowance for loan losses is subject to review by the OTS, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the OTS after a review of the information available at the time of the OTS examination. The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated:
Year ended December 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at beginning of period $ 5,040 $5,118 $5,111 $5,397 $4,797 (Recovery of) provision for loan loss allowances (1,546) - - (100) 535 Charge-offs: Real estate (403) (28) (373) (170) (43) Consumer (43) (57) (21) (16) (43) Commercial - - - (60) - ------- ------ ------ ------ ------ Total charge-offs (446) (85) (394) ( 246) (86) ------- ------ ------ ------ ------ Recoveries: Real estate 2,930 4 365 52 146 Consumer 4 3 10 8 5 Commercial - - 26 - - ------- ------ ------ ------ ------ Total recoveries 2,934 7 401 60 151 ------- ------ ------ ------ ------ Net recoveries (charge-offs) 2,488 (78) 7 (186) 65 ------- ------ ------ ------ ------ Balance at end of year $ 5,982 $5,040 $5,118 $5,111 $5,397 ======= ====== ====== ====== ====== Ratio of net recoveries (charge-offs) to average net loans 0.40% (0.01)% 0.00% (0.04)% 0.02% Ratio of net recoveries (charge-offs) to (recovery of) provision for loan loss allowances 160.93% N/A N/A (186.00)% 12.15%
-53- 82 The following table sets forth the allocation of the allowance for loan losses by category. The allocations are based on management's assessment of the risk characteristics of each of the components of the total loan portfolio and is subject to changes as and when the risk factors of each such component change. The allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in any category.
At December 31, --------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------------- ---------------------- --------------------- ---------------------- --------------------- Percent of Percent of Percent of Percent of Percent of loans in loans in loans in loans in loans in each each each each each category category category category category to total to total to total to total to total Amount loans Amount loans Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) Real estate loans $4,242 84.35% $4,561 86.53% $4,585 88.52% $4,593 88.77% $4,711 90.25% Consumer loans 673 6.57 322 6.18 376 6.37 349 6.05 457 5.85 Commercial loans 1,067 9.08 157 7.29 157 5.11 169 5.18 229 3.90 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $5,982 100.00% $5,040 100.00% $5,118 100.00% $5,111 100.00% $5,397 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES Federal regulations and Ohio law permit the Company to invest in various types of investment securities, including interest-bearing deposits in other financial institutions, federal funds, U.S. Treasury and agency obligations, mortgage-backed securities, and certain other specified investments. The Board of Directors of the Company has adopted an investment policy which authorizes management to make investments in U.S. Treasury obligations, U.S. Federal agency and federally-sponsored corporation obligations, investment-grade municipal obligations, creditworthy, unrated securities issued by municipalities in which an office of the Company is located, investment-grade corporate debt securities, investment-grade asset-backed securities, certificates of deposit that are fully-insured by the FDIC, bankers' acceptances, federal funds and interest-bearing time deposits with other financial institutions. The Company's investment policy is designed primarily to provide and maintain liquidity within regulatory guidelines, to maintain a balance of high quality investments to minimize risk, and to maximize return without sacrificing liquidity and safety. See "REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Analysis of Financial Condition; and - Liquidity and Capital Resources." The investment activities of the Company are supervised by the Company's Investment Committee and investment purchases are monitored weekly by the Executive Committee of the Company. The Company maintains a significant portfolio of mortgage-backed securities in the form of Federal National Mortgage Association (the "FNMA"), Government National Mortgage Association (the "GNMA") and the FHLMC participation certificates. Mortgage-backed securities generally entitle the Company to receive a portion of the cash flows from an identified pool of mortgages. GNMA securities are guaranteed by the Federal government as to the timely payment of principal and interest. FNMA securities and a majority of the Company's FHLMC securities are guaranteed by the issuing agency as to timely payment of principal and interest. The balance of the Company's FHLMC securities are guaranteed as to timely payment of interest and eventual payment of principal. The Company purchases mortgage-backed securities primarily as an alternative to originating loans for its portfolio. In recent years, the Company's funds available for investment have exceeded the volume of loan originations based on loan demand in the Company's primary market area. Purchases of mortgage-backed securities enable the Company to generate positive interest rate spreads with minimal administrative expense and reduced credit risk due to the guarantees provided by the issuer. Mortgage-backed securities classified as available for sale also provide the Company with an additional source of liquid funds. The Company also invests generally in short maturity medium-term corporate notes of investment grade. The notes, which -54- 83 include debentures and collateralized notes, generally provide a spread above the risk-free rate afforded by comparable maturity U.S. Treasury securities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management." Although the Company's mortgage-backed securities are generally guaranteed as to repayment of principal and interest, the Company is exposed to prepayment risk and reinvestment risk to the extent that the issuer redeems the security or that actual prepayments on the underlying mortgages are greater than estimated over the life of the security. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Prepayments may require the Company to make adjustments to the amortization of any premium or accretion of any discount relating to the securities, thereby changing the net yield on such securities. The Company reviews prepayment estimates for mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates and to determine the yield and estimated maturity of the mortgage-backed security portfolio. To the extent that the Company's mortgage-backed securities prepay faster than anticipated in a declining rate environment, the Company may not be able to reinvest the proceeds of such prepayments at a comparable rate of return, which could adversely affect net interest income. Conversely, in a rising interest rate environment, prepayments may occur at a slower than projected pace, thereby extending the estimated life of the security and depriving the Company of the ability to reinvest cash flows at higher rates of interest. In addition, the market value of such securities may be adversely affected by changes in interest rates. As discussed below, a decline in the market value of securities classified as available for sale may adversely affect the Company's retained earnings. Investment and mortgage-backed securities are classified upon acquisition as available for sale or held to maturity. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss, net of taxes, reflected as a component of equity. Securities classified as held to maturity are carried at amortized cost. The Company recognizes premiums and discounts in interest income over the period to maturity by the level yield method and realized gains or losses on the sale of debt securities based on the amortized cost of the specific securities sold. Security sales are recorded on a trade date basis. -55- 84 The following table sets forth the amortized cost and fair value of the Company's short-term investments, FHLB stock, investment securities and mortgage-backed securities at the dates indicated.
At December 31 ----------------------------------------------------------------------------------- 1997 1996 ------------------------------------------ ---------------------------------------- Amortized % of Fair % of Amortized % of Fair % of Cost Total Value Total Cost Total Value Total --------- ----- ----- ----- --------- ----- ----- ----- (Dollars in thousands) Available for sale: Short-term investments: Federal funds $ 19,879 5.22% $ 19,879 5.15% $ 5,982 1.39% $ 5,982 1.39% Overnight repurchase agreement - - - - - - - - FHLB stock 11,136 2.93 11,136 2.89 10,370 2.42 10,370 2.40 Investment securities: U.S. treasury obligations 20,072 5.27 20,224 5.24 12,517 2.92 12,613 2.92 U.S. government agency obligations 5,000 1.31 5,038 1.31 - - - - Corporate notes 14,019 3.68 14,140 3.66 2,026 0.47 2,046 0.47 Mortgage-backed securities FHLMC 54,039 14.20 54,827 14.21 73,748 17.19 74,420 17.23 FNMA 5,265 1.39 5,345 1.39 7,489 1.75 7,613 1.76 Private issues 2,329 0.62 2,251 0.58 2,513 0.58 2,433 0.57 -------- ------ -------- ------ -------- ------ -------- ----- Total available for sale 131,739 34.62 132,840 34.43 114,645 26.72 115,477 26.74 -------- ------ -------- ------ -------- ------ -------- ----- Held to maturity: Investment securities: U.S. treasury obligations 4,968 1.31 5,013 1.30 14,967 3.49 15,051 3.49 Corporate notes - - - - 13,003 3.03 13,057 3.02 Mortgage-backed securities: GNMA 9,077 2.39 9,492 2.46 11,163 2.60 11,627 2.69 FHLMC 156,988 41.25 158,939 41.19 184,363 42.98 184,838 42.81 FNMA 77,783 20.43 79,555 20.62 90,858 21.18 91,754 21.25 -------- ------ -------- ------ -------- ------ -------- ----- Total held to maturity 248,816 65.38 252,999 65.57 314,354 73.28 316,327 73.26 -------- ------ ------- ------ -------- ------ ------- ----- Total investment portfolio $380,555 100.00% $385,839 100.00% $428,999 100.00% $431,804 100.00% ======== ====== ======== ====== ======== ====== ======== ======
At December 31 ---------------------------------------- 1995 ---------------------------------------- Amortized % of Fair % of Cost Total Value Total --------- ----- ----- ----- Available for sale: Short-term investments: Federal funds $ 6,412 1.29% $ 6,412 1.26% Overnight repurchase agreement 20,194 4.05 20,194 3.98 FHLB stock 9,675 1.94 9,675 1.91 Investment securities: U.S. treasury obligations 26,883 5.39 27,382 5.40 U.S. government agency obligations - - - - Corporate notes 4,678 0.94 4,743 0.94 Mortgage-backed securities FHLMC 84,768 17.00 86,071 16.97 FNMA 9,204 1.85 9,390 1.85 Private issues 4,544 0.91 4,544 0.90 -------- ------ -------- ------ Total available for sale 166,358 33.37 168,411 33.21 -------- ------ -------- ------ Held to maturity: Investment securities: U.S. treasury obligations 14,991 3.01 15,220 3.00 Corporate notes 15,128 3.03 15,209 3.00 Mortgage-backed securities: GNMA 13,534 2.71 14,166 2.79 FHLMC 183,767 36.86 186,943 36.86 FNMA 104,806 21.02 107,231 21.14 ------- ----- ------- ----- Total held to maturity 332,226 66.63 338,769 66.79 ------- ----- ------- ----- Total investment portfolio $498,584 100.00% $507,180 100.00% ======== ====== ======== ======
-56- 85 The maturities of the Company's short-term investments and securities at December 31, 1997, excluding FHLB stock, are indicated in the following table:
At December 31, 1997 ------------------------------------------------------------------------------------------------- After one through One year or less five years After five years Total ------------------------------------------------------------------------------------------------- Amortized Average Amortized Average Amortized Average Amortized Fair Average cost yield cost yield cost yield cost value yield --------- ------- --------- ------- --------- ------- --------- ----- ------- (Dollars in thousands) Short-term investments: Federal funds $19,879 5.50% $ - -% $ - -% $ 19,879 $ 19,879 5.50% Investment securities: Available for sale 5,004 5.78 29,087 6.32 5,000 6.53 39,091 39,402 6.28 Held to maturity - 4,968 6.49 - 4,968 5,013 6.49 ------- ---- -------- ---- -------- ---- -------- -------- ---- Total investment securities 5,004 5.78 34,055 6.34 5,000 6.53 44,059 44,415 6.30 Mortgage-backed securities: Available for sale 10,153 6.93 31,035 7.11 20,445 7.56 61,633 62,423 7.22 Held to maturity 27,009 7.16 78,566 7.16 138,273 7.08 243,848 247,986 7.11 ------- ---- -------- ---- -------- ---- -------- -------- ---- Total mortgage-backed 37,162 7.09 109,601 7.13 158,718 7.14 305,481 310,409 7.13 securities ------- ---- -------- ---- -------- ---- -------- -------- ---- Total interest-earning assets $62,045 6.47% $143,656 6.94% $163,718 7.12% $369,419 $374,703 6.94% ======= ==== ======== ==== ======== ==== ======== ======== ====
DEPOSITS AND BORROWINGS GENERAL. Deposits have traditionally been the primary source of the Company's funds for use in lending and other investment activities. In addition to deposits, the Company derives funds from interest payments and principal repayments on loans and income on earning assets. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate in response to general interest rates and money market conditions. The Company may also borrow from the FHLB as a source of funds. DEPOSITS. Deposits are attracted principally from within the Company's primary market area through the offering of a selection of deposit instruments, including regular passbook savings accounts, demand deposits, individual retirement accounts ("IRAs"), NOW accounts, money market accounts, and certificates of deposit. Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are monitored weekly by the Company's Executive Committee. The Company does not use brokers to attract deposits. The amount of deposits from outside the Company's primary market area is not significant. -57- 86 The following table sets forth the dollar amount of deposits in the various types of accounts offered by the Company at the dates indicated:
At December 31, --------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ---------------------------------------- Percent Weighted Percent Weighted of total average of total average Amount deposits rate Amount deposits rate ------ -------- -------- ------ -------- -------- (Dollars in thousands) Checking accounts: Interest-bearing $ 58,707 6.62% 2.03% $ 56,347 6.05% 2.34% Noninterest-bearing 5,387 0.61 - 4,201 0.45 - Savings accounts 243,588 27.47 2.99 256,081 27.47 3.08 Money market accounts 56,727 6.40 2.99 64,622 6.93 3.08 -------- ------ -------- ------ Total transaction accounts 364,409 41.10 381,251 40.90 Certificates of deposit: 4.00% or less 448 0.05 745 0.08 4.01% - 6.00% 415,045 46.80 421,302 45.20 6.01% - 8.00% 106,835 12.04 128,697 13.81 8.01% - 10.00% 71 0.01 65 0.01 -------- ------ -------- ------ Certificates of deposit 522,399 58.90 5.78 550,809 59.10 5.74 -------- ------ -------- ------ Total deposits $886,808 100.00% 4.56% $932,060 100.00% 4.60% ======== ====== ======== ======
Total deposits decreased by $45.3 million, or 4.9%, from December 31, 1996, to December 31, 1997, primarily due to disintermediation. The following table shows rate and maturity information for the Company's certificates of deposit at December 31, 1997:
At December 31, 1997 ------------------------------------------------------------------ Over Over Up to 1 year to 2 years to Rate one year 2 years 3 years Thereafter Total ---- -------- --------- --------- ---------- ----- (In thousands) 4.00% or less $ 437 $ - $ - $ 11 $ 448 4.01% to 6.00% 304,184 74,609 27,938 8,314 415,045 6.01% to 8.00% 44,908 7,921 23,302 30,704 106,835 8.01% to 10.00% 71 - - - 71 -------- ------- ------- ------- -------- Total certificates of deposit $349,600 $82,530 $51,240 $39,029 $522,399 ======== ======= ======= ======= ======== Percent of total certificates of deposit 66.92% 15.80% 9.81% 7.47% 100.00%
At December 31, 1997, approximately $350.0 million of the Company's certificates of deposit were expected to mature within one year. Based on past experience and the Company's prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with the Company at maturity, although there can be no assurance that this will occur. If, however, the Company is unable to renew the maturing certificates for any reason, borrowings of up to $222.7 million are available from the FHLB of -58- 87 Cincinnati. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources." The following table presents the amount of the Company's certificates of deposit of $100,000 or more by the time remaining until maturity at December 31, 1997: Maturity Amount (In thousands) Three months or less $14,294 Over 3 months to 6 months 8,810 Over 6 months to 12 months 9,894 Over 12 months 15,717 ------- Total $48,715 ======= Management believes that a substantial percentage of the above certificates will be renewed with the Company at maturity. The following table sets forth the Company's deposit account balance activity for the periods indicated: Year ended December 31, --------------------------------- 1997 1996 ---- ---- (Dollars in thousands) Beginning balance $932,060 $938,855 Net decrease in deposits (85,868) (49,819) -------- -------- Net deposits before interest credited 846,192 889,036 Interest credited 40,616 43,024 -------- -------- Ending balance $886,808 $932,060 ======== ======== Net decrease $(45,252) $ (6,795) ======== ======== Percent decrease (4.86)% (0.72)% BORROWINGS. The FHLB system functions as a central reserve bank providing credit for its member institutions and certain other financial institutions. See "REGULATION - Federal Home Loan Banks." As a member in good standing of the FHLB of Cincinnati, the Company is authorized to apply for advances from the FHLB of Cincinnati, provided certain standards of creditworthiness have been met. Under current regulations, an association must meet certain qualifications to be eligible for FHLB advances. The extent to which an association is eligible for such advances will depend upon whether it meets the Qualified Thrift Lender (the "QTL") test. See "REGULATION - Office of Thrift Supervision -- Qualified Thrift Lender Test." If an association meets the QTL test, the Company will be eligible for 100% of the advances it would otherwise be eligible to receive. If an association does not meet the QTL test, the association will be eligible for such advances only to the extent it holds specified QTL test assets. At December 31, 1997, the Company was in compliance with the QTL test, but had no outstanding advances from the FHLB. Borrowings of up to $222.7 million are available to the Company from the FHLB of Cincinnati. COMPETITION The Company faces competition for deposits and loans from other savings and loan associations, credit unions, banks and mortgage originators in the Company's primary market area. The primary factors in -59- 88 competition for deposits are customer service, convenience of office location and interest rates. The Company competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. The Company does not offer all of the products and services offered by some of its competitors, particularly commercial banks. PROPERTIES The following table sets forth certain information at December 31, 1997, regarding the properties on which the main office and the branch offices of the Company are located:
Owned or Year Net book Location leased opened value Deposits - -------- -------- ------ -------- -------- (In thousands) 275 Federal Plaza West Owned 1919 $1,037 $85,507 Youngstown, Ohio 32 State Street Owned 1916 315 94,633 Struthers, Ohio 4005 Hillman Way Owned 1958 473 114,927 Boardman, Ohio 650 East State Street Owned 1925 185 69,168 Salem, Ohio 6000 Mahoning Avenue Leased 1959 9 78,568 Austintown, Ohio 7525 Market Street Owned 1971 542 104,678 Boardman, Ohio 4259 Kirk Road Owned 1975 603 85,226 Austintown, Ohio 202 South Main Street Owned 1975 236 68,342 Poland, Ohio 3500 Belmont Avenue Owned 1976 331 66,433 Youngstown, Ohio 29 North Broad Street Owned 1977 311 35,058 Canfield, Ohio 980 Great East Plaza Leased 1980 14 22,792 Niles, Ohio 127 North Market Street Owned 1987 140 31,012 East Palestine, Ohio 210 West Lincoln Way Owned 1987 331 16,734 Lisbon, Ohio 148725 South Avenue Ext. Owned 1997 833 2,214 Columbiana, Ohio 1140 Boardman - Poland Road (1) Leased 1986 Poland, Ohio
- ---------------------------- (1) Closed in January 1998. -60- 89 EMPLOYEES At December 31, 1997, the Company had 391 full-time equivalent employees and 91 part-time employees. The Company believes that relations with its employees are excellent. The Company offers health, life and disability benefits to all employees and has a defined benefit pension plan, a 401(k) plan and a postretirement health plan for its eligible employees. None of the employees of the Company is represented by a collective bargaining unit. LEGAL PROCEEDINGS The Company is not presently involved in any material legal proceedings. From time to time, the Company is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by the Company. YEAR 2000 CONSIDERATIONS The Company's lending and deposit activities are almost entirely dependent upon computer systems which process and record transactions, although the Company can effectively operate for brief periods when its electronic systems malfunction or cannot be accessed. The Company utilizes the services of a third-party data processing service bureau. In addition to its basic operating activities, the Company's facilities and infrastructure, such as security systems and communications equipment, are dependent to varying degrees upon computer systems. The Company is aware of the potential year-2000 related problems that may affect the computers which control or operate the Company's operating systems, facilities and infrastructure. In 1997, the Company began the process of identifying any year-2000 related problems that may be experienced by its computer-operated or -dependent systems. The Board of Directors reviews the Company's progress in addressing year-2000 issues quarterly. The Company has contacted the companies that supply or service the Company's computer-operated or -dependent systems to obtain confirmation that each such system that is material to the operations of the Company is either currently year-2000 compliant or is expected to be year-2000 compliant. With respect to systems that cannot presently be confirmed as year-2000 compliant, the Company will continue to work with the appropriate supplier or servicer to ensure that all such systems will be rendered compliant in a timely manner, with minimal expense to the Company or disruption of the Company's operations. The Company has established a December 31, 1998 deadline for its third-party data service bureau to be year-2000 compliant. If, by the end of 1998, any of the Company's suppliers or servicers is unable to certify year-2000 compliance with respect to any systems the failure of which would have a material adverse effect on the Company's operations, financial condition or results, the Company would then have sufficient time to identify and contract with suppliers and servicers who are able to certify year-2000 compliance. The expense of such a change in suppliers or servicers is not expected to be material to the Company. The OTS recently completed an examination of the Company's Year 2000 policies and plans and found the Company's actions to be satisfactory. In addition to possible expense related to its own systems, the Company could incur losses if loan payments are delayed due to year-2000 problems affecting any of the Company's significant borrowers or impairing the payroll systems of large employers in the Bank's primary market area. Because the Company's loan portfolio is diversified with regard to individual borrowers and types of businesses and the Company's primary market area is not significantly dependent upon one employer or industry, the Company does not expect any significant or prolonged year-2000 related difficulties that will affect net earnings or cash flow. See "Loans to One Borrower Limits," and "Primary Market Area." At this time, however, the expense that may be incurred by the Company in connection with year-2000 issues cannot be determined. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Year 2000 Issue." -61- 90 CHANGE IN ACCOUNTANTS As a result of the Company's decision to convert from a mutual savings and loan association to a permanent capital stock savings and loan association, the Company decided on November 20, 1997, to replace Packer, Thomas & Co. and to engage Deloitte & Touche LLP as independent auditors. Packer, Thomas & Co. served as the Company's independent auditors from the fiscal year ended December 31, 1993 through the fiscal year ended December 31, 1996. The decision to change independent auditors was approved by the Board of Directors upon recommendation by the Audit Committee of the Board of Directors. The reports of Packer, Thomas & Co. on the financial statements of the Company for the fiscal years ended December 31, 1996 and 1995, did not contain any adverse opinion or disclaimer of opinion, was not qualified or modified as to audit scope or accounting principles and did not include an explanatory paragraph for material uncertainties. There has not been any disagreement between the Company and Packer, Thomas & Co. for the years ended December 31, 1996 and 1995 and through November 20, 1997, or with Deloitte & Touche LLP for the year ended December 31, 1997, on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS THE HOLDING COMPANY. The Board of Directors of the Holding Company currently consists of nine members divided into three classes. All of the directors of the Holding Company were initially elected to the Board of Directors at the time the Holding Company was formed in 1998. The terms of Richard M. Barrett, Charles B. Cushwa, III and John F. Zimmerman, Jr. will expire in 1999; the terms of Donald R. Inglis, Gary Keller and Herbert F. Schuler, Sr. will expire in 2000; and the terms of James E. Bennett, Jr., Douglas M. McKay and Clarence R. Smith, Jr. will expire in 2001. The following persons are officers of the Holding Company: Douglas M. McKay, President and Chairman of the Board; Patrick A. Kelly, Treasurer; and Donald J. Varner, Secretary. THE COMPANY. The Amended Constitution of the Company provides for a Board of Directors consisting of not less than five directors. The Board of Directors of the Company currently consists of 11 directors. Each director serves for a three-year term. The Board of Directors met 16 times during the year ended December 31, 1997, for regular and special meetings. Mr. Smith attended fewer than 75% of the aggregate of such meetings and all meetings of committees of which he was a member due to surgery. -62- 91 The following table presents certain information with respect to the present directors and the executive officers of the Company:
Year of commencement Term Name Age (1) Position(s) with the Company of directorship expires - ---- --- ---------------------------- ----------------- ------- Richard M. Barrett 58 Director 1976 1999 James E. Bennett, Jr. 79 Director 1964 2001 Charles B. Cushwa, III 63 Director 1975 1999 William A. Holdford 49 Vice President/Loan Administration - Donald R. Inglis 69 Director 1978 2000 Gary Keller 56 Director 1982 2000 Patrick A. Kelly 39 Director, Treasurer, CFO and Senior Vice 1996 1999 President Douglas M. McKay 49 Director, Chairman of the Board and 1995 2001 President Herbert F. Schuler, Sr. 57 Director 1977 2000 Clarence R. Smith, Jr. 69 Director 1976 2001 Robert J. Steele, Jr. 39 Vice President/Savings Administration - Donald J. Varner 66 Director, Secretary and Senior Vice 1986 President/ Retail Banking 2000 John F. Zimmerman, Jr. 49 Director 1991 1999
- ---------------------------- (1) As of December 31, 1997. RICHARD M. BARRETT. Prior to his retirement in 1995, Mr. Barrett was the President of Barrett Cadillac, Inc., an automobile dealership located in Youngstown, Ohio. JAMES E. BENNETT, JR. Mr. Bennett is an attorney and, since 1985, has served as of counsel to the Youngstown, Ohio law firm of Manchester, Bennett, Powers and Ullman, a Legal Professional Association. CHARLES B. CUSHWA, III. Mr. Cushwa is a director of the Cushwa Center for Entrepreneurship at Youngstown State University, a position he has held since 1988. WILLIAM A. HOLDFORD. Mr. Holdford is the Vice President of Loan Administration of the Company, a position he has held since March, 1990. DONALD R. INGLIS. Mr. Inglis retired from private practice as a Certified Public Accountant in 1988. GARY KELLER. Mr. Keller is the Chairman, President and Chief Executive Officer of the Salem China Company and Urfric, Inc., which manufacture, import and distribute ceramic products and solid brass decorative hardware. Mr. Keller is also the President and Chief Executive Officer of Sebring Industries, Inc., an import business located in Salem, Ohio. PATRICK A. KELLY. Mr. Kelly was appointed Treasurer of the Company in April 1992 and named Senior Vice President of the Company in November 1995. Mr. Kelly has been employed by the Company since February 1983. DOUGLAS M. MCKAY. Mr. McKay joined the Company in 1973 as a loan officer. Since 1995, Mr. McKay has served as Chief Executive Officer and Chairman of the Board of Directors of the Company and -63- 92 additionally, as President of the Company since 1996. From 1991 to 1995, Mr. McKay was employed as Executive Vice President of the Company. HERBERT F. SCHULER, SR. Mr. Schuler is the President and Chief Executive Officer of General Extrusions, Inc., an aluminum parts manufacturer, and the President and Treasurer of Genex Tool & Die, Inc., a tool and die company. Mr. Schuler has been employed by each company since the 1960s. CLARENCE R. SMITH, JR. Mr. Smith is the Chairman of the Board of S-P Company and subsidiaries, and Diamond Steel Construction-Youngstown. ROBERT J. STEELE, JR. Mr. Steele was a branch administrator for the Company from January 1993 to April 1996 and has served as Vice President of Savings Administration for the Company since April 1996. DONALD J. VARNER. Mr. Varner, an attorney, has worked for the Company for the past 41 years, and from 1976 to 1995, he served the Company as Vice President and Corporate Counsel. Mr. Varner is currently the Corporate Secretary of the Company and Senior Vice President of the Company's Retail Banking Division. JOHN F. ZIMMERMAN, JR. Mr. Zimmerman, an attorney, is a member of the law firm of Manchester, Bennett, Powers and Ullman, a Legal Professional Association, located in Youngstown, Ohio, and has been associated with the firm since 1974. COMMITTEES OF DIRECTORS The Board of Directors of the Company has Executive, Salary, Planning, Investment, Asset Liability, Benefit, Distribution and Audit Committees. The Executive Committee is composed of Mr. Kelly, Mr. McKay, Mr. Varner and one non-employee director of the Company who alternates monthly. The functions of the Executive Committee include loan approval and review of the Company's investment activity, although the Executive Committee is authorized to act on other matters. The Executive Committee met 52 times during the year ended December 31, 1997. The Salary Committee is comprised of Mr. Barrett, Mr. Bennett, Mr. Cushwa, Mr. Inglis, Mr. Keller, Mr. Schuler, Mr. Smith and Mr. Zimmerman. The functions of the Salary Committee are to determine compensation for the Company's three senior officers and to make decisions regarding employee benefits and related matters. The Salary Committee met once during the year ended December 31, 1997. The Audit Committee is comprised of Mr. Schuler, Mr. Cushwa and Mr. Inglis. The Audit Committee reviews audit reports and related matters to ensure effective compliance with regulatory and internal policies and procedure. The Audit Committee met seven times during the year ended December 31, 1997. Upon completion of the Conversion, the Audit Committee will become a committee of the Holding Company in accordance with the requirements of Nasdaq. The Board of Directors of the Holding Company does not currently have any committees, but will establish appropriate committees upon the completion of the Conversion. COMPENSATION Each director of the Company currently receives a retainer of $10,000 per year and $400 per meeting of the full Board attended. Non-employee directors receive an additional fee of $400 per committee meeting attended. The Chairmen of the Audit and Salary Committees receive an additional fee of $200 per committee meeting. Director compensation is approved by the members of the Company at the annual meeting of members. -64- 93 The following table presents certain information regarding the annual compensation received by executive officers of the Company who received compensation exceeding $100,000 for 1997:
SUMMARY COMPENSATION TABLE --------------------------------------------------- Annual compensation (1) Other compensation - ------------------------------------------------------------------------------------------------------ Name and principal position Year Salary Bonus - ------------------------------------------------------------------------------------------------------ Douglas M. McKay 1997 $239,934 $120,614 $28,455 (2) President - ------------------------------------------------------------------------------------------------------ Donald J. Varner 1997 $126,588 $ 56,418 $24,823 (3) Secretary - ------------------------------------------------------------------------------------------------------ Patrick A. Kelly 1997 $115,184 $ 54,859 $24,412 (4) Treasurer - ------------------------------------------------------------------------------------------------------
(1) Does not include amounts attributable to other miscellaneous benefits received by executive officers. The cost to the Company of providing such benefits to each named executive officer was less than 10% of his cash compensation. (2) Consists of directors' fees of $16,000 and matching contributions of $2,375 and $7,220 and a discretionary contribution of $2,860 paid by the Company to Mr. McKay's account in The Home Savings and Loan Company of Youngstown, Ohio 401(k) Savings Plan (the "401(k) Plan"). (3) Consists of directors' fees of $15,600 and matching contributions of $1,466 and $6,311 and a discretionary contribution of $1,446 paid by the Company to Mr. Varner's account in the 401(k) Plan. (4) Consists of directors' fees of $16,000 and matching contributions of $1,266 and $5,861 and a discretionary contribution of $1,285 paid by the Company to Mr. Kelly's account in the 401(k) Plan. PENSION PLAN The Company maintains and administers a defined benefit retirement plan (the "Pension Plan"). Employees become eligible to participate in the Pension Plan on the first day of the year coincident with or next following the later of the date the employee (i) attains age 20, or (ii) completes six months of continuous employment with the Company. Participants become 100% vested in the Pension Plan upon completion of five years of service. Upon retirement at age 65 or after five years of service, vested participants are entitled to annual benefits equal to the sum of: (i) .95% multiplied by the number of years for which the employee was a participant in the Pension Plan, not to exceed 35 years, multiplied by the average of the highest five consecutive years of the participant's annual salary during the final 10 years of the participant's employment prior to retirement (the "Final Average Compensation"); (ii) .65% multiplied by the number of years for which the employee was a participant in the Pension Plan, not to exceed 35 years, multiplied by the amount of the Final Average Compensation in excess of the average of Social Security taxable wage basis for the 35-year period ending with the year of the employee's Social Security Retirement Age (the "Covered Compensation"); and (iii) 1.5% multiplied by the Final Average Compensation multiplied by the number of years for which the employee was a participant in the Pension Plan in excess of 35 years, but not to exceed five years. The Pension Plan permits early retirement after age 60 with 15 or more years of service at a reduced benefit level. -65- 94 The Company's funding policy is to contribute amounts to the Pension Plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table indicates the annual retirement benefit that would be payable under the Pension Plan upon retirement at age 65 to a participant electing to receive his retirement benefit in the standard form of benefit:
Years of credited service Average compensation --------------------------------------------------------------- (highest 5 years)(1) 15 20 25 30 35 -------------------- -- -- -- -- -- 20,000 $ 2,545 $ 3,393 $ 4,242 $ 5,090 $ 5,938 35,000 3,818 5,090 6,363 7,635 8,908 40,000 5,538 7,384 9,230 11,076 12,922 50,000 7,681 10,242 12,802 15,363 17,923 60,000 9,824 13,099 16,374 19,649 22,924 70,000 11,968 15,957 19,946 23,935 27,925 100,000 18,398 24,530 30,663 36,795 42,928 150,000 29,114 38,818 48,523 58,227 67,932
- ---------------- (1) The maximum amount of annual compensation which can be considered in computing benefits under Section 401(a)(17) of the Code is $160,000. Mr. McKay, Mr. Kelly and Mr. Varner have approximately 25, 15 and 41 years of credited service under the Pension Plan, respectively. Their base salary and bonuses are reported above in the Summary Compensation Table. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 401(K) SAVINGS PLAN The Company maintains the 401(k) Plan for all of its employees who are age 20 or older and who have completed at least six months of service with the Company. Pursuant to the 401(k) Plan, participants may elect to contribute up to 15% of their annual compensation on a tax-deferred basis. In addition, in its sole discretion, the Company may make annual profit sharing contributions and matching contributions to the 401(k) Plan for the benefit of participants. The Company's 401(k) Plan expenses, including employer contributions, if any, for the years ended December 31, 1997 and 1996, were $468,000 and $513,000, respectively. In connection with the Conversion, the Board of Directors of the Company has amended the 401(k) Plan to allow participants to invest in the Common Shares through the 401(k) Plan. POSTRETIREMENT BENEFIT PLANS In addition to the Company's retirement plans, the Company sponsors a defined benefit health care plan (the "Postretirement Health Plan") that provides postretirement medical benefits to full-time employees who have worked 15 years and attained age 60, or worked 5 years and attained age 65, while in service with the Company. The Postretirement Health Plan is contributory and contains minor cost-sharing features such as deductibles and coinsurance. In addition, postretirement life insurance coverage is provided for employees who were participants prior to December 10, 1976. The life insurance plan is non-contributory. The Company's policy is to pay premiums monthly, with no pre-funding. -66- 95 STOCK BENEFIT PLANS EMPLOYEE STOCK OWNERSHIP PLAN. The Holding Company intends to establish the ESOP for the benefit of employees of the Holding Company and its subsidiaries, including the Company, who are age 20 or older and who have completed at least six months of service with the Holding Company and its subsidiaries. The Board of Directors of the Holding Company believes that the ESOP will be in the best interests of the Holding Company and its shareholders. The ESOP trust intends to borrow funds from the Holding Company with which to acquire up to 8% of the total Common Shares sold in connection with the Conversion and contributed to the Foundation. Such loan will be secured by the Common Shares purchased with the proceeds from the loan and will be repaid by the ESOP over a period of approximately 15 years with contributions to the ESOP and earnings on ESOP assets. The interest rate paid on the loan will be the Prime Rate less 1/2%, which is currently 8.0%. Common Shares purchased with such loan proceeds will be held in a suspense account for allocation among ESOP participants as the loan is repaid. The amount of cash or other assets that can be contributed to the ESOP each year is limited by certain IRS regulations. The Company may make the contribution to the ESOP, to the extent permitted by such regulations, to prepay the ESOP loan in fewer than 15 years. A shorter repayment period could result in increased compensation expense during the years in which payments are made on the ESOP loan. See "PRO FORMA DATA." Contributions to the ESOP and shares released from the suspense account will be allocated pro rata to participants on the basis of compensation. Except for participants who retire, become disabled, or die during the plan year, all other participants must have completed at least 1,000 hours of service during a plan year in order to receive an allocation. Benefits become fully vested after five years of service. Vesting will be accelerated upon retirement or at age 65, death, disability, termination of the ESOP, or change in control of the Holding Company or the Company. Shares allocated to the account of a participant whose employment by the Company terminates prior to such participant having satisfied the vesting requirement will be forfeited. Forfeitures will be reallocated among remaining participating employees. Benefits may be paid either in the Holding Company common shares or in cash. Benefits may be payable upon retirement, death, disability, or separation from service. Benefits payable under the ESOP cannot be estimated. A committee appointed by the Board of Directors of the Holding Company will administer the ESOP. The Common Shares and other ESOP funds will be held by a trustee selected and appointed by the Holding Company (the "ESOP Trustee"). The ESOP Committee may instruct the ESOP Trustee regarding investments of funds contributed to the ESOP. The ESOP Trustee must vote all common shares of the Holding Company held in the ESOP that are allocated to the accounts of ESOP participants in accordance with the instructions of such participants. Common shares held by the ESOP that are not allocated to participants' accounts and allocated shares for which voting instructions are not received will be voted by the ESOP Trustee in its sole discretion. The tax-qualified status of the ESOP and its purchase of the Common Shares of the Holding Company are subject to the subsequent approval of the Commissioner of the IRS (the "Commissioner"). The Holding Company will submit to the Commissioner an application for approval of the ESOP. Although no assurances can be given, the Holding Company expects that the ESOP will be approved by the Commissioner. STOCK OPTION PLAN. After the completion of the Conversion, the Board of Directors of the Holding Company intends to adopt the Stock Option Plan, subject to approval by the shareholders of the Holding Company. The purposes of the Stock Option Plan include retaining and providing incentives to the directors, officers, and employees of the Holding Company and its subsidiaries by facilitating their purchase of a stock interest in the Holding Company. -67- 96 Options granted to the officers and employees under the Stock Option Plan may be "incentive stock options" within the meaning of Section 422 of the Code ("ISOs"). Options granted under the Stock Option Plan to directors who are not full-time employees of the Holding Company or the Company will not qualify under the Code and thus will not be ISOs ("Non-qualified Options"). Although any eligible director, officer, or employee of the Holding Company or the Company may receive Non-qualified Options, it is anticipated that the non-employee directors will receive Non-qualified Options and other eligible participants will receive ISOs. The option exercise price will be determined by the Stock Option Committee at the time of grant; provided, however, that the exercise price for an ISO, or for any option if the Stock Option Plan is implemented by the Holding Company during the first year following completion of the Conversion, must not be less than 100% of the fair market value of the shares on the date of the grant. No stock option will be exercisable after the expiration of ten years from the date of grant, except that in the case of an ISO granted to an employee who owns more than 10% of the Holding Company's outstanding common shares at the time such ISO is granted under the Stock Option Plan, the exercise price of the ISO may not be less than 110% of the fair market value of the shares on the date of the grant and the ISO may not be exercisable after the expiration of five years from the date of grant. An option recipient cannot transfer or assign an option other than by will or in accordance with the laws of descent and distribution. "Termination for cause," as defined in the Stock Option Plan, will result in the termination of any outstanding options. The Holding Company will receive no monetary consideration for the granting of options under the Stock Option Plan. Upon the exercise of options, the Holding Company will receive a payment of cash, common shares of the Holding Company, or a combination of cash and common shares from option recipients in exchange for shares issued. A number of shares equal to 10% of the total Common Shares sold in the Conversion and contributed to the Foundation is expected to be reserved for issuance by the Holding Company upon the exercise of options to be granted to certain directors, officers, and employees of the Holding Company and its subsidiaries from time to time under the Stock Option Plan. No determination has been made regarding the recipients of awards under the Stock Option Plan or the number of shares to be awarded to individual recipients. The Stock Option Committee may grant options under the Stock Option Plan to the directors, officers, and employees of the Holding Company and the Company at such times as they deem most beneficial to the Holding Company on the basis of the individual participant's responsibility, tenure, and future potential. Under OTS regulations, no stock options may be awarded during the first year after the completion of the Conversion unless the Stock Option Plan is approved by the shareholders of the Holding Company at an annual or a special meeting of shareholders held not less than six months following the completion of the Conversion. If the Stock Option Plan is approved by the Holding Company shareholders at such meeting and implemented during the first year after the completion of the Conversion, the following restrictions will apply: (i) the number of shares which may be subject to options awarded under the Stock Option Plan to directors who are not full-time employees of the Holding Company may not exceed 5% per person and 30% in the aggregate of the available shares; (ii) the number of shares which may be subject to options awarded under the Stock Option Plan to any individual who is a full-time employee of the Holding Company or its subsidiaries may not exceed 25% of the available shares; (iii) stock options must be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of the award; and (iv) stock options will become exercisable at the rate of one-fifth per year commencing no earlier than one year from the date of the award, subject to acceleration of vesting only in the event of the death or disability of a participant. The ultimate value of any option granted at fair market value will depend on future appreciation in the fair market value of the -68- 97 shares to which the option relates. No decision has been made as to anticipated awards under the Stock Option Plan. RECOGNITION AND RETENTION PLAN. After the completion of the Conversion, the Company intends to adopt the RRP. The purpose of the RRP is to provide directors, directors emeritus, officers, and certain key employees of the Company with an ownership interest in the Holding Company in a manner designed to compensate such directors, directors emeritus, officers, and key employees for services to the Company. The Company expects to contribute sufficient funds to enable the RRP to purchase up to 4% of the total Common Shares sold in the Offering and contributed to the Foundation. The Company will receive no monetary consideration from the recipients for the awards of shares under the RRP. The RRP Committee will administer the RRP and determine the number of shares to be granted to eligible participants. Each participant granted shares under the RRP will be entitled to the benefit of any dividends or other distributions paid on such shares prior to the shares being earned, although dividends or other distributions on shares held in the RRP Trust will not be distributed to the participant until the shares are distributed to the participant. Compensation expense in the amount of the fair market value of the RRP shares will be recognized as the shares are earned. No determination has been made regarding recipients of RRP awards or the number of shares to be awarded to individual recipients. Under OTS regulations, no RRP shares may be awarded during the first year after the completion of the Conversion unless the RRP is approved by the shareholders of the Holding Company at an annual meeting or a special meeting of shareholders held not less than six months following the completion of the Conversion. If the RRP is approved by the Holding Company shareholders at such meeting and implemented during the first year after the completion of the Conversion, the following restrictions will apply: (i) the number of shares which may be subject to awards under the RRP to directors or directors emeritus who are not full-time employees of the Holding Company or its subsidiaries may not exceed 5% per person and 30% in the aggregate of the eligible shares; (ii) the number of shares which may be subject to awards under the RRP to any individual who is a full-time employee of the Holding Company or its subsidiaries may not exceed 25% of the eligible shares; and (iii) RRP awards will be earned at the rate of one-fifth per year commencing no earlier than one year from the date of the award subject to acceleration of vesting only in the event of the death or the disability of the participant. EMPLOYMENT AGREEMENTS The Company currently has no employment agreements with any of its officers. The Company intends to enter into employment agreements with Douglas M. McKay, Donald J. Varner and Patrick A. Kelly (collectively, the "Employment Agreements"). Each of the Employment Agreements will provide for a term of three years and performance reviews by the Board of Directors not less often than annually at which time the Employment Agreement may be extended for a period of one year. The Employment Agreements will also provide for the inclusion of the officers in any formally established employee benefit, bonus, pension, and profit-sharing plans for which senior management personnel are eligible and for vacation and sick leave in accordance with the Company's prevailing policies. The Employment Agreements will be terminable by the Company at any time. In the event of termination by the Company for "just cause," as defined in the Employment Agreements, the employee will have no right to receive any compensation or other benefits for any period after such termination. In the event of termination by the Company other than for just cause or in connection with a "change of control," as defined in the Employment Agreements, the employee will be entitled to a continuation of salary payments for a period of time equal to the remaining term of an Employment Agreement and a continuation of benefits substantially equal to those being provided at the date of termination of his employment until the earliest to occur of the end of the -69- 98 term of the Employment Agreement or the date on which the employee becomes employed full-time by another employer. Each Employment Agreement also will contain provisions with respect to the occurrence within one year of a "change of control" of (1) the termination of the employee's employment for any reason other than just cause, retirement, or termination at the end of the term of the agreement, or (2) a constructive termination resulting from change in the capacity or circumstances in which the employee is employed or a material reduction in his responsibilities, authority, compensation, or other benefits provided under the Employment Agreement without the employee's written consent. In the event of any such occurrence, the employee will be entitled to payment of an amount equal to three times the employee's annual compensation immediately preceding the termination of his employment. In addition, the employee will be entitled to continued coverage under all benefit plans until the earliest of the end of the term of his Employment Agreement or the date on which he is included in another employer's benefit plans as a full-time employee. The maximum which the employee may receive, however, is limited to an amount which will not result in the imposition of a penalty tax pursuant to Section 280G(b)(3) of the Code. "Control," as defined in the Employment Agreements, generally refers to the acquisition by any person or entity of the ownership or power to vote 10% or more of the voting stock of the Company or the Holding Company, the control of the election of a majority of the directors of the Company or the Holding Company, or the exercise of a controlling influence over the management or policies of the Company or the Holding Company. The aggregate payments that would have been made to Messrs. McKay, Varner and Kelly pursuant to the Employment Agreements, assuming their termination at December 31, 1997, following a change of control, would have been approximately $720,000, $380,000 and $346,000, respectively. In recent years, the Company has paid annual bonuses to members of management on a discretionary basis as determined by the non-employee directors of the Company. Following the completion of the Conversion, the Board of Directors of the Company anticipates establishing a formalized bonus plan that provides for bonus payments to management based on performance-related criteria. At this time, the Board has not determined such criteria. CERTAIN TRANSACTIONS WITH THE COMPANY In accordance with regulations of the OTS and the State of Ohio, the Company makes loans to executive officers and directors of the Company in the ordinary course of business and on the same terms and conditions, including interest rates and collateral, as those generally available to the Company's customers. All outstanding loans to executive officers and directors comply with such policy, do not involve more than the normal risk of collectibility or present other unfavorable features and are current in their payments. Loans to directors and executive officers of the Company and their related interests totaled $1.3 million at December 31, 1997. REGULATION GENERAL As a savings and loan association incorporated under the laws of Ohio, the Company is subject to regulation, examination and oversight by the OTS and the Superintendent of the Division (the "Ohio Superintendent"). Because the Company's deposits are insured by the FDIC, the Company also is subject to general oversight by the FDIC. The Company must file periodic reports with the OTS, the Ohio Superintendent and the FDIC concerning its activities and financial condition. Examinations are conducted periodically by federal and state regulators to determine whether the Company is in compliance with various regulatory -70- 99 requirements and is operating in a safe and sound manner. The Company is a member of the FHLB of Cincinnati. The Holding Company will be a savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently, the Holding Company will be subject to regulation, examination, and oversight by the OTS and will be required to submit periodic reports to the OTS. Because the Holding Company and the Company are corporations organized under Ohio law, they are also subject to the provisions of the Ohio Revised Code applicable to corporations generally. Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations and the Department of the Treasury is preparing a report for Congress on the development of a common charter for all financial institutions. Pursuant to such legislation, Congress may eliminate the OTS and the Company may be regulated under federal law as a bank or be required to change its charter. Such change in regulation or charter would likely change the range of activities in which the Company may engage and would probably subject the Company to more regulation by the FDIC. In addition, the Holding Company might become subject to different holding company regulations, including separate capital requirements. At this time, the Holding Company cannot predict when or whether Congress may actually pass legislation regarding the Holding Company's and the Company's regulatory requirements or charter. Although such legislation may change the activities in which either the Holding Company and the Company may engage, it is not anticipated that the current activities of the Holding Company or the Company will be materially affected by those activity limits. OHIO SAVINGS AND LOAN LAW The Ohio Superintendent is responsible for the regulation and supervision of Ohio savings and loan associations in accordance with the laws of the State of Ohio. Ohio law prescribes the permissible investments and activities of Ohio savings and loan associations, including the types of lending that such associations may engage in and the investments in real estate, subsidiaries, and corporate or government securities that such associations may make. The ability of Ohio associations to engage in these state-authorized investments and activities is subject to oversight and approval by the FDIC, if such investments or activities are not permissible for a federally chartered savings and loan association. The Ohio Superintendent also has approval authority over any mergers involving or acquisitions of control of Ohio savings and loan associations. The Ohio Superintendent may initiate certain supervisory measures or formal enforcement actions against Ohio associations. Ultimately, if the grounds provided by law exist, the Ohio Superintendent may place an Ohio association in conservatorship or receivership. The Ohio Superintendent conducts regular examinations of the Company approximately once every eighteen months. Such examinations are usually conducted jointly with one or both federal regulators. The Ohio Superintendent imposes assessments on Ohio associations based on their asset size to cover the cost of supervision and examination. OFFICE OF THRIFT SUPERVISION GENERAL. The OTS is an office in the Department of the Treasury and is responsible for the regulation and supervision of all federally chartered savings and loan associations and all other savings and loan associations the deposits of which are insured by the FDIC. The OTS issues regulations governing the operation of savings and loan associations, regularly examines such associations and imposes assessments on savings associations based on their asset size to cover the costs of this supervision and examination. The OTS also may initiate enforcement actions against savings and loan associations and certain persons affiliated with them for -71- 100 violations of laws or regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the OTS may appoint a conservator or receiver for a savings and loan association. Savings associations are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosures, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of an association to open a new branch or engage in a merger. Community reinvestment regulations evaluate how well and to what extent an institution lends and invests in its designated service area, with particular emphasis on low- to moderate-income communities and borrowers in that area. The Company has received a "satisfactory" examination rating under those regulations. REGULATORY CAPITAL REQUIREMENTS. The Company is required by OTS regulations to meet certain minimum capital requirements. For information regarding the Company's regulatory capital at December 31, 1997, and pro forma regulatory capital after giving effect to the Conversion, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources" and "REGULATORY CAPITAL COMPLIANCE." Current capital requirements call for tangible capital of 1.5% of adjusted total assets, core capital (which for the Company consists solely of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for the Company consists of core capital and general valuation allowances) of 8.0% of risk-weighted assets (assets, including certain off-balance sheet items, are weighted at percentage levels ranging from 0% to 100% depending on the relative risk). The OTS has proposed to amend the core capital requirement so that those associations that do not have the highest examination rating and an acceptable level of risk will be required to maintain core capital of from 4% to 5%, depending on the Company's examination rating and overall risk. The Company does not anticipate that it will be adversely affected if the core capital requirement regulation is amended as proposed. The OTS has adopted an interest rate risk component to the risk-based capital requirement, though the implementation of that component has been delayed. Pursuant to that requirement a savings association would have to measure the effect of an immediate 200 basis point change in interest rates on the value of its portfolio as determined under the methodology of the OTS. If the measured interest rate risk is above the level deemed normal under the regulation, the Company will be required to deduct one-half of such excess exposure from its total capital when determining its risk-based capital. Pending implementation of the interest rate risk component, the OTS has the authority to impose a higher individualized capital requirement on any savings association it deems to have excess interest rate risk. The OTS also may adjust the risk-based capital requirement on an individualized basis to take into account risks due to concentrations of credit and non-traditional activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset and Liability Management." The OTS has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled savings and loan associations. At each successively lower defined capital category, an association is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OTS has less flexibility in determining how to resolve the problems of the institution. The OTS has defined these capital levels as follows: (i) well-capitalized associations must have total risk-based capital of at least 10%, core risk-based capital (consisting only of items that qualify for inclusion in core capital) of at least 6% and core capital of at least 5%; (ii) adequately capitalized associations are those that meet the regulatory minimum of total risk-based capital of 8%, core risk-based capital of 4%, and core capital of 4% (except for associations receiving the highest examination rating, in which case the level is 3%) but are not well-capitalized; (iii) undercapitalized associations are those that do not meet regulatory limits, but that are not significantly undercapitalized; (iv) significantly undercapitalized associations have total risk-based capital of less -72- 101 than 6%, core risk-based capital of less than 3% or core capital of less than 3%; and (v) critically undercapitalized associations are those with core capital of less than 2% of total assets. In addition, the OTS generally can downgrade an association's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the association is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. An undercapitalized association must submit a capital restoration plan to the OTS within 45 days after it becomes undercapitalized. Undercapitalized associations will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Critically undercapitalized institutions must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances. The Company's capital at December 31, 1997, meets the standards for a well-capitalized institution. Federal law prohibits a savings and loan association from making a capital distribution to anyone or paying management fees to any person having control of the association if, after such distribution or payment, the association would be undercapitalized. In addition, each company controlling an undercapitalized association must guarantee that the association will comply with its capital plan until the association has been adequately capitalized on an average during each of four preceding calendar quarters and must provide adequate assurances of performance. The aggregate liability pursuant to such guarantee is limited to the lesser of (i) an amount equal to 5% of the association's total assets at the time the association became undercapitalized or (ii) the amount that is necessary to bring the association into compliance with all capital standards applicable to such association at the time the association fails to comply with its capital restoration plan. LIQUIDITY. OTS regulations require that savings associations maintain an average daily balance of liquid assets (cash, certain time deposits, association's acceptances, and specified United States Government, state or federal agency obligations) equal to a monthly average of not less than 4% of its net withdrawable savings deposits plus borrowings payable in one year or less. Monetary penalties may be imposed upon member institutions failing to meet liquidity requirements. The eligible liquidity of the Company at December 31, 1997, was approximately $101.7 million, or 11.48%, which exceeded the applicable 4% liquidity requirement by approximately $66.2 million. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources." QUALIFIED THRIFT LENDER TEST. Prior to September 30, 1996, the QTL test required savings associations to maintain a specified level of investments in assets that are designated as qualifying thrift investments ("QTI"), which are generally related to domestic residential real estate and manufactured housing and include stock issued by any FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business, and 20% of liquid assets) must consist of QTI on a monthly average basis in 9 out of every 12 months. Congress created a second QTL test, effective September 30, 1996, pursuant to which a savings association may also qualify as a QTL thrift if at least 60% of the institution's assets (on a tax basis) consist of specified assets (generally loans secured by residential real estate or deposits, educational loans, cash, and certain governmental obligations). The OTS may grant exceptions to the QTL test under certain circumstances. If a savings association fails to meet the QTL test, the association and its holding company become subject to certain operating and regulatory restrictions. A savings association that fails to meet the QTL test will not be eligible for new FHLB advances. At December 31, 1997, the Company met the QTL test. LENDING LIMIT. OTS regulations generally limit the aggregate amount that a savings association can lend to one borrower or group of related borrowers to an amount equal to 15% of the association's Lending Limit Capital. A savings association may lend to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." Certain types of loans are -73- 102 not subject to this limit. In applying this limit, the regulations require that loans to certain related borrowers be aggregated. An exception to this limit permits loans of any type to one borrower up to $500,000. Based on such limits, the Company was able to lend approximately $21.0 million to one borrower at December 31, 1997. The largest amount the Company had outstanding to one borrower at December 31, 1997, was $15.2 million, which consisted of four loans secured by first mortgage liens on freezer warehouses. At December 31, 1997, such loans were performing in accordance with their terms. See "THE BUSINESS OF THE COMPANY - Lending Activities -- Loan to One Borrower Limits." TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers, directors, and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders, and their related interests cannot exceed the Company's Lending Limit Capital (or 200% of Lending Limit Capital for qualifying institutions with less than $100 million in assets). Most loans to directors, executive officers, and principal shareholders must be approved in advance by a majority of the "disinterested" members of the board of directors of the Company with any "interested" director not participating. All loans to directors, executive officers, and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. The Company was in compliance with such restrictions at December 31, 1997. All transactions between a savings association and its affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An affiliate of a savings association is any company or entity that controls, is controlled by or is under common control with, the savings association. The Holding Company will be an affiliate of the Company. Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a savings association or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, (ii) limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (iii) require that all such transactions be on terms substantially the same, or at least as favorable to the association, as those provided in transactions with a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee, and other similar types of transactions. In addition to the limits in Sections 23A and 23B, a savings association may not make any loan or other extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for a bank holding company and may not purchase or invest in securities of any affiliate except shares of a subsidiary. The Company was in compliance with these requirements and restrictions at December 31, 1997. LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions, according to ratings of associations based on their capital level and supervisory condition. Capital distributions, for purposes of such regulation, include, without limitation, payments of cash dividends, repurchases, and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association. For purposes of the capital distribution regulations, each institution is categorized in one of three tiers. Tier 1 consists of associations that, before and after the proposed capital distribution, meet their fully phased-in capital requirement. Associations in this category may make capital distributions during any calendar year equal to the greater of 100% of their net income, current year-to-date, plus 50% of the amount by which the lesser of such association's tangible, core or risk-based capital exceeds its fully phased-in capital requirement for such capital component, as measured at the beginning of the calendar year, or the amount authorized for a tier 2 association. A tier 2 association meets its current minimum, but not fully phased-in capital requirement before and after a proposed capital distribution. An association in this category may make capital distributions up to 75% of its net income over the most recent four quarters. A Tier 3 association is one which does not meet its current minimum capital requirement and must obtain OTS approval of any capital distribution. A tier 1 -74- 103 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a tier 2 or tier 3 association. The Company meets the requirements for a tier 1 association and has not been notified of any need for more than normal supervision. The Company will also be prohibited from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the net worth of the Company would be reduced below the amount required to be maintained for the liquidation account established in connection with the Conversion. See "THE CONVERSION Principal Effects of the Conversion - Liquidation Account." In addition, as a subsidiary of the Holding Company, the Company will also be required to give the OTS 30 days' notice prior to declaring any dividend on its stock. The OTS may object to the dividend during that 30-day period based on safety and soundness concerns. Moreover, the OTS may prohibit any capital distribution otherwise permitted by regulation if the OTS determines that such distribution would constitute an unsafe or unsound practice. Pursuant to OTS policy, as a condition to approval of the Conversion, the Company will be required to state that it will not undertake a tax-free return of capital for a period of one year following completion of the Conversion. In December 1994, the OTS issued a proposal to amend the capital distributions limits. Under that proposal, an association which is not owned by a holding company and which has an examination rating of 1 or 2 could make a capital distribution without notice to the OTS, if it remains adequately capitalized, as described above, after the distribution is made. Any other association seeking to make a capital distribution that would not cause the association to fall below the capital levels to qualify as adequately capitalized or better, would have to provide notice to the OTS. Except under limited circumstances and with OTS approval, no capital distributions would be permitted if it caused the association to become undercapitalized. HOLDING COMPANY REGULATION. After the Conversion, the Holding Company will be a savings and loan holding company within the meaning of the HOLA. As such, the Holding Company will register with the OTS and will be subject to OTS regulations, examination, supervision, and reporting requirements. The HOLA generally prohibits a savings and loan holding company from controlling any other savings and loan association or savings and loan holding company, without prior approval of the OTS, or from acquiring or retaining more than 5% of the voting shares of a savings and loan association or holding company thereof, which is not a subsidiary. Under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the OTS, up to 15% of the previously unissued voting shares of an undercapitalized savings and loan association for cash without being deemed to control the association. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. The Holding Company will be a unitary savings and loan holding company. Under current law, there are generally no restrictions on the activities of unitary savings and loan holding companies and such companies are the only financial institution holding companies which may engage in commercial, securities, and insurance activities without limitation. The broad latitude under current law can be restricted if the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings and loan association. The OTS may impose such restrictions as deemed necessary to address such risk, including limiting (i) payment of dividends by the savings and loan association; (ii) transactions between the savings and loan association and its affiliates; and (iii) any activities of the savings and loan association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings and loan association. Notwithstanding the foregoing rules as to permissible business activities of a unitary savings and loan holding company, if the savings and loan association subsidiary of a holding company fails to meet the QTL, then such unitary holding company would become subject to the activities restrictions applicable to -75- 104 multiple holding companies. At December 31, 1997, the Company met the QTL. See "Qualified Thrift Lender Test." Congress is considering legislation which may limit the Holding Company's ability to engage in these activities and the Holding Company cannot predict if and in what form these proposals might become law. However, such limits would not impact the Holding Company's initial activity of holding stock of the Company. If the Holding Company were to acquire control of another savings institution, other than through a merger or other business combination with the Company, the Holding Company would become a multiple savings and loan holding company. Unless the acquisition is an emergency thrift acquisition and each subsidiary savings and loan association meets the QTL, the activities of the Holding Company and any of its subsidiaries (other than the Company or other subsidiary savings and loan associations) would thereafter be subject to activity restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof that is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities previously directly authorized by federal regulation as of March 5, 1987, to be engaged in by multiple holding companies; or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the OTS by regulation prohibits or limits such activities for savings and loan holding companies, and which have been approved by the OTS prior to being engaged in by a multiple holding company. The OTS may approve an acquisition resulting in the formation of a multiple savings and loan holding company that controls savings and loan associations in more than one state only if the multiple savings and loan holding company involved controls a savings and loan association that operated a home or branch office in the state of the Company to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). As under prior law, the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings and loan associations in more than one state in the case of certain emergency thrift acquisitions. Bank holding companies have had more expansive authority to make interstate acquisitions than savings and loan holding companies since August 1995. FDIC REGULATIONS DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations. The FDIC is required to maintain designated levels of reserves in each fund. The Company's deposit accounts are insured by the FDIC in the SAIF up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including the Company, and has authority to initiate enforcement actions against federally insured savings associations if the FDIC does not believe the OTS has taken appropriate action to safeguard safety and soundness and the deposit insurance fund. The FDIC is required to maintain designated levels of reserves in each fund. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments -76- 105 vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Federal legislation which was effective September 30, 1996, provided for the recapitalization of the SAIF by means of a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. In addition, the cost of prior thrift failures, which had previously been paid only by SAIF members, will also be paid by BIF members. As a result, SAIF assessments for healthy institutions in 1997 were $.064 per $100 in deposits. The Company had $904.4 million in deposits at March 31, 1995. The Company paid a special assessment of approximately $5.9 million in November 1996, which was accounted for and recorded as of September 30, 1996. This assessment was tax-deductible but reduced earnings for the year ended December 31, 1996. FRB REGULATIONS FRB regulations currently require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8 million (subject to an exemption of up to $4.7 million), and of 10% of net transaction accounts over $47.8 million. At December 31, 1997, the Company was in compliance with this reserve requirement. FEDERAL HOME LOAN BANKS The FHLBs provide credit to their members in the form of advances. See "THE BUSINESS OF THE COMPANY - Deposits and Borrowings." The Company is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Company's residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, and 5% of its advances from the FHLB. The Company is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $11.1 million at December 31, 1997. Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the U.S. Government or an agency thereof; deposits in any FHLB; or other real estate related collateral (up to 30% of the member association's capital) acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. -77- 106 TAXATION FEDERAL TAXATION The Holding Company and the Company are each subject to the federal tax laws and regulations which apply to corporations generally. In addition to the regular income tax, the Holding Company and the Company may be subject to an alternative minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum taxable income" (which is the sum of a corporation's regular taxable income, with certain adjustments, and tax preference items), less any available exemption. Such tax preference items include interest on certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the amount by which a corporation's "adjusted current earnings" exceeds its alternative minimum taxable income computed without regard to this preference item and prior to reduction by net operating losses, is included in alternative minimum taxable income. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax. Payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain "small corporations" for tax years beginning after December 31, 1997. A corporation initially qualifies as a small corporation if it had average gross receipts of $5,000,000 or less for the three tax years ending with its first tax year beginning after December 31, 1997. Once a corporation is recognized as a small corporation, it will continue to be exempt from the alternative minimum tax for as long as its average gross receipts for the prior three-year period do not exceed $7,500,000. In determining if a corporation meets this requirement, the first year that it achieved small corporation status is not taken into consideration. Based on the Company's average gross receipts of approximately $82.9 million for the three tax years ending on December 31, 1997, the Company would not qualify as a small corporation exempt from the alternative minimum tax. Prior to the enactment of the Small Business Jobs Protection Act (the "Small Business Act"), which was signed into law on August 21, 1996, certain thrift institutions, were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualified thrift institutions could compute deductions for bad debts using either the specific charge off method of Section 166 of the Code, or one of the two reserve methods of Section 593 of the Code. The reserve methods under Section 593 of the Code permitted a thrift institution annually to elect to deduct bad debts under either (i) the "percentage of taxable income" method applicable only to thrift institutions, or (ii) the "experience" method that also was available to small banks. Under the "percentage of taxable income" method, a thrift institution generally was allowed a deduction for an addition to its bad debt reserve equal to 8% of its taxable income (determined without regard to this deduction and with additional adjustments). Under the experience method, a thrift institution was generally allowed a deduction for an addition to its bad debt reserve equal to the greater of (i) an amount based on its actual average experience for losses in the current and five preceding taxable years, or (ii) an amount necessary to restore the reserve to its balance as of the close of the base year. A thrift institution could elect annually to compute its allowable addition to bad debt reserves for qualifying loans either under the experience method or the percentage of taxable income method. The Small Business Act eliminated the percentage of taxable income reserve method of accounting for bad debts by thrift institutions, effective for taxable years beginning after December 31, 1995. Thrift institutions that would be treated as small banks are allowed to utilize the experience method applicable to such institutions, while thrift institutions that are treated as large banks are required to use only the specific charge off method. A thrift institution required to change its method of computing reserves for bad debts will treat such change as a change in the method of accounting, initiated by the taxpayer, and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured -78- 107 with respect to such change. Generally, the amounts to be recaptured will be determined solely with respect to the "applicable excess reserves" of the taxpayer. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to the residential loan requirement described below. In the case of a thrift institution that becomes a large bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans (generally loans secured by improved real estate) and its reserve for losses on nonqualifying loans (all other types of loans) as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that becomes a small bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would have been at the close of its last year beginning before January 1, 1996, had the thrift always used the experience method. For taxable years that begin on or after January 1, 1996, and before January 1, 1998, if a thrift meets the residential loan requirement for a tax year, the recapture of the applicable excess reserves otherwise required to be taken into account as a Code Section 481(a) adjustment for the year will be suspended. A thrift meets the residential origination loan requirement if, for the tax year, the principal origination amount of residential loans made by the thrift during the year is not less than its base amount. The "base amount" generally is the average of the principal origination amounts of the residential loans made by the thrift during the six most recent tax years beginning before January 1, 1996. A residential loan is a loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by residential real and church property and certain mobile homes), but only to the extent that the loan is made to the owner of the property. The balance of the pre-1988 reserves is subject to the provisions of Section 593(e) as modified by the Small Business Act which require recapture in the case of certain excessive distributions to shareholders. The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for any other purpose (excess to absorb bad debt losses). Distribution of a cash dividend by a thrift institution to a shareholder is treated as made: first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper. To the extent a distribution by the Company to the Holding Company is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and the Company's gross income for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves. As of December 31, 1997, the Company's pre-1988 reserves for tax purposes totaled approximately $14.4 million. The Company believes it had approximately $140.0 million of accumulated earnings and profits for tax purposes as of December 31, 1997, which would be available for dividend distributions, provided regulatory restrictions applicable to the payment of dividends are met. See "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions." No representation can be made as to whether the Company will have current or accumulated earnings and profits in subsequent years. The tax returns of the Company have been audited or closed without audit through fiscal year 1994. In the opinion of management, any examination of open returns would not result in a deficiency which could have a material adverse effect on the financial condition of the Company. OHIO TAXATION The Holding Company is subject to the Ohio corporation franchise tax, which, as applied to the Holding Company, is a tax measured by both net earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 -79- 108 and (ii) 0.582% times taxable net worth. Under these alternative measures of computing tax liability, the states to which a taxpayer's adjusted total net income and adjusted total net worth are apportioned or allocated are determined by complex formulas. The minimum tax is $50 per year. A special litter tax is also applicable to all corporations, including the Holding Company, subject to the Ohio corporation franchise tax other than "financial institutions." If the franchise tax is paid on the net income basis, the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable income and .22% of computed Ohio taxable income in excess of $50,000. If the franchise tax is paid on the net worth basis, the litter tax is equal to .014% times taxable net worth. Ohio corporation franchise tax law is scheduled to change markedly as a consequence of legislative reforms enacted July 1, 1997. Tax liability, however, continues to be measured by both net income and net worth. In general, tax liability will be the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii) 0.40% of taxable net worth. Under these alternative measures of computing tax liability, the states to which total net income and total net worth will be apportioned or allocated will continue to be determined by complex formulas, but the formulas change. The minimum tax will still be $50 per year and maximum tax liability as measured by net worth will be limited to $150,000 per year. The special litter taxes remain in effect. Various other changes in the tax law may affect the Holding Company. The Company is a "financial institution" for State of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.5% of the Company's apportioned book net worth, determined in accordance with GAAP, less any statutory deduction. This rate of tax is scheduled to decrease in each of the years 1999 and 2000. As a "financial institution," the Company is not subject to any tax based upon net income or net profits imposed by the State of Ohio. THE CONVERSION THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY THE MEMBERS OF THE COMPANY ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS AND THE DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN. GENERAL On December 9, 1997, the Board of Directors of the Company unanimously adopted the Plan and recommended that the voting members of the Company approve the Plan at the Special Meeting. During and upon completion of the Conversion, the Company will continue to provide the services presently offered to depositors and borrowers, will maintain its existing offices, and will retain its existing management and employees. Based on the current Adjusted Valuation Range, between 21,250,000 and 28,937,500 Common Shares are expected to be offered in the Subscription Offering and the Community Offering at a price of $10 per share. Applicable regulations permit the Holding Company to issue up to 33,465,625 Common Shares with an aggregate purchase price of $334,656,250. Federal regulations require, with certain exceptions, that shares offered in connection with the Conversion must be sold up to at least the minimum point of the Adjusted Valuation Range in order for the Conversion to become effective. The actual number of Common Shares sold in connection with the Conversion will be determined upon completion of the Offering based on the final valuation -80- 109 of the Company, as converted, and the Holding Company. See "Pricing and Number of Common Shares to be Sold." The Common Shares will be offered in the Subscription Offering to the ESOP and certain present and former depositors of the Company. Any Common Shares not subscribed for in the Subscription Offering will be offered to the general public in the Community Offering in a manner which will seek to achieve the widest distribution of the Common Shares, but which will give preference to natural persons who maintain a bona fide residence in Columbiana, Mahoning or Trumbull, Counties, Ohio. Under OTS regulations, the Community Offering must be completed within 45 days after completion of the Subscription Offering, unless such period is extended by the Company with the approval of the OTS and the Division. Shares not subscribed for in the Subscription Offering or the Community Offering will be offered to the general public in the Public Offering. If the Community Offering and the Public Offering are determined not to be feasible, an occurrence that is not currently anticipated, the Boards of Directors of the Holding Company and the Company will consult with the OTS and the Division to determine an appropriate alternative method of selling unsubscribed Common Shares up to the minimum of the Adjusted Valuation Range. No alternative sales methods are currently planned. OTS and Ohio regulations require the completion of the Conversion within 24 months after the date of the approval of the Plan by the voting members of the Company. The commencement and completion of the Conversion will be subject to market conditions and other factors beyond the Company's control. Due to changing economic and market conditions, no assurance can be given as to the length of time that will be required to complete the sale of the Common Shares. If delays are experienced, significant changes may occur in the estimated pro forma market value of the Company. In such circumstances, the Company may also incur substantial additional printing, legal and accounting expenses in completing the Conversion. In the event the Conversion is not successfully completed, the Company will be required to charge all Conversion expenses against current earnings. REASONS FOR THE CONVERSION The principal factors considered by the Company's Board of Directors in reaching the decision to pursue a mutual-to-stock conversion were the numerous competitive advantages which the stock form of organization offers, including growth opportunities, employee retention through the use of stock-based benefit plans, and increased capital levels. If the Company is to continue to grow and prosper, the mutual form of organization is the least desirable form from a competitive standpoint. The opportunities for a mutual to expand through mutual-to-mutual mergers or acquisitions are limited. Although the Company does not have any specific acquisitions planned at this time, the Conversion will position the Company to take advantage of any acquisition opportunities which may present themselves. Because a conversion to stock form is a time-consuming and complex process, the Company cannot wait until an acquisition is imminent to embark on the conversion process. As an increasing number of the Company's competitors convert to stock form and acquire the ability to use stock-based compensation programs, the Company, in mutual form, would be at a disadvantage when it comes to attracting and retaining qualified management. The Company believes that the ESOP, the Stock Option Plan and the RRP are important tools in achieving such goals. See "MANAGEMENT - Stock Benefit Plans." CONTRIBUTION TO THE FOUNDATION GENERAL. The Plan provides that the Holding Company and the Company may contribute common shares to the Foundation. The Company believes that the contribution to the Foundation will benefit the long-term value of the Company's community banking franchise by enhancing the Company's visibility and reputation -81- 110 in the communities that it serves. The Foundation is dedicated to charitable purposes within the communities served by the Company, including community development activities. PURPOSE OF THE FOUNDATION. The Foundation was formed in 1991 to augment the Company's community activities. The Foundation is dedicated exclusively to community activities and the promotion of charitable causes. The Board of Directors believes that the contribution of common shares to the Foundation is consistent with the Company's commitment to community service and to the Company's CRA responsibilities. The contribution of Common Shares to the Foundation will enable the communities served by the Company to share in the growth and success of the Company and the Holding Company long after completion of the Conversion. The Foundation enables the Company and the Holding Company to utilize a unified charitable donation strategy with centralized responsibility for administration and allocation of corporate charitable funds and enables the Company to provide community support in future years, regardless of the Company's earnings. The contribution to the Foundation will not take the place of the Company's traditional community lending activities. STRUCTURE OF THE FOUNDATION. The Foundation is a charitable trust established exclusively for charitable purposes, including community development, as set forth in Section 501(c)(3) of the Code. The trust agreement provides that no part of the net earnings of the Foundation will inure to the benefit of any private shareholder or individual. The business of the Foundation is conducted by an independent trustee, which is currently National City Bank, Northeast, located at 20 Federal Plaza, Youngstown, Ohio 44503. The Company has the power to direct the trustee with respect to distributions by the Foundation, consistent with the purposes for which the Foundation was established, through a distribution committee of the Company. The committee consists of Douglas M. McKay, the Chairman of the Board, President and Chief Executive Officer of the Company, Donald J. Varner, the Secretary, Senior Vice President of Retail Banking and a director of the Company and Patrick A. Kelly, the Chief Financial Officer, Treasurer, Senior Vice President and a director of the Company. In connection with the Conversion, Messrs. McKay, Varner and Kelly have indicated an intent to purchase, together with their Associates, 80,000, 60,000 and 60,000 shares, respectively, or .32%, .24% and .24%, respectively, of the total number of shares sold in the Conversion, assuming the sale of 25,000,000 Common Shares at the mid-point of the Adjusted Valuation Range. See "Intended Purchase by Directors and Executive Officers." Each director, officer and employee of the Company, as well as any person who has the power to direct the management or policies of the Company or any other person who owes a fiduciary duty to the Company, must comply with the regulations of the OTS regarding conflicts of interest if such person is also a trustee of the Foundation, a member of the distribution committee or an employee of the Foundation. The Company proposes to contribute to the Foundation immediately following the Conversion a number of shares equal to 5% of the Common Shares sold in the Conversion, subject to the overall limitation of 1,250,000 common shares. The contribution to the Foundation would equal 1,062,500 common shares at the minimum of the Adjusted Valuation Range and 1,250,000 common shares at the mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, which would have a market value of $10,625,000 and $12,500,000, respectively, based on the purchase price of $10 per share. Keller, an independent appraiser of financial institutions, considered the effect of the contribution of shares to the Foundation when determining the pro forma market value of the Holding Company and the Company, as converted. Keller determined that the contribution would dilute the equity and earnings of the initial shareholders of the Holding Company and that the contribution would result in a charge to the Company's earnings, therefore resulting in a lower pro forma market value of the Holding Company and the Company, as converted. See "RISK FACTORS - Contribution to the Foundation." As a result of the contribution to the Foundation and its impact on the pro forma market value of the Holding Company and the Company, as converted, the Holding Company will offer 2,550,000, 3,000,000, 3,262,500 and 3,564,375 fewer shares at the -82- 111 minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, than if it had not made such contribution. Based on the $10 price per share, the Holding Company will receive $25.5 million, $30.0 million, $32.6 million and $35.6 million less in gross proceeds than it would have if the contribution to the Foundation were not made. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." Notwithstanding the impact of the contribution on the Offering, the Company and the Holding Company determined to fund the Foundation with common shares to enhance the ties between the Company and the communities it serves by allowing the communities to share in the growth and success of the Company and the Holding Company over the long term. The funding of the Foundation with Common Shares also provides the Foundation with a potentially larger endowment than a cash contribution since, as a shareholder, the Foundation will share in the growth and success of the Company and the Holding Company. The contribution of Common Shares to the Foundation has the potential to provide a self-sustaining funding mechanism to enable the Company to maintain a consistent level of charitable grants and donations regardless of the Company's income. The Foundation will receive income from any dividends that may be paid on the Common Shares in the future. Subject to applicable federal and state laws, the Foundation may also obtain funds through loans collateralized by the Common Shares or from the proceeds of the sale of any of the Common Shares in the open market from time to time to provide the Foundation with additional liquidity. As a private foundation under Section 501(c)(3) of the Code, the Foundation will be required to distribute annually in grants or donations, a minimum of 5% of the average fair market value of its net investment assets. Upon completion of the Conversion and the contribution of shares to the Foundation, the Holding Company would have 22,312,500, 26,250,000, 30,187,500 and 34,715,265 shares issued and outstanding at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, respectively. Because the Holding Company will have an increased number of shares outstanding, the voting and ownership interests of shareholders in the Holding Company's Common Shares would be diluted as compared to their interests in the Holding Company if the Foundation were not established. Assuming the sale of Common Shares at the maximum of the Adjusted Valuation Range and the contribution of 1,250,000 common shares to the Foundation, there will be a dilution of approximately 4.14% to the ownership interests in the Holding Company of the persons purchasing Common Shares in the Conversion. For additional discussion of the dilutive effect, see "PRO FORMA DATA." TAX CONSIDERATIONS. The Foundation qualifies as a Section 501(c)(3) exempt organization under the Code, and is classified as a private foundation. Under the Code, the Company is generally allowed a deduction for charitable contributions made to qualifying donees within the taxable year of up to 10% of its taxable income (with certain modifications) for such year. Charitable contributions made in excess of the annual deductible amount will be deductible over each of the five succeeding taxable years, subject to certain limitations. The Company and the Holding Company believe that the Conversion presents a unique opportunity to increase the funding of the Foundation given the substantial amount of additional capital being raised in the Conversion. In making such a determination, the Company and the Holding Company considered the dilutive impact of the contribution of Common Shares to the Foundation on the amount of Common Shares available to be offered for sale in the Conversion. Based on such consideration, the Company and Holding Company believe that the contribution to the Foundation is justified given the Company's capital position and its earnings, the substantial additional capital being raised in the Conversion and the potential benefits of the Foundation to the communities served by the Company. In this regard, assuming the sale of the Common Shares at the mid-point of the Adjusted Valuation Range, the Holding Company would have pro forma shareholders' equity of $360.7 million, or 28.6% of pro forma consolidated assets, and the Company's pro forma tangible, core and total risk-based capital ratios would be 18.78%, 18.78% and 39.62%, respectively. See "REGULATORY CAPITAL COMPLIANCE," "CAPITALIZATION," AND "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH -83- 112 NO FOUNDATION." The amount of the contribution will not adversely impact the financial condition of the Company and the Holding Company, and the Company and the Holding Company therefore believe that the amount of the charitable contribution is reasonable and is safe and sound given the Company's and the Holding Company's pro forma capital positions. The Company and the Holding Company have received an opinion of their independent tax advisors that the Company's contribution of shares to the Foundation would not constitute an act of self-dealing, and that the Company will be entitled to a deduction in the amount of the fair market value of the shares at the time of the contribution, subject to the annual deduction limitation described above. The Company, however, will be able to carry forward any unused portion of the deduction for five years following the contribution, subject to certain limitations. The Company's independent tax advisors, however, have not rendered advice as to the fair market value for purposes of determining the amount of the tax deduction. The Company is permitted under the Code to carry over the excess contribution over the five-year period following the contribution to the Foundation. Assuming the close of the Offering at the mid-point of the Adjusted Valuation Range, the Company estimates that all of the deduction should be deductible over the six-year period. Neither the Company nor the Holding Company expect to make any further contributions to the Foundation during 1998 or within the first five years following the initial contribution. After that time, the Company and the Holding Company may consider future contributions to the Foundation. The Company does expect to continue its practice of making small donations, directly to charitable institutions during 1998 and the following five years. Any such decisions would be based on an assessment of, among other factors, the financial condition of the Company and the Holding Company at that time, the interests of shareholders of the Holding Company and the depositors of the Company, and the financial condition and operations of the Foundation. As a private foundation, earnings and gains, if any, from the sale of common shares or other assets are generally exempt from federal and state corporate income taxation. However, investment income, such as interest, dividends and capital gains, of a private foundation will generally be subject to a federal excise tax of 2%. The Foundation is required to make an annual filing with the IRS within four and one-half months after the close of the Foundation's fiscal year to maintain its tax-exempt status. The Foundation is required to publish a notice that the annual information return will be available for public inspection for a period of 180 days after the date of such public notice. The information return for a private foundation must include, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the Foundation's managers and a concise statement of the purpose of each grant. REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. The contribution to the Foundation is subject to the following conditions being agreed to by the Foundation in writing as a condition to receiving OTS approval of the Conversion: (i) the Foundation will be subject to examination by the OTS; (ii) the Foundation must comply with supervisory directives imposed by the OTS; (iii) the Committee will operate in accordance with written policies adopted by the Board of Directors, including a conflict of interest policy; (iv) any common shares held by the Foundation must be voted in the same ratio as all other outstanding common shares on all proposals considered by shareholders of the Holding Company; provided, however, that, consistent with the condition, the OTS would waive this voting restriction under certain circumstances if compliance with the voting restriction would: (a) cause a violation of the law of the State of Ohio and the OTS determines that federal law would not preempt the application of the laws of Ohio to the Foundation; (b) would cause the Foundation to lose its tax-exempt status or otherwise have a material and adverse tax consequence on the Foundation; or (c) would cause the Foundation to be subject to an excise tax under Section 4941 of the Code; and (v) any common shares subsequently purchased by the Foundation will be aggregated with any shares repurchased by the Company or the Holding Company for purposes of calculating the number of shares which may be repurchased during the three-year period subsequent to the Conversion. In order for the OTS to waive such voting restriction, the Holding Company's or the Foundation's legal counsel would be required to render an opinion satisfactory to the OTS. While there is no current intention for the Holding Company or the Foundation to seek a -84- 113 waiver from the OTS from such restrictions, there can be no assurances that a legal opinion addressing these issues could be rendered, or if rendered, that the OTS would grant an unconditional waiver of the voting restriction. In no event would the voting restriction survive the sale of common shares held by the Foundation. APPROVAL OF THE FOUNDATION BY MEMBERS. The contribution of common shares to the Foundation is subject to the approval of a majority of the total outstanding votes eligible to be cast at the Special Meeting. If the Company's members approve the Plan, but not the contribution to the Foundation, the Company intends to complete the Conversion without the contribution to the Foundation. The elimination of the contribution to the Foundation may materially increase the pro forma market value of the Company, as converted, and the Holding Company. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." PRINCIPAL EFFECTS OF THE CONVERSION VOTING RIGHTS. Deposit holders who are members of the Company in its mutual form will have no voting rights in the Company as converted and will not participate, therefore, in the election of directors or otherwise control the Company's affairs. Voting rights in the Holding Company will be held exclusively by its shareholders, and voting rights in the Company will be held exclusively by the Holding Company as the sole shareholder of the Company. Each holder of the Holding Company's common shares will be entitled to one vote for each share owned on any matter to be considered by the Holding Company's shareholders. See "DESCRIPTION OF AUTHORIZED SHARES." DEPOSIT ACCOUNTS AND LOANS. Deposit accounts in the Company, as converted, will be equivalent in amount, interest rate and other terms to the present deposit accounts in the Company, and the existing FDIC insurance on such accounts will not be affected by the Conversion. The Conversion will not affect the terms of loan accounts or the rights and obligations of borrowers under their individual contractual arrangements with the Company. TAX CONSEQUENCES. The consummation of the Conversion is expressly conditioned on receipt by the Company of a private letter ruling from the IRS or an opinion of counsel to the effect that the Conversion will constitute a tax-free reorganization as defined in Section 368(a) of the Code. The Company intends to proceed with the Conversion based upon an opinion received from its special counsel, Vorys, Sater, Seymour and Pease LLP, to the following effect: (1) The Conversion constitutes a reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized by the Company in its mutual form or in its stock form as a result of the Conversion. The Company in its mutual form and the Company in its stock form will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; (2) No gain or loss will be recognized by the Company upon the receipt of money from the Holding Company in exchange for the capital stock of the Company, as converted; (3) The assets of the Company will have the same basis in its hands immediately after the Conversion as they had in its hands immediately prior to the Conversion, and the holding period of the assets of the Company after the Conversion will include the period during which the assets were held by the Company before the Conversion; (4) No gain or loss will be recognized by the deposit account holders of the Company upon the issuance to them, in exchange for their respective withdrawable deposit accounts in the Company immediately prior to the Conversion, of withdrawable deposit accounts in the Company immediately -85- 114 after the Conversion, in the same dollar amount as their withdrawable deposit accounts in the Company immediately prior to the Conversion, plus, in the case of Eligible Account Holders and Supplemental Eligible Account Holders, the interests in the Liquidation Account of the Company, as described below; (5) The basis of the withdrawable deposit accounts in the Company held by its deposit account holders immediately after the Conversion will be the same as the basis of their deposit accounts in the Company immediately prior to the Conversion. The basis of the interests in the Liquidation Account received by the Eligible Account Holders and Supplemental Eligible Account Holders will be zero. The basis of the nontransferable subscription rights received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Eligible Members will be zero (assuming that at distribution such rights have no ascertainable fair market value); (6) No gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Eligible Members upon the distribution to them of nontransferable subscription rights to purchase Common Shares (assuming that at distribution such rights have no ascertainable fair market value), and no taxable income will be realized by such Eligible Account Holders, Supplemental Eligible Account Holders or Other Eligible Members as a result of their exercise of such nontransferable subscription rights; (7) The basis of the Common Shares purchased by members of the Company pursuant to the exercise of subscription rights will be the purchase price thereof (assuming that such rights have no ascertainable fair market value and that the purchase price is not less than the fair market value of the shares on the date of such exercise), and the holding period of such shares will commence on the date of such exercise. The basis of the Common Shares purchased other than by the exercise of subscription rights will be the purchase price thereof (assuming in the case of the other subscribers that the opportunity to buy in the Subscription Offering has no ascertainable fair market value), and the holding period of such shares will commence on the day after the date of the purchase; (8) For purposes of Section 381 of the Code, the Company will be treated as if there had been no reorganization. The taxable year of the Company will not end on the effective date of the Conversion. Immediately after the Conversion, the Company in its stock form will succeed to and take into account the tax attributes of the Company in its mutual form immediately prior to the Conversion, including the Company's earnings and profits or deficit in earnings and profits; (9) The bad debt reserves of the Company in its mutual form immediately prior to the Conversion will not be required to be restored to the gross income of the Company in its stock form as a result of the Conversion and immediately after the Conversion such bad debt reserves will have the same character in the hands of the Company in its stock form as they would have had if there had been no Conversion. The Company in its stock form will succeed to and take into account the dollar amounts of those accounts of the Company in its mutual form which represent bad debt reserves in respect of which the Company in its mutual form has taken a bad debt deduction for taxable years ending on or before the Conversion; and (10) Regardless of book entries made for the creation of the Liquidation Account, the Conversion will not diminish the accumulated earnings and profits of the Company available for the subsequent distribution of dividends within the meaning of Section 316 of the Code. The creation of the Liquidation Account on the records of the Company will have no effect on its taxable income, deductions for additions to reserves for bad debts under Section 593 of the Code or distributions to stockholders under Section 593(e) of the Code. -86- 115 For Ohio tax purposes, the tax consequences of the Conversion will be as follows: (1) The Company is a "financial institution" for State of Ohio tax purposes, and the Conversion will not change such status; (2) The Company is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.5% of the Company's equity capital determined in accordance with GAAP, and the Conversion will not change such status; (3) As a "financial institution," the Company is not subject to any tax based upon net income or net profit imposed by the State of Ohio, and the Conversion will not change such status; (4) The Conversion will not be a taxable transaction to the Company in its mutual or stock form for purposes of the Ohio corporate franchise tax. As a consequence of the Conversion, however, the annual Ohio corporate franchise tax liability of the Company will increase if the taxable net worth of the Company (i.e., book net worth computed in accordance with GAAP at the close of the Company's taxable year for federal income tax purposes) increases thereby; and (5) The Conversion will not be a taxable transaction to any deposit account holder or borrower member of the Company in its mutual or stock form for purposes of the Ohio corporate franchise tax and the Ohio personal income tax. The Company has received an opinion from Keller to the effect that the subscription rights have no ascertainable fair market value because the rights are received by specified persons at no cost, may not be transferred and are of short duration. The IRS could challenge the assumption that the subscription rights have no ascertainable fair market value. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member is urged to consult his or her own tax advisor with respect to the effect of such tax consequences on his or her own particular facts and circumstances. LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the Company in its present mutual form, each depositor in the Company would receive a pro rata share of any assets of the Company remaining after payment of the claims of all creditors, including the claims of all depositors to the withdrawable value of their deposit accounts. A depositor's pro rata share of such remaining assets would be the same proportion of such assets as the value of such depositor's accounts bears to the total aggregate value of all deposits in the Company at the time of liquidation. In the event of a complete liquidation of the Company in its stock form after the Conversion, each depositor would have a claim of the same general priority as the claims of all other general creditors of the Company. Except as described below, each depositor's claim would be solely in the amount of the balance in such depositor's account plus accrued interest. The depositor would have no interest in the assets of the Company above that amount. Such assets would be distributed to the Holding Company as the sole shareholder of the Company. For the purpose of granting a limited priority claim to the assets of the Company in the event of a complete liquidation thereof to Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain deposit accounts at the Company after the Conversion, the Company will, at the time of Conversion, establish a liquidation account in an amount equal to the net worth of the Company as of December 31, 1997 (the "Liquidation Account"). The Liquidation Account will not operate to restrict the use or application of any of the regulatory capital of the Company. -87- 116 Each Eligible Account Holder and Supplemental Eligible Account Holder will have a separate inchoate interest (the "Subaccount") in a portion of the Liquidation Account for Qualifying Deposits held on the Eligibility Record Date or the Supplemental Eligibility Record Date. The balance of each initial Subaccount shall be an amount determined by multiplying the amount in the Liquidation Account by a fraction, the numerator of which is the closing balance in the account holder's account as of the close of business on the Eligibility Record Date or the Supplemental Eligibility Record Date, as the case may be, and the denominator of which is the total amount of all Qualifying Deposits of Eligible Account Holders and Supplemental Eligible Account Holders on the corresponding record date. The balance of each Subaccount may be decreased but will never be increased. If, at the close of business on the last day of each fiscal year of the Company subsequent to the respective record dates, the balance in the deposit account to which a Subaccount relates is less than the lesser of (i) the deposit balance in such deposit account at the close of business on the last day of any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying Deposit as of the Eligibility Record Date or the Supplemental Eligibility Record Date, the balance of the Subaccount for such deposit account shall be adjusted proportionately to the reduction in such deposit account balance. In the event of any such downward adjustment, such Subaccount balance shall not be subsequently increased notwithstanding any increase in the deposit balance of the related deposit account. If any deposit account is closed, its related Subaccount shall be reduced to zero upon such closing. In the event of a complete liquidation of the converted Company (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder shall receive from the Liquidation Account a distribution equal to the current balance in each of such account holder's Subaccounts before any liquidation distribution may be made to the Holding Company as the sole shareholder of the Company. Any assets remaining after satisfaction of such liquidation rights and the claims of the Company's creditors would be distributed to the Holding Company as the sole shareholder of the Company. No merger, consolidation, purchase of bulk assets or similar combination or transaction with another financial institution, the deposits of which are insured by the FDIC, will be deemed to be a complete liquidation for this purpose and, in any such transaction, the Liquidation Account shall be assumed by the surviving institution. COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE INSURED BY THE FDIC. For a description of the characteristics of the Common Shares, see "DESCRIPTION OF AUTHORIZED SHARES." INTERPRETATION AND AMENDMENT OF THE PLAN To the extent permitted by law, all interpretations of the Plan by the Boards of Directors of the Holding Company and the Company will be final. The Plan may be amended by the Boards of Directors of the Holding Company and the Company at any time with the concurrence of the OTS and the Division. If the Company and the Holding Company determine, upon advice of counsel and after consultation with the OTS and the Division, that any such amendment is material, subscribers will be notified of the amendment and will be provided the opportunity to affirm, increase, decrease or cancel their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded with interest. CONDITIONS AND TERMINATION The completion of the Conversion requires the approval of the Plan and the adoption of the Amended Articles of Incorporation and the Amended Constitution by the voting members of the Company at the Special -88- 117 Meeting and the completion of the sale of the requisite amount of Common Shares within 24 months following the date of such approval. If these conditions are not satisfied, the Plan will automatically terminate and the Company will continue its business in the mutual form of organization. The Plan may be voluntarily terminated by the Board of Directors at any time before the Special Meeting and at any time thereafter with the approval of the OTS and the Division. SUBSCRIPTION OFFERING THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, DAYLIGHT STANDARD TIME, ON _____ __, 1998. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE ___:00 __.M., DAYLIGHT STANDARD TIME, ON _____ __, 1998, WILL BE VOID, WHETHER OR NOT THE COMPANY HAS BEEN ABLE TO LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS. Nontransferable subscription rights to purchase Common Shares are being issued at no cost to all eligible persons and entities in accordance with the preference categories established by the Plan, as described below. Each subscription right may be exercised only by the person to whom it is issued and only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST REPRESENT TO THE COMPANY THAT HE OR SHE IS PURCHASING SUCH SHARES FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO ATTEMPTS TO TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES AND SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS. The number of Common Shares which a person who has subscription rights may purchase will be determined, in part, by the total number of Common Shares to be issued and the availability of Common Shares for purchase under the preference categories set forth in the Plan and certain other limitations. See "Limitations on Purchases of Common Shares." The sale of any Common Shares pursuant to subscriptions received is contingent upon approval of the Plan by the voting members of the Company at the Special Meeting. The preference categories and preliminary purchase limitations which have been established by the Plan, in accordance with applicable regulations, for the allocation of Common Shares are as follows: (a) Each Eligible Account Holder shall receive, without payment therefor, a nontransferable right to purchase in the Subscription Offering up to the greater of (i) 35,000 Common Shares, (ii) .10% of the total number of Common Shares sold in connection with the Conversion, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares sold in connection with the Conversion by a fraction, the numerator of which is the amount of the Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date, subject to the overall purchase limitations set forth in Section 11 of the Plan and subject to adjustment by the Board of Directors of the Holding Company and the Company as set forth in Section 11 of the Plan. If the exercise of subscription rights by Eligible Account Holders results in an over-subscription, Common Shares will be allocated among subscribing Eligible Account Holders in a manner which will, to the extent possible, make the total allocation of each subscriber equal 100 shares or the amount subscribed for, whichever is less. Any Common Shares remaining after such allocation has been made will be allocated among the subscribing Eligible Account Holders whose subscriptions remain unfilled in the proportion which the amount of their respective Qualifying Deposits on the Eligibility Record Date bears to the total Qualifying Deposits of all Eligible Account Holders on such date. Notwithstanding the foregoing, Common Shares in excess of 28,937,500, the maximum of the Adjusted Valuation Range, may be sold to the ESOP before fully satisfying the subscriptions of Eligible Account Holders. No fractional shares will be issued. For purposes of this paragraph (a), increases in the -89- 118 Qualifying Deposits of directors and executive officers of the Company during the twelve months preceding the Eligibility Record Date shall not be considered. (b) The ESOP shall receive, without payment therefor, a nontransferable right to purchase in the Subscription Offering an aggregate amount of up to 10% of the total Common Shares sold in the Conversion and contributed to the Foundation, provided that shares remain available after satisfying the subscription rights of Eligible Account Holders up to the maximum of the Adjusted Valuation Range pursuant to paragraph (a) above. Although the Plan and OTS regulations permit the ESOP to purchase up to 10% of the Common Shares, the Holding Company anticipates that the ESOP will purchase 8% of the Common Shares. If the ESOP is unable to purchase all or part of the Common Shares for which it subscribes, the ESOP may purchase Common Shares on the open market or may purchase authorized but unissued Common Shares. If the ESOP purchases authorized but unissued Common Shares, such purchases could have a dilutive effect on the interests of the Holding Company's shareholders. See "RISK FACTORS - Potential Impact of Benefit Plans on Net Earnings and Shareholders' Equity." (c) Provided that shares remain available after satisfying the subscription rights of Eligible Account Holders and the ESOP pursuant to paragraphs (a) and (b) above each Supplemental Eligible Account Holder will receive, without payment therefor, a nontransferable right to purchase up to the greater of (i) 35,000 Common Shares, (ii) .10% of the total number of Common Shares sold in connection with the Conversion, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares sold in connection with the Conversion by a fraction, the numerator of which is the amount of the Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each case on the Supplemental Eligibility Record Date, subject to the overall purchase limitations set forth in Section 11 of the Plan and subject to adjustment by the Board of Directors of the Holding Company and the Company as set forth in Section 11 of the Plan. If the exercise of subscription rights by Supplemental Eligible Account Holders results in an oversubscription, Common Shares will be allocated among subscribing Supplemental Eligible Account Holders in a manner which will, to the extent possible, make the total allocation of each subscriber equal 100 shares or the amount subscribed for, whichever is less. Any Common Shares remaining after such allocation has been made will be allocated among the subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled in the proportion which the amount of their respective Qualifying Deposits on the Supplemental Eligibility Record Date bears to the total Qualifying Deposits of all Supplemental Eligible Account Holders on such date. No fractional shares will be issued. (d) Provided that shares remain available after satisfying the subscription rights of Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders pursuant to paragraphs (a), (b) and (c) above, each Other Eligible Member, other than an Eligible Account Holder or Supplemental Eligible Account Holder, shall receive, without payment therefor, a nontransferable right to purchase up to the greater of (i) 35,000 Common Shares, and (ii) .10% of the total number of Common Shares sold in connection with the Conversion, subject to adjustment by the Boards of Directors of the Company and the Holding Company. In the event of an oversubscription by Other Eligible Members, the available Common Shares will be allocated among subscribing Other Eligible Members in the same proportion that their subscriptions bear to the total amount of subscriptions by all Other Eligible Members; provided, however, that, to the extent sufficient Common Shares are available, each subscribing Other Eligible Member shall receive 25 Common Shares before the remaining available Common Shares are allocated. (e) Provided that shares remain available after satisfying the subscription rights of Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and Other Eligible -90- 119 Members pursuant to paragraphs (a), (b), (c) and (d), above, the directors, officers and employees of the Company shall receive, without payment therefor, nontransferable rights to purchase an aggregate of up to 15% of the Common Shares sold in connection with the Conversion subject to the overall purchase limitations set forth in Section 11 of the Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of the Plan. The ability of directors, officers and employees to purchase Common Shares under this paragraph is in addition to rights which are otherwise available to them under the Plan. If the exercise of subscription rights by directors, officers and employees of the Company results in an oversubscription, Common Shares will be allocated among subscribing directors, officers and employees on an equitable basis to be determined by the Board of Directors of the Company by giving weight to an individual's period of service, compensation and position at the Company. For information as to the number of shares proposed to be purchased by the directors and executive officers, see "Intended Purchases by Directors and Executive Officers." The Board of Directors may reject any one or more subscriptions if, based upon the Board of Directors' interpretation of applicable regulations, such subscriber is not entitled to the shares for which he or she has subscribed or if the sale of shares subscribed for would be in violation of any applicable statutes, regulations, or rules. The Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons having subscription rights reside. However, no such person will be offered or receive any Common Shares under the Plan who resides in a foreign country or in a state of the United States with respect to which each of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares under the Plan resides in such country or state; (ii) under the securities laws of such country or state, the granting of subscription rights or the offer or sale of Common Shares to such persons would require the Holding Company or its officers or directors to register as a broker or dealer or to register or otherwise qualify its securities for sale in such country or state; and (iii) such registration or qualification would be impracticable for reasons of cost or otherwise. The term "resident," as used herein with respect to the Subscription Offering, means any person who, on the date of submission of a Stock Order Form, maintained a bona fide residence within a jurisdiction in which the Common Shares are being offered for sale. If a person is a business entity, the person's residence shall be the location of the principal place of business. If the person is a personal benefit plan, the residence of the beneficiary shall be the residence of the plan. In the case of all other benefit plans, the residence of the trustee shall be the residence of the plan. In all cases, the determination of a subscriber's residency shall be in the sole discretion of the Company and the Holding Company. COMMUNITY OFFERING To the extent Common Shares remain available after the satisfaction of all subscriptions received in the Subscription Offering, the Company is hereby offering Common Shares in the Community Offering subject to the limitations set forth below. If subscriptions are received in the Subscription Offering for up to 33,465,625 Common Shares, Common Shares may not be available in the Community Offering. All sales of the Common Shares in the Community Offering will be at the same price per share as in the Subscription Offering. THE COMMUNITY OFFERING WILL BE TERMINATED ON OR BEFORE___________, 1998, UNLESS EXTENDED BY THE COMPANY AND THE HOLDING COMPANY WITH THE APPROVAL OF THE OTS AND THE DIVISION, IF NECESSARY. IN ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED BEYOND ______________, 1998. -91- 120 In the event shares are available for the Community Offering, each person, together with any Associate or groups Acting in Concert, may purchase in the Community Offering up to 35,000 Common Shares. If an insufficient number of Common Shares is available to fill all of the orders received in the Community Offering, the available Common Shares will be allocated in a manner to be determined by the Boards of Directors of the Holding Company and the Company, subject to the following: (i) Preference will be given to natural persons who maintains a bona fide residence in Columbiana, Mahoning or Trumbull Counties, Ohio, the counties in which the offices of the Company are located; (ii) Orders received in the Community Offering will first be filled up to 2% of the total number of Common Shares offered, with any remaining shares allocated on an equal number of shares per order basis until all orders have been filled; and (iii) The right of any person to purchase Common Shares in the Community Offering is subject to the right of the Holding Company and the Company to accept or reject such purchases in whole or in part. PUBLIC OFFERING As a final step in the Conversion, the Plan provides that all Common Shares not purchased in the Subscription Offering and the Community Offering may be offered for sale to the general public in the Public Offering through a syndicate of registered broker-dealers to be formed by Trident, McDonald & Company and Oppenheimer. The Company and the Holding Company expect to market any Common Shares which remain unsubscribed after the Subscription Offering and the Community Offering through the Public Offering. The Company and the Holding Company have the right to reject orders in whole or part in their sole discretion in the Public Offering. Neither Trident, McDonald & Company and Oppenheimer, nor any registered broker-dealer shall have any obligation to take or purchase any Common Shares in the Public Offering; however, Trident, McDonald & Company and Oppenheimer have agreed to use their best efforts in the sale of Common Shares in the Public Offering. The price at which Common Shares are sold in the Public Offering will be the same price at which Common Shares are offered and sold in the Subscription Offering and the Community Offering. No person, together with any Associate or group Acting in Concert, will be permitted to subscribe in the Public Offering for more than 35,000 Common Shares, subject to the maximum purchase limitations. See "- Limitations on Purchases of Common Shares." LIMITATIONS ON PURCHASES OF COMMON SHARES The Plan provides for certain additional limitations to be placed upon the purchase of Common Shares. To the extent Common Shares are available, the minimum number of Common Shares that may be purchased by any party is 25, or $250. No fractional shares will be issued. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. In the event shares are available for the Community Offering or the Public Offering, each person, together with any Associate or other persons Acting in Concert, may purchase in the Community Offering and the Public Offering up to 35,000 -92- 121 Common Shares. Purchases in the Subscription Offering, the Community Offering and the Public Offering are subject to the additional limitation that no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1% of the Common Shares sold in the Offering. Such limitations do not apply to the Foundation or the ESOP, which intends to purchase up to 8% of the total Common Shares sold in the Conversion and contributed to the Foundation. Subject to applicable regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors. "Acting in Concert" is defined as "knowing participation in a joint activity or independent conscious parallel action towards a common goal whether or not pursuant to an express agreement" or "a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise." Persons shall be presumed to be Acting in Concert with each other, subject to rebuttal through a filing with the OTS, if: (i) both are purchasing Common Shares in the Conversion and (a) are certain executive officers, including the president, chief executive officer, chief operating officer or vice president, directors, trustees, partners, persons who perform, or whose nominees or representatives perform, similar policy making functions at a company (other than the Company or the Holding Company), a principal business unit or subsidiary of a company, a partnership, a joint venture or a similar organization; (b) are persons who directly or indirectly own or control 10% or more of the stock of a company (other than the Company or the Holding Company); or (c) constitute a group under the beneficial ownership reporting rules under Section 13 or the proxy rules under Section 14 of the Exchange Act; or (ii) one person provides credit to the other for the purchase of Common Shares or is instrumental in obtaining that credit. Companies (other than the Company or the Holding Company), partnerships, joint ventures and similar organizations shall be presumed to be acting in concert with their executive officers, directors, trustees, trusts for which they serve as trustee, partners, agents who perform, or whose nominees or representatives perform, similar policy making functions and persons who directly or indirectly own or control 10% or more of their stock if both are purchasing Common Shares in the Conversion. In addition, if a person is presumed to be Acting in Concert with another person, company or similar organization, then such person is presumed to be Acting in Concert with anyone else who is, or is presumed to be, Acting in Concert with such other person, company or similar organization. For purposes of the Plan, (i) the directors of the Company or the Holding Company are not deemed to be Acting in Concert solely by reason of their membership on the Board of Directors of the Company or the Holding Company; (ii) an associate of a person (an "Associate") is (a) any corporation or organization (other than the Company or the Holding Company) of which such person is an officer, partner or, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (b) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such person, or relative of such spouse, who either has the same home as such person or who is a director or officer of the Bank or the Holding Company. Purchases of Common Shares in the Offering are also subject to the change in control regulations of the OTS which restrict direct and indirect purchases of 10% or more of the stock of any savings association by any person or group of persons acting in concert, under certain circumstances. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND RELATED ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation." After the Conversion, Common Shares, except for Common Shares purchased by affiliates of the Holding Company and the Company, will be freely transferable, subject to OTS and Division regulations. PLAN OF DISTRIBUTION The offering of the Common Shares is made only pursuant to this Prospectus, which is available at the offices of the Company. See "ADDITIONAL INFORMATION." Officers and directors of the Company will be -93- 122 available to answer questions about the Conversion and may also hold informational meetings for interested persons. Such officers and directors will not be permitted to make statements about the Holding Company or the Company unless such information is also set forth in this Prospectus, nor will they render investment advice. The Holding Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Common Shares will be conducted within the requirements of Rule 3a4-1, which will permit officers, directors and employees of the Holding Company and the Company to participate in the sale of Common Shares. No officer, director or employee of the Holding Company or the Company will be compensated in connection with his participation by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the Common Shares. To assist the Holding Company and the Company in marketing the Common Shares, the Holding Company and the Company have retained Trident, McDonald & Company and Oppenheimer (the "Underwriters"), broker-dealers registered with the SEC and members of the National Association of Securities Dealers, Inc. ("NASD"). The Underwriters will assist the Company in (i) training and educating the Company's employees regarding the mechanics and regulatory requirements of the conversion process; (ii) conducting information meetings for subscribers and other potential purchasers; and (iii) keeping records of all stock subscriptions. For providing these services, the Company has agreed to pay the Underwriters a commission equal to .95% of the aggregate dollar amount of Common Shares sold in the Subscription Offering and the Community Offering, excluding shares sold by Selected Dealers (hereinafter defined), if any, and shares purchased by the ESOP and directors, officers, and employees of the Company and their affiliates. The Company has also agreed to reimburse the Underwriters for all reasonable legal fees and expenses not to exceed $50,000 and reasonable out-of-pocket expenses not to exceed $10,000. The Company and the Holding Company have also agreed to indemnify the Underwriters, under certain circumstances, against liabilities and expenses (including legal fees) arising out of or based upon untrue statements or omissions contained in the materials used in the Offering or in various documents submitted to regulatory authorities in respect of the Conversion, including liabilities under the Securities Act of 1933, as amended (the "Act"), unless such untrue statement or omission, or alleged untrue statement or omission, was made in reliance upon certain information furnished to the Company by the Underwriters expressly for use in the Summary Proxy Statement or this Prospectus. If Common Shares remain available after the satisfaction of all subscriptions received in the Subscription Offering, the Underwriters may enter into an agreement with other NASD member firms ("Selected Dealers") to assist in the sale of Common Shares in the Community Offering and the Public Offering, if conducted. If Selected Dealers are used, the Company will pay a fee for shares sold by Selected Dealers in an amount to be agreed upon jointly by the Underwriters and the Company to reflect market requirements at the time of the Community Offering. During the Community Offering and the Public Offering, Selected Dealers may only solicit indications of interest from their customers to place orders with the Company as of a certain date (the "Order Date") for the purchase of Common Shares. When and if the Company believes that enough indications of interest and orders have been received in the Community Offering and the Public Offering, if necessary, to consummate the Conversion, the Underwriters will request, as of the Order Date, Selected Dealers to submit orders to purchase shares for which they have previously received indications of interest from the customers. Selected Dealers will send confirmations of the orders to such customers on the next business day after the Order Date. Selected Dealers will debit the accounts of their customers on the date which will be three business days from the Order Date (the "Settlement Date"). On the Settlement Date, funds received by Selected Dealers will be remitted to the Company. It is anticipated that the Conversion will be consummated on the Settlement Date. However, if consummation is delayed after the Settlement Date, funds will earn interest at the current passbook savings account rate (the "Conversion Rate"), which is currently ____%, with an annual percentage yield of ____%, until the completion of the offering. Funds will be returned promptly in the event the Conversion is not consummated. -94- 123 EFFECT OF EXTENSION OF COMMUNITY OFFERING If the Community Offering extends beyond ____________, 1998, persons who have subscribed for Common Shares in the Subscription Offering or in the Community Offering will receive a written notice that prior to a date specified in the notice, they have the right to affirm, increase, decrease or rescind their subscriptions for Common Shares. Persons who do not affirmatively elect to continue their subscription or who elect to rescind their subscriptions during any such extension will have all of their funds promptly refunded with interest. Persons who elect to decrease their subscriptions will have the appropriate portion of their funds promptly refunded with interest at the Conversion Rate. USE OF STOCK ORDER FORMS Subscriptions for Common Shares in the Subscription Offering and in the Community Offering may be made only by completing and submitting a Stock Order Form. Any person who desires to subscribe for Common Shares in the Subscription Offering must do so by delivering to the Company by mail or in person, prior to 12:00 noon, Eastern Daylight Time, on ____________, 1998, a properly executed and completed Stock Order Form, together with full payment of the subscription price of $10 for each Common Share for which subscription is made. ANY STOCK ORDER FORM WHICH IS NOT RECEIVED BY THE COMPANY PRIOR TO 12:00 NOON, EASTERN DAYLIGHT TIME, ON _____ ______, 1998, OR FOR WHICH FULL PAYMENT HAS NOT BEEN RECEIVED BY THE COMPANY PRIOR TO SUCH TIME, WILL NOT BE ACCEPTED. PHOTOCOPIES, TELECOPIES OR OTHER REPRODUCTIONS OF STOCK ORDER FORMS WILL NOT BE ACCEPTED. See "ADDITIONAL INFORMATION." In the event that (a) a Stock Order Form is not delivered and is returned to the Holding Company by the United States Postal Service, (b) the Holding Company is unable to locate the addressee, or (c) the Stock Order Form is not received, is received after ___________, 1998, is defectively completed or executed, or is not accompanied by full payment for the shares subscribed for (including instances where a savings account balance from which withdrawal is authorized is insufficient to fund the amount of such required payment or funds that have been wired to such account for the purpose of purchasing shares), the subscription rights for the person to whom such rights have been granted will lapse as though that person failed to return the completed Stock Order Form within the time period specified. The Holding Company may, but will not be required to, waive any irregularity on any Stock Order Form or require the submission of corrected Stock Order Forms or the remittance of full payment for subscribed shares by such date as the Holding Company specify. The waiver of an irregularity on a Stock order Form in no way obligates the Holding Company to waive any other irregularity on that, or any irregularity on any other Stock Order Form. Waivers will be considered on a case by case basis. Photocopies of Stock order Forms, payments from private third parties, or electronic transfers of funds will not be accepted. The Holding Company's interpretation of the terms and conditions of the Plan and of the acceptability of the Stock Order Forms will be final. The Company and the Holding Company have the right to investigate any irregularity on any Stock Order Form. Qualifying deposits will be split in the case of multiple orders. AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE HOLDING COMPANY, MAY NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE HOLDING COMPANY, UNLESS (I) THE COMMUNITY OFFERING IS NOT COMPLETED BY __________, 1998, OR (II) THE FINAL VALUATION OF THE COMPANY, AS CONVERTED, AND THE HOLDING COMPANY IS LESS THAN $212,500,000 OR MORE THAN $334,652,500. IF EITHER OF THOSE EVENTS OCCUR, PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR ORDERED COMMON SHARES IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR SUBSCRIPTIONS OR ORDERS PRIOR TO A DATE SPECIFIED IN THE NOTICE. ANY PERSON WHO DOES NOT AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST AT THE CONVERSION RATE. ANY PERSON WHO ELECTS TO DECREASE HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST AT THE CONVERSION RATE. IN ADDITION, IF THE PURCHASE -95- 124 LIMITATIONS ARE INCREASED, PERSONS WHO HAVE SUBSCRIBED FOR THE MAXIMUM AMOUNT WILL BE GIVEN THE OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS. SUBSCRIBERS SHOULD UNDERSTAND THAT IN THE EVENT OF ANY EXTENSION, SIGNIFICANT DELAYS COULD OCCUR BETWEEN THE EXPIRATION DATE AND THE FINAL CLOSING DATE OF THE CONVERSION. PAYMENT FOR COMMON SHARES Payment of the subscription price for all Common Shares for which subscription is made must accompany a completed Stock Order Form in order for subscriptions or orders to be valid. Payment for Common Shares may be made (i) in cash, if delivered in person; (ii) by check, bank draft, or money order made payable to the Company; or (iii) by authorization of withdrawal from deposit accounts in the Company (other than non-self-directed IRAs). No payments by wire transfer will be accepted, including wire transfers to an existing account. The Company cannot lend money or otherwise extend credit to any person to purchase Common Shares. Payments made in cash or by check, bank draft, or money order will be placed in a segregated savings account insured by the FDIC up to applicable limits until the Conversion is completed or terminated. Interest will be paid by the Company on such account at the Conversion Rate, which is currently ____% with an annual percentage yield of ____%, from the date payment is received until the Conversion is completed or terminated. Payments made by check will not be deemed to have been received until the check has cleared for payment. Instructions for authorizing withdrawals from deposit accounts, including certificates of deposit, are provided in the Stock Order Form. Once a withdrawal has been authorized, none of the designated withdrawal amount may be used by a subscriber for any purpose other than to purchase Common Shares, unless the Conversion is terminated. All sums authorized for withdrawal will continue to earn interest at the contract rate for such account or certificate until the completion or termination of the Conversion. Interest penalties for early withdrawal applicable to certificate accounts will be waived in the case of withdrawals authorized for the purchase of Common Shares. If a partial withdrawal from a certificate account results in a balance less than the applicable minimum balance requirement, the certificate will be canceled and the remaining balance will earn interest at the Company's passbook rate subsequent to the withdrawal. In order to utilize funds in an IRA maintained at the Company, the funds must be transferred to a self-directed IRA that permits the funds to be invested in stock. There will be no early withdrawal or IRS penalties for such transfer. The beneficial owner of the IRA must direct the trustee of the account to use funds from such account to purchase Common Shares in connection with the Conversion. THIS CANNOT BE DONE THROUGH THE MAIL. Persons who are interested in utilizing IRAs at the Company to subscribe for Common Shares should contact the Conversion Information Center at (330) 747-1111 for instructions and assistance. Subscriptions will not be filled by the Company until subscriptions have been received in the Offering for up to 21,250,000 Common Shares, the minimum point of the Adjusted Valuation Range. If the Conversion is terminated, all funds delivered to the Company for the purchase of Common Shares will be returned with interest at the Conversion Rate, and all charges to deposit accounts will be rescinded. If the Conversion is completed, subscribers and other purchasers will be notified by mail, promptly upon completion of the sale of the Common Shares, of the number of shares for which their subscriptions have been accepted. The funds on deposit with the Company for the purchase of Common Shares will be withdrawn and paid to the Holding Company in exchange for the Common Shares. Certificates representing Common Shares will be delivered promptly thereafter. Purchasers may not be able to sell the Common Shares which they purchased until certificates for the Common Shares are available and delivered to them, even though trading for the Common Shares may have commenced. Allocations of Common Shares, if any, will be deemed final only -96- 125 upon shareholder receipt of the certificate representing the Common Shares. The Common Shares will not be insured by the FDIC. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes but may pay for such Common Shares upon consummation of the Conversion. INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the intended purchases by the directors and executive officers of the Company and the Holding Company:
Position with the Percent of Holding Company Total Aggregate total Name and the Company (1) shares (2) purchase price (2) offering (3) - ---- --------------- ------ -------------- -------- Richard M. Barrett Director 31,000 $ 310,000 .12% James E. Bennett, Jr. Director 1,000 10,000 - Charles. B. Cushwa, III Director 60,000 600,000 .24 William A. Holdford (4) - 10,000 100,000 .04 Donald R. Inglis Director 35,000 300,000 .12 Gary Keller Director 60,000 600,000 .24 Patrick A. Kelly Treasurer 60,000 600,000 .24 Douglas M. McKay Chairman of 80,000 800,000 .32 the Board and President Herbert F. Schuler, Sr. Director 90,000 900,000 .36 Clarence R. Smith, Jr. Director 25,000 250,000 .10 Robert J. Steele, Jr. (6) - 10,000 100,000 .04 Donald J. Varner (7) Secretary 60,000 600,000 .24 John F. Zimmerman, Jr. Director 15,000 150,000 .06 ------- ---------- ---- All directors and executive officers as a group (13 persons) 532,000 $5,320,000 2.12% ======= ========== ====
- ----------------------------- (1) Unless otherwise noted, the individual holds the same position with both the Company and the Holding Company. (2) Includes intended purchases by Associates of directors and executive officers, to the extent known. (3) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted Valuation Range, will be sold in connection with the Conversion at $10 per share and that a sufficient number of Common Shares will be available to satisfy the intended purchases by directors and executive officers. See "Pricing and Number of Common Shares to be Sold." (4) Mr. Holdford is the Vice President of Loan Administration of the Company. (5) Mr. Kelly is the Treasurer, Chief Financial Officer, Senior Vice President and a director of the Company. -97- 126 (6) Mr. Steele is the Vice President of Savings Administration of the Company. (7) Mr. Varner is the Secretary, Senior Vice President of Retail Banking and a director of the Company. All purchases by executive officers and directors of the Company are being made for investment purposes only and with no present intent to resell. Directors and executive officers will pay the same $10 per share price for Common Share purchased in the Conversion as all other subscribers. PRICING AND NUMBER OF COMMON SHARES TO BE SOLD The aggregate offering price of the Common Shares will be based on the pro forma market value of the shares as determined by an independent appraisal of the Company, as converted, and the Holding Company. Keller, a firm which evaluates and appraises financial institutions, has been retained by the Company to prepare an appraisal of the estimated pro forma market value of the Company as converted, and the Holding Company. Keller will receive a fee of $27,000 for its appraisal and one update and will not be reimbursed for out-of-pocket expenses. Keller was selected by the Board of Directors of the Company because Keller has extensive experience in the valuation of thrift institutions, particularly in the mutual-to-stock conversion context. The Board of Directors reviewed the credentials of Keller's appraisal personnel and obtained references and recommendations from other companies which have engaged Keller. Keller is certified by the OTS as a mutual-to-stock conversion appraiser. The Company and Keller have no relationships which would affect Keller's independence. The appraisal was prepared by Keller in reliance upon the information contained herein. Keller also considered the following factors, among others: the economic and demographic conditions in the Company's primary market area; the quality and depth of the Company's management and personnel; certain historical financial and other information relating to the Company; a comparative evaluation of the operating and financial statistics of the Company with those of other thrift institutions; the aggregate size of the Offering; the impact of the Conversion on the Company's regulatory capital and earnings potential; the trading market for stock of comparable thrift institutions and thrift holding companies; and general conditions in the markets for such stocks. The Boards of Directors of the Holding Company and the Company reviewed and deemed appropriate the assumptions and methodology used by Keller in preparing the appraisal. The Pro Forma Value, determined by Keller, is $250,000,000 as of February 24, 1998. The Adjusted Valuation Range established in accordance with the Plan is $212,500,000 to $289,375,000 which, based upon a per share offering price of $10, will result in the sale of between 21,250,000 and 28,937,500 Common Shares. Applicable regulations permit the Holding Company to issue up to a total of 33,465,625 Common Shares with an aggregate purchase price of $334,656,250. The total number of Common Shares sold in the Conversion will be based on the Adjusted Valuation Range. Pro forma shareholders' equity per share and pro forma earnings per share decrease moving from the low end to the high end of the Adjusted Valuation Range. See "PRO FORMA DATA." If, due to changing market conditions, the final valuation is less than $212,500,000 or more than $334,656,250, subscribers will be given the right to affirm, increase, decrease or rescind their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded with interest. THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF THE AUDITED -98- 127 FINANCIAL STATEMENTS AND STATISTICAL INFORMATION PROVIDED BY THE COMPANY. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE COMPANY, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE COMPANY OR THE HOLDING COMPANY. THE VALUATION CONSIDERS THE COMPANY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE COMPANY. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON SHARES WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT THE CONVERSION PURCHASE PRICE. A copy of the complete appraisal is on file and open for inspection at the office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the Central Regional Office of the OTS, 200 West Madison Street, Suite 1300, Chicago, Illinois 60606; at the office of the Division, 77 S. High Street, Columbus, Ohio 43215; and at the offices of the Company. RESTRICTIONS ON REPURCHASE OF COMMON SHARES OTS regulations generally prohibit the Holding Company from repurchasing any of its capital stock for three years following the date of completion of the Conversion, except as part of an open-market stock repurchase program during the second and third years following the Conversion involving no more than 5% of the outstanding capital stock during a twelve-month period. The OTS may permit a repurchase during the first year following the completion of the Conversion or may permit the Holding Company to exceed the 5% limits in the second and third years if exceptional circumstances are established. In addition, after such a repurchase, the Company's regulatory capital must equal or exceed all regulatory capital requirements. Before the commencement of a repurchase program, the Holding Company must provide notice to the OTS, and the OTS may disapprove the program if the OTS determines that it would adversely affect the financial condition of the Company or if it determines that there is no valid business purpose for such repurchase. Such repurchase restrictions would not prohibit the ESOP or the RRP from purchasing Common Shares during the first year following the Conversion. Ohio regulations prohibit the Holding Company from repurchasing shares during the first year after the Conversion if the effect thereof would cause the Company not to meet its capital requirements. RESTRICTIONS ON TRANSFER OF COMMON SHARES BY DIRECTORS AND OFFICERS Common Shares purchased by directors and executive officers of the Holding Company will be subject to the restriction that such shares may not be sold for a period of one year following completion of the Conversion, except in the event of the death of the shareholder. The certificates evidencing Common Shares issued by the Holding Company to directors and executive officers will bear a legend giving appropriate notice of the restriction imposed upon them. In addition, the Holding Company will give appropriate instructions to the transfer agent (if any) for the Holding Company's common shares in respect of the applicable restriction on transfer of any restricted shares. Any shares issued as a stock dividend, stock split or otherwise in respect of restricted shares will be subject to the same restrictions. Subject to certain exceptions, for a period of three years following the Conversion, no director or officer of the Holding Company or the Company, or any of their Associates, may purchase any common shares of the Holding Company without the prior written approval of the OTS, except through a broker-dealer registered with the SEC. This restriction will not apply, however, to negotiated transactions involving more than 1% of a class of outstanding common shares of the Holding Company or shares acquired by any stock benefit plan of the Holding Company or the Company. -99- 128 The Common Shares, like the stock of most public companies, are subject to the registration requirements of the Act. Accordingly, the Common Shares may be offered and sold only in compliance with such registration requirements or pursuant to an applicable exemption from registration. Common Shares received in the Conversion by persons who are not "affiliates" of the Holding Company may be resold without registration. Common Shares received by affiliates of the Holding Company will be subject to resale restrictions. An "affiliate" of the Holding Company, for purposes of Rule 144, is a person who directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the Holding Company. Rule 144 generally requires that there be publicly available certain information concerning the Holding Company and that sales subject to Rule 144 be made in routine brokerage transactions or through a market maker. If the conditions of Rule 144 are satisfied, each affiliate (or group of persons acting in concert with one or more affiliates) is generally entitled to sell in the public market, without registration, in any three-month period, a number of shares which does not exceed the greater of (i) 1% of the number of outstanding shares of the Holding Company or (ii) if the shares are admitted to trading on a national securities exchange or reported through the automated quotation system of a registered securities association, such as The Nasdaq Stock Market, the average weekly reported volume of trading during the four weeks preceding the sale. RIGHTS OF REVIEW Any person aggrieved by a final action of the OTS which approves, with or without conditions, or disapproves the Plan may obtain review of such action by filing in the Court of Appeals of the United States for the circuit in which the principal office or residence of such person is located or in the United States Court of Appeals for the District of Columbia, a written petition praying that the final action of the OTS be modified, terminated, or set aside. Such petition must be filed within 30 days after the date of mailing of proxy materials to the voting members of the Company or within 30 days after the date of publication in the Federal Register of notice of approval of the Plan by the OTS, whichever is later. RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS GENERAL Federal law and regulations, Ohio law, the Articles of Incorporation and Code of Regulations of the Holding Company, the Amended Articles of Incorporation and Amended Constitution of the Company, and certain employee benefit plans to be adopted by the Holding Company and the Company contain certain provisions which may deter or prohibit a change of control of the Holding Company and the Company. Such provisions are intended to encourage any acquirer to negotiate the terms of an acquisition with the Board of Directors of the Holding Company, thereby reducing the vulnerability of the Holding Company to takeover attempts and certain other transactions which have not been negotiated with and approved by the Board of Directors. Anti-takeover devices and provisions may, however, have the effect of discouraging sudden and other hostile takeover attempts which are not approved by the Board of Directors, even under circumstances in which shareholders may deem such takeovers to be in their best interests or in which shareholders may receive a substantial premium for their shares over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to participate by virtue of such devices and provisions. Such provisions may also benefit management by discouraging changes of control in which incumbent management would be removed from office. The following is a summary of certain provisions of such laws, regulations and documents. -100- 129 FEDERAL LAW AND REGULATION FEDERAL DEPOSIT INSURANCE ACT. The Federal Deposit Insurance Act (the "FDIA") provides that no person, acting directly or indirectly or in concert with one or more persons, shall acquire control of any insured savings association or holding company unless 60 days' prior written notice has been given to the OTS, and the OTS has not issued a notice disapproving the proposed acquisition. Control, for purposes of the FDIA, means the power, directly or indirectly, to direct the management or policies of an insured institution or to vote 25% or more of any class of securities of such institution. This provision of the FDIA is implemented by the OTS in accordance with the Regulations for Acquisition of Control of an Insured Institution, 12 C.F.R. Part 574 (the "Control Regulations"). Control, for purposes of the Control Regulations, exists in situations in which the acquiring party has direct or indirect voting control of at least 25% of the institution's voting shares or controls in any manner the election of a majority of the directors of such institution or the Director of the OTS determines that such person exercises a controlling influence over the management or policies of such institution. In addition, control is presumed to exist, subject to rebuttal, if the acquiring party (which includes a group "acting in concert") has voting control of at least 10% of the institution's voting stock and any of eight control factors specified in the Control Regulations exists. There are also rebuttable presumptions in the Control Regulations concerning whether a group "acting in concert" exists, including presumed action in concert among members of an "immediate family." The Control Regulations apply to acquisitions of Common Shares in connection with the Conversion and to acquisitions after the Conversion. CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. A regulation of the OTS provides that, for a period of three years after the date of the completion of the Conversion, no person shall, directly or indirectly, offer to acquire or acquire beneficial ownership of more than 10% of any class of equity security of the Holding Company or the Company without the prior written approval of the OTS. In addition to the actual ownership of more than 10% of a class of equity securities, a person shall be deemed to have acquired beneficial ownership of more than 10% of the equity securities of the Holding Company or the Company if the person holds any combination of stock and revocable and/or irrevocable proxies of the Holding Company under circumstances that give rise to a conclusive control determination or rebuttable control determination under the Control Regulations. Such circumstances include (i) holding any combination of voting shares and revocable and/or irrevocable proxies representing more than 25% of any class of voting stock of the Holding Company enabling the acquirer (a) to elect one-third or more of the directors, (b) to cause the Holding Company or the Company's shareholders to approve the acquisition or corporate reorganization of the Holding Company, or (c) to exert a controlling influence on a material aspect of the business operations of the Holding Company or the Company, and (ii) acquiring any combination of voting shares and irrevocable proxies representing more than 25% of any class of voting shares. The three-year restriction does not apply (i) to any offer with a view toward public resale made exclusively to the Holding Company or the Company or any underwriter or selling group acting on behalf of the Holding Company or the Company, (ii) unless made applicable by the OTS by prior written advice, to any offer or announcement of an offer which, if consummated, would result in the acquisition by any person, together with all other acquisitions by any such person of the same class of securities during the preceding 12-month period, of not more than 1% of the class of securities, or (iii) to any offer to acquire or the acquisition of beneficial ownership of more than 10% of any class of equity security of the Holding Company or the Company by a corporation whose ownership is or will be substantially the same as the ownership of the Holding Company or the Company if made more than one year following the date of the Conversion. The foregoing restriction does not apply to the acquisition of the capital stock of the Holding Company or the Company by one or more tax-qualified employee stock benefit plans, provided that the plan or plans do not have the beneficial ownership in the aggregate of more than 25% of any class of equity security of the Holding Company or the Company. HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or -101- 130 savings and loan holding company, (ii) acquiring substantially all of the assets of a savings association or holding company thereof, or (iii) acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. Under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of the previously unissued voting shares of an undercapitalized savings association for cash without such savings association being deemed to be controlled by the Holding Company. Except with the prior approval of the Director of the OTS, no director or officer of the savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's voting shares may acquire control of any savings institution, other than a subsidiary institution or any other savings and loan holding company. OHIO LAW MERGER MORATORIUM STATUTE. Ohio has a merger moratorium statute regulating certain takeover bids affecting certain public corporations which have significant ties to Ohio. The statute prohibits, with some exceptions, any merger, combination or consolidation and any of certain other sales, leases, distributions, dividends, exchanges, mortgages or transfers between such an Ohio corporation and any person who has the right to exercise, alone or with others, 10% or more of the voting power of such corporation (an "Interested Shareholder") for three years following the date on which such person first becomes an Interested Shareholder. Such a business combination is permitted only if, prior to the time such person first becomes an Interested Shareholder, the Board of Directors of the issuing corporation has approved the purchase of shares which resulted in such person first becoming an Interested Shareholder. After the initial three-year moratorium, such a business combination may not occur unless (1) one of the exceptions referred to above applies, (2) the holders of at least two-thirds of the voting shares, and of at least a majority of the voting shares not beneficially owned by the Interested Shareholder, approve the business combination at a meeting called for such purpose, or (3) the business combination meets certain statutory criteria designed to ensure that the issuing public corporation's remaining shareholders receive fair consideration for their shares. An Ohio corporation, under certain circumstances, may "opt out" of the statute by specifically providing in its articles of incorporation that the statute does not apply to any business combination of such corporation. The statute still prohibits for 12 months, however, any business combination that would have been prohibited but for the adoption of such an opt-out amendment. The statute also provides that it will continue to apply to any business combination between a person who became an Interested Shareholder prior to the adoption of such an amendment as if the amendment had not been adopted. The Articles of Incorporation of the Holding Company do not opt out of the protection afforded by Chapter 1704. CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised Code (the "Control Share Acquisition Statute") requires that certain acquisitions of voting securities which would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of the Holding Company (a "Control Share Acquisition") must be approved in advance by the holders of at least a majority of the outstanding voting shares represented at a meeting at which a quorum is present and a majority of the portion of the outstanding voting shares represented at such a meeting, excluding the voting shares owned by the acquiring shareholder. The Control Share Acquisition Statute was intended, in part, to protect shareholders of Ohio corporations from coercive tender offers. TAKEOVER BID STATUTE. Ohio law also contains a statute regulating takeover bids for any Ohio corporation. Such statute provides that no offeror may make a takeover bid unless (i) at least 20 days prior thereto the offeror announces publicly the terms of the proposed takeover bid and files with the Ohio Division of -102- 131 Securities (the "Securities Division") and provides the target company with certain information in respect of the offeror, his ownership of the company's shares and his plans for the company, and (ii) within ten days following such filing either (a) no hearing is required by the Securities Division, (b) a hearing is requested by the target company within such time but the Securities Division finds no cause for hearing exists, or (c) a hearing is ordered and upon such hearing the Securities Division adjudicates that the offeror proposes to make full, fair and effective disclosure to offerees of all information material to a decision to accept or reject the offer. The takeover bid statute also states that no offeror shall make a takeover bid if he owns 5% or more of the issued and outstanding equity securities of any class of the target company, any of which were purchased within one year before the proposed takeover bid, and the offeror, before making any such purchase, failed to announce his intention to gain control of the target company or otherwise failed to make full and fair disclosure of such intention to the persons from whom he acquired such securities. The United States District Court for the Southern District of Ohio has determined that the Ohio takeover bid statute is preempted by federal regulation. ARTICLES OF INCORPORATION OF THE HOLDING COMPANY ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The Articles of Incorporation of the Holding Company permit the Board of Directors of the Holding Company to issue additional common shares. The ability of the Board of Directors to issue such additional shares may create impediments to gaining, or otherwise discourage persons from attempting to gain, control of the Holding Company. MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the Articles of Incorporation of the Holding Company provides that, in the event the Board of Directors recommends against the approval of any of the following matters, the holders of at least 80% of the voting shares of the Holding Company are required to approve any such matters: (1) A proposed amendment to the Articles of Incorporation of the Holding Company; (2) A proposed Amendment to the Code of Regulations of the Holding Company; (3) A proposal to change the number of directors by action of the shareholders; (4) An agreement of merger or consolidation providing for the proposed merger or consolidation of the Holding Company with or into one or more other corporations; (5) A proposed combination or majority share acquisition involving the issuance of shares of the Holding Company and requiring shareholder approval; (6) A proposal to sell, exchange, transfer or otherwise dispose of all, or substantially all, of the assets, with or without the goodwill, of the Holding Company; or (7) A proposed dissolution of the Holding Company. ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised Code provides that shareholders of a for profit corporation which is not a savings and loan association and which is incorporated under Ohio law must initially be granted the right to cumulate votes in the election of directors. The right to cumulate votes in the election of directors will exist at a meeting of shareholders if notice in writing is given by any shareholder to the President, a Vice President or the Secretary of an Ohio corporation, not less than 48 hours before a meeting at which directors are to be elected, that the shareholder desires that the voting for the election of directors shall be cumulative and if an announcement of the giving of such notice is made upon the convening of such meeting by the Chairman or Secretary or by or on behalf of the shareholder giving such notice. If cumulative voting is invoked, each shareholder would have a number of votes equal to the number of directors to be elected, multiplied by the number of shares owned by him, and would be entitled to distribute his votes among the candidates as he sees fit. -103- 132 Section 1701.69 of the Ohio Revised Code provides that an Ohio corporation may eliminate cumulative voting in the election of directors after the expiration of 90 days after the date of initial incorporation by filing with the Ohio Secretary of State an amendment to the articles of incorporation eliminating cumulative voting. The Articles of Incorporation of the Holding Company have been amended to eliminate cumulative voting. The elimination of cumulative voting may make it more difficult for shareholders to elect as directors persons whose election is not supported by the Board of Directors of the Holding Company. EMPLOYEE BENEFIT PLANS The Stock Option Plan, the ESOP and the RRP also may be deemed to have certain anti-takeover effects. See "DESCRIPTION OF AUTHORIZED SHARES" and "MANAGEMENT - Employee Stock Ownership Plan; - Stock Option Plan; and - Recognition and Retention Plan." DESCRIPTION OF AUTHORIZED SHARES GENERAL The Articles of Incorporation of the Holding Company will authorize the issuance of 100 million common shares, and 25 million preferred shares. Neither of the common shares and the preferred shares authorized by the Holding Company's Articles of Incorporation have par value. Upon receipt by the Holding Company of the purchase price therefor and subsequent issuance thereof, each Common Share issued in the Conversion will be fully paid and nonassessable. Notwithstanding the foregoing, until payments are received by the Holding Company from the ESOP in accordance with the terms of a loan agreement to be entered into by and between the Holding Company and the ESOP, Common Shares issued to the ESOP for which payment in money has not been received will not be fully paid and non-assessable. The Common Shares will represent nonwithdrawable capital and will not and cannot be insured by the FDIC. Each Common Share will have the same relative rights and will be identical in all respects to every other Common Share. None of the preferred shares of the Holding Company will be issued in connection with the Conversion. The Board of Directors of the Holding Company is authorized, without shareholder approval, to issue preferred shares and to fix and state the designations, preferences or other special rights of such shares and the qualifications, limitations and restrictions thereof. The preferred shares may rank prior to the common shares as to dividend rights, liquidation preferences or both. Each holder of preferred shares will be entitled to one vote for each preferred share held of record on all matters submitted to a vote of shareholders. The issuance of preferred shares and any conversion rights which may be specified by the Board of Directors for the preferred shares could adversely affect the voting power of holders of the common shares. The Board of Directors has no present intention to issue any of the preferred shares. The following is a summary description of the rights of the common shares of the Holding Company, including the material express terms of such shares as set forth in the Holding Company's Articles of Incorporation. LIQUIDATION RIGHTS In the event of the complete liquidation or dissolution of the Holding Company, the holders of the Common Shares will be entitled to receive all assets of the Holding Company available for distribution, in cash or in kind, after payment or provision for payment of (i) all debts and liabilities of the Holding Company, (ii) any accrued dividend claims, and (iii) any interests in the Liquidation Account payable as a result of a liquidation of the Company. See "THE CONVERSION Liquidation Account." -104- 133 VOTING RIGHTS The holders of the Common Shares will possess exclusive voting rights in the Holding Company. Each holder of Common Shares will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of common shares. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of the Holding Company -- Elimination of Cumulative Voting." DIVIDENDS The holders of the Common Shares will be entitled to the payment of dividends when, as and if declared by the Board of Directors and paid out of funds, if any, available under applicable laws and regulations for the payment of dividends. The payment of dividends is subject to federal and state statutory and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions" and "TAXATION - Federal Taxation" for a description of restrictions on the payment of cash dividends. PREEMPTIVE RIGHTS After the consummation of the Conversion, no shareholder of the Holding Company will have, as a matter of right, the preemptive right to purchase or subscribe for shares of any class, now or hereafter authorized, or to purchase or subscribe for securities or other obligations convertible into or exchangeable for such shares or which by warrants or otherwise entitle the holders thereof to subscribe for or purchase any such share. RESTRICTIONS ON ALIENABILITY See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for a description of the limitations on the repurchase of stock by the Holding Company; "THE CONVERSION - Restrictions on Transfer of Common Shares by Directors and Officers" for a description of certain restrictions on the transferability of Common Shares purchased by officers and directors; and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS" for information regarding regulatory restrictions on acquiring Common Shares. REGISTRATION REQUIREMENTS The Holding Company will register its common shares pursuant to Section 12(g) of the Exchange Act prior to or promptly upon the completion of the Conversion and will not deregister such shares for a period of three years following the completion of the Conversion. Upon such registration, the proxy and tender offer rules, insider trading restrictions, annual and periodic reporting and other requirements of the Exchange Act will apply to the Holding Company. LEGAL MATTERS Certain legal matters pertaining to the Common Shares and the federal and Ohio tax consequences of the Conversion are being passed upon for the Holding Company and the Company by Vorys, Sater, Seymour and Pease LLP, Cincinnati, Ohio. Certain legal matters are being passed upon for Trident, McDonald & Company and Oppenheimer by its counsel, Luse Lehman Gorman Pomerenck & Schick, A Professional Corporation, Washington, D.C. -105- 134 EXPERTS Keller has consented to the publication herein of the summary of its letter to the Company setting forth its opinion as to the estimated pro forma market value of the Company as converted and to the use of its name and statements with respect to it appearing herein. The financial statements of the Company as of December 31, 1997, and for the year then ended included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of the Company as of December 31, 1996, and for each of the two years then ended included in this Prospectus have been audited by Packer, Thomas & Co., independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Holding Company has filed with the SEC a Registration Statement on Form S-1 (File No. 333-47957) under the Act with respect to the Common Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. Such information may be inspected at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC at prescribed rates. Such information may also be inspected on the SEC's internet website, at www.sec.gov. The Company has filed an Application for Conversion (the "Application") with the OTS and the Division. This Prospectus omits certain information contained in the Application. The Application may be inspected at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the Central Regional Office of the OTS, 200 West Madison, Suite 1300, Chicago, Illinois 60606; and at the offices of the Division, 77 S. High Street, Columbus, Ohio 43215. -106- 135 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE HOLDING COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITY, OTHER THAN THE COMMON SHARES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM DELIVERY OF THIS PROSPECTUS WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS PAGE ---- PROSPECTUS SUMMARY..............................................1 SELECTED FINANCIAL INFORMATION AND OTHER DATA..................10 RISK FACTORS...................................................12 USE OF PROCEEDS................................................18 MARKET FOR COMMON SHARES.......................................19 DIVIDEND POLICY................................................20 REGULATORY CAPITAL COMPLIANCE..................................21 CAPITALIZATION.................................................22 PRO FORMA DATA.................................................23 COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION.............................................26 RECENT DEVELOPMENTS............................................27 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO CONDENSED STATEMENTS OF INCOME.................................30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............30 THE BUSINESS OF THE COMPANY....................................41 CHANGE IN ACCOUNTANTS..........................................62 MANAGEMENT.....................................................62 REGULATION.....................................................70 TAXATION.......................................................77 THE CONVERSION.................................................80 RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE ASSOCIATION AND RELATED ANTI-TAKEOVER PROVISIONS..........100 DESCRIPTION OF AUTHORIZED SHARES..............................104 REGISTRATION REQUIREMENTS.....................................105 LEGAL MATTERS.................................................105 EXPERTS.......................................................106 ADDITIONAL INFORMATION........................................106 FINANCIAL STATEMENTS..........................................F-1 UNTIL 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. Up to 28,937,500 Common Shares UNITED COMMUNITY FINANCIAL CORP. ------------ PROSPECTUS ------------ TRIDENT SECURITIES, INC. MCDONALD & COMPANY SECURITIES, INC. CIBC OPPENHEIMER CORP. ___________, 1998 136 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO Page ---- Independent Auditors' Reports......................................... F-1, 2 Statements of Financial Condition as of December 31, 1997 and 1996.... F-3 Statements of Income for the Years Ended December 31, 1997, 1996 and 1995..................... F-4 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995..................... F-5 Statements of Equity for the Years Ended December 31, 1997, 1996 and 1995..................... F-6 Notes to Financial Statements......................................... F-7 * * * All financial statement schedules are omitted as the required information either is not applicable or is included in the Financial Statements or related Notes. Separate financial statements for the Holding Company have not been included herein because the Holding Company, which has engaged in only organizational activities to date, has no significant assets, liabilities (contingent or otherwise), revenues or expenses. 137 INDEPENDENT AUDITORS' REPORT To the Board of Directors The Home Savings and Loan Company of Youngstown, Ohio We have audited the accompanying statements of financial condition of The Home Savings and Loan Company of Youngstown, Ohio as of December 31, 1997, and the related statements of income, equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of The Home Savings and Loan Company of Youngstown, Ohio for the years ended December 31, 1996 and 1995 were audited by other auditors whose report, dated February 28, 1997, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1997 financial statements present fairly, in all material respects, the financial position of The Home Savings and Loan Company of Youngstown, Ohio at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP CLEVELAND, OHIO February 27, 1998 F-1 138 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO We have audited the accompanying statements of financial condition of The Home Savings and Loan Company of Youngstown, Ohio as of December 31, 1996, and the related statements of income, equity, and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Home Savings and Loan Company of Youngstown, Ohio at December 31, 1996, and the results of its operations and its cash flows for each of the two years then ended in conformity with generally accepted accounting principles. Packer, Thomas & Co. Youngstown, Ohio February 28, 1997 F-2 139 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO STATEMENTS OF FINANCIAL CONDITION
December 31, -------------------------------- 1997 1996 ---------- ---------- (In thousands) ASSETS: Cash and deposits with banks $ 14,618 $ 13,686 Federal funds sold and other 19,879 5,982 ---------- ---------- Total cash and cash equivalents 34,497 19,668 ---------- ---------- Investment securities: Available for sale (amortized cost of $39,091 and $14,543, respectively) 39,402 14,659 Held to maturity, (fair value of $5,013 and $28,108, 4,968 27,970 respectively) Mortgage-backed securities: Available for sale (amortized cost of $61,633 and $83,750, 62,423 84,466 respectively) Held to maturity (fair value of $247,986 and $288,219, respectively) 243,848 286,384 Loans, net (including allowance for loan losses of $5,982 and $5,040, respectively) 633,236 616,923 Federal Home Loan Bank stock 11,136 10,370 Premises and equipment 7,930 6,596 Accrued interest receivable 6,414 6,450 Real estate owned 55 29 Other assets 1,084 1,221 ---------- ---------- TOTAL ASSETS $1,044,993 $1,074,736 ========== ========== LIABILITIES AND EQUITY: LIABILITIES: Deposits $ 886,808 $ 932,060 Advance payments by borrowers for taxes and insurance 3,715 3,852 Accrued interest payable 845 1,000 Post-retirement benefit obligation 7,647 7,326 Accrued expenses and other liabilities 4,625 2,367 ---------- ---------- Total liabilities 903,640 946,605 ---------- ---------- COMMITMENTS AND CONTINGENCIES EQUITY: Retained earnings (substantially restricted) 140,636 127,589 Net unrealized gain on available for sale securities, net of taxes of $385 and $291, respectively 717 542 ---------- ---------- TOTAL EQUITY 141,353 128,131 ---------- ---------- TOTAL LIABILITIES AND EQUITY $1,044,993 $1,074,736 ========== ==========
See Notes to Financial Statements. F-3 140 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO STATEMENTS OF INCOME
Year Ended December 31, --------------------------------------------------- 1997 1996 1995 ---------- --------- ---------- (In thousands) INTEREST INCOME: Loans $54,148 $48,586 $43,093 Mortgage-backed securities: Available for sale 5,122 6,871 6,969 Held to maturity 19,024 21,988 23,827 Investment securities: Available for sale 2,169 1,226 2,253 Held to maturity 843 1,780 2,185 FHLB stock dividend 766 695 632 Other interest-earning assets 613 603 875 ------- ------- ------- Total interest income 82,685 81,749 79,834 INTEREST EXPENSE: Interest expense on deposits 40,463 43,009 41,104 ------- ------- ------- NET INTEREST INCOME 42,222 38,740 38,730 RECOVERY OF LOAN LOSS ALLOWANCES (1,546) NET INTEREST INCOME AFTER RECOVERY OF LOAN LOSS ALLOWANCES 43,768 38,740 38,730 ------- ------- ------- NONINTEREST INCOME: Service fees and other charges 1,092 755 681 Net (losses) gains: Mortgage-backed securities available for sale 80 321 Investment securities available for sale 45 74 Other (losses) gains (34) (45) 9 Other income 426 536 469 ------- ------- ------- Total noninterest income 1,564 1,291 1,554 ------- ------- ------- NONINTEREST EXPENSES: Salaries and employee benefits 14,710 12,735 11,033 Occupancy 1,256 1,250 1,194 Equipment and data processing 2,534 2,181 1,768 Deposit insurance premiums 588 2,033 2,064 Federal deposit insurance special assessment 5,903 Franchise tax 1,752 1,643 1,398 Advertising 1,045 1,000 1,162 Other expenses 3,418 3,323 3,376 ------- ------- ------- Total noninterest expenses 25,303 30,068 21,995 ------- ------- ------- INCOME BEFORE INCOME TAXES 20,029 9,963 18,289 INCOME TAXES 6,982 3,332 6,707 ------- ------- ------- NET INCOME $13,047 $ 6,631 $11,582 ======= ======= =======
See Notes to Financial Statements. F-4 141 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------- 1997 1996 1995 ----------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,047 $ 6,631 $ 11,582 Adjustments to reconcile net income to net cash provided by operating activities: Recovery of loan loss allowances (1,546) Net (gains) losses (46) (404) Accretion of discounts and amortization of premiums (1,090) (1,499) (2,018) Depreciation 1,080 1,016 671 FHLB stock dividends (766) (695) (632) Decrease (increase) in interest receivable 36 1,312 (89) (Decrease) increase in interest payable (155) (18) 512 Increase in post retirement benefit obligation 321 312 221 Decrease (increase) in prepaid and other assets 137 (182) (109) Increase (decrease) in other liabilities 2,165 (929) 2,807 -------- -------- -------- Net cash provided by operating activities 13,183 5,948 12,541 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity 42,885 46,034 41,023 Mortgage-backed securities available for sale 19,101 23,014 13,705 Investment securities held to maturity 23,000 2,000 15,700 Investment securities available for sale 6,312 3,653 2,596 Proceeds from sale of: Mortgage-backed securities available for sale 3,065 9,711 Investment securities available for sale 21,004 16,353 Purchases of: Mortgage-backed securities held to maturity (30,031) (43,884) Mortgage-backed securities available for sale (8,110) (16,334) Investment securities available for sale (30,876) (7,544) (16,487) Investment securities held to maturity (11,704) Principal collected on loans 119,120 125,550 105,413 Loans originated (133,357) (194,650) (142,779) Loans acquired (116) (24) (4,024) Proceeds from disposal of real estate owned 315 81 385 Purchases of premises and equipment (2,414) (1,516) (1,488) Proceeds from disposal of premises and equipment 7 -------- -------- -------- Net cash provided by (used in) investing activities 47,035 (20,532) (31,814) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in Now, Savings and Money Market Accounts (16,842) (241) (54,150) Net (decrease) increase of Certificates of Deposit (28,410) (6,554) 94,093 Net (decrease) increase in advance payments by borrowers for taxes and insurance (137) (767) 542 -------- -------- -------- Net cash provided (used in) by financing activities (45,389) (7,562) 40,485 -------- -------- -------- Increase (decrease) in cash and cash equivalents 14,829 (22,146) 21,212 Cash and cash equivalents, beginning of year 19,668 41,814 20,602 -------- -------- -------- Cash and cash equivalents, end of year $ 34,497 $ 19,668 $ 41,814 ======== ======== ========
See Notes to Financial Statements. F-5 142 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO STATEMENTS OF EQUITY
Net Unrealized Gain (Loss) On Retained Securities Earnings Total Equity -------------- -------- ------------ (In thousands) Balance, January 1, 1995 $(2,167) $109,376 $107,209 Change in net unrealized gain on securities, net of taxes 3,502 3,502 Net income 11,582 11,582 ------- -------- -------- Balance, December 31, 1995 1,335 120,958 122,293 ------- -------- -------- Change in net unrealized loss on securities, net of taxes (793) (793) Net income 6,631 6,631 ------- -------- -------- Balance, December 31, 1996 542 127,589 128,131 ------- -------- -------- Change in net unrealized gain on securities, net of taxes 175 175 Net income 13,047 13,047 ------- -------- -------- Balance, December 31, 1997 $ 717 $140,636 $141,353 ======= ======== ========
See Notes to Financial Statements. F-6 143 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of The Home Savings & Loan Company of Youngstown, Ohio, a state chartered savings and loan company, (the "Company"), conform to generally accepted accounting principles and prevailing practices within the banking and thrift industry. A summary of the more significant accounting policies follows: NATURE OF OPERATIONS The Company is an Ohio Corporation organized as a savings and loan association. The business of the Company is providing consumer and business banking services to its market area in northeastern Ohio. At the end of 1997, the Company was doing business through 14 full service banking branches. Loans and deposits are primarily generated from the areas where banking branches are located. The Company's income is derived predominantly from interest on loans, securities, and to a lesser extent, noninterest income. The Company's principal expenses are interest paid on deposits and normal operating costs. The Company's operations are principally in the savings and loan industry, which constitutes a single industry segment. PLAN OF CONVERSION On December 9, 1997, the Board of Directors of the Company adopted a Plan of Conversion to convert from a state chartered mutual savings and loan association to a state of Ohio chartered capital stock savings and loan association with the concurrent formation of a holding company subject to approval by regulatory authorities and depositors of the Company. The conversion is expected to be accomplished through the adoption of a state stock charter for the Company, the sale of all of the Company's stock to the holding company and the sale of the holding company's common stock to the public. A subscription offering of the shares of common stock will be offered initially to eligible account holders, employee benefit plans of the Company, supplemental eligible account holders, other members and directors, officers and employees of the Company. Any shares of common stock not sold in the subscription offering are expected to be offered for sale to the general public. At the time of the conversion, the Company will establish a liquidation account in an amount equal to its retained earnings as of the date of the latest balance sheet appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at the Company after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible or supplemental eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Company, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Company formed a charitable foundation (the "Foundation") in 1991 to further the commitment to the communities it serves. At the time of the conversion, the Company plans to contribute to the Foundation a number of common shares equal to 5% of the common shares issued in the conversion, subject to the overall limitation of 1,250,000 common shares. Subsequent to the conversion, the Company may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. F-7 144 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO Conversion costs will be deferred and reduce the proceeds from the shares sold in the conversion. If the conversion is not completed, all costs will be charged as an expense. As of December 31, 1997, conversion costs have not been significant. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT AND MORTGAGE-BACKED SECURITIES Securities are classified as available for sale or held to maturity upon their acquisition. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of equity, net of taxes. Securities classified as held to maturity are carried at amortized cost. Premiums and discounts are recognized in interest income over the period to maturity by the level yield method. Realized gains or losses on the sale of debt securities are recorded based on the amortized cost of the specific securities sold. Security sales are recorded on a trade date basis. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances. For balance sheet presentation, the balances are presented net of deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Discounts and premiums are accreted or amortized using the interest method over the remaining period to contractual maturity. Unamortized net fees or costs are recognized upon early repayment of the loans. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses. Loans intended for sale are carried at the lower of cost or estimated market value determined on an aggregate basis. Net unrealized losses are recognized through a valuation allowance by a charge to income. Gains or losses on the sale of loans are determined under the specific identification method. On January 1, 1995, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which impose certain requirements on the measurement of impaired loans. The Company has previously measured such loans in accordance with the methods prescribed in SFAS No. 114. Consequently, no additional loss provisions were required by the adoption of these statements. SFAS No. 114 also requires that impaired loans for which foreclosure is probable should continue to be accounted for as loans. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material effect on the Company's results of operations. A loan (including a loan impaired under SFAS No. 114) is classified as nonaccrual when collectability is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). A loan may be considered impaired, but remain on accrual status, when the borrower demonstrates (by continuing to make payments) a willingness to keep the loan current and by reducing the delinquency to less than 90 days. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Cash receipts received on impaired loans are generally applied first to escrow requirements, then to delinquent interest, with any remainder to the principal balance. Loans are returned to full accrual status when the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). Loans are F-8 145 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or the terms due to the inability of the borrower to meet the obligation under the original terms. A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In general, the Company considers a loan on income-producing properties to be impaired when the debt service ratio is less than 1.0 and it is not probable that all payments will be received in accordance with contractual terms. Loans on non-income producing properties are considered impaired whenever fair value of the underlying collateral is less than book value of the outstanding loan. The Company performs a review of all loans over $500,000 to determine if the impairment criteria have been met. If the impairment criteria have been met, a reserve is calculated, including all collection costs, according to the provisions of the SFAS No. 114. Most of the Company's loan portfolios are excluded from the scope of SFAS No. 114 because the pronouncement is generally not applicable to large groups of smaller-balance homogeneous loans such as residential mortgage, and other consumer loans. For loans which are individually not significant ($500,000 or less) and represent a homogeneous population, the Company evaluates impairment based on the level and extent of delinquencies in the portfolio and the Company's prior charge-off experience with those delinquencies. The Company charges principal off at the earlier of (i) when a total loss of principal has been deemed to have occurred as a result of the book value exceeding the fair value, or (ii) when collection efforts have ceased. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio and current economic conditions. Consequently, these estimates are particularly susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives (or term of the lease, if shorter) of the related assets. REAL ESTATE OWNED Real estate owned, including property acquired in settlement of foreclosed loans, is carried at the lower of cost or estimated fair value less estimated cost to sell after foreclosure. Costs relating to the development and improvement of real estate owned are capitalized, whereas costs relating to holding and maintaining the property are charged to expense. LOAN FEES Loan origination fees received for loans, net of direct origination costs, are deferred and amortized to interest income over the contractual lives of the loans using the level yield method. Fees received for loan commitments that are expected to be drawn, based on the Company's experience with similar commitments, are deferred and amortized over the lives of the loans using the level yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. Unamortized deferred loan fees or costs related to loans paid off are included in income. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses. Amortization of net deferred fees is discontinued for loans that are deemed to be nonperforming. F-9 146 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO INCOME TAXES The provision for federal income taxes is based upon earnings reported for financial statement purposes rather than amounts reported on the Company's income tax returns. Deferred income taxes, which result from temporary differences in the recognition of income and expense for financial statement and tax return purposes, are included in the calculation of income tax expense. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. POSTRETIREMENT BENEFITS The Company accrues estimated costs of retiree health care and life insurance benefits over the years employees render the services necessary to earn those benefits. The Company elected to recognize the accumulated postretirement benefit obligation when SFAS No. 106 "Employers' Accounting for Postretirement Benefits other than Pensions" was adopted. STATEMENTS OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all highly liquid investments with a term of three months or less to be cash equivalents. LONG-LIVED ASSETS Effective October 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangible assets and goodwill related to those assets to be held and used and for long-lived assets to be held and certain intangible assets to be disposed of. The adoption of SFAS No. 121 did not have a material impact on the Company's financial conditions or results of operations. POTENTIAL IMPACT OF CHANGES IN INTEREST RATES The Company's profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and investments and interest expense on deposits. Like most financial institutions, the Company's short-term interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond its control. The Company's interest earning assets consist primarily of long-term, fixed rate and adjustable rate mortgage loans and investments which adjust more slowly to changes in interest rates than its interest bearing liabilities which are deposits. Accordingly, the Company's earnings could be adversely affected during periods of rising interest rates. NEW ACCOUNTING STANDARDS On January 1, 1997 the Company adopted SFAS No. 125. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," amends portions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS No. 65, and supersedes SFAS No. 122. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The statement also defines accounting treatment for servicing assets and other retained interests in the assets that are transferred. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is required to be applied prospectively. The adoption of this statement has not had a material effect on the Company's financial condition or results of operations. The Financial Accounting Standards Board has issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," that defers the effective date of certain provisions of SFAS No. 125 related to secured borrowings and collateral, repurchase agreements, F-10 147 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO dollar rolls, securities lending, and similar transactions until after December 31, 1997. Management has determined that the impact of adopting this statement is not material to the financial statements. SFAS No. 130, "Reporting Comprehensive Income," issued in July 1997, establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 requires that companies (i) classify terms of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial condition. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassifications of financial statements for earlier periods provided for comprehensive purposes is required. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for the Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers Accounting for Postretirement Benefits Other than Pensions," were issued. SFAS No. 132 suggests combined formats for presentation of pension and other postretirement benefit disclosures. It does not change the measurement or recognition of those plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. Restatements of disclosures for earlier periods provided for comparative purposes is required. Management does not believe the adoption of this statement will have a material impact on the Company's financial condition and results on operations. RECLASSIFICATIONS Certain items in the financial statements for 1996 and 1995 have been reclassified to conform to the 1997 presentation. 2. CASH AND CASH EQUIVALENTS Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. These reserves, which consisted of vault cash and deposits at the Federal Reserve Bank, totaled $2.534 million and $2.22 million at December 31, 1997 and 1996, respectively. F-11 148 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 3. INVESTMENT SECURITIES Investment securities are summarized as follows:
December 31, 1997 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- (In thousands) Available for Sale U.S. Treasury and agency securities $25,072 $190 $ - $25,262 Corporate notes 14,019 121 - 14,140 ------- ---- --- ------- Total investment securities available for sale 39,091 311 - 39,402 Held to Maturity U.S. Treasury and agency securities 4,968 45 - 5,013 ------- ---- --- ------- Total investment securities held to maturity 4,968 45 - 5,013 ------- ---- --- ------- Total investment securities $44,059 $356 $ - $44,415 ======= ==== === =======
December 31, 1996 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- ----- (In thousands) Available for Sale U.S. Treasure and agency securities $12,517 $ 96 $ - $12,613 Corporate notes 2,026 21 1 2,046 ------- ----- --- ------- Total investment securities available for sale 14,543 117 1 14,659 Held to Maturity U.S. Treasury and agency securities 14,967 84 15,051 Corporate notes 13,003 55 1 13,057 ------- ----- --- ------- Total investment securities held to maturity 27,970 139 1 28,108 ------- ----- --- ------- Total investment securities $42,513 $256 $ 2 $42,767 ======= ===== ==== =======
The weighted average interest rate on investment securities was 6.39% and 6.34% at December 31, 1997 and 1996, respectively. The corporate notes consist primarily of medium-term notes issued by corporations with investment grade ratings. Investment securities available for sale by contractual maturity, repricing or expected call date are shown below:
December 31, 1997 ---------------------------------- Amortized Cost Fair Value -------------- ---------- (In thousands) Due in one year or less $ 5,004 $ 5,011 Due after one year through five years 29,087 29,354 Due after five years through ten years 5,000 5,037 Due after ten years - - ------- ------- Total $39,091 $39,402 ======= =======
F-12 149 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO Investment securities held to maturity by contractual maturity, repricing or expected call date are shown below:
December 31, 1997 ------------------------------- Amortized Cost Fair Value -------------- ---------- (In thousands) Due in one year or less $ - $ - Due after one year through five years 4,968 5,013 Due after five years through ten years - - Due after ten years - - ------ ------ Total $4,968 $5,013 ====== ======
Proceeds on sales of investment securities available for sale were $21,004,000 and $16,353,000 for the years ended December 31, 1996 and 1995. There were realized gains of approximately $155,000 and $74,000 for the years ended December 31, 1996 and 1995, respectively. Realized losses were approximately $110,000 for the year ended December 31, 1996, and there were no realized losses for year ended December 31, 1995. There were no sales of investment securities during the year ended December 31, 1997. Securities pledged for public funds deposits were approximately $3,763,000 and $2,888,000 at December 31, 1997 and 1996, respectively. 4. MORTGAGE-BACKED SECURITIES Mortgage-backed securities were summarized as follows:
December 31, 1997 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------- ---------- ------- ----------- (In thousands) Available for Sale Participation certificates: Government agency issues $ 59,304 $1,073 $205 $ 60,172 Private issues 2,329 - 78 2,251 --------- ------ ---- --------- Total mortgage-backed securities available for sale 61,633 1,073 283 62,423 --------- ------ ---- --------- Held to Maturity Participation certificates: Government and government agency issues 243,848 4,672 534 247,986 --------- ------ ---- --------- Total mortgage-backed securities $305,481 $5,745 $817 $310,409 --------- ------ ---- ---------
F-13 150 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
December 31, 1996 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------- ---------- ------ ---------- (In thousands) Available for Sale Participation certificates: Government agency issues $ 81,237 $1,655 $ 859 $ 82,033 Private issues 2,513 - 80 2,433 -------- ------ ------ -------- Total mortgage-backed securities available for sale 83,750 1,655 939 84,466 -------- ------ ------ -------- Held to Maturity Participation certificates: Government and government agency issues 286,384 4,519 2,684 288,219 -------- ------ ------ -------- Total mortgage-backed securities $370,134 $6,174 $3,623 $372,685 ======== ====== ====== ========
Mortgage-backed securities are classified by type of interest payment as follows:
December 31, ---------------------------------------------------------- 1997 1996 ---- ---- Amortized Amortized Cost Fair Value Cost Fair Value --------- ----------- ---------- ----------- (In thousands) Available for Sale Adjustable rate: Private issues $ 762 $ 762 $ 919 $ 919 -------- -------- -------- -------- Total adjustable rate 762 762 919 919 -------- -------- -------- -------- Fixed rate: Participation certificates: Government agency issues 59,304 60,172 81,237 82,033 Private issues 1,567 1,489 1,594 1,514 -------- -------- -------- -------- Total fixed rate 60,871 61,661 82,831 83,547 -------- -------- -------- -------- Total available for sale 61,633 62,423 83,750 84,466 -------- -------- -------- -------- Held to Maturity Adjustable rate: Participation certificates: Government agency Issues 955 969 1,113 1,124 -------- -------- -------- -------- Total adjustable rate 955 969 1,113 1,124 -------- -------- -------- -------- Fixed rate: Participation certificates: Government and government agency issues 242,893 247,017 285,271 287,095 -------- -------- -------- -------- Total fixed rate 242,893 247,017 285,271 287,095 -------- -------- -------- -------- Total held to maturity 243,848 247,986 286,384 288,219 -------- -------- -------- -------- Total mortgage-backed securities $305,481 $310,409 $370,134 $372,685 ======== ======== ======== ========
Proceeds on sales of mortgage-backed securities available for sale were $3,065,000 and $9,711,000 for the years ended December 31, 1997 and 1995, respectively. These were realized gains of $80,000 and $325,000 for the years F-14 151 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO ended December 31, 1997 and 1995, respectively, and realized losses for the year ended December 31, 1995 were $4,000. There were no sales of mortgage-backed securities during the year ended December 31, 1996. 5. LOANS Loans held for portfolio consist of the following:
December 31, ------------------------- 1997 1996 ------ ------- (In thousands) Real Estate: Permanent: One-to-four family $489,677 $482,089 Multifamily 8,944 8,778 Non-residential 33,479 35,315 Land 285 195 Construction: One-to-four family 24,044 27,610 Multifamily 325 490 -------- -------- Total real estate 556,754 554,477 Consumer 43,388 39,605 Commercial 59,897 46,742 -------- -------- Total loans 660,039 640,824 -------- -------- Less: Loans in process 16,485 14,700 Allowance for loan losses 5,982 5,040 Deferred loan fees, net 4,336 4,161 -------- -------- Total 26,803 23,901 -------- -------- Loans, net $633,236 $616,923 ======== ========
Loans with adjustable rates included above totaled $180.6 million and $177.0 million at December 31, 1997 and 1996, respectively. Substantially all such loans have contractual interest rates that increase or decrease at periodic intervals no greater than three years, or have original terms to maturity of three years or less. Adjustable-rate loans reprice primarily based upon U.S. Treasury security rates. The Bank's primary lending area is within the northeast, Ohio. At December 31, 1997 and 1996, substantially all of the Company's gross loans were to borrowers in Ohio. The Company originates or purchases commercial real estate and business loans. These loans are considered by management to be of somewhat greater risk of uncollectibility than single-family residential real estate loans due to the dependency on income production or future development of real estate. The following table sets forth the Company's commercial non-residential real estate portfolios by type of collateral. F-15 152 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
December 31, ------------------------------------------ 1997 1996 ------------------- ------------------- Percent Percent Amount of Total Amount of Total ------ -------- ------ -------- (In thousands) Strip shopping centers $ 1,736 5.19% $ 1,886 5.34% Office buildings 9,160 27.36 9,922 28.10 Warehouses 17,853 53.33 18,610 52.70 Hotel property 4,373 13.06 4,504 12.75 Other 357 1.06 393 1.11 ------- ------ ------- ------ Total $33,479 100.00% $35,315 100.00% ======= ====== ======= ======
Commercial loans are collateralized by accounts receivable, inventory and other assets used in the borrowers' business. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers' residence. At December 31, 1997, 1996 and 1995, loans serviced for the benefit of others, not included in the detail above, totaled $6.6 million, $7.0 million and $7.6 million, respectively. Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments extend over various periods of time with the majority of such commitments disbursed within a ninety day period. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit at fixed rates exposes the Company to some degree of interest rate risk. The Company evaluates each customer's creditworthiness on a case-by-case basis. The type or amount of collateral obtained varies and is based on management's credit evaluation of the potential borrower. The Company normally has outstanding a number of commitments to extend credit. At December 31, 1997, there were outstanding commitments to originate $5,708,000 of fixed-rate mortgage loans and other loans (with interest rates that ranged from 7 1/4% to 8 1/2%) and $1,992,000 of adjustable-rate loans, all at market rates. Terms of the commitments extend up to nine months, but are generally less than two months. At December 31, 1997, there were also outstanding unfunded consumer lines of credit of $16,068,000 and commercial lines of credit of $3,047,000. Substantially all lines of credit are adjustable-rate based on the one-year U.S. Treasury index and are generally renewable on an annual basis. The Company does not expect all of these lines to be used by the borrowers. The Company's business activity is principally with customers located in Ohio. Except for residential loans in the Company's market area, the Company has no other significant concentrations of credit risk. F-16 153 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses are as follows:
Year ended December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- (In thousands) Balance, beginning of year $ 5,040 $5,118 $5,111 Recovery of loan loss allowances (1,546) - - Amounts charged off (446) (85) (394) Recoveries 2,934 7 401 ------- ------ ------ Balance, end of year $ 5,982 $5,040 $5,118 ======= ====== ======
Nonperforming loans (loans 90 days past due and restructured loans) were $10.2 million, $9.8 million and $6.1 million at December 31, 1997, 1996 and 1995, respectively.
As of or for the year ended December 31, --------------------------- 1997 1996 ---- ---- (In thousands) Impaired loans on which no specific valuation allowance was provided $9,340 $8,863 Impaired loans on which specific valuation allowance was provided 151 251 ------ ------ Total impaired loans at year-end 9,491 9,114 Specific valuation allowances on impaired loans at year-end 157 254 Average impaired loans during year 8,390 7,349 Interest income recognized on impaired loans during the year 544 522 Interest income potential based on original contract terms of impaired loans 585 584
Directors and officers of the Company are customers of the institution in the ordinary course of business. Deposits and loans of directors and officers have terms consistent with those offered to other customers. At December 31, 1997 and 1996, loans to officers or directors of the Company totaled approximately $1,345,000 and $1,227,000, respectively. F-17 154 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 6. PREMISES AND EQUIPMENT AND OTHER ASSETS Premises and equipment consist of the following:
December 31, ----------------------------- 1997 1996 ---- ---- (In thousands) Land and land improvements $ 1,952 $ 1,066 Buildings 9,992 8,900 Leasehold improvements 325 771 Furniture and equipment 4,773 4,134 ------- ------- 17,042 14,871 Less allowances for depreciation and amortization 9,112 8,275 ------- ------- Total $ 7,930 $ 6,596 ======= =======
Accrued interest - receivables consist of the following: December 31, ---------------------------- 1997 1996 ---- ---- (In thousands) Investment securities $ 639 $ 314 Mortgage-backed securities 2,252 2,758 Loans 3,523 3,378 ------ ------ Total $6,414 $6,450 ====== ====== 7. DEPOSITS Deposits consist of the following:
December 31, --------------------------------------------------------- 1997 1996 -------------------------- ------------------------- Weighted Weighted Amount Average Rate Amount Average Rate ------ ------------ ------ ------------ (In thousands) Checking accounts: Interest-bearing $ 58,707 2.03% $ 56,347 2.34% Noninterest-bearing 5,387 4,201 Savings accounts 243,588 2.99 256,081 3.08 Money market accounts 56,727 2.99 64,622 3.08 Certificates of deposit 522,399 5.78 550,809 5.74 -------- ---- -------- ---- Total deposits $886,808 4.56% $932,060 4.60% ======== ==== ======== ====
F-18 155 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
Interest expense on deposits is summarized as follows: Year Ended December 31, --------------------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Interest-bearing checking $ 1,165 $ 1,154 $ 1,058 Savings accounts 7,387 7,879 8,123 Money market accounts 1,741 2,094 2,307 Certificates of deposit 30,170 31,882 29,616 ------- ------- ------- $40,463 $43,009 $41,104 ======= ======= =======
A summary of certificates of deposit by maturity follows: December 31, 1997 ----------------- (In thousands) Within 12 months $349,600 12 months to 24 months 82,530 24 months to 36 months 51,240 36 months to 48 months 14,780 Over 48 months 24,249 -------- Total $522,399 At December 31, 1997, deposit accounts with balances of $100,000 and greater totaled approximately $48.7 million. Deposits in excess of $100,000 are not federally insured. The Company has not accepted brokered deposits for the years ended December 31, 1997 and 1996. Directors and officers of the Company are customers of the institution in the ordinary course of business. Deposits and loans of directors and officers have terms consistent with those offered to other customers. At December 31, 1997 and 1996, deposits from officers or directors of the Company totaled approximately $2,467,000 and $2,484,000, respectively. 8. INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred income tax assets and liabilities are computed annually for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established, based on the weight of available evidence, when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities. The provision for federal income taxes consists of the following components: Year ended December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- (In thousands) Current $6,807 $3,055 $5,875 Deferred 175 277 832 ------ ------ ------ Total $6,982 $3,332 $6,707 ====== ====== ====== F-19 156 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO A reconciliation from tax at the statutory rate to the income tax provision is as follows:
Year Ended December 31, -------------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- Dollars Rate Dollars Rate Dollars Rate ------- ---- ------- ---- ------- ---- (In thousands) Tax at statutory rate $7,010 35.00% $3,487 35.00% $6,401 35.00% Increase (decrease) due to: Other (28) (.14) (155) (1.55) 306 1.67 ------ ----- ------ ----- ------ ----- Income tax provision $6,982 34.86% $3,332 33.45% $6,707 36.67% ====== ===== ====== ===== ====== =====
Significant components of the deferred tax assets and liabilities are as follows. No valuation allowance was considered necessary for the years ended December 31, 1997 and 1996.
December 31, ------------------------------- 1997 1996 ---- ---- (In thousands) Deferred tax assets: Loan loss reserves $2,093 $1,764 Post-retirement benefits 2,676 2,564 Deferred loan fees 1,518 1,457 Interest on non-accrual loans 205 204 ------ ------ Net deferred tax assets 6,492 5,989 ------ ------ Deferred tax liabilities: Accelerated depreciation 479 560 Pension benefit obligations 461 493 Original issue discount 1,408 877 FHLB stock dividends 2,093 1,833 Post 1987 tax bad debts 2,152 2,152 Mark-to-market 385 291 ------ ------ Net deferred tax liabilities 6,978 6,206 ------ ------ Net deferred tax liability $ (486) $ (217) ====== ======
During 1996, legislation was passed that repealed Section 593 of the Internal Revenue Code for taxable years beginning after December 31, 1995. Section 593 allowed thrift institutions, including the Company, to use the percentage-of-taxable income bad debt accounting method, if more favorable than the specific charge-off method, for federal income tax purposes. The excess reserves (deduction based on the percentage-of-taxable income less the deduction based on the specific charge-off method) accumulated post-1987 are required to be recaptured ratably over a six-year period beginning in 1996. The recapture has no effect on the Company's statement of income as income taxes were provided for in prior years in accordance with generally accepted accounting principles. The timing of this recapture may be delayed for a one or two-year period to the extent that the Company originates more residential loans than the average originations in the past six years. The Company met the origination requirement for 1996 and 1997 and, therefore, will delay recapture at least until the six-year period beginning in 1998. The recapture amount of approximately $6.1 million will result in payments totaling approximately $2.1 million and have been previously accrued. The pre-1988 reserve provisions are subject only to recapture requirements in the case of certain excess distributions to, and redemptions of shareholders or if the Company no longer qualifies as a "bank." Tax bad debt deductions F-20 157 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO accumulated prior to 1988 by the Company are approximately $14.4 million. No deferred income taxes have been provided on these bad debt deductions and no recapture of these amounts is anticipated. 9. REGULATORY CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The regulations require the Company to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Core and Tangible capital (as defined in the regulations) to adjusted total assets (as defined) and of total capital (as defined) to risk-weighted assets (as defined).
As of December 31, 1997 ------------------------------------------------------------------------ Minimum To Be Well Capitalized Capital Under Prompt Corrective Actual Requirements Action Provisions -------------------- ------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (In thousands) Total capital (to risk-weighted $146,461 28.85% $40,619 8.00% $50,774 10.00% assets) Tier 1 capital (to risk-weighted 140,636 27.70 * * 30,464 6.00 assets) Core (Tier 1) capital (to 140,636 13.47 31,322 3.00 52,203 5.00 adjusted total assets) Tangible capital (to adjusted total assets) 140,636 13.47 15,661 1.50 * * As of December 31, 1996 ------------------------------------------------------------------------ Minimum To Be Well Capitalized Capital Under Prompt Corrective Actual Requirements Action Provisions -------------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (In thousands) Total capital (to risk-weighted $132,374 26.15% $40,496 8.00% $50,620 10.00% assets) Tier 1 capital (to risk-weighted 127,589 25.21 * * 30,372 6.00 assets) Core (Tier 1) capital (to 127,589 11.87 32,247 3.00 53,745 5.00 adjusted total assets) Tangible capital (to adjusted total assets) 127,589 11.87 16,124 1.50 * *
* Ratio is not required under regulations. F-21 158 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO The following is a reconciliation of the Company's equity reported in the financial statements under generally accepted accounting principles to OTS regulatory capital requirements.
Tangible Core (Tier 1) Risk-Based Capital Capital Capital -------- -------- -------- (In thousands) DECEMBER 31, 1997 Total equity as reported in the financial statements $141,353 $141,353 $141,353 General allowance for loan losses - - 5,825 Net unrealized gain on available for sale securities (717) (717) (717) -------- -------- -------- Regulatory Capital $140,636 $140,636 $146,461 ======== ======== ======== DECEMBER 31, 1996 Total equity as reported in the financial statements $128,131 $128,131 $128,131 General allowance for loan losses - - 4,785 Net unrealized gain on available for sale securities (542) (542) (542) -------- -------- -------- Regulatory Capital $127,589 $127,589 $132,374 ======== ======== ========
As of December 31, 1997 and 1996, the Office of Thrift Supervision categorized the Company as well capitalized under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, the Company must maintain minimum Core, Tier 1 and total capital ratios as set forth in the table above. There are no conditions or events since that notification that have changed the Company's category. Management believes, as of December 31, 1997, that the Company meets all capital requirements to which it is subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which the Company's loans and securities are concentrated, could adversely affect future earnings and, consequently, the Company's ability to meet its future capital requirements. 10. BENEFIT PLANS RETIREMENT PLANS The Company has a defined benefit pension plan covering substantially all of its full-time employees. The benefits are based on years of service and the employee's compensation during the last five years of employment. Participants become 100% vested upon completion of five years of service. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. F-22 159 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO Net periodic pension expense included the following components:
Year Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Service cost - benefits earned during the period $ 376 $ 357 $ 290 Interest cost on projected benefit obligation 530 544 466 Actual return on plan assets (1,013) (525) (425) Net amortization and deferral 500 (39) (60) ------- ------ ------ Net periodic pension expense $ 393 $ 337 $ 271 ======= ====== ======
As of December 31, ----------------------- 1997 1996 ---- ---- (In thousands) Accumulated benefit obligation: Vested benefits $5,004 $5,227 Nonvested benefits 236 196 ------ ------ Actuarial present value of accumulated benefit obligations $5,240 $5,423 ====== ======
The following tables present the pension plan's funded status and amounts recognized in the Company's financial statements:
As of December 31, ----------------------- 1997 1996 ---- ---- (In thousands) Plan assets at fair value, primarily stock and bond funds $ 7,445 $ 7,264 Less: projected benefit obligation for service rendered to date (8,612) (8,350) ------- ------- Excess of projected benefit obligation over plan assets (1,167) (1,086) Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions 1,544 1,745 Unrecognized net transition asset (161) Unrecognized prior service cost 367 410 ------- ------- Prepaid pension cost included in prepaid expenses and other assets $ 744 $ 908 ======= =======
Assumptions used in accounting for the defined benefit plan were as follows:
As of December 31, ----------------------- 1997 1996 ---- ---- (In thousands) Weighted average discount rate 7.00% 7.25% Rates of increase in future compensation levels 6.00 6.00 Expected long-term rate of return on plan assets 8.00 8.00
The prior service cost is being amortized using the straight-line method over the average remaining service period of participants expected to receive benefits. F-23 160 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO The Company has a defined contribution 401(K) savings plan, which covers substantially all employees. Under the provisions of the plan, the Company's matching contribution is discretionary and may be changed from year to year. For 1997 and 1996, the Company match was 25% of pre-tax contributions, up to a maximum of 6% of the employees' base pay. In addition, in 1997, 1996 and 1995 the Company paid a 1% discretionary contribution to all employees who were eligible to participate in the plan. Also in 1996, the Company implemented a discretionary profit sharing pool as a part of the 401(K) plan which is based upon a formula involving the average net income of the Company over a three year period. Participants become 100% vested in the Company contributions upon completion of five years of service. For the years ended 1997, 1996 and 1995, the expense related to this plan was approximately $468,000, $513,000 and $107,000, respectively. OTHER POSTRETIREMENT BENEFIT PLANS In addition to the Company's retirement plans, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees who have worked 15 years and attained age 60, or worked 5 years and attained age 65, while in service with the Company. The plan is contributory and contains minor cost-sharing features such as deductibles and coinsurance. In addition, postretirement life insurance coverage is provided for employees who were participants prior to December 10, 1976. The life insurance plan is non-contributory. The Company's policy is to pay premiums monthly, with no pre-funding. The following tables present the other postretirement benefit plan's funded status and amounts recognized in the Company's financial statements:
Year Ended December 31, ----------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Service cost $ 208 $ 189 $ 165 Interest cost 332 316 296 Net amortization and deferral (134) (128) (177) ----- ----- ----- Net periodic post-retirement benefit cost $ 406 $ 377 $ 284 ===== ===== =====
As of December 31, ------------------------ 1997 1996 ---- ---- (In thousands) Accumulated post-retirement benefit obligation: Retirees $1,738 $1,709 Fully eligible active plan participants 252 483 Other active plan participants 3,260 2,592 ------ ------ Accumulated post-retirement benefit obligation 5,250 4,784 Unrecognized net gain 2,028 2,147 Unrecognized prior service cost 369 395 ------ ------ Accrued post-retirement benefit obligation $7,647 $7,326 ====== ======
The weighted-average annual assumed rate of increase in the per capita cost of coverage benefits (i.e., health care cost trend rate) used in the 1997 and 1996 actuarial valuations is 9 percent through 1997 and is assumed to decrease 1 percent per year to 6 percent for the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point for each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by approximately $1,015,000, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by approximately $120,000. F-24 161 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7 percent and 7.25 percent at December 31, 1997 and 1996, respectively. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash, Cash Equivalents, Accrued Interest Receivable and Payable and Advance Payments by Borrowers for Taxes and Insurance - The carrying amounts as reported in the Statements of Financial Condition are a reasonable estimate of fair value due to their short-term nature. Mortgage-Backed and Investment Securities - Fair values are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Loans - The fair value is estimated by discounting the future cash flows using the current market rates for loans of similar maturities with adjustments for market and credit risks. Federal Home Loan Bank Stock - The fair value is estimated to be the carrying value, which is par. All transactions in the capital stock of the Federal Home Loan Bank are executed at par. Deposits - The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997 and 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-25 162 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO
December 31, 1997 December 31, 1996 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (In thousands) Assets: Cash and cash equivalents $ 34,497 $ 34,497 $ 19,668 $ 19,668 Investment securities: Held to maturity 4,968 5,013 27,970 28,108 Available for sale 39,402 39,402 14,659 14,659 Mortgage-backed securities: Held to maturity 243,848 247,986 286,384 288,219 Available for sale 62,423 62,423 84,466 84,466 Loans 633,236 640,354 616,923 614,723 Federal Home Loan Bank stock 11,136 11,136 10,370 10,370 Accrued interest receivable 6,414 6,414 6,450 6,450 Liabilities: Deposits: Checking, savings and money market accounts 364,409 364,409 381,251 381,251 Certificates of deposit 522,399 522,051 550,809 550,433 Advance payments by borrowers for taxes and insurance 3,715 3,715 3,852 3,852 Accrued interest payable 845 845 1,000 1,000
12. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest on deposits and borrowings $40,618 $43,026 $40,592 Income taxes 5,500 4,425 4,311 Supplemental schedule of noncash activities: Loans exchanged for mortgage-backed securities 224 Securities transferred from held to maturity to available for sale 13,934 Transfers from loans to real estate owned 372 71 311
13. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT On September 30, 1996, the President signed into law an omnibus appropriations act for fiscal year 1997 that included, among other things, the recapitalization of the Savings Association Insurance Fund ("SAIF") in a section entitled the Deposit Insurance Funds Act of 1996 ("ACT"). The Act included a provision where all insured depository institutions would be charged a one-time special assessment on their SAIF assessable deposits as of March 31, 1995. The Company recorded a pretax charge of $5,903,000 ($3,837,000 after tax), which represented 65.7 basis points of the March 31, 1995 assessable deposits. This charge was recorded upon enactment of the Act on September 30, 1996, and paid on November 29, 1996. The annual deposit insurance rate in effect after this recapitalization has been reduced to 6.5 basis points of insured deposits. F-26 163 PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION * Legal Fees and expenses......................................$200,000 * Postage, printing, Edgar and mailing..........................500,000 * Appraisal and business plan fees and expenses..................38,000 * Accounting fees and expenses.................................110,000 * SEC filing fees...............................................105,199 * OTS filing fees................................................14,400 * Nasdaq filing fees.............................................95,000 * Conversion agent fees and expenses.............................75,000 * Transfer agent fees and expenses...............................45,000 * Other expenses................................................189,401 ** Underwriting fees and expenses..............................2,128,000 Total estimated expenses............................... $3,500,000
- ----------------------------- * Estimated. ** To assist the Holding Company and the Company in marketing the Common Shares, the Holding Company and the Company have retained Trident Securities, Inc. ("Trident"), McDonald & Company Securities, Inc. ("McDonald") and CIBC Oppenheimer Corp. (collectively, the "Underwriters"). The Underwriters are broker-dealers registered with the SEC and members of the NASD. For its services, the Underwriters will receive a marketing fee of .95% of the aggregate purchase price of the Common Shares sold other than (i) Common Shares purchased by the directors, officers and employees of the Company and the Holding Company and their affiliates, (ii) Common Shares purchased by the ESOP, and (iii) Common Shares sold by Selected Dealers (hereinafter defined). Depending on market conditions, the Common Shares, if any, not initially subscribed for in the Subscription Offering or the Community Offering may be offered for sale to the general public on a best efforts basis in a syndicated community offering by a selling group of broker-dealers ("Selected Dealers") to be formed by the Underwriters. If Selected Dealers are employed, the Selected Dealers will be paid a commission to be agreed to by the Underwriters, the Company and the Holding Company. The estimated underwriting fees are based on the following assumptions: (i) 25,000,000 Common Shares will be sold in the Offering; (ii) approximately 600,000 Common Shares sold in the Offering will be purchased by directors, officers and employees of the Company and the Holding Company and their affiliates; (iii) 2,000,000 Common Shares sold in the Offering will be purchased by the ESOP; and (iv) the remaining 22,400,000 Common Shares sold in the Offering will be sold to persons other than the ESOP and the Company's directors, executive officers and employees and affiliates, with sales commissions of .95% of the aggregate dollar amount of such Common Shares. The Company will also reimburse the Underwriters for all reasonable fees and expenses of its legal counsel, not to exceed $60,000. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) OHIO REVISED CODE Division (E) of Section 1701.13 of the Ohio Revised Code governs indemnification by a corporation and provides as follows: (E)(1) A corporation may indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or II-1 164 investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorney's fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. (2) A corporation may indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any of the following: (a) Any claim, issue, or matter as to which such person is adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless, and only to the extent that the court of common pleas or the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper; (b) Any action or suit in which the only liability asserted against a director is pursuant to section 1701.95 of the Revised Code. (3) To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the action, suit, or proceeding. (4) Any indemnification under divisions (E)(1) and (2) of this section, unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in divisions (E)(1) and (2) of this section. Such determination shall be made as follows: (a) By a majority vote of a quorum consisting of directors of the indemnifying corporation who were not and are not parties to or threatened with any such action, suit, or proceeding; (b) If the quorum described in division (E)(4)(a) of this section is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation or any person to be indemnified within the past five years; (c) By the shareholders; or (d) By the court of common pleas or the court in which such action, suit, or proceeding was brought. Any determination made by the disinterested directors under division (E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this section shall be promptly communicated to the person who threatened or brought the action or suit by or in the right of the corporation under division (E)(2) of this section, and within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which action or suit was brought to review the reasonableness of such determination. II-2 165 (5)(a) Unless at the time of a director's act or omission that is the subject of an action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section, the articles or the regulations of a corporation state by specific reference to this division that the provisions of this division do not apply to the corporation and unless the only liability asserted against a director in an action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section is pursuant to section 1701.95 of the Revised Code, expenses, including attorney's fees, incurred by a director in defending the action, suit, or proceeding shall be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding upon receipt of an undertaking by or on behalf of the director in which he agrees to do both of the following: (i) Repay such amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation; (ii) Reasonably cooperate with the corporation concerning the action, suit, or proceeding. (b) Expenses, including attorney's fees, incurred by a director, trustee, officer, employee, or agent in defending any action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section, may be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding as authorized by the directors in the specific case upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount, if it ultimately is determined that he is not entitled to be indemnified by the corporation. (6) The indemnification authorized by this section shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under the articles, the regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in their official capacities and as to action in another capacity while holding their offices and positions, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (7) A corporation may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit, or self-insurance, on behalf of or for any person who is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or profit, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. Insurance may be purchased from or maintained with a person in which the corporation has a financial interest. (8) The authority of a corporation to indemnify persons pursuant to divisions (E)(1) and (2) of this section does not limit the payment of expenses as they are incurred, indemnification, insurance, or other protection that may be provided pursuant to divisions (E)(5), (6), and (7) of this section. Divisions (E)(1) and (2) of this section do not create any obligation to repay or return payments made by the corporation pursuant to division (E)(5), (6), or (7). (9) As used in this division, references to "corporation" include all constituent corporations in a consolidation or merger and the new or surviving corporation, so that any person who is or was a director, officer, employee, or agent of such a constituent corporation, or is or was serving at the request of such constituent corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, shall stand in the same position under this section with respect to the new or surviving corporation as he would if he had served the new or surviving corporation in the same capacity. II-3 166 (b) THE HOLDING COMPANY'S CODE OF REGULATIONS Article Five of the Holding Company's Code of Regulations provides for the indemnification of officers and directors as follows: Section 5.01. Mandatory Indemnification. The corporation shall indemnify any officer or director of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action threatened or instituted by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. A person claiming indemnification under this Section 5.01 shall be presumed, in respect of any act or omission giving rise to such claim for indemnification, to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal matter, to have had no reasonable cause to believe his conduct was unlawful, and the termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, rebut such presumption. Section 5.02. Court-Approved Indemnification. Anything contained in the Regulations or elsewhere to the contrary notwithstanding: (A) the corporation shall not indemnify any officer or director of the corporation who was a party to any completed action or suit instituted by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, in respect of any claim, issue or matter asserted in such action or suit as to which he shall have been adjudged to be liable for acting with reckless disregard for the best interests of the corporation or misconduct (other than negligence) in the performance of his duty to the corporation unless and only to the extent that the Court of Common Pleas of Mahoning County, Ohio, or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances of the case, he is fairly and reasonably entitled to such indemnity as such Court of Common Pleas or such other court shall deem proper; and (B) the corporation shall promptly make any such unpaid indemnification as is determined by a court to be proper as contemplated by this Section 5.02. Section 5.03. Indemnification for Expenses. Anything contained in the Regulations or elsewhere to the contrary notwithstanding, to the extent that an officer or director of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 5.01, or in defense of any claim, issue or matter therein, he shall be promptly indemnified by the corporation against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) actually and reasonably incurred by him in connection therewith. Section 5.04 Determination Required. Any indemnification required under Section 5.01 and not precluded under Section 5.02 shall be made by the corporation only upon a determination that such indemnification of the officer or director is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 5.01. Such determination may be made only (A) by a majority vote of a quorum consisting of directors of the corporation who were not and are not parties to, or threatened with, any such action, suit or proceeding, or (B) if such a quorum is not obtainable or if a majority of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation, or any person to be indemnified, within the past five years, or (C) by the shareholders, or (D) by the Court of Common Pleas of Mahoning County, Ohio, or (if the corporation is a party thereto) the court in which such action, suit or proceeding was brought, if any; any such determination may be made by a court under division (D) of this Section 5.04 at any time including, without limitation, any time before, during or after the time when any such determination may be requested of, be under consideration by or have been denied or disregarded by the disinterested directors under division (A) or by independent legal counsel under division (B) or by the shareholders under division (C) of this Section 5.04; and no failure for any reason to make any such determination, and no II-4 167 decision for any reason to deny any such determination, by the disinterested directors under division (A) or by independent legal counsel under division (B) or by shareholders under division (C) of this Section 5.04 shall be evidence in rebuttal of the presumption recited in Section 5.01. Any determination made by the disinterested directors under division (A) or by independent legal counsel under division (B) of this Section 5.04 to make indemnification in respect of any claim, issue or matter asserted in an action or suit threatened or brought by or in the right of the corporation shall be promptly communicated to the person who threatened or brought such action or suit, and within ten (10) days after receipt of such notification such person shall have the right to petition the Court of Common Pleas of Mahoning County, Ohio, or the court in which such action or suit was brought, if any, to review the reasonableness of such determination. Section 5.05. Advances for Expenses. Expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) incurred in defending any action, suit or proceeding referred to in Section 5.01 shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding to or on behalf of the officer or director promptly as such expenses are incurred by him, but only if such officer or director shall first agree, in writing, to repay all amounts so paid in respect of any claim, issue or other matter asserted in such action, suit or proceeding in defense of which he shall not have been successful on the merits or otherwise: (A) if it shall ultimately be determined as provided in Section 5.04 that he is not entitled to be indemnified by the corporation as provided under Section 5.01; or (B) if, in respect of any claim, issue or other matter asserted by or in the right of the corporation in such action or suit, he shall have been adjudged to be liable for acting with reckless disregard for the best interests of the corporation or misconduct (other than negligence) in the performance of his duty to the corporation, unless and only to the extent that the Court of Common Pleas of Mahoning County, Ohio, or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances, he is fairly and reasonably entitled to all or part of such indemnification. Section 5.06. Article Five Not Exclusive. The indemnification provided by this Article Five shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under the Articles or the Regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer or director of the corporation and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 5.07. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the obligation or the power to indemnify him against such liability under the provisions of this Article Five. Section 5.08. Certain Definitions. For purposes of this Article Five, and as examples and not by way of limitation: (A) A person claiming indemnification under this Article 5 shall be deemed to have been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 5.01, or in defense of any claim, issue or other matter therein, if such action, suit or proceeding shall be terminated as to such person, with or without prejudice, without the entry of a judgment or order against him, without a conviction of him, without the imposition of a fine upon him and without his payment or agreement to pay any amount in settlement thereof (whether or not any such termination is based upon a judicial or other determination of the lack of merit of the claims made against him or otherwise results in a vindication of him); and (B) References to an "other enterprise" shall include employee benefit plans; references to a "fine" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" within the meaning of that term as used in this Article Five. II-5 168 Section 5.09. Venue. Any action, suit or proceeding to determine a claim for indemnification under this Article Five may be maintained by the person claiming such indemnification, or by the corporation, in the Court of Common Pleas of Mahoning County, Ohio. The corporation and (by claiming such indemnification) each such person consent to the exercise of jurisdiction over its or his person by the Court of Common Pleas of Mahoning County, Ohio, in any such action, suit or proceeding. (c) INSURANCE POLICIES The Company currently maintains a directors' and officers' liability policy providing for insurance of directors and officers for liability incurred in connection with performance of their duties as directors and officers. Such policy does not, however, provide insurance for losses resulting from willful or criminal misconduct. (d) INDEMNIFICATION AGREEMENTS (i) AGREEMENT WITH KELLER & CO., INC. The Company has agreed to indemnify Keller & Co., Inc. ("Keller"), the firm retained by the Company to provide the appraisal of the pro forma market value of the Company, as converted, and the Holding Company, in connection with certain matters related to the appraisal. The Company will indemnify Keller and its affiliates and employees for certain costs and expenses, including reasonable legal fees, in connection with claims or litigation relating to the appraisal and arising out of any misstatement or untrue statement of a material fact in the information supplied to Keller by the Company or by an intentional omission by the Company to state a material fact in the information so provided, except where Keller has been negligent or at fault. (ii) AGREEMENT WITH TRIDENT In general, the agreement with Trident (the "Agency Agreement") provides that the Company will indemnify and hold harmless Trident's directors, officers, employees, agents and any controlling person against any and all loss, liability, claim, damage or expense (including the reasonable fees and disbursements of counsel) arising out of any untrue statement, or alleged untrue statement, of a material fact contained in the Summary Proxy Statement or the Prospectus, any application to regulatory authorities, any "blue sky" application, or any other related document prepared or executed by or on behalf of the Company with its consent in connection with, or in contemplation of, the transactions contemplated by the Agency Agreement, or any omission therefrom of a material fact required to be stated therein, unless such untrue statement or omission, or alleged untrue statement or omission, was made in reliance upon, and in conformity with, written information regarding Trident furnished to the Company by Trident expressly for use in the Summary Proxy Statement or the Prospectus. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. No securities of the Holding Company have been sold by the Holding Company without registration pursuant to the Act, except as follows: On February 2, 1998, in connection with the incorporation of the Holding Company, 100 common shares, without par value, of the Holding Company (the "Securities") were sold for an aggregate purchase price of $100 pursuant to Section 4(2) of the Act in a transaction not involving any public offering. The Securities were sold to Douglas M. McKay, the President of the Holding Company, who had access to all material information about the Holding Company. The Securities were offered without the use of any form of general solicitation or advertising. No underwriter was involved in the transaction, and no commission, discount or other remuneration was paid or given in connection with the sale of the Securities. Under the terms of the Subscription Agreement between the Holding Company and Mr. McKay, the Securities will be repurchased by the Holding Company for $100 on the effective date of the Conversion. II-6 169
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS The exhibits filed as a part of this Registration Statement are as follows: *1.1 Engagement letter with Trident Securities, Inc. 1.2 Form of Agency Agreement with Trident Securities, Inc. 2 Amended Plan of Conversion *3.1 Articles of Incorporation of United Community Financial Corp. 3.2 Code of Regulations of United Community Financial Corp. *5 Opinion of Vorys, Sater, Seymour and Pease LLP regarding legality of securities being registered *8.1 Opinion of Vorys, Sater, Seymour and Pease LLP regarding tax matters *8.2 Opinion of Keller & Company, Inc. regarding the value of subscription rights for tax purposes. 10.1 The Home Savings and Loan Company of Youngstown, Ohio 1998 Long-Tern Incentive Plan (proposed) *10.2 United Community Financial Corp. Recognition and Retention Plan and Trust Agreement (proposed) 10.3 United Community Financial Corp. Employee Stock Ownership Plan and Trust (proposed) 10.4 Form of Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and certain executive officers (proposed) (revised) 16 Letter from Packer, Thomas & Co. regarding change in certifying accountants 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Packer, Thomas & Co. *23.3 Consent of Keller & Company, Inc. *23.4 Consent of Vorys, Sater, Seymour and Pease LLP *27 Financial Data Schedule 99.1 Summary Proxy Statement (revised) 99.2 Order Form and Form of Certification *99.3 Form of Proxy 99.4 Solicitation and Marketing Material (proposed) (revised) *99.5 Appraisal Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Keller & Company, Inc. **99.6 Appraisal Report prepared by Keller & Company, Inc. ----------------------
* Previously filed. ** Previously filed pursuant to hardship exemption. (b)FINANCIAL STATEMENT SCHEDULES: No financial statement schedules are filed because the required information is not applicable or is included in the financial statements or related notes. II-7 170 ITEM 17. UNDERTAKINGS. (a) The undersigned, the Holding Company, hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Holding Company, pursuant to the foregoing provisions or otherwise, the Holding Company has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Holding Company of expenses incurred or paid by a director, officer or controlling person of the Holding Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Holding Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-8 171 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, duly authorized to do so, in the City of Youngstown, State of Ohio, on May 6, 1998. UNITED COMMUNITY FINANCIAL CORP. By: /s/ DOUGLAS M. McKAY --------------------- Douglas M. McKay its President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed below by the following persons in the capacities and as of the dates indicated.
Signature Title Date --------- ----- ---- Director , 1998 - ----------------------------------- ----- Richard M. Barrett /s/ JAMES E. BENNETT, JR. Director May 6, 1998 - ----------------------------------- James E. Bennett, Jr. /s/ CHARLES B. CUSHWA, III Director May 6, 1998 - ----------------------------------- Charles B. Cushwa, III Director , 1998 - ----------------------------------- ----- Donald R. Inglis Director , 1998 - ----------------------------------- ----- Gary Keller /s/ PATRICK A. KELLY Treasurer (principal financial and accounting May 6, 1998 - ----------------------------------- officer) Patrick A. Kelly /s/ DOUGLAS M. McKAY Director, President and Chairman (principal May 6, 1998 - ----------------------------------- executive officer) Douglas M. McKay /s/ HERBERT F. SCHULER Director May 6, 1998 - ----------------------------------- Herbert F. Schuler /s/ CLARENCE R. SMITH, JR. Director May 6, 1998 - ----------------------------------- Clarence R. Smith, Jr. /s/ DONALD J. VARNER Secretary May 6, 1998 - ----------------------------------- Donald J. Varner /s/ JOHN F. ZIMMERMAN, JR. Director May 6, 1998 - ----------------------------------- John F. Zimmerman, Jr.
II-9 EX-1.2 2 EXHIBIT 1.2 1 Exhibit 1.2 UNITED COMMUNITY FINANCIAL CORP. ____________ TO ____________ SHARES COMMON STOCK (WITHOUT PAR VALUE) $10.00 PER SHARE SALES AGENCY AGREEMENT ---------------------- Trident Securities, Inc. 4601 Six Forks Road, Suite 400 Raleigh, North Carolina 27609 Dear Sirs: United Community Financial Corp., an Ohio corporation (the "Holding Company"), and The Home Savings and Loan Company of Youngstown, Ohio, an Ohio-chartered and federally insured mutual savings and loan association (the "Company"), hereby confirm, as of _____________, 1998, their respective agreements with Trident Securities, Inc. ("Trident"), a broker-dealer registered with the Securities and Exchange Commission ("Commission") and a member of the National Association of Securities Dealers, Inc. ("NASD"), as follows: 1. INTRODUCTORY. The Company intends to convert from an Ohio-chartered mutual savings association to an Ohio-chartered stock savings association as a wholly owned subsidiary of the Holding Company (together with the Offerings, as defined below, the issuance of shares of common stock of the Company to the Holding Company and the incorporation of the Holding Company, the "Conversion") pursuant to a plan of conversion adopted on ____________ (the "Plan"). In accordance with the Plan, the Holding Company is offering shares of its common stock no par value per share (the "Shares" and the "Common Stock"), pursuant to nontransferable subscription rights in a subscription offering (the "Subscription Offering") to certain depositors and borrowers of the Company, the Company's Employee Stock Ownership Plan (the "ESOP") and directors, officers and employees of the Company. Shares of the Common Stock not sold in the Subscription Offering may be offered to the general public in a community offering (the "Community Offering", and together with the Subscription Offering the "Offerings"), subject to the right of the Holding Company and the Company, in their absolute discretion, to reject orders in the Community Offering in whole or in part. It is anticipated that shares of the Common Stock not otherwise subscribed for in the Subscription and Community Offerings may be offered at the discretion of the Holding Company to certain members of the general public as part of a community offering on a best efforts basis by Trident or, if necessary, by a selling group of selected broker-dealers to be managed by Trident (the "Syndicated Community Offering"). In the Offerings, the Holding Company is offering between ___________ and ___________ shares, 2 United Community Financial Corp. Sales Agency Agreement Page 2 with the possibility of offering up to ___________ shares without a resolicitation of subscribers. No Eligible Account Holder, Supplemental Account Holder or Other Member may purchase in his capacity as such more than 30,000 shares of Common Stock in the Subscription Offering. No individual person or other entity, together with associates of and persons acting in concert with such person, may purchase in the Community Offering and the Syndicated Community Offering more than 30,000 shares of Common Stock. No person, individually or together with associates of and persons acting in concert with such person, may purchase more than 30,000 shares of Common Stock in the Conversion. The Holding Company and the Company have been advised by Trident that it will utilize its best efforts in assisting the Holding Company and the Company with the sale of the Shares in the Offerings and, if deemed necessary by the Holding Company, in a Syndicated Community Offering. Prior to the execution of this Agreement, the Holding Company has delivered to Trident the Prospectus dated ____________, 1998 (as hereinafter defined) and all supplements thereto to be used in the Offerings. Such Prospectus contains information with respect to the Holding Company, the Company and the Shares. 2. Representations and Warranties. ------------------------------- (a) The Holding Company and the Company jointly and severally represent and warrant to Trident that: (i) The Holding Company has filed with the Commission a registration statement, including exhibits and an amendment or amendments thereto, on Form S-1 (No. 333-_____), including a Prospectus relating to the Offerings, for the registration of the Shares under the Securities Act of 1933, as amended (the "Act"); and such registration statement has become effective under the Act and no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the Holding Company's best knowledge, threatened by the Commission. Except as the context may otherwise require, such registration statement, as amended or supplemented, on file with the Commission at the time the registration statement became effective, including the Prospectus, financial statements, schedules, exhibits and all other documents filed as part thereof, as amended and supplemented, is herein called the "Registration Statement," and the prospectus, as amended or supplemented, on file with the Commission at the time the Registration Statement became effective is herein called the "Prospectus," except that if the prospectus filed by the Holding Company with the Commission pursuant to Rule 424(b) of the general rules and regulations of the Commission under the Act (together with the enforceable published policies and actions of the Commission thereunder, the "SEC 3 United Community Financial Corp. Sales Agency Agreement Page 3 Regulations") differs from the form of prospectus on file at the time the Registration Statement became effective, the term "Prospectus" shall refer to the Rule 424(b) prospectus from and after the time it is filed with the Commission and shall include any amendments or supplements thereto from and after their dates of effectiveness or use, respectively. If any Shares remain unsubscribed following completion of the Subscription Offering and the Community Offering, the Holding Company (i) will, if required by the SEC Regulations, promptly file with the Commission a post-effective amendment to such Registration Statement relating to the results of the Subscription and the Community Offerings, any additional information with respect to the proposed plan of distribution and any revised pricing information or (ii) if no such post-effective amendment is required, will file with, or mail for filing to, the Commission a prospectus or prospectus supplement containing information relating to the results of the Subscription and Community Offerings and pricing information pursuant to Rule 424(c) of the Regulations, in either case in a form reasonably acceptable to the Holding Company and Trident. (ii) The Company has filed an Application for Approval of Conversion including exhibits (as amended or supplemented, the "Conversion Application" with the Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act (the "HOLA") and the rules and regulations promulgated thereunder, which has been approved by the OTS; and the Prospectus and the proxy statement for the solicitation of proxies from members for the special meeting to approve the Plan (the "Proxy Statement") included as part of the Conversion Application have been approved for use by the OTS. No order has been issued by the OTS preventing or suspending the use of the Prospectus or the Proxy Statement; and no action by or before the OTS revoking such approvals is, to the Company's best knowledge, pending or threatened. (iii) The Holding Company has filed with the OTS a holding company application on Form H-(e)1-S (the "H-(e)1-S") under the HOLA and the regulations promulgated thereunder and shall receive approval of its acquisition of the Company from the OTS prior to closing. (iv) The Company and Holding Company have filed copies of the Conversion Application and a holding company application (the "Holding Company Application") with the Ohio Department of Commerce, Division of Savings and Loans (the "Ohio Division") together with all amendments thereto. Such applications have been approved by the Ohio Division, including approval of the proposed stock articles of incorporation, constitution, and bylaws. 4 United Community Financial Corp. Sales Agency Agreement Page 4 (v) At the date of the Prospectus and at all times subsequent thereto through and including the Closing Date (i) the Registration Statement and the Prospectus (as amended or supplemented, if amended or supplemented) complied with the Act and the SEC Regulations, (ii) the Registration Statement (as amended or supplemented, if amended or supplemented) did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (iii) the Prospectus (as amended or supplemented, if amended or supplemented) did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (iv) the Conversion Application was complete and did not contain an untrue statement or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Representations or warranties in this subsection shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Holding Company or the Company relating to Trident by or on behalf of Trident expressly for use in the Registration Statement or Prospectus. (vi) The Holding Company has been duly incorporated as an Ohio corporation and the Company has been duly organized as a mutual savings association under the laws of the State of Ohio, and each of them is validly existing and in good standing under the laws of the jurisdiction of its organization with full power and authority to own its property and conduct its business as described in the Registration Statement and Prospectus; the Company is a member in good standing of the Federal Home Loan Bank; and the deposit accounts of the Company are insured by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC") up to the applicable legal limits. Neither the Holding Company nor the Company is required to be qualified to do business as a foreign corporation in any jurisdiction where non-qualification would have a material adverse effect on the operations of the Holding Company and the Company, taken as a whole. The Company does not own equity securities of or an equity interest in any business enterprise other than the Holding Company and the Company's wholly owned service corporation. Upon amendment of the Company's charter, constitution and bylaws to read in the form of a federal stock charter and constitution as provided under Ohio law and the rules and regulations promulgated thereunder and completion of the sale by the Holding Company of the Shares as contemplated by the Prospectus, (i) the 5 United Community Financial Corp. Sales Agency Agreement Page 5 Company will be converted pursuant to the Plan to an Ohio-chartered capital stock savings association with full power and authority to own its property and conduct its business as described in the Prospectus, (ii) all of the authorized and outstanding capital stock of the Company will be owned of record and beneficially by the Holding Company, and (iii) the Holding Company will have no direct subsidiaries other than the Company. (vii) The Company has good and marketable title to all assets material to its business and to those assets described in the Prospectus as owned by it, free and clear of all material liens, charges, encumbrances or restrictions, except for liens for taxes not yet due, except as described in the Prospectus and except as could not in the aggregate have a material adverse effect upon the operations or financial condition of the Holding Company and the Company taken as a whole; and all of the leases and subleases material to the operations or financial condition of the Company, under which it holds properties, including those described in the Prospectus, are in full force and effect as described therein. (viii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary actions on the part of each of the Holding Company and the Company, and this Agreement is a valid and binding obligation with valid execution and delivery by each of the Holding Company and the Company, enforceable in accordance with its terms (except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally or the rights of creditors of savings and loan holding companies the accounts of whose subsidiaries are insured by the FDIC or by general equity principles, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except to the extent that the provisions of Sections 8 and 9 hereof may be unenforceable as against public policy or pursuant to Section 23A of the Federal Reserve Act, 12 U.S.C. Section 371c ("Section 23A")). (ix) Except as described in the Prospectus, there is no litigation or governmental proceeding pending or, to the best knowledge of the Holding Company or the Company, threatened against or involving the Holding Company, the Company or any of their respective assets which individually or in the aggregate would reasonably be expected to have a material adverse effect on the condition (financial or otherwise), results of operations and business, including the assets and properties, of the Holding Company and the Company, taken as a whole. 6 United Community Financial Corp. Sales Agency Agreement Page 6 (x) The Holding Company and the Company have received the opinion of Vorys, Sater, Seymour and Pease, LLP to the effect that the Conversion will constitute a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and that the Conversion will not be a taxable transaction for the Holding Company or the Company under the income tax laws of Ohio. The facts relied upon in such opinions are accurate and complete. (xi) Each of the Holding Company and the Company has all such corporate power, authority, authorizations, approvals and orders as may be required to enter into this Agreement and to carry out the provisions and conditions hereof, subject to the limitations set forth herein and subject to the satisfaction of certain conditions imposed by the OTS in connection with its approval Conversion Application and the H-(e)1-S application and the Ohio Division in connection with its approval of the Conversion Application and Holding Company Application, and except as may be required under the securities, or "blue sky," laws of various jurisdictions, and in the case of the Holding Company, as of the Closing Date, will, to the best knowledge of the Company, have such approvals and orders to issue and sell the Shares to be sold by the Holding Company as provided herein, and in the case of the Company, as of the Closing Date, will, to the knowledge of the Holding Company, have such approvals and orders to issue and sell the Shares of its Common Stock to be sold to the Holding Company as provided in the Plan, subject to the issuance of an amended charter in the form required for an Ohio-chartered stock savings associations (the "Stock Charter"), the form of which Stock Charter has been approved by the Ohio Division. (xii) Neither the Holding Company nor the Company is in violation of any rule or regulation of the Ohio Division, OTS or FDIC that could reasonably be expected to result in any enforcement action against the Holding Company, the Company or their respective officers or directors that could reasonably be expected to have a material adverse effect on the condition (financial or otherwise), operations, businesses, assets or properties of the Holding Company and the Company, taken as a whole. (xiii) The financial statements and any related notes or schedules which are included in the Registration Statement and the Prospectus fairly present the financial condition, income, retained earnings and cash flows of the Company at the respective dates thereof and for the respective periods covered thereby and comply as to form with the applicable accounting requirements of the SEC 7 United Community Financial Corp. Sales Agency Agreement Page 7 Regulations and the applicable accounting regulations of the OTS. Such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as set forth therein, and such financial statements are consistent with financial statements and other reports filed by the Company with supervisory and regulatory authorities except as such generally accepted accounting principles may otherwise require. The tables in the Prospectus accurately present the information purported to be shown thereby at the respective dates thereof and for the respective periods therein. (xiv) There has been no material change in the condition (financial or otherwise), results of operations or business, including assets and properties, of the Holding Company and the Company, taken as a whole, since the latest date as of which such condition is set forth in the Prospectus, except as set forth therein; and the capitalization, assets, properties and business of each of the Holding Company and the Company conform in all material respects to the descriptions thereof contained in the Prospectus. Neither the Holding Company nor the Company has any material liabilities of any kind, contingent or otherwise, except as set forth in the Prospectus. (xv) There has been no breach or default (or the occurrence of any event which, with notice or lapse of time or both, would constitute a default) under, or creation or imposition of any lien, charge or other encumbrance upon any of the properties or assets of the Holding Company or the Company pursuant to any of the terms, provisions or conditions of, any agreement, contract, indenture, bond, debenture, note, instrument or obligation to which the Holding Company or the Company is a party or by which any of them or any of their respective assets or properties may be bound or is subject, or violation of any governmental license or permit or any enforceable published law, administrative regulation or order or court order, writ, injunction or decree, which breach, default, encumbrance or violation would have a material adverse effect on the condition (financial or otherwise), operations, business, assets or properties of the Holding Company and the Company taken as a whole; all agreements which are material to the condition (financial or otherwise), results of operations or business of the Holding Company and the Company taken as a whole are in full force and effect, and no party to any such agreement has instituted or, to the best knowledge of the Holding Company and the Company, threatened any action or proceeding wherein the Holding Company or the Company would be alleged to be in default thereunder. 8 United Community Financial Corp. Sales Agency Agreement Page 8 (xvi) Neither the Holding Company nor the Company is in violation of its respective Articles of Incorporation, constitution, charter or bylaws. The execution and delivery hereof and the consummation of the transactions contemplated hereby by the Holding Company and the Company do not conflict with or result in a breach of the Articles of Incorporation, charter, constitution or bylaws of the Holding Company or the Company (in either mutual or stock form) or constitute a material breach of or default (or an event which, with notice or lapse of time or both, would constitute a default) under, give rise to any right of termination, cancellation or acceleration contained in, or result in the creation or imposition of any lien, charge or other encumbrance upon any of the properties or assets of the Holding Company or the Company pursuant to any of the terms, provisions or conditions of, any material agreement, contract, indenture, bond, debenture, note, instrument or obligation to which the Holding Company or the Company is a party or violate any governmental license or permit or any enforceable published law, administrative regulation or order or court order, writ, injunction or decree (subject to the satisfaction of certain conditions imposed by the Director of the OTS and Ohio Division in connection with his approval of the Conversion Application or the H-(e)1-S, which breach, default, encumbrance or violation would have a material adverse effect on the condition (financial or otherwise), operations or business of the Holding Company and the Company taken as a whole. (xvii) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus and prior to the Closing Date (as hereinafter defined), except as otherwise may be indicated or contemplated therein (including any judgment resulting from litigation described in the Prospectus), neither the Holding Company nor the Company has issued any equity securities which will remain issued at the Closing Date or incurred any liability or obligation, direct or contingent, or borrowed money, except liabilities, obligations or borrowings in the ordinary course of business, or entered into any other transaction not in the ordinary course of business and consistent with prior practices, which is material in light of the business of the Holding Company and the Company, taken as a whole. (xviii) Upon consummation of the Conversion, the authorized, issued and outstanding equity capital of the Holding Company shall be within the range as set forth in the Prospectus under the caption "Capitalization," and no Common Stock of the Holding Company shall be outstanding immediately prior to the Closing Date; the issuance and the sale of the Shares of the Holding Company have been duly authorized by all necessary action of the Holding Company and 9 United Community Financial Corp. Sales Agency Agreement Page 9 approved by the OTS, and, when issued in accordance with the terms of the Plan and paid for, shall be validly issued, fully paid and nonassessable and shall conform to the description thereof contained in the Prospectus; the issuance of the Shares is not subject to preemptive rights; and purchasers of the Shares from the Holding Company, upon issuance thereof against payment therefor, will acquire such Shares free and clear of all claims, encumbrances, security interests and liens of the Holding Company whatsoever. The certificates representing the Shares will conform in all material respects with the requirements of applicable laws and regulations. The issuance and sale of the capital stock of the Company to the Holding Company has been duly authorized by all necessary action of the Company and the Holding Company and appropriate regulatory authorities (subject to the satisfaction of various conditions imposed by the OTS or the Ohio Division in connection with its approval of the Conversion Application, the Holding Company Application and the H-(e)1-S, and such capital stock, when issued in accordance with the terms of the Plan, will be fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus. (xix) No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement or the issuance of the Shares, except for the declaration of effectiveness of any required post-effective amendment by the Commission and approval thereof by the OTS, approval of the Holding Company's application on H-(e)1-S by the OTS, and the approval of the Conversion Application and Holding Company Application by the Ohio Division and the issuance of the stock charter and constitution by the Ohio Division and as may be required under the securities laws of various jurisdictions. (xx) All contracts and other documents required to be filed as exhibits to the Registration Statement or the Conversion Application, Holding Company Application and the H-(e)1-S have been filed with the Commission, the Ohio Division and the OTS, as the case may be. (xxi) Deloitte & Touche, LLP which has audited the financial statements of the Company at December 31, 1997 and 1998 and for the years ended December 31, 1997, 1996 and 1995 included in the Prospectus is an independent public accountant within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountant. 10 United Community Financial Corp. Sales Agency Agreement Page 10 (xxii) The Holding Company and the Company have timely filed all required federal, state and local franchise tax returns, and no deficiency has been asserted with respect to such returns by any taxing authorities, and the Holding Company and the Company have paid all taxes that have become due and, to the best of their knowledge, have made adequate reserves for similar future tax liabilities, except where any failure to make such filings, payments and reserves, or the assertion of such a deficiency, would not have a material adverse effect on the condition of the Holding Company and the Company, taken as a whole or in the case of taxes which the Company is contesting in good faith. (xxiii) All of the loans represented as assets of the Company on the most recent financial statements of the Company included in the Prospectus meet or are exempt from all requirements of federal, state or local law pertaining to lending, including without limitation truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material adverse effect on the Holding Company and the Company, taken as a whole. (xxiv) The records of account holders, depositors, borrowers and other members of the Company delivered to Trident by the Company or its agent for use during the Conversion have been prepared or reviewed by the Company and, to the best knowledge of the Holding Company and the Company, are reliable and accurate. (xxv) None of the Holding Company, the Company or the employees of the Holding Company or the Company, has made any payment of funds to the Holding Company or the Company prohibited by law, and no funds of the Holding Company or the Company have been set aside to be used for any payment prohibited by law. (xxvi) There are no actions, suits, regulatory investigations or other proceedings pending or, to the best knowledge of the Holding Company or the Company, threatened against the Holding Company or the Company relating to environmental protection. To the best knowledge of the Holding Company and the Company, no disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has been caused by the Holding Company or the Company or, to the best knowledge of the Holding 11 United Community Financial Corp. Sales Agency Agreement Page 11 Company or the Company, has occurred on, in or at any of the facilities or properties of the Holding Company or the Company, except such disposal, release or discharge which would not have a material adverse effect on the Holding Company or the Company, taken as a whole. (xxvii) At the Closing Date, the Holding Company and the Company will have completed the conditions precedent to, and shall have conducted the Conversion in all material respects in accordance with, the Plan, the HOLA and regulations promulgated thereunder, Ohio law and regulation and all other applicable laws, regulations, published decisions and orders, including all terms, conditions, requirements and provisions precedent to the Conversion imposed by the OTS and the Ohio Division. (b) Trident represents and warrants to the Holding Company and the Company that: (i) Trident is registered as a broker-dealer with the Commission, and is in good standing with the Commission and the NASD. (ii) Trident is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, and is licensed to conduct business in the State of Ohio with full corporate power and authority to provide the services to be furnished to the Holding Company and the Company hereunder. (iii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Trident, and this Agreement is a legal, valid and binding obligation of Trident, enforceable in accordance with its terms (except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally or the rights of creditors of registered broker-dealers, the accounts of whose may be protected by the Securities Investor Protection Corporation or by general equity principles, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except to the extent that the provisions of Sections 8 and 9 hereof may be unenforceable as against public policy or pursuant to Section 23A). (iv) Each of Trident and, to Trident's knowledge, its employees, agents and representatives who shall perform any of the services required hereunder to be performed by Trident shall be duly authorized and shall have all licenses, 12 United Community Financial Corp. Sales Agency Agreement Page 12 approvals and permits necessary to perform such services, and Trident is a registered selling agent in the jurisdictions in which the Common Stock is to be offered and sold and will remain registered in such jurisdictions in which the Holding Company is relying on such registration for the sale of the Shares, until the Conversion is consummated or terminated. (v) The execution and delivery of this Agreement by Trident, the fulfillment of the terms set forth herein and the consummation of the transactions contemplated hereby shall not violate or conflict with the corporate charter or bylaws of Trident or violate, conflict with or constitute a breach of, or default (or an event which, with notice or lapse of time, or both, would constitute a default) under, any material agreement, indenture or other instrument by which Trident is bound or under any governmental license or permit or any law, administrative regulation, authorization, approval or order or court decree, injunction or order. (vi) Any funds received by Trident to purchase Common Stock will be handled in accordance with Rule 15c2-4 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (vii) There is not now pending or, to Trident's knowledge, threatened against Trident any action or proceeding before the Commission, the NASD, any state securities commission or any state or federal court concerning Trident's activities as a broker-dealer. 3. EMPLOYMENT OF TRIDENT; SALE AND DELIVERY OF THE SHARES. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Holding Company and the Company hereby employ Trident as their agent to utilize its best efforts in assisting the Holding Company with the Holding Company's sale of the Shares in the Subscription Offering and Community Offering. Trident will assist the Holding Company and the Company in: (i) training and educating their employees regarding the mechanics and regulatory requirements of the Conversion; (ii) keeping records of all stock subscriptions and allocating Shares in the event of an oversubscription; (iii) obtaining proxies from members of the Company with respect to the Special Meeting at which the Plan is submitted to a vote; and (iv) assisting with the Community Offering. The employment of Trident hereunder shall terminate (a) forty-five (45) days after the Offerings close, unless the Holding Company and the Company, with the approval of the OTS, are permitted to extend such period of time, or (b) upon consummation of the Conversion, whichever date shall first occur. In the event the Holding Company is unable to sell a minimum of __________ Shares (or such lesser amount as the OTS may permit) within the period herein provided, this Agreement 13 United Community Financial Corp. Sales Agency Agreement Page 13 shall terminate, and the Holding Company and the Company shall refund promptly to any persons who have subscribed for any of the Shares, the full amount which it may have received from them, together with interest as provided in the Prospectus, and no party to this Agreement shall have any obligation to the other party hereunder, except as set forth in Sections 6, 8(a) and 9 hereof. Appropriate arrangements for placing the funds received from subscriptions for Shares in special interest-bearing accounts with the Company until all Shares are sold and paid for were made prior to the commencement of the Subscription Offering, with provision for prompt refund to the purchasers as set forth above, or for delivery to the Holding Company if all Shares are sold. If all conditions precedent to the consummation of the Conversion are satisfied, including the sale of all Shares required by the Plan to be sold, the Holding Company agrees to issue or have issued such Shares and to release for delivery certificates to subscribers thereof for such Shares on the Closing Date against payment to the Holding Company by any means authorized pursuant to the Prospectus, at the principal office of the Holding Company at 275 Federal Plaza West, Youngstown, Ohio 44501-1111 or at such other place as shall be agreed upon between the parties hereto. The date upon which Trident is paid the compensation due hereunder is herein called the "Closing Date." Trident agrees either (a) upon receipt of executed order forms of subscribers to forward, for deposit in a segregated account, the offering price of the Common Stock ordered on or before twelve noon on the next business day following receipt or execution of an order form by Trident to the Company or (b) to solicit indications of interest in which event (i) Trident will subsequently contact any potential subscriber indicating interest to confirm the interest and give instructions to execute and return an order form or to receive authorization to execute the order form on the subscriber's behalf, (ii) Trident will mail acknowledgments of receipt of orders to each subscriber confirming interest on the business day following such confirmation, (iii) Trident will debit accounts of such subscribers on the third business day ("debit date") following receipt of the confirmation referred to in (i), and (iv) Trident will forward completed order forms together with such funds to the Company on or before twelve noon on the next business day following the debit date for deposit in a segregated account. Trident acknowledges that if the procedure in (b) is adopted, subscribers' funds are not required to be in their accounts until the debit date. In addition to the expenses specified in Section 6 hereof, Trident shall receive the following compensation for its services hereunder: (a) Except for shares purchased by the Company's executive officers and directors, and their associates, and by any employee benefit plan for which no 14 United Community Financial Corp. Sales Agency Agreement Page 14 commission shall be paid: (i) a commission equal to 0.95% of the aggregate dollar amount of stock sold to eligible account holders, supplemental eligible account holders and other members and persons in the Community Offering; excluding any shares sold to the Company's directors, executive officers and employee benefit plans, and associates of the Company's directors and executive officers and (ii) a commission to be agreed upon by Trident and the Holding Company for Shares sold by other member firms of the NASD through a selected dealers arrangement in the Syndicated Community Offering. All such fees are to be payable in next-day funds to Trident on the Closing Date. (b) Trident shall be reimbursed for allocable expenses, including but not limited to travel, communications, legal fees and postage, incurred by it whether or not the Offerings are successfully completed; provided, however, that reimbursable out of pocket expenses shall not exceed $10,000 and legal fees exclusive of disbursements will not exceed $50,000 without the prior permission from the Company (excluding legal fees and expenses to comply with "blue sky" requirements), and that neither the Holding Company or the Company shall pay or reimburse Trident for any of the foregoing expenses accrued after Trident shall have notified the Holding Company or the Company of its election to terminate this Agreement pursuant to Section 11 hereof or after such time as the Holding Company or the Company shall have given notice in accordance with Section 12 hereof that Trident is in breach of this Agreement. Full payment to defray Trident's reimbursable expenses shall be made in next-day funds on the Closing Date or, if the Conversion is not completed and is terminated for any reason, within ten (10) business days of receipt by the Holding Company of a written request from Trident for reimbursement of its expenses. Trident acknowledges receipt of $5,000 advance payment from the Company which shall be credited against the total reimbursement due Trident hereunder. (c) Notwithstanding the limitations on reimbursement of Trident for allocable expenses provided in the immediately preceding paragraph (b), in the event that a resolicitation or other event causes the Offerings to be extended beyond their original expiration date, Trident shall be reimbursed for its reasonable allocable expenses incurred during such extended period. The Holding Company shall pay any stock issue and transfer taxes which may be payable with respect to the sale of the Shares. The Holding Company and the Company shall also pay all reasonable expenses of the Conversion incurred by them or on their prior approval including but not limited to their attorneys' fees, NASD filing fees, and attorneys' fees relating to any required state securities laws research and filings, telephone charges, air freight, rental equipment, supplies, transfer agent charges, fees relating to auditing and accounting and costs of printing all documents necessary in connection with the Conversion. 15 United Community Financial Corp. Sales Agency Agreement Page 15 4. OFFERING. Subject to the provisions of Section 7 hereof, Trident is assisting the Holding Company on a best efforts basis in offering a minimum of ____________ and a maximum of _____________ Shares, with the possibility of offering up to ___________ shares (except as the OTS may permit to be decreased or increased) in the Subscription and Community Offerings. The Shares are to be offered to the public at the price set forth on the cover page of the Prospectus and the first page of this Agreement. 5. FURTHER AGREEMENTS. The Holding Company and the Company jointly and severally covenant and agree that: (a) The Holding Company shall deliver to Trident, from time to time, such number of copies of the Prospectus as Trident reasonably may request. The Holding Company authorizes Trident to use the Prospectus in any lawful manner in connection with the offer and sale of the Shares. (b) The Holding Company will notify Trident immediately upon discovery, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement becomes effective or any supplement to the Prospectus has been filed, (ii) of the issuance by the Commission of any stop order relating to the Registration Statement or of the initiation or the threat of any proceedings for that purpose, (iii) of the receipt of any notice with respect to the suspension of the qualification of the Shares for offering or sale in any jurisdiction, and (iv) of the receipt of any comments (other than those of a non-substantive nature) from the staff of the Commission relating to the Registration Statement. If the Commission enters a stop order relating to the Registration Statement at any time, the Holding Company will make every reasonable effort to obtain the lifting of such order at the earliest possible moment. (c) During the time when a prospectus is required to be delivered under the Act, the Holding Company will comply so far as it is able with all requirements imposed upon it by the Act, as now in effect and hereafter amended, and by the SEC Regulations, as from time to time in force, so far as necessary to permit the continuance of offers and sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If during the period when the Prospectus is required to be delivered in connection with the offer and sale of the Shares any event relating to or affecting the Holding Company and the Company, taken as a whole, shall occur as a result of which it is necessary, in the opinion of counsel for Trident, with the concurrence of counsel to the Holding Company, to amend or supplement the Prospectus in order to make the Prospectus not false or misleading in light of the circumstances existing at the time it is delivered to a purchaser of the Shares, the Holding Company forthwith shall prepare and 16 United Community Financial Corp. Sales Agency Agreement Page 16 furnish to Trident a reasonable number of copies of an amendment or amendments or of a supplement or supplements to the Prospectus (in form and substance satisfactory to counsel for Trident) which shall amend or supplement the Prospectus so that, as amended or supplemented, the Prospectus shall not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser of the Shares, not misleading. The Holding Company will not file or use any amendment or supplement to the Registration Statement or the Prospectus of which Trident has not first been furnished a copy or to which Trident shall reasonably object after having been furnished such copy. For the purposes of this subsection the Holding Company and the Company shall furnish such information with respect to themselves as Trident from time to time may reasonably request. (d) The Holding Company and the Company have taken or will take all reasonable necessary action as may be required to qualify or register the Shares for offer and sale by the Holding Company under the securities or blue sky laws of such jurisdictions as Trident and the Holding Company may agree upon; provided, however, that the Holding Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any such jurisdiction. In each jurisdiction where such qualification or registration shall be effected, the Holding Company, unless Trident agrees that such action is not necessary or advisable in connection with the distribution of the Shares, shall file and make such statements or reports as are, or reasonably may be, required by the laws of such jurisdiction. (e) Appropriate entries will be made in the financial records of the Company sufficient to establish a liquidation account for the benefit of eligible account holders and supplemental eligible account holders in accordance with the requirements of the OTS. (f) The Holding Company will file a registration statement for the Common Stock under Section 12(g) of the Exchange Act, prior to completion of the stock offering pursuant to the Plan and shall request that such registration statement be effective upon completion of the Conversion. The Holding Company shall maintain the effectiveness of such registration for a minimum period of three years or for such shorter period as may be required by applicable law. (g) The Holding Company will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the regulations promulgated under the Act) covering a twelve-month period 17 United Community Financial Corp. Sales Agency Agreement Page 17 beginning not later than the first day of the Holding Company's fiscal quarter next following the effective date (as defined in said Rule 158) of the Registration Statement. (h) For a period of three (3) years from the date of this Agreement (unless the Common Stock shall have been deregistered under the Exchange Act), the Holding Company will furnish to Trident, as soon as publicly available after the end of each fiscal year, a copy of its annual report to shareholders for such year; and the Holding Company will furnish to Trident (i) as soon as publicly available, a copy of each report or definitive proxy statement of the Holding Company filed with the Commission under the Exchange Act or mailed to shareholders, and (ii) from time to time, such other public information concerning the Holding Company as Trident may reasonably request. (i) The Holding Company shall use the net proceeds from the sale of the Shares consistently with the manner set forth in the Prospectus. (j) The Holding Company shall not deliver the Shares until each and every condition set forth in Section 7 hereof has been satisfied, unless such condition is waived by Trident. (k) The Holding Company shall advise Trident, if necessary, as to the allocation of deposits, in the case of eligible account holders and votes, in the case of other members, and of the Shares in the event of an oversubscription and shall provide Trident final instructions as to the allocation of the Shares ("Allocation Instructions") in such event and such information shall be accurate and reliable. Trident shall be entitled to rely on such instructions and shall have no liability in respect of its reliance thereon, including without limitation, no liability for or related to any denial or grant of a subscription in whole or in part. (l) The Holding Company and the Company will take such actions and furnish such information as are reasonably requested by Trident in order for Trident to ensure compliance with the NASD's "Interpretation Relating to Free-Riding and Withholding." 6. PAYMENT OF EXPENSES. Whether or not the Conversion is consummated, the Holding Company and the Company shall pay or reimburse Trident for (a) all filing fees paid or incurred by Trident in connection with all filings with the NASD with respect to the Subscription and Community Offerings and, (b) if the Holding Company is unable to sell a minimum of ___________ Shares or such lesser amount as the OTS may permit or the Conversion is otherwise terminated, the Holding Company and the Company shall reimburse Trident for allocable expenses incurred by Trident relating to the offering of the Shares as provided in 18 United Community Financial Corp. Sales Agency Agreement Page 18 Section 3 hereof; provided, however, that neither the Holding Company nor the Company shall pay or reimburse Trident for any of the foregoing expenses accrued after Trident shall have notified the Holding Company or the Company of its election to terminate this Agreement pursuant to Section 11 hereof or after such time as the Holding Company or the Company shall have given notice in accordance with Section 12 hereof that Trident is in breach of this Agreement. 7. CONDITIONS OF TRIDENT'S OBLIGATIONS. Except as may be waived by Trident, the obligations of Trident as provided herein shall be subject to the accuracy of the representations and warranties contained in Section 2 hereof as of the date hereof and as of the Closing Date, to the performance by the Holding Company and the Company of their obligations hereunder and to the following conditions: (a) At the Closing Date, Trident shall receive the favorable opinion of Vorys, Sater, Seymour and Pease, LLP, special counsel for the Holding Company and the Company, dated the Closing Date, addressed to Trident, in form and substance reasonably satisfactory to counsel for Trident and to the effect that: (i) the Holding Company has been duly incorporated and is validly existing as a corporation under the laws of the State of Ohio, and the Company is validly existing as a savings association in mutual form under the laws of the State of Ohio, each with full corporate power and authority to own its properties and conduct its business as described in the Prospectus; (ii) the Company is a member of the Federal Home Loan Bank, and the deposit accounts of the Company are insured by the SAIF up to the applicable legal limits; (iii) to the Actual Knowledge of such counsel, the activities of the Company as such activities are described in the Prospectus are permitted under federal and Ohio law to subsidiaries of an Ohio business corporation and the activities of the Company's wholly-owned service corporation as described in the Prospectus are permitted for a service corporation of an Ohio chartered savings association under Ohio law and to the extent applicable under the HOLA; (iv) the Plan complies with, and to such counsel's Actual Knowledge, the Conversion has been effected in all material respects in accordance with, Ohio law, the HOLA and the regulations promulgated thereunder (except with respect to the securities or "blue sky" laws of various states and except for compliance with post-Closing conditions in the Ohio Division and OTS approvals as to which 19 United Community Financial Corp. Sales Agency Agreement Page 19 no opinion need be rendered); to such counsel's Actual Knowledge, all of the terms, conditions, requirements and provisions with respect to the Plan and the Conversion imposed by the Ohio Division and OTS, except with respect to the Conversion Application, the Prospectus and the Proxy Statement (which are covered by clause (xix) below) and the filing or submission of certain required post-Conversion reports or other materials by the Holding Company or the Company, have been complied with by the Holding Company and the Company in all material respects; and, to the Actual Knowledge of such counsel, no person has sought to obtain regulatory or judicial review of the final action of the Ohio Division and OTS in approving the Plan; (v) the Holding Company has authorized Common Stock as set forth in the Registration Statement and the Prospectus, and the description of such Common Stock in the Registration Statement and the Prospectus is accurate in all material respects; (vi) the issuance and sale of the Shares have been duly and validly authorized by all necessary corporate action on the part of the Holding Company; the Shares, upon receipt of payment and issuance in accordance with the terms of the Plan and this Agreement, will be validly issued, fully paid, nonassessable and free of preemptive rights, and purchasers of the Shares from the Holding Company, upon issuance thereof against payment therefor, will acquire such Shares free and clear of all claims, encumbrances, security interests and liens created by the Holding Company; (vii) the form of certificate used to evidence the Shares is in proper form and complies in all material respects with applicable Ohio law; (viii) the issuance and sale of the capital stock of the Company to the Holding Company have been duly authorized by all necessary corporate action of the Company and the Holding Company and have received the approval of the Ohio Division and OTS, and such capital stock, upon receipt of payment and issuance in accordance with the terms of the Plan, will be validly issued, fully paid and nonassessable and owned of record and, to the Actual Knowledge of such counsel, beneficially by the Holding Company; (ix) subject to the satisfaction of the conditions to the Ohio Division of the Conversion Application and Holding Company Application and the OTS's approval of the Conversion Application and H-(e)1-S, no further approval, authorization, consent or other order of any federal or state regulatory agency, the 20 United Community Financial Corp. Sales Agency Agreement Page 20 Ohio Division or the OTS is required in connection with the execution and delivery of this Agreement and the consummation of the Conversion, except with respect to the issuance to the Company of the Stock Charter and constitution by the Ohio Division, except as may be required under the "blue sky" laws of various jurisdictions and except as may be required under the rules and regulations of the NASD; (x) to the Actual Knowledge of such counsel, the Company has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business by federal laws and regulations as such business is described in the Prospectus, all such licenses, permits and other governmental authorizations are in full force and effect and the Company is in all material respects complying therewith, except where the failure to hold such licenses, permits or governmental authorizations or the failure to so comply would not have a material adverse effect on the Holding Company and the Company, taken as a whole; (xi) to the Actual Knowledge of such counsel, there are no material legal or governmental proceedings pending or threatened against or involving the assets of the Holding Company or the Company (provided that for this purpose such counsel need not regard any litigation or governmental procedure to be "threatened" unless the potential litigant or government authority has manifested to the management of the Holding Company or the Company, or to such counsel, a present intention to initiate such litigation or proceeding); (xii) to the Actual Knowledge of such counsel, the execution and delivery of this Agreement and the consummation of the Conversion by the Holding Company and the Company do not constitute a material breach of or default (or an event which, with notice or lapse of time or both, would constitute a default) under, nor give rise to any right of termination, cancellation or acceleration contained in, or result in the creation or imposition of any lien, charge or other encumbrance upon any of the properties or assets of the Holding Company or the Company pursuant to any of the terms, provisions or conditions of, any material agreement, contract, indenture, bond, debenture, note, instrument or obligation to which the Holding Company or the Company is a party or violate any federal governmental license or permit or any federal law, administrative regulation or order or court order, writ, injunction or decree (subject to the satisfaction of certain conditions imposed by the OTS or the Ohio Division), which breach, default, encumbrance or violation would have a material adverse 21 United Community Financial Corp. Sales Agency Agreement Page 21 effect on the condition (financial or otherwise), operations, business, assets or properties of the Holding Company and the Company, taken as a whole; and (xiii) to the Actual Knowledge of such counsel, there has been no material breach of any provision of the Holding Company's or the Company's Articles of Incorporation, constitution, charter or bylaws or breach or default (or the occurrence of any event which, with notice or lapse of time or both, would constitute a default) under any agreement, contract, indenture, bond, debenture, note, instrument or obligation to which the Holding Company or the Company is a party or by which any of them or any of their respective assets or properties may be bound, or a violation of any court order, writ, injunction or decree which breach, default, or violation would have a material adverse effect on the condition (financial or otherwise), operations, business, assets or properties of the Holding Company and the Company, taken as a whole; (xiv) the execution and delivery of this Agreement and the consummation of the Conversion have been duly and validly authorized by all necessary corporate action on the part of each of the Holding Company and the Company; (xv) this Agreement is a legal, valid and binding obligation of each of the Holding Company and the Company, enforceable in accordance with its terms except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, reorganization, receivership, conservatorship or other laws relating to or affecting the enforcement of creditors' rights generally or the rights of creditors of depository institutions whose accounts are insured by the FDIC savings and loan holding companies the accounts of whose subsidiaries are insured by the FDIC, (ii) by general equity principles, regardless of whether such enforceability is considered in a proceeding in equity or at law, or (iii) laws relating to the safety and soundness of insured depository institutions and their affiliates and except to the extent that the provisions of Sections 8 and 9 hereof may be unenforceable as against public policy or applicable law, including but not limited to Section 23A (as to which no opinion need be rendered); (xvi) the statements in the Prospectus and incorporated by reference in the Proxy Statement under the captions "Regulation," "Dividends," "Restrictions on Acquisitions of the Holding Company" and "Description of Capital Stock," insofar as they are, or refer to, statements of law or legal conclusions (excluding financial data included therein, as to which an opinion need not be expressed), have been prepared or reviewed by counsel and are correct in all material respects; 22 United Community Financial Corp. Sales Agency Agreement Page 22 (xvii) the Conversion Application has been approved by the OTS and Ohio Division, and the Prospectus and the Proxy Statement have been authorized for use by the OTS; the Registration Statement and any post-effective amendment thereto has been declared effective by the Commission, and to the Actual Knowledge of such counsel, no proceedings are pending by or before the Commission, the Ohio Division or the OTS seeking to revoke or rescind the orders declaring the Registration Statement effective or approving the Conversion Application, or, to the Actual Knowledge of such counsel, are contemplated or threatened; (xviii) the execution and delivery of this Agreement and the consummation of the Conversion by the Holding Company and the Company do not conflict with or result in a breach of the Articles of Incorporation, constitution, charter or bylaws of the Holding Company or the Company (in either mutual or stock form); and (xix) at the time the Conversion Application, the Registration Statement, the Prospectus and the Proxy Statement, in each case as amended, were approved or declared effective, such documents complied as to form in all material respects with the requirements of the Act, the HOLA and the SEC Regulations and rules and regulations of the OTS and the Ohio Division, as the case may be (except as to information with respect to Trident included therein and financial statements, notes to financial statements, financial tables and other financial and statistical data, and stock valuation information, included therein, as to which an opinion need not be expressed); to such counsel's Actual Knowledge, all documents and exhibits required to be filed with the Conversion Application and the Registration Statement have been so filed and the descriptions in the Conversion Application and the Registration Statement of such documents and exhibits are accurate in all material respects. In rendering such opinions, such counsel may rely as to matters of fact on certificates of officers and directors of the Holding Company and the Company and certificates of public officials delivered pursuant hereto. Such counsel may assume that any agreement is the valid and binding obligation of any parties to such agreement other than the Holding Company and the Company. Such opinion may be governed by, and interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991), and, as a consequence, such opinion is subject to the qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and it should be read in conjunction therewith. 23 United Community Financial Corp. Sales Agency Agreement Page 23 In addition, the General Qualifications set forth in the Accord apply to the opinions set forth in such opinion, and the term "Actual Knowledge" as used therein shall have the meaning set forth in the Accord. Such opinion may be limited to present statutes, regulations and judicial interpretations and to facts as they presently exist; in rendering such opinion, such counsel need assume no obligation to revise or supplement it should the present laws be changed by legislative or regulatory action, judicial decision or otherwise which occur subsequent to the date of the opinion; and such counsel need express no view, opinion or belief with respect to whether any proposed or pending legislation, if enacted, or any regulations or any policy statements issued by any regulatory agency, whether or not promulgated pursuant to any such legislation, would affect the validity of the execution and delivery by the Holding Company and the Company of this Agreement or the issuance of the Shares. Further, in rendering such opinions, Vorys, Sater, Seymour and Pease, LLP will opine solely as to matters of Federal Securities and Banking law and Ohio law. (c) At the Closing Date, Trident shall receive the letter of Vorys, Sater, Seymour and Pease, LLP, special counsel for the Holding Company and the Company, dated the Closing Date, addressed to Trident, in form and substance reasonably satisfactory to counsel for Trident and to the effect that: based on such counsel's participation in conferences with representatives of the Holding Company, the Company, its counsel, the independent appraiser, the independent certified public accountants, Trident and its counsel, review of documents and understanding of applicable law (including the requirements of Form S-1 and the character of the Registration Statement contemplated thereby) and the experience such counsel has gained in its practice under the Act, nothing has come to such counsel's attention that would lead it to believe that the Registration Statement, as amended or supplemented (except as to information in respect of Trident contained therein and except as to the financial statements, notes to financial statements, financial tables and other financial and statistical data and stock valuation information contained therein, as to which counsel need express no view), at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, as amended or supplemented (except as to information in respect of Trident contained therein and except as to financial statements, notes to financial statements, financial tables and other financial and statistical data and stock valuation information contained therein as to which such counsel need express no view), as of its date and at the Closing Date, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (in making this statement such counsel may state that it has not undertaken to verify independently the information 24 United Community Financial Corp. Sales Agency Agreement Page 24 in the Registration Statement or Prospectus and, therefore, does not assume any responsibility for the accuracy of completeness or fairness thereof). (d) Counsel for Trident shall have been furnished such documents as they reasonably may require for the purpose of enabling them to review or pass upon the matters required by Trident, and for the purpose of evidencing the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained, including but not limited to, resolutions of the Board of Directors of the Holding Company and the Company regarding the authorization of this Agreement and the transactions contemplated hereby. (e) Prior to and at the Closing Date, in the reasonable opinion of Trident, (i) there shall have been no material adverse change in the condition, financial or otherwise, business or results of operations of the Holding Company and the Company, taken as a whole, since the latest date as of which such condition is set forth in the Prospectus, except as referred to therein; (ii) there shall have been no transaction entered into by the Holding Company or the Company after the latest date as of which the financial condition of the Holding Company and the Company is set forth in the Prospectus other than transactions referred to or contemplated therein, transactions in the ordinary course of business, and transactions which are not materially adverse to the Holding Company and the Company, taken as a whole; (iii) none of the Holding Company or the Company shall have received from the OTS or Commission any direction (oral or written) to make any change in the method of conducting their respective businesses which is material and adverse to the business of the Holding Company and the Company, taken as a whole, with which they have not complied; (iv) except as noted in the Prospectus, no action, suit or proceeding, at law or in equity or before or by any federal or state commission, board or other administrative agency, shall be pending or threatened against the Holding Company or the Company or affecting any of their respective assets, wherein an unfavorable decision, ruling or finding would have a material adverse effect on the business, operations, financial condition or income of the Holding Company and the Company, taken as a whole; and (v) the Shares shall have been qualified or registered for offering and sale by the Holding Company under the securities or blue sky laws of such jurisdictions as Trident and the Holding Company shall have agreed upon. (f) At the Closing Date, Trident shall receive a certificate of the principal executive officer and the principal financial officer of each of the Holding Company and the Company, dated the Closing Date, to the effect that: (i) they have examined the Prospectus and, at the time the Prospectus became authorized by the Holding Company for use, the Prospectus did not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the 25 United Community Financial Corp. Sales Agency Agreement Page 25 circumstances under which they were made, not misleading with respect to the Holding Company or the Company; (ii) since the date the Prospectus became authorized by the Holding Company for use, no event has occurred which should have been set forth in an amendment or supplement to the Prospectus which has not been so set forth, including specifically, but without limitation, any material change in the business, condition (financial or otherwise) or results of operations of the Holding Company or the Company and, the conditions set forth in clauses (ii) through (iv) inclusive of subsection (e) of this Section 7 have been satisfied; (iii) to the best knowledge of such officers, no order has been issued by the Commission or the OTS to suspend the Subscription Offering or the Community Offering or the effectiveness of the Prospectus, and no action for such purposes has been instituted or threatened by the Commission or the OTS; (iv) to the best knowledge of such officers, no person has sought to obtain review of the final actions of the Office approving the Plan; and (v) all of the representations and warranties contained in Section 2 of this Agreement are true and correct, with the same force and effect as though expressly made on the Closing Date. (g) At the Closing Date, Trident shall receive, among other documents: (i) copies of the letters from the OTS authorizing the use of the Prospectus and the Proxy Statement; (ii) if available, a copy of the order of the Commission declaring the Registration Statement effective; (iii) copies of the letters from the OTS evidencing the corporate existence of the Company; (iv) a copy of the letter from the appropriate Ohio authority evidencing the incorporation (and, if generally available from such authority, valid existence) of the Holding Company; (v) a copy of the Holding Company's Articles of Incorporation certified by the appropriate Ohio governmental authority; (vi) a copy of the OTS order approving the Conversion; (vii) a copy of the OTS letter authorizing the acquisition of the Company by the Holding Company; (viii) a copy of the letter from the OTS approving the use of the prospectus, proxy statement and offering materials; and (ix) such other documents as Trident may reasonably request and which are normal and customary documents to be provided at the Closing Date. (h) As soon as available after the Closing Date, Trident shall receive a certified copy of the Company's Stock Charter executed by the OTS. (i) Concurrently with the execution of this Agreement, Trident acknowledges receipt of a letter from Deloitte & Touche, LLP, independent certified public accountants, addressed to Trident and the Holding Company, in substance and form satisfactory to counsel for Trident, with respect to the financial statements and certain financial information contained in the Prospectus. 26 United Community Financial Corp. Sales Agency Agreement Page 26 (j) At the Closing Date, Trident shall receive a letter in form and substance satisfactory to counsel for Trident from Deloitte & Touche, LLP, independent certified public accountants, dated the Closing Date and addressed to Trident and the Holding Company, confirming the statements made by them in the letter delivered by them pursuant to the preceding subsection as of a specified date not more than three (3) business days prior to the Closing Date. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are, in the reasonable opinion of Trident and its counsel, satisfactory to Trident and its counsel. Any certificates signed by an officer or director of the Holding Company or the Company prepared for Trident's reliance and delivered to Trident or to counsel for Trident shall be deemed a representation and warranty by the Holding Company or the Company to Trident as to the statements made therein. If any condition to Trident's obligations hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled, Trident may terminate this Agreement or, if Trident so elects, may waive any such conditions which have not been fulfilled, or may extend the time of their fulfillment. If Trident terminates this Agreement as aforesaid, the Holding Company and the Company shall reimburse Trident for its expenses as provided in Section 3(b) hereof. 8. Indemnification. ---------------- (a) The Holding Company and the Company jointly and severally agree to indemnify and hold harmless Trident, its officers, directors and employees and each person, if any, who controls Trident within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever and shall further promptly reimburse such persons upon written demand for any legal or other expenses reasonably incurred by each or any of them in investigating, preparing to defend or defending against any such action, proceeding or claim (whether commenced or threatened) arising out of or based upon (A) any misrepresentation by the Holding Company or the Company in this Agreement or any breach of warranty by the Holding Company or the Company with respect to this Agreement or arising out of or based upon any untrue or alleged untrue statement of a material fact or the omission or alleged omission of a material fact required to be stated or necessary to make not misleading any statements contained in (i) the Registration Statement or the Prospectus or (ii) any application or other document or communication (in this Section 8 collectively called "Application") prepared or executed by or on behalf of the Holding Company or the Company or based upon (B) written information furnished by or on behalf of the Holding Company or the Company, whether or not filed in any jurisdiction, to effect the Conversion or qualify the Shares under the securities laws thereof or filed with the OTS or Commission, unless such statement or omission was 27 United Community Financial Corp. Sales Agency Agreement Page 27 made in reliance upon and in conformity with written information furnished to the Holding Company or the Company with respect to Trident by or on behalf of Trident expressly for use in the Prospectus or any amendment or supplement thereof or in any Application, as the case may be. (b) The Holding Company shall indemnify and hold Trident harmless for any liability whatsoever arising out of any records of account holders, depositors, and other members of the Company delivered to Trident by the Company or its agents for use during the Conversion. (c) Trident agrees to indemnify and hold harmless the Holding Company and the Company, their officers, directors and employees and each person, if any, who controls the Holding Company and the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Holding Company and the Company to Trident, but only with respect to (A) statements or omissions, if any, made in the Prospectus or any amendment or supplement thereof, in any Application or to a purchaser of the Shares in reliance upon, and in conformity with, written information furnished to the Holding Company or the Company with respect to Trident by or on behalf of Trident expressly for use in the Prospectus or in any Application; (B) any misrepresentation or breach of warranty by Trident in Section 2(b) of this Agreement; or (C) any liability of the Holding Company or the Company which is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have principally and directly resulted from negligence or willful misconduct of Trident. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with the other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than the reasonable cost of investigation except as otherwise provided herein. In the event the indemnifying party 28 United Community Financial Corp. Sales Agency Agreement Page 28 elects to assume the defense of any such action and retain counsel acceptable to the indemnified party, the indemnified party may retain additional counsel, but shall bear the fees and expenses of such counsel unless (i) the indemnifying party shall have specifically authorized the indemnified party to retain such counsel or (ii) the parties to such suit include such indemnifying party and the indemnified party, and such indemnified party shall have been advised by counsel that one or more material legal defenses may be available to the indemnified party which may not be available to the indemnifying party, in which case the indemnifying party shall not be entitled to assume the defense of such suit notwithstanding the indemnifying party's obligation to bear the fees and expenses of such counsel. An indemnifying party against whom indemnity may be sought shall not be liable to indemnify an indemnified party under this Section 8 if any settlement of any such action is effected without such indemnifying party's consent. To the extent required by law, this Section 8 is subject to and limited by the provisions of Section 23A. 9. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 8 above is for any reason held to be unavailable to Trident, the Holding Company and/or the Company other than in accordance with its terms, the Holding Company or the Company and Trident shall contribute to the aggregate losses, liabilities, claims, damages, and expenses of the nature contemplated by said indemnity agreement incurred by the Holding Company or the Company and Trident (i) in such proportion as is appropriate to reflect the relative benefits received by the Holding Company and the Company on the one hand and Trident on the other from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above, but also the relative fault of the Holding Company or the Company on the one hand and Trident on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Holding Company and the Company on the one hand and Trident on the other shall be deemed to be in the same proportions as the total net proceeds from the Conversion received by the Holding Company and the Company bear to the total fees received by Trident under this Agreement. The relative fault of the Holding Company or the Company on the one hand and Trident on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Holding Company or the Company or by Trident and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holding Company and the Company and Trident agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by 29 United Community Financial Corp. Sales Agency Agreement Page 29 any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by the indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, Trident shall not be required to contribute any amount in excess of the amount by which fees owed Trident pursuant to this Agreement exceeds the amount of any damages which Trident has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. To the extent required by law, this Section 9 is subject to and limited by the provisions of Section 23A. 10. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND INDEMNITIES. The respective indemnities of the Holding Company and the Company and Trident and the representation and warranties of the Holding Company and the Company and of Trident set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of Trident or the Holding Company or the Company or any controlling person or indemnified party referred to in Section 8 hereof, and shall survive any termination or consummation of this Agreement and/or the issuance of the Shares, and any legal representative of Trident, the Holding Company, the Company and any such controlling persons shall be entitled to the benefit of the respective agreements, indemnities, warranties and representations. 11. TERMINATION. Trident may terminate this Agreement by giving the notice indicated below in this Section at any time after this Agreement becomes effective as follows: (a) If any domestic or international event or act or occurrence has materially disrupted the United States securities markets such as to make it, in Trident's reasonable opinion, impracticable to proceed with the offering of the Shares; or if trading on the New York Stock Exchange ("NYSE") shall have suspended (except that this shall not apply to the imposition of NYSE trading collars imposed on program trading); or if the United States shall have become involved in a war or major hostilities; or if a general banking moratorium has been declared by a state or federal authority which has a material effect on the Company or the Conversion; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if there shall have been a material adverse change in the capitalization, condition or business of the Holding Company, or if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, 30 United Community Financial Corp. Sales Agency Agreement Page 30 whether or not said loss shall have been insured; or if there shall have been a material adverse change in the condition or prospects of the Holding Company or the Company. (b) If Trident elects to terminate this Agreement as provided in this Section, the Holding Company and the Company shall be notified promptly by Trident by telephone or telegram, confirmed by letter. (c) If this Agreement is terminated by Trident for any of the reasons set forth in subsection (a) above, the Holding Company and the Company shall upon demand pay Trident the full amount so owing pursuant to Sections 3(b), 3(c), 6, 8(a) and 9 of this Agreement. (d) The Company may terminate the Conversion in accordance with the terms of the Plan. Such termination shall be without liability to any party, except that the Holding Company and the Company shall be required to fulfill their obligations pursuant to Sections 3(b), 3(c), 6, 8(a) and 9 of this Agreement and Trident shall be required to fulfill its obligations, if any, pursuant to Section 9 of this Agreement. 12. NOTICES. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to Trident shall be mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601 Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. Timothy Lavelle (with a copy to Luse Lehman Gorman Pomerenk & Schick, P.C. Suite 400, 5335 Wisconsin Avenue, N.W., Washington, D.C., 20015, Attention: Alan Schick, Esquire). and if sent to the Holding Company or the Company, shall be mailed, delivered or telegraphed and confirmed to The Home Savings and Loan Company of Youngstown, Ohio, 275 Federal West Plaza, Youngstown, Ohio 44501-1111, Attention: Douglas B. McKay, President (with a copy to Vorys, Sater, Seymour and Pease, LLP, Cincinnati, Ohio, Attention: Terry Haber, Esquire). 13. PARTIES. This Agreement shall inure solely to the benefit of, and shall be binding upon, Trident, the Holding Company, the Company and the controlling and other persons referred to in Section 8 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 14. CONSTRUCTION. Unless governed by preemptive federal law, this Agreement shall be governed by and construed in accordance with the substantive laws of Ohio. 31 United Community Financial Corp. Sales Agency Agreement Page 31 15. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute but one and the same instrument. 32 United Community Financial Corp. Sales Agency Agreement Page 32 Please acknowledge your agreement to the foregoing by signing below and returning to the Holding Company one copy of this letter. UNITED COMMUNITY FINANCIAL CORP. THE HOME SAVINGS AND LOAN ASSOCIATION OF YOUNGSTOWN, OHIO By: By: ------------------------------------ ------------------------------------- Douglas B. McKay Douglas B. McKay President and Chief Executive Officer President and Chief Executive Officer Date: _________, 1998 Date: __________, 1998
Agreed to and accepted: TRIDENT SECURITIES, INC. By: --------------- Date: __________, 1998 EX-2 3 EXHIBIT 2 1 Exhibit 2 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO AMENDED PLAN OF CONVERSION Table of Contents
1. Introduction.......................................................................................................1 2. Definitions........................................................................................................1 3. Procedures for the Conversion......................................................................................4 4. Initial Purchase Price of Common Shares and Number of Common Shares to be Offered..................................5 5. Subscription Rights of Eligible Account Holders....................................................................6 6. Subscription Rights of Tax-Qualified Employee Stock Benefit Plans..................................................6 7. Subscription Rights of Supplemental Eligible Account Holders.......................................................7 8. Subscription Rights of Other Eligible Members......................................................................7 9. Subscription Rights of Directors, Officers and Employees...........................................................7 10. Community Offering, Public Offering and Other Offerings............................................................8 11. Additional Limitations on Purchases................................................................................8 12. Procedures for the Offerings......................................................................................10 13. Payment for Common Shares.........................................................................................10 14. Expiration of Subscription Rights.................................................................................11 15. Compliance with Securities Laws...................................................................................12 16. Rights of Shareholders After Completion of Conversion.............................................................12 17. Liquidation Account...............................................................................................12 18. Accounts in Converted Company.....................................................................................13 19. Restrictions on Purchases and Sales of Common Shares by Officers and Directors Following Conversion...............13 20. Restrictions on Acquisition of the Company or the Holding Company.................................................13 21. Consummation of Conversion........................................................................................14 22. Adoption of Amended Articles and Amended Constitution.............................................................14 23. Tax Rulings/Opinions..............................................................................................14 24. Directors and Officers of the Company.............................................................................14 25. Stock Benefit Plans...............................................................................................14 26. Registration of Common Shares; Market for Common Shares...........................................................14 27. Establishment and Funding of Charitable Foundation................................................................15 28. Expenses of Conversion............................................................................................15 29. Amendment or Termination of this Plan.............................................................................15 30. Interpretation of this Plan.......................................................................................15
A-i 2 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO AMENDED PLAN OF CONVERSION 1. INTRODUCTION. The Board of Directors of The Home Savings and Loan Company of Youngstown, Ohio (the "Company") adopted a Plan of Conversion on December 9, 1997. On May 6, 1998, the Board of Directors approved certain amendments to the Plan of Conversion, all of which are incorporated into this Amended Plan of Conversion. This Amended Plan of Conversion is hereinafter referred to as this "Plan." The Board of Directors of the Company believes that a conversion of the Company from a mutual savings and loan association incorporated under Ohio law to a permanent capital stock savings and loan association incorporated under Ohio law (the "Conversion") pursuant to this Plan is in the best interests of the Company, its members, depositors, customers, employees and the communities it serves. In connection with the conversion to stock form, the Company has formed a holding company (the "Holding Company") which will provide the Company with greater organizational and operational flexibility, including increased versatility for effecting mergers and acquisitions of other financial institutions. The Holding Company will own all of the issued and outstanding common stock of the Company. Through the sale of common shares of the Holding Company, the Conversion will provide increased capital levels to support and enhance lending and investment activities, diversification into additional financial services activities and growth. The increased capital from the Conversion will further enhance the Company's ability to meet the borrowing and other financial needs of the communities it currently serves. To further demonstrate the commitment of the Company to the communities it serves, the Plan provides that the Company may establish or contribute to a charitable foundation in connection with the Conversion. The contribution of funds for shares of the holding company to a charitable foundation would allow the communities served by the Company to benefit from the growth and profitability of the Company and the Holding Company. The foundation would be funded either through a contribution of cash by the Company prior to the Conversion or through the donation of common shares of the Holding Company immediately after the Conversion, or a combination thereof. This Plan is subject to the approval of the Ohio Department of Commerce, Division of Financial Institutions, and the Office of Thrift Supervision and must be adopted by a majority of the members of the Company eligible to vote at a special meeting of members. 2. DEFINITIONS. As used in this Plan, the following terms have the following meanings: ACTING IN CONCERT means (a) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. ACTUAL PURCHASE PRICE means the actual uniform price per share at which Common Shares are ultimately sold by the Holding Company in the Offerings in accordance with the terms hereof. AFFILIATE, when used to indicate a relationship with a specified Person, means a Person who directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the specified Person. AMENDED ARTICLES means the Amended Articles of Incorporation of the Company which are in the form attached hereto as Exhibit I and which authorize the issuance of capital stock and which will be filed with the Ohio Secretary of State on the date on which the Conversion becomes effective. AMENDED CONSTITUTION means the Amended Constitution of the Company which is in the form attached hereto as Exhibit II and which will be filed with the Division on the date on which the Conversion becomes effective. 1 3 APPLICATION means the Application for Conversion on Form AC to be filed by the Company with the OTS pursuant to Title 12, Code of Federal Regulations, Part 563b and with the Division pursuant to Ohio Administrative Code Section 1301:2-1-16. ASSOCIATE, when used to indicate a relationship with any Person, means (i) any corporation or organization (other than the Company, the Holding Company or a majority-owned subsidiary of the Company or the Holding Company) of which such Person is an Officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, except that such term will not include a Tax-Qualified Employee Stock Benefit Plan, or a non-tax-qualified employee stock benefit plan and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a Director or an Officer. BROKER means any Person engaged in the business of effecting transactions in securities for the account of others. CODE means the Internal Revenue Code of 1986, as amended. COMMON SHARES means the common shares of the Holding Company to be offered and sold by the Holding Company in connection with the Conversion, but shall not include shares, if any, issued to a charitable foundation pursuant to Section 27 hereof. COMMUNITY MEMBER means any natural person who, on the date of submission of an Order Form, is a resident of Mahoning, Trumbull or Columbiana County, the counties in Ohio in which the Company has its home and branch offices. COMMUNITY OFFERING means the offering of Common Shares to the public concurrently with or after the completion of the Subscription Offering in a manner by which Community Members are given preference. COMPANY means The Home Savings and Loan Company of Youngstown, Ohio, in its mutual form or stock form, as appropriate. CONVERSION means the change in the form of the Company from the mutual to the permanent capital stock form upon (i) the adoption and filing of the Amended Articles and the Amended Constitution; (ii) the sale and issuance of Common Shares by the Holding Company in the Offerings, and (iii) the purchase by the Holding Company of the capital stock of the Company. DEALER means any Person who engages either for all or part of such person's time, directly or indirectly, as an agent, Broker or principal, in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another Person. DEMAND ACCOUNT has the same meaning as specified in Title 12, Code of Federal Regulations, Part 561, as in effect on the date this Plan is adopted by the Board of Directors of the Company. DIRECTOR means a director of the Holding Company, the Company or any subsidiary. DIVISION means the Division of Financial Institutions of the Department of Commerce of the State of Ohio. ELIGIBILITY RECORD DATE means the close of business on July 31, 1996, the record date set by the Company for determining Eligible Account Holders. ELIGIBLE ACCOUNT HOLDER means any Person holding a Qualifying Deposit in the Company on the Eligibility Record Date. EMPLOYEE means an employee of the Company or any subsidiary. ESTIMATED PRICE RANGE means the range of the estimated aggregate pro forma market value of the total Common Shares to be offered in the Conversion, as determined by the Independent Appraiser in accordance with Section 4 of this Plan. 2 4 FDIC means the Federal Deposit Insurance Corporation, an agency of the United States Government, or any successor thereto. FOUNDATION means the charitable foundation, described in Section 27 of this Plan, which will qualify as an exempt organization under Section 501(c)(3) of the Code. HOLDING COMPANY means the corporation to be formed at the direction of the Company for the purpose of becoming a savings and loan holding company through the acquisition of all of the capital stock to be issued by the Company in connection with the Conversion. INDEPENDENT APPRAISER means the firm employed by the Company to determine the estimated pro forma market value of the Common Shares. INITIAL PURCHASE PRICE means the price per share to be paid initially for Common Shares subscribed for in the Subscription Offering or ordered in the Community Offering. LIQUIDATION ACCOUNT means the account established in accordance with Section 17 of this Plan for Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain a Savings Account at the Company after the Conversion. MEMBER means any Person qualifying as a member of the Company under its articles of incorporation and constitution in effect on the date of the Special Meeting. OFFERINGS means the Subscription Offering, the Community Offering and the Public Offering, if any. OFFICER means the Chairman of the Board of Directors, the President, a Vice President, the Secretary, the Treasurer or principal financial officer, or the comptroller or principal accounting officer of the Holding Company or the Company and any other person performing similar functions for the Holding Company or the Company. ORDER FORMS means the original forms which will be sent to Participants to exercise their Subscription Rights in accordance with this Plan and which may be sent to Persons in the Community Offering and the Public Offering to order Common Shares. OTHER ELIGIBLE MEMBER means a Voting Member, other than an Eligible Account Holder or a Supplemental Eligible Account Holder. OTS means the Department of the Treasury, Office of Thrift Supervision, an agency of the United States Government. PARTICIPANT means any Eligible Account Holder, Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible Account Holder, Other Eligible Member or Director, Officer or Employee. PERSON means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. PROSPECTUS means the document or documents describing the terms and conditions of the Offerings, including a complete description of the business and affairs of the Company and the Holding Company. PROXY means the form of authorization by which a Person is, or may be deemed to be, designated to act for a Voting Member in the exercise of his or her voting rights in the affairs of the Company. PROXY MATERIALS means the Notice of Special Meeting, the Proxy Statement and the form of Proxy used in connection with soliciting Proxies from Members for use at the Special Meeting. 3 5 PUBLIC OFFERING means an underwritten firm commitment offering of Common Shares to the public through one or more underwriters. QUALIFYING DEPOSIT means the aggregate balance of all Savings Accounts and, as permitted by 12 C.F.R. Section 563b3.3(e)(1), the aggregate balance of all Demand Accounts, owned by an Eligible Account Holder or a Supplemental Eligible Account Holder at the close of business on the Eligibility Record Date or the Supplemental Eligibility Record Date, respectively; provided, however, that Savings Accounts and Demand Accounts with an aggregate deposit balance of less than $50 will not constitute a Qualifying Deposit. SAVINGS ACCOUNT has the same meaning as specified in Title 12, Code of Federal Regulations, Part 561, as in effect on the date this Plan is adopted by the Board of Directors of the Company, and includes certificates of deposit. SEC means the Securities and Exchange Commission, an agency of the United States Government. SPECIAL MEETING means the meeting of the Voting Members of the Company called for the specific purpose of submitting this Plan to the Voting Members for approval. SUBSCRIPTION OFFERING means the offering of Common Shares to the holders of Subscription Rights. SUBSCRIPTION RIGHTS means the nontransferable rights issued by the Company to Participants to purchase Common Shares in the Subscription Offering pursuant to this Plan. SUPPLEMENTAL ELIGIBILITY RECORD DATE means the last day of the calendar quarter preceding the approval of the Application by the OTS and the record date used for determining Supplemental Eligible Account Holders. Such date shall be required by this Plan if the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to approval of the Application by the OTS. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER means any Person holding a Qualifying Deposit at the close of business on the Supplemental Eligibility Record Date, except Officers and Directors and their Associates. TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN means any defined benefit plan or defined contribution plan of the Holding Company or the Company, such as an employee stock ownership plan, stock bonus plan, profit sharing plan or other plan which, with its related trust, meets the requirements for qualification under Section 401 of the Code. VOTING MEMBER means any Member of the Company eligible to vote at the Special Meeting. VOTING RECORD DATE means the record date fixed by the Board of Directors of the Company in accordance with Ohio law and the articles of incorporation and constitution of the Company for determining the eligibility of Members to vote on this Plan at the Special Meeting. 3. PROCEDURES FOR THE CONVERSION. The following procedures will be followed to effect the Conversion: (a) Promptly after the adoption of this Plan by a vote of at least two-thirds of the members of the Board of Directors of the Company, the Company will publish a notice of the adoption of this Plan in an English language newspaper having general circulation in each community in which an office of the Company is located. Copies of this Plan will also be made available for inspection by Members at the offices of the Company. (b) The Company will submit this Plan for approval, together with all other requisite materials, to the OTS and the Division in the form of the Application. After the filing of the Application with the OTS and the Division, the Company (i) will prominently post in each of the offices of the Company and publish in an English language newspaper having general circulation in each community in which an office of the Company is located a notice to the effect that the Company has filed the Application with the OTS, and (ii) when advised by the Division, will prominently post in each of the offices of the Company and publish in an English language newspaper having general circulation in each community in which an office of the Company is located a notice to the effect that the Company has filed the Application with the Division. 4 6 (c) The Holding Company will be incorporated, after which the Board of Directors of the Holding Company will consent to the Plan by at least a two-thirds vote. As soon as practicable after the adoption of the Plan by the Board of Directors of the Holding Company, the Holding Company will submit or cause to be submitted to the OTS such applications as may be required for approval of the Holding Company's acquisition of the Company. In addition, the Holding Company will file a registration statement with the SEC to register the Common Shares under the Securities Act of 1933, as amended. The Holding Company will also register the Common Shares under any applicable state securities laws, subject to Section 15 hereof. (d) After the OTS and the Division approve the Application and the SEC approves the registration statement, the Company will mail Proxy Materials to each of the Voting Members at his or her last known address appearing on the records of the Company for the purpose of soliciting the Proxies of Voting Members for use at the Special Meeting. The approval of this Plan requires the affirmative vote, cast in person or by Proxy, of a majority of the total outstanding votes entitled to be cast at the Special Meeting. The Company may, at its option, mail to all Voting Members a proxy statement in either long or summary form describing this Plan. If the Company provides a summary form proxy statement, the Company shall also mail to all Eligible Account Holders and Supplemental Eligible Account Holders who are not Voting Members a letter informing them of their right to receive a Prospectus and an Order Form and other materials relating to the Conversion by returning a postage-paid card which will be distributed with the Proxy Materials or such letter. (e) Subject to the approval of this Plan by the Voting Members at the Special Meeting, Common Shares will be offered simultaneously to Participants in the respective priorities set forth in Sections 5, 6, 7, 8 and 9 of this Plan. All sales of Common Shares to Participants will be completed at the earliest practicable date following expiration of the Subscription Rights provided for in this Plan. Notwithstanding anything in this Plan to the contrary, the Company, in its sole discretion, may commence the Subscription Offering concurrently with or at any time after the mailing to the Voting Members of the Proxy Materials and may complete the Subscription Offering before the Special Meeting, provided that the offer and sale of Common Shares shall be conditioned upon the approval of this Plan by the Voting Members. In the event that the Company elects, in its discretion, to commence the Subscription Offering after the Special Meeting, the Subscription Offering will be commenced not later than 45 days after the date on which the Special Meeting is adjourned, except as may otherwise be approved by the OTS. Concurrently with, following the commencement of or following the completion of the Subscription Offering, the Company may also offer Common Shares in the Community Offering, subject to the prior satisfaction of the Subscription Rights of the Participants. Following the completion of the Community Offering, the Company may offer any remaining Common Shares in a Public Offering. (f) The Holding Company will use a portion of the net proceeds from the Offerings to purchase all of the capital stock of the Company to be outstanding upon the consummation of the Conversion. (g) All other steps considered necessary or desirable by the Boards of Directors of the Company and the Holding Company to effect the Conversion will be taken pursuant to applicable laws and regulations. 4. INITIAL PURCHASE PRICE OF COMMON SHARES AND NUMBER OF COMMON SHARES TO BE OFFERED. (a) The Initial Purchase Price will be determined by the Boards of Directors of the Company and the Holding Company before the commencement of the Subscription Offering, subject to adjustment as described below. The Actual Purchase Price and the number of Common Shares to be sold in connection with the Conversion will be determined by the Boards of Directors of the Company and the Holding Company before the completion of all sales of Common Shares contemplated by this Plan on the basis of the estimated pro forma market value of the Company, as converted. No fractional shares will be issued in connection with the Conversion. (b) The estimated pro forma market value of the Company, as converted, will be determined by the Independent Appraiser, based upon such factors as the Independent Appraiser deems appropriate and as are consistent with the regulations of the OTS and the Division. Immediately before the commencement of the Subscription Offering, the Estimated Price Range will be established. The maximum of the Estimated Price Range shall be 15% above the pro forma market value of the Company and the minimum of the Estimated Price Range shall be 15% below the pro forma market value of the Company. The Independent Appraiser will review, from time to time as appropriate or as required by law or regulation, developments subsequent to its valuation to determine whether the estimated pro forma market value of the Company, as converted, should be revised. (c) If, after the commencement of the Subscription Offering, the Independent Appraiser determines that the estimated pro forma market value of the Company, as converted, has increased or decreased due to subsequent developments, the 5 7 Conversion may be completed without notifying Persons who have subscribed for Common Shares and without a resolicitation of subscriptions from such Persons if such estimated pro forma market value is not less than the minimum of the 6 8 Estimated Price Range and does not exceed the maximum of the Estimated Price Range by more than 15%. If, however, as a result of any such change, the estimated pro forma market value of the Company is less than the minimum of the Estimated Price Range or exceeds the maximum of the Estimated Price Range by more than 15%, a new Estimated Price Range may be established and the Board of Directors may, with the approval of the OTS and the Division, elect to increase or decrease the number of Common Shares to be sold in connection with the Conversion or increase or decrease the Initial Purchase Price, in which case Persons who have subscribed for Common Shares will be notified and will be given the opportunity to increase, decrease or rescind their subscriptions. 5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS. (a) Each Eligible Account Holder will receive, without payment therefor, nontransferable Subscription Rights to purchase a number of Common Shares up to the greater of (i) the amount which may be purchased in the Public Offering or the Community Offering, (ii) one-tenth of one percent (.10%) of the total number of Common Shares to be sold in connection with the Conversion, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares to be sold in connection with the Conversion by a fraction, the numerator of which is the amount of the Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date, subject to the overall purchase limitations set forth in Section 11 of this Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of this Plan. (b) In the event that subscriptions for Common Shares are received from Eligible Account Holders upon the exercise of Subscription Rights pursuant to paragraph (a) of this Section 5 in excess of the number of Common Shares available for such subscriptions, the Common Shares available for purchase will be allocated among the subscribing Eligible Account Holders in a manner by which each subscribing Eligible Account Holder, to the extent possible, will be permitted to subscribe for a number of shares sufficient to make such Eligible Account Holder's total allocation of Common Shares equal to the lesser of (i) 100 shares and (ii) the number of shares subscribed for by such Eligible Account Holder. Any shares remaining after such allocation will be allocated among the subscribing Eligible Account Holders whose subscriptions remain unsatisfied in the proportion which the amount of each Eligible Account Holder's Qualifying Deposit bears to the total of the Qualifying Deposits of all subscribing Eligible Account Holders. No fractional shares will, however, be issued in connection with the Conversion. (c) The Subscription Rights of the Eligible Account Holders are subordinate to the limited priority rights of the Tax-Qualified Employee Stock Benefit Plans of the Company as set forth in Section 6 of this Plan. For purposes of paragraph (b) of this Section 5, Subscription Rights held by Eligible Account Holders who are also Officers or Directors, and their Associates, to the extent that they are attributable to increased deposits during the one-year period preceding the Eligibility Record Date, will be subordinated to the Subscription Rights of all other Eligible Account Holders. 6. SUBSCRIPTION RIGHTS OF TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS. The Tax-Qualified Employee Stock Benefit Plans of the Company will receive non-transferable Subscription Rights to purchase up to 10% of the Common Shares to be sold in connection with the Conversion, subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of this Plan. The Subscription Rights of the Tax-Qualified Employee Stock Benefit Plans are subordinate to the Subscription Rights of Eligible Account Holders pursuant to Section 5 of this Plan, except that if the final pro forma market value of the Company exceeds the maximum of the Estimated Price Range determined pursuant to Section 4 of this Plan, the Tax-Qualified Employee Stock Benefit Plans shall have first priority with respect to the amount of Common Shares sold in excess of the maximum of the Estimated Price Range. Common Shares purchased by an individual participant (a "Plan Participant") in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of Subscription Rights granted to such Plan Participant in his individual capacity as an Eligible Account Holder or Supplemental Eligible Account Holder and purchases by such Plan Participant in the Community Offering or the Public Offering shall not be deemed to be purchases by a Tax-Qualified Employee Stock Benefit Plan for purposes of calculating the maximum amount of Common Shares that Tax-Qualified Employee Stock Benefit Plans may purchase pursuant to the first sentence of this Section 6, if the individual Plan Participant controls or directs the investment authority with respect to such account or subaccount. 7 9 7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. (a) In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to OTS approval of the Application, then, and only in that event, each Supplemental Eligible Account Holder will receive, without payment therefor, nontransferable Subscription Rights to purchase a number of Common Shares up to the greater of (i) the amount which may be purchased in the Public Offering or the Community Offering, (ii) one-tenth of one percent (.10%) of the total number of Common Shares to be sold in connection with the Conversion, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares to be sold in connection with the Conversion by a fraction, the numerator of which is the amount of the Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each case on the Supplemental Eligibility Record Date, subject to the overall purchase limitations set forth in Section 11 of this Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of this Plan. (b) In the event that subscriptions for Common Shares are received from Supplemental Eligible Account Holders upon the exercise of Subscription Rights pursuant to paragraph (a) of this Section 7 in excess of the number of Common Shares available for such subscriptions, the Common Shares available for purchase will be allocated among the subscribing Supplemental Eligible Account Holders in a manner by which each subscribing Supplemental Eligible Account Holder, to the extent possible, will be permitted to subscribe for a number of Common Shares sufficient to make such Supplemental Eligible Account Holder's total allocation of Common Shares equal to the lesser of (i) 100 shares and (ii) the number of Common Shares subscribed for by such Supplemental Eligible Account Holder. Any Common Shares remaining after such allocation will be allocated among the subscribing Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in the proportion which the amount of each such Supplemental Eligible Account Holder's Qualifying Deposit bears to the total amount of the Qualifying Deposits of all such subscribing Supplemental Eligible Account Holders. No fractional shares will be issued, however, in connection with the Conversion. (c) Subscription Rights received pursuant to this Section 7 are subordinate to the Subscription Rights of Eligible Account Holders and the Tax-Qualified Employee Stock Benefit Plans pursuant to Sections 5 and 6 of this Plan. Any Subscription Rights received by an Eligible Account Holder pursuant to Section 5 of this Plan will be applied in partial satisfaction of Subscription Rights received pursuant to this Section 7. 8. SUBSCRIPTION RIGHTS OF OTHER ELIGIBLE MEMBERS. (a) Each Other Eligible Member will receive, without payment therefor, nontransferable Subscription Rights to purchase a number of Common Shares up to the greater of (i) the amount of Common Shares which may be purchased in the Public Offering or the Community Offering, and (ii) one-tenth of one percent (.10%) of the total number of Common Shares to be sold in connection with the Conversion, subject to the overall purchase limitations set forth in Section 11 of this Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of this Plan. (b) In the event that subscriptions for Common Shares are received from Other Eligible Members upon the exercise of Subscription Rights pursuant to paragraph (a) of this Section 8 in excess of the number of Common Shares available for such subscriptions, the Common Shares available for purchase will be allocated among the subscribing Other Eligible Members in the same proportion that their respective subscriptions bear to the aggregate subscriptions of all Other Eligible Members; provided, however, that, to the extent sufficient Common Shares are available, each subscribing Other Eligible Member shall be permitted to purchase 25 Common Shares before the remaining available Common Shares are allocated. No fractional shares will be issued, however, in connection with the Conversion. (c) Subscription Rights received by Other Eligible Members pursuant to this Section 8 are subordinate to the Subscription Rights received by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders pursuant to Sections 5, 6 and 7 of this Plan. 9. SUBSCRIPTION RIGHTS OF DIRECTORS, OFFICERS AND EMPLOYEES. (a) Directors, Officers and Employees of the Company shall receive, without payment therefor, non-transferable Subscription Rights to purchase, in the aggregate, up to 15% of the Common Shares to be sold in connection with the Conversion, subject to the overall purchase limitations set forth in Section 11 of this Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of this Plan. 8 10 (b) In the event that subscriptions for Common Shares are received from Directors, Officers and Employees upon the exercise of Subscription Rights pursuant to paragraph (a) of this Section 9 in excess of the number of Common Shares available for such subscriptions, the Common Shares available for purchase will be allocated among the individual Directors, Officers and Employees of the Company on an equitable basis to be determined by the Board of Directors of the Company by giving weight to a Person's period of service, compensation and position. If any such Director, Officer or Employee does not subscribe for his or her full allocation of Common Shares, any Common Shares not subscribed for may be purchased by other Directors, Officers and Employees of the Company in proportion to their respective Subscription Rights. No fractional shares shall be issued, however, in connection with the Conversion. (c) Subscription Rights received by Directors, Officers and Employees of the Company pursuant to this Section 9 are subordinate to the Subscription Rights received by Eligible Amount Holders, the Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Eligible Members pursuant to Sections 5, 6, 7 and 8 of this Plan. 10. COMMUNITY OFFERING, PUBLIC OFFERING AND OTHER OFFERINGS. (a) Any Common Shares not subscribed for in the Subscription Offering may be offered and sold in the Community Offering. If conducted, the Community Offering may be conducted concurrently with or at any time after the commencement or completion of the Subscription Offering and will be conducted in a manner which will give Community Members a preference in the purchase of Common Shares and will seek to achieve the widest distribution of Common Shares. The Company or the Holding Company may retain a Broker or a syndicate of broker-dealers to assist in selling the Common Shares in the Community Offering. The Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by the Holding Company and the Company with any required regulatory approval. (b) The maximum number of Common Shares which may be subscribed for or purchased in the Community Offering by any Person, together with any Associates or group of Persons Acting in Concert, will be 35,000 Common Shares, subject to the overall purchase limitations set forth in Section 11 of this Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of this Plan. Orders for Common Shares in the Community Offering will first be filled up to a maximum of two percent (2%) of the Common Shares and thereafter any remaining shares will be allocated on an equal number of shares per order basis until all orders for Common Shares have been filled, subject to the limitations provided in Section 11 of this Plan. The Company and the Holding Company reserve the right to reject, in whole or in part, any order to purchase Common Shares from any Person in the Community Offering. (c) The Holding Company and the Company may sell any Common Shares remaining following the Subscription Offering and the Community Offering in a Public Offering. The provisions of Section 11 hereof shall not be applicable to the sales to underwriters for purposes of the Public Offering but shall be applicable to sales by the underwriters to the public. The price to be paid by the underwriters in such an offering shall be equal to the Actual Purchase Price less an underwriting discount to be negotiated among such underwriters and the Company and the Holding Company, subject to any required regulatory approval or consent. (d) If for any reason a Public Offering of Common Shares not sold in the Subscription Offering and the Community Offering cannot be effected, or in the event that any insignificant residue of Common Shares is not sold in the Subscription Offering and the Community Offering, the Holding Company and the Company shall use their best efforts to obtain other purchasers for such shares in such manner and upon such conditions as may be satisfactory to the OTS and the Division. 11. ADDITIONAL LIMITATIONS ON PURCHASES (a) A minimum of 25 Common Shares must be purchased by each Person purchasing Common Shares in connection with the Conversion to the extent Common Shares are available; provided, however, that if the Actual Purchase Price is greater than $20 per share, the minimum number of Common Shares to which a Person may subscribe will be adjusted in a manner by which the aggregate Actual Purchase Price required to be paid for such minimum number of Common Shares does not exceed $500. No fractional shares will be issued, however, in connection with the Conversion. (b) If a Qualifying Deposit is held in the name of more than one Person, the aggregate amount of Common Shares which may be subscribed for or purchased by all Persons having an interest in such Qualifying Deposit shall be subject to the applicable purchase limitations set forth in Sections 5, 7, 8, 9 and 10 of this Plan. 9 11 (c) Participants may purchase Common Shares in the Community Offering subject to the purchase limitations set forth in Section 10 of this Plan; provided, however, that the maximum amount of Common Shares which may be subscribed for or purchased in connection with the Conversion by any Person, together with any Associate or group of Persons Acting in Concert, will be one percent (1%) of the Common Shares to be sold in connection with the Conversion, except that any one or more of the Tax-Qualified Employee Stock Benefit Plans may purchase in the aggregate not more than 10% of the Common Shares to be sold in connection with the Conversion and will be entitled to purchase such amount regardless of the number of Common Shares purchased by other Persons. Common Shares held by one or more Tax-Qualified Employee Stock Benefit Plans or non-tax-qualified employee stock benefit plans and attributed to a Person will not be aggregated with Common Shares purchased directly by or otherwise attributable to such Person. Common Shares purchased by a Plan Participant in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of Subscription Rights granted to such Plan Participant in his individual capacity as a Participant and for purchases by such Plan Participant in the Community Offering or the Public Offering shall be aggregated with Common Shares purchased directly by or otherwise attributable to such Person. For the purpose of this Section 11, the members of the Boards of Directors of the Company and the Holding Company will not be deemed to be Associates or a group of Persons Acting in Concert solely as a result of their membership on such Boards of Directors. (d) The Officers and Directors of the Company and their Associates may purchase in the Conversion, in the aggregate, up to 25% of the total number of Common Shares to be sold in connection with the Conversion. Common Shares held by one or more Tax-Qualified Employee Stock Benefit Plans or non-tax-qualified employee stock benefit plans and attributed to a Person will not be aggregated with Common Shares purchased directly by or otherwise attributable to such Person. Common Shares purchased by Plan Participants in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of Subscription Rights granted to such Plan Participant in his individual capacity as a Participant or purchases by a Plan Participant in the Community Offering or the Public Offering shall be aggregated with Common Shares purchased directly by or otherwise attributable to such Person. (e) Subject to any required regulatory approval and the requirements of applicable laws and regulations, but without further approval of the Members or resolicitation of subscribers, the purchase limitations set forth in Sections 10 and 11 of this Plan may be increased or decreased at the sole discretion of the Boards of Directors of the Company and the Holding Company at any time. If such limitation is increased after the commencement of the Subscription Offering, persons who subscribed for the maximum amount will be given the opportunity to increase their subscriptions up to the then applicable limit, subject to the rights and preferences of any person who has priority Subscription Rights. The Boards of Directors of the Company and the Holding Company may, in their sole discretion, increase such maximum purchase limitation up to 9.99%; provided, however, that orders for Common Shares exceeding 5% of the Common Shares to be sold in connection with the Conversion shall not exceed, in the aggregate, 10% of the Common Shares to be sold in connection with the Conversion. In the event that the purchase limitation is decreased after commencement of the Subscription Offering, the order of any Person who subscribed for the maximum number of Common Shares shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of Common Shares permitted to be subscribed for by such Person. The maximum purchase limitation for Eligible Account Holders, Supplemental Eligible Account Holders and Other Eligible Members shall not be decreased below one-tenth of one percent (.10%) of the total number of Common Shares to be issued in connection with the Conversion. (f) The purchase limitations set forth in this Section 11 shall not apply to the common shares, if any, contributed to the Foundation in accordance with the provisions of Section 27 of this Plan, nor shall such common shares be deemed Common Shares. (g) The Subscription Rights granted under this Plan are nontransferable. Each Subscription Right may be exercised only by the Person to whom it is issued and only for such Person's own account. Each Person exercising Subscription Rights will be required to certify that he or she is purchasing for his or her own account and that he or she has no agreement or understanding for the sale or transfer of the Common Shares for which he or she subscribes. The Board of Directors of the Company may reject any subscription which it reasonably believes involves an impermissible transfer of a Subscription Right. The Board of Directors of the Company may require any Person who the Board reasonably believes to be involved in an impermissible transfer of a Subscription Right to provide such information or assurances as the Board may request to verify the validity of a Subscription Right. 10 12 12. PROCEDURES FOR THE OFFERINGS. (a) At the time the Proxy Materials are mailed to the Voting Members at their last known addresses appearing on the records of the Company, pursuant to the authorization of the OTS and the Division, the Company and the Holding Company may commence the Subscription Offering and the Community Offering. The Holding Company and the Company may elect to mail a Prospectus and an Order Form only to those Participants who request such materials by returning a postage-paid card by a date specified in the letter informing them of their Subscription Rights. Under such circumstances, the Subscription Offering shall not be closed until the expiration of 30 days after the mailing by the Holding Company and the Company of the postage-paid card to Participants. (b) The Prospectus will contain all the information required by the OTS, the Division, the SEC and all applicable laws and regulations necessary to enable the recipients of the Order Forms to make informed investment decisions regarding the purchase of Common Shares. (c) The Order Forms will contain all the information required by the OTS, the Division and all applicable laws and regulations. Order Forms which have been photocopied or reproduced in any other manner will not be accepted. (d) The offer of Common Shares to Participants, to Community Members and to others will be conditioned upon the approval of this Plan by the Voting Members at the Special Meeting. (e) The Subscription Offering and the Community Offering may be closed before the Special Meeting. 13. PAYMENT FOR COMMON SHARES. (a) Full payment for all Common Shares subscribed for must be received by the Company, together with properly completed and manually signed original Order Forms therefor, before the expiration time, which will be specified on the Order Forms, unless such date is extended by the Company and the Holding Company. The amount of the required payment will be the amount which equals the Initial Purchase Price (which will be specified in the Order Forms or accompanying materials), multiplied by the number of Common Shares subscribed for in accordance with the terms of this Plan. (b) Payment for Common Shares ordered in the Subscription Offering will be permitted to be made: (i) In cash, if delivered in person; (ii) By check, bank draft, money order or negotiable order of withdrawal; provided, however, that any payment by check will be accepted subject to payment of such check by the drawee of such check; (iii) By appropriate authorization of withdrawal from any Savings Account at the Company; or (iv) By appropriate authorization of funds held for such Person's benefit by a Tax-Qualified Employee Stock Benefit Plan to the extent that such plan allows participants or any related trust established for the benefit of such Person to direct that some or all of such Person's individual accounts or subaccounts be invested in Common Shares. (c) For the purpose of determining the withdrawal balance of any Savings Account, such withdrawals will be deemed to have been made upon receipt of appropriate authorization therefor, but interest at the rates applicable to such accounts will be paid by the Company on the amounts deemed to have been withdrawn until the date on which the Conversion is completed or terminated, at which time the authorized withdrawal actually will be made. Interest will be paid by the Company on payments for Common Shares paid in cash or by check, negotiable order of withdrawal or money order at an annual rate equal to the passbook account rate at the Company or such higher rate as may be determined by the Company. Such interest will be paid from the date payments are received by the Company until consummation or termination of the Conversion. (d) The Order Forms will contain appropriate means by which authorization of withdrawals from Savings Accounts may be made to pay for subscribed Common Shares. Once a withdrawal has been authorized, none of the designated withdrawal amount may be withdrawn from the designated Savings Account (except by the Company as payment for Common Shares) while this Plan remains in effect. Savings Accounts will be permitted to be established for the purpose of making payment for subscribed Common Shares. Notwithstanding any regulatory provisions regarding penalties for early 11 13 withdrawal from certificate accounts and minimum qualifying balances for such accounts, payment for Common Shares will be permitted through authorization of withdrawals from such accounts without the assessment of such penalties. If, after such withdrawal, the applicable minimum balance requirement ceases to be met, such certificate account will be canceled and the remaining balance thereof will earn interest only at the passbook account rate at the Company. (e) The Company may not lend funds or otherwise extend credit to any Person to purchase Common Shares. (f) If the Actual Purchase Price is less than the Initial Purchase Price, the Company shall refund the difference to all Participants and other Persons, unless the Holding Company and the Company choose to provide Participants and other Persons the opportunity on the Order Form to elect to have such difference applied to the purchase of additional whole Common Shares, subject to applicable purchase limits. If the Actual Purchase Price is more than the Initial Purchase Price, the Company shall reduce the number of Common Shares ordered by Participants and other Persons and refund any remaining amount which is attributable to a fractional share interest, unless the Company and the Holding Company choose to provide Participants and other Persons the opportunity to increase their payments for Common Shares subscribed for or ordered, subject to applicable purchase limits. 14. EXPIRATION OF SUBSCRIPTION RIGHTS. (a) All Subscription Rights provided for in this Plan, including, without limitation, the Subscription Rights of all Persons whose Order Forms are returned by the United States Post Office as undeliverable, will expire at a specified time on a specified date which will be not less than 20 days nor more than 45 days following the date on which Order Forms are first sent to Participants. If the Holding Company and the Company elect to mail a Prospectus and an Order Form only to those Participants who request such materials by returning a postage-paid card by a date specified in the letter informing them of their Subscription Rights, the Subscription Offering shall not be closed until the expiration of 30 days after the mailing of the postage-paid card to Participants. (b) If the Company is unable to locate particular persons granted Subscription Rights under this Plan, or if Order Forms (i) are returned as undeliverable by the United States Post Office, (ii) are not received by the Company prior to the expiration date specified thereon, (iii) are defectively filled out or executed, or (iv) are not, when received by the Company, accompanied by the full required payment for the Common Shares subscribed for (including cases in which Savings Accounts from which withdrawals are authorized contain insufficient funds to satisfy the required payment or the check, bank draft, negotiable order of withdrawal or money order is not paid by the drawee thereof), the Subscription Rights will lapse as though the Person to whom such rights have been granted failed to return the completed Order Form within the time period specified thereon. In any such case as discussed in this paragraph (b), all payments accompanying the Order Forms will be refunded and, in the case of payments authorized through withdrawal from Savings Accounts as permitted by Section 13 of this Plan, such withdrawals will not be made. (c) The Company may, but will not be obligated to, waive any irregularity on any Order Form or require the submission of a corrected Order Form or waive the remittance of full payment for shares subscribed for by such date as it may specify. An executed Order Form, once received by the Company, may not be modified, amended or rescinded without the consent of the Company, unless (i) the Community Offering is not completed within 45 days after the expiration time of the Subscription Offering, or (ii) the final valuation of the Company, as converted, is less than the minimum of the Estimated Price Range established by the Independent Appraiser before the commencement of the Subscription Offering or exceeds the maximum of the Estimated Price Range by more than 15%. If either of those events occurs, persons who have subscribed for Common Shares will receive written notice that they have a right to affirm, increase, decrease or rescind their subscriptions. Subject to the authority of the OTS and the Division, all interpretations by the Company and the Holding Company of the terms and conditions of this Plan and of the Order Forms will be final. (d) The sale of all Common Shares must be completed within 45 days after the termination of the Subscription Offering, unless extended by the Company with the consent of the OTS and the Division, and within 24 months of approval of this Plan by the Voting Members at the Special Meeting. The 24-month period may not be extended by the Company, the OTS or the Division. 12 14 15. COMPLIANCE WITH SECURITIES LAWS. The Company and the Holding Company will make reasonable efforts to comply with the securities laws of the United States and all other jurisdictions in which Participants reside. No Person, however, will be offered any Subscription Rights or sold any Common Shares under this Plan if such Person resides in a foreign country or in any jurisdiction of the United States in respect of which (a) the granting of Subscription Rights or the offer or sale of Common Shares under this Plan to such Person would require the Company, the Holding Company or their Directors, Officers or employees to register under the securities laws of such jurisdiction as a Broker, Dealer or agent or to register or otherwise qualify the Common Shares for sale in such state; (b) there are few Participants otherwise eligible to subscribe for Shares under this Plan who reside in such jurisdiction; or (c) the Company determines that compliance with the securities laws of such jurisdiction would be impracticable or unduly burdenson for reasons of cost or otherwise. No payments will be made in lieu of the granting of Subscription Rights to such Participants. 16. RIGHTS OF SHAREHOLDERS AFTER COMPLETION OF CONVERSION. After the Conversion, the Holding Company will be the sole shareholder of the Company and will exercise all rights attendant to owning the shares of the Company. Voting rights in respect of the Holding Company will be held and exercised exclusively by the holders of the issued and outstanding common shares of the Holding Company. Neither borrowers from the Company nor holders of Savings Accounts in the Company will have any voting rights in the Company or the Holding Company on the basis of such borrowings or Savings Accounts. The shareholders of the Holding Company will have the exclusive rights, subject to the rights of Eligible Account Holders and Supplemental Eligible Account Holders in the Liquidation Account provided for in Section 17 of this Plan, to receive the distribution of any assets remaining after payment of creditors' claims, including the claims of Savings Account holders to the withdrawal value of their accounts, in the event of any voluntary or involuntary liquidation of the Company after the Conversion. 17. LIQUIDATION ACCOUNT. (a) For purposes of granting a limited priority claim to the assets of the Company in the event of a complete liquidation thereof to Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain a Savings Account at the Company after the Conversion, the Company will, at the time of the Conversion, establish the Liquidation Account in an amount equal to the retained earnings of the Company as set forth in its latest statement of financial condition contained in the Prospectus for the sale of Common Shares. The Liquidation Account will not operate to restrict the use or application of any of the regulatory capital of the Company. (b) Each Eligible Account Holder and Supplemental Eligible Account Holder will have a separate inchoate interest in a portion of the Liquidation Account for each Savings Account making up such account holder's Qualifying Deposit (herein referred to as the "Subaccount"). (c) The initial balance of each Subaccount will be an amount determined by multiplying the amount in the Liquidation Account by a fraction, the numerator of which is the amount of the account holder's Qualifying Deposits as of the close of business on the Eligibility Record Date or the Supplemental Eligibility Record Date, as the case may be, and the denominator of which is the total amount of all Qualifying Deposits of Eligible Account Holders and Supplemental Eligible Account Holders on the corresponding record date. For Savings Accounts in existence on both the Eligibility Record Date and the Supplemental Eligibility Record Date, separate Subaccounts will be determined on the basis of the Qualifying Deposits in such Savings Accounts on each such date. The balance of each Subaccount will never be increased above the initial balance. If the balance in the Savings Account to which a Subaccount relates, at the close of business on the last day of each fiscal year of the Company subsequent to the respective record dates, is less than the lesser of (i) the deposit balance in such Savings Account at the close of business on the last day of each fiscal year of the Holding Company subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date and (ii) the amount of the Qualifying Deposit as of the Eligibility Record Date or the Supplemental Eligibility Record Date, the balance of the Subaccount for such Savings Account will be adjusted in proportion to the reduction in such Savings Account balance. In the event of any such downward adjustment, such Subaccount balance will not be subsequently increased notwithstanding any increase in the deposit balance of the related Savings Account. If any Savings Account is closed, its related Subaccount will be reduced to zero upon such closing. The Subaccount of an account holder will be maintained for as long as the account holder maintains the related Savings Account with the same Social Security or tax identification number. (d) In the event of a complete liquidation of the converted Company (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder will be entitled to receive from the Liquidation Account a 13 15 distribution equal to the current adjusted balance in each of such account holder's Subaccounts before any liquidation distribution may be made to any holders of the capital stock of the Company. No merger, consolidation, sale of bulk assets or similar combination or transaction with another savings association, the accounts of which are insured by the FDIC, will be deemed to be a complete liquidation for this purpose and, in any such transaction, the Liquidation Account will be assumed by the surviving insured institution. 18. ACCOUNTS IN CONVERTED COMPANY. Each Savings Account in the Company at the time of the Conversion will constitute, without payment or further action by the account holder, a Savings Account in the Company as converted, equal in withdrawable amount to the withdrawal value (as adjusted to give effect to any withdrawal made for the purchase of Common Shares), and subject to the same terms and conditions, except as to voting and liquidation rights, as such Savings Account in the Company immediately before the Conversion. 19. RESTRICTIONS ON PURCHASES AND SALES OF COMMON SHARES BY OFFICERS AND DIRECTORS FOLLOWING CONVERSION. (a) All Common Shares purchased by Officers or Directors of the Holding Company or the Company or their Associates pursuant to this Plan will be subject to the restriction that no such shares will be sold for a period of one year following the date of purchase of such shares, except in the event of the death of the Officer, Director or Associate or pursuant to any merger or similar transaction approved by the OTS. (b) With respect to all Common Shares subject to the restriction on subsequent disposition pursuant to paragraph (a) of this Section 19, each of the following provisions will apply: (i) Each certificate representing such shares will bear the following legend prominently stamped thereon giving notice of such restriction on transfer: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD BY THE REGISTERED HOLDER HEREOF FOR A PERIOD OF NOT LESS THAN ONE YEAR FROM THE DATE OF ISSUANCE HEREOF, EXCEPT IN THE EVENT OF THE DEATH OF THE REGISTERED HOLDER OF SUCH SHARES. (ii) Instructions will be given to the transfer agent for the Holding Company, if any, not to recognize or effect any transfer of any certificates representing such shares or any change of record ownership thereof in violation of such restriction on transfer; and (iii) Any shares of capital stock of the Holding Company issued as a stock dividend, stock split or otherwise with respect to outstanding Common Shares subject to restrictions on transfer hereunder will be subject to the same restrictions as are applicable to the Common Shares with respect to which such shares of stock are issued. (c) For a period of three years following the Conversion, no Officer or Director, or any Associates of such Officer or Director shall, without the prior written approval of the OTS, purchase the capital stock of the Holding Company other than from a Broker or Dealer registered with the SEC. This provision will not apply to (i) negotiated transactions involving more than one percent of a class of outstanding capital stock of the Holding Company or (ii) purchases of shares of capital stock made by and held by any one or more tax-qualified or non-tax-qualified employee stock benefit plans which may be attributable to individual Officers or Directors. The foregoing restrictions on purchases of common shares of the Holding Company shall be in addition to any restrictions that may be imposed by federal and state securities laws. 20. RESTRICTIONS ON ACQUISITION OF THE COMPANY OR THE HOLDING COMPANY. Acquisition of the capital stock of the Company or the Holding Company after the Conversion will be subject to various restrictions contained in the Amended Articles, the Amended Constitution, the articles of incorporation of the Holding Company, the code of regulations of the Holding Company and various state and federal laws and regulations. In addition, the articles of incorporation of the Holding Company or the Amended Articles may include the limitation that, for a period of up to five years 14 16 from the date of completion of the Conversion of the Company from mutual to stock form, no Person may directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of an equity security of the Company or the Holding Company. 21. CONSUMMATION OF CONVERSION. The Conversion of the Company from mutual to stock form will be deemed to have taken place and to be effective at the time and date provided in the regulations of the OTS and the Division. The Conversion must be completed within 24 months of the approval of this Plan by the Members. 22. ADOPTION OF AMENDED ARTICLES AND AMENDED CONSTITUTION As part of the Conversion, the Company shall take all appropriate steps to adopt the Amended Articles and the Amended Constitution and to present the Amended Articles and the Amended Constitutions to the Voting Members for their approval. 23. TAX RULINGS/OPINIONS. The Conversion is expressly conditioned upon the prior receipt by the Company and the Holding Company of either rulings from the Internal Revenue Service and the appropriate Ohio taxing authorities or opinions of legal counsel or other tax advisors to the Company in form and substance satisfactory to the Company and to the effect, among other things, that the Conversion will constitute a tax-free "reorganization" as defined in Section 368(a) of the Internal Revenue Code of 1986, as amended, and comparable provisions of applicable state law, or that consummation of the transactions provided for in this Plan will not otherwise result in any federal, state or other tax consequences to the Company or the converted Company deemed materially adverse by the Board of Directors of the Company or the Board of Directors of the Holding Company. 24. DIRECTORS AND OFFICERS OF THE COMPANY. It is not intended that the Conversion will result in any change in the Directors or Officers of the Company. The persons serving as Officers on the date the Application is filed with the OTS and the Division will continue to serve at the discretion of the Board of Directors of the Company in their respective capacities as Officers of the converted the Company. The persons serving as Directors of the Company on the date the Application is filed with the OTS and the Division will continue to serve as Directors following the Conversion until their terms expire or their earlier death, resignation or removal from office. 25. STOCK BENEFIT PLANS. Following the completion of the Conversion, the Company or the Holding Company may establish one or more stock option plans and management recognition plans to the extent permitted by OTS regulations. The Company and the Holding Company may make scheduled or discretionary contributions to one or more stock benefit plans maintained by the Company or the Holding Company for the benefit of the Directors, Officers or employees of the Company or the Holding Company, provided such contributions do not cause the Company to fail to meet its regulatory capital requirement. 26. REGISTRATION OF COMMON SHARES; MARKET FOR COMMON SHARES. (a) Before or promptly following the Conversion, the Holding Company will register the Common Shares with the SEC pursuant to the Securities Exchange Act of 1934 and will not deregister such shares for a period of three years thereafter. (b) The Holding Company will use its best efforts to encourage and assist a market maker to establish and maintain a market for the Common Shares and will use its best efforts to cause such shares to be quoted on The Nasdaq Stock Market (or any comparable quotation system which may hereafter be developed) or listed on a national or regional securities exchange. 15 17 27. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION As part of the Conversion, the Holding Company and the Company may establish or contribute to the Foundation. To fund the Foundation, the Company would contribute funds prior to completion of the Conversion or, immediately subsequent to the Conversion, the Company or the Holding Company would contribute common shares in an amount not to exceed eight percent (8%) of the number of Common Shares issued in the Conversion, or a combination of cash and common shares, subject to the receipt of any required regulatory approval or consent. The purpose of the contribution to the Foundation is to complement the Company's existing community reinvestment activities and to share the Company's financial success as a locally-based, community-oriented, financial services institution. The Foundation would be dedicated to the promotion of charitable purposes including community development, grants, or donations to support housing assistance and affordable housing programs, not-for-profit community groups and other similar types of organizations and projects. In order to serve the purposes for which it would be formed and in order to maintain its qualification under Section 501(c)(3) of the Code, the Foundation might sell, on an annual basis, a portion of the common shares contributed to it by the Company or the Holding Company, if any. The Board of Directors of the Foundation may be comprised of individuals who are Officers or Directors of the Company or the Holding Company. The Board of Directors of the Foundation would be responsible for establishing the policies of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation. 28. EXPENSES OF CONVERSION. The Company and the Holding Company will use their best efforts to ensure that the expenses incurred in connection with the Conversion will be reasonable. 29. AMENDMENT OR TERMINATION OF THIS PLAN. If deemed necessary or desirable by the Boards of Directors of the Company and the Holding Company, this Plan may be amended by the Boards of Directors of the Company and the Holding Company in their sole discretion at any time prior to the solicitation of Proxies from Voting Members entitled to vote on this Plan and at any time thereafter with the concurrence of the OTS and the Division. The Conversion pursuant to this Plan may be terminated by the Boards of Directors of the Company and the Holding Company in their sole discretion at any time prior to the Special Meeting and at any time thereafter with the concurrence of the OTS and the Division. 30. INTERPRETATION OF THIS PLAN. The Boards of Directors of the Company and the Holding Company will interpret this Plan. To the extent permitted by law, all interpretations of this Plan and applications of its terms shall be made by a majority of the Directors of the Company and the Holding Company and, subject to the authority of the OTS and the Division, such interpretation will be final. 16 EX-3.2 4 EXHIBIT 3.2 1 Exhibit 3.2 CODE OF REGULATIONS OF UNITED COMMUNITY FINANCIAL CORP. INDEX
Section Caption Page No. - ------- ------- -------- ARTICLE ONE MEETINGS OF SHAREHOLDERS 1.01. Annual Meetings.......................................................................1 1.02. Calling of Meetings...................................................................1 1.03. Place of Meetings.....................................................................1 1.04. Notice of Meetings....................................................................1 1.05. Waiver of Notice......................................................................2 1.06. Quorum................................................................................2 1.07. Votes Required........................................................................2 1.08. Order of Business.....................................................................2 1.09. Shareholders Entitled to Vote.........................................................2 1.10. Cumulative Voting.....................................................................2 1.11. Proxies...............................................................................3 1.12. Inspectors of Election................................................................3 ARTICLE TWO DIRECTORS 2.01. Authority and Qualifications..........................................................3 2.02. Number of Directors and Term of Office................................................3 2.03. Nomination............................................................................4 2.04. Election..............................................................................5 2.05. Removal...............................................................................5 2.06. Vacancies.............................................................................5 2.07. Meetings..............................................................................5 2.08. Notice of Meetings....................................................................6 2.09. Waiver of Notice......................................................................6 2.10. Quorum................................................................................6 2.11. Executive Committee...................................................................6 2.12. Compensation..........................................................................7 2.13. Bylaws................................................................................7
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ARTICLE THREE OFFICERS 3.01. Officers..............................................................................7 3.02. Tenure of Office......................................................................7 3.03. Duties of the Chairman of the Board...................................................7 3.04. Duties of the President...............................................................8 3.05. Duties of the Vice Presidents.........................................................8 3.06. Duties of the Secretary...............................................................8 3.07. Duties of the Treasurer...............................................................8 ARTICLE FOUR SHARES 4.01. Certificates..........................................................................8 4.02. Transfers.............................................................................9 4.03. Transfer Agents and Registrars........................................................9 4.04. Lost, Wrongfully Taken or Destroyed Certificates......................................9 4.05. Uncertificated Shares................................................................10 ARTICLE FIVE INDEMNIFICATION AND INSURANCE 5.01. Mandatory Indemnification............................................................10 5.02. Court-Approved Indemnification.......................................................10 5.03. Indemnification for Expenses.........................................................11 5.04 Determination Required...............................................................11 5.05. Advances for Expenses................................................................12 5.06. Article Five Not Exclusive...........................................................12 5.07. Insurance............................................................................12 5.08. Certain Definitions..................................................................12 5.09. Venue................................................................................13 ARTICLE SIX MISCELLANEOUS 6.01. Amendments...........................................................................13 6.02. Action by Shareholders or Directors Without a Meeting................................13
3 CODE OF REGULATIONS OF UNITED COMMUNITY FINANCIAL CORP. ARTICLE ONE MEETINGS OF SHAREHOLDERS SECTION 1.01. ANNUAL MEETINGS. The annual meeting of the shareholders for the election of directors, for the consideration of reports to be laid before such meeting and for the transaction of such other business as may properly come before such meeting shall be held on the last Thursday in April of each year or on such other date as may be fixed from time to time by the directors. SECTION 1.02. CALLING OF MEETINGS. Meetings of the shareholders may be called only by the chairman of the board; the president or, in case of the president's absence, death, or disability, the vice president authorized to exercise the authority of the president; the secretary; the directors by action at a meeting, or a majority of the directors acting without a meeting; or the holders of at least twenty-five percent of all shares outstanding and entitled to vote thereat. SECTION 1.03. PLACE OF MEETINGS. All meetings of shareholders shall be held at the principal office of the corporation, unless otherwise provided by action of the directors. Meetings of shareholders may be held at any place within or without the State of Ohio. SECTION 1.04. NOTICE OF MEETINGS. (A) Written notice stating the time, place and purposes of a meeting of the shareholders shall be given either by personal delivery or by mail not less than seven nor more than sixty days before the date of the meeting (1) to each shareholder of record entitled to notice of the meeting, (2) by or at the direction of the president or the secretary. If mailed, such notice shall be addressed to the shareholder at his address as it appears on the records of the corporation. Notice of adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at such meeting. In the event of a transfer of shares after the record date for determining the shareholders who are entitled to receive notice of a meeting of shareholders, it shall not be necessary to give notice to the transferee. Nothing herein contained shall prevent the setting of a record date in the manner provided by law, the Articles of Incorporation of the corporation (the "Articles") or elsewhere in this Code of Regulations (the "Regulations") for the determination of shareholders who are entitled to receive notice of or to vote at any meeting of shareholders or for any purpose required or permitted by law. (B) Following receipt by the president or the secretary of a request in writing, specifying the purpose or purposes for which the persons properly making such request have called 1 4 a meeting of the shareholders, delivered either in person or by registered mail to such officer by any persons entitled to call a meeting of shareholders, such officer shall cause to be given to the shareholders entitled thereto notice of a meeting to be held on a date not less than seven nor more than sixty days after the receipt of such request, as such officer may fix. If such notice is not given within fifteen days after the receipt of such request by the president or the secretary, then, and only then, the persons properly calling the meeting may fix the time of meeting and give notice thereof in accordance with the provisions of the Regulations. SECTION 1.05. WAIVER OF NOTICE. Notice of the time, place and purpose or purposes of any meeting of shareholders may be waived in writing, either before or after the holding of such meeting, by any shareholders, which writing shall be filed with or entered upon the records of such meeting. The attendance of any shareholder, in person or by proxy, at any such meeting without protesting the lack of proper notice, prior to or at the commencement of the meeting, shall be deemed to be a waiver by such shareholder of notice of such meeting. SECTION 1.06. QUORUM. At any meeting of shareholders, the holders of a majority of the voting shares of the corporation outstanding and entitled to vote thereat, present in person or by proxy, shall constitute a quorum for such meeting. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, or the chairman of the board, the president, or the officer of the corporation acting as chairman of the meeting, may adjourn such meeting from time to time, and if a quorum is present at such adjourned meeting any business may be transacted as if the meeting had been held as originally called. SECTION 1.07. VOTES REQUIRED. At all elections of directors the candidates receiving the greatest number of votes shall be elected. Any other matter submitted to the shareholders for their vote shall be decided by the vote of such proportion of the shares, or of any class of shares, or of each class, as is required by law, the Articles or the Regulations. SECTION 1.08. ORDER OF BUSINESS. The order of business at any meeting of shareholders shall be determined by the officer of the corporation acting as chairman of such meeting unless otherwise determined by a vote of the holders of a majority of the voting shares of the corporation then outstanding, present in person or by proxy, and entitled to vote at such meeting. SECTION 1.09. SHAREHOLDERS ENTITLED TO VOTE. Each shareholder of record on the books of the corporation on the record date for determining the shareholders who are entitled to vote at a meeting of shareholders shall be entitled at such meeting to one vote for each share of the corporation standing in his name on the books of the corporation on such record date. The directors may fix a record date for the determination of the shareholders who are entitled to receive notice of and to vote at a meeting of shareholders, which record date shall not be a date earlier than the date on which the record date is fixed and which record date may be a maximum of sixty days preceding the date of the meeting of shareholders. SECTION 1.10. CUMULATIVE VOTING. If notice in writing shall be given by a shareholder to the president, a vice president or the secretary of the corporation, not less than forty- 2 5 eight hours before the time fixed for holding a meeting of the shareholders for the purpose of electing directors if notice of such meeting shall have been given at least ten days prior thereto, and otherwise not less than twenty-four hours before such time, that such shareholder desires that the voting at such election shall be cumulative, and if an announcement of the giving of such notice is made upon the convening of the meeting by the chairman or secretary or by or on behalf of the shareholder giving such notice, each shareholder shall have the right to cumulate such voting power as he possesses and to give one candidate as many votes as is determined by multiplying the number of directors to be elected by the number of votes to which such shareholder is entitled, or to distribute such number of votes on the same principle among two or more candidates, as he sees fit; provided, however, that the foregoing procedures shall not apply if the Articles provide that no shareholder may cumulate his voting power. SECTION 1.11. PROXIES. At meetings of the shareholders, any shareholder of record entitled to vote thereat may be represented and may vote by a proxy or proxies appointed by an instrument in writing signed by such shareholder, but such instrument shall be filed with the secretary of the meeting before the person holding such proxy shall be allowed to vote thereunder. No proxy shall be valid after the expiration of eleven months after the date of its execution, unless the shareholder executing it shall have specified therein the length of time it is to continue in force. SECTION 1.12. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the directors may appoint inspectors of election to act at such meeting or any adjournment thereof; if inspectors are not so appointed, the officer of the corporation acting as chairman of any such meeting may make such appointment. In case any person appointed as inspector fails to appear or act, the vacancy may be filled only by appointment made by the directors in advance of such meeting or, if not so filled, at the meeting by the officer of the corporation acting as chairman of such meeting. No other person or persons may appoint or require the appointment of inspectors of election. ARTICLE TWO DIRECTORS SECTION 2.01. AUTHORITY AND QUALIFICATIONS. Except where the law, the Articles or the Regulations otherwise provide, all authority of the corporation shall be vested in and exercised by its directors. Section 2.02. Number of Directors and Term of Office. ----------------------------------------------------- (A) Until changed in accordance with the provisions of the Regulations, the number of directors of the corporation shall be nine. (B) Directors shall be elected in such numbers and to serve for such terms that the terms of an equal number of directors, as nearly as possible, will expire each year. A term may 3 6 not exceed three years. Directors shall serve until their successors are duly elected and qualified or until their earlier resignation, removal from office, or death. (C) The number of directors may be fixed or changed at a meeting of the shareholders called for the purpose of electing directors at which a quorum is present, only by the affirmative vote of the holders of not less than a majority of the voting shares which are represented at the meeting, in person or by proxy, and entitled to vote on such proposal. (D) The directors may fix or change the number of directors and may fill any director's office that is created by an increase in the number of directors; provided, however, that the directors may not increase the number of directors to greater than thirteen (13) nor reduce the number of directors to fewer than seven (7) and no reduction in the number of directors shall of itself have the effect of shortening the term of any incumbent director. Section 2.03. Nomination. ------------------------- (A) Any nominee for election as a director of the corporation may be proposed only by the directors or by any shareholder entitled to vote for the election of directors. No person, other than a nominee proposed by the directors, may be nominated for election as a director of the corporation unless such person shall have been proposed in a written notice, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the corporation at the principal offices of the corporation. In the case of a nominee proposed for election as a director at an annual meeting of shareholders, such written notice of a proposed nominee shall be received by the Secretary of the corporation on or before the sixtieth (60th) day before the first anniversary of the most recent annual meeting of shareholders of the corporation held for the election of directors; provided, however, that if the annual meeting for the election of directors in any year is not held on or before the thirty-first (31st) day next following such anniversary, then the written notice required by this subparagraph (A) shall be received by the Secretary within a reasonable time prior to the date of such annual meeting. In the case of a nominee proposed for election as a director at a special meeting of shareholders at which directors are to be elected, such written notice of a proposed nominee shall be received by the Secretary of the corporation no later than the close of business on the seventh (7th) day following the day on which notice of the special meeting was mailed to shareholders. Each such written notice of a proposed nominee shall set forth (1) the name, age, business or residence address of each nominee proposed in such notice, (2) the principal occupation or employment of each such nominee, and (3) the number of common shares of the corporation owned beneficially and/or of record by each such nominee and the length of time any such shares have been so owned. (B) If a shareholder shall attempt to nominate one or more persons for election as a director at any meeting at which directors are to be elected without having identified each such person in a written notice given as contemplated by, and/or without having provided therein the information specified in, subparagraph (A) of this Section, each such attempted nomination shall be invalid and shall be disregarded unless the person acting as Chairman of the meeting determines that the facts warrant the acceptance of such nomination. 4 7 (C) The election of directors shall be by ballot whenever requested by the person acting as Chairman of the meeting or by the holders of a majority of the voting shares outstanding, entitled to vote at such meeting and present in person or by proxy, but unless such request is made, the election shall be by voice vote. SECTION 2.04. ELECTION. At each annual meeting of shareholders for the election of directors, the successors to the directors whose term shall expire in that year shall be elected, but if the annual meeting is not held or if one or more of such directors are not elected thereat, they may be elected at a special meeting called for that purpose. The election of directors shall be by ballot whenever requested by the presiding officer of the meeting or by the holders of a majority of the voting shares outstanding, entitled to vote at such meeting and present in person or by proxy, but unless such request is made, the election shall be viva voce. SECTION 2.05. REMOVAL. A director or directors may be removed from office, with or without assigning any cause, only by the vote of the holders of shares entitling them to exercise not less than 75% of the voting power of the corporation to elect directors in place of those to be removed; provided, however, if the shareholders have a right to vote cumulatively in the election of directors, unless all the directors, or all the directors of a particular class (if the directors of the corporation are divided into classes), are removed, no individual director shall be removed in case the votes of a sufficient number of shares are cast against his removal that, if cumulatively voted at an election of all directors, or all the directors of a particular class, as the case may be, would be sufficient to elect at least one director. In case of any such removal, a new director may be elected at the same meeting for the unexpired term of each director removed. Failure to elect a director to fill the unexpired term of any director removed shall be deemed to create a vacancy in the board. SECTION 2.06. VACANCIES. The remaining directors, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill any vacancy in the board for the unexpired term. A vacancy in the board exists within the meaning of this Section 2.06 in case the shareholders increase the authorized number of directors but fail at the meeting at which such increase is authorized, or an adjournment thereof, to elect the additional directors provided for, or in case the shareholders fail at any time to elect the whole authorized number of directors. SECTION 2.07. MEETINGS. A meeting of the directors shall be held immediately following the adjournment of each annual meeting of shareholders at which directors are elected, and notice of such meeting need not be given. The directors shall hold such other meetings as may from time to time be called, and such other meetings of directors may be called only by the chairman of the board, the president, or any two directors. All meetings of directors shall be held at the principal office of the corporation or at such other place as the directors may from time to time determine by resolution. Meetings of the directors may be held through any communications equipment if all persons participating can hear each other, and participation in a meeting pursuant to this provision shall constitute presence at such meeting. 5 8 SECTION 2.08. NOTICE OF MEETINGS. Notice of the time and place of each meeting of directors for which such notice is required by law, the Articles, the Regulations or the By-Laws shall be given to each of the directors by at least one of the following methods: (A) In a writing mailed not less than three days before such meeting and addressed to the residence or usual place of business of a director, as such address appears on the records of the corporation; or (B) By telegraph, cable, radio, wireless, or a writing sent or delivered to the residence or usual place of business of a director as the same appears on the records of the corporation, not later than the day before the date on which such meeting is to be held; or (C) Personally or by telephone not later than the day before the date on which such meeting is to be held. Notice given to a director by any one of the methods specified in the Regulations shall be sufficient, and the method of giving notice to all directors need not be uniform. Notice of any meeting of directors may be given only by the chairman of the board, the president or the secretary of the corporation. Any such notice need not specify the purpose or purposes of the meeting. Notice of adjournment of a meeting of directors need not be given if the time and place to which it is adjourned are fixed and announced at such meeting. SECTION 2.09. WAIVER OF NOTICE. Notice of any meeting of directors may be waived in writing, either before or after the holding of such meeting, by any director, which writing shall be filed with or entered upon the records of the meeting. The attendance of any director at any meeting of directors without protesting, prior to or at the commencement of the meeting, the lack of proper notice, shall be deemed to be a waiver by him of notice of such meeting. SECTION 2.10. QUORUM. A majority of the whole authorized number of directors shall be necessary to constitute a quorum for a meeting of directors, except that a majority of the directors in office shall constitute a quorum for filling a vacancy in the board. The act of a majority of the directors present at a meeting at which a quorum is present is the act of the board, except as otherwise provided by law, the Articles or the Regulations. SECTION 2.11. EXECUTIVE COMMITTEE. The directors may create an executive committee or any other committee of directors, to consist of not less than three directors, and may authorize the delegation to such executive committee or other committees of any of the authority of the directors, however conferred, other than that of filling vacancies among the directors or in the executive committee or in any other committee of the directors. Such executive committee or any other committee of directors shall serve at the pleasure of the directors, shall act only in the intervals between meetings of the directors, and shall be subject to the control and direction of the directors. Such executive committee or other 6 9 committee of directors may act by a majority of its members at a meeting or by a writing or writings signed by all of its members. Any act or authorization of any act by the executive committee or any other committee within the authority delegated to it shall be as effective for all purposes as the act or authorization of the directors. No notice of a meeting of the executive committee or of any other committee of directors shall be required. A meeting of the executive committee or of any other committee of directors may be called only by the president or by a member of such executive or other committee of directors. Meetings of the executive committee or of any other committee of directors may be held through any communications equipment if all persons participating can hear each other and participation in such a meeting shall constitute presence thereat. SECTION 2.12. COMPENSATION. Directors shall be entitled to receive as compensation for services rendered and expenses incurred as directors such amounts as the directors may determine. SECTION 2.13. BYLAWS. The directors may adopt, and amend from time to time, bylaws for their own government, which bylaws shall not be inconsistent with the law, the Articles or the Regulations. ARTICLE THREE OFFICERS SECTION 3.01. OFFICERS. The officers of the corporation to be elected by the directors shall be a president, a secretary, a treasurer, and, if desired, one or more vice presidents and such other officers and assistant officers as the directors may from time to time elect. The directors may elect a chairman of the board, who must be a director. Officers need not be shareholders of the corporation and may be paid such compensation as the board of directors may determine. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Articles, the Regulations or the bylaws to be executed, acknowledged or verified by two or more officers. SECTION 3.02. TENURE OF OFFICE. The officers of the corporation shall hold office at the pleasure of the directors. Any officer of the corporation may be removed, either with or without cause, at any time, by the affirmative vote of a majority of all the directors then in office; such removal, however, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 3.03. DUTIES OF THE CHAIRMAN OF THE BOARD. The chairman of the board, if any, shall preside at all meetings of the directors. He shall have such other powers and duties as the directors shall from time to time assign to him. 7 10 SECTION 3.04. DUTIES OF THE PRESIDENT. The president shall be the chief executive officer of the corporation, shall exercise supervision over the business of the corporation and shall have, among such additional powers and duties as the directors may from time to time assign to him, the power and authority to sign all certificates evidencing shares of the corporation and all deeds, mortgages, bonds, contracts, notes and other instruments requiring the signature of the president of the corporation. It shall be the duty of the president to preside at all meetings of shareholders. SECTION 3.05. DUTIES OF THE VICE PRESIDENTS. In the absence of the president or in the event of his inability or refusal to act, the vice president, if any (or in the event there be more than one vice president, the vice presidents in the order designated, or in the absence of any designation, then in the order of their election), shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the directors may from time to time prescribe. SECTION 3.06. DUTIES OF THE SECRETARY. It shall be the duty of the secretary, or of an assistant secretary, if any, in case of the absence or inability to act of the secretary, to keep minutes of all the proceedings of the shareholders and the directors and to make a proper record of the same; to perform such other duties as may be required by law, the Articles or the Regulations; to perform such other and further duties as may from time to time be assigned to him by the directors or the president; and to deliver all books, paper and property of the corporation in his possession to his successor, or to the president. SECTION 3.07. DUTIES OF THE TREASURER. The treasurer, or an assistant treasurer, if any, in case of the absence or inability to act of the treasurer, shall receive and safely keep in charge all money, bills, notes, chooses in action, securities and similar property belonging to the corporation, and shall do with or disburse the same as directed by the president or the directors; shall keep an accurate account of the finances and business of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, stated capital and shares, together with such other accounts as may be required and hold the same open for inspection and examination by the directors; shall give bond in such sum with such security as the directors may require for the faithful performance of his duties; shall, upon the expiration of his term of office, deliver all money and other property of the corporation in his possession or custody to his successor or the president; and shall perform such other duties as from time to time may be assigned to him by the directors. ARTICLE FOUR SHARES SECTION 4.01. CERTIFICATES. Certificates evidencing ownership of shares of the corporation shall be issued to those entitled to them. Each certificate evidencing shares of the 8 11 corporation shall bear a distinguishing number; the signatures of the chairman of the board, the president, or a vice president, and of the secretary or an assistant secretary (except that when any such certificate is countersigned by an incorporated transfer agent or registrar, such signatures may be facsimile, engraved, stamped or printed); and such recitals as may be required by law. Certificates evidencing shares of the corporation shall be of such tenor and design as the directors may from time to time adopt and may bear such recitals as are permitted by law. SECTION 4.02. TRANSFERS. Where a certificate evidencing a share or shares of the corporation is presented to the corporation or its proper agents with a request to register transfer, the transfer shall be registered as requested if: (1) An appropriate person signs on each certificate so presented or signs on a separate document an assignment or transfer of shares evidenced by each such certificate, or signs a power to assign or transfer such shares, or when the signature of an appropriate person is written without more on the back of each such certificate; and (2) Reasonable assurance is given that the endorsement of each appropriate person is genuine and effective; the corporation or its agents may refuse to register a transfer of shares unless the signature of each appropriate person is guaranteed by a commercial bank or trust company having an office or a correspondent in the City of New York or by a firm having membership in the New York Stock Exchange; and (3) All applicable laws relating to the collection of transfer or other taxes have been complied with; and (4) The corporation or its agents are not otherwise required or permitted to refuse to register such transfer. SECTION 4.03. TRANSFER AGENTS AND REGISTRARS. The directors may appoint one or more agents to transfer or to register shares of the corporation, or both. SECTION 4.04. LOST, WRONGFULLY TAKEN OR DESTROYED CERTIFICATES. Except as otherwise provided by law, where the owner of a certificate evidencing shares of the corporation claims that such certificate has been lost, destroyed or wrongfully taken, the directors must cause the corporation to issue a new certificate in place of the original certificate if the owner: (1) So requests before the corporation has notice that such original certificate has been acquired by a bona fide purchaser; and (2) Files with the corporation, unless waived by the directors, an indemnity bond, with surety or sureties satisfactory to the corporation, in such sums as the directors may, in their discretion, deem reasonably sufficient as indemnity against any loss or liability that the corporation may incur by reason of the issuance of each such new certificate; and 9 12 (3) Satisfies any other reasonable requirements which may be imposed by the directors, in their discretion. SECTION 4.05. UNCERTIFICATED SHARES. Anything contained in this Article Fourth to the contrary notwithstanding, the directors may provide by resolution that some or all of any or all classes and series of shares of the corporation shall be Uncertificated shares, provided that such resolution shall not apply to (A) shares of the corporation represented by a certificate until such certificate is surrendered to the corporation in accordance with applicable provisions of Ohio law or (B) any certificated security of the corporation issued in exchange for an uncertificated security in accordance with applicable provisions of Ohio law. The rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of certificates representing shares of the same class and series shall be identical, except as otherwise expressly provided by law. ARTICLE FIVE INDEMNIFICATION AND INSURANCE SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall indemnify any officer or director of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action threatened or instituted by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. A person claiming indemnification under this Section 5.01 shall be presumed, in respect of any act or omission giving rise to such claim for indemnification, to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal matter, to have had no reasonable cause to believe his conduct was unlawful, and the termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, rebut such presumption. SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything contained in the Regulations or elsewhere to the contrary notwithstanding: (A) the corporation shall not indemnify any officer or director of the corporation who was a party to any completed action or suit instituted by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, 10 13 trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, in respect of any claim, issue or matter asserted in such action or suit as to which he shall have been adjudged to be liable for acting with reckless disregard for the best interests of the corporation or misconduct (other than negligence) in the performance of his duty to the corporation unless and only to the extent that the Court of Common Pleas of Mahoning County, Ohio, or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances of the case, he is fairly and reasonably entitled to such indemnity as such Court of Common Pleas or such other court shall deem proper; and (B) the corporation shall promptly make any such unpaid indemnification as is determined by a court to be proper as contemplated by this Section 5.02. SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained in the Regulations or elsewhere to the contrary notwithstanding, to the extent that an officer or director of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 5.01, or in defense of any claim, issue or matter therein, he shall be promptly indemnified by the corporation against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) actually and reasonably incurred by him in connection therewith. SECTION 5.04 DETERMINATION REQUIRED. Any indemnification required under Section 5.01 and not precluded under Section 5.02 shall be made by the corporation only upon a determination that such indemnification of the officer or director is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 5.01. Such determination may be made only (A) by a majority vote of a quorum consisting of directors of the corporation who were not and are not parties to, or threatened with, any such action, suit or proceeding, or (B) if such a quorum is not obtainable or if a majority of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation, or any person to be indemnified, within the past five years, or (C) by the shareholders, or (D) by the Court of Common Pleas of Mahoning County, Ohio, or (if the corporation is a party thereto) the court in which such action, suit or proceeding was brought, if any; any such determination may be made by a court under division (D) of this Section 5.04 at any time including, without limitation, any time before, during or after the time when any such determination may be requested of, be under consideration by or have been denied or disregarded by the disinterested directors under division (A) or by independent legal counsel under division (B) or by the shareholders under division (C) of this Section 5.04; and no failure for any reason to make any such determination, and no decision for any reason to deny any such determination, by the disinterested directors under division (A) or by independent legal counsel under division (B) or by shareholders under division (C) of this Section 5.04 shall be evidence in rebuttal of the presumption recited in Section 5.01. Any determination made by the disinterested directors under division (A) or by independent legal counsel under division (B) of this Section 5.04 to make indemnification in respect of any claim, issue or matter asserted in an action or suit threatened or brought by or in the right of the corporation shall be promptly communicated to the person who threatened or brought 11 14 such action or suit, and within ten days after receipt of such notification such person shall have the right to petition the Court of Common Pleas of Mahoning County, Ohio, or the court in which such action or suit was brought, if any, to review the reasonableness of such determination. SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) incurred in defending any action, suit or proceeding referred to in Section 5.01 shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding to or on behalf of the officer or director promptly as such expenses are incurred by him, but only if such officer or director shall first agree, in writing, to repay all amounts so paid in respect of any claim, issue or other matter asserted in such action, suit or proceeding in defense of which he shall not have been successful on the merits or otherwise: (A) if it shall ultimately be determined as provided in Section 5.04 that he is not entitled to be indemnified by the corporation as provided under Section 5.01; or (B) if, in respect of any claim, issue or other matter asserted by or in the right of the corporation in such action or suit, he shall have been adjudged to be liable for acting with reckless disregard for the best interests of the corporation or misconduct (other than negligence) in the performance of his duty to the corporation, unless and only to the extent that the Court of Common Pleas of Mahoning County, Ohio, or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances, he is fairly and reasonably entitled to all or part of such indemnification. SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification provided by this Article Five shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under the Articles or the Regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer or director of the corporation and shall inure to the benefit of the heirs, executors, and administrators of such a person. SECTION 5.07. INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the obligation or the power to indemnify him against such liability under the provisions of this Article Five. SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this Article Five, and as examples and not by way of limitation: (A) A person claiming indemnification under this Article 5 shall be deemed to have been successful on the merits or otherwise in defense of any action, suit or proceeding referred 12 15 to in Section 5.01, or in defense of any claim, issue or other matter therein, if such action, suit or proceeding shall be terminated as to such person, with or without prejudice, without the entry of a judgment or order against him, without a conviction of him, without the imposition of a fine upon him and without his payment or agreement to pay any amount in settlement thereof (whether or not any such termination is based upon a judicial or other determination of the lack of merit of the claims made against him or otherwise results in a vindication of him); and (B) References to an "other enterprise" shall include employee benefit plans; references to a "fine" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" within the meaning of that term as used in this Article Five. SECTION 5.09. VENUE. Any action, suit or proceeding to determine a claim for indemnification under this Article Five may be maintained by the person claiming such indemnification, or by the corporation, in the Court of Common Pleas of Mahoning County, Ohio. The corporation and (by claiming such indemnification) each such person consent to the exercise of jurisdiction over its or his person by the Court of Common Pleas of Mahoning County, Ohio, in any such action, suit or proceeding. ARTICLE SIX MISCELLANEOUS SECTION 6.01. AMENDMENTS. The Regulations may be amended, or new regulations may be adopted, at a meeting of shareholders held for such purpose, only by the affirmative vote of the holders of shares entitling them to exercise not less than a majority of the voting power of the corporation on such proposal, or without a meeting by the written consent of the holders of shares entitling them to exercise not less than a majority of the voting power of the corporation on such proposal. SECTION 6.02. ACTION BY SHAREHOLDERS OR DIRECTORS WITHOUT A MEETING. Anything contained in the Regulations to the contrary notwithstanding, except as provided in Section 6.01, any action which may be authorized or taken at a meeting of the shareholders or of the directors or of a committee of the directors, as the case may be, may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by, all the shareholders who would be entitled to notice of a meeting of the shareholders held for such purpose, or all the directors, or all the members of such committee of the directors, respectively, which writings shall be filed with or entered upon the records of the corporation. 13 EX-10.1 5 EXHIBIT 10.1 1 Exhibit 10.1 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 1998 LONG-TERM INCENTIVE PLAN 2 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN OHIO 1998 LONG-TERM INCENTIVE PLAN INDEX SECTION DESCRIPTION - ------- ----------- 1 Purpose of the Plan 2 Definitions 3 Types of Awards Covered 4 Administration 5 Eligibility 6 Shares of Stock Subject to the Plan 7 Stock Options 8 Stock Appreciation Rights 9 Restricted Stock 10 Performance Awards 11 Other Stock-Based Incentive Awards 12 Exercise of Options 13 Rights in Event of Death or Disability 14 Award Agreements 15 Tax Withholding 16 Change of Control 17 Dilution or Other Adjustment 18 Transferability 19 Amendment or Termination 20 General Provisions 21 Plan Effective Date 22 Plan Termination 3 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 1998 LONG-TERM INCENTIVE PLAN SECTION 1 PURPOSE OF THE PLAN 1.1 The 1998 Long-Term Incentive Plan, maintained by The Home Savings and Loan Company of Youngstown, Ohio, is intended to motivate key employees to enhance shareholder value by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees. SECTION 2 DEFINITIONS 2.1 Unless the context indicates otherwise, the following terms, when used in this Plan, shall have the meanings set forth in this Section: A) "AFFILIATE" means (i) a member of a controlled group of corporations of which the Company is a member or (ii) an unincorporated trade or business which is under common control with the Company as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended, (the "Code") and the regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Sections 1563(a)(4) and (e)(3)(c). b) "AWARD" shall mean grants or awards under this Plan in the form of Options, SARs, Restricted Stock, Performance Awards or other stock-based incentive awards. c) "BOARD" shall mean the Board of Directors of the Company. d) "CHANGE OF CONTROL" shall be deemed to have taken place on an occurrence of an event as defined in Section 16 of this Plan. e) "CODE" shall mean the Internal Revenue Code of 1986 as it may be amended from time to time and related Treasury Regulations. f) "COMMITTEE" shall mean the Board, or any Committee comprised of two or more Outside Directors, that may be designated by the Board to administer the Plan, in accordance with Section 4 hereof. 1 4 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- g) "COMMON STOCK" shall mean the common stock, par value $.01, of the Company. h) "COMPANY" shall mean The Home Savings and Loan Company of Youngstown, Ohio. i) "DEFERRED SHARES" an award made pursuant to Section 11 of the Plan of the right to receive Common Stock in lieu of cash thereof at the end of a specified time period. j) "DIRECTOR" shall mean any member of the Board. k) "DISABILITY" shall mean permanent and total disability within the meaning of Section 22(e)(3) of the Code. l) "EMPLOYEE" shall mean any full-time employee of the Company or its Subsidiaries (including Directors who are otherwise employed on a full-time basis by the Company or its Subsidiaries). m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934 as it may be amended from time to time. n) "FAIR MARKET VALUE" of the Common Stock on a given date shall be based upon either (i) if the Common Stock is listed on a national securities exchange or quoted in an interdealer quotation system, the last sales price or, if unavailable, the average of the closing bid and asked prices per share of the Common Stock on such date (or, if there was no trading or quotation in the Common Stock on such date, on the next preceding date on which there was trading or quotation) as provided by one of such organizations or (ii) if the Common Stock is not listed on a national securities exchange or quoted in an interdealer quotation system, the price will be equal to the Company's fair market value, as determined by the Committee in good faith based upon the best available facts and circumstances at the time. o) "GRANTEE" shall mean a person granted an Award under the Plan. p) "IMMEDIATE FAMILY" shall mean with respect to a given Grantee that Grantee's spouse, children, or grandchildren (including adopted children or grandchildren). q) "ISO" shall mean an Award granted pursuant to the Plan to purchase shares of the Stock and IS intended to qualify as an incentive stock option under Section 422 of the Code, as now or hereafter constituted. r) "NON-EMPLOYEE DIRECTOR" shall mean a Director of the Company who is not an Employee nor has been an Employee at any time during the prior one-year period. 2 5 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- s) "NQSO" shall mean an Award granted pursuant to the Plan to purchase shares of stock and IS NOT intended to qualify as an incentive stock option under Section 422 of the Code, as now or hereafter constituted. t) "OPTIONS" shall refer collectively to NQSOs and ISOs issued under and subject to the Plan. u) "OUTSIDE DIRECTOR" shall mean a non-employee Director within the meaning of Rule 16b-3(b)(3) under the Exchange Act, or any successor thereto, who are also "outside directors" within the meaning of Section 162(m) of the Code and the regulations thereunder. v) "PERFORMANCE AWARDS" shall mean Awards under the Plan, payable in cash, Common Stock, other securities or other awards and shall confer on the holder thereof the right to receive payments, upon the achievement of such performance goals during such performance periods as the Committee shall establish. w) "PERMITTED TRANSFEREE" shall mean any individual or entity as defined in Section 18.2 of this Plan. x) "PLAN" shall mean this 1998 Long-Term Incentive Plan as set forth herein and as amended from time to time. y) "RESTRICTED STOCK" shall mean an Award of Common Stock subject to restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine. aa) RULES" means Rule 16(b)(3) and any successor provisions promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. bb) "SAR" shall mean an Award constituting the right to receive, upon surrender of the right, but without payment, an amount payable in cash. cc) "Subsidiary or Subsidiaries" shall mean any entity or entities in which the Company owns a majority of the voting power. dd) "TEN PERCENT SHAREHOLDER" shall mean any Grantee who owns more than 10% of the combined voting power of all classes of stock of the Company, within the meaning of Section 422 of the Code. SECTION 3 TYPES OF AWARDS COVERED 3.1 Awards granted, under the Plan may be: a) stock options ("Options") which may be designated as: 3 6 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- (i) nonqualified stock options ("NQSOs"); or (ii) incentive stock options ("ISOs"); b) stock appreciation rights ("SARs"); c) restricted stock awards ("Restricted Stock"); d) performance awards ("Performance Awards"); or e) other forms of stock-based incentive awards. SECTION 4 ADMINISTRATION 4.1 The Plan shall be administered by the Committee. Subject to the provisions of the Plan and applicable law, the Committee shall have full discretion and the exclusive power to: a) select the Employees who will participate in the Plan and to make Awards to such Employees; b) determine the time at which such Awards shall be granted and any terms and conditions with respect to such Awards as shall not be inconsistent with the provisions of the Plan; and c) resolve all questions relating to the administration of the Plan, and applicable law. 4.2 The interpretation of and application by the Committee of any provision of the Plan shall be final and conclusive. The Committee, in its sole discretion, may establish such rules and guidelines relating to the Plan as it may deem appropriate. 4.3 The Committee may employ such legal counsel, consultants, and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. The Committee shall keep minutes of its actions under the Plan. 4.4 No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Awards granted hereunder. All members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. 4 7 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- SECTION 5 ELIGIBILITY 5.1 The individuals who shall be eligible to participate in the Plan shall be officers, management, and such other key Employees of the Company and Subsidiaries (including any directors who are also employees) as the Committee may from time to time determine. 5.2 Directors of the Company who are not employees of the Company shall be eligible to participate in the Plan. 5.3 An Employee or Non-Employee Director who has been granted an Award in one year shall not necessarily be entitled to be granted Awards in subsequent years. SECTION 6 SHARES OF STOCK SUBJECT TO THE PLAN 6.1 Awards may be granted with respect to the Common Stock of the Company. 6.2 Shares delivered upon exercise of the Awards, at the election of the Board of Directors of the Company, may be Common Stock that is authorized but previously unissued, or stock reacquired by the Company, or both. 6.3 Subject to the provisions of Section 17, the maximum number of shares available for issuance under the Plan shall be at least ______ and will represent ten percent (10%) of the total number of shares outstanding. As such shares outstanding increase (which limit shall be determined without considering as outstanding any shares that are the subject of any unexercised options under the Plan or any other option plan of the Company or any Shares owned by the Company or any of its subsidiaries) such shares available for issuance under the plan share increase proportionately; provided, however, that the maximum number of Shares for which ISOs may be granted under the Plan shall not exceed ________ Shares (which number is subject to adjustment as provided in Section 17.2) The number of shares of Common Stock reserved under the Plan shall not be less than the total number of shares granted, whether exercised or unexercised for all Awards under the Plan. 6.4 Notwithstanding any other provision of the Plan to the contrary, in no event may any Grantee in any calendar year receive more than _____ Options whether they be ISOs or NQSOs, subject to adjustments as provided in Section 17 of the Plan. 6.5 Notwithstanding any other provision of the Plan to the contrary, in no event may any Grantee in any calendar year receive more than _____ SARs, subject to adjustments as provided in Section 17 of the Plan. 5 8 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- 6.6 Notwithstanding any other provision of the Plan to the contrary, in no event may any Grantee in any calendar year receive an award of Performance Awards having an aggregate maximum value as of their respective date of grant in excess of ___________. 6.7 Any shares of Common Stock awarded under the Plan, which Award for any reason expires or is terminated unexercised as to such shares, shall again be available for the grant of other Awards under the Plan; provided, however, that forfeited shares or other securities shall not be available for further Awards if the Grantee has realized any benefits of ownership from such shares. SECTION 7 STOCK OPTIONS 7.1 The Committee may grant Options, as follows, which shall be evidenced by a stock option agreement and may be designated as (i) NQSOs or (ii) ISOs: a) NQSOS ----- (i) A NQSO is a right to purchase a specified number of shares of Common Stock during such time as the Committee may determine, not to exceed ten years, at a price determined by the Committee that is not less than the Fair Market Value of the Common Stock on the date the option is granted. (ii) The purchase price of the Common Stock subject to the NQSO may be paid in cash. At the discretion of the Committee, the purchase price may also be paid by the tender of Common Stock or through a combination of Common Stock and cash or through such other means as the Committee determines are consistent with the Plan's purpose and applicable law. No fractional shares of Common Stock will be issued or accepted. (iii) No NQSO may be exercised more than ten years after the date the NQSO is granted. (iv) Without limiting the foregoing, to the extent permitted by law (including relevant state law): A) the Committee may agree to accept, as full or partial payment of the purchase price of Common Stock issued upon the exercise of the NQSO, a promissory note of the person exercising the NQSO evidencing the person's obligation to make future cash payments to the Company, which promissory note shall be payable as determined by the Company (but in no event later than five years after the date thereof), shall be secured by a pledge of the shares of 6 9 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- Common Stock purchased and shall bear interest at a rate established by the Committee; and B) the Committee may permit the person exercising the NQSO, either on a selective or aggregate basis, to simultaneously exercise the NQSO and sell the shares of Common Stock acquired, pursuant to a brokerage or similar arrangement approved in advance by the Committee, and use the proceeds from sale as payment of the exercise price of the NQSO. (b) ISOS ---- (i) No ISO may be granted under the Plan to a Non-Employee Director. (ii) The aggregate Fair Market Value (determined at the time of the grant of the Award) of the shares of Common Stock subject to ISOs which are exercisable by a Grantee for the first time during a particular calendar year shall not exceed $100,000. To the extent that ISOs granted to a Grantee exceed the limitation set forth in the preceding sentence, ISOs granted last shall be treated as NQSOs. (iii) No ISO may be exercisable more than: A) in the case of a Grantee who IS NOT a Ten Percent Shareholder, on the date the ISO is granted, ten years after the date the ISO is granted; and B) in the case of a Grantee who IS a Ten Percent Shareholder, on the date the ISO is granted, five years after the date the ISO is granted. (iv) The exercise price of any ISO shall be determined by the Committee and shall not be less than: A) in the case of a Grantee who IS NOT a Ten Percent Shareholder on the date the ISO is granted, the Fair Market Value of the Common Stock subject to the ISO on such date; and B) in the case of an employee who IS a Ten Percent Shareholder on the date the ISO is granted, not less than 110 percent of the Fair Market Value of the Common Stock subject to the ISO on such date. (v) The Committee may provide that the option price under an ISO may be paid by one or more of the methods available for paying the option price of an NQSO per Section 7.1(a)(iv). 7 10 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- 7.2 The Committee shall specify in the stock option agreement the terms upon which the Options shall become exercisable; provided, however that the Grantee continues to be employed by the Company on such anniversary date (ii) expire at the end of the maximum time frame allowable under Sections 7.1(a)(iii) or 7.1(b)(iii), as applicable, and (iii) be granted with an exercise price equal to the Fair Market Value. 7.3 The aggregate number of shares of Common Stock to be issued pursuant to ISOs shall not exceed five percent (5%) of the Company's outstanding shares, or in the event of a change in capitalization as described in Section 17.2. SECTION 8 STOCK APPRECIATION RIGHTS 7.2 The amount payable with respect to each SAR shall be equal in value to the applicable percentage of the excess, if any, of the Fair Market Value of a share of Common Stock on the exercise date over the exercise price of the SAR. The exercise price of the SAR shall be determined by the Committee and shall not be less than the Fair Market Value of a share of Common Stock on the date the SAR is granted. SARs may be granted in tandem with an Option in which event the Grantee has the right to elect to exercise either the SAR or the Option. Upon their election to exercise one of these Awards, the other Award is subsequently terminated. SARs may also be granted as an independent Award. 8.3 In the case of an SAR granted in tandem with an ISO to an employee who is a Ten Percent Shareholder on the date of such grant, the amount payable with respect to each SAR shall be equal in value to the applicable percentage of the excess, if any, of the Fair Market Value of a share of Common Stock on the exercise date over the exercise price of the SAR, which exercise price shall not be less than 110 percent of the Fair Market Value of a share of Common Stock on the date the SAR is granted. 8.4 The applicable percentage and exercise price shall be established by the Committee at the time the SAR is granted. SECTION 9 RESTRICTED STOCK 9.1 Restricted Stock is Common Stock of the Company that is issued to a Grantee at a price determined by the Committee, which price may be zero, and is subject to restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine. 9.2 The Committee shall specify in the Award agreement the terms upon which such shares of Common Stock granted to a Grantee as an Award shall vest; provided, 8 11 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- however that the Grantee continues to be employed by the Company on such date. 9.3 The Committee may, in its discretion, provide for accelerated vesting of Restricted Stock upon the achievement of specified performance goals to be determined by the Committee. 9.4 Grantee may make the election under Section 83(b) of the Code. SECTION 10 PERFORMANCE AWARDS 10.1 A Performance Award granted under the Plan: a) may be denominated or payable in cash, Common Stock, Restricted Stock, other securities, or other Awards; and b) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. 10.1 Subject to the terms of the Plan and any applicable Award agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee. SECTION 11 OTHER STOCK-BASED INCENTIVE AWARDS 10.1 The Committee may from time to time grant Awards under this Plan that provide a Grantee the right to purchase Common Stock or units that are valued by reference to the Fair Market Value of the Common Stock (including, but not limited to, phantom securities or dividend equivalents) or to receive Deferred Shares which are stock-based incentive grants in lieu of a cash deferral of bonuses. Such Awards shall be in a form determined by the Committee (and may include terms contingent upon a change of control of the Company); PROVIDED that such Awards shall not be inconsistent with the terms and purposes of the Plan. 11.2 The Committee shall determine the price of any Award and may accept any lawful consideration. 9 12 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- SECTION 12 EXERCISE OF OPTIONS 12.1 The Committee may provide for the exercise of Options in installments and upon such terms, conditions and restrictions as it may determine subject to applicable law and the other requirements of this Plan. 12.2 The Committee may provide for termination of an Option in the case of termination of employment or directorship or any other reason. 12.3 An Option granted hereunder shall be exercisable, in whole or in part, only by written notice delivered in person or by mail to the Secretary of the Company at its principal office, specifying the number of shares of Common Stock to be purchased and accompanied by payment thereof and otherwise in accordance with the stock option agreement pursuant to which the Option was granted. SECTION 13 RIGHTS IN EVENT OF DEATH OR DISABILITY 13.1 If a Grantee dies or becomes subject to a Disability prior to termination of his or her right to exercise an Option in accordance with the provisions of his or her stock option agreement without having totally exercised the Option, the stock option agreement may provide that the Option may be exercised, to the extent that the shares with respect to the Option could have been exercised by the Grantee on the date of his or her death or Disability, by (i), in the event of the Grantee's death, the Grantee's estate or by the person who acquired the right to exercise the Option by bequest or inheritance or (ii), in the event of the Grantee's Disability, the Grantee or his or her personal representative. 13.2 In the event of the Grantee's death or Disability, the Option shall not be exercisable after the date of its expiration or more than six months from the date of the Grantee's death or Disability, whichever first occurs. 13.3 The date of Disability of a Grantee shall be determined by the Committee. SECTION 14 AWARD AGREEMENTS 14.1 Each Award granted under the Plan shall be evidenced by an award agreement between the Grantee to whom the Award is granted and the Company, setting forth the number of shares of Common Stock, SARs, or units subject to the Award and such other terms and conditions applicable to the Award not inconsistent with the Plan as the Committee may deem appropriate. 14.2 The award agreement for an Option shall also be referred to as a stock option agreement. 10 13 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- SECTION 15 TAX WITHHOLDING 15.1 The Committee may establish such rules and procedures as it considers desirable in order to satisfy any obligation of the Company to withhold federal income taxes or other taxes with respect to any Award made under the Plan. Such rules and procedures may provide: a) in the case of Awards paid in shares of Common Stock, the Company may withhold shares of Common Stock otherwise issuable upon exercise of such Award in order to satisfy withholding obligations, unless otherwise instructed by the Grantee or unless the Committee determines otherwise at the time of Grant; and b) in the case of an Award paid in cash, that the withholding obligation shall be satisfied by withholding the applicable amount and paying the net amount in cash to the Grantee; provided that the requirements of the Rules, to the extent applicable, must be satisfied with regard to any withholding pursuant to clause (a). SECTION 16 CHANGE OF CONTROL 16.1 For the purpose of the Plan, a "Change of Control" of the Company means a Change of Control of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change of Control of the Company within the meaning of the Home Owners' Loan Act of 1933, as amended, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS) (or its predecessor agency), as in effect on the Effective Date, as defined in Section 21 hereof (provided, that in applying the definition of change of control as set forth under the rules and regulations of the OTS, the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change of Control shall be deemed to have occurred at such time as; (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the 11 14 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- Company's outstanding securities ordinarily having the right to vote at the election of directors except for any securities purchased by the Company in connection with the conversion to the stock forms; (b) individuals who constitute the Board of Directors of the Company on the date hereof (the "Incumbent Board"), cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of a least 75% of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same Nominating Committee serving under an Incumbent Board shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or similar transaction occurs in which the Company is not the resulting entity or; (d) the approval by shareholders of a proxy statement proposal soliciting proxies from shareholders of the Company, by someone other than the current management of the Company; seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made and completed for 20% or more of the voting securities of the Company. 16.2 However, notwithstanding anything contained in this section to the contrary, a Change of Control shall not be deemed to have occurred as a result of an event described in (i), (ii), or (iii) (a), (c), or (e) above which resulted from an acquisition or proposed acquisition of stock of the Company by a person, as defined in the OTS' Acquisition of Control Regulations (12 C.F.R. 574) (The "Control Regulations"), who was an executive officer of the Company on January 19, 1990 and who has continued to serve as an executive officer of the Company as of the date of the event described in (i), (ii) or (iii) (a), (c) or (e) above (an "incumbent officer"). In the event a group of individuals acting in concert satisfies the definition of "person" under the Control Regulations, the requirements of the preceding sentence shall be satisfied and thus a Change of Control shall not be deemed to have occurred if at least one individual in the group is an incumbent officer. 12 15 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- 16.3 In the event of a Change of Control affecting the Company, then, notwithstanding any provision of the Plan or of any provisions of any Award agreements entered into between the Company and any Grantee to the contrary, all Awards that have not expired and which are then held by any Grantee (or the person or persons to whom any deceased Grantee's rights have been transferred) shall, as of such Change of Control, become fully and immediately vested and exercisable and may be exercised for the remaining term of such Awards. SECTION 17 DILUTION OR OTHER ADJUSTMENT 17.1 If the Company is a party to any merger or consolidation, or undergoes any merger, consolidation, separation, reorganization, liquidation or the like, the Committee shall have the power to make arrangements, which shall be binding upon the holders of unexpired Awards, for the substitution of new Awards for, or the assumption by another corporation of, any unexpired Awards then outstanding hereunder. 17.2 In the event of a reclassification, stock split, combination of shares, separation (including a spin-off), dividend on shares of the Common Stock payable in stock or other similar change in capitalization or in the corporate structure of shares of the Common Stock, the Committee shall conclusively determine the appropriate adjustment in the option prices of outstanding Options, and the number and kind of shares or other securities as to which outstanding Awards shall be exercisable, and in the aggregate number of shares with respect to which Awards may be granted. 17.3 The number of shares reserved under the Plan shall adjust as the number of shares of Common Stock increase as provided in Section 6.3 of this Plan. SECTION 18 TRANSFERABILITY 18.1 No Award, other than an NQSO, shall be sold, pledged, assigned, transferred, or encumbered by a Grantee other than by will or by the laws of descent and distribution. 18.2 Only an NQSO may be pledged, assigned, transferred, or gifted by a Grantee to another individual provided that the NQSO is pledged, assigned, transferred or gifted without consideration by a Grantee, subject to such rules as the Committee may adopt, to (i) a member of the Grantee's immediate family, (ii) a trust solely for the benefit of the Grantee and his or her immediate family or (iii) a partnership or limited liability company whose only partners or members are the Grantee and his or her Immediate Family (hereinafter referred to as the Permitted Transferee); PROVIDED that the Committee is notified in advance in 13 16 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- writing of the terms and conditions of any proposed pledge, assignment, transfer, or gift and the Committee determines that such pledge, assignment, transfer or gift complies with the requirements of the Plan and the applicable Award agreement. 18.3 Any pledge, assignment or gift of an Award that does not comply with the provisions of the Plan and the applicable Award agreement shall be void and unenforceable against the Company. 18.4 All terms and conditions of a pledged, assigned, transferred or gifted Award shall apply to the beneficiary, executor, administrator, and Permitted Transferee, whether one or more, of the Grantee (including the beneficiary, executor and administrator of a permitted transferee), including the right to amend the applicable Award agreement; PROVIDED that the permitted transferee shall not pledge, assign, transfer, or gift an Award other than by will or by the laws of descent and distribution. SECTION 19 AMENDMENT OR TERMINATION 19.1 The Committee may at any time amend, suspend or terminate the Plan; PROVIDED, that: a) no change in any Awards previously granted may be made without the consent of the holder thereof; and b) no amendment, other than an amendment authorized by Section 17 or Section 6.3, may be made increasing the aggregate number of shares of the Common Stock with respect to which ISOs may be granted, or changing the class of employees eligible to receive ISOs hereunder, without the approval of the holders of a majority of the outstanding voting shares of the Company. SECTION 20 GENERAL PROVISIONS 20.1 No Awards may be exercised by a Grantee if such exercise, and the receipt of cash or stock thereunder, would be, in the opinion of counsel selected by the Company, contrary to law or the regulations of any duly constituted authority having jurisdiction over the Plan. 20.2 A bona fide leave of absence approved by a duly constituted officer of the Company shall not be considered interruption or termination of service of any Grantee for any purposes of the Plan or Awards granted thereunder, except that no Awards may be granted to an Employee while he or she is on a bona fide leave of absence. 14 17 THE HOME SAVINGS & LOAN COMPANY 1998 LONG-TERM INCENTIVE PLAN - ---------------------------------------- 20.3 No Grantee shall have any rights as a shareholder with respect to any shares subject to Awards granted to him or her under the Plan prior to the date as of which he or she is actually recorded as the holder of such shares upon the stock records of the Company. 20.4 Nothing contained in the Plan or in an Award agreement granted thereunder shall confer upon any Grantee any right to (i) continue in the employ of the Company or any of its Subsidiaries or continue serving on the Board of Directors of the Company or (ii) interfere in any way with the right of the Company or any of its Subsidiaries to terminate the Grantee's employment at any time or service on the Board. 20.5 Any Award agreement may provide that stock issued upon exercise of any Awards may be subject to such restrictions, including, without limitation, restrictions as to transferability and restrictions constituting substantial risks of forfeiture as the Committee may determine at the time such Award is granted. SECTION 21 PLAN EFFECTIVE DATE 21.1 The Plan shall become effective on the date of its adoption by the Board of Directors of the Company subject to approval of the Plan by the holders of a majority of the outstanding voting shares of the Company within twelve (12) months after the date of the Plan's adoption by said Board of Directors. In the event of the failure to obtain such shareholder approval, the Plan and any Awards granted thereunder, shall be null and void and the Company shall have no liability thereunder. 21.2 No Award granted under the Plan shall be exercisable until such shareholder approval has been obtained. SECTION 22 PLAN TERMINATION 22.1 No Award may be granted under the Plan on or after the date which is ten years following the effective date specified in Section 21, but Awards previously granted may be exercised in accordance with their terms. 15 EX-10.3 6 EXHIBIT 10.3 1 Exhibit 10.3 UNITED COMMUNITY FINANCIAL CORP. EMPLOYEE STOCK OWNERSHIP PLAN {Effective January 1, 1998} 2 UNITED COMMUNITY FINANCIAL CORP. EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS -----------------
SECTION PAGE - ------- ---- 1 PARTICIPATION............................................................................................1 ------------- 1.01. Eligibility Requirements.................................................................1 1.02. Service for Eligibility..................................................................1 2 CONTRIBUTIONS............................................................................................2 ------------- 2.01. Regular Employer Contribution............................................................2 2.02. Employer Contribution to Reduce Loan Obligation..........................................2 2.03. Rollover Contributions/Participant Contributions.........................................2 2.04. Limitations on Annual Additions..........................................................3 2.05. Dual Plan Limitation.....................................................................3 2.06. Corrective Adjustments...................................................................4 2.07. Contributions Conditioned on Initial Plan Qualification..................................4 3 ALLOCATION OF EMPLOYER CONTRIBUTIONS.....................................................................5 ------------------------------------ 3.01. Allocation of Regular Contributions and Forfeitures......................................5 3.02. Allocation of Employer Shares Purchased with Proceeds of Plan Loan.......................5 3.03. Special Restriction on Allocation........................................................6 4 PARTICIPANTS' ACCOUNTS...................................................................................6 ---------------------- 4.01. Establishment of Employer Contributions Accounts.........................................6 4.02. Establishment of Suspense Account........................................................6 5 PLAN INVESTMENTS.........................................................................................7 ---------------- 5.01. Primary Investments......................................................................7 5.02. Diversification Requirements.............................................................7
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SECTION PAGE - ------- ---- 6 VALUATION OF PARTICIPANTS' ACCOUNTS......................................................................8 ----------------------------------- 6.01. Valuations...............................................................................8 6.02. Method of Adjustment.....................................................................8 7 RETIREMENT BENEFITS......................................................................................9 ------------------- 7.01. Time of Retirement.......................................................................9 7.02. Amount of Retirement Benefits............................................................9 8 DEATH BENEFITS..........................................................................................10 -------------- 8.01. Amount of Death Benefit.................................................................10 8.02. Designation of Beneficiary..............................................................10 8.03. Distribution of Death Benefit...........................................................11 9 DISABILITY BENEFITS.....................................................................................11 ------------------- 9.01. Amount of Disability Benefit............................................................11 9.02. Determination of Total and Permanent Disability.........................................12 10 TERMINATION OF EMPLOYMENT..............................................................................12 ------------------------- 10.01. Amount of Benefits Upon Termination of Employment......................................12 11 VESTING................................................................................................13 ------- 11.01. Determination of Vested Benefits.......................................................13 11.02. Service for Vesting....................................................................13 11.03. Full Vesting at Normal Retirement Age, Death or Disability.............................13 11.04. Termination After Eligibility for Retirement...........................................13 12 PAYMENT OF BENEFITS....................................................................................14 ------------------- 12.01. Method of Payment......................................................................14 12.02. Timing of Payments.....................................................................14 12.03. Distributions After Death..............................................................14 12.04. Cash-Outs/Consent......................................................................15 12.05. Put Option.............................................................................16 12.06. Right of First Refusal.................................................................18
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SECTION PAGE - ------- ---- 12.07. Eligible Rollover Distributions........................................................19 12.08. Installment Distributions..............................................................20 13 BREAK IN SERVICE RULES.................................................................................21 ---------------------- 13.01. Effect of Break in Service on Eligibility..............................................21 13.02. Effect of Break in Service on Vesting..................................................21 13.03. Authorized Leaves of Absence...........................................................22 14 TRUST AGREEMENT........................................................................................22 --------------- 14.01. Description of Trust Agreement.........................................................22 15 PLAN ADMINISTRATION....................................................................................22 ------------------- 15.01. Plan Administrator.....................................................................22 15.02. Duties of Plan Administrator...........................................................23 16 AMENDMENTS.............................................................................................23 ---------- 16.01. Sponsor's Right to Amend Plan..........................................................23 17 DISTRIBUTIONS ON PLAN TERMINATION......................................................................24 --------------------------------- 17.01. Full Vesting on Plan Termination.......................................................24 17.02. Payment on Plan Termination............................................................24 17.03. Discontinuance of Contributions; Partial Termination of Plan...........................25 18 CREDITORS OF PARTICIPANTS..............................................................................25 ------------------------- 18.01. Non-Assignability......................................................................25 18.02. Qualified Domestic Relations Orders....................................................25 19 CLAIMS PROCEDURES......................................................................................25 ----------------- 19.01. Filing a Claim for Benefits............................................................25 19.02. Denial of Claim........................................................................26 19.03. Remedies Available to Participants.....................................................26 20 VOTING RIGHTS..........................................................................................27 -------------
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SECTION PAGE - ------- ---- 20.01. Participant Voting Rights with Respect to Allocated Shares.............................27 20.02. Participant Voting Rights with Respect to Unallocated Shares...........................28 21 TOP HEAVY RULES........................................................................................28 --------------- 21.01. Definitions............................................................................28 21.02. Top Heavy Status.......................................................................29 21.03. Minimum Contributions..................................................................30 21.04. Top Heavy Vesting......................................................................31 22 EXEMPT LOANS...........................................................................................31 ------------ 22.01. Authority to Borrow....................................................................31 22.02. Requirements for Plan Loans............................................................31 23 MISCELLANEOUS..........................................................................................33 ------------- 23.01. Employment Rights......................................................................33 23.02. Gender.................................................................................33 23.03. Notice Requirement.....................................................................33 23.04. Merger or Consolidation................................................................33 23.05. Social Security Benefits...............................................................33 23.06. Forfeitures............................................................................33 23.07. Named Fiduciaries......................................................................34 23.08. Limitations on Payment.................................................................34 23.09. Interpretation of Document.............................................................34 23.10. Nonterminable Protections and Rights...................................................35 23.11. Dividends..............................................................................35 24 CERTAIN DEFINITIONS....................................................................................35 ------------------- 24.01. Account................................................................................35 24.02. Affiliate..............................................................................35 24.03. Annual Additions.......................................................................36 24.04. Beneficiary............................................................................36 24.05. Code...................................................................................37 24.06. Compensation...........................................................................37 24.07. Current Participant....................................................................37 24.08. Effective Date.........................................................................37 24.09. Employee...............................................................................37 24.10. Employer...............................................................................37
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SECTION PAGE - ------- ---- 24.11. Employer Contributions Account.........................................................38 24.12. Employer Shares or Shares..............................................................38 24.13. Employment Commencement Date...........................................................38 24.14. Entry Date.............................................................................38 24.16. Forfeiture.............................................................................39 24.17. Full Time..............................................................................39 24.18. Hour of Service........................................................................39 24.19. Late Retirement Date...................................................................40 24.21. Normal Retirement Age..................................................................40 24.22. Normal Retirement Date.................................................................40 24.23. One-Year Break in Service..............................................................41 24.24. Participant............................................................................41 24.25. Plan...................................................................................41 24.26. Plan Administrator.....................................................................41 24.27. Plan Year..............................................................................41 24.28. Projected Annual Benefit...............................................................41 24.29. Spouse or Surviving Spouse.............................................................42 24.30. Trust Agreement........................................................................42 24.31. Trust Fund.............................................................................42 24.32. Trustee................................................................................42 24.33. Valuation Date.........................................................................42 24.34. Year of Service........................................................................42
v 7 UNITED COMMUNITY FINANCIAL CORP. EMPLOYEE STOCK OWNERSHIP PLAN United Community Financial Corp. (the "Sponsor") hereby adopts the following employee stock ownership plan (hereinafter referred to as the "Plan"), effective as of the Effective Date. The Plan shall be for the exclusive benefit of eligible Employees of the Sponsor and The Home Savings and Loan Company of Youngstown, Ohio, and, where applicable, the designated Beneficiaries of such Employees. It is intended that this Plan, together with the Trust Agreement, shall comply with the applicable provisions of the Code and ERISA. SECTION L --------- PARTICIPATION ------------- 1.01. ELIGIBILITY REQUIREMENTS Each Employee of the Employer shall be eligible to participate in the Plan on the Entry Date coinciding with or first following the date on which he has completed 12 months of service as a Full-Time Employee and has attained age 20. An Employee shall also be given credit for all 12-month periods during which he was a Full-Time Employee with an Affiliate which is not a participating employer. 1.02. SERVICE FOR ELIGIBILITY The 12-month period during which the Employee must meet the Full-Time requirement shall initially be the 12 consecutive months beginning with his Employment Commencement Date and, thereafter, the anniversary of the Employee's Employment Commencement Date. 8 SECTION 2 --------- CONTRIBUTIONS ------------- 2.01. REGULAR EMPLOYER CONTRIBUTION Subject to its right to terminate or amend this Plan, 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 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 shall be such amount as the Board of Directors of the Employer may in its discretion determine; provided, however, that, in any year, the amount contributed shall not exceed the maximum amount deductible from the Employer's income for such year under Section 404(a)(3) of the Code, or any succeeding statute of similar import. 2.02. EMPLOYER CONTRIBUTION TO REDUCE LOAN OBLIGATION 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 any Plan loan used to acquire Employer Shares, provided that the amounts contributed by the Employer pursuant to this Section 2.02, in any year, shall not exceed the maximum amount deductible from the Employer's income for such year under Section 404(a)(9) of the Code, or any succeeding statute of similar import. 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 shall not exceed the lesser of (a) $30,000 [or, if greater, such increased amount as permitted by the Secretary of the Treasury]; or (b) 25% of the Participant's "compensation" for the Limitation Year. 2 9 For purposes of this Section 2.04, the portion of such Employer contribution which is deemed to be allocated to a Participant's Account for such Plan Year shall be an amount which bears the same ratio to the total contribution made by or on behalf of the Employer for such Plan Year which is used to repay principal (or, to the extent more than one-third of such Employer contributions are allocated in a Plan Year to "Highly-Compensated Employees," within the meaning of Code Section 414(q), to repay principal and interest) on one or more Plan loans, or to purchase Employer Shares, as the number of Employer Shares allocated to such Participant's Account in respect of such Plan Year bears to the total number of Employer Shares allocated to the Accounts of all Participants in respect of such Plan Year. For purposes of this Section 2.04, "compensation" shall mean 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. 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 Employee by the Employer which are not includable in the gross income of an Employee by reason of Section 125 or Section 457 of the Code, shall be included in the definition of "compensation" selected by the Plan Administrator pursuant to the preceding paragraph. 2.05. DUAL PLAN LIMITATION This Section 2.05 shall apply prior to the first Plan Year coinciding with or immediately 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, 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 and the denominator of 3 10 which is the lesser of (a) 1.25 times the dollar limitation of Section 415(b)(1)(A) of the Code in effect for the Limitation Year; or (b) 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 Accounts under all defined contribution plans maintained by the Employer (whether or not terminated) 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: (a) 1.25 times the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such year; or (b) 1.4 times the amount which may be taken into account under Section 415(c)(1)(B) of the Code. For any years in which the Plan is "top heavy," "1.0" shall 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 this Plan will be reduced so that the sum of the fractions equals 1.0. 2.06. CORRECTIVE ADJUSTMENTS If, due to a reasonable error in estimating a Participant's annual compensation, or due to the allocation of Forfeitures, an excess Annual Addition exists, such excess will be used to reduce Employer contributions for such Participant in the next, and succeeding, Limitation Years. If the Participant was not covered by the Plan at the end of the Limitation Year, such excess will be applied to reduce Employer contributions for all remaining Participants in the next, and succeeding, Limitation Years. 2.07. CONTRIBUTIONS CONDITIONED ON INITIAL PLAN QUALIFICATION All Employer contributions under this Plan will be made with the understanding that the Plan will initially qualify under the provisions of Section 401(a) of the Code. In the event the Internal Revenue Service determines that this Plan is not initially qualified under the Code, and the Employer is unable to 4 11 amend the Plan so as to receive a favorable determination, then any contribution made by the Employer incident to such initial qualification request, less any expenses and adjusted by any gains or losses, will be refunded to the Employer. Such refund must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. SECTION 3 --------- ALLOCATION OF EMPLOYER CONTRIBUTIONS ------------------------------------ 3.01. ALLOCATION OF REGULAR CONTRIBUTIONS AND FORFEITURES Each Plan Year, the Employer's regular contribution made pursuant to Section 2.01, and any Forfeitures available for such year, shall be allocated to the Accounts of Participants who are both Full-Time and Current Participants for such year. In that regard, the amount allocated to the Account of a particular Full-Time Current Participant shall be in the same proportion to the total amounts available for allocation as the Compensation of such Full-Time Current Participant for the Plan Year bears to the Compensation of all Full-Time Current Participants for such Plan Year. 3.02. ALLOCATION OF EMPLOYER SHARES PURCHASED WITH PROCEEDS OF PLAN LOAN Any Employer Shares purchased with the proceeds of Plan loans shall be held in a suspense account and allocated to Participants' Employer Contributions Accounts as such loans are reduced and such Shares are released pursuant to the terms of the loans and Section 22.02(e) of the Plan. Each year the number of Employer Shares released under all Plan loans shall be allocated to each Participant's Employer Contributions Account in the same manner as the Employer's regular contribution is allocated under Section 3.01. 5 12 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 either Sections 1042 or 2057 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 [or any person related to such Participant within the meaning of Code Section 267(b)] who makes an election under Code Section 1042(a) with respect to Employer Shares. SECTION 4 --------- PARTICIPANTS' ACCOUNTS ---------------------- 4.01. ESTABLISHMENT OF EMPLOYER CONTRIBUTIONS ACCOUNTS The Plan Administrator shall 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. 4.02. ESTABLISHMENT OF SUSPENSE ACCOUNT The Plan Administrator shall 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 shall be transferred from the suspense account and allocated to the Participants' Employer Contributions Accounts as such Shares are released from encumbrance under the terms of such Plan loans. 6 13 SECTION 5 --------- PLAN INVESTMENTS ---------------- 5.01. PRIMARY INVESTMENTS As an employee stock ownership plan, this Plan shall invest primarily in Employer Shares. Any Plan assets not invested in Employer Shares shall be invested in other investment vehicles by the Trustee, in its discretion, pursuant to the provisions of the Trust Agreement. 5.02. DIVERSIFICATION REQUIREMENTS (a) Any Participant who has completed at least ten years of participation in the Plan and who has attained age 55 (the "diversification requirements"), may elect within the first 90 days of each of the six Plan Years immediately following the Plan Year in which he first satisfies the diversification requirements, 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 shall be applied by substituting "50%" for "25%." The Participant's direction shall be provided to the Plan Administrator in writing. (b) The Plan shall, in each instance, distribute [notwithstanding Section 409(d) of the Code] the portion of the Participant's Account that is covered by the election within the first 180 days of the Plan Year in which the election is made. This paragraph (b) shall apply notwithstanding any other provision of the Plan other than such provisions as require the consent of the Participant to a distribution with a present value in excess of $5,000. If the Participant does not consent, such amount shall be retained in the Plan. (c) In lieu of making the distribution described in paragraph (b) above, the Plan may satisfy the requirements of paragraph (a) by offering at least three investment options (other than Employer Shares) to each Participant making the election described in paragraph (a) and, if the Participant so elects, by investing within the 180-day period specified in 7 14 paragraph (b) the amount in question in the option(s) selected by the Participant. SECTION 6 --------- VALUATION OF PARTICIPANTS' ACCOUNTS ----------------------------------- 6.01. VALUATIONS As of each Valuation Date, or more frequently at the election of the Plan Administrator, the Plan Administrator shall obtain an evaluation 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 shall 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 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 shall 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 shall be adjusted as of each succeeding Valuation Date by the following credits and charges in the order specified: (a) In the case of each Participant to, for or on behalf of whom disbursements from the Plan have been made, there shall be debited the total amount of any disbursements made to him or for his account from his Account during the period since the last Valuation Date. (b) In the case of each Participant (including former Employees for whom Accounts are being maintained), there shall be 8 15 credited or debited to his Account that portion of the net increase (including an amount equal to the non-distributed dividends on allocated Employer Shares) or net decrease of the value of the assets of the Trust Fund since the last Valuation Date which the balance of his Account [after completion of the adjustment called for in Section 6.02(a) above] bears to the total balance of all Accounts after completion of the adjustments called for in Section 6.02(a) above. (c) In the case of each Full-Time Current Participant, there shall be credited to his Account the Employer's contributions, Forfeitures and Employer Shares released under Plan loans that are allocable to him under Section 3 of this Plan. In allocating Forfeitures, Employer Shares shall be allocated only after other assets in all terminated Participants' Accounts have been allocated. SECTION 7 --------- RETIREMENT BENEFITS ------------------- 7.01. TIME OF RETIREMENT A Participant may retire from the employ of the Employer on his Normal Retirement Date or his Late Retirement Date. 7.02. AMOUNT OF RETIREMENT BENEFITS The amount which a Participant shall be entitled to receive upon reaching his Normal Retirement Date or his Late Retirement Date shall be an amount equal to the value of the Employer Shares credited to his Account and the net value of the other assets of such Account as of the Valuation Date immediately following his Normal Retirement Date or his Late Retirement Date. 9 16 SECTION 8 --------- DEATH BENEFITS -------------- 8.01. AMOUNT OF DEATH BENEFIT The death benefit under this Plan shall be an amount equal to the value of the Employer Shares and the net value of the other assets credited to the deceased Participant's Account as of the later of (a) the Valuation Date immediately following the date of his death; and (b) the Valuation Date immediately following the date death benefits are distributed. 8.02. DESIGNATION OF BENEFICIARY Subject to the provisions of Section 8.03, each Participant shall designate, by a written instrument filed with the Plan Administrator, one or more Beneficiaries who, upon the death of the Participant, shall 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. In the absence of such specification, payments shall 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 this 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. The Plan Administrator may, in its discretion, limit the number of Beneficiaries that may be designated by a Participant. If 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, shall be made to the executors or administrators of the Participant's estate. Any minor's share shall 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. Once benefits begin to be paid to a Beneficiary pursuant to this section, such Beneficiary shall name an individual or individuals to receive the remainder of such benefit, if any, upon the death of the Beneficiary. In the absence of such a 10 17 designation by the Beneficiary, such remaining benefit, if any, shall be paid to the estate of the Beneficiary. If the designated Beneficiary is alive at the time of the Participant's death but dies prior to the commencement of the payment of death benefits hereunder, the death benefit payable pursuant to this Section 8 shall be payable to the estate of the Beneficiary. 8.03. DISTRIBUTION OF DEATH BENEFIT If a Participant dies while actively employed, without a Surviving Spouse and prior to the commencement of his retirement benefits, the death benefit described in Section 8.01 shall be distributed to the person or persons specified in Section 8.02, in accordance with the provisions of Section 12 hereof. If a Participant dies while actively employed, with a Surviving Spouse and prior to the commencement of his retirement benefits, then, notwithstanding the provisions of Section 8.02 hereof, the death benefit described in Section 8.01 shall be paid to his Surviving Spouse in accordance with the provisions of Section 12 hereof, UNLESS such Surviving Spouse, in accordance with the provisions of this paragraph, has consented to an alternate Beneficiary, in which case, such death benefit shall be distributed to such alternate Beneficiary in accordance with the provisions of Section 12. 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 spousal consent (or the Spouse expressly permits designations by the Participant without further spousal consent); (c) acknowledge the effect of such consent; and (d) be witnessed by a Plan representative or notary public. SECTION 9 --------- DISABILITY BENEFITS ------------------- 9.01. AMOUNT OF DISABILITY BENEFIT 11 18 If a Participant who is actively employed becomes "totally and permanently disabled" as defined in Section 9.02 below, such Participant shall be entitled to receive as a disability benefit an amount equal to the value of the Employer Shares credited to his Account and the net value of other assets of such Account as of the later of (a) the Valuation Date immediately following the date that the Plan Administrator determines him to be "totally and permanently disabled", and (b) the Valuation Date immediately following the date disability benefits are distributed. 9.02. DETERMINATION OF TOTAL AND PERMANENT DISABILITY A Participant shall be considered to be "totally and permanently disabled" if it is established by a licensed physician selected by the Plan Administrator that 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. SECTION 10 ---------- TERMINATION OF EMPLOYMENT ------------------------- 10.01. AMOUNT OF BENEFITS UPON TERMINATION OF EMPLOYMENT If a Participant leaves the employ of the Employer for any reason other than retirement, death or disability in accordance with Section 7, 8 or 9 hereof, he shall be entitled to receive an amount equal to the nonforfeitable percentage of the value of the Employer Shares and the net value of the other assets credited to his Account as of the later of: (a) the Valuation Date immediately following the date of his termination of employment; and (b) the Valuation Date immediately following the date such termination benefits are distributed. Such nonforfeitable percentage shall be determined in accordance with Section 11.01 hereof. 12 19 SECTION 11 ---------- VESTING ------- 11.01. DETERMINATION OF VESTED BENEFITS Employer contributions allocated to the Participant's Employer Contributions Account shall become vested in accordance with the table shown below:
NONFORFEITABLE YEARS OF SERVICE PERCENTAGE Less than 5 0 5 or more 100%
11.02. SERVICE FOR VESTING Years of Service for vesting purposes shall include all Years of Service with the Employer. 11.03. FULL VESTING AT NORMAL RETIREMENT AGE, DEATH OR DISABILITY Notwithstanding any provision in this Plan to the contrary, the value of a Participant's Accounts shall be fully vested and nonforfeitable upon the Participant's (a) attaining his Normal Retirement Age; (b) becoming totally and permanently disabled; or (c) death, provided the Participant is actively employed with the Employer upon the occurrence of such events. 11.04. TERMINATION AFTER ELIGIBILITY FOR RETIREMENT The termination of a Participant's employment after he has attained his Normal Retirement Age shall be considered a retirement for purposes of this Plan. 13 20 SECTION 12 ---------- PAYMENT OF BENEFITS ------------------- 12.01. METHOD OF PAYMENT At the time a Participant or Beneficiary becomes entitled to receive any amount because of the Participant's retirement, death, disability or termination of employment, the Trustee, acting in accordance with the written instructions of the Plan Administrator, shall make payment from the Trust Fund to such individual (or his Beneficiary in the case of his 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 shall be made by the Trustee, at the option of the Participant (or his Beneficiary) in Employer Shares, in cash or both. 12.02. TIMING OF PAYMENTS (a) Unless the Participant elects otherwise, the payment of retirement, death, disability and termination benefits shall begin no later than 60 days after the latest of the close of the Plan Year in which (i) the Participant attains his Normal Retirement Age; (ii) occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (c) the Participant terminates service with the Employer. (b) Notwithstanding any provisions hereof to the contrary, benefit payments under this Plan which are paid to a Participant who is not a "5% owner," as such term is defined by Code Section 416, shall commence by the April 1 following the later of (a) the calendar year in which the Participant attains age 70 1/2; or (b) the calendar year in which the Participant retires. Benefit payments under this Plan which are paid to a "5% owner," as such term is defined by Code Section 416, shall commence by the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. In such case, the "5% owner" shall elect to receive a benefit in a form specified in Section 12.01, providing that such form of benefit at all times meets the requirements of Section 401(a)(9) of the Code and regulations thereunder. 12.03. DISTRIBUTIONS AFTER DEATH 14 21 If the distribution of the Participant's Account has begun and he dies before his entire Account has been distributed to him, the remaining portion of such Account will be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. Subject to Section 12.04 of the Plan, if the Participant dies before his distribution has begun, his entire Account shall be distributed within five years after the fifth anniversary of the first December 31 coinciding with or next following the date of his death unless (a) a portion of his Account is payable to or on behalf of a designated Beneficiary; (b) such portion will be distributed over the life of such designated Beneficiary; and (c) such distribution begins not later than the December 31 coinciding with or next following the first anniversary of the date of the Participant's death (or such date as prescribed by the Secretary of Treasury). Notwithstanding the preceding paragraph, if the designated Beneficiary is the Participant's Surviving Spouse, the date by which distributions must commence under (c) in the preceding paragraph shall be the date the Participant would have attained age 70 1/2. If the Surviving Spouse dies before distributions to said spouse begins, this section shall apply as if the Surviving Spouse were the Participant. Life expectancy of a Surviving Spouse may be recalculated annually; however, in the case of any other designated Beneficiary, such life expectancy will be calculated at the time that payment first commences without further calculations. In addition, any amount paid to a child of the Participant will be treated as if it had been paid to the Surviving Spouse when the child reaches the age of majority. 12.04. CASH-OUTS/CONSENT If for any reason a Participant terminates service or dies and the value of his nonforfeitable Account does not exceed (or at the time of any prior distribution has not exceeded) $5,000, the Participant (or Beneficiary in the case of the Participant's death) shall receive a distribution of the value of the entire nonforfeitable portion of such Accounts as soon as administratively feasible after the next Valuation Date after his date of termination; and the remainder of such Accounts will be 15 22 treated as a Forfeiture. For purposes of this section, if the value of the Participant's nonforfeitable Account is zero, the Participant shall be deemed to have received a distribution of such nonforfeitable Account. If the value of a Participant's nonforfeitable Accounts exceeds (or at the time of any prior distribution exceeded) $5,000, no amount shall be distributed to such Participant prior to his Normal Retirement Age without his consent. A Participant's election to receive a distribution from the Plan prior to his Normal Retirement Age shall not be valid unless the Participant has received a general description of the material features and an explanation of the relative values of the optional forms of benefits (hereinafter referred to as "description") under the Plan. The Participant shall 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 is informed 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 this Plan and the Participant, after receiving such information, affirmatively elects a distribution prior to such 30-day period. If a Participant who is not 100% vested in his Account receives a distribution pursuant to this section which is less than the value of his Employer Contributions Account and resumes employment covered under this Plan, the Participant's Account will be restored to the amount on the date of distribution if he repays to the Plan the full amount of his distribution before the earlier of (a) five years after the first date on which the Participant is subsequently reemployed by the Employer; or (b) the date on which he incurs five consecutive One-Year Breaks in Service following the date of distribution. If a Participant is deemed to have received a distribution pursuant to the first paragraph of this section, the Participant will be deemed to have repaid the full amount of his distribution upon his rehire. 12.05. PUT OPTION Except as otherwise provided in this Section 12.05, any Employer Shares which are not readily tradable on an established market at the time they are distributed to Participants or former 16 23 Participants, or they are subject to a trading limitation when distributed, shall be subject to a put option which will permit the Participant, the Participant's donees or a person (including an estate or its distributee) to whom the Shares pass by reason of the Participant's death to put those Employer Shares to the Employer. Put options shall be exercisable at least during the 16-month period which begins on the date the Employer Shares subject to the option are distributed by this Plan. Such an option may be exercised by the holder of the Shares 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 Shares determined in accordance with the provisions of Treasury Regulation sec.54.4975-11(d)(5). If, pursuant to this section, the Employer is required to repurchase Employer Shares which are distributed to a Participant 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 shall 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 which are distributed to a Participant as part of an installment distribution, the amount to be paid for such Employer Shares shall be paid not later than 30 days after the exercise of the put option described in this Section. 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 obligation is exercised. Adequate security shall be provided and reasonable interest shall be paid on the unpaid amounts referred to in the preceding sentence. Notwithstanding any provision of this Plan to the contrary, (a) to the extent that the Employer is prohibited by law from redeeming or purchasing its own securities, consistent with the provisions of Section 409(h)(3) of the Code, Employer Shares under this Plan shall not be subject to the put option described in this Section 12.05 and, as such, a Participant will not be permitted to put such Employer Shares to the Employer; or (b) in the case of a Plan established by a bank which is 17 24 prohibited by law from redeeming or purchasing its own securities, the requirements of this section shall not apply, providing the Plan provides that Participants entitled to receive a distribution from the Plan shall have the right to receive a distribution in the form of cash. 12.06. RIGHT OF FIRST REFUSAL (a) During any period when Employer Shares are not publicly traded, all distributions of Employer Shares to any Participant or his Beneficiary by the Plan shall be subject to a "right of first refusal" upon the terms and conditions hereinafter set forth. The "right of first refusal" shall provide that prior to any transfer (as determined by the Plan Administrator) 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 shall have a "right of first refusal" to purchase such Shares. Neither the Plan nor the Employer shall be required to exercise the "right of first refusal." This Section 12.06 shall not be operative unless and until the Board of Directors of the Employer so directs. (b) The terms and conditions of the "right of first refusal" shall 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 shall forthwith 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, shall 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. 18 25 12.07. ELIGIBLE ROLLOVER DISTRIBUTIONS (a) Notwithstanding any provision of this Plan to the contrary that would otherwise limit a distributee's election under the Plan, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, 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 12.07: (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); and (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). (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. 19 26 (iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Spouse or Surviving Spouse of an Employee or 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. 12.08. 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, unless the Participant elects otherwise, such distribution shall be made in substantially equal periodic installments (not less frequently than annually) over a period not longer than the greater of: (a) five years; or (b) in the case of a Participant with an Account in excess of $710,000 for each $140,000, or any fraction thereof, by which such balance exceeds $710,000; provided, however, that in no event may installment payments under the Plan be made which exceeds 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 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. 20 27 The $710,000 and $140,000 dollar amounts referred to above shall be indexed for inflation for years after 1997 by the Secretary of the Treasury, and the amount applicable for any Plan Year shall be the dollar amount specified by the Secretary. SECTION L3 ---------- BREAK IN SERVICE RULES ---------------------- 13.01. EFFECT OF BREAK IN SERVICE ON ELIGIBILITY If a Participant terminates his employment with the Employer and subsequently resumes employment after incurring a One-Year Break in Service, the rehired Participant shall again participate in the Plan as of the date of his reemployment, providing he is an Employee on his date of rehire. 13.02. EFFECT OF BREAK IN SERVICE ON VESTING In the case of a Participant who has five or more consecutive One-Year Breaks in Service, Years of Service performed by such Participant after such One-Year Breaks in Service will be disregarded for the purpose of determining the vested percentage of any Employer contributions that accrued to his Account before the commencement of such One-Year Breaks in Service. Moreover, if a Participant incurs five or more consecutive One-Year Breaks in Service, such Participant's pre-break service will be disregarded in determining the vested percentage of any post-break Employer contributions that accrue to his Account if (a) he has no vested interest in his Account at the time of his separation from service; and (b) upon returning to service, the number of his consecutive One-Year Breaks in Service is greater than the number of his pre-break Years of Service. Separate accounts will be maintained for the Participant's pre-break and post-break Employer contributions. Both accounts will share in the earnings and losses of the Trust Fund. In the case of a Participant who does not have five consecutive One-Year Breaks in Service, both pre-break and post-break Years of Service will count in determining the vested 21 28 percentage of pre-break and post-break Employer contributions that accrue to his Account. 13.03. AUTHORIZED LEAVES OF ABSENCE Authorized leaves of absence, as determined by the Plan Administrator, will be included in determining service for both eligibility and vesting purposes. All Employees in similar circumstances will be treated alike. Notwithstanding anything in the Plan to the contrary, contributions, benefits and service credit with respect to "qualified military service," as such term is defined by Section 414(u)(5) of the Code, shall be provided in accordance with Section 414(u) of the Code. SECTION 14 ---------- TRUST AGREEMENT --------------- 14.01. DESCRIPTION OF TRUST AGREEMENT The Employer proposes to enter into a Trust Agreement with the Trustee to provide for the administration of the Trust Fund. The Trust Agreement shall be deemed to form a part of this Plan, and any and all rights or benefits which may accrue to any person under this Plan shall be subject to all the terms and provisions of the Trust Agreement. The Plan is designed to invest primarily in Employer Shares. If and to the extent that Employer Shares are not available at a price acceptable to the Trustee, the Trustee is authorized to make other investments as provided in the Trust Agreement. SECTION 15 ---------- PLAN ADMINISTRATION ------------------- 15.01. PLAN ADMINISTRATOR The Plan shall be administered by a Plan Administrator. Such Plan Administrator shall be a committee of one or more individuals who shall be appointed by and serve at the pleasure 22 29 of the Employer. In the event that no such appointment is made, the Sponsor shall serve as Plan Administrator. 15.02. DUTIES OF PLAN ADMINISTRATOR The Plan Administrator shall supervise the maintenance of such accounts and records as shall 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 all functions necessary to administer the Plan, including, without limitation, to determine the eligibility and qualification of Employees for benefits under the Plan; to determine the allocation and vesting of contributions, earnings and profits of the Plan; to interpret and construe the terms of the Plan; to adopt rules, regulations and procedures consistent therewith and to decide all disputes with respect to the rights and obligations of Participants in the Plan. If the Trust Agreement permits, the Plan Administrator may direct the Trustee with respect to investment of the assets of the Trust Fund or may employ investment counsel to do so. The Plan Administrator will have absolute discretion in carrying out its duties and responsibilities under this paragraph. The Plan Administrator may employ one or more persons to render advice with regard to any responsibility it has under the Plan and may designate others to carry out any of its responsibilities. SECTION 16 ---------- AMENDMENTS ---------- 16.01. SPONSOR'S RIGHT TO AMEND PLAN The Sponsor shall have the right at any time, by an instrument in writing, to modify, alter or amend this Plan, in whole or in part, provided that no such change shall in any way affect the vested rights of the Employees under this Plan. If an amendment changes the nonforfeitable rights provided in Section 23 30 11 and such amendment does not provide the Participant with a greater nonforfeitable interest in his Account for each Year of Service earned under the Plan, then 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 his nonforfeitable rights computed without regard to such amendment. No election is required to the extent an amendment does not decrease the nonforfeitable percentage of a Participant for any Year of Service. No amendment to the Plan shall decrease a Participant's Account balance or eliminate an optional form of distribution. Any amendment to the Plan shall be executed by any individual authorized by the Board of Directors of the Sponsor. SECTION 17 ---------- DISTRIBUTIONS ON PLAN TERMINATION --------------------------------- 17.01. FULL VESTING ON PLAN TERMINATION The Sponsor shall have the right at any time, by an instrument in writing, to terminate the Plan. When and if this Plan is terminated, or upon dissolution or liquidation of the Employer, after the payment of all expenses and after all adjustments of Participants' Accounts to reflect such expenses, fund profits or losses, income and allocations to date of termination, each affected Participant shall be entitled to receive that number of Employer Shares as is then credited to his Account and the net value of other assets of such Account. 17.02. PAYMENT ON PLAN TERMINATION The Plan Administrator shall make payment of each Participant's Account in cash or Employer Shares. Such payment shall be made to each Participant in a single lump sum payment. 24 31 17.03. DISCONTINUANCE OF CONTRIBUTIONS; PARTIAL TERMINATION OF PLAN Any complete discontinuance of contributions by the Employer or partial termination of the Plan will be treated as a termination with all affected Participants acquiring nonforfeitable interests in amounts contributed to such date of termination. SECTION 18 ---------- CREDITORS OF PARTICIPANTS ------------------------- 18.01. NON-ASSIGNABILITY Except to the extent permitted by ERISA, assignment, pledge or encumbrance of any character of the benefits under the Plan is not permitted or recognized under any circumstances; and such benefits shall not be subject to claims of creditors, execution, attachment, garnishment or any other legal process. 18.02. QUALIFIED DOMESTIC RELATIONS ORDERS Section 18.01 shall 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 Section 414(p) of the Code], or any domestic relations order entered before January 1, 1985. A qualified domestic relations order may provide for an immediate lump-sum distribution to the alternate payee named therein upon the determination by the Plan Administrator that the order constitutes a qualified domestic relations order. SECTION 19 ---------- CLAIMS PROCEDURES ----------------- 19.01. FILING A CLAIM FOR BENEFITS 25 32 A Participant or Beneficiary, or the Employer acting on behalf of such Participant or Beneficiary, shall notify the Plan Administrator of a claim for benefits under the Plan. Such request shall be in writing to the Plan Administrator and shall set forth the basis of such claim and shall authorize the Plan Administrator to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of benefits to which the Participant or Beneficiary may be entitled under the terms of the Plan. A decision by the Plan Administrator shall be made promptly and not later than 90 days after the Plan Administrator's receipt of the claim for benefits under the Plan, unless special circumstances require an extension of the time for processing; in which case, a decision shall be rendered as soon as possible, but not later than 180 days after the initial receipt of the claim for benefits. 19.02. DENIAL OF CLAIM Whenever a claim for benefits by any Participant or Beneficiary has been denied by the Plan Administrator, a written notice prepared in a manner calculated to be understood by the Participant or Beneficiary shall be provided setting forth (a) the specific 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 procedure. 19.03. REMEDIES AVAILABLE TO PARTICIPANTS Upon denial of his claim by the Plan Administrator, a Participant or Beneficiary: (a) may request a review by a named fiduciary, other than the Plan Administrator, upon written application to the Plan; (b) may review pertinent Plan documents; and 26 33 (c) may submit issues and comments in writing to a named fiduciary. A Participant or Beneficiary shall have 60 days after receipt by the claimant of written notification of a denial of a claim to request a review of a denied claim. A decision by a named fiduciary shall 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 shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. The decision on review by a named fiduciary shall be in writing and shall 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. SECTION 20 ---------- VOTING RIGHTS ------------- 20.01. PARTICIPANT VOTING RIGHTS WITH RESPECT TO ALLOCATED SHARES If the Employer Shares are "registration-type class of securities," all Employer Shares held in the Trust Fund and allocated to Participants' Accounts shall be voted by the Trustee pursuant to written instructions received from the Participants or Beneficiaries. If the Employer Shares are not "registration-type class of securities," all Employer Shares held in the Trust Fund and allocated to Participants' Accounts shall be voted by the Trustee pursuant to written instructions received from Participants and Beneficiaries with respect to any corporate matters relating to the approval of any 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 this purpose, "registration-type class of securities" shall have the meaning as set forth in Code Section 409(e)(4). With respect to allocated Shares for which the Trustee does not receive written instructions from Participants, such Shares shall be voted by the Trustee in the same 27 34 proportion as the Shares voted by the Participants. 20.02. PARTICIPANT VOTING RIGHTS WITH RESPECT TO UNALLOCATED SHARES All Employer Shares held in the Trust Fund and not allocated to Participants' Accounts shall be voted by the Trustee in the same proportion as the Shares voted by the Participants. Notwithstanding the foregoing, if at the time Employer Shares are required to be voted, no shares have been allocated to Participants' Accounts, the Plan Administrator shall vote such shares. SECTION 21 ---------- TOP HEAVY RULES --------------- 21.01. DEFINITIONS If the Plan is or becomes top heavy in any Plan Year, the provisions of this Section 21 will supersede any conflicting provisions in the Plan. The following definitions and rules are necessary to comply with related federal tax requirements: (a) Key Employee: Any 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 if 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 if such individual's annual compensation exceeds the dollar limitation under Code Section 415(c)(l)(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), but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Code Section 125, 402(a)(8), 402(h) or 403(b). 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. 28 35 (b) Non-Key Employee: Any 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 any Plan Year 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 which, 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 determination period (regardless of whether the Plan has terminated); and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Code Sections 401(a)(4) or 410. (f) Top Heavy Plan: The Plan, if it meets the requirements of Section 21.02. 21.02. TOP HEAVY STATUS This Plan, and any other plans aggregated with it, will become top heavy pursuant to this Section 21.02, as of the Determination Date, if the present value of accrued benefits for Key Employees is more than 60% (90% in the case of "super top heavy") of the sum of the present value of accrued benefits of all Employees, excluding former Key Employees. In the case of more than one plan which is to be aggregated, the present value of the accrued benefits (including distributions for Key Employees and all Employees) is first determined separately for each plan as of each plan's Determination Date. The plans then will 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. 29 36 The account balances and accrued benefits of a Participant who has not been credited with an Hour of Service for the Employer maintaining the Plan during the five-year period ending on the Determination Date will be disregarded. The present value of accrued benefits as of the Determination Date for any individual is the sum of (a) the Account balance 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 an employee stock ownership 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. 21.03. MINIMUM CONTRIBUTIONS For each Plan Year in which the Plan is top heavy, each Participant who is a Non-Key Employee (including those Participants who did not complete 1,000 Hours of Service in the Plan Year) must receive an annual allocation of contributions and Forfeitures (disregarding Social Security benefits) equal to at least 3% of his Compensation; provided that, if the largest percentage of Compensation allocated to a Key Employee for a Plan Year is less than 3%, that largest percentage will be substituted for 3%. For any year in which the Employer maintains a defined benefit plan in addition to this Plan, the benefit which is required to be provided to participants in both plans will be satisfied by providing each Non-Key Employee with the minimum annual top-heavy benefit provided under the top heavy provisions of the defined benefit plan. For any year in which the Employer maintains another defined contribution plan in addition to this Plan, the minimum benefit required to be provided to participants in both plans shall be provided by this Plan. 21.04. TOP HEAVY VESTING 30 37 If the Plan should become top heavy, the following vesting schedule shall apply to each Participant's Employer Contributions Account:
NONFORFEITABLE YEARS OF SERVICE PERCENTAGE Less than 3 0 3 or more 100%
Under no circumstances, however, will a Participant's vested interest be decreased as a result of the Plan becoming top heavy. If at any time after becoming top heavy the Plan should cease to be top heavy, the vesting schedule contained in Section 11 shall again be applicable. However, any portion of a Participant's Employer Contributions Account that was nonforfeitable before the Plan ceased to be top heavy shall remain nonforfeitable. In addition, any Participant with three or more Years of Service at the time that the Plan ceases to be top heavy may elect to have the vesting schedule contained in this section remain applicable. The election period shall be the same as described in Section 16. SECTION 22 ---------- EXEMPT LOANS ------------ 22.01. AUTHORITY TO BORROW The Trustee may 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)(l)(iii). 22.02. REQUIREMENTS FOR PLAN LOANS Any loan made to the Plan pursuant to this Section 22 must meet the following requirements: (a) The proceeds of the loan must be used within a reasonable time after their receipt by the Plan either (i) to 31 38 acquire Employer Shares; (ii) to repay such loan; or (iii) to repay a prior exempt loan. (b) The interest rate of 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 shall have any rights to assets of the Plan other than: (i) collateral given for the loan; (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 such collateral and the investment of such contributions. (e) 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 duration of the loan, the number of securities released must equal the number of encumbered securities held immediately before release for the current Plan Year multiplied by a fraction. The Plan Administrator shall select either the fraction set forth in 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. (f) All other requirements of Treasury Regulation Section 54.4975-7(b). 32 39 SECTION 23 ---------- MISCELLANEOUS ------------- 23.01. EMPLOYMENT RIGHTS The right of the Employer to terminate the employment of any of its Employees shall not in any way be affected by the Employee's participation in this Plan. 23.02. GENDER Wherever used in this Plan the masculine pronoun refers to both men and women. 23.03. NOTICE REQUIREMENT Notice of the existence and provisions of the Plan and of any amendment thereto shall be communicated by the Employer to those entitled to notice thereof. 23.04. MERGER OR CONSOLIDATION In case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant in the Plan would (if this Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to, or greater than, the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan then terminated). 23.05. SOCIAL SECURITY BENEFITS Post-separation Social Security benefit increases shall not affect benefits under this Plan. 23.06. FORFEITURES Forfeitures resulting from termination of employment shall be allocated to other Participants as of the last day of the Plan Year which immediately follows the earlier of: (a) the date on which the Participant receives an actual distribution of his nonforfeitable Account; and (b) the date the Participant incurs five consecutive One-Year Breaks in Service. 33 40 In the event that a Participant who received a distribution of his nonforfeitable Account returns to the employment of the Employer before he incurs five consecutive One-Year Breaks in Service and takes such action as is necessary to reinstate the portion of his Account that was previously forfeited, the forfeited portion of his Account shall be restored first from Forfeitures available for allocation in that year and then from additional Employer contributions, if necessary. All rights to forfeiture restoration shall lapse when this Plan is terminated with regard to all Participants who have not resumed employment prior to Plan termination. 23.07. NAMED FIDUCIARIES The named fiduciaries of this Plan shall be the Sponsor, the Plan Administrator and the Trustee. 23.08. LIMITATIONS ON PAYMENT No payment shall be made to any incompetent person (through minority or otherwise) until the Plan Administrator shall have been furnished evidence satisfactory to it of the person to whom such payment shall be made and his right to receive the same. Until furnished such evidence, all amounts so payable shall be held in trust for the person or persons entitled to receive them, separate and apart from the Plan's general Trust Fund. 23.09. INTERPRETATION OF DOCUMENT The construction and interpretation of the Plan provisions are vested with the Plan Administrator, in its absolute discretion, including, without limitation, the determination of benefits, eligibility and interpretation of Plan provisions. All such decisions, determinations and interpretations shall be final, conclusive and binding upon all parties having an interest in the Plan. 23.10. NONTERMINABLE PROTECTIONS AND RIGHTS Notwithstanding anything contained herein to the contrary, except as provided in Section 12.05 or 12.06 of the Plan, or as otherwise permitted by applicable law, no security 34 41 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 12.05 hereof, shall be nonterminable regardless of whether this Plan ceases to be an employee stock ownership plan or an exempt loan is paid in full. 23.11. 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 unallocated suspense account described in Section 4.02 shall be allocated in accordance with procedures established by the Plan Administrator. SECTION 24 ---------- CERTAIN DEFINITIONS ------------------- Whenever used in this Plan, the following words and phrases shall have the meanings specified below. Additional words and phrases may be defined in the text of the Plan. 24.01. ACCOUNT "Account" means a Participant's Employer Contributions Account. 24.02. AFFILIATE "Affiliate" means any other employer which, together with the Sponsor, is a member of a controlled group of corporations or of a commonly controlled trade or business [as defined in Code Sections 414(b) and (c) and as modified by Code Section 415(h)] or of an affiliated service group [as defined in Code Section 414(m)] or other organization described in Code Section 414(o). 35 42 24.03. ANNUAL ADDITIONS "Annual Additions" means the sum of the following amounts credited to a Participant for the Limitation Year under all defined contribution plans maintained by the Employer: (a) Employer contributions; (b) Forfeitures; (c) amounts allocated after March 31, 1984 to an individual medical account, as defined in Section 415(l)(1) of the Code, which is part of a defined benefit plan maintained by the Employer; and (d) 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 (d) shall not be subject to the 25% of compensation limit provided in Section 2.04. "Annual Additions" shall exclude, for a Limitation Year, forfeitures of Employer Shares purchased with the proceeds of a loan described in Section 2.02 and interest on a loan described in Section 2.02 which is deductible under Code Section 404(a)(9)(B), providing not more than one-third of Employer contributions made to the Plan for such year are allocated to the Accounts of Participants who are Highly-Compensated Employees, within the meaning of Code Section 414(q). 24.04. BENEFICIARY "Beneficiary" means the individual, individuals or trust designated by the Participant under the terms of Section 8.02 hereof to receive the death benefit payable under the Plan. 24.05. CODE 36 43 "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. 24.06. COMPENSATION "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), or 403(b) of the Code, excluding any amounts paid by the Employer during any Plan Year in excess of $160,000, as adjusted under Code Section 401(a)(17) for Plan Years after January 1, 1998. 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. 24.07. CURRENT PARTICIPANT "Current Participant" means, for any Plan Year, a Participant who was employed by the Employer on the last day of such Plan Year. [24.08. EFFECTIVE DATE] "Effective Date" means January 1, 1998. 24.09. EMPLOYEE "Employee" means any person who is an employee in the regular employment of the Employer. 24.10. EMPLOYER "Employer" means United Community Financial Corp. and any Affiliate who, with the consent of the Employer, adopts this Plan as a participating employer. As of the Effective Date, The Home Savings and Loan Company of Youngstown, Ohio shall be a participating employer. 24.11. EMPLOYER CONTRIBUTIONS ACCOUNT 37 44 "Employer Contributions Account" means the account established for each Participant under this Plan pursuant to Section 4.01. 24.12. EMPLOYER SHARES OR SHARES "Employer Shares" or "Shares" means securities which constitute "employer securities" under Section 409(l) of the Code and "qualifying employer securities" under Section 4975(e)(8) of the Code and Section 407(d)(5) of ERISA. 24.13. EMPLOYMENT COMMENCEMENT DATE "Employment Commencement Date" means the date on which an Employee first performs an Hour of Service for the Employer. 24.14. ENTRY DATE "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 Effective Date. 38 45 24.15. ERISA "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 24.16. FORFEITURE "Forfeiture" means the amount of the value of any Participant's Account that such Participant is not entitled to receive under Section 11 on the termination of his employment. 24.17. FULL TIME "Full Time" means employment with the Employer for not less than 1,000 hours during the 12 consecutive calendar months for which a determination is made. 24.18. HOUR OF SERVICE "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 shall 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 duty, military duty, leave of absence or required by the Family and Medical Leave Act of 1993. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall 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 39 46 Employer or an Affiliate. The same hours of service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall 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) in the case of a Participant who is absent from work for maternity or paternity reasons, such Participant shall have credited, solely for purposes of determining whether a One-Year Break in Service has occurred for eligibility and vesting, 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 shall not exceed 501 hours. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of pregnancy of the Participant; (ii) by reason of the birth of a child of the Participant; (iii) by reason of the placement of a child with the Participant in connection with the adoption of such child by such Participant; or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. 24.19. LATE RETIREMENT DATE "Late Retirement Date" means the first day of the month following the date on which a Participant elects to retire after his Normal Retirement Date. 24.20. LIMITATION YEARError! Bookmark not defined. "Limitation Year" means the Plan Year. 24.21. NORMAL RETIREMENT AGE "Normal Retirement Age" means age 65. 24.22. NORMAL RETIREMENT DATE "Normal Retirement Date" means the first day of the month coincident with or next following the date on which the 40 47 Participant attains Normal Retirement Age; provided, however, that this Plan shall not be interpreted to require that a Participant retire prior to attaining any specific age. 24.23. ONE-YEAR BREAK IN SERVICE "One-Year Break in Service" means, for vesting purposes, a Plan Year during which a Participant has not completed more than 500 Hours of Service. 24.24. PARTICIPANT "Participant" means either (a) an Employee who is participating in the Plan in accordance with Section 1.01 for whom Accounts are being maintained; or (b) a former Employee for whom Accounts are being maintained. 24.25. PLAN "Plan" means the United Community Financial Corp. Employee Stock Ownership Plan as in effect from time to time. 24.26. PLAN ADMINISTRATOR "Plan Administrator" means an administrative committee appointed by the Sponsor to administer this Plan pursuant to Section 15 or, if no such appointment is made, the Sponsor. 24.27. PLAN YEAR "Plan Year" means the fiscal year of the Plan which begins each January l and ends each December 31. 24.28. PROJECTED ANNUAL BENEFIT "Projected Annual Benefit" means the annual benefit to which the Participant would be entitled under all Employer 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. 41 48 24.29. SPOUSE OR SURVIVING SPOUSE "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 Section 414(p) of the Code. 24.30. TRUST AGREEMENT "Trust Agreement" means the agreement, and any amendments made thereto, by and between the Employer and the Trustee for the management, investment and disbursement of funds held in the Trust Fund. 24.31. TRUST FUND "Trust Fund" means the fund established pursuant to the terms of the Trust Agreement. 24.32. TRUSTEE "Trustee" means the bank, trust company and/or individual or individuals designated by the Employer to hold and invest the Trust Fund and to pay benefits and expenses as authorized by the Plan Administrator in accordance with the terms and provisions of the agreement by and between the Employer and such bank, trust company and/or individual or individuals. 24.33. VALUATION DATE "Valuation Date" means the last day of each Plan Year and any other date(s) fixed by the Plan Administrator for the valuation of assets and adjustments of individual Accounts. 24.34. YEAR OF SERVICE "Year of Service" means a Plan Year during which a Participant is, and each Plan Year prior to the Effective Date during which such Participant was, a Full-Time Employee of the Employer. An Employee shall also be given credit for all Years 42 49 of Service with an Affiliate which is not a participating employer. IN WITNESS WHEREOF, the undersigned has caused this Plan to be executed by its duly authorized officer effective as of the Effective Date. UNITED COMMUNITY FINANCIAL CORP. By: ---------------------------------------- Name (Print): ------------------------------ Title: ------------------------------------- Date: ___________________ THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By: ---------------------------------------- Name (Print): ------------------------------ Title: ------------------------------------- Date: ____________________ 43 50 UNITED COMMUNITY FINANCIAL CORP. -------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN TRUST ----------------------------------- Effective January 1, 1998 51 UNITED COMMUNITY FINANCIAL CORP. -------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN TRUST ----------------------------------- TABLE OF CONTENTS ----------------- ARTICLE I - NAME OF TRUST 1 - --------- ARTICLE II - CONTRIBUTIONS TO THE TRUST FUND 2 - ---------- ARTICLE III - PAYMENTS FROM THE TRUST FUND 3 - ----------- ARTICLE IV - INVESTMENT OF THE TRUST FUND 3 - ---------- ARTICLE V - POWERS OF THE TRUSTEE 5 - --------- ARTICLE VI - ADMINISTRATIVE PROVISIONS 9 - ---------- ARTICLE VII - SUBSTITUTION OF TRUSTEE 12 - ----------- ARTICLE VIII - AMENDMENT AND TERMINATION 14 - ------------ ARTICLE IX - MISCELLANEOUS PROVISIONS 14 - ---------- 52 UNITED COMMUNITY FINANCIAL CORP. -------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN TRUST ----------------------------------- THIS AGREEMENT made and entered into this ___ day of _______________, by and between United Community Financial Corp. and The Home Savings and Loan Company of Youngstown, Ohio (hereinafter referred to as the "Employer"), and __________________, as trustee (hereinafter "Trustee"); W I T N E S S E T H: WHEREAS, effective as of January 1, 1998, the Employer adopted and established an employee stock ownership plan, called the United Community Financial Corp. Employee Stock Ownership Plan (the "Plan"); and WHEREAS, it is necessary, under applicable law, to establish a trust (hereinafter the "Trust") to hold the assets of the Plan; and WHEREAS, the Employer desires to enter into an agreement with the Trustee to provide for the investment of the assets of the Trust and for the payment of benefits from the Trust; NOW, THEREFORE, in consideration of the mutual undertakings of the parties hereto, it is hereby agreed as follows: ARTICLE I --------- NAME OF TRUST ------------- 1. This Agreement and the Trust it evidences shall on and after the effective date stated in paragraph 3 of this Article I be known as the United Community Financial Corp. Employee Stock Ownership Plan Trust (which trust agreement, as hereinafter set forth and as it may hereafter be amended, is referred to herein as the "Agreement" or the "Trust Agreement"), and the provisions hereof are intended to implement on and after the effective date the provisions of the Plan. 53 2. The Plan, and any future amendments thereto, shall form a part of this Trust Agreement, and any amendments hereto, in the same manner as if all terms and provisions thereof were copied herein in detail; the terms and provisions of this Trust Agreement, and any future amendments hereto, shall form a part of the Plan, as from time to time amended, in the same manner as if the same were copied in the Plan in detail. 3. The Trust Agreement is effective as of January 1, 1998. 4. The Trustee is authorized to accept all funds or property designated to be held under the terms of this Trust Agreement. By execution of this Trust Agreement, the Trustee acknowledges its acceptance as Trustee hereunder and accepts the provisions hereof and agrees to hold and administer all the moneys and other property which, on the effective date hereof, comprise the assets of the Trust Fund as well as any property hereafter received by it for the uses and purposes herein expressed. ARTICLE II ---------- CONTRIBUTIONS TO THE TRUST FUND ------------------------------- 1. Subject to the provisions of Article VIII hereof, the Employer, on behalf of itself and its employees, intends (but is not required), from time to time, to deliver or cause to be delivered to the Trustee such amounts of cash, Employer Shares (as defined in the Plan) and other property acceptable to the Trustee as the Employer, in its sole discretion, deems necessary to comply with the provisions of the Plan. All such amounts received by the Trustee from the Employer shall constitute one common trust fund. Unless the context clearly applies or indicates the contrary, as used herein, the term "Trust Fund" comprises all property of every kind held by the Trustee, from time to time, pursuant to this Trust Agreement. The Trustee shall have no duty, expressed or implied, to compel any payment to be made to it by the Employer or otherwise be responsible for the adequacy of the Trust Fund to meet and discharge any liabilities under the Plan and shall be accountable only for cash and other property actually received by it. 2. All contributions to the Plan are made subject to continuing qualification of the Plan and, any provisions of the 2 54 Plan or this Trust Agreement to the contrary notwithstanding, the Employer, by delivering to the Trustee written notification specifying the circumstances which warrant the return of contributions, may direct the Trustee to return contributions to the Employer in all circumstances permitted under Section 409(j) of the Internal Revenue Code of 1986, as amended (the "Code"). In any such event, the Trustee shall return to the Employer, 3 55 within the time frame specified in Section 409(j)(3) of the Code, the market value of the subject contributions. ARTICLE III ----------- PAYMENTS FROM THE TRUST FUND ---------------------------- 1. Payments shall be made from the Trust Fund by the Trustee to such persons, in such manner, at such times and in such amounts as the Plan Administrator (as defined in the Plan) may from time to time direct in writing; provided, however, that the Trustee may withhold compliance with the Plan Administrator's direction to the extent that, and so long as, the Trustee shall deem such withholding necessary to insure payment of the Trustee's expenses. 2. The Plan Administrator may direct the Trustee to make payments to a paying agent or agents or to the Employer itself as paying agent. 3. The Plan Administrator shall furnish the Trustee with all necessary factual information required by it to perform its duties as Trustee hereunder, and the Trustee shall not be required to verify the facts so furnished by the Plan Administrator. The Trustee, in following the directions of the Plan Administrator, is authorized to act upon instructions of the Plan Administrator or of any individual that the Employer shall designate in writing. ARTICLE IV ---------- INVESTMENT OF THE TRUST FUND ---------------------------- 1. The Trust Fund, except such estimated amounts as in the opinion of the Trustee are required for current payments and expenses, shall be invested and reinvested by the Trustee without distinction between principal and income primarily in qualifying employer securities, as defined in Section 4975(e)(8) of the Code. 2. To the extent that qualifying employer securities are not available at a favorable price, the Trustee is authorized to invest and reinvest any portion of the Trust Fund which is not 4 56 invested in qualifying employer securities in such bonds; notes; debentures; mortgages; mutual funds; investment trust certificates; preferred or common stock; real estate; savings and loan accounts; insurance policies on the lives of participants in the Plan payable to the Trust; or in such property, real, personal or mixed, either within or without the state comprising the situs of the Trust, unless specifically prohibited by law or by the provisions of this Trust Agreement. All or any part of the Trust Fund may be invested in deposits which bear a reasonable interest rate in a bank or similar financial institution which is supervised by the United States or of any state thereof; and the Trustee may hold any reasonable portion of the Trust Fund in overnight accounts pending investment or payment of expenses or benefits. The Trustee may, to the extent it deems it advisable, invest in a common or collective trust fund or pooled investment fund, including any common trust fund for qualified employee benefit trusts, maintained by any bank or trust company in the United States which is supervised by a state or federal agency. During such period of time as an investment in any such common trust fund shall exist, the Declaration of Trust of such fund shall constitute a part of this Trust Agreement. 3. The Trustee shall have the right, to the extent permissible under applicable law, to (a) purchase, sell, exchange and retain preferred or common stocks or other marketable obligations consisting of bonds, debentures, notes or certificates, or other evidences of indebtedness, issued by the Employer or by any "affiliate" [within the meaning of Section 407(d)(7) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")]; and (b) acquire and hold parcels of real property (and related personal property) which is leased, or is to be leased, to the Employer or to an "affiliate" [within the meaning of Section 407(d)(7) of ERISA]. Notwithstanding the foregoing, the Trustee shall not have the right to invest any Employer Shares held by it which are either allocated to the accounts of participants, or acquired pursuant to a loan and held in an unallocated account. 4. The Plan Administrator may appoint one or more Investment Managers to exercise full investment management authority with respect to all or a portion of the assets of the Trust Fund and to authorize payment of the fees and expenses of such Investment Manager from the assets of the Trust Fund. In the event the Plan Administrator exercises this right, it shall certify to the Trustee and such Investment Manager the scope of 5 57 the duties and responsibilities of the Investment Manager. Such Investment Manager shall be either (a) registered as an investment advisor under the Investment Advisors Act of 1940; (b) a bank, as defined in the Investment Advisors Act of 1940; or (c) an insurance company qualified to manage, acquire or dispose of Plan assets under the laws of more than one state. Upon its appointment, the Investment Manager shall certify and acknowledge in writing to the Plan Administrator and the Trustee that it has a copy of the Trust Agreement and the Plan, that it is a fiduciary with respect to such Plan and Trust and that it has assumed the duties and responsibilities conferred upon it by the Plan Administrator. The duties, responsibilities and authority of any such Investment Manager may be revoked or modified by the Plan Administrator at any time by written notice to such Investment Manager and to the Trustee. Any Investment Manager duly appointed and authorized by the Plan Administrator shall, during the period of its appointment, possess fully and absolutely those powers, rights and duties of the Trustee (to the extent delegated by the Plan Administrator and to the extent permissible under the terms of this Trust Agreement) with respect to the investment or reinvestment of that portion of the Trust Fund over which such Investment Manager has investment management authority. During any period of time when such Investment Manager is so appointed and serving, and with respect to those assets of the Trust Fund over which such Investment Manager exercises investment management authority, the Trustee's responsibility shall be limited to holding such assets as a custodian, providing accounting services, disbursing benefits as authorized and executing such investment instructions only as directed by such Investment Manager. Any certificates or other instruments duly signed by such Investment Manager (or the authorized representative of such Investment Manager), purporting to evidence any instruction, direction or order of such Investment Manager with respect to the investment of those assets of the Plan over which the Investment Manager has investment management authority shall be accepted by the Trustee as conclusive proof thereof. The Trustee shall also be fully protected in acting in good faith upon any notice, instruction, direction, order, certificate, opinion, letter, telegram or other document believed by the Trustee to be genuine and to be by such Investment Manager (or the authorized representative of such Investment Manager). Unless the Trustee participates knowingly in, or knowingly undertakes to conceal, an act or omission of an investment manager, knowing such act or omission to be a breach of the fiduciary responsibility of the Investment Manager with respect to the Plan, the Trustee shall 6 58 not be liable for any act or omission of an Investment Manager and shall not be under any obligation to invest or otherwise manage the assets of the Plan that are the subject of the management of the Investment Manager. ARTICLE V --------- POWERS OF THE TRUSTEE --------------------- 1. Subject to any limitations imposed under Article IV, the Trustee is authorized and empowered: (a) to sell, exchange, convey, transfer or dispose of and also to grant options with respect to any property, whether real or personal at any time held by it; and any sale may be made by private contract or by public auction and no person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency or propriety of any such sale or other disposition; (b) to retain, manage, operate, repair and improve and to mortgage or lease for any period and on such terms as the Trustee shall deem proper any real estate or personal property held by the Trustee, including power to demolish any buildings or other improvements in whole or in part and to erect buildings or other improvements and to make leases that may extend beyond the term of the Trust; and to foreclose, extend, renew, assign, release or partially release and discharge mortgages or other liens; (c) to compromise, compound and settle any debt or obligation due from third persons to it, or to third persons from it as Trustee hereunder, and to reduce the rate of interest on, to extend or otherwise to modify or to foreclose upon default or otherwise to enforce such obligation; (d) except as otherwise provided in Section 20 of the Plan, (i) to vote in person or by proxy, with or within power of substitution, on any stocks, bonds 7 59 or other securities held by it; (ii) to exercise any options appurtenant to any stocks, bonds or other securities for the conversion thereof into other stocks, bonds or securities or to exercise any rights to subscribe for additional stocks, bonds or other securities and to make any and all necessary payments thereof; (iii) to join in, dissent from or oppose the reorganization, recapitalization, consolidation, sale or merger of corporations or properties in which it may be interested as Trustee, upon such terms and conditions as it may deem wise; and (iv) to accept any securities which may be issued upon any such reorganization, recapitalization, consolidation, sale or merger and thereafter to hold the same; (e) to make, execute, acknowledge and deliver any and all deeds, leases, assignments, documents of transfer and conveyance, documents of release and satisfaction and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (f) to write covered call options for the purchase of securities held in the Trust and to enter into closing purchase transactions for the purpose of terminating same to acquire and dispose of any call option and any put option and to grant options involving disposition of any Trust asset or to take options for the acquisition by the trust estate of any asset; (g) to enforce any right, obligation or claim in its discretion and in general to protect in any way the interest of the Trust Fund, either before or after default; and, in any case, it shall consider such action for the best interest of the Trust Fund, to abstain from the enforcement of any right, obligation or claim; to abandon any property, whether real or personal, which at any time may be held by it; (h) to borrow, or raise moneys, from the Employer or other sources, at a reasonable rate of interest, for the purposes of the Trust Fund, as it may deem 8 60 advisable, and in particular, to borrow money to purchase qualifying employer securities; and for any sums so borrowed to issue its promissory note as Trustee and to secure the repayment thereof by mortgaging or pledging only the assets purchased with the borrowed funds. Loans entered into pursuant to this subsection shall accrue interest at a reasonable rate and shall be repaid within a definite period, as set forth in the loan agreement. Proceeds obtained from a loan entered into pursuant to this subsection may be used only to acquire qualifying employer securities, repay the loan or repay a prior loan entered into pursuant to this subsection. No lender shall have recourse against the Trust Fund except with respect to such assets as the Trustee mortgages or pledges. The Trustee shall repay such loans only from Employer contributions and Trust Fund earnings. Upon the Trustee's payment of any portion of the balance due on a loan, the assets originally pledged by it as collateral for such portion shall be released from encumbrance, and any released securities shall be allocated in the manner described in the Plan. No person lending money to the Trustee shall be bound to see to the application of the money loaned or to inquire into the validity, expedience or propriety of any such borrowing; (i) to cause any investment in the Trust Fund to be registered in or transferred into its name as Trustee or the name or names of his nominee or nominees, or to retain them unregistered or in form permitting transferability by delivery, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (j) to acquire property returning no income or slight income or to retain any such property so long as the Trustee shall deem advisable; (k) to consult with counsel, who may be counsel to the Trustee or the Employer, and in so doing shall be fully protected in acting upon the advice of such counsel; 9 61 (l) to continue to exercise any powers and discretion herein granted for a reasonable time after the termination of the Trust; (m) to utilize the facilities of any bank as a depository; and (n) to perform all acts which it may deem necessary or proper and to exercise any and all powers of the Trustee under this Agreement upon such terms and conditions as it may deem for the best interest of the Trust Fund. 2. In addition to the powers and authorities herein elsewhere granted, except as herein expressly provided otherwise, the Trustee shall have the powers, authorities and discretions set forth in the laws of the state comprising the situs of the Trust insofar as applicable hereto. The powers and authorities granted to the Trustee shall not be limited by the fact that such Trustee may be a bank or other financial institution; and no Trustee duly appointed, qualified and acting hereunder shall be subject to limitations or restrictions imposed upon a bank or other financial institution or upon fiduciaries generally with respect to the type of investment any such institution or trustee may make of its own funds or the funds of others except to the extent expressly provided herein or by law. Specifically, such Trustee may retain, acquire or otherwise deal in stock for which it is registrar, transfer agent or the like; may deposit Trust funds with itself as Trustee and as a bank; may contract or otherwise enter into transactions between itself as Trustee and as a bank or between itself as Trustee and any other institution for which it then, theretofore, or thereafter may be acting as Trustee, unless specifically prohibited by law. 3. The Trustee may not maintain the indicia of ownership of any assets of the Trust Fund outside the jurisdiction of the district courts of the United States, except to the extent otherwise expressly permitted by law. ARTICLE VI ---------- ADMINISTRATIVE PROVISIONS ------------------------- 10 62 1. The Trustee shall maintain, with respect to the Employer, true and accurate records and accounts reflecting all receipts and disbursements made by it pursuant to this Trust Agreement and containing a description of all assets from time to time held by it hereunder. Such records and accounts shall be open to the inspection of the Employer and the Plan Administrator at all reasonable times and may be audited from time to time by such person or persons as the Employer or the Plan Administrator may designate. Within 90 days after the end of each fiscal year, and at such other times as the Employer or Plan Administrator may request in writing, the Trustee shall deliver to the Employer or Plan Administrator a report and account in writing, covering the period from the last previous report and account, in such form and detail as the Employer or Plan Administrator may reasonably request; and the approval of any such report and account by the Employer or Plan Administrator shall be a full acquittance and discharge of the Trustee with respect to the matters therein set forth. Upon the expiration of 120 days from the date of filing such annual or other report and account, or upon the earlier specific approval thereof as provided above, the Trustee shall be forever released and discharged from all liability and accountability, except for actual fraud or a breach of fiduciary responsibility by failure to abide by the terms of this Trust Agreement, to anyone with respect to the propriety of its acts and transactions shown in such report and account except with respect to any such acts or transactions as to which the Employer or Plan Administrator shall within such 120-day period file written objections with the Trustee. Nothing herein contained, however, shall be deemed to preclude the Trustee from its right to have its accounts judicially settled by a court of competent jurisdiction, in which event, only the Trustee and the Employer shall be necessary parties. 2. The Trustee may employ such agents, attorneys (who may be counsel for the Trustee), auditors, clerical and other assistants as, in its judgment, may be necessary or desirable for the proper administration of the Trust Fund and to advise the Trustee hereunder and may delegate to any person so employed any ministerial power of duty of the Trustee. 3. The Trustee may institute, maintain or defend any litigation necessary in connection with the administration of the Trust Fund, provided the Trustee shall be under no duty or obligation to do so unless it shall have been indemnified to its satisfaction against all expenses and liabilities which it may 11 63 sustain or reasonably anticipate by reason thereof. The Trustee shall notify the Employer in writing before instituting, or commencing the defense of, any such litigation. 4. All expenses of administering the Plan and Trust, including, without limitation, the Trustee's compensation (to be agreed upon, from time to time, between the Employer and Trustee) and expenses, Investment Managers' fees and expenses and legal, accounting and other professional fees and expenses incurred in connection with the Plan or the Trust, shall be paid from the Trust Fund, unless otherwise paid by the Employer. Notwithstanding any provision contained herein, to the extent that any Trustee serving under this Agreement is an employee of the Employer, he shall receive no compensation (other than the reimbursement of his expenses) for serving as Trustee. 5. No person shall be obliged to see to the application of any money or property delivered to the Trustee, nor shall any such person be required to take cognizance of the provisions of this Trust Agreement. The certificate of the Trustee, duly executed, may be received by any person dealing with the Trustee as conclusive evidence of any matter relating to this Agreement or the administration thereof. In general, each person dealing with the Trustee may act upon any advice, request or representation in writing by the Trustee, or the Trustee's duly authorized agent, and shall not be liable to any person in so doing. In case of doubt as to whether the Trustee has or has not been granted a specific power not enumerated hereunder, the certificate of the Trustee that the exercise of such power is necessary or desirable for the proper administration or distribution of the Trust Fund shall be conclusive upon all persons dealing with the Trustee to the same extent as if such power had been specifically granted to the Trustee. 6. If the assets held by the Trustee hereunder, or any benefits payable by the Trustee hereunder, shall become liable for the payment of any estate, inheritance or income tax, which, in the Trustee's opinion, it shall be or may be required to pay, the Trustee shall have full power and authority to pay such tax out of any moneys or other property in its hands for the account of the person whose interests hereunder are liable for such tax; but, at least ten calendar days prior to making any such payment, the Trustee shall mail a notice to the Employer or Plan Administrator of its intention to make such payment. The Trustee also, prior to making any payment to any beneficiary hereunder, 12 64 may require such releases or other documents from any lawful taxing authority and may require such indemnity from such beneficiary as it shall deem necessary for its protection. 7. The Employer or Plan Administrator shall furnish to the Trustee all the information necessary for the Trustee to carry out the purposes of the Trust Agreement. This information shall include information relative to the liquidity needs of the Plan and other information regarding the Plan and its participants that the Trustee may regard as necessary to carry out its functions. 8. The Trustee shall not be liable for its action in making payment or delivery of any cash or other property to any person at the direction of the Employer or Plan Administrator; and, in the event of litigation, actual or threatened, the Trustee shall not be liable for declining to make delivery thereof until final adjudication shall have been made by a court of competent jurisdiction or by agreement of the parties. All costs and expenses of such litigation shall be paid by the Employer. 9. The Trustee shall be under no duty to inquire into any rule, regulation, instruction, direction or order purporting to have been issued by the Employer or Plan Administrator and to be duly signed by an authorized officer of the Employer or by any other individual designated by the Employer as authorized to instruct the Trustee; and any certificate duly signed by an authorized officer or such individual purporting to evidence any such instruction, direction or order shall be accepted by the Trustee as conclusive proof thereof. The Trustee shall also be fully protected in acting in good faith upon any notice, resolution, instruction, direction, order, certificate, opinion, letter, telegram or other document or communication believed by the Trustee to be genuine and to be the act of the Employer or Plan Administrator. 10. The Trustee shall discharge its duties with respect to the Trust Fund solely in the interest of the participants and beneficiaries of the Plan for the exclusive purpose of providing benefits to such participants and beneficiaries and defraying reasonable expenses in administering the Plan with respect to which the Trust Fund is established and maintained. 13 65 11. The Employer intends that the Trust herein established for the purpose of implementing the Plan shall qualify under Sections 401 and 501 of the Code; and until advised to the contrary in writing, the Trustee may assume that the Trust is so qualified and is entitled to the exemption from taxes provided for in said sections. 12. No bond shall ever be required of any Trustee, successor Trustee or ancillary Trustee duly appointed and acting hereunder, except such bond as may be required by any applicable law or statute of the United States, including, without limitation, ERISA, or of any state having appropriate jurisdiction, which required bond may not under such law or statute be waived by the parties to this Agreement. If requested by the Employer, Trustee shall from time to time deliver to the Employer copies of Trustee's then most current audited financial statements. 13. The Trustee shall discharge its duties under this Trust Agreement: (a) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (b) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (c) in accordance with the provisions of this Trust Agreement insofar as they are consistent with the provisions of ERISA, as the same may be from time to time amended; but the duties and obligations of the Trustee shall be limited to those expressly imposed upon it by this Trust Agreement and any other agreement to which it is a party, notwithstanding any reference herein to the Plan. 14 66 ARTICLE VII ----------- SUBSTITUTION OF TRUSTEE ----------------------- 1. The Trustee shall serve until a successor Trustee shall be named by the board of directors of the Employer or until its resignation, death, incapacity or removal, in which event such board of directors shall name a successor. A Trustee otherwise eligible to participate in the Plan and Trust shall not be excluded on the ground that it is a Trustee. The word "Trustee" as used herein shall include the original and any successor Trustee or Trustees. 2. The Trustee may resign at any time upon giving 30 days' prior written notice to the Employer or, with the consent of the board of directors of the Employer, the Trustee may resign with less than 30 days' prior written notice. 3. The board of directors of the Employer may remove the Trustee by giving at least 30 days' prior written notice to the Trustee. 4. Upon such removal or resignation of the Trustee, the board of directors of the Employer shall appoint and designate a successor Trustee which shall be one or more individual successor Trustees or a corporate Trustee organized under the laws of the United States or of any state thereof with authority to accept and execute trusts. Any successor Trustee must accept and acknowledge in writing its appointment as a successor Trustee before it can act in such capacity. 5. Title to all property and records or true copies of such records necessary to the current operation of the Trust Fund held by the Trustee hereunder shall vest in any successor Trustee acting pursuant to the provisions hereof, without the execution or filing of any further instrument. Any resigning or removed Trustee shall execute all instruments and do all acts necessary to vest such title in any successor Trustee of record. Each successor Trustee shall have, exercise and enjoy all the powers, both discretionary and ministerial, herein conferred upon its predecessor. No successor Trustee shall be obliged to examine the accounts, records and acts of any previous Trustee; and each successor Trustee in no way or manner shall be responsible for any action or omission to act on the part of any previous Trustee. 15 67 6. Any corporation resulting from any merger or consolidation to which the Trustee may be a party or succeeding to the Trust Business of the Trustee or to which substantially all of the Trust Assets of the Trustee may be transferred shall be the successor to the Trustee hereunder without any further act or formality with like effect as if such successor Trustee had originally been named Trustee herein; and, in any such event, it shall not be necessary for the Trustee or any successor Trustee to give notice thereof to any person; and any requirement, statutory or otherwise, that notice shall be given is hereby waived. ARTICLE VIII ------------ AMENDMENT AND TERMINATION ------------------------- 1. This Trust Agreement may be amended from time to time in any respect whatsoever by resolution of the Employer specifying such amendment, subject to the following limitations: (a) Under no condition shall such amendment or amendments result in or permit the return or repayment to the Employer of any property held or acquired by the Trustee hereunder, or the proceeds thereof, or result in or permit the distribution of any such property for the benefit of anyone other than employees of the Employer who are beneficiaries under the Plan, except to the extent provided for by Paragraph 2 of Article II. (b) Such amendment or amendments shall not increase the duties or responsibilities of the Trustee hereunder without its written consent. The Employer or Plan Administrator shall deliver a copy of each amendment to this Trust Agreement to the Trustee within 90 days of such amendment. 2. This Trust Agreement and the Trust may be terminated by the Employer at any time by delivering to the Trustee evidence of the formal action specifying that (a) the Plan is being terminated; or (b) contributions thereunder are being discontinued. 16 68 This Agreement and Trust shall automatically terminate when no cash or other property remains in the Trust. 3. Nothing in this Agreement and Trust shall be construed to prevent the Employer from suspending contributions to the Trust for any period whatsoever or permanently; but such a suspension, whether temporary or permanent, shall not of itself terminate the Trust. ARTICLE IX ---------- MISCELLANEOUS PROVISIONS ------------------------ 1. Except to the extent that this provision may not be legally waived, no personal liability whatever shall attach to or be incurred by any stockholder, officer, director or employee, as such, of the Employer, under or by reason of the terms or conditions contained in or implied from this Trust Agreement. The duties, obligations and rights of the Trustee shall be limited to and by the provisions of this Trust Agreement, notwithstanding any reference herein to the Plan; provided, however, the Employer agrees to deliver to the Trustee a copy of each amendment to the Plan within 90 days of the date of such amendment. 2. No benefits or beneficial interest provided for hereunder or under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, either voluntary or involuntary, except as otherwise provided by federal law; and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be null and void; neither shall such benefits or beneficial interest be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable. 3. The Employer shall have no beneficial interest in the Trust Fund or any part thereof; and no part of the Trust Fund shall ever revert or be repaid to the Employer, either directly or indirectly, except as provided in Paragraph 2 of Article II hereof. 4. Unless superseded by federal law, the laws of the State of Ohio shall govern, control and determine all questions arising with respect to the Trust Fund and interpretation and validity of 17 69 the provisions of this Agreement. In the event any provision or provisions of this Agreement shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this agreement but shall be fully severable, and the agreement shall be construed and enforced as if said illegal or invalid provision or provisions had never been inserted herein. 5. Words and phrases are used interchangeably in the Plan and this Trust Agreement and a word, term or phrase defined in either is similarly defined for the purposes of the other. The terms "agreement," "herein," "hereunder" and similar terms refer to this Trust Agreement, including the Plan which is made a part hereof, unless otherwise qualified by the context. 6. This Trust Agreement shall be binding upon persons who are entitled to any benefits hereunder, their heirs and legal representatives and upon the Employer, the Trustee and its respective successors and assigns. 7. This Trust Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which together shall constitute one and the same instrument. 18 70 IN WITNESS WHEREOF, United Community Financial Corp. and The Home Savings and Loan Company of Youngstown, Ohio, as the Employer, and _________________________, as Trustee, have caused these presents to be executed as of the day and year first above written. ATTEST: UNITED COMMUNITY FINANCIAL CORP. By: - ------------------------------ ------------------------------------- Its: - ------------------------------ ------------------------------------ ATTEST: THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By: - ------------------------------ ------------------------------------- Its: - ------------------------------ ------------------------------------ ATTEST: ---------------------------------------- TRUSTEE By: - ------------------------------ ------------------------------------- Its: - ------------------------------ ------------------------------------ 19 EX-10.4 7 EXHIBIT 10.4 1 Exhibit 10.4 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this ____ day of ____________, 1998, by and between The Home Savings and Loan Company of Youngstown, Ohio, a savings and loan association incorporated under Ohio law (hereinafter referred to as the "COMPANY"), and _______________, an individual (hereinafter referred to as the "EMPLOYEE"); WITNESSETH: WHEREAS, the EMPLOYEE is currently employed as the _______________ of the COMPANY; WHEREAS, as a result of the skill, knowledge and experience of the EMPLOYEE, the Board of Directors of the COMPANY desires to retain the services of the EMPLOYEE as the _______________ of the COMPANY; WHEREAS, the EMPLOYEE desires to continue to serve as the _______________ of the COMPANY; and WHEREAS, the EMPLOYEE and the COMPANY desire to enter into this AGREEMENT to set forth the terms and conditions of the employment relationship between the COMPANY and the EMPLOYEE; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the COMPANY and the EMPLOYEE hereby agree as follows: 1. Employment and Term. (a) Term. Upon the terms and subject to the conditions of this AGREEMENT, the COMPANY hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts employment, as the _______________ of the COMPANY. The term of this AGREEMENT shall commence on ____________, 1998, and shall end on ____________, 2001, unless extended by the COMPANY, with the consent of the EMPLOYEE, as provided in subsection (b) of this Section 1 (hereinafter referred to, together with such extensions, as the "TERM"). (b) Extension. On or before each anniversary of the date of this AGREEMENT, the Board of Directors of the COMPANY shall review this AGREEMENT and, upon approval by the Board of Directors, shall extend the term of this AGREEMENT for a one-year period beyond the then effective expiration date. Any such extension shall be subject to the written consent of the EMPLOYEE. The Board of Directors shall document its reasons for extending the term of this AGREEMENT in the minutes of the meeting at which such action is taken. 2 2. Duties of the EMPLOYEE. (a) General Duties and Responsibilities. The EMPLOYEE shall serve as the _______________ of the COMPANY. Subject to the direction of the Board of Directors of the COMPANY, the EMPLOYEE shall perform all duties and shall have all powers which are commonly incident to the office of _______________ or which, consistent therewith, are delegated to him by the Board of Directors. Such duties may include, but shall not be limited to, - ---------------------------------------------------------------------------. (b) Devotion of Entire Time to the Business of the COMPANY. The EMPLOYEE shall devote his entire productive time, ability and attention during normal business hours throughout the TERM to the faithful performance of his duties under this AGREEMENT. The EMPLOYEE shall not directly or indirectly render any services of a business, commercial or professional nature to any person or organization other than the COMPANY, United Community Financial Corp. (hereinafter referred to as the "HOLDING COMPANY"), the sole shareholder of the COMPANY, or any subsidiary of the COMPANY or the HOLDING COMPANY without the prior written consent of the Board of Directors of the COMPANY; provided, however, that the EMPLOYEE shall not be precluded from (i) vacations and other leave time in accordance with Section 3(d) below, (ii) reasonable participation in community, civic, charitable or similar organizations, (iii) reasonable participation in industry-related activities, including, but not limited to, attending state and national trade association meetings and serving as an officer, director or trustee of a state or national trade association or Federal Home Loan Bank, (iv) serving as an officer or director of the HOLDING COMPANY or any subsidiary of the COMPANY or the HOLDING COMPANY and receiving a salary, director's fees or other compensation or benefits, as appropriate, or (v) pursuing personal investments which do not interfere or conflict with the performance of the EMPLOYEE's duties to the COMPANY. 3. Compensation. (a) Base Salary. The EMPLOYEE shall receive during the TERM an annual salary payable in equal installments not less often than monthly. The amount of such annual salary shall be $__________ until changed by the Board of Directors of the COMPANY in accordance with Section 3(b) below. (b) Annual Salary Review. On or before each anniversary of the date of this AGREEMENT, the annual salary of the EMPLOYEE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $__________, based upon the EMPLOYEE's individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in the minutes of the Board of Directors of the COMPANY. 2 3 (c) Employee Benefit Programs. During the TERM, the EMPLOYEE shall be entitled to participate in all formally established employee benefit, bonus, pension and profit sharing plans and similar programs that are maintained by the COMPANY or the HOLDING COMPANY from time to time and all employee benefit plans or programs hereafter adopted in writing by the Board of Directors of the COMPANY or the HOLDING COMPANY for which senior management personnel of the COMPANY are eligible, including any employee stock ownership plan, stock option plan or other stock benefit plan (hereinafter collectively referred to as "BENEFIT PLANS"), in accordance with the terms and conditions of such BENEFIT PLANS. Notwithstanding any statement to the contrary contained elsewhere in this AGREEMENT, the COMPANY may at any time discontinue or terminate any BENEFIT PLAN now existing or hereafter adopted, to the extent permitted by the terms of such BENEFIT PLAN, and shall not be required to compensate the EMPLOYEE for such discontinuance or termination to the extent such discontinuance or termination pertains to all employees of the COMPANY who are eligible participants at the time. (d) Vacation and Sick Leave. The EMPLOYEE shall be entitled, without loss of pay, to be absent voluntarily from the performance of his duties under this AGREEMENT, in accordance with the policies periodically established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. The EMPLOYEE shall be entitled to annual sick leave as established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. (e) Expenses. In addition to any compensation received under Section 3(d), the COMPANY shall pay or reimburse the EMPLOYEE for all reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties under this AGREEMENT, including participation in industry-related activities. 4. Termination of Employment. (a) General. The employment of the EMPLOYEE shall terminate at any time during the TERM (i) at the option of the COMPANY, upon the delivery by the COMPANY of written notice of termination to the EMPLOYEE, or (ii) at the option of the EMPLOYEE, upon delivery by the EMPLOYEE of written notice of termination to the COMPANY if, in connection with a CHANGE OF CONTROL (hereinafter defined), the present capacity or circumstances in which the EMPLOYEE is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties or responsibilities substantially inconsistent with those normally associated with the EMPLOYEE's position described in Section 2(a) of this AGREEMENT, change of title or removal as a director of the COMPANY or the HOLDING COMPANY, the requirement that the EMPLOYEE regularly perform his principal executive functions more than thirty-five (35) miles from his primary office immediately preceding the CHANGE OF CONTROL or the EMPLOYEE's compensation or other benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. For purposes of this AGREEMENT, an event shall be deemed to have occurred "in connection with a CHANGE OF CONTROL" if such event occurs within one year before or after a CHANGE OF CONTROL. The following 3 4 subsections (A), (B) and (C) of this Section 4(a) shall govern the obligations of the COMPANY to the EMPLOYEE upon the occurrence of the events described in such subparagraphs: (A) Termination for CAUSE. In the event that the COMPANY terminates the employment of the EMPLOYEE during the TERM because of the EMPLOYEE's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure or refusal to perform the duties and responsibilities assigned in this AGREEMENT, willful violation of any law, rule or regulation (other than traffic violations or other minor offenses), or final cease-and-desist order or material breach of any provision of this AGREEMENT (hereinafter collectively referred to as "CAUSE"), the EMPLOYEE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination. (B) Termination in Connection with CHANGE OF CONTROL. In the event that the employment of the EMPLOYEE is terminated by the COMPANY in connection with a CHANGE OF CONTROL for any reason other than CAUSE or is terminated by the EMPLOYEE as provided in Section 4(a)(ii) above, then the following shall occur: (I) The COMPANY shall promptly pay to the EMPLOYEE or to his beneficiaries, dependents or estate an amount equal to the product of 2.99 multiplied by the EMPLOYEE's "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (hereinafter collectively referred to as "SECTION 280G"); (II) The EMPLOYEE, his dependents, beneficiaries and estate shall continue to be covered at the COMPANY's expense under all health, life, disability and other benefit plans of the COMPANY in which the EMPLOYEE was a participant prior to the effective date of the termination of his employment as if the EMPLOYEE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and (III) The EMPLOYEE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EMPLOYEE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (II) above. (C) Termination not in Connection with CHANGE OF CONTROL. In the event that the employment of the EMPLOYEE is terminated before the expiration of the TERM for any reason other than death, termination for CAUSE or termination in connection with a CHANGE OF CONTROL, then the following shall occur: (I) The COMPANY shall be obligated to continue to pay on at least a monthly basis, until the expiration of the TERM, to the EMPLOYEE, his designated beneficiaries or his estate, the annual salary in effect at the time of termination pursuant to 4 5 Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EMPLOYEE in the twelve month period prior to the termination of employment; (II) The COMPANY shall continue to provide to the EMPLOYEE, at the COMPANY's expense, health, life, disability and other benefits substantially equal to those being provided to the EMPLOYEE at the date of termination of his employment until the earliest to occur of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and (III) The EMPLOYEE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EMPLOYEE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph II above. (b) Death of the EMPLOYEE. The TERM shall automatically expire upon the death of the EMPLOYEE. In such event, the EMPLOYEE's estate shall be entitled to receive the compensation due the EMPLOYEE through the last day of the calendar month in which the death occurred, except as otherwise specified herein. (c) "Golden Parachute" Provision. In the event that any payments pursuant to this Section 4 would result in the imposition of a penalty tax pursuant to SECTION 280G, such payments shall be reduced to the maximum amount which may be paid under SECTION 280G without exceeding such limits. Any payments made to the EMPLOYEE pursuant to this AGREEMENT are subject to and conditioned upon their compliance with 12 U.S.C. ss.1828(k) and any regulations promulgated thereunder. (d) Definition of "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean any one of the following events; (i) the acquisition of ownership or power to vote more than 25% of the voting stock of the COMPANY or the HOLDING COMPANY; (ii) the acquisition of the ability to control the election of a majority of the directors of the COMPANY or the HOLDING COMPANY; (iii) during any period of three or less consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY; (iv) the acquisition by any person or entity of "conclusive control" of the COMPANY within the meaning of 12 C.F.R. ss.574.4(a), or the acquisition by any person or entity of "rebuttable control" within the meaning of 12 C.F.R. ss.574.4(b) that has not been rebutted in accordance with 12 C.F.R. ss.574.4(c); or (v) an event that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the 5 6 "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT. For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EMPLOYEE and any person or persons with whom the EMPLOYEE is "acting in concert" within the meaning of 12 C.F.R. Part 574. (e) Termination by EMPLOYEE. If the EMPLOYEE terminates this AGREEMENT without the written consent of the COMPANY, the EMPLOYEE may be liable for any damages sustained by the COMPANY with respect to the loss of the EMPLOYEE'S services, up to the amount of base salary that would have been paid to the EMPLOYEE to the end of the TERM. 5. Special Regulatory Events. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EMPLOYEE shall be as follows in the event of the following circumstances: (a) If the EMPLOYEE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY's affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY's obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY shall pay the EMPLOYEE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended; (b) If the EMPLOYEE is removed and/or permanently prohibited from participating in the conduct of the COMPANY's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under this AGREEMENT shall terminate as of the effective date of such order; provided, however, that vested rights of the EMPLOYEE shall not be affected by such termination; (c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EMPLOYEE shall not be affected; (d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Director of the Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority contained in Section 13(c) of the FDIA or (ii) by the Director of the OTS, or his or her designee, at any time the Director of the OTS approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Director of the OTS to be in an unsafe or unsound condition; provided, 6 7 however that no vested rights of the EMPLOYEE shall not be affected by any such termination; and (e) The provisions of this Section 5 are governed by the requirements of 12 C.F.R. ss.563.39(b) and in the event that any statements in this Section 5 are inconsistent with 12 C.F.R. ss.563.39(b), the provisions of 12 C.F.R. ss.563.39(b) shall be controlling. 6. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all of their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect. 7. Confidential Information. The EMPLOYEE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EMPLOYEE agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use or such information is otherwise legally in the public domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the COMPANY, its subsidiaries, or affiliates, or to any of the businesses operated by them, and the EMPLOYEE confirms that such information constitutes the exclusive property of the COMPANY. The EMPLOYEE shall not otherwise knowingly act or conduct himself to the material detriment of the COMPANY, its subsidiaries, or affiliates or in a manner which is inimical or contrary to the interests of the COMPANY. 8. Non-assignability. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives without the COMPANY's prior written consent; provided, however, that nothing in this Section 8 shall preclude the EMPLOYEE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or other legal representatives of the EMPLOYEE or his estate from assigning any rights hereunder to the person or persons entitled thereto. 9. No Attachment. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 10. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the benefit of, the EMPLOYEE and the COMPANY and their respective permitted successors and assigns. 7 8 11. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto. 12. Waiver. No term or condition of this AGREEMENT shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived. 13. Severability. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as if this AGREEMENT had not been executed. 14. Headings. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT. 15. Governing Law. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing. 16. Effect of Prior Agreements. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EMPLOYEE. 17. Notices. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows: If to the COMPANY: The Home Savings and Loan Company of Youngstown, Ohio 275 Federal Plaza West P.O. Box 1111 Youngstown, Ohio 44501-1111 8 9 If to the EMPLOYEE: ------------------- ------------------- ------------------- IN WITNESS WHEREOF, the COMPANY has caused this AGREEMENT to be executed by its duly authorized officer, and the EMPLOYEE has signed this AGREEMENT, each as of the day and year first above written. Attest: The Home Savings and Loan Company of Youngstown, Ohio - ---------------------------- By: ------------------------------- ------------------------------- its Chairman of the Board Attest: - ---------------------------- ----------------------------------- [EMPLOYEE] 9 EX-16 8 EXHIBIT 16 1 Exhibit 16 [Packer, Thomas & Co. letterhead] May 4, 1998 Securities and Exchange Commission Mail Stop 9-5 450 5th Street, N.W. Washington, D.C. 20549 Dear Sirs/Madams: We have read and agree with the comments in Item 11 of Amendment No. 1 to Registration Statement No. 333-47957 on Form S-1 of United Community Financial Corp. dated May 6, 1998, as it relates to "Change in Accountants." Very truly yours, PACKER, THOMAS & CO. EX-23.1 9 EXHIBIT 23.1 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-47957 of United Community Financial Corp. on Form S-1 of our report dated February 27, 1998, appearing in the Prospectus, which is part of such Registration Statement. We also consent to the reference to us under the heading, "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Cleveland, Ohio May 4, 1998 EX-23.2 10 EXHIBIT 23.2 1 Exhibit 23.2 INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-47957 of United Community Financial Corp. on Form S-1 of our report dated February 28, 1997, appearing in the Prospectus, which is part of such Registration Statement. We also consent to the reference to us under the headings, "Change in Accountants", and "Experts" in such Prospectus. Packer, Thomas & Co. Youngstown, Ohio May 4, 1998 EX-99.1 11 EXHIBIT 99.1 1 Exhibit 99.1 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 275 FEDERAL PLAZA WEST YOUNGSTOWN, OHIO 44503-1203 (330) 742-0500 NOTICE OF SPECIAL MEETING OF MEMBERS Notice is hereby given that a Special Meeting of Members of The Home Savings and Loan Company of Youngstown, Ohio (the "Company") will be held at ______________________________, Youngstown, Ohio, on ______ ___, 1998, at __:00 __.m. Eastern Daylight Time (the "Special Meeting"), for the following purposes, all of which are more completely set forth in the accompanying Summary Proxy Statement: 1. To consider and act upon a resolution to approve the Amended Plan of Conversion (the "Plan"), a copy of which is attached to the Summary Proxy Statement as Exhibit A, pursuant to which the Company would convert from a mutual savings and loan association incorporated under the laws of the State of Ohio to a permanent capital stock savings and loan association incorporated under the laws of the State of Ohio (the "Conversion") and become a wholly-owned subsidiary of United Community Financial Corp., an Ohio corporation organized for the purpose of acquiring all of the capital stock to be issued by the Company in the Conversion; 2. To consider and act upon a resolution to adopt the Amended Articles of Incorporation of the Company, a copy of which is attached to the Plan as Exhibit I; 3. To consider and act upon a resolution to adopt the Amended Constitution of the Company, a copy of which is attached to the Plan as Exhibit II; 4. To consider and act upon a resolution to approve the contribution of up to 1,250,000 common shares of United Community Financial Corp. to the Home Savings Charitable Foundation, a tax-exempt organization established by the Company in 1991 in furtherance of the Company's commitment to the communities it services; and 5. To transact such other business as may properly come before the Special Meeting and any adjournments thereof. Only those members of the Company who have a savings deposit at the Company at the close of business on ________, 1998, are members of the Company entitled to notice of and to vote at the Special Meeting and any adjournments thereof. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, WE URGE YOU TO CONSIDER THE ACCOMPANYING SUMMARY PROXY STATEMENT CAREFULLY, TO COMPLETE THE ENCLOSED PROXY CARD(S) AND TO RETURN THE COMPLETED PROXY CARD(S) TO THE COMPANY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTE(S) WILL BE COUNTED. Youngstown, Ohio By Order of the Board of Directors _______ ___, 1998 Douglas M. McKay, President 2 THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 275 FEDERAL PLAZA WEST YOUNGSTOWN, OHIO 44503-1203 (330) 742-0500 SUMMARY PROXY STATEMENT INTRODUCTION The enclosed proxy (the "Proxy") is being solicited by the Board of Directors of The Home Savings and Loan Company of Youngstown, Ohio (the "Company") for use at a Special Meeting of Members of the Company to be held at ______________________________, Youngstown, Ohio, on ________ ___, 1998, at __:00 __.m. Eastern Daylight Time, and at any adjournments thereof (the "Special Meeting"). The Special Meeting is being held for the following purposes: 1. To consider and act upon a resolution to approve the Plan of Conversion (the "Plan"), a copy of which is attached hereto as Exhibit A, pursuant to which the Company would convert from a mutual savings and loan association incorporated under the laws of the State of Ohio to a permanent capital stock savings and loan association incorporated under the laws of the State of Ohio (the "Conversion") and become a wholly-owned subsidiary of United Community Financial Corp. (the "Holding Company"), an Ohio corporation organized for the purpose of acquiring all of the capital stock to be issued by the Company in the Conversion; 2. To consider and act upon a resolution to adopt the Amended Articles of Incorporation of the Company (the "Amended Articles"), a copy of which is attached to the Plan as Exhibit I; 3. To consider and act upon a resolution to adopt the Amended Constitution of the Company (the "Amended Constitution"), a copy of which is attached to the Plan as Exhibit II; 4. To consider and act upon a resolution to approve the contribution of up to 1,250,000 common shares of the Holding Company (the "Contribution") to the Home Savings Charitable Foundation (the "Foundation"), a tax-exempt organization established by the Company in 1991 in furtherance of the Company's commitment to the communities it services; and 5. To transact such other business as may properly come before the Special Meeting. The Board of Directors of the Company adopted the Plan on December 9, 1997, and amended the Plan on May 6, 1998. The Plan has been approved by the Office of Thrift Supervision (the "OTS") and the Ohio Department of Commerce, Division of Financial Institutions (the "Division"), subject to the approval of the Plan by the members of the Company at the Special Meeting and the satisfaction of certain other conditions. The approval of the Plan will have the effect of (i) terminating the voting rights of the present members of the Company and (ii) modifying, and eventually eliminating, their right to receive any surplus in the event of a complete liquidation of the Company. Except for certain rights in the special liquidation account established by the Plan (the "Liquidation Account"), such voting and liquidation rights after the Conversion will vest exclusively in the holders of the common shares of the Holding Company. See "THE CONVERSION - Principal Effects of the Conversion -- Liquidation Account." 3 During and upon the completion of the Conversion, the Company will continue to provide services to depositors and borrowers pursuant to its current policies, at its existing offices. In addition, the Company will continue to be a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati and savings accounts at the Company will continue to be insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC") in the Savings Association Insurance Fund (the "SAIF"). This Summary Proxy Statement is dated ________ ___, 1998, and is first being mailed to members of the Company, together with the Prospectus of the Holding Company dated __________ ___, 1998 (the "Prospectus"), on or about _________ ___, 1998. VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL All depositors at the Company having a savings account of record with the Company on May 6, 1998 (the "Voting Record Date"), are members of the Company eligible to vote at the Special Meeting and at any adjournments thereof ("Voting Members"). Voting Members will be entitled to cast one vote for each $100, or fraction thereof, of the withdrawable value of their savings accounts on the Voting Record Date. A savings account in which one or more persons has an interest shall be deemed to be held by only one Voting Member for the purpose of voting at the Special Meeting. Any questions as to the eligibility of a member to vote, the number of votes allocated to each Voting Member or any other matter relating to voting will be resolved at the time of the Special Meeting by reference to the records of the Company. The Company records disclose that, as of the Voting Record Date, there were ____________ votes entitled to be cast at the Special Meeting, a majority of which are required to approve the Plan and the Contribution to the Foundation. A vote of three-fifths of the votes cast in person or by proxy at the Special Meeting is required to adopt the Amended Articles and the Amended Constitution of the Company. PROXIES Voting Members may vote in person or by proxy at the Special Meeting. For Voting Members wishing to vote by proxy at the Special Meeting, the enclosed Proxy may be completed and given in accordance with this Summary Proxy Statement. Any other proxy held by the Company will not be used by the Company for the Special Meeting. A Proxy will be voted in the manner indicated thereon or, in the absence of specific instructions, will be voted FOR the approval of the Plan, FOR the adoption of the Amended Articles, FOR the adoption of the Amended Constitution and FOR the Contribution to the Foundation. Without affecting any vote previously taken, a Voting Member may revoke a proxy at any time before such proxy is exercised by executing and delivering a later dated proxy or by giving the Company notice of revocation in writing or in open meeting at the Special Meeting. Attendance at the Special Meeting will not, of itself, revoke a proxy. Proxies may be solicited by the directors, officers and employees of the Company in person or by telephone, telegraph or mail, for use only at the Special Meeting and any adjournments thereof and will not be used for any other meeting. The cost of soliciting Proxies will be borne by the Company. 2 4 MANAGEMENT'S RECOMMENDATIONS AND REASONS FOR CONVERSION THE BOARD OF DIRECTORS RECOMMENDS THAT MEMBERS VOTE FOR THE APPROVAL OF THE PLAN AND FOR THE ADOPTION OF THE AMENDED ARTICLES AND THE AMENDED CONSTITUTION OF THE COMPANY. The principal factors considered by the Company's Board of Directors in reaching the decision to pursue a mutual-to-stock conversion were the numerous competitive advantages which the stock form of organization offers, including growth opportunities, employee retention, and increased capital levels. If the Company is to continue to grow and prosper, the mutual form of organization is the least desirable form from a competitive standpoint. The opportunities for a mutual savings and loan association to expand through mutual-to-mutual mergers or cash acquisitions are limited. Although the Company does not have any specific acquisitions planned at this time, the Conversion will position the Company to take advantage of any acquisition opportunities which may present themselves. Because a conversion to stock form is a time-consuming and complex process, the Company cannot wait until a prospective acquisition arises to embark on the conversion process. As an increasing number of the Company's competitors convert to stock form and acquire the ability to use stock-based compensation programs, the Company, in mutual form, would be at a disadvantage when it comes to attracting and retaining qualified management. The Company believes that the Holding Company's employee stock ownership plan (the "ESOP"), stock option plan (the "Stock Option Plan") and recognition and retention plan (the "RRP") are important tools in achieving such goals, even though the Holding Company will be required to wait until at least six months after the Conversion to implement the Stock Option Plan and the RRP. See "MANAGEMENT - Stock Benefit Plans" in the Prospectus. MANAGEMENT'S RECOMMENDATION AND REASONS FOR THE CONTRIBUTION TO THE FOUNDATION THE BOARD OF DIRECTORS RECOMMENDS THAT MEMBERS VOTE FOR THE APPROVAL OF THE CONTRIBUTION TO THE FOUNDATION. The Plan provides that the Holding Company and the Company may contribute common shares of the Holding Company to the Foundation. The Foundation is dedicated to charitable purposes within the communities served by the Company, including community development activities. The purpose of the Foundation is to provide funding to support charitable causes and community development activities. The Company believes that the contribution to the Foundation could increase the long-term value of the Company's community banking franchise by enhancing the Company's visibility and reputation in the communities that it serves. The contribution to the Foundation of Common Shares will enable the communities served by the Company to share in the growth and success of the Company and the Holding Company long after completion of the Conversion. The Foundation enables the Company and the Holding Company to utilize a unified charitable donation strategy with centralized responsibility for administration and allocation of corporate charitable funds and enables the Company to provide a consistent level of community support in future years, regardless of future earnings. The Company, however, does not expect the contribution to the Foundation to take the place of the Company's traditional community lending activities. 3 5 THE BUSINESS OF THE HOLDING COMPANY The Holding Company was incorporated under Ohio law in February 1998 for the purpose of purchasing all of the capital stock of the Company to be issued in connection with the Conversion. The Holding Company has not conducted and will not conduct any business before the completion of the Conversion, other than business related to the Conversion. Upon the consummation of the Conversion, the Holding Company will be a unitary savings and loan holding company, the principal assets of which initially will be the capital stock of the Company, cash, the investments made with the net proceeds retained from the sale of common shares of the Holding Company in connection with the Conversion (the "Common Shares") and a loan to be made by the Holding Company to the ESOP to facilitate the ESOP's purchase of Common Shares in the Conversion. See "USE OF PROCEEDS." The office of the Holding Company is located at 275 Federal Plaza West, Youngstown, Ohio 44503-1203, and its telephone number is (330) 743-0500. THE BUSINESS OF THE COMPANY The Company is a mutual savings and loan association which was organized under Ohio law in 1889 as "The Home Building and Loan." In 1897, the name of the Company was changed to "The Home Savings and Loan Company of Youngstown, Ohio." As an Ohio savings and loan association, the Company is subject to supervision and regulation by the OTS, the Division and the FDIC. The Company is a member of the FHLB of Cincinnati, and the deposits of the Company are insured up to applicable limits by the FDIC in the SAIF. See "REGULATION" in the Prospectus. The Company conducts business from its main office located in Youngstown, Ohio and 13 full-service branches, located in the Northern Ohio communities of Austintown, Boardman, Canfield, Columbiana, East Palestine, Liberty Township, Lisbon, Niles, Poland, Salem and Struthers. The principal business of the Company is the origination of mortgage loans on one- to four-family residential real estate located in the Company's primary market area, which consists of northern Columbiana County, Mahoning County and southern Trumbull County. The Company also originates loans secured by nonresidential real estate in its primary market area. In addition to real estate lending, the Company originates commercial loans and various types of consumer loans, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans. See "THE BUSINESS OF THE COMPANY - Lending Activities" in the Prospectus. The Company invests in interest-bearing deposits in other financial institutions, federal funds and U.S. Treasury and agency Securities. See "THE BUSINESS OF THE COMPANY "Investment Activities." Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC in the SAIF, principal repayments of loans and maturities of securities. See "THE BUSINESS OF THE COMPANY - Deposits and Borrowings," in the Prospectus. The main office of the Company is located at 275 Federal Plaza West, Youngstown, Ohio 44503-1203, and its telephone number is (330) 743-0500. 4 6 THE CONVERSION THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY THE MEMBERS OF THE COMPANY ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS AND THE DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN. GENERAL The Board of Directors of the Company adopted the Plan and recommended that the voting members of the Company approve the Plan at the Special Meeting. During and upon completion of the Conversion, the Company will continue to provide the services presently offered to depositors and borrowers, will maintain its existing offices, and will retain its existing management and employees. Based on an independent appraisal of the pro forma market value of the Holding Company and the Company, as converted, and as a result of the contribution of shares to the Foundation (the "Adjusted Valuation Range"), between 21,250,000 and 28,937,500 Common Shares are expected to be offered in a subscription offering (the "Subscription Offering") and a community offering (the "Community Offering") at a price of $10 per share. Applicable regulations permit the Holding Company to issue up to 33,465,625 Common Shares with an aggregate purchase price of $334,656,250. Federal regulations require, with certain exceptions, that shares offered in connection with the Conversion must be sold up to at least the minimum point of the Adjusted Valuation Range in order for the Conversion to become effective. The actual number of Common Shares sold in connection with the Conversion will be determined upon completion of the Offering based on the final valuation of the Company, as converted. See "Pricing and Number of Common Shares to be Sold." The Common Shares will be offered in the Subscription Offering, subject to the rights and restrictions established by the Plan, to (a) eligible depositors of the Company as of July 31, 1996 (the "Eligibility Record Date") who had deposit accounts with balances, in the aggregate, of $50 or more (a "Qualifying Deposit"), (b) the ESOP, (c) eligible depositors of the Company who had Qualifying Deposits as of March 31, 1998 (the "Supplemental Eligibility Record Date"), (d) members of the Company eligible to vote at the Special Meeting ("Other Eligible Members"), and (e) directors, officers and employees of the Company. Any Common Shares not subscribed for in the Subscription Offering will be offered to the general public in the Community Offering in a manner which will seek to achieve the widest distribution of the Common Shares, but which will give preference to natural persons residing in Columbiana, Mahoning and Trumbull, Counties, Ohio. Under OTS regulations, the Community Offering must be completed within 45 days after completion of the Subscription Offering, unless such period is extended by the Company with the approval of the OTS and the Division. If the Community Offering is determined not to be feasible, an occurrence that is not currently anticipated, the Boards of Directors of the Holding Company and the Company will consult with the OTS and the Division to determine an appropriate alternative method of selling unsubscribed Common Shares up to the minimum of the Valuation Range. No alternative sales methods are currently planned. The minimum number of Common Shares any person may purchase in the Offering is 25. Each Eligible Account Holder (hereafter defined), Supplemental Eligible Account Holder (hereafter defined) and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in 5 7 which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. Except for the ESOP, which may purchase up to 10% of the total Common Shares sold in the Offering, no person, together with his or her Associates (hereafter defined) and other persons Acting in Concert (hereafter defined) with him or her, may purchase more than 1.0% of the Common Shares sold in the Offering. Subject to OTS regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors of the Holding Company and the Company. If the purchase limitations are increased after the commencement of the Subscription Offering, persons who have subscribed for the maximum amount will be given the opportunity to increase their subscriptions. See "Limitations on Purchases of Common Shares." OTS and Ohio regulations require the completion of the Conversion within 24 months after the date of the approval of the Plan by the voting members of the Company. The commencement and completion of the Conversion will be subject to market conditions and other factors beyond the Company's control. Due to changing economic and market conditions, no assurance can be given as to the length of time that will be required to complete the sale of the Common Shares. If delays are experienced, significant changes may occur in the estimated pro forma market value of the Company. In such circumstances, the Company may also incur substantial additional printing, legal and accounting expenses in completing the Conversion. In the event the Conversion is not successfully completed, the Company will be required to charge all Conversion expenses against current earnings. PRINCIPAL EFFECTS OF THE CONVERSION VOTING RIGHTS. Deposit holders who are members of the Company in its mutual form will have no voting rights in the Company as converted and will not participate, therefore, in the election of directors or otherwise control the Company's affairs. Voting rights in the Holding Company will be held exclusively by its shareholders, and voting rights in the Company will be held exclusively by the Holding Company as the sole shareholder of the Company. Each holder of the Holding Company's common shares will be entitled to one vote for each share owned on any matter to be considered by the Holding Company's shareholders. See "DESCRIPTION OF AUTHORIZED SHARES." DEPOSIT ACCOUNTS AND LOANS. Deposit accounts in the Company, as converted, will be equivalent in amount, interest rate and other terms to the present deposit accounts in the Company, and the existing FDIC insurance on such accounts will not be affected by the Conversion. The Conversion will not affect the terms of loan accounts or the rights and obligations of borrowers under their individual contractual arrangements with the Company. TAX CONSEQUENCES. The consummation of the Conversion is expressly conditioned on receipt by the Company of a private letter ruling from the IRS or an opinion of counsel to the effect that the Conversion will constitute a tax-free reorganization as defined in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends to proceed with the Conversion based upon an opinion received from its special counsel, Vorys, Sater, Seymour and Pease LLP, to the following effect: (1) The Conversion constitutes a reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized by the Company in its mutual form or in its stock form as a result of the Conversion. The Company in its mutual form and the Company in its stock form will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; 6 8 (2) No gain or loss will be recognized by the Company upon the receipt of money from the Holding Company in exchange for the capital stock of the Company, as converted; (3) The assets of the Company will have the same basis in its hands immediately after the Conversion as they had in its hands immediately prior to the Conversion, and the holding period of the assets of the Company after the Conversion will include the period during which the assets were held by the Company before the Conversion; (4) No gain or loss will be recognized by the deposit account holders of the Company upon the issuance to them, in exchange for their respective withdrawable deposit accounts in the Company immediately prior to the Conversion, of withdrawable deposit accounts in the Company immediately after the Conversion, in the same dollar amount as their withdrawable deposit accounts in the Company immediately prior to the Conversion, plus, in the case of eligible depositors of the Company as of the Eligibility Record Date who had Qualifying Deposits (the "Eligible Account Holders") and eligible depositors of the Company as of the Supplemental Eligibility Record Date who had Qualifying Deposits (the "Supplemental Eligible Account Holders"), the interests in the Liquidation Account of the Company, as described below; (5) The basis of the withdrawable deposit accounts in the Company held by its deposit account holders immediately after the Conversion will be the same as the basis of their deposit accounts in the Company immediately prior to the Conversion. The basis of the interests in the Liquidation Account received by the Eligible Account Holders and Supplemental Eligible Account Holders will be zero. The basis of the nontransferable subscription rights received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Eligible Members will be zero (assuming that at distribution such rights have no ascertainable fair market value); (6) No gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Eligible Members upon the distribution to them of nontransferable subscription rights to purchase Common Shares (assuming that at distribution such rights have no ascertainable fair market value), and no taxable income will be realized by such Eligible Account Holders, Supplemental Eligible Account Holders or Other Eligible Members as a result of their exercise of such nontransferable subscription rights; (7) The basis of the Common Shares purchased by members of the Company pursuant to the exercise of subscription rights will be the purchase price thereof (assuming that such rights have no ascertainable fair market value and that the purchase price is not less than the fair market value of the shares on the date of such exercise), and the holding period of such shares will commence on the date of such exercise. The basis of the Common Shares purchased other than by the exercise of subscription rights will be the purchase price thereof (assuming in the case of the other subscribers that the opportunity to buy in the Subscription Offering has no ascertainable fair market value), and the holding period of such shares will commence on the day after the date of the purchase; (8) For purposes of Section 381 of the Code, the Company will be treated as if there had been no reorganization. The taxable year of the Company will not end on the effective date of the Conversion. Immediately after the Conversion, the Company in its stock form will succeed to and take into account the tax attributes of the Company in its mutual form immediately prior to the Conversion, including the Company's earnings and profits or deficit in earnings and profits; (9) The bad debt reserves of the Company in its mutual form immediately prior to the Conversion will not be required to be restored to the gross income of the Company in its stock 7 9 form as a result of the Conversion and immediately after the Conversion such bad debt reserves will have the same character in the hands of the Company in its stock form as they would have had if there had been no Conversion. The Company in its stock form will succeed to and take into account the dollar amounts of those accounts of the Company in its mutual form which represent bad debt reserves in respect of which the Company in its mutual form has taken a bad debt deduction for taxable years ending on or before the Conversion; and (10) Regardless of book entries made for the creation of the Liquidation Account, the Conversion will not diminish the accumulated earnings and profits of the Company available for the subsequent distribution of dividends within the meaning of Section 316 of the Code. The creation of the Liquidation Account on the records of the Company will have no effect on its taxable income, deductions for additions to reserves for bad debts under Section 593 of the Code or distributions to stockholders under Section 593(e) of the Code. For Ohio tax purposes, the tax consequences of the Conversion will be as follows: (1) The Company is a "financial institution" for State of Ohio tax purposes, and the Conversion will not change such status; (2) The Company is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.5% of the Company's equity capital determined in accordance with generally accepted accounting standards ("GAAP"), and the Conversion will not change such status; (3) As a "financial institution," the Company is not subject to any tax based upon net income or net profit imposed by the State of Ohio, and the Conversion will not change such status; (4) The Conversion will not be a taxable transaction to the Company in its mutual or stock form for purposes of the Ohio corporate franchise tax. As a consequence of the Conversion, however, the annual Ohio corporate franchise tax liability of the Company will increase if the taxable net worth of the Company (i.e., book net worth computed in accordance with GAAP at the close of the Company's taxable year for federal income tax purposes) increases thereby; and (5) The Conversion will not be a taxable transaction to any deposit account holder or borrower member of the Company in its mutual or stock form for purposes of the Ohio corporate franchise tax and the Ohio personal income tax. The Company has received an opinion from Keller & Company, Inc. ("Keller"), a firm experienced in valuing thrift institutions, to the effect that the subscription rights have no ascertainable fair market value because the rights are received by specified persons at no cost, may not be transferred and are of short duration. The IRS could challenge the assumption that the subscription rights have no ascertainable fair market value. LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the Company in its present mutual form, each depositor in the Company would receive a pro rata share of any assets of the Company remaining after payment of the claims of all creditors, including the claims of all depositors to the withdrawable value of their deposit accounts. A depositor's pro rata share of such remaining assets would be the same proportion of such assets as the value of such depositor's accounts bears to the total aggregate value of all deposits in the Company at the time of liquidation. 8 10 In the event of a complete liquidation of the Company in its stock form after the Conversion, each depositor would have a claim of the same general priority as the claims of all other general creditors of the Company. Except as described below, each depositor's claim would be solely in the amount of the balance in such depositor's account plus accrued interest. The depositor would have no interest in the assets of the Company above that amount. Such assets would be distributed to the Holding Company as the sole shareholder of the Company. For the purpose of granting a limited priority claim to the assets of the Company in the event of a complete liquidation thereof to Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain deposit accounts at the Company after the Conversion, the Company will, at the time of Conversion, establish a liquidation account in an amount equal to the net worth of the Company as of December 31, 1997 (the "Liquidation Account"). The Liquidation Account will not operate to restrict the use or application of any of the regulatory capital of the Company. Each Eligible Account Holder and Supplemental Eligible Account Holder will have a separate inchoate interest (the "Subaccount") in a portion of the Liquidation Account for Qualifying Deposits held on the Eligibility Record Date or the Supplemental Eligibility Record Date. The balance of each initial Subaccount shall be an amount determined by multiplying the amount in the Liquidation Account by a fraction, the numerator of which is the closing balance in the account holder's account as of the close of business on the Eligibility Record Date or the Supplemental Eligibility Record Date, as the case may be, and the denominator of which is the total amount of all Qualifying Deposits of Eligible Account Holders and Supplemental Eligible Account Holders on the corresponding record date. The balance of each Subaccount may be decreased but will never be increased. If, at the close of business on the last day of each fiscal year of the Company subsequent to the respective record dates, the balance in the deposit account to which a Subaccount relates is less than the lesser of (i) the deposit balance in such deposit account at the close of business on the last day of any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying Deposit as of the Eligibility Record Date or the Supplemental Eligibility Record Date, the balance of the Subaccount for such deposit account shall be adjusted in proportion to the reduction in such deposit account balance. In the event of any such downward adjustment, such Subaccount balance shall not be subsequently increased notwithstanding any increase in the deposit balance of the related deposit account. If any deposit account is closed, its related Subaccount shall be reduced to zero upon such closing. In the event of a complete liquidation of the converted Company (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder shall receive from the Liquidation Account a distribution equal to the current balance in each of such account holder's Subaccounts before any liquidation distribution may be made to the Holding Company as the sole shareholder of the Company. Any assets remaining after satisfaction of such liquidation rights and the claims of the Company's creditors would be distributed to the Holding Company as the sole shareholder of the Company. No merger, consolidation, purchase of bulk assets or similar combination or transaction with another financial institution, the deposits of which are insured by the FDIC, will be deemed to be a complete liquidation for this purpose and, in any such transaction, the Liquidation Account shall be assumed by the surviving institution. COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE INSURED BY THE FDIC. For a description of the characteristics of the Common Shares, see "DESCRIPTION OF AUTHORIZED SHARES." 9 11 INTERPRETATION AND AMENDMENT OF THE PLAN To the extent permitted by law, all interpretations of the Plan by the Boards of Directors of the Holding Company and the Company will be final. The Plan may be amended by the Boards of Directors of the Holding Company and the Company at any time with the concurrence of the OTS and the Division. If the Company and the Holding Company determine, upon advice of counsel and after consultation with the OTS and the Division, that any such amendment is material, subscribers will be notified of the amendment and will be provided the opportunity to affirm, increase, decrease or cancel their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded with interest at the Conversion Rate (hereinafter defined). CONDITIONS AND TERMINATION The completion of the Conversion requires the approval of the Plan and the adoption of the Amended Articles of Incorporation and the Amended Constitution by the voting members of the Company at the Special Meeting and the completion of the sale of the requisite amount of Common Shares within 24 months following the date of such approval. If these conditions are not satisfied, the Plan will automatically terminate and the Company will continue its business in the mutual form of organization. The Plan may be voluntarily terminated by the Board of Directors at any time before the Special Meeting and at any time thereafter with the approval of the OTS and the Division. SUBSCRIPTION OFFERING THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, EASTERN DAYLIGHT TIME, ON _____ __, 1998. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE 12:00 NOON, EASTERN DAYLIGHT TIME, ON _____ __, 1998, WILL BE VOID, WHETHER OR NOT THE COMPANY HAS BEEN ABLE TO LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS. Nontransferable subscription rights to purchase Common Shares are being issued at no cost to all eligible persons and entities in accordance with the preference categories established by the Plan, as described below. Each subscription right may be exercised only by the person to whom it is issued and only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST REPRESENT TO THE COMPANY THAT HE OR SHE IS PURCHASING SUCH SHARES FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO ATTEMPTS TO TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES AND SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS. The number of Common Shares which a person who has subscription rights may purchase will be determined, in part, by the total number of Common Shares to be issued and the availability of Common Shares for purchase under the preference categories set forth in the Plan and certain other limitations. See "Limitations on Purchases of Common Shares." The sale of any Common Shares pursuant to subscriptions received is contingent upon approval of the Plan by the voting members of the Company at the Special Meeting. The preference categories and preliminary purchase limitations which have been established by the Plan, in accordance with applicable regulations, for the allocation of Common Shares are as follows: (a) Each Eligible Account Holder shall receive, without payment therefor, a nontransferable right to purchase in the Subscription Offering up to the greater of (i) 35,000 10 12 Common Shares, (ii) .10% of the total number of Common Shares sold in connection with the Conversion, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares sold in connection with the Conversion by a fraction, the numerator of which is the amount of the Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date, subject to the overall purchase limitations set forth in Section 11 of the Plan and subject to adjustment by the Board of Directors of the Holding Company and the Company as set forth in Section 11 of the Plan. If the exercise of subscription rights by Eligible Account Holders results in an over-subscription, Common Shares will be allocated among subscribing Eligible Account Holders in a manner which will, to the extent possible, make the total allocation of each subscriber equal 100 shares or the amount subscribed for, whichever is less. Any Common Shares remaining after such allocation has been made will be allocated among the subscribing Eligible Account Holders whose subscriptions remain unfilled in the proportion which the amount of their respective Qualifying Deposits on the Eligibility Record Date bears to the total Qualifying Deposits of all Eligible Account Holders on such date. Notwithstanding the foregoing, Common Shares in excess of 28,750,000, the maximum of the Valuation Range, may be sold to the ESOP before fully satisfying the subscriptions of Eligible Account Holders. No fractional shares will be issued. For purposes of this paragraph (a), increases in the Qualifying Deposits of directors and executive officers of the Company during the twelve months preceding the Eligibility Record Date shall not be considered. (b) The ESOP shall receive, without payment therefor, a nontransferable right to purchase in the Subscription Offering an aggregate amount of up to 10% of the total Common Shares sold in the Conversion and contributed to the Foundation, provided that shares remain available after satisfying the subscription rights of Eligible Account Holders up to the maximum of the Valuation Range pursuant to paragraph (a) above. Although the Plan and OTS regulations permit the ESOP to purchase up to 10% of the Common Shares, the Holding Company anticipates that the ESOP will purchase 8% of the Common Shares. If the ESOP is unable to purchase all or part of the Common Shares for which it subscribes, the ESOP may purchase Common Shares on the open market or may purchase authorized but unissued Common Shares. If the ESOP purchases authorized but unissued Common Shares, such purchases could have a dilutive effect on the interests of the Holding Company's shareholders. See "RISK FACTORS - Potential Impact of Benefit Plans on Net Earnings and Shareholders' Equity." (c) Provided that shares remain available after satisfying the subscription rights of Eligible Account Holders and the ESOP pursuant to paragraphs (a) and (b) above each Supplemental Eligible Account Holder will receive, without payment therefor, a nontransferable right to purchase up to the greater of (i) 35,000 Common Shares, (ii) .10% of the total number of Common Shares sold in connection with the Conversion, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares sold in connection with the Conversion by a fraction, the numerator of which is the amount of the Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each case on the Supplemental Eligibility Record Date, subject to the overall purchase limitations set forth in Section 11 of the Plan and subject to adjustment by the Board of Directors of the Holding Company and the Company as set forth in Section 11 of the Plan. If the exercise of subscription rights by Supplemental Eligible Account Holders results in an oversubscription, Common Shares will be allocated among subscribing Supplemental Eligible Account Holders in a manner which will, to the extent possible, make the total allocation of each subscriber equal 100 shares or the amount subscribed for, whichever is less. Any Common Shares remaining after such allocation has been made will be allocated among the subscribing Supplemental Eligible 11 13 Account Holders whose subscriptions remain unfilled in the proportion which the amount of their respective Qualifying Deposits on the Supplemental Eligibility Record Date bears to the total Qualifying Deposits of all Supplemental Eligible Account Holders on such date. No fractional shares will be issued. (d) Provided that shares remain available after satisfying the subscription rights of Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders pursuant to paragraphs (a), (b) and (c) above, each Other Eligible Member, other than an Eligible Account Holder or Supplemental Eligible Account Holder, shall receive, without payment therefor, a nontransferable right to purchase up to the greater of (i) 35,000 Common Shares, and (ii) .10% of the total number of Common Shares sold in connection with the Conversion, subject to adjustment by the Boards of Directors of the Company and the Holding Company. In the event of an oversubscription by Other Eligible Members, the available Common Shares will be allocated among subscribing Other Eligible Members in the same proportion that their subscriptions bear to the total amount of subscriptions by all Other Eligible Members; provided, however, that, to the extent sufficient Common Shares are available, each subscribing Other Eligible Member shall receive 25 Common Shares before the remaining available Common Shares are allocated. (e) Provided that shares remain available after satisfying the subscription rights of Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and Other Eligible Members pursuant to paragraphs (a), (b), (c) and (d), above, the directors, officers and employees of the Company shall receive, without payment therefor, nontransferable rights to purchase an aggregate of up to 15% of the Common Shares sold in connection with the Conversion subject to the overall purchase limitations set forth in Section 11 of the Plan and subject to adjustment by the Boards of Directors of the Company and the Holding Company as set forth in Section 11 of the Plan. The rights of directors, officers and employees to purchase Common Shares under this paragraph are in addition to rights which are otherwise available to them under the Plan. If the exercise of subscription rights by directors, officers and employees of the Company results in an oversubscription, Common Shares will be allocated among subscribing directors, officers and employees on an equitable basis to be determined by the Board of Directors of the Company by giving weight to an individual's period of service, compensation and position at the Company. For information as to the number of shares proposed to be purchased by the directors and executive officers, see "Shares to be Purchased by Management Pursuant to Subscription Rights." The Board of Directors may reject any one or more subscriptions if, based upon the Board of Directors' interpretation of applicable regulations, such subscriber is not entitled to the shares for which he or she has subscribed or if the sale of shares subscribed for would be in violation of any applicable statutes, regulations, or rules. In connection with the exercise of subscription rights arising from a deposit account in which two or more persons have an interest, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. The Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons having subscription rights reside. However, no such person will be offered or receive any Common Shares under the Plan who resides in a foreign country or in a state of the United States with respect to which each of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares under the Plan resides in such country or state; (ii) under the securities laws of such country or state, the granting of subscription rights or the offer or sale of Common Shares to 12 14 such persons would require the Holding Company or its officers or directors to register as a broker or dealer or to register or otherwise qualify its securities for sale in such country or state; and (iii) such registration or qualification would be impracticable for reasons of cost or otherwise. COMMUNITY OFFERING To the extent Common Shares remain available after the satisfaction of all subscriptions received in the Subscription Offering, the Company is hereby offering Common Shares in the Community Offering subject to the limitations set forth below. If subscriptions are received in the Subscription Offering for up to 33,465,625 Common Shares, Common Shares may not be available in the Community Offering. All sales of the Common Shares in the Community Offering will be at the same price per share as in the Subscription Offering. THE COMMUNITY OFFERING WILL BE TERMINATED ON OR BEFORE 12:00 NOON, EASTERN DAYLIGHT TIME, ___________ 1998, UNLESS EXTENDED BY THE COMPANY AND THE HOLDING COMPANY. IN ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED BEYOND ______________, 1998, WITHOUT THE APPROVAL OF THE OTS AND THE DIVISION. In the event shares are available for the Community Offering, each person, together with any Associate or groups Acting in Concert, may purchase in the Community Offering up to 35,000 Common Shares. If an insufficient number of Common Shares is available to fill all of the orders received in the Community Offering, the available Common Shares will be allocated in a manner to be determined by the Boards of Directors of the Holding Company and the Company, subject to the following: (i) Preference will be given to natural persons who maintain a bona fide residence in Columbiana, Mahoning or Trumbull Counties, Ohio, the counties in which the offices of the Company are located on the date of submission of a Stock Order Form; (ii) Orders received in the Community Offering will first be filled up to 2% of the total number of Common Shares offered, with any remaining shares allocated on an equal number of shares per order basis until all orders have been filled; and (iii) The right of any person to purchase Common Shares in the Community Offering is subject to the right of the Holding Company and the Company to accept or reject such purchases in whole or in part. 13 15 PUBLIC OFFERING The Plan provides that all Common Shares not purchased in the Subscription Offering and the Community Offering may be offered for sale to the general public in a public offering (the "Public Offering") through a syndicate of registered broker-dealers to be formed. The Company and the Holding Company expect to market any Common Shares which remain unsubscribed after the Subscription Offering and the Community Offering through the Public Offering. The Company and the Holding Company have the right to reject orders in whole or part in their sole discretion in the Public Offering. Neither Trident, McDonald & Company, Oppenheimer nor any registered broker-dealer shall have any obligation to take or purchase any Common Shares in the Public Offering; however, Trident Securities, Inc. ("Trident") , McDonald & Company Securities, Inc. ("McDonald & Company") and CIBC Oppenheimer Corp. ("Oppenheimer") have agreed to use their best efforts in the sale of Common Shares in the Public Offering. The price at which Common Shares are sold in the Public Offering will be the same price at which Common Shares are offered and sold in the Subscription Offering and the Community Offering. No person will be permitted to subscribe in the Public Offering for more than 35,000 Common Shares, subject to the maximum purchase limitations. See "- Limitations on Purchases of Common Shares." LIMITATIONS ON PURCHASES OF COMMON SHARES The Plan provides for certain additional limitations to be placed upon the purchase of Common Shares. To the extent Common Shares are available, the minimum number of Common Shares that may be purchased by any party is 25, or $250. No fractional shares will be issued. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. In the event shares are available for the Community Offering or the Public Offering, each person, together with any Associate or other persons Acting in Concert, may purchase in the Community Offering and the Public Offering up to 35,000 Common Shares. Purchases in the Subscription Offering, the Community Offering and the Public Offering are subject to the additional limitation that no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1% of the Common Shares sold in the Offering. Such limitations do not apply to the Foundation and the ESOP, which intends to purchase up to 8% of the total Common Shares sold in the Conversion and contributed to the Foundation. Subject to applicable regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors. The minimum number of Common Shares any person may purchase in the Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. Except for the ESOP, which may purchase up to 10% of the total Common Shares sold in the Offering, no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1.0% of the Common Shares sold in the Offering. Subject to OTS regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors of the Holding Company and the Company. If 14 16 the purchase limitations are increased after the commencement of the Subscription Offering, persons who have subscribed for the maximum amount will be given the opportunity to increase their subscriptions. See "Limitations on Purchases of Common Shares." Purchases of Common Shares in the Offering are also subject to the change in control regulations of the OTS which restrict direct and indirect purchases of 10% or more of the stock of any savings association by any person or group of persons acting in concert, under certain circumstances. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND RELATED ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation" in the Prospectus. After the Conversion, Common Shares, except for Common Shares purchased by affiliates of the Holding Company and the Company, will be freely transferable, subject to OTS and Division regulations. PLAN OF DISTRIBUTION The offering of the Common Shares is made only pursuant to this Prospectus, which is available at the offices of the Company. See "ADDITIONAL INFORMATION AND STOCK ORDER FORMS." Officers and directors of the Company will be available to answer questions about the Conversion and may also hold informational meetings for interested persons. Such officers and directors will not be permitted to make statements about the Holding Company or the Company unless such information is also set forth in this Prospectus, nor will they render investment advice. The Holding Company will rely on Rule 3a4-1 under the Securities Exchange Act of 1934 (the "Exchange Act"), and sales of Common Shares will be conducted within the requirements of Rule 3a4-1, which will permit officers, directors and employees of the Holding Company and the Company to participate in the sale of Common Shares. No officer, director or employee of the Holding Company or the Company will be compensated in connection with his participation by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the Common Shares. To assist the Holding Company and the Company in marketing the Common Shares, the Holding Company and the Company have retained Trident, a broker-dealer registered with the SEC and a member of the National Association of Securities Dealers, Inc. ("NASD"). Trident will assist the Company in (i) training and educating the Company's employees regarding the mechanics and regulatory requirements of the conversion process; (ii) conducting information meetings for subscribers and other potential purchasers; and (iii) keeping records of all stock subscriptions. For providing these services, the Company has agreed to pay Trident a commission equal to .95% of the aggregate dollar amount of Common Shares sold in the Subscription Offering and the Community Offering, excluding shares sold by Selected Dealers, if any, and shares purchased by the ESOP and directors, officers, and employees of the Company and their affiliates. The Company has also agreed to reimburse Trident for its reasonable legal fees and expenses not to exceed $50,000 and its reasonable out-of-pocket expenses not to exceed $10,000. The Company and the Holding Company have also agreed to indemnify Trident, under certain circumstances, against liabilities and expenses (including legal fees) arising out of or based upon untrue statements or omissions contained in the materials used in the Offering or in various documents submitted to regulatory authorities in respect of the Conversion, including liabilities under the Securities Act of 1933, as amended (the "Act"), unless such untrue statement or omission, or alleged untrue statement or omission, was made in reliance upon certain information furnished to the Company by Trident expressly for use in the Summary Proxy Statement or this Prospectus. If Common Shares remain available after the satisfaction of all subscriptions received in the Subscription Offering, Trident, McDonald & Company and Oppenheimer may enter into an agreement 15 17 with other NASD member firms ("Selected Dealers") to assist in the sale of Common Shares in the Community Offering. If Selected Dealers are used, the Company will pay a fee for shares sold by Selected Dealers in an amount to be agreed upon jointly by Trident and McDonald & Company and the Company to reflect market requirements at the time of the Community Offering. During the Community Offering, Selected Dealers may only solicit indications of interest from their customers to place orders with the Company as of a certain date (the "Order Date") for the purchase of Common Shares. When and if the Company believes that enough indications of interest and orders have been received in the Community Offering to consummate the Conversion, Trident and McDonald & Company will request, as of the Order Date, Selected Dealers to submit orders to purchase shares for which they have previously received indications of interest from the customers. Selected Dealers will send confirmations of the orders to such customers on the next business day after the Order Date. Selected Dealers will debit the accounts of their customers on the date which will be three business days from the Order Date (the "Settlement Date"). On the Settlement Date, funds received by Selected Dealers will be remitted to the Company. It is anticipated that the Conversion will be consummated on the Settlement Date. However, if consummation is delayed after the Settlement Date, funds will earn interest at the Conversion Rate until the completion of the offering. Funds will be returned promptly in the event the Conversion is not consummated. EFFECT OF EXTENSION OF COMMUNITY OFFERING If the Community Offering extends beyond ____________, 1998, persons who have subscribed for Common Shares in the Subscription Offering or in the Community Offering will receive a written notice that prior to a date specified in the notice, they have the right to affirm, increase, decrease or rescind their subscriptions for Common Shares. Persons who do not affirmatively elect to continue their subscription or who elect to rescind their subscriptions during any such extension will have all of their funds promptly refunded with interest at the Conversion Rate. Persons who elect to decrease their subscriptions will have the appropriate portion of their funds promptly refunded. USE OF STOCK ORDER FORMS Subscriptions for Common Shares in the Subscription Offering and in the Community Offering may be made only by completing and submitting a Stock Order Form. Any person who desires to subscribe for Common Shares in the Subscription Offering must do so by delivering to the Company by mail or in person, prior to 12:00 noon, Eastern Daylight Time, on ____________, 1998, a properly executed and completed Stock Order Form, together with full payment of the subscription price of $10 for each Common Share for which subscription is made. ANY STOCK ORDER FORM WHICH IS NOT RECEIVED BY THE COMPANY PRIOR TO 12:00 NOON, EASTERN DAYLIGHT TIME, ON _____ ______, 1998, OR FOR WHICH FULL PAYMENT HAS NOT BEEN RECEIVED BY THE COMPANY PRIOR TO SUCH TIME, WILL NOT BE ACCEPTED. PHOTOCOPIES, TELECOPIES OR OTHER REPRODUCTIONS OF STOCK ORDER FORMS WILL NOT BE ACCEPTED. See "ADDITIONAL INFORMATION." AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE HOLDING COMPANY, MAY NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE HOLDING COMPANY, UNLESS (I) THE COMMUNITY OFFERING IS NOT COMPLETED BY __________, 1998, OR (II) THE FINAL VALUATION OF THE COMPANY, AS CONVERTED, IS LESS THAN $212,500,000 OR MORE THAN $334,652,500. IF EITHER OF THOSE EVENTS OCCUR, PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR ORDERED COMMON SHARES IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR SUBSCRIPTIONS OR ORDERS PRIOR TO A DATE SPECIFIED IN THE NOTICE. ANY PERSON WHO DOES NOT AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY REFUNDED. ANY PERSON WHO ELECTS TO DECREASE HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE 16 18 APPROPRIATE PORTION OF HIS FUNDS PROMPTLY REFUNDED. IN ADDITION, IF THE PURCHASE LIMITATIONS ARE INCREASED, PERSONS WHO HAVE SUBSCRIBED FOR THE MAXIMUM AMOUNT WILL BE GIVEN THE OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS. PAYMENT FOR COMMON SHARES Payment of the subscription price for all Common Shares for which subscription is made must accompany a completed Stock Order Form in order for subscriptions or orders to be valid. Payment for Common Shares may be made (i) in cash, if delivered in person; (ii) by check, bank draft, or money order made payable to the Company; or (iii) by authorization of withdrawal from deposit accounts in the Company (other than non-self-directed IRAs). No payments by wire transfer will be accepted. The Company cannot lend money or otherwise extend credit to any person to purchase Common Shares. Payments made in cash or by check, bank draft, or money order will be placed in a segregated savings account insured by the FDIC up to applicable limits until the Conversion is completed or terminated. Interest will be paid by the Company on such account at the then current passbook savings account rate, which is currently ____% (the "Conversion Rate") with an annual percentage yield of ____%, from the date payment is received until the Conversion is completed or terminated. Payments made by check will not be deemed to have been received until the check has cleared for payment. Instructions for authorizing withdrawals from deposit accounts, including certificates of deposit, are provided in the Stock Order Form. Once a withdrawal has been authorized, none of the designated withdrawal amount may be used by a subscriber for any purpose other than to purchase Common Shares, unless the Conversion is terminated. All sums authorized for withdrawal will continue to earn interest at the contract rate for such account or certificate until the completion or termination of the Conversion. Interest penalties for early withdrawal applicable to certificate accounts will be waived in the case of withdrawals authorized for the purchase of Common Shares. If a partial withdrawal from a certificate account results in a balance less than the applicable minimum balance requirement, the certificate will be canceled and the remaining balance will earn interest at the Company's passbook rate subsequent to the withdrawal. In order to utilize funds in an IRA maintained at the Company, the funds must be transferred to a self-directed IRA that permits the funds to be invested in stock. There will be no early withdrawal or IRS penalties for such transfer. The beneficial owner of the IRA must direct the trustee of the account to use funds from such account to purchase Common Shares in connection with the Conversion. THIS CANNOT BE DONE THROUGH THE MAIL. Persons who are interested in utilizing IRAs at the Company to subscribe for Common Shares should contact the Conversion Information Center at (330) 747-1111 for instructions and assistance. Subscriptions will not be filled by the Company until subscriptions have been received in the Offering for up to 21,250,000 Common Shares, the minimum point of the Adjusted Valuation Range. If the Conversion is terminated, all funds delivered to the Company for the purchase of Common Shares will be returned, and all charges to deposit accounts will be rescinded. If the Conversion is completed, subscribers and other purchasers will be notified by mail, promptly upon completion of the sale of the Common Shares, of the number of shares for which their subscriptions have been accepted. The funds on deposit with the Company for the purchase of Common Shares will be withdrawn and paid to the Holding Company in exchange for the Common Shares. Certificates representing Common Shares will be delivered promptly thereafter. The Common Shares will not be insured by the FDIC. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes but may pay for such Common Shares upon consummation of the Conversion. 17 19 INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the intended purchases by the directors and executive officers of the Company and the Holding Company:
Position with the Percent of Holding Company Total Aggregate total Name and the Company(1) shares(2) purchase price(2) offering(3) - ---- --------------- ------ -------------- -------- Richard M. Barrett Director 31,000 $ 310,000 .12% James E. Bennett, Jr. Director 1,000 10,000 - Charles. B. Cushwa, III Director 60,000 600,000 .24 William A. Holdford(4) - 10,000 100,000 .04 Donald R. Inglis Director 35,000 300,000 .12 Gary Keller Director 60,000 600,000 .24 Patrick A. Kelly Treasurer 60,000 600,000 .24 Douglas M. McKay Chairman of 80,000 800,000 .32 the Board and President Herbert F. Schuler, Sr. Director 90,000 900,000 .36 Clarence R. Smith, Jr. Director 25,000 250,000 .10 Robert J. Steele, Jr.(6) - 10,000 100,000 .04 Donald J. Varner(7) Secretary 60,000 600,000 .24 John F. Zimmerman, Jr. Director 15,000 150,000 .06 ------- ---------- ---- All directors and executive officers as a group (13 persons) 532,000 $5,320,000 2.12% ======= ========== ==== - -----------------------------
(1) Unless otherwise noted, the individual holds the same position with both the Company and the Holding Company. (2) Includes intended purchases by Associates of directors and executive officers, to the extent known. (3) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted Valuation Range, will be sold in connection with the Conversion at $10 per share and that a sufficient number of Common Shares will be available to satisfy the intended purchases by directors and executive officers. See "Pricing and Number of Common Shares to be Sold." (4) Mr. Holdford is the Vice President of Loan Administration of the Company. (5) Mr. Kelly is the Treasurer, Chief Financial Officer, Senior Vice President and a director of the Company. (6) Mr. Steele is the Vice President of Savings Administration of the Company. (7) Mr. Varner is the Secretary, Senior Vice President of Retail Banking and a director of the Company. 18 20 All purchases by executive officers and directors of the Company are being made for investment purposes only and with no present intent to resell. Directors and executive officers will pay the same $10 per share price for Common Share purchased in the Conversion as all other subscribers. PRICING AND NUMBER OF COMMON SHARES TO BE SOLD The aggregate offering price of the Common Shares will be based on the pro forma market value of the shares as determined by an independent appraisal of the Company, as converted, and the Holding Company. Keller, a firm which evaluates and appraises financial institutions, has been retained by the Company to prepare an appraisal of the estimated pro forma market value of the Company as converted, and the Holding Company. Keller will receive a fee of $27,000 for its appraisal and one update and will not be reimbursed for out-of-pocket expenses. Keller was selected by the Board of Directors of the Company because Keller has extensive experience in the valuation of thrift institutions, particularly in the mutual-to-stock conversion context. The Board of Directors reviewed the credentials of Keller's appraisal personnel and obtained references and recommendations from other companies which have engaged Keller. Keller is certified by the OTS as a mutual-to-stock conversion appraiser. The Company and Keller have no relationships which would affect Keller's independence. The appraisal was prepared by Keller in reliance upon the information contained herein and in the Prospectus. Keller also considered the following factors, among others: the economic and demographic conditions in the Company's primary market area; the quality and depth of the Company's management and personnel; certain historical financial and other information relating to the Company; a comparative evaluation of the operating and financial statistics of the Company with those of other thrift institutions; the aggregate size of the Offering; the impact of the Conversion on the Company's regulatory capital and earnings potential; the trading market for stock of comparable thrift institutions and thrift holding companies; and general conditions in the markets for such stocks. The Boards of Directors of the Holding Company and the Company reviewed and deemed appropriate the assumptions and methodology used by Keller in preparing the appraisal. The Pro Forma Value, determined by Keller, is $250,000,000 as of February 24, 1998. The Adjusted Valuation Range established in accordance with the Plan is $212,500,000 to $289,375,000 which, based upon a per share offering price of $10, will result in the sale of between 21,250,000 and 28,937,500 Common Shares. Applicable regulations permit the Holding Company to Common Shares in an amount not to exceed issue up to a total of 33,465,625 Common Shares with an aggregate purchase price of $334,656,250. The total number of Common Shares sold in the Conversion will be based on the Valuation Range. Pro forma shareholders' equity per share and pro forma earnings per share decrease moving from the low end to the high end of the Valuation Range. See "PRO FORMA DATA" in the Prospectus. If, due to changing market conditions, the final valuation is less than $212,500,000 or more than $334,656,250, subscribers will be given the right to affirm, increase, decrease or rescind their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded with interest. THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF 19 21 THE AUDITED FINANCIAL STATEMENTS AND STATISTICAL INFORMATION PROVIDED BY THE COMPANY. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE COMPANY, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE COMPANY OR THE HOLDING COMPANY. THE VALUATION CONSIDERS THE COMPANY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE COMPANY. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON SHARES WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT THE CONVERSION PURCHASE PRICE. A copy of the complete appraisal is on file and open for inspection at the office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the Central Regional Office of the OTS, 200 West Madison Street, Suite 1300, Chicago, Illinois 60606; at the office of the Division, 77 S. High Street, Columbus, Ohio 43215; and at the offices of the Company. RESTRICTIONS ON REPURCHASE OF COMMON SHARES OTS regulations generally prohibit the Holding Company from repurchasing any of its capital stock for three years following the date of completion of the Conversion, except as part of an open-market stock repurchase program during the second and third years following the Conversion involving no more than 5% of the outstanding capital stock during a twelve-month period. In addition, after such a repurchase, the Company's regulatory capital must equal or exceed all regulatory capital requirements. Before the commencement of a repurchase program, the Holding Company must provide notice to the OTS, and the OTS may disapprove the program if the OTS determines that it would adversely affect the financial condition of the Company or if it determines that there is no valid business purpose for such repurchase. Such repurchase restrictions would not prohibit the ESOP or the RRP from purchasing Common Shares during the first year following the Conversion. Ohio regulations prohibit the Holding Company from repurchasing shares during the first year after the Conversion if the effect thereof would cause the Company not to meet its capital requirements. RESTRICTIONS ON TRANSFER OF COMMON SHARES BY DIRECTORS AND OFFICERS Common Shares purchased by directors and executive officers of the Holding Company will be subject to the restriction that such shares may not be sold for a period of one year following completion of the Conversion, except in the event of the death of the shareholder. The certificates evidencing Common Shares issued by the Holding Company to directors and executive officers will bear a legend giving appropriate notice of the restriction imposed upon them. In addition, the Holding Company will give appropriate instructions to the transfer agent (if any) for the Holding Company's common shares in respect of the applicable restriction on transfer of any restricted shares. Any shares issued as a stock dividend, stock split or otherwise in respect of restricted shares will be subject to the same restrictions. Subject to certain exceptions, for a period of three years following the Conversion, no director or officer of the Holding Company or the Company, or any of their Associates, may purchase any common shares of the Holding Company without the prior written approval of the OTS, except through a broker-dealer registered with the SEC. This restriction will not apply, however, to negotiated transactions involving more than 1% of a class of outstanding common shares of the Holding Company or shares acquired by any stock benefit plan of the Holding Company or the Company. The Common Shares, like the stock of most public companies, are subject to the registration requirements of the Act. Accordingly, the Common Shares may be offered and sold only in compliance with such registration requirements or pursuant to an applicable exemption from registration. Common 20 22 Shares received in the Conversion by persons who are not "affiliates" of the Holding Company may be resold without registration. Common Shares received by affiliates of the Holding Company will be subject to resale restrictions. An "affiliate" of the Holding Company, for purposes of Rule 144, is a person who directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the Holding Company. Rule 144 generally requires that there be publicly available certain information concerning the Holding Company and that sales subject to Rule 144 be made in routine brokerage transactions or through a market maker. If the conditions of Rule 144 are satisfied, each affiliate (or group of persons acting in concert with one or more affiliates) is generally entitled to sell in the public market, without registration, in any three-month period, a number of shares which does not exceed the greater of (i) 1% of the number of outstanding shares of the Holding Company or (ii) if the shares are admitted to trading on a national securities exchange or reported through the automated quotation system of a registered securities association, such as The Nasdaq Stock Market, the average weekly reported volume of trading during the four weeks preceding the sale. RIGHTS OF REVIEW Any person aggrieved by a final action of the OTS which approves, with or without conditions, or disapproves the Plan may obtain review of such action by filing in the Court of Appeals of the United States for the circuit in which the principal office or residence of such person is located or in the United States Court of Appeals for the District of Columbia, a written petition praying that the final action of the OTS be modified, terminated, or set aside. Such petition must be filed within 30 days after the date of mailing of proxy materials to the voting members of the Company or within 30 days after the date of publication in the Federal Register of notice of approval of the Plan by the OTS, whichever is later. OTHER THE PLAN IS ATTACHED TO THIS SUMMARY PROXY STATEMENT AS EXHIBIT A AND SHOULD BE REVIEWED CAREFULLY. ALL STATEMENTS MADE IN THIS SUMMARY PROXY STATEMENT AND THE PROSPECTUS ARE HEREBY QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN. THE ADOPTION OF THE PLAN BY THE VOTING MEMBERS AT THE SPECIAL MEETING WILL AUTHORIZE THE BOARDS OF DIRECTORS OF THE HOLDING COMPANY AND THE COMPANY TO AMEND OR TERMINATE THE PLAN. IF THE BOARDS OF DIRECTORS OF THE HOLDING COMPANY AND THE COMPANY DETERMINE, UPON ADVICE OF COUNSEL AND AFTER CONSULTATION WITH THE OTS AND THE DIVISION, THAT ANY SUCH AMENDMENT IS MATERIAL, SUBSCRIBERS WILL BE NOTIFIED OF THE AMENDMENT AND WILL BE PROVIDED THE OPPORTUNITY TO AFFIRM, INCREASE, DECREASE OR CANCEL THEIR SUBSCRIPTIONS. THE FOUNDATION GENERAL The Plan provides that the Holding Company and the Company may contribute common shares to the Foundation. The Company believes that the contribution to the Foundation could increase the long-term value of the Company's community banking franchise by enhancing the Company's visibility and reputation in the communities that it serves. The Foundation is dedicated to charitable purposes within the communities served by the Company, including community development activities. PURPOSE OF THE FOUNDATION 21 23 The purpose of the Foundation is to provide funding to support charitable causes and community development activities. The Foundation was formed in 1991 to augment the Company's community activities. The Foundation is dedicated exclusively to community activities and the promotion of charitable causes, and may be able to support such activities in ways that are not currently available to the Company. The Board of Directors believes the establishment of a charitable foundation is consistent with the Company's commitment to community service and to the Company's CRA responsibilities. Funding of the Foundation with Common Shares will enable the communities served by the Company to share in the growth and success of the Company and the Holding Company long after completion of the Conversion. The Foundation enables the Company and the Holding Company to utilize a unified charitable donation strategy with centralized responsibility for administration and allocation of corporate charitable funds and enables the Company to provide community support in future years, regardless of future earnings. The Company, however, does not expect the contribution to the Foundation to take the place of the Company's traditional community lending activities. STRUCTURE OF THE FOUNDATION The Foundation is a charitable trust established exclusively for charitable purposes, including community development, as set forth in Section 501(c)(3) of the Code. The trust agreement provides that no part of the net earnings of the Foundation will inure to the benefit of any private shareholder or individual. The business of the Foundation is conducted by an independent trustee, which is currently National City Bank, Northeast, located at 20 Federal Plaza, Youngstown, Ohio 44503. The Company has the power to direct the trustee with respect to distributions by the Foundation, consistent with the purposes for which the Foundation was established, through a distribution committee of the Company. The committee consists of Douglas M. McKay, the Chairman of the Board, President and Chief Executive Officer of the Company, Donald J. Varner, the Secretary, Senior Vice President/Retail Banking and a director of the Company and Patrick A. Kelly, the Chief Financial Officer, Treasurer, Senior Vice President and a director of the Company. In connection with the conversion, Messrs. McKay, Varner and Kelly have indicated an intent to purchase, together with their Associates, 80,000, 60,000 and 60,000 shares respectively, or .32%, .24% and .24%, respectively, of the total number of Common Shares sold in the Conversion, assuming the sale of 25,000,000 Common Shares at the mid-point of the Adjusted Valuation Range. See "THE CONVERSION - Intended Purchases by Directors and Executive Officers." Each director, officer and employee of the Company, as well as any person who has the authority to direct the management or policies of the Company or any other person who owes a fiduciary duty to the Company, must comply with the regulations of the OTS regarding conflicts of interest if such person is also a trustee of the Foundation, a member of the distribution committee or an employee of the Foundation. The Company proposes to contribute to the Foundation immediately following the Conversion a number of shares equal to 5.0% of the Common Shares sold in the Conversion, subject to the overall limitation of 1,250,000 common shares. The contribution would equal 1,062,500 Common Shares at the minimum of the Adjusted Valuation Range and 1,250,000 common shares at the mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, which would have a market value of $10,625,000 and $12,500,000, respectively, based on the purchase price of $10.00 per share. Keller, an independent appraiser of financial institutions, considered the effect of the contribution of shares to the Foundation when determining the pro forma market value of the Holding Company and the Company, as converted. Keller determined that the contribution would dilute the equity and earnings of the initial shareholders of the Holding Company and that the contribution would result in a charge to the Company's earnings, therefore resulting in a lower pro forma market 22 24 value of the Holding Company and the Company, as converted. See "RISK FACTORS - Contribution to the Foundation." As a result of the contribution to the Foundation, the Holding Company will offer 2,500,000, 3,000,000, 3,262,500 and 3,564,375 fewer shares at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, than if it had not made such contribution. Based on the $10 price per share, the Holding Company will receive $25.5 million, $30.0 million, $32.6 million and $35.6 million less in gross proceeds than it would have if the contribution to the Foundation were not made. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." Notwithstanding the impact of the contribution on the offering, the Company and the Holding Company determined to fund the Foundation with Common Shares to enhance the ties between the Company and the communities it serves by allowing the communities to share in the growth and success of the Company and the Holding Company over the long term. The funding of the Foundation with Common Shares also provides the Foundation with a potentially larger endowment than a cash contribution since, as a shareholder, the Foundation will share in the growth and success of the Holding Company. The contribution of Common Shares to the Foundation has the potential to provide a self-sustaining funding mechanism to enable the Company to maintain a consistent level of charitable grants and donations regardless of the Company's income. The Foundation will receive income from any dividends that may be paid on the Common Shares in the future. Subject to applicable federal and state laws, the Foundation may also obtain funds through loans collateralized by the Common Shares or from the proceeds of the sale of any of the Common Shares in the open market from time to time to provide the Foundation with additional liquidity. As a private foundation under Section 501(c)(3) of the Code, the Foundation will be required to distribute annually in grants or donations, a minimum of 5% of the average fair market value of its net investment assets. Upon completion of the Conversion and the contribution of shares to the Foundation, the Holding Company would have 22,312,500, 26,250,000, 30,187,500 and 34,715,265 shares issued and outstanding at the minimum, mid-point, maximum and adjusted maximum of the Valuation Range, respectively. Because the Holding Company will have an increased number of shares outstanding, the voting and ownership interests of shareholders in the Holding Company's Common Shares would be diluted as compared to their interests in the Holding Company if the shares were not contributions to the Foundation. Assuming the sale of Common Shares at the maximum of the Adjusted Valuation Range and the contribution of 1,250,000 common shares to the Foundation, there will be a dilution of approximately 4.14% to the ownership interests in the Holding Company of the persons purchasing Common Shares in the Conversion. For additional discussion of the dilutive effect, see "PRO FORMA DATA" in the Prospectus. TAX CONSIDERATIONS The Foundation qualifies as a Section 501(c)(3) exempt organization under the Code, and is classified as a private foundation. Under the Code, the Company is generally allowed a deduction for charitable contributions made to qualifying donees within the taxable year of up to 10% of its taxable income (with certain modifications) for such year. Charitable contributions made in excess of the annual deductible amount will be deductible over each of the five succeeding taxable years, subject to certain limitations. The Company and the Holding Company believe that the Conversion presents a unique opportunity to increase the funding of the Foundation given the substantial amount of additional capital being raised in 23 25 the Conversion. In making such a determination, the Company and the Holding Company considered the dilutive impact of the contribution of Common Shares to the Foundation on the amount of Common Shares available to be offered for sale in the Conversion. Based on such consideration, the Company and Holding Company believe that the contribution to the Foundation is justified given the Company's capital position and its earnings, the substantial additional capital being raised in the Conversion and the potential benefits of the Foundation to the communities served by the Company. In this regard, assuming the sale of the Common Shares at the mid-point of the Valuation Range, the Holding Company would have pro forma shareholders' equity of $360.7 million, or 28.6% of pro forma consolidated assets, and the Company's pro forma tangible, core and total risk-based capital ratios would be 18.78%, 18.78% and 39.62%, respectively. See "REGULATORY CAPITAL COMPLIANCE," "CAPITALIZATION," AND "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION" in the Prospectus. The amount of the contribution will not adversely impact the financial condition of the Company and the Holding Company, and the Company and the Holding Company therefore believe that the amount of the charitable contribution is reasonable and is safe and sound given the Company's and the Holding Company's pro forma capital positions. The Company and the Holding Company have received an opinion of their independent tax advisors that the Company's contribution of shares to the Foundation would not constitute an act of self-dealing, and that the Company will be entitled to a deduction in the amount of the fair market value of the shares at the time of the contribution, subject to the annual deduction limitation described above. The Company, however, will be able to carry forward any unused portion of the deduction for five years following the contribution, subject to certain limitations. The Company's independent tax advisors, however, have not rendered advice as to the fair market value for purposes of determining the amount of the tax deduction. The Company is permitted under the Code to carry over the excess contribution over the five-year period following the contribution to the Foundation. Assuming the close of the Offering at the mid-point of the Valuation Range, the Company estimates that all of the deduction should be deductible over the six-year period. The Company and the Holding Company do not anticipate making any other contributions to the Foundation during 1998 or the first five years following the Conversion. The Company may make donations to charitable institutions in an aggregate amount not to exceed $80,000 per year consistent with past practice. During 1996 and 1997, the Company directly donated approximately $57,000 and $64,000 to charitable institutions in its community. After that five-year period, the Company and the Holding Company may consider future contributions to the Foundation. Any such decisions would be based on an assessment of, among other factors, the financial condition of the Company and the Holding Company at that time, the interests of shareholders of the Holding Company and the depositors of the Company, and the financial condition and operations of the Foundation. As a private foundation, earnings and gains, if any, from the sale of common shares or other assets are generally exempt from federal and state corporate income taxation. However, investment income, such as interest, dividends and capital gains, of a private foundation will generally be subject to a federal excise tax of 2.0%. The Foundation is required to make an annual filing with the IRS within four and one-half months after the close of the Foundation's fiscal year to maintain its tax-exempt status. The Foundation will be required to publish a notice that the annual information return will be available for public inspection for a period of 180 days after the date of such public notice. The information return for a private foundation must include, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the Foundation's managers and a concise statement of the purpose of each grant. REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION 24 26 The contribution to the Foundation is subject to the following conditions being agreed to by the Foundation in writing as a condition to receiving OTS approval of the Conversion: (i) the Foundation will be subject to examination by the OTS; (ii) the Foundation must comply with supervisory directives imposed by the OTS; (iii) the Committee will operate in accordance with written policies adopted by the Board of Directors, including a conflict of interest policy; (iv) any common shares held by the Foundation must be voted in the same ratio as all other outstanding common shares on all proposals considered by shareholders of the Holding Company; provided, however, that, consistent with the condition, the OTS would waive this voting restriction under certain circumstances if compliance with the voting restriction would: (a) cause a violation of the law of the State of Ohio and the OTS determines that federal law would not preempt the application of the laws of Ohio to the Foundation; (b) would cause the Foundation to lose its tax-exempt status or otherwise have a material and adverse tax consequence on the Foundation; or (c) would cause the Foundation to be subject to an excise tax under Section 4941 of the Code; and (v) any common shares subsequently purchased by the Foundation will be aggregated with any shares repurchased by the Company or the Holding Company for purposes of calculating the number of shares which may be repurchased during the three-year period subsequent to the Conversion. In order for the OTS to waive such voting restriction, the Holding Company's or the Foundation's legal counsel would be required to render an opinion satisfactory to the OTS. While there is no current intention for the Holding Company or the Foundation to seek a waiver from the OTS from such restrictions, there can be no assurances that a legal opinion addressing these issues could be rendered, or if rendered, that the OTS would grant an unconditional waiver of the voting restriction. In no event would the voting restriction survive the sale of common shares held by the Foundation. The establishment of the Foundation is subject to the approval of the majority of the total outstanding votes of the Company's members eligible to be cast at the Special Meeting. The establishment of the Foundation will be considered as a separate matter from approval of the Plan. If the Company's members approve the Plan, but not the establishment of the Foundation, the Company intends to complete the Conversion without the Foundation. Failure to approve the Foundation may materially increase the pro forma market value of the common shares being offered. See "Pro Forma Data" in the Prospectus. USE OF PROCEEDS The following table presents the estimated gross and net proceeds from the sale of the Common Shares, based on the Valuation Range:
Minimum Mid-point Maximum Maximum, as adjusted ------- --------- ------- -------------------- Gross proceeds $212,500,000 $250,000,000 $289,375,000 $334,656,250 Less estimated expenses 3,172,000 3,500,000 3,845,000 4,240,000 ------------ ------------ ------------ ------------ Total net proceeds $209,328,000 $246,500,000 $285,535,000 $330,416,250 ============ ============ ============ ============
The net proceeds from the sale of the Common Shares may vary depending upon financial and market conditions at the time of the completion of the Offering. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." The expenses detailed above are estimated. Actual expenses may be more than or less than estimated. See "THE CONVERSION - Plan of Distribution." The Holding Company will retain up to 50% of the net proceeds from the sale of the Common Shares, or approximately $165.2 million at the adjusted maximum of the Adjusted Valuation Range. 25 27 Such proceeds will be used to lend up to 8% of the proceeds of the Offering to the ESOP to acquire Common Shares in the Offering. Based upon the issuance of 33,465,625 shares at the adjusted maximum of the Adjusted Valuation Range, the loan to the ESOP would be $26.8 million. See "MANAGEMENT - Stock Benefit Plans - -- Employee Stock Ownership Plan." The loan to the ESOP will have a term of up to 15 years and an interest rate equal to the base rate on corporate loans, posted by at least 75% of the nation's 30 largest banks, as reported in The Wall Street Journal (the "Prime Rate") less 1/2%, which is currently 8.0%. The balance of the net proceeds may be invested initially in investment securities, mortgage-backed securities, U.S. Government and federal agency securities of various maturities, deposits in either the Company or other financial institutions, or a combination thereof. Ultimately the proceeds retained by the Holding Company may be used for general corporate purposes, which may include, acquisitions of other financial institutions, other financial service companies or other businesses which a savings and loan holding company is permitted to own, the payment of dividends, a tax-free return of capital, repurchases of Common Shares and funding of the RRP. The Holding Company and the Company, however, will not take any action that would further the payment of a tax-free return of capital to the Holding Company shareholders during the first year following the completion of the Conversion. The Holding Company currently has no specific plan to repurchase any of the Common Shares. In the future, the Board of Directors of the Holding Company will make decisions on the repurchase of the Common Shares based on its view of the appropriateness of the price of the Common Shares as well as the Holding Company's and the Company's investment opportunities and capital needs. OTS regulations generally prohibit the Holding Company from repurchasing any of its capital stock for three years following the date of completion of the Conversion, except as part of an open-market stock repurchase program during the second and third years following the Conversion involving no more than 5% of the outstanding capital stock during a twelve-month period. The OTS may permit a repurchase during the first year following the completion of the Conversion or may permit the Holding Company to exceed the 5% limits in the second and third years if exceptional circumstances are established. In addition, after any repurchase during the three years following the completion of the Conversion, the Company's regulatory capital must equal or exceed all regulatory capital requirements. See "THE CONVERSION - Restrictions on Repurchase of Common Shares." The remainder of the net proceeds received from the sale of the Common Shares, approximately $165.2 million at the adjusted maximum of the Valuation Range, will be invested by the Holding Company in the capital stock to be issued by the Company to the Holding Company. The resulting increase in the regulatory capital of the Company will permit the Company to expand its lending and investment activities and to enhance customer services. The Company anticipates that the portion of the net proceeds received by the Company will initially be invested in overnight funds and short-term investments with maturities of up to three years and eventually utilized for general corporate purposes, including increased loan origination activity and a modest increase in investments in corporate notes and U.S. Government and federal agency securities. During the next three years, the Company intends to concentrate on increasing its consumer and commercial loan portfolios, but during the first year following the Conversion, the Company anticipates an increase in construction and one- to four-family loans. The Company may also use such funds for the expansion of its facilities, and, although no such transactions are specifically being considered at this time, to expand operations through acquisitions of other financial institutions, branch offices or other financial services companies, including those located within the Company's market area or the establishment of de novo branch offices or loan origination facilities. 26 28 MARKET FOR COMMON SHARES Neither the Holding Company nor the Company has ever issued capital stock to the public and, consequently, there is currently no established market for the Common Shares. The Holding Company received conditional approval to have the Common Shares listed on Nasdaq under the symbol "UCFC." One of the conditions to the Nasdaq listing is the commitment of at least three brokerage firms to make a market in the Common Shares. Trident, McDonald & Company and Oppenheimer have informed the Holding Company that they intend to make a market in the Common Shares and expect that additional market makers will be identified. A public trading market for the stock of any issuer, including the Holding Company, depends upon the presence of both willing buyers and willing sellers at any given time. Accordingly, the number of active buyers and sellers of the Common Shares at any particular time may be limited. No assurance can be given that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that it will continue. Investors should consider, therefore, the potentially long-term nature of an investment in the Common Shares. The appraisal of the pro forma market value of the Common Shares is not a recommendation as to the advisability of purchasing Common Shares, nor does it represent Keller's opinion as to the price at which the Common Shares may trade. There can be no assurance that the Common Shares may later be resold at the price at which they are purchased in the Conversion. See "RISK FACTORS - Absence of Established Market for the Common Shares" in the Prospectus. DIVIDEND POLICY Following the completion of the Conversion, the Board of Directors of the Holding Company intends to establish a dividend policy. The declaration and payment of dividends by the Holding Company will be subject to the discretion of the Board of Directors of the Holding Company, to the earnings and financial condition of the Holding Company and to general economic conditions. The timing of payments of dividends and the annual rate will depend upon a determination by the Board of Directors of the Holding Company, in the exercise of its discretion, that the net income, capital and consolidated financial condition of the Holding Company and the general economy justify the declaration and payment of dividends by the Holding Company, subject to the limitation under Ohio law that a corporation may pay dividends only out of surplus. There can be no assurance that dividends will be paid on the Common Shares or, if paid, that such dividends will continue to be paid in the future. In addition, the Holding Company and the Company will not take any action that would further the payment of a tax-free return of capital to the Holding Company shareholders during the first year following the completion of the Conversion. Other than earnings on the investment of the proceeds retained by the Holding Company and interest earned on the loan to the ESOP, the principal source of income of the Holding Company will be dividends periodically declared and paid by the Board of Directors of the Company on the common shares of the Company held by the Holding Company. The declaration and payment of dividends by the Company to the Holding Company will be subject to the discretion of the Board of Directors of the Company, to the earnings and financial condition of the Company, to general economic conditions and to federal and state restrictions on the payment of dividends by thrift institutions. Under regulations of the OTS applicable to converted associations, the Company will not be permitted to pay a cash dividend on its capital stock after the Conversion if its regulatory capital would, as a result of the payment of such dividend, be reduced below the amount required for the Liquidation Account or the applicable regulatory capital requirement prescribed by the OTS. See "THE CONVERSION Principal Effects of the 27 29 Conversion -- Liquidation Account" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources" in the Prospectus. The Company may not pay a dividend unless such dividend also complies with an OTS regulation limiting capital distributions by savings and loan associations. Capital distributions, for purposes of such regulation, include, without limitation, payments of cash dividends, repurchases, and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association. See "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions" in the Prospectus. DESCRIPTION OF AUTHORIZED SHARES GENERAL The Articles of Incorporation of the Holding Company authorize the issuance of __________ common shares, and ____ preferred shares. Neither the common shares nor the preferred shares authorized by the Holding Company's Articles of Incorporation have par value. Upon receipt by the Holding Company of the purchase price therefor and subsequent issuance thereof, each Common Share issued in the Conversion will be fully paid and nonassessable. Notwithstanding the foregoing, until payments are received by the Holding Company from the ESOP in accordance with the terms of a loan agreement to be entered into by and between the Holding Company and the ESOP, Common Shares issued to the ESOP for which payment in money has not been received will not be fully paid and non-assessable. The Common Shares will represent nonwithdrawable capital and will not and cannot be insured by the FDIC. Each Common Share will have the same relative rights and will be identical in all respects to every other Common Share. None of the preferred shares of the Holding Company will be issued in connection with the Conversion. The Board of Directors of the Holding Company is authorized, without shareholder approval, to issue preferred shares and to fix and state the designations, preferences or other special rights of such shares and the qualifications, limitations and restrictions thereof. The preferred shares may rank prior to the common shares as to dividend rights, liquidation preferences or both. Each holder of preferred shares will be entitled to one vote for each preferred share held of record on all matters submitted to a vote of shareholders. The issuance of preferred shares and any conversion rights which may be specified by the Board of Directors for the preferred shares could adversely affect the voting power of holders of the common shares. The Board of Directors has no present intention to issue any of the preferred shares. The following is a summary description of the rights of the common shares of the Holding Company, including the material express terms of such shares as set forth in the Holding Company's Articles of Incorporation. LIQUIDATION RIGHTS In the event of the complete liquidation or dissolution of the Holding Company, the holders of the Common Shares will be entitled to receive all assets of the Holding Company available for distribution, in cash or in kind, after payment or provision for payment of (i) all debts and liabilities of the Holding Company, (ii) any accrued dividend claims, and (iii) any interests in the Liquidation Account payable as a result of a liquidation of the Company. See "THE CONVERSION - Liquidation Account." 28 30 VOTING RIGHTS The holders of the Common Shares will possess exclusive voting rights in the Holding Company. Each holder of Common Shares will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of common shares. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK AND ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of the Holding Company -- Elimination of Cumulative Voting" in the Prospectus. DIVIDENDS The holders of the Common Shares will be entitled to the payment of dividends when, as and if declared by the Board of Directors and paid out of funds, if any, available under applicable laws and regulations for the payment of dividends. The payment of dividends is subject to federal and state statutory and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions" and "TAXATION - Federal Taxation" in the Prospectus for a description of restrictions on the payment of cash dividends. PREEMPTIVE RIGHTS After the consummation of the Conversion, no shareholder of the Holding Company will have, as a matter of right, the preemptive right to purchase or subscribe for shares of any class of the Holding Company, now or hereafter authorized, or to purchase or subscribe for securities or other obligations convertible into or exchangeable for such shares or which by warrants or otherwise entitle the holders thereof to subscribe for or purchase any such share. RESTRICTIONS ON ALIENABILITY See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for a description of the limitations on the repurchase of stock by the Holding Company; "THE CONVERSION - Restrictions on Transfer of Common Shares by Directors and Officers" for a description of certain restrictions on the transferability of Common Shares purchased by officers and directors; and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK AND ANTI-TAKEOVER PROVISIONS" in the Prospectus for information regarding regulatory restrictions on acquiring Common Shares. EXPERTS Keller has consented to the publication herein of the summary of its opinion as to the estimated pro forma market value of the Company, as converted, and the Holding Company and to the use of its name and statements with respect to it appearing herein. LEGAL PROCEEDINGS The Company is not presently involved in any material legal proceedings. From time to time, the Company is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by the Company. 29 31 ADDITIONAL INFORMATION AND STOCK ORDER FORMS The Prospectus contains the following: audited financial statements of the Company, including statements of income and retained earnings, for the three fiscal years ended December 31, 1997, management's discussion and analysis of financial condition and results of operations; selected financial information of the Company for the five fiscal years ended December 31, 1997; information concerning the capitalization of the Company; a description of the Company's lending, savings and investment activities; and additional information about the business and financial condition of the Company. A copy of the Prospectus accompanies this Summary Proxy Statement. To obtain an additional copy of the Prospectus, contact the Company's Conversion Information Center at (330) 747-1111. The Subscription Offering will commence on _________ ___, 1998, and end at 12:00 noon, Eastern Daylight Time, on _______ ____, 1998. Stock Order Forms for purchases of Common Shares in the Subscription Offering must be received by the Company on or before noon, Eastern Daylight Time, on ______ ___, 1998. 30 EX-99.2 12 EXHIBIT 99.2 1 Exhibit 99.2 REVOCABLE PROXY THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO The undersigned member of The Home Savings and Loan Company of Youngstown, Ohio, a savings and loan association incorporated under Ohio law ("Home Savings"), hereby nominates, constitutes and appoints _________________________________ and _______________________________________, or either one of them, as proxy or proxies for the undersigned member, each with full power of substitution and resubstitution, to vote all of the votes which the undersigned member is entitled to cast at the Special Meeting of the Members of Home Savings to be held at _____________ __.m., Eastern Standard Time, on ______________________, 1998, at ___________________________, Youngstown, Ohio, and at any adjournments thereof (the "Special Meeting"), on the following matters and in the manner specified below: IMPORTANT: PLEASE SIGN AND DATE THIS REVOCABLE PROXY ON THE REVERSE SIDE. - -------------------------------------------------------------------------------- UNITED COMMUNITY FINANCIAL CORP. ORDER FORM INSTRUCTIONS - -------------------------------------------------------------------------------- ITEM INSTRUCTIONS ITEMS 1, 2 AND 3 -- Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying the number of shares purchased by the Subscription Price of $10.00 per share. The minimum purchase is 25 shares. The maximum purchase by (i) any person or entity or (ii) persons of entities exercising subscription rights through a single account, is 35,000 shares. In addition, no person or entity, or group of persons acting in concert, together with any Associate (as defined in the Prospectus), may subscribe for more than 1% of the common shares sold in the Offering. United Community Financial Corp. and Home Savings have the right to reject the order of any subscriber who (i) submits false or misleading information on a Stock Order Form or otherwise, (ii) attempts to purchase shares in violation of the Plan of Reorganization or applicable law or (iii) fails to cooperate with attempts to verify information with respect to purchase rights. ITEM 4 -- Payment for shares may be made in cash (only if delivered by you in person) or by check, bank draft or money order made payable to United Community Financial Corp. Your funds will earn interest at the Home Savings current passbook savings rate until the Offering is completed or terminated. DO NOT MAIL CASH TO PURCHASE STOCK! PAYMENT MAY NOT BE MADE BY WIRE TRANSFER. Please check this box if your method of payment is by cash, check, bank draft or money order. ITEM 5 -- If you pay for your stock by a withdrawal from a Home Savings deposit account, insert the account number(s) and the amount of your withdrawal authorization for each account. The total amount withdrawn should equal the amount of your stock purchase. Your order will be rejected if, on the date your order is received, the accounts designated by you do not contain sufficient funds to complete your purchase. There will be no penalty assessed for early withdrawals from certificate of deposit accounts used for stock purchases. This form of payment may not be used if your account is an Individual Retirement Account. If you wish to use your IRA currently at Home Savings, you must call the Stock Information Center prior to ________, 1998 and complete all paperwork required. ITEM 6 -- a. Please check this box if you were a member of Home Savings on August 31, 1996 (the Eligibility Record Date). You must list the full title and account numbers of all accounts you had on this date in order to insure proper identification of your purchase rights and preferences. b. Please check this box if you were a member of Home Savings on __________ (the Supplemental Eligibility Record Date). You must list the full title and account numbers of all accounts you had on this date in order to insure proper identification of your purchase rights and preferences. c. Please check this box if you were a member of Home Savings on May 6, 1998 (the Record Date). You must list the full title and account numbers of all accounts you had on this date in order to insure proper identification of your purchase rights and preferences. ITEMS 7, 8 AND 9 -- The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of your common shares. Please complete items 7, 8 and 9 as fully and accurately as possible, and be certain to supply your social security number or tax identification number and your daytime telephone number(s). We will need to call you if we cannot execute your order as given. If you have any questions or concerns regarding the registration of your common shares, please consult your legal advisor. Stock ownership must be registered in one of the ways described under "Stock Ownership Guide." ITEM 10 -- Please check this box if you are a member of the NASD or if this item otherwise applies to you. ITEMS 11 AND 12 -- Please sign and date the Stock Order Form where indicated. Review the Stock Order Form carefully before you sign, including the acknowledgment. Normally, one signature is required. An additional signature is required only when payment is to be made by withdrawal from a deposit account that requires multiple signatures to withdraw funds. If you have any remaining questions, or if you would like assistance in completing your Stock Order Form, you may call the Stock Information Center. The Stock Information Center phone number is (330) _______________. - -------------------------------------------------------------------------------- Stock Ownership Guide If you decide to subscribe for common shares, you will need to register your common shares in one of the following ways. Please consult this guide when completing Section 8 of your Stock Order Form. INDIVIDUAL o Include the first name, middle initial and last name of the shareholder. o Avoid the use of two initials. o Omit titles such as "Mr., "Mrs.", or "Dr." JOINT TENANTS WITH RIGHT OF SURVIVORSHIP o Joint Tenant with Rights of Survivorship can be used to identify two or more owners. o When stock is held by joint tenants, ownership passes automatically to the surviving joint tenants(s) upon the death of any joint tenant. o All parties must agree to the transfer or sale of shares held by joint tenants. o In order to subscribe as joint tenants, all tenants must appear together on an eligible joint tenant account at Home Savings. TENANTS IN COMMON o Tenants in common may be used to identify two or more owners. o When stock is held by tenants in common, upon the death of one co-tenant, ownership of the stock is held by the surviving co-tenant(s) and by the heirs of the deceased co-tenants. o All parties must agree to the transfer or sale of shares held by tenants in common. o In order to order in common, all tenants must appear together on an eligible tenants in common account in Home Savings. UNIFORM TRANSFER TO MINORS o Stock may be held in the name of a custodian for a minor under the Uniform Transfer to Minors Acts of each state. o There may be only one custodian and one minor designated on a stock certificate. o Example, stock held by John Doe as custodian for Susan Doe under the Ohio Uniform Transfer to Minors Act will be abbreviated: John Doe, CUST Susan Doe UTMA, OH. o Use the minor's social security number. FIDUCIARIES Information provided with respect to stock to be held in a fiduciary capacity must contain the following: o The name(s) of the fiduciary. If an individual, list the first name, middle initial and last name. If a corporation, list the full corporate title. If an individual and a corporation, list the corporation before the individual. o The fiduciary capacity, such as administrator, executor, trustee, committee, etc. o The date of the document governing the relationship. o The name of the maker, donor or testator and the name of the beneficiary. o An example of fiduciary ownership in the case of a trust is: John Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe. 2 Please mark your votes as indicated in this example [ X ] This Revocable Proxy will be voted as directed by the undersigned member. IF NO DIRECTION IS GIVEN, THIS REVOCABLE PROXY WILL BE VOTED FOR THE APPROVAL OF THE PLAN OF CONVERSION, FOR THE ADOPTION OF THE AMENDED ARTICLES OF INCORPORATION, FOR THE ADOPTION OF THE AMENDED CONSTITUTION AND FOR THE APPROVAL OF THE CONTRIBUTION TO THE FOUNDATION. FOR AGAINST ABSTAIN [ ] [ ] [ ] 1. The approval of the Plan of Conversion, a copy of which is attached as Exhibit A to the Summary Proxy Statement mailed to the undersigned member in connection with the Special Meeting. FOR AGAINST ABSTAIN [ ] [ ] [ ] 2. The adoption of the Amended Articles of Incorporation of Home Savings, a copy of which is attached to the Plan of Conversion as Exhibit I. FOR AGAINST ABSTAIN [ ] [ ] [ ] 3. The adoption of the Amended Constitution of Home Savings, a copy of which is attached to the Plan of Conversion as Exhibit II. FOR AGAINST ABSTAIN [ ] [ ] [ ] 4. The approval of the contribution of up to 1,250,000 common shares of United Community Financial Corp. (the "Contribution") to the Home Savings Charitable Foundation (the "Foundation"), a tax-exempt organization established by Home Savings in 1991 in furtherance of Home Savings commitment to the communities it serves. 5. In their discretion, upon such other matters as may properly come before the Special Meeting. Without affecting any vote previously taken, this Revocable Proxy may be revoked by the undersigned at any time before it is exercised by (i) executing and delivering to Home Savings a later dated proxy, or (ii) giving notice of revocation in writing to the Secretary of Home Savings or in open meeting to the inspectors of election. Receipt of the Summary Proxy Statement of Home Savings and the Prospectus of United Community Financial Corp. dated ______, 1998, is hereby acknowledged by the undersigned. NOTE: Please sign your name exactly as it appears on this Revocable Proxy. Joint accounts require only one signature. If you are signing this Revocable Proxy as an attorney, administrator, agent, corporation, officer, executor, trustee or guardian, etc., please add your full title to your signature. Signature Dated: , 1998 ---------------------------------------------- ------------- IMPORTANT: IF YOU RECEIVE MORE THAN ONE CARD, PLEASE SIGN AND RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE. - -------------------------------------------------------------------------------- o THIS IS YOUR PROXY CARD to vote on the Amended Plan of Conversion, the Amend Articles of Incorporation and the Amended Constitution of The Home Savings and Loan Company of Youngstown, Ohio. o PLEASE SIGN AND RETURN ALL CARDS YOU RECEIVE IMMEDIATELY. A postage paid envelope is enclosed. o If you do not sign and return a proxy card, it is the same as voting against the Amended Plan of Conversion. o Voting in favor of the Amended Plan of Conversion in no way obligates you to buy any common share. o If you would like to order common share, please fill out the Stock Order Form on the following page. 3 UNITED COMMUNITY FINANCIAL CORP. Stock Order Form The Home Savings & Loan Company EXPIRATION DATE of Youngstown, Ohio 275 Federal Plaza West for Stock Order Forms: Youngstown, Ohio 12:00 Noon, Youngstown, Ohio Time 44503-1203 330-747-1101 - -------------------------------------------------------------------------------- IMPORTANT -- PLEASE NOTE: A properly completed original stock order form must be used to subscribe for common shares. Faxes or copies of this form will not be accepted. Please read the Stock Ownership Guide and Stock Order Form Instructions as you complete this Form. - -------------------------------------------------------------------------------- (1) NUMBER OF SHARES SUBSCRIPTION PRICE (2) TOTAL PAYMENT DUE X $10.00 = - ----------------------- ----------------------- - -------------------------------------------------------------------------------- (3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION [ ] Check here if you are a director, officer or employee of Home Savings or a member of such person's immediate family. - -------------------------------------------------------------------------------- (4) METHOD OF PAYMENT/CHECK Enclosed is a check, bank draft or money order made payable to United Community Financial Corp. in the amount of: ----------------- - -------------------------------------------------------------------------------- (5) METHOD OF PAYMENT/WITHDRAWAL The undersigned authorizes withdrawal from the following account(s) at Home Savings. There is no penalty for early withdrawal for purposes of this payment. - -------------------------------------------------------------------------------- ACCOUNT NUMBER(S) WITHDRAWAL AMOUNT(S) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TOTAL WITHDRAWAL AMOUNT: --------------------------------------------------- - -------------------------------------------------------------------------------- (6) PURCHASER INFORMATION A. [ ] Eligible Account Holder -- Check here if you were a depositor of a least $50.00 at Home Savings on July 31, 1996. Enter Information below for all deposit accounts that you had at Home Savings on July 31, 1996. B. [ ] Supplemental Eligible Account Holder -- Check here if you were a depositor of at least $50.00 at Home Savings on March 31, 1998 but are not an Eligible Account Holder. Enter information below for all deposit accounts that you had at Home Savings on March 31, 1998. C. [ ] Other Member -- Check here if you were a depositor of at least $50.00 on May 6, 1998 but are not an eligible Account Holder or Supplemental Eligible Account Holder. Enter information below for all deposit accounts that you had at Home Savings on May 6, 1998. o THESE ACCOUNT NUMBERS CORRESPOND TO THE PREPRINTED REGISTRATION IN THE TOP LEFT HAND CORNER OF THIS FORM. o THESE MAY NOT BE ALL OF YOUR QUALIFYING ACCOUNTS. o YOU MUST LIST ANY ACCOUNT NUMBERS FROM OTHER STOCK ORDER FORMS YOU HAVE RECEIVED IN THE MAIL AND ANY OTHER ACCOUNTS THAT YOU HAVE OR HAVE HAD AT HOME SAVINGS. o IF YOU DO NOT LIST ALL OF YOUR ACCOUNTS, YOU MAY NOT RECEIVE ALL OF THE COMMON SHARES THAT YOU ARE ELIGIBLE FOR. - -------------------------------------------------------------------------------- ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP [ ] Individual [ ] Joint Tenants [ ] Tenants in Common [ ] Fiduciary (Under Agreement Dated , 19 ) [ ] Individual Retirement Account (IRA) [ ] Corporation or Partnership [ ] Uniform Transfer to Minors Act [ ] Other - --------------------------------------------------------------------------------
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY) Social Security # or Tax ID - -------------------------------------------------------------------- --------------------------- Name(s) continued Telephone (Daytime) - -------------------------------------------------------------------- --------------------------- Street Address City State Zip Code - -------------------------------------------------------------------- ----- ---------------
- -------------------------------------------------------------------------------- (9) NASD AFFILIATION [ ] Check here if you are a member of the National Association of Securities Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the immediate family of any such person to whose support such person contributes, directly or indirectly, or the holder of an account in which an NASD member or person associated with an NASD member has a beneficial interest. To comply with conditions under which an exemption from the NASD's Interpretation With Respect to Free-Riding and Withholding is available, you agree, if you have checked the NASD Affiliation box, (i) not to sell, transfer or hypothecate the stock for a period of 90 days following issuance, and (ii) to report this subscription in writing to the applicable NASD member within one day of payment therefor. - -------------------------------------------------------------------------------- (10) ASSOCIATE--ACTING IN CONCERT [ ] Check here, and complete the reverse side of this Form, if you or any associate (as defined on the reverse side of this Form) or persons acting in concert with you have submitted other orders for shares in the Subscription and/or the Community Offerings. - -------------------------------------------------------------------------------- (11) ACKNOWLEDGMENT To be effective, this fully completed Stock Order Form must be actually received by Home Savings, no later than 12:00 Noon, Local Time, on May XX, 1998, unless extended; otherwise this Stock Order Form and all subscription rights will be void. Completed Stock Order Forms, together with the required payment or withdrawal authorization, may be delivered to Home Savings or may be mailed to the Post Office Box indicated on the enclosed business reply envelope. All rights exercisable hereunder are not transferable and shares purchased upon exercise of such rights must be purchased for the account of the person exercising such rights. It is understood that this Stock Order Form will be accepted in accordance with, and subject to, the terms and conditions of the Amended Plan of Conversion from a Mutual Savings and Loan Association to a Stock Savings and Loan Association ("Plan") of Home Savings described in the accompanying Prospectus. If the Plan is not approved by the members of Home Savings at a Special Meeting to be held on May XX, 1998, or any adjournment thereof, all orders will be cancelled and funds received as payment, with accrued interest, will be returned promptly. The undersigned agrees that after receipt by Home Savings, this Stock Order Form may not be modified, withdrawn or cancelled (unless the offering is not completed within 45 days after the completion of the Subscription Offering) without Home Savings' consent, and if authorization to withdraw from deposit accounts at Home Savings has been given as payment for shares, the amount authorized for withdrawal shall not otherwise be available for withdrawal by the undersigned. Under penalty of perjury, I certify that the Social Security or Tax ID Number and the other information provided under the number 8 of this Stock Order Form are true, correct and complete, that I am not subject to back-up withholding, that I am purchasing for my own account and that there is no agreement or understanding regarding the transfer of my subscription rights or the sale or transfer to these shares. Applicable regulations prohibit any person from transferring or entering into any agreement directly or indirectly to transfer, the legal or beneficial ownership of subscription rights, or the underlying securities to the account of another. Home Savings and United Community Financial Corp. may pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve such transfer. I acknowledge that the common shares offered are not a savings or deposit accounts and are not insured by the Savings Association Insurance Fund, the Bank Insurance Fund, the Federal Deposit Insurance Corporation, or any other government agency, may lose value and is not guaranteed by United Community Financial Corp. A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE FORM OF CERTIFICATION ON THE REVERSE HEREOF. SIGNATURE DATE SIGNATURE DATE --------- ---- --------- ---- - --------------------------------------- ------------------------------ OFFICE USE ------------- ------------- ------------- Date Received Batch # Order # SIGNED FORM OF CERTIFICATION MUST ACCOMPANY ALL STOCK ORDER FORMS (SEE REVERSE SIDE) 4 ITEM (6)A, B, C -- (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------- ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
ITEM 11 -- (CONTINUED) List below all other orders submitted by you or your Associates (as defined) or by persons acting in concert with you. - -------------------------------------------------------------------------------- NUMBER OF NAMES(S) LISTED ON OTHER SHARES STOCK ORDER FORMS ORDERED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- "Associate" is defined as: (i) any corporation or organization (other than Home Savings, United Community Financial Corp., or a majority-owned subsidiary of Home Savings, or United Community Financial Corp.) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar fiduciary capacity; except for any tax-qualified employee stock benefit plan or any charitable trust which is exempt from federal taxation pursuant to Section 501(c)(3) of the Code; and (iii) any relative or spouse of such person, or any relative of such spouse, who either has the same home as such person or who is a director or officer of Home Savings, United Community Financial Corp. or any subsidiaries thereof. - -------------------------------------------------------------------------------- A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED BELOW AND ON THE FRONT OF THIS FORM. FORM OF CERTIFICATION I/WE ACKNOWLEDGE THAT THE COMMON SHARES OF UNITED COMMUNITY FINANCIAL CORP. IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND IS NOT FEDERALLY INSURED, AND IS NOT GUARANTEED BY HOME SAVINGS OR BY THE FEDERAL GOVERNMENT. If anyone asserts that the common shares are federally insured or guaranteed, or are as safe as an insured deposit, I should call the Office of Thrift Supervision, Central Regional Director, Ronald N. Karr at (312) 917-50 . I/We further certify that, before purchasing the common shares, no par value per share, of United Community Financial Corp., the proposed holding company for Home Savings, I/we received a Prospectus dated May 22, 1998 (the "Prospectus"), which contains disclosure concerning the nature of the common shares being offered and describes the following risks involved in the investment under the heading "RISK FACTORS" beginning on page of the Prospectus.
1. Anticipated Low Return on Equity ..............................................(page ) 2. Interest Rate Risk ............................................................(page ) 3. Risks Associated with Commercial Lending.......................................(page ) 4. Possible Adverse Effects of Contribution of Shares to the Foundation ..........(page ) 5. Risks Associated with Economic Conditions in the Company's Market Area ........(page ) 6. Geographic Concentration of Credit.............................................(page ) 7. Competition in Primary Market Area ............................................(page ) 8. Absence of Established Market for the Common Shares ...........................(page ) 9. Dilutive Impact of Benefit Plans on Net Income and Shareholders' Equity........(page ) 10. Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit plans...........................................(page ) 11. Legislation and Regulation Which May Adversely Affect Earnings and Operations................................................................(page ) 12. Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium Prices............................................................(page )
Signature Date Signature Date - --------- ---- --------- ---- - -------------------------------- ----------------------------------- Name (Please Print) Name (Please Print) - -------------------------------- ----------------------------------- EX-99.4 13 EXHIBIT 99.4 1 Exhibit 99.4 UNITED COMMUNITY FINANCIAL CORP. (PROPOSED HOLDING COMPANY FOR THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO ) YOUNGSTOWN, OHIO PROPOSED MARKETING MATERIALS 2 Marketing Materials for The Home Savings and Loan Company of Youngstown, Ohio Table of Contents ----------------- I. Press Release A. Explanation B. Schedule C. Distribution List D. Examples II. Question and Answer Brochure A. Explanation B. Method of Distribution C. Example III. Officer and Director Brochure A. Explanation B. Method of Distribution C. Example IV. Counter Cards, Lobby Posters and a Tombstone Announcement A. Explanation B. Quantity C. Examples V. Community Meeting Invitation and Prospect Letters A. Explanation B. Examples VI. IRA Mailing F. Explanation G. Example VII. Letters G. Explanation H. Example VIII. Proxygram A. Explanation B. Example 3 I. Press Releases A. Explanation In an effort to ensure that all customers, community members, and other interested investors receive prompt accurate information in a simultaneous manner, Trident Securities, Inc. advises The Home Savings and Loan Company to forward press releases to national and regional publications, newspapers, radio stations, etc., at various points during the Conversion process. Only press releases approved by Conversion Counsel will be forwarded for publication in any manner. B. Press Releases 1. Approval of Conversion by the Office of Thrift Supervision and the Securities and Exchange Commission (mid to late May 1998) 2. Close of Stock Offering C. Distribution Lists (see attached) (Note: Distribution to be coordinated with PR firm) D. Examples (see attached) 4 National Media Distribution List -------------------------------- AMERICAN BANKER One State Street Plaza New York, New York 10004 Michael Weinstein BUSINESS WIRE 212 South Tryon Suite 1460 Charlotte, North Carolina 28281 WALL STREET JOURNAL World Financial Center 200 Liberty New York, New York 10004 SNL SECURITIES Post Office Box 2124 Charlottesville, Virginia 22902 BARRONS Dow Jones & Company Barron's Statistical Information 200 Burnett Road Chicopee, Massachusetts 01020 INVESTORS BUSINESS DAILY 12655 Beatrice Street Post Office Box 661750 Los Angeles, California 90066 LOCAL MEDIA LIST (Provided by PR Firm) 5 D. Press Release FOR IMMEDIATE RELEASE For More Information Contact: Douglas M. McKay, President Telephone: (330) 742-0500 THE HOME SAVINGS AND LOAN COMPANY STOCK SALE APPROVED ----------------------------------------------------- Youngstown, Ohio, _________, 1998 - Mr. Douglas M. McKay, President and Chief Executive Officer of The Home Savings and Loan Company of Youngstown, Ohio, announced today that The Home Savings and Loan Company of Youngstown, Ohio has received approval from the Office of Thrift Supervision and the Division of Financial Institutions of the Department of Commerce of the State of Ohio to convert from a state chartered mutual savings and loan association to a permanent capital stock savings and loan association. In connection with the Conversion, The Home Savings and Loan Company has formed a holding company, United Community Financial Corp. to hold all of the outstanding capital stock of The Home Savings and Loan Company. A Prospectus and Proxy Statement describing the Plan of Conversion will be mailed to certain members of The Home Savings and Loan Company on or about _________, 1998. Under the Plan of Conversion, United Community Financial Corp. is offering an estimated 25,000,000 shares of common stock at $10.00 per share. Certain of The Home Savings and Loan Company's past and present members will have the opportunity to purchase stock through a subscription offering that closes on _________, 1998. Shares that are not subscribed for during the subscription offering, if any, will be offered to the general public, with preference given to natural persons who are residents of Columbiana, Mahoning and Trumbull Counties, Ohio, in a community offering. The offerings are being managed by Trident Securities, Inc., of Raleigh, North Carolina and McDonald & Company Securities, Inc., Cleveland, Ohio. As a result of the Conversion, The Home Savings and Loan Company will be structured in the stock form, just like all commercial banks and an increasing number of savings institutions, and will become a subsidiary of United Community Financial Corp. According to Mr. McKay, "Our day to day operations will not change as a result of the Conversion and deposits will continue to be insured by the FDIC up to the applicable legal limits". The Home Savings and Loan Company is headquartered in Youngstown, Ohio. The Bank was organized in 1889. At December 31, 1997, The Home Savings and Loan Company had total assets of $1.0 billion and total equity of $141.4 million. Customers or interested members of the community with questions concerning the stock offering should call the institution at (330) 747-1111 or visit any Home Savings and Loan Company office. 6 D. Press Release FOR IMMEDIATE RELEASE Contact: Douglas M. McKay, President Telephone: (330) 742-0500 UNITED COMMUNITY FINANCIAL CORP. HOLDING COMPANY FOR ---------------------------------------------------- THE HOME SAVINGS AND LOAN COMPANY, ---------------------------------- COMPLETES INITIAL STOCK OFFERING -------------------------------- Youngstown, Ohio _________, 1998 - Douglas M. McKay, President and Chief Executive Officer of The Home Savings and Loan Company, Youngstown, Ohio, announced today that United Community Financial Corp., the proposed holding company for The Home Savings and Loan Company, has completed its initial common stock offering. In connection with the stock offering, United Community Financial Corp. sold a total of _______ shares at $10 per share. It is anticipated that the common stock of United Community Financial Corp. will begin trading on the NASDAQ National Market System on _________, 1998 under the symbol "UCFC." Trident Securities, Inc. and McDonald & Company Securities, Inc. will be market makers in the stock. The net proceeds contributed to The Home Savings and Loan Company upon Conversion will substantially increase its capital. The Home Savings and Loan Company will use the funds contributed to it for general corporate purposes, including, initially, local lending and investment in short-term U.S. Government and agency obligations. On _______, 1998, The Home Savings and Loan Company's Plan of Conversion was approved by The Home Savings and Loan Company's depositor and borrower members at a Special Meeting that was held at the main office of the institution. Mr. McKay stated, "The Officers and Board of Directors of The Home Savings and Loan Company express their thanks for the response by customers and the community to the stock offering. The Home Savings and Loan Company looks forward to serving the needs of its customers as a stock institution." 7 II. Question and Answer Brochure A. Explanation The Question and Answer brochure is an essential marketing piece in any Conversion. It serves to answer some of the most commonly asked questions in "plain, everyday language." Although most of the answers are taken verbatim from the Prospectus and Proxy Statement, it assists the individual in finding answers to simple questions. Conversion Counsel approves the language for each Question and Answer. Trident Securities, Inc. and The Home Savings and Loan Company and it's advertising agency will be responsible for any introductory or concluding remarks, design, layout, color, and paper stock. This will be coordinated through Trident Securities, Inc. in conjunction with the financial printer. B. Method of Distribution There are three primary methods of distribution of the Question and Answer brochure. However, regardless of the method of distribution, the brochure is always accompanied by a Prospectus. 1. A Question and Answer brochure is sent out in the initial mailing to all members of The Home Savings and Loan Company. 2. Question and Answer brochures are available in The Home Savings and Loan Company's offices. 3. Question and Answer brochures are sent out in a standard information packet to all interested investors who phone the Conversion Information Center requesting information. C. Example 8 C. Example HOME SAVINGS OF YOUNGSTOWN, OHIO Questions and Answers Regarding the Subscription Offering and the Community Offering MUTUAL TO STOCK CONVERSION -------------------------- The Board of Directors of The Home Savings and Loan Company of Youngstown, Ohio ("HOME SAVINGS" or the "Company") has adopted a plan of conversion (the "Plan") to convert from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (the "Conversion") and simultaneously become a wholly-owned subsidiary of United Community Financial Corp., an Ohio corporation organized by HOME SAVINGS to own all of the outstanding common shares of HOME SAVINGS ("UCFC" or the "Holding Company"). This brochure is provided to answer general questions you might have about the Conversion and about your opportunity to invest in common shares of UCFC. Following the Conversion, HOME SAVINGS will continue to provide financial services to its depositors, borrowers and other customers as it has in the past and will operate with its existing management and employees. The Conversion will not affect the terms, balances, interest rates or existing federal insurance coverage on HOME SAVINGS' deposits or the terms or conditions of any loans to existing borrowers under their contract arrangements with HOME SAVINGS. For complete information regarding the Conversion, see the Prospectus and the Proxy Statement. Copies of each of the Prospectus and the Proxy Statement may be obtained by calling the Conversion Information Center at (330) 747-1111. THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY UCFC COMMON SHARES. OFFERS TO BUY OR TO SELL MAY BE MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION. THE COMMON SHARES OF UCFC BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. 9 1. Q. WHAT IS A "CONVERSION"? A. A Conversion is a change in the legal form of organization. HOME SAVINGS currently operates as a mutual savings and loan association with no shareholders. Through the Conversion, HOME SAVINGS will become a stock savings and loan association and will form a holding company, UCFC, which will ultimately own all of the outstanding shares of HOME SAVINGS. UCFC will issue common shares in the Conversion, as described below, and will be a publicly-owned company. 2. Q. WHY IS HOME SAVINGS CONVERTING? A. As a mutual savings and loan association, HOME SAVINGS does not have shareholders and has no authority to issue capital stock. By converting to the stock form of organization, HOME SAVINGS will be structured in the form used by commercial banks, most business entities and a growing number of savings institutions. The Conversion will be important to the future growth and performance of HOME SAVINGS by providing a larger capital base from which it may operate, enhancing future access to capital markets and, if desired, enhancing HOME SAVINGS' ability to diversify and expand into other financial service-related activities. Currently, HOME SAVINGS has no specific plans, agreements, arrangements or understandings regarding such diversification. 3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON A PERSON'S SAVINGS ACCOUNTS, CERTIFICATES OF DEPOSIT OR LOANS WITH HOME SAVINGS? A. No. The Conversion will not change the amount, interest rate or withdrawal rights of any savings and checking accounts or certificates of deposit. The rights and obligations of borrowers under their loan agreements will not be affected. However, upon consummation of the Conversion, HOME SAVINGS' deposit account holders will no longer have voting rights in HOME SAVINGS, and will not have voting rights in UCFC unless they purchase common shares. 4. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR MANAGEMENT? A. No. The Conversion will not cause any changes in the personnel or management of HOME SAVINGS.. The normal day-to-day operations will continue as before. 5. Q. DID THE BOARD OF DIRECTORS OF HOME SAVINGS APPROVE THE CONVERSION? Yes. The Board of Directors unanimously adopted the Plan on December 9, 1997, and amended the Plan on May 6, 1998. 6 Q. HOW WILL THE COMMUNITY BENEFIT FROM THE CONVERSION? A. In 1991, HOME SAVINGS established the Home Savings Charitable Foundation 10 (the "Foundation"), which is an exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Each year since the Foundation was established, HOME SAVINGS has made annual contributions to the Foundation in furtherance of HOME SAVINGS' commitment to the communities that it serves. In connection with the Conversion, UCFC intends to contribute to the Foundation approximately 5.0% of the number of common shares issued in the Conversion, subject to the overall limitation of 1,250,000 common shares. HOME SAVINGS and UCFC believe that the contribution of common shares to the Foundation will benefit the long term value of HOME SAVINGS' community banking franchise by enabling the communities it serves to share in the potential growth and success of HOME SAVINGS and UCFC over the long term. THE SUBSCRIPTION OFFERING, THE COMMUNITY OFFERING AND THE SYNDICATED COMMUNITY OFFERING 7. Q. WHO IS ENTITLED TO SUBSCRIBE FOR COMMON SHARES OF UCFC? A. Rights to subscribe for common shares will be given in order of priority to (i) each account holder, who, at the close of business on July 31, 1996 ("Eligibility Record Date"), had one or more deposit accounts with deposit balances, in the aggregate, of $50 or more (a "Qualifying Deposit") with HOME SAVINGS ("Eligible Account Holders"), (ii) the United Community Financial Corp. Employee Stock Ownership Plan (the "ESOP"), (iii) each account holder who, at the close of business on March 31, 1998 ("Supplemental Eligibility Record Date"), had a Qualifying Deposit with HOME SAVINGS ("Supplemental Eligible Account Holders"), (iv) members of HOME SAVINGS as of April 30, 1998 ("Other Members") and (v) directors, officers and employees of HOME SAVINGS. IT IS THE RESPONSIBILITY OF EACH SUBSCRIBER QUALIFYING AS AN ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER OR OTHER MEMBER TO LIST COMPLETELY ALL ACCOUNT NUMBERS FOR QUALIFYING SAVINGS ACCOUNTS AS OF THE QUALIFYING DATE ON THE STOCK ORDER FORM. FAILURE TO DO SO MAY RESULT IN A REDUCTION OR ELIMINATION OF A SUBSCRIBER'S ORDER. Shares that are not subscribed for during the Subscription Offering, if any, may be offered to the general public through a Community Offering with preference given to natural persons who are residents of Mahoning, Columbiana and Trumbull Counties, Ohio (the "Local Community"). It is anticipated that any shares not subscribed for in the Subscription Offering and the Community Offering will be offered to certain members of the general public through a syndicate of registered broker dealers pursuant to selected dealers agreements in a Syndicated Community Offering. 11 8. Q. HOW DO I SUBSCRIBE FOR COMMON SHARES OF UCFC? A. Eligible subscribers wishing to exercise their subscription rights must return the completed stock order form along with full payment or appropriate instructions authorizing a withdrawal from a deposit account at HOME SAVINGS to HOME SAVINGS in the postage-paid envelope provided, so that the stock order form and payment or withdrawal authorization instructions are RECEIVED on or prior to the close of the Subscription Offering which will be 12:00 noon, Eastern Daylight Time, on ___________, 1998, unless extended. 9. Q. HOW CAN I PAY FOR MY SUBSCRIPTION ORDER? A. You may pay for your order in cash, but only if delivered in person to HOME SAVINGS or by check or money order. Subscription funds will earn interest at HOME SAVINGS' passbook rate from the day the funds are received by HOME SAVINGS until the completion or termination of the Conversion. You may also authorize HOME SAVINGS to withdraw funds from your HOME SAVINGS savings account or certificate of deposit without early withdrawal penalty. These funds will continue to earn interest at the rate in effect for your account until completion of the Conversion at which time your funds will be withdrawn for your purchase. Funds remaining in this account (if any) will continue at the contractual rate unless the withdrawal reduces the account balance below the applicable minimum, in which case you will receive interest at the passbook rate. A hold will be placed on your account for the amount you specify for payment for common shares. You will not have access to these funds from the day HOME SAVINGS receives your order until the completion or termination of the Conversion. If you want to use funds in your Individual Retirement Account ("IRA") held at HOME SAVINGS to subscribe for shares, call our Conversion Information Center at (330) 747-1111 for assistance. There will be no early withdrawal or IRS penalties incurred by these transactions. It takes several days to process the necessary IRA forms and, therefore, it is necessary that you make arrangements by ___________, 1998, to accommodate your order. 10. Q. HOW MANY COMMON SHARES OF UCFC ARE BEING OFFERED? A. UCFC is offering up to 28,937,500 common shares at a price of $10.00 per share. The number of shares may be decreased to 21,250,000 or increased to 33,465,625 in response to the independent appraiser's final determination of the consolidated pro forma market value of UCFC and HOME SAVINGS, as converted. 12 11. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF COMMON SHARES THAT I CAN PURCHASE IN THE CONVERSION? A. The minimum number of common shares any person may purchase is 25 shares. No stock order form will be accepted for less than $250. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 30,000 common shares. 12. Q. MUST I PAY A COMMISSION ON THE SHARES FOR WHICH I SUBSCRIBE? A. No. You will not pay a commission on shares purchased in the Subscription Offering, the Community Offering, if any, or the Syndicated Community Offering, if any. 13. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR SHARE PURCHASES? A. Yes. HOME SAVINGS will pay its current passbook rate from the date funds are received (with a completed stock order form) during the Subscription Offering and the Community Offering until the completion of the Conversion. 14. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM, WHAT SHOULD I DO? A. HOME SAVINGS will mail you another order form, or you may obtain one from any HOME SAVINGS' office. If you need assistance in obtaining or completing a Stock Order Form, please call the Conversion Information Center at (330) 747-1111 or visit the Conversion Information Center. 15. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE SHARES? A. Following the completion of the Conversion, the Board of Directors of UCFC intends to establish a dividend policy. The declaration and payment of dividends or other capital distributions by UCFC will be subject to the discretion of the Board of Directors of UCFC, to the earnings and financial condition of UCFC and HOME SAVINGS and to general economic conditions. The timing of the payment of dividends and the annual rate will depend upon a determination by the Board of Directors of UCFC that the net income, capital and financial condition of UCFC and the general economy justify the declaration and payment of dividends by UCFC. No assurance can be given, however, that dividends will be paid or, if paid, will continue in the future. In accordance with the policy of the Office of Thrift Supervision, UCFC will not undertake an extraordinary tax-free return of capital to its shareholders during the first year following the completion of the Conversion. 13 16. Q. HOW MANY SHARES DO THE DIRECTORS AND OFFICERS OF HOME SAVINGS INTEND TO PURCHASE THROUGH THE SUBSCRIPTION OFFERING? A. Directors and executive officers intend to purchase approximately 5,320,000 of the common shares to be offered in the Conversion (approximately 2.128% if 25,000,000 shares are sold in the Conversion). The directors and officers will pay the same $10 purchase price as that paid by members and the general public. 17. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY? A. NO. Pursuant to federal regulations, subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members may be exercised only by the person(s) to whom they are granted. Any person found to be transferring or selling subscription rights will be subject to forfeiture of such rights and other penalties. 18. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD ME THAT I AM STILL ELIGIBLE TO BUY STOCK. IS THAT TRUE? A. If you were an account holder on the Eligibility Record Date (July 31, 1996), the Supplemental Eligibility Record Date (March 31, 1998) or the Voting Record Date (May 6, 1998) you are entitled to purchase shares regardless of whether or not you continue to hold your HOME SAVINGS account. 19. Q. MAY I OBTAIN A LOAN FROM HOME SAVINGS USING SHARES AS COLLATERAL TO PAY FOR MY SHARES? A. No. Federal regulations do not allow HOME SAVINGS to make loans for this purpose, but another financial institution may make a loan for this purpose. 20. Q. CAN I PURCHASE SHARES USING FUNDS IN A HOME SAVINGS IRA ACCOUNT? A. Yes. Contact the Conversion Information Center at (330) 747-1111 for additional information. It takes several days to process the necessary IRA forms and, therefore, it is necessary that you make arrangements by ________, 1998, to accommodate your order. 21. Q. WILL THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") INSURE THE SHARES OF STOCK? A. No. The shares of UCFC are not savings deposits or savings accounts and will not be insured by the FDIC or any other government agency. 14 22. Q. WILL THERE BE A MARKET FOR THE SHARES FOLLOWING THE CONVERSION? A. UCFC has never issued stock before, and consequently there is no established market for its common shares. UCFC has received conditional approval to have the common shares listed on The Nasdaq National Market System under the symbol "UCFC". Trident Securities, Inc., McDonald & Company Securities, Inc. and CIBC Oppenheimer Corp. intend to make a market in the common shares. However, purchasers of common shares should recognize that no assurance can be given that an active and liquid trading market will develop or, if developed, will be maintained. ABOUT VOTING "FOR" THE PLAN OF CONVERSION 23. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD TO CONSIDER THE PLAN? A. If you were a member of HOME SAVINGS on May 6, 1998 (the "Voting Record Date", you are eligible to vote at the Special Meeting of Members to be held on ________, 1998. However, members of record as of the close of business on the Voting Record Date who cease to be depositors prior to the date of the Special Meeting are no longer members and will not be entitled to vote at the Special Meeting. If you are a Voting Member, you should have received a proxy statement and proxy card with which to vote. 24. Q. HOW MANY VOTES DO I HAVE AS A VOTING MEMBER? A. HOME SAVINGS' charter provides that each account holder is entitled to one vote for each $100, or fraction thereof, on deposit in such account. 25. Q. IF I VOTE "AGAINST" THE PLAN AND IT IS APPROVED, WILL I BE PROHIBITED FROM BUYING COMMON SHARES DURING THE SUBSCRIPTION OFFERING? A. No. Voting against the Plan in no way restricts you from purchasing stock in either the Subscription Offering, the Community Offering or the Syndicated Community Offering. 26. Q. WHAT HAPPENS IF HOME SAVINGS DOES NOT GET ENOUGH VOTES TO APPROVE THE PLAN? A. The Conversion would not take place and HOME SAVINGS would remain a mutual savings and loan association. 15 27. Q. AS A VOTING MEMBER OF HOME SAVINGS, AM I REQUIRED TO VOTE? A. No. However, failure to return your proxy card will have the same effect as a vote "Against" the Plan. 28. Q. WHAT IS A PROXY CARD? A. A Proxy Card gives you the ability to vote without attending the Special Meeting in person. However, you may attend the meeting and vote in person, even if you have previously returned your proxy card. 29. Q. HOW DOES THE CONVERSION AFFECT ME? A. The Conversion is intended, among other things, to assist HOME SAVINGS in maintaining and expanding its many services to HOME SAVINGS' customers and community. By purchasing shares, you will also have the opportunity to invest in UCFC, the proposed holding company for HOME SAVINGS. However, there is no obligation to purchase shares. The purchase of shares is strictly optional. 30. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE OFFERING? A. You may call the Conversion Information Center, at (330) 747-1111 for further information or to request a copy of the Prospectus, Proxy Statement, Stock Order Form and Proxy Card. THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. A PROSPECTUS CAN BE OBTAINED AT A HOME SAVINGS OFFICE OR BY CALLING THE CONVERSION INFORMATION CENTER. THERE SHALL BE NO SOLICITATION OF AN OFFER OR SALE OF STOCK IN ANY JURISDICTION IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF COMMON SHARES WOULD BE UNLAWFUL. THE COMMON SHARES ARE NOT A DEPOSIT OR ACCOUNT AND ARE NOT FEDERALLY INSURED OR GUARANTEED. FOR YOUR CONVENIENCE In order to assist you during the stock offering period, we have established a Conversion Information Center to answer your questions. Please call: (330) 747-1111 16 III. Officer and Director Brochure (optional) A. Explanation An Officer and Director Brochure merely highlights the intended stock purchases shown in the Prospectus. B. Method of Distribution There are three primary methods of distribution of Officer and Director Brochures. However, regardless of the method of distribution, they are always accompanied by a Prospectus. 1. An Officer and Director Brochure is sent out in the initial mailing to all members of The Home Savings and Loan Company. 2. Officer and Director Brochures will be available in any of The Home Savings and Loan Company's offices. 3. Officer and Director Brochures are sent out in a standard information packet to all interested investors who telephone the Conversion Information Center requesting information. 17 OFFICER AND DIRECTOR STOCK PURCHASE COMMITMENTS
Aggregate Percent of Total Shares Purchase Price Total Offering (1) ------------ -------------- ------------------ Name and Position - ----------------- Richard M. Barrett 31,000 $310,000 .124 James E. Bennett, Jr. 1,000 10,000 .004 Charles B. Cushwa, III 60,000 600,000 .24 Donald R. Inglis 30,000 300,000 .12 Patrick A. Kelly 60,000 600,000 .24 Gary Keller 60,000 600,000 .24 William A. Holdford 10,000 100,000 .04 Douglas M. McKay 80,000 800,000 .32 Herbert F. Schuler, Sr. 90,000 900,000 .36 Clarence R. Smith, Jr. 25,000 250,000 .10 Robert J. Steele, Jr. 10,000 100,000 .04 Donald J. Varner 60,000 600,000 .24 John F. Zimmerman, Jr. 15,000 150,000 .06 ------- ---------- ----- TOTAL 532,000 $5,320,000 2.128% ======= ========== ===== (1) At the midpoint of the offering and assumes enough common shares will be available to satisfy all subscriptions.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO SOLICITATION OF AN OFFER OR SALE OF COMMON SHARES IN ANY JURISDICTION IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF COMMON SHARES WOULD BE UNLAWFUL. THE COMMON SHARES ARE NOT A DEPOSIT OR ACCOUNT AND ARE NOT FEDERALLY INSURED OR GUARANTEED. 18 IV. Counter Cards, Lobby Posters and the Tombstone Announcement A. Explanation Counter cards, lobby posters and the tombstone announcement serve three purposes: (1) As a notice to The Home Savings and Loan Company's customers and members of the local community that the stock sale is underway; (2) to remind the customers of the end of the Subscription Offering; and (3) to invite members of the community to an informational meeting, if applicable. Trident has learned in the past that many people need reminding of the deadline for subscribing and therefore we suggest the use of these simple reminders. B. Quantity Approximately 3 - 4 counter cards may be used at The Home Savings and Loan Company's offices, at teller windows and on customer service representatives' desks. These counter cards will be exact duplicates of the lobby poster and will be no larger than 8-1/2" x 11". Approximately 1 - 2 lobby posters may be used at the offices of The Home Savings and Loan Company. These posters will be approximately 2' x 3'. Tombstone announcements may be used for placement in local newspapers. The advertisements will run no more than twice each in the local newspaper. The ads will be no larger than 8-1/2" x 11". C. Examples enclosed 19 POSTER The Home Savings and Loan Company of Youngstown STOCK OFFERING MATERIALS AVAILABLE HERE Customer Priority Rights for the Stock Offering by United Community Financial Corp. Expire on ________, 1998 20 POSTER For the first time ever, you can own stock in The Home Savings and Loan Company of Youngstown, Ohio. Customers of The Home Savings and Loan Company of Youngstown, Ohio have the opportunity to invest in The Home Savings and Loan Company of Youngstown, Ohio by purchasing common stock in the newly-formed holding company, United Community Financial Corp. The common shares are being offered in a Subscription Offering to certain eligible deposit account holders and members of The Home Savings and Loan Company of Youngstown, Ohio until __________, 1998. A Proxy Statement and Prospectus relating to these securities were recently mailed to all eligible customers. Additional Prospectuses, relating to these securities, are available at any of our branch offices or by calling our Conversion Information Center at (330) 747-1111. Your Subscription Rights expire on ___________, 1998. The common shares offered in the conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This announcement shall not constitute an offer to sell or a solicitation of an offer to buy common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of common shares would be unlawful. 21 - -------------------------------------------------------------------------------- This announcement is neither an offer to sell nor a solicitation of an offer to buy these securities. The offer is made only by the Prospectus. These shares have not been approved or disapproved by the Securities and Exchange Commission, the Office of Thrift Supervision or the Federal Deposit Insurance Corporation, nor has such Commission, Office or Corporation passed upon the accuracy or adequacy of the Prospectus. Any representation to the contrary is a criminal offense. NEW ISSUE ______, 1998 UP TO 28,937,500 SHARES These shares are being offered pursuant to a Plan of Conversion whereby THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO will convert from an Ohio mutual savings and loan association to an Ohio permanent capital stock savings and loan association and become the wholly-owned subsidiary of UNITED COMMUNITY FINANCIAL CORP. COMMON SHARES --------------- PRICE $10.00 PER SHARE --------------- Copies of the Prospectus may be obtained in any State in which this announcement is circulated from such of the undersigned or other brokers and dealers as may legally offer these securities in such state. TRIDENT SECURITIES, INC. MCDONALD & COMPANY SECURITIES, INC. CIBC OPPENHEIMER CORP. For a copy of the Prospectus call (330) 747-1111. - -------------------------------------------------------------------------------- 22 V. Community Meeting Materials A. Explanation In order to educate the public about the stock offering, Trident suggests holding Community meetings in various locations. In an effort to target a group of interested investors, Trident requests that each Director and Executive Officer of The Home Savings and Loan Company submit a list of acquaintances that he or she would like to invite to a Community meeting. B. Method of Distribution of Invitations and Prospect Letters Each Director and/or Officer submits his list of prospects. Invitations are sent to each Director's prospects through the mail. All invitations are preceded by a Prospectus and all attendees are given a Prospectus at the meeting. 23 PROSPECT INVITATION ================================================================================ The Directors and Officers of The Home Savings and Loan Company of Youngstown, Ohio cordially invite you to attend a brief presentation regarding the stock offering of United Community Financial Corp., our proposed holding company. Please join us at one of the following meetings: Place Place Place Address Address Address Date Date Date at ____ p.m. at ____ p.m. at ____ p.m. Hors d'oeuvres will be served. Space is Limited so Please call (330) 747-1111 if You Plan to Attend. ================================================================================ 24 VI. IRA Mailing A. Explanation A special IRA mailing is proposed to be sent to all IRA customers of HOME SAVINGS in order to alert the customers that funds held in an IRA can be used to purchase stock. Since this transaction is not as simple as designating funds from a certificate of deposit like a normal stock purchase, this letter informs the customer that this process is slightly more detailed and cannot be done through the mail. B. Quantity One IRA letter is proposed to be mailed to each IRA customer of The Home Savings and Loan Company. These letters would be mailed following OTS approval for the Conversion and after each customer has received the initial mailing containing a Proxy Statement and a Prospectus. C. Example - Enclosed 25 The Home Savings and Loan Company Letterhead ________, 1998 Dear Individual Retirement Account Participant: As you know, The Home Savings and Loan Company of Youngstown, Ohio ("Home Savings") is in the process of converting from an Ohio mutual savings and loan association to an Ohio permanent capital stock savings and loan association, and has formed United Community Financial Corp. ("UCFC") to hold all of the stock of Home Savings (the "Conversion"). Through the Conversion, certain current and former depositors of Home Savings have the opportunity to purchase common shares of UCFC in a Subscription Offering. UCFC currently is offering up to 28,937,500 common shares, subject to adjustment, at a price of $10.00 per share. As the holder of an individual retirement account ("IRA") at Home Savings, you may use your IRA funds to subscribe for the common shares. If you desire to purchase common shares of UCFC through your IRA, Home Savings can assist you in self-directing those funds. This process can be done without an early withdrawal penalty and generally without a negative tax consequence to your IRA. If you are interested in receiving more information on self-directing your IRA, please contact our Conversion Information Center at (330) 747-1111. Because it takes several days to process the necessary IRA forms, a response must be received by _______, 1998 to accommodate your interest. Sincerely, Douglas M. McKay President The common shares offered in the Conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. 26 VII. Letters A. Explanation Cover letters to accompany offering materials. B. Method of Distribution Enclosed with the initial mailing. C. Examples 27 (Trident Letterhead) ___________, 1998 To Members and Friends of The Home Savings and Loan Company of Youngstown, Ohio: Trident Securities, Inc., McDonald & Company Securities, Inc. and CIBC Oppenheimer Corp., members of the National Association of Securities Dealers, Inc., are assisting The Home Savings and Loan Company of Youngstown, Ohio ("Home Savings") in its conversion from a mutual savings and loan association to a permanent capital stock savings and loan association and the concurrent offering of common shares by United Community Financial Corp. ("UCFC"), an Ohio corporation recently formed for the purpose of acquiring all of the stock of Home Savings (the "Conversion"). At the request of Home Savings, we are enclosing materials explaining the Conversion process and your right to subscribe for common shares of HOME SAVINGS. Please read the enclosed offering materials carefully before subscribing for common shares. If you have any questions, please call the Conversion Information Center at (330) 747-1111. Sincerely, TRIDENT SECURITIES, INC. Enclosures The common shares offered in the Conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. 28 (The Home Savings and Loan Company Letterhead) ___________, 1998 Dear Valued Member: The Home Savings and Loan Company of Youngstown, Ohio ("Home Savings") is pleased to announce that we have received regulatory approval to proceed with our plan to convert from a mutual savings and loan association to a permanent capital stock savings and loan association (the "Conversion"), conditioned upon receipt of approval by Home Savings' members, among other things. This Conversion is a significant event in the history of Home Savings in that it allows customers, directors and employees an opportunity to subscribe for common shares of United Community Financial Corp. ("UCFC"), the proposed holding company for Home Savings. We want to assure you that the Conversion will not affect the terms, balances, interest rates or existing FDIC insurance coverage on deposits at Home Savings, or the terms or conditions of any loans to existing borrowers under their individual contract arrangements with Home Savings. Let us also assure you that the Conversion will not result in any changes in the management, personnel or the Board of Directors of Home Savings. A special meeting of the members of Home Savings will be held on ___________, 1998, at _______, Eastern Daylight Time, at Home Savings' main office to consider and vote upon Home Savings' Plan of Conversion. Enclosed is a proxy card. The Board of Directors of Home Savings solicits your vote "FOR" the Plan of Conversion. A vote in favor of the Plan of Conversion does not obligate you to purchase common shares of UCFC. If you do not plan to attend the special meeting, please sign and return your proxy card promptly. Your vote is important to us. As one of our valued members, you have the opportunity to invest in the future of Home Savings by purchasing common shares of UCFC during the Subscription Offering, without paying a sales commission. If you decide to exercise your subscription rights to purchase shares, you must return a properly completed stock order form, together with full payment for the subscribed shares, so that it is RECEIVED by Home Savings not later than 12:00 Noon, Eastern Daylight Time on _________, 1998. We also have enclosed a Prospectus and Proxy Statement which fully describes the Conversion and provides financial and other information about UCFC and Home Savings. Please review these materials carefully before you vote or invest. For your convenience we have established a Conversion Information Center. If you have any questions, please call the Conversion Information Center at (330) 747-1111. We look forward to continuing to provide quality financial services to you in the future. Sincerely, Douglas M. McKay President The common shares offered in the Conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of common shares would be unlawful. 29 (Optional) (The Home Savings and Loan Company Letterhead) ____________, 1998 Dear Interested Investor: The Home Savings and Loan Company of Youngstown, Ohio ("Home Savings") is pleased to announce that we have received regulatory approval to proceed with our plan to convert from a mutual savings and loan association to a permanent capital stock savings and loan association (the "Conversion"), conditioned upon receipt of approval by Home Savings' members, among other things. This Conversion is a significant event in the history of Home Savings in that it allows customers, community members, directors and employees an opportunity to purchase common shares of United Community Financial Corp., the proposed holding company for Home Savings. We want to assure you that the Conversion will not result in any changes in the management, personnel or the Board of Directors of Home Savings. Enclosed is a Prospectus which fully describes Home Savings, its management, board of directors and financial condition. Please review it carefully before you make an investment decision. If you decide to invest, please return to Home Savings a properly completed stock order form, together with full payment for shares, at your earliest convenience. For your convenience we have established a Conversion Information Center. If you have any questions, please call the Conversion Information Center at (330) 747-1111. Sincerely, Douglas M. McKay President Enclosures The common shares offered in the Conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of common shares would be unlawful. 30 (The Home Savings and Loan Company Letterhead) ____________, 1998 Dear Friend: The Home Savings and Loan Company of Youngstown, Ohio ("Home Savings") is pleased to announce that we have received regulatory approval to proceed with our plan to convert from a mutual savings and loan association to a permanent capital stock savings and loan association (the "Conversion"), conditioned upon receipt of approval by Home Savings' members, among other things. The Conversion is a significant event in the history of Home Savings in that it allows customers, directors and employees an opportunity to subscribe for common shares of United Community Financial Corp., the proposed holding company for Home Savings. We want to assure you that the Conversion will not affect the terms, balances, interest rates or existing FDIC insurance coverage on deposits at Home Savings, or the terms or conditions of any loans to existing borrowers under their individual contract arrangements with Home Savings. Let us also assure you that the Conversion will not result in any changes in the management, personnel or the Board of Directors of Home Savings. Our records indicate that you were a depositor of Home Savings on July 31, 1996, or March 31, 1998. Therefore, under applicable law, you are entitled to subscribe for common shares of United Community Financial Corp. in the Subscription Offering. Orders submitted by you and others in the Subscription Offering are contingent upon the current members' approval of the Plan of Conversion at a special meeting of members to be held on __________, 1998, and upon receipt of all required regulatory approvals. If you decide to exercise your subscription rights to purchase shares, you must return a properly completed stock order form, together with full payment for the subscribed shares, so that it is RECEIVED at Home Savings not later than 12:00 Noon, Eastern Daylight Time on __________, 1998. Enclosed is a Prospectus which fully describes Home Savings, its management, board of directors and financial condition. Please review it carefully before you invest. For your convenience, we have established a Conversion Information Center. If you have any questions, please call the Conversion Information Center at (330) 747-1111. Sincerely, Douglas M. McKay President Enclosures The common shares offered in the Conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of common shares would be unlawful. 31 (Optional) (The Home Savings and Loan Company Letterhead) ___________, 1998 Dear Member: As a qualified member of The Home Savings and Loan Company of Youngstown, Ohio ("Home Savings"), you have the right to vote upon Home Savings' proposed Plan of Conversion and also generally have the right to subscribe for common shares of United Community Financial Corp., the proposed holding company for Home Savings. However, the proposed Plan of Conversion provides that United Community Financial Corp. will not offer shares in any state in which compliance with the securities laws would be impracticable for reasons of cost or otherwise. Unfortunately, the securities laws of your state would require United Community Financial Corp. to register its common shares and /or its employees in order to sell the common shares to you. Such registration would be prohibitively expensive or otherwise impracticable in light of the few members residing in your state. You may vote on the proposed Plan of Conversion and we urge you to read the enclosed Summary Proxy Statement and execute the enclosed Revocable Proxy. Questions regarding the execution of the Revocable Proxy should be directed to Home Savings' Conversion Information Center at (330) 747-1111. Sincerely, Douglas M. McKay President Enclosures The common shares offered in the Conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the common shares. The offer is made only by the Prospectus. There shall be no sale of common shares in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. 32 VIII. Proxy Reminder A. Explanation A proxygram is used when the majority of votes needed to adopt the Plan of Conversion is still outstanding. The proxygram is mailed to those "target vote" depositors who have not previously returned their signed proxy. The target vote depositors are determined by the Conversion agent. B. Example enclosed 33 B. Example - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- P R O X Y G R A M (LOGO) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT BEEN RECEIVED. YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO VOTING AGAINST THE PLAN OF CONVERSION. VOTING FOR THE PLAN OF CONVERSION WILL NOT AFFECT THE INSURANCE COVERAGE OF YOUR ACCOUNTS. ALL ACCOUNTS WILL CONTINUE TO BE INSURED UP TO THE LEGAL LIMIT ($100,000 PER ACCOUNT AS DEFINED BY LAW) BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION, AN AGENCY OF THE U.S. GOVERNMENT. REMEMBER, VOTING FOR THE PLAN OF CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY SHARES. PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR DELIVER IT TO AN OFFICE OF THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO. WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION. THANK YOU! - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THE BOARD OF DIRECTORS OF THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO 34 SUBSCRIPTION RIGHTS SPECIAL NOTICE Any transfer of, or attempt to transfer, a subscription right to any other person is illegal and subject to civil fines and/or penalties and even criminal fines and/or penalties. The Home Savings and Loan Company of Youngstown, Ohio intends to vigorously prosecute any transfer or attempt to transfer subscription rights that comes to its attention. If you are (or have been) contacted by anyone offering to give you money to buy common shares in order to transfer the common shares to them later, share the proceeds upon the sale of the common shares, or transfer your subscription rights in any other way, please call us immediately at (330) 747-1111. Thank you. -----END PRIVACY-ENHANCED MESSAGE-----