UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
Commission File Number: 0-024399
Ohio 34-1856319
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
275 Federal Plaza West, Youngstown, Ohio 44503
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number: (330) 742-0500
Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of Class) (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last reported sale of March 25, 1999, was $372.1 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)
As of March 26, 1999, there were 32,159,826 of the Registrant's Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 1998 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement for the 1999 Annual
Meeting of Shareholders
TABLE OF CONTENTS
Item
Number Page
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PART I
1. Description of Business
General-----------------------------------------------------------------------------------1
Discussion of Forward-Looking Statements--------------------------------------------------1
Lending Activities------------------------------------------------------------------------2
Investment Activities---------------------------------------------------------------------12
Sources of Funds--------------------------------------------------------------------------15
Competition-------------------------------------------------------------------------------17
Employees---------------------------------------------------------------------------------17
Year 2000 Considerations------------------------------------------------------------------18
Regulation--------------------------------------------------------------------------------18
Taxation----------------------------------------------------------------------------------23
2. Description of Property-----------------------------------------------------------------------26
3. Legal Proceedings-----------------------------------------------------------------------------26
4. Submission of Matters to a Vote of Security Holders-------------------------------------------27
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters-------------------------27
6. Selected Financial Data-----------------------------------------------------------------------27
7. Management's Discussion and Analysis of Financial Condition and Results of Operations---------27
7A. Quantitative and Qualitative Disclosures About Market Risk------------------------------------27
8. Financial Statements and Supplemental Data----------------------------------------------------27
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure----------27
PART III
10. Directors and Executive Officers of the Registrant--------------------------------------------28
11. Executive Compensation------------------------------------------------------------------------28
12. Security Ownership of Certain Beneficial Owners and Management--------------------------------28
13. Certain Relationships and Related Transactions------------------------------------------------28
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K-------------------------------28
Signatures-----------------------------------------------------------------------------------------------29
Exhibit Index--------------------------------------------------------------------------------------------30
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
United Community Financial Corp. (UCFC) was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) issued upon the conversion of Home Savings from a mutual savings association to a permanent capital stock savings association (Conversion). The Conversion was completed on July 8, 1998.
Home Savings was organized as a mutual savings association under Ohio law in 1889. As an Ohio savings association, Home Savings is subject to supervision and regulation by the Office of Thrift Supervision (OTS), the Ohio Department of Commerce, Division of Financial Institutions (Division) and the Federal Deposit Insurance Corporation (FDIC). Home Savings is a member of the Federal Home Loan Bank (FHLB) of Cincinnati and the deposits of Home Savings are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (SAIF).
As a savings and loan holding company, UCFC is subject to regulation, supervision and examination by the OTS. UCFC's activities have been limited primarily to holding the common stock of Home Savings since acquiring such common stock in the Conversion. Consequently, the following discussion focuses primarily on the business of Home Savings.
Home Savings 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 Home Savings is the origination of mortgage loans on one- to four-family residential real estate located in Home Savings' primary market area, which consists of northern Columbiana County, Mahoning County and southern Trumbull County. Home Savings also originates loans secured by nonresidential real estate in its primary market area. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer loans, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans. For liquidity and interest rate risk management purposes, Home Savings invests in interest-bearing deposits in other financial institutions, federal funds and U.S. Treasury and agency securities. Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC in the SAIF, principal repayments of loans and maturities of securities.
Interest on loans and other investments is Home Savings' primary source of income. Home Savings' principal expense is interest paid on deposit accounts. Operating results are dependent to a significant degree on the net interest income of Home Savings, which is the difference between interest earned on loans and other investments and interest paid on deposits. Like most thrift institutions, Home Savings' interest income and interest expense are significantly affected by general economic conditions and by the policies of various regulatory authorities.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
When used in this Form 10-K or in future filings by UCFC with the Securities and Exchange Commission, in UCFC's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in Home Savings' market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings' market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. UCFC cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. UCFC advises readers that the factors listed above could affect UCFC's financial performance and could cause UCFC's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
UCFC does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
LENDING ACTIVITIES
GENERAL. Home Savings' principal lending activity is the origination of conventional real estate loans secured by one- to four-family residences located in Home Savings' primary market area. Home Savings also originates loans secured by multifamily and nonresidential real estate and originates loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer credits, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans.
LOAN PORTFOLIO COMPOSITION. The following table presents certain information regarding the composition of Home Savings' loan portfolio at the dates indicated:
At December 31,
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1998 1997 1996
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Percent of Percent of Percent of
Total Total Total
Amount loans Amount loans Amount loans
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(Dollars in thousands)
Real estate loans:
Permanent
One- to four-family $516,767 73.84% $489,677 74.19% $482,089 75.23%
Multifamily 8,172 1.17 8,944 1.36 8,778 1.37
Nonresidential 31,308 4.47 33,479 5.07 35,315 5.51
Land 190 0.03 285 0.04 195 0.03
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Total permanent 556,437 79.51 532,385 80.66 526,377 82.14
Construction loans:
One- to four-family 25,691 3.67 24,044 3.64 27,610 4.31
Multifamily and
non-residential 833 0.12 325 0.05 490 0.08
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Total construction 26,524 3.79 24,369 3.69 28,100 4.39
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Total real estate loans 582,961 83.30 556,754 84.35 554,477 86.53
Consumer loans
Home equity 18,321 2.62 17,097 2.59 14,581 2.28
Auto 1,603 0.23 2,457 0.37 3,486 0.54
Education 3,993 0.57 3,479 0.53 2,701 0.42
Other (1) 17,856 2.55 20,355 3.08 18,837 2.94
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Total consumer 41,773 5.97 43,388 6.57 39,605 6.18
Commercial loans 75,085 10.73 59,897 9.08 46,742 7.29
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Total loans 699,819 100.00% 660,039 100.00% 640,824 100.00%
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Less net items 42,321 26,803 23,901
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Total loans, net $657,498 $633,236 $616,923
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1995 1994
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Percent of Percent of
Total Total
Amount loans Amount loans
------ ----- ------ -----
Real estate loans:
Permanent
One- to four-family $428,213 75.39% $386,663 73.72%
Multifamily 16,042 2.82 14,838 2.83
Nonresidential 36,845 6.48 43,235 8.24
Land 1,280 0.23 1,666 0.32
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Total permanent 482,380 84.92 446,402 85.11
Construction loans:
One- to four-family 19,804 3.49 18,200 3.47
Multifamily and
non-residential 597 0.11 994 0.19
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Total construction 20,401 3.60 19,194 3.66
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Total real estate loans 502,781 88.52 465,596 88.77
Consumer loans
Home equity 11,439 2.01 11,265 2.15
Auto 4,582 0.81 2,339 0.45
Education 2,788 0.49 2,217 0.42
Other (1) 17,384 3.06 15,907 3.03
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Total consumer 36,193 6.37 31,728 6.05
Commercial loans 29,043 5.11 27,165 5.18
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Total loans 568,017 100.00% 524,489 100.00%
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Less net items 21,328 21,076
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Total loans, net $546,689 $503,413
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(1) Consists of overdraft protection loans and loans to individuals secured by demand accounts, deposits, automobiles, boats and one- to four-family residences.
LOAN MATURITY. The following table sets forth certain information as of December 31, 1998, regarding the dollar amount of loans maturing in Home Savings' portfolio based on their contractual terms to maturity. Demand loans and other loans having no stated schedule of repayments or no stated maturity are reported as due in one year or less. Mortgage loans originated by Home Savings generally include due-on-sale clauses that provide Home Savings with the contractual right to deem the loan immediately due and payable in the event the borrower transfers the ownership of the property without Home Savings' consent. The table does not include the effects of possible prepayments or scheduled repayments.
Principal repayments contractually due in the years ended December 31,
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2002 - 2004 - 2009 - 2014 and
1999 2000 2001 2003 2008 2013 thereafter Total
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(In thousands)
Residential mortgage loans (1) $51,255 $28,596 $28,164 $58,142 $152,271 $106,188 $126,655 $551,271
Nonresidential real estate 968 901 870 5,493 14,600 5,790 3,068 31,690
loans
Commercial loans 27,867 7,703 3,145 11,568 10,661 7,604 6,537 75,085
Consumer loans 5,394 4,178 3,795 5,443 18,808 866 3,289 41,773
------- ------- ------- ------- -------- -------- -------- --------
Total $85,484 $41,378 $35,974 $80,646 $196,340 $120,448 $139,549 $699,819
------- ------- ------- ------- -------- -------- -------- --------
------- ------- ------- ------- -------- -------- -------- --------
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(1) Includes permanent and construction loans for one- to four-family and multi-family properties and land loans.
The next table sets forth the dollar amount of all loans due after December 31, 1999, which have fixed or adjustable interest rates:
Due after December 31, 1999
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(In thousands)
Fixed rate of interest $473,037
Adjustable rate of interest 141,298
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$614,335
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LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending activity of Home Savings is the origination of conventional loans secured by first mortgages on one- to four-family residences, primarily single-family homes, located within Home Savings' primary market area. At December 31, 1998, Home Savings' one- to four-family residential real estate loans totaled approximately $516.8 million, or 73.8% of total loans. At December 31, 1998, $3.7 million, or 0.7%, of Home Savings' one-to four-family loans were nonperforming.
OTS regulations and Ohio law limit the amount which Home Savings may lend in relationship to the appraised value of the real estate and improvements which will secure the loan at the time of loan origination. In accordance with such regulations, Home Savings makes loans on one- to four-family residences of up to 90% of the value of the real estate and improvements thereon (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 a 95% LTV, although Home Savings requires private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property securing the loan.
Home Savings currently offers fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs) for terms of up to 30 years. Although Home Savings' loan portfolio includes a significant amount of 30-year fixed-rate loans, most loans currently originated by Home Savings are 15-year fixed-rate loans. The interest rate adjustment periods on ARMs are typically one or three years. The maximum interest rate adjustment on most of the ARMs is 2.0% on any adjustment date and a total of 6.0% over the life of the loan. The interest rate adjustments on one-year and three-year ARMs presently offered by Home Savings are indexed to the weekly average rate on the one-year and three-year U.S. Treasury securities, respectively. Rate adjustments are computed by adding a stated margin, typically 2.75%, to the index. Home Savings does not offer ARMs to borrowers on one- to four-family residences with LTVs of 95%.
Home Savings issues standby loan origination commitments to qualified borrowers primarily for the purchase of single-family residential real estate. Such commitments are made on specified terms and conditions and are made for periods of up to 60 days, during which time the interest rate is locked in.
Home Savings has purchased interests in loans at times when there was low demand in Home Savings' primary market area, although Home Savings has not purchased interests in one- to four-family loans during the past 10 years. Home Savings' loan portfolio includes 215 participation interests in several groups of single-family loans located within and outside of Home Savings primary lending area. At December 31, 1998, the outstanding balance of participation loans purchased, which is included in the one- to four-family loan portfolio, was $3.9 million, or 0.8% of Home Savings' total one- to four-family loan portfolio.
LOANS SECURED BY MULTIFAMILY RESIDENCES. Home Savings originates loans secured by multifamily properties which contain more than four units, although this is not a significant component of Home Savings' lending activities. Multifamily loans are offered with adjustable rates of interest, which adjust according to a specified index, and typically have terms ranging from five to ten years and LTVs of up to 75%.
Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. Home Savings attempts to reduce the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the project and by obtaining personal guaranties on loans made to corporations and partnerships. Home Savings requires borrowers to submit financial statements annually to enable Home Savings to monitor the loan and requires an assignment of rents.
At December 31, 1998, loans secured by multifamily properties totaled approximately $8.2 million, or 1.2% of total loans. The largest loan had a principal balance of $1.4 million.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Home Savings originates loans for the purchase of nonresidential real estate. Home Savings' nonresidential real estate loans have adjustable rates, terms of up to 20 years and generally LTVs of up to 80%. Rate adjustments on ARMs secured by nonresidential real estate are determined by adding 3.5% to the current U.S. Treasury index. Among the properties securing Home Savings' nonresidential real estate loans are shopping centers, hotels, motels and freezer warehouses. The majority of such properties are located outside of Home Savings' primary lending area. Home Savings has been involved for over 20 years in freezer warehouse financing through a Youngstown area real estate developer who specializes in the construction of freezer facilities.
Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Home Savings has endeavored to reduce such risk by evaluating the credit history of the borrower, the location of the real estate, the financial condition of the borrower, the quality and characteristics of the income stream generated by the property and the appraisals supporting the property's valuation. At December 31, 1998, Home Savings' largest loan secured by nonresidential real estate was a participation with an $11.8 million balance and such loan was performing according to its terms.
At December 31, 1998, approximately $31.3 million, or 4.5%, of Home Savings' total loans were secured by mortgages on nonresidential real estate.
CONSTRUCTION LOANS. Home Savings makes loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. Residential construction loans are made to both owner-occupants and to builders on a speculative (unsold) basis. Construction loans to owner-occupants are structured as permanent loans with fixed or adjustable rates of interest and terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only at a fixed rate. Construction loans for one- to four-family residences have 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, 1998, Home Savings had approximately $26.5 million, or 3.8% of its total loans, invested in construction loans, including $25.7 million in one- to four-family residential construction and approximately $833 thousand in multifamily construction loans. No commercial construction loans were outstanding at that date.
Approximately 50% of Home Savings' construction loans to builders are made for homes as to which the builder does not have a contract with a buyer. Home Savings, however, generally limits speculative loans to builders with whom Home Savings has a long-standing relationship and limits the number of outstanding loans on unsold homes under construction within a specific area.
Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties because construction loans are more difficult to appraise and to monitor. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is not always possible to evaluate accurately the LTVs and the total loan funds required to complete a project. In the event a default on a construction loan occurs and foreclosure follows, Home Savings must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project.
Home Savings also originates a limited number of loans secured by vacant land for the construction of single-family houses. Home Savings' land loans are generally fixed-rate loans for terms up to five years and require a LTV of 75% or less. At December 31, 1998, approximately $445 thousand, or 0.1%, of Home Savings' total loans were secured by land loans made to developers and to individuals intending to construct and occupy single-family residences on the properties.
COMMERCIAL LOANS. Home Savings makes commercial loans to businesses in its primary market area, including traditional lines of credit, revolving lines of credit, term loans and acquisition and development loans. The 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.
At December 31, 1998, Home Savings had approximately $75.1 million, or 10.7% of total loans, invested in commercial loans. The majority of these loans are secured by a security interest in inventory, accounts receivable, machinery, investment property, vehicles or other assets of the borrower. Home Savings also originates unsecured commercial loans including lines of credit for periods of less than 12 months, short-term loans and, occasionally, term loans for periods of up to 36 months. These loans are underwritten based on the 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, Home Savings intends to increase its unsecured commercial loan volume in the future.
Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependent on the income stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial loans, if any, often consists of rapidly depreciating assets.
CONSUMER LOANS. Home Savings originates various types of consumer credit loans, including home equity loans, education loans, loans secured by savings accounts, motor vehicles and unsecured loans. Consumer loans are made at fixed and adjustable rates of interest and for varying terms based on the type of loan. Consumer loans secured by a deposit or savings account are made for up to 90% of the principal balance of the account and generally have adjustable rates which adjust based on the weekly average yield on U.S. Treasury securities plus a margin.
For new automobiles, loans are originated for up to 90% of the value of the car with terms of up to five years, and for used automobiles, loans are made for up to the average value of the car model and a term of three years. All automobile loans are originated directly by Home Savings. At December 31, 1998, automobile loans amounted to $1.6 million, or 0.2%, of Home Savings' consumer loan portfolio.
Home Savings makes closed-end home equity loans in an amount which, when added to the prior indebtedness secured by the real estate, does not exceed 90% of the estimated value of the real estate. Home equity loans are typically secured by a second mortgage on the real estate. Home Savings frequently holds the first mortgage, although Home Savings will make home equity loans in cases where another lender holds the first mortgage. Home Savings also offers home equity loans with a line of credit feature. Home equity loans are made with adjustable and fixed rates of interest. Fixed-rate home equity loans have terms of ten years but can be called after five years. Rate adjustments on adjustable home equity loans are determined by adding a 3.0% margin for loans on one- to four-family residences of up to 80% LTV or by adding a 4.0% margin for loans on one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury index. At December 31, 1998, approximately $18.3 million, or 2.6%, of Home Savings' consumer loan portfolio consisted of home equity loans.
Consumer loans may entail greater credit risk than do residential mortgage loans. The risk of default on consumer loans increases during periods of recession, high unemployment, and other adverse economic conditions. Although Home Savings has not had significant delinquencies on consumer loans, no assurance can be provided that delinquencies will not increase.
At December 31, 1998, Home Savings had approximately $41.8 million, or 6.0% of its total loans, invested in consumer loans. Home Savings anticipates a moderate increase in its consumer loan portfolio in the future as a result of increased cross-selling efforts to existing customers.
LOAN SOLICITATION AND PROCESSING. The lending activities of Home Savings are subject to the written, non-discriminatory underwriting standards and loan origination procedures approved by Home Savings' Board of Directors (Board). Loan originations are generally obtained from existing customers and members of the local community and from referrals by real estate brokers, lawyers, accountants, and current and former customers. Home Savings also advertises in the local print media, radio and television.
Each of Home Savings' 14 offices has loan personnel who can accept loan applications, which are then forwarded to Home Savings' Underwriting Department for processing and approval. In underwriting real estate loans, Home Savings typically obtains a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate that will be given as security for the loan is prepared by one of Home Savings' in-house licensed appraisers or an approved fee appraiser. For certain large nonresidential real estate loans, the appraisal will be conducted by an outside fee appraiser whose report is reviewed by Home Savings' chief appraiser. Upon the completion of the appraisal and the receipt of information on the credit history of the borrower, the application for a loan is submitted for review to the appropriate persons. Nonresidential real estate loans up to $100 thousand require two approvals, loans up to $200 thousand require three approvals, and loans of $200 thousand up to $1.0 million require five approvals from a member of Home Savings' underwriting staff, the Senior Loan Officer, the Lending Operations Officer or any other senior officer of Home Savings. Commercial loans up to $200 thousand may be approved by one of Home Savings' commercial loan officers. Commercial loans of $200 thousand or more but less than $1.0 million must be approved by two members of the Underwriting Department, the Senior Loan Officer or the Lending Operations Officer and any two of the following officers: the President, the Chief Financial Officer, the Senior Vice President of Retail Banking or the Vice President of Facilities Management. In addition to the approval by the officers described above, loans for over $1.0 million require the prior approval of a majority of the outside directors of Home Savings.
Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name Home Savings as an insured mortgagee. Home Savings generally obtains an attorney's opinion of title, although title insurance may be obtained on larger nonresidential real estate loans.
The procedure for approval of construction loans is the same as for permanent real estate loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. Home Savings also evaluates the feasibility of the proposed construction project and the experience and record of the builder. Once approved, the construction loan is disbursed in installments based upon periodic inspections of construction progress.
Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any.
LOAN ORIGINATIONS AND PURCHASES. Historically, Home Savings has originated substantially all of the loans in its portfolio and has held them until maturity. Nevertheless, Home Savings' residential loans are generally made on terms and conditions and documentation which conform to the secondary market guidelines for sale to the Federal Home Loan Mortgage Company (FHLMC) and other institutional investors in the secondary market. Education loans are sold, once the borrower has graduated, to the Student Loan Marketing Association. Home Savings does not originate first mortgage loans insured by the Federal Housing Authority or guaranteed by the Veterans Administration, but it has purchased such loans as well as participation interests in such loans.
Home Savings has not sold any loans during the years ended December 31, 1998, 1997 and 1996. The following table presents Home Savings' total loan origination and repayment activity for the years indicated:
Year ended December 31,
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1998 1997 1996
--------- --------- ---------
(In thousands)
Loans originated:
Real estate:
Permanent:
One- to four-family $140,344 $68,303 $129,074
Multifamily 225
Nonresidential 340 218 136
Land 810
--------- --------- ---------
Total permanent 141,494 68,521 129,435
Construction:
One- to four-family 28,226 25,440 26,545
Multifamily 180 1,390 740
Total construction 28,406 26,830 27,285
--------- --------- ---------
Total real estate loans originated 169,900 95,351 156,720
Consumer 15,535 17,038 16,199
Commercial 44,050 20,968 21,731
--------- --------- ---------
Total loans originated 229,485 133,357 194,650
Loans purchased 11 116 24
--------- --------- ---------
Total loans originated and purchased 229,496 133,473 194,674
Principal repayments 205,791 119,120 125,550
--------- --------- ---------
Net increase in loans $ 23,705 $ 14,353 $ 69,124
--------- --------- ---------
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At December 31, 1998, Home Savings had $24.6 million of outstanding commitments to originate loans and $21.4 million available to borrowers under consumer and commercial lines of credit. At December 31, 1998, Home Savings had $8.0 million in undisbursed funds related to construction loans in process.
LOAN ORIGINATION AND OTHER FEES. Home Savings realizes loan origination fees and other fee income from its lending activities. A fee of 2.0% of the loan amount, up to $1 thousand is charged for fixed-rate residential real estate loans and Home Savings charges an origination fee of two percent of the loan amount, up to $850, for adjustable-rate residential real estate loans. Loan origination fees for nonresidential real estate loans and commercial loans are negotiated on an individual basis. In addition, Home Savings realizes income from late payment charges and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income, varying with the volume of lending, loan repayments and general economic conditions. All nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized in accordance with Statement of Financial Accounting Standards (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 15.0% of Home Savings' unimpaired capital and unimpaired surplus (Lending Limit Capital). A savings association may lend to one borrower an additional amount not to exceed 10.0% of Home Savings' Lending Limit Capital if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated.
Based on such limits, Home Savings could lend approximately $45.9 million to one borrower at December 31, 1998. The largest amount Home Savings had outstanding to one borrower at December 31, 1998, was $11.8 million, which consisted of one loan secured by a first mortgage on a freezer warehouse. At December 31, 1998, this loan was performing in accordance with its terms.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Home Savings attempts to maintain a high level of asset quality through sound underwriting policies and aggressive collection practices.
At the beginning of each month, the Collections Department of Home Savings receives a report on all delinquent loans, and Home Savings' personnel telephone the delinquent borrowers and mail delinquency notices. When a loan payment has not been made by the fifteenth of the month, a late notice is sent and a penalty of five percent of the payment due is assessed. Once a loan is 60 days delinquent, a second notice is sent and the Collections Department contacts the borrower by telephone. The Collections Department will generally continue to attempt to bring the loan current through telephone calls or personal visits until the loan has been delinquent 90 to 120 days. If the loan has not been brought current by the 120th day, a member of the Collections Department will present the loan to Home Savings' Pre-Foreclosure Committee which meets weekly. If the Pre-Foreclosure Committee agrees to recommend the commencement of foreclosure proceedings, the loan is presented to the Executive Committee of Home Savings (Executive Committee) of the Board, which normally refers the loan to Home Savings' in-house legal staff. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding balance in relation to the original indebtedness, the extent of the delinquency, the borrower's ability and willingness to cooperate in curing the delinquency and any environmental issues that may need to be addressed.
The following table reflects the amount of loans in a delinquent status as of the dates indicated:
At December 31,
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1998 1997
----------------------------------- -----------------------------------
Percent of Percent of
total total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
Loans delinquent for:
30-59 days 232 $ 8,236 1.25% 242 $ 6,895 1.09%
60-89 days 89 2,462 0.37 132 4,415 0.70
90 days or over 189 5,729 0.87 298 9,491 1.50
--- ------- ---- --- ------- ----
Total delinquent loans 510 $16,427 2.49% 672 $20,801 3.29%
--- ------- ---- --- ------- ----
--- ------- ---- --- ------- ----
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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.
The following table sets forth information with respect to Home Savings' nonperforming loans and other assets at the dates indicated:
At December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Nonperforming loans:
Nonaccrual loans
Real estate loans:
One- to four-family $ 3,655 $ 5,540 $ 5,343 $ 3,542 $ 3,491
Multifamily and nonresidential 378 649 704 1,082 104
Construction (net of Loan In Process) and land 233 769 491 7
------- ------- ------ ------ ------
Total real estate loans 4,266 6,958 6,538 4,631 3,595
Consumer 317 404 517 298 274
Commercial 1,146 2,129 2,059 260 219
------- ------- ------ ------ ------
Total nonaccrual loans 5,729 9,491 9,114 5,189 4,088
Restructured real estate loans 1,832 644 698 891 2,681
------- ------- ------ ------ ------
Total nonperforming loans 7,561 10,135 9,812 6,080 6,769
Real estate acquired through foreclosure and other
repossessed assets 78 55 29 46 1,570
------- ------- ------ ------ ------
Total nonperforming assets $ 7,639 $10,190 $9,841 $6,126 $8,339
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Nonperforming loans as a percent of loans 1.15% 1.60% 1.59% 1.11% 1.34%
Nonperforming assets as a percent of total assets 0.61 0.98 0.92 0.57 0.82
Allowance for loan losses as a percent of
nonperforming loans 84.62 59.02 51.37 84.18 75.51
Allowance for loan losses as a percent of total loans
before allowance 0.96 0.94 0.81 0.93 1.01
|
For 1998, approximately $349 thousand in interest income would have been recorded had nonaccruing and restructured loans been accruing pursuant to contractual terms. During 1998 interest collected on such loans and included in net income was approximately $343 thousand.
Nonaccrual and restructured loans decreased approximately $2.6 million to $7.6 million at December 31, 1998, from $10.2 million at December 31, 1997. Nonaccrual one- to four-family mortgage loans and commercial loans decreased $1.9 million and $1.0 million, respectively. The reduction of the one- to four-family loans was due to a number of loans becoming current on their payments. The reduction in nonaccrual commercial loans was the result of two loans being reclassified as restructured. Nonaccrual construction loans decreased $536 thousand at December 31, 1998 compared to December 31, 1997 due to several loans becoming current. At December 31, 1998, total nonaccrual and restructured loans accounted for 1.15% of net loans receivable, compared to 1.60% at December 31, 1997. Total nonperforming assets were 0.61% of total assets as of December 31, 1998, a decrease of 0.37% from 0.98% as of December 31, 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, 1998, the carrying value of real estate acquired in settlement of loans was $78 thousand, and consisted of three single-family properties.
Home Savings classifies its assets in accordance with federal regulations. Problem assets are classified as "special mention", "substandard," "doubtful" or "loss." "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that Home Savings will sustain some loss if the deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable and (ii) there is a high possibility of loss. An asset classified as "loss" is considered uncollectible and of such little value that its continuance as an asset of Home Savings is not warranted. Federal regulations also contain a "special mention" category, consisting of assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving management's close attention.
Home Savings classifies its commercial loans on a periodic basis, not less often than quarterly, according to a nine-level risk rating system that includes, in addition to the "substandard," "doubtful" and "loss," categories discussed above, further classifications of "prime," "good," "satisfactory," "fair," "watch" and "uncertain."
Commercial loans that are classified "prime," "good," "satisfactory" or "fair" possess levels of risk, if any, which are generally acceptable to Home Savings. "Watch" assets are the equivalent of "special mention" assets discussed above and a loan which is classified as "uncertain" represents a loan for which there is insufficient current information on the borrower to evaluate the primary source of payment. A loan may only be maintained as "uncertain" for 90 days while additional information is obtained, subject to one 90-day extension by the Commercial Loan Manager or a higher level officer.
The aggregate amounts of Home Savings' classified assets at the dates indicated were as follows:
At December 31,
-------------------------
1998 1997
------ ------
(In thousands)
Classified assets:
Substandard $8,034 $9,188
Doubtful
Loss 95 151
------ ------
Total classified assets $8,129 $9,339
------ ------
------ ------
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Home Savings analyzes each classified asset on a quarterly basis to determine whether changes in the classifications are appropriate under the circumstances. Such analysis focuses on a variety of factors, including the amount of, and the reasons for, any delinquency, the use of the real estate securing the loan, the financial condition of the borrower, and the appraised value of the real estate. As such factors change, the classification of the asset will change accordingly.
Home Savings establishes a general allowance for loan losses for any loan classified as special mention, substandard or doubtful. If an asset, or portion thereof, is classified as loss, Home Savings establishes a specific allowance for loss in the amount of 100% of the portion of the asset classified loss or charges off the portion of any real estate loan deemed to be uncollectible.
ALLOWANCE FOR LOAN LOSSES. Management reviews on a quarterly basis the allowance for loan losses as it relates to a number of relevant factors, including, but not limited to, growth and changes in the composition of the loan portfolio, trends in the level of delinquent and problem loans, current and anticipated economic conditions in the primary lending area, past loss experience, and possible losses arising from specific problem assets.
While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. In addition, Home Savings' determination as to the amount of its allowance for loan losses is subject to review by the 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 Home Savings' allowance for loan losses for the periods indicated:
Year ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $ 5,982 $ 5,040 $ 5,118 $ 5,111 $ 5,397
Provision for (recovery of) loan loss allowances 650 (1,546) (100)
Charge-offs:
Real estate (47) (403) (28) (373) (170)
Consumer (72) (43) (57) (21) (16)
Commercial (151) (60)
------- -------- ------ ------ ------
Total charge-offs (270) (446) (85) (394) ( 246)
------- -------- ------ ------ ------
Recoveries:
Real estate 25 2,930 4 365 52
Consumer 10 4 3 10 8
Commercial 1 26
------- -------- ------ ------ ------
Total recoveries 36 2,934 7 401 60
------- -------- ------ ------ ------
Net recoveries (charge-offs) (234) 2,488 (78) 7 (186)
------- -------- ------ ------ ------
Balance at end of year $ 6,398 $ 5,982 $5,040 $5,118 $5,111
------- -------- ------ ------ ------
------- -------- ------ ------ ------
Ratio of net recoveries (charge-offs)
to average net loans (0.04)% 0.40% (0.01)% 0.00% (0.04)%
Ratio of net recoveries (charge-offs) to
provision for (recovery of) loan loss 36.00% 160.93% N/A N/A (186.00)%
allowances
|
The following table sets forth the allocation of the allowance for loan losses by category. The allocations are based on management's assessment of the risk characteristics of each of the components of the total loan portfolio and are subject to change as and when the risk factors of each component change. The allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in any category.
At December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- -------------------- ------------------ --------------------- ----------------------
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 $4,220 83.30% $4,242 84.35% $4,561 86.53% $4,585 88.52% $4,593 88.77%
Consumer loans 611 5.97 673 6.57 322 6.18 376 6.37 349 6.05
Commercial loans 1,567 10.73 1,067 9.08 157 7.29 157 5.11 169 5.18
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,398 100.00% $5,982 100.00% $5,040 100.00% $5,118 100.00% $5,111 100.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
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INVESTMENT ACTIVITIES
Federal regulations and Ohio law permit Home Savings to invest in various types of investment securities, including interest-bearing deposits in other financial institutions, federal funds, U.S. Treasury and agency obligations, mortgage-backed securities, and certain other specified investments. The Board has adopted an investment policy which authorizes management to make investments in U.S. Treasury obligations, U.S. Federal agency and federally-sponsored corporation obligations, investment-grade municipal obligations, creditworthy, unrated securities issued by municipalities in which an office of Home Savings is located, investment-grade corporate debt securities, investment-grade asset-backed securities, certificates of deposit that are fully-insured by the FDIC, bankers' acceptances, federal funds, money market funds and interest-bearing time deposits with other financial institutions. Home Savings' investment policy is designed primarily to provide and maintain liquidity within regulatory guidelines, to maintain a balance of high quality investments to minimize risk, and to maximize
return without sacrificing liquidity and safety. The investment activities of Home Savings are supervised by Home Savings' Investment Committee and investment purchases are monitored weekly by the Executive Committee.
Home Savings maintains a significant portfolio of mortgage-backed securities in the form of Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) and FHLMC participation certificates. Mortgage-backed securities generally entitle Home Savings to receive a portion of the cash flows from an identified pool of mortgages. GNMA securities, FNMA securities and a majority of Home Savings' FHLMC securities are guaranteed by the issuing agency as to timely payment of principal and interest. The balance of Home Savings' FHLMC securities are guaranteed as to timely payment of interest and eventual payment of principal.
Home Savings purchases mortgage-backed securities primarily as an alternative to originating loans for its portfolio. In recent years, Home Savings' funds available for investment have exceeded the volume of loan originations based on loan demand in Home Savings' primary market area. Purchases of mortgage-backed securities enable Home Savings to generate positive interest rate spreads with minimal administrative expense and reduce credit risk due to the guarantees provided by the issuer. Mortgage-backed securities classified as available for sale also provide Home Savings with an additional source of liquid funds. Home Savings also invests generally in short maturity, medium-term corporate notes of investment grade. The notes, which include debentures and collateralized notes, generally provide a spread above the risk-free rate afforded by comparable maturity U.S. Treasury Securities.
Although Home Savings' mortgage-backed securities are generally guaranteed as to repayment of principal and interest, Home Savings is exposed to prepayment risk and reinvestment risk to the extent that the issuer redeems the security or that actual prepayments on the underlying mortgages are greater than estimated over the life of the security. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of the prepayments. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Prepayments may require Home Savings to make adjustments to the amortization of any premium or accretion of any discount relating to the securities, thereby changing the net yield on such securities. Home Savings reviews prepayment estimates for mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates and to determine the yield and estimated maturity of the mortgage-backed security portfolio.
To the extent that Home Savings' mortgage-backed securities prepay faster than anticipated in a declining rate environment, Home Savings may not be able to reinvest the proceeds of such prepayments at a comparable rate of return, which could adversely affect net interest income. Conversely, in a rising interest rate environment, prepayments may occur at a slower than projected pace, thereby extending the estimated life of the security and depriving Home Savings of the ability to reinvest cash flows at higher rates of interest. In addition, the market value of such securities may be adversely affected by changes in interest rates. As discussed below, a decline in the market value of securities classified as available for sale may adversely affect Home Savings' retained earnings.
Since the conversion, funds not currently utilized by UCFC for general corporate purposes including possible acquisitions are invested in similar investments previously discussed as authorized Home Savings' investments. In addition, UCFC invested in Eurodollars, which is a short-term investment. These types of investments provide a great deal of liquidity and flexibility as UCFC pursues alternative investment opportunities.
Investment and mortgage-backed securities are classified upon acquisition as available for sale or held to maturity. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss, net of taxes, reflected as a component of retained earnings. Securities classified as held to maturity are carried at amortized cost. Home Savings recognizes premiums and discounts in interest income over the period to maturity by the level yield method and realized gains or losses on the sale of debt securities based on the amortized cost of the specific securities sold. Security sales are recorded on a trade date basis.
The following table sets forth the amortized cost and fair value of UCFC and Home Savings' short-term investments, FHLB stock, investment securities and mortgage-backed securities at the dates indicated.
At December 31
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
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 $ 12,798 2.28% $12,798 2.25% $ 19,879 5.22% $ 19,879 5.15%
Money market fund 5,002 0.89 5,002 0.88
Eurodollars 133,813 23.79 133,813 23.58
Other 2,162 0.38 2,162 0.38
FHLB stock 11,958 2.13 11,958 2.11 11,136 2.93 11,136 2.89
Investment securities:
U.S. Treasury obligations 15,045 2.68 15,376 2.71 20,072 5.27 20,224 5.24
U.S. Government agency obligations 13,000 2.31 13,060 2.30 5,000 1.31 5,038 1.31
Corporate notes 82,249 14.63 82,452 14.53 14,019 3.68 14,140 3.66
Mortgage-backed securities
FHLMC 38,732 6.89 39,450 6.95 54,039 14.20 54,827 14.21
FNMA 19,691 3.50 19,811 3.49 5,265 1.39 5,345 1.39
Private issues 2,106 0.37 2,029 0.36 2,322 0.62 2,244 0.58
Collateralized mortgage obligations
FNMA 13,075 2.32 13,046 2.30
Private issues 24,753 4.40 24,554 4.33
-------- ------ -------- ------ -------- ------ -------- ------
Total available for sale 374,384 66.57 375,511 66.17 131,732 34.62 132,833 34.43
-------- ------ -------- ------ -------- ------ -------- ------
Held to maturity:
Investment securities:
U.S. Treasury obligations 4,993 0.89 5,016 0.88 4,968 1.31 5,013 1.30
Corporate notes
Mortgage-backed securities:
GNMA 7,057 1.25 7,413 1.30 9,077 2.39 9,492 2.46
FHLMC 114,208 20.31 116,443 20.52 156,988 41.25 158,939 41.19
FNMA 61,734 10.98 63,154 11.13 77,783 20.43 79,555 20.62
-------- ------ -------- ------ -------- ------ -------- ------
Total held to maturity 187,992 33.43 192,026 33.83 248,816 65.38 252,999 65.57
-------- ------ -------- ------ -------- ------ -------- ------
Total investment portfolio $562,376 100.00% $567,537 100.00% $380,548 100.00% $385,832 100.00%
-------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------
At December 31
----------------------------------------
1996
----------------------------------------
Amortized % of Fair % of
Cost Total Value Total
--------- ----- ----- -----
(Dollars in thousands)
Available for sale:
Short-term investments:
Federal funds $ 5,982 1.39% $ 5,982 1.39%
Money market fund
Eurodollars
Other
FHLB stock 10,370 2.42 10,370 2.40
Investment securities:
U.S. Treasury obligations 12,517 2.92 12,613 2.92
U.S. Government agency obligations
Corporate notes 2,026 0.47 2,046 0.47
Mortgage-backed securities
FHLMC 73,748 17.19 74,420 17.23
FNMA 7,489 1.75 7,613 1.76
Private issues 2,499 0.58 2,419 0.57
Collateralized mortgage obligations
FNMA
Private issues
-------- ------ -------- ------
Total available for sale 114,631 26.72 115,463 26.74
-------- ------ -------- ------
Held to maturity:
Investment securities:
U.S. Treasury obligations 14,967 3.49 15,051 3.49
Corporate notes 13,003 3.03 13,057 3.02
Mortgage-backed securities:
GNMA 11,163 2.60 11,627 2.69
FHLMC 184,363 42.98 184,838 42.81
FNMA 90,858 21.18 91,754 21.25
-------- ------ -------- ------
Total held to maturity 314,354 73.28 316,327 73.26
-------- ------ -------- ------
Total investment portfolio $428,985 100.00% $431,790 100.00%
-------- ------ -------- ------
-------- ------ -------- ------
|
The maturities of UCFC and Home Savings' short-term investments and investment securities at December 31, 1998, excluding FHLB stock, are indicated in the following table:
At December 31, 1998
-------------------------------------------------------------------------
After one through
One year or less five years Total
-------------------- ------------------ -------------------------------
Amortized Average Amortized Average Amortized Fair Average
cost yield cost yield cost value Yield
--------- ------- --------- ------- --------- ------ -------
(Dollars in thousands)
Short-term investments:
Federal funds $ 12,798 4.76% $ 12,798 $ 12,798 4.76%
Eurodollars 133,813 4.77 133,813 133,813 4.77
Money market fund 5,002 4.10 5,002 5,002 4.10
Liquid cash 2,162 4.75 2,162 2,162 4.75
--------- ------ --------- ---------- ----
Total short-term investments $153,775 4.75% $ 153,775 $153,775 4.75%
--------- ------ --------- ---------- ----
--------- ------ --------- ---------- ----
Investment securities:
Available for sale $12,552 5.85% $97,742 5.77% $110,294 $110,888 5.78%
Held to maturity 4,993 6.41 4,993 5,016 6.41
-------- ------ -------- ---- --------- --------- ----
Total investment securities $17,545 6.01% $97,742 5.77% $115,287 $115,904 5.81%
--------- ------ -------- ---- --------- --------- ----
--------- ------ -------- ---- --------- --------- ----
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SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of Home Savings' funds for use in lending and other investment activities. In addition to deposits, Home Savings derives funds from interest payments and principal repayments on loans and income on earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate in response to general interest rates and money market conditions. Home Savings may also borrow from the FHLB as a source of funds.
DEPOSITS. Deposits are attracted principally from within Home Savings' primary market area through the offering of a selection of deposit instruments, including regular passbook savings accounts, demand deposits, individual retirement accounts (IRAs), NOW accounts, money market accounts, and certificates of deposit. Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are monitored weekly by the Executive Committee. Home Savings does not use brokers to attract deposits. The amount of deposits from outside Home Savings' primary market area is not significant.
The following table sets forth the dollar amount of deposits in the various types of accounts offered by Home Savings at the dates indicated:
At December 31,
------------------------------------------------------------------------------------
1998 1997
-------------------------------------- --------------------------------------
Percent Weighted Percent Weighted
of total average of total average
Amount deposits rate Amount deposits rate
------ -------- -------- ------ -------- --------
(Dollars in thousands)
Checking accounts:
Interest-bearing $ 69,284 8.91% 1.86% $ 58,707 6.62% 2.03%
Noninterest-bearing 6,933 0.89 5,387 0.61
Savings accounts 224,840 28.92 2.50 243,588 27.47 2.99
Money market accounts 44,764 5.76 2.57 56,727 6.40 2.99
-------- -------- ---------- --------
Total transaction accounts 345,821 44.48 364,409 41.10
Certificates of deposit:
4.00% or less 506 0.06 448 0.05
4.01% - 6.00% 374,090 48.11 415,045 46.80
6.01% - 8.00% 57,166 7.35 106,835 12.04
8.01% - 10.00% 71 0.01
-------- ------- --------- -------
Total certificates of deposit 431,762 55.52 5.35 522,399 58.90 5.78
-------- ------- --------- -------
Total deposits $777,583 100.00% 4.02% $886,808 100.00% 4.56%
-------- ------- --------- -------
-------- ------- --------- -------
|
Total deposits decreased by $109.2 million, or 12.3%, from December 31, 1997, to December 31, 1998, primarily due to deposits withdrawn for the purchase of UCFC shares in the Conversion.
The following table shows rate and maturity information for Home Savings' certificates of deposit at December 31, 1998:
At December 31, 1998
------------------------------------------------------------
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 $ 462 $ $ 9 $ 34 $ 506
4.01% to 6.00% 262,865 62,339 26,677 22,209 374,090
6.01% to 8.00% 8,223 20,907 7,894 20,143 57,166
-------- ------- ------- ------- --------
Total certificates of deposit $271,550 $83,246 $34,580 $42,386 $431,762
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
Percent of total certificates
of deposit 62.89% 19.28% 8.01% 9.82% 100.00%
|
At December 31, 1998, approximately $271.6 million of Home Savings' certificates of deposit mature within one year. Based on past experience and Home Savings' prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with Home Savings at maturity. If, however, Home Savings is unable to renew the maturing certificates for any reason, borrowings of up to $235 million are available from the FHLB of Cincinnati.
The following table presents the amount of Home Savings' certificates of deposit of $100 thousand or more by the time remaining until maturity at December 31, 1998:
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 9,994
Over 3 months to 6 months 5,701
Over 6 months to 12 months 7,871
Over 12 months 14,017
--------
Total $ 37,583
--------
--------
|
Management believes that a substantial percentage of the above certificates will be renewed with Home Savings at maturity.
The following table sets forth Home Savings' deposit account balance activity for the periods indicated:
Year ended December 31,
-----------------------------
1998 1997
---- ----
(Dollars in thousands)
Beginning balance $ 886,808 $ 932,060
Net decrease in deposits (145,153) (85,868)
---------- ----------
Net deposits before interest
credited 741,655 846,192
Interest credited 35,928 40,616
---------- ----------
Ending balance $ 777,583 $ 886,808
---------- ----------
---------- ----------
Net decrease $(109,225) $ (45,252)
---------- ----------
---------- ----------
Percent decrease (12.32)% (4.86)%
|
BORROWINGS. The FHLB system functions as a central reserve bank providing credit for its member institutions and certain other financial institutions. As a member in good standing of the FHLB of Cincinnati, Home Savings is authorized to apply for advances 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 (QTL) test. If an association meets the QTL test, Home Savings will be eligible for 100% of the advances it would otherwise be eligible to receive. If an association does not meet the QTL test, the association will be eligible for such advances only to the extent it holds specified QTL test assets. At December 31, 1998, Home Savings was in compliance with the QTL test. Although Home Savings may borrow up to $235 million from the FHLB, there are no outstanding advances.
COMPETITION
Home Savings faces competition for deposits and loans from other savings and loan associations, credit unions, banks and mortgage originators in Home Savings' primary market area. The primary factors in competition for deposits are customer service, convenience of office location and interest rates. Home Savings competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. Home Savings does not offer all of the products and services offered by some of its competitors, particularly commercial banks.
EMPLOYEES
At December 31, 1998, Home Savings had 418 full-time equivalent employees. Home Savings believes that relations with its employees are good. Home Savings offers health, life and disability benefits to all employees, a 401(k) plan,
an employee stock ownership plan and a post-retirement health plan for its eligible employees. Home Savings has a defined benefit pension plan; however, as of December 31, 1998, the plan was amended to freeze benefit accruals. None of the employees of Home Savings is represented by a collective bargaining unit.
YEAR 2000 CONSIDERATIONS
UCFC and Home Savings are aware of the potential year 2000 related problems that may affect the computers which control or operate Home Savings' operating systems, facilities and infrastructure. To prepare for the change, Home Savings formed a year 2000 compliance initiative committee to oversee all necessary corrective activities. A year 2000 Project Plan was initiated to identify potential operational and business risks, assess systems and equipment, perform and test all renovations, and implement renovated systems. If the disruption of any system could inhibit Home Savings from interacting with or serving its customers, then it has been identified as "mission critical". The year 2000 compliance committee has determined that the greatest potential impact upon Home Savings and UCFC is the effect of the year 2000 problem on Home Savings' core transaction processing system which is managed by an outside data processing service bureau. The outside service bureau, working in conjunction with Home Savings, has installed and successfully tested a year 2000 compliant processing system.
All remaining third-party applications and internally developed applications will be tested for year 2000 performance during the first quarter of 1999. This testing will determine the extent to which all such applications integrate compatibility and function reliably in Home Savings' existing system environment. Home Savings anticipates that testing will be completed by March 31, 1999, and that any identified application and/or system incompatibilities will be remediated by June 30, 1999.
In addition to comprehensive internal preparations, Home Savings is developing contingency plans for all "mission critical" systems which could be disrupted by year 2000 failures outside of its control. The impact of various external failures is being analyzed, including disruption of utilities and essential services. Alternative procedures are being developed, documented and tested which would enable Home Savings to maintain delivery of products and services to customers. Such contingency plans include automated and manual procedures for controlling cash reserves, recording customer account transactions, providing back-up voice and data communications, reacting to utility interruptions, engaging external check processing services, ensuring adequate or increased security levels, and maintaining other necessary daily operations.
As of December 31, 1998, Home Savings had incurred costs of approximately $204 thousand in connection with its year 2000 preparedness. Additional costs to complete this project are currently estimated to be $181 thousand.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio, Home Savings is subject to regulation, examination and oversight by the OTS and the Division. Because Home Savings' deposits are insured by the FDIC, Home Savings is also subject to general oversight by the FDIC. Home Savings must file periodic reports with the OTS, the Division and the FDIC concerning its activities and financial condition. Examinations are conducted periodically by federal and state regulators to determine whether Home Savings is in compliance with various regulatory requirements and is operating in a safe and sound manner. Home Savings is a member of the FHLB of Cincinnati.
UCFC is a savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (HOLA). Consequently, UCFC is subject to regulation, examination, and oversight by the OTS and is required to submit periodic reports to the OTS. Because UCFC and Home Savings are corporations organized under Ohio law, they are also subject to the provisions of the Ohio Revised Code applicable to corporations generally, including laws which restrict takeover bids, tender offer and control-share acquisitions involving public companies which have significant ties to Ohio.
Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations. Pursuant to such legislation, Congress may eliminate the OTS and Home Savings may be regulated under federal law as a bank or be required to change its charter. Such change in regulation or charter would likely change the range of activities in which Home Savings may engage and would probably subject Home Savings to more regulation by the FDIC. In addition, UCFC might become subject to different holding company regulations limiting the activities in which UCFC may engage and subjecting UCFC to additional regulatory requirements, including separate capital requirements. At this time, UCFC cannot predict when or whether Congress may actually pass legislation regarding UCFC's
and Home Savings' regulatory requirements or charter. Although such legislation may change the activities in which either UCFC and Home Savings may engage, it is not anticipated that the current activities of UCFC or Home Savings will be materially affected by those activity limits.
OHIO SAVINGS AND LOAN LAW
The Division 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 Division also has approval authority over any mergers or acquisitions of control of Ohio savings and loan associations. The Division may initiate certain supervisory measures or formal enforcement actions against Ohio associations. Ultimately, if the grounds provided by law exist, the Division may place an Ohio association in conservatorship or receivership.
The Division conducts regular examinations of Home Savings approximately once every eighteen months. Such examinations are usually conducted jointly with one or both federal regulators. The Division imposes assessments on Ohio associations based on their asset size to cover the cost of supervision and examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is responsible for the regulation and supervision of all federally chartered savings and loan associations and all other savings and loan associations the deposits of which are insured by the FDIC. The OTS issues regulations governing the operation of savings and loan associations, regularly examines such associations and imposes assessments on savings associations based on their asset size to cover the costs of this supervision and examination. The OTS also may initiate enforcement actions against savings and loan associations and certain persons affiliated with them for violations of laws or regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the OTS may appoint a conservator or receiver for a savings and loan association.
Savings associations are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosures, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of an association to open a new branch or engage in a merger. Community reinvestment regulations evaluate how well and to what extent an institution lends and invests in its designated service area, with particular emphasis on low- to moderate-income communities and borrowers in that area. Home Savings has received a "satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. Home Savings is required by OTS regulations to meet certain minimum capital requirements. Current capital requirements call for tangible capital of 1.5% of adjusted total assets, core capital (which for Home Savings consists solely of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for Home Savings consists of core capital and general valuation allowances) of 8.0% of risk-weighted assets (assets, including certain off-balance sheet items, are weighted at percentage levels ranging from 0% to 100% depending on the relative risk).
The 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, Home Savings will be required to deduct one-half of such excess exposure from its total capital when determining its risk-based capital. Pending implementation of the interest rate risk component, the 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.
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. 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. Home Savings' capital at December 31, 1998 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 Home Savings at December 31, 1998, was approximately $399.3 million, or 39.5%, which exceeded the applicable 4% liquidity requirement by approximately $358.8 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to maintain a specified level of investments in assets that are designated as qualifying thrift investments (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. Effective September 30, 1996, a savings association may also qualify as a QTL by meeting the definition of "domestic building and loan association" under the Internal Revenue Code of 1986, as amended (Code). In order to be considered a domestic building and loan association under the Code, at least 60% of the institution's assets must consist of specified assets (generally loans secured by residential real estate or deposits, educational loans, cash, and certain governmental obligations). The 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, 1998, Home Savings met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount that a savings association can lend to one borrower to an amount equal to 15% of the association's Lending Limit Capital. A savings association may lend to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." Certain types of loans are not subject to this limit. In applying the limit on loans to one borrower, the regulations require that loans to certain related borrowers be aggregated. A general exception to the 15% limit permits loans of any type to one borrower up to $500,000.
Based on such limits, Home Savings was able to lend approximately $45.9 million to one borrower at December 31, 1998. The largest amount Home Savings had outstanding to one borrower at December 31, 1998, was $11.8 million, which consisted of one loan secured by a first mortgage lien on a freezer warehouse. At December 31, 1998, such loan was performing in accordance with its terms.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers, directors, and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders, and their related interests cannot exceed Home Savings' Lending Limit Capital (or 200% of Lending Limit Capital for qualifying institutions with less than $100 million in assets). Most loans to directors, executive officers, and principal shareholders must be approved in advance by a majority of the "disinterested" members of the Board with any "interested" director not participating. All loans to directors, executive officers, and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. Home Savings was in compliance with such restrictions at December 31, 1998.
All transactions between a savings association and its affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (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. UCFC is an affiliate of Home Savings. Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a savings association or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, (ii) limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (iii) require that all such transactions be on terms substantially the same, or at least as favorable to the association, as those provided in transactions with a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee, and other similar types of transactions. In addition to the limits in Sections 23A and 23B, a savings association may not make any loan or other extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for a bank holding company and may not purchase or invest in securities of any affiliate except shares of a subsidiary. Home Savings was in compliance with these requirements and restrictions at December 31, 1998.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions, including dividend payments. An association which has converted from mutual to stock form is prohibited from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the net worth of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. OTS regulations also establish a three-tier system limiting capital distributions according to ratings of associations based on their capital level and supervisory condition.
Tier 1 consists of associations that, before and after the proposed distribution, meet their fully phased-in capital requirements. Associations in this category may make capital distributions during any calendar year up to the greater of (i) 100% of net income, current year-to-date, plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its fully phased-in capital requirement for such capital component, as measured at the beginning of the calendar year, and (ii) the amount authorized for a Tier 2 association. A Tier 1 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association. Home Savings meets the requirements for a Tier 1 association and has not been notified of any need for more than normal supervision.
Tier 2 consists of associations that, before and after the proposed distribution, meet their current minimum, but not fully phased-in, capital requirements. Associations in this category may make capital distributions of up to 75% of net income over the most recent four quarters. Tier 3 associations do not meet current minimum capital requirements and must obtain OTS approval of any capital distribution. Tier 2 associations that propose to make a capital distribution in excess of the noted safe harbor level must also obtain OTS approval. Tier 2 associations proposing to make a capital distribution within the safe harbor provisions and Tier 1 associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution.
As a subsidiary of UCFC, Home Savings is required to give the OTS 30 days' notice prior to declaring any dividend on its stock. The OTS may object to the distribution during such 30-day period based on safety and soundness concerns. Home Savings did not pay any dividends to UCFC in 1998.
HOLDING COMPANY REGULATION. UCFC is a savings and loan holding company within the meaning of the HOLA. As such, UCFC has registered with the OTS and is 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.
UCFC is a unitary savings and loan holding company. Under current law, there are generally no restrictions on the activities of unitary savings and loan holding companies and such companies are the only financial institution holding companies which may engage in commercial, securities, and insurance activities without limitation. The broad latitude under current law can be restricted if the 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 UCFC and its affiliates may be imposed on the savings and loan association. Notwithstanding the foregoing rules as to permissible business activities of a unitary savings and loan holding company, if the savings and loan association subsidiary of a holding company fails to meet the QTL, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. At December 31, 1998, Home Savings met the QTL.
If UCFC were to acquire control of another savings institution, other
than through a merger or other business combination with Home Savings, UCFC
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 UCFC and any of its subsidiaries
(other than Home Savings or other subsidiary savings and loan associations)
would thereafter be subject to activity restrictions.
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 Home Savings to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). As under prior law, the 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.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF HOLDING CO. AND THRIFT. In addition to the Ohio law limitations on the merger with, and acquisition of, UCFC, federal limitations generally require regulatory approval of acquisitions at specified levels. Under pertinent federal law and regulations, no person, directly or indirectly, or acting in concert with others, may acquire control of Home Savings or UCFC without 60 days' prior notice to the OTS. "Control" is generally defined as having more than 25% ownership or voting power; however, ownership or voting power of more than 10% may be deemed "control" if certain factors are in place. If the acquisition of control is by a company, the acquiror must obtain approval, rather than give notice, of the acquisition as a savings and loan holding company.
In addition, any merger of Home Savings must be approved by the OTS as well as the Division. Further, any merger of UCFC in which UCFC is not the resulting company must also be approved by both the OTS and the Division.
FDIC REGULATIONS
DEPOSIT INSURANCE AND ASSESSMENTS. 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 (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. Home Savings' 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 Home Savings, and has authority to initiate enforcement actions against federally insured savings associations if the FDIC does not believe the OTS has taken appropriate action to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each fund. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $46.5 million (subject to an exemption of up to $4.9 million), and of 10% of net transaction accounts over $46.5 million. At December 31, 1998, Home Savings was in compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. Home Savings 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 Home Savings' residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, and 5% of its advances from the FHLB. Home Savings is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $12.0 million at December 31, 1998.
FHLB advances to member institutions who meet the QTL Test are generally limited to the lower of (i) 50% of the member's assets or (ii) 20 times the member's investment in FHLB stock. At December 31, 1998, Home Savings' maximum limit on advances was approximately $235 million. The granting of advances is also subject to the FHLB's collateral and credit underwriting guidelines.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the U.S. Government or an agency thereof; deposits in any FHLB; or other real estate related collateral (up to 30% of the member association's capital) acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance.
TAXATION
FEDERAL TAXATION
UCFC and Home Savings are each subject to the federal tax laws and regulations which apply to corporations generally. In addition to the regular income tax, UCFC and Home Savings may be subject to an alternative minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum taxable income" (which is the sum of a corporation's regular taxable income, with certain adjustments, and tax preference items), less any available exemption. Such tax preference items include interest on certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the amount by which a corporation's "adjusted current earnings" exceeds its alternative minimum taxable income computed without regard to these preference items and prior to reduction by net operating losses, is included in alternative minimum taxable income. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax. Payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain "small corporations" for tax years beginning after December 31, 1998.
Based on Home Savings average gross receipts of approximately $85.2 million for the three tax years immediately proceeding, Home Savings would not qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (Small
Business Act), which was signed into law on August 21, 1996, certain thrift
institutions, were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method of
Section 166 of the Code, or one of the two reserve methods of Section 593 of the
Code. The reserve methods under Section 593 of the Code permitted a thrift
institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable income reserve method of accounting for bad debts by thrift institutions, effective for taxable years beginning after December 31, 1995. Thrift institutions that would be treated as small banks are allowed to utilize the experience method applicable to such institutions, while thrift institutions that are treated as large banks are required to use only the specific charge off method.
A thrift institution required to change its method of computing reserves for bad debts will treat such change as a change in the method of accounting, initiated by the taxpayer, and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured with respect to such change. Generally, the amounts to be recaptured will be determined solely with respect to the "applicable excess reserves" of the taxpayer. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to the residential loan requirement described below. In the case of a thrift institution that becomes a large bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans (generally loans secured by improved real estate) and its reserve for losses on nonqualifying loans (all other types of loans) as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., 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 then its base amount. The "base amount" generally is the average of the principal origination amounts of the residential loans made by the thrift during the six most recent tax years beginning before January 1, 1996. A residential loan is a loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by residential real and church property and certain mobile homes), but only to the extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture in
the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by Home Savings to UCFC
is deemed paid out of its pre-1988 reserves under these rules, the pre-1988
reserves would be reduced and Home Savings gross income for tax purposes would
be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of December 31, 1998, Home
Savings' pre-1988 reserves for tax purposes totaled approximately $14.4 million.
Home Savings believes it had approximately $160.0 million of accumulated
earnings and profits for tax purposes as of December 31, 1998, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the
payment of dividends are met. No representation can be made as to whether Home Savings will have current or accumulated earnings and profits in subsequent years.
The tax returns of Home Savings have been audited or closed without audit through fiscal year 1994. In the opinion of management, any examination of open returns would not result in a deficiency which could have a material adverse effect on the financial condition of Home Savings.
OHIO TAXATION
UCFC is subject to the Ohio corporation franchise tax, which, as applied to UCFC, 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 thousand of computed Ohio taxable income and 8.9% of computed Ohio taxable income in excess of $50 thousand and (ii) 0.582% times taxable net worth. For returns filed in 1999 and thereafter the rate of tax is the greater of (i) 5.1% on the first $50 thousand of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50 thousand or (ii) .400% times taxable net worth, not to exceed $150 thousand.
A special litter tax is also applicable to all corporations, including UCFC, subject to the Ohio corporation franchise tax other than "financial institutions." Where the franchise tax is paid on the net income basis, the litter tax is equal to 0.11% of the first $50 thousand of computed Ohio taxable income and 0.22% of computed Ohio taxable income in excess of $50 thousand.
UCFC, effective for its 1999 Ohio franchise tax return, has elected to be taxed as a qualified holding company in the State of Ohio. In order to be taxed as a qualified holding company, certain requirements must be satisfied. A qualified holding company is exempt from the net worth base of the franchise tax but is not exempt from the net income base.
Home Savings is a "financial institution" for State of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.5% of Home Savings' apportioned book net worth, determined in accordance with GAAP, less any statutory deduction. For tax year 1999, however, the franchise tax on financial institutions will be 1.4% of the taxable book net worth and for tax year 2000 and years thereafter the tax will be 1.3% of the taxable book net worth. As a "financial institution," Home Savings is not subject to any tax based upon net income or net profits imposed by the State of Ohio.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31, 1998, regarding the properties on which the main office and the branch offices of Home Savings are located:
Owned or Year Net book
Location leased opened value Deposits
-------- -------- ------ -------- --------
(In thousands)
275 Federal Plaza West Owned 1919 $1,017 $72,015
Youngstown, Ohio
32 State Street Owned 1916 304 85,469
Struthers, Ohio
4005 Hillman Way Owned 1958 501 99,963
Boardman, Ohio
650 East State Street Owned 1925 176 63,688
Salem, Ohio
6000 Mahoning Avenue Leased 1959 10 71,926
Austintown, Ohio
7525 Market Street Owned 1971 525 90,244
Boardman, Ohio
4259 Kirk Road Owned 1975 584 77,091
Austintown, Ohio
202 South Main Street Owned 1975 224 61,932
Poland, Ohio
3500 Belmont Avenue Owned 1976 318 55,357
Youngstown, Ohio
29 North Broad Street Owned 1977 294 29,709
Canfield, Ohio
980 Great East Plaza Leased 1980 12 19,426
Niles, Ohio
127 North Market Street Owned 1987 129 29,723
East Palestine, Ohio
210 West Lincoln Way Owned 1987 320 16,543
Lisbon, Ohio
148725 South Avenue Ext. Owned 1997 807 4,497
Columbiana, Ohio
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ITEM 3. LEGAL PROCEEDINGS
Home Savings is not presently involved in any material legal proceedings. From time to time, Home Savings is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by Home Savings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There were 34,715,625 common shares of UCFC stock issued and 32,129,463 shares outstanding as of March 4, 1999. The Holding Company's common stock trades on The Nasdaq Stock Market -Registered Trademark- under the symbol UCFC. Quarterly stock price and dividends declared are shown in the following table.
Market Price and Dividends
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First Second Third Fourth
Quarter Quarter Quarter Quarter 1998
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1998
High N/A N/A $18.130 $15.000 $18.130
Low N/A N/A 13.500 12.880 12.880
Close N/A N/A 14.000 14.880 14.880
Dividends declared and paid N/A N/A N/A 0.075 0.075
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As of March 29, 1999, there were approximately 16,683 holders of UCFC Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the Annual Report to Shareholders of UCFC (Annual Report) under the caption "Selected Financial Data and Other Data" is incorporated herein by reference and attached hereto as part of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference and attached hereto as part of Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Annual Report under the caption "Asset and Liability Management and Market Risk" is incorporated herein by reference and attached hereto as part of Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated Financial Statements appearing in the Annual Report and the report of Deloitte & Touche LLP dated January 29, 1999, are incorporated herein by reference and attached hereto as part of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On November 20, 1997, the Board of Directors of Home Savings approved a change of Home Savings' independent public auditors from Packer, Thomas & Co. to Deloitte & Touche LLP. Packer, Thomas & Co. served as Home Savings' independent public 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 report of Packer, Thomas & Co. on the financial statements of Home Savings for the fiscal year ended December 31, 1996, did not contain any adverse opinion or disclaimer of opinion nor was it qualified or modified as to audit scope or accounting principles nor did it include an explanatory paragraph for material uncertainties. There has not been any disagreement between Packer, Thomas & Co. and Deloitte & Touche LLP on any matter of accounting principles or practices, consolidated financial statement disclosure or audit scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement for the 1999 Annual Meeting of Shareholders of UCFC (Proxy Statement), filed with the Securities and Exchange Commission (Commission) on March 30, 1999, under the captions "Proposal One - Election of Directors" and "Executive Officers," is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors - Certain Transactions" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Voting Securities and Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) EXHIBITS
3.1 Articles of Incorporation
3.2 Amended Code of Regulations
10 Material Contracts
11 Statement Regarding Computation of Per Share Earnings
13 Portions of the 1998 Annual Report to Shareholders
20 Proxy Statement for 1999 Annual Meeting of Shareholders
21 Subsidiaries of Registrant
27 Financial Data Schedule
99 Independent Auditors' Report from Packer, Thomas & Co.
(b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(c) REPORTS ON FORM 8-K. On October 21, 1998 an 8-K was filed for Item 5, Other Events, providing the third quarter financial information news release.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED COMMUNITY FINANCIAL CORP.
By: /S/ Douglas M. McKay
-----------------------------------
Douglas M. McKay, President
(Duly Authorized Representative)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
/S/ Douglas M. McKay /S/ Richard M. Barrett
------------------------------------------- --------------------------------------------------
Douglas M. McKay, President and Director Richard M. Barrett, Director
Date: March 29, 1999 Date: March 29, 1999
/S/ John F. Zimmerman, Jr. /S/ Gary Keller
------------------------------------------- --------------------------------------------------
John F. Zimmerman, Jr., Director Gary Keller, Director
Date March 29, 1999 Date: March 29, 1999
/S/ Herbert F. Schuler, Sr. /S/ Patrick A. Kelly
------------------------------------------- --------------------------------------------------
Herbert F. Schuler, Sr., Director Patrick A. Kelly, Treasurer (Principal Financial
Officer)
Date: March 29, 1999 Date: March 29, 1999
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INDEX TO EXHIBITS
EXHIBIT NUMBER
3.1 Articles of Incorporation Incorporated by reference to the Registration Statement on
Form S-1 filed by UCFC on March 13, 1998 (S-1) with the
Securities and Exchange Commission (SEC), Exhibit 3.1
3.2 Amended Code of Regulations
10.1 The Home Savings and Loan Company of Youngstown, Incorporated by reference to the Pre-Effective Amendment,
Ohio Employee Stock Ownership Plan Exhibit 10.3
10.2 Employment Agreement between The Home Savings and
Loan Company of Youngstown, Ohio and Douglas M. McKay,
dated December 17, 1998.
10.3 Employment Agreement between The Home Savings
and Loan Company of Youngstown, Ohio and Donald
J. Varner, dated December 17, 1998.
10.4 Employment Agreement between The Home Savings
and Loan Company of Youngstown, Ohio and Patrick
A. Kelly, dated December 17, 1998.
11 Statement Regarding Computation of Per Share Earnings Incorporated by reference to Note 16 to the Financial
Statements included in the Annual Report in Exhibit 13
13 Portions of the 1998 Annual Report to Shareholders
20 Proxy Statement for 1999 Annual Meeting of Shareholders Incorporated by reference to the Proxy Statement, filed
with the Securities and Exchange Commission
on March 30, 1999
21 Subsidiaries of Registrant
27 Financial Data Schedule
99 Independent Auditors' Report from Packer, Thomas & Co.
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AMENDED
CODE OF REGULATIONS
OF
UNITED COMMUNITY FINANCIAL CORP.
(May 13, 1998)
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...............................................3
1.11. Proxies.........................................................3
1.12. Inspectors of Election..........................................3
ARTICLE TWO
DIRECTORS
2.01. Authority and Qualifications....................................4
2.02. Number of Directors and Term of Office..........................4
2.03. Nomination......................................................4
2.04. Election........................................................5
2.05. Removal.........................................................5
2.06. Vacancies.......................................................6
2.07. Meetings........................................................6
2.08. Notice of Meetings..............................................6
2.09. Waiver of Notice................................................7
2.10. Quorum..........................................................7
2.11. Executive Committee.............................................7
2.12. Compensation....................................................7
2.13. Bylaws..........................................................7
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ARTICLE THREE
OFFICERS
3.01. Officers........................................................8
3.02. Tenure of Office................................................8
3.03. Duties of the Chairman of the Board.............................8
3.04. Duties of the President.........................................8
3.05. Duties of the Vice Presidents...................................8
3.06. Duties of the Secretary.........................................9
3.07. Duties of the Treasurer.........................................9
ARTICLE FOUR
SHARES
4.01. Certificates.....................................................9
4.02. Transfers........................................................9
4.03. Transfer Agents and Registrars..................................10
4.04. Lost, Wrongfully Taken or Destroyed Certificates................10
4.05. Uncertificated Shares...........................................10
ARTICLE FIVE
INDEMNIFICATION AND INSURANCE
5.01. Mandatory Indemnification.......................................11
5.02. Court-Approved Indemnification..................................11
5.03. Indemnification for Expenses....................................12
5.04 Determination Required..........................................12
5.05. Advances for Expenses...........................................12
5.06. Article Five Not Exclusive......................................13
5.07. Insurance.......................................................13
5.08. Certain Definitions.............................................13
5.09. Venue...........................................................14
ARTICLE SIX
MISCELLANEOUS
6.01. Amendments......................................................14
6.02. Action by Shareholders or Directors Without a Meeting...........14
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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
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-
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 five.
(B) A term may not exceed one year. 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 five (5) and no reduction in the number of directors shall of itself have the effect of shortening the term of any incumbent director.
(E) The directors shall be divided into two classes if the number of directors is six, seven or eight, and each director shall be elected for a term of two years. The directors shall be divided into three classes if the number of directors is nine or more, and each director shall be elected for a term of three years. Each class shall consist of no fewer than three members, and each class shall be as nearly equal in number as the then total number of directors shall permit, with the terms of office of all members of one class expiring each year.
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.
(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.
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 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.
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 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
(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, 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 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 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.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 17th day of December, 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 Douglas M. McKay, an individual (hereinafter referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the President and Chief Executive Officer 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 President and Chief Executive Officer of the COMPANY;
WHEREAS, the EMPLOYEE desires to continue to serve as the President and Chief Executive Officer 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 President and Chief Executive Officer of the COMPANY. The term of this AGREEMENT shall commence on January 1, 1999, and shall end on December 31, 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. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall serve as the President and Chief Executive Officer 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 President and Chief Executive Officer or which, consistent therewith, are delegated to him by the Board of Directors. Such duties may include, but shall not be limited to, developing organizational policies and strategic business plans and objectives, directing and coordinating corporate programs, supervising and evaluating senior management members.
(b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE 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) TOTAL COMPENSATION. The EMPLOYEE shall receive during the TERM total compensation established by the Salary Committee of the Board of Directors. In making its determination, the Salary Committee shall consider the average total compensation for the Chief Executive Officers of a peer group of companies. The companies comprising the peer group shall be selected by Deloitte & Touche LLP or another third party consultant acceptable to the EMPLOYEE and the compensation committee of the Board of Directors of the COMPANY. The selection of the peer group shall take into account the asset size and performance ratios of the COMPANY, and such other factors as the consultant considers appropriate under the circumstances. It is the intent of the COMPANY and the EMPLOYEE that the EMPLOYEE's total compensation shall include the following components: (1) a base salary, payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. The percentage of total compensation derived from each of the three components described in the preceding sentence shall be
comparable to the peer group average. Until the COMPANY has implemented a compensation program which includes the three components described above, the EMPLOYEE shall receive an annual salary of not less than $309,000, payable in equal installments not less often than monthly, and cash incentive compensation payable not less often than annually.
(b) ANNUAL REVIEW. On or before December 31st of each year, commencing in 1999, the total compensation of the EMPLOYEE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $309,000, based upon the EMPLOYEE's individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in the minutes of the Board of Directors of the COMPANY.
(c) EMPLOYEE BENEFIT PROGRAMS. During the TERM, the EMPLOYEE shall be entitled to participate in all formally established employee benefit, bonus, pension, insurance 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. 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 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 as of the date of this AGREEMENT or the EMPLOYEE's benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (A), (B) and (C) of this Section 4(a) shall govern the obligations of the 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 (hereinafter defined) for any reason other than CAUSE or is terminated by the EMPLOYEE as provided in Section 4(a)(ii) above, then the following shall occur:
(I) The 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, as described in Section 3(c) of this AGREEMENT, in which the EMPLOYEE was a participant prior to the effective date of the termination of his employment as if the EMPLOYEE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor
shall any amounts received from other employment or otherwise by the EMPLOYEE offset in any manner the obligations of the 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 total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EMPLOYEE in the twelve month period prior to the termination of employment;
(II) The COMPANY shall continue to provide to the EMPLOYEE, at the COMPANY's expense, health, life, disability and other benefits, as described in Section 3(c) of this AGREEMENT, substantially equal to those being provided to the EMPLOYEE at the date of termination of his employment until the earliest to occur of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and
(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. Section 1828(k) and any regulations promulgated thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean any one of the following events:
(i) the acquisition of ownership or power to vote more than 25% of the voting stock of the COMPANY or the HOLDING COMPANY;
(ii) the acquisition of the ability to control the election of a majority of the directors of the COMPANY or the HOLDING COMPANY;
(iii) during any period of three or less consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY;
(iv) the acquisition by any person or entity of "conclusive control" of the COMPANY within the meaning of 12 C.F.R. Section 574.4(a), or the acquisition by any person or entity of "rebuttable control" within the meaning of 12 C.F.R. Section 574.4(b) that has not been rebutted in accordance with 12 C.F.R. Section 574.4(c); or
(v) an event that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT.
For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EMPLOYEE and any person or persons with whom the EMPLOYEE is "acting in concert" within the meaning of 12 C.F.R. Part 574.
For purposes of this AGREEMENT, an event shall be deemed to have occurred "in connection with a CHANGE OF CONTROL" if such event occurs within one year before or after a CHANGE OF CONTROL.
(e) TERMINATION BY EMPLOYEE. If the EMPLOYEE terminates this
AGREEMENT without the written consent of the COMPANY, other than pursuant to
Section 4(a)(ii) of this AGREEMENT, the EMPLOYEE shall not engage in the
financial institutions business as a director, officer, employee or consultant
for any business or enterprise which competes with the principal business of the
COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning,
Trumbull and Columbiana Counties or any other geographic area in which the
COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this
AGREEMENT. This provision shall not apply in the event of the termination of
the employment of the EMPLOYEE by the EMPLOYER prior to the expiration of the
TERM or
the termination of the employment of the EMPLOYEE by the EMPLOYEE pursuant to
Section 4(a)(ii) of this AGREEMENT.
5. SPECIAL REGULATORY EVENTS. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EMPLOYEE shall be as follows in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY's affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY's obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY shall pay the EMPLOYEE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the COMPANY's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under
this AGREEMENT shall terminate as of the effective date of such order; provided,
however, that vested rights of the EMPLOYEE shall not be affected by such
termination;
(c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EMPLOYEE shall not be affected;
(d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Director of the Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority contained in Section 13(c) of the FDIA or (ii) by the Director of the OTS, or his or her designee, at any time the Director of the OTS approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Director of the OTS to be in an unsafe or unsound condition; provided, however that no vested rights of the EMPLOYEE shall not be affected by any such termination; and
(e) The provisions of this Section 5 are governed by the requirements
of 12 C.F.R. Section 563.39(b) and in the event that any statements in this
Section 5 are inconsistent with 12 C.F.R. Section 563.39(b), the provisions of
12 C.F.R. Section 563.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all of their
obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect.
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EMPLOYEE agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use or such information is otherwise legally in the public domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the COMPANY, its subsidiaries, or affiliates, or to any of the businesses operated by them, and the EMPLOYEE confirms that such information constitutes the exclusive property of the COMPANY. The EMPLOYEE shall not otherwise knowingly act or conduct himself to the material detriment of the COMPANY, its subsidiaries, or affiliates or in a manner which is inimical or contrary to the interests of the COMPANY.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives without the COMPANY's prior written consent; provided, however, that nothing in this Section 8 shall preclude the EMPLOYEE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or other legal representatives of the EMPLOYEE or his estate from assigning any rights hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to the benefit of, the EMPLOYEE and the COMPANY and their respective permitted successors and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto.
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as if this AGREEMENT had not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EMPLOYEE.
17. NOTICES. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows:
If to the COMPANY:
The Home Savings and Loan Company
of Youngstown, Ohio
275 Federal Plaza West
P.O. Box 1111
Youngstown, Ohio 44501-1111
If to the EMPLOYEE:
Mr. Douglas M. McKay
227 Griswold Drive
Youngstown, Ohio 44512
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
/s/ Mary Jane Botsko By: /s/ Donald J. Varner
---------------------------- -------------------------------
Donald J. Varner
Senior Vice President and Corporate Secretary
|
Attest:
/s/ Mary Jane Botsko /s/ Douglas M. McKay
---------------------------- -----------------------------------
Douglas M. McKay
|
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 17th day of December, 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 Donald J. Varner, an individual (hereinafter referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the Senior Vice President - Retail Division and Corporate Secretary 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 Senior Vice President - Retail Division and Corporate Secretary of the COMPANY;
WHEREAS, the EMPLOYEE desires to continue to serve as the Senior Vice President - Retail Division and Corporate Secretary 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 Senior Vice President - Retail Division and Corporate
Secretary of the COMPANY. The term of this AGREEMENT shall commence on January
1, 1999, and shall end on December 31, 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. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall serve as
the Senior Vice President - Retail Division and Corporate Secretary 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 Senior Vice President - Retail Division and Corporate
Secretary or which, consistent therewith, are delegated to him by the Board of
Directors. Such duties may include, but shall not be limited to, assisting in
the development of policies and strategic objectives with respect to products,
services and delivery systems, directing and coordinating the administration of
the Loan Administration, Savings Administration, Branch Administration and
Marketing departments of the COMPANY, serve as corporate secretary with
responsibility for maintaining the books and records of the COMPANY.
(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) TOTAL COMPENSATION. The EMPLOYEE shall receive during the TERM total compensation established by the Salary Committee of the Board of Directors. In making its determination, the Salary Committee shall consider the average total compensation for a Senior Vice President and Corporate Secretary of a peer group of companies. The companies comprising the peer group shall be selected by Deloitte & Touche LLP or another third party consultant acceptable to the EMPLOYEE and the compensation committee of the Board of Directors of the COMPANY. The selection of the peer group shall take into account the asset size and performance ratios of the COMPANY, and such other factors as the consultant considers appropriate under the circumstances. It is the intent of the COMPANY and the EMPLOYEE that the EMPLOYEE's total compensation shall include the following components: (1) a base salary,
payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. The percentage of total compensation derived from each of the three components described in the preceding sentence shall be comparable to the peer group average. Until the COMPANY has implemented a compensation program which includes the three components described above, the EMPLOYEE shall receive an annual salary of not less than $139,874, payable in equal installments not less often than monthly, and cash incentive compensation payable not less often than annually.
(b) ANNUAL REVIEW. On or before December 31st of each year, commencing in 1999, the total compensation of the EMPLOYEE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $139,874, based upon the EMPLOYEE's individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in the minutes of the Board of Directors of the COMPANY.
(c) EMPLOYEE BENEFIT PROGRAMS. During the TERM, the EMPLOYEE shall be entitled to participate in all formally established employee benefit, bonus, pension, insurance 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. 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, (ii) at the option of the EMPLOYEE, after the EMPLOYEE has reached age 65, provided that the EMPLOYEE shall give the COMPANY at least 60 days prior written notice of his intent to resign, and (iii) at the option of the EMPLOYEE, upon delivery by the EMPLOYEE of written notice of termination to the COMPANY if the present capacity or circumstances in which the EMPLOYEE is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties 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 as of the date of this AGREEMENT or the EMPLOYEE's benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (A), (B) and (C) of this Section 4(a) shall govern the obligations of the 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 (hereinafter defined) for any reason other than CAUSE or is terminated by the EMPLOYEE as provided in Section 4(a)(ii) above, then the following shall occur:
(I) The 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, as described in Section 3(c) of this AGREEMENT, in which
the EMPLOYEE was a participant prior to the effective date of the termination of his employment as if the EMPLOYEE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EMPLOYEE offset in any manner the obligations of the 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 total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EMPLOYEE in the twelve month period prior to the termination of employment;
(II) The COMPANY shall continue to provide to the EMPLOYEE, at the COMPANY's expense, health, life, disability and other benefits, as described in Section 3(c) of this AGREEMENT, substantially equal to those being provided to the EMPLOYEE at the date of termination of his employment until the earliest to occur of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and
(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.
Section 1828(k) and any regulations promulgated thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean any one of the following events:
(i) the acquisition of ownership or power to vote more than 25% of the voting stock of the COMPANY or the HOLDING COMPANY;
(ii) the acquisition of the ability to control the election of a majority of the directors of the COMPANY or the HOLDING COMPANY;
(iii) during any period of three or less consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY;
(iv) the acquisition by any person or entity of "conclusive control" of the COMPANY within the meaning of 12 C.F.R. Section 574.4(a), or the acquisition by any person or entity of "rebuttable control" within the meaning of 12 C.F.R. Section 574.4(b) that has not been rebutted in accordance with 12 C.F.R. Section 574.4(c); or
(v) an event that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT.
For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EMPLOYEE and any person or persons with whom the EMPLOYEE is "acting in concert" within the meaning of 12 C.F.R. Part 574.
For purposes of this AGREEMENT, an event shall be deemed to have occurred "in connection with a CHANGE OF CONTROL" if such event occurs within one year before or after a CHANGE OF CONTROL.
(e) TERMINATION BY EMPLOYEE. If the EMPLOYEE terminates this AGREEMENT without the prior written consent of the COMPANY, other than pursuant to Section 4(a)(ii) of this AGREEMENT, the EMPLOYEE shall not engage in the financial institutions business as a director, officer, employee or consultant for any business or enterprise
which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana Counties or any other geographic area in which the COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this AGREEMENT. This provision shall not apply in the event of the termination of the employment of the EMPLOYEE by the EMPLOYER prior to the expiration of the TERM or the termination of the employment of the EMPLOYEE by the EMPLOYEE pursuant to Section 4(a)(ii) of this AGREEMENT.
5. SPECIAL REGULATORY EVENTS. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EMPLOYEE shall be as follows in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY's affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY's obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY shall pay the EMPLOYEE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the COMPANY's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under
this AGREEMENT shall terminate as of the effective date of such order; provided,
however, that vested rights of the EMPLOYEE shall not be affected by such
termination;
(c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EMPLOYEE shall not be affected;
(d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Director of the Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority contained in Section 13(c) of the FDIA or (ii) by the Director of the OTS, or his or her designee, at any time the Director of the OTS approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Director of the OTS to be in an unsafe or unsound condition; provided, however that no vested rights of the EMPLOYEE shall not be affected by any such termination; and
(e) The provisions of this Section 5 are governed by the requirements
of 12 C.F.R. Section 563.39(b) and in the event that any statements in this
Section 5 are inconsistent with 12 C.F.R. Section 563.39(b), the provisions of
12 C.F.R. Section 563.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all of their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect.
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EMPLOYEE agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use or such information is otherwise legally in the public domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the COMPANY, its subsidiaries, or affiliates, or to any of the businesses operated by them, and the EMPLOYEE confirms that such information constitutes the exclusive property of the COMPANY. The EMPLOYEE shall not otherwise knowingly act or conduct himself to the material detriment of the COMPANY, its subsidiaries, or affiliates or in a manner which is inimical or contrary to the interests of the COMPANY.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives without the COMPANY's prior written consent; provided, however, that nothing in this Section 8 shall preclude the EMPLOYEE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or other legal representatives of the EMPLOYEE or his estate from assigning any rights hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to the benefit of, the EMPLOYEE and the COMPANY and their respective permitted successors and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto.
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as if this AGREEMENT had not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EMPLOYEE.
17. NOTICES. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows:
If to the COMPANY:
The Home Savings and Loan Company
of Youngstown, Ohio
275 Federal Plaza West
P.O. Box 1111
Youngstown, Ohio 44501-1111
If to the EMPLOYEE:
Mr. Donald J. Varner
249 Griswold Drive
Youngstown, Ohio 44512
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
/s/ Mary Jane Botsko By: /s/ Douglas M. McKay
---------------------------- -------------------------------
Douglas M. McKay
its Chairman of the Board
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Attest:
/s/ Mary Jane Botsko By: /s/ Donald J. Varner
---------------------------- -----------------------------------
Donald J. Varner
|
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 17th day of December, 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 Patrick A. Kelly, an individual (hereinafter referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the Senior Vice President -Financial Division, Chief Financial Officer and Treasurer 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 Senior Vice President - Financial Division, Chief Financial Officer and Treasurer of the COMPANY;
WHEREAS, the EMPLOYEE desires to continue to serve as the Senior Vice
President -Financial Division, Chief Financial Officer and Treasurer 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 Senior Vice President -Financial Division, Chief Financial Officer and Treasurer of the COMPANY. The term of this AGREEMENT shall commence on January 1, 1999, and shall end on December 31, 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. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall serve as
the Senior Vice President -Financial Division, Chief Financial Officer and
Treasurer 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 Senior Vice President -Financial
Division, Chief Financial Officer and Treasurer or which, consistent therewith,
are delegated to him by the Board of Directors. Such duties may include, but
shall not be limited to, assisting in the development of policies and strategic
objectives pertaining to fiscal control and operating results, directing and
coordinating the activities of the Investment, Accounting, Controlling, Planning
and Facilities Management departments of the COMPANY, and preparation of
financial reports.
(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) TOTAL COMPENSATION. The EMPLOYEE shall receive during the TERM total compensation established by the Salary Committee of the Board of Directors. In making its determination, the Salary Committee shall consider the average total compensation for the Chief Financial Officers of a peer group of companies. The companies comprising the peer group shall be selected by Deloitte & Touche LLP or another third party consultant acceptable to the EMPLOYEE and the compensation committee of the Board of Directors of the COMPANY. The selection of the peer group shall take into account the asset size and performance ratios of the COMPANY, and such other factors as the consultant considers appropriate under the circumstances. It is the intent of the COMPANY and the EMPLOYEE that the EMPLOYEE's
total compensation shall include the following components: (1) a base salary, payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. The percentage of total compensation derived from each of the three components described in the preceding sentence shall be comparable to the peer group average. Until the COMPANY has implemented a compensation program which includes the three components described above, the EMPLOYEE shall receive an annual salary of not less than $137,711, payable in equal installments not less often than monthly, and cash incentive compensation payable not less often than annually.
(b) ANNUAL REVIEW. On or before December 31st of each year, commencing in 1999, the total compensation of the EMPLOYEE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $137,711, based upon the EMPLOYEE's individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in the minutes of the Board of Directors of the COMPANY.
(c) EMPLOYEE BENEFIT PROGRAMS. During the TERM, the EMPLOYEE shall be entitled to participate in all formally established employee benefit, bonus, pension, insurance 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. 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 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 as of the date of this AGREEMENT or the EMPLOYEE's benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (A), (B) and (C) of this Section 4(a) shall govern the obligations of the 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 (hereinafter defined) for any reason other than CAUSE or is terminated by the EMPLOYEE as provided in Section 4(a)(ii) above, then the following shall occur:
(I) The 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, as described in Section 3(c) of this AGREEMENT, in which the EMPLOYEE was a participant prior to the effective date of the termination of his employment as if the EMPLOYEE were still employed under this AGREEMENT until the
earlier of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EMPLOYEE offset in any manner the obligations of the 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 total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EMPLOYEE in the twelve month period prior to the termination of employment;
(II) The COMPANY shall continue to provide to the EMPLOYEE, at the COMPANY's expense, health, life, disability and other benefits, as described in Section 3(c) of this AGREEMENT, substantially equal to those being provided to the EMPLOYEE at the date of termination of his employment until the earliest to occur of the expiration of the TERM or the date on which the EMPLOYEE is included in another employer's benefit plans as a full-time employee; and
(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. Section 1828(k) and any regulations promulgated thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean any one of the following events:
(i) the acquisition of ownership or power to vote more than 25% of the voting stock of the COMPANY or the HOLDING COMPANY;
(ii) the acquisition of the ability to control the election of a majority of the directors of the COMPANY or the HOLDING COMPANY;
(iii) during any period of three or less consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY;
(iv) the acquisition by any person or entity of "conclusive control" of the COMPANY within the meaning of 12 C.F.R. Section 574.4(a), or the acquisition by any person or entity of "rebuttable control" within the meaning of 12 C.F.R. Section 574.4(b) that has not been rebutted in accordance with 12 C.F.R. Section 574.4(c); or
(v) an event that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT.
For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EMPLOYEE and any person or persons with whom the EMPLOYEE is "acting in concert" within the meaning of 12 C.F.R. Part 574.
For purposes of this AGREEMENT, an event shall be deemed to have occurred "in connection with a CHANGE OF CONTROL" if such event occurs within one year before or after a CHANGE OF CONTROL.
(e) TERMINATION BY EMPLOYEE. If the EMPLOYEE terminates this
AGREEMENT without the written consent of the COMPANY, other than pursuant to
Section 4(a)(ii) of this AGREEMENT, the EMPLOYEE shall not engage in the
financial institutions business as a director, officer, employee or consultant
for any business or enterprise which competes with the principal business of the
COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning,
Trumbull and Columbiana Counties or any other geographic
area in which the COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this AGREEMENT. This provision shall not apply in the event of the termination of the employment of the EMPLOYEE by the EMPLOYER prior to the expiration of the TERM or the termination of the employment of the EMPLOYEE by the EMPLOYEE pursuant to Section 4(a)(ii) of this AGREEMENT.
5. SPECIAL REGULATORY EVENTS. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EMPLOYEE shall be as follows in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY's affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY's obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY shall pay the EMPLOYEE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the COMPANY's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under
this AGREEMENT shall terminate as of the effective date of such order; provided,
however, that vested rights of the EMPLOYEE shall not be affected by such
termination;
(c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EMPLOYEE shall not be affected;
(d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Director of the Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority contained in Section 13(c) of the FDIA or (ii) by the Director of the OTS, or his or her designee, at any time the Director of the OTS approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Director of the OTS to be in an unsafe or unsound condition; provided, however that no vested rights of the EMPLOYEE shall not be affected by any such termination; and
(e) The provisions of this Section 5 are governed by the requirements
of 12 C.F.R. Section 563.39(b) and in the event that any statements in this
Section 5 are inconsistent with 12 C.F.R. Section 563.39(b), the provisions of
12 C.F.R. Section 563.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all of their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect.
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EMPLOYEE agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use or such information is otherwise legally in the public domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the COMPANY, its subsidiaries, or affiliates, or to any of the businesses operated by them, and the EMPLOYEE confirms that such information constitutes the exclusive property of the COMPANY. The EMPLOYEE shall not otherwise knowingly act or conduct himself to the material detriment of the COMPANY, its subsidiaries, or affiliates or in a manner which is inimical or contrary to the interests of the COMPANY.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives without the COMPANY's prior written consent; provided, however, that nothing in this Section 8 shall preclude the EMPLOYEE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or other legal representatives of the EMPLOYEE or his estate from assigning any rights hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to the benefit of, the EMPLOYEE and the COMPANY and their respective permitted successors and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto.
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as if this AGREEMENT had not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EMPLOYEE.
17. NOTICES. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows:
If to the COMPANY:
The Home Savings and Loan Company
of Youngstown, Ohio
275 Federal Plaza West
P.O. Box 1111
Youngstown, Ohio 44501-1111
If to the EMPLOYEE:
Mr. Patrick A. Kelly
211 Montgomery Drive
Canfield, Ohio 44406
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
/s/ Mary Jane Botsko By: /s/ Douglas M. McKay
---------------------------- -------------------------------
Douglas M. McKay
its Chairman of the Board
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Attest:
/s/ Mary Jane Botsko /s/ Patrick A. Kelly
---------------------------- -----------------------------------
Patrick A. Kelly
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SELECTED FINANCIAL DATA AND OTHER DATA
SELECTED FINANCIAL CONDITION DATA: At December 31,
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1998 1997 1996 1995 1994
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(IN THOUSANDS)
Total assets $1,257,305 $1,044,993 $1,074,736 $1,077,523 $1,018,879
Cash and cash equivalents 170,508 34,497 19,668 41,813 20,601
Investment securities:
Available for sale 110,888 39,402 14,659 32,125 33,415
Held to maturity 4,993 4,968 27,970 30,119 34,322
Mortgage-backed securities:
Available for sale 98,890 62,416 84,466 100,005 87,935
Held to maturity 182,999 243,848 286,384 302,107 312,300
Loans, net 657,498 633,236 616,923 546,689 503,413
FHLB stock 11,958 11,136 10,370 9,675 9,043
Deposits 777,583 886,808 932,060 938,855 898,912
Total equity 464,645 141,353 128,131 122,294 107,209
SUMMARY OF EARNINGS: Year Ended December 31,
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1998 1997 1996 1995 1994
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(IN THOUSANDS)
Interest income $ 85,881 $ 82,685 $ 81,749 $ 79,834 $ 74,639
Interest expense 35,755 40,463 43,009 41,104 34,898
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Net interest income 50,126 42,222 38,740 38,730 39,741
Provision for (recovery of) loan
loss allowances 650 (1,546) (100)
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Net interest income after provision
for (recovery of) loan
loss allowances 49,476 43,768 38,740 38,730 39,841
Noninterest income 2,289 1,564 1,291 1,554 1,018
Noninterest expenses (1)(2) 38,217 25,303 30,068 21,995 20,341
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Income before provision for
income taxes 13,548 20,029 9,963 18,289 20,518
Provision for income taxes 4,849 6,982 3,332 6,707 7,294
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Net income $ 8,699 $ 13,047 $ 6,631 $ 11,582 $ 13,224
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(1) FOR THE YEAR ENDED DECEMBER 31, 1998, NONINTEREST EXPENSE INCLUDED $11.8
MILLION AS A RESULT OF THE CONTRIBUTION TO THE FOUNDATION.
(2) FOR THE YEAR ENDED DECEMBER 31, 1996, NONINTEREST EXPENSE INCLUDED A $5.9
MILLION ONE-TIME ASSESSMENT IMPOSED ON HOME SAVINGS AS A RESULT OF
LEGISLATION TO RECAPITALIZE THE SAIF.
SELECTED FINANCIAL RATIOS AND OTHER DATA: At or for the Year Ended December 31,
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1998 1997 1996 1995 1994
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Performance ratios: (1)
Return on average assets (2) 0.73% 1.23% 0.61% 1.11% 1.30%
Return on average equity (3) 3.03 9.68 5.28 9.98 12.77
Interest rate spread (4) 3.32 3.53 3.14 3.30 3.64
Net interest margin (5) 4.33 4.09 3.65 3.79 4.01
Noninterest expense to average assets 3.21 2.39 2.77 2.10 2.01
Efficiency ratio (6) 72.91 57.79 75.11 54.60 49.91
Average interest-earning assets to
average interest-bearing liabilities 132.69 114.26 112.82 111.93 110.58
Capital ratios:
Average equity to average assets 24.13 12.74 11.58 11.08 10.21
Equity to assets at year end 36.96 13.53 11.92 11.35 10.52
Tangible capital 26.80 13.47 11.87 11.24 10.70
Core capital 26.80 13.47 11.87 11.24 10.70
Risk-based capital 51.51 28.85 26.15 26.65 25.35
Asset quality ratios:
Nonperforming loans to loans at year end (7) 1.15 1.60 1.59 1.11 1.34
Nonperforming assets to average assets (8) 0.64 0.96 0.91 0.59 0.82
Nonperforming assets to total assets at year end (8) 0.61 0.98 0.92 0.57 0.82
Allowance for loans losses as a percent of loans 0.96 0.94 0.81 0.93 1.01
Allowance for loans losses as a
percent of nonperforming loans (7) 84.62 59.02 51.37 84.18 75.51
Number of:
Loans 19,628 19,173 18,826 17,736 17,027
Deposits 105,426 108,663 108,793 105,987 99,541
Full-service offices (9) 14 15 14 14 14
Per share data: (10)
Basic earnings (11) 0.08 N/A N/A N/A N/A
Diluted earnings (11) 0.08 N/A N/A N/A N/A
Book value (12) 14.46 N/A N/A N/A N/A
Dividend payout ratio (13) 53.57% N/A N/A N/A N/A
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(1) PERFORMANCE RATIOS FOR 1998 REFLECT THE $11.8 MILLION CONTRIBUTION TO THE
FOUNDATION AND PERFORMANCE RATIOS FOR 1996 REFLECT THE $5.9 MILLION ONE-
TIME ASSESSMENT IMPOSED ON HOME SAVINGS AS A RESULT OF LEGISLATION TO
RECAPITALIZE THE SAVINGS ASSOCIATION INSURANCE FUND (SAIF).
(2) NET INCOME DIVIDED BY AVERAGE TOTAL ASSETS. EXCLUDING THE EFFECT OF THE
CONTRIBUTION TO THE FOUNDATION, THE RETURN ON AVERAGE ASSETS WOULD HAVE
BEEN 1.37% FOR THE YEAR ENDED DECEMBER 31, 1998. EXCLUDING THE EFFECT OF
THE ONE-TIME SAIF ASSESSMENT, THE RETURN ON AVERAGE ASSETS WOULD HAVE BEEN
0.96% FOR THE YEAR ENDED DECEMBER 31, 1996.
(3) NET INCOME DIVIDED BY AVERAGE TOTAL EQUITY. EXCLUDING THE EFFECT OF THE
CONTRIBUTION TO THE FOUNDATION, THE RETURN ON AVERAGE EQUITY WOULD HAVE
BEEN 5.63% FOR THE YEAR ENDED DECEMBER 31, 1998. EXCLUDING THE EFFECT OF
THE ONE-TIME SAIF ASSESSMENT, THE 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 CONTRIBUTION TO THE
FOUNDATION, THE EFFICIENCY RATIO WOULD HAVE BEEN 50.33% FOR THE YEAR ENDED
DECEMBER 31, 1998. EXCLUDING THE EFFECT OF THE ONE-TIME SAIF ASSESSMENT,
THE EFFICIENCY RATIO WOULD HAVE BEEN 60.37% FOR THE YEAR ENDED DECEMBER
31, 1996.
(7) NONPERFORMING LOANS CONSIST OF NONACCRUAL LOANS AND RESTRUCTURED LOANS.
(8) NONPERFORMING ASSETS CONSIST OF NONPERFORMING LOANS AND REAL ESTATE
ACQUIRED IN SETTLEMENT OF LOANS.
(9) ON JANUARY 20, 1998, HOME SAVINGS CLOSED A BRANCH LOCATED IN A SUPERMARKET
IN POLAND, OHIO, REDUCING THE NUMBER OF FULL-SERVICE OFFICES TO 14.
(10) FOR PURPOSE OF DISPLAYING SIX MONTHS EARNINGS PER SHARE IT IS ASSUMED
CONVERSION TOOK PLACE AS OF JULY 1, 1998.
(11) NET INCOME DIVIDED BY AVERAGE NUMBER OF SHARES OUTSTANDING. EXCLUDING THE
EFFECT OF THE CONTRIBUTION TO THE FOUNDATION, THE BASIC AND DILUTED
EARNINGS PER SHARE WOULD HAVE BEEN $0.32 FOR THE YEAR ENDED DECEMBER 31,
1998.
(12) EQUITY DIVIDED BY NUMBER OF SHARE OUTSTANDING.
(13) HISTORICAL PER SHARE DIVIDEND DECLARED AND PAID FOR THE QUARTER ENDED
DECEMBER 31, 1998 DIVIDED BY THE DILUTED EARNING PER SHARE OF $0.14 FOR
THE QUARTER ENDED DECEMBER 31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
UCFC was incorporated for the purpose of owning all of the outstanding stock of Home Savings. The following discussions and analysis of the financial condition and results of operations of UCFC and Home Savings should be read in conjunction with and with reference to the consolidated financial statements, and the notes thereto, included in this Annual Report.
CHANGES IN FINANCIAL CONDITION
Total assets were $1.3 billion at December 31, 1998, a $212.3 million, or 20.3%, increase compared to December 31, 1997. The increase in total assets was primarily attributable to the sale of UCFC's shares in connection with the Conversion.
Total loans increased $39.8 million, or 6.0%, to $699.8 million at December 31, 1998, compared to $660.0 million at December 31, 1997. The most significant increases were in loans secured by one- to four-family residences, which increased $27.1 million and commercial loans, which increased $15.2 million, compared to the prior year. These increases were offset by decreases of $2.2 million in nonresidential real estate loans and $1.6 million in consumer loans.
Funds not currently utilized for general corporate purposes, including loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds, investment securities and mortgage-backed securities. Overnight funds increased $133.9 million to $153.8 million at December 31, 1998 from $19.9 million at December 31, 1997. Investment securities and mortgage-backed securities available for sale increased $71.5 million and $36.5 million, respectively, since December 31, 1997. These increases reflect the investment of the Conversion proceeds in overnight funds and investment and mortgage-backed securities available for sale which provide a great deal of liquidity and flexibility as UCFC pursues alternative investment opportunities.
Total deposits decreased $109.2 million, or 12.3%, from December 31, 1997. This reduction was primarily due to deposits withdrawn for the purchase of UCFC shares in the Conversion. The deposit decrease included an $18.7 million reduction in savings accounts and a $90.6 million decrease in certificate accounts. Transaction accounts increased by $160 thousand.
Total equity increased $323.3 million at December 31, 1998, compared to December 31, 1997, primarily due to the Conversion. Book value per share was $14.46 as of December 31, 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
Net Income--Net income for the year ended December 31, 1998, was $8.7 million, compared to $13.0 million for the year ended December 31, 1997. The decline in net income resulted primarily from the contribution of $11.8 million to the Foundation in 1998. UCFC believes 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 served by Home Savings to share in the potential growth and success of Home Savings and UCFC. Also contributing to the decline in the current year was a recovery in 1997 of $3.3 million of interest and a loan loss recovery of $2.8 million in connection with three loans that had previously been charged off. These changes were partially offset by a $3.2 million increase in total interest income and $4.7 million decrease in interest expense.
Earnings per share since the Conversion, for the six-month period ended December 31, 1998, was $0.08. Without the contribution to the Foundation earnings per share for the same period would have been $0.32. There are no comparable per share earnings for 1997 as Home Savings was a mutual association.
Core earnings, defined as pre-tax earnings adjusted for securities sales transactions and unusual or nonrecurring expense or income items, for the year ended December 31, 1998, were $25.2 million compared to $15.0 million in 1997. The $10.2 million increase resulted primarily from an increase in net interest income. The following table summarizes the components of adjusted pre-tax core earnings:
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------
(IN THOUSANDS)
Net interest income $50,126 $38,914
Provision for loan losses 650 700
Noninterest income 2,104 1,518
Noninterest expense 26,383 24,703
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Adjusted pre-tax core earnings $25,197 $15,029
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NET INTEREST INCOME--Net interest income increased $7.9 million, or 18.7%, to $50.1 million in 1998 from $42.2 million for 1997. Total interest income increased $3.2 million and interest expense declined $4.7 million. The increase in total interest
income was primarily due to an increase in interest-earning assets as a result of the investment of proceeds from the Conversion. The average balance of interest-earning assets was $124.8 million higher for the year ended December 31, 1998 compared to 1997. The decrease in interest expense was due to a decline in the weighted average interest rate and a reduction in the average balance due to the withdrawal of funds to purchase stock in the Conversion. The interest rate spread decreased 21 basis points to 3.32% for 1998 from 3.53% for 1997 as UCFC experienced a 59 basis point decrease in the yield on its interest-earning assets and a 38 basis point decrease in the cost of its interest-bearing liabilities. The interest rate spread was also impacted by the recovery of delinquent interest discussed above.
Total interest income increased $3.2 million, or 3.9%, in 1998 from 1997. The average yield on interest-earning assets, including the effects of the recovery of delinquent interest in 1997 discussed above, decreased to 7.42% in 1998 from 8.01% in 1997. Without the $3.3 million recovery of delinquent interest, total interest income for 1997 would have been $79.3 million, resulting in a $6.6 million, or 8.3%, increase in total interest income when comparing 1998 to 1997. The resulting average yield on interest-earning assets would have been 7.68% for 1997 absent the $3.3 million recovery, approximately 33 basis points below the yield achieved as a result of the interest recovery and 26 basis points above the yield for 1998. Similarly, the interest rate spread would have been 3.20% for 1997 compared to 3.32% for 1998.
Interest income on loans receivable decreased $1.1 million in 1998, primarily as a result of the recovery of interest in 1997. Without the 1997 recovery of interest, interest income on loans receivable would have increased $2.2 million from 1997 to 1998. The average yield on loans receivable without the recovery would have been 8.15% for 1997, compared to 8.26% for 1998. The average balance of net loans receivable increased $18.6 million for the year ended December 31, 1998 compared to 1997.
The average balances of investment securities and other interest-earning assets increased by $161.5 million in 1998 compared to 1997, resulting in an additional $8.7 million of interest income for 1998. As previously stated, much of the proceeds from the Conversion were invested primarily in these instruments for liquidity and flexibility. The average balance of mortgage-backed securities decreased by $55.3 million during 1998 compared to 1997, resulting in a reduction of interest income of $4.5 million. The reduction in the average balance of mortgage-backed securities was due to repayments and maturities of mortgage-backed securities.
Total interest expense decreased $4.7 million, or 11.6%, from 1997 to 1998. The average balance of interest-bearing liabilities decreased $31.5 million, or 3.5%, primarily due to the withdrawal of deposits to purchase UCFC shares. The average rate paid decreased to 4.10% in 1998 from 4.48% in 1997.
PROVISION FOR LOAN LOSSES--Provisions for loan losses are charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for estimated losses based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan loss allowance was $650 thousand in 1998, as a result of continuing growth in the loan portfolio, particularly in commercial loans, at December 31, 1998, compared to a net recovery of $1.5 million in 1997 due to the loan recovery discussed above. Home Savings' allowance for loan losses totaled $6.4 million at December 31, 1998, which was .96% of total loans.
NONINTEREST INCOME--Noninterest income increased $725 thousand, or 46.4%, to $2.3 million for the year ended December 31, 1998, from $1.6 million for the year ended December 31, 1997. The increase was primarily due to a gain of approximately $253 thousand on the sale of mortgage-backed securities along with approximately $375 thousand in fees and commissions related to check services during the Conversion. The level of noninterest income was also impacted by an increase in automated teller machine service charges and NOW non-sufficient funds fees of approximately $84 thousand, and a rebate of approximately $29 thousand from the Ohio Bureau of Workers' Compensations.
NONINTEREST EXPENSE--Noninterest expense increased $12.9 million to $38.2 million for 1998, from $25.3 million in 1997. This increase was primarily attributable to the charitable donation of $11.8 million to the Foundation and an increase of $921 thousand in salary and employee benefits primarily as a result of the implementation of the Employee Stock Ownership Plan (ESOP).
FEDERAL INCOME TAXES--Federal income taxes decreased $2.1 million, or 30.6%, in 1998 compared to 1997, primarily due to lower pre-tax income as a result of the contribution to the Foundation in 1998 and the recovery on the three loans in 1997 stated above.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
NET INCOME--Net income increased $6.4 million, or 96.8%, to $13.0 million for the year ended December 31, 1997, compared to $6.6 million for the year ended December 31, 1996. The results for 1996 reflect the payment of a $5.9 million one-time assessment to recapitalize the SAIF. Other factors accounting for the increase in net income from 1996 to 1997 were the recovery of $3.3 million of interest and a loan loss recovery of $2.8 million on three loans that were previously charged off and a decrease in deposit insurance premiums. These increases were partially offset by a $2.0 million increase in salaries and employee benefits and a $3.7 million increase in federal income taxes.
NET INTEREST INCOME--Net interest income increased $3.5 million, or 9.0%, to $42.2 million in 1997 from $38.7 million for 1996. Home Savings' interest rate spread increased 39 basis points to 3.53% for 1997 from 3.14% for 1996 as Home Savings experienced a 30 basis point increase in the yield on its interest-earning assets and a nine basis point decrease in the cost of its interest-bearing liabilities. The interest rate spread was favorably impacted by the recovery of delinquent interest stated above.
Total interest income increased $936 thousand, or 1.1%, in 1997 from 1996. Interest income on loans receivable increased $5.6 million, primarily as a result of an increase of $33.4 million, or 5.7%, in the average balance of net loans and a recovery of $3.3 million of interest on three previously delinquent loans. The increase in average loan balances was primarily in higher yielding commercial loans, although one- to four-family loans also increased year to year. Home Savings emphasized growth in loans, particularly commercial and consumer loans, in order to achieve a higher net yield and to increase the loan to deposit ratio. The growth in interest income on loans was partially offset by a reduction in interest income on mortgage-backed securities, as Home Savings reduced the average balance of these lower-yielding investments. The reduction in the average balance of mortgage-backed securities resulted from the repayments and maturities of mortgage-backed securities, the proceeds of which were used primarily to fund deposit outflows and the increase in net loan balances. The average yield on Home Savings' interest-earning assets, including the effects of the recovery of delinquent interest discussed below, increased to 8.01% from 7.71%.
Total interest income for 1997 was affected by the large loan recoveries of approximately $3.3 million of interest on three loans that had been nonaccruing for a significant period of time. Without this recovery of delinquent interest, Home Savings' total interest income for 1997 would have been $79.3 million, resulting in a $2.4 million, or 2.9%, decrease in total interest income compared to 1996. The resulting average yield on interest-earning assets would have been 7.68% for 1997, approximately 33 basis points below the yield achieved as a result of the interest recovery and three basis points below the yield for 1996. Similarly, Home Savings' interest rate spread would have been 3.20% for 1997 compared to 3.14% for 1996.
Total interest expense decreased $2.5 million, or 5.9%, from 1996 to 1997. The average balance of interest-bearing liabilities decreased $36.4 million, or 3.9%, and the average rate paid decreased to 4.48% in 1997 from 4.57% in 1996. Deposits, primarily certificates of deposit, declined year to year, primarily as a result of maturing certificates being reinvested in alternative investments, such as mutual funds.
PROVISION FOR LOAN LOSSES--Based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio, particularly in commercial loans, and prior loan loss experience, a net recovery of $1.5 million was credited to operations in 1997, and no amounts were recorded as provisions or recoveries in 1996. The recovery recorded in 1997 was due to the significant settlement of several large loans which also affected Home Savings' total interest income for 1997. In 1997, Home Savings recovered $2.9 million that had been charged off in prior years. Approximately $2.8 million of the recovery related to a $4.3 million loan. At December 31, 1997, Home Savings' allowance for loan losses totaled $6.0 million, which equaled .9% of total loans.
NONINTEREST INCOME--Noninterest income increased $273 thousand, or 21.1%, to $1.6 million for 1997 from $1.3 million for 1996. Substantially all of Home Savings' other income is derived from service fees and other charges which totaled $1.1 million for 1997 compared to $755 thousand 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 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, Home Savings 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.
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.
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to UCFC's average balance sheet information and reflects the average yield on interest- earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances. Nonaccruing loans have been included in the table as loans carrying a zero yield. The average balance for securities available for sale is computed using the carrying value and the average yield on securities available for sale has been computed using the historical amortized average balance.
Year Ended December 31,
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1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST Average Interest Average Interest
OUTSTANDING EARNED/ YIELD/ outstanding earned/ Yield/ outstanding earned/ Yield/
BALANCE PAID RATE balance paid rate balance paid rate
-------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Net loans (1) $ 642,168 $53,063 8.26% $ 623,546 $54,148 8.68% $ 590,128 $48,586 8.23%
Mortgage-backed
securities:
Available for sale 66,450 4,351 6.55 73,053 5,122 7.01 96,229 6,871 7.14
Held to maturity 218,510 15,344 7.02 267,242 19,024 7.12 305,583 21,988 7.20
Investment securities:
Available for sale 70,810 4,194 5.92 33,883 2,169 6.40 17,903 1,226 6.85
Held to maturity 4,859 319 6.57 13,333 843 6.32 29,944 1,780 5.94
Other interest-earning assets 154,784 8,610 5.56 21,716 1,379 6.35 21,034 1,298 6.17
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Total interest-earning
assets 1,157,581 85,881 7.42 1,032,773 82,685 8.01 1,060,821 81,749 7.71
Noninterest earning assets 32,575 24,985 23,809
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Total assets $1,190,156 $1,057,758 $1,084,630
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Interest-bearing liabilities:
Deposits:
Checking and
demand accounts $ 123,742 2,619 2.12 $ 120,962 2,906 2.40 $ 122,993 3,248 2.64
Savings accounts 273,765 7,114 2.60 248,914 7,387 2.97 257,806 7,879 3.06
Certificates of deposit 474,912 26,022 5.48 534,038 30,170 5.65 559,485 31,882 5.70
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Total deposits 872,419 35,755 4.10 903,914 40,463 4.48 940,284 43,009 4.57
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Total interest-bearing
liabilities 872,419 35,755 4.10 903,914 40,463 4.48 940,284 43,009 4.57
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Noninterest-bearing
liabilities 30,521 19,109 18,744
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Total liabilities 902,940 923,023 959,028
Equity 287,216 134,735 125,602
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Total liabilities
and equity $1,190,156 $1,057,758 $1,084,630
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Net interest income
and interest rate spread $50,126 3.32% $42,222 3.53% $38,740 3.14%
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Net yield on interest
earning assets 4.33% 4.09% 3.65%
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Average interest-earning
assets to average interest-
bearing liabilities 132.69% 114.26% 112.82%
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(1) NONACCRUAL LOANS ARE INCLUDED IN THE AVERAGE BALANCE.
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected UCFC'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,
--------------------------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------------------------------------------------------------------------------------------------
Increase Total Increase
(decrease) due to increase (decrease) due to Total
------------------------- ---------- ------------------- increase
Rate Volume (decrease) Rate Volume (decrease)
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Interest-earning assets:
Loans $(2,828) $ 1,743 $(1,085) $2,734 $ 2,828 $ 5,562
Mortgage-backed securities:
Available for sale (326) (445) (771) (122) (1,627) (1,749)
Held to maturity (255) (3,425) (3,680) (232) (2,732) (2,964)
Investment securities:
Available for sale (149) 2,174 2,025 (74) 1,017 943
Held to maturity 34 (558) (524) 121 (1,058) (937)
Other interest-earning assets (149) 7,380 7,231 38 43 81
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Total interest-earning assets $(3,673) $ 6,869 3,196 $2,465 $(1,529) 936
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Interest-bearing liabilities:
Savings accounts $(1,384) $ 1,112 (272) $ (225) $ (267) (492)
Checking accounts (356) 69 (287) (289) (53) (342)
Certificates of deposit (888) (3,261) (4,149) (271) (1,441) (1,712)
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Total interest-bearing liabilities$(2,628) $(2,080) (4,708) $ (785) $(1,761) (2,546)
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Change in net interest income $ 7,904 $ 3,482
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ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK--The principal market risk affecting Home Savings is interest rate risk. Home Savings does not maintain a trading account for any class of financial instrument, and Home Savings is not affected by foreign currency exchange rate risk or commodity price risk. Because Home Savings does not hold any equity securities other than stock in the FHLB of Cincinnati, Home Savings is not subject to equity price risk.
Home Savings, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Interest rate risk is defined as the sensitivity of an institution's earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk of Home Savings, the Board of Directors has adopted an interest rate risk policy which requires the Board to review quarterly reports related to interest rate risk and to set exposure limits for Home Savings as a guide to senior management in setting and implementing day to day operating strategies.
QUANTITATIVE ASPECTS OF MARKET RISK--As part of its interest rate risk analysis, Home Savings uses the "net portfolio value" (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.
Home Savings uses a net portfolio value and earnings simulation model prepared by a third party as its primary method to identify and manage its interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies.
Presented below are analyses of Home Savings' interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. The percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the maximum change in NPV that the Board of Directors deems advisable in the event of various changes in interest rates.
YEAR ENDED DECEMBER 31, 1998
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CHANGE NPV AS % OF PORTFOLIO NEXT 12 MONTHS
IN RATES NET PORTFOLIO VALUE VALUE OF ASSETS NET INTEREST INCOME
------------------------------------------------------------------------------------------------------
(BASIS POINTS) $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE IN % $ CHANGE % CHANGE
------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
+400 $269,636 $(75,189) (21.80)% 26.74% (3.65)% $(2,907) (6.59)%
+300 287,238 (57,587) (16.70) 27.67 (2.72) (2,098) (4.75)
+200 307,696 (37,129) (10.77) 28.73 (1.66) (1,259) (2.85)
+100 327,953 (16,872) (4.89) 29.70 (0.69) (507) (1.15)
Static 344,825 30.39
(100) 344,333 (492) (0.14) 30.00 (0.39) (553) (1.25)
(200) 337,232 (7,593) (2.20) 29.19 (1.20) (2,345) (5.32)
(300) 332,677 (12,148) (3.52) 28.54 (1.85) (4,068) (9.22)
(400) 330,958 (13,867) (4.02) 28.05 (2.34) (5,158) (11.69)
Year Ended December 31, 1997
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Change NPV as % of portfolio Next 12 months
in rates Net portfolio value value of assets Net interest income
------------------------------------------------------------------------------------------------------
(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)
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As illustrated in the tables, Home Savings' NPV is more sensitive to increases in interest rates than to decreases. Home Savings' sensitivity to increases in rates occurs principally because, as rates increase, borrowers become less likely to prepay fixed-rate loans than when interest rates are declining, and the majority of Home Savings' loans have fixed rates of interest. In addition, loan demand is adversely affected by increases in interest rates. Thus, in a rising interest rate environment, the amount of interest Home Savings would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made, while the interest Home Savings would pay on its deposits would increase rapidly because deposits generally have shorter periods to repricing than loans.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.
The Board of Directors and management of Home Savings believe that certain factors afford Home Savings the ability to operate successfully despite its exposure to interest rate risk. Home Savings manages its interest rate risk by maintaining capital well in excess of regulatory requirements. See "Liquidity and Capital."
LIQUIDITY AND CAPITAL
UCFC'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, 1998, 1997 and 1996.
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Net income $ 8,699 $13,047 $ 6,631
Adjustments to reconcile net income to net cash from operating activities 5,754 143 (676)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,453 13,190 5,955
Net cash (used in) provided by investing activities (71,048) 47,028 (20,539)
Net cash (provided by) used in financing activities 192,606 (45,389) (7,562)
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Net change in cash and cash equivalents 136,011 14,829 (22,146)
Cash and cash equivalents at beginning of year 34,497 19,668 41,814
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $170,508 $34,497 $19,668
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The principal sources of funds for UCFC and Home Savings are deposits,
loan repayments, maturities of securities and other funds provided by
operations. Home Savings also has the ability to borrow from the FHLB. While
scheduled loan repayments and maturing investments are relatively predictable,
deposit flows and early loan prepayments are more influenced by interest rates,
general economic conditions and competition. Investments in liquid assets
maintained by UCFC and Home Savings are based upon management's assessment of
(1) need for funds, (2) expected deposit flows, (3) yields available on
short-term liquid assets and (4) objectives of the asset and liability
management program. At December 31, 1998, approximately $271.6 million of Home
Savings' certificates of deposit were expected to mature within one year. Based
on past experience and Home Savings' prevailing pricing strategies, management
believes that a substantial percentage of such certificates will be renewed with
Home Savings at maturity, although there can be no assurance that this will
occur.
OTS regulations presently require Home Savings to maintain an average daily balance of investments in United States Treasury, federal agency obligations and other investments in an amount equal to 4% of the sum of Home Savings' average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement is intended to provide a source of relatively liquid funds upon which Home Savings may rely, if necessary, to fund loan originations, deposit withdrawals or other short-term funding needs. As of December 31, 1998 Home Savings' liquidity rate was 39.5%.
Home Savings 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 tangible assets, core capital (which for Home Savings consists solely of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for Home Savings consists of core capital and general valuation allowances) of 8% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk).
The following table summarizes Home Savings' regulatory capital requirements and actual capital at December 31, 1998.
EXCESS OF ACTUAL CAPITAL APPLICABLE
ACTUAL CAPITAL CURRENT REQUIREMENT OVER CURRENT REQUIREMENT ASSET
---------------------------------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT TOTAL
---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Tangible capital $299,617 26.80% $16,767 1.50% $282,850 25.30% $1,117,800
Core capital 299,617 26.80 33,534 3.00 266,083 23.80 1,117,800
Risk-based capital 305,919 51.51 47,513 8.00 258,406 43.51 593,914
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ACCOUNTING AND REPORTING DEVELOPMENTS
A discussion of recently issued accounting pronouncements and their impact on UCFC's Consolidated Financial Statements is provided at pages 27 and 28 in Note 1 to the Notes to Consolidated Financial Statements.
FOURTH QUARTER RESULTS
The following table presents summarized quarterly data for each of the years indicated.
Quarterly Financial Data
(Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998:
Total interest income $19,678 $21,017 $23,212 $21,974 $85,881
Total interest expense 9,556 9,960 8,462 7,777 35,755
Net interest income 10,122 11,057 14,750 14,197 50,126
Provision for loan
loss allowances 250 150 100 150 650
Noninterest income 378 684 745 482 2,289
Noninterest expense 6,095 6,263 18,613 7,246 38,217
Income taxes 1,454 1,866 (1,196) 2,725 4,849
Net income (loss) 2,701 3,462 (2,022) 4,558 8,699
Earnings (loss) per share:
Basic N/A N/A (0.06) 0.14 $0.08
Diluted N/A N/A (0.06) 0.14 $0.08
1997:
Total interest income $20,001 $23,082 $20,040 $19,562 $82,685
Total interest expense 10,211 10,165 10,089 9,998 40,463
Net interest income 9,790 12,917 9,951 9,564 42,222
Provision for (recovery of) loan
loss allowances 0 (2,246) 0 700 (1,546)
Noninterest income 298 376 386 504 1,564
Noninterest expense 6,005 6,228 6,097 6,973 25,303
Income taxes 1,360 3,187 1,338 1,097 6,982
Net income 2,723 6,124 2,902 1,298 13,047
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YEAR 2000 ISSUE
With the year 2000 approaching, there is concern that the change of date could affect any system that relies on computers, computer software programs or computer chips. Many computer systems have been designed to store and recognize the year in two digits rather than four digits and to assume that the first two digits are 19. Beginning in the year 2000, therefore, the possibility exists that some computer systems may misinterpret "00" as 1900 instead of 2000. If not remedied, such a scenario could expose Home Savings and UCFC to business risks resulting from the interruption or shut-down of normal business operations.
To prepare for the change, Home Savings formed a Year 2000 compliance initiative committee to oversee all necessary corrective activities. A Year 2000 Project Plan was initiated to identify potential operational and business risks, assess systems and equipment, perform and test all renovations, and implement renovated systems. If the disruption of any system could inhibit Home Savings from interacting with or serving its customers, then it has been identified as "mission critical". The year 2000 compliance committee has determined that the greatest potential impact upon Home Savings and UCFC is the effect of the year 2000 problem on Home Savings' core transaction processing system which is managed by an outside data processing service bureau. The outside service bureau, working in conjunction with Home Savings, has installed and successfully tested a year 2000 compliant processing system.
In addition to comprehensive internal preparations, Home Savings is developing contingency plans for all "mission critical" systems which could be disrupted by Y2K failures outside of its control. The impact of various external failures is being analyzed, including disruption of utilities and essential services. Alternative procedures are being developed, documented and tested which would enable Home Savings to maintain delivery of products and services to customers. Such contingency plans include automated and manual procedures for controlling cash reserves, recording customer account transactions, providing back-up voice and data communications, reacting to utility interruptions, engaging external check processing services, ensuring adequate or increased security levels, and maintaining other necessary daily operations.
As of December 31, 1998, Home Savings had incurred costs of approximately $204 thousand. Additional costs to complete this project are currently estimated to be $181 thousand.
INDEPENDENT AUDITORS' REPORT
[LOGO]
To the Shareholders and Board of Directors United Community Financial Corp.
We have audited the accompanying consolidated statements of financial condition of United Community Financial Corp. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of The Home Savings and Loan Company of Youngstown, Ohio (subsidiary of United Community Financial Corp.) for the year ended December 31, 1996 were audited by other auditors whose report, dated February 28, 1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1998 and 1997 consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP CLEVELAND, OHIO January 29, 1999 |
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Assets
Cash and deposits with banks $ 16,733 $ 14,618
Federal funds sold and other 153,775 19,879
------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 170,508 34,497
------------------------------------------------------------------------------------------------------------------------
Investment securities:
Available for sale (amortized cost of $110,294 and $39,091,
respectively) 110,888 39,402
Held to maturity (fair value of $5,016 and $5,013, respectively) 4,993 4,968
Mortgage-backed securities:
Available for sale (amortized cost of $98,357 and $61,626, respectively) 98,890 62,416
Held to maturity (fair value of $187,010 and $247,986, respectively) 182,999 243,848
Loans, net (including allowance for loan losses of $6,398 and $5,982, respectively) 657,498 633,236
Federal Home Loan Bank stock 11,958 11,136
Premises and equipment 7,523 7,930
Accrued interest receivable 7,259 6,421
Real estate owned 78 55
Other assets 4,711 1,084
------------------------------------------------------------------------------------------------------------------------
Total assets $1,257,305 $1,044,993
------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits $ 777,583 $ 886,808
Advance payments by borrowers for taxes and insurance 3,954 3,715
Accrued interest payable 672 845
Accrued expenses and other liabilities 10,451 12,272
------------------------------------------------------------------------------------------------------------------------
Total liabilities 792,660 903,640
------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued
at December 31, 1998
Common stock--no par value; 499,000,000 shares authorized; 34,715,625
shares issued--and 32,129,463 outstanding at December 31, 1998 342,840
Retained earnings 146,934 140,636
Other comprehensive income 733 717
Unearned compensation (25,862)
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 464,645 141,353
------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,257,305 $1,044,993
------------------------------------------------------------------------------------------------------------------------
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income
Loans $53,063 $54,148 $48,586
Mortgage-backed securities:
Available for sale 4,351 5,122 6,871
Held to maturity 15,344 19,024 21,988
Investment securities:
Available for sale 4,194 2,169 1,226
Held to maturity 319 843 1,780
FHLB stock dividend 822 766 695
Other interest-earning assets 7,788 613 603
-------------------------------------------------------------------------------------------------------------
Total interest income 85,881 82,685 81,749
Interest expense
Interest expense on deposits 35,755 40,463 43,009
-------------------------------------------------------------------------------------------------------------
Net interest income 50,126 42,222 38,740
Provision for (recovery of) loan loss allowances 650 (1,546)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for
(recovery of) loan loss allowances 49,476 43,768 38,740
-------------------------------------------------------------------------------------------------------------
Noninterest income
Service fees and other charges 1,186 1,092 755
Net gains (losses):
Mortgage-backed securities available for sale 147 80
Mortgage-backed securities held to maturity 106
Investment securities available for sale 45
Other (68) (34) (45)
Other income 918 426 536
-------------------------------------------------------------------------------------------------------------
Total noninterest income 2,289 1,564 1,291
-------------------------------------------------------------------------------------------------------------
Noninterest expenses
Salaries and employee benefits 15,631 14,710 12,735
Occupancy 1,324 1,256 1,250
Equipment and data processing 2,573 2,534 2,181
Deposit insurance premiums 631 588 2,033
Federal deposit insurance special assessment 5,903
Franchise tax 1,917 1,752 1,643
Advertising 1,181 1,045 1,000
Other expenses 3,116 2,811 2,715
Charitable contributions 11,844 607 608
-------------------------------------------------------------------------------------------------------------
Total noninterest expenses 38,217 25,303 30,068
-------------------------------------------------------------------------------------------------------------
Income before income taxes 13,548 20,029 9,963
Income taxes 4,849 6,982 3,332
-------------------------------------------------------------------------------------------------------------
Net income $ 8,699 $13,047 $ 6,631
-------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic $ 0.08
--------------------------------------------------------------------------------
Diluted $ 0.08
--------------------------------------------------------------------------------
Average common shares outstanding 32,083,400
--------------------------------------------------------------------------------
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Common Retained Comprehensive Unearned
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Stock Earnings Income Compensation Total
--------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1996 $120,958 $ 1,335 $122,293
Comprehensive income:
Net income 6,631 6,631
Change in net unrealized gain (loss) on
securities, net of taxes of $291 (793) (793)
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income 5,838
Balance December 31, 1996 127,589 542 128,131
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 13,047 13,047
Change in net unrealized gain (loss) on
securities, net of taxes of $385 175 175
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income 13,222
Balance December 31, 1997 140,636 717 141,353
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 8,699 8,699
Change in net unrealized gain (loss) on
securities, net of taxes of $395 16 16
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income 8,715
Issuance of 34,715,625 common shares $342,602 $(26,773) 315,829
Shares distributed by ESOP trust 238 911 1,149
Dividends paid, $0.075 per share (2,401) (2,401)
--------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $342,840 $146,934 $ 733 $(25,862) $464,645
--------------------------------------------------------------------------------------------------------------------------
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Cash Flows from Operating Activities
Net income $ 8,699 $ 13,047 $ 6,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan loss allowances 650 (1,546)
Net gains (185) (46)
Accretion of discounts and amortization of premiums (1,425) (1,090) (1,499)
Depreciation 1,022 1,080 1,016
FHLB stock dividends (822) (766) (695)
(Increase) decrease in interest receivable (838) 43 1,319
Decrease in interest payable (173) (155) (18)
Increase in post retirement benefit obligation 320 321 312
(Increase) decrease in prepaid and other assets (3,627) 137 (182)
(Decrease) increase in other liabilities (2,151) 2,165 (929)
Change in unearned compensation 1,149
Charitable contribution of stock 11,834
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,453 13,190 5,955
--------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity 66,328 42,885 46,034
Mortgage-backed securities available for sale 19,452 19,094 23,007
Investment securities held to maturity 23,000 2,000
Investment securities available for sale 11,114 6,312 3,653
Proceeds from sale of:
Mortgage-backed securities available for sale 13,145 3,065
Mortgage-backed securities held to maturity 2,764
Investment securities available for sale 21,004
Purchases of:
Mortgage-backed securities held to maturity (8,047) (30,031)
Mortgage-backed securities available for sale (69,119) (8,110)
Investment securities available for sale (82,466) (30,876) (7,544)
Principal collected on loans 205,791 119,120 125,550
Loans originated (229,485) (133,357) (194,650)
Purchases of premises and equipment (621) (2,414) (1,516)
Other 96 199 64
--------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (71,048) 47,028 (20,539)
--------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in Now, Savings and Money Market Accounts (18,590) (16,842) (241)
Net decrease of Certificates of Deposit (90,637) (28,410) (6,554)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 239 (137) (767)
Net proceeds from the sale or issuance of common shares 303,995
Dividends paid (2,401)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 192,606 (45,389) (7,562)
--------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 136,011 14,829 (22,146)
Cash and cash equivalents, beginning of year 34,497 19,668 41,814
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $170,508 $ 34,497 $ 19,668
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of United Community Financial Corp., a unitary savings and loan holding company (UCFC) and The Home Savings & Loan Company of Youngstown, Ohio, a state chartered savings and loan company, (Home Savings), conform to generally accepted accounting principles and prevailing practices within the banking and thrift industry. A summary of the more significant accounting policies follows.
NATURE OF OPERATIONS
UCFC was incorporated under Ohio law in February 1998 by Home Savings in
connection with the conversion of Home Savings from an Ohio mutual savings and
loan association to an Ohio capital stock savings and loan association, the
issuance of Home Savings' stock to UCFC and the offer and sale of UCFC's common
stock by UCFC (Conversion). Upon consummation of the Conversion on July 8, 1998,
UCFC became the unitary savings and loan holding company for Home Savings. The
business of Home Savings and, therefore, the primary business of UCFC is
providing consumer and business banking service to its market area in
northeastern Ohio. At the end of 1998, Home Savings was doing business through
14 full service banking branches. Loans and deposits are primarily generated
from the areas where banking branches are located. Home Savings' income is
derived predominantly from interest on loans, securities, and to a lesser
extent, noninterest income. Home Savings' principal expenses are interest paid
on deposits and normal operating costs. Home Savings' operations are principally
in the savings and loan industry. Consistent with internal reporting Home
Savings' operations are reported in one operating segment, which is retail
banking.
CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
UCFC issued 34,715,625 common shares in connection with the Conversion.
Gross proceeds from the offering were $347,156,250, which includes 2,677,250
shares issued to the United Community Financial Corp. Employee Stock Ownership
Plan and 1,183,438 shares sold to Home Savings for transfer to the Home Savings
Charitable Foundation. Conversion costs amounted to $4.6 million.
Home Savings issued all its outstanding common stock to UCFC in exchange for approximately one-half of the net proceeds. UCFC accounted for the purchase in a manner similar to a pooling of interests whereby assets and liabilities of Home Savings maintain their historical cost basis in the consolidated company.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Securities are classified as available for sale or held to maturity upon
their acquisition. Securities classified as available for sale are carried at
estimated fair value with the unrealized holding gain or loss reflected as a
component of equity, net of taxes. Securities classified as held to maturity are
carried at amortized cost. Premiums and discounts are recognized in interest
income over the period to maturity by the level yield method. Realized gains or
losses on the sale of debt securities are recorded based on the amortized cost
of the specific securities sold. Security sales are recorded on a trade date
basis.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances. For balance sheet presentation, the balances are
presented net of deferred fees or costs on originated loans or unamortized
premiums or discounts on purchased loans. Discounts and premiums are accreted or
amortized using the interest method over the remaining period to contractual
maturity. Unamortized net fees or costs are recognized upon early repayment of
the loans. Unamortized net fees or costs on loans sold are included in the basis
of the loans in calculating gains and losses.
Loans intended for sale are carried at the lower of cost or estimated market value determined on an aggregate basis. Net unrealized losses are recognized through a valuation allowance by a charge to income. Gains or losses on the sale of loans are determined under the specific identification method.
A loan (including a loan impaired under SFAS No. 114) is classified as nonaccrual when collectability is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). A loan may be considered impaired, but remain on accrual status, when the borrower demonstrates (by continuing to make payments) a willingness to keep the loan current and by reducing the delinquency to less than 90 days. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently
recognized only to the extent that cash payments are received. Cash receipts received on impaired loans are generally applied first to escrow requirements, then to delinquent interest, with any remainder to the principal balance. Loans are returned to full accrual status when the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). Loans are classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or the terms due to the inability of the borrower to meet the obligation under the original terms.
A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In general, Home Savings considers a loan on income-producing properties to be impaired when the debt service ratio is less than 1.0 and it is not probable that all payments will be received in accordance with contractual terms. Loans on non-income producing properties are considered impaired whenever fair value of the underlying collateral is less than book value of the outstanding loan. Home Savings performs a review of all loans over $500 thousand to determine if the impairment criteria have been met. If the impairment criteria have been met, a reserve is calculated, including all collection costs, according to the provisions of the SFAS No. 114. Most of Home Savings' loan portfolios are excluded from the scope of SFAS No. 114 because the pronouncement is generally not applicable to large groups of smaller-balance homogeneous loans such as residential mortgage, and other consumer loans. For loans which are individually not significant ($500 thousand or less) and represent a homogeneous population, Home Savings evaluates impairment based on the level and extent of delinquencies in the portfolio and Home Savings prior charge-off experience with those delinquencies. Home Savings charges principal off at the earlier of (i) when a total loss of principal has been deemed to have occurred as a result of the book value exceeding the fair value, or (ii) when collection efforts have ceased.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based upon
estimates derived from an analysis of individual credits, prior and current loss
experience, loan portfolio delinquency levels, overall growth in the loan
portfolio and current economic conditions. Consequently, these estimates are
particularly susceptible to changes that could result in a material adjustment
to results of operations. The provision for loan losses represents a charge
against current earnings in order to maintain the allowance for loan losses at
an appropriate level.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the useful lives (or term of the lease, if shorter) of
the related assets.
REAL ESTATE OWNED
Real estate owned, including property acquired in settlement of
foreclosed loans, is carried at the lower of cost or estimated fair value less
estimated cost to sell after foreclosure. Costs relating to the development and
improvement of real estate owned are capitalized, whereas costs relating to
holding and maintaining the property are charged to expense.
LOAN FEES
Loan origination fees received for loans, net of direct origination
costs, are deferred and amortized to interest income over the contractual lives
of the loans using the level yield method. Fees received for loan commitments
that are expected to be drawn, based on Home Savings' experience with similar
commitments, are deferred and amortized over the lives of the loans using the
level yield method. Fees for other loan commitments are deferred and amortized
over the loan commitment period on a straight-line basis. Unamortized deferred
loan fees or costs related to loans paid off are included in income. Unamortized
net fees or costs on loans sold are included in the basis of the loans in
calculating gains and losses. Amortization of net deferred fees is discontinued
for loans that are deemed to be nonperforming.
INCOME TAXES
The provision for federal income taxes is based upon earnings reported
for financial statement purposes rather than amounts reported on Home Savings'
income tax returns. Deferred income taxes, which result from temporary
differences in the recognition of income and expense for financial statement and
tax return purposes, are included in the calculation of income tax expense. The
effect on deferred tax assets and liabilities of a change in income tax rates is
recognized in income in the period that includes the enactment date.
Deferred income tax assets and liabilities are recorded annually for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established, based on the weight of available evidence, when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE
Basic "Earnings Per Share" (EPS) is based on the weighted average number
of common shares outstanding during the year. Diluted EPS is based on the
weighted average number of common shares and common share equivalents
outstanding during the year. See further discussion at Note 16.
POSTRETIREMENT BENEFITS
Home Savings accrues estimated costs of retiree health care and life
insurance benefits over the years employees render the services necessary to
earn those benefits. Home Savings elected to recognize the accumulated
postretirement benefit obligation when SFAS No. 106 "Employers' Accounting for
Postretirement Benefits other than Pensions" was adopted.
STATEMENTS OF CASH FLOWS
For purposes of the statement of cash flows, Home Savings considers all
highly liquid investments with a term of three months or less to be cash
equivalents.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
Home Savings' profitability depends to a large extent on its net interest
income, which is the difference between interest income from loans and
investments and interest expense on deposits. Like most financial institutions,
Home Savings' short-term interest income and interest expense are significantly
affected by changes in market interest rates and other economic factors beyond
its control. Home Savings' interest earning assets consist primarily of
long-term, fixed rate and adjustable rate mortgage loans and investments which
adjust more slowly to changes in interest rates than its interest bearing
liabilities which are deposits. Accordingly, Home Savings' earnings could be
adversely affected during periods of rising interest rates.
NEW ACCOUNTING STANDARDS
On January 1, 1997 Home Savings adopted SFAS No. 125. SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The statement also defines accounting treatment for servicing assets
and other retained interests in the assets that are transferred. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is required to be applied
prospectively. The adoption of this statement has not had a material effect on
Home Savings financial condition or results of operations. The Financial
Accounting Standards Board has issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125," that defers the effective date of
certain provisions of SFAS No. 125 related to secured borrowings and collateral,
repurchase agreements, dollar rolls, securities lending, and similar
transactions until after December 31, 1997. Management has determined that the
impact of adopting this statement is not material to the financial statements.
On January 1, 1998, Home Savings adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required.
On January 1, 1998, Home Savings adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way public business enterprises report information about reportable operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement requires that a public enterprise report financial and descriptive information about its operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Information required to be disclosed includes segment profit or loss, certain specific revenue and expense items, segment assets and certain other information. The adoption of the statement did not change Home Savings' segment reporting. Home Savings continues to report its operations as one industry segment, retail banking.
Home Savings adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," in 1998. This statement standardizes the disclosure for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," were issued. SFAS No. 132 suggests combined formats for presentation of pension and other postretirement benefit disclosures. It does not
change the measurement or recognition of those plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. Restatements of disclosures for earlier periods provided for comparative purposes is required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for years beginning after June 15, 1999. Management does not believe the adoption of this statement will have a material impact on Home Savings' financial condition and results of operations.
RECLASSIFICATIONS
Certain items in the financial statements for 1997 and 1996 have been
reclassified to conform to the 1998 presentation.
2. CASH AND CASH EQUIVALENTS
Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. These reserves, which consisted of vault cash and deposits at the Federal Reserve Bank, totaled approximately $3.7 million and $2.5 million at December 31, 1998 and 1997, respectively.
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
DECEMBER 31, 1998
---------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Available for Sale
---------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities $ 28,045 $391 $ $ 28,436
Corporate notes 82,249 331 128 82,452
---------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 110,294 722 128 110,888
Held to Maturity
---------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities 4,993 23 5,016
---------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity 4,993 23 5,016
---------------------------------------------------------------------------------------------------------------
Total investment securities $115,287 $745 $128 $115,904
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
|
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
Corporate notes 4,968 45 5,013
---------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity 4,968 45 5,013
---------------------------------------------------------------------------------------------------------------
Total investment securities $44,059 $356 $44,415
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
|
The weighted average interest rate on investment securities was 6.01% and 6.39% at December 31, 1998 and 1997, respectively. The corporate notes consist primarily of medium-term notes issued by corporations with investment grade ratings.
Investment securities available for sale by contractual maturity, repricing or expected call date are shown below:
DECEMBER 31, 1998
--------------------------------------------------------------------------------
AMORTIZED COST FAIR VALUE
--------------------------------------------------------------------------------
(IN THOUSANDS)
Due in one year or less $ 12,552 $ 12,600
Due after one year through five years 97,742 98,288
Due after five years through ten years
Due after ten years
--------------------------------------------------------------------------------
Total $110,294 $110,888
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
Investment securities held to maturity by contractual maturity, repricing or expected call date are shown below:
DECEMBER 31, 1998
--------------------------------------------------------------------------------
AMORTIZED COST FAIR VALUE
--------------------------------------------------------------------------------
(IN THOUSANDS)
Due in one year or less $ 4,993 $ 5,016
Due after one year through five years
Due after five years through ten years
Due after ten years
--------------------------------------------------------------------------------
Total $ 4,993 $ 5,016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
There were no sales of investment securities during the years ended December 31, 1998 and 1997. Proceeds on sales of investment securities available for sale were approximately 21.0 million for the year ended December 31, 1996. There were realized gains of approximately $155 thousand and realized losses of approximately $110 thousand for the year ended December 31, 1996. There were no sales of investment securities held to maturity during the year ended December 31, 1996.
Securities pledged for public funds deposits were approximately $2.1 million and $3.8 million at December 31, 1998 and 1997, respectively.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities were summarized as follows:
DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Available for Sale
----------------------------------------------------------------------------------------------------------
Participation certificates:
Government agency issues $ 58,423 $ 893 $ 55 $ 59,261
Private issues 2,106 77 2,029
Collateralized Mortgage Obligations:
Government agency issues 13,075 5 34 13,046
Private issues 24,753 199 24,554
----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
available for sale 98,357 898 365 98,890
Held to Maturity
----------------------------------------------------------------------------------------------------------
Participation certificates:
Government and government agency issues 182,999 4,071 60 187,010
----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $281,356 $4,969 $425 $285,900
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
December 31, 1997
----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Available for Sale
----------------------------------------------------------------------------------------------------------
Participation certificates:
Government agency issues $ 59,304 $1,073 $205 $ 60,172
Private issues 2,322 78 2,244
----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
available for sale 61,626 1,073 283 62,416
Held to Maturity
----------------------------------------------------------------------------------------------------------
Participation certificates:
Government and government agency issues 243,848 4,672 534 247,986
----------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $305,474 $5,745 $817 $310,402
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
|
Mortgage-backed securities are classified by type of interest payment as follows:
December 31,
---------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Available for Sale
---------------------------------------------------------------------------------------------------------------------------
Adjustable rate:
Private issues $ 571 $ 571 $ 757 $ 757
---------------------------------------------------------------------------------------------------------------------------
Total adjustable rate 571 571 757 757
---------------------------------------------------------------------------------------------------------------------------
Fixed rate:
Participation certificates:
Government agency issues 58,423 59,261 59,304 60,172
Private issues 1,535 1,458 1,565 1,487
Collateralized Mortgage Obligations:
Government agency issues 13,075 13,046
Private issues 24,753 24,554
---------------------------------------------------------------------------------------------------------------------------
Total fixed rate 97,786 98,319 60,869 61,659
---------------------------------------------------------------------------------------------------------------------------
Total available for sale 98,357 98,890 61,626 62,416
---------------------------------------------------------------------------------------------------------------------------
Held to Maturity
---------------------------------------------------------------------------------------------------------------------------
Adjustable rate:
Participation certificates:
Government agency Issues 718 712 955 969
---------------------------------------------------------------------------------------------------------------------------
Total adjustable rate 718 712 955 969
---------------------------------------------------------------------------------------------------------------------------
Fixed rate:
Participation certificates:
Government and government agency issues 182,281 186,298 242,893 247,017
Total fixed rate 182,281 186,298 242,893 247,017
---------------------------------------------------------------------------------------------------------------------------
Total held to maturity 182,999 187,010 243,848 247,986
---------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $281,356 $285,900 $305,474 $310,402
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
|
Proceeds on sales of mortgage-backed securities available for sale were $13.1 million and $3.1 million for the years ended December 31, 1998 and 1997, respectively. There were realized gains of $147 thousand and $80 thousand for the years ended December 31, 1998 and 1997, respectively, and no realized losses for 1998 or 1997. Proceeds on sales of mortgage-backed securities held to maturity for the year ended December 31, 1998 were $2.8 million with an amortized cost of $2.7 million. Mortgage-backed securities sold from the held to maturity portfolio were less than 15% of the principal outstanding at acquisition. There were realized gains of $106 thousand and no realized losses for the year ended December 31, 1998. There were no sales of mortgage-backed securities held to maturity during the year ended December 31, 1997. There were no sales of mortgage-backed securities available for sale or held to maturity during the year ended December 31, 1996.
5. LOANS
Loans consists of the following:
December 31,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------
(IN THOUSANDS)
Real Estate:
Permanent:
One-to-four family $516,767 $489,677
Multifamily 8,172 8,944
Non-residential 31,308 33,479
Land 190 285
Construction:
One-to-four family 25,691 24,044
Multifamily and non-residential 833 325
--------------------------------------------------------------------------------
Total real estate 582,961 556,754
Consumer 41,773 43,388
Commercial 75,085 59,897
--------------------------------------------------------------------------------
Total loans 699,819 660,039
--------------------------------------------------------------------------------
Less:
Loans in process 31,026 16,485
Allowance for loan losses 6,398 5,982
Deferred loan fees, net 4,897 4,336
--------------------------------------------------------------------------------
Total 42,321 26,803
--------------------------------------------------------------------------------
Loans, net $657,498 $633,236
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
Loans with adjustable rates included above totaled $161.1 million and $180.6 million at December 31, 1998 and 1997, respectively. Substantially all such loans have contractual interest rates that increase or decrease at periodic intervals no greater than three years, or have original terms to maturity of three years or less. Adjustable-rate loans reprice primarily based upon U.S. Treasury security rates.
Home Savings' primary lending area is within the northeast, Ohio. At December 31, 1998 and 1997, substantially all of Home Savings' gross loans were to borrowers in Ohio.
Home Savings originates or purchases commercial real estate and business loans. These loans are considered by management to be of somewhat greater risk of uncollectibility than single-family residential real estate loans due to the dependency on income production or future development of real estate. The following table sets forth Home Savings' commercial non-residential real estate portfolios by type of collateral.
December 31,
-----------------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------------------
PERCENT Percent
AMOUNT OF TOTAL Amount of Total
-----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Strip shopping centers $ 1,614 5.16% $ 1,736 5.19%
Office buildings 8,230 26.29 9,160 27.36
Warehouses 17,050 54.46 17,853 53.33
Hotel property 4,111 13.12 4,373 13.06
Other 303 0.97 357 1.06
-----------------------------------------------------------------------------------------------
Total $31,308 100.00% $33,479 100.00%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
|
Commercial real estate loans are typically collateralized by the property. Commercial loans are collateralized by accounts receivable, inventory and other assets used in the borrowers' business. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers' residence.
At December 31, 1998, 1997 and 1996, loans serviced for the benefit of others, not included in the detail above, totaled $6.0 million, $6.6 million and $7.0 million, respectively.
Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments extend over various periods of time with the majority of such commitments disbursed within a ninety day period. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit at fixed rates exposes Home Savings to some degree of interest rate risk. Home Savings evaluates each customer's creditworthiness on a case-by-case basis. The type or amount of collateral obtained varies and is based on management's credit evaluation of the potential borrower. Home Savings normally has a number of outstanding commitments to extend credit. At December 31, 1998, there were outstanding commitments to originate $23.6 million of fixed-rate mortgage loans and other loans (with interest rates that ranged from 6.5% to 9.0%), $1.0 million of adjustable-rate loans, all at market rates, and $14.0 million of commercial loans. Terms of the commitments extend up to nine months, but are generally less than two months.
At December 31, 1998, there were also outstanding unfunded consumer lines of credit of $19.6 million and commercial lines of credit of $1.8 million. Substantially all lines of credit are adjustable-rate based on the one-year U.S. Treasury index and are generally renewable on an annual basis. Home Savings does not expect all of these lines to be used by the borrowers.
Home Savings' business activity is principally with customers located in Ohio. Except for residential loans in Home Savings' market area, Home Savings has no other significant concentrations of credit risk.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
Balance, beginning of year $5,982 $ 5,040 $5,118
Provision for (recovery of) loan loss allowances 650 (1,546)
Amounts charged off (270) (446) (85)
Recoveries 36 2,934 7
---------------------------------------------------------------------------------------------
Balance, end of year $6,398 $ 5,982 $5,040
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
|
Nonperforming loans (loans 90 days past due and restructured loans) were $7.6 million, $10.2 million and $9.8 million at December 31, 1998, 1997 and 1996, respectively.
As of or for the
Year Ended
December 31,
1998 1997
------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Impaired loans on which no specific valuation allowance was provided $5,677 $9,340
Impaired loans on which specific valuation allowance was provided 52 151
------------------------------------------------------------------------------------------------------------
Total impaired loans at year-end 5,729 9,491
Specific valuation allowances on impaired loans at year-end 52 157
Average impaired loans during year 6,830 8,390
Interest income recognized on impaired loans during the year 343 544
Interest income potential based on original contract terms of impaired loans 349 585
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
|
Directors and officers of Home Savings are customers of the institution in the ordinary course of business. Loans of directors and officers have terms consistent with those offered to other customers. At December 31, 1998 and 1997, loans to officers or directors of Home Savings totaled approximately $1.4 million and $1.3 million, respectively.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------
(IN THOUSANDS)
Land and land improvements $ 1,952 $ 1,952
Buildings 10,103 9,992
Leasehold improvements 273 325
Furniture and equipment 5,221 4,773
--------------------------------------------------------------------------------
17,549 17,042
Less allowances for depreciation and amortization 10,026 9,112
--------------------------------------------------------------------------------
Total $ 7,523 $ 7,930
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
7. DEPOSITS
Deposits consist of the following:
December 31,
-----------------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
-----------------------------------------------------------------------------------------------
(IN THOUSANDS)
Checking accounts:
Interest-bearing $ 69,284 1.86% $ 58,707 2.03%
Noninterest-bearing 6,933 5,387
Savings accounts 224,840 2.50 243,588 2.99
Money market accounts 44,764 2.57 56,727 2.99
Certificates of deposit 431,762 5.35 522,399 5.78
-----------------------------------------------------------------------------------------------
Total deposits $777,583 4.02% $886,808 4.56%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
|
Interest expense on deposits is summarized as follows:
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
(IN THOUSANDS)
Interest-bearing checking $ 1,279 $ 1,165 $ 1,154
Savings accounts 7,114 7,387 7,879
Money market accounts 1,340 1,741 2,094
Certificates of deposit 26,022 30,170 31,882
--------------------------------------------------------------------------------
Total $35,755 $40,463 $43,009
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
A summary of certificates of deposit by maturity follows:
December 31, 1998
--------------------------------------------------------------------------------
(IN THOUSANDS)
Within 12 months $271,550
12 months to 24 months 83,246
24 months to 36 months 34,580
36 months to 48 months 26,576
Over 48 months 15,810
--------------------------------------------------------------------------------
Total $431,762
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
At December 31, 1998, deposit accounts with balances of $100 thousand and greater totaled approximately $37.6 million. Deposits in excess of $100 thousand are not federally insured. Home Savings does not have brokered deposits for the years ended December 31, 1998 and 1997.
8. INCOME TAXES
The provision for federal income taxes consists of the following components:
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
(IN THOUSANDS)
Current $ 8,774 $6,807 $3,055
Deferred (3,925) 175 277
--------------------------------------------------------------------------------
Total $ 4,849 $6,982 $3,332
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
A reconciliation from tax at the statutory rate to the income tax provision is as follows:
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Dollars Rate Dollars Rate Dollars Rate
-------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Tax at statutory rate $4,888 35.00% $7,010 35.00% $3,487 35.00%
Increase (decrease) due to:
Other (39) (.35) (28) (.14) (155) (1.55)
-------------------------------------------------------------------------------------------------------------------------
Income tax provision $4,849 34.65% $6,982 34.86% $3,332 33.45%
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
|
Significant components of the deferred tax assets and liabilities are as follows. No valuation allowance was considered necessary for the years ended December 31, 1998 and 1997.
December 31,
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
(IN THOUSANDS)
Deferred tax assets:
Charitable contribution $ 3,286
Loan loss reserves 2,239 $ 2,093
Postretirement benefits 2,776 2,676
Deferred loan fees 1,714 1,518
Interest on non-accrual loans 122 205
-------------------------------------------------------------------------
Net deferred tax assets 10,137 6,492
-------------------------------------------------------------------------
Deferred tax liabilities:
ESOP compensation 128
Accelerated depreciation 379 479
Pension benefit obligations 309 461
Original issue discount 1,637 1,408
FHLB stock dividends 2,374 2,093
Post 1987 tax bad debts 1,614 2,152
Mark-to-market 394 385
-------------------------------------------------------------------------
Net deferred tax liabilities 6,835 6,978
-------------------------------------------------------------------------
Net deferred tax asset (liability) $ 3,302 $ (486)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
|
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including Home Savings, to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The excess
reserves (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six-year period beginning in 1996. The recapture
has no effect on Home Savings' statement of income as income taxes were provided
for in prior years in accordance with generally accepted accounting principles.
The pre-1988 reserve provisions are subject only to recapture requirements in
the case of certain excess distributions to, and redemptions of shareholders or
if Home Savings no longer qualifies as a "bank." Tax bad debt deductions
accumulated prior to 1988 by Home Savings are approximately $14.4 million. No
deferred income taxes have been provided on these bad debt deductions and no
recapture of these amounts is anticipated.
In December 1998, Home Savings made a charitable contribution of 1,183,438 shares of UCFC stock to the Home Savings Charitable Foundation in the amount of approximately $11.8 million. Charitable contributions can only be deducted to the extent of 10% of Home Savings' taxable income for the period in which the contribution is made. Any excess may be carried forward for a period of five years to be offset against future taxable income. A deferred tax asset in the amount of $3.3 million has been established to account for the contribution carryforward. No valuation allowance is deemed necessary as it is anticipated that Home Savings will have sufficient taxable income over the next five years to fully utilize this carryforward amount.
9. STOCKHOLDERS' EQUITY
DIVIDENDS
UCFC's source of funds for dividends to its stockholders are earnings on
its investments and dividends from Home Savings. During the year ended December
31, 1998, UCFC paid dividends in the amount of $2.4 million. However Home
Savings primary regulator, the OTS has regulations that impose certain
restrictions on payments of dividends to UCFC.
OTS regulations provide that an institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution could, after prior notice to the OTS (approval is not required), make capital distributions during the calendar year of up to 100 percent of its net income to date during the calendar year plus 50% of its surplus capital at the beginning of the calendar year. Any capital distributions in excess of this amount would require prior regulatory approval. During the year ended December 31, 1998, Home Savings did not make any distributions.
OTHER COMPREHENSIVE INCOME
Other comprehensive income included in the Consolidated Statements of
Stockholders' Equity consists solely of unrealized gains and losses on available
for sale securities. The change in net unrealized gain on available for sale
securities includes reclassification adjustments to reclassify gains or losses
for sales of the related security of $96 thousand, $52 thousand and $29 thousand
for the year ended December 31, 1998, 1997 and 1996, respectively.
LIQUIDATION ACCOUNT
In accordance with federal regulations, at the time Home Savings
converted from a mutual savings and loan association to a capital stock savings
and loan association, Home Savings established a liquidation account which
amounted to approximately $141.4 million at the time of the conversion. The
liquidation account is maintained for the benefit of eligible account holders
who continue to maintain their accounts at Home Savings. The liquidation account
is reduced annually to the extent that eligible account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holders interest in the liquidation account. In the event of a complete
liquidation of Home Savings, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to their current adjusted qualifying balance before any distribution may be made
to UCFC as the sole shareholder of Home Savings. Under current regulations, Home
Savings is not permitted to pay dividends on its stock if the effect would
reduce its regulatory capital below the liquidation account.
10. REGULATORY CAPITAL REQUIREMENTS
Home Savings is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Home Savings' financial statements. The regulations require Home Savings to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of Home Savings' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Home Savings' capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Home Savings to maintain minimum amounts and ratios of Core and Tangible capital (as defined in the regulations) to adjusted total assets (as defined) and of total capital (as defined) to risk-weighted assets (as defined).
As of December 31, 1998
-----------------------------------------------------------------------------------------------------------------------------
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Total capital (to risk-weighted assets) $305,919 51.51% $47,513 8.00% $59,391 10.00%
Tier 1 capital (to risk-weighted assets) 299,617 50.45 * * 35,635 6.00
Core (Tier 1) capital (to adjusted
total assets) 299,617 26.80 33,534 3.00% 55,890 5.00
Tangible capital (to adjusted
tangible assets) 299,617 26.80 16,767 1.50% * *
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
|
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 assets) $146,461 28.85% $40,619 8.00% $50,774 10.00%
Tier 1 capital (to risk-weighted assets) 140,636 27.70 * * 30,464 6.00
Core (Tier 1) capital (to adjusted
total assets) 140,636 13.47 31,322 3.00 52,203 5.00
Tangible capital (to adjusted
tangible assets) 140,636 13.47% 15,661 1.50% * *
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
|
*RATIO IS NOT REQUIRED UNDER REGULATIONS.
As of December 31, 1998 and 1997, the Office of Thrift Supervision categorized Home Savings as well capitalized under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, Home Savings must maintain minimum Core, Tier 1 and total capital ratios as set forth in the table above. There are no conditions or events since that notification that have changed Home Savings' category.
Management believes, as of December 31, 1998, that Home Savings meets all capital requirements to which it is subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which Home Savings' loans and securities are concentrated, could adversely affect future earnings and, consequently, Home Savings' ability to meet its future capital requirements.
11. BENEFIT PLANS
RETIREMENT PLANS
Home Savings has a defined benefit pension plan covering substantially
all of its full-time employees. The benefits are based on years of service and
the employee's compensation during the last five years of employment.
Participants become 100% vested upon completion of five years of service. Home
Savings' funding policy is to contribute amounts to the plan sufficient to meet
the minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as Home Savings may determine
to be appropriate from time to time. Contributions are intended to provide not
only for benefits attributed to service to date but also for those expected to
be earned in the future. As of December 31 1998, Home Savings amended the
defined benefit pension plan to freeze benefit accruals effective December 31,
1998. A curtailment gain recognized as a result of freezing the plan was not
significant.
OTHER POSTRETIREMENT BENEFIT PLANS
In addition to Home Savings' retirement plans, Home Savings sponsors a
defined benefit health care plan that provides postretirement medical benefits
to full-time employees who have worked 15 years and attained age 60, or worked 5
years and attained age 65, while in service with Home Savings. The plan is
contributory and contains minor cost-sharing features such as deductibles and
coinsurance. In addition, postretirement life insurance coverage is provided for
employees who were participants prior to December 10, 1976. The life insurance
plan is non-contributory. Home Savings' policy is to pay premiums monthly, with
no pre-funding.
The weighted-average annual assumed rate of increase in the per capita cost of coverage benefits (i.e., health care cost trend rate) used in the 1998 valuation was 8 percent and 1997 valuation was 9 percent and was assumed to decrease 1 percent per year to 6 percent for the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Effect on total of service and interest cost components $ 130 $ (98)
Effect on the postretirement benefit obligation $1,100 $(880)
---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------------------------------------
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLAN PLAN PLAN PLAN
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 8,612 $ 5,250 $ 8,350 $ 4,785
Service cost 435 229 376 208
Interest cost 557 325 530 332
Actuarial (gain)/loss 2,529 (110) (585) 10
Benefit paid (178) (319) (59) (85)
Curtailment (4,119)
---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of the year $ 7,836 $ 5,375 $ 8,612 $ 5,250
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 7,445 $ 5,991
Actual return of plan assets 1,016 1,013
Employer contribution 575 500
Benefits paid (178) (59)
---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of the year $ 8,858 $ 0 $ 7,445 $ 0
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Funded status of the plan $ 1,022 $(5,375) $(1,167) $(5,250)
Unrecognized net (gain)/loss from past
experience different from that assumed and
effects of changes in assumptions (2,249) 1,544 (2,028)
Prior service cost not yet recognized in net
periodic pension cost (343) 367 (369)
---------------------------------------------------------------------------------------------------------------------------
(Accrued)/prepaid pension cost included in
other liabilities $ 1,022 $(7,967) $ 744 $(7,647)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
|
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
DEFINED POST- Defined Post- Defined Post-
BENEFIT RETIREMENT Benefit retirement Benefit retirement
PLAN PLAN Plan Plan Plan Plan
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Service cost $ 435 $ 229 $ 376 $ 208 $ 357 $ 189
Interest cost 557 325 530 332 544 316
Expected return on plan assets (609) (495) (525)
Net amortization of prior service cost 43 (26) (92) (26) (118) (26)
Recognized net actuarial loss/(gain) 10 (123) 74 (108) 79 (102)
---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 436 $ 405 $ 393 $ 406 $ 337 $ 377
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
|
Assumption used in the valuations were as follows:
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
DEFINED POST- Defined Post- Defined Post-
BENEFIT RETIREMENT Benefit retirement Benefit retirement
PLAN PLAN Plan Plan Plan Plan
---------------------------------------------------------------------------------------------------------------------------
Weighted average discount rate 5.50% 6.50% 7.00% 7.00% 7.25% 7.25%
Rate of increase in future compensation levels N/A N/A 6.00 N/A 6.00 N/A
Expected long-term rate of return on plan assets 8.00 N/A 8.00 N/A 8.00 N/A
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
|
The prior service cost is being amortized using the straight-line method over the average remaining service period of participants expected to receive benefits.
401(k) SAVINGS PLAN Home Savings also sponsors a defined contribution 401(k) savings plan, which covers substantially all employees. Under the provisions of the plan, Home Savings' matching contribution is discretionary and may be changed from year to year. For 1998 and 1997, Home Savings' match was 25% of pre-tax contributions, up to a maximum of 6% of the employees' base pay. In addition, in 1997 and 1996 Home Savings paid a 1% discretionary contribution to all employees who were eligible to participate in the plan. Also in 1996, Home Savings implemented a discretionary profit sharing pool as a part of the 401(k) plan which is based upon a formula involving the average net income of Home Savings over a three year period. Participants become 100% vested in Home Savings contributions upon completion of five years of service. For the years ended 1998, 1997 and 1996, the expense related to this plan was approximately $134 thousand, $468 thousand and $513 thousand, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the conversion, UCFC established an Employee Stock
Ownership Plan (ESOP) for the benefit of the employees of UCFC and Home Savings.
All full-time employees who meet certain age and years of service criteria are
eligible to participate in the ESOP. An ESOP is a tax-qualified retirement plan
designed to invest primarily in the stock of UCFC. The ESOP borrowed $26.8
million from UCFC to purchase 2,677,250 shares in conjunction with the
conversion. The term of the loan will be 15 years and will be repaid primarily
with contributions from Home Savings to the ESOP.
The loan is collateralized by the shares of common stock held by the ESOP. As the note is repaid, shares are released from collateral based on the proportion of the payment in relation to total payments required to be made on the loan. The shares released from collateral are then allocated to participants on the basis of compensation as described in the plan. Compensation expense is determined by multiplying the per share market price of UCFC's stock during the period by the number of shares to be released. UCFC recognized approximately $1.3 million in compensation expense for the year ended December 31, 1998 related to the ESOP. Unallocated shares are considered neither outstanding shares for computation of basic earnings per share nor potentially dilutive securities for computation of diluted earnings per share. Dividends on unallocated ESOP shares are reflected as a reduction in the loan (and Home Savings' contribution is reduced accordingly). Shares released or committed to be released for allocation during the year ended December 31, 1998 totaled 91,088. Shares remaining not released or committed to be released for allocation at December 31, 1998 totaled 2,586,162 and had a market value of approximately $39.8 million. No shares have been specifically allocated as of December 31, 1998.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by Home Savings using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Home Savings could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
CASH, CASH EQUIVALENTS, ACCRUED INTEREST RECEIVABLE AND PAYABLE AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE--The carrying amounts as reported in the Statements of Financial Condition are a reasonable estimate of fair value due to their short-term nature.
MORTGAGE-BACKED AND INVESTMENT SECURITIES--Fair values are based on quoted market prices, dealer quotes and prices obtained from independent pricing services.
LOANS--The fair value is estimated by discounting the future cash flows using the current market rates for loans of similar maturities with adjustments for market and credit risks.
FEDERAL HOME LOAN BANK STOCK--The fair value is estimated to be the carrying value, which is par. All transactions in the capital stock of the Federal Home Loan Bank are executed at par.
DEPOSITS--The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.
LIMITATIONS--Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time Home Savings' entire holdings of a particular financial instrument. Because no market exists for a significant portion of Home Savings' financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1998 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
DECEMBER 31, 1998 December 31, 1997
---------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents $170,508 $170,508 $ 34,497 $ 34,497
Investment securities:
Held to maturity 4,993 5,016 4,968 5,013
Available for sale 110,888 110,888 39,402 39,402
MORTGAGE-BACKED SECURITIES:
Held to maturity 182,999 187,010 243,848 247,986
Available for sale 98,890 98,890 62,416 62,416
Loans 657,498 668,600 633,236 640,354
Federal Home Loan Bank stock 11,958 11,958 11,136 11,136
Accrued interest receivable 7,259 7,259 6,414 6,414
LIABILITIES:
Deposits:
Checking, savings and money
market accounts 345,821 345,821 364,409 364,409
Certificates of deposit 431,762 434,716 522,399 522,051
Advance payments by borrowers
for taxes and insurance 3,954 3,954 3,715 3,715
Accrued interest payable 672 672 845 845
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
|
13. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $35,928 $40,618 $43,026
Income taxes 9,100 5,500 4,425
Supplemental schedule of noncash activities:
Loans exchanged for mortgage-backed securities 224
Transfers from loans to real estate owned 191 372 71
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
|
14. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the President signed into law an omnibus appropriations act for fiscal year 1997 that included, among other things, the recapitalization of the SAIF in a section entitled the Deposit Insurance Funds Act of 1996 (ACT). The Act included a provision where all insured depository institutions would be charged a one-time special assessment on their SAIF assessable deposits as of March 31, 1995. Home Savings recorded a pretax charge of $5.9 million ($3.8 million after tax), which represented 65.7 basis points of the March 31, 1995 assessable deposits. This charge was recorded upon enactment of the Act on September 30, 1996, and paid on November 29, 1996. The annual deposit insurance rate in effect after this recapitalization has been reduced to 6.5 basis points of insured deposits.
15. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1998
--------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
Cash and deposits with banks $ 98
Federal funds sold and other 138,815
--------------------------------------------------------------------------------
Total cash and cash equivalents 138,913
Note receivable 26,235
Investment in subsidiary 300,350
Other assets 20
--------------------------------------------------------------------------------
Total assets $465,518
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 873
--------------------------------------------------------------------------------
Total liabilities 873
Total stockholders' equity 464,645
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $465,518
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--------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME DECEMBER 31, 1998
--------------------------------------------------------------------------------
(IN THOUSANDS)
INCOME
Interest income $ 3,711
--------------------------------------------------------------------------------
Total income 3,711
EXPENSES
Interest expense 883
Other expenses 273
--------------------------------------------------------------------------------
Total expenses 1,156
--------------------------------------------------------------------------------
Income before income taxes 2,555
Income taxes 1,040
--------------------------------------------------------------------------------
Income before undistributed net earnings of subsidiary 1,515
Equity in undistributed net earnings of subsidiary 7,184
Net income $ 8,699
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
|
CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1998
----------------------------------------------------------------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,699
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of the subsidiary (7,184)
Increase in other assets (20)
Increase in other liabilities 873
Issuance of stock for Charitable Foundation 11,834
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Net cash provided by operating activities 14,202
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital stock of subsidiary (177,218)
ESOP loan repayment 335
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Net cash used in investing activities (176,883)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the sale or issuance of common shares 303,995
Dividends paid (2,401)
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Net cash provided by financing activities 301,594
----------------------------------------------------------------------------------------
Increase in cash and cash equivalents 138,913
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 0
----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 138,913
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|
16. EARNINGS PER SHARE
For the purpose of computing weighted average shares outstanding, shares issued in the conversion on July 8, 1998 were assumed to have been outstanding since July 1, 1998. Earnings per share for all prior periods are not presented as there was no common stock issued or outstanding for the years ended December 31, 1997 and 1996. Earnings per share has been computed for the year ended December 31, 1998 as follows:
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
BASIC:
Net income applicable to common stock* $ 2,536
Average common shares outstanding 32,083
Net income per common share--basic $ 0.08
DILUTED :
Net income applicable to common stock* $ 2,536
Average common shares outstanding 32,083
Net income per common share--diluted $ 0.08
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--------------------------------------------------------------------------------
|
*NET INCOME IS FOR THE SIX MONTHS ENDED 12/31/98.
EXHIBIT 21
SUBSIDIARIES
Name State of Incorporation
----- -----------------------
The Home Savings and Loan Company Ohio
of Youngstown, Ohio
|
| ARTICLE 9 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UNITED COMMUNITY FINANCIAL CORP. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD START | JAN 01 1998 |
| PERIOD END | DEC 31 1998 |
| CASH | 16,733 |
| INT BEARING DEPOSITS | 0 |
| FED FUNDS SOLD | 153,775 |
| TRADING ASSETS | 0 |
| INVESTMENTS HELD FOR SALE | 209,778 |
| INVESTMENTS CARRYING | 187,992 |
| INVESTMENTS MARKET | 192,026 |
| LOANS | 657,498 |
| ALLOWANCE | 6,398 |
| TOTAL ASSETS | 1,257,305 |
| DEPOSITS | 777,583 |
| SHORT TERM | 0 |
| LIABILITIES OTHER | 15,077 |
| LONG TERM | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 342,840 |
| OTHER SE | 121,805 |
| TOTAL LIABILITIES AND EQUITY | 1,257,305 |
| INTEREST LOAN | 53,063 |
| INTEREST INVEST | 24,208 |
| INTEREST OTHER | 8,610 |
| INTEREST TOTAL | 85,881 |
| INTEREST DEPOSIT | 34,872 |
| INTEREST EXPENSE | 35,755 |
| INTEREST INCOME NET | 50,126 |
| LOAN LOSSES | 650 |
| SECURITIES GAINS | 253 |
| EXPENSE OTHER | 38,217 |
| INCOME PRETAX | 13,548 |
| INCOME PRE EXTRAORDINARY | 13,548 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 8,699 |
| EPS PRIMARY | 0.08 |
| EPS DILUTED | 0.08 |
| YIELD ACTUAL | 4.33 |
| LOANS NON | 5,729 |
| LOANS PAST | 0 |
| LOANS TROUBLED | 1,832 |
| LOANS PROBLEM | 0 |
| ALLOWANCE OPEN | 5,982 |
| CHARGE OFFS | (270) |
| RECOVERIES | 36 |
| ALLOWANCE CLOSE | 6,398 |
| ALLOWANCE DOMESTIC | 6,398 |
| ALLOWANCE FOREIGN | 0 |
| ALLOWANCE UNALLOCATED | 0 |
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT FROM PACKER, THOMAS & CO.
TO THE BOARD OF DIRECTORS
THE HOME SAVINGS AND LOAN COMPANY
OF YOUNGSTOWN, OHIO
We have audited the statement 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 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.
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, the financial statements referred to above present fairly, in all material respects, the financial position of The Home Savings and Loan Company of Youngstown, Ohio at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Packer, Thomas & Co.
Youngstown, Ohio
February 28, 1997