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Section 1: S-4/A (FORM S-4/A)

Form S-4/A
Table of Contents

As filed with the Securities and Exchange Commission on October 28, 2019

Registration No. 333-234144

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

AMENDMENT NO. 2

TO THE

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FIRST DEFIANCE FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

OHIO   6035   34-1803915

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

601 Clinton Street

Defiance, Ohio 43512

(419) 782-5015

(Address, including ZIP Code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Donald P. Hileman

President and Chief Executive Officer

First Defiance Financial Corp.

601 Clinton Street

Defiance, Ohio 43512

(419) 782-5015

(Address, including ZIP Code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gary M. Small

President and Chief

Executive Officer

United Community

Financial Corp.

275 West Federal Street

Youngstown, Ohio 44503

(330) 742-0500

 

Kimberly J. Schaefer

Vorys, Sater, Seymour

and Pease LLP

301 E. Fourth Street

Suite 3500

Cincinnati, Ohio 45202

(513) 723-4068

 

Robert M. Fleetwood

Barack Ferrazzano
Kirschbaum &

Nagelberg LLP

200 W. Madison Street,

Suite 3900

Chicago, Illinois 60606

(312) 984-3100

 

Edward D. Herlihy

Brandon C. Price

Wachtell, Lipton, Rosen

& Katz

51 West 52nd Street

New York, New York

10019

(212) 403-1000

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement has become effective and all other conditions to the consummation of the transactions have been satisfied or waived.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

    

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

 

 

The Registrant hereby amends this Registration Statement on such date(s) as may be necessary to delay its effective date until the Registrant files a further amendment specifically stating that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement becomes effective on such date as the Commission, acting pursuant to Section 8(a) of the Securities Act of 1933, may determine.

 

 

 


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Information contained herein is not complete and may be changed. A registration statement relating to the shares of First Defiance Financial Corp. common stock to be issued in the merger has been filed with the Securities and Exchange Commission. These securities may not be issued prior to the time the registration statement becomes effective. This document is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS—SUBJECT TO COMPLETION—OCTOBER 28, 2019

 

Proxy Statement   Prospectus
LOGO  

LOGO

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Shareholder:

On September 9, 2019, First Defiance Financial Corp., an Ohio corporation (“First Defiance”), entered into an Agreement and Plan of Merger, as amended from time to time (the “merger agreement”), with United Community Financial Corp., an Ohio corporation (“United Community”). The merger agreement provides that, upon the terms and subject to the conditions set forth therein, United Community will merge with and into First Defiance (the “merger”), with First Defiance surviving the merger. Immediately following the merger, United Community’s wholly owned bank subsidiary, Home Savings Bank (“Home Savings”), will merge (the “bank merger”) with and into First Defiance’s wholly owned bank subsidiary, First Federal Bank of the Midwest (“First Federal”). First Federal will be the surviving entity in the bank merger and, immediately prior to the bank merger, will be converted into an Ohio state-chartered bank. Consummation of the merger is subject to certain conditions, including, but not limited to, obtaining the requisite vote of First Defiance and United Community shareholders and the approval of the merger by various regulatory agencies.

If we complete the merger, each outstanding share of United Community common stock (except for certain specified shares of United Community common stock held by United Community or First Defiance) will be automatically converted into the right to receive 0.3715 shares of First Defiance common stock (which we refer to as the “exchange ratio”), subject to the payment of cash instead of fractional shares of First Defiance common stock. Although the number of shares of First Defiance common stock that each United Community shareholder will receive is fixed, the market value of the merger consideration will fluctuate with the market price of First Defiance common stock and will not be known at the time First Defiance and United Community shareholders vote on the merger. Based on the closing price of First Defiance’s common stock on The NASDAQ Stock Market LLC, or NASDAQ, on September 6, 2019, the last trading day before public announcement of the merger, of $26.32, the exchange ratio represented approximately $9.78 in value for each share of United Community common stock. Based on First Defiance’s closing price on October 25, 2019, the latest practicable trading day before the date of this joint proxy statement/prospectus, of $30.87, the exchange ratio represented approximately $11.47 in value for each share of United Community common stock. Based on the exchange ratio and the number of shares of United Community common stock outstanding and reserved for issuance under various equity plans as of October 25, 2019, the maximum number of shares of First Defiance common stock issuable in the merger is 17,989,356. We urge you to obtain current market quotations for First Defiance (trading symbol “FDEF”) and United Community (trading symbol “UCFC”).

First Defiance and United Community will each hold a special meeting of their shareholders in connection with the merger. First Defiance and United Community shareholders will be asked to vote to adopt the merger agreement and approve related matters, as described in the attached joint proxy statement/prospectus. Adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of First Defiance common stock and the affirmative vote of the holders of at least two-thirds of the outstanding shares of United Community common stock.

The special meeting of First Defiance shareholders will be held on December 10, 2019, at 1:00 p.m. local time at the First Federal Operations Center located at 25600 Elliott Road, Defiance, Ohio 43512.

The special meeting of United Community shareholders will be held on December 10, 2019, at 1:00 p.m. local time at United Community’s corporate headquarters, 275 West Federal Street, 9th Floor, Youngstown, Ohio 44503.

This document, including the material incorporated by reference into this document, contains important information about United Community, First Defiance, the merger and the conditions that must be satisfied before the merger can occur.

First Defiance’s board of directors unanimously recommends that First Defiance shareholders vote “FOR” the adoption of the merger agreement and “FOR” the other matters to be considered at the First Defiance special meeting.

United Community’s board of directors unanimously recommends that United Community shareholders vote “FOR” the adoption of the merger agreement and “FOR” the other matters to be considered at the United Community special meeting.

The attached joint proxy statement/prospectus describes the special meeting of First Defiance, the special meeting of United Community, the merger, the documents related to the merger, proposals to be voted upon at the special meetings of each of First Defiance and United Community, and other related matters. We urge you to review this entire document, including the section titled “Risk Factors” beginning on page 27, carefully. You may also obtain information about First Defiance and United Community from documents that each has filed with the Securities and Exchange Commission that are incorporated by reference into this joint proxy statement/prospectus.

 

LOGO

 

  

LOGO

Donald P. Hileman

President and Chief Executive Officer

First Defiance Financial Corp.

  

Gary M. Small

President and Chief Executive Officer

United Community Financial Corp.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this joint proxy statement/prospectus or determined if this joint proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. The securities we are offering through this document are not savings or deposit accounts or other obligations of any bank or non-bank subsidiary of either of our companies, and they are not insured by the Federal Deposit Insurance Corporation, the Deposit Insurance Fund, or any other governmental agency.

The date of this joint proxy statement/prospectus is October 28, 2019, and it is first being mailed or otherwise delivered to the shareholders of First Defiance and United Community on or about October 31, 2019.


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LOGO

First Defiance Financial Corp.

601 Clinton Street

Defiance, Ohio 43512-3272

(419) 782-5015

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

December 10, 2019

To Our Shareholders:

Notice is hereby given that a special meeting of shareholders of First Defiance Financial Corp., an Ohio corporation (“First Defiance”), will be held at the First Federal Operations Center located at 25600 Elliott Road, Defiance, Ohio 43512 on December 10, 2019, at 1:00 p.m. local time for the purpose of considering and voting upon the following matters:

 

  1.

To adopt the Agreement and Plan of Merger, dated as of September 9, 2019, as amended from time to time (the “merger agreement”), by and between First Defiance and United Community Financial Corp. (“United Community”) (the “First Defiance merger proposal”);

 

  2.

To approve the Amended and Restated Articles of Incorporation of First Defiance (the “First Defiance articles of incorporation proposal”);

 

  3.

To approve the Amended and Restated Code of Regulations of First Defiance (the “First Defiance code of regulations proposal”);

 

  4.

To approve, on a non-binding, advisory basis, the compensation to be paid to First Defiance’s named executive officers that is based on or otherwise relates to the merger, discussed under section titled “The Merger—Interests of First Defiance Directors and Executive Officers in the Merger” beginning on page 93 (the “First Defiance compensation proposal”); and

 

  5.

To approve the adjournment of the First Defiance special meeting, if necessary or appropriate, to permit further solicitation of proxies (the “First Defiance adjournment proposal”).

The First Defiance board of directors has established October 25, 2019, as the record date for the special meeting. Only record holders of shares of First Defiance common stock as of the close of business on that date will be entitled to receive notice of and to vote at the special meeting. Approval of the First Defiance merger proposal requires the affirmative vote of holders of at least two-thirds of the outstanding shares of common stock of First Defiance. Approval of the First Defiance articles of incorporation proposal and the First Defiance code of regulations proposal, each require the affirmative vote of holders of at least a majority of the outstanding shares of common stock of First Defiance. The First Defiance compensation proposal and the First Defiance adjournment proposal will be approved if at least a majority of the votes cast at the First Defiance special meeting are voted in favor of each of the proposals.

Your attention is directed to the joint proxy statement/prospectus accompanying this Notice for a more complete description of the matters to be acted upon at the special meeting. A proxy card is also enclosed for the special meeting.

Whether or not you expect to attend the special meeting in person, please vote your shares to assure the presence of a quorum by (1) signing, dating and returning the enclosed proxy card promptly, (2) visiting the website shown on your proxy card and voting via the Internet, or (3) voting via the toll-free number on your proxy card. A postage-paid envelope has been enclosed for your convenience. You may revoke your proxy at any time prior to the proxy being voted at the special meeting by delivering a signed revocation to First Defiance at any time prior to the special meeting, by submitting a later-dated proxy card, or by attending the special meeting and voting in person.


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First Defiance’s board of directors has unanimously approved the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of First Defiance and its shareholders, and unanimously recommends that First Defiance shareholders vote “FOR” the First Defiance merger proposal, “FOR” the First Defiance articles of incorporation proposal, “FOR” the First Defiance code of regulations proposal, “FOR” the First Defiance compensation proposal and “FOR” the First Defiance adjournment proposal.

Your vote is very important. We cannot complete the merger unless First Defiance’s shareholders adopt the merger agreement and approve the First Defiance amended and restated code of regulations.

 

 

By Order of the Board of Directors

 

LOGO

Defiance, Ohio

 

Donald P. Hileman

October 28, 2019

 

President and Chief Executive Officer

 

First Defiance Financial Corp.

 


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LOGO

United Community Financial Corp.

275 West Federal Street

Youngstown, Ohio 44503

(330) 742-0500

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

December 10, 2019

To Our Shareholders:

Notice is hereby given that a special meeting of shareholders of United Community Financial Corp., an Ohio corporation (“United Community”), will be held at United Community’s corporate headquarters, 275 West Federal Street, 9th Floor, Youngstown, Ohio 44503 on December 10, 2019, at 1:00 p.m. local time for the purpose of considering and voting upon the following matters:

 

  1.

To adopt the Agreement and Plan of Merger, dated as of September 9, 2019, as amended from time to time (the “merger agreement”), by and between First Defiance Financial Corp. (“First Defiance”) and United Community (the “United Community merger proposal”);

 

  2.

To approve, on a non-binding, advisory basis, the compensation to be paid to United Community’s named executive officers that is based on or otherwise relates to the merger, discussed under the section titled “The Merger—Interests of United Community Directors and Executive Officers in the Merger” beginning on page 99 (the “United Community compensation proposal”); and

 

  3.

To approve the adjournment of the United Community special meeting, if necessary or appropriate, to permit further solicitation of proxies (the “United Community adjournment proposal”).

The United Community board of directors has established October 25, 2019, as the record date for the United Community special meeting. Only record holders of shares of United Community common stock as of the close of business on that date will be entitled to receive notice of and to vote at the United Community special meeting. Approval of the United Community merger proposal requires the affirmative vote of holders of at least two-thirds of the outstanding shares of common stock of United Community. The United Community compensation proposal and the United Community adjournment proposal will be approved if at least a majority of the votes cast at the United Community special meeting are voted in favor of each proposal.

Your attention is directed to the joint proxy statement/prospectus accompanying this Notice for a more complete description of the matters to be acted upon at the special meeting. A proxy card is also enclosed for the special meeting.

Whether or not you expect to attend the special meeting, please vote your shares to assure the presence of a quorum by (1) signing, dating and returning the enclosed proxy card promptly, (2) visiting the website shown on your proxy card and voting via the Internet, or (3) voting via the toll-free number on your proxy card. A postage-paid envelope has been enclosed for your convenience. You may revoke your proxy at any time prior to the proxy being voted at the special meeting by delivering a signed revocation to United Community at any time prior to the special meeting, by submitting a later-dated proxy card, or by attending the special meeting and voting in person.

United Community’s board of directors has unanimously approved the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of United Community and its shareholders, and unanimously recommends that United Community shareholders vote “FOR” the United Community merger proposal, “FOR” the United Community compensation proposal, and “FOR” the United Community adjournment proposal.


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Your vote is very important. We cannot complete the merger unless United Community’s shareholders adopt the merger agreement.

 

 

By Order of the Board of Directors

 

LOGO

Youngstown, Ohio

 

Gary M. Small

October 28, 2019

 

President and Chief Executive Officer

 

United Community Financial Corp.

 


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REFERENCES TO ADDITIONAL INFORMATION

This joint proxy statement/prospectus incorporates important business and financial information about First Defiance and United Community from documents filed with the Securities and Exchange Commission (“SEC”) that are not included in or delivered with this joint proxy statement/prospectus. You can obtain any of the documents filed with or furnished to the SEC by First Defiance and/or United Community at no cost from the SEC’s website at http://www.sec.gov. First Defiance has filed a registration statement on Form S-4 of which this joint proxy statement/prospectus forms a part. As permitted by SEC rules, this joint proxy statement/prospectus does not contain all of the information included in the registration statement or in the exhibits or schedules to the registration statement. You may obtain a free copy of the registration statement, including any amendments, schedules and exhibits at the addresses set forth below. Statements contained in this joint proxy statement/prospectus as to the contents of any contract or other documents referred to in this joint proxy statement/prospectus are not necessarily complete. In each case, you should refer to the copy of the applicable contract or other document filed as an exhibit to the registration statement. You may also request copies of these documents, including documents incorporated by reference into this joint proxy statement/prospectus, at no cost by contacting the appropriate company at the following address or telephone number:

 

First Defiance Financial Corp.
Attention: Corporate Secretary
601 Clinton Street
Defiance, Ohio 43512-3272
(419) 782-5015
  United Community Financial Corp.
Attention: Corporate Secretary
275 West Federal Street
Youngstown, Ohio 44503
(330) 742-0500

You will not be charged for any of these documents that you request. To obtain timely delivery of these documents, you must request them no later than five business days before the date of your special meeting. This means that First Defiance shareholders requesting documents must do so by December 3, 2019, in order to receive them before the First Defiance special meeting, and United Community shareholders requesting documents must do so by December 3, 2019, in order to receive them before the United Community special meeting.

You should rely only on the information contained in, or incorporated by reference into, this joint proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated October 28, 2019, and you should assume that the information in this joint proxy statement/prospectus is accurate only as of such date. You should assume that the information incorporated by reference into this joint proxy statement/prospectus is accurate as of the date of such information. Neither the mailing of this joint proxy statement/prospectus to First Defiance shareholders or United Community shareholders, nor the issuance by First Defiance of shares of First Defiance common stock in connection with the merger, will create any implication to the contrary.

This joint proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise indicates, information contained in this joint proxy statement/prospectus regarding First Defiance has been provided by First Defiance and information contained in this joint proxy statement/prospectus regarding United Community has been provided by United Community.

See “Where You Can Find More Information” beginning on page 145 for more details.

 


Table of Contents

TABLE OF CONTENTS

 

Questions and Answers

     1  

Summary

     11  

Selected Historical Financial Information of First Defiance

     23  

Selected Historical Financial Information of United Community

     25  

Risk Factors

     27  

Forward-Looking Statements

     35  

The First Defiance Special Meeting

     37  

Time, Date and Place of Meeting

     37  

Matters to be Considered

     37  

Shares Outstanding and Entitled to Vote; Record Date

     37  

Votes Required

     37  

Effect of Abstentions and Broker Non-Votes

     38  

Shares Held by Officers and Directors

     38  

How to Vote Your Shares; Solicitation of Proxies

     38  

First Defiance’s Proposals

     40  

The United Community Special Meeting

     48  

Time, Date and Place of Meeting

     48  

Matters to be Considered

     48  

Shares Outstanding and Entitled to Vote; Record Date

     48  

Votes Required

     48  

Effect of Abstentions and Broker Non-Votes

     49  

Shares Held by Officers and Directors

     49  

How to Vote Your Shares; Solicitation of Proxies

     49  

United Community’s Proposals

     51  

United Community Annual Meeting Shareholder Proposals

     53  

The Merger

     54  

Background of the Merger

     54  

First Defiance’s Reason’s for the Merger; Board Recommendation

     62  

Opinion of First Defiance’s Financial Advisor

     65  

United Community’s Reasons for the Merger; Board Recommendation

     77  

Opinion of United Community’s Financial Advisor

     79  

Certain Unaudited Prospective Financial Information

     90  

Management and Board of Directors of First Defiance After the Merger

     93  

Interests of First Defiance Directors and Executive Officers in the Merger

     93  

Merger-related Compensation for First Defiance’s Named Executive Officers

     97  

Interests of United Community Directors and Executive Officers in the Merger

     99  

Merger-related Compensation for United Community’s Named Executive Officers

     102  

Regulatory Approvals Required for the Merger

     104  

Accounting Treatment

     105  

Public Trading Markets

     106  

The Merger Agreement

     107  

Explanatory Note Regarding the Merger Agreement

     107  

Structure of the Merger

     107  

Merger Consideration

     108  

Fractional Shares

     108  

Governing Documents; Directors and Officers; Governance Matters; Headquarters

     108  

Treatment of United Community Equity-Based Awards

     109  


Table of Contents

Closing and Effective Time of the Merger

     110  

Conversion of Shares; Exchange of Certificates

     110  

Letter of Transmittal

     110  

Dividends and Distributions

     111  

Representations and Warranties

     111  

Covenants and Agreements

     113  

Shareholder Meetings and Recommendation of First Defiance’s and United Community’s Boards of Directors

     118  

Agreement Not to Solicit Other Offers

     119  

Conditions to Complete the Merger

     120  

Termination of the Merger Agreement

     120  

Effect of Termination

     122  

Termination Fee

     122  

Expenses and Fees

     123  

Amendment, Waiver, and Extension of the Merger Agreement

     123  

Voting Agreement

     123  

Material U.S. Federal Income Tax Consequences of the Merger

     125  

Unaudited Pro Forma Condensed Combined Financial Statements

     128  

Comparison of Rights of First Defiance Shareholders and United Community Shareholders

     138  

Legal Matters

     144  

Experts

     144  

Where You Can Find More Information

     145  

 

Annex A

Agreement and Plan of Merger, dated September 9, 2019, by and between First Defiance Financial Corp. and United Community Financial Corp.

 

Annex B

Opinion of Keefe, Bruyette & Woods, Inc.

 

Annex C

Opinion of Sandler O’Neill & Partners, L.P.

 

Annex D

First Defiance Amended and Restated Articles of Incorporation

 

Annex E

First Defiance Amended and Restated Code of Regulations

 


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QUESTIONS AND ANSWERS

The following questions and answers summary highlights certain questions that you may have about the merger and the First Defiance or the United Community special meetings and provides brief answers to those questions. We urge you to read carefully the remainder of this joint proxy statement/prospectus, including all financial statements and annexes, because the information in this section does not provide all the information that may be important to you with respect to the merger and the matters to be voted upon at the First Defiance or the United Community special meetings. Additional important information is also contained in certain documents that have been incorporated by reference to this joint proxy statement/prospectus. Please see “Where You Can Find More Information” beginning on page 145.

 

Q:

What is the merger?

 

A:

First Defiance and United Community have entered into an Agreement and Plan of Merger, dated as of September 9, 2019, as amended from time to time (the “merger agreement”). Under the merger agreement, United Community will merge with and into First Defiance, with First Defiance continuing as the surviving company (the “merger”). Immediately following completion of the merger, United Community’s wholly owned subsidiary, Home Savings Bank (“Home Savings”) will merge with and into First Federal Bank of the Midwest (“First Federal”), a wholly owned subsidiary of First Defiance, with First Federal continuing as the surviving bank (the “bank merger”). A copy of the merger agreement is attached to this document as Annex A.

The merger cannot be completed unless, among other conditions, including regulatory approval, both First Defiance and United Community shareholders approve their respective proposals to adopt the merger agreement and the First Defiance shareholders approve the First Defiance amended and restated code of regulations.

 

Q:

Why am I receiving this joint proxy statement/prospectus?

 

A:

We are delivering this document to you because it is a joint proxy statement/prospectus being used by both the First Defiance and United Community boards of directors to solicit proxies of their respective shareholders in connection with approval of the merger and related matters.

In order to approve the merger and related matters, First Defiance has called a special meeting of its shareholders. This document serves as the proxy statement for the First Defiance special meeting and describes the proposals to be presented at the First Defiance special meeting.

United Community has also called a special meeting of its shareholders to approve the merger and related matters. This document serves as the proxy statement for the United Community special meeting and describes the proposals to be presented at the United Community special meeting.

Finally, this document is also a prospectus that is being delivered to United Community shareholders because, in connection with the merger, First Defiance is offering 0.3715 shares of its common stock (the “exchange ratio”) per share of United Community common stock to United Community shareholders, subject to the payment of cash instead of fractional shares of First Defiance common stock.

This joint proxy statement/prospectus contains important information about the merger and the other proposals being voted on at the First Defiance and United Community special meetings and important information to consider in connection with an investment in First Defiance common stock. You should read it carefully and in its entirety. The enclosed materials allow you to have your shares of common stock voted by proxy without attending your meeting. Your vote is important and we encourage you to submit your proxy as soon as possible.

 

1


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Q:

What are First Defiance shareholders being asking to vote on at the First Defiance special meeting?

 

A:

First Defiance is soliciting proxies from its shareholders with respect to the following proposals:

 

   

A proposal to adopt the merger agreement, a copy of which is attached to this document as Annex A (the “First Defiance merger proposal”);

 

   

A proposal to amend and restate First Defiance’s Articles of Incorporation, effective upon the consummation of the merger, as discussed under the heading “First Defiance Articles of Incorporation ProposalApproval of the First Defiance amended and restated articles of incorporation” beginning on page 40 (the “First Defiance articles of incorporation proposal”)

 

   

A proposal to amend and restate First Defiance’s Code of Regulations, effective upon the consummation of the merger, as discussed under the heading “First Defiance Code of Regulations ProposalApproval of the First Defiance amended and restated code of regulations” beginning on page 41 (the “First Defiance code of regulations proposal”);

 

   

A proposal to approve, on an advisory (non-binding) basis, the compensation that certain executive officers of First Defiance may receive in connection with the merger pursuant to existing agreements or other arrangements with First Defiance, discussed under the heading “The Merger—Interests of First Defiance Directors and Executive Officers in the Merger” beginning on page 93 (the “First Defiance compensation proposal”); and

 

   

A proposal to adjourn the First Defiance special meeting, if necessary or appropriate, to permit further solicitation of proxies (the “First Defiance adjournment proposal”).

 

Q:

What are United Community shareholders being asking to vote on at the United Community special meeting?

 

A:

United Community is soliciting proxies from its shareholders with respect to the following proposals:

 

   

A proposal to adopt the merger agreement, a copy of which is attached to this document as Annex A (the “United Community merger proposal”);

 

   

A proposal to approve, on an advisory (non-binding) basis, the compensation that certain executive officers of United Community may receive in connection with the merger pursuant to existing agreements or other arrangements with United Community, discussed under the heading “The Merger—Interests of United Community Directors and Executive Officers in the Merger” beginning on page 99 (the “United Community compensation proposal”); and

 

   

A proposal to adjourn the United Community special meeting, if necessary or appropriate, to permit further solicitation of proxies (the “United Community adjournment proposal”).

 

Q:

What will First Defiance shareholders receive in the merger?

 

A:

If the merger is completed, First Defiance shareholders will not receive any merger consideration and will continue to hold the shares of First Defiance common stock that they currently hold. Following the merger, shares of First Defiance common stock will continue to be traded on The NASDAQ Global Select Stock Market (“NASDAQ”) under the symbol “FDEF.”

 

Q:

What will United Community shareholders receive in the merger?

 

A:

If the merger is completed, each share of United Community common stock outstanding immediately prior to the effective time of the merger, except for certain shares owned by First Defiance or United Community, will be converted into the right to receive 0.3715 shares of First Defiance common stock, subject to the payment of cash instead of fractional shares of First Defiance common stock. See “The Merger—Merger Consideration” beginning on page 108.

 

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Q:

How will the merger affect holders of United Community equity awards?

 

A:

The United Community equity awards granted under the United Community 2015 Long Term Incentive Compensation Plan, the United Community 2007 Long Term Incentive Compensation Plan or the United Community 1999 Long Term Incentive Compensation Plan (collectively, the “United Community stock plans”) will be affected as follows:

Options: If the merger is completed, each option granted by United Community to purchase shares of United Community common stock under a United Community stock plan or otherwise, whether vested or unvested (“United Community option”), that is outstanding and unexercised immediately prior to the completion of the merger will fully vest and be converted into a fully vested option (a “First Defiance option”) to purchase (a) the number of whole shares of First Defiance common stock (rounded down to the nearest whole share) that is equal to (i) the number of shares of United Community common stock subject to such United Community option immediately prior to the completion of the merger multiplied by (ii) 0.3715, (b) at an exercise price per share of First Defiance common stock (rounded up to the nearest whole cent) equal to (i) the exercise price for each share of United Community common stock subject to such United Community option immediately prior to the completion of the merger divided by (ii) 0.3715, subject to the terms and conditions of the United Community stock plan, if any, pursuant to which such United Community option was granted and/or any associated award agreement.

Restricted Stock: If the merger is completed, each award of shares of United Community common stock subject to vesting, repurchase or other lapse restriction granted under a United Community stock plan or otherwise, whether vested or unvested (a “United Community restricted stock award”) that is outstanding immediately prior to completion of the merger will fully vest and be cancelled and converted automatically into the right to receive 0.3715 shares of First Defiance common stock, subject to the payment of cash instead of fractional shares of First Defiance common stock, in respect of each share of United Community common stock underlying such United Community restricted stock award.

Performance Share Units: If the merger is completed, each performance-vesting restricted stock unit granted under a United Community stock plan or otherwise, whether vested or unvested, that is outstanding immediately prior to the completion of the merger (“United Community PSU award”) will fully vest (with any performance-based vesting condition applicable to such United Community PSU award to be measured consistent with the terms of the applicable award agreement applicable upon a change in control for such United Community PSU award, as determined by the United Community board of directors or its compensation committee prior to the completion of the merger) and will be cancelled and converted automatically into the right to receive 0.3715 shares of First Defiance common stock in respect of each share of United Community common stock underlying such United Community PSU award; provided that the United Community board of directors or its compensation committee will exclude any costs or expenses related to the merger, if any, from the performance metrics applicable to the United Community PSU awards when determining actual United Community performance through the date of the completion of the merger.

 

Q:

What are the material U.S. federal income tax consequences of the merger to United Community shareholders?

 

A:

The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”), and it is a condition to the respective obligations of First Defiance and United Community to complete the merger that each of First Defiance and United Community receives a legal opinion to that effect. Accordingly, holders of United Community common stock are not expected to recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of United Community common stock for shares of First Defiance common stock in the merger, except with respect to any cash received instead of fractional shares of First Defiance common stock.

 

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For further information, please refer to “Material U.S. Federal Income Tax Consequences of the Merger.” The U.S. federal income tax consequences described above may not apply to all holders of United Community common stock. The tax consequences to a holder of United Community common stock will depend on his or her individual situation. Accordingly, we strongly urge holders of United Community common stock to consult their tax advisors for a full understanding of the particular tax consequences of the merger to them.

For a more detailed discussion of the material U.S. federal income tax consequences of the transaction, see “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 125.

The tax consequences of the merger to any particular shareholder will depend on that shareholder’s particular facts and circumstances. Accordingly, you are urged to consult your tax advisor to determine your tax consequences from the merger.

 

Q:

When will the merger be completed?

 

A:

United Community and First Defiance are working to complete the merger as soon as practicable. Neither United Community nor First Defiance can predict, however, the actual date on which the merger will be completed (or whether it will be completed) because First Defiance and United Community must obtain the approval of First Defiance shareholders and United Community shareholders to adopt the merger agreement at their respective special meetings, and also must obtain necessary regulatory approvals in addition to satisfying other closing conditions. Such conditions have been described more thoroughly in “The Merger Agreement—Conditions to Complete the Merger” beginning on page 120.

 

Q:

What happens if the merger is not completed?

 

A:

If the merger is not completed, United Community shareholders will not receive any consideration for their shares of United Community common stock in connection with the merger. Instead, United Community will remain an independent, public company and United Community common stock will continue to be listed and traded on NASDAQ. In addition, if the merger agreement is terminated in certain circumstances, United Community or First Defiance may be required to pay a termination fee. See “The Merger Agreement—Termination Fee” for a complete discussion of the circumstances under which a termination fee will be required to be paid.

 

Q:

When and where are the special meetings?

 

A:

The First Defiance special meeting will be held at the First Federal Operations Center located at 25600 Elliott Road, Defiance, Ohio 43512 on December 10, 2019, at 1:00 p.m. local time.

The United Community special meeting will be held at United Community’s corporate headquarters, 275 West Federal Street, 9th Floor, Youngstown, Ohio 44503 on December 10, 2019, at 1:00 p.m. local time.

 

Q:

Who can vote at the First Defiance special meeting?

 

A:

Only holders of record of First Defiance common stock at the close of business on October 25, 2019, the record date for the First Defiance special meeting, will be entitled to vote. At the close of business on October 25, 2019, there were 19,729,215 shares of First Defiance common stock issued and outstanding and entitled to vote, and shares of First Defiance common stock were held of record by approximately 2,329 shareholders. Each share of First Defiance common stock entitles the holder to one vote on all matters properly presented at the First Defiance special meeting.

 

Q:

Who can vote at the United Community special meeting?

 

A:

Only holders of record of United Community common stock at the close of business on October 25, 2019, the record date for the United Community special meeting, will be entitled to vote. At the close of business

 

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on October 25, 2019, there were 48,112,240 shares of United Community common stock issued and outstanding and entitled to vote, and shares of United Community common stock were held of record by approximately 7,100 shareholders. Each share of United Community common stock entitles the holder to one vote on all matters properly presented at the United Community special meeting.

 

Q:

What constitutes a quorum for the First Defiance special meeting?

 

A:

A majority of the issued and outstanding shares of First Defiance common stock represented in person or by proxy at the special meeting will constitute a quorum for the purpose of considering and acting upon each of the proposals. Abstentions, if any, will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum; however, broker non-votes will not be included.

 

Q:

What constitutes a quorum for the United Community special meeting?

 

A:

A majority of the issued and outstanding shares of United Community common stock represented in person or by proxy at the special meeting will constitute a quorum for the purpose of considering and acting upon each of the proposals. Abstentions, if any, will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum; however, broker non-votes will not be included.

 

Q:

What vote is required to approve each proposal at the First Defiance special meeting?

 

A:

The First Defiance merger proposal:

 

   

Standard: Approval of the First Defiance merger proposal requires the affirmative vote of the holders of least two-thirds of the issued and outstanding shares of First Defiance common stock. Approval of this proposal is a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the First Defiance special meeting or fail to instruct your bank or broker how to vote with respect to the First Defiance merger proposal, it will have the same effect as voting “AGAINST” the First Defiance merger proposal.

First Defiance articles of incorporation proposal:

 

   

Standard: Approval of the First Defiance articles of incorporation proposal requires the affirmative vote of the holders of at least a majority of the issued and outstanding shares of First Defiance common stock. Approval of this proposal is not a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the First Defiance special meeting or fail to instruct your bank or broker how to vote with respect to the First Defiance articles of incorporation proposal, it will have the same effect as a vote “AGAINST” the First Defiance articles of incorporation proposal.

The First Defiance code of regulations proposal:

 

   

Standard: Approval of the First Defiance code of regulations proposal requires the affirmative vote of the holders of at least a majority of the issued and outstanding shares of First Defiance common stock. Approval of this proposal is a condition to the closing of the merger. In addition, even if this proposal is approved by First Defiance shareholders, the First Defiance code of regulations will not be amended and restated unless the merger is consummated.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the First Defiance special meeting or fail to instruct your bank or broker how to vote with respect to the First Defiance code of regulations proposal, it will have the same effect as a vote “AGAINST” the First Defiance code of regulations proposal.

 

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The First Defiance compensation proposal:

 

   

Standard: Approval of the First Defiance compensation proposal requires the affirmative vote of the holders of shares of First Defiance common stock representing at least a majority of votes cast at the First Defiance special meeting. Approval of this proposal is not a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the First Defiance special meeting or fail to instruct your bank or broker how to vote with respect to the First Defiance compensation proposal, it will have no effect on the proposal.

The First Defiance adjournment proposal:

 

   

Standard: Approval of the First Defiance adjournment proposal requires the affirmative vote of the holders of shares of First Defiance common stock representing at least a majority of votes cast at the First Defiance special meeting. Approval of this proposal is not a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the First Defiance special meeting or fail to instruct your bank or broker how to vote with respect to the First Defiance adjournment proposal, it will have no effect on the proposal.

 

Q:

What vote is required to approve each proposal at the United Community special meeting?

 

A:

The United Community merger proposal:

 

   

Standard: Approval of the United Community merger proposal requires the affirmative vote of the holders of at least two-thirds of the issued and outstanding shares of United Community common stock. Approval of this proposal is a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the United Community special meeting or fail to instruct your bank or broker how to vote with respect to the United Community merger proposal, it will have the same effect as voting “AGAINST” the United Community merger proposal.

The United Community compensation proposal:

 

   

Standard: Approval of the United Community compensation proposal requires the affirmative vote of the holders of shares of United Community common stock representing at least a majority of votes cast at the United Community special meeting. Approval of this proposal is not a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the United Community special meeting or fail to instruct your bank or broker how to vote with respect to the United Community compensation proposal, it will have no effect on the proposal.

The United Community adjournment proposal:

 

   

Standard: Approval of the United Community adjournment proposal requires the affirmative vote of the holders of shares of United Community common stock representing at least a majority of votes cast at the United Community special meeting. Approval of this proposal is not a condition to the closing of the merger.

 

   

Effect of abstentions and broker non-votes: If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the United Community special meeting or fail to instruct your bank or broker how to vote with respect to the United Community adjournment proposal, it will have no effect on the proposal.

 

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Q:

Why is my vote important?

 

A:

If you do not vote, it will be more difficult for First Defiance or United Community to obtain the necessary quorum to hold its special meeting. In addition, failing to submit a proxy or vote in person, or failing to instruct your bank or broker how to vote will have the same effect as a vote “AGAINST” approval of the First Defiance merger proposal, the First Defiance articles of incorporation proposal, the First Defiance code of regulations proposal and the United Community merger proposal, as applicable.

 

Q:

What will happen if First Defiance shareholders do not approve the First Defiance articles of incorporation proposal?

 

A:

The approval of the First Defiance articles of incorporation proposal is not required in order to complete the merger and is not a condition to either party’s obligation to complete the merger under the merger agreement. Accordingly, if the First Defiance shareholders do not approve the First Defiance articles of incorporation proposal, it will have no impact on whether the merger is completed.

 

Q:

What will happen if First Defiance shareholders do not approve the First Defiance code of regulations proposal?

 

A:

The approval of the First Defiance code of regulations proposal is a condition to each party’s obligation to complete the merger under the merger agreement. Accordingly, if the First Defiance shareholders do not approve the First Defiance code of regulations proposal, it will prevent the completion of the merger unless such condition is validly waived by each party.

 

Q:

What will happen if United Community shareholders do not approve the United Community compensation proposal or First Defiance shareholders do not approve the First Defiance compensation proposal?

 

A:

The SEC, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, adopted rules that require United Community and First Defiance to seek an advisory (non-binding) vote from their respective shareholders with respect to certain payments that will or may be made to United Community’s named executive officers and First Defiance’s named executive officers, respectively, in connection with the merger. The vote on the United Community compensation proposal and the First Defiance compensation proposal are each a vote separate and apart from the vote to approve the merger proposal. You may vote for the United Community compensation proposal or the First Defiance compensation proposal, as appropriate, and against the merger proposal, or vice versa. Because the vote on the compensation proposal on specified compensation is advisory only, it will not be binding on United Community or First Defiance and will have no impact on whether the merger is completed or on whether any contractually obligated payments are made to the named executive officers of United Community or First Defiance.

 

Q:

What do I need to do now?

 

A:

After you have carefully read this joint proxy statement/prospectus and have decided how you wish to vote your shares, please vote your shares as soon as possible so that your shares will be represented and voted the First Defiance special meeting and/or the United Community special meeting, as applicable. If you are a shareholder of both First Defiance and United Community, you will need to vote your First Defiance and United Community shares separately and to submit a separate proxy card to each company. Please follow the instructions set forth on the proxy card included with this joint proxy statement/prospectus to vote your shares or, if your shares are held in the name of your broker, bank, or other nominee, please follow the instructions provided by such record holder to ensure that your shares are voted as desired.

 

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Q:

How do I vote my First Defiance shares of common stock?

 

A:

If you are a First Defiance shareholder as of October 25, 2019, the record date, you may submit your proxy before First Defiance’s special meeting in one of the following ways: complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope; visit the website shown on your proxy card to vote via the Internet; or use the toll-free number shown on your proxy card.

If your shares are held in “street name,” through a broker, bank or other nominee, that institution will send you separate instructions describing the procedure for voting your shares. “Street name” shareholders who wish to vote at the meeting will need to obtain a proxy form from their broker, bank or other nominee.

 

Q:

How do I vote my United Community shares of common stock?

 

A:

If you are a United Community shareholder as of October 25, 2019, the record date, you may submit your proxy before United Community’s special meeting in one of the following ways: complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope; visit the website shown on your proxy card to vote via the Internet; or use the toll-free number shown on your proxy card.

If your shares are held in “street name,” through a broker, bank or other nominee, that institution will send you separate instructions describing the procedure for voting your shares. “Street name” shareholders who wish to vote at the meeting will need to obtain a proxy form from their broker, bank or other nominee.

 

Q:

Can I change my vote?

 

A:

First Defiance Shareholders: Yes. If you are a holder of record of First Defiance common stock, you may change your vote or revoke your proxy at any time before it is voted at the First Defiance special meeting by (i) signing and returning a later dated proxy card, (ii) delivering a signed revocation to First Defiance at the below listed address at any time before the special meeting or (iii) attending the First Defiance special meeting and giving notice of revocation to the Corporate Secretary. Attendance at the special meeting by itself will not automatically revoke your proxy.

A signed revocation or later-dated proxy received by First Defiance after the vote will not affect the vote. If you wish to revoke your vote through a signed revocation, such notice must be sent so that notice is received before the vote is taken at the special meeting and should be addressed as follows:

First Defiance Financial Corp.

Attention: Corporate Secretary

601 Clinton Street

Defiance, Ohio 43512

(419) 782-5015

United Community Shareholders: Yes. If you are a holder of record of United Community common stock, you may change your vote or revoke your proxy at any time before it is voted at the United Community special meeting by (i) signing and returning a later dated proxy card, (ii) delivering a signed revocation to United Community at the below listed address at any time before the special meeting or (iii) attending the United Community special meeting and giving notice of revocation to the Corporate Secretary. Attendance at the special meeting by itself will not automatically revoke your proxy.

A signed revocation or later-dated proxy received by United Community after the vote will not affect the vote. If you wish to revoke your vote through a signed revocation, such notice must be sent so that notice is received before the vote is taken at the special meeting and should be addressed as follows:

United Community Financial Corp.

Attention: Jude J. Nohra, Corporate Secretary

275 West Federal Street

Youngstown, Ohio 44503

(330) 742-0500

 

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If you have instructed a broker or other nominee to vote your shares, you must follow directions received from your broker or other nominee in order to change those instructions.

 

Q:

Will First Defiance be required to submit the First Defiance merger proposal to its shareholders even if the First Defiance board of directors has withdrawn, modified or qualified its recommendation?

 

A:

Yes. Unless the merger agreement is terminated before the First Defiance special meeting, First Defiance is required to submit the merger proposal to its shareholders even if the First Defiance board of directors has withdrawn or modified its recommendation.

 

Q:

Will United Community be required to submit the United Community merger proposal to its shareholders even if the United Community board of directors has withdrawn, modified or qualified its recommendation?

 

A:

Yes. Unless the merger agreement is terminated before the United Community special meeting, United Community is required to submit the merger proposal to its shareholders even if the United Community board of directors has withdrawn or modified its recommendation.

 

Q:

Are United Community shareholders entitled to dissenters’ rights?

 

A:

No. Under Section 1701.84 of the Ohio General Corporation Law (“OGCL”), the holders of United Community common stock will not be entitled to dissenters’ rights in connection with the merger if (1) shares of United Community common stock are listed on a national securities exchange as of the day immediately preceding the date on which the vote on the United Community merger proposal is taken at the United Community special meeting and (2) the consideration to be received by the shareholders consists of shares or shares and cash in lieu of fractional shares that, immediately following the effective time of a merger are listed on a national securities exchange and for which no proceedings are pending to delist the shares from the national securities exchange as of the effective time of the merger. Accordingly, the holders of United Community common stock are not entitled to any dissenters’ rights in connection with the merger.

 

Q:

Should the United Community shareholders send in their stock certificates now?

 

A:

No. Please do not send in your United Community stock certificates with your proxy card. The exchange agent will send you separate instructions for exchanging United Community stock certificates or shares in book-entry form for merger consideration. See “The Merger Agreement—Conversion of Shares; Exchange of Certificates” beginning on page 110.

 

Q:

What should I do if I receive more than one set of voting materials?

 

A:

First Defiance and United Community shareholders may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold shares of First Defiance and/or United Community common stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold such shares. If you are a holder of record of First Defiance common stock or United Community common stock and your shares are registered in more than one name, you will receive more than one proxy card. In addition, if you are a holder of both First Defiance common stock and United Community common stock, you will receive one or more separate proxy cards or voting instruction cards for each company. Please complete, sign, date, and return each proxy card and voting instruction card that you receive or otherwise follow the voting instructions set forth in this joint proxy statement/prospectus to ensure that you vote every share of First Defiance common stock and/or United Community common stock that you own.

 

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Q:

Whom should I contact if I have any questions about the proxy materials, voting, or the special meeting?

 

A:

First Defiance Shareholders: If you have any questions about the proxy materials or if you need assistance submitting your proxy or voting your shares or need additional copies of this document or the enclosed proxy card, you should contact First Defiance at the toll-free number on your proxy card.

United Community Shareholders: If you have any questions about the proxy materials or if you need assistance submitting your proxy or voting your shares or need additional copies of this document or the enclosed proxy card, you should contact United Community at the toll-free number on your proxy card.

 

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SUMMARY

This summary highlights selected information from this joint proxy statement/prospectus. It does not contain all of the information that may be important to you. To fully understand the merger, you should read this entire document and its appendices carefully and the other documents to which we refer before you decide how to vote. In addition, we incorporate by reference important business and financial information about First Defiance and United Community into this joint proxy statement/prospectus. See “Where Can You Find More Information” on page 145.

The Parties

First Defiance Financial Corp.

601 Clinton Street

Defiance, Ohio 43512-3272

(419) 782-5015

First Defiance Financial Corp. (“First Defiance”) is a unitary thrift holding company that conducts business through its three wholly-owned subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”) and First Defiance Risk Management Inc. (“First Defiance Risk Management”). At June 30, 2019, First Defiance had assets of $3.28 billion and shareholders’ equity of $407.2 million.

First Federal is a federally chartered savings bank, operating 44 full-service branches and numerous ATM locations in northwest Ohio, southeast Michigan and northeast Indiana and a loan production office in Ann Arbor, Michigan. First Federal provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust and wealth management services through its extensive branch network. First Insurance is an insurance agency that conducts business throughout First Federal’s markets. First Insurance offers property and casualty insurance, life insurance and group health insurance. First Defiance Risk Management is a wholly owned insurance company subsidiary of First Defiance to insure First Defiance and its subsidiaries against certain risks unique to the operations of First Defiance and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.

United Community Financial Corp.

275 West Federal Street

Youngstown, Ohio 44503

(330) 742-0500

United Community Financial Corp. (“United Community”) is a financial holding company that conducts business through its subsidiaries, Home Savings Bank (“Home Savings”), HSB Insurance, LLC, HSB Capital, LLC and HSB Insurance, Inc. At June 30, 2019, United Community had assets of $2.87 billion and shareholders’ equity of $317.6 million.

Home Savings is an Ohio state-chartered bank that conducts its business from its main office located in Youngstown, Ohio and 33 retail banking offices (32 in Ohio and one in Pennsylvania). Home Savings also has residential mortgage loan centers servicing Ohio, West Virginia, western Pennsylvania, northern Kentucky, and eastern Indiana. HSB Capital, LLC provides mezzanine funding for customers of the Home Savings, and are expected to be repaid from the cash flow from operations of the business. HSB Insurance, LLC is a wholly-



 

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owned insurance subsidiary of United Community that offers a variety of insurance products for business and residential customers, including auto, homeowners, life-health, commercial, surety bonds and aviation. HSB Insurance, Inc. is a captive insurance company that is a wholly-owned subsidiary of United Community. HSB Insurance, Inc. insures against certain risks that are unique to the operations of United Community and its subsidiaries and for which insurance may not be currently available or economically feasible; by pooling resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

The Merger (page 54)

First Defiance and United Community are proposing a strategic merger. The merger agreement provides for the merger of United Community into First Defiance (the “merger”), with First Defiance surviving the merger and the subsequent merger of Home Savings into First Federal (the “bank merger”), with First Federal surviving the bank merger. The mergers cannot be completed unless at least 13,152,810 shares of First Defiance common stock, which is two-thirds of the issued and outstanding First Defiance common stock on October 25, 2019, and at least 32,074,827 shares of United Community common stock, which is two-thirds of the issued and outstanding United Community common stock on October 25, 2019, approve the merger. The merger agreement is attached to this document as Annex A and is incorporated in this joint proxy statement/prospectus by reference. We encourage you to read the merger agreement carefully, as it is the legal document that governs the merger.

In the Merger, United Community Shareholders Will Receive First Defiance Common Stock (page 108)

If the merger is completed, each United Community shareholder will receive in exchange for each United Community common share owned as of immediately prior to the effective time of the merger 0.3715 shares of First Defiance common stock. First Defiance will not issue any fractional shares of First Defiance common stock in the merger. United Community shareholders who would otherwise be entitled to a fraction of a share of First Defiance common stock upon the completion of the merger will be entitled to receive an amount in cash (without interest) rounded to the nearest whole cent, determined by multiplying the ten (10)-day volume weighted average stock price of a share of First Defiance common stock as of the third trading day prior to the closing of the merger by the fractional share of First Defiance common stock to which such former holder would otherwise be entitled.

As a result of the foregoing, based on the number of shares of First Defiance and United Community common stock outstanding as of October 25, 2019, on a fully diluted basis, approximately 52.5% and 47.5% of First Defiance common stock will be held by First Defiance shareholders and former United Community shareholders, respectively, immediately following the effectiveness of the merger.

Based on the closing price of First Defiance common stock on the NASDAQ Global Select Market (“NASDAQ”), on September 6, 2019, the last trading day before the announcement of the merger, of $26.32 a share of United Community common stock entitled to receive 0.3715 of a share of First Defiance common stock would receive stock consideration valued at approximately $9.78. Based on the closing price of First Defiance common stock on the NASDAQ on October 25, 2019, the latest practicable date before the printing of this document, a share of United Community entitled to 0.3715 of a share of First Defiance common stock would receive stock consideration valued at approximately $11.47.

Special Meeting of First Defiance Shareholders (page 37)

The First Defiance special meeting of shareholders will take place the First Federal Operations Center located at 25600 Elliott Road, Defiance, Ohio 43512 on December 10, 2019, at 1:00 p.m. local time. Holders



 

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of First Defiance common stock on October 25, 2019, are entitled to vote at the special meeting. At the First Defiance special meeting, First Defiance shareholders will be asked to:

 

   

adopt the merger agreement (the “First Defiance merger proposal”);

 

   

approve the amendment and restatement of First Defiance’s articles of incorporation to be effective upon the consummation of the merger (the “First Defiance articles of incorporation proposal”)

 

   

approve the amendment and restatement of First Defiance’s code of regulations to be effective upon the consummation of the merger (the “First Defiance code of regulations proposal”);

 

   

approve, on an advisory (non-binding) basis, the compensation that certain executive officers of First Defiance may receive in connection with the merger pursuant to existing agreements or other arrangements with First Defiance (the “First Defiance compensation proposal”); and

 

   

approve the adjournment of the First Defiance special meeting, if necessary or appropriate, to permit further solicitation of proxies (the “First Defiance adjournment proposal”).

The holders of at least 13,152,810 shares of First Defiance common stock, which is two-thirds of the issued and outstanding First Defiance common stock as of the record date, must vote to approve the First Defiance merger proposal. The holders of at least 9,864,608 shares of First Defiance common stock, which is a majority of the issued and outstanding First Defiance common stock as of the record date, must vote to approve the First Defiance articles of incorporation proposal and the First Defiance code of regulations proposal. The holders of shares of First Defiance common stock representing at least a majority of votes cast at the First Defiance special meeting must vote to approve the First Defiance compensation proposal and the First Defiance adjournment proposal.

As of the record date, directors and executive officers of First Defiance and their affiliates collectively owned approximately 2.2% of the outstanding First Defiance common stock. All of the directors of First Defiance entered into voting agreements pursuant to which they agreed to vote all of their shares of First Defiance common stock in favor of the First Defiance merger proposal, the First Defiance articles of incorporation proposal, the First Defiance code of regulations proposal and the First Defiance adjournment proposal.

Special Meeting of United Community Shareholders (page 48)

The United Community special meeting of shareholders will take place at United Community’s corporate headquarters, 275 West Federal Street, 9th Floor, Youngstown, Ohio 44503 on December 10, 2019, at 1:00 p.m. local time. Holders of United Community common stock on October 25, 2019, are entitled to vote at the special meeting. At the United Community special meeting, United Community shareholders will be asked to:

 

   

adopt the merger agreement (the “United Community merger proposal”);

 

   

approve, on an advisory (non-binding) basis, the compensation that certain executive officers of United Community may receive in connection with the merger pursuant to existing agreements or other arrangements with United Community (the “United Community compensation proposal”); and

 

   

approve the adjournment of the United Community special meeting, if necessary or appropriate, to permit further solicitation of proxies (the “United Community adjournment proposal”).

The holders of at least 32,074,827 shares of United Community common stock, which is two-thirds of the issued and outstanding United Community common stock as of the record date, must vote to approve the United Community merger proposal. The holders of shares of United Community common stock representing at least a majority of votes cast at the United Community special meeting must vote to approve the United Community compensation proposal and the United Community adjournment proposal.



 

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As of the record date, directors and executive officers of United Community and their affiliates collectively owned approximately 3.1% of the outstanding United Community common stock. All of the directors of United Community entered into voting agreements pursuant to which they agreed to vote all of their shares of United Community common stock in favor of the United Community merger proposal and the United Community adjournment proposal.

First Defiance’s Reasons for the Merger; Board Recommendation (page 62)

First Defiance’s board of directors believes that the terms of the merger agreement are fair and in the best interests of First Defiance and its shareholders. In reaching this decision, the board of directors considered several factors. For the factors considered by First Defiance’s board of directors in reaching its decision to approve the merger agreement, see “First Defiance’s Reasons for the Merger; Board Recommendation” beginning on page 62. The First Defiance board of directors unanimously recommends that you vote FOR the adoption of the merger agreement.

United Community’s Reasons for the Merger; Board Recommendation (page 77)

The United Community board of directors believes that the terms of the merger agreement are fair and in the best interests of United Community and its shareholders. In reaching this decision, the board of directors considered several factors. For the factors considered by United Community’s board of directors in reaching its decision to approve the merger agreement, see “United Community’s Reasons for the Merger; Board Recommendation” beginning on page 77. The United Community board of directors unanimously recommends that you vote FOR the adoption of the merger agreement.

Opinion of First Defiance’s Financial Advisor (page 65 and Annex B)

In connection with the merger, First Defiance’s financial advisor, Keefe, Bruyette & Woods, Inc. (“KBW”) delivered a written opinion, dated September 7, 2019, to the First Defiance board of directors as to the fairness, from a financial point of view and as of the date of the opinion, to First Defiance of the exchange ratio in the proposed merger. The full text of KBW’s opinion, which describes the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW in preparing the opinion, is attached as Annex B to this joint proxy statement/prospectus. The opinion was for the information of, and was directed to, the First Defiance board of directors (in its capacity as such) in connection with its consideration of the financial terms of the merger. The opinion did not address the underlying business decision of First Defiance to engage in the merger or enter into the merger agreement or constitute a recommendation to the First Defiance board of directors in connection with the merger, and it does not constitute a recommendation to any holder of First Defiance common stock or any stockholder of any other entity as to how to vote in connection with the merger or any other matter.

For further information, see “The Merger—Opinion of First Defiance’s Financial Advisor” beginning on page 65.

Opinion of United Community’s Financial Advisor (page 79 and Annex C)

In connection with its evaluation of the merger, the United Community board of directors received the opinion of United Community’s financial advisor, Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”), dated September 8, 2019, to the effect that, as of the date of the opinion, the exchange ratio was fair, from a financial point of view, to the holders of United Community common stock. The full text of the opinion, which describes the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review



 

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undertaken by Sandler O’Neill in preparing the opinion, is attached as Annex C to this document. United Community’s shareholders are encouraged to read the opinion carefully and in its entirety. The opinion was for the information of, and was directed to, the United Community board of directors (in its capacity as such) in connection with its consideration of the financial terms of the merger. The opinion did not address the underlying business decision of United Community to engage in the merger or enter into the merger agreement or constitute a recommendation to the United Community board of directors in connection with the merger, and it does not constitute a recommendation to any holder of United Community common stock as to how to vote in connection with the merger or any other matter.

For further information, see “The Merger—Opinion of United Community’s Financial Advisor” beginning on page 79.

Treatment of United Community Equity Awards (page 99)

The United Community equity awards granted under the United Community 2015 Long Term Incentive Compensation Plan, the United Community 2007 Long Term Incentive Compensation Plan or the United Community 1999 Long Term Incentive Compensation Plan (collectively, the “United Community stock plans”) will be affected as follows:

Options: If the merger is completed, each option granted by United Community to purchase shares of United Community common stock under a United Community Stock Plan or otherwise, whether vested or unvested (“United Community option”), that is outstanding and unexercised immediately prior to the completion of the merger will fully vest and be converted into a fully vested option (a “First Defiance option”) to purchase (a) the number of whole shares of First Defiance common stock (rounded down to the nearest whole share) that is equal to (i) the number of shares of United Community common stock subject to such United Community option immediately prior to the completion of the merger multiplied by (ii) 0.3715, (b) at an exercise price per share of First Defiance common stock (rounded up to the nearest whole cent) equal to (i) the exercise price for each share of United Community common stock subject to such United Community option immediately prior to the completion of the merger divided by (ii) 0.3715, subject to the terms and conditions of the United Community stock plan, if any, pursuant to which such United Community option was granted and/or any associated award agreement.

Restricted Stock: If the merger is completed, each award of shares of United Community common stock subject to vesting, repurchase or other lapse restriction granted under a United Community stock plan or otherwise, whether vested or unvested (a “United Community restricted stock award”) that is outstanding immediately prior to completion of the merger will fully vest and be cancelled and converted automatically into the right to receive 0.3715 shares of First Defiance common stock in respect of each share of United Community common stock underlying such United Community restricted stock award.

Performance Share Units: If the merger is completed, each performance-vesting restricted stock unit granted under a United Community stock plan or otherwise, whether vested or unvested, that is outstanding immediately prior to the completion of the merger (“United Community PSU award”) will fully vest (with any performance-based vesting condition applicable to such United Community PSU award to be measured consistent with the terms of the applicable award agreement applicable upon a change in control for such United Community PSU award, as determined by the United Community board of directors or its compensation committee prior to the completion of the merger) and will be cancelled and converted automatically into the right to receive 0.3715 shares of First Defiance common stock in respect of each share of United Community common stock underlying such United Community PSU award; provided, that the United Community board of directors or its compensation committee will exclude any costs or expenses related to the merger, if any, from the performance metrics applicable to the United Community PSU awards when determining actual United Community performance through the date of the completion of the merger.



 

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Regulatory Approvals Required (page 104)

The merger must be approved by the Federal Reserve Board of Governors (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions (“ODFI”). First Defiance and United Community have filed applications and notifications to obtain necessary regulatory approvals. Although neither First Defiance nor United Community is aware of any reason why the Federal Reserve, the FDIC or the ODFI would not grant such approvals, First Defiance and United Community cannot be certain when or if they will be obtained. For more information, see “The MergerRegulatory Approvals Required for the Merger” beginning on page 104.

Material U.S. Federal Income Tax Consequences of the Merger (page 125)

The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and it is a condition to the respective obligations of First Defiance and United Community to complete the merger that each of First Defiance and United Community receives a legal opinion to that effect. Accordingly, holders of United Community common stock are not expected to recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of United Community common stock for shares of First Defiance common stock in the merger, except with respect to any cash received instead of fractional shares of First Defiance common stock. For further information, please refer to “Material U.S. Federal Income Tax Consequences of the Merger.” The U.S. federal income tax consequences described above may not apply to all holders of United Community common stock. The tax consequences to a holder of United Community common stock will depend on his or her individual situation. Accordingly, we strongly urge holders of United Community common stock to consult their tax advisors for a full understanding of the particular tax consequences of the merger to them.

First Defiance’s Officers and Directors Have Financial Interests in the Merger that Differ from Your Interests (page 93)

First Defiance shareholders should be aware that First Defiance’s directors and executive officers have interests in the merger that are different from, or in addition to, interests of First Defiance shareholders generally. These interests include, among others, continued service as a director for certain First Defiance directors, continued employment for certain executive officers of First Defiance, and rights to ongoing indemnification and insurance coverage by the surviving corporation for acts or omissions occurring prior to the merger.

The First Defiance board of directors was aware of and considered those interests, among other matters, in reaching its decisions to approve the merger agreement and the transactions contemplated thereby and to recommend the adoption of the merger agreement to First Defiance shareholders. See the section entitled “The Merger—Interests of First Defiance’s Directors and Executive Officers in the Merger” beginning on page 93 of this joint proxy statement/prospectus for a more detailed description of these interests.

Interests of First Defiance’s Directors and Executive Officers in the Merger (page 93)

In considering the recommendation of the First Defiance board of directors with respect to the merger, First Defiance shareholders should be aware that First Defiance’s directors and executive officers have certain interests in the merger, including financial interests, that may be different from, or in addition to, the interests of First Defiance shareholders generally. The First Defiance board of directors was aware of these interests and considered them, among other matters, in making its recommendation that First Defiance shareholders vote to approve the First Defiance merger proposal.

These interests include, among others:

 

   

Pursuant to the merger agreement, seven of the 13 members of the board of directors of First Defiance and First Federal immediately following the closing of the merger will be designated by First Defiance



 

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to remain on the board of directors, including Donald P. Hileman, the current President and Chief Executive Officer of First Defiance and First Federal, and John L. Bookmyer, the current Chairman of First Defiance, who will remain Chairman;

 

   

Pursuant to the merger agreement, First Defiance may deem the merger a “change in control” and accelerate vesting of equity-based awards held by members of the board of directors and its employees, in the event that such awards would not otherwise vest under the terms of applicable agreements and plans, in order to align the treatment of such awards with those held by United Community employees and directors;

 

   

Mr. Hileman will remain Chief Executive Officer for a period of approximately one year following the effective time, and subsequently will become Executive Chairman of First Defiance and First Federal, pursuant to the terms of an employment agreement he entered into with First Defiance and First Federal in connection with the merger, which provides for certain payments in connection with the effective time and a qualifying termination of employment thereafter;

 

   

Paul D. Nungester, Jr., Executive Vice President and Chief Financial Officer of First Defiance and First Federal, John R. Reisner, Executive Vice President, Chief Risk Officer and Legal Counsel of First Defiance and First Federal, Dennis E. Rose, Jr., Executive Vice President and Director of Strategy Management, and Gregory R. Allen, Executive Vice President and Fort Wayne Market Area Executive, are each party to agreements with First Defiance that provide for severance benefits upon a qualifying termination of employment;

 

   

Timothy K. Harris, Executive Vice President and Chief Credit Officer, is eligible for severance benefits under the First Defiance severance plan; and

 

   

First Defiance’s directors and executive officers are entitled to continued indemnification and insurance coverage under the merger agreement.

For a more complete description of these interests, see the section entitled “The Merger—Interests of First Defiance Directors and Executive Officers in the Merger” and “The Merger—Merger-related Compensation for First Defiance’s Named Executive Officers” beginning on pages 93 and 97, respectively.

Interests of United Community’s and Directors and Executive Officers in the Merger (page 99)

In considering the recommendation of the United Community board of directors with respect to the merger, United Community shareholders should be aware that United Community’s directors and executive officers have certain interests in the merger, including financial interests, that may be different from, or in addition to, the interests of United Community shareholders generally. The United Community board of directors was aware of these interests and considered them, among other matters, in making its recommendation that United Community shareholders vote to approve the merger proposal.

These interests include, among others:

 

   

at the effective time, each option to purchase shares of United Community common stock will fully vest and convert into an option of equivalent value, with appropriate adjustments to reflect the application of the exchange ratio, to purchase shares of First Defiance common stock, and each United Community restricted stock award and United Community PSU award will fully vest and convert into the right to receive the merger consideration in respect of each share of United Community common stock subject to each award;

 

   

Pursuant to the merger agreement, six of the 13 members of the board of directors of First Defiance and First Federal immediately following the closing of the merger will be designated by United Community, including Richard J. Schiraldi, the current Chairman of United Community, who will become Vice Chairman of First Defiance and First Federal;



 

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Gary M. Small, President and Chief Executive Officer of United Community and Home Savings, will become President of First Defiance and First Federal at the effective time and subsequently will become Chief Executive Officer of First Defiance and First Federal, pursuant to the terms of an employment agreement he entered into with First Defiance and First Federal, which agreement provides for certain payments in connection with the effective time or a qualifying termination of employment thereafter;

 

   

Timothy W. Esson, Chief Financial Officer of United Community and Executive Vice President and Chief Financial Officer of Home Savings, Zahid Afzal, Executive Vice President and Chief Operating Officer of Home Savings, Matthew T. Garrity, Executive Vice President, Commercial Lending and Credit Administration of Home Savings, and Jude J. Nohra, General Counsel and Secretary of United Community and Executive Vice President, Corporate Governance, General Counsel and Secretary, Home Savings, are each party to change in control agreements with United Community that provide for severance benefits upon a qualifying termination of employment; and

 

   

United Community’s directors and executive officers are entitled to continued indemnification and insurance coverage under the merger agreement.

For a more complete description of these interests, see the section entitled “The Merger—Interests of United Community Directors and Executive Officers in the Merger” and “The Merger—Merger-related Compensation for United Community’s Named Executive Officers” beginning on pages 99 and 102, respectively.

Agreement Not to Solicit Other Offers (page 119)

First Defiance and United Community have agreed that they will not, and will cause their subsidiaries and use their reasonable best efforts to cause their officers, directors, agents, advisors, and representatives not to, directly or indirectly, (i) initiate, solicit, knowingly encourage, or knowingly facilitate inquiries or proposals with respect to any acquisition proposal, (ii) engage or participate in any negotiations with any person concerning any acquisition proposal, or (iii) provide any confidential or nonpublic information or data to, or have or participate in any discussions with, any person relating to, any acquisition proposal except to notify a person that has made or, to the knowledge of First Defiance or United Community, as applicable, is making any inquiries with respect to, or is considering making, an acquisition proposal, of the existence of First Defiance’s or United Community’s obligations with respect to such acquisition proposals under the merger agreement. However, in the event that prior to the adoption of the merger agreement by First Defiance’s or United Community’s shareholders, as applicable, either First Defiance or United Community receives an unsolicited bona fide written acquisition proposal (the “receiving party”), such receiving party may, and may permit its subsidiaries and its subsidiaries’ officers, directors, agents, advisors, and representatives to, furnish or cause to be furnished nonpublic information or data and participate in negotiations or discussions to the extent that its board of directors concludes in good faith (after receiving the advice of its outside counsel, and with respect to financial matters, its financial advisors) that failure to take such actions would be reasonably likely to result in a violation of its fiduciary duties under applicable law, provided that, prior to providing any such nonpublic information, such receiving party enters into a confidentiality agreement with such third-party on terms no less favorable to it than the confidentiality agreement between First Defiance and United Community, and which confidentiality agreement does not provide such person with any exclusive right to negotiate with such receiving party. The receiving party will promptly (within 24 hours) advise the other party following receipt of any acquisition proposal or any inquiry which could reasonably be expected to lead to an acquisition proposal, and the substance thereof (including the terms and conditions of and the identity of the person making such inquiry or acquisition proposal and a copy thereof if in writing and any related documentation or correspondence), and will keep the other party apprised of any related developments, discussions, and negotiations on a current basis, including any amendments to or revisions of the material terms of such inquiry or acquisition proposal.



 

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Conditions to Complete the Merger (page 120)

First Defiance’s and United Community’s respective obligations to complete the merger are subject to the satisfaction or waiver of the following conditions:

 

   

the accuracy of the representations and warranties of the other party contained in the merger agreement as of the date on which the merger agreement was entered into and as of the closing date, subject to the materiality standards provided in the merger agreement (and the receipt by each party of an officer’s certificate from the other party to such effect);

 

   

the performance by the other party in all material respects of all of the covenants and obligations required to be performed by it under the merger agreement at or prior to the closing date (and the receipt by each party of an officer’s certificate from the other party to such effect);

 

   

the adoption of the merger agreement by First Defiance’s shareholders and by United Community’s shareholders;

 

   

the approval of the First Defiance code of regulations proposal by First Defiance’s shareholders;

 

   

the receipt of necessary regulatory approvals contemplated by the merger agreement and the expiration of all statutory waiting periods in respect thereof, without the imposition of any condition or restriction that would reasonably be expected to have a material adverse effect on the surviving corporation and its subsidiaries, taken as a whole, after giving effect to the merger;

 

   

the effectiveness of the registration statement of which this joint proxy statement/prospectus is a part with respect to the First Defiance common stock to be issued upon the consummation of the merger, and the absence of any stop order (or proceedings for that purpose initiated or threatened and not withdrawn);

 

   

the authorization for listing on NASDAQ, subject to official notice of issuance, of the First Defiance common stock to be issued upon the consummation of the merger;

 

   

the absence of any change in the financial condition, assets or business of the other party or its subsidiaries from the date of the merger agreement until the closing date that has had or would reasonably be expected to have a material adverse effect on the other party;

 

   

the absence of any order, injunction, or decree by any court or regulatory authority of competent jurisdiction or other legal restraint or prohibition preventing the completion of the merger or the other transactions contemplated by the merger agreement, and the absence of any statute, rule, regulation, order, injunction, or decree enacted, entered, promulgated, or enforced by any regulatory authority which prohibits or makes illegal consummation of the merger, the bank merger or the other transactions contemplated by the merger agreement; and

 

   

receipt by such party of an opinion of legal counsel to the effect that on the basis of facts, representations, and assumptions set forth or referred to in such opinion, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.

Neither United Community nor First Defiance can provide assurance as to when or if all of the conditions to the merger can or will be satisfied or waived by the appropriate party. As of the date of this joint proxy statement/prospectus, neither United Community nor First Defiance has reason to believe that any of these conditions will not be satisfied. See “The Merger Agreement—Conditions to Complete the Merger” beginning on page 120.



 

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Termination and Amendment of the Merger Agreement (pages 120 and 123)

First Defiance and United Community may agree to terminate the merger agreement and abandon the merger at any time before the effective time of the merger:

 

   

by the mutual consent of First Defiance and United Community, each evidenced by appropriate written board resolutions;

 

   

by either First Defiance or United Community, if the other party has breached or failed to perform any of its representations, warranties, covenants or agreements set forth in the merger agreement, which breach or failure to perform, either individually or together with other such breaches, in the aggregate, if occurring or continuing on the date on which the completion of the merger would otherwise occur would result in the failure of any of the conditions to the terminating party’s obligation to close set forth in the merger agreement and such breach or failure to perform has not been or cannot be cured within forty-five (45) days following written notice to the party committing such breach, making such untrue representation, provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement;

 

   

by either First Defiance or United Community, if any required regulatory approval has been denied and such denial has become final and nonappealable; provided that the right to terminate the merger agreement for such denial is not available to a party whose failure (or the failure of any of its affiliates) to fulfill any of its obligations (excluding representations and warranties) under the merger agreement has been the cause of or resulted in the occurrence of such denial;

 

   

by either First Defiance or United Community, if any court of competent jurisdiction or other regulatory authority issues a judgment, order, injunction, rule or decree, or taken any other action restraining, enjoining or otherwise prohibiting the merger and such judgment, order, injunction, rule, decree or other action has become final and nonappealable; provided, however, that the right to terminate the merger agreement for such judgment, order, injunction, rule or decree or other action is not available to a party whose failure (or the failure of any of its affiliates) to fulfill any of its obligations (excluding representations and warranties) under the merger agreement has been the cause of or resulted in the occurrence of any such judgment, order, injunction, rule or decree or other action;

 

   

by either party if the merger is not completed on or before September 9, 2020, provided that the terminating party’s failure to fulfill any of its obligations (excluding warranties and representations) under the merger agreement shall not have been the cause of or resulted in the failure of the effective time of the merger to occur on or before such date;

 

   

by First Defiance, prior to such time as the United Community merger proposal is approved, if (i) United Community’s board of directors has (A) failed to recommend in the joint proxy statement/prospectus that the shareholders of United Community adopt the merger agreement, or withdrawn, modified or qualified such recommendation in a manner adverse to First Defiance, or publicly disclosed that it has resolved to do so, or failed to recommend against acceptance of a tender offer or exchange offer has been publicly disclosed within ten (10) business days after the commencement of such tender or exchange offer, in any such case whether or not permitted by the terms of the merger agreement or (B) recommended or endorsed a proposal to acquire United Community or failed to issue a press release reaffirming its recommendation that the shareholders of First Defiance adopt the merger within ten (10) Business Days after a proposal to acquire United Community is publicly announced or (ii) United Community or its board of directors has breached in any material respect its obligations to the non-solicitation of acquisition proposals, calling a meeting of its shareholders, or recommending that its shareholders adopt the merger agreement; or

 

   

by United Community, prior to such time as the First Defiance merger proposal and the First Defiance code of regulations proposal are approved, if (i) First Defiance’s board of directors has (A) failed to



 

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recommend in the joint proxy statement/prospectus that the shareholders of First Defiance adopt the merger agreement, or withdrawn, modified or qualified such recommendation in a manner adverse to United Community, or publicly disclosed that it has resolved to do so, or failed to recommend against acceptance of a tender offer or exchange offer has been publicly disclosed within ten (10) business days after the commencement of such tender or exchange offer, in any such case whether or not permitted by the terms of the merger agreement or (B) recommended or endorsed a proposal to acquire First Defiance or failed to issue a press release reaffirming its recommendation that the shareholders of United Community adopt this Agreement within ten (10) Business Days after a proposal to acquire First Defiance is publicly announced or (ii) First Defiance or its board of directors has breached in any material respect its obligations to the non-solicitation of acquisition proposals, calling a meeting of its shareholders, or recommending that its shareholders adopt the merger agreement and approve the First Defiance articles of incorporation proposal and the First Defiance code of regulations proposal;

If the merger agreement is terminated under certain circumstances, including circumstances involving alternative acquisition proposals and changes in the recommendation of United Community’s or First Defiance’s respective boards, United Community or First Defiance may be required to pay a termination fee to the other equal to $18,400,000.

For more information, see “The Merger Agreement—Termination of the Merger Agreement” beginning on page 120.

Risk Factors (page 27)

You should consider all the information contained in or incorporated by reference into this joint proxy statement/prospectus in deciding how to vote for the proposals presented in the joint proxy statement/prospectus. In particular, you should consider the factors described under “Risk Factors” beginning on page 27.

Litigation Relating to the Merger (page 106)

Certain litigation is pending in connection with the merger. For more information, see “The Merger—Litigation Relating to the Merger,” beginning on page 106.

Comparative Stock Prices and Dividends

The following table sets forth the closing sales prices per share of First Defiance and United Community common stock on the last full trading day prior to the announcement of the merger and on the last practicable trading day prior to printing this joint proxy statement/prospectus. The table also presents the equivalent price per share of United Community, giving effect to the merger as of such dates.



 

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The information listed as “per equivalent United Community share” was obtained by multiplying the pro forma amounts by the exchange ratio of 0.3715. We present this information to reflect the fact that United Community shareholders will receive shares of First Defiance common stock for each share of United Community common stock exchanged in the merger. First Defiance anticipates that the combined company will derive financial benefits from the merger that include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of First Defiance following the merger under one set of assumptions, does not reflect these benefits and, accordingly, does not attempt to predict or suggest future results. The pro forma information also does not necessarily reflect what the historical results of First Defiance would have been had our companies been combined during these periods.

 

     First
Defiance
Historical
     United
Community
Historical
     Pro Forma
Combined(1)(2)
     Per equivalent
United
Community
Share
 

Book value per share:

           

At June 30, 2019

   $ 20.64      $ 6.61      $ 23.15      $ 8.60  

Cash dividends declared per share:

           

Six months ended June 30, 2019

   $ 0.38      $ 0.14      $ 0.38      $ 0.14  

Year ended December 31, 2018

   $ 0.64      $ 0.26      $ 0.64      $ 0.24  

Diluted net income per share:

           

Six months ended June 30, 2019

   $ 1.19      $ 0.39      $ 1.12      $ 0.42  

Year ended December 31, 2018

   $ 2.26      $ 0.74      $ 2.14      $ 0.80  

 

(1)

Pro forma dividends per share represent First Defiance’s historical dividends per share.

(2)

The pro forma book value per share of First Defiance is based on the pro forma common shareholders’ equity for the combined entities divided by total pro forma common shares of the combined entities.

Comparison of Shareholders’ Rights (page 138)

The rights of United Community shareholders will change as a result of the merger due to differences in First Defiance’s and United Community’s articles of incorporation and codes of regulations. Rights of United Community shareholders are currently governed by United Community’s articles of incorporation and code of regulations and Ohio law. Upon the completion of the merger, United Community shareholders immediately prior to the effective time will become shareholders of First Defiance, as the continuing company in the merger, and the rights of United Community shareholders will thereafter be governed by First Defiance’s articles of incorporation and code of regulations, each as in effect as of such time, and Ohio law. The differences in shareholder rights are explained more fully in “Comparison of Rights of First Defiance Shareholders and United Community Shareholders” beginning on page 138.

Accounting Treatment of the Merger (page 105)

First Defiance and United Community each prepare their respective financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). The merger will be accounted for using the acquisition method of accounting, and First Defiance will be treated as the accounting acquirer.



 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF FIRST DEFIANCE

The tables below contain information regarding the financial condition and earnings of First Defiance for the periods presented. The selected historical financial data as of and for the six months ended June 30, 2019 and 2018 have been derived from First Defiance’s unaudited interim consolidated financial statements, which are incorporated by reference into this joint proxy statement/prospectus. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, which First Defiance’s management considers necessary for a fair presentation of its financial position and results of operations for these periods. The financial condition and results of operations as of and for the six months ended June 30, 2019 do not purport to be indicative of the financial condition or results of operations to be expected as of or for the year ended December 31, 2019. The unaudited consolidated financial statements as of June 30, 2019 and for the six-month periods ended June 30, 2019 and 2018, together with the notes thereto, are included in First Defiance’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which is incorporated by reference into this joint proxy statement/prospectus. The selected historical financial data as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 has been derived from First Defiance’s audited consolidated financial statements, and First Defiance’s audited consolidated financial statements as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 have been incorporated by reference into this joint proxy statement/prospectus. This information is only a summary. You should read it in conjunction with the historical financial statements (and related notes), as well as the information contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained or incorporated by reference in First Defiance’s annual reports on Form 10-K and quarterly reports on Form 10-Q and other information filed by First Defiance with the SEC. See “Where You Can Find More Information” beginning on page 145.

First Defiance Financial Corp.

Consolidated Statement of Financial Data

(Dollars in thousands, except per share data)

 

    At June 30,     At December 31,  
    2019     2018     2018     2017     2016     2015     2014  
    (Unaudited)                                

Financial Condition:

             

Total assets

  $ 3,277,552     $ 3,039,574     $ 3,181,722     $ 2,993,403     $ 2,477,597     $ 2,297,676     $ 2,178,952  

Investment securities

    296,600       286,957       294,602       261,298       251,176       236,678       239,634  

Loans held-to-maturity, net

    2,595,285       2,358,023       2,511,708       2,322,030       1,914,603       1,776,835       1,622,020  

Allowance for loan loss

    28,934       27,321       28,331       26,683       25,884       25,382       24,766  

Non-performing assets

    15,334       20,135       20,221       32,247       14,803       17,582       30,311  

Mortgage servicing rights

    9,855       9,948       10,119       9,808       9,595       9,248       9,012  

Deposits and borrowers’ escrow balances

    2,684,187       2,494,335       2,624,534       2,440,581       1,984,278       1,838,811       1,763,122  

FHLB advances

    105,178       85,722       85,189       84,279       103,943       59,902       21,544  

Stockholders’ equity

    407,216       386,920       399,589       373,286       293,018       280,197       279,505  


 

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First Defiance Financial Corp.

Consolidated Statement of Financial Data

(Dollars in thousands, except per share data)

 

     Six Months Ended
June 30,
    Year Ended December 31,  
     2019     2018     2018     2017     2016     2015     2014  
     (Unaudited)                                

Operations:

              

Interest income

   $ 69,160     $ 59,204     $ 124,717     $ 108,102     $ 87,383     $ 80,836     $ 76,248  

Interest expense

     11,901       6,970       16,462       11,431       8,440       6,781       6,559  

Net interest income

     57,259       52,234       108,255       96,671       78,943       74,055       69,689  

Provision for loan losses

     494       (672     1,176       2,949       283       136       1,117  

Non-interest income

     21,299       20,917       39,208       40,081       34,030       31,803       31,641  

Non-interest expense

     49,101       45,916       89,412       85,351       71,093       67,889       66,758  

Income before income taxes

     28,963       27,907       56,875       48,452       41,597       37,833       33,455  

Income taxes

     5,282       5,061       10,626       16,184       12,754       11,410       9,163  

Net income

   $ 23,681     $ 22,846     $ 46,249     $ 32,268     $ 28,843     $ 26,423     $ 24,292  

Basic earnings per share

   $ 1.19     $ 1.12     $ 2.27     $ 1.62     $ 1.61     $ 1.44     $ 1.28  

Diluted earnings per share

   $ 1.19     $ 1.12     $ 2.26     $ 1.61     $ 1.60     $ 1.41     $ 1.22  
     At or for the Six
Months Ended
June 30,
    At or for the Year ended December 31,  
     2019     2018     2018     2017     2016     2015     2014  

Other ratios:

              

Return on average assets

     1.49     1.54     1.52     1.13     1.20     1.19     1.12

Return on average equity

     12.03     12.20     12.03     9.19     10.10     9.52     8.78

Interest rate spread

     3.76     3.79     3.79     3.74     3.61     3.71     3.57

Net interest margin

     4.03     3.95     3.98     3.88     3.74     3.81     3.68

Ratio of operating expenses to average total assets

     3.09     3.09     2.93     2.99     2.97     3.05     3.09


 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF UNITED COMMUNITY

The tables below contain information regarding the financial condition and earnings of United Community for the periods presented. The selected historical financial data as of and for the six months ended June 30, 2019 and 2018 have been derived from United Community’s unaudited interim consolidated financial statements, which are incorporated by reference into this joint proxy statement/prospectus. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, which United Community’s management considers necessary for a fair presentation of its financial position and results of operations for these periods. The financial condition and results of operations as of and for the six months ended June 30, 2019 do not purport to be indicative of the financial condition or results of operations to be expected as of or for the year ended December 31, 2019. The unaudited consolidated financial statements as of June 30, 2019 and for the six-month periods ended June 30, 2019 and 2018, together with the notes thereto, are included in United Community’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which is incorporated by reference into this joint proxy statement/prospectus. The selected historical financial data as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 has been derived from United Community’s audited consolidated financial statements, and United Community’s audited consolidated financial statements as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 have been incorporated by reference into this joint proxy statement/prospectus. This information is only a summary. You should read it in conjunction with the historical financial statements (and related notes), as well as the information contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained or incorporated by reference in United Community’s annual reports on Form 10-K and quarterly reports on Form 10-Q and other information filed by United Community with the SEC. See Where You Can Find More Information” beginning on page 145.

United Community Financial Corp.

Consolidated Statement of Financial Data

(In thousands)

 

    At June 30,     At December 31,  
    2019     2018     2018     2017     2016     2015     2014  
    (Unaudited)                                

Financial Condition:

             

Total assets

  $ 2,869,116     $ 2,770,558     $ 2,811,357     $ 2,649,905     $ 2,191,345     $ 1,987,989     $ 1,833,550  

Cash and cash equivalents

    54,562       66,977       60,985       46,880       45,887       35,910       32,980  

Securities trading

    705       —         364       —         —         —         —    

Securities available-for-sale

    319,009       247,630       241,643       270,561       343,284       357,670       499,790  

Securities held-to-maturity

    —         81,294       77,491       82,911       97,519       110,699       —    

Loans held-for-sale

    97,477       107,701       91,472       83,752       62,758       35,801       20,730  

Loans held-to-maturity, net

    2,229,326       2,099,781       2,176,842       1,999,877       1,503,577       1,316,192       1,148,093  

Federal home loan bank stock, at cost

    14,059       19,324       19,144       19,324       18,068       18,068       18,068  

Cash surrender value of life insurance

    65,002       63,354       64,220       62,488       55,861       54,366       46,401  

Customer deposits

    2,071,104       1,946,125       1,922,265       1,800,263       1,438,475       1,435,743       1,347,836  

Brokered deposits

    188,075       189,220       290,955       156,476       76,516       —         —    

Borrowed funds

    233,146       297,118       243,224       356,733       391,268       279,510       216,752  

Stockholders’ equity

    317,554       301,484       309,334       294,265       249,806       244,245       240,135  


 

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United Community Financial Corp.

Consolidated Statement of Financial Data

(Dollars in thousands, except per share data)

 

     Six Months Ended
June 30,
    Year ended December 31,  
     2019     2018     2018     2017     2016     2015     2014  
     (Unaudited)                                

Operations:

              

Interest income

   $ 59,200     $ 52,711     $ 110,572     $ 93,510     $ 70,729     $ 65,635     $ 63,244  

Interest expense

     14,971       9,883       22,627       13,157       8,428       9,113       11,825  

Net interest income

     44,229       42,828       87,945       80,353       62,301       56,522       51,419  

Provision for loan losses

     10       269       699       4,253       5,387       2,135       (1,271

Non-interest income

     12,744       11,671       23,402       25,239       22,076       19,717       13,741  

Non-interest expense

     33,650       32,130       65,079       68,259       52,019       49,929       55,960  

Income before income taxes

     23,313       22,100       45,569       33,080       26,971       24,175       10,471  

Income taxes

     4,171       4,003       8,391       11,295       8,143       7,893       (39,735

Net income

   $ 19,142     $ 18,097     $ 37,178     $ 21,785     $ 18,828     $ 16,282     $ 50,206  

Basic earnings per share

   $ 0.39     $ 0.36     $ 0.75     $ 0.44     $ 0.40     $ 0.34     $ 1.00  

Diluted earnings per share

   $ 0.39     $ 0.36     $ 0.74     $ 0.44     $ 0.40     $ 0.34     $ 1.00  
     At or for the Six
Months Ended
June 30,
    At or for the Year Ended December 31,  
     2019     2018     2018     2017     2016     2015     2014  

Other ratios:

              

Return on average assets

     1.35     1.34     1.35     0.85     0.91     0.85     2.82

Return on average equity

     12.11     12.00     12.10     7.63     7.58     6.65     23.30

Interest rate spread

     3.04     3.19     3.19     3.27     3.13     3.06     2.93

Net interest margin

     3.35     3.41     3.43     3.41     3.24     3.18     3.10

Ratio of operating expenses to average total assets

     2.37     2.38     2.33     2.66     2.50     2.61     3.14


 

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RISK FACTORS

In addition to general investment risks and the other information contained in or incorporated by reference into this joint proxy statement/prospectus, including the matters addressed under the section “Forward-Looking Statements,” you should carefully consider the following risk factors in deciding how to vote for the proposals presented in this joint proxy statement/prospectus. You should also consider the other information in this joint proxy statement/prospectus and the other documents incorporated by reference into this joint proxy statement/prospectus. Please see Where You Can Find More Information.

Risks Related to the Merger and First Defiance’s Business Upon Completion of the Merger

Because the market price of First Defiance common stock will fluctuate, United Community shareholders cannot be certain of the market value of the merger consideration they will receive.

Upon completion of the merger, each outstanding share of United Community common stock, except for shares of United Community common stock owned by United Community as treasury stock or owned directly or indirectly First Defiance (other than shares held in a fiduciary capacity or in connection with debts previously contracted), will be converted into 0.3715 shares of First Defiance common stock, subject to the payment of cash instead of fractional shares of First Defiance common stock. The merger consideration that United Community shareholders will receive is a fixed number of shares of First Defiance common stock; it is not a number of shares with a particular fixed market value. The market value of the merger consideration will vary from the closing price of First Defiance common stock on the date First Defiance and United Community announced the merger agreement, on the date that this joint proxy statement/prospectus is mailed to First Defiance and United Community shareholders, on the date of the special meetings of First Defiance and United Community shareholders, and on the date the merger is completed. Any change in the market price of First Defiance common stock prior to the completion of the merger will affect the market value of the merger consideration that United Community shareholders will receive upon completion of the merger, and there will be no adjustment to the merger consideration for changes in the market price of either shares of First Defiance common stock or shares of United Community common stock.

The market price of First Defiance’s common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding First Defiance’s operations or business prospects, including market sentiment regarding First Defiance’s entry into the merger agreement. These risks may be affected by:

 

   

operating results that vary from the expectations of First Defiance’s management or of securities analysts and investors;

 

   

developments in First Defiance’s business or in the financial services sector generally;

 

   

regulatory or legislative changes affecting First Defiance’s industry generally or its business and operations;

 

   

operating and securities price performance of companies that investors consider to be comparable to First Defiance;

 

   

changes in estimates or recommendations by securities analysts or rating agencies;

 

   

announcements of strategic developments, acquisitions, dispositions, financings, and other material events by First Defiance or its competitors; and

 

   

changes in global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit, or asset valuations or volatility.

Many of these factors are outside the control of First Defiance and United Community. Therefore, at the time of the United Community special meeting and the time of the First Defiance special meeting, neither United Community shareholders nor First Defiance shareholders will know the precise market value of the merger consideration to be received by United Community shareholders at the effective time of the merger. You should obtain current market quotations for both First Defiance common stock and United Community common stock.

 

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The market price of First Defiance common stock after the merger may be affected by factors different from those currently affecting the market prices of United Community common stock or First Defiance common stock.

Upon completion of the merger, holders of United Community common stock will become holders of First Defiance common stock. First Defiance’s business differs in certain respects from that of United Community, and, accordingly, the results of operations and of the combined company and the market price of First Defiance common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each of First Defiance and United Community. For a discussion of the businesses of First Defiance and United Community and of some important factors to consider in connection with those businesses, see the documents incorporated by reference into this joint proxy statement/prospectus and referred to under “Where You Can Find More Information.”

Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.

Before the merger and the bank merger may be completed, First Defiance and United Community must obtain all necessary approvals from the Federal Reserve, the FDIC and the ODFI. Other approvals, waivers, or consents from regulators may also be required. In determining whether to grant these approvals, the regulators consider a variety of factors, including the regulatory standing of each party and the factors described under “The Merger—Regulatory Approvals Required for the Merger.” An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval or delay the receipt of one or more of the required regulatory approvals. The Federal Reserve has stated that if supervisory issues arise during processing of an application for approval of a merger transaction, a banking organization will be expected to withdraw its application pending resolution of such supervisory concerns. Accordingly, if there is an adverse development in either party’s regulatory standing, First Defiance may be required to withdraw its application for approval of the proposed merger and, if possible, resubmit such application after the applicable supervisory concerns have been resolved.

The terms and conditions of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the merger agreement. There is no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there is no assurance that any such conditions, limitations, obligations or restrictions will not result in the delay or abandonment of the merger. See “The Merger—Regulatory Approvals Required for the Merger.” Each party’s obligation to complete the merger is conditioned on the receipt of the required regulatory approvals and the expiration of all statutory waiting periods in respect thereof, without the imposition of any condition or restriction that would reasonably be expected to have a material adverse effect on the surviving corporation and its subsidiaries, taken as a whole, after giving effect to the merger. See “The Merger Agreement—Conditions to Complete the Merger.”

The success of the merger and integration of First Defiance and United Community will depend on a number of uncertain factors.

The success of the merger will depend on a number of factors, including, without limitation:

 

   

First Defiance’s ability to integrate the branches acquired from Home Savings in the merger (the “acquired branches”) into First Federal’s current operations;

 

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First Defiance’s ability to limit the outflow of deposits held by its new customers in the acquired branches and to successfully retain and manage interest-earning assets (i.e., loans) acquired in the merger;

 

   

First Defiance’s ability to control the incremental non-interest expense from the acquired branches in a manner that enables it to maintain a favorable overall efficiency ratio;

 

   

First Defiance’s ability to retain and attract the appropriate personnel to staff the acquired branches; and

 

   

First Defiance’s ability to earn acceptable levels of interest and non-interest income, including fee income, from the acquired branches.

Integrating the acquired branches will be an operation of substantial size and expense and may be affected by general market and economic conditions or government actions affecting the financial industry generally. Integration efforts will also likely divert First Defiance’s management’s attention and resources. No assurance can be given that First Defiance will be able to integrate the acquired branches successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business, or inconsistencies in standards, controls, procedures, and policies that adversely affect First Defiance’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. First Defiance may also encounter unexpected difficulties or costs during the integration that could adversely affect its earnings and financial condition, perhaps materially. Additionally, no assurance can be given that the operation of the acquired branches will not adversely affect First Defiance’s existing profitability, that First Defiance will be able to achieve results in the future similar to those achieved by its existing banking business, or that First Defiance will be able to manage any growth resulting from the merger effectively.

Combining First Defiance and United Community may be more difficult, costly, or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.

First Defiance and United Community have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on First Defiance’s ability to successfully combine and integrate the businesses of First Defiance and United Community in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses, or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees, or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect First Defiance’s ability to successfully conduct its business, which could have an adverse effect on First Defiance’s financial results and the value of its common stock. If First Defiance experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause First Defiance and/or United Community to lose customers or cause customers to remove their accounts from First Defiance and/or United Community and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of United Community and First Defiance during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated.

The combined company may be unable to retain First Defiance and/or United Community personnel successfully after the merger is completed.

The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees of First Defiance and United Community. It is possible that these employees may

 

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decide not to remain with First Defiance or United Community, as applicable, while the merger is pending or with the combined company after the merger is consummated. If key employees terminate their employment, or if an insufficient number of employees is retained to maintain effective operations, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating United Community and First Defiance to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, First Defiance and United Community may not be able to locate suitable replacements for any key employees who leave either company, or to offer employment to potential replacements on reasonable terms.

The unaudited pro forma condensed combined financial statements included in this document are preliminary and the actual financial condition and results of operations of First Defiance after the merger may differ materially, and the projected financial information of First Defiance and United Community included in this joint proxy statement/prospectus is inherently subject to uncertainties.

The unaudited pro forma condensed combined financial statements in this document are presented for illustrative purposes only and are not necessarily indicative of what First Defiance’s actual financial condition or results of operations would have been had the merger been completed on the dates indicated. The preparation of the pro forma financial information is based upon available information and certain assumptions and estimates that First Defiance and United Community currently believe are reasonable. The unaudited pro forma condensed combined financial statements reflect adjustments, which are based upon preliminary estimates, to record the United Community identifiable assets acquired and liabilities assumed at fair value and the resulting goodwill recognized. The purchase price allocation reflected in this document is preliminary, and final allocation of the purchase price will be based upon the actual purchase price and the fair value of the assets and liabilities of United Community as of the date of the completion of the merger. Accordingly, the final acquisition accounting adjustments may differ materially from the pro forma adjustments reflected in this document. For more information, please see “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 128.

While the projected financial information of First Defiance and United Community (the “management projections”) included in this joint proxy statement/prospectus is presented with numerical specificity, the management projections were based on numerous variables and assumptions that are inherently uncertain and may be beyond First Defiance management’s and United Community management’s control. Further, given that the management projections cover multiple years, by their nature, they become subject to greater uncertainty with each successive year beyond their preparation. Important factors that may affect actual results and may result in such projections not being achieved include: the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement, the inability to complete the merger, or the failure to satisfy other conditions to completion of the merger, including that a regulatory authority may prohibit, delay or refuse to grant a required regulatory approval for the completion of the merger, and risks and uncertainties pertaining to First Defiance’s business and United Community’s business, including the risks and uncertainties detailed in their respective public periodic filings with the SEC. In addition, the ability to achieve the management projections may depend on, in part, whether or not the strategic goals, objectives and targets are reached over the applicable period. The assumptions upon which the management projections were based necessarily involve judgments with respect to, among other things, future economic, competitive and regulatory conditions and financial market conditions and future business decisions that may not be realized and that are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, including, among other things, the inherent uncertainty of the business and economic conditions affecting the industry in which First Defiance and United Community operate, and the risks and uncertainties described in “Forward-Looking Statements”, all of which are difficult or impossible to predict accurately and many of which are beyond First Defiance’s and United Community’s control. The management projections also reflect assumptions by First Defiance and United Community management that are subject to change and are susceptible to multiple interpretations and periodic revisions based on actual results, revised prospects for the First Defiance and United Community businesses, changes in general business or economic conditions, or any other transaction

 

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or event that has occurred or that may occur and that was not anticipated when such projections were prepared. Accordingly, there can be no assurance that the management projections will be realized, and actual results may differ, and may differ materially, from those shown. For more information see “The Merger—Projected Financial Information.”

Certain of First Defiance’s and United Community’s directors and executive officers may have interests in the merger that may differ from the interests of First Defiance’s shareholders and United Community’s shareholders.

First Defiance’s shareholders and United Community’s shareholders should be aware that some of First Defiance’s and United Community’s directors and executive officers may have interests in the merger and have arrangements that are different from, or in addition to, those of First Defiance’s shareholders and United Community’s shareholders generally. The First Defiance and United Community boards of directors were aware of these interests and considered these interests, among other matters, when making their decisions to approve the merger agreement, and in recommending that shareholders vote in favor of adopting the merger agreement. For a more complete description of these interests, please see “The Merger—Interests of First Defiance’s Directors and Executive Officers in the Merger” and “The Merger—Interests of United Community’s Directors and Executive Officers in the Merger.”

Termination of the merger agreement could negatively impact United Community or First Defiance.

If the merger agreement is terminated, there may be various consequences. For example, United Community’s or First Defiance’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger or the merger agreement is terminated, the market price of United Community’s or First Defiance’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, United Community or First Defiance may be required to pay a termination fee of $18.4 million.

United Community and First Defiance will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on United Community or First Defiance. These uncertainties may impair United Community’s or First Defiance’s ability to attract, retain, and motivate key personnel until the merger is completed, and could cause customers and others that deal with United Community or First Defiance to seek to change existing business relationships with United Community or First Defiance. Retention of certain employees by United Community or First Defiance may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration, or a desire not to remain with United Community or First Defiance, United Community’s business or First Defiance’s business could be harmed. In addition, subject to certain exceptions, each of First Defiance and United Community has agreed to operate its business in the ordinary course prior to closing. See “The Merger Agreement—Covenants and Agreements” for a description of the restrictive covenants applicable to United Community and First Defiance.

If the merger is not completed, First Defiance and United Community will have incurred substantial expenses without realizing the expected benefits of the merger.

Each of First Defiance and United Community has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing, and mailing this joint proxy statement/prospectus, and all filing

 

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and other fees paid to the SEC in connection with the merger. If the merger is not completed, First Defiance and United Community would have to recognize these expenses without realizing the expected benefits of the merger.

The merger agreement limits the ability of First Defiance and United Community ability to pursue acquisition proposals and requires First Defiance and United Community to pay a termination fee to the other party of $18.4 million if the merger agreement is terminated under limited circumstances, including circumstances relating to acquisition proposals. See “The Merger Agreement—Termination Fee.” This termination fee may discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of First Defiance or United Community from considering or proposing such an acquisition. Additionally, certain provisions of the First Defiance and United Community governing documents may deter potential acquirers.

The fairness opinions of First Defiance’s and United Community’s financial advisors delivered to the parties’ respective boards of directors prior to signing the merger agreement do not reflect any changes in circumstances that may have occurred since the date of such opinions.

The fairness opinion of KBW was rendered to the First Defiance’s board of directors on September 7, 2019, and the fairness opinion of Sandler O’Neill was rendered to the United Community board of directors on September 8, 2019. Changes in the operations and prospects of First Defiance or United Community, general market and economic conditions and other factors which may be beyond the control of First Defiance and United Community may have altered the value of First Defiance or United Community or the market prices of the shares of First Defiance common stock or United Community common stock as of the date of this joint proxy statement/prospectus, or may alter such values and market prices by the time the merger is completed. The respective opinions from KBW and Sandler O’Neill do not speak as of any date other than the respective dates of such opinions. See “The Merger—Opinion of First Defiance’s Financial Advisor” and “The Merger—Opinion of United Community’s Financial Advisor.”

The shares of First Defiance common stock to be received by United Community shareholders as a result of the merger will have different rights from the shares of United Community common stock.

Upon completion of the merger, United Community shareholders will become First Defiance shareholders and their rights as shareholders will be governed by the First Defiance articles of incorporation and code of regulations, each as in effect following the completion of the merger. The rights associated with United Community common stock are different from the rights associated with First Defiance common stock. Please see “Comparison of Rights of First Defiance Shareholders and United Community Shareholders” beginning on page 138 for a discussion of the different rights associated with First Defiance common stock and United Community common stock.

Holders of United Community and First Defiance common stock will have a reduced ownership and voting interest in the combined company after the merger and will exercise less influence over management.

Holders of United Community and First Defiance common stock currently have the right to vote in the election of the board of directors and on other matters affecting United Community and First Defiance, respectively. Upon completion of the merger, each United Community shareholder who receives shares of First Defiance common stock will become a shareholder of the combined company, with a percentage ownership of the combined company that is smaller than the shareholder’s percentage ownership of United Community. Based on the number of shares outstanding on September 9, 2019 and the shares expected to be issued in the merger, the former shareholders of United Community as a group will receive shares in the merger constituting approximately 47.5% of the outstanding shares of First Defiance common stock immediately after the merger, and current shareholders of First Defiance as a group will own approximately 52.5% of the outstanding shares of First Defiance common stock immediately after the merger. Because of this, United Community shareholders

 

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may have less influence on the management and policies of the combined company than they now have on the management and policies of United Community, and current First Defiance shareholders may have less influence on the management and policies of the combined company than they now have on the management and policies of First Defiance.

United Community shareholders will not have dissenters’ rights in the merger.

Dissenters’ rights (also known as appraisal rights) are statutory rights that, if applicable under law, enable shareholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction. Under the Ohio Revised Code, a shareholder may not dissent from a merger when the shares for which the shareholder would otherwise be entitled to relief are listed on a national securities exchange and the consideration to be received by the shareholder are the shares of the surviving corporation, or cash in lieu of fractional shares, and such surviving corporation shares are listed on a national securities exchange.

Because United Community common stock is listed on NASDAQ and United Community shareholders will receive shares of First Defiance common stock as merger consideration, which are also currently listed on NASDAQ and are expected to continue to be so listed at the effective date of the merger, the United Community shareholders will not be entitled to any dissenters’ rights in connection with the merger.

Lawsuits filed against United Community and First Defiance, and their respective directors, may prevent the merger from becoming effective or from becoming effective within the expected timeframe or result in the payment of damages.

Transactions like the merger are frequently the subject of litigation or other legal proceedings, including actions alleging that the board of directors of either United Community or First Defiance breached their respective fiduciary duties to their shareholders by entering into the merger agreement, by failing to obtain a greater value in the transaction for their shareholders or otherwise. For information about current litigation that is pending against United Community and its directors in connection with the merger, see “The Merger—Litigation Relating to the Merger.” Both United Community and First Defiance believe that such pending litigation is without merit, but the ultimate resolution of the lawsuit cannot be predicted with certainty. Additional litigation or other proceedings may also be brought against either United Community or First Defiance or against the board of directors of either company, and there is no assurance that such parties would be successful in defending against such litigation or proceedings. An adverse outcome in pending or possible future litigation or proceedings, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on the business, results of operation or financial position of United Community, First Defiance or the combined company, including through the possible diversion of either company’s resources or distraction of key personnel.

Further, one of the conditions to the completion of the merger is the absence of any order, injunction, or decree by any court or regulatory authority of competent jurisdiction or other legal restraint or prohibition preventing the completion of the merger or the other transactions contemplated by the merger agreement. If any plaintiff were successful in obtaining an injunction prohibiting United Community or First Defiance from completing the merger on the agreed upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe and could result in significant costs to United Community and/or First Defiance, including any cost associated with the indemnification of directors and officers. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect the combined company’s business, financial condition, results of operations and cash flow.

Risks Related to First Defiance’s Business

You should read and consider risk factors specific to First Defiance’s business that will also affect the combined company after the merger. These risks are described in the sections entitled “Risk Factors” in First

 

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Defiance’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and in other documents incorporated by reference into this joint proxy statement/prospectus. Please see the section entitled “Where You Can Find More Information” beginning on page 145 of this joint proxy statement/prospectus for the location of information incorporated by reference into this joint proxy statement/prospectus.

Risks Related to United Community’s Business

You should read and consider risk factors specific to United Community’s business that will also affect the combined company after the merger. These risks are described in the sections entitled “Risk Factors” in United Community’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and in other documents incorporated by reference into this joint proxy statement/prospectus. Please see the section entitled “Where You Can Find More Information” beginning on page 145 of this joint proxy statement/prospectus for the location of information incorporated by reference into this joint proxy statement/prospectus.

 

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FORWARD-LOOKING STATEMENTS

Certain statements contained in this communication which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, certain plans, expectations, goals, projections and benefits relating to the merger transaction between First Defiance and United Community, which are subject to numerous assumptions, risks and uncertainties. Words such as “may,” “believe,” “expect,” “anticipate,” “intend,” “will,” “should,” “plan,” “estimate,” “predict,” “continue” and “potential” or the negative of these terms or other comparable terminology, as well as similar expressions, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Please refer to each of First Defiance’s and United Community’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as their other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of the management’s control. It is possible that actual results and outcomes may differ, possibly materially, from the anticipated results or outcomes indicated in these forward-looking statements. In addition to factors disclosed in reports filed by First Defiance and United Community with the SEC, risks and uncertainties for First Defiance, United Community and the combined company include, but are not limited to:

 

   

the possibility that any of the anticipated benefits of the proposed merger will not be realized or will not be realized within the expected time period;

 

   

the risk that integration of United Community’s operations with those of First Defiance will be materially delayed or will be more costly or difficult than expected;

 

   

the parties’ inability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger;

 

   

the inability to complete the merger due to the failure of First Defiance’s or United Community’s shareholders to adopt the merger agreement;

 

   

the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory and other approvals;

 

   

the taking of governmental action (including the passage of legislation) to block the merger or otherwise adversely affecting First Defiance and United Community;

 

   

the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;

 

   

the failure of the proposed merger to close for any other reason;

 

   

the effect of restrictions placed on First Defiance’s, United Community’s or their respective subsidiaries’ business activities and the limitations put on First Defiance’s and United Community’s ability to pursue alternatives to the merger pursuant to the merger agreement;

 

   

First Defiance’s and United Community’s directors and executive officers having interests in the merger that are different from, or in addition to, the interests of First Defiance shareholders and United Community shareholders generally;

 

   

diversion of management’s attention from ongoing business operations and opportunities due to the merger; the challenges of integrating and retaining key employees;

 

   

the effect of the announcement of the merger on First Defiance’s, United Community’s or the combined company’s respective customer and employee relationships and operating results;

 

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the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

 

   

the possibility of actual results of operations, cash flows and financial position after the merger materially differing from the unaudited pro forma condensed combined financial information included in this joint proxy statement/prospectus;

 

   

dilution caused by First Defiance’s issuance of additional shares of First Defiance common stock in connection with the merger;

 

   

changes in legislation, regulation, policies or administrative practices, whether by judicial, governmental or legislative action and other changes pertaining to banking, securities, taxation and financial accounting and reporting, environmental protection and insurance, and the ability to comply with such changes in a timely manner;

 

   

changes in the monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of the Treasury and the Federal Reserve;

 

   

changes in interest rates, which may affect First Defiance’s and United Community’s net income, prepayment penalty income, mortgage banking income and other future cash flows, or the market value of First Defiance’s and United Community’s assets, including its investment securities;

 

   

changes in accounting principles, policies, practices or guidelines;

 

   

changes in First Defiance’s credit ratings or in First Defiance’s ability to access the capital markets; and

 

   

general competitive, economic, political and market conditions and fluctuations.

All forward-looking statements included in this filing are made as of the date hereof and are based on information available at the time of the filing. You should understand that these factors, in addition to those discussed elsewhere in this document and in documents that have been incorporated by reference, could affect the future results of First Defiance and United Community, and could cause those results to be substantially different from those expressed in any forward-looking statements. Except as required by law, First Defiance and United Community do not undertake any obligation to update any forward-looking statement to reflect events or circumstances arising after the date of this document.

 

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THE FIRST DEFIANCE SPECIAL MEETING

Time, Date and Place of Meeting

This joint proxy statement/prospectus is being sent to you in connection with the solicitation of proxies by the First Defiance board of directors for use at the special meeting of shareholders of First Defiance to be held at the First Federal Operations Center located at 25600 Elliott Road, Defiance, Ohio 43512 on December 10, 2019 at 1:00 p.m. local time.

Matters to be Considered

At the special meeting, shareholders will be asked to consider and vote upon the following proposals:

 

   

To approve the First Defiance merger proposal;

 

   

To approve the First Defiance articles of incorporation proposal;

 

   

To approve the First Defiance code of regulations proposal;

 

   

To approve, on a non-binding, advisory basis, the First Defiance compensation proposal;

 

   

To approve the First Defiance adjournment proposal; and

 

   

To transact such other business as may properly come before the First Defiance special meeting or any adjournment or postponement of the First Defiance special meeting.

The First Defiance board of directors is not aware, at this time, of any additional matters that may be presented for action at the special meeting of shareholders, other than those proposals set forth above. If any other matters are properly brought before the First Defiance special meeting for consideration, however, shares of First Defiance common stock represented by properly executed proxies will be voted in the discretion of the persons named in the proxy card in accordance with their best judgment.

Shares Outstanding and Entitled to Vote; Record Date

Only shareholders of record on October 25, 2019, will be entitled to notice of and to vote at the special meeting of First Defiance shareholders. At the close of business on October 25, 2019, there were 19,729,215 shares of First Defiance common stock issued and outstanding and entitled to vote, and shares of First Defiance common stock were held of record by approximately 2,329 shareholders. Each share of First Defiance common stock entitles the holder to one vote on all matters properly presented at the First Defiance special meeting.

Votes Required

The following votes are required to approve each of the proposals to be considered at the special meeting:

 

Item

  

Vote Required

Approval of the merger proposal

  

Approval by at least two-thirds of the issued and outstanding shares of First Defiance common stock

Approval of the First Defiance articles of incorporation proposal

  

Approval by at least a majority of the issued and outstanding shares of First Defiance common stock

Approval of the First Defiance code of regulations proposal

  

Approval by at least a majority of the issued and outstanding shares of First Defiance common stock

Approval of the First Defiance compensation proposal

  

Approval by shares of First Defiance common stock representing at least a majority of the votes cast at the First Defiance special meeting

First Defiance adjournment proposal

  

Approval by shares of First Defiance common stock representing at least a majority of the votes cast at the First Defiance special meeting

 

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A quorum, consisting of the holders of a majority of the outstanding shares of First Defiance common stock, must be present in person or by proxy at the special meeting of First Defiance shareholders before any action can be taken. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called.

Effect of Abstentions and Broker Non-Votes

Any “broker non-votes” submitted by brokers or nominees in connection with the special meeting will not be counted for purposes of determining the number of votes cast on a proposal and will not be treated as present for quorum purposes. “Broker non-votes” are shares held by brokers or nominees as to whom voting instructions have not been received from the beneficial owners or the persons entitled to vote those shares and for which the broker or nominee does not have discretionary voting power under the applicable NASDAQ and New York Stock Exchange (“NYSE”) rules. Under these rules, it is expected that all proposals to be voted on at the First Defiance special meeting are matters on which brokerage firms may not vote in their discretion on behalf of their clients. Because the First Defiance merger proposal is required to be approved by the affirmative vote of at least two-thirds of the outstanding shares of First Defiance common stock, abstentions and broker non-votes will have the same effect as a vote against the First Defiance merger proposal. And for the same reason, the failure of a First Defiance shareholder to vote by proxy or in person at the First Defiance special meeting will have the effect of a vote against the First Defiance merger proposal. Abstentions, broker non-votes and any failure to vote by proxy or in person at the First Defiance special meeting will also have the effect of a vote against approval of the First Defiance articles of incorporation proposal and the First Defiance code of regulations proposal. Abstentions, broker non-votes and any failure to vote by proxy or in person at the First Defiance special meeting will have no effect on the First Defiance compensation proposal or the First Defiance adjournment proposal.

Shares Held by Officers and Directors

As of October 25, 2019, the directors and executive officers of First Defiance and the affiliates of such directors and executive officers had sole or shared voting power with respect to 434,845 shares of First Defiance common stock, or approximately 2.2% of the outstanding shares of First Defiance common stock. The directors of First Defiance have agreed to vote their shares of First Defiance common stock for the First Defiance merger proposal, the First Defiance articles of incorporation proposal, the First Defiance code of regulations proposal, the First Defiance compensation proposal and the First Defiance adjournment proposal.

How to Vote Your Shares; Solicitation of Proxies

A proxy card for use at the special meeting accompanies each copy of this joint proxy statement/prospectus mailed to First Defiance shareholders. This proxy is solicited by the First Defiance board of directors. Whether or not you plan to attend the special meeting in person, the First Defiance board of directors urges you to complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope; visit the website shown on your proxy card to vote via the Internet; or use the toll-free number shown on your proxy card. If you have executed a proxy, you may revoke it at any time before a vote is taken at the special meeting by:

 

   

filing written notice of revocation to be received prior to voting at the special meeting with our Secretary, at 601 Clinton Street, Defiance, Ohio 43512;

 

   

submitting a valid proxy bearing a later date that is received prior to voting at the special meeting; or

 

   

attending the special meeting in person and giving notice of revocation to First Defiance’s Secretary.

Your attendance at the special meeting will not, by itself, revoke your proxy.

If your shares are held in “street name,” through a broker, bank or other nominee, that institution will send you separate instructions describing the procedure for voting your shares. “Street name” shareholders who wish to vote at the meeting will need to obtain a proxy form from their broker, bank or other nominee.

 

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The costs incurred in connection with the solicitation of proxies for the First Defiance special meeting will be borne by First Defiance. Proxies will be solicited by mail and may also be solicited, for no additional compensation, by officers, directors or employees of First Defiance. First Defiance will also pay the standard charges and expenses of brokerage houses, voting trustees, banks, associations and other custodians, nominees and fiduciaries, who are record holders of shares of First Defiance common stock not beneficially owned by them, for forwarding the proxy materials to, and obtaining proxies from, the beneficial owners of shares of First Defiance common stock entitled to vote at the special meeting of First Defiance shareholders. First Defiance has also made arrangements with Alliance Advisors, LLC (“Alliance”) to assist it in soliciting proxies and has agreed to pay Alliance approximately $7,500 (for general proxy solicitation services), plus data processing and calling fees and reimbursement of out-of-pocket expenses.

 

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FIRST DEFIANCE’S PROPOSALS

First Defiance Merger Proposal—Adoption of the merger agreement

At the First Defiance special meeting, the First Defiance shareholders will be asked to adopt the merger agreement. Holders of First Defiance common stock should read this joint proxy statement/prospectus in its entirety, including the annexes, for more detailed information concerning the merger agreement and the merger. A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A.

After careful consideration, the First Defiance board of directors approved the merger agreement, including the merger and the transactions contemplated by the merger agreement, and determined the merger agreement and the merger to be advisable and in the best interests of First Defiance and its shareholders.

The First Defiance board of directors recommends that First Defiance shareholders vote “FOR” the First Defiance merger proposal.

First Defiance Articles of Incorporation Proposal—Approval of the First Defiance amended and restated articles of incorporation

At the First Defiance special meeting, First Defiance shareholders will be asked to approve First Defiance’s amended and restated articles of incorporation to become effective upon consummation of the merger. The amended and restated articles of incorporation restate into one document prior amendments approved by First Defiance and its shareholders and that are currently in effect, including certain clarifying changes, and include the following two substantive amendments: (1) an increase in the number of authorized shares of First Defiance common stock from 50,000,000 to 75,000,000 and (2) granting the board of directors of First Defiance the power to repeal, alter, amend or rescind First Defiance’s code of regulations by the affirmative vote of a majority of the authorized number of directors, subject to any exceptions provided in First Defiance’s code of regulations or the OGCL. The proposed amendment and restatement does not change the authorized number of shares of First Defiance preferred stock. A copy of the proposed amended and restated First Defiance articles of incorporation is attached to this joint proxy statement/prospectus as Annex D. The two amendments to the articles are discussed in further detail below. Approval of this proposal is not a condition to the closing of the merger.

Increase of Authorized Common Stock

As of the close of business on the record date, October 25, 2019, First Defiance had no shares of First Defiance preferred stock issued and outstanding, 19,729,215 shares of First Defiance common stock issued and outstanding, and approximately 801,142 shares of First Defiance common stock reserved for future issuance under various equity plans of First Defiance. Based on the number of shares of United Community common stock outstanding as of the record date, if the merger is completed, First Defiance will be required to issue approximately 17,989,356 shares of First Defiance common stock to the United Community shareholders.

First Defiance currently has a sufficient number of authorized and unissued shares of First Defiance common stock available to complete the merger. However, the First Defiance board of directors believes it is desirable to increase the authorized shares of First Defiance common stock to provide greater flexibility in the capital structure of the combined company following the merger. The increased number of authorized shares of common stock will provide First Defiance the ability to react quickly to strategic opportunities and to utilize such shares for potential stock offerings, stock splits and dividends, acquisitions, employee benefit plans and other corporate purposes that might be proposed in the future. There are no present plans or commitments for the issuance of any of the additional shares that would be authorized upon approval of the amended and restated articles of incorporation, other than the issuance of shares in connection with the merger and shares to be issued pursuant to First Defiance’s existing equity plans. The additional shares of First Defiance common stock will not be entitled to preemptive rights nor will existing shareholders have any preemptive right to acquire any of those shares when issued.

 

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Amendment of the Code of Regulations by the Board of Directors

This amendment to the First Defiance articles of incorporation, and the corresponding change to the First Defiance code of regulations (discussed under “The First Defiance Proposals—First Defiance Code of Regulations Proposal—Approval of the First Defiance amended and restated code of regulations—Amendment of the Code of Regulations by the Board of Directors” below), grants the First Defiance board of directors the power to repeal, alter, amend or rescind First Defiance’s code of regulations by the affirmative vote of a majority of the authorized number of directors, subject to any exceptions provided in the code of regulations or the OGCL.

In 2006, Section 1701.11(A)(1)(d) of the OGCL was amended to grant directors, in addition to the shareholders, the ability to amend the code of regulations of Ohio corporations if the articles or code of regulations directly grant such ability to the directors, and so long as: (1) the OGCL does not expressly reserve the ability to amend the affected provision of the code of regulations to shareholders, and (2) the proposed amendment to the code of regulations does not divest shareholders of the power or limit shareholders’ power to adopt, amend, or repeal the code of regulations. The First Defiance board of directors believes it is in the best interests of its shareholders to approve this proposed change in the amended and restated articles of incorporation so that the First Defiance board of directors has the flexibility granted under the OGCL to make changes to the code of regulations that reflect prevailing governance standards without having to wait for a shareholder meeting. With such authority, the First Defiance board of directors may amend provisions in the code of regulations relating to important but primarily administrative or procedural issues, such as allowing the use of electronic proxies, fixing the date and location of meetings, or requirements relating to notice of nominations or shareholder proposals. However, directors may not amend the code of regulations in a manner that restricts shareholders’ authority to adopt, amend, or repeal regulations, or amend any provisions of regulations that address certain matters, including, but not limited to, the following, which are reserved to shareholders:

 

   

Specify the minimum percentage of shares required to call a shareholders’ meeting;

 

   

Establish the length of time required for notice of a shareholders’ meeting;

 

   

Provide voting rights with respect to shares not yet fully paid;

 

   

Establish quorum requirements for shareholder or director meetings;

 

   

Specify the vote required for an action of the directors;

 

   

Prohibit taking shareholder or director actions without a meeting;

 

   

Define director terms of office or classification of directors;

 

   

Establish greater than a majority vote of shareholders to remove directors without cause;

 

   

Delegate authority to board committees to adopt, amend, or repeal regulations; or

 

   

Eliminate the requirement that a control share acquisition of an issuing public corporation be approved by the acquired corporation’s shareholders.

After careful consideration, the First Defiance board of directors adopted, subject to approval by the First Defiance shareholders, the amended and restated articles of incorporation of First Defiance to (1) increase the number of authorized shares of First Defiance common stock from 50,000,000 to 75,000,000 and (2) grant the board of directors of First Defiance the power to repeal, alter, amend or rescind First Defiance’s code of regulations by the affirmative vote of a majority of the authorized number of directors.

The First Defiance board of directors recommends that First Defiance shareholders vote “FOR” the First Defiance articles of incorporation proposal.

First Defiance Code of Regulations Proposal—Approval of the First Defiance amended and restated code of regulations

At the First Defiance special meeting, First Defiance shareholders will be asked to approve a proposal to amend and restate First Defiance’s code of regulations to become effective upon consummation of the merger to:

 

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(1) grant the board of directors of First Defiance the power to repeal, alter, amend or rescind First Defiance’s code of regulations by the affirmative vote of a majority of the authorized number of directors, (2) provide a new Article X relating to the governance of the First Defiance board of directors, including its general powers, the number and classification of members of the board of directors, meetings, special meetings, quorum for meetings, manner of acting, action without a meeting, resignation, vacancies, presumption of assent of members and compensation of members of the board of directors, (3) provide a new Article XI relating to committees of the board of directors, (4) provide a new Article XII relating to certain governance matters, including interpretation of Article XII, the location of First Federal’s main office, officers of First Defiance and First Federal, amendments to Article I or Article XII of the proposed amended and restated code of regulations of First Defiance, designation of members of the board of directors of First Defiance and First Federal, and committees of the board of directors of First Defiance and (5) provide certain clarifying changes. A copy of the proposed First Defiance amended and restated code of regulations is attached to this joint proxy statement/prospectus as Annex E. Approval of the First Defiance code of regulations proposal is a condition to the closing of the merger. If First Defiance shareholders do not approve the First Defiance code of regulations proposal, the merger cannot be consummated unless the parties validly waive this condition to closing. Further, if this proposal is approved by First Defiance shareholders but the First Defiance merger proposal is not approved by First Defiance shareholders or the merger is not consummated, the code of regulations will not be amended and restated as described herein.

Amendment of the Code of Regulations by the Board of Directors

The amended and restated code of regulations amends Article IX of the First Defiance code of regulations to grant the board of directors of First Defiance the power to repeal, alter, amend or rescind First Defiance’s code of regulations by the affirmative vote of a majority of the authorized number of directors, subject to any exceptions provided in the code of regulations and the OGCL. The reasons for this change are discussed above under “The First Defiance Proposals—First Defiance Articles of Incorporation Proposal—Approval of the First Defiance amended and restated articles of incorporation—Amendment of the Code of Regulations by the Board of Directors.”

New Articles X and XI

The First Defiance board of directors has always conducted its governance matters in accordance with the bylaws of the board of directors, a document that was adopted by the board in connection with the formation of First Defiance (the “board bylaws”). However, the First Defiance board believes it is in the best interests of its shareholders to consolidate the board bylaws into the code of regulations so that all of its governance provisions are contained in a single document. As a result, the amended and restated code of regulations contains two entirely new articles, Article X and Article XI, that are substantially similar to provisions that are currently contained in the board bylaws. The addition of Articles X and XI to the First Defiance code of regulations will not change how the First Defiance board of directors currently operates, but will merely move these governance provisions from the board bylaws into the code of regulations. If the First Defiance code of regulations proposal is approved, the board bylaws would be terminated.

Proposed new Article X contains the following provisions:

 

   

grants general powers to the First Defiance board of directors to direct the business and affairs of First Defiance;

 

   

provides that the number of members of the First Defiance board of directors may be increased or decreased by resolution of the First Defiance board of directors within the range set forth in First Defiance’s articles of incorporation and that the First Defiance board of directors shall be divided into classes in accordance with the provisions of First Defiance’s articles of incorporation.

 

   

governs regular annual meetings and special meetings of the First Defiance board of directors, including manner of participation, notice of and location of such meetings, quorum requirements, manner of acting and presumption of assent to actions taken at a meeting;

 

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allows the First Defiance board of directors to act without a meeting if a consent in writing, setting forth the action so taken, is signed by all of the members of the First Defiance board of directors;

 

   

provides for the manner of resigning from the First Defiance board of directors and filling vacancies; and

 

   

grants the First Defiance board of directors the ability to establish compensation for directors for their service as such and/or compensation for actual attendance at committee meetings.

Proposed new Article XI relates to committees of the First Defiance board of directors. Among other things, Article XI allows the First Defiance board of directors, by resolution passed by a majority of the authorized number of directors, to designate one or more committees for the conduct of the business of First Defiance, and may prescribe the duties, constitution and procedures of such committees. Each committee must have at least three members of the First Defiance board of directors. In addition, the First Defiance board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Under Article XI, the First Defiance board of directors, by the affirmative vote of a majority of the number of directors fixed by Article I, Section 2 of the proposed amended and restated code of regulations, may change the members of, fill vacancies in, and discharge any committee of the First Defiance board of directors. Article XI states that any member of a committee may resign at any time by giving notice, and the resignation will be effective upon receipt of such notice or at any later time specified.

New Article XII

Unlike Articles X and XI, Article XII is a new provision. Article XII provides for the governance of First Defiance following the merger and ensures the combination of the boards and management teams of First Defiance and United Community to lead the resulting company. Among other things, Article XII contains the following sections:

 

   

Interpretation. The provisions of Article XII will control over any inconsistency with the rest of the amended and restated code of regulations.

 

   

Office of First Federal. The location of the main office of First Federal will be in Youngstown, Ohio following the closing of the merger.

 

   

Officers of First Defiance and First Federal: Certain individuals will be elected as officers of First Defiance and First Federal for specific terms pursuant to the terms of the merger agreement. Beginning at the effective time of the merger and ending on a date that is two years after the earlier of (i) a date during the period beginning January 1, 2021 and ending June 30, 2021, as determined by the First Defiance board of directors, or (ii) the date Donald Hileman ceases for any reason to serve as Chief Executive Officer of First Defiance (such date reflected by (i) or (ii), the “succession date”), a vote of three-fourths of the authorized number of First Defiance directors is required to: (a) remove any of such individuals from, or fail to appoint or re-elect such individuals to, such officer positions, (b) modify any of such individuals’ respective duties, authority or reporting relationships, (c) amend or terminate any employment agreements entered into by First Defiance with such individuals, or (d) appoint a replacement for any of such individuals that cease to serve in such officer positions. See “The Merger—Management and Board of Directors of First Defiance After the Merger” above for further information regarding the directors and officers of First Defiance following consummation of the merger.

 

   

Amendments to the Code of Regulations. Prior to the second anniversary of the succession date, any repeal, alteration, amendment or rescindment of Article I or Article XII of the proposed amended and restated code of regulations by the board of directors of First Defiance will require (and any such repeal, alteration, amendment or rescindment may be proposed or recommended by the First Defiance board of directors for adoption by the shareholders of First Defiance only by) the affirmative vote of

 

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three-fourths of the authorized number of directors. In addition, prior to the second anniversary of the succession date, First Defiance may not exercise its authority, in its capacity as sole shareholder of First Federal, to (and First Defiance shall cause First Federal not to) modify, amend or repeal any of the provisions of the organizational documents of First Federal implementing the provisions of Article XII of the proposed amended and restated code of regulations, or implement or adopt any provisions of the organizational documents of First Federal inconsistent with the foregoing, in each case, without the affirmative vote of three-fourths of the authorized number of directors of First Defiance.

 

   

Board of Directors of First Defiance:

 

   

Pursuant to the merger agreement, at the effective time of the merger, the board of directors of First Defiance, as the surviving corporation, will consist of the following 13 directors: (i) Mr. Hileman, John Bookmyer and five other persons who served as directors of First Defiance or First Federal immediately prior to the effective time of the merger and are designated by First Defiance (each, a “First Defiance related director,” which term includes any directors who are subsequently appointed or nominated and elected to fill a vacancy created by the cessation of service of a First Defiance related director, as applicable, in accordance with Article XII, Section 6 of the proposed amended and restated code of regulations); and (ii) Gary Small, Richard Schiraldi, and four other persons who served as directors of United Community or Home Savings immediately prior to the effective time of the merger and are designated by United Community (each, a “United Community related director,” which term includes any directors who are subsequently appointed or nominated and elected to fill a vacancy created by the cessation of service of a United Community related director in accordance with Article XII, Section 6 of the proposed amended and restated code of regulations).

 

   

The directors will continue to be divided into three classes. Immediately following the effective time of the merger, the Class I directors of First Defiance will consist of two First Defiance related directors and two United Community related directors, each of whom will be appointed for a term expiring at the 2022 annual meeting of shareholders. Thereafter, the Class I directors will be elected to three-year terms. Upon the expiration of their initial term, the initial Class I directors will be re-nominated by the First Defiance board of directors, provided that such nomination is reasonably agreeable to the governance and nominating committee in accordance with the good faith execution of its duties, for an additional term to expire at the 2025 annual meeting of shareholders.

 

   

Immediately following the effective time of the merger, the Class II directors of First Defiance will consist of two First Defiance related directors and two United Community related directors, each of whom will be appointed for a term expiring at the 2021 annual meeting of shareholders. Thereafter, the Class II directors will be elected to three-year terms. Upon the expiration of their initial term, the initial Class II directors will be re-nominated by the First Defiance board of directors, provided that such nomination is reasonably agreeable to the governance and nominating committee in accordance with the good faith execution of its duties, for an additional term to expire at the 2024 annual meeting of shareholders.

 

   

Immediately following the effective time of the merger, the Class III directors of First Defiance will consist of three First Defiance related directors and two United Community related directors, each of whom will be appointed for a term expiring at the 2020 annual meeting of shareholders. Thereafter, the Class III directors will be elected to three-year terms. Upon the expiration of their initial term, the initial Class III directors will be re-nominated by the First Defiance board of directors, provided that such nomination is reasonably agreeable to the governance and nominating committee in accordance with the good faith execution of its duties, for an additional term to expire at the 2023 annual meeting of shareholders.

 

   

If, prior to the second anniversary of the succession date, any of the initial Class I, II or III directors ceases to serve as a director for any reason or does not stand for reelection, the resultant

 

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vacancy will be filled by the First Defiance board of directors with an individual selected by the United Community related directors (if such director was a United Community related director) or the First Defiance related directors (if such director was a First Defiance related director) in good faith in a manner intended to preserve the principles of representation in the proposed amended and restated code of regulations, provided that such individual is reasonably agreeable to the governance and nominating committee in accordance with the good faith execution of its duties, which such individual. Any such replacement director will have the same rights to renomination as the rest of his or her class of directors.

 

   

In addition, Mr. Bookmyer will serve as chairman of the First Defiance board of directors for a term beginning at the effective time of the merger and until the succession date, Mr. Hileman will serve as executive chairman of the First Defiance board of directors for a term beginning at the succession date and until the date on which his successor is duly elected and qualified or until his death or until he resigns or is removed in accordance with the proposed amended and restated code of regulations and Mr. Schiraldi will serve as vice chairman of the First Defiance board of directors for a term beginning at the effective time of the merger through the succession date and until the date on which his successor is duly elected and qualified or until his death or until he resigns or is removed in accordance with the proposed amended and restated code of regulations. The removal of Mr. Bookmyer, Mr. Hileman or Mr. Schiraldi, or the failure to appoint or re-elect any of them as chairman, executive chairman and vice chairman, respectively, will require the affirmative vote of three-fourths of the authorized number of directors until the second anniversary of the succession date. Until the second anniversary of the succession date, upon the death, resignation, removal, disqualification or other cessation of service by Mr. Bookmyer, Mr. Hileman or Mr. Schiraldi serving in the capacities set forth above (or any of such individuals’ successors selected and appointed pursuant to the terms of the proposed amended and restated code of regulations), First Defiance will not appoint any individual to serve in such capacity, except with the affirmative vote of three-fourths of the authorized number of directors.

 

   

Board of Directors of First Federal:

 

   

At the effective time of the merger, First Defiance will cause the board of directors of First Federal, as the surviving bank, to consist of the following thirteen directors: (i) Mr. Hileman, Mr. Bookmyer, and five other persons who served as directors of First Defiance or First Federal immediately prior to the effective time of the merger (each, a “First Federal related bank director,” which term includes any directors who were subsequently appointed or nominated and elected to fill a vacancy created by the cessation of service of a First Federal related bank director in accordance with Article XII, Section 7 of the proposed amended and restated code of regulations); and (ii) Mr. Small, Mr. Schiraldi, and four other persons who served as directors of United Community or Home Savings immediately prior to the effective time of the merger (each, a “United Community related bank director,” which term includes any directors who were subsequently appointed or nominated and elected to fill a vacancy created by the cessation of service of a United Community related bank director in accordance with Article XII, Section 7 of the proposed amended and restated code of regulations). If, prior to the second anniversary of the succession date, any of the directors of First Federal ceases to serve as a director or does not stand for reelection, the resultant vacancy will be filled by the board of directors of First Federal with an individual selected by the United Community related bank directors (if such director was a United Community related bank director) or the First Federal related bank directors (if such director was a First Federal related bank director), in each case, in good faith in a manner intended to preserve the principles of representation in the proposed amended and restated code of regulations. Prior to the second anniversary of the succession date, the affirmative vote of three-fourths of the authorized number of directors of First Defiance will be required for the board of directors of First Federal to (a) fail to re-elect any of the United Community related bank directors or First Federal related bank directors or (b) increase or decrease the number of directors of the board of directors of First Federal.

 

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In addition, First Defiance will cause First Federal to appoint Mr. Bookmyer as chairman of the board of directors of First Federal for a term beginning at the effective time of the merger and until the succession date, Mr. Hileman as executive chairman of the board of directors of First Federal for a term beginning at the succession date and until the date on which his successor is duly elected and qualified or until his death or until he resigns or is removed in accordance with the proposed amended and restated code of regulations and Mr. Schiraldi as vice chairman of the board of directors of First Federal for a term beginning at the effective time of the merger and through the succession date and until the date on which his successor is duly elected and qualified or until his death or until he resigns or is removed in accordance with the proposed amended and restated code of regulations. The removal of Mr. Bookmyer, Mr. Hileman or Mr. Schiraldi, or the failure to appoint or re-elect any of them as chairman, executive chairman and vice chairman, respectively, will require the affirmative vote of three-fourths of the authorized number of directors of First Defiance until the second anniversary of the succession date. Until the second anniversary of the succession date, upon the death, resignation, removal, disqualification or other cessation of service by Mr. Bookmyer, Mr. Hileman or Mr. Schiraldi serving in the capacities set forth above (or any of such individuals’ successors selected and appointed pursuant to the terms of the proposed amended and restated code of regulations), First Defiance will cause First Federal not to appoint any individual to serve in such capacity, except with the affirmative vote of three-fourths of the authorized number of directors of First Defiance.

 

   

Committees of the Board of Directors of First Defiance. At the effective time of the merger, First Defiance will have an audit committee, a governance and nominating committee, a compensation committee and a risk committee. The chairman of each of the audit committee and the risk committee shall be a First Defiance related director. The Chairman of each of the governance and nominating committee and the compensation committee will be a United Community related director.

The First Defiance board of directors recommends that First Defiance shareholders vote “FOR” the First Defiance code of regulations proposal.

First Defiance Compensation Proposal—Approval of First Defiance compensation of named executive officers

Section 14A of the Exchange Act and Rule 14a-21(c) under the Exchange Act require that First Defiance seek a nonbinding advisory vote from its shareholders to approve the compensation of the named executive officers of First Defiance that is based upon or otherwise related to the merger as disclosed under the heading “The Merger—Interests of First Defiance Directors and Executive Officers in the Merger” beginning on page 93. As required by these provisions, First Defiance is asking its shareholders to vote on the adoption of the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to First Defiance’s named executive officers in connection with the merger and the agreements or understandings pursuant to which such compensation may be paid or become payable, in each case as disclosed pursuant to Item 402(t) of Regulation S-K in ‘The Merger—Interests of First Defiance Directors and Executive Officers in the Merger,’ are hereby APPROVED.”

The vote with respect to this proposal is an advisory vote and will not be binding on First Defiance, United Community, or the surviving corporation. Therefore, regardless of whether First Defiance shareholders approve this proposal, if the merger agreement is approved by the shareholders and the merger is completed, the compensation will be paid to such named executive officers to the extent payable in accordance with the terms of such compensation contracts and arrangements. Approval of this proposal is not a condition to the closing of the merger.

 

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The First Defiance board of directors recommends that First Defiance shareholders vote “FOR” the First Defiance compensation proposal.

First Defiance Adjournment Proposal—Adjournment of the First Defiance special meeting

If, at the special meeting of First Defiance shareholders, the number of shares of First Defiance common stock present or represented and voting in favor of the First Defiance merger proposal or the First Defiance code of regulations proposal is insufficient to adopt the First Defiance merger proposal or the First Defiance code of regulations proposal, respectively, First Defiance intends to ask its shareholders to vote to adjourn the special meeting to another time or place, if necessary or appropriate, to permit further solicitation of proxies. In this event, First Defiance will request that the shareholders vote on the First Defiance adjournment proposal and not the First Defiance merger proposal or the First Defiance code of regulations proposal.

First Defiance is asking its shareholders to authorize the holder of any proxy solicited by the First Defiance board of directors to vote in favor of granting discretionary authority to the proxy holders, and each of them individually, to adjourn the First Defiance special meeting to another time and place, if necessary or appropriate, for the purpose of soliciting additional proxies. If First Defiance requests a vote on the First Defiance adjournment proposal and the First Defiance shareholders approve this proposal, First Defiance could adjourn the special meeting and use this additional time to solicit proxies from its shareholders, including those shareholders who have previously voted.

The First Defiance board of directors recommends that First Defiance shareholders vote “FOR” the First Defiance adjournment proposal.

 

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THE UNITED COMMUNITY SPECIAL MEETING

Time, Date and Place of Meeting

This joint proxy statement/prospectus is being sent to you in connection with the solicitation of proxies by the United Community board of directors for use at the special meeting of shareholders of United Community to be held at United Community’s corporate headquarters, 275 West Federal Street, 9th Floor, Youngstown, Ohio 44503 on December 10, 2019, at 1:00 p.m. local time.

Matters to be Considered

At the special meeting, shareholders will be asked to consider and vote upon the following proposals:

 

   

To approve the United Community merger proposal;

 

   

To approve, on a non-binding, advisory basis, the United Community compensation proposal;

 

   

To approve the United Community adjournment proposal; and

 

   

To transact such other business as may properly come before the United Community special meeting or any adjournment or postponement of the United Community special meeting.

The United Community board of directors is not aware, at this time, of any additional matters that may be presented for action at the special meeting of shareholders, other than those proposals set forth above. If any other matters are properly brought before the special meeting for consideration, however, shares of United Community common stock represented by properly executed proxies will be voted in the discretion of the persons named in the proxy card in accordance with their best judgment.

Shares Outstanding and Entitled to Vote; Record Date

Only shareholders of record on October 25, 2019, will be entitled to notice of and to vote at the special meeting of United Community shareholders. At the close of business on October 25, 2019, there were 48,112,240 shares of United Community common stock issued and outstanding and entitled to vote. Shares of United Community common stock were held of record by approximately 7,100 shareholders. Each share of United Community common stock entitles the holder to one vote on all matters properly presented at the special meeting.

Votes Required

The following votes are required to approve each of the proposals to be considered at the special meeting:

 

Item

  

Vote Required

United Community merger proposal

  

Approval by at least two-thirds of the issued and outstanding shares of United Community common stock

United Community compensation proposal

  

Approval by shares of United Community common stock representing at least a majority of the votes cast at the United Community special meeting

United Community adjournment proposal

  

Approval by shares of United Community common stock representing at least a majority of the votes cast at the United Community special meeting

A quorum, consisting of the holders of a majority of the outstanding shares of United Community common stock, must be present in person or by proxy at the special meeting of United Community shareholders before any action can be taken. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called.

 

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Effect of Abstentions and Broker Non-Votes

Any “broker non-votes” submitted by brokers or nominees in connection with the special meeting will not be counted for purposes of determining the number of votes cast on a proposal and will not be treated as present for quorum purposes. “Broker non-votes” are shares held by brokers or nominees as to whom voting instructions have not been received from the beneficial owners or the persons entitled to vote those shares and for which the broker or nominee does not have discretionary voting power under the applicable NASDAQ and NYSE rules. Under these rules, it is expected that all proposals to be voted on at the United Community special meeting are matters on which brokerage firms may not vote in their discretion on behalf of their clients. Because the United Community merger proposal is required to be approved by the affirmative vote of at least two-thirds of the outstanding shares of United Community common stock, abstentions and broker non-votes will have the same effect as a vote against the United Community merger proposal. And for the same reason, the failure of a United Community shareholder to vote by proxy or in person at the special meeting will have the effect of a vote against approval of the United Community merger proposal. Abstentions, broker non-votes and any failure to vote by proxy or in person at the United Community special meeting will have no effect on the United Community compensation proposal or the United Community adjournment proposal.

Shares Held by Officers and Directors

As of October 25, 2019, the directors and executive officers of United Community and the affiliates of such directors and executive officers had sole or shared voting power with respect to 1,476,528 shares of United Community common stock, or approximately 3.1% of the outstanding shares of United Community common stock. The directors of United Community have agreed to vote their shares of United Community common stock for the approval of the United Community merger proposal and the United Community adjournment proposal.

How to Vote Your Shares; Solicitation of Proxies

A proxy card for use at the special meeting accompanies each copy of this joint proxy statement/prospectus mailed to United Community shareholders. This proxy is solicited by the United Community board of directors. Whether or not you plan to attend the special meeting in person, the United Community board of directors urges you to complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope; visit the website shown on your proxy card to vote via the Internet; or use the toll-free number shown on your proxy card. If you have executed a proxy, you may revoke it at any time before a vote is taken at the special meeting by:

 

   

filing a written notice of revocation with Jude J. Nohra, Corporate Secretary of the Company, at 275 West Federal Street, Youngstown, Ohio 44503;

 

   

executing and delivering a later dated proxy to United Community at the above address prior to the special meeting; or

 

   

attending the special meeting in person and giving notice of revocation to United Community’s Secretary.

Your attendance at the special meeting will not, by itself, revoke your proxy.

If you are a United Community shareholder whose shares are not registered in your own name, you will need additional documentation from your record holder in order to vote your shares in person at the special meeting. If you hold your United Community shares through a broker, bank or other nominee (i.e., in “street name”) and you want to vote your shares in person at the meeting, you will have to get a written proxy in your name from the broker, bank or other nominee who holds your shares.

 

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The costs incurred in connection with the solicitation of proxies for the United Community special meeting will be borne by United Community. Proxies will be solicited by mail and may also be solicited, for no additional compensation, by officers, directors or employees of United Community. United Community will also pay the standard charges and expenses of brokerage houses, voting trustees, banks, associations and other custodians, nominees and fiduciaries, who are record holders of shares of United Community common stock not beneficially owned by them, for forwarding the proxy materials to, and obtaining proxies from, the beneficial owners of shares of United Community common stock entitled to vote at the special meeting of United Community shareholders. United Community has also made arrangements with Alliance to assist it in soliciting proxies and has agreed to has agreed to pay Alliance approximately $7,500 (for general proxy solicitation services), plus data processing and calling fees and reimbursement of out-of-pocket expenses.

 

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UNITED COMMUNITY’S PROPOSALS

United Community Merger Proposal—Adoption of the merger agreement

At the United Community special meeting, the United Community shareholders will be asked to adopt the merger agreement. Holders of United Community common stock should read this joint proxy statement/prospectus in its entirety, including the annexes, for more detailed information concerning the merger agreement and the merger. A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A.

After careful consideration, the United Community board of directors approved the merger agreement, including the merger and the transactions contemplated by the merger agreement, and determined the merger agreement and the merger to be advisable and in the best interests of United Community and its shareholders.

The United Community board of directors recommends that the United Community shareholders vote “FOR” the United Community merger proposal.

United Community Compensation Proposal—Approval of United Community compensation of named executive officers

Section 14A of the Exchange Act and Rule 14a-21(c) under the Exchange Act require that United Community seek a nonbinding advisory vote from its shareholders to approve the compensation of the named executive officers of United Community that is based upon or otherwise related to the merger as disclosed under the heading “The Merger—Interests of United Community Directors and Executive Officers in the Merger” beginning on page 99. As required by these provisions, United Community is asking its shareholders to vote on the adoption of the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to United Community’s named executive officers in connection with the merger and the agreements or understandings pursuant to which such compensation may be paid or become payable, in each case as disclosed pursuant to Item 402(t) of Regulation S-K in ‘The Merger—Interests of United Community Directors and Executive Officers in the Merger,’ are hereby APPROVED.”

The vote with respect to this proposal is an advisory vote and will not be binding on United Community, First Defiance, or the surviving corporation. Therefore, regardless of whether United Community shareholders approve this proposal, if the merger agreement is approved by the shareholders and the merger is completed, the compensation will be paid to such named executive officers to the extent payable in accordance with the terms of such compensation contracts and arrangements. Approval of this proposal is not a condition to the closing of the merger.

The United Community board of directors recommends that the United Community shareholders vote “FOR” the United Community compensation proposal.

United Community Adjournment Proposal—Adjournment of the United Community special meeting

If, at the special meeting of United Community shareholders, the number of shares of United Community common stock present or represented and voting in favor of the United Community merger proposal is insufficient to adopt the United Community merger proposal, United Community intends to ask its shareholders to vote to adjourn the special meeting to another time or place, if necessary or appropriate, to permit further solicitation of additional proxies. In this event, United Community will request that the shareholders vote on the United Community adjournment proposal and not the United Community merger proposal.

United Community is asking that its shareholders authorize the holder of any proxy solicited by the United Community board of directors to vote in favor of granting discretionary authority to the proxy holders, and each

 

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of them individually, to adjourn the United Community special meeting to another time and place, if necessary or appropriate, for the purpose of soliciting additional proxies. If United Community requests a vote on the United Community adjournment proposal and the United Community shareholders approve this proposal, United Community could adjourn the special meeting and use this additional time to solicit proxies from its shareholders, including those shareholders who have previously voted.

The United Community board of directors recommends that the United Community shareholders vote “FOR” the United Community adjournment proposal.

 

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UNITED COMMUNITY ANNUAL MEETING SHAREHOLDER PROPOSALS

United Community held its 2019 annual meeting of shareholders on May 2, 2019. If the merger is completed, United Community will be merged into First Defiance and thus will no longer have public shareholders. However, if the merger is not completed or if United Community is required to do so under applicable law, United Community will hold a 2020 annual meeting of shareholders. Any shareholder nominations or proposals appropriate for shareholder action at United Community’s 2020 annual meeting must be submitted to United Community as set forth below.

For proposals to be considered for inclusion in the proxy statement for the 2020 annual meeting, they must be received by United Community no later than November 23, 2019. Such proposals must be directed to United Community Financial Corp., Attention: Jude J. Nohra, Corporate Secretary, 275 West Federal Street, Youngstown, Ohio 44503. Any United Community shareholder who intends to propose any other matter to be acted upon at the 2020 annual meeting must inform United Community no later than February 6, 2020. The proxy cards delivered in connection with the 2020 annual meeting would confer discretionary voting authority, to be exercised in the judgment of the United Community’s board of directors, with respect to any shareholder proposal received after February 6, 2020. United Community also would have authority to discretionarily vote proxies with respect to shareholder proposals received after November 23, 2019, but prior to February 6, 2020, unless the proposing United Community shareholder takes the necessary steps outlined in Rule 14a-4(c)(2) under the Exchange Act to ensure the proper delivery of proxy materials related to the proposal .

In order to make a director nomination at the United Community 2020 annual meeting, a United Community shareholder would need to notify United Community no later than the 60th day before the first anniversary of the 2019 annual meeting of United Community shareholders. In addition, the notice must meet all other requirements contained in United Community’s code of regulations, a copy of which is available without charge upon written request directed to United Community Financial Corp., Attention: Jude J. Nohra, Corporate Secretary, 275 West Federal Street, Youngstown, Ohio 44503.

 

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THE MERGER

Background of the Merger

On a regular basis, each of First Defiance’s and United Community’s board of directors and senior management have separately reviewed and discussed their respective business strategies, performance and prospects, including strategic opportunities and challenges, and have considered various strategic options potentially available to each respective organization, all with the goal of enhancing value for their respective shareholders and delivering the best possible services to their respective customers and communities. The strategic discussions have focused on, among other things, the business and regulatory environment facing financial institutions generally and each organization, in particular, as well as conditions and trends in the banking industry.

These reviews have included periodic discussions by each company’s board of directors with respect to potential transactions of various types that would further their respective strategic objectives and the potential benefits and risks of any such transactions. In addition, senior management of each organization has, from time to time, engaged in discussions with representatives of other financial institutions.

In recognition of the comparable business strategies of United Community and First Defiance, in early 2017, Gary Small, President and Chief Executive Officer of United Community, contacted Donald Hileman, President and Chief Executive Officer of First Defiance, to assess his interest in engaging in an evaluation of a potential strategic business combination between United Community and First Defiance. Mr. Small and Mr. Hileman, together with select senior management of each company, conducted informal exploratory discussions from time to time over several months in 2017 to assess whether United Community and First Defiance could best achieve their strategic objectives through a potential transaction. This evaluation included entry into a mutual non-disclosure agreement and exchange of select preliminary diligence information as well as discussions regarding potential terms of an all-stock business combination, including potential governance arrangements. Sandler O’Neill acted as United Community’s financial advisor, and KBW acted as First Defiance’s financial advisor, to assist in the parties’ respective evaluation of a potential transaction. During this time, each of Mr. Small and Mr. Hileman regularly updated their respective boards of directors on the status of the exploratory discussions. The companies ultimately determined in September 2017 to independently pursue their respective strategic objectives and ceased discussions regarding a potential transaction.

Throughout 2018, the First Defiance board of directors continued to evaluate its business strategies, including possible acquisitions, mergers and other opportunistic strategic transactions. First Defiance’s management team met several times in 2018 with representatives of KBW to discuss the general banking environment and several possible strategic transactions, none of which First Defiance actively pursued. First Defiance management regularly updated the First Defiance board of directors regarding those discussions, possible strategic opportunities and the succession plans of Mr. Hileman and other executive officers. In the later part of 2018, the board determined to take a dual approach to planning and authorized the engagement of an executive search firm for the purpose of finding candidates for the President of First Federal, First Defiance’s bank subsidiary, and a new President was appointed in March 2019. The First Defiance board of directors continued its ongoing strategic planning process that looked at all viable strategic options. The board instructed management to continue to evaluate both acquisition opportunities and mergers with similarly sized companies. Management also continued to have informal conversations with potential upstream partners.

The United Community board of directors continued its regular strategic planning process and reviews during and following the discussions with First Defiance, including the evaluation of possible potential transactions that would further its strategic objectives. As part of this strategic planning process, United Community’s board of directors asked Sandler O’Neill to make a presentation to the United Community board of directors at its regularly scheduled board meeting held in January 2019. Sandler O’Neill’s presentation covered a

 

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review of the current environment for the banking industry, United Community’s stand-alone valuation metrics, potential acquisition targets of United Community, potential partners for a strategic merger and potential acquirers of United Community. Sandler O’Neill discussed with the board certain of the factors and trends impacting the banking industry and United Community’s business which made continually improving profitability a challenge, including, among others, cost and type of deposit funding, the interest rate environment and flat yield curve, the effects of scale, technology and increased competition and the regulatory environment. The board discussed that while it felt confident in the continued execution of its strategy for generating organic growth, in order to be better informed regarding the availability of other alternatives that could enhance long-term shareholder value, it wanted Sandler O’Neill to prepare a more detailed evaluation of the potential acquirers of United Community that Sandler O’Neill had identified with a focus on evaluating whether there were any potential acquirers who had the ability to deliver consideration to United Community shareholders that would be financially compelling and who may have interest in engaging in a transaction.

At the February 2019 meeting of the United Community board of directors, representatives of Sandler O’Neill presented Sandler O’Neill’s analysis of potential acquirers. Sandler O’Neill explained to the board its view that the number of potential acquirers of banks generally was limited in the current market and that it had identified a select number of institutions who were most likely to meet the criteria established by the United Community board, although it was not certain whether any of the institutions would have an interest in engaging in a transaction in the near-term. Sandler O’Neill reviewed its evaluation of each of the potential partners with the board. Following the discussion, the board asked Mr. Small to informally reach out to representatives of four institutions identified by Sandler O’Neill to assess their level of interest in engaging in discussions to evaluate a potential transaction so that the board could determine the viability and attractiveness of these strategic alternatives.

Over the next few weeks, Mr. Small engaged in discussions with representatives of the four financial institutions identified by the board. During this time, Mr. Small also had discussions with a fifth financial institution who reached out to him.

Mr. Small provided updates to the United Community board on the results of his outreach during meetings held in April 2019. Mr. Small reported that of the four financial institutions selected by the board for outreach, one was not interested in a potential transaction and three had expressed some level of interest in engaging in discussions in the future but that due to other strategic priorities would not be prepared to engage in a transaction in the near-term. Mr. Small also informed the board of his meeting with the fifth financial institution, but expressed concern regarding the attractiveness of that institution’s stock as deal consideration. The board determined that Mr. Small should not make any further outreach at that time and should continue to focus on executing the company’s strategy for organic growth.

At the end of the first quarter of 2019, due to the slower pace of acquisition opportunities and the pricing environment, the First Defiance board determined that the company and its management team should focus on more significant merger opportunities with similarly sized institutions, including United Community. The board discussed that while it felt confident in the continued execution of its strategy for generating organic growth, in order to be better informed regarding the availability of other alternatives from a financial perspective that could enhance long-term shareholder value, it requested more information as to potential partners. In April 2019, Mr. Hileman provided updates to the First Defiance board on the results of his outreach in the first quarter of 2019. At that time, the board instructed Mr. Hileman to continue his discussions with other potential partners, including United Community.

In late April 2019, Mr. Small received a call from Mr. Hileman inviting him to an informal meeting to discuss their organizations generally as well as the current economic environment and the general financial institutions industry. Mr. Small informed the board of Mr. Hileman’s call at its May 2, 2019 board meeting.

 

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On May 8, 2019, Mr. Hileman and Mr. Small met at a neutral facility. They discussed general industry matters as well as trends impacting each of United Community and First Defiance. Mr. Hileman then expressed interest in reengaging in discussions regarding a potential strategic business combination between United Community and First Defiance and his belief that the two organizations would be better as a combined organization. Mr. Hileman stated his view that the complementary nature of the two institutions created an opportunity to leverage the strengths of both institutions to create a premier franchise headquartered in Ohio with the benefits of scale, a more diversified balance sheet, complementary geographies and the best of each institution’s technology and talent.

After the meeting, Mr. Hileman updated the board chairman on his discussion with Mr. Small. It was agreed to have Mr. Hileman continue his outreach with Mr. Small to evaluate a possible strategic transaction with United Community. Mr. Hileman had numerous conversations with KBW over the next month, including regarding the financial aspects of a possible combination. Mr. Hileman also continued conversations with Mr. Small as to high level discussions related to operating models and possible cost saves and one time costs.

At a meeting of the United Community board of directors on May 23, 2019, Mr. Small updated the board on the outreach from Mr. Hileman as well as his view on the potential strategic and financial benefits of such a transaction. The board expressed its support for Mr. Small to continue these discussions to assess the viability of a strategic merger with First Defiance and the potential terms of such a transaction.

Over the next few weeks, Mr. Small and Mr. Hileman engaged in exploratory discussions with respect to a potential transaction that built upon their prior discussions and preliminary diligence from two years earlier. Their discussions were focused on identifying and refining the potential strategic and financial benefits and risks associated with a transaction and on developing a high-level framework of the economic and governance terms of a transaction, including board and management split between representatives of each company, headquarters, surviving entity name and other matters. The key components of a potential transaction framework that they developed during these discussions consisted of an all-stock strategic business combination with a fixed exchange ratio that would be priced based on each company’s relative contribution to the pro forma surviving company (based on various financial metrics) with a board split based on pro rata ownership of each company’s shareholders of the surviving entity and each company having key leadership roles, with a management succession plan whereby Mr. Small would succeed Mr. Hileman as Chief Executive Officer following an initial integration period and Mr. Hileman would at that time become Executive Chairman. Mr. Hileman and Mr. Small discussed their view that this approach to shared governance and management best positioned the combined company to leverage the strengths of each institution going forward and would help to mitigate integration related risks. During this time, Mr. Small and Mr. Hileman also involved members of senior management as well as representatives of Sandler O’Neill and KBW.

In early June 2019, based on the discussions and information that was exchanged between the representatives of United Community and First Defiance, Mr. Hileman and Mr. Small reached a preliminary understanding, subject to diligence and further discussion with each company’s board of directors, that if the parties were to combine, that United Community’s shareholders would own approximately 47% of the pro forma surviving company, which corresponded to an exchange ratio of approximately 0.3636 based upon the parties’ relative common stock prices at the time.

On June 11, 2019, Mr. Small and Mr. Hileman, together with Richard Schiraldi, the Chairman of the United Community board, and John Bookmyer, the Chairman of the First Defiance board, met and discussed the strategic benefits and risks associated with a transaction between United Community and First Defiance. They discussed the complementary natures of the culture and franchises of each company and the transaction framework that had been developed by Mr. Small and Mr. Hileman, with a focus on governance matters. They agreed that a successful combination of the two franchises had the potential to create a premier franchise with stronger financial results and an attractive Midwestern footprint that could leverage the complementary nature of each company’s balance sheet, business lines, management teams, culture and community-based approach. They

 

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also discussed that they believed a meeting in the next few weeks with Mr. Small, Mr. Hileman and additional directors of United Community and First Defiance would be beneficial to each institution’s consideration of a potential transaction.

On July 1, 2019, during a regularly scheduled call with the United Community directors held for Mr. Small to provide an update on the second quarter, Mr. Small and Mr. Schiraldi also updated United Community’s board on the status of the discussions with First Defiance and the proposed next steps. The board endorsed continuing with the discussions and having a meeting with Mr. Small, Mr. Hileman and additional directors of United Community and First Defiance as a next step.

First Defiance prepared a presentation outlining the transaction rationale as well as preliminary board structure and succession overview of Mr. Hileman and Mr. Small to be used for discussion.

On July 15, 2019, Mr. Small and Mr. Hileman met with select directors of each of United Community and First Defiance, including Mr. Schiraldi and Mr. Bookmyer, and presented their respective views on the potential strategic and financial benefits of a transaction as well as the transaction framework they had been discussing. The outcome of this meeting was that United Community and First Defiance agreed to have an in-depth discussion of a potential transaction at their respective upcoming July board meetings and each determine whether to move to the next phase of the process involving detailed diligence and negotiation of transaction documents.

At First Defiance’s regularly scheduled board meeting held on July 22, 2019, a key agenda item was the discussion and consideration of entering into a formal process with United Community with regard to a possible strategic transaction. Representatives of KBW and Barack Ferrazzano Kirschbaum & Nagelberg LLP (“Barack Ferrazzano”), First Defiance’s outside legal counsel, were also present for the meeting. Mr. Hileman updated the board on the meeting that was held on July 15, 2019 with representatives from both United Community’s board and First Defiance’s board as well as the ongoing discussions that he had been having with Mr. Small. Mr. Hileman also summarized the discussions between the two organizations that took place in 2017 to allow the new directors of First Defiance to have a more fulsome understanding of the past relationship between the two organizations. Mr. Hileman also outlined for the board the preliminary transaction terms that would be further developed during the formal process based upon conducting thorough due diligence. Mr. Hileman highlighted that the approximate pro forma ownership in the surviving entity of First Defiance’s existing shareholders was targeted to be approximately 53%. He also discussed the general governance framework for the transaction, including the possible board size, the number of First Defiance representatives on the board, the possible management team of the pro forma surviving company and the location of the headquarters for the surviving holding company and surviving bank, among other things. Barack Ferrazzano led a discussion regarding the fiduciary duties of the directors in considering significant corporate actions, including a possible strategic transaction with United Community. Representatives of KBW also discussed with the board the general economic environment for financial institutions, at that time, and provided observations of the then current market for mergers and acquisitions among financial services companies. KBW also reviewed financial aspects of a possible transaction with United Community, as well as financial information relating to First Defiance remaining as an independent organization. The First Defiance board discussed the possible benefits and risks of a strategic combination with United Community to its shareholders and other key constituencies and compared a potential transaction with United Community to other possible strategic alternatives, including a possible acquisition of a much smaller financial institution that management and the board had considered pursuing before the opportunity with United Community developed. The board also discussed some of the possible benefits and challenges that First Defiance could face if it continued as an independent organization, including, maintaining its loan growth, succession planning of key management and officers and other environmental challenges to First Defiance’s strategic plan. After a lengthy discussion, the board concluded that First Defiance should continue its discussions with United Community and begin a more formal process that should include detailed diligence and the negotiation of transaction documents. Additionally, the board established a special transaction committee of the board to oversee management in its execution of the diligence and negotiation

 

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process and to facilitate the overall process and communication between management and the board. The directors appointed to the special transaction committee were: Mr. Bookmyer, Mr. Hileman, Charles Neihaus and Sam Strausbaugh. Additionally, the board determined that Jean Hubbard would also be available to serve on the committee and be present at meetings if other members were unable to attend.

On July 23, 2019, United Community’s board of directors held a regularly scheduled meeting. The meeting was also attended by representatives of Sandler O’Neill and Wachtell, Lipton, Rosen & Katz (“Wachtell Lipton”), United Community’s outside legal counsel. Mr. Small began by reviewing with the board the interest expressed by First Defiance in a potential strategic merger and the transaction framework that had been developed. Among other things, he highlighted that United Community shareholders would receive all-stock consideration and that under the ownership split being discussed United Community shareholders would own approximately 47% of the pro forma surviving company, which equated to an exchange ratio of 0.3636 and an implied premium to United Community’s trading price on July 22, 2019 of approximately 6.5%. Mr. Small also described the meetings and discussions that had taken place between the management teams and directors to date and explained that the preliminary discussions between the two companies in 2017 regarding a potential strategic combination had helped lay the groundwork for the current discussions. Representatives of Sandler O’Neill made a presentation to the board that included an overview of the current bank operating environment and general consolidation trends as well as a preliminary financial analysis regarding a potential transaction with First Defiance. Sandler O’Neill and the directors discussed the difficult operating environment facing banks, particularly in light of net interest margin compression being experienced by financial institutions generally, a challenging interest rate environment, increased competition with respect to core funding and significant costs associated with technology investment and regulatory compliance. In addition to a review of United Community’s stand-alone valuation, Sandler O’Neill also presented a review of other potential strategic alternatives to the proposed transaction with First Defiance. Sandler O’Neill also reviewed the evaluation and outreach that had been conducted by United Community earlier in the year and noted that there had not been any new developments on that front. The United Community board then discussed the potential benefits and risks of a strategic combination with First Defiance to its shareholders and other key constituencies and compared the potential transaction with First Defiance to its other potential strategic alternatives, including continuing to focus on organic growth as an independent company. The board concluded that United Community should continue its discussions with First Defiance and begin a more formal process that should include detailed diligence and the negotiation of transaction documents.

Over the next two weeks, United Community and First Defiance commenced their respective due diligence on each other, which included access to virtual data rooms and telephonic and in person meetings between the management teams of the two companies and their respective advisors and representatives. During this time, Mr. Small and Mr. Hileman continued their discussions with respect to the terms of the potential transaction, including integration matters and more detail around certain of the governance provisions.

Additionally, First Defiance instructed Barack Ferrazzano to begin drafting a definitive merger agreement for the proposed transaction. Mr. Hileman and other key officers reviewed preliminary drafts of the merger agreement and on August 13, 2019, Barack Ferrazzano sent a draft of the merger agreement to Wachtell Lipton. The merger agreement reflected an all-stock transaction but did not include an exchange ratio, which was still subject to negotiation and finalization based upon market conditions.

On August 15, 2019, the executive committee of the United Community board convened a meeting to receive a status report on the potential transaction. Senior management and representatives from Sandler O’Neill and Wachtell Lipton also participated. Mr. Small provided an update on the satisfactory results of the due diligence process to date as well as the progress of discussions on governance issues. Sandler O’Neill provided a market update presentation, focusing on the Federal Reserve’s interest rate cut on July 31, 2019, the flattening of, and at times inversion of the, yield curve, the volatility in the equity and bond markets since the prior meeting

 

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and the impact of these developments on the businesses, trading prices and prospects of United Community and First Defiance. Sandler O’Neill also discussed with the United Community board that since the last United Community board meeting, First Defiance common stock had traded down relative to United Community common stock and the impact of such movements on the implied transaction value based on the 0.3636 exchange ratio that the parties had been discussing, which would, based on then current stock prices of the two organizations, result in a small implied discount to United Community’s then current common stock trading price. The executive committee expressed its support for United Community to continue its due diligence and negotiations and instructed management and Sandler O’Neill to continue to monitor and update the board on market events and the impact on the implied transaction value.

Following the meeting of the executive committee, the parties continued their due diligence reviews and Mr. Small and United Community’s financial advisors communicated to First Defiance that they viewed the exchange ratio as an item that would require further discussion. Wachtell Lipton also sent a revised draft of the merger agreement to Barack Ferrazzano and the two law firms exchanged term sheets for the employment agreements for Mr. Small and Mr. Hileman that would be entered into with First Defiance contemporaneously with the execution of the merger agreement and would become effective as of the closing of the merger. Over the next couple of weeks, Wachtell Lipton and Barack Ferrazzano further exchanged drafts of the merger agreement and other transaction documents to be entered into in connection with the execution of the merger agreement, including voting agreements with directors of United Community and First Defiance as well as the employment agreements between First Defiance and each of Mr. Small and Mr. Hileman, and engaged in telephonic negotiations of the terms of such agreements. In each of the drafts of the merger agreement the exchange ratio was left blank. Also, during this time, the parties worked to complete their respective due diligence reviews.

On August 26, 2019, the compensation committee of the United Community board met to discuss and provide feedback on Mr. Small’s proposed employment agreement. Representatives of Wachtell Lipton also participated.

On August 28, 2019, the United Community board of directors held a regularly scheduled meeting and engaged in a detailed discussion of the proposed transaction with First Defiance. Members of United Community’s management team and representatives from Sandler O’Neill and Wachtell Lipton were also in attendance. At the meeting, Mr. Small updated the United Community board of directors on the status of the proposed transaction. The senior management team provided a report to the board on the results of the due diligence conducted on First Defiance to date and the anticipated benefits and risks associated with the proposed merger, and its conclusion that the diligence supported the strategic rationale for the proposed transaction. Sandler O’Neill provided a market update to the full board, including a review of the matters discussed with the executive committee at its August 15 meeting, and an updated financial analysis of the proposed transaction. Representatives of Wachtell Lipton advised the board of directors on its fiduciary duties and discussed the terms of the draft transaction agreements, including the merger agreement, voting agreements and employment agreements, which were substantially complete other than the exchange ratio. The United Community board discussed the results of diligence, the strategic benefits and risks of the proposed transaction, as well as the challenging operating environment for banks and the discussion of strategic alternatives from prior meetings of the board and its belief that the strategic rationale for a merger with First Defiance remained compelling. The board also engaged in a discussion regarding the recent relative underperformance of First Defiance’s common stock as compared to United Community’s common stock, which at that time had resulted in an implied transaction value that was at a slight discount to United Community’s then current trading price. The United Community board directed United Community and its advisors to continue to finalize the transaction documents and to inform First Defiance that it would require an increase to the 0.3636 exchange ratio that had been discussed between the parties if the implied discount continued to exist as the parties moved toward executing the merger agreement. The board also scheduled a meeting for September 5, 2019 to receive a market update and determine a specific proposal with respect to the exchange ratio that would then be negotiated with First Defiance prior to the targeted announcement date of September 9, 2019.

 

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Following this meeting, Mr. Small and United Community’s financial and legal advisors communicated to First Defiance and their advisors United Community’s position on the exchange ratio.

On August 29, 2019, the board of First Defiance met to discuss the current status of the merger agreement, the proposals regarding the exchange ratio and the proposed employment agreements with Mr. Hileman and Mr. Small. Representatives of Barack Ferrazzano were present at the meeting. Following the meeting, Barack Ferrazzano had several conversations with Wachtell Lipton regarding the proposed merger agreement.

On August 29, 2019, the compensation committee of First Defiance met to discuss the proposed employment agreements with Mr. Hileman and Mr. Small. Representatives of Barack Ferrazzano were present at the meeting. Following the meeting, Barack Ferrazzano had several conversations with Wachtell Lipton regarding the proposed employment agreements.

On September 5, 2019, the compensation committee of the First Defiance’s board met to review and approve the terms of the employment agreements with Mr. Hileman and Mr. Small. Representatives of Barack Ferrazzano were present at the meeting and, following the meeting, communicated the terms of the employment agreements that were acceptable to First Defiance to Wachtell Lipton, which such terms are set forth in the agreements executed by the parties on September 9, 2019.

On September 5, 2019, the compensation committee of the United Community board also met to review the substantially final terms of the employment agreements of Mr. Small and Mr. Hileman that Barack Ferrazzano had sent to Wachtell Lipton. Representatives from Wachtell Lipton were present at the meeting.

Immediately following United Community’s compensation committee meeting on September 5, 2019, the United Community board of directors held a special meeting for a status update on the proposed transaction, with the primary purpose of the meeting being to formulate a proposal with respect to the exchange ratio. Representatives of senior management, Sandler O’Neill and Wachtell Lipton also participated. Representatives of Sandler O’Neill presented a market update and an updated financial analysis with respect to the proposed transaction, including analyses at different exchange ratios as well as the impact that a special cash dividend would have. Representatives of Wachtell Lipton presented an update on the status of the transaction documents and the members of the compensation committee updated the full board on their discussions with respect to the employment agreements. Following discussion, the United Community board instructed management and Sandler O’Neill to propose an increased exchange ratio of 0.3715, which would increase the pro forma ownership in the surviving entity of United Community shareholders from 47% to 47.5%, as well as a special cash dividend payable to United Community shareholders prior to closing, if necessary, to address any remaining discount implied by the transaction value as compared to the closing price of United Community’s common stock as of the signing of the merger.

Following the board meeting, representatives of Sandler O’Neill conveyed the proposal on the exchange ratio and special dividend to representatives of KBW. The KBW representatives indicated that they would review the proposal with First Defiance.

On September 6, 2019, First Defiance’s special committee met with KBW representatives to discuss United Community’s latest proposal on the exchange ratio. KBW provided a market update to the committee and reviewed the potential impact of the proposed exchange ratio on financial aspects of the proposed transaction. The committee determined to recommend to the full board that it approve the proposed transaction with the proposed exchange ratio of 0.3715.

On September 6, 2019, following the closing of the market, in accordance with First Defiance’s directives, representatives of KBW communicated to Sandler O’Neill that First Defiance, pending final board approval, was in agreement with the proposed exchange ratio of 0.3715, which represented an implied premium to United Community’s closing price on September 6, 2019 of $0.17 or 1.7%, but as a result, First Defiance had

 

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determined that the special dividend proposal was moot. Sandler O’Neill and United Community agreed that, pending board approval on both sides, the special dividend proposal would be moot.

Following these discussions, Wachtell Lipton and Barack Ferrazzano finalized the transaction agreements in advance of each company’s respective board meetings to consider the proposed transaction.

On September 7, 2019, the First Defiance board held a meeting to consider the terms of the proposed transaction with United Community. Members of First Defiance’s management team and representatives of KBW and Barack Ferrazzano were also in attendance. Mr. Hileman updated the board as to the recent discussions between the management teams and advisors, as well as the considerations of the special transaction committee. At this meeting, KBW reviewed the financial aspects of the proposed merger and rendered an opinion to the First Defiance board to the effect that, as of such date and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW as set forth in such opinion, the exchange ratio in the proposed merger was fair, from a financial point of view, to First Defiance. See “Opinion of First Defiance’s Financial Advisor,” beginning on page 65, for more information. Representatives of Barack Ferrazzano then advised the board on its fiduciary duties and led the board through the proposed final merger agreement and related transaction documents. After discussing and considering the proposed terms of the merger agreement and related transaction documents, and taking into consideration the matters discussed during that meeting and prior meetings of the First Defiance board and the factors described under “First Defiance’s Reasons for the Merger; Board Recommendation” beginning on page 62, the First Defiance board of directors unanimously determined the merger, the merger agreement, the other transaction agreements and the other transactions contemplated by the proposed merger agreement, to be in the best interests of First Defiance, its shareholders and its other constituencies, and the board of directors unanimously approved and adopted the proposed merger agreement, the other transaction agreements and the transactions contemplated thereby, including the merger, and determined that it would recommend that First Defiance’s shareholders adopt the merger agreement.

On September 8, 2019, the United Community board of directors held a meeting to consider the terms of the proposed transaction with First Defiance. Members of United Community’s management team and representatives from Sandler O’Neill and Wachtell Lipton were also in attendance. Sandler O’Neill provided an update on the discussions with KBW with respect to United Community’s proposed exchange ratio and First Defiance’s acceptance of an increased exchange ratio of 0.3715. Sandler O’Neill then reviewed the market developments since the last board meeting and its updated financial analysis, and rendered an opinion to the United Community board to the effect that, as of that date and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by Sandler O’Neill as set forth in such opinion, the exchange ratio in the proposed merger was fair to the holders of United Community common stock from a financial point of view. See “Opinion of United Community’s Financial Advisor,” beginning on page 79, for more information. Representatives of Wachtell Lipton further advised the board of directors on its fiduciary duties and confirmed the terms of the proposed final merger agreement and related transaction documents. After considering the proposed terms of the merger agreement and related transaction documents and the various presentations of its financial and legal advisors, and taking into consideration the matters discussed during that meeting and prior meetings of the United Community board and the factors described under “United Community’s Reasons for the Merger; Board Recommendation,” beginning on page 77, the United Community board of directors unanimously determined the merger, the merger agreement, the other transaction documents and the other transactions contemplated by the proposed merger agreement, to be in the best interests of United Community, its shareholders and its other constituencies, and the board of directors unanimously approved and adopted the proposed merger agreement, the other transaction agreements and the transactions contemplated thereby, including the merger, and determined that it would recommend that United Community shareholders adopt the merger agreement.

 

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Subsequently, the merger agreement and related transaction agreements were executed and delivered and the transaction was announced on the morning of September 9, 2019 in a press release issued jointly by United Community and First Defiance.

First Defiance’s Reasons for the Merger; Board Recommendation

First Defiance’s board of directors has concluded that the merger offers shareholders an extremely attractive opportunity to achieve the board of directors’ strategic business objectives. These objectives included increasing shareholder value and growing the size of the business to one of the premier financial institutions in Ohio and the greater Midwest region.

In deciding to approve the merger agreement and the transactions it contemplates, First Defiance’s board of directors evaluated the merger in consultation with management, as well as First Defiance’s legal counsel and financial advisors, and considered numerous factors, including the following:

 

   

information with respect to the businesses, earnings, operations, financial condition, prospects, capital levels and asset quality of First Defiance and United Community, both individually and as a combined company; in reviewing these factors, the First Defiance board of directors considered the following:

 

   

the historical performance of each of First Defiance’s and United Community’s common stock;

 

   

the strategic fit of the business lines and the operating philosophies of the two institutions;

 

   

that First Defiance’s and United Community’s senior leadership share beliefs in strong community ties, customer focus and accountability, and its views regarding the long-term impacts of such philosophies with respect to the development of the communities in which the combined company will operate and the potential business performance of the combined company;

 

   

its understanding that the merger would diversify First Defiance’s loan portfolio, revenue streams and markets and strengthen its core retail deposit franchise, which may mitigate certain business risks;

 

   

the anticipated cost savings associated with the merger; and

 

   

the anticipated impact of the transaction on the combined company, including the expected impact on additional key financial metrics (including tangible book value per share, return on assets, return on tangible common equity, and cash efficiency ratio), regulatory capital ratios and anticipated earnings per share accretion;

 

   

views with respect to other potential strategic alternatives, including focusing exclusively on organic growth, pursuing other acquisitions or pursuing larger merger partners;

 

   

the complementary nature of the businesses of First Defiance and United Community, its view that the combined organization would have a stronger, deeper leadership team than First Defiance as a stand-alone company, the anticipated improved stability of the combined company’s business and earnings in varying economic and market climates relative to First Defiance on a stand-alone basis and the combined organization’s anticipated ability to provide enhanced products, services and technologies; all of which could facilitate enhanced operational performance, strategic growth and risk management for the combined company;

 

   

the fact that the merger would combine two solid banking franchises to create a bank with over $6.0 billion in assets;

 

   

the consistency of the merger with First Defiance’s long-term strategic vision to seek profitable future expansion in Ohio and the greater Midwest region, providing the foundation for expansion of its geographic footprint, leading to continued growth in overall shareholder value;

 

   

both organizations have a long-standing, community banking philosophy of superior customer service, personalized financial solutions for both personal and business customers and a commitment to their communities;

 

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the opportunity to build greater brand recognition and awareness;

 

   

understanding that First Defiance shareholders would own approximately 52.5% of the combined company’s common stock;

 

   

the structure of the transaction as a merger of equals in which First Defiance’s board of directors and management would have significant participation in the combined company; in particular, the provisions of the merger agreement setting forth the corporate governance of the combined company, including:

 

   

the fact that Mr. Bookmyer would serve as Chairman of the combined company, Mr. Schiraldi would serve as Vice Chairman, Mr. Hileman would serve as Chief Executive Officer (transitioning to Executive Chairman in the first half of 2021) and Mr. Small would serve as President (transitioning to Chief Executive Officer in the first half of 2021);

 

   

the fact that seven of 13 total directors of the combined company would be current members of the First Defiance board of directors (including Mr. Hileman and Mr. Bookmyer); and

 

   

that the affirmative vote of at least 75% of the board of directors of the combined company would be required to remove Mr. Hileman from serving in the capacities referred to above;

 

   

the fact that First Defiance’s code of regulations and corporate governance guidelines would be amended to preserve certain corporate governance arrangements of the combined company (including senior executive management positions of the combined company and the allocation of directors between First Defiance and United Community) for a period from closing through the second anniversary of the transition of Mr. Hileman to Executive Chairman in the first half of 2021;

 

   

the familiarity of First Defiance’s senior management team with United Community’s management team and the belief of First Defiance’s senior management that the management teams and employees of First Defiance and United Community possess complementary skills and expertise and the potential advantages of a larger institution when pursuing, or seeking to retain, production and management talent;

 

   

the belief of First Defiance’s senior management and the First Defiance board of directors that the two companies share a common vision with respect to corporate culture and delivering financial performance and shareholder value and that their executive officers and employees possess complementary skills and expertise;

 

   

the advantages of a combination with an institution such as United Community that already has an established market share in the Ohio market and the opportunities for increased efficiencies and significant cost savings resulting from a combination with United Community’s current organization, resulting in increased profitability of the combined entity over time, as compared to a possible combination without a similar market presence;

 

   

the fact that the combined company would continue to be publicly held following the merger and would continue to be traded on the NASDAQ Global Select Market, providing the combined company’s shareholders with continued access to a public trading market, and that shareholders would be expected to have increased liquidity for their shares as a result of the higher market capitalization of the combined company, the significantly expanded shareholder base and the potential increase in interest from institutional investors and securities analysts;

 

   

the fact that the market capitalization of the combined institution, as compared with First Defiance’s market capitalization as a stand-alone entity, would be expected to provide the combined company with increased access to capital markets to finance the combined company’s capital requirements, and in addition would provide for enhanced market visibility;

 

   

the fact that the higher market capitalization of the combined company would be expected to enhance the attractiveness of the company’s common stock going forward, which would make the common

 

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stock more attractive as consideration to be used in future acquisition opportunities that may allow for increased shareholder value;

 

   

the current and prospective economic and competitive environments facing First Defiance and other financial institutions, characterized by intensifying competition from both banks and non-bank financial service organizations, and the growing costs associated with regulatory compliance in the industry;

 

   

the belief that, while no assurances could be given, the business and financial advantages contemplated in connection with the merger were likely to be achieved within a reasonable time frame, particularly in light of the fact that the organizations have transition experience due to successfully completed acquisitions and data processing conversions;

 

   

review of the results of First Defiance’s due diligence review of United Community and discussions with First Defiance’s senior management and outside advisors concerning United Community;

 

   

the opinion dated September 7, 2019 of KBW to the First Defiance board of directors as to the fairness, from a financial point of view and as of the date of the opinion, to First Defiance of the exchange ratio in the proposed merger as more fully described under “The Merger—Opinion of First Defiance’s Financial Advisor” beginning on page 65;

 

   

the terms of the merger agreement, including the expected tax treatment of the merger as a “reorganization” for United States federal income tax purposes, and the deal protection and termination fee provisions, which it reviewed with its outside legal counsel;

 

   

the fact that First Defiance’s shareholders will have the opportunity to vote to approve the merger agreement;

 

   

the board of directors’ right to withdraw its recommendation to the First Defiance shareholders that they approve the merger agreement and the right of the United Community board of directors to withdraw its recommendation to the United Community shareholders that they adopt the merger agreement, in each case in certain circumstances, as more fully described under “The Merger Agreement—Shareholder Meetings and Recommendation of First Defiance’s and United Community’s Boards of Directors” beginning on page 118;

 

   

the restrictions on the conduct of First Defiance’s business during the period between execution of the merger agreement and the consummation of the merger, which restrictions are customary for public company merger agreements involving financial institutions but which, subject to specific exceptions, could delay or prevent First Defiance from undertaking business opportunities that might arise or certain other actions it might otherwise take with respect to First Defiance’s operations absent the pendency of the merger;

 

   

both First Defiance’s and United Community’s ability to take certain actions in response to an unsolicited bona fide written acquisition proposal under specific circumstances and the terms of the merger agreement that restrict both First Defiance’s and United Community’s ability to solicit alternative transactions;

 

   

the potential risks associated with achieving, within anticipated time periods or at all, cost savings and successfully integrating the businesses, operations and workforces of First Defiance and United Community, including the costs and risks of successfully integrating the differing business models and lines of business of the two companies;

 

   

the possibility that the merger and the related integration process could result in the loss of key employees, in the disruption of First Defiance’s ongoing business and in the loss of customers for the combined company;

 

   

the other risks described under the section entitled “Risk Factors” and “Forward-Looking Statements” beginning on pages 27 and 35, respectively;

 

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the fact that First Defiance or United Community may be obligated to pay the other party a termination fee of $18.4 million in certain circumstances as more fully described under “The Merger Agreement—Termination Fee” beginning on page 122;

 

   

the likelihood that the merger will be approved by the relevant bank regulatory authorities in a timely manner and the consideration of the relevant factors assessed by the regulators for such approvals and the evaluation of such factors;

 

   

that there can be no assurance that all conditions to the parties’ obligations to complete the merger will be satisfied, including the risk that certain regulatory approvals might not be obtained;

 

   

the substantial costs to be incurred in connection with the merger, including the costs of integrating the businesses of First Defiance and United Community, transaction fees, expenses and other payments that will or may arise from the merger;

 

   

the potential risk of diverting management attention and resources from the operation of First Defiance’s business and towards the completion of the merger and the integration of the two companies; and

 

   

the risk that the merger may not be completed despite the combined efforts of First Defiance and United Community, or that completion may be unduly delayed, even if the required regulatory approvals are obtained and the requisite approvals are obtained from the First Defiance shareholders and the United Community shareholders, including as a result of factors outside First Defiance’s and United Community’s control.

In considering the recommendation of the First Defiance board, you should be aware that certain directors and executive officers of First Defiance may have interests in the merger that are different from, or in addition to, interests of shareholders of First Defiance generally and may create potential conflicts of interest. The First Defiance board was aware of these interests and considered them when evaluating and negotiating the merger agreement, the merger and the other transactions contemplated by the merger agreement, and in recommending to First Defiance’s shareholders that they vote in favor of the merger proposal. See “The Merger—Interests of First Defiance Directors and Executive Officers in the Merger” beginning on page 93.

The above discussion of the information and factors considered by the First Defiance board of directors is not intended to be exhaustive, but includes the material factors they considered. In arriving at its determination to approve the merger agreement and the transactions it contemplates, and recommend that the First Defiance shareholders vote to approve them, the First Defiance board of directors did not assign any relative or specific weights to the above factors, and individual directors may have given differing weights to different factors. It should be noted that the foregoing explanation of the factors considered by First Defiance’s board of directors and its reasons for recommending the merger to First Defiance’s shareholders, as well as certain information presented in this section is forward-looking in nature and, therefore, such information should be read in light of the factors discussed in the section entitled “Forward-Looking Statements”.

For the reasons set forth above, the First Defiance board of directors unanimously recommends that the First Defiance shareholders vote “FOR” the First Defiance merger proposal.

Opinion of First Defiance’s Financial Advisor

First Defiance engaged KBW to render financial advisory and investment banking services to First Defiance, including an opinion to the First Defiance board of directors as to the fairness, from a financial point of view, to First Defiance of the exchange ratio in the proposed merger. First Defiance selected KBW because KBW is a nationally recognized investment banking firm with substantial experience in transactions similar to the merger. As part of its investment banking business, KBW is continually engaged in the valuation of financial services businesses and their securities in connection with mergers and acquisitions.

 

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As part of its engagement, representatives of KBW attended the meeting of the First Defiance board of directors held on September 7, 2019 at which the First Defiance board of directors evaluated the proposed merger. At this meeting, KBW reviewed the financial aspects of the proposed merger and rendered an opinion to the First Defiance board of directors to the effect that, as of such date and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW as set forth in such opinion, the exchange ratio in the proposed merger was fair, from a financial point of view, to First Defiance. The First Defiance board of directors approved the merger agreement at this meeting.

The description of the opinion set forth herein is qualified in its entirety by reference to the full text of the opinion, which is attached as Annex B to this document and is incorporated herein by reference, and describes the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW in preparing the opinion.

KBW’s opinion speaks only as of the date of the opinion. The opinion was for the information of, and was directed to, the First Defiance board of directors (in its capacity as such) in connection with its consideration of the financial terms of the merger. The opinion addressed only the fairness, from a financial point of view, of the exchange ratio in the merger to First Defiance. It did not address the underlying business decision of First Defiance to engage in the merger or enter into the merger agreement or constitute a recommendation to the First Defiance board of directors in connection with the merger, and it does not constitute a recommendation to any holder of First Defiance common stock or any shareholder of any other entity as to how to vote in connection with the merger or any other matter, nor does it constitute a recommendation as to whether or not any such shareholder should enter into a voting, shareholders’, affiliates’ or other agreement with respect to the merger or exercise any dissenters’ or appraisal rights that may be available to such shareholder.

KBW’s opinion was reviewed and approved by KBW’s Fairness Opinion Committee in conformity with its policies and procedures established under the requirements of Rule 5150 of the Financial Industry Regulatory Authority.

In connection with the opinion, KBW reviewed, analyzed and relied upon material bearing upon the financial and operating condition of First Defiance and United Community and bearing upon the merger, including, among other things:

 

   

a draft of the merger agreement, dated September 7, 2019 (the most recent draft then made available to KBW);

 

   

the audited financial statements and the Annual Reports on Form 10-K for the three fiscal years ended December 31, 2016, December 31, 2017, and December 31, 2018 of First Defiance;

 

   

the unaudited quarterly financial statements and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 of First Defiance;

 

   

the audited financial statements and the Annual Reports on Form 10-K for the three fiscal years ended December 31, 2016, December 31, 2017, and December 31, 2018 of United Community;

 

   

the unaudited quarterly financial statements and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 of United Community;

 

   

certain regulatory filings of First Defiance and United Community and their respective subsidiaries, including the quarterly reports on Form FRY-9C and quarterly call reports filed with respect to each quarter during the three year period ended December 31, 2018 and the quarters ended March 31, 2019 and June 30, 2019;

 

   

certain other interim reports and other communications of First Defiance and United Community to their respective shareholders; and

 

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other financial information concerning the respective businesses and operations of First Defiance and United Community furnished to KBW by First Defiance and United Community or which KBW was otherwise directed to use for purposes of its analysis.

KBW’s consideration of financial information and other factors that it deemed appropriate under the circumstances or relevant to its analyses included, among others, the following:

 

   

the historical and current financial position and results of operations of First Defiance and United Community;

 

   

the assets and liabilities of First Defiance and United Community;

 

   

the nature and terms of certain other merger transactions and business combinations in the banking industry;

 

   

a comparison of certain financial and stock market information of First Defiance and United Community with similar information for certain other companies, the securities of which were publicly traded;

 

   

publicly-available consensus “street estimates” of United Community, as well as assumed United Community long-term growth rates provided to KBW by United Community management, all of which information was discussed with KBW by such management and used and relied upon by KBW based on such discussions, at the direction of First Defiance management and with the consent of the First Defiance board of directors;

 

   

publicly available consensus “street estimates” of First Defiance, as well as assumed First Defiance long-term growth rates provided to KBW by First Defiance management, all of which information was discussed with KBW by such management and used and relied upon by KBW at the direction of such management and with the consent of the First Defiance board of directors; and

 

   

estimates regarding certain pro forma financial effects of the merger on First Defiance (including without limitation the cost savings and related expenses expected to result or be derived from the merger) that were prepared by First Defiance management, provided to and discussed with KBW by such management, and used and relied upon by KBW at the direction of such management and with the consent of the First Defiance board of directors.

KBW also performed such other studies and analyses as it considered appropriate and took into account its assessment of general economic, market and financial conditions and its experience in other transactions, as well as its experience in securities valuation and knowledge of the banking industry generally. KBW also participated in discussions that were held by the managements of First Defiance and United Community regarding the past and current business operations, regulatory relations, financial condition and future prospects of their respective companies and such other matters as KBW deemed relevant to its inquiry.

In conducting its review and arriving at its opinion, KBW relied upon and assumed the accuracy and completeness of all of the financial and other information provided to it or that was publicly available and KBW did not independently verify the accuracy or completeness of any such information or assume any responsibility or liability for such verification, accuracy or completeness. KBW relied, with the consent of First Defiance, upon the management of United Community as to the reasonableness and achievability of the publicly available consensus “street estimates” of United Community and the assumed United Community long-term growth rates referred to above (and the assumptions and bases therefor), and KBW assumed that all such information was reasonably prepared and represented, or in the case of the United Community “street estimates” referred to above that such estimates were consistent with, the best currently available estimates and judgments of such management and that the forecasts, projections and estimates reflected in such information would be realized in the amounts and in the time periods estimated. KBW further relied upon the management of First Defiance as to the reasonableness and achievability of the publicly available consensus “street estimates” of First Defiance, the

 

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assumed First Defiance long-term growth rates, and the estimates regarding certain pro forma financial effects of the merger on First Defiance (including, without limitation, the cost savings and related expenses expected to result or be derived from the merger), all as referred to above, and the assumptions and bases for all such information, and KBW assumed, at the direction of First Defiance, that all of the foregoing information was reasonably prepared and represented, or in the case of the publicly available consensus “street estimates” referred to above that such estimates were consistent with, the best currently available estimates and judgments of First Defiance management and that the forecasts, projections and estimates reflected in such information would be realized in the amounts and in the time periods estimated.

It is understood that the portion of the foregoing financial information of First Defiance and United Community that was provided to KBW was not prepared with the expectation of public disclosure and that all of the foregoing financial information, including the publicly available consensus “street estimates” of First Defiance and United Community referred to above, was based on numerous variables and assumptions that are inherently uncertain (including, without limitation, factors related to general economic and competitive conditions) and, accordingly, actual results could vary significantly from those set forth in all of such information. KBW assumed, based on discussions with the respective managements of First Defiance and United Community and with the consent of the First Defiance board of directors, that all such information provided a reasonable basis upon which KBW could form its opinion and KBW expressed no view as to any such information or the assumptions or bases therefor. KBW relied on all such information without independent verification or analysis and did not in any respect assume any responsibility or liability for the accuracy or completeness thereof.

KBW also assumed that there were no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of either First Defiance or United Community since the date of the last financial statements of each such entity that were made available to KBW and that KBW was directed to use. KBW is not an expert in the independent verification of the adequacy of allowances for loan and lease losses and KBW assumed, without independent verification and with First Defiance’s consent, that the aggregate allowances for loan and lease losses for each of First Defiance and United Community are adequate to cover such losses. In rendering its opinion, KBW did not make or obtain any evaluations or appraisals or physical inspection of the property, assets or liabilities (contingent or otherwise) of First Defiance or United Community, the collateral securing any of such assets or liabilities, or the collectability of any such assets, nor did KBW examine any individual loan or credit files, nor did it evaluate the solvency, financial capability or fair value of First Defiance or United Community under any state or federal laws, including those relating to bankruptcy, insolvency or other matters. Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold. Because such estimates are inherently subject to uncertainty, KBW assumed no responsibility or liability for their accuracy.

KBW assumed, in all respects material to its analyses:

 

   

the merger and any related transactions (including the bank merger) would be completed substantially in accordance with the terms set forth in the merger agreement (the final terms of which KBW assumed would not differ in any respect material to its analyses from the draft version of the merger agreement reviewed by KBW and referred to above) with no adjustments to the exchange ratio and with no other consideration or payments in respect of United Community common stock;

 

   

the representations and warranties of each party in the merger agreement and in all related documents and instruments referred to in the merger agreement were true and correct;

 

   

each party to the merger agreement or any of the related documents would perform all of the covenants and agreements required to be performed by such party under such documents;

 

   

there are no factors that would delay or subject to any adverse conditions, any necessary regulatory or governmental approval for the merger or any related transaction and all conditions to the completion of the merger and any related transaction would be satisfied without any waivers or modifications to the merger agreement or any of the related documents; and

 

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in the course of obtaining the necessary regulatory, contractual, or other consents or approvals for the merger and any related transactions, no restrictions, including any divestiture requirements, termination or other payments or amendments or modifications, would be imposed that would have a material adverse effect on the future results of operations or financial condition of First Defiance, United Community or the pro forma combined entity or the contemplated benefits of the merger, including without limitation the cost savings and related expenses expected to result or be derived from the merger.

KBW assumed that the merger would be consummated in a manner that complied with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations. KBW was further advised by representatives of First Defiance that First Defiance relied upon advice from its advisors (other than KBW) or other appropriate sources as to all legal, financial reporting, tax, accounting and regulatory matters with respect to First Defiance, United Community, the merger and any related transaction (including the bank merger), and the merger agreement. KBW did not provide advice with respect to any such matters.

KBW’s opinion addressed only the fairness, from a financial point of view, as of the date of such opinion, of the exchange ratio in the merger to First Defiance. KBW expressed no view or opinion as to any other terms or aspects of the merger or any term or aspect of any related transaction (including the bank merger), including without limitation, the form or structure of the merger or any such related transaction, any consequences of the merger to First Defiance, its shareholders, creditors or otherwise, or any terms, aspects, merits or implications of any employment, retention, consulting, voting, support, cooperation, shareholder or other agreements, arrangements or understandings contemplated or entered into in connection with the merger, any such related transaction, or otherwise. KBW’s opinion was necessarily based upon conditions as they existed and could be evaluated on the date of such opinion and the information made available to KBW through such date. Developments subsequent to the date of KBW’s opinion may have affected, and may affect, the conclusion reached in KBW’s opinion and KBW did not and does not have an obligation to update, revise or reaffirm its opinion. KBW’s opinion did not address, and KBW expressed no view or opinion with respect to:

 

   

the underlying business decision of First Defiance to engage in the merger or enter into the merger agreement;

 

   

the relative merits of the merger as compared to any strategic alternatives that are, have been or may be available to or contemplated by First Defiance or the First Defiance board of directors;

 

   

any business, operational or other plans with respect to United Community or the pro forma combined entity that may be contemplated by First Defiance or the First Defiance board of directors or that may be implemented by First Defiance or the First Defiance board of directors subsequent to the closing of the merger;

 

   

the fairness of the amount or nature of any compensation to any of First Defiance’s officers, directors or employees, or any class of such persons, relative to any compensation to the holders of First Defiance common stock or relative to the exchange ratio;

 

   

the effect of the merger or any related transaction on, or the fairness of the consideration to be received by, holders of any class of securities of First Defiance, United Community or any other party to any transaction contemplated by the merger agreement;

 

   

the actual value of First Defiance common stock to be issued in connection with the merger;

 

   

the prices, trading range or volume at which First Defiance common stock or United Community common stock would trade following the public announcement of the merger or the prices, trading range or volume at which First Defiance common stock would trade following the consummation of the merger;

 

   

any advice or opinions provided by any other advisor to any of the parties to the merger or any other transaction contemplated by the merger agreement; or

 

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any legal, regulatory, accounting, tax or similar matters relating to First Defiance, United Community, any of their respective shareholders, or relating to or arising out of or as a consequence of the merger or any other related transaction (including the bank merger), including whether or not the merger would qualify as a tax-free reorganization for United States federal income tax purposes.

In performing its analyses, KBW made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of KBW, First Defiance and United Community. Any estimates contained in the analyses performed by KBW are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, the KBW opinion was among several factors taken into consideration by the First Defiance board of directors in making its determination to approve the merger agreement and the merger. Consequently, the analyses described below should not be viewed as determinative of the decision of the First Defiance board of directors with respect to the fairness of the exchange ratio. The type and amount of consideration payable in the merger were determined through negotiation between First Defiance and United Community and the decision of First Defiance to enter into the merger agreement was solely that of the First Defiance board of directors.

The following is a summary of the material financial analyses presented by KBW to the First Defiance board of directors in connection with its opinion. The summary is not a complete description of the financial analyses underlying the opinion or the presentation made by KBW to the First Defiance board of directors, but summarizes the material analyses performed and presented in connection with such opinion. The financial analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex analytic process involving various determinations as to appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, KBW did not attribute any particular weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, KBW believes that its analyses and the summary of its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and opinion.

For purposes of the financial analyses described below, KBW utilized an implied transaction value for the proposed merger of $9.78 per outstanding share of United Community common stock, or $473.3 million in the aggregate (inclusive of the implied value of United Community performance stock units and in-the-money United Community stock options), based on the 0.3715x exchange ratio in the proposed merger and the closing price of First Defiance common stock on September 6, 2019. In addition to the financial analyses described below, KBW reviewed with the First Defiance board of directors for informational purposes, among other things, an implied transaction multiple for the proposed merger (based on the implied transaction value for the merger of $9.78 per outstanding share of United Community common stock) of 11.8x United Community’s estimated calendar year 2019 earnings per share (“EPS”) and 11.0x United Community’s estimated calendar year 2020 EPS using the publicly available calendar year 2019 and calendar year 2020 net income consensus “street estimates” for United Community and a diluted United Community share count provided by United Community management.

First Defiance and United Community Selected Companies Analysis

Using publicly available information, KBW compared the financial performance, financial condition and market performance of First Defiance and United Community to 16 selected major exchange-traded (defined as

 

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the NASDAQ, New York Stock Exchange and NYSE American) banks that were headquartered in the Midwest with total assets between $2.0 billion and $4.0 billion. Merger targets and internet banks were excluded from the selected companies.

The selected companies were as follows:

 

Bridgewater Bancshares, Inc.

  

MutualFirst Financial, Inc.

Civista Bancshares, Inc.

  

Nicolet Bankshares, Inc.

Farmers National Banc Corp.

  

Old Second Bancorp, Inc.

First Business Financial Services, Inc.

  

Southern Missouri Bancorp, Inc.

First Financial Corporation

  

Sterling Bancorp, Inc.

First Mid Bancshares, Inc.

  

Stock Yards Bancorp, Inc.

Independent Bank Corporation

  

Waterstone Financial, Inc.

Mercantile Bank Corporation

  

West Bancorporation, Inc.

To perform this analysis, KBW used profitability and other financial information for the latest 12 months (“LTM”) or most recent completed fiscal quarter (“MRQ”) available (which were the periods ended June 30, 2019) or as of the end of such periods (which was June 30, 2019) and market price information as of September 6, 2019. KBW also used EPS estimates taken from consensus “street estimates” for First Defiance, United Community and the selected companies. Where consolidated holding company level financial data for First Defiance, United Community and the selected companies was unreported, subsidiary bank level data was utilized to calculate ratios. Certain financial data prepared by KBW, as referenced in the tables presented below, may not correspond to the data presented in First Defiance’s or United Community’s historical financial statements, or the data prepared by Sandler O’Neill presented under the section “The Merger—Opinion of United Community’s Financial Advisor,” as a result of the different periods, assumptions and methods used by KBW to compute the financial data presented.

KBW’s analysis showed the following concerning the financial performance of First Defiance, United Community and the selected companies:

 

                 Selected Companies  
     First
Defiance
    United
Community
    75th
Percentile
    Average     Median     25th
Percentile
 

Core Return on Average Assets(1)

     1.53     1.47     1.68     1.50     1.48     1.29

Core Return on Average Tangible Common Equity(1)

     16.7     14.3     15.6     14.6     15.0     13.3

Net Interest Margin

     4.01     3.30     4.07     3.75     3.79     3.54

Fee Income / Revenue Ratio

     26.4     22.8     25.6     23.3     24.3     14.6

Efficiency Ratio (%)

     60.5     55.4     54.7     59.3     57.9     64.0

 

(1)

Core income excluded extraordinary items, non-recurring items (including deferred tax asset (“DTA”) revaluations), gains/losses on sale of securities and amortization of intangibles as calculated by S&P Global Market Intelligence.

 

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KBW’s analysis also showed the following concerning the financial condition of First Defiance, United Community and the selected companies:

 

                 Selected Companies  
     First
Defiance
    United
Community
    75th
Percentile
    Average     Median     25th
Percentile
 

Tangible Common Equity / Tangible Assets

     9.6     10.3     10.8     10.7     10.0     9.1

Total Capital Ratio

     12.8     14.2     16.3     15.1     13.4     12.8

Loans / Deposits

     97.9     99.6     89.5     98.5     95.5     108.6

Loan Loss Reserves / Loans

     1.10     0.87     1.03     0.92     0.93     0.81

Nonperforming Assets(1) / Loans and OREO

     0.97     1.18     0.39     0.85     0.67     1.15

Net Charge-offs / Average Loans(2)

     (0.08 %)      (0.02 %)      (0.00 %)      0.03     0.01     0.07

 

(1)

Nonperforming Assets included nonaccrual loans, accruing troubled debt restructured loans, loans 90+ days past due, and other real estate owned as defined by S&P Global Market Intelligence.

(2)

For the most recent quarter, annualized.

In addition, KBW’s analysis showed the following concerning the market performance of First Defiance, United Community and the selected companies:

 

                 Selected Companies  
     First
Defiance
    United
Community
    75th
Percentile
    Average     Median     25th
Percentile
 

One-Year Price Change

     (17.1 %)      (6.9 %)      (7.8 %)      (13.2 %)      (14.6 %)      (21.7 %) 

Year-to-date Price Change

     7.4     8.6     14.0     8.1     7.2     (0.2 %) 

Price / Tangible Book Value

     1.70     1.57     1.54     1.48     1.43     1.35

Price / LTM Core EPS(1)

     11.3     11.7     12.2     11.2     10.9     10.1

Price / 2019 Estimated EPS(2)

     11.1     11.6     12.2     11.1     11.0     10.0

Price / 2020 Estimated EPS(2)

     11.3     10.8     12.0     11.0     10.6     9.9

Dividend Yield

     2.9     2.9     2.9     2.1     2.6     0.7

MRQ Dividend Payout Ratio(3)

     31.1     31.8     35.2     23.3     26.4     6.9

 

(1)

Core income excluded extraordinary items, non-recurring items (including DTA revaluations), gains/losses on sale of securities and amortization of intangibles as calculated by S&P Global Market Intelligence.

(2)

In the case of First Defiance and United Community, EPS estimates were based on net income consensus “street estimates” for First Defiance and United Community and diluted share counts for First Defiance and United Community provided by the respective management teams of First Defiance and United Community.

(3)

In the case of two of the selected companies, the dividend payout ratios were adjusted to reflect the semi-annual nature of dividend payments.

No company used as a comparison in the above selected companies analysis is identical to First Defiance or United Community. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies involved.

 

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Selected Transactions Analysis

KBW reviewed publicly available information related to 17 selected U.S. whole bank and non-mutual thrift transactions announced since June 30, 2015 with announced deal values between $100 million and $2.0 billion and where the accounting target’s shareholders were to own at least 35% of the pro forma entity. Terminated transactions were excluded from the selected transactions. The selected transactions were as follows:

 

Acquiror

  

Acquired Company

WSFS Financial Corporation

  

Beneficial Bancorp, Inc.

Veritex Holdings, Inc.

  

Green Bancorp, Inc.

Cadence Bancorporation

  

State Bank Financial Corporation

Allegiance Bancshares, Inc.

  

Post Oak Bancshares, Inc.

First Choice Bancorp

  

Pacific Commerce Bancorp

Howard Bancorp, Inc.

  

1st Mariner Bank

First Financial Bancorp.

  

MainSource Financial Group, Inc.

OceanFirst Financial Corp.

  

Sun Bancorp, Inc.

Pinnacle Financial Partners, Inc.

  

BNC Bancorp

Southern National Bancorp of Virginia, Inc.

  

Eastern Virginia Bankshares, Inc.

Access National Corporation

  

Middleburg Financial Corporation

Bar Harbor Bankshares

  

Lake Sunapee Bank Group

Westfield Financial, Inc.

  

Chicopee Bancorp, Inc.

Chemical Financial Corporation

  

Talmer Bancorp, Inc.

BBCN Bancorp, Inc.

  

Wilshire Bancorp, Inc.

Yadkin Financial Corporation

  

NewBridge Bancorp

Nicolet Bankshares, Inc.

  

Baylake Corp.

For each selected transaction, KBW derived the following implied transaction statistics, in each case based on the transaction consideration value paid for the acquired company and using financial data based on the acquired company’s then latest publicly available financial statements prior to the announcement of the acquisition:

 

   

Price per common share to tangible book value per share of the acquired company (in the case of selected transactions involving a private acquired company, this transaction statistic was calculated as total transaction consideration divided by total tangible common equity);

 

   

Price per LTM EPS of the acquired company (in the case of selected transactions involving a private acquired company, this transaction statistic was calculated as total transaction consideration divided by LTM net income);

 

   

Price per current calendar year estimated EPS of the acquired company in the 12 selected transactions in which consensus “street estimates” for the acquired company were available at announcement; and

 

   

Tangible equity premium to core deposits (total deposits less time deposits greater than $100,000) of the acquired company, referred to as core deposit premium.

KBW also reviewed the price per share paid for the acquired company for the 15 selected transactions in which the acquired company was publicly traded as a premium/discount to the closing price of the acquired company one day prior to the announcement of the respective transaction (expressed as a percentage and referred to as the one-day market premium). The above transaction statistics for the selected transactions were compared with the corresponding transaction statistics for the proposed merger based on the implied transaction value for the proposed merger of $9.78 per share of United Community common stock, or $473.3 million in the aggregate, and using historical financial information for United Community as of or for the 12 months ended June 30, 2019, the estimated calendar year 2019 EPS for United Community (calculated using the calendar year 2019 net income consensus “street estimate” and a diluted United Community share count provided by United Community management) and the closing price of United Community common stock on September 6, 2019.

 

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The results of the analysis are set forth in the following table (excluding the impact of the LTM EPS multiples for two of the selected transactions and the current calendar year estimated EPS multiple for one of the selected transactions, which multiples were not considered meaningful because they were greater than 40.0x):

 

           Selected Companies  
     First Defiance /
United
Community
    75th
Percentile
    Average     Median     25th
Percentile
 

Price / Tangible Book Value

     1.60     2.27     1.95     1.90     1.58

Price / LTM EPS

     11.9     22.6     21.6     20.0     17.9

Price / Current Calendar Year EPS

     11.8     21.3     19.8     16.8     16.0

Core Deposit Premium

     9.1     19.8     14.3     13.8     9.6

One-Day Market Premium

     1.7     19.0     13.8     15.3     8.2

No target company or transaction used as a comparison in the above selected transaction analysis is identical to United Community or the proposed merger. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies involved.

Relative Contribution Analysis

KBW analyzed the relative standalone contribution of First Defiance and United Community to various pro forma balance sheet and income statement items. This analysis did not include purchase accounting adjustments or cost savings. To perform this analysis, KBW used (i) historical balance sheet data for First Defiance and United Community as of or for the 12 months ended June 30, 2019, and (ii) publicly available consensus “street estimates” of First Defiance and United Community. The results of KBW’s analysis are set forth in the following table, which also compares the results of KBW’s analysis with the implied pro forma ownership percentages of First Defiance and United Community shareholders in the pro forma combined entity based on the 0.3715x exchange ratio in the proposed merger:

 

     First Defiance
as a % of
Total
    United Community
as a % of
Total
 

Ownership

    

Pro Forma Ownership at 0.3715x Merger Exchange RaRatio

     52.5     47.5

Balance Sheet

    

Total Assets

     53     47

Gross Loans

     54     46

Total Deposits

     54     46

Tangible Common Equity

     51     49

Income Statement

    

LTM Core Net Income

     54     46

2019 Estimated Net Income

     54     46

2020 Estimated Net Income

     52     48

Pro Forma Financial Impact Analysis

KBW performed a pro forma financial impact analysis that combined projected income statement and balance sheet information of First Defiance and United Community. Using (i) closing balance sheet estimates as of December 31, 2019 for First Defiance and United Community taken from publicly available consensus “street estimates” of First Defiance and United Community, (ii) publicly available consensus net income “street estimates” of First Defiance and United Community and assumed First Defiance and United Community long-term net income growth rates provided by First Defiance management and United Community management,

 

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respectively, and (iii) pro forma assumptions (including, without limitation, the cost savings and related expenses expected to result from the merger, certain accounting adjustments and restructuring charges) provided by First Defiance management, KBW analyzed the estimated financial impact of the merger on certain projected financial results. This analysis indicated that the merger could be accretive to First Defiance’s estimated EPS in 2020 and 2021 and dilutive to First Defiance’s estimated tangible book value per share at closing as of December 31, 2019. Furthermore, the analysis indicated that, pro forma for the merger, each of First Defiance’s tangible common equity to tangible assets ratio, leverage ratio, and total risk-based capital ratio at closing as of December 31, 2019 could be lower and each of First Defiance’s Common Equity Tier 1 Ratio and Tier 1 Capital Ratio at closing as of December 31, 2019 could be higher. For all of the above analysis, the actual results achieved by First Defiance following the merger may vary from the projected results, and the variations may be material.

First Defiance Discounted Cash Flow Analysis

KBW performed a discounted cash flow analysis to estimate a range for the implied equity value of First Defiance. In this analysis, KBW used publicly available consensus “street estimates” of First Defiance and assumed long term growth rates for First Defiance provided by First Defiance management, and KBW assumed discount rates ranging from 8.0% to 12.0%. The range of values was derived by adding (i) the present value of the estimated excess cash flows that First Defiance could generate over the five year period from December 31, 2019 through December 31, 2024 as a standalone company and (ii) the present value of First Defiance’s implied terminal value at the end of such period. KBW assumed that First Defiance would maintain a tangible common equity to tangible assets ratio of 8.0% and would retain sufficient earnings to maintain that level. In calculating the terminal value of First Defiance, KBW applied a range of 9.0x to 13.0x First Defiance’s estimated 2025 earnings. This discounted cash flow analysis resulted in a range of implied values per share of First Defiance common stock of $25.84 per share to $38.66 per share.

The discounted cash flow analysis is a widely used valuation methodology, but the results of such methodology are highly dependent on the assumptions that must be made, including asset and earnings growth rates, terminal values, dividend payout rates and discount rates. The analysis did not purport to be indicative of the actual values or expected values of First Defiance.

United Community Discounted Cash Flow Analysis

KBW performed a discounted cash flow analysis to estimate a range for the implied equity value of United Community. In this analysis, KBW used publicly available consensus “street estimates” of United Community and assumed long term growth rates for United Community provided by United Community management, and KBW assumed discount rates ranging from 8.0% to 12.0%. The range of values was derived by adding (i) the present value of the estimated excess cash flows that United Community could generate over the five year period from December 31, 2019 through December 31, 2024 as a standalone company, and (ii) the present value of United Community’s implied terminal value at the end of such period. KBW assumed that United Community would maintain a tangible common equity to tangible assets ratio of 8.0% and would retain sufficient earnings to maintain that level. In calculating the terminal value of United Community, KBW applied a range of 9.0x to 13.0x United Community’s estimated 2025 earnings. This discounted cash flow analysis resulted in a range of implied values per share of United Community common stock of $10.10 to $14.99.

The discounted cash flow analysis is a widely used valuation methodology, but the results of such methodology are highly dependent on the assumptions that must be made, including asset and earnings growth rates, terminal values, dividend payout rates, and discount rates. The analysis did not purport to be indicative of the actual values or expected values of United Community.

Pro Forma Combined Discounted Cash Flow Analysis

KBW performed a discounted cash flow analysis to estimate an illustrative range for the implied equity value of the pro forma combined entity, taking into account the cost savings and related expenses expected to

 

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result from the merger as well as certain accounting adjustments and restructuring charges assumed with respect thereto. In this analysis, KBW used publicly available consensus “street estimates” of First Defiance and United Community and assumed First Defiance and United Community long-term growth rates provided by First Defiance management and United Community management, respectively, and estimated cost savings and related expenses and accounting adjustments and restructuring charges provided by First Defiance management, and KBW assumed discount rates ranging from 8.0% to 12.0%. The range of values was derived by adding (i) the present value of the estimated excess cash flows that the pro forma combined entity could generate over the 5 year period from December 31, 2019 through December 31, 2024 and (ii) the present value of the pro forma combined entity’s implied terminal value at the end of such period, in each case applying estimated cost savings and related expenses and accounting adjustments and restructuring charges. KBW assumed that the pro forma combined entity would maintain a tangible common equity to tangible assets ratio of 8.00% and would retain sufficient earnings to maintain that level. In calculating the terminal value of the pro forma combined entity, KBW applied a range of 9.0x to 13.0x the pro forma combined entity’s estimated 2025 earnings. This discounted cash flow analysis resulted in an illustrative range of implied values per share of the pro forma combined entity’s common stock of $28.69 to $43.09.

The discounted cash flow analysis is a widely used valuation methodology, but the results of such methodology are highly dependent on the assumptions that must be made, including asset and earnings growth rates, terminal values, dividend payout rates, and discount rates. The above analysis did not purport to be indicative of the actual values or expected values of the pro forma combined entity.

Miscellaneous

KBW acted as financial advisor to First Defiance in connection with the proposed merger and did not act as an advisor to or agent of any other person. As part of its investment banking business, KBW is continually engaged in the valuation of bank and bank holding company securities in connection with acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for various other purposes. As specialists in the securities of banking companies, KBW has experience in, and knowledge of, the valuation of banking enterprises. Further to certain existing sales and trading relationships of certain KBW broker-dealer affiliates with United Community, and otherwise in the ordinary course of KBW and its affiliates’ broker-dealer businesses, KBW and its affiliates may from time to time purchase securities from, and sell securities to, First Defiance and United Community. In addition, as a market maker in securities, KBW and its affiliates may from time to time have a long or short position in, and buy or sell, debt or equity securities of First Defiance or United Community for its and their own respective accounts and for the accounts of its and their respective customers and clients. KBW employees may also from time to time maintain individual positions in First Defiance common stock. As First Defiance was informed by KBW prior to the date of KBW’s opinion, such positions include an individual position in shares of First Defiance common stock held by a senior member of the KBW advisory team providing services to First Defiance in connection with the proposed merger.

Pursuant to the KBW engagement agreement, First Defiance has agreed to pay KBW a total cash fee equal to 0.75% of the aggregate merger consideration, $250,000 of which became payable to KBW with the rendering of KBW’s opinion and the balance of which is contingent upon the consummation of the merger. First Defiance also has agreed to reimburse KBW for reasonable out-of-pocket expenses and disbursements incurred in connection with its engagement and to indemnify KBW against certain liabilities relating to or arising out of KBW’s engagement or KBW’s role in connection therewith. Other than in connection with the present engagement, in the two years preceding the date of KBW’s opinion, KBW did not provide investment banking and financial advisory services to First Defiance. In the two years preceding the date of KBW’s opinion, KBW did not provide investment banking and financial advisory services to United Community. KBW may in the future provide investment banking and financial advisory services to First Defiance or United Community and receive compensation for such services.

 

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United Community’s Reasons for the Merger; Board Recommendation

In reaching its decision to adopt and approve the merger agreement, the other transaction agreements and the transactions contemplated thereby, including the merger, and to recommend that its shareholders adopt the merger agreement, the United Community board of directors evaluated the merger in consultation with the United Community management, as well as United Community’s financial and legal advisors, and considered a number of factors, including the following material factors:

 

   

the United Community board’s understanding of the current and prospective environment in which United Community and First Defiance operate, including national and local economic conditions, the interest rate environment, the competitive and regulatory environments for financial institutions generally and the likely effect of these factors on United Community both with and without the merger;

 

   

the United Community board’s familiarity with and understanding of United Community’s business, results of operations, asset quality, financial and market position and expectations concerning United Community’s future earnings and prospects;

 

   

information and discussion regarding First Defiance’s business, results of operations, financial and market position and future earnings and prospects and the results of United Community’s due diligence investigation;

 

   

the United Community board’s evaluation, with the assistance of management and its financial and legal advisors, of strategic alternatives available to United Community for enhancing value over the long term and the potential risks, rewards and uncertainties associated with such alternatives, and the United Community board’s belief that the proposed merger with First Defiance was the best option available to United Community and its shareholders;

 

   

the strategic benefits of the transaction and the synergies and cost savings expected to be achieved by the combined company upon completion of the merger, including the following:

 

   

the creation of a community bank based in Ohio with over $6.0 billion in assets and operations throughout Ohio, Michigan, Indiana, Pennsylvania and West Virginia and the belief that this positions the combined company as the premier Midwest franchise;

 

   

the increased scale resulting from the merger and the diversification of the combined company’s balance sheet and complementary strengths of both institution’s employees, technology, processes and businesses and the expectation that these factors will enhance growth, profitability and performance;

 

   

the material earnings per share accretion that is estimated to result from the merger with fully-phased in cost savings; and

 

   

the complementary nature of the companies’ markets, credit culture and relationship banking approach.

 

   

the fact that the merger consideration is all stock with a fixed exchange ratio offers United Community shareholders the opportunity to fully participate in the future growth and opportunities of the combined company, and the fact that the receipt of the merger consideration (other than any cash in lieu of fractional shares) will generally be tax-free to United Community’s shareholders based on the expected tax treatment of the merger as a “reorganization” for U.S. federal income tax purposes, as further described under “The Merger—Material United States Federal Income Tax Consequences”;

 

   

the corporate governance provisions of the merger agreement, including the participation of six of United Community’s directors on the board of directors of the combined company and the significant leadership positions of United Community senior management in the combined company, which the

 

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board of directors of United Community believes would assist in integrating and operating the combined company post-closing and enhance the likelihood of realizing the strategic benefits that United Community expects to result from the merger and reduce execution risk;

 

   

the financial presentation of United Community’s financial advisor, Sandler O’Neill, to the United Community board on September 8, 2019 and its opinion delivered to the United Community board, to the effect that as of such date and based on and subject to certain assumptions, procedures, qualifications and limitations, the exchange ratio was fair to holders of United Community common stock from a financial point of view, as further described under “The Merger—Opinion of United Community’s Financial Advisor”;

 

   

the historical performance of each of United Community’s common stock and First Defiance’s common stock;

 

   

the implied value of the merger consideration of $9.78 for each share of United Community common stock represented approximately a 1.7% premium over the closing price of United Community common stock on September 6, 2019 (the last trading day prior to the board meeting to approve the transaction);

 

   

the regulatory and other approvals required in connection with the merger, consideration of the relevant factors assessed by the regulators for the approvals and the parties’ evaluations of those factors, and the expectation that such approvals could be received in a reasonably timely manner and without the imposition of unacceptable conditions;

 

   

the terms and conditions of the merger agreement, including, among other things, the expected tax treatment of the merger as a “reorganization” for United States federal income tax purposes, each company’s ability to take certain actions in response to an unsolicited bona fide written acquisition proposal under specific circumstances, the conditions to closing, the possibility that each company would be required to pay a termination fee under certain circumstances, the fact that each company’s shareholders will have an opportunity to vote on the merger and that their approval is a condition to completion of the merger, the terms of the merger agreement that restrict each company’s ability to solicit alternative transactions, and the provisions of the merger agreement generally requiring each company to conduct its business in the ordinary course and the other restrictions on the conduct of each company’s business prior to completion of the merger;

 

   

with the merger consideration consisting of United Community shares at a fixed exchange ratio, the potential risk for the implied value of the merger consideration to be adversely affected by a decrease in the trading price of First Defiance common stock;

 

   

the risk that the merger may not be consummated or that the closing may be unduly delayed, including as a result of factors outside either party’s control;

 

   

the potential risk of diverting management attention and resources from the operation of United Community’s business to the merger, and the possibility of employee attrition or adverse effects on client and business relationships as a result of the announcement and pendency of the merger;

 

   

the potential risks and costs associated with successfully integrating United Community’s business, operations and workforce with those of First Defiance, including the risk of not realizing all of the anticipated benefits of the merger or not realizing them in the expected timeframe; and

 

   

the other risks described under the sections entitled “Risk Factors” and “Forward-Looking Statements”.

In considering the recommendation of the United Community board, you should be aware that certain directors and executive officers of United Community may have interests in the merger that are different from, or in addition to, interests of shareholders of United Community generally and may create potential conflicts of interest. The United Community board was aware of these interests and considered them when evaluating and negotiating the merger agreement, the merger and the other transactions contemplated by the merger agreement,

 

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and in recommending to United Community’s shareholders that they vote in favor of the merger proposal. See “The Merger—Interests of United Community Directors and Executive Officers in the Merger”.

This discussion of the information and factors considered by the United Community board includes the material factors considered by the United Community board, but it is not intended to be exhaustive and may not include all the factors considered by the United Community board. In view of the wide variety of factors considered, and the complexity of these matters, the United Community board did not quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination to adopt and approve the merger agreement, the other transaction agreements and the transactions contemplated thereby, including the merger, and to recommend that its shareholders adopt the merger agreement. Rather, the United Community board viewed its position and recommendation as being based on the totality of the information presented to and factors considered by it, including discussions with, and questioning of, United Community’s management and its financial and legal advisors. In addition, individual members of the United Community board may have given differing weights to different factors. It should be noted that this explanation of the reasoning of the United Community board and certain information presented in this section is forward-looking in nature and, therefore, that information should be read in light of the factors discussed in the section entitled “Forward-Looking Statements”.

For the reasons set forth above, the United Community board of directors unanimously recommends that the United Community shareholders vote “FOR” the United Community merger proposal.

Opinion of United Community’s Financial Advisor

United Community retained Sandler O’Neill to act as financial advisor to its board of directors in connection with United Community’s consideration of a possible business combination with First Defiance. United Community selected Sandler O’Neill to act as its financial advisor because Sandler O’Neill is a nationally recognized investment banking firm whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, Sandler O’Neill is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.

Sandler O’Neill acted as financial advisor to United Community’s board of directors in connection with the proposed merger and participated in certain of the negotiations leading to the execution of the merger agreement. At the September 8, 2019 meeting at which United Community’s board of directors considered the merger and the merger agreement, Sandler O’Neill delivered to the board of directors its oral opinion, which was subsequently confirmed in writing on September 8, 2019 to the effect that, as of such date, the exchange ratio was fair to the holders of United Community’s common stock from a financial point of view. The full text of Sandler O’Neill’s opinion is attached as Annex C to this joint proxy statement/prospectus. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Sandler O’Neill in rendering its opinion. The description of the opinion set forth below is qualified in its entirety by reference to the full text of the opinion. Holders of United Community common stock are urged to read the entire opinion carefully in connection with their consideration of the proposed merger.

Sandler O’Neill’s opinion was directed to the board of directors of United Community in connection with its consideration of the merger and the merger agreement and does not constitute a recommendation to any shareholder of United Community as to how any such shareholder should vote at any meeting of shareholders called to consider and vote upon the approval of the merger and the merger agreement. Sandler O’Neill’s opinion was directed only to the fairness, from a financial point of view, of the exchange ratio to the holders of United Community common stock and did not address the underlying business decision of United Community to engage in the merger, the form or structure of the merger or any other transactions contemplated in the merger agreement, the relative merits of the merger as compared to any other alternative transactions or business strategies that might exist for United Community or the effect of any other transaction in which United

 

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Community might engage. Sandler O’Neill also did not express any opinion as to the fairness of the amount or nature of the compensation to be received in the merger by any officer, director or employee of United Community or First Defiance, or any class of such persons, if any, relative to the compensation to be received in the merger by any other shareholder. Sandler O’Neill’s opinion was approved by Sandler O’Neill’s fairness opinion committee.

In connection with its opinion, Sandler O’Neill reviewed and considered, among other things:

 

   

an execution copy of the merger agreement, distributed on September 7, 2019;

 

   

certain publicly available financial statements and other historical financial information of United Community and its banking subsidiary that Sandler O’Neill deemed relevant;

 

   

certain publicly available financial statements and other historical financial information of First Defiance that Sandler O’Neill deemed relevant;

 

   

publicly available mean analyst net income, earnings per share and dividends per share estimates for United Community for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of United Community, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of United Community;

 

   

publicly available mean analyst net income, earnings per share and dividends per share estimates for First Defiance for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of First Defiance, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of First Defiance;

 

   

the pro forma financial impact of the merger on First Defiance based on certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as provided by the senior management of First Defiance and confirmed by the senior management of United Community;

 

   

the relative contribution of assets, liabilities, equity and earnings of United Community and First Defiance to the combined entity;

 

   

the publicly reported historical price and trading activity for United Community common stock and First Defiance common stock, including a comparison of certain stock market information for United Community common stock and First Defiance common stock and certain stock indices as well as publicly available information for certain other similar companies, the securities of which are publicly traded;

 

   

a comparison of certain financial information for United Community and First Defiance with similar financial institutions for which information is publicly available;

 

   

governance terms of certain recent merger of equals transactions in the bank and thrift industry (on a nationwide basis), to the extent publicly available;

 

   

the current market environment generally and the banking environment in particular; and

 

   

such other information, financial studies, analyses and investigations and financial, economic and market criteria as Sandler O’Neill considered relevant.

Sandler O’Neill also discussed with certain members of the senior management of United Community and its representatives the business, financial condition, results of operations and prospects of United Community and held similar discussions with certain members of the senior management of First Defiance and its representatives regarding the business, financial condition, results of operations and prospects of First Defiance.

In performing its review, Sandler O’Neill relied upon the accuracy and completeness of all of the financial and other information that was available to and reviewed by Sandler O’Neill from public sources, that was

 

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provided to Sandler O’Neill by United Community or First Defiance or their respective representatives, or that was otherwise reviewed by Sandler O’Neill, and Sandler O’Neill assumed such accuracy and completeness for purposes of rendering its opinion without any independent verification or investigation. Sandler O’Neill relied on the assurances of the respective managements of United Community and First Defiance that they were not aware of any facts or circumstances that would have made any of such information inaccurate or misleading. Sandler O’Neill was not asked to and did not undertake an independent verification of any of such information and did not assume any responsibility or liability for the accuracy or completeness thereof. Sandler O’Neill did not make an independent evaluation or perform an appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of United Community or First Defiance or any of their respective subsidiaries, nor was Sandler O’Neill furnished with any such evaluations or appraisals. Sandler O’Neill rendered no opinion or evaluation on the collectability of any assets or the future performance of any loans of United Community or First Defiance or any of their respective subsidiaries. Sandler O’Neill did not make an independent evaluation of the adequacy of the allowance for loan losses of United Community, First Defiance, or any of their respective subsidiaries, or of the combined entity after the Merger, and Sandler O’Neill did not review any individual credit files relating to United Community or First Defiance or any of their respective subsidiaries. Sandler O’Neill assumed, with United Community’s consent, that the respective allowances for loan losses for United Community, First Defiance and their respective subsidiaries were adequate to cover such losses and would be adequate on a pro forma basis for the combined entity.

In preparing its analyses, Sandler O’Neill used publicly available mean analyst net income, earnings per share and dividends per share estimates for United Community for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of United Community, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of United Community. In addition, Sandler O’Neill used publicly available mean analyst net income, earnings per share and dividends per share estimates for First Defiance for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of First Defiance, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of First Defiance. Sandler O’Neill also received and used in its pro forma analyses certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as provided by the senior management of First Defiance and confirmed by the senior management of United Community. With respect to the foregoing information, the respective senior managements of United Community and First Defiance confirmed to Sandler O’Neill that such information reflected (or, in the case of the publicly available analyst estimates referred to above, were consistent with) the best currently available estimates and judgments of those respective managements as to the future financial performance of United Community and First Defiance, respectively, and the other matters covered thereby, and Sandler O’Neill assumed that the future financial performance reflected in such information would be achieved. Sandler O’Neill did not express an opinion as to such information, or the assumptions on which such information was based. Sandler O’Neill assumed that there had been no material change in the respective assets, financial condition, results of operations, business or prospects of United Community, First Defiance or any of their respective subsidiaries since the date of the most recent financial statements made available to Sandler O’Neill. Sandler O’Neill assumed in all respects material to its analyses that United Community and First Defiance would remain as going concerns for all periods relevant to its analyses.

Sandler O’Neill also assumed, with United Community’s consent, that (i) each of the parties to the merger agreement would comply in all material respects with all material terms and conditions of the merger agreement and all related agreements, that all of the representations and warranties contained in such agreements were true and correct in all material respects, that each of the parties to such agreements would perform in all material respects all of the covenants and other obligations required to be performed by such party under such agreements and that the conditions precedent in such agreements were not and would not be waived, (ii) in the course of obtaining the necessary regulatory or third party approvals, consents and releases with respect to the merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on United

 

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Community, First Defiance, the merger or any related transactions, and (iii) the merger and any related transactions would be consummated in accordance with the terms of the merger agreement without any waiver, modification or amendment of any material term, condition or agreement thereof and in compliance with all applicable laws and other requirements. Finally, with United Community’s consent, Sandler O’Neill relied upon the advice that United Community received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the merger and the other transactions contemplated by the agreement. Sandler O’Neill expressed no opinion as to any such matters.

Sandler O’Neill’s opinion was necessarily based on financial, economic, regulatory, market and other conditions as in effect on, and the information made available to Sandler O’Neill as of, the date of its opinion. Events occurring after the date thereof could materially affect Sandler O’Neill’s opinion. Sandler O’Neill did not undertake to update, revise, reaffirm or withdraw its opinion or otherwise comment upon events occurring after the date thereof. Sandler O’Neill expressed no opinion as to the trading value of United Community common stock or First Defiance common stock at any time or what the value of First Defiance common stock would be once it is actually received by the holders of United Community common stock.

In rendering its opinion, Sandler O’Neill performed a variety of financial analyses. The summary below is not a complete description of all the analyses underlying Sandler O’Neill’s opinion or the presentation made by Sandler O’Neill to United Community’s board of directors, but is a summary of the material analyses performed and presented by Sandler O’Neill. The summary includes information presented in tabular format. In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Sandler O’Neill believes that its analyses must be considered as a whole and that selecting portions of the factors and analyses to be considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying its opinion. Also, no company included in Sandler O’Neill’s comparative analyses described below is identical to United Community or First Defiance and no transaction is identical to the merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or transaction values, as the case may be, of United Community and First Defiance and the companies to which they were compared. In arriving at its opinion, Sandler O’Neill did not attribute any particular weight to any analysis or factor that it considered. Rather, Sandler O’Neill made qualitative judgments as to the significance and relevance of each analysis and factor. Sandler O’Neill did not form an opinion as to whether any individual analysis or factor (positive or negative) considered in isolation supported or failed to support its opinion, rather, Sandler O’Neill made its determination as to the fairness of the exchange ratio to the holders of United Community common stock on the basis of its experience and professional judgment after considering the results of all its analyses taken as a whole.

In performing its analyses, Sandler O’Neill also made numerous assumptions with respect to industry performance, business and economic conditions and various other matters, many of which cannot be predicted and are beyond the control of United Community, First Defiance, and Sandler O’Neill. The analyses performed by Sandler O’Neill are not necessarily indicative of actual values or future results, both of which may be significantly more or less favorable than suggested by such analyses. Sandler O’Neill prepared its analyses solely for purposes of rendering its opinion and provided such analyses to United Community’s board of directors at its September 8, 2019 meeting. Estimates on the values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. Accordingly, Sandler O’Neill’s analyses do not necessarily reflect the value of United Community common stock or First Defiance common stock or the prices at which United Community or First Defiance common stock may be sold at any time. The analyses of

 

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Sandler O’Neill and its opinion were among a number of factors taken into consideration by United Community’s board of directors in making its determination to approve the merger agreement and the analyses described below should not be viewed as determinative of the decision of United Community’s board of directors with respect to the fairness of the exchange ratio.

Summary of Proposed Merger Consideration and Implied Transaction Metrics

Sandler O’Neill reviewed the financial terms of the proposed merger. Pursuant to the terms of the merger agreement, at the effective time of the merger, each share of United Community common stock issued and outstanding immediately prior to the effective time of the merger, except for certain shares as set forth in the merger agreement, shall be converted into the right to receive 0.3715 shares of First Defiance common stock, par value $0.01 per share. Based on the closing price per share of First Defiance common stock on September 6, 2019 of $26.32 and based upon 48,085,839 United Community common shares outstanding, 233,641 United Community performance stock units, and 163,832 United Community options with a weighted average exercise price of $4.63, Sandler O’Neill calculated an aggregate implied transaction value of $473.3 million. Based upon financial information for United Community as of or for the last twelve months (“LTM”) ended June 30, 2019, publicly available mean analyst EPS estimates for the year ending December 31, 2019 and December 31, 2020, and the closing price of United Community’s common stock on September 6, 2019, Sandler O’Neill calculated the following implied transaction metrics:

 

Transaction Price / United Community June 30, 2019 Book Value per Share:

     148

Transaction Price / United Community June 30, 2019 Tangible Book Value per Share:

     160

Transaction Price / United Community LTM Earnings per Share:

     12.5x  

Transaction Price / United Community 2019E Mean Analyst Earnings per Share(1):

     11.7x  

Transaction Price / United Community 2020E Mean Analyst Earnings per Share(1):

     11.0x  

Tangible Book Premium / Core Deposits(2):

     9.1

Tangible Book Premium / Core Deposits(3):

     8.2

Market Premium as of 9/6/19:

     1.7

 

(1)

Based on publicly available mean analyst earnings per share estimates

(2)

Core deposits defined as total deposits less time deposits with balances greater than $100,000

(3)

Core deposits defined as total deposits less time deposits with balances greater than $250,000

 

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Contribution Analysis

Sandler O’Neill reviewed the relative contribution of United Community and First Defiance to the pro forma balance sheet and income of the combined entity based upon financial information for United Community and First Defiance as of or for the LTM ended June 30, 2019. This analysis excluded mark-to-market and other transaction-related adjustments. The results of this analysis are set forth in the following table, which also compares the results of this analysis with the implied pro forma ownership percentages of United Community and First Defiance shareholders in the combined company:

 

     United
Community
     First Defiance  
$ values in thousands                            

Balance Sheet as of June 30, 2019:

           

Net Loans

   $ 2,327        47.1    $ 2,610        52.9

Total Assets

   $ 2,869        46.7    $ 3,278        53.3

Total Deposits

   $ 2,259        45.7    $ 2,681        54.3

Total Common Equity

   $ 318        43.8    $ 407        56.2

Tangible Common Equity

   $ 294        49.1    $ 305        50.9

Earnings:

           

LTM Net Income

   $ 38.2        44.8    $ 47.1        55.2

2019E Mean Analyst Net Income(1)

   $ 40.4        46.1    $ 47.3        53.9

2020E Mean Analyst Net Income(1)

   $ 42.9        48.1    $ 46.3        51.9

Market Valuation:

           

Market Capitalization as of 9/6/19

   $ 462.1        47.1    $ 519.2        52.9

Market Capitalization Based on 5-Day VWAPs as of 9/6/19

   $ 464.0        47.4    $ 515.8        52.6

Market Capitalization Based on 10-Day VWAPs as of 9/6/19

   $ 463.1        47.3    $ 515.7        52.7

Proposed Pro Forma Ownership

        47.5         52.5

 

(1)

Based on publicly available mean analyst earnings per share estimates

Stock Trading History

Sandler O’Neill reviewed the publicly available historical reported trading prices of United Community common stock and First Defiance common stock for the one-year and three-year periods ended September 6, 2019. Sandler O’Neill then compared the relationship between the movements in the price of United Community common stock and First Defiance common stock, respectively, to movements in their respective peer groups (as described below) as well as certain stock indices.

United Community’s One-Year Stock Performance

 

     Beginning Value
September 6, 2018
    Ending Value
September 6, 2019
 

United Community

     100     93.1

United Community Peer Group

     100     85.2

S&P 500 Index

     100     103.5

NASDAQ Bank Index

     100     81.0

 

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United Community’s Three-Year Stock Performance

 

     Beginning Value
September 6, 2016
    Ending Value
September 6, 2019
 

United Community

     100     145.4

United Community Peer Group

     100     121.9

S&P 500 Index

     100     136.2

NASDAQ Bank Index

     100     115.5

First Defiance’s One-Year Stock Performance

 

     Beginning Value
September 6, 2018
    Ending Value
September 6, 2019
 

First Defiance

     100     82.9

First Defiance Peer Group

     100     85.6

S&P 500 Index

     100     103.5

NASDAQ Bank Index

     100     81.0

First Defiance’s Three-Year Stock Performance

 

     Beginning Value
September 6, 2016
    Ending Value
September 6, 2019
 

First Defiance

     100     118.1

First Defiance Peer Group

     100     123.0

S&P 500 Index

     100     136.2

NASDAQ Bank Index

     100     115.5

Comparable Company Analyses

Sandler O’Neill used publicly available information to compare selected financial information for United Community with a group of financial institutions selected by Sandler O’Neill (the “United Community Peer Group”). The United Community Peer Group included public, major exchange traded (NASDAQ, NYSE, NYSEAM) banks and thrifts, headquartered in the Midwest region with total assets between $1.0 billion and $5.0 billion and ROAA greater than 1.25% as of or for the LTM ended June 30, 2019, but excluded targets of announced merger transactions and mutual holding companies. The United Community Peer Group consisted of the following companies:

 

Bank First Corporation

  

Independent Bank Corporation

Bridgewater Bancshares, Inc.

  

Lakeland Financial Corporation

Community Trust Bancorp, Inc.

  

Macatawa Bank Corporation

Farmers & Merchants Bancorp, Inc.

  

Mercantile Bank Corporation

Farmers National Banc Corp.

  

Nicolet Bankshares, Inc.

First Defiance Financial Corp.

  

Old Second Bancorp, Inc.

First Financial Corporation

  

Southern Missouri Bancorp, Inc.

First Savings Financial Group

  

Sterling Bancorp, Inc.

German American Bancorp, Inc.

  

Stock Yards Bancorp, Inc.

Great Southern Bancorp, Inc.

  

Waterstone Financial, Inc.

The analysis compared publicly available financial information for United Community with corresponding data for the United Community Peer Group as of or for the LTM ended June 30, 2019 with pricing data as of September 6, 2019. The table below sets forth the data for United Community and the median, mean, low and high data for the United Community Peer Group. Certain financial data prepared by Sandler O’Neill, as

 

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referenced in the table presented below, may not correspond to the data presented in United Community’s historical financial statements, as a result of the different periods, assumptions and methods used by Sander O’Neill to compute the financial data presented.

United Community Comparable Company Analysis

 

     United
Community
     United
Community
Peer Group
Median
     United
Community
Peer Group
Mean
     United
Community
Peer Group
Low
     United
Community
Peer Group
High
 

Total assets ($mm)

     2,869        3,060        2,964        1,229        4,976  

Loans / Deposits (%)

     99.6        92.2        96.1        80.9        129.9  

Nonperforming assets(1) / Total assets (%)

     0.97        0.50        0.73        0.09        2.20  

Tangible common equity/Tangible assets (%)

     10.32        10.31        10.94        8.72        19.17  

Tier 1 risk-based capital ratio (%)

     13.23        12.43        13.94        10.49        25.29  

Total risk-based capital ratio (%)

     14.17        13.72        15.36        11.99        26.12  

CRE / Total risk-based capital ratio (%)

     217.9        191.1        218.1        89.5        477.5  

LTM return on average assets (%)

     1.36        1.49        1.51        1.26        1.89  

LTM return on average equity (%)

     12.16        13.10        13.25        7.65        18.30  

LTM Net interest margin (%)

     3.37        3.85        3.82        2.97        4.33  

LTM Efficiency ratio (%)

     56.22        57.15        57.35        38.00        77.09  

Price/Tangible book value (%)

     157        148        159        112        219  

Price/LTM earnings per share (x)

     12.3        11.3        11.8        8.0        15.7  

Price/2019E earnings per share(2) (x)

     11.3        11.2        11.8        8.5        15.1  

Price/2020E earnings per share(2) (x)

     10.6        11.8        11.5        8.2        14.7  

Current dividend yield (%)

     3.3        2.5        2.1        0.0        3.9  

Market value ($mm)

     462        451        510        139        1,077  

 

(1)

Nonperforming assets defined as nonaccrual loans and leases, renegotiated loans and leases, and real estate owned

(2)

Based on publicly available median analyst earnings per share estimates

Note: Bank level financial data as of or for the period ended June 30, 2019 was used where consolidated holding company data was unavailable.

Sandler O’Neill used publicly available information to perform a similar analysis for First Defiance by comparing selected financial information for First Defiance with a group of financial institutions selected by Sandler O’Neill (the “First Defiance Peer Group”). The First Defiance Peer Group included public, major exchange traded (NASDAQ, NYSE, NYSEAM) banks and thrifts, headquartered in the Midwest region with total assets between $1.0 billion and $5.0 billion and ROAA greater than 1.25% as of or for the LTM ended June 30, 2019, but excluded targets of announced merger transactions and mutual holding companies. The First Defiance Peer Group consisted of the following companies:

 

Bank First Corporation

  

Lakeland Financial Corporation

Bridgewater Bancshares, Inc.

  

Macatawa Bank Corporation

Community Trust Bancorp, Inc.

  

Mercantile Bank Corporation

Farmers & Merchants Bancorp, Inc.

  

Nicolet Bankshares, Inc.

Farmers National Banc Corp.

  

Old Second Bancorp, Inc.

First Financial Corporation

  

Southern Missouri Bancorp, Inc.

First Savings Financial Group

  

Sterling Bancorp, Inc.

German American Bancorp, Inc.

  

Stock Yards Bancorp, Inc.

Great Southern Bancorp, Inc.

  

United Community Financial Corp.

Independent Bank Corporation

  

Waterstone Financial, Inc.

 

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The analysis compared publicly available financial information for First Defiance with corresponding data for the First Defiance Peer Group as of or for the as of or for the LTM ended June 30, 2019 with pricing data as of September 6, 2019. The table below sets forth the data for First Defiance and the median, mean, low and high data for the First Defiance Peer Group. Certain financial data prepared by Sandler O’Neill, as referenced in the table presented below, may not correspond to the data presented in First Defiance’s historical financial statements, as a result of the different periods, assumptions and methods used by Sander O’Neill to compute the financial data presented.

First Defiance Comparable Company Analysis

 

     First
Defiance
     First
Defiance
Peer Group
Median
     First
Defiance
Peer Group
Mean
     First
Defiance
Peer Group
Low
     First
Defiance
Peer Group
High
 

Total assets ($mm)

     3,278        2,962        2,943        1,229        4,976  

Loans / Deposits (%)

     97.9        92.2        96.2        80.9        129.9  

Nonperforming assets¹ / Total assets (%)

     0.78        0.50        0.74        0.09        2.20  

Tangible common equity/Tangible assets (%)

     9.60        10.36        10.98        8.72        19.17  

Tier 1 risk-based capital ratio (%)

     11.75        12.56        14.01        10.49        25.29  

Total risk-based capital ratio (%)

     12.75        13.96        15.43        11.99        26.12  

CRE / Total risk-based capital ratio (%)

     289.8        191.1        214.5        89.5        477.5  

LTM return on average assets (%)

     1.49        1.47        1.51        1.26        1.89  

LTM return on average equity (%)

     11.95        13.10        13.26        7.65        18.30  

LTM Net interest margin (%)

     4.02        3.83        3.78        2.97        4.33  

LTM Efficiency ratio (%)

     60.02        56.65        57.16        38.00        77.09  

Price/Tangible book value (%)

     170        148        159        112        219  

Price/LTM earnings per share (x)

     11.3        11.3        11.9        8.0        15.7  

Price/2019E earnings per share(2) (x)

     11.0        11.3        11.8        8.5        15.1  

Price/2020E earnings per share(2) (x)

     11.0        11.8        11.5        8.2        14.7  

Current dividend yield (%)

     2.9        2.5        2.2        0.0        3.9  

Market value ($mm)

     519        448        508        139        1,077  

 

(1)

Nonperforming assets defined as nonaccrual loans and leases, renegotiated loans and leases, and real estate owned

(2)

Based on publicly available median analyst earnings per share estimates

Note: Bank level financial data as of or for the period ended June 30, 2019 was used where consolidated holding company data was unavailable.

Net Present Value Analyses

Sandler O’Neill performed an analysis that estimated the net present value of United Community common stock assuming United Community performed in accordance with publicly available mean analyst net income, earnings per share and dividends per share estimates for United Community for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of United Community, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of United Community. To approximate the terminal value of a share of United Community common stock at December 31, 2023, Sandler O’Neill applied price to 2023 earnings multiples ranging from 10.0x to 15.0x and multiples of December 31, 2023 tangible book value ranging from 130% to 205%. The terminal values were then discounted to present values using different discount rates ranging from 11.0% to 15.0%, which were chosen to reflect different assumptions regarding required rates of return of holders or prospective buyers of United Community

 

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common stock. As illustrated in the following tables, the analysis indicated an imputed range of values per share of United Community common stock of $7.01 to $11.54 when applying multiples of earnings and $7.30 to $12.61 when applying multiples of tangible book value.

Earnings Per Share Multiples

 

Discount Rate

   10.0x      11.0x      12.0x      13.0x      14.0x      15.0x  

11.0%

   $ 8.13      $ 8.81      $ 9.49      $ 10.17      $ 10.86      $ 11.54  

12.0%

   $ 7.83      $ 8.48      $ 9.14      $ 9.79      $ 10.45      $ 11.10  

13.0%

   $ 7.54      $ 8.17      $ 8.80      $ 9.43      $ 10.06      $ 10.69  

14.0%

   $ 7.27      $ 7.87      $ 8.48      $ 9.08      $ 9.69      $ 10.29  

15.0%

   $ 7.01      $ 7.59      $ 8.17      $ 8.75      $ 9.33      $ 9.91  

Tangible Book Value Per Share Multiples

 

Discount Rate

   130%      145%      160%      175%      190%      205%  

11.0%

   $ 8.47      $ 9.30      $ 10.13      $ 10.95      $ 11.78      $ 12.61  

12.0%

   $ 8.16      $ 8.95      $ 9.75      $ 10.54      $ 11.33      $ 12.13  

13.0%

   $ 7.86      $ 8.62      $ 9.38      $ 10.15      $ 10.91      $ 11.67  

14.0%

   $ 7.57      $ 8.31      $ 9.04      $ 9.77      $ 10.50      $ 11.24  

15.0%

   $ 7.30      $ 8.01      $ 8.71      $ 9.41      $ 10.12      $ 10.82  

Sandler O’Neill also considered and discussed with the United Community’s board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to earnings. To illustrate this impact, Sandler O’Neill performed a similar analysis assuming United Community’s earnings varied from 20% above estimates to 20% below estimates. This analysis resulted in the following range of per share values for United Community’s common stock, applying the price to 2023 earnings multiples range of 10.0x to 15.0x referred to above and a discount rate of 13.16%.

Earnings Per Share Multiples

 

Annual Budget Variance

   10.0x      11.0x      12.0x      13.0x      14.0x      15.0x  

(20.0%)

   $ 6.25      $ 6.75      $ 7.25      $ 7.75      $ 8.25      $ 8.75  

(10.0%)

   $ 6.87      $ 7.43      $ 8.00      $ 8.56      $ 9.12      $ 9.68  

0.0%

   $ 7.50      $ 8.12      $ 8.75      $ 9.37      $ 10.00      $ 10.62  

10.0%

   $ 8.12      $ 8.81      $ 9.50      $ 10.18      $ 10.87      $ 11.56  

20.0%

   $ 8.75      $ 9.50      $ 10.25      $ 11.00      $ 11.75      $ 12.50  

Sandler O’Neill also performed an analysis that estimated the net present value per share of First Defiance common stock, assuming First Defiance performed in accordance with publicly available mean analyst net income, earnings per share and dividends per share estimates for First Defiance for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of First Defiance, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of First Defiance. To approximate the terminal value of a share of First Defiance common stock at December 31, 2023, Sandler O’Neill applied price to 2023 earnings multiples ranging from 10.0x to 15.0x and multiples of December 31, 2023 tangible book value ranging from 130% to 205%. The terminal values were then discounted to present values using different discount rates ranging from 11.0% to 15.0%, which were chosen to reflect different assumptions regarding required rates of return of holders or prospective buyers of First Defiance common stock. As illustrated in the following tables, the analysis indicated an imputed range of values per share of First Defiance common stock of $17.88 to $29.73 when applying multiples of earnings and $18.84 to $32.88 when applying multiples of tangible book value.

 

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Earnings Per Share Multiples

 

Discount Rate

   10.0x      11.0x      12.0x      13.0x      14.0x      15.0x  

11.0%

   $ 20.77      $ 22.56      $ 24.35      $ 26.14      $ 27.93      $ 29.73  

12.0%

   $ 19.99      $ 21.71      $ 23.43      $ 25.16      $ 26.88      $ 28.60  

13.0%

   $ 19.25      $ 20.91      $ 22.56      $ 24.21      $ 25.87      $ 27.52  

14.0%

   $ 18.55      $ 20.14      $ 21.73      $ 23.32      $ 24.91      $ 26.50  

15.0%

   $ 17.88      $ 19.41      $ 20.94      $ 22.46      $ 23.99      $ 25.52  

Tangible Book Value Per Share Multiples

 

Discount Rate

   130%      145%      160%      175%      190%      205%  

11.0%

   $ 21.89      $ 24.09      $ 26.29      $ 28.49      $ 30.68      $ 32.88  

12.0%

   $ 21.07      $ 23.18      $ 25.30      $ 27.41      $ 29.52      $ 31.63  

13.0%

   $ 20.29      $ 22.32      $ 24.35      $ 26.38      $ 28.41      $ 30.43  

14.0%

   $ 19.55      $ 21.50      $ 23.45      $ 25.40      $ 27.35      $ 29.30  

15.0%

   $ 18.84      $ 20.71      $ 22.59      $ 24.46      $ 26.34      $ 28.21  

Sandler O’Neill also considered and discussed with United Community’s board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to earnings. To illustrate this impact, Sandler O’Neill performed a similar analysis assuming First Defiance’s earnings varied from 20% above estimates to 20% below estimates. This analysis resulted in the following range of per share values for First Defiance common stock, applying the price to 2023 earnings multiples range of 10.0x to 15.0x referred to above and a discount rate of 13.16%.

Earnings Per Share Multiples

 

Annual Budget Variance

   10.0x      11.0x      12.0x      13.0x      14.0x      15.0x  

(20.0%)

   $ 15.85      $ 17.17      $ 18.48      $ 19.80      $ 21.11      $ 22.43  

(10.0%)

   $ 17.50      $ 18.97      $ 20.45      $ 21.93      $ 23.41      $ 24.89  

0.0%

   $ 19.14      $ 20.78      $ 22.43      $ 24.07      $ 25.71      $ 27.35  

10.0%

   $ 20.78      $ 22.59      $ 24.40      $ 26.20      $ 28.01      $ 29.82  

20.0%

   $ 22.43      $ 24.40      $ 26.37      $ 28.34      $ 30.31      $ 32.28  

Sandler O’Neill noted that the net present value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

Pro Forma Transaction Analysis

Sandler O’Neill analyzed certain potential pro forma effects of the merger on First Defiance assuming the merger closes December 31, 2019. Sandler O’Neill utilized the following information and assumptions: (a) publicly available mean analyst net income, earnings per share and dividends per share estimates for United Community for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of United Community, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of United Community, (b) publicly available mean analyst net income, earnings per share and dividends per share estimates for First Defiance for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of First Defiance, as well as an estimated long-term annual earnings per share growth rate and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of First Defiance, and (c) certain

 

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assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as provided by the senior management of First Defiance and confirmed by the senior management of United Community. The analysis indicated that the transaction could be accretive to First Defiance’s estimated earnings per share (excluding one-time transaction costs and expenses) in the years ending December 31, 2020 through December 31, 2023 and dilutive to First Defiance’s estimated tangible book value per share at close and at December 31, 2020, and accretive to First Defiance’s estimated tangible book value per share at December 31, 2021, December 31, 2022, and December 31, 2023.

In connection with this analysis, Sandler O’Neill considered and discussed with United Community’s board of directors how the analysis would be affected by changes in the underlying assumptions, including the impact of final purchase accounting adjustments determined at the closing of the merger, and noted that the actual results achieved by the combined company may vary from projected results and the variations may be material.

Sandler O’Neill’s Relationship

Sandler O’Neill is acting as United Community’s financial advisor in connection with the merger and will receive a fee for such services in an amount equal to 0.75% of the aggregate merger consideration, which fee is contingent upon the closing of the merger. At the time of announcement, based on First Defiance’s closing stock price of $26.32 as of September 6, 2019, Sandler O’Neill’s advisory fee was approximately $3.5 million. Sandler O’Neill also received a $400,000 fee from United Community upon rendering its opinion, which opinion fee will be credited in full towards the advisory fee which will become payable to Sandler O’Neill on the day of closing of the merger. United Community has also agreed to indemnify Sandler O’Neill against certain claims and liabilities arising out of Sandler O’Neill’s engagement and to reimburse Sandler O’Neill for certain of its out-of-pocket expenses incurred in connection with Sandler O’Neill’s engagement.

Sandler O’Neill did not provide any other investment banking services to United Community, nor did Sandler O’Neill provide any investment banking services to First Defiance, in the two years preceding the date of its opinion. In the ordinary course of Sandler O’Neill’s business as a broker-dealer, Sandler O’Neill may purchase securities from and sell securities to United Community, First Defiance and their respective affiliates. Sandler O’Neill may also actively trade the equity and debt securities of United Community, First Defiance and their respective affiliates for Sandler O’Neill’s account and for the accounts of Sandler O’Neill’s customers.

Certain Unaudited Prospective Financial Information

Certain Unaudited Prospective Financial Information of First Defiance

First Defiance and United Community do not as a matter of course make public projections as to future performance, revenues, earnings or other financial results due to, among other reasons, the inherent uncertainty of the underlying assumptions and estimates. However, First Defiance and United Community are including in this proxy statement/prospectus certain unaudited prospective financial information for First Defiance and United Community that was made available as described below. The inclusion of this information should not be regarded as an indication that any of First Defiance, United Community, Sandler O’Neill or KBW, their respective representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results, or that it should be construed as financial guidance, and it should not be relied on as such.

For purposes of Sandler O’Neill’s First Defiance net present value analysis performed in connection with Sandler O’Neill’s opinion, Sandler O’Neill used publicly available mean analyst net income, earnings per share and dividends per share estimates for First Defiance for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of First Defiance, as well as an estimated long-term annual earnings per share growth rate of 7% and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of First Defiance. The following table

 

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summarizes this unaudited prospective financial information with respect to First Defiance as used by Sandler O’Neill for its First Defiance net present value analysis:

 

     For the Years Ended December 31,  
     2019      2020      2021      2022      2023  

Net income ($ in thousands)

   $ 47,263      $ 46,340      $ 49,405      $ 52,863      $ 56,565  

Earnings per share

   $ 2.38      $ 2.34      $ 2.50      $ 2.68      $ 2.87  

Dividends per share

   $ 0.77      $ 0.80      $ 0.83      $ 0.86      $ 0.89  

Similarly, for purposes of certain discounted cash flow analyses performed by KBW in connection with KBW’s opinion, KBW used publicly available mean consensus “street estimates” for calendar years 2019 and 2020 First Defiance net income and earnings per share, as well as an assumed First Defiance long-term earnings per share growth rate of 7% provided by First Defiance management, all of which information was discussed with KBW by such management and used and relied upon by KBW at the direction of such management.

Certain Unaudited Prospective Financial Information of United Community

For purposes of Sandler O’Neill’s United Community net present value analysis performed in connection with Sandler O’Neill’s opinion, Sandler O’Neill used publicly available mean analyst net income, earnings per share and dividends per share estimates for United Community for the years ending December 31, 2019 and December 31, 2020, as confirmed by the senior management of United Community, as well as an estimated long-term annual earnings per share growth rate of 7% and estimated dividends per share for the years ending December 31, 2021 through December 31, 2023, as confirmed by the senior management of United Community. The following table summarizes this unaudited prospective financial information with respect to United Community as used by Sandler O’Neill for its United Community net present value analysis:

 

     For the Years Ended December 31,  
     2019      2020      2021      2022      2023  

Net income ($ in thousands)

   $ 40,368      $ 42,874      $ 45,876      $ 49,089      $ 52,523  

Earnings per share

   $ 0.83      $ 0.89      $ 0.95      $ 1.02      $ 1.09  

Dividends per share

   $ 0.30      $ 0.34      $ 0.38      $ 0.42      $ 0.46  

Similarly, for purposes of certain discounted cash flow analyses performed by KBW in connection with KBW’s opinion, KBW used publicly available mean consensus “street estimates” for calendar years 2019 and 2020 United Community net income and earnings per share, as well as an assumed United Community long-term earnings per share growth rate of 7% provided by United Community management, all of which information was discussed with KBW by such management and used and relied upon by KBW at the direction of First Defiance management.

This information is subjective in many respects. While presented with numeric specificity, the unaudited prospective financial information reflects numerous estimates and assumptions with respect to business, economic, market, competition, regulatory and financial conditions and matters specific to First Defiance’s and United Community’s respective business, all of which are difficult to predict and many of which are beyond First Defiance’s and United Community’s control. The unaudited prospective financial information reflects both assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and therefore, is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. No assurance can be given that the unaudited prospective financial information and the underlying estimates and assumptions will be realized. In addition, since the unaudited prospective financial information covers multiple years, such information by its nature becomes subject to greater uncertainty with each successive year. Actual results may differ materially from those set forth above, and important factors that may affect actual results and cause the unaudited prospective financial information to be inaccurate include, but are not limited to, risks and uncertainties relating to First Defiance’s and United

 

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Community’s business, industry performance, general business and economic conditions, customer requirements, competition and adverse changes in applicable laws, regulations or rules. For other factors that could cause actual results to differ, please see the sections entitled “Risk Factors” and “Forward-Looking Statements.”

The unaudited prospective financial information appearing above was not prepared with a view toward public disclosure (except for publicly available mean analyst net income, earnings per share and dividends per share estimates), nor was it prepared with a view toward compliance with GAAP, the prevailing practices in the banking industry, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. In addition, the unaudited prospective financial information requires significant estimates and assumptions that make it inherently less comparable to the similarly titled GAAP measures in First Defiance’s or United Community’s historical GAAP financial statements. Neither First Defiance’s nor United Community’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the unaudited prospective financial information contained in this document, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the unaudited prospective financial information. The independent registered public accountant reports included in this proxy statement/prospectus relate to historical financial information of each of First Defiance and United Community. They do not extend to the unaudited prospective financial information and should not be read to do so.

Furthermore, the unaudited prospective financial information does not take into account any circumstances or events occurring after the dates of the respective fairness opinions delivered by Sandler O’Neill and KBW. No assurance can be given that, had the unaudited prospective financial information been prepared as of the date of this proxy statement/prospectus, similar estimates and assumptions would be used. Neither First Defiance nor United Community intends to, and expressly disclaims any obligation to, make publicly available any update or other revision to the unaudited prospective financial information to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events, even if any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions. The unaudited prospective financial information does not take into account the possible financial and other effects on First Defiance or United Community of the merger and does not attempt to predict or suggest future results of the combined company after giving effect to the merger. The unaudited prospective financial information does not give effect to the merger, including the impact of negotiating or executing the merger agreement, the expenses that may be incurred in connection with completing the merger, the potential synergies that may be achieved by the combined company as a result of the merger, the effect on First Defiance or United Community of any business or strategic decision or action that has been or will be taken as a result of the merger agreement having been executed, or the effect of any business or strategic decisions or actions that would likely have been taken if the merger agreement had not been executed, but that were instead altered, accelerated, postponed or not taken in anticipation of the merger. Further, the unaudited prospective financial information does not take into account the effect on First Defiance or United Community of any possible failure of the merger to occur. By inclusion of the unaudited prospective financial information in this document, none of First Defiance, United Community, Sandler O’Neill, KBW or their respective affiliates, associates, officers, directors, advisors, agents or other representatives makes any representation to any shareholder of First Defiance or United Community or any other person regarding First Defiance’s or United Community’s ultimate performance compared to the information contained in the unaudited prospective financial information or that the projected results will be achieved. The inclusion of the unaudited prospective financial information in this document should not be deemed an admission or representation by First Defiance or United Community that it is viewed as material information, particularly in light of the inherent risks and uncertainties associated with such forecasts. The summary of the unaudited prospective financial information included above is not being included to influence your decision whether to vote to approve the merger, but is being provided solely because it was made available to Sandler O’Neill and KBW as discussed above, in connection with the merger.

 

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In light of the foregoing, and considering that the special meetings of First Defiance and United Community shareholders will be held several months after the unaudited prospective financial information was prepared, as well as the uncertainties inherent in any forecasted information, shareholders are cautioned not to place unwarranted reliance on such information, and First Defiance and United Community urge all shareholders to review First Defiance’s and United Community’s financial statements and other information contained elsewhere in this document for a description of First Defiance’s and United Community’s respective businesses and reported financial results. See “Where You Can Find More Information” beginning on page 145.

Management and Board of Directors of First Defiance After the Merger

The merger agreement provides that, following the merger, Donald P. Hileman, the current Chief Executive Officer of First Defiance, will continue to serve as the Chief Executive Officer of the surviving company and surviving bank, and that Gary M. Small, the current President and Chief Executive Officer of United Community, will become President of the surviving company and surviving bank. In addition, John L. Bookmyer, the current Chairman of First Defiance, will continue to serve as Chairman of the surviving company and surviving bank following the merger, and Richard J. Schiraldi, the current Chairman of United Community, will become Vice Chairman of the surviving company and surviving bank.

The merger agreement also provides that, on a date during the period commencing January 1, 2021, and ending June 30, 2021, as determined by the surviving company’s board of directors, or any such earlier date as of which Mr. Hileman ceases for any reason to serve in the position of Chief Executive Officer of the surviving company or surviving bank, as applicable, (i) Mr. Small shall become President and Chief Executive Officer of the surviving company and surviving bank, (ii) Mr. Hileman shall become Executive Chairman of the surviving company and surviving bank, and (iii) Mr. Schiraldi shall continue as Vice Chairman of the surviving company and surviving bank. In addition, the merger agreement provides that the respective boards of directors of the surviving company and surviving bank will each consist of 13 members, with seven members designated by First Defiance (including its Chief Executive Officer, Chairman and five other members of the First Defiance or First Federal board of directors), and six members designated by United Community (including its Chief Executive Officer, Chairman and four other members of the United Community or Home Savings board of directors). Other than as specifically identified above, the other members of the board of directors of the surviving company have not yet been identified.

Interests of First Defiance Directors and Executive Officers in the Merger

In considering the recommendation of the First Defiance board of directors, First Defiance shareholders should be aware that the directors and executive officers of First Defiance have certain interests in the merger that may be different from, or in addition to, the interests of First Defiance shareholders generally. The First Defiance board of directors was aware of these interests and considered them, among other matters, in making its recommendation that First Defiance shareholders vote to approve the merger proposal.

Treatment of First Defiance Equity-Based Awards

The executives and directors of First Defiance hold outstanding awards under the First Defiance equity incentive plans. Messrs. Hileman, Nungester, Reisner, Rose, Allen, and Harris each hold outstanding awards of performance-based restricted stock units; Messrs. Nungester and Allen, and the non-employee directors, each hold outstanding awards of restricted stock; and Mr. Allen holds outstanding awards of restricted stock units. Pursuant to the employment and change in control agreements between First Defiance and the named executive officers (other than Mr. Harris), the merger will be considered a “change in control.” As a result, awards held by such executives will vest upon a termination other than for cause following the effective time of the merger. The performance-based awards will vest on a pro-rata basis, while the other awards will vest in full.

Mr. Harris and the non-employee directors do not have employment or other agreements with First Defiance under which their outstanding equity awards will vest on an accelerated basis in connection with a merger-related

 

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termination. However, in order to better align the treatment of United Community and First Defiance directors and employees, the merger agreement provides First Defiance discretion to deem the merger a change in control under applicable award agreements and plans. It has not yet been determined as of the date of this filing whether and for whom First Defiance will exercise such discretion.

For an estimate of the amounts that would become payable to First Defiance’s named executive officers in respect of their unvested equity-based award agreements if a severance-qualifying termination of employment were to occur immediately following the effective time of the merger, see “The Merger—Merger-related Compensation for First Defiance’s Named Executive Officers.” First Defiance estimates that the aggregate amount that would become payable to its executive officers who are not named executive officers with respect to accelerated vesting of their unvested equity-based awards to be $564,997, based on a price per share of First Defiance common stock of $27.82 (the average closing price of common stock of First Defiance over the five trading days following the announcement of the merger), and assuming that such executives incur a termination other than for cause following the effective time of the merger and such effective time of the merger were October 15, 2019.

New Employment Agreement with Donald P. Hileman

In connection with the execution of the merger agreement, First Defiance entered into an employment agreement with Mr. Hileman setting forth the terms of his continuing employment with First Defiance following the effective time of the merger. The employment agreement provides that Mr. Hileman will continue to serve as Chief Executive Officer of First Defiance and First Federal and as a member of the boards of directors of First Defiance and First Federal. On a date between January 1, 2021 and June 30, 2021, to be determined by the board of directors following the effective time (the “Succession Date”), Mr. Hileman will retire as Chief Executive Officer and transition to the role of Executive Chairman of First Defiance and First Federal. Mr. Hileman will serve as Executive Chairman for a period of two years, during which time he will continue to serve on the boards of directors of First Defiance and First Federal. In consideration for his services as Chief Executive Officer, Mr. Hileman will be entitled to (a) an annual base salary of at least $495,000, (b) target annual incentive opportunities of not less than 50% of his annual base salary, (c) an annual equity award with a target value of not less than 45% of his annual base salary, and (d) employee benefits and fringe benefits (including additional life insurance, supplemental disability, paid vacation and reimbursement of club dues) that are no less favorable than those provided by First Defiance prior to the effective time or, if more favorable, those provided to the Chief Executive Officer of United Community immediately prior to the effective time. Mr. Hileman’s compensation and benefits will be reviewed by the compensation committee of the board of directors of First Defiance as soon as practicable following the closing of the merger to ensure they are commensurate with market practices for Mr. Hileman’s role with First Defiance relative to First Defiance’s peer group following the closing of the merger. In addition, Mr. Hileman will receive a one-time cash retention award of $2,250,000 in connection with the cancellation of his current employment agreement.

Upon his transition to Executive Chairman, Mr. Hileman’s annual base salary will be reduced to a market-based level to be determined by the board of directors. He will not participate in the annual incentive plan of First Defiance unless otherwise determined by the board of directors, and he will be eligible for equity-based awards as a member of the board of directors but not under the long-term incentive plan for executive management of First Defiance. During this period, he will remain an employee of First Defiance and be eligible for retirement and welfare benefits on the same basis as other full-time employees.

If the employment of Mr. Hileman is terminated by First Defiance without cause or by the executive for good reason prior to his transition to Executive Chairman, subject to the execution of a release of claims, he will be entitled to the following severance benefits:

 

   

Prorated Bonus. A prorated annual cash bonus for the year in which termination occurs, determined assuming performance goals are satisfied at the target level.

 

   

Long-Term Incentive Awards. (a) Accelerated vesting in full of any unvested time-vesting long-term incentive awards, (b) any performance-vesting long-term incentive awards for which the performance

 

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period is complete shall vest in full and any such awards for which the performance period is not complete shall be earned as provided in the applicable award agreement and vest in full and (c) any vested stock options exercisable for the full remaining term thereof.

If the compensation and benefits payable under the employment agreement become subject to Section 280G of the Code, such amounts will be reduced to the extent such reduction would place the applicable executive in a better after-tax position. The retention award is not anticipated to become subject to Section 280G because the merger is not expected to constitute a “change in control” of First Defiance for purposes of Section 280G.

The employment agreement also contains certain restrictive covenants, including a perpetual nondisclosure covenant and covenants concerning noncompetition and nonsolicitation of clients, customers and employees, each of which applies during Mr. Hileman’s employment and for one year thereafter.

Employment and Change in Control Agreements with First Defiance

Superseded Employment Agreement with Donald P. Hileman

First Defiance is party to an employment agreement with Mr. Hileman, which will be superseded upon the effective time by the new employment agreement with Mr. Hileman, as noted above. Under the superseded employment agreement, if the employment of Mr. Hileman was terminated involuntarily without cause or by Mr. Hileman for good reason within six months before or 12 months following a change in control of First Defiance, which the merger qualifies, subject to the execution of a release of claims, he would be entitled to the following severance benefits:

 

   

Severance Payment. A cash severance payment equal to the product of (a) 2.99 multiplied by (b) the sum of (i) his annual base salary plus (ii) his average annual bonus for the most recently completed five-year period.

 

   

COBRA Benefits. Healthcare continuation coverage under COBRA equal to the coverage in place on the date of termination, at no cost to the executive, until the earlier of the first anniversary of such termination or eligibility under another employer’s group health plans; or, in lieu thereof, a lump sum cash payment equal to 12 months of such premiums.

If the compensation and benefits payable under the employment agreement were subject to Section 280G of the Code, such amounts would be reduced to the extent such reduction would result in the total compensation and benefits being equal to an amount $1.00 less than the amount that would make the executive subject to Section 280G of the Code. Notwithstanding the foregoing, no such reduction is anticipated because the merger is not expected to constitute a “change in control” of First Defiance for purposes of Section 280G.

The employment agreement also contains certain restrictive covenants, including a perpetual nondisclosure covenant and covenants concerning noncompetition and nonsolicitation of employees, each of which applies for 12 months following termination of employment.

Agreements with Other Executive Officers

Employment Agreements with Messrs. Nungester and Allen

First Defiance is party to employment agreements with Mr. Nungester and, until December 31, 2019, Mr. Allen. Under such agreements, if the employment of the executive is terminated involuntarily without cause or by the executive for good reason within six months before or 12 months following a change in control of First Defiance, which the merger qualifies, subject to the execution of a release of claims, the executive is entitled to the following severance benefits:

 

   

Severance Payment. A cash severance payment equal to the product of (a) 2.99 multiplied by (b) the sum of (i) the executive’s current annual base salary (in the case of Mr. Allen, his average annual salary for the most recently completed five-year period) plus (ii) the executive’s average annual bonus for the most recently completed five-year period.

 

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COBRA Benefits. With respect to Mr. Nungester, healthcare continuation coverage under COBRA equal to the coverage in place on the date of termination, at no cost to the executive, until the earlier of the first anniversary of such termination or eligibility under another employer’s group health plans; or, in lieu thereof, a lump sum cash payment equal to 12 months of such premiums; and with respect to Mr. Allen, healthcare continuation coverage under COBRA equal to the coverage in place on the date of termination, at no cost to the executive, until December 31, 2019.

If the compensation and benefits payable under the employment agreements were subject to Section 280G of the Code, such amounts would be reduced to the extent such reduction would result in the total compensation and benefits being equal to an amount $1.00 less than the amount that would make the executives subject to Section 280G of the Code. Notwithstanding the foregoing, no such reductions are anticipated because the merger is not expected to constitute a “change in control” of First Defiance for purposes of Section 280G.

The agreements also contain certain restrictive covenants, including a perpetual nondisclosure covenant and covenants concerning noncompetition and nonsolicitation of employees, each of which applies for 12 months following termination of employment.

Change in Control Agreements with Messrs. Reisner and Allen

First Defiance is party to change in control agreements with Mr. Reisner and, effective January 1, 2020, Mr. Allen. Under the agreements, if the employment of the executive is terminated involuntarily without cause or by the executive for good reason within six months before or 12 months following a change in control of First Defiance, which the merger qualifies, subject to the execution of a release of claims, the executive is entitled to the following severance benefits:

 

   

Severance Payment. A cash severance payment equal to the product of (a) two multiplied by (b) the sum of (i) the executive’s current annual base salary plus (ii) the executive’s average annual bonus for the most recently completed five-year period.

 

   

COBRA Benefits. Healthcare continuation coverage under COBRA equal to the coverage in place on the date of termination, at no cost to the executive, until the earlier of the first anniversary of such termination or eligibility under another employer’s group health plans.

If the compensation and benefits payable under the change in control agreements were subject to Section 280G of the Code, such amounts would be reduced to the extent such reduction would result in the total compensation and benefits being equal to an amount $1.00 less than the amount that would make the executives subject to Section 280G of the Code. Notwithstanding the foregoing, no such reductions are anticipated because the merger is not expected to not constitute a “change in control” of First Defiance for purposes of Section 280G.

The agreements also contain certain restrictive covenants, including a perpetual nondisclosure covenant and covenants concerning noncompetition and nonsolicitation of customers, suppliers, and employees, each of which applies for 12 months following termination of employment.

Change in Control Agreement with Mr. Rose

First Defiance is party to change in control agreement with Mr. Rose. Under the agreement, if the employment of the executive is terminated involuntarily without cause or by the executive for good reason within six months before or 12 months following a change in control of First Defiance, which the merger qualifies, subject to the execution of a release of claims, the executive is entitled to the following severance benefits:

 

   

Severance Payment. A cash severance payment equal to his current annual base salary.

 

   

COBRA Benefits. Healthcare continuation coverage under COBRA equal to the coverage in place on the date of termination, at no cost to the executive, until the earlier of the first anniversary of such termination or his eligibility under another employer’s group health plans.

 

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If the compensation and benefits payable under the change in control agreement were subject to Section 280G of the Code, such amounts would be reduced to the extent such reduction would result in the total compensation and benefits being equal to an amount $1.00 less than the amount that would make the executive subject to Section 280G of the Code. Notwithstanding the foregoing, no such reduction is anticipated because the merger is not expected to constitute a “change in control” of First Defiance for the purposes of Section 280G.

The agreement also contains certain restrictive covenants, including a perpetual nondisclosure covenant and covenants concerning noncompetition and nonsolicitation of customers, suppliers, and employees, each of which applies for 12 months following the executive’s termination of employment.

First Defiance Severanc