United Community Financial (UCFC) 10-Q 2002 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 0-24399

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Ohio	34-1856319
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

275 Federal Plaza West Youngstown, Ohio	44503-1203
(Address of principal executive offices)	(Zip Code)

(330) 742-0500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X             No        

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

35,567,794 common shares as of April 30, 2002

TABLE OF CONTENTS

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION PAGE

Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of March 31, 2002              and December 31, 2001	1
Consolidated Statements of Income for the Three Months Ended              March 31, 2002 and 2001	2
Consolidated Statement of Comprehensive Income for the Three Months              Ended March 31, 2002	3
Consolidated Statements of Cash Flows for the Three Months Ended              March 31, 2002 and 2001	4
Notes to Consolidated Financial Statements	5–7
Item 2. Management’s Discussion and Analysis of Financial Condition and              Results of Operations	8-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk	12

Part II OTHER INFORMATION  13

Signatures	14
Exhibits	15

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(unaudited)

			March 31,			December 31,
			2002			2001
			(Dollars in thousands)
Assets:
Cash and deposits with banks			$	52,875		$	35,588
Federal funds sold and other				103,805			170,296
		Total cash and cash equivalents		156,680			205,884
Marketable securities:
	Trading (amortized cost of $6,515 and $8,352, respectively)			6,514			8,352
	Available for sale (amortized cost of $89,979 and $49,960, respectively)			90,301			51,081
	Held to maturity (fair value of $2,152 and $1,695, respectively)			2,197			1,698
Mortgage-related securities:
	Available for sale (amortized cost of $53,784 and $66,033, respectively)			54,533			67,069
	Held to maturity (fair value of $71,502 and $80,644, respectively)			70,227			78,798
Loans, net (including allowance for loan losses of $12,022 and $11,480, respectively)				1,446,941			1,406,479
Loans held for sale, net				6,810			20,192
Margin accounts				20,307			20,979
Federal Home Loan Bank stock				18,968			18,760
Premises and equipment				17,558			17,481
Accrued interest receivable				10,421			9,575
Real estate owned				1,186			477
Goodwill				21,873			19,664
Identified intangible assets				5,674			6,312
Other assets				5,751			11,979
		Total assets	$	1,935,941		$	1,944,780
Liabilities and Shareholders’ Equity
Liabilities:
Deposits			$	1,419,134		$	1,383,418
Other borrowed funds				226,754			271,631
Advance payments by borrowers for taxes and insurance				3,367			5,760
Accrued interest payable				2,955			2,983
Accrued expenses and other liabilities				20,423			19,108
		Total liabilities		1,672,633			1,682,900
Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and unissued at March 31, 2002				—			—
Common stock-no par value; 499,000,000 shares authorized; 37,753,294 and 37,754,086 shares issued, respectively				136,996			136,903
Retained earnings				162,751			160,915
Accumulated other comprehensive income				696			1,402
Unearned stock compensation				(22,058	)		(22,988	)
Treasury stock, at cost; 2,186,500 and 2,086,500 shares, respectively				(15,077	)		(14,352	)
		Total shareholders’ equity		263,308			261,880
		Total liabilities and shareholders’ equity	$	1,935,941		$	1,944,780

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME(unaudited)

						For the Three Months Ended
					March 31,
					2002			2001
				(Dollars in thousands, except per share data)
Interest income
	Loans				$	26,974		$	18,074
	Loans held for sale					114			—
	Mortgage-related securities:
		Available for sale				889			1,464
		Held to maturity				1,250			1,782
	Marketable securities:
		Trading				33			31
		Available for sale				951			1,332
		Held to maturity				17			13
	Margin accounts					220			668
	FHLB stock dividend					208			246
	Other interest-earning assets					607			428
			Total interest income			31,263			24,038
Interest expense
	Deposits					12,108			10,284
	Other borrowed funds					2,785			1,397
			Total interest expense			14,893			11,681
Net interest income						16,370			12,357
Provision for loan losses						696			330
Net interest income after provision for loan losses						15,674			12,027
Noninterest income
	Brokerage commissions					3,382			3,591
	Service fees and other charges					1,898			1,919
	Underwriting and investment banking fees					33			63
	Net gains (losses):
		Mortgage-related securities				—			92
		Marketable securities				582			245
		Trading securities				23			(411	)
		Loans sold				776			25
		Other				(1	)		(9	)
	Other income					1,065			273
			Total noninterest income			7,758			5,788
Noninterest expenses
	Salaries and employee benefits					9,723			7,864
	Occupancy					673			573
	Equipment and data processing					1,819			1,619
	Franchise tax					506			510
	Advertising					393			551
	Amortization of core deposit intangible					638			—
	Other expenses					1,735			1,662
			Total noninterest expenses			15,487			12,779
Income before income taxes						7,945			5,036
Income taxes						2,868			1,834
Net income before extraordinary items						5,077			3,202
Extraordinary items
	Early extinguishment of debt (net of tax of $443)					822			—
Net income					$	4,255		$	3,202
Earnings per share:
	Basic and diluted before extraordinary items				$	0.16		$	0.10
	Basic and diluted				$	0.13		$	0.10

See Notes to Consolidated Financial Statements.

2

UNITED COMMUNITY FINANCIAL CORP.

STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended March 31,
	2002			2001
	(In thousands)
Net income	$	4,255		$	3,202
Unrealized holding (losses) gains arising during the period, net of tax effect of $(176) and $596, respectively		(328	)		1,286
Reclassification adjustment for (gains) included in net income, net of tax effect of $(204) and $(97), respectively		(378	)		(180	)
Comprehensive income	$	3,549		$	4,308

See Notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

					Three Months Ended March 31,
					2002			2001
					(Dollars in thousands)
Cash Flows from Operating Activities:
	Net income				$	4,255		$	3,202
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
				Provision for loan loss allowances		696			330
				Net gains		(1,358	)		(353	)
				Accretion of discounts		(25	)		(241	)
				Depreciation		529			513
				ESOP compensation		553			486
				Amortization of restricted stock compensation		469			416
				FHLB stock dividends		(208	)		(246	)
				Decrease (increase) in trading securities		1,838			(35	)
				Decrease in margin accounts		672			4,011
				Increase in interest receivable		(846	)		(521	)
				Decrease (increase) in prepaid and other assets		7,285			(3,645	)
				(Decrease) increase in interest payable		(28	)		679
				Decrease in loans held for sale		13,382			—
				Increase in other liabilities		(2,572	)		(1,663	)
				Net cash provided by operating activities		24,642			2,933
Cash Flows from Investing Activities:
	Proceeds from principal repayments and maturities of:
				Mortgage-related securities held to maturity		8,661			5,584
				Mortgage-related securities available for sale		12,118			6,833
				Marketable securities held to maturity		—			400
				Marketable securities available for sale		11,000			18,503
	Proceeds from sale of:
				Mortgage-related securities held to maturity		—			1,454
				Mortgage-related securities available for sale		—			7,784
				Marketable securities available for sale		4,571			6,438
				Loans		53,278			1,330
				Real estate owned		152			—
				Fixed assets		18			—
	Purchases of:
				Marketable securities available for sale		(54,296	)		(5,023	)
				Marketable securities held to maturity		(500	)		(382	)
				Mortgage-related securities available for sale		—			(19,505	)
	Net principal disbursed on loans					(88,950	)		(51,326	)
	Loans purchased					(5,450	)		(900	)
	Purchases of premises and equipment					(606	)		(538	)
	Other					—			87
				Net cash used in investing activities		(60,004	)		(29,261	)
Cash Flows from Financing Activities:
			Net increase in NOW, savings and money market accounts			23,220			5,738
			Net increase in certificates of deposit			13,046			33,542
			Net decrease in advance payments by borrowers for taxes and insurance			(2,393	)		(1,588	)
			Proceeds from FHLB advances			1,239			—
			Repayment of FHLB advances			(40,001	)		—
			Net change in other borrowed funds			(5,808	)		24,199
			Dividends paid			(2,419	)		(2,522	)
			Purchase of treasury stock			(725	)		(7,036	)
				Net cash (used in) provided by financing activities		(13,841	)		52,333
(Decrease) increase in cash and cash equivalents						(49,203	)		26,005
Cash and cash equivalents, beginning of period						205,883			45,972
Cash and cash equivalents, end of period					$	156,680		$	71,977
Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest on deposits and borrowings			$	14,921		$	11,159
		Income taxes				380			101
Supplemental schedule of noncash activities:
	Transfers from loans to real estate owned					879			87

See Notes to Consolidated Financial Statements.

4

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings & Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. Home Savings has 29 full service offices located throughout Mahoning, Columbiana, Trumbull, Huron, Sandusky, Ashland, Seneca, Erie, Hancock and Richland Counties and four loan production offices in the Cleveland, Canton, Stow and Mentor areas in northeastern Ohio. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for three wholly owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Through these subsidiaries, Butler Wick’s business includes investment brokerage services, which it has conducted for over 70 years, and a network of integrated financial services, including asset management, trust and estate services, public finance and insurance. Butler Wick and its subsidiaries have ten full service offices and two trust offices throughout northeastern Ohio and western Pennsylvania.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for fair statement of results for the interim periods.

The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2001, contained in United Community’s Form 10-K for the year ended December 31, 2001.

2. SALE OF MORTGAGE-RELATED SECURITIES

There were no sales of mortgage-related securities held to maturity during the three months ended March 31, 2002. During the three months ended March 31, 2001, Home Savings sold approximately $1.5 million of mortgage-related securities held to maturity with outstanding balances less than 15% of the principal outstanding at acquisition. A gain of approximately $61,000 was recorded on the sale.

5

3. SEGMENT INFORMATION

Statement of Financial Accounting Standard (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires financial disclosure and descriptive information about reportable operating segments based on how chief decision-makers manage the business. United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and corporate banking services. Investment advisory services provide investment brokerage and a network of integrated financial services. Condensed statements of income and selected financial information by operating segment for the three months ended March 31, 2002 and 2001 are as follows:

Three Months Ended March 31, 2002

		Retail		Investment
		Banking		Advisory Services			Eliminations			Total
				(In thousands)
Interest income		$	31,448	$	266		$	(451	)	$	31,263
Interest expense			15,283		61			(451	)		14,893
Provision for loan loss			696		—			—			696
Net interest income after provision for loan loss			15,469		205			—			15,674
Non-interest income			3,011		4,747			—			7,758
Non-interest expense			10,366		5,121			—			15,487
Income before tax			8,114		(169	)		—			7,945
Income tax expense			2,926		(58	)		—			2,868
Net income before extraordinary items			5,188		(111	)		—			5,077
Extraordinary items:
	Early extinguishment of debt (net of tax of $443)		822		—			—			822
Net income		$	4,366	$	(111	)	$	—		$	4,255

Three months ended March 31, 2001

	Retail		Investment
	Banking		Advisory Services			Eliminations			Total
					(In thousands)
Interest income	$	24,048	$	721		$	(731	)	$	24,038
Interest expense		12,062		350			(731	)		11,681
Provision for loan loss		330		—			—			330
Net interest income after provision for loan loss		11,656		371			—			12,027
Non-interest income		763		5,025			—			5,788
Non-interest expense		7,906		4,873			—			12,779
Income before tax		4,513		523			—			5,036
Income tax		1,648		186			—			1,834
Net income	$	2,865	$	337		$	—		$	3,202

6

4. EARNINGS PER SHARE

Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options and restricted stock awards. No shares of common stock were anti-dilutive for the period ended March 31, 2002. 638,483 shares of common stock were excluded from the diluted earnings per share calculation for the period ended March 31, 2001, as they were anti-dilutive.

		Three Months Ended
		March 31,
		2002		2001
		(In thousands,
		except per share data)
Income before extraordinary item		$	5,077	$	3,202
Extraordinary item, net of tax			822		—
Net income applicable to common stock		$	4,255	$	3,202
Weighted average common shares outstanding			31,951		32,671
Dilutive effect of restricted stock			141		143
Dilutive effect of stock options			120		1
Weighted average common shares outstanding for diluted earnings computation			32,212		32,815
Earnings per share before extraordinary item
	Basic	$	0.16	$	0.10
	Diluted	$	0.16	$	0.10
Earnings per share
	Basic	$	0.13	$	0.10
	Diluted	$	0.13	$	0.10

5. NEW ACCOUNTING STANDARDS

In June 2001, FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the accounting for such assets arising from prior and future business combinations. Upon adopting this Statement, goodwill arising from business combinations is no longer amortized, but assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other intangible assets, such as core deposit intangible assets, continue to be amortized over their estimated useful lives. United Community adopted this Statement on January 1, 2002. Management evaluated goodwill for impairment in the first quarter of 2002 and determined that it was not impaired. United Community had goodwill of $21.9 million and core deposit intangible assets of $5.7 million as of March 31, 2002.

6. ACQUISITIONS

On April 1, 2002, United Community acquired all of the capital stock of Potters Financial Corporation, the holding company for Potters Bank, an Ohio-chartered state savings bank. Potters Bank was merged into Home Savings. Home Savings will account for the acquisition as a purchase and will include Potters’ results of operations from the effective date of the acquisition in its 2002 financial statements. At March 31, 2002, Potters had total assets of $126.9 million and total deposits of $113.0 million. Based on Potters 991,546 outstanding shares, the acquisition was valued at $23.6 million, which was paid in cash.

7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

		At or For the
		Three Months Ended
		March 31,			March 31,
Selected financial ratios and other data: (1)		2002			2001
Performance ratios:
	Return on average assets (2)		0.87	%		0.98	%
	Return on average equity (3)		6.42	%		4.89	%
	Interest rate spread (4)		3.01	%		2.92	%
	Net interest margin (5)		3.50	%		3.90	%
	Noninterest expense to average assets		3.17	%		3.91	%
	Efficiency ratio (6)		63.13	%		70.20	%
	Average interest-earning assets to average interest-bearing liabilities		115.55	%		126.48	%
Capital ratios:
	Average equity to average assets		13.58	%		20.03	%
	Equity to assets, end of period		13.60	%		18.98	%
	Tangible capital (7)		9.28	%		14.05	%
	Core capital (7)		9.28	%		14.05	%
	Risk-based capital (7)		14.84	%		23.60	%
Asset quality ratios:
	Nonperforming loans to total loans at end of period (8)		0.76	%		0.66	%
	Nonperforming assets to average assets (9)		0.62	%		0.50	%
	Nonperforming assets to total assets at end of period		0.63	%		0.48	%
	Allowance for loan losses as a percent of loans		0.82	%		0.73	%
	Allowance for loan losses as a percent of nonperforming loans (8)		109.91	%		111.59	%
Per share data:
	Basic earnings per share before extraordinary item (10)	$	0.16		$	0.10
	Diluted earnings per share before extraordinary item (10)	$	0.16		$	0.10
	Basic earnings per share (10)	$	0.13		$	0.10
	Diluted earnings per share (10)	$	0.13		$	0.10
	Dividends per share	$	0.075		$	0.075
	Book value per share (11)	$	7.40		$	7.10
Office data
	Number of full service banking offices		29			17
	Number of loan production offices		4			4
	Number of full service brokerage offices		10			10
	Number of trust offices		2			2

(1)	Ratios for the three month period are annualized where appropriate.
(2)	Net income divided by average total assets.
(3)	Net income divided by average total equity.
(4)	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.
(5)	Net interest income as a percentage of average interest-earning assets.
(6)	Noninterest expense, excluding the amortization of core deposit intangible, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities and other.
(7)	Home Savings only.
(8)	Nonperforming loans consist of nonaccrual loans and restructured loans.
(9)	Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans.
(10)	Net income divided by average number of shares outstanding.
(11)	Equity divided by number of shares outstanding.

8

Forward Looking Statements

Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to United Community or its management are intended to identify such forward looking statements. United Community’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

Comparison of Financial Condition at March 31, 2002 and December 31, 2001

Total assets decreased $8.8 million, or 0.5%, to $1.9 billion at March 31, 2002 compared to December 31, 2001. The primary reason for the decrease in total assets consisted of decreases in cash and cash equivalents of $49.2 million, loans held for sale of $13.4 million and other assets of $6.2 million. These decreases, along with an increase in deposits, were used to fund increases in loans and securities and a decrease in borrowed funds.

Net loans increased $40.5 million, or 2.9%, to $1.45 billion at March 31, 2002, compared to $1.41 billion at December 31, 2001. Real estate loans increased $24.3 million and commercial loans increased $16.3 million. These increases were partially offset by a $1.2 million decrease in consumer loans. Home Savings is expecting growth in all loan categories, which will increase the risk of loan losses. Non-residential real estate lending and commercial lending are generally considered to involve a higher degree of risk than residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of businesses and income-producing properties.

United Community has become active in the secondary market for mortgage loans through it subsidiary Home Savings. Loans held for sale decreased $13.4 million, or 66.3%, to $6.8 million at March 31, 2002 compared to $20.2 million at December 31, 2001. Home Savings will continue to sell loans going forward as a part of its strategic plan.

Funds that are available for general corporate purposes, such as loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds and marketable and mortgage-related securities available for sale. Cash and deposits with banks increased $17.3 million, or 48.6%, to $52.9 million at March 31, 2002 compared to $35.6 million at December 31, 2001, primarily as a result of an increase of funds to fund the purchase of Potters Financial Corporation. Federal funds sold and other overnight funds decreased $66.5 million, or 39.0%, to $103.8 million at March 31, 2002 from $170.3 million at December 31, 2001. Securities available for sale, which include both marketable and mortgage-related securities, increased $26.7 million, or 22.6%, since December 31, 2001. Securities held to maturity, which also consist of both marketable securities and mortgage-related securities, decreased $8.1 million, or 10.0%, since December 31, 2001. Trading securities, which consist of marketable securities, decreased $1.8 million, or 22.0%, to $6.5 million at March 31, 2002. The net decrease in overnight funds, along with an increase in deposits, was primarily used to fund increases in net loans, securities and the decrease in other borrowed funds. Securities available for sale, in conjunction with overnight funds, enable United Community to utilize excess funds while providing a great deal of liquidity and flexibility as United Community pursues other investment opportunities.

Nonperforming assets, which include nonaccrual and restructured loans and real estate owned, decreased approximately $814,000, or 6.3%, to $12.1 million at March 31, 2002 from $12.9 million at December 31, 2001, primarily due to loans either becoming current or being paid off. At March 31, 2002, total nonaccrual and restructured loans accounted for 0.76% of net loans receivable, compared to 0.89% at December 31, 2001. Total nonperforming assets were 0.63% of total assets as of March 31, 2002 and 0.67% as of December 31, 2001.

Other assets declined $6.2 million, or 52.0%, to $5.8 million at March 31, 2002 compared to $12.0 million at December 31, 2001. The primary reason for the decrease is a receipt of funds from Freddie Mac in the first quarter of 2002 as a result of a receivable from Freddie Mac at year end.

Total deposits increased $35.7 million from $1.38 billion at December 31, 2001 to $1.42 billion at March 31, 2002. The increase was due to a $14.2 million increase in checking accounts, a $13.0 million increase in certificates of deposit and a $8.9 million increase in savings accounts. The increases in certificates of deposit and checking accounts were primarily due to Home Savings competitively pricing these products.

9

Other borrowed funds decreased $44.9 million to $226.7 million at March 31, 2002 compared to $271.6 million at December 31, 2001. The decrease was primarily due to the maturity of borrowings from the Federal Home Loan Bank (FHLB) and early extinguishment of FHLB debt. As of March 31, 2002, $188.0 million of the other borrowed funds consisted of long-term FHLB advances. The remaining funds consist of a revolving line of credit and other short-term borrowings.

Shareholders’ equity increased $1.4 million, or 0.5%, to $263.3 million at March 31, 2002 from $261.9 million at December 31, 2001. The increase was primarily due to earnings for the quarter, which was offset by quarterly dividends of $0.075 per share and treasury stock purchases. Book value per share was $7.40 as of March 31, 2002.

Comparison of Operating Results for the Three Months Ended
March 31, 2002 and March 31, 2001

Net Income. Net income for the three months ended March 31, 2002 was $4.3 million, or $0.13 per diluted share, compared to net income of $3.2 million, or $0.10 per diluted share, for the three months ended March 31, 2001. Net interest income increased $4.0 million and noninterest income increased $2.0 million, which were offset by a $2.7 million increase in noninterest expense and a $366,000 increase in the provision for loan losses. United Community acquired Industrial Bancorp in the third quarter of 2001, which is partially attributable to the increases in 2002. United Community’s annualized return on average assets and return on average equity were 0.87% and 6.42%, respectively, for the three months ended March 31, 2002. The annualized return on average assets and return on average equity for the comparable period in 2001 were 0.98% and 4.89%, respectively.

Net Interest Income. Net interest income increased $4.0 million, or 32.5%, for the three months ended March 31, 2002, compared to the first quarter of 2001. The increase is primarily due to an increase in interest income on loans of $8.9 million as a result of a higher loan volume and loans acquired from Industrial. This increase was partially offset by increases of $1.8 million and $1.4 million in interest expense on deposits and other borrowed funds, respectively, and decreases of $1.5 million and $448,000 in interest earned on securities and margin accounts, respectively.

Provision for Loan Losses. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. Due to growth in the loan portfolio, the acquisition of Industrial Bancorp, the current economic conditions and loans being originated in new market areas, the provision for loan loss allowances was $696,000 for the first quarter of 2002 compared to a $330,000 provision booked in the first quarter of 2001. Home Savings anticipates additional growth in the loan portfolio which may have further impact on the loan loss provision in the future. Home Savings’ allowance for loan losses totaled $12.0 million at March 31, 2002, which was 0.82% of total loans, compared to 0.73% at March 31, 2001.

Noninterest Income. Noninterest income increased $2.0 million, or 34.0%, from $5.8 million for the three months ended March 31, 2001, to $7.8 million for the three months ended March 31, 2002. Since Anthem is Home Savings’ health care provider, Home Savings received shares of Anthem stock through the demutualization of Anthem, Inc. and subsequently sold the stock. To recognize the receipt, other income was increased by $847,000. To recognize the subsequent sale of the stock, a gain of $476,000 was recognized on the sale of marketable securities. In addition to these transactions, increases in the gains recognized on loans sold and trading securities of $751,000 and $434,000, respectively, also contributed to the increase in noninterest income. A decrease in brokerage commissions of $209,000 partially offset these increases.

Noninterest Expense. Total noninterest expense increased $2.7 million, or 21.2%, to $15.5 million for the three months ended March 31, 2002, from $12.8 million for the three months ended March 31, 2001. The primary reasons for the increase are increases of $1.9 million in salaries and employee benefits primarily as a result of the acquisition of Industrial and $638,000 in the amortization of the core deposit intangible from the acquisition of Industrial.

Federal Income Taxes. The provision for federal income taxes increased $1.0 million for the three months ended March 31, 2002, compared to the three months ended March 31, 2001 due to higher pre-tax income in 2002. The effective tax rates were 36.1% and 36.4% for the three months ended March 31, 2002 and 2001, respectively.

Extraordinary Items. Extraordinary items increased $822,000, net of tax, from December 31, 2001 to March 31, 2002. In 2002, United Community established that it was advantageous to extinguish debt early and incur associated fees due to current economic conditions and cash inflow from loans sold. In accordance with generally accepted accounting principles, United Community recognized the associated fees, net of tax, as an extraordinary item.

10

UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEET

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the months ended March 31, 2002 and March 31, 2001. Average balance calculations were based on daily balances.

						Three Months Ended March 31,
				2002							2001
		Average		Interest					Average		Interest
		outstanding		earned/		Yield/			outstanding		earned/		Yield/
		balance		paid		rate			balance		paid		rate
						(In thousands)
Interest-earning assets:
Net loans (1)		$	1,428,867	$	26,974		7.55	%	$	895,727	$	18,074		8.07	%
Net loans held for sale			15,852		114		2.88	%		0		0		0.00	%
Mortgage-related securities:
	Available for sale		61,547		889		5.78	%		93,259		1,464		6.28	%
	Held to maturity		74,616		1,250		6.70	%		104,674		1,782		6.81	%
Marketable securities:
	Trading		7,726		33		1.71	%		6,160		31		2.01	%
	Available for sale		92,278		951		4.12	%		89,048		1,332		5.98	%
	Held to maturity		1,726		17		3.94	%		880		13		5.91	%
Margin accounts			20,440		220		4.31	%		32,874		668		8.13	%
FHLB stock			18,767		208		4.43	%		13,798		247		7.16	%
Other interest-earning assets			146,902		607		1.65	%		31,788		427		5.37	%
Total interest-earning assets			1,868,721		31,263		6.69	%		1,268,208		24,038		7.58	%
Noninterest-earning assets			83,909							40,544
Total assets		$	1,952,630						$	1,308,752
Interest-bearing liabilities:
NOW and money market accounts		$	262,795	$	1,633		2.49	%	$	146,197	$	1,077		2.95	%
Savings accounts			260,936		1,345		2.06	%		198,712		1,111		2.24	%
Certificates of deposit			839,288		9,130		4.35	%		553,389		8,096		5.85	%
Other borrowed funds			254,272		2,785		4.38	%		104,430		1,397		5.35	%
Total interest-bearing liabilities			1,617,291		14,893		3.68	%		1,002,728		11,681		4.66	%
Noninterest-bearing liabilities			70,254							43,920
Total liabilities			1,687,545							1,046,648
Equity			265,085							262,104
Total liabilities and equity		$	1,952,630						$	1,308,752
Net interest income and Interest rate spread				$	16,370		3.01	%			$	12,357		2.92	%
Net interest margin							3.50	%						3.90	%
Average interest-earning assets to average interest-bearing liabilities							115.55	%						126.48	%

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

11

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

A comprehensive qualitative and quantitative analysis regarding Home Savings’ market risk was disclosed in United Community’s 2001 Annual Report under the caption “Asset and Liability Management and Market Risk.” No material change in the methodology or results has occurred.

12

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

Items 1, 2, 3, 4 and 5 — Not applicable

Item 6 — Exhibits and Reports on Form 8-K

a. Exhibits

Exhibit
Number	Description
3.1         3.2	Articles of Incorporation Amended Code of Regulations

b. Reports on Form 8-K

On January 23, 2002, United Community filed an 8-K under Item 5, Other Events, disclosing operating results for the quarter ended December 31, 2001.

13

UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		UNITED COMMUNITY FINANCIAL CORP.
Date:	May 13, 2002	/s/ Douglas M. McKay
		Douglas M. McKay, President
Date:	May 13, 2002	/s/ Patrick A. Kelly
		Patrick A. Kelly, Treasurer

14

UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on March 13, 1998 with the Securities and Exchange Commission (SEC), Exhibit 3.1.

Exhibit 3.2

Incorporated by reference to the 1998 Form 10-K filed by United Community on March 31, 1999 with the SEC, Exhibit 3.2.

15