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 September 30, 2001
[ ] 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 (IRS Employer
incorporation or organization) 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.
35,667,586 common shares as of November 9, 2001
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of September 30, 2001 and
December 31, 2000........................................................................ 1
Consolidated Statements of Income for the Three Months and Nine Months Ended
September 30, 2001 and 2000 ............................................................. 2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 ............................................................. 3
Consolidated Statement of Comprehensive Income for the Three Months
and Nine Months Ended September 30, 2001................................................. 4
Notes to Consolidated Financial Statements .............................................. 5 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 11-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 17
PART II. OTHER INFORMATION............................................................................. 18
Signatures............................................................................................. 19
EXHIBITS............................................................................................... 20
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
September 30, December 31,
2001 2000
----------- -----------
(Dollars in thousands)
ASSETS:
Cash and deposits with banks $ 30,894 $ 23,479
Federal funds sold and other 44,846 22,493
----------- -----------
Total cash and cash equivalents 75,740 45,972
----------- -----------
Marketable securities:
Trading (amortized cost of $6,119 and $5,927, respectively) 6,126 5,933
Available for sale (amortized cost of $53,143 and $98,267, respectively) 54,232 98,445
Held to maturity (fair value of $604 and $900, respectively) 584 876
Mortgage-related securities:
Available for sale (amortized cost of $77,995 and $92,059, respectively) 79,496 91,731
Held to maturity (fair value of $88,634 and $108,229, respectively) 86,102 107,684
Loans, net (including allowance for loan losses of $10,197 and $6,553, respectively) 1,379,394 876,653
Loans held for sale, net 120,981 -
Margin accounts 22,044 33,361
Federal Home Loan Bank stock 18,503 13,793
Premises and equipment 16,884 11,939
Accrued interest receivable 10,729 7,701
Real estate owned 410 359
Goodwill 19,650 -
Identified intangible assets 7,068 -
Other assets 5,276 5,752
----------- -----------
TOTAL ASSETS $ 1,903,219 $ 1,300,199
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 1,342,997 $ 900,413
Other borrowed funds 275,572 114,317
Advance payments by borrowers for taxes and insurance 3,649 4,152
Accrued interest payable 5,041 2,933
Accrued expenses and other liabilities 16,959 16,485
----------- -----------
TOTAL LIABILITIES 1,644,218 1,038,300
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock-no par value; 1,000,000 shares authorized and unissued
at September 30, 2001 - -
Common stock-no par value; 499,000,000 shares authorized; 37,754,086
and 37,800,497 shares issued, respectively 136,859 136,967
Retained earnings 157,748 155,026
Accumulated other comprehensive income (loss) 1,683 (98)
Unearned stock compensation (23,832) (26,674)
Treasury stock, at cost; 1,958,500 and 483,500 shares, respectively (13,457) (3,322)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 259,001 261,899
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,903,219 $ 1,300,199
=========== ===========
See Notes to Consolidated Financial Statements.
1
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)
INTEREST INCOME
Loans $ 28,242 $ 16,159 $ 65,714 $ 45,523
Loans held for sale 69 - 69 -
Mortgage-related securities:
Available for sale 1,236 1,640 4,112 5,180
Held to maturity 1,523 2,095 4,957 6,683
Marketable securities:
Trading 15 12 80 84
Available for sale 698 1,982 3,053 6,316
Held to maturity 8 13 33 48
Margin accounts 389 967 1,512 2,638
FHLB stock dividend 321 250 821 713
Other interest-earning assets 371 118 1,204 350
-------- -------- -------- --------
Total interest income 32,872 23,236 81,555 67,535
INTEREST EXPENSE
Deposits 13,735 9,124 34,736 25,554
Other borrowed funds 3,084 2,319 6,008 6,343
-------- -------- -------- --------
Total interest expense 16,819 11,443 40,744 31,897
-------- -------- -------- --------
NET INTEREST INCOME 16,053 11,793 40,811 35,638
PROVISION FOR LOAN LOSS ALLOWANCES 465 150 1,045 150
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSS ALLOWANCES 15,588 11,643 39,766 35,488
-------- -------- -------- --------
NONINTEREST INCOME
Brokerage commissions 3,019 3,910 10,031 13,532
Service fees and other charges 2,156 1,404 5,923 4,017
Underwriting and investment banking fees 127 113 511 327
Net gains (losses):
Mortgage-related securities - - 140 -
Marketable securities - 50 245 46
Trading securities (655) (49) (850) 178
Loans sold 258 - 339 -
Other 46 8 52 5
Other income 285 278 753 694
-------- -------- -------- --------
Total noninterest income 5,236 5,714 17,144 18,799
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and employee benefits 8,097 9,483 24,496 27,554
Gain on postretirement curtailment - (2,928) - (2,928)
Loss on pension termination - 1,008 - 1,008
Occupancy 702 552 1,896 1,540
Equipment and data processing 1,930 1,477 5,324 4,222
Franchise tax 500 927 1,514 2,793
Advertising 428 526 1,416 1,343
Other expenses 2,861 1,695 6,204 4,849
-------- -------- -------- --------
Total noninterest expenses 14,518 12,740 40,850 40,381
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 6,306 4,617 16,060 13,906
INCOME TAXES 2,341 1,528 5,954 4,745
-------- -------- -------- --------
NET INCOME $ 3,965 $ 3,089 $ 10,106 $ 9,161
======== ======== ======== ========
EARNINGS PER SHARE:
Basic and diluted $ 0.12 $ 0.09 $ 0.31 $ 0.27
See Notes to Consolidated Financial Statements.
2
UNITED COMMUNITY FINANCIAL CORP.
STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended September 30,
-------------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Net income $ 3,965 $ 3,089
Unrealized holding gains arising
during the period, net of tax effect
of $328 and $789, respectively 610 1,440
Reclassification adjustment for gains
included in net income, net of tax effect
of $13 - 25
------------------ -----------------
Comprehensive income $ 4,575 $ 4,554
================== =================
Nine Months Ended September 30,
-------------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Net income
Unrealized holding gains arising $ 10,106 $ 9,161
during the period, net of tax effect
of $959 and $703, respectively 1,570 1,283
Reclassification adjustment for gains
included in net income, net of tax effect
of $(114) and $12, respectively (211) 22
------------------ -----------------
Comprehensive income $ 11,465 $ 10,466
================== =================
See Notes to Consolidated Financial Statements.
3
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2001 2000
--------- ---------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,106 $ 9,161
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan loss allowances 1,045 150
Net (gains) losses (776) (51)
Accretion of discounts and amortization of premiums (1,846) (286)
Depreciation 1,664 1,103
ESOP compensation 1,486 1,476
Amortization of restricted stock compensation 1,248 1,379
FHLB stock dividends (821) (713)
(Increase) decrease in trading securities (193) 1,845
Decrease (increase) in margin accounts 11,317 (13,764)
(Increase) decrease in interest receivable (533) 498
Decrease (Increase) in prepaid and other assets 1,189 (1,069)
Increase (decrease) in interest payable 1,324 (1,812)
Increase in other liabilities 1,269 532
--------- ---------
Net cash provided by (used in) operating activities 26,479 (1,551)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal repayments and maturities of:
Mortgage-related securities held to maturity 20,112 20,241
Mortgage-related securities available for sale 25,754 16,645
Marketable securities held to maturity 900 693
Marketable securities available for sale 65,575 62,096
Proceeds from sale of:
Mortgage-related securities held to maturity 1,454 -
Mortgage-related securities available for sale 15,839 -
Marketable securities available for sale 6,438 17,672
Loans 31,335 -
Real estate owned 589 -
Purchases of:
Marketable securities available for sale (14,553) (30,038)
Marketable securities held to maturity (585) (476)
Mortgage-related securities available for sale (27,555) (1,195)
Net cash paid for acquisiton (69,844) -
Net principal disbursed on loans (265,676) (104,926)
Loans purchased (2,576) (7,865)
Purchases of premises and equipment (1,613) (2,891)
Other - 225
--------- ---------
Net cash used in investing activities (214,406) (29,819)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in NOW, savings and money market accounts 50,392 (11,298)
Net increase in certificates of deposit 75,788 31,601
Net decrease in advance payments by borrowers
for taxes and insurance (1,792) (1,811)
Proceeds from FHLB advances 193,000 -
Repayment of FHLB advances (8,000) -
Net increase in other borrowed funds (74,175) (50,939)
Dividends paid (7,383) (7,623)
Purchase of treasury stock (10,135) -
--------- ---------
Net cash provided by (used in) financing activities 217,695 (40,070)
--------- ---------
Increase (decrease) in cash and cash equivalents 29,768 (71,440)
Cash and cash equivalents, beginning of period 45,972 111,445
--------- ---------
Cash and cash equivalents, end of period $ 75,740 $ 40,005
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 38,636 $ 33,763
Income taxes 5,530 4,428
Supplemental schedule of noncash activities:
Loans transferred to held for sale 120,981 -
Transfers from loans to real estate owned 534 371
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 10 full
service offices and two trust office 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 nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2001. 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, 2000, contained in United Community's
Form 10-K for the year ended December 31, 2000.
2. SALE OF MORTGAGE-RELATED SECURITIES
During the nine months ended September 30, 2001, Home Savings sold approximately
$15.8 million of mortgage-related securities available for sale. A gain of
approximately $79,000 was recorded on the sale. During the nine months ended
September 30, 2001, Home Savings sold approximately $1.5 million of
mortgage-related securities held to maturity with outstanding balances of less
than 15% of the principal outstanding at acquisition. A gain of approximately
$61,000 was recorded on the sale. There were no sales of mortgage-related
securities available for sale or held to maturity during the nine months ended
September 30, 2000.
5
3. LOANS
Loans consist of the following:
September 30, December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Real Estate:
Permanent:
One- to four-family $1,062,236 $618,112
Multifamily 56,956 24,085
Non-residential 156,850 137,976
Land 12,063 5,172
Construction:
One- to four-family 137,256 57,955
Multifamily and non-residential 24,350 11,389
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate 1,449,711 854,689
Consumer 114,351 58,345
Commercial 44,360 34,657
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 1,608,422 947,691
- -----------------------------------------------------------------------------------------------------------------------------------
Less:
Loans in process 88,748 59,273
Allowance for loan losses 10,197 6,553
Deferred loan fees, net 9,102 5,212
- -----------------------------------------------------------------------------------------------------------------------------------
Total 108,047 71,038
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net $1,500,375 $ 876,653
- -----------------------------------------------------------------------------------------------------------------------------------
Changes in the allowance for loan losses are as follows:
Nine Months Ended Year Ended
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance, beginning of year $ 6,553 $ 6,405
Acquired from Industrial Bancorp 2,795 -
Provision for loan loss allowances 1,045 300
Amounts charged off (222) (201)
Recoveries 26 49
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $10,197 $ 6,553
- -----------------------------------------------------------------------------------------------------------------------------------
4. DEPOSITS
Deposits consist of the following:
September 30, December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Checking accounts:
Interest-bearing $ 84,492 1.69% $ 65,988 1.05%
Noninterest-bearing 30,219 17,573
Savings accounts 259,849 2.37 199,680 2.28
Money market accounts 130,029 3.89 80,004 4.35
Certificates of deposit 838,408 5.47 537,168 6.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $1,342,997 4.36% $ 900,413 4.61%
- -----------------------------------------------------------------------------------------------------------------------------------
6
5. OTHER BORROWED FUNDS
The following is a summary of FHLB borrowings:
September 30, December 31,
2001 2000
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Weighted Weighted
Year of Maturity Amount average rate Amount average rate
- -------------------------------------------------------------------------------------------------------
2001 $ 12,000 5.23% $ 76,500 6.25%
2002 35,000 5.40 5,000 7.02
2003 20,000 5.40 - -
2004 43,000 4.56 - -
2005 18,000 5.19 - -
2006 112,000 4.73 - -
- -------------------------------------------------------------------------------------------------------
Total $ 240,000 $ 81,500
- -------------------------------------------------------------------------------------------------------
In addition to the FHLB advances, United Community has a variable interest
revolving line of credit and securities sold under repurchase agreements. At
September 30, 2001, the revolving line of credit was $18.2 million compared to
$25.3 million at December 31, 2000. The repurchase agreements were $17.0 million
and $7.5 million at September 30, 2001 and December 31, 2000, respectively.
6. 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 an investment brokerage and a network of integrated financial
services. Condensed statements of income and selected financial information by
operating segment for the three and nine months ended September 30, 2001 and
2000 are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2001
Investment Advisory
Retail Banking Services Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Interest income $ 32,915 $ 433 $476 $ 32,872
Interest expense 17,125 170 476 16,819
Provision for loan loss 465 - - 465
------------- ------------- ----------- ------------
Net interest income after
provision for loan loss 15,325 263 - 15,588
Non-interest income 874 4,362 - 5,236
Non-interest expense 10,298 4,220 - 14,518
------------- ------------- ----------- ------------
Income before tax 5,901 405 - 6,306
Income tax expense 2,200 141 - 2,341
------------- ------------- ----------- ------------
Net income $ 3,701 $ 264 $ - $ 3,965
============= ============= =========== ============
7
THREE MONTHS ENDED SEPTEMBER 30, 2000
Investment Advisory
Retail Banking Services Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Interest income $ 22,718 $ 1,017 $499 $ 23,236
Interest expense 11,382 560 499 11,443
Provision for loan loss 150 - - 150
--------------- ------------- ----------- -------------
Net interest income after
provision for loan loss 11,186 457 - 11,643
Non-interest income 617 5,097 - 5,714
Non-interest expense 7,399 5,341 - 12,740
--------------- ------------- ----------- -------------
Income before tax 4,404 213 - 4,617
Income tax expense 1,452 76 - 1,528
--------------- ------------- ----------- -------------
Net income $ 2,952 $ 137 $ - $ 3,089
=============== ============= =========== =============
NINE MONTHS ENDED SEPTEMBER 30, 2001
Investment Advisory
Retail Banking Services Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Interest income $ 81,704 $ 1,664 $1,813 $ 81,555
Interest expense 41,832 725 1,813 40,744
Provision for loan loss 1,045 - - 1,045
------------- ------------- ----------- ------------
Net interest income after
provision for loan loss 38,827 939 - 39,766
Non-interest income 2,776 14,368 - 17,144
Non-interest expense 26,228 14,622 - 40,850
------------- ------------- ----------- ------------
Income before tax 15,375 685 - 16,060
Income tax expense 5,707 247 - 5,954
------------- ------------- ----------- ------------
Net income $ 9,668 $ 438 $ - $10,106
============= ============= =========== ============
NINE MONTHS ENDED SEPTEMBER 30, 2000
Investment Advisory
Retail Banking Services Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Interest income $ 66,226 $ 2,807 $1,498 $ 67,535
Interest expense 31,840 1,555 1,498 31,897
Provision for loan loss 150 - - 150
------------- ------------- ----------- ------------
Net interest income after
provision for loan loss 34,236 1,252 - 35,488
Non-interest income 1,826 16,973 - 18,799
Non-interest expense 23,200 17,181 - 40,381
------------- ------------- ----------- ------------
Income before tax 12,862 1,044 - 13,906
Income tax expense 4,370 375 - 4,745
------------- ------------- ----------- ------------
Net income $ 8,492 $ 669 $ - $ 9,161
============= ============= =========== ============
8
7. 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 the Recognition and Retention Plan.
No shares of common stock were anti-dilutive for the periods ended September 30,
2001. 638,483 shares of common stock were excluded from the diluted earnings per
share calculation for the periods ended September 30, 2000, as they were
anti-dilutive.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------ ----------- -----------
(In thousands, (In thousands,
except per share data) except per share data)
BASIC EARNINGS PER SHARE:
Net income applicable to common stock $ 3,964 $ 3,089 $ $9,161
10,106
Weighted average common shares outstanding 31,921 33,252 32,307 33,205
------------- ------------ ----------- -----------
Basic earnings per share $ 0.12 $ 0.09 $ 0.31 $ 0.27
============= ============ =========== ===========
DILUTED EARNINGS PER SHARE:
Net income applicable to common stock $ 3,964 $ 3,089 $10,106 $9,161
Weighted average common shares outstanding 31,921 33,252 32,307 33,205
Dilutive effect of restricted stock 185 841 181 859
Dilutive effect of stock options 91 - 29 -
------------- ------------ ----------- -----------
Weighted average common shares outstanding
for dilutive computation 32,197 34,093 32,517 34,064
------------- ------------ ----------- -----------
Diluted earnings per share $ 0.12 $ 0.09 $ 0.31 $0.27
============= ============ =========== ===========
8. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The FASB delayed the
effective date of SFAS No. 133 for one year, to fiscal years beginning after
June 15, 2000. SFAS No. 138 amends the accounting and reporting standards of
SFAS No. 133 for certain derivative instruments and certain hedging activities.
United Community adopted SFAS No. 133 and SFAS No. 138 as of January 1, 2001,
which adoption did not have a material impact on United Community's financial
position or results of operations.
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement replaces SFAS No. 125 and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001, and is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Adoption of this statement did not
have, and is not anticipated to have, a material impact on United Community's
financial position or results of operations.
In June 2001, FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141
requires all business combinations within its scope to be accounted for using
the purchase method, rather than the pooling-of-interests method. The provisions
of this Statement apply to all business combinations initiated after June 30,
2001. United Community completed the acquisition of Industrial Bancorp on July
1, 2001, which it accounted for using the purchase method.
Also in June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the accounting for such assets arising from prior and
future business combinations. Upon the adoption of this Statement, goodwill
arising from business
9
combinations will no longer be amortized, but rather will be assessed regularly
for impairment, with any such impairment recognized as a reduction to earnings
in the period identified. Other intangible assets, such as core deposit
intangible assets, will continue to be amortized over their estimated useful
lives. United Community is required to adopt this Statement on January 1, 2002
and early adoption is not permitted. United Community had goodwill of $19.7
million and core deposit intangible assets of $7.1 million as of September 30,
2001.
9. ACQUISITIONS
On July 1, 2001, United Community acquired all of the capital stock of
Industrial Bancorp, Inc., the holding company for The Industrial Savings and
Loan Association (Industrial Savings), an Ohio-chartered savings and loan
association, through the merger of Home Savings' subsidiary, UCFC Acquisition
Subsidiary, Inc. into Industrial Bancorp, Inc. Industrial Savings was then
merged into Home Savings. The assets acquired consisted principally of loans and
securities.
Home Savings accounted for the acquisition as a purchase and has included
Industrial Bancorp's results of operations from the effective date of the
acquisition in its 2001 financial statements. Based on Industrial Bancorp's
4,284,751 outstanding shares, the acquisition was valued at $87.3 million, which
was paid in cash. The excess of the aggregate purchase price over the fair
market value of net assets acquired of approximately $19.7 million will not be
amortized in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets."
In connection with the acquisition, Home Savings acquired all of the equipment
and other physical property of Industrial Bancorp. Home Savings intends to
continue to use the assets acquired in this transaction in the manner utilized
by Industrial Bancorp prior to the acquisition.
The following summarized unaudited pro forma financial information for the
periods ended September 30, 2001 and 2000 assume the Industrial Bancorp merger
occurred as of January 1, 2000:
September 30, 2001 September 30, 2000
------------------ ------------------
(In thousands, except per share data)
Net interest income after provision for loan losses $44,441 $43,906
Net income 5,427 9,423
Diluted earnings per share $ 0.17 $ 0.28
As previously announced on September 6, 2001, United Community Financial Corp.
executed a definitive agreement for Home Savings to acquire Potters Financial
Corporation (Potters), the holding company for Potters Bank in East Liverpool,
Ohio. Subject to approval of regulatory authorities and Potters' shareholders,
Home Savings will pay $22.00 in cash for each Potters common share. The
transaction is anticipated to be completed in the first quarter of 2002. Home
Savings will account for the acquisition as a purchase and will include Potters'
results of operations from the effective date of the acquisition in its 2001
financial statements. At September 30, 2001, Potters had total assets of $147.0
million and total deposits of $115.0 million. Based on Potters' 997,989
outstanding shares and 105,282 stock options, the acquisition is valued at $23.6
million.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNITED COMMUNITY FINANCIAL CORP.
At or For the At or For the
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
SELECTED FINANCIAL RATIOS AND OTHER DATA:(1) 2001 2000 2001 2000
-------- -------- -------- --------
Performance ratios:
Return on average assets(2) 0.84% 0.97% 0.86% 0.98%
Return on average equity(3) 6.13% 4.74% 5.19% 4.71%
Interest rate spread(4) 2.99% 2.82% 2.86% 2.97%
Net interest margin(5) 3.57% 3.83% 3.60% 3.93%
Noninterest expense to average assets 3.09% 4.00% 3.49% 4.30%
Efficiency ratio(6) 68.19% 72.77% 70.40% 74.18%
Average interest-earning assets to average interest-
bearing liabilities 115.41% 127.14% 120.69% 127.25%
Capital ratios:
Average equity to average assets 13.76% 20.42% 16.65% 20.71%
Equity to assets, end of period 13.61% 20.19% 13.61% 20.19%
Tangible capital(7) 8.90% 13.50% 8.90% 13.50%
Core capital(7) 8.90% 13.50% 8.90% 13.50%
Risk-based capital(7) 14.01% 23.36% 14.01% 23.36%
Asset quality ratios:
Nonperforming loans to total loans at end of period(8) 0.88% 0.43% 0.88% 0.43%
Nonperforming assets to average assets(9) 0.72% 0.31% 0.87% 0.31%
Nonperforming assets to total assets at end of period 0.71% 0.30% 0.71% 0.30%
Allowance for loan losses as a percent of loans 0.68% 0.77% 0.68% 0.77%
Allowance for loan losses as a percent of
nonperforming loans(8) 77.46% 178.43% 77.46% 178.43%
Per share data:
Basic earnings per share 10) $ 0.12 $ 0.09 $ 0.31 $ 0.27
Diluted earnings per share(10) $ 0.12 $ 0.09 $ 0.31 $ 0.27
Dividends per share $ 0.075 $ 0.075 $ 0.225 $ 0.225
Book value per share(11) $ 7.99 $ 7.69 $ 7.99 $ 7.69
Office Data
Number of full service banking offices 29 15 29 15
Number of loan production offices 4 - 4 -
Number of full service brokerage offices 10 10 10 10
Number of trust offices 2 1 2 1
- ----------
(1) Ratios for the three and nine month periods are annualized where
appropriate.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Difference between weighted average yield on interest-earning
assets and weighted average cost of interest-bearing
liabilities.
(5) Net interest income as a percentage of average interest-earning
assets.
(6) Noninterest expense divided by the sum of net interest income
and noninterest income, excluding gains and losses.
(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.
11
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 SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
Total assets were $1.9 billion at September 30, 2001, a $603.0 million, or
46.4%, increase compared to December 31, 2000. The primary reason for the
increase in total assets was the purchase of Industrial Bancorp (Industrial)
assets totaling $424.1 million, which resulted in $19.7 million in goodwill and
core deposit intangible assets of $7.1 million as of September 30, 2001. During
the year, there have been increases in cash and cash equivalents of $29.8
million and loans and loans held for sale of $502.7 million and $121.0 million,
respectively. Increases in deposits of $442.6 million and other borrowed funds
of $161.3 million and a net reduction of $79.1 million in securities funded
these increases.
Cash and cash equivalents increased $29.8 million, of which approximately $17.5
million was acquired from Industrial. The remaining increase is primarily as a
result of funds borrowed from the Federal Home Loan Bank, which are available
for increased loan activity and daily operations.
Net loans increased $502.7 million, or 57.3%, to $1.4 billion at September 30,
2001, compared to $876.7 million at December 31, 2000. Approximately $380.1
million of the increase was acquired from Industrial. Real estate loans
increased $502.8 million, consumer loans increased $56.0 million and commercial
loans increased $9.7 million. Home Savings is expecting growth in all loan
categories, which will increase the risk of loan losses. Non-residential real
estate lending is generally considered to involve a higher degree of risk than
residential real estate lending due to the relatively larger loan amounts and
the effects of general economic conditions on the successful operation of
income-producing properties. Refer to Note 3 for a more detailed breakout of
loans.
United Community has become active in the secondary market through it subsidiary
Home Savings. During 2001, Home Savings has identified $121.0 million in loans
that it has classified as held for sale. Home Savings anticipates selling a
majority of these loans in the fourth quarter of 2001.
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. Federal funds sold and other overnight funds increased $22.3 million, or
99.4%, to $44.8 million at September 30, 2001 from $22.5 million at December 31,
2000. Securities available for sale, which include both marketable and
mortgage-related securities, decreased $56.4 million, or 29.7%, since December
31, 2000. Securities held to maturity, which also consist of both marketable
securities and mortgage-related securities, decreased $21.9 million, or 20.0%,
since December 31, 2000. Trading securities, which consist of marketable
securities, increased $193,000, or 3.3%, to $6.1 million at September 30, 2001.
The net decrease in overnight funds and securities, along with increases in
deposits and other borrowed funds was primarily used to fund increases in net
loans of $502.7 million. 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.
Nonaccrual and restructured loans increased approximately $3.4 million to $13.2
million at September 30, 2001 from $9.8 million at December 31, 2000, primarily
due to $3.6 million being acquired from Industrial. At September 30, 2001, total
nonaccrual and restructured loans accounted for 0.88% of net loans receivable,
compared to 1.10% at December 31, 2000. Total nonperforming assets, which
include nonaccrual and restructured loans and real estate owned, were 0.71% of
total assets as of September 30, 2001 and 0.77% as of December 31, 2000.
Total deposits increased $442.6 million from $900.4 million at December 31, 2000
to $1.3 billion at September 30, 2001, of which $313.6 million was purchased
from Industrial. The increase was due to a $61.0 million increase in
certificates of deposit and a $39.2
12
million increase in checking accounts. The increases in certificates of deposit
and checking accounts were primarily due to Home Savings competitively pricing
these products. Refer to Note 4 for a more detailed breakdown of deposits.
Other borrowed funds increased $161.3 million to $275.6 million at September 30,
2001 compared to $114.3 million at December 31, 2000. This increase was
primarily due to Federal Home Loan Bank advances of $50.0 million acquired from
Industrial, $87.0 million borrowed from the Federal Home Loan Bank for the
Industrial acquisition and other borrowings to fund loan growth. As of September
30, 2001, $41.0 million and $199.0 million of the other borrowed funds consisted
of short-term and long-term Federal Home Loan Bank advances, respectively. The
remaining funds consist of a revolving line of credit and other short-term
borrowings. Refer to Note 5 for a more detailed breakout of borrowed funds.
Shareholders' equity decreased $2.9 million, or 1.1%, to $259.0 million at
September 30, 2001 from $261.9 million at December 31, 2000. The decrease was
primarily due to the quarterly dividends of $0.075 per share and treasury stock
purchases, offset by earnings for the nine months and an increase in other
comprehensive income. Book value per share was $7.99 as of September 30, 2001.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
NET INCOME. Net income for the three months ended September 30, 2001 was $4.0
million, or $0.12 per diluted share, compared to net income of $3.1 million, or
$0.09 per diluted share, for the three months ended September 30, 2000. Net
interest income increased $4.3 million, which was offset by a $1.8 million
increase in noninterest expense, a $315,000 increase in provision for loan
losses and a $478,000 reduction in noninterest income. United Community's
annualized return on average assets and return on average equity were 0.84% and
6.13%, respectively, for the three months ended September 30, 2001. The
annualized return on average assets and return on average equity for the
comparable period in 2000 were 0.97% and 4.74%, respectively.
NET INTEREST INCOME. Net interest income increased $4.3 million, or 36.1%, for
the three months ended September 30, 2001, compared to the third quarter of
2000. The increase is primarily due to an increase in interest income on loans
of $12.1 million as a result of a higher loan volume and loans acquired from
Industrial. This increase was partially offset by increases of $4.6 million and
$765,000 in interest expense on deposits and other borrowed funds, respectively,
and decreases of $2.3 million and $578,000 in interest earned on securities and
margin accounts, respectively.
PROVISION FOR LOAN LOSS ALLOWANCES. 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 provision for loan loss allowances was
$465,000 for the third quarter of 2001 compared to a $150,000 provision being
booked in the third quarter of 2000. 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 $10.2 million at
September 30, 2001, which was 0.68% of total loans, compared to 0.77% at
September 30, 2000.
NONINTEREST INCOME. Noninterest income decreased $478,000, or 8.4%, from $5.7
million for the three months ended September 30, 2000, to $5.2 million for the
three months ended September 30, 2001. Decreases of $891,000 in brokerage
commissions and a $606,000 loss on trading securities primarily within the
Butter Wick Retention Plan due to current market conditions were the primary
reasons for the decline. These decreases were partially offset by an
increase in service fees and other charges of $752,000.
NONINTEREST EXPENSE. Total noninterest expense increased $1.8 million, or 14.0%,
to $14.5 million for the three months ended September 30, 2001, from $12.7
million for the three months ended September 30, 2000. The increase was
primarily due to the gain on postretirement curtailment of $2.9 million and the
loss on pension termination of $1.0 million, which were recognized in 2000. The
$1.1 million increase in other expenses, primarily due to $915,000 in
amortization of the core deposit intangible assets, along with increases in
occupancy, equipment and data processing offset the $1.4 million decline in
salaries and employee benefits. The primary reason for the decline in salaries
and employee benefits is the decline in commission income and lower expenses
related to the Butler Wick retention plan.
13
FEDERAL INCOME TAXES. The provision for federal income taxes increased $813,000
for the three months ended September 30, 2001, compared to the three months
ended September 30, 2000 due to higher pre-tax income in 2001. The effective tax
rates were 37.1% and 33.1% for the three months ended September 30, 2001 and
2000, respectively.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
NET INCOME. Net income for the nine months ended September 30, 2001 was $10.1
million, or $0.31 per diluted share. Net income for the comparable period in
2000 was $9.2 million, or $0.27 per diluted share. Net interest income for the
nine months ended September 30, 2001 increased $5.2 million. Noninterest income
declined $1.7 million, while the provisions for income taxes and loan losses
increased $1.2 million and $895,000, respectively, and noninterest expense
increased $469,000. United Community's annualized return on average assets and
return on average equity were 0.86% and 5.19%, respectively, for the nine months
ended September 30, 2001. The annualized return on average assets and return on
average equity for the comparable period in 2000 were 0.98% and 4.71%,
respectively.
NET INTEREST INCOME. Net interest income increased $5.2 million for the nine
months ended September 30, 2001, compared to the same period of 2000. The
increase was primarily due to an increase in loan interest income of $20.2
million, which was substantially offset by an increase of $9.2 million in
interest expense on deposits and decreases of $6.1 million in interest
income on securities.
PROVISION FOR LOAN LOSS ALLOWANCES. Due to growth in the loan portfolio, the
provision for loan loss allowances was $1.0 million for the first nine months of
2001 compared to the $150,000 provision booked in the comparable period of 2000.
Home Savings anticipates further 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 $10.2 million at September 30, 2001, which was 0.68% of
total loans, compared to 0.77% at September 30, 2000.
NONINTEREST INCOME. Noninterest income declined $1.7 million, or 8.8%, from
$18.8 million for the nine months ended September 30, 2000, to $17.1 million for
the nine months ended September 30, 2001. Declines of $3.5 million in commission
income and $1.0 million in trading securities losses were partially offset by
increases of $1.9 million in service fees and other charges and higher gains on
the sale of mortgage-related and marketable securities and loans. The lower
commission income is attributable to the overall volatility of the stock market,
which has led to fewer transactions throughout the brokerage industry.
NONINTEREST EXPENSE. Total noninterest expense increased $469,000, or 1.2%, to
$40.9 million for the nine months ended September 30, 2001, from $40.4 million
for the nine months ended September 30, 2000. The increase was primarily due to
increases in equipment and data processing, occupancy, advertising and other
expenses. These increases were partially offset by decreases of $3.1 million in
salaries and employee benefits and $1.3 million in franchise taxes. The decline
in salaries and employee benefits for the nine months ended September 30, 2001
was primarily due to the decline in commission income and lower expenses related
to the Butler Wick retention plan. The increase in noninterest expense was also
affected by a $2.9 million gain on postretirement curtailment and a $1.0 million
loss on the termination of Home Savings' pension plan, both of which were
recognized in 2000.
FEDERAL INCOME TAXES. The provision for federal income taxes increased $1.2
million, or 25.5%, for the nine months ended September 30, 2001, compared to the
nine months ended September 30, 2000. The effective tax rates were 37.1% and
34.1% for the nine months ended September 30, 2001 and 2000, respectively.
14
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 three month periods ended September 30, 2001 and 2000. Average balance
calculations were based on daily balances.
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------ ---------- ---------- ------------- --------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Net loans(1) $ 1,462,232 $28,242 7.73% $ 804,693 $ 16,159 8.03%
Net loans held for sale 3,945 69 7.00% - - -
Mortgage-related securities:
Available for sale 84,497 1,236 5.85% 100,504 1,640 6.53%
Held to maturity 90,081 1,523 6.76% 121,604 2,095 6.89%
Marketable securities:
Trading 5,634 15 1.06% 5,550 12 0.86%
Available for sale 57,996 698 4.81% 135,057 1,982 5.87%
Held to maturity 652 8 4.91% 875 13 5.94%
Margin accounts 25,568 389 6.09% 43,702 967 8.85%
Other interest-earning assets 68,144 692 4.06% 20,630 368 7.14%
------------ ---------- ---------- ------------- --------- ----------
Total interest-earning assets 1,798,749 32,872 7.31% 1,232,615 23,236 7.54%
Noninterest-earning assets 81,385 42,739
------------ -------------
Total assets $ 1,880,134 $ 1,275,354
============ =============
Interest-bearing liabilities:
NOW and money market accounts $ 200,136 $ 1,518 3.03% $ 147,054 $ 1,111 3.02%
Savings accounts 259,623 1,545 2.38% 211,244 1,323 2.51%
Certificates of deposit 821,786 10,672 5.19% 471,751 6,690 5.67%
Other borrowed funds 276,963 3,084 4.45% 139,447 2,319 6.65%
------------ ---------- ---------- ------------- --------- ----------
Total interest-bearing liabilities 1,558,508 16,819 4.32% 969,496 11,443 4.72%
---------- ---------- --------- ----------
Noninterest-bearing liabilities 62,920 45,401
------------ -------------
Total liabilities 1,621,428 1,014,897
Equity 258,706 260,457
------------ -------------
Total liabilities and equity $ 1,880,134 $ 1,275,354
============ =============
Net interest income and
interest rate spread $16,053 2.99% $ 11,793 2.82%
========== ========== ========= ==========
Net interest margin 3.57% 3.83%
========== ==========
Average interest-earning assets to average
interest-bearing liabilities 115.41% 127.14%
========== ==========
- ----------
(1) Nonaccrual loans are included in the average balance.
15
UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS
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 nine month periods ended September 30, 2001 and 2000. Average balance
calculations were based on daily balances.
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------- --------- --------- ------------- ---------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Net loans(1) $ 1,157,182 $65,714 7.57% $ 761,498 $ 45,523 7.97%
Net loans held for sale 1,329 69 6.92% - - -
Mortgage-related securities:
Available for sale 90,576 4,112 6.05% 106,049 5,180 6.51%
Held to maturity 97,369 4,957 6.79% 128,421 6,683 6.94%
Marketable securities:
Trading 6,053 80 1.76% 6,261 84 1.79%
Available for sale 71,438 3,053 5.70% 144,556 6,316 5.83%
Held to maturity 811 33 5.43% 1,053 48 6.08%
Margin accounts 28,448 1,512 7.09% 40,959 2,638 8.59%
Other interest-earning assets 56,993 2,025 4.74% 20,923 1,063 6.77%
------------- --------- --------- ------------- ---------- ---------
Total interest-earning assets 1,510,199 81,555 7.20% 1,209,720 67,535 7.44%
Noninterest-earning assets 49,527 41,397
------------- -------------
Total assets $ 1,559,726 $ 1,251,117
============= =============
Interest-bearing liabilities:
NOW and money market accounts $ 169,834 $3,708 2.91% $ 145,959 $ 3,074 2.81%
Savings accounts 226,005 3,792 2.24% 217,298 4,045 2.48%
Certificates of deposit 677,410 27,236 5.36% 454,634 18,435 5.41%
Other borrowed funds 178,068 6,008 4.50% 132,797 6,343 6.37%
------------- --------- --------- ------------- ---------- ---------
Total interest-bearing liabilities 1,251,317 40,744 4.34% 950,688 31,897 4.47%
--------- --------- ---------- ---------
Noninterest-bearing liabilities 48,774 41,323
------------- -------------
Total liabilities 1,300,091 992,011
Equity 259,635 259,106
------------- -------------
Total liabilities and equity $ 1,559,726 $ 1,251,117
============= =============
Net interest income and
interest rate spread $40,811 2.86% $ 35,638 2.97%
========= ========= ========== =========
Net interest margin 3.60% 3.93%
========= =========
Average interest-earning assets to average
interest-bearing liabilities 120.69% 127.25%
========= =========
- ----------
(1) Nonaccrual loans are included in the average balance.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK. The principal market risk affecting
United Community is interest rate risk. United Community is subject to interest
rate risk to the extent that its interest-earning assets reprice differently
than its interest-bearing liabilities. Interest rate risk is defined as the
sensitivity of a company's earnings and net asset values to changes in interest
rates. As part of its efforts to monitor and manage the interest rate risk, the
Board of Directors of Home Savings, which accounts for most of the assets and
liabilities of United Community, has adopted an interest rate risk policy which
requires the Home Savings Board to review quarterly reports related to interest
rate risk and to set exposure limits for Home Savings as a guide to senior
management in setting and implementing day to day operating strategies.
United Community is subject to minimal equity price risk because its investment
in equity securities, other than stock in the FHLB of Cincinnati, is 0.54% of
total assets. United Community is not affected by foreign currency exchange rate
risk or commodity price risk.
QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk analysis,
Home Savings uses the "net portfolio value" ("NPV") methodology adopted by the
OTS as part of its capital regulations and also considers the OTS methodology in
light of the rate shock estimates contained in the quarterly rate shock risk
reports prepared by an outside consulting firm that specializes in interest rate
risk assessments as well as the sensitivity of earnings to changes in interest
rates and the corresponding impact on net interest income. Generally, NPV is the
discounted present value of the difference between incoming cash flows on
interest-earning and other assets and outgoing cash flows on interest-bearing
and other liabilities. The application of the methodology attempts to quantify
interest rate risk as the change in the NPV and net interest income that would
result from various levels of theoretical basis point changes in market interest
rates.
Home Savings uses a net portfolio value and earnings simulation model
prepared by a third party as its primary method to identify and manage its
interest rate risk profile. The model is based on actual cash flows and
repricing characteristics for all financial instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on
future volumes and the prepayment rate of applicable financial instruments.
Assumptions based on the historical behavior of deposit rates and balances in
relation to changes in interest rates are also incorporated into the model.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure NPV or net interest income or precisely predict the impact of
fluctuations in interest rates on net interest rate changes as well as changes
in market conditions and management strategies.
Presented below are analyses of Home Savings' interest rate risk as measured by
changes in NPV and net interest income for instantaneous and sustained parallel
shifts of 100 basis point increments in market interest rates. The percentage
changes fall within the policy limits set by the Board of Directors of Home
Savings as the minimum NPV ratio and the maximum change in interest income that
the Home Savings Board of Directors deems advisable in the event of various
changes in interest rates.
Nine Months Ended September 30, 2001
-------------------------------------------------------------------------------------------------------------------------
NPV as % of portfolio Next 12 months
Change Net portfolio value value of assets Net interest income
in rates ---------------------------------------------------------------------------------------------
(Basis points) $ Amount $ Change % Change NPV Ratio Change in % $ Change % Change
-------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+300 $ 88,450 $ (74,028) (45.56)% 5.19% (3.53)% $(7,653) (13.07)%
+200 129,927 (32,551) (20.03) 7.33 (1.38) (4,924) (8.41)
+100 168,666 6,188 3.81 9.18 0.47 (2,235) (3.82)
Static 162,478 - - 8.71 - - -
(100) 144,659 (17,819) (10.97) 7.69 (1.02) (204) (0.35)
(200) 117,325 (45,153) (27.79) 6.22 (2.49) (2,478) (4.23)
(300) 103,965 (58,513) (36.01) 5.53 (3.18) (7,557) (12.91)
Year Ended December 31, 2000
-------------------------------------------------------------------------------------------------------------------------
Change NPV as % of portfolio Next 12 months
in rates Net portfolio value value of assets Net interest income
---------------------------------------------------------------------------- ------------------------
(Basis points) $ Amount $ Change % Change NPV Ratio Change in % $ Change % Change
-------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+300 $ 149,982 $ (64,325) (30.02)% 13.55% (4.14)% $ (6,135) (14.40)%
+200 171,431 (42,876) (20.01) 15.02 (2.67) (3,997) (9.38)
+100 193,800 (20,507) (9.57) 16.46 (1.23) (1,928) (4.52)
Static 214,307 - - 17.69 - - -
(100) 221,943 7,636 3.56 17.99 0.30 1,013 2.38
(200) 216,714 2,407 1.12 17.42 (0.27) 274 0.64
(300) 214,534 227 0.11 17.06 (0.63) (563) (1.32)
17
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 Articles of Incorporation
3.2 Amended Code of Regulations
10 Agreement and Plan of Merger dated September 5, 2001
11 Statement regarding computation of earnings per share
b. Reports on Form 8-K
On July 13, 2001, United Community filed an 8-K under Item 2,
Acquisition or Disposition of Assets, to announce the acquisition
of all of the outstanding shares of Industrial Bancorp, Inc.
A Form 8-K/A was filed on August 10, 2001 amending the 8-K filed
on July 13, 2001 to include required financial statements and
proforma financial statements.
On July 18, 2001, United Community filed a Form 8-K under Item 5,
Other Events, disclosing operating results for the quarter ended
June 30, 2001.
United Community filed a Form 8-K on September 12, 2001 under Item
5, Other Events, disclosing the signing of a definitive agreement
to acquire Potters Financial Corporation.
18
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: November 13, 2001 /s/ Douglas M. McKay
-----------------------------------------
Douglas M. McKay, President
Date: November 13, 2001 /s/ Patrick A. Kelly
-----------------------------------------
Patrick A. Kelly, Treasurer
19
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.
EXHIBIT 10
----------
Incorporated by reference to the Form 8-K disclosing other events filed by
United Community on September 12, 2001 with the SEC, Exhibit 2.
20