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, 2003
[ ] 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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.
34,420,265 common shares as of April 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2003 (Unaudited)
and December 31, 2002.................................................................... 1
Consolidated Statements of Income for the Three Months Ended
March 31, 2003 and 2002 (Unaudited)...................................................... 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (Unaudited)...................................................... 3
Notes to Consolidated Financial Statements .............................................. 4 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 7-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 11
Item 4. Controls and Procedures.................................................................. 11
PART II. OTHER INFORMATION............................................................................. 12
Signatures............................................................................................. 13
Certifications......................................................................................... 14-15
EXHIBITS............................................................................................... 16-18
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2003 2002
(unaudited)
----------- -----------
(In thousands)
ASSETS:
Cash and deposits with banks $ 36,404 $ 33,178
Federal funds sold and other 17,985 77,758
----------- -----------
Total cash and cash equivalents 54,389 110,936
----------- -----------
Securities:
Trading, at fair value 19,938 5,060
Available for sale, at fair value 290,101 237,268
Loans, net (including allowance for loan losses of $15,584 and $15,099, respectively) 1,478,930 1,478,213
Loans held for sale, net 36,550 45,825
Margin accounts 13,961 14,809
Federal Home Loan Bank stock 21,276 21,069
Premises and equipment 20,537 20,002
Accrued interest receivable 9,472 9,558
Real estate owned 1,236 994
Goodwill 33,593 33,593
Core deposit intangible 4,711 5,101
Other assets 9,139 7,703
----------- -----------
TOTAL ASSETS $ 1,993,833 $ 1,990,131
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 1,468,929 $ 1,481,901
Other borrowed funds 228,301 210,024
Advance payments by borrowers for taxes and insurance 7,851 5,996
Accrued interest payable 1,290 1,126
Accrued expenses and other liabilities 17,266 16,515
----------- -----------
TOTAL LIABILITIES 1,723,637 1,715,562
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock-no par value; 1,000,000 shares authorized and unissued
at March 31, 2003 - -
Common stock-no par value; 499,000,000 shares authorized; 37,802,081
and 37,803,269 shares issued, respectively 138,391 138,207
Retained earnings 174,637 172,080
Other comprehensive income 1,879 2,363
Unearned stock compensation (18,834) (19,724)
Treasury stock, at cost, 3,387,116 and 2,558,214 shares, respectively (25,877) (18,357)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 270,196 274,569
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,993,833 $ 1,990,131
=========== ===========
See Notes to Consolidated Financial Statements.
1
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the Three Months Ended
March 31, March 31,
2003 2002
-------- --------
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans $ 25,914 $ 26,974
Loans held for sale 496 114
Securities:
Trading 72 33
Available for sale 2,694 1,840
Held to maturity - 1,267
Margin accounts 171 220
FHLB stock dividend 208 208
Other interest-earning assets 186 607
-------- --------
Total interest income 29,741 31,263
INTEREST EXPENSE
Interest expense on deposits 9,029 12,108
Interest expense on other borrowed funds 2,203 2,785
-------- --------
Total interest expense 11,232 14,893
-------- --------
NET INTEREST INCOME 18,509 16,370
PROVISION FOR LOAN LOSS ALLOWANCES 696 696
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSS ALLOWANCES 17,813 15,674
-------- --------
NONINTEREST INCOME
Commissions 3,175 3,382
Service fees and other charges 1,800 1,898
Underwriting and investment banking 118 33
Net gains (losses):
Securities 496 582
Trading securities (148) 23
Loans sold 2,010 776
Other (59) (1)
Other income 583 1,065
-------- --------
Total noninterest income 7,975 7,758
-------- --------
NONINTEREST EXPENSES
Salaries and employee benefits 10,901 9,723
Occupancy 829 673
Equipment and data processing 2,344 1,819
Franchise tax 488 506
Advertising 587 393
Amortization of core deposit intangible 389 638
Other expenses 2,617 3,000
-------- --------
Total noninterest expenses 18,155 16,752
-------- --------
INCOME BEFORE INCOME TAXES 7,633 6,680
INCOME TAXES 2,653 2,425
-------- --------
NET INCOME $ 4,980 $ 4,255
======== ========
COMPREHENSIVE INCOME $ 4,174 $ 3,549
EARNINGS PER SHARE:
Basic and diluted $ 0.16 $ 0.13
See Notes to Consolidated Financial Statements.
2
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-------------------------------
2003 2002
--------- ---------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,980 $ 4,255
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan loss allowances 696 696
Net gains (2,447) (1,358)
Amortization of premiums (accretion of discounts) 1,250 (25)
Depreciation 948 529
ESOP compensation 647 553
Amortization of restricted stock compensation 427 469
FHLB stock dividends (208) (208)
(Increase) decrease in trading securities (14,878) 1,838
Decrease in margin accounts 848 672
Decrease (increase) in interest receivable 86 (846)
(Increase) decrease in prepaid and other assets (1,906) 7,285
Increase (decrease) in interest payable 164 (28)
Decrease in loans held for sale 9,275 13,382
Proceeds from sale of loans held for sale 115,659 53,278
Increase (decrease) in other liabilities 1,012 (2,572)
--------- ---------
Net cash from operating activities 116,553 77,920
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal repayments and maturities of:
Securities held to maturity - 8,661
Securities available for sale 42,720 23,118
Proceeds from sale of:
Securities available for sale 8,242 4,571
Real estate owned 18 152
Fixed assets - 18
Purchases of:
Securities available for sale (104,859) (54,296)
Securities held to maturity - (500)
Net principal disbursed on loans (77,509) (88,950)
Loans purchased (37,726) (5,450)
Purchases of premises and equipment (1,477) (606)
--------- ---------
Net cash from investing activities (170,591) (113,282)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in NOW, savings and money market accounts 13,488 23,220
Net (decrease) increase in certificates of deposit (26,186) 13,046
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 1,855 (2,393)
Proceeds from FHLB advances and other long term debt - 1,239
Repayment of FHLB advances and other long term debt (48) (40,001)
Net change in other borrowed funds 18,325 (5,808)
Dividends paid (2,382) (2,419)
Proceeds from the exercise of stock options 335 -
Purchase of treasury stock (7,896) (725)
--------- ---------
Net cash from financing activities (2,509) (13,841)
--------- ---------
(Decrease) increase in cash and cash equivalents (56,547) (49,203)
Cash and cash equivalents, beginning of period 110,936 205,883
--------- ---------
Cash and cash equivalents, end of period $ 54,389 $ 156,680
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 11,395 $ 14,921
Income taxes 720 380
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned 317 879
See Notes to Consolidated Financial Statements.
3
UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. STOCK COMPENSATION
Employee compensation expense under stock option plans is reported if
options are granted below market price at grant date. Pro forma disclosures of
net income and earnings per share are shown using the fair value method of FASB
Statement No. 123 to measure expense for options granted after 1994, using an
option pricing model to estimate fair value.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
For the Three Months
Ended March 31,
2003 2002
- -----------------------------------------------------------------------------------------
(In thousands)
Net income as reported $ 4,980 $4,255
Deduct: Stock-based compensation expense
determined under fair value method 2,201 1,411
- -----------------------------------------------------------------------------------------
Pro Forma net income $ 2,779 $2,844
- -----------------------------------------------------------------------------------------
Basic earnings per share as reported $ 0.16 $ 0.13
Pro Forma basic earnings per share $ 0.09 $ 0.09
Diluted earnings per share as reported $ 0.16 $ 0.13
Pro forma diluted earnings per share $ 0.09 $ 0.09
- -----------------------------------------------------------------------------------------
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002
- -----------------------------------------------------------------------------------------
Dividend yield 3.34% 4.00%
Expected stock price volatility 48.31% 38.31%
Risk-free interest rate 3.98% 5.01%
Expected option life (In years) 10 10
- -----------------------------------------------------------------------------------------
2. 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 34 full service offices and four loan production
offices throughout northern Ohio and western Pennsylvania. 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 eleven full service offices and two trust offices throughout northern 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.
4
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2003. 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, 2002, contained in United Community's
Form 10-K for the year ended December 31, 2002.
3. SEGMENT INFORMATION
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 by
operating segment for the three months ended March 31, 2003 and 2002 are as
follows:
THREE MONTHS ENDED MARCH 31, 2003
Retail Investment
Banking Advisory Services Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Interest income $ 29,906 $ 258 $(423) $ 29,741
Interest expense 11,611 44 (423) 11,232
Provision for loan loss 696 - 696
------------ ------------ ------------ ------------
Net interest income after
provision for loan loss 17,599 214 17,813
Non-interest income 3,318 4,657 7,975
Non-interest expense 13,221 4,934 18,155
------------ ------------ ------------ ------------
Income before tax 7,696 (63) 7,633
Income tax expense 2,675 (22) 2,653
------------ ------------ ------------ ------------
Net income $ 5,021 $ (41) $ - $ 4,980
============ ============ ============ ============
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 11,631 5,121 - 16,752
------------ ------------ ------------ ------------
Income before tax 6,849 (169) - 6,680
Income tax expense 2,483 (58) - 2,425
------------ ------------ ------------ ------------
Net income before extraordinary items $ 4,366 $(111) $ - $ 4,255
============ ============ ============ ============
4. LONG-TERM INCENTIVE
On July 12, 1999, shareholders approved the United Community Financial
Corp. Long-Term Incentive Plan (Incentive Plan). The purpose of the Incentive
Plan is to promote and advance the interests of United Community and its
shareholders by enabling United Community to attract, retain and reward
directors, directors emeritus, managerial and other key employees of United
Community, including Home Savings and Butler Wick, by facilitating their
purchase of an ownership interest in United Community.
The Incentive Plan provides for the grant of options, which may qualify as
either incentive or nonqualified stock options. The incentive plan provides that
option prices will not be less than the fair market value of the stock at the
grant date. The maximum number of common shares that may be issued under the
plan is 3,471,562. All of the options awarded become exercisable on the date of
grant. The option period expires 10 years from the date of grant. A summary of
activity in the plan is as follows:
5
For the three months ended March 31,
----------------------------------------------------------
2003 2002
--------------------------- ---------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- --------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,909,615 $ 7.01 1,307,496 $ 6.79
Granted 742,654 8.97 715,710 7.40
Exercised 72,760 6.91 - -
Forfeited - - - -
- --------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,579,509 7.58 2,023,198 7.01
- --------------------------------------------------------------------------------------------------------
Options exercisable at end of period 2,579,509 $ 7.58 2,023,198 $ 7.01
- --------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during year $ 3.65 $ 2.44
- --------------------------------------------------------------------------------------------------------
5. 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. For the
period ending March 31, 2003, there were 742,654 anti-dilutive shares that were
not taken into consideration for the dilutive earnings per share calculation.
There were no anti-dilutive shares for the period ended March 31, 2002.
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
(In thousands,
except per share data)
------------- ------------
Net income applicable to common stock $4,980 $4,255
============= ============
Weighted average common shares outstanding 31,669 31,951
Dilutive effect of restricted stock 25 141
Dilutive effect of stock options 317 120
------------- ------------
Weighted average common shares outstanding
for diluted computation 32,011 32,212
============= ============
Earnings per share
Basic $ 0.16 $ 0.13
Diluted $ 0.16 $ 0.13
- -------------------------------------------------------------------------------
6. SUBSEQUENT EVENT
On April 21, 2003, United Community announced that its Board of Directors
approved a plan to repurchase an additional 1,000,000 shares of United
Community's common stock. The shares will be purchased through open market
transactions. As of March 31, 2003, there are 276,247 shares remaining to be
purchased from the repurchase program previously announced on October 23, 2000.
6
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) 2003 2002
------ ------
Performance ratios:
Return on average assets (2) 1.00% 0.87%
Return on average equity (3) 7.25% 6.42%
Interest rate spread (4) 3.59% 3.01%
Net interest margin (5) 3.92% 3.50%
Noninterest expense to average assets 3.63% 3.17%
Efficiency ratio (6) 67.82% 63.12%
Average interest-earning assets to average interest-
bearing liabilities 113.80% 115.55%
Capital ratios:
Average equity to average assets 13.75% 13.58%
Equity to assets, end of period 13.55% 13.60%
Tangible capital 8.23% 9.28%
Core capital 8.23% 9.28%
Risk-based capital 12.62% 14.84%
Asset quality ratio:
Nonperforming loans to total loans at end of period (7) 0.97% 0.76%
Nonperforming assets to average assets (8) 0.80% 0.62%
Nonperforming assets to total assets at end of period 0.80% 0.63%
Allowance for loan losses as a percent of loans 1.04% 0.82%
Allowance for loan losses as a percent of
nonperforming loans (7) 105.78% 109.91%
Office data:
Number of full service banking offices 34 29
Number of loan production offices 4 4
Number of full service brokerage offices 11 10
Number of trust offices 2 2
Per share data:
Basic earnings per share (9) 0.16 0.13
Diluted earnings per share (9) 0.16 0.13
Tangible book value (10) 6.74 6.63
Book value (11) 7.86 7.40
Market value as a multiple of book value (12) 1.11 1.00
(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) Nonperforming loans consist of nonaccrual loans and restructured
loans.
(8) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans.
(9) Net income divided by average number of shares outstanding.
(10) Equity minus goodwill and core deposit intangible, divided by number
of shares outstanding.
(11) Equity divided by number of shares outstanding.
(12) Market value divided by book value.
7
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, 2003 AND DECEMBER 31, 2002
Total assets increased $3.7 million, or 0.2%, to $2.0 billion at March 31, 2003
compared to December 31, 2002. United Community had increases of $67.7 million
in securities, $717,000 in net loans, and $1.4 million in other assets, which
were partially offset by a $56.5 million decrease in cash and cash equivalents
and a $9.3 million decline in loans held for sale. The asset growth was funded
by an $18.3 million increase in borrowed funds, which was partially offset by a
$13.0 million decrease in deposits.
Net loans increased $717,000, or 0.05%, to $1.5 billion at March 31, 2003,
compared to December 31, 2002. Construction loans increased $55.9 million,
nonresidential and multifamily real estate loans increased $10.0 million,
consumer loans increased $5.7 million, and commercial loans increased $348,000.
These increases were substantially offset by a $79.7 million decline in one- to
- -four-family real estate loans. The decline in one- to -four-family loans is due
primarily to the repayment of loans as consumers take advantage of the current
interest rate environment. Loans held for sale decreased $9.3 million, or 20.2%,
to $36.6 million at March 31, 2003 compared to $45.8 million at December 31,
2002. During the first quarter of 2003, Home savings sold approximately $112.7
million in newly originated fixed-rate loans to help reduce interest rate risk.
Home Savings will continue to sell loans as a part of its strategic plan to
reduce interest rate risk.
The allowance for loan losses increased to $15.6 million at March 31, 2003 from
$15.1 million at December 31, 2002. Home Savings is expecting continued growth
in the nonresidential real estate and commercial loan categories, which could
increase the risk of loan losses. Nonresidential 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.
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 $3.2 million, or 9.7%, to $36.4
million at March 31, 2003 compared to $33.2 million at December 31, 2002.
Federal funds sold and other overnight funds decreased $59.8 million, or 76.9%,
to $18.0 million at March 31, 2003 from $77.8 million at December 31, 2002.
Securities available for sale, which include both marketable and
mortgage-related securities, increased $52.8 million, or 22.3%, since December
31, 2002. Trading securities, which consist of marketable securities, increased
$14.9 million to $19.9 million at March 31, 2003. The net decrease in cash and
deposits and overnight funds, along with the decrease in loans held for sale and
an increase in other borrowed funds, was primarily used to fund increases in
securities and the decrease in deposits.
Nonperforming assets, which include nonaccrual and restructured loans and real
estate owned, increased approximately $1.4 million, or 8.4%, to $17.8 million at
March 31, 2003 from $16.5 million at December 31, 2002, primarily due to an
increase in nonperforming consumer loans. Total nonaccrual and restructured
loans accounted for 0.97% of net loans receivable at March 31, 2003 and 1.01% of
net loans receivable at December 31, 2002. Total nonperforming assets were 0.80%
of total assets as of March 31, 2003 and 0.83% as of December 31, 2002.
Total deposits decreased $13.0 million from $1.48 billion at December 31, 2002
to $1.47 billion at March 31, 2003. The decrease consisted of a $28.1 million
decline in checking accounts and a $26.5 million decrease in certificates of
deposits, which was partially offset by a $41.6 million increase in savings
accounts. Assuming the interest rate environment remains the same, United
Community anticipates the deposit runoff to begin stabilizing as core deposit
pricing reaches its low.
Other borrowed funds increased $18.3 million to $228.3 million at March 31, 2003
compared to $210.0 million at December 31, 2002, primarily due to a $15.1
million repurchase agreement entered into by Butler Wick. As of March 31, 2003,
$182.9 million of the other borrowed funds consisted of FHLB advances. The
remaining funds consist of a revolving line of credit and other short-term
borrowings.
8
Shareholders' equity decreased $4.4 million, or 1.6%, to $270.2 million at March
31, 2003 from $274.6 million at December 31, 2002. The decrease was primarily
due to treasury stock purchases and quarterly dividends of $0.075 per share
which were partially offset by earnings for the year. During the first quarter
of 2003, United Community repurchased 882,585 shares of its stock. As United
Community completes its first buy back program, it anticipates continued share
repurchases through the newly approved buy back program. Tangible book value and
book value per share were $6.74 and $7.85 as of March 31, 2003.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 2003 AND MARCH 31, 2002
NET INCOME. Net income for the three months ended March 31, 2003 was $5.0
million, or $0.16 per diluted share, compared to net income of $4.3 million, or
$0.13 per diluted share, for the three months ended March 31, 2002. Net interest
income increased $2.1 million and noninterest income increased $217,000, and
were partially offset by a $1.4 million increase in noninterest expense. United
Community's annualized return on average assets and return on average equity
were 1.00% and 7.25%, respectively, for the three months ended March 31, 2003.
The annualized return on average assets and return on average equity for the
comparable period in 2002 were 0.87% and 6.42%, respectively.
NET INTEREST INCOME. Net interest income increased $2.1 million, or 13.1%, for
the three months ended March 31, 2003, compared to the first quarter of 2002.
The increase is primarily due to a $3.1 million decrease in interest expense on
deposits and a $582,000 decrease in interest expense on other borrowed funds as
a result of the current interest rate environment and an $854,000 increase in
interest earned on available for sale securities. These decreases were partially
offset by decreases in interest income of $1.1 million on loans and $1.3 million
on mortgage-related securities held to maturity. The interest rate spread for
the three months ended March 31, 2003 was 3.59% compared to 3.01% for the
quarter ended March 31, 2002. Assuming the interest rate environment remains
steady, United Community anticipates some compression of the interest rate
margin as core deposit pricing reaches its low and loans continue to prepay.
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 fair value of the underlying collateral, changes in the composition of the
loan portfolio and prior loan loss experience. Due to growth in the construction
and consumer loan portfolios, an increase in nonperforming assets and current
economic conditions, a $696,000 provision for loan losses was recorded for the
first quarter of 2003. 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 $15.6 million at March
31, 2003, which was 1.04% of total loans, compared to 0.82% at March 31, 2002.
NONINTEREST INCOME. Noninterest income increased $217,000, or 2.8%, from $7.8
million for the three months ended March 31, 2002, to $8.0 million for the three
months ended March 31, 2003. The primary reason for the increase is a $1.2
million increase in gains recognized on the sale of loans, which was partially
offset by a $482,000 decrease in other income and a $207,000 decline in
commission income. The decrease in other income was primarily due to the
acquisition of stock through the demutualization of Anthem, Inc. in 2002, which
Home Savings received since Anthem is the health care provider for its
employees.
NONINTEREST EXPENSE. Total noninterest expense increased $1.4 million, or 8.4%,
to $18.2 million for the three months ended March 31, 2003, from $16.8 million
for the three months ended March 31 2002. The increase is primarily due to a
$1.2 million increase in salaries and employee benefits, a $525,000 increase in
equipment and data processing, a $194,000 increase in advertising and a $156,000
increase in occupancy. The increase in salaries and employee benefits is
primarily related to a $500,000 charge for postretirement benefits, as a result
of increased health care costs, and salaries from the acquisition of Potters
Financial Corp. (Potters). These increases were partially offset by decreases of
$383,000 in other expenses and $249,000 in the amortization of the core deposit
intangible related to the acquisitions of Potters and Industrial Bancorp. The
decline in other expenses is primarily due to charges recognized in the first
quarter of 2002 as a result of the early extinguishment of debt that did not
reoccur in 2003.
FEDERAL INCOME TAXES. The provision for federal income taxes increased $228,000
for the three months ended March 31, 2003, compared to the three months ended
March 31, 2002 due to higher pre-tax income in 2003. The effective tax rates
were 34.8% and 36.3% for the three months ended March 31, 2003 and 2002,
respectively.
9
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 months ended March 31, 2003 and March 31, 2002. Average balance
calculations were based on daily balances.
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------
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) $1,459,191 $ 25,914 7.10% $1,428,867 $ 26,974 7.55%
Net loans held for sale 41,142 496 4.82% 15,852 114 2.88%
Investment securities:
Trading 11,848 72 2.43% 7,726 33 1.71%
Available for sale 283,134 2,694 3.81% 153,825 1,840 4.78%
Held to maturity 0 0 0.00% 76,342 1,267 6.64%
Margin accounts 14,382 171 4.76% 20,440 220 4.31%
FHLB stock 21,071 208 3.95% 18,767 208 4.43%
Other interest-earning assets 58,427 186 1.27% 146,902 607 1.65%
------------- ------------ ---------- ------------- ---------- ---------
Total interest-earning assets 1,889,195 29,741 6.30% 1,868,721 31,263 6.69%
Noninterest-earning assets 108,699 83,909
------------- -------------
Total assets $1,997,894 $1,952,630
============= =============
Interest-bearing liabilities:
NOW and money market accounts $ 309,972 $ 1,047 1.35% $ 262,795 $ 1,633 2.49%
Savings accounts 334,298 865 1.04% 260,936 1,345 2.06%
Certificates of deposit 805,590 7,117 3.53% 839,288 9,130 4.35%
Other borrowed funds 210,250 2,203 4.19% 254,272 2,785 4.38%
------------- ------------ ---------- ------------- ---------- ---------
Total interest-bearing liabilities 1,660,110 11,232 2.71% 1,617,291 14,893 3.68%
------------ ---------- ---------- ---------
Noninterest-bearing liabilities 63,073 70,254
------------- -------------
Total liabilities 1,723,183 1,687,545
Equity 274,711 265,085
------------- -------------
Total liabilities and equity $1,997,894 $1,952,630
============= =============
Net interest income and
Interest rate spread $ 18,509 3.59% $ 16,370 3.01%
============ ========== ========== =========
Net interest margin 3.92% 3.50%
========== =========
Average interest-earning assets to average
interest-bearing liabilities 113.80% 115.55%
========== =========
- -------------
(1) Nonaccrual loans are included in the average balance.
10
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 2002 Annual Report under the
caption "Asset and Liability Management and Market Risk." No material change in
the methodology or results has occurred.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out by United Community's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) of
the Securities Exchange Act of 1934). Based on their evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that United
Community's disclosure controls and procedures are effective. Subsequent to the
date of their evaluation, there were no significant changes in United
Community's internal controls or in other factors that could significantly
affect these controls.
11
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
99.1 Certification of Financial Statements by Chief Executive Officer
99.2 Certification of Financial Statements by Chief Financial Officer
b. Reports on Form 8-K
On January 29, 2003, United Community filed an 8-K under Item 5, Other Events,
disclosing operating results for the quarter ended December 31, 2002.
12
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 14, 2003 /s/ Douglas M. McKay
---------------------------------------------
Douglas M. McKay, Chief Executive Officer
Date: May 14, 2003 /s/ Patrick A. Kelly
---------------------------------------------
Patrick A. Kelly, Chief Financial Officer
13
UNITED COMMUNITY FINANCIAL CORP.
CERTIFICATION
I, Douglas M. McKay, certify that:
1) I have reviewed this quarterly report on Form 10-Q of United Community
Financial Corp.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period by this
quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in the
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Douglas M. McKay
- --------------------
Douglas M. McKay
Chief Executive Officer
May 14, 2003
14
UNITED COMMUNITY FINANCIAL CORP.
CERTIFICATION
I, Patrick A. Kelly, certify that:
1) I have reviewed this quarterly report on Form 10-Q of United Community
Financial Corp.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period by this
quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in the
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Patrick A. Kelly
- ---------------------------
Patrick A. Kelly
Chief Financial Officer
May 14, 2003
15
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.
16