.
.
.
EXHIBIT 13
SELECTED FINANCIAL AND OTHER DATA
Selected financial condition data:
At December 31,
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2003 2002 2001 2000 1999
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(In thousands)
Total assets $2,073,833 $ 1,990,131 $ 1,944,780 $ 1,300,199 $1,327,573
Cash and cash equivalents 81,155 110,936 205,883 45,972 111,445
Securities:
Trading 15,600 5,060 8,352 5,933 7,657
Available for sale 227,525 237,268 118,150 190,176 275,463
Held to maturity - - 80,496 108,560 139,170
Bank owned life insurance 20,496 - - - -
Loans, net 1,576,494 1,478,213 1,406,479 876,653 723,087
Loans held for sale 37,715 45,825 20,192 - -
FHLB stock 21,924 21,069 18,760 13,793 12,825
Deposits 1,423,698 1,481,901 1,383,418 900,413 834,087
Other borrowed funds 338,463 210,024 271,631 114,317 213,578
Total shareholders' equity 279,836 274,569 261,880 261,899 256,868
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Summary of earnings:
Year ended December 31,
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2003 2002 2001 2000 1999
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(In thousands)
Interest income $ 111,663 $ 125,960 $ 113,989 $ 91,622 $ 89,971
Interest expense 40,252 54,236 57,047 44,104 34,284
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Net interest income 71,411 71,724 56,942 47,518 55,687
Provision for loan loss allowances 3,179 3,578 2,495 300 100
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Net interest income after provision
for loan loss allowances 68,232 68,146 54,447 47,218 55,587
Noninterest income 40,845 31,806 28,449 24,754 22,721
Noninterest expenses (1)(2) 73,572 68,359 57,708 54,307 61,037
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Income before income taxes 35,505 31,593 25,188 17,665 17,271
Income taxes 12,565 10,776 9,509 6,051 6,876
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Net income $ 22,940 $ 20,817 $ 15,679 $ 11,614 $ 10,395
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(1) For the year ended December 31, 2000, noninterest expense included a $2.9
million gain on postretirement benefits curtailment and a $1.0 million loss
on pension termination.
(2) For the year ended December 31, 1999, noninterest expense included $6.4
million compensation expense as a result of the $6.00 per share special
capital distribution paid on Recognition and Retention Plan (RRP) shares.
Selected financial ratios and other data:
At or for the year ended December 31,
2003 2002 2001 2000 1999
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Performance ratios: (1)
Return on average assets (2) 1.15% 1.04% 0.97% 0.92% 0.79%
Return on average equity (3) 8.27 7.74 6.03 4.47 2.46
Interest rate spread (4) 3.51 3.36 2.95 2.91 2.98
Net interest margin (5) 3.81 3.79 3.66 3.89 4.38
Noninterest expense to average assets 3.70 3.74 3.56 4.30 4.66
Efficiency ratio (6) 65.29 64.52 66.34 75.14 77.85
Average interest-earning assets to
average interest-bearing liabilities 114.24 114.98 119.23 127.08 152.09
Capital ratios:
Average equity to average assets 13.95 13.48 16.04 20.57 32.25
Shareholders' equity to assets at year end 13.49 13.80 13.47 20.14 19.35
Tangible capital 8.22 8.05 9.07 14.51 26.75
Core capital 9.64 8.05 9.07 14.51 26.75
Risk-based capital 10.56 12.61 14.70 24.33 50.41
Asset quality ratios:
Nonperforming loans to loans at year end (7) 0.94 0.95 0.89 1.10 0.54
Nonperforming assets to average assets (8) 0.82 0.81 0.80 0.79 0.31
Nonperforming assets to total assets at year end(8) 0.79 0.81 0.67 0.77 0.30
Allowance for loan losses as a percent of loans 0.96 0.94 0.81 0.74 0.88
Allowance for loan losses as a
percent of nonperforming loans (7) 100.70 100.98 92.13 67.79 164.86
Number of:
Loans 37,668 37,872 25,636 22,699 20,274
Deposits 169,920 173,528 164,753 115,785 106,196
Per share data:
Basic earnings (9) $ 0.73 $ 0.65 $ 0.49 $ 0.35 $ 0.31
Diluted earnings (9) 0.72 0.65 0.48 0.35 0.30
Book value (10) 8.21 7.79 7.34 7.02 6.80
Dividend per share 0.30 0.30 0.30 0.30 0.30
Dividend payout ratio (11) 41.67% 46.15% 62.50% 85.71% 100.00%
(1) Performance ratios for 2000 reflect the $2.9 million gain on postretirement
benefits curtailment and the $1.0 million loss on pension termination.
Performance ratios for 1999 reflect the $6.4 million employee benefit
expense related to the $6.00 per share special capital distribution paid on
the RRP shares.
(2) Net income divided by average total assets. Excluding the effects of the
gain on postretirement benefits curtailment and the loss on pension
termination, the return on average assets would have been 0.80% for the
year ended December 31, 2000. Excluding the effect of the employee benefit
expense related to the special capital distribution paid on the RRP shares,
the return on average assets would have been 1.16% for the year ended
December 31, 1999.
(3) Net income divided by average total equity. Excluding the effects of the
gain on postretirement benefits curtailment and the loss on pension
termination, the return on average equity would have been 3.90% for the
year ended December 31, 2000. Excluding the effect of the employee benefit
expense related to the special capital distribution paid on the RRP shares,
the return on average equity would have been 3.60% for the year ended
December 31, 1999.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Noninterest expense divided by the sum of net interest income and
noninterest income. Excluding the effects of the gain on postretirement
benefits curtailment and the loss on pension termination, the efficiency
ratio would have been 78.22% for the year ended December 31, 2000.
Excluding the effect of the employee benefit expense related to the special
capital distribution paid on the RRP shares, the efficiency ratio would
have been 69.52% for the year ended December 31, 1999.
(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. Excluding the
effects of the gain on postretirement benefits curtailment and the loss on
pension termination, basic and diluted earnings per share would have been
$0.31 for the year ended December 31, 2000. Excluding the effect of the
employee benefit expense related to the special capital distribution paid
on the RRP shares, basic earnings per share would have been $0.45 and
diluted earnings per share would have been $0.44 for the year ended
December 31, 1999.
(10) Shareholders' equity divided by number of shares outstanding.
(11) Historical per share dividends declared and paid for the year divided by
the diluted earnings per share for the year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
United Community Financial Corp. (United Community) was incorporated for
the purpose of owning all of the outstanding stock of The Home Savings and Loan
Company of Youngstown, Ohio (Home Savings). On August 12, 1999, United Community
acquired Butler Wick Corp. (Butler Wick), an investment brokerage/advisory firm,
in a transaction accounted for as a pooling of interests. On July 1, 2001,
United Community acquired Industrial Bancorp, Inc. (Industrial), which was
accounted for as a purchase. Accordingly, the results of Industrial's operations
from the effective date of acquisition have been included in United Community's
2001 financial statements. On April 1, 2002, United Community acquired Potters
Financial Corporation (Potters), which was accounted for as a purchase.
Accordingly, the results of Potters' operations from the effective date of
acquisition have been included in United Community's 2002 financial statements.
See Note 3 to the consolidated financial statements for a more detailed
discussion of these acquisitions.
The following discussion and analysis of the financial condition and
results of operations of United Community and its subsidiaries should be read in
conjunction with the consolidated financial statements, and the notes thereto,
included in this Annual Report.
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 "anticipate," "plan," "expect,"
"believe," 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.
CHANGES IN FINANCIAL CONDITION
Total assets increased $83.7 million, or 4.2%, from $2.0 billion at
December 31, 2002 to $2.1 billion at December 31, 2003. The net change in assets
was a result of increases of $98.3 million, or 6.7%, in loans, $20.5 million in
bank owned life insurance and $3.2 million in other assets which were partially
offset by decreases of $29.8 million, or 26.8%, in cash and cash equivalents and
$8.1 million, or 17.7%, in loans held for sale. Total liabilities increased
$78.4 million, or 4.6%, as a result of a $128.4 million, or 61.2%, increase in
other borrowed funds offset by a decrease of $58.2 million, or 3.9%, in
deposits. We anticipate continued balance sheet growth resulting from our
expansion into new markets, including ongoing benefits from the 2001 and 2002
acquisitions.
Net loans increased $98.3 million, or 6.7%, to $1.6 billion at December 31,
2003, compared to $1.5 billion at December 31, 2002. The most significant
increases were $236.7 million in one-to four-family construction loans, $72.9
million in nonresidential real estate loans, $69.8 million in multifamily real
estate loans, $63.2 million in consumer loans, $10.5 million in multifamily
construction loans, $8.7 million in land loans and $8.2 million in commercial
loans. The increase in one-to four-family construction loans was partially
offset by an increase of $88.1 million in loans in process. During 2003, Home
Savings entered into an agreement to purchase one- to four-family construction
loans from another institution. Loans purchased under this agreement earn a
floating rate of interest, are guaranteed as to principal and interest by a
third party and may be for the purpose of constructing either pre-sold or
speculative homes. At December 31, 2003, approximately $101.9 million was
outstanding under this program. Home Savings anticipates continuing purchases of
loans under this program in 2004. The opening of an office in the Columbus, Ohio
area specializing in construction lending also contributed to this increase.
Real estate loans secured by one-to four-family residences declined $286.7
million as a result of the sale of approximately $90.4 million of fixed rate
loans from the portfolio to help manage interest rate risk and continued
refinancing activity of loans in the portfolio as a result of the interest rate
environment. Home Savings anticipates continued net 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.
Loans held for sale were $37.7 million at December 31, 2003 compared to
$45.8 million at December 31, 2002. The balance of loans held for sale at any
point in time includes loans that have not yet been sold and loans that have
been sold with future delivery dates. Home Savings actively manages its pipeline
of loans in process utilizing forward sale contracts to minimize exposure to
rising interest rates. Home Savings will continue to sell fixed rate loans going
forward as a part of its strategic plan to help manage interest rate risk. As
interest rates rise, loan origination volumes generally decline, thus resulting
in fewer loans available for sale, and potentially lower gains on the sale of
those assets.
Funds not currently utilized for general corporate purposes, including loan
originations, enhanced customer services and possible acquisitions, are invested
in overnight funds and securities. Overnight funds decreased $32.9 million, or
42.4%, to $44.8 million at December 31, 2003 compared to $77.8 million at
December 31, 2002. The decrease in overnight funds was used to partially fund an
increase in net loans of $98.3 million.
During the second quarter of 2003, Home Savings invested $20.0 million in
bank owned life insurance, which represents insurance on the lives of certain
employees where Home Savings is the beneficiary. Bank owned life insurance
provides a long-term asset to offset long-
term benefit liabilities, while generating competitive investment yields. Home
Savings has recognized a $496,000 increase in the cash value of the policies,
which is tax deferred. Any death benefit proceeds received by Home Savings are
tax-free.
Total deposits decreased $58.2 million, or 3.9%, from $1.5 billion at
December 31, 2002 to $1.4 billion at December 31, 2003, primarily as a result of
a decline in certificates of deposit of $76.1 million. This change was partially
offset by increases of $9.9 million in savings accounts and $12.1 million in
checking accounts. During 2003, Home Savings emphasized growing core deposit
accounts that may be more likely to generate lasting customer relationships.
Certificate of deposit pricing was less aggressive due to the availability of
lower cost funding alternatives. Management continually evaluates many
variables, including cash requirements, liquidity targets, asset acquisition,
liability mix and gap targets when pricing deposits. United Community acquired
$313.6 million in deposits from the Industrial acquisition and $113.8 million
from the Potters acquisition. Deposits in branches acquired from Industrial and
Potters have declined to $295.2 million and $106.3 million, respectively.
Other borrowed funds increased $128.4 million, or 61.2%, at December 31,
2003 compared to December 31, 2002. The change consists of increases of $101.2
million in short-term FHLB advances, $14.4 million in long-term FHLB advances,
$8.1 million in other short-term borrowings and $4.7 million of securities sold
under repurchase agreements. These increases were used to fund the increases in
loans and to offset the decrease in deposits. United Community continually
evaluates funding alternatives and may borrow additional funds in 2004 to
satisfy funding requirements.
Total shareholders' equity increased $5.3 million, or 1.9%, from December
31, 2002 to December 31, 2003. The increase was primarily due to earnings for
the year and a decrease in unearned stock compensation, offset by quarterly
dividend payments, treasury stock purchases and a decrease in accumulated other
comprehensive income. United Community acquired 1.3 million shares of common
stock for $12.2 million during the year ended December 31, 2003. As of December
31, 2003, United Community has authorization to purchase up to 856,747
additional shares under its current repurchase program. On January 28, 2004,
United Community offered to purchase up to 4 million shares, or approximately
11.7% of its outstanding shares, from shareholders at a price of $12.50 per
share. The offer expires on March 1, 2004. This transaction is expected to
result in a decrease in cash and cash equivalents of approximately $43 million,
an increase in borrowings of approximately $4.2 million and a decrease in
Shareholders' equity of approximately $47.2 million, assuming all 4 million
shares are repurchased. Book value and tangible per share were $8.21 and $7.11,
respectively as of December 31, 2003.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
DECEMBER 31, 2002
NET INCOME -- Net income for the year ended December 31, 2003 was $22.9 million,
compared to $20.8 million for the year ended December 31, 2002, primarily due to
an increase of $9.0 million in noninterest income and a $399,000 decline in the
provision for loan loss allowances. This increase was partially offset by a
$313,000 decline in net interest income and a $5.2 million increase in
noninterest expense. Diluted earnings per share for the year ended December 31,
2003 were $0.72 compared to diluted earnings per share of $0.65 for the year
ended December 31, 2002.
NET INTEREST INCOME -- Net interest income decreased $313,000, or 0.4%, to $71.4
million in 2003 from $71.7 million for 2002. Total interest income decreased
$14.3 million and interest expense declined $14.0 million. The decrease in total
interest income was primarily due to decreases in interest earned on loans of
$11.4 million, interest earned on securities of $2.3 million and other interest
earning assets of $1.1 million. The average balance of interest-earning assets
declined $19.9 million for the year ended December 31, 2003 compared to 2002.
The average yield on interest-earning assets decreased to 5.97% in 2003 compared
to 6.66% in 2002. The decrease in interest expense was primarily due to a
decrease in interest expense on deposits of $14.0 million. The average balance
of interest-bearing liabilities decreased $6.8 million and the average rate paid
decreased to 2.46% for 2003 from 3.30% for 2002. The net result of these changes
was a 2 basis point increase in the net interest margin to 3.81% for 2003 from
3.79% for 2002. We anticipate that the average rate paid on interest-bearing
liabilities will not decrease significantly going forward. As a result, net
interest income could be negatively impacted in a continuing declining interest
rate environment. However, we believe we are well positioned in the event of a
gradual increase in interest rates.
PROVISION FOR LOAN LOSSES -- Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for probable estimated losses based on
management's evaluation of such factors as the delinquency status of loans,
current economic conditions, the net realizable value of the underlying
collateral, changes in the composition of the loan portfolio and prior loan loss
experience. The provision for loan losses was $3.2 million in 2003 compared to a
provision of $3.6 million in 2002, primarily as a result of declines in
nonperforming loans and delinquent loans. The decision to diversify the mix of
loans in the portfolio in recent years to include more construction, consumer,
commercial and commercial real estate loans involved the acceptance of a
relatively higher level of credit risk. As a result, this may require a higher
provision for loan losses than if the portfolio remained primarily comprised of
one- to four-family mortgage loans. The allowance for loan losses totaled $15.1
million at December 31, 2003, which was 0.96% of total loans and 100.7% of
nonperforming loans.
NONINTEREST INCOME -- Noninterest income increased $9.0 million, or 28.4%, to
$40.8 million for the year ended December 31, 2003, from $31.8 million for the
year ended December 31, 2002. The increase was primarily due to increases of
$5.8 million in net gains recognized on the sale of loans, $1.5 million in gains
recognized on trading securities, $1.2 million in commissions earned and $1.2
million in underwriting and investment banking income. During 2003, Home Savings
sold a total of $536.6 million in mortgage loans, including $90.4 million in
loans out of the portfolio, compared to total sales of $338.7 million in 2002,
including $107.9 million from the portfolio. As a result of declining one - to
four -family residential loan volumes, the gain on related sales is expected to
decline. The change in trading securities was a result of a $1.5 million
increase in the value of securities held for the Butler Wick retention plan. The
changes in commissions and
underwriting are predominately related to an increase in the dollar volume of
bond issues underwritten by Butler Wick in 2003. These increases were partially
offset by a $1.3 million decline in gains recognized on the sale of securities
as a result of $21.3 million of security sales during 2003 compared to $46.0
million in 2002. Gains recognized in 2002 include $476,000 from the sale of
stock received in the Anthem demutualization, which Home Savings received since
Anthem is Home Savings' health insurance provider. To recognize the receipt of
the stock, other income was increased by $847,000 in 2002. The $242,000 decrease
in other income during 2003 was a result of the non-recurring receipt of the
Anthem stock in 2002, partially offset by $496,000 income recognized from the
investment in bank owned life insurance in 2003.
NONINTEREST EXPENSE -- Noninterest expense increased $5.2 million to $73.6
million for 2003, from $68.4 million in 2002. The primary reasons for the
increase is an increase in salaries and employee benefits of $6.6 million and an
increase in equipment and data processing of $1.2 million. The primary reasons
for the increase in salaries and employee benefits include $2.5 million in
additional expense related to post retirement costs as a result of rising health
care costs and a $1.5 million increase in the value of the Butler Wick retention
plan. Additional factors that contributed to the increase include increases in
commissions and bonuses paid, as a result of increased loan volumes and
increased dollar volumes of bond deals, and a full year of expense for personnel
from the acquisition of Potters as opposed to nine months worth of expense in
2002. The change in equipment and data processing is a result of increased
depreciation for a new teller system and phone system, computer and equipment
upgrades to run the new system and a full year of depreciation for Potters in
2003 compared to nine months in 2002. These increases were partially offset by a
$1.7 million decline in other expense mainly as a result of a $954,000 decline
in bank fees as a result of the early extinguishment of debt in 2002. Decreases
in supervisory fees, telephone expense and SAIF premiums also contributed to the
decline.
FEDERAL INCOME TAXES -- Federal income taxes increased $1.8 million, or 10.2%,
in 2003 compared to 2002, primarily due to higher pretax income in 2003. The
effective tax rate was 35% in 2003 and 34% in 2002. The primary reason for the
increase in effective tax rate is related to the reversal in 2002 of a $400,000
valuation allowance that was established in 1999 in relation to the contribution
United Community made to the Home Savings Charitable Foundation. Based on
current levels of taxable income, management believes that the tax benefit
related to the contribution will be completely utilized. Refer to Note 14 to the
consolidated financial statements for a further analysis of the effective tax
rate.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
DECEMBER 31, 2001
NET INCOME -- Net income for the year ended December 31, 2002 was $20.8 million,
compared to $15.7 million for the year ended December 31, 2001. The primary
reasons for the increase were a $14.8 million increase in net interest income
and a $3.4 million increase in noninterest income. These increases were
partially offset by a $10.7 million increase in noninterest expense and a $1.1
million increase in the provision for loan loss allowances. Diluted earnings per
share for the year ended December 31, 2002 were $0.65 compared to diluted
earnings per share of $0.48 for the year ended December 31, 2001.
NET INTEREST INCOME -- Net interest income increased $14.8 million, or 26.0%, to
$71.7 million in 2002 from $56.9 million for 2001. Total interest income
increased $12.0 million and interest expense decreased $2.8 million. The
increase in total interest income was primarily due to an increase in interest
on loans of $17.1 million, which was partially offset by a decrease in interest
earned on securities of $3.9 million and a decrease in income on margin accounts
of $944,000. The average balance of interest-earning assets increased $334.0
million for the year ended December 31, 2002 compared to 2001. The average yield
on interest-earning assets decreased to 6.66% in 2002 compared to 7.32% in 2001.
The decrease in interest expense was primarily due to a decrease in interest
expense on deposits of $3.1 million. The average balance of interest-bearing
liabilities increased $338.9 million and the average rate paid decreased to
3.30% for 2002 from 4.37% for 2001. The interest rate spread increased 41 basis
points to 3.36% for 2002 from 2.95% for 2001 as a result of the 107 basis point
decrease in the cost of interest-bearing liabilities partially offset by a 66
basis point decrease in the yield on interest-earning assets.
PROVISION FOR LOAN LOSSES -- The provision for loan losses was $3.6 million in
2002 compared to a provision of $2.5 million in 2001. The primary reasons for
the increase in the provision is the loan growth experienced in 2002, an
increase in nonperforming loans of $3.2 million from December 31, 2001 to
December 31, 2002, an increase in loans charged off, an increase in
delinquencies, economic conditions and loans originated in new market areas.
Additional factors that contributed to the increase in the provision include a
shift in the mix of the portfolio as a result of the sale of mortgage loans and
an increase in loans on the watch list. The allowance for loan losses totaled
$15.1 million at December 31, 2002, which was 0.94% of total loans and 100.98%
of nonperforming loans.
NONINTEREST INCOME -- Noninterest income increased $3.4 million, or 11.8%, to
$31.8 million for the year ended December 31, 2002, from $28.4 million for the
year ended December 31, 2001. The increase was primarily due to an increase of
$1.7 million in net gains recognized on the sale of securities, an increase of
$2.0 million in other income, a $469,000 increase in gains recognized on the
sale of loans and a $219,000 increase in service fees and other charges. Since
Anthem is Home Savings' health insurance provider, Home Savings received shares
of Anthem stock through the demutualization of Anthem, Inc. and subsequently
sold the stock. To recognize the receipt of the stock, other income was
increased by $847,000. To recognize the subsequent sale of the stock, a gain of
$476,000 was recognized on the sale of investment securities. These increases
were partially offset by a $1.0 million decline in underwriting and investment
banking income and a $552,000 recognized loss primarily due to the disposal of
fixed assets in 2002.
NONINTEREST EXPENSE -- Noninterest expense increased $10.7 million to $68.4
million for 2002, from $57.7 million in 2001. The primary reasons for the
increase is an increase in salaries and employee benefits of $5.4 million, an
increase in occupancy expense of $611,000, an increase in advertising expense of
$229,000, a $931,000 increase in equipment and data processing and a $509,000
increase in the amortization of the core deposit intangible, all of which are
primarily related to the Industrial and Potters acquisitions. Although
approximately $4.4 million of the increase in salaries and employee benefits is
attributable to the acquisitions, the increase in salaries and employee benefits
is also attributable to an increase in commissions paid to loan originators of
$472,000 as a result of increased loan volume, an increase in ESOP expense of
$373,000 due to the increase in United Community's stock price and an increase
in RRP expense as a result of additional grants that vested in 2002. Also
contributing to the increase in noninterest expense was a $3.0 million increase
in other expenses. The increase in other expense is primarily due to an increase
of $954,000 in bank fees as a result of the early extinguishment of debt.
Increases in supervisory fees, telephone expense, postage, couriers, SAIF
premiums and protection costs also added to the increase.
FEDERAL INCOME TAXES -- Federal income taxes increased $1.3 million, or 13.3%,
in 2002 compared to 2001, primarily due to higher pretax income in 2002. The
effective tax rate was 34% in 2002 and 38% in 2001. The primary reason for the
reduction in effective tax rate is related to the reversal of a $400,000
valuation allowance that was established in 1999 in relation to the contribution
United Community made to the Home Savings Charitable Foundation. Based on
current levels of taxable income, management believes that the tax benefit
related to the contribution will be completely utilized. Refer to Note 14 to the
consolidated financial statements for a further analysis of the effective tax
rate.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies of United Community are in accordance
with accounting principles generally accepted within the United States of
America and conform to general practices within the banking industry.
Application of these principles requires management to make estimates,
assumptions and judgements that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions and judgements
are based on information available as of the date of the financial statements.
Accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions and judgements.
The most significant accounting policies followed by United Community are
presented in Note 1 to the consolidated financial statements. Accounting and
reporting policies for the allowance for loan losses and mortgage servicing
rights are deemed critical since they involve the use of estimates and require
significant management judgements. United Community provides further detail on
the methodology and reporting of the allowance for loan losses in Note 6 and
mortgage servicing rights in Note 7.
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to United
Community's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average balances of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances. Nonaccruing loans have been included in the table
as loans carrying a zero yield. The average balance for securities available for
sale is computed using the carrying value and the average yield on securities
available for sale has been computed using the historical amortized average
balance.
Year ended December 31,
-----------------------------------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
-----------------------------------------------------------------------------------------------
(In thousands)
Interest-earning assets:
Net loans (1) $1,496,518 $98,646 6.59% $ 1,507,591 $110,013 7.30% $1,185,202 $ 92,933 7.84%
Net loans held for sale 41,418 1,950 4.71 18,351 1,243 6.77 12,440 886 7.12
Securities:
Trading 13,887 415 2.99 10,179 196 1.93 6,359 151 2.37
Available for sale 262,967 8,851 3.37 174,526 7,602 4.36 152,657 8,864 5.81
Held to maturity - - - 56,845 3,762 6.62 94,670 6,400 6.76
Margin accounts 14,349 689 4.80 17,883 830 4.64 26,637 1,774 6.66
FHLB stock 21,388 855 4.00 20,136 932 4.63 15,822 1,078 6.81
Other interest-earning assets 21,415 257 1.20 86,318 1,382 1.60 64,006 1,903 2.97
-----------------------------------------------------------------------------------------------
Total interest-earning assets 1,871,942 111,663 5.97 1,891,829 125,960 6.66 1,557,793 113,989 7.32
Noninterest-earning assets 116,685 103,504 64,049
-----------------------------------------------------------------------------------------------
Total assets $1,988,627 $ 1,995,333 $1,621,842
===============================================================================================
Interest-bearing liabilities:
Deposits:
Checking accounts $ 308,816 $ 3,112 1.01% $ 279,894 $ 5,319 1.90% $ 184,120 $ 5,446 2.96%
Savings accounts 335,843 2,347 0.70 299,048 4,946 1.65 228,485 5,212 2.28
Certificates of deposit 763,704 25,441 3.33 850,054 34,668 4.08 696,633 37,353 5.36
Other borrowed funds 203,276 9,352 4.06 216,420 9,303 4.30 197,294 9,036 4.58
-----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,638,639 40,252 2.46 1,645,416 54,236 3.30 1,306,532 57,047 4.37
-----------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 72,536 80,969 55,088
-----------------------------------------------------------------------------------------------
Total liabilities 1,711,175 1,726,385 1,361,620
Shareholders' equity 277,452 268,948 260,222
===============================================================================================
Total liabilities and equity $1,988,627 $ 1,995,333 $1,621,842
===============================================================================================
Net interest income and
interest rate spread $71,411 3.51% $ 71,724 3.36% $ 56,942 2.95%
===============================================================================================
Net interest margin 3.81% 3.79% 3.66%
===============================================================================================
Average interest-earning assets
to average interest-bearing
liabilities 114.24% 114.98% 119.23%
===============================================================================================
(1) Nonaccrual loans are included in the average balance.
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected United Community's interest income and interest expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in
volume multiplied by prior period rate), (ii) changes in rate (change in rate
multiplied by prior period volume) and (iii) total changes in rate and volume.
The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated in proportion to the changes due to
volume and rate:
Year ended December 31,
----------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
----------------------------------------------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
------------------ increase ------------------- increase
Rate Volume (decrease) Rate Volume (decrease)
----------------------------------------------------------------------
(In thousands)
Interest-earning assets:
Loans $ (10,564) $ (803) $ (11,367) $ (5,846) $22,926 $ 17,080
Loans held for sale (226) 933 707 (41) 398 357
Securities:
Trading 132 87 219 (21) 66 45
Available for sale (1,016) 2,265 1,249 (2,958) 1,696 (1,262)
Held to maturity (1,881) (1,881) (3,762) (132) (2,506) (2,638)
Margin accounts 30 (171) (141) (453) (491) (944)
FHLB stock (142) 65 (77) (975) 829 (146)
Other interest-earning assets (281) (844) (1,125) (2,130) 1,609 (521)
----------------------------------------------------------------------
Total interest-earning assets $ (13,948) $ (349) $ (14,297) $ (12,556) $24,527 $ 11,971
======================================================================
Interest-bearing liabilities:
Checking accounts (2,829) 704 (2,125) $ 279 $ (406) $ (127)
Savings accounts (3,303) 622 (2,681) 2,159 (2,425) (266)
Certificates of deposit (5,935) (3,292) (9,227) (33,547) 30,862 (2,685)
Other borrowed funds (307) 356 49 (462) 729 267
----------------------------------------------------------------------
Total interest-bearing liabilities $ (12,374) $(1,610) $ (13,984) $ (31,571) $28,760 $ (2,811)
======================================================================
Change in net interest income $ (313) $ 14,782
======================================================================
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE
SHEET ARRANGEMENTS
The following table presents, as of December 31, 2003, United Community's
significant fixed and determinable contractual obligations by payment date. The
payment amounts represent those amounts contractually due to the recipient and
do not include any unamortized premiums or discounts or other similar carrying
value adjustments. Further discussion of the nature of each obligation is
included in the referenced note to the consolidated financial statements.
Payments Due In
---------------------------------------------------------------------------
Note One Year One to Three to Over
Reference or Less Three Years Five Years Five Years Total
---------------------------------------------------------------------------
(In Thousands)
Operating leases 9 $ 1,128 $ 1,958 $ 1,277 $ 555 $ 4,918
Deposits without a stated maturity 11 681,493 - - - -
Certificates of deposit 11 342,394 210,996 188,707 108 742,205
Federal Home Loan Bank borrowings 12 119,250 141,000 17,000 21,328 298,578
Other borrowed funds 12 39,885 - - - 39,885
---------------------------------------------------------------------------
A schedule of significant commitments as of December 31, 2003 follows:
(In thousands)
Commitment to originate:
Mortgage loans $19,760
Other loans 4,770
Unfunded lines of credit 77,424
Net commitments to sell mortgage loans 7,216
Further discussion of these commitments is included in Note 6 to the
consolidated financial statements. In addition, United Community has commitments
under benefit plans as described in Note 17 to the consolidated financial
statements.
In September 2003, an arbitration proceeding was initiated against Butler
Wick seeking compensatory and punitive damages, interest and other costs in
connection with alleged losses experienced in the claimants' brokerage account.
Butler Wick has denied these claims. Further discussion of this proceeding is
included in Note 13 to the consolidated financial statements.
ASSET AND LIABILITY MANAGEMENT AND 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
only 0.20% 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.
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 internally 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.
Year ended December 31, 2003
- ------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------
(In thousands)
+300 $ 248,137 $ (28,816) (10.40)% 13.54% (0.50)% $ 658 1.00%
+200 266,586 (10,367) (3.74) 14.14 0.10 1,057 1.60
+100 276,775 (178) (0.06) 14.32 0.28 1,097 1.66
Static 276,953 - - 14.04 - - -
(100) 243,845 (33,108) (11.95) 12.29 (1.75) (1,703) (2.58)
(200) N/A N/A N/A N/A N/A N/A N/A
(300) N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
N/A - Due to a continuing low interest rate environment, it is not possible to
calculate results for these scenarios.
Year ended December 31, 2003
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
+300 $240,891 $(22,216) (8.44)% 13.57% (0.20)% $ (1,882) (2.74)%
+200 255,933 (7,174) (2.73) 14.03 0.26 (594) (0.87)
+100 268,153 5,046 1.92 14.31 0.54 363 0.53
Static 263,107 - - 13.77 - - -
(100) 220,472 (42,635) (16.20) 11.52 (2.25) (3,017) (4.40)
(200) N/A N/A N/A N/A N/A N/A N/A
(300) N/A N/A N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Historically, Home Savings' NPV has been more sensitive to increases in
interest rates than to decreases. This sensitivity to increases in rates
occurred principally because, as rates increased, borrowers were less likely to
prepay fixed-rate loans than when interest rates declined, and the majority of
Home Savings' loans have fixed rates of interest. With the current prolonged
period of low interest rates, however, Home Savings' present NPV is more
sensitive to falling rates. This increased sensitivity occurs because the
prepayments on fixed-rate loans dramatically increase and the value of core
deposits is diminished.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and early withdrawal levels from
certificates of deposit may deviate significantly from those assumed in making
risk calculations.
The Board of Directors and management of Home Savings believe that certain
factors afford Home Savings the ability to operate successfully despite its
exposure to interest rate risk. Home Savings manages its interest rate risk by
maintaining capital in excess of regulatory requirements. See "Liquidity and
Capital."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES. Home Savings' profitability
depends to a large extent on its net interest income, which is the difference
between interest income from loans and securities and interest expense on
deposits and borrowings. Like most financial institutions, Home Savings'
short-term interest income and interest expense are significantly affected by
changes in market interest rates and other economic factors beyond its control.
Home Savings' interest-earning assets consist primarily of long-term, fixed-rate
and adjustable-rate mortgage loans and securities which adjust more slowly to
changes in interest rates than its interest bearing liabilities which are
primarily deposits. Accordingly, Home Savings' earnings could be adversely
affected during sustained periods of rising interest rates.
LIQUIDITY AND CAPITAL
United Community's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing activities.
These activities are summarized below for the years ended December 31, 2003,
2002 and 2001.
Years ended December 31,
---------------------------------
2003 2002 2001
---------------------------------
(In thousands)
Net income $ 22,940 $ 20,817 $ 15,679
Adjustments to reconcile net income to net cash from
operating activities 20,152 (12,421) 113,747
---------------------------------
Net cash from operating activities 43,092 8,396 129,426
Net cash from investing activities (127,776) (13,145) (223,346)
Net cash from financing activities 54,903 (90,198) 253,831
---------------------------------
Net change in cash and cash equivalents (29,781) (94,947) 159,911
Cash and cash equivalents at beginning of year 110,936 205,883 45,972
---------------------------------
Cash and cash equivalents at end of year $ 81,115 $ 110,936 $ 205,883
=================================
The principal sources of funds for United Community are deposits, loan
repayments, maturities of securities, borrowings from financial institutions and
other funds provided by operations. Home Savings also has the ability to borrow
from the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan prepayments are more
influenced by interest rates, general economic conditions and competition.
Investments in liquid assets maintained by United Community, Home Savings and
Butler Wick are based upon management's assessment of (1) need for funds, (2)
expected deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset and liability management program. At December 31, 2003,
approximately $342.4 million of Home Savings' certificates of deposit are
expected to mature within one year. Based on past experience and Home Savings'
prevailing pricing strategies, management believes that a substantial percentage
of such certificates will be renewed with Home Savings at maturity, although
there can be no assurance that this will occur.
The Board of Directors has authorized an ongoing program to purchase
shares of United Community's common stock to fund employee benefit programs,
stock options and award programs and other corporate purposes. These purchases
can be made in the open market or negotiated transactions, from time to time,
depending on market conditions. United Community acquired 1,302,085 shares of
common stock for $12.2 million, 529,200 shares of common stock for $4.4 million
and 1,604,126 shares of common stock for $11.0 million during the years ended
December 31, 2003, 2002 and 2001. During the fourth quarter of 2003, United
Community completed the repurchase program previously announced on October 23,
2000. United Community has remaining authorization to repurchase 856,747 shares
as of December 31, 2003 under the current repurchase program. Management intends
to repurchase shares as authorized.
Home Savings is required by federal regulations to meet certain minimum
capital requirements. Current capital requirements call for tangible capital of
1.5% of adjusted tangible assets, leverage, also known as core capital (which
for Home Savings consists solely of tangible
capital) of 4.0% of adjusted total assets and risk-based capital (which for Home
Savings consists of leverage capital and the allowance for loan losses) of 8% of
risk-weighted assets (assets are weighted at percentage levels ranging from 0%
to 100% depending on their relative risk).
The following table summarizes Home Savings' regulatory capital
requirements and actual capital at December 31, 2003.
Current Excess of actual capital Applicable
Actual capital minimum requirement over current requirement asset base
------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Total
------------------------------------------------------------------------------------------------
(In thousands)
Tangible capital $ 157,160 8.22% $ 28,674 1.50% $ 128,486 6.72% $ 1,911,621
Core capital 157,160 8.22 76,465 4.00 80,695 4.22 1,911,621
Risk-based capital 172,271 10.56 130,465 8.00 41,806 2.56 1,630,814
================================================================================================
On January 28, 2004, United Community offered to purchase up to 4 million
shares, or approximately 11.7% of its outstanding shares, from shareholders
at a price of $12.50 per share. The offer expires on March 1, 2004. This
transaction is expected to result in a decrease in cash and cash equivalents of
approximately $43 million, an increase in Borrowings of approximately $4.2
million and a decrease in Shareholders' equity of approximately $47.2 million,
assuming all 4 million shares are repurchased. Home Savings will remain well
capitalized by all three measures (tangible, core and risk-based) at the
conclusion of this transaction.
ACCOUNTING AND REPORTING DEVELOPMENTS
A discussion of recently issued accounting pronouncements and their impact
on United Community's Consolidated Financial Statements is provided in Note 1 of
the Notes to Consolidated Financial Statements.
MARKET PRICE AND DIVIDENDS
There were 37,807,457 common shares of United Community stock issued and
34,559,783 shares outstanding and held by approximately 12,824 record holders as
of February 17, 2004. United Community's common shares are traded on The Nasdaq
Stock Market(R) under the symbol "UCFC". Quarterly stock prices and dividends
declared are shown in the following table.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------
2003:
High $ 9.07 $ 9.70 $ 10.00 $ 12.00
Low 8.60 8.74 9.11 9.75
Close 8.82 9.22 9.90 11.41
Dividends
declared
and paid 0.075 0.075 0.075 0.075
- ---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------
2002:
High $ 8.13 $ 9.39 $ 9.15 $ 8.99
Low 7.05 7.43 8.35 8.45
Close 7.40 9.36 8.85 8.65
Dividends
declared
and paid 0.075 0.075 0.075 0.075
- -----------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------------------
2003 2002
---------------------------------
(In thousands)
ASSETS
Cash and deposits with banks $ 36,334 $ 33,178
Federal funds sold 44,821 77,758
---------------------------------
Total cash and cash equivalents 81,155 110,936
---------------------------------
Securities:
Trading, at fair value 15,600 5,060
Available for sale, at fair value 227,525 237,268
Loans held for sale 37,715 45,825
Loans, net (including allowance for loan losses of $15,111 and $15,099) 1,576,494 1,478,213
Margin accounts 14,388 14,809
Federal Home Loan Bank stock 21,924 21,069
Premises and equipment 20,510 20,002
Accrued interest receivable 8,443 9,558
Real estate owned 1,299 994
Goodwill 33,593 33,593
Core deposit intangible 3,787 5,101
Cash surrender value of life insurance 20,496 -
Other assets 10,904 7,703
---------------------------------
TOTAL ASSETS $2,073,833 $ 1,990,131
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 63,442 $ 56,452
Interest bearing 1,360,256 1,425,449
Borrowed funds:
Short-term 159,135 37,945
Long-term 179,328 172,079
Advance payments by borrowers for taxes and insurance 10,721 5,996
Accrued interest payable 970 1,126
Accrued expenses and other liabilities 20,145 16,515
---------------------------------
TOTAL LIABILITIES 1,793,997 1,715,562
---------------------------------
SHAREHOLDERS' EQUITY
Preferred stock-no par value; 1,000,000 shares authorized and unissued - -
Common stock -- no par value; 499,000,000 shares authorized; 37,804,457
and 37,803,269 shares issued 139,526 138,207
Retained earnings 185,495 172,080
Accumulated other comprehensive income 1,124 2,363
Unearned compensation (16,752) (19,724)
Treasury stock, at cost, 2003 - 3,718,542 shares and 2002 - 2,558,214 shares (29,557) (18,357)
---------------------------------
TOTAL SHAREHOLDERS' EQUITY 279,836 274,569
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,073,833 $ 1,990,131
---------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
(In thousands, except per share data)
INTEREST INCOME
Loans $98,646 $ 110,013 $92,933
Loans held for sale 1,950 1,243 886
Securities:
Trading 415 196 151
Available for sale 8,851 7,602 8,864
Held to maturity - 3,762 6,400
Margin accounts 689 830 1,774
FHLB stock dividend 855 932 1,078
Other interest-earning assets 257 1,382 1,903
----------------------------------------------
Total interest income 111,663 125,960 113,989
----------------------------------------------
INTEREST EXPENSE
Interest expense on deposits 30,900 44,933 48,011
Interest expense on other borrowed funds 9,352 9,303 9,036
----------------------------------------------
Total interest expense 40,252 54,236 57,047
----------------------------------------------
Net interest income 71,411 71,724 56,942
Provision for loan losses 3,179 3,578 2,495
----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 68,232 68,146 54,447
----------------------------------------------
NONINTEREST INCOME
Brokerage commissions 14,925 13,677 13,411
Service fees and other charges 8,382 7,976 7,757
Underwriting and investment banking 1,528 312 1,316
Net gains (losses):
Securities available for sale 839 2,127 392
Trading securities 850 (651) (869)
Loans sold 11,707 5,919 5,450
Other (105) (515) 37
Other income 2,719 2,961 955
----------------------------------------------
Total noninterest income 40,845 31,806 28,449
----------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 46,511 39,917 34,528
Occupancy 3,658 3,186 2,575
Equipment and data processing 9,459 8,309 7,378
Franchise tax 1,562 2,032 2,010
Advertising 2,232 2,167 1,938
Amortization of core deposit intangible 1,314 2,180 1,671
Other expenses 8,836 10,568 7,608
----------------------------------------------
Total noninterest expenses 73,572 68,359 57,708
----------------------------------------------
INCOME BEFORE INCOME TAXES 35,505 31,593 25,188
INCOME TAXES 12,565 10,776 9,509
----------------------------------------------
NET INCOME $22,940 $ 20,817 $15,679
----------------------------------------------
EARNINGS PER SHARE
Basic $ 0.73 $ 0.65 $ 0.49
Diluted $ 0.72 $ 0.65 $ 0.48
----------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Shares Common Retained Comprehensive Unearned Treasury
Outstanding Stock Earnings Income (Loss) Compensation Stock Total
----------------------------------------------------------------------------------------
(In thousands, except per share data)
BALANCE DECEMBER 31, 2000 37,317 $ 136,967 $ 155,026 $ (98) $ (26,674) $ (3,322) $ 261,899
Comprehensive income:
Net income - - 15,679 - - - 15,679
Change in net unrealized gain on
securities, net of taxes of $808 - - - 1,500 - - 1,500
----------------------------------------------------------------------------------------
Comprehensive income - - 15,679 1,500 - - 17,179
Amortization of restricted common stock
compensation - 62 - - 1,622 - 1,684
Forfeiture of restricted common stock (46) (290) - - 242 - (48)
Shares allocated to ESOP participants - 164 - - 1,822 - 1,986
Purchase of treasury stock (1,604) - - - - (11,038) (11,038)
Exercise of stock options 1 - - - - 8 8
Dividends paid, $0.30 per share - - (9,790) - - - (9,790)
----------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2001 35,668 136,903 160,915 1,402 (22,988) (14,352) 261,880
Comprehensive income:
Net income - - 20,817 - - - 20,817
Reclassification of HTM securities - - - 1,704 - - 1,704
Change in net unrealized gain (loss) on
securities, net of taxes of $517 - - - (743) - - (743)
----------------------------------------------------------------------------------------
Comprehensive income - - 20,817 961 - - 21,778
Issuance of common shares for RRP 70 592 - - (592) - -
Amortization of restricted common stock
compensation - 215 - - 1,947 - 2,162
Forfeiture of restricted common stock (21) (128) - - 87 - (41)
Shares allocated to ESOP participants - 625 - - 1,822 - 2,447
Purchase of treasury stock (529) - - - - (4,386) (4,386)
Exercise of stock options 57 - (16) - - 381 365
Dividends paid, $0.30 per share - - (9,636) - - (9,636)
----------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2002 35,245 138,207 172,080 2,363 (19,724) (18,357) 274,569
Comprehensive income:
Net income - - 22,940 - - - 22,940
Change in net unrealized gain (loss) on
securities, net of taxes of $745 - - - (1,239) - - (1,239)
----------------------------------------------------------------------------------------
Comprehensive income - - 22,940 (1,239) - - 21,701
Issuance of common shares for RRP 2 23 - - (23) -
Amortization of restricted common stock
compensation - 280 - - 1,169 - 1,449
Forfeiture of restricted common stock (1) (7) - - 4 - (3)
Shares allocated to ESOP participants - 1,019 - - 1,822 - 2,841
Purchase of treasury stock (1,302) - - - - (12,233) (12,233)
Exercise of stock options 142 4 (96) - - 1,033 941
Dividends paid, $0.30 per share - - (9,429) - - - (9,429)
------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2003 34,086 $ 139,526 $ 185,495 $ 1,124 $ (16,752) $(29,557) $ 279,836
------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------------------
2003 2002 2001
-------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $22,940 $ 20,817 $ 15,679
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,179 3,578 2,495
Net (gains) losses (12,441) (7,517) (5,895)
Amortization of premiums and accretion of discounts 6,340 2,119 (2,095)
Depreciation 3,544 2,948 2,223
FHLB stock dividends (855) (932) (1,078)
Decrease in interest receivable 1,115 784 621
Decrease in interest payable (156) (1,951) (734)
(Increase) decrease in other assets (6,010) 3,827 (4,620)
Increase (decrease) in other liabilities 4,195 (7,758) 3,419
(Increase) decrease in trading securities (10,540) 3,292 (2,419)
Amortization of restricted stock compensation 1,446 2,121 1,636
Decrease in margin accounts 421 6,170 12,382
Net principal disbursed on loans held for sale (427,426) (253,261) (34,453)
Proceeds from sale of loans held for sale 454,499 231,712 140,279
ESOP compensation 2,841 2,447 1,986
-------------------------------------------------
Net cash from operating activities 43,092 8,396 129,426
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal repayments and
maturities of:
Securities available for sale 153,112 82,821 107,001
Securities held to maturity - 25,679 28,685
Proceeds from sale of:
Securities available for sale 22,325 45,096 22,435
Securities held to maturity - 932 1,454
Loans 103,426 112,620 42,805
Premises and equipment - 27 -
Real estate owned 1,820 1,379 839
Purchases of:
Securities available for sale (170,458) (187,144) (42,890)
Securities held to maturity - (999) (2,082)
Bank owned life insurance (20,000) - -
Net cash paid for acquisition - (13,729) (69,844)
Net principal disbursed on loans (2,606) (48,590) (297,944)
Loans purchased (211,370) (27,335) (11,036)
Purchases of premises and equipment (4,025) (3,902) (2,769)
-------------------------------------------------
Net cash from investing activities (127,776) (13,145) (223,346)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in NOW, savings and money market accounts 17,935 50,574 97,277
Net (decrease) increase in certificates of deposit (75,475) (63,816) 70,050
Net increase in advance payments by borrowers
for taxes and insurance 4,725 1 319
Proceeds from FHLB advances and other long term debt 25,500 26,239 193,000
Repayment of FHLB advances and other long term debt (11,164) (70,051) (20,000)
Net change in other borrowed funds 114,103 (19,488) (65,994)
Dividends paid (9,429) (9,636) (9,790)
Proceeds from exercise of stock options 941 365 7
Purchase of treasury stock (12,233) (4,386) (11,038)
-------------------------------------------------
Net cash from financing activities 54,903 (90,198) 253,831
-------------------------------------------------
(Decrease) increase in cash and cash equivalents (29,781) (94,947) 159,911
Cash and cash equivalents, beginning of year 110,936 205,883 45,972
-------------------------------------------------
Cash and cash equivalents, end of year $81,155 $110,936 $205,883
-------------------------------------------------
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of United Community Financial Corp. (United
Community), a unitary savings and loan holding company, The Home Savings and
Loan Company of Youngstown, Ohio (Home Savings), an Ohio chartered savings bank,
and Butler Wick Corp. (Butler Wick), an investment brokerage firm, conform to
accounting principles generally accepted in the United States of America and
prevailing practices within the banking, thrift and brokerage industries. A
summary of the more significant accounting policies follows.
Nature of Operations
United Community was incorporated under Ohio law in February 1998 by Home
Savings in connection with the conversion of Home Savings from an Ohio mutual
savings and loan association to an Ohio capital stock savings and loan
association (Conversion). Upon consummation of the Conversion on July 8, 1998,
United Community became the unitary savings and loan holding company for Home
Savings. The business of Home Savings is providing consumer and business banking
service to its market area in Ohio and western Pennsylvania. During 2003, Home
Savings changed its charter to a state chartered savings bank. At the end of
2003, Home Savings was doing business through 35 full-service banking branches
and 6 loan production offices. Loans and deposits are primarily generated from
the areas where banking branches are located. Home Savings derives its income
predominantly from interest on loans, securities, and to a lesser extent,
noninterest income. Home Savings' principal expenses are interest paid on
deposits and normal operating costs. Home Savings' operations are principally in
the savings and loan industry. Consistent with internal reporting, Home Savings'
operations are reported in one operating segment, which is retail banking. On
August 12, 1999, United Community acquired Butler Wick, the parent company for
two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust
Company. Butler Wick has 13 office locations providing a full range of
investment alternatives for individuals, companies and not-for-profit
organizations throughout Ohio and western Pennsylvania. Butler Wick's operations
are reported in a separate operating segment, which is investment advisory
services.
Basis of Presentation
The consolidated financial statements include the accounts of United
Community and its subsidiaries. All material inter-company transactions have
been eliminated. Certain prior period data has been reclassified to conform to
current period presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions based on available information.
These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for loan losses, fair values of financial instruments, fair value of
servicing rights, carrying value of goodwill and core deposit intangible assets
and status of contingencies are particularly subject to change.
Securities
Securities are classified as available for sale, held to maturity or
trading upon their acquisition. Securities are classified as available for sale
when they might be sold before maturity. Securities available for sale are
carried at estimated fair value with the unrealized holding gain or loss
reported in other comprehensive income. Securities are classified as held to
maturity and carried at amortized cost when management has the positive intent
and ability to hold them to maturity. Securities classified as trading are
carried at estimated fair market value with the unrealized holding gains and
losses included in income. Other securities such as Federal Home Loan Bank stock
are carried at cost. Interest income includes amortization of purchase premium
or discount. Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a decline in fair
value is not temporary.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or market in the aggregate. Net unrealized losses, if any,
are recorded as a valuation allowance and charged to earnings.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances. For balance sheet presentation, the balances are
presented net of deferred fees or costs and allowance for loan losses.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income on mortgage and commercial loans is discontinued at the time the loan is
90 days delinquent unless the credit is well secured and in process of
collection. Consumer loans are typically charged off no later than 180 days past
due. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses and decreased
by charge-offs less recoveries. Management's determination of the adequacy of
the allowance is based upon estimates derived from an analysis of individual
credits, prior and current loss experience, loan portfolio delinquency levels,
the nature and volume of the loan portfolio, current economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogenous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the useful lives, ranging from 3
years to 39 years, (or term of the lease, if shorter) of the related assets.
Real Estate Owned
Real estate owned, including property acquired in settlement of foreclosed
loans, is carried at the lower of cost or estimated fair value less estimated
cost to sell after foreclosure, establishing a new cost basis. If fair value
declines, a valuation allowance is recorded through expense. Costs relating to
the development and improvement of real estate owned are capitalized, whereas
costs relating to holding and maintaining the property are charged to expense.
Servicing Assets
Servicing assets represent the allocated value of retained servicing
rights on loans sold or securitized. Servicing assets are expensed in proportion
to, and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the assets, using groupings of the
underlying loans as to interest rates and, secondarily, as to prepayment
characteristics. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance to the extent that fair value is less than the capitalized
amount for a grouping.
Goodwill and Other Intangible Assets
Goodwill results from business acquisitions and represents the excess of
the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified.
Other intangible assets consist of core deposit intangible assets arising from
whole bank acquisitions. They are initially measured at fair value and then are
amortized on an accelerated method over their estimated useful lives.
Cash Surrender Value of Life Insurance
Bank owned life insurance represents insurance on the lives of certain
employees where Home Savings is the beneficiary. Bank owned life insurance
provides a long-term asset to offset long-term benefit liabilities, while
generating competitive investment yields. Bank owned life insurance is recorded
at its cash surrender value, or the amount currently realizable. Increases in
the Home Savings' policy cash value are tax deferred and death benefit proceeds
received by Home Savings are tax-free.
Long-term Assets
Premises and equipment and other long-term assets are reviewed for
impairment when events indicate their carrying amounts may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Securitizations
Some loans are transferred from time to time to a third party in exchange
for ownership of a security based on those loans. Such transfers are recorded as
a sale when control has been relinquished, with a gain or loss recorded on the
sale. The gain or loss is calculated based on the cash received versus the
carrying value of the assets transferred. If some interests, such as servicing
assets and cash reserve accounts, are retained, the carrying value of all assets
sold and retained is allocated to each asset based on fair value at sale date.
Fair values are based on market quotes or on the present value of future
expected cash flows using estimates of credit losses, prepayment rates, interest
rates, and discount rates.
Loan Fees
Loan origination fees received for loans, net of direct origination costs,
are deferred and amortized to interest income over the contractual lives of the
loans using the level yield method. Fees received for loan commitments that are
expected to be drawn, based on Home Savings' experience with similar
commitments, are deferred and amortized over the lives of the loans using the
level yield method. Fees for other loan commitments are deferred and amortized
over the loan commitment period on a straight-line basis. Unamortized deferred
loan fees or costs related to loans paid off are included in income. Unamortized
net fees or costs on loans sold are included in the basis of the loans in
calculating gains and losses. Amortization of net deferred fees is discontinued
for loans that are deemed to be nonperforming.
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 SFAS
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.
2003 2002 2001
---------------------------------------------
(In thousands)
Net income as reported $22,940 $ 20,817 $ 15,679
Deduct: Stock-based compensation expense
determined under fair value method 2,165 1,411 1,011
---------------------------------------------
Pro Forma net income 20,775 19,406 14,668
---------------------------------------------
Basic earnings per share as reported 0.73 0.65 0.49
Pro Forma basic earnings per share 0.66 0.61 0.46
Diluted earnings per share as reported 0.72 0.65 0.48
Pro forma diluted earnings per share 0.65 0.61 0.45
---------------------------------------------
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002 2001
-----------------------
Dividend yield 3.34% 4.00% 4.59%
Expected stock price volatility 48.31% 38.31% 33.63%
Risk-free interest rate 3.98% 5.01% 5.08%
Expected option life (In years) 10 10 10
-----------------------
Income Taxes
Deferred income taxes, which result from temporary differences in the
recognition of income and expense for financial statement and tax return
purposes, are included in the calculation of income tax expense. The effect on
deferred tax assets and liabilities of a change in income tax rates is
recognized in income in the period that includes the enactment date.
Deferred income tax assets and liabilities are recorded for differences
between financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to periods in which the differences are expected to affect
taxable income. Valuation allowances are established, based on the weight of
available evidence, when it is more likely than not that some portion or all of
the deferred tax asset will not be realized. Income tax expense is the tax
payable or refundable for the period adjusted for the change during the period
in deferred tax assets and liabilities.
Employee Stock Ownership Plan
The cost of shares issued to the ESOP, but not yet allocated to
participants, is shown as a reduction of shareholders' equity. Compensation
expense is based on the market price of shares as they are committed to be
released to participant accounts. Dividends on allocated ESOP shares reduce
retained earnings; dividends on unearned ESOP shares reduce debt and accrued
interest.
Earnings Per Share
Basic Earnings Per Share (EPS) are based on the weighted average number of
common shares outstanding during the year. Diluted EPS are based on the weighted
average number of common shares and common share equivalents outstanding during
the year. Unearned ESOP shares are not considered outstanding for this
calculation. See further discussion at Note 22.
Statements of Cash Flows
For purposes of the statement of cash flows, United Community considers all
highly liquid investments with a term of three months or less to be cash
equivalents. Net cash flows are reported for loan and deposit transactions.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated. See
further discussion at Note 13.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 18. Fair
value estimates involve uncertainties and matters of significant judgement
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which are also recognized as separate components of equity.
Execution, Settlement and Financing of Securities Transactions
In the normal course of business, Butler Wick's activities involve the
execution, settlement, and financing of various securities transactions. These
activities may expose Butler Wick to risk in the event the customer is unable to
fulfill its contractual obligations. Butler Wick maintains cash and margin
accounts for its customers located primarily in Ohio and western Pennsylvania.
Butler Wick's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, Butler Wick extends credit to its
customers, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in customer's accounts. In connection with
these activities, Butler Wick executes and clears customer transactions
involving the sale of securities not yet purchased, substantially all of which
are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose Butler Wick to significant off-balance-sheet risk
in the event margin requirements are not sufficient to fully cover losses that
customers may incur. In the event the customer fails to satisfy its obligations,
Butler Wick may be required to purchase or sell financial instruments at
prevailing market prices to fulfill the customer's obligations. Butler Wick
seeks to control the risks associated with its customers' activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. Butler Wick monitors required margin levels
daily and, pursuant to such guidelines, requires the customer to deposit
additional collateral or to reduce positions when necessary.
Butler Wick's customer financing and securities settlement activities
require Butler Wick to pledge customer securities as collateral in support of
various secured financing sources such as bank loans and securities loaned. In
the event the counterparty is unable to meet its contractual obligation to
return customer securities pledged as collateral, Butler Wick may be exposed to
the risk of acquiring the securities at prevailing market prices in order to
satisfy its customer obligations. Butler Wick controls this risk by monitoring
the market value of securities pledged on a daily basis and by requiring
adjustments of collateral levels in the event of excess market exposure. In
addition, Butler Wick establishes credit limits for such activities and monitors
compliance on a daily basis.
As a securities broker and dealer, a substantial portion of Butler Wick's
transactions are collateralized. Butler Wick's exposure to credit risk
associated with nonperformance in fulfilling contractual obligations pursuant to
securities transactions can be directly impacted by volatile trading markets,
which may impair the customer's ability to satisfy its obligations to Butler
Wick.
Off Balance Sheet Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet
customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay.
Such financial instruments are recorded when they are funded.
New Accounting Standards
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, FASB Statement 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equities, FASB Statement 132
(revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, and FASB Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
Operating Segments
Internal financial information is primarily reported and aggregated in two
lines of business, retail banking and broker/dealer investment advisory
services.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the bank to the holding company or by the holding
company to shareholders. These restrictions currently pose no practical limit on
the ability of the bank or holding company to pay dividends at historical
levels.
Reclassifications
Some items in the prior year financial statements were reclassified to
conform to the current presentation.
2. SUBSEQUENT EVENT
On January 28, 2004, United Community offered to purchase up to 4 million
shares, or approximately 11.7% of its outstanding shares, from shareholders at a
price of $12.50 per share. The offer expires on March 1, 2004. This transaction
is expected to result in a decrease in cash and cash equivalents of
approximately $43 million, an increase in borrowings of approximately $4.2
million and a decrease in shareholders' equity of approximately $47.2 million,
assuming all 4 million shares are repurchased.
3. ACQUISITIONS
On April 1, 2002, United Community acquired all of the capital stock of
Potters Financial Corporation, the holding company for Potters Bank, an
Ohio-chartered state savings bank. Potters Bank was merged into Home Savings.
The assets acquired consisted principally of loans and securities.
United Community accounted for the acquisition as a purchase and has
included Potters' results of operations from the effective date of the
acquisition in its 2002 financial statements. Based on Potters 991,546
outstanding shares, the acquisition was valued at $23.6 million, which was paid
in cash. The excess of the aggregate purchase price over the fair market value
of net identifiable assets acquired, or goodwill, was approximately $11.7
million. In accordance with SFAS No. 142, goodwill is not amortized, but instead
is evaluated for impairment. The core deposit intangible is subject to
amortization on an accelerated basis over an estimated life of 20 years. Because
the merger was structured as a tax free exchange, none of the goodwill is
expected to be deductible for tax purposes.
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.
United Community 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 identifiable assets acquired, or goodwill, was approximately
$21.9 million. In accordance with SFAS No. 142, goodwill is not amortized, but
instead is evaluated for impairment. The core deposit intangible is subject to
amortization on an accelerated basis over an estimated life of 15 years. Because
the merger was structured as a tax free exchange, none of the goodwill is
expected to be deductible for tax purposes.
4. CASH AND CASH EQUIVALENTS
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. These reserves, which consisted of
vault cash and deposits at the Federal Reserve Bank, totaled approximately $11.4
million and $14.7 million at December 31, 2003 and 2002.
5. SECURITIES
The components of securities are as follows:
December 31, 2003 December 31, 2002
---------------------------------------------------------------------------
Gross Gross Gross Gross
Fair Unrealized Unrealized Fair Unrealized Unrealized
Value Gains Losses Value Gains Losses
---------------------------------------------------------------------------
(In thousands)
Available for Sale
U.S. Treasury and agency securities $ 58,748 $ 199 $ (24) $ 52,967 $ 495 $ -
Corporate notes 5,062 38 - 17,592 253 -
Tax exempt municipals 10 2 - 13 2 -
Equity securities 8,930 1,453 (902) 7,994 526 (384)
Mortgage-related securities 154,775 1,158 (273) 158,702 2,789 (46)
---------------------------------------------------------------------------
Total $ 227,525 $ 2,850 $ (1,199) $237,268 $4,065 $ (430)
---------------------------------------------------------------------------
The weighted average interest rate on marketable securities was 4.65% and
3.47% at December 31, 2003 and 2002, respectively. The corporate notes consist
primarily of medium-term notes issued by corporations with investment grade
ratings.
Securities available for sale by contractual maturity, repricing or
expected call date are shown below:
December 31, 2003
------------------
Fair Value
------------------
(In thousands)
Due in one year or less $ 33,866
Due after one year through five years 29,954
Mortgage related securities 154,775
------------------
Total $218,595
------------------
Equity securities do not have a contractual maturity.
During the fourth quarter of 2002, United Community transferred securities
with a carrying value of $54.6 million previously classified as held to maturity
to available for sale. The unrealized gain on the securities transferred totaled
$2.6 million. Management transferred these securities to provide more
flexibility in managing interest rate risk. Future security purchases will all
be classified as available for sale.
Sales of available for sale securities were as follows:
2003 2002 2001
--------------------------------------------
(In thousands)
Proceeds $22,325 $45,096 $22,435
Gross gains 847 2,127 442
Gross losses 8 - 50
--------------------------------------------
Securities pledged for public funds deposits were approximately $12.9
million and $35.3 million at December 31, 2003 and 2002, respectively. See
further discussion regarding pledged securities in Note 12.
United Community's trading securities consist of commercial paper,
government obligations and an investment in mutual funds for the Butler Wick
Retention Plan.
Investments in an unrealized loss position are as follows at December 31,
2003:
Less than 12 months 12 months or more Total
-----------------------------------------------------------------------------
Unrealized Unrealized Unrealized
Fair value loss Fair value loss Fair value loss
-----------------------------------------------------------------------------
(In thousands)
Description of securities:
US Treasury obligations and direct
obligations of US government
agencies $ 3,525 $ (24) $ - $ - $ 3,525 $ (24)
Corporate notes - - - - - -
Tax exempt municipals - - - - - -
Mortgage related securities 35,678 (263) 223 (10) 35,901 (273)
-----------------------------------------------------------------------------
Subtotal, debt securities 39,203 (287) 223 (10) 39,426 (297)
Equity securities - - 4,098 (902) 4,098 (902)
-----------------------------------------------------------------------------
Total temporarily impaired securities $ 39,203 $ (287) $ 4,321 $ (912) $ 43,524 $ (1,199)
-----------------------------------------------------------------------------
The securities that have been impaired less than twelve months include
three U.S. treasury and agency positions along with seven mortgage related
securities. These securities have unrealized losses due to the current level of
interest rates.
Securities that have been impaired for a period greater than twelve months
include two mortgage related securities and one position in FNMA preferred
stock. The two mortgage related securities were originated in the late eighties,
have low coupons and have relatively small balances. These factors make the
securities fairly liquid. The securities continue to pay down and management
expects to receive all principal owed on the securities.
The FNMA preferred security is a floating rate security which resets every
two years based on the two-year treasury. At the time of purchase in August of
2000, the yield curve was inverted. Since that time, the yield curve has become
very steep and the attractiveness of this security has fallen. Management
expects the value of the security to improve as rates rise and the yield curve
begins to flatten.
6. LOANS
Loans consist of the following:
December 31,
----------------------------------
2003 2002
----------------------------------
(In thousands)
Real Estate:
Permanent:
One- to four-family $ 602,480 $ 889,199
Multifamily 149,547 79,760
Nonresidential 309,467 236,581
Land 14,511 5,812
Construction:
One- to four-family 358,890 122,234
Multifamily and non residential 46,165 35,600
----------------------------------
Total real estate 1,481,060 1,369,186
Consumer 218,763 155,520
Commercial 66,835 58,639
----------------------------------
Total loans 1,766,658 1,583,345
----------------------------------
Less:
Loans in process 173,436 85,340
Allowance for loan losses 15,111 15,099
Deferred loan fees (expenses), net 1,617 4,693
----------------------------------
Total 190,164 105,132
----------------------------------
Loans, net $ 1,576,494 $ 1,478,213
----------------------------------
Loan commitments are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments extend
over various periods of time with the majority of such commitments disbursed
within a sixty-day period. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Commitments to
extend credit at fixed rates expose Home Savings to some degree of interest rate
risk. Home Savings evaluates each customer's creditworthiness on a case-by-case
basis. The type or amount of collateral obtained varies and is based on
management's credit evaluation of the potential borrower. Home Savings normally
has a number of outstanding commitments to extend credit. At December 31, 2003,
there were outstanding commitments to originate $10.3 million of fixed-rate
mortgage loans and other loans (with interest rates that ranged from 4.39% to
13.50%), $13.8 million of
adjustable-rate loans, and $450,000 of commercial loans. At December 31, 2002,
there were outstanding commitments to originate $16.0 million of fixed-rate
mortgage loans and other loans (with interest rates that ranged from 4.50% to
7.75%), $12.0 million of adjustable-rate loans, and $135,000 of commercial
loans. Terms of the commitments extend up to six months, but are generally less
than two months.
At December 31, 2003, there were also outstanding unfunded consumer lines
of credit of $77.1 million, which are adjustable-rate based on the prime
interest rate, and commercial lines of credit of $155.2 million, which are
adjustable-rate based on the prime lending index. At December 31, 2002, there
were outstanding unfunded consumer lines of credit of $67.2 million, which were
adjustable-rate based on the one year U.S. Treasury index, and commercial lines
of credit of $63.2 million, which were adjustable-rate based on the prime
lending index. Generally, all lines of credit are renewable on an annual basis.
Home Savings does not expect all of these lines to be used by the borrowers.
At December 31, 2003 and 2002, there were $7.6 million and $8.7 million,
respectively, of outstanding stand-by letters of credit. These are issued to
guarantee the performance of a customer to a third party. Stand-by letters of
credit are generally contingent upon the failure of the customer to perform
according to the terms of an underlying contract with the third party.
Home Savings' business activity is principally with customers located in
Ohio. Except for residential loans in Home Savings' market area, Home Savings
has no other significant concentrations of credit risk.
Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Year ended December 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
(In thousands)
Balance, beginning of year $ 15,099 $11,480 $ 6,553
Acquired from Industrial Bancorp - - 2,795
Acquired from Potters Financial Corp. - 1,869 -
Provision for loan losses 3,179 3,578 2,495
Amounts charged off (3,340) (1,967) (395)
Recoveries 173 139 32
----------------------------------------------------
Balance, end of year $ 15,111 $15,099 $ 11,480
----------------------------------------------------
Nonaccrual loans (loans 90 days past due) were $13.0 million, $14.4 million
and $10.9 million at December 31, 2003, 2002 and 2001. Restructured loans were
$1.9 million, $1.3 million and $1.6 million at December 31, 2003, 2002 and 2001.
As of or for the year ended
December 31,
2003 2002 2001
-----------------------------------------------
(In thousands)
Impaired loans on which no specific valuation allowance was provided $4,366 $2,365 $1,718
Impaired loans on which specific valuation allowance was provided 1,514 4,032 1,169
-----------------------------------------------
Total impaired loans at year-end 5,880 6,397 2,887
Specific valuation allowances on impaired loans at year-end 277 2,122 751
Average impaired loans during year 6,628 5,652 1,953
Interest income recognized on impaired loans during the year 145 177 163
Interest income received on impaired loans during the year 288 128 145
Interest income potential based on original contract terms of impaired loans 539 502 190
-----------------------------------------------
Nonaccrual, restructured and impaired loans are defined differently. Some
loans may be included in all three categories, whereas other loans may only be
included in one or two of the categories.
Directors and officers of United Community, Home Savings and Butler Wick
are customers of Home Savings in the ordinary course of business. The following
describes loans to officers or directors of United Community, Home Savings and
Butler Wick:
(In thousands)
--------------
Balance as of December 31, 2002 $ 1,475
New loans to officers and directors 603
Loan payments during 2003 (634)
Reductions due to changes in board or
officer memberships (117)
--------
Balance as of December 31, 2003 $ 1,327
--------
7. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others, which are not reported in United
Community's assets, totaled $633.2 million and $386.4 million at December 31,
2003 and 2002.
Activity for capitalized mortgage servicing rights, included in other
assets, was as follows:
2003 2002 2001
---------------------------------------
(In thousands)
Balance, beginning of year $3,603 $ 1,627 $ 1,322
Additions 4,448 2,979 509
Amortized to expense (2,494) (1,003) (204)
---------------------------------------
Balance, end of year $5,557 $ 3,603 $ 1,627
---------------------------------------
Activity in the valuation allowance for mortgage servicing rights was as
follows:
2003 2002 2001
------------------------------------
(In thousands)
Balance, beginning of year $ - $ (22) $ -
Additions (415) (100) (22)
Recoveries 339 122 -
------------------------------------
Balance, end of year $(76) $ - $ (22)
------------------------------------
8. SECURITIZATIONS
Home Savings sold $90.4 million and $107.9 million in residential mortgage
loans in securitization transactions in 2003 and 2002, respectively. The
securities received in these transactions were then immediately sold. Gains of
$4.2 million and $4.6 million were recorded on the sales. Home Savings retained
servicing responsibilities for the loans, for which it receives servicing fees
approximating 0.40% and 0.26%, respectively, of the outstanding balance of the
loans.
For the loans securitized in 2003 and 2002, approximately $30.5 million and
$33.9 million, respectively, of the loans had loan to value ratios greater than
80% and did not have sufficient mortgage insurance coverage on the delivery
date. These loans were sold with recourse to Home Savings. This recourse
obligation will terminate for each loan on June 30, 2005 and June 30, 2004,
respectively, provided that on those dates, the applicable loan is not thirty
days or more delinquent. If this criteria is not met, the recourse agreement on
that loan will continue until such time as the loan becomes and remains current
for a period of twelve consecutive scheduled monthly payments from the date of
the last delinquency. Home Savings reduced the recorded gain from the
securitizations by the fair value of the recourse obligations. As of December
31, 2003, approximately $23.6 million and $12.3 million, respectively, of these
loans were still covered by the recourse obligations.
Home Savings also services loans from a securitization prior to 2002. Some
of these loans are covered by recourse and/or indemnification provisions
specific to that sale. At December 31, 2003, approximately $257,000 in loans are
covered by a recourse agreement, approximately $19.0 million in loans are
covered by an indemnification agreement, and approximately $92,000 in loans are
covered by both recourse and indemnification agreements.
Cash flows from all securitizations of mortgage loans were as follows:
2003 2002
------------------------------------
(In thousands)
Securitization proceeds $93,983 $108,895
Servicing fees received 418 356
An analysis of the activity in securitizations serviced by Home Savings
during 2003 and 2002 follows:
December 31,
2003 2002
---------------------------------------
(In thousands)
Balance at beginning of year:
Principal balance of loans $156,995 $102,487
Amortized cost of servicing rights 1,350 929
Servicing rights as a % of principal 0.86% 0.91%
New securitizations during the year:
Principal balance of loans 90,413 107,897
Fair value of servicing rights 741 1,215
Servicing rights as a % of principal 0.82% 1.13%
Principal payments received on loans securitized (118,647) (53,389)
Balance at end of year:
Principal balance of loans 128,761 156,995
Amortized cost of servicing rights 1,005 1,350
Servicing rights as a % of principal 0.78% 0.86%
---------------------------------------
In the securitization transactions, Home Savings retained residual
interests in the form of servicing assets. The servicing assets represent the
allocated value of retained servicing rights on the loans securitized.
December 31,
2003 2002
--------------------------------------
Other information at end of period
Weighted average rate of loans 6.73% 6.99%
Weighted average maturity of loans in months 284 290
Principal balance of loans 30 days or more past
due (in thousands) $546 $243
Fair value assumptions
Discount rate 8.00% 8.00%
Weighted average prepayment assumptions 364 PSA 249 PSA
The following table indicates how the fair value of the servicing rights might
decline if the assumptions change unfavorably in two different magnitudes:
December 31,
-------------------------------------------
2003 2002
-------------------------------------------
(In thousands)
Fair value at end of year $1,362 $1,427
Weighted average life (in months) 69 74
Projected fair value based on:
Increase in PSA of 50 1,251 1,307
Increase in PSA of 100 1,157 1,208
The effect of adverse changes is hypothetical and should not be extrapolated to
other changes, as the effects are not linear.
9. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
-------------------------------------------------------------
Estimated life 2003 2002
-------------------------------------------------------------
(In thousands)
Land and improvements $ 6,188 $ 4,898
Buildings up to 39 years 16,483 14,590
Leasehold improvements 10 years 1,110 1,106
Furniture and equipment 3-5 years 15,833 14,557
-------------------------------------------------------------
39,614 35,151
Less: Accumulated depreciation and amortization 19,104 15,149
-------------------------------------------------------------
Total $ 20,510 $20,002
-------------------------------------------------------------
Rent expense was $1.0 million for 2003, $924,000 for 2002 and $937,000 for
2001. Rent commitments under noncancelable operating leases for offices were as
follows, before considering renewal options that generally are present:
(In thousands)
--------------
2004 $ 1,128
2005 1,090
2006 868
2007 692
2008 585
Thereafter 555
-------
Total $ 4,918
-------
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill for the year is as follows:
(In thousands)
--------------
Balance as of December 31, 2001 $19,664
Goodwill acquired during the period 13,929
-------
Balance as of December 31, 2002 $33,593
Goodwill acquired during period -
-------
Balance as of December 31, 2003 $33,593
-------
Acquired Intangible Assets
As of December 31,
2003 2002
----------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------------------------
(In thousands)
Amortized intangible assets:
Core deposit intangibles $ 8,952 $ 5,165 $ 8,952 $ 3,851
----------------------------------------------------------------------
Total $ 8,952 $ 5,165 $ 8,952 $ 3,851
----------------------------------------------------------------------
Estimated amortization expense:
For the year ended:
December 31, 2004 $ 899
December 31, 2005 666
December 31, 2006 512
December 31, 2007 400
December 31, 2008 313
Aggregate amortization expense for the years ended December 31, 2003, 2002
and 2001 were $1.3 million, $2.2 million and $1.7 million, respectively.
11. DEPOSITS
Deposits consist of the following:
December 31,
-------------------------------
2003 2002
-------------------------------
(In thousands)
Checking accounts:
Interest-bearing $ 115,724 $ 110,657
Noninterest-bearing 63,442 56,452
Savings accounts 312,210 302,276
Money market accounts 190,117 194,173
Certificates of deposit 742,205 818,343
-------------------------------
Total deposits $ 1,423,698 $ 1,481,901
-------------------------------
Interest expense on deposits is summarized as follows:
Year Ended December 31,
----------------------------------------------------
2003 2002 2001
------- ------------- -------
(In thousands)
Interest-bearing demand deposits $ 3,113 $ 5,319 $ 5,446
Savings accounts 2,347 4,946 5,212
Certificates of deposit 25,440 34,668 37,353
------- ------- -------
Total $30,900 $44,933 $48,011
------- ------- -------
A summary of certificates of deposit by maturity follows:
December 31, 2003
-----------------
(In thousands)
Within 12 months $342,394
12 months to 24 months 171,404
24 months to 36 months 39,592
36 months to 48 months 89,714
48 months to 60 months 79,368
Over 60 months 19,733
--------
Total $742,205
--------
A summary of certificates of deposit with balances of $100,000 or more by
maturity is as follows:
December 31, 2003 December 31, 2002
------------------------------------------------
(In thousands)
Three months or less $ 29,027 $ 36,778
Over three months to six months 11,986 34,551
Over six months to twelve months 23,711 30,642
Over twelve months 83,686 65,748
-------- ---------
Total $148,410 $ 167,719
-------- ---------
Deposits in excess of $100,000 are not federally insured. Home Savings did
not have brokered deposits for the years ended December 31, 2003 and 2002.
12. OTHER BORROWED FUNDS
The following is a summary of short-term borrowings:
December 31,
------------------------------------------------------------------
2003 2002
------------------------------------------------------------------
(In thousands)
Weighted Weighted
Amount average rate Amount average rate
-------- ------------ ------- ------------
Variable interest revolving line of $ 19,295 0.96% $11,221 1.05%
credit
Securities sold under repurchase 19,394 1.22% 14,614 1.56%
agreement
Transaction loans; 30 year 1,196 7.42% 1,217 7.43%
amortization; 15 year balloon
Overnight FHLB advances 101,250 1.03% - -%
-------- -------
Total short-term borrowings $141,135 $27,052
-------- -------
The following is a summary of term FHLB borrowings:
December 31, December 31,
2003 2002
---------------------------------------------------------------------
(In thousands)
Weighted Weighted
Year of Maturity Amount average rate Amount average rate
- ----------------------------------------------------------------------------------------------------------------
2003 $ - -% $ 10,893 4.44%
2004 18,000 4.83 18,742 4.73%
2005 19,000 5.01 18,615 5.14%
2006 122,000 4.60 118,509 4.66%
2007 15,500 3.64 14,421 3.75%
2008 1,500 2.93 - -%
Thereafter 21,328 3.83 1,792 3.70%
--------- ---------
Total $ 197,328 $ 182,972
--------- ---------
Total term borrowings $ 338,463 $ 210,024
--------- ---------
Home Savings has available credit, subject to collateral requirements, with
the FHLB of $434.2 million, of which $298.6 million was used at December 31,
2003. All advances from the FHLB of Cincinnati are secured by a blanket mortgage
collateral agreement for 125% of outstanding advances, amounting to $373.2
million at December 31, 2003. Butler Wick has a revolving line of credit, which
is fully collateralized by securities valued at $24.0 million and $6.6 million
at December 31, 2003 and 2002. Securities worth $27.4 million are being held at
the Federal Reserve Bank as collateral for a repurchase agreement as of December
31, 2003.
During 2002, United Community incurred approximately $1.3 million in costs
associated with the early extinguishment of debt with FHLB. Management
established that it was advantageous to extinguish debt early and incur the
associated fees due to the current economic conditions and cash inflows from
loans sold.
13. LOSS CONTINGENCY
In September 2003, an arbitration proceeding was initiated against Butler
Wick and a broker employed by Butler Wick asserting certain claims. The
claimants seek compensatory damages of $6.9 million, interest of 10% per annum;
litigation costs, including attorneys' fees, and punitive damages of at least
$7.0 million in connection with alleged losses experienced in their securities
brokerage account. Butler Wick and the broker responded in November 2003 by
filing a Statement of Answer in which they denied the claims. The parties have
not selected an arbitration panel, scheduled a hearing date, or exchanged
documents. Butler Wick intends to vigorously defend the claims. It is not
possible to make a reasonable estimate of financial exposure, if any, at this
time, and no loss accruals have been recorded in connection with this matter.
14. INCOME TAXES
The provision for income taxes consists of the following components:
Year ended December 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
(In thousands)
Current $12,926 $11,986 $7,374
Deferred (361) (1,210) 2,135
------- ------- ------
Total $12,565 $10,776 $9,509
------- ------- ------
A reconciliation from tax at the statutory rate to the income tax
provision is as follows:
Year ended December 31,
----------------------------------------------------------------------------
2003 2002 2001
Dollars Rate Dollars Rate Dollars Rate
----------------------------------------------------------------------------
(In thousands)
Tax at statutory rate $ 12,427 35.0% $11,057 35.0% $8,816 35.0%
Increase (decrease) due to:
Intangible amortization - - - - 585 2.3
Change in valuation allowance - - (400) (1.3) - -
State taxes (40) (0.1) (11) (-) (29) (0.1)
Other 178 0.5 130 0.4 137 0.6
-------- ---- ------- ---- ------ ----
Income tax provision $ 12,565 35.4% $10,776 34.1% $9,509 37.8%
-------- ---- ------- ---- ------ ----
Significant components of the deferred tax assets and liabilities are as
follows:
December 31,
--------------------------
2003 2002
--------------------------
(In thousands)
Deferred tax assets:
Charitable contribution $ - $ 394
Loan loss reserves 5,289 5,293
Postretirement benefits 1,464 1,023
Deferred loan fees 563 1,093
ESOP shares released 1,162 1,026
Compensation accruals 1,347 721
Other 678 1,206
--------- ---------
Deferred tax assets 10,503 10,756
--------- ---------
Deferred tax liabilities:
Purchase accounting adjustments 2,140 2,841
Original issue discount 1,388 2,082
FHLB stock dividends 5,126 4,827
Unrealized gain on securities available for sale 606 1,272
Loan servicing 1,919 1,261
Other 340 516
--------- ---------
Deferred tax liabilities 11,519 12,799
--------- ---------
Net deferred tax liability $ (1,016) $ (2,043)
--------- ---------
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including Home Savings, to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The excess
reserves (deduction based on the percentage of taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six-year period beginning in 1996. The recapture
has no effect on Home Savings' statement of income as income taxes were provided
for in prior years in accordance with SFAS 109, "Accounting for Income Taxes."
The timing of this recapture was delayed for two years because Home Savings
originated more residential loans in that period than the average originations
in the past six years. Beginning in 1998, Home Savings began to recapture the
excess reserves in the amount of $6.1 million resulting in payments totaling
$2.1 million, which have been previously accrued. The pre-1988 reserve
provisions are subject only to recapture requirements in the case of certain
excess distributions to, and redemptions of, shareholders or if Home Savings no
longer qualifies as a "bank." Tax bad debt deductions accumulated prior to 1988
by Home Savings are approximately $21.1 million. A deferred income tax liability
of $7.3 million has not been provided on these bad debt deductions and no
recapture of these amounts is anticipated.
15. SHAREHOLDERS' EQUITY
Dividends
United Community's source of funds for dividends to its shareholders are
earnings on its investments and dividends from Home Savings and Butler Wick.
During the year ended December 31, 2003, United Community paid regular dividends
in the amount of $9.4 million. While Home Savings' primary regulator is the
FDIC, the OTS has regulations that impose certain restrictions on payments of
dividends to United Community.
Home Savings must file an application with, and obtain approval from, the
OTS (i) if the proposed distribution would cause total distributions for the
calendar year to exceed net income for that year to date plus retained net
income (as defined) for the preceding two years; (ii) if Home Savings would not
be at least adequately capitalized following the capital distribution; (iii) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between Home Savings and the OTS or
the FDIC, or any condition imposed on Home Savings in an OTS-approved
application or notice. If Home Savings is not required to file an application,
it must file a notice of the proposed capital distribution with the OTS. As of
December 31, 2003, Home Savings had $4.4 million of retained earnings that could
be distributed without requiring the prior approval of the OTS.
Other Comprehensive Income
Other comprehensive income included in the Consolidated Statements of
Shareholders' Equity consists solely of unrealized gains and losses on available
for sale securities. The change includes reclassification of gains or losses on
sales of securities of $545,000, $1.3 million and $217,000 for the years ended
December 31, 2003, 2002 and 2001.
Liquidation Account
At the time of the Conversion, Home Savings established a liquidation
account, totaling $141.4, which was equal to its regulatory capital as of the
latest practicable date prior to the Conversion. In the event of a complete
liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for the accounts then
held.
16. REGULATORY CAPITAL REQUIREMENTS
Home Savings is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on United Community. The regulations require Home Savings to
meet specific capital adequacy guidelines and the regulatory framework for
prompt corrective action that involve quantitative measures of Home Savings'
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Home Savings' capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Home Savings to maintain minimum amounts and ratios of Leverage (or
Core) and Tangible capital (as defined in the regulations) to adjusted total
assets (as defined) and of total capital (as defined) to risk-weighted assets
(as defined). Actual and required capital amounts and ratios are presented
below.
As of December 31, 2003
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
-----------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------
(In thousands)
Total capital (to risk-weighted assets) $172,271 10.56% $130,465 8.00% $163,081 10.00%
Tier 1 capital (to risk-weighted assets) 157,160 9.64 * * 97,849 6.00
Leverage (Tier 1) capital (to adjusted
total assets) 157,160 8.22 76,465 4.00 95,581 5.00
Tangible capital (to adjusted
total assets) 157,160 8.22 28,674 1.50 * *
------- ---- ------- ---- -------- -----
As of December 31, 2002
Minimum To Be Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
-----------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------
(In thousands)
Total capital (to risk-weighted assets) $163,419 12.61% $103,656 8.00% $129,569 10.00%
Tier 1 capital (to risk-weighted assets) 150,821 11.64 * * 77,742 6.00
Leverage (Tier 1) capital (to adjusted
total assets) 150,821 8.05 74,954 4.00 93,693 5.00
Tangible capital (to adjusted
total assets) 150,821 8.05 28,108 1.50 * *
------- ----- -------- ---- -------- -----
*Ratio is not required under regulations.
As of December 31, 2003 and 2002, the FDIC and OTS, respectively
categorized Home Savings as well capitalized under the regulatory framework for
Prompt Corrective Action. To be categorized as well capitalized, Home Savings
must maintain minimum Leverage, Tier 1 and total capital ratios as set forth in
the table above. There are no conditions or events since that notification that
have changed Home Savings' category.
Management believes, as of December 31, 2003, that Home Savings meets all
capital requirements to which it is subject. Events beyond management's control,
such as fluctuations in interest rates or a downturn in the economy in areas in
which Home Savings' loans and securities are concentrated, could adversely
affect future earnings and, consequently, Home Savings' ability to meet its
future capital requirements.
Butler Wick is subject to regulatory capital requirements set forth by the
Securities and Exchange Commission's Uniform Net Capital Rule. Butler Wick has
elected to use the alternative method, permitted by rule, which requires Butler
Wick to maintain minimum net capital, as defined, equal to the greater of
$250,000 or 2% of aggregate debit balances arising from customer transactions,
as defined. The Net Capital Rule also provides that equity capital may not be
withdrawn or cash dividends paid if resulting net capital would be less than 5%
of aggregate debits. At December 31, 2003, Butler Wick had net capital of $8.2
million, which was 50% of aggregate debit balances and $7.9 million in excess of
required minimum net capital.
17. BENEFIT PLANS
Other Postretirement Benefit Plans
In addition to Home Savings' retirement plans, Home Savings sponsors a
defined benefit health care plan that was curtailed in 2000 to provide
postretirement medical benefits for employees who have worked 20 years and
attained a minimum age of 60 by September 1, 2000, while in service with Home
Savings. The plan is contributory and contains minor cost-sharing features such
as deductibles and coinsurance. In addition, postretirement life insurance
coverage is provided for employees who were participants prior to December 10,
1976. The life insurance plan is non-contributory. Home Savings' policy is to
pay premiums monthly, with no pre-funding. Information about changes in
obligations of the benefit plan follows:
Year ended December 31,
---------------------------------------
2003 2002
---------------------------------------
Postretirement Plan
---------------------------------------
(In thousands)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,686 $ 2,861
Service cost 6 19
Interest cost 226 256
Actuarial loss 288 787
Benefits paid (274) (237)
-------- --------
Benefit obligation at end of the year $ 3,932 $ 3,686
-------- --------
Funded status of the plan $ (3,932) $ (3,686)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (34) (337)
Prior service cost not yet recognized in net
periodic benefit cost (6) (7)
-------- --------
Accrued benefit cost $ (3,972) $ (4,030)
-------- --------
Components of net periodic benefit cost/(gain) are as follows:
Year Ended December 31,
-----------------------------------
2003 2002 2001
-----------------------------------
Postretirement Plan
-----------------------------------
(In thousands)
Service cost $ 6 $ 19 $ 13
Interest cost 226 256 194
Expected return on plan assets - - -
Net amortization of prior service cost (1) (1) (1)
Recognized net actuarial gain (15) - (1,167)
---- ----- -------
Net periodic benefit cost/(gain) 216 274 (961)
---- ----- -------
Assumptions used in the valuations were as follows:
Weighted average discount rate 6.00% 6.75% 7.25%
---- ----- -------
The weighted-average annual assumed rate of increase in the per capita cost
of coverage benefits (i.e., health care cost trend rate) used in the 2003
valuation was 20% and was assumed to decrease to 5.5% for the year 2011 and
remain at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. A one-percentage point change in
assumed health care cost trend rates would have the following effects as of
December 31, 2003:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------------------------------
(In thousands)
Effect on total of service and interest cost components $ 22 $ (19)
Effect on the postretirement benefit obligation $378 $ (328)
---- ------
401(k) Savings Plan
Home Savings sponsors a defined contribution 401(k) savings plan, which
covers substantially all employees. Under the provisions of the plan, Home
Savings' matching contribution is discretionary and may be changed from year to
year. For 2003, 2002 and 2001, Home Savings' match was 50% of pre-tax
contributions, up to a maximum of 6% of the employees' base pay. Participants
become 100% vested in Home Savings contributions upon completion of three years
of service. For the years ended 2003, 2002 and 2001, the expense related to this
plan was approximately $433,000, $396,000 and $308,000.
Butler Wick also sponsors a defined contribution 401(k) savings plan, which
covers substantially all employees who have completed one year of service. Under
the provisions of the plan, Butler Wick's matching contribution is discretionary
and may be changed from year to year. For 2003, 2002 and 2001, Butler Wick's
match was 25% of pre-tax contributions, up to a maximum of 6% of the employees'
base pay. Participants become 100% vested in Butler Wick contributions upon
completion of six years of service. For the years ended 2003, 2002 and 2001, the
expense related to this plan was approximately $133,000, $132,000 and $126,000.
Employee Stock Ownership Plan
In conjunction with the Conversion, United Community established an
Employee Stock Ownership Plan (ESOP) for the benefit of the employees of United
Community and Home Savings. All full-time employees who meet certain age and
years of service criteria are eligible to participate in the ESOP. An ESOP is a
tax-qualified retirement plan designed to invest primarily in the stock of
United Community. The ESOP borrowed $26.8 million from United Community to
purchase 2,677,250 shares in conjunction with the conversion. The term of the
loan is 15 years and is being repaid primarily with contributions from Home
Savings to the ESOP.
The loan is collateralized by the shares of common stock held by the ESOP.
As the note is repaid, shares are released from collateral based on the
proportion of the payment in relation to total payments required to be made on
the loan. The shares released from collateral are then allocated to participants
on the basis of compensation as described in the plan. Compensation expense is
determined by multiplying the average per share market price of United
Community's stock during the period by the number of shares to be released.
United Community recognized approximately $2.8 million, $2.4 million and $2.1
million in compensation expense for the years ended December 31, 2003, 2002 and
2001, respectively, related to the ESOP. Unallocated shares are considered
neither outstanding shares for computation of basic earnings per share nor
potentially dilutive securities for computation of diluted earnings per share.
Dividends on unallocated ESOP shares are reflected as a reduction in the loan
(and Home Savings' contribution is reduced accordingly). Shares released or
committed to be released for allocation during the years ended December 31,
2003, 2002 and 2001 totaled 294,802, 294,802 and 294,802 and had a combined fair
market value of $10.1 million. Shares remaining not released or committed to be
released for allocation at December 31, 2003 totaled 2.7 million and had a
market value of approximately $30.9 million.
Recognition and Retention Plan
On July 12, 1999, shareholders approved the United Community Financial
Corp. Recognition and Retention Plan (RRP). The purpose of the plan is to reward
and retain directors, officers and employees of United Community and Home
Savings who are in key positions of responsibility by providing them with an
ownership interest in United Community. Under the RRP, recipients are entitled
to receive dividends and have voting rights on their respective shares, but are
restricted from selling or transferring the shares prior to vesting.
In August 1999, United Community awarded 1,342,334 common shares to
eligible individuals. Approximately one-fifth of the number of shares awarded,
or 268,638 shares, vested on the date of grant. The remaining 1,073,696 shares
vest ratably on each of the first four anniversary dates of the plan. In August
2000, United Community awarded 46,291 common shares to eligible individuals.
Approximately two-fifths of the number of shares awarded, or 18,517 shares,
vested on the date of grant. The remaining 27,774 shares vest ratably on each of
the first three anniversary dates of the plan. In August 2002, United Community
awarded 69,677 common shares to eligible individuals. Approximately one-half of
the shares awarded, or 34,839 shares, vested on the date of grant. The remaining
34,838 shares vested on the first anniversary date. In August 2003, United
Community awarded 2,376 common shares to eligible individuals, all of which
vested immediately upon grant. As of December 31, 2003, there are no shares
available for future grants.
The aggregate fair market value of the unvested RRP shares is considered
unearned compensation at the time of grant and is amortized over the vesting
period. Compensation expense recognized in 2003, 2002 and 2001 related to the
RRP was $1.2 million, $1.9 million and $1.6 million.
Retention Plan
In connection with the Butler Wick acquisition, United Community
established and funded a $3.7 million retention plan into a Rabbi Trust.
Participants in the retention plan become vested in their benefits after five
years of service, subject to acceleration in the event of a change in control of
United Community or Butler Wick. If a participant voluntarily leaves the employ
of Butler Wick or a subsidiary, or is fired for cause, before the expiration of
the five-year vesting period, the participant will forfeit all funds in the
plan. If a participant dies, becomes disabled or retires at or after age 65 and
prior to the expiration of the five-year vesting period, the participant, or the
participant's estate, will be entitled to receive the funds allocated to him or
her under the plan, increased for any earnings or reduced for any loss on such
funds, at the end of the five-year vesting period. Retention plan expense,
including fair value adjustments related to the assets in Rabbi Trust, was $1.6
million, $126,000 and $(73,000) for 2003, 2002 and 2001.
Long-Term Incentive Plan
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 became 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:
As of December 31,
--------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------------------------------------------------------------------------------------
Outstanding at beginning of year 1,909,615 $7.01 1,307,496 $ 6.79 629,085 $6.97
Granted 742,654 8.97 715,710 7.40 771,390 6.66
Exercised (171,873) 7.08 (75,538) 6.84 (1,126) 6.66
Forfeited (11,774) 7.86 (38,053) 6.93 (91,853) 6.95
--------- ----- --------- ------ --------- -----
Outstanding at end of year 2,468,622 7.60 1,909,615 7.01 1,307,496 6.79
--------- ----- --------- ------ --------- -----
Options exercisable at year end 2,468,622 $7.60 1,909,615 $ 7.01 1,307,496 $6.79
--------- ----- --------- ------ --------- -----
Weighted-average fair value of options
granted during year $3.65 $ 2.44 $1.83
----- ------ -----
Outstanding stock options have a weighted average remaining life of 7.79
years and may be exercised on the range of $6.656 to $8.97.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
United Community using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that United Community could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Cash and cash equivalents, margin accounts, accrued interest receivable and
payable and advance payments by borrowers for taxes and insurance -- The
carrying amounts as reported in the Statements of Financial Condition are a
reasonable estimate of fair value due to their short-term nature.
Securities -- Fair values are based on quoted market prices, dealer quotes and
prices obtained from independent pricing services.
Loans -- The fair value is estimated by discounting the future cash flows using
the current market rates for loans of similar maturities with adjustments for
market and credit risks.
Loans held for sale -- The fair value of loans held for sale is based on market
quotes.
Federal Home Loan Bank stock -- The fair value is estimated to be the carrying
value, which is par. All transactions in the capital stock of the Federal Home
Loan Bank are executed at par.
Deposits -- The fair value of demand deposits, savings accounts and money market
deposit accounts is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using rates
currently offered for deposits of similar remaining maturities.
Other borrowed funds -- -The fair value of borrowings is the amount payable on
demand at the reporting date.
Off balance sheet commitments-The fair value of commitments is considered to be
nominal.
Limitations -- Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time United Community's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
United Community's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, a significant asset not considered a
financial asset is premises and equipment. In addition, tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2003 and 2002. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements
since that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
December 31, 2003 December 31, 2002
----------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------------------
(In thousands)
ASSETS:
Cash and cash equivalents $ 81,155 $ 81,155 $ 110,936 $ 110,936
Securities:
Trading 15,600 15,600 5,060 5,060
Available for sale 227,525 227,525 237,268 237,268
Loans held for sale 37,715 37,824 45,825 46,828
Loans 1,576,494 1,603,241 1,478,213 1,510,558
Margin accounts 14,388 14,388 14,809 14,809
Federal Home Loan Bank stock 21,924 21,924 21,069 21,069
Accrued interest receivable 8,443 8,443 20,002 20,002
LIABILITIES:
Deposits:
Checking, savings and money market accounts (681,493) (681,493) (663,558) (663,558)
Certificates of deposit (742,205) (758,894) (818,343) (835,753)
Other borrowed funds (338,463) (344,703) (210,024) (220,029)
Advance payments by borrowers for taxes
and insurance (10,721) (10,721) (5,996) (5,996)
Accrued interest payable (970) (970) (1,126) (1,126)
---------- ---------- ---------- ----------
19. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings, net of amounts capitalized $40,408 $ 56,093 $ 62,963
Interest capitalized on borrowings 21 - -
Income taxes 14,570 11,878 7,471
Supplemental schedule of noncash activities:
Loans transferred to held for sale 11,341 8,418 120,981
Transfers from loans to real estate owned 2,224 2,025 851
Securities held to maturity transferred to available for sale - 54,927 -
------- -------- --------
20. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
------------------------------------------
2003 2002
------------------------------------------
(In thousands)
ASSETS
Cash and deposits with banks $ 1,082 $ 447
Federal funds sold and other 43,213 44,683
--------- ---------
Total cash and cash equivalents 44,295 45,130
Securities:
Trading 4,071 3,155
Available for sale 4,832 3,375
Note receivable 20,071 21,506
Accrued interest receivable 1 11
Investment in subsidiary-Home Savings 195,222 191,845
Investment in subsidiary-Butler Wick 15,388 13,960
Other assets 535 -
--------- ---------
TOTAL ASSETS $ 284,415 $ 278,982
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 4,577 $ 4,413
--------- ---------
Total liabilities 4,577 4,413
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 279,836 274,569
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 284,415 $ 278,982
--------- ---------
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
(In thousands)
INCOME
Cash dividends from subsidiary $ 22,000 $ 30,000 $ -
Interest income 1,871 2,191 3,752
Noninterest income 873 (574) (862)
-------- -------- --------
Total income 24,744 31,617 2,890
EXPENSES
Interest expense - - 385
Noninterest expenses 984 988 986
-------- -------- --------
Total expenses 984 988 1,371
-------- -------- --------
Income before income taxes 23,760 30,629 1,519
Income taxes 692 238 602
-------- -------- --------
Income before equity in undistributed net earnings of
subsidiaries 23,068 30,391 917
Equity in undistributed net earnings of subsidiaries (128) (9,574) 14,762
-------- -------- --------
Net income $ 22,940 $ 20,817 $ 15,679
-------- -------- --------
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 22,940 $ 20,817 $ 15,679
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of the subsidiaries 128 9,574 (14,762)
Amortization of premiums and accretion of discounts - 15 (1)
Net gains - (76) (1)
Decrease (increase) in interest receivable 10 (10) 370
(Increase) decrease in other assets (519) 4,333 (4,294)
(Decrease) increase in other liabilities (1,764) 1,774 (789)
(Increase) decrease in trading securities (916) 614 803
--------- -------- --------
Net cash from operating activities 19,879 37,041 (2,995)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal repayments and maturities of:
Securities available for sale - 3,708 37,665
Proceeds from sale of:
Securities available for sale - 162 350
Purchases of:
Securities available for sale (527) (4,357) (356)
ESOP loan repayment 534 335 146
--------- -------- --------
Net cash from investing activities 7 (152) 37,805
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (9,429) (9,636) (9,790)
Net decrease in borrowed funds - - (12,000)
Purchase of treasury stock (12,233) (4,386) (11,038)
Exercise of stock options 941 365 8
--------- -------- --------
Net cash from financing activities (20,721) (13,657) (32,820)
--------- -------- --------
(Decrease) increase in cash and cash equivalents (835) 23,232 1,990
Cash and cash equivalents, beginning of year 45,130 21,898 19,908
--------- -------- --------
Cash and cash equivalents, end of year $ 44,295 $ 45,130 $ 21,898
--------- -------- --------
21. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the manner in which public enterprises
report information about operating segments in financial statements. United
Community has two principal segments, retail banking and broker
dealer/investment advisory services. Retail banking provides consumer and
business banking services. Broker dealer/investment advisory services provide
investment brokerage services and a network of integrated financial services.
The accounting policies of the segments are the same as those described in Note
1. Condensed statements of income and selected financial information by
operating segment for the years ended December 31, 2003, 2002 and 2001 are as
follows:
Broker/Dealer Investment
------------------------
Retail Banking Advisory Services Eliminations Total
-------------- ----------------- ------------ -----
2003
RESULTS OF OPERATIONS
Total interest income $ 112,203 $ 1,153 $ (1,693) $ 111,663
Total interest expense 41,724 221 (1,693) 40,252
Net interest income after
provision for loan loss 3,179 - - 3,179
Noninterest income 18,795 22,050 - 40,845
Noninterest expense 50,277 23,295 - 73,572
---------- ------- ---------- ----------
Income before tax 35,818 (313) - 35,505
Income tax 12,675 (110) - 12,565
---------- ------- ---------- ----------
Net income $ 23,143 $ (203) - $ 22,940
---------- ------- ---------- ----------
SELECTED FINANCIAL INFORMATION
Total assets $2,267,792 $37,958 $ (231,867) $2,073,883
Capital expenditures 3,714 311 - 4,025
Depreciation and amortization 3,049 495 - 3,544
---------- ------- ---------- ----------
(In thousands)
2002
RESULTS OF OPERATIONS
Total interest income $ 126,690 $ 1,073 $ (1,803) $ 125,960
Total interest expense 55,821 218 (1,803) 54,236
Net interest income after
provision for loan loss 67,291 855 - 68,146
Noninterest income 12,442 19,364 - 31,806
Noninterest expense 48,878 19,481 - 68,359
---------- ------- ---------- ----------
Income before tax 30,855 738 - 31,593
Income tax 10,515 261 - 10,776
---------- ------- ---------- ----------
Net income $ 20,340 $ 477 - $ 20,817
---------- ------- ---------- ----------
SELECTED FINANCIAL INFORMATION
Total assets $2,191,205 $26,748 $ (227,822) $1,990,131
Capital expenditures 3,656 246 - 3,902
Depreciation and amortization 2,403 545 - 2,948
---------- ------- ---------- ----------
2001
RESULTS OF OPERATIONS
Total interest income $ 114,295 $ 1,982 $ (2,288) $113,989
Total interest expense 58,516 819 (2,288) 57,047
Net interest income after
provision for loan loss 53,284 1,163 - 54,447
Noninterest income 8,659 19,790 - 28,449
Noninterest expense 37,434 20,274 - 57,708
---------- ------- ---------- ----------
Income before tax 24,509 679 - 25,188
Income tax 9,263 246 - 9,509
---------- ------- ---------- ----------
Net income $ 15,246 $ 433 $ - $ 15,679
---------- ------- ---------- ----------
SELECTED FINANCIAL INFORMATION
Total assets $2,145,275 $35,977 $ (236,472) $1,944,780
Capital expenditures 2,407 362 - 2,769
Depreciation and amortization 1,675 548 - 2,223
---------- ------- ---------- ----------
22. EARNINGS PER SHARE
Earnings per share are 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 common shares determined
for the basic computation plus the dilutive effect of potential common shares
that could be issued under outstanding stock options and the RRP. No shares of
common stock were anti-dilutive for the periods ended December 31, 2003, 2002
and 2001.
2003 2002 2001
-----------------------------------------------------
(In thousands, except per share data)
BASIC EARNINGS PER SHARE:
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $22,940 $20,817 $ 15,679
Weighted average common shares
outstanding 31,353 31,859 32,176
------- ------- --------
Basic earnings per share $ 0.73 $ 0.65 $ 0.49
------- ------- --------
DILUTED EARNINGS PER SHARE:
Net income applicable to common stock $22,940 $20,817 $ 15,679
Weighted average common shares
outstanding 31,353 31,859 32,176
Dilutive effect of restricted stock - 130 154
Dilutive effect of stock options 431 336 35
------- ------- --------
Weighted average common shares
outstanding for dilutive computation 31,784 32,325 32,365
------- ------- --------
Diluted earnings per share $ 0.72 $ 0.65 $ 0.48
------- ------- --------
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents summarized quarterly data for each of the
years indicated.
(Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
(In thousands, except per share data)
2003:
Total interest income $ 29,741 $ 28,304 $ 27,045 $ 26,573 $111,663
Total interest expense 11,232 10,177 9,515 9,328 40,252
-------- -------- -------- -------- --------
Net interest income 18,509 18,127 17,530 17,245 71,411
Provision for loan losses 696 1,702 571 210 3,179
Noninterest income 7,975 13,169 10,303 9,398 40,845
Noninterest expense 18,155 18,729 18,369 18,319 73,572
Income taxes 2,653 3,837 3,110 2,965 12,565
-------- -------- -------- -------- --------
Net income $ 4,980 $ 7,028 $ 5,783 $ 5,149 $ 22,940
-------- -------- -------- -------- --------
Earnings per share:
Basic $ 0.16 $ 0.22 $ 0.18 $ 0.17 $ 0.73
Diluted 0.16 0.22 0.17 0.17 0.72
-------- -------- -------- -------- --------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
(In thousands, except per share data)
2002:
Total interest income $ 31,126 $ 32,458 $ 31,548 $ 30,828 $125,960
Total interest expense 14,893 13,726 13,152 12,465 54,236
-------- -------- -------- -------- --------
Net interest income 16,233 18,732 18,396 18,363 71,724
Provision for loan losses 696 532 750 1,600 3,578
Noninterest income 7,895 8,512 6,496 8,903 31,806
Noninterest expense 16,752 17,365 15,973 18,269 68,359
Income taxes 2,425 3,350 2,964 2,037 10,776
-------- -------- -------- -------- --------
Net income $ 4,255 $ 5,997 $ 5,205 $ 5,360 $ 20,817
-------- -------- -------- -------- --------
Earnings per share:
Basic 0.13 0.19 0.16 0.17 0.65
Diluted 0.13 0.19 0.16 0.17 0.65
-------- -------- -------- -------- --------
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
United Community Financial Corp.
Youngstown, OH
We have audited the accompanying consolidated statements of financial condition
of United Community Financial Corp. as of December 31, 2003 and 2002 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three year period ended December 31,
2003. These financial statements are the responsibility of United Community's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Community
Financial Corp. as of December 31, 2003 and 2002 and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Crowe Chizek and Company LLC
------------------------------------
Crowe Chizek and Company LLC
Cleveland, Ohio
January 28, 2004