.
.
.
EXHIBIT 13
SELECTED FINANCIAL AND OTHER DATA
Selected financial condition data:
At December 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(In thousands)
Total assets $2,287,788 $2,073,833 $1,990,131 $1,944,780 $1,300,199
Cash and cash equivalents 40,281 81,155 110,936 205,883 45,972
Securities:
Trading, at fair value 32,316 15,600 5,060 8,352 5,933
Available for sale, at fair value 198,404 227,525 237,268 118,150 190,176
Held to maturity, at amortized cost -- -- -- 80,496 108,560
Loans held for sale 59,099 37,715 45,825 20,192 --
Loans, net 1,815,976 1,576,494 1,478,213 1,406,479 876,653
Federal Home Loan Bank stock, at cost 22,842 21,924 21,069 18,760 13,793
Cash surrender value of life insurance 21,406 20,496 -- -- --
Deposits 1,522,952 1,423,698 1,481,901 1,383,418 900,413
Borrowed funds 483,503 338,463 210,024 271,631 114,317
Total shareholders' equity 252,352 279,836 274,569 261,880 261,899
---------- ---------- ---------- ---------- ----------
Summary of earnings:
Year ended December 31,
---------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- -------
(In thousands)
Interest income $113,441 $111,663 $125,960 $113,989 $91,622
Interest expense 40,378 40,252 54,236 57,047 44,104
-------- -------- -------- -------- -------
Net interest income 73,063 71,411 71,724 56,942 47,518
Provision for loan losses 9,370 3,179 3,578 2,495 300
-------- -------- -------- -------- -------
Net interest income after provision
for loan losses 63,693 68,232 68,146 54,447 47,218
Non-interest income 36,109 40,845 31,806 28,449 24,754
Non-interest expenses (1) 72,834 73,572 68,359 57,708 54,307
-------- -------- -------- -------- -------
Income before income taxes 26,968 35,505 31,593 25,188 17,665
Income taxes 9,103 12,565 10,776 9,509 6,051
-------- -------- -------- -------- -------
Net income $ 17,865 $ 22,940 $ 20,817 $ 15,679 $11,614
-------- -------- -------- -------- -------
(1) For the year ended December 31, 2000, non-interest expense included a $2.9
million gain on postretirement benefits curtailment and a $1.0 million loss
on pension termination.
EX. 13-1
Selected financial ratios and other data:
At or for the year ended December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Performance ratios: (1)
Return on average assets (2) 0.83% 1.15% 1.04% 0.97% 0.92%
Return on average shareholders' equity (3) 7.01 8.27 7.74 6.03 4.47
Interest rate spread (4) 3.34 3.51 3.36 2.95 2.91
Net interest margin (5) 3.60 3.81 3.79 3.66 3.89
Non-interest expense to average assets 3.37 3.70 3.74 3.56 4.30
Efficiency ratio (6) 65.87 65.29 64.52 66.34 75.14
Average interest-earning assets to
average interest-bearing liabilities 113.16 114.24 114.98 119.23 127.08
Capital ratios:
Average equity to average assets 11.78 13.95 13.48 16.04 20.57
Shareholders' equity to assets at year end 11.03 13.49 13.80 13.47 20.14
Tier 1 leverage ratio 8.36 8.22 8.05 9.07 14.51
Tier 1 risk-based capital ratio 9.92 9.64 11.64 13.88 23.51
Total risk-based capital ratio 10.79 10.56 12.61 14.70 24.33
Asset quality ratios:
Nonperforming loans to loans, net (7) 1.22 0.94 1.06 0.89 1.11
Nonperforming assets to total assets at year end (8) 1.04 0.78 0.85 0.67 0.78
Allowance for loan losses as a percent of loans 0.87 0.96 1.02 0.82 0.75
Allowance for loan losses as a
percent of nonperforming loans (7) 71.57 101.87 96.20 92.13 67.20
Number of:
Loans 41,690 37,668 37,872 25,636 22,699
Deposits 173,997 169,920 173,528 164,753 115,785
Per share data:
Basic earnings (9) $ 0.61 $ 0.73 $ 0.65 $ 0.49 $ 0.35
Diluted earnings (9) 0.60 0.72 0.65 0.48 0.35
Book value (10) 8.09 8.21 7.79 7.34 7.02
Dividend per share 0.30 0.30 0.30 0.30 0.30
Dividend payout ratio (11) 50.00% 41.67% 46.15% 62.50% 85.71%
(1) Performance ratios for 2000 reflect the $2.9 million gain on postretirement
benefits curtailment and the $1.0 million loss on pension termination.
(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.
(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.
(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) Non-interest expense, excluding the amortization of core deposit
intangible, divided by the sum of net interest income and non-interest
income, excluding gains and losses on securities and other. 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.
(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 and other repossessed assets.
(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.
(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.
EX. 13-2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
United Community Financial Corp. (United Community) was incorporated in the
State of Ohio in February 1998 for the purpose of owning all of the outstanding
capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home
Savings) issued upon the conversion of Home Savings from a mutual savings
association to a permanent capital stock savings association (Conversion). The
Conversion was completed on July 8, 1998. On August 12, 1999, United Community
acquired Butler Wick Corp. (Butler Wick), an investment brokerage/advisory firm.
Home Savings conducts business from its main office located in Youngstown, Ohio,
36 full-service branches and five loan production offices located throughout
Ohio and western Pennsylvania. The principal business of Home Savings is the
origination of mortgage loans on one- to four-family residential real estate
located in Home Savings' primary market area, which consists of Ashland,
Columbiana, Cuyahoga, Erie, Geauga, Hancock, Huron, Lake, Mahoning, Montgomery,
Richland, Sandusky, Seneca, Summit and Trumbull counties in Ohio and Beaver
County in Pennsylvania. Home Savings also originates loans secured by
nonresidential real estate. In addition to real estate lending, Home Savings
originates commercial loans and various types of consumer loans. For liquidity
and interest rate risk management purposes, Home Savings invests in various
financial instruments as discussed below. Funds for lending and other investment
activities are obtained primarily from savings deposits, which are insured up to
applicable limits by the FDIC, principal repayments of loans, borrowings from
the Federal Home Loan Bank and maturities of securities.
Interest on loans and other investments is Home Savings' primary source of
income. Home Savings' principal expenses are interest paid on deposit accounts
and other borrowings and salaries and benefits paid to our employees. Operating
results are dependent to a significant degree on the net interest income of Home
Savings, which is the difference between interest earned on loans and other
investments and interest paid on deposits and borrowed funds. Like most thrift
institutions, Home Savings' interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
Butler Wick is the parent company for two wholly-owned subsidiaries: Butler Wick
& Co., Inc. and Butler Wick Trust Company. Butler Wick conducts business from
its main office located in Youngstown, Ohio and 14 offices located in
northeastern Ohio and western Pennsylvania. Butler Wick primarily sells common
and preferred stocks, but also offers an array of government, corporate and
municipal bonds, unit trusts, mutual funds, IRAs, money market accounts and
certificates of deposit. Butler Wick also offers investments in precious metals
and a full line of life insurance and annuity products, personal and corporate
financial planning, estate planning, pension and profit sharing.
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 $214.0 million, or 10.3%, from $2.1 billion at December
31, 2003 to $2.3 billion at December 31, 2004. The net change in assets was a
result of increases of $239.5 million, or 15.2%, in net loans, $21.4 million in
loans held for sale, $16.7 million in trading securities and $3.3 million in
other assets, which were partially offset by decreases of $40.9 million, or
50.4%, in cash and cash equivalents and $29.1 million, or 12.8%, in securities
held for sale. Total liabilities increased $241.4 million, or 13.5%, primarily
as a result of a $116.4 million, or 73.2%, increase in short-term borrowed
funds, a $28.6 million increase in long-term borrowed funds, a $77.7 million
increase in interest bearing deposits and a $21.5 million increase in
non-interest bearing deposits. These increases were offset by a decrease of $4.3
million, or 21.4%, in accrued expenses and other liabilities. We anticipate
continued balance sheet growth resulting from our expansion within our existing
regions, including ongoing benefits from the introduction of new products, as
well as ongoing benefits from new offices opened in 2004 and those planned for
2005.
Net loans increased $239.5 million, or 15.2%, to $1.8 billion at December 31,
2004, compared to $1.6 billion at December 31, 2003. The most significant
increases were in the one- to four-family portfolio with a $91.0 million
increase in one-to-four family real estate loans and a $56.4 million increase in
one- to four-family construction loans. Other increases in the loan portfolio
included a $48.9 million increase in consumer loans, a $20.0 million increase in
commercial loans and a $19.6 million increase in multifamily and non-residential
construction loans. Also contributing to the increase was a decrease in deferred
fees on loans of $998,000 offset by an increase in the allowance for loan
EX. 13-3
loss of $766,000. 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. Home Savings continued to
purchase loans under this program in 2004 and had approximately $85.5 million
outstanding at December 31, 2004. The establishment of a wholesale loan
department at Home Savings also contributed to the increase in net loans. Home
Savings anticipates continued net growth in all loan categories, which may
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. Furthermore, consumer lending can also involve a higher degree of
risk than residential real estate lending as collateral for consumer loans can
decline in value more quickly than real estate collateral.
Loans held for sale were $59.1 million at December 31, 2004 compared to $37.7
million at December 31, 2003. 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. The gain or loss on the sale of these loans is not
recognized until the settlement of the transaction and subsequent delivery of
the loan. Home Savings actively manages its pipeline of loans in process
utilizing forward sale contracts to minimize exposure to rising interest rates.
In the third quarter of 2004, Home Savings transferred $39.3 million in fixed
rate, fixed term second mortgage loans originated by the bank from the portfolio
to loans held for sale. Also contributing to the increase in 2004 was the
commencement of originating Small Business Administration loans for sale. The
Company purchases residential mortgage loans from a number of correspondent
lenders in the normal course of business. Looking into 2005, Home Savings
intends to continue to sell fixed rate loans as a part of its strategic plan to
manage interest rate risk. As interest rates rise, loan origination volumes
generally decline, thus resulting in fewer loans available for sale.
Trading securities increased $16.7 million, or 107.2%, from December 31, 2003 to
December 31, 2004. The increase is a result of an increase in Butler Wick's
trading portfolio of $18.8 million. This portfolio consists of U.S. agency
securities of the Federal Home Loan Bank and Federal National Mortgage
Association, with an average maturity of 1.7 years. Partially offsetting the
increase was a decrease in trading securities held by United Community in
relation to the Butler Wick Retention Plan. Approximately 56% of the plan's
assets were distributed in August as all participants fully vested at that time.
Refer to note 17 of the consolidated financial statements for further discussion
of the retention plan.
Other assets increased $3.3 million during 2004. The increase is a result of
increases in customer receivables for returned checks of $866,000 and increased
prepaid service contracts of $251,000 at Home Savings and increases of $455,000
in receivables due from customers and $369,000 in receivables due from
brokers/dealers at Butler Wick. Also contributing to the increase was an
increase in deferred federal income tax at United Community of $365,000 and in
other accounts receivable of $390,000 due to United Community for a security
sale that occurred prior to year end and settled in January 2005.
Funds not currently utilized for general corporate purposes, including loan
originations, enhanced customer services and possible acquisitions, are invested
in overnight funds and securities. Cash and cash equivalents decreased $40.9
million, or 50.4%, to $40.3 million at December 31, 2004 compared to $81.2
million at December 31, 2003. The decrease is primarily as a result of the
completion of the self-tender offer in March 2004 in which United Community
purchased 3,667,227 common shares at $12.50 per share.
Available for sale securities decreased during 2004 as a result of paydowns and
maturities of $76.2 million and sales of $46.5 million in Home Savings'
portfolio. Activity in Butler Wick's portfolio also contributed to the decrease
with sales of $14.2 million and paydowns of $100,000. United Community sold $2.3
million in securities during 2004, further contributing to the decrease. Home
Savings had purchases of available for sale securities of $95.7 million, while
Butler Wick had purchases of $15.9 million and United Community purchased
$105,000 of securities, partially offsetting the paydown, maturity and sale
activity.
During the second quarter of 2003, Home Savings invested $20.0 million in bank
owned life insurance, which is 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 recognized into other non-interest income a
$496,000 increase in the cash value of the policy in 2003 and $910,000 in 2004.
The increase in the cash value of the policy is tax exempt and any death benefit
proceeds received by Home Savings are tax-free.
Total deposits increased $99.3 million, or 7.0%, from $1.4 billion at December
31, 2003 to $1.5 billion at December 31, 2004, primarily as a result of an
increase in certificates of deposit of $82.1 million and an increase in
non-interest bearing NOW deposits of $21.0 million. This change was offset by a
modest decrease of $4.0 million in savings accounts. Non-interest bearing NOW
deposits account for the majority of Home Savings' non-interest bearing
deposits. During 2004, Home Savings continued emphasizing growth in core deposit
accounts that may be more likely to generate lasting customer relationships.
Also, certificate of deposit pricing was more aggressive in order to attract new
customers. Management continually evaluates many variables when pricing
deposits, including cash requirements, liquidity targets, asset acquisition,
liability mix, and interest rate risk when pricing deposits. The increase in
total deposits was used to partially fund the increase in loan volume during
2004.
Borrowed funds increased $145.0 million, or 42.9%, at December 31, 2004 compared
to December 31, 2003. Home Savings had increases of $94.0 million in short-term
Federal Home Loan Bank advances and $30.7 million in long-term Federal Home Loan
Bank advances during 2004. These increases were used to fund loan growth in
excess of deposit growth. Butler Wick incurred a $19.2 million increase in short
term borrowings in order to fund the purchase of the government agency
securities held in their trading portfolio. The securities were used to
collateralize repurchase agreements. The increase in other borrowed funds was
offset by a modest decrease in repurchase agreement
EX. 13-4
deposits at Home Savings of $2.4 million. United Community continually evaluates
funding alternatives and may borrow additional funds in 2005 to satisfy funding
requirements.
Total shareholders' equity decreased $27.5 million, or 9.8%, from December 31,
2003 to December 31, 2004. The decrease was primarily due to treasury stock
purchases, offset by increases in capital stock and retained earnings along with
a decrease in unearned compensation. Treasury stock increased $40.3 million as a
result of United Community's self-tender in which it purchased 3,667,227 shares
at a cost of $46.2 million in March 2004. This purchase was the result of the
self-tender offer discussed above and in the Liquidity and Capital section of
this Management's Discussion and Analysis. Partially offsetting this purchase
was the exercise of stock options. Eligible participants exercised approximately
913,000 stock options at a cost of $6.4 million. Capital stock increased as a
result of the increase in United Community's share price for ESOP shares
released and for stock options exercised during the year. Retained earnings
increased as a result of net income for United Community of $855,000, Home
Savings of $16.2 million and Butler Wick of $801,000 which were reduced by
dividends paid to United Community shareholders during 2004 of $8.5 million.
Unearned compensation decreased $1.8 million as a result of shares released from
the ESOP during 2004. Book value and tangible book value were $8.09 and $6.92,
respectively, as of December 31, 2004.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
DECEMBER 31, 2003
NET INCOME--Net income for the year ended December 31, 2004 was $17.9 million,
compared to $22.9 million for the year ended December 31, 2003, primarily due to
an increase of $6.2 million in the provision for loan losses and reduced
non-interest income of $4.7 million, offset by an increase in net interest
income of $1.7 million and reduced provision for income taxes of $3.5 million.
NET INTEREST INCOME--Net interest income increased $1.7 million, or 2.3%, to
$73.1 million in 2004 from $71.4 million for 2003. Total interest income
increased $1.8 million while interest expense increased only slightly. The
increase in total interest income was primarily due to increases in interest
earned on loans at Home Savings of $3.8 million, in interest earned on margin
accounts at Butler Wick of $113,000 and in interest earned on trading securities
of $321,000. The average balance of net loans increased $231.6 million, driving
the increase in interest earned on those assets. The increase in margin account
interest is due to a higher yield earned on those assets of 88 basis points. The
increase in trading securities was a result of an increase in the average
balance of trading securities of $15.3 million in Butler Wick's portfolio. These
increases were partially offset by a decrease in interest earned on available
for sale securities of $1.8 million, due to a decrease in the average balance of
available for sale securities of $62.9 as a result of paydowns, maturities and
sales of securities previously discussed.
Interest expense increased slightly because a decline in interest expense on
deposits at Home Savings of $2.5 million was more than offset by an increase in
interest expense on borrowed funds of $2.7 million. The decrease in interest
expense on deposits was caused by a decrease in the average rate paid as well as
a decrease in the average balance of interest-bearing savings accounts of $21.3
million and a decrease in the average balance of NOW and money market accounts
of $5.9 million. Interest on borrowed funds increased primarily as a
result of a $172.7 million increase in the average balance of borrowings.
Borrowings increased, as noted above, to fund loan growth in excess of deposit
growth at Home Savings as well as to purchase trading securities used to
collateralize repurchase agreements at Butler Wick. It is anticipated that the
average rate paid on interest-bearing liabilities will increase in 2005 as rates
have started to rise. However, management believes the Company is well
positioned in the event of a gradual increase in interest rates as rates offered
on loans will increase as well.
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, 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 $9.4
million in 2004 compared to a provision of $3.2 million in 2003. The $6.2
million increase is primarily a result of impairment charges aggregating $8.4
million in the third quarter. These impairment charges relate to two loans made
to a boat dealer and to a number of loans to purchasers of boats from that
dealer. The charge was recorded after the Company learned that insufficient
collateral securing these loans as well as lack of clear title to the collateral
existed. Also, the mix of all loans in the portfolio in recent years has changed
to include more construction, consumer, commercial and commercial real estate
loans which involve a relatively higher level of credit risk. These factors all
required 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 $15.9 million at December 31, 2004, which was 0.87% of net
loans and 71.6% of nonperforming loans compared to $15.1 million at December 31,
2003, which was 0.96% of net loans and 101.9% of nonperforming loans.
NON-INTEREST INCOME--Non-interest income decreased $4.7 million, or 11.6%, to
$36.1 million for the year ended December 31, 2004, from $40.8 million for the
year ended December 31, 2003. The decrease was due to decreases of $8.5 million
in net gains recognized on the sale of loans, $831,000 in gains recognized on
available for sale securities, $857,000 in gains recognized on trading
securities and $499,000 in underwriting and investment banking income.
During 2004, Home Savings sold $180.9 million in mortgage loans compared to
sales of $536.6 million in 2003. A decline in one- to four-family residential
loan origination volumes led to the gain on related sales. As interest rates
begin to rise, loan sales are expected to continue slowing into the foreseeable
future.
The decline in gains on available for sale securities was a result of an
other-than-temporary charge of $1.4 million taken by Home Savings to write down
a Fannie Mae security to its approximate market value. Home Savings incurred the
charge because the market value of the stock
EX. 13-5
declined significantly in the fourth quarter, following several negative
announcements by Fannie Mae involving regulatory actions, earnings restatements
and management turnover. Home Savings concluded that these events made the
likelihood of future price appreciation less certain in the near term and would
extend the time period for a recovery of the Company's investment cost beyond
previous estimates.
The change in income from trading securities was a result of larger losses
recognized in Butler Wick's trading portfolio in 2004 compared to 2003. In 2004,
Butler Wick sustained losses aggregating $142,000 on a portfolio of $30.3
million compared to $21,000 on a portfolio of $11.5 million in 2003. Also, lower
gains were recognized on the retention plan at Butler Wick during 2004 compared
to 2003. Gains recognized on the retention plan in 2004 were $135,000 compared
to $872,000 in 2003 and are expected to remain low as a result of the
distribution in August 2004 of 56% of the plan assets to plan participants.
Underwriting and investment banking fee income is derived from tax-advantaged
bond offerings for school districts, health care facilities, municipalities and
public agencies. Butler Wick brought fewer of these offerings to the market in
2004 compared to 2003 resulting in a decrease in revenues of $499,000.
A 40.5% increase in service fees and other charges in 2004 partially offset the
aforementioned decreases in non-interest income. Service fees at Home Savings
increased $2.7 million for the year ended December 31, 2004 compared to 2003 as
a result of an increase in OverdraftHonor(TM) fees of $1.4 million, a decrease
in deferred mortgage servicing rights amortization of $916,000 and a $341,000
increase in collection fee income. Service fees at Butler Wick increased
$664,000, mostly due to an increase in trust fee income of $435,000 compared to
2003. Brokerage commissions also increased at Butler Wick for the year ending
December 31, 2004 compared to the same period in 2003. Commissions are generated
from the sale of equities, mutual funds and bonds to retail clients. Commissions
increased $2.3 million over last year as a result of increased activity in 2004
compared to 2003.
NON-INTEREST EXPENSE--Non-interest expense decreased $738,000 to $72.8 million
for 2004, from $73.6 million in 2003. The primary reasons for the decrease are
decreases in salaries and employee benefits of $437,000, a decrease in
amortization expense related to the core deposit intangible of $414,000, a
decrease in advertising expense of $379,000 and a decrease in equipment and data
processing of $373,000. The primary reasons for the decrease in salaries and
employee benefits include a reduction in the accrued expense related to the
postretirement benefit plan of $1.5 million at Home Savings. Additional factors
that contributed to the decrease include decreases in commissions and bonuses
paid at Home Savings and a reduction in RRP expense as participants in that plan
vested in August 2003. Offsetting the change in salary expense at Home Savings
was an increase in salary expense at Butler Wick of $565,000 as a result of
increased brokerage activity. The decrease in the amortization of the core
deposit intangible resulting from the 2001 acquisition of Industrial Bancorp,
Inc. and the 2002 acquisition of Potters' Financial Corporation is a result of
amortization on a lower balance. The amount of amortization taken is greater in
the first years of acquisition and decreases as the asset ages. Advertising
expense declined in 2004 as a result of lower advertising expenses recognized at
Home Savings of $336,000 partially as a result of fewer advertising campaigns
and $40,000 at Butler Wick. Equipment and data processing decreased as a result
of lower depreciation expenses recognized at Home Savings in 2004 as compared to
2003.
FEDERAL INCOME TAXES--Federal income taxes decreased $3.5 million, or 27.6%, in
2004 compared to 2003, primarily due to lower pretax income in 2004. The
effective tax rate was 34% in 2004 and 35% in 2003. 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, 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 non-interest income and a $399,000 decline in the
provision for loan losses. This increase was partially offset by a $313,000
decline in net interest income and a $5.2 million increase in non-interest
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.
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.
EX. 13-6
NON-INTEREST INCOME--Non-interest 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.
NON-INTEREST EXPENSE--Non-interest expense increased $5.2 million to $73.6
million for 2003, from $68.4 million in 2002. The primary reasons for the
increase are 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 the postretirement benefit plan 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 underwriting, 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 FDIC SAIF premiums
also contributed to the decline.
FEDERAL INCOME TAXES--Federal income taxes increased $1.8 million, or 16.6%, 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 the 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.
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 judgments that
affect the amounts reported in the financial statements and accompanying notes.
These estimates, assumptions and judgments 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 judgments.
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, mortgage servicing rights
and other-than-temporary impairment are deemed critical since they involve the
use of estimates and require significant management judgments. Application of
assumptions different than those used by management could result in material
changes in United Community's financial position or results of operations.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an amount that
management believes will be adequate to absorb probable incurred losses in
existing loans taking into consideration such factors as past loss experience,
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, and current economic conditions
that affect the borrower's ability to pay. Determination of the allowance is
inherently subjective due to the aforementioned reasons. Loan losses are
charged-off against the allowance when management believes that the full
collectability of the loan is unlikely. Recoveries of amounts previously
charged-off are credited to the allowance. Allowances established to provide for
losses related to recourse provisions under loan sale agreements are classified
with other liabilities.
The allowance is based on management's evaluation of homogeneous groups of loans
(single-family residential mortgage loans and all consumer credit except marine
loans) to which loss factors have been applied, as well as an evaluation of
individual credits (multi-family and non-residential mortgage loans and marine
loans) which are based on internal risk ratings, collateral and other unique
characteristics of each loan.
Management believes that it uses the best information available to determine the
adequacy of the allowance for loan losses. However, future adjustments to the
allowance may be necessary and the results of operations could be significantly
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations.
EX. 13-7
MORTGAGE SERVICING RIGHTS. The cost of mortgage loans sold or securitized is
allocated between the mortgage servicing rights and the mortgage loans based on
the relative fair values of each. The fair value of the mortgage servicing
rights is determined by using a discounted cash flow model, which estimates the
present value of the future net cash flows of the servicing portfolio based on
various factors, such as servicing costs, expected prepayment speeds and
discount rates, about which management must make assumptions based on future
expectations.
Mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing income. Management periodically evaluates mortgage
servicing rights for impairment by stratifying the loans in the servicing
portfolio primarily based on fair value of the rights as compared to amortized
cost. Impairment is measured by estimating the fair value of each pool, taking
into consideration the estimated level of prepayments based upon current
industry expectations. An impairment allowance is recorded for a pool when, and
in an amount which, its fair value is less than its carrying value.
The value of mortgage servicing rights is subject to prepayment risk. Future
expected net cash flows from servicing a loan will not be realized if the loan
pays off earlier than anticipated. Since most of these loans do not contain
prepayment penalties, United Community receives no economic benefit if the loan
pays off earlier than anticipated.
OTHER-THAN-TEMPORARY IMPAIRMENT. Securities are written down to fair value when
a decline in fair value is other than temporary. Declines in the fair value of
securities below their cost that are other than temporary are reflected as
realized losses. In estimating other than temporary losses, management
considers: (1) the length of time and extent that fair value has been less than
cost, (2) the financial condition and near term prospects of the issuer, and (3)
the Company's intent to hold the security for a period sufficient to allow for
any anticipated recovery in fair value. Management must use its judgment based
on information available in assessing the likelihood of recovery in value.
EX. 13-8
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to United
Community's average balance sheet 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. Loan fees are included in interest income. 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,
-------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Net loans (1) $1,728,139 $102,453 5.93% $1,496,518 $ 98,646 6.59% $1,507,591 $110,013 7.30%
Loans held for sale 30,814 1,449 4.70 41,418 1,950 4.71 18,351 1,243 6.77
Securities:
Trading 29,221 736 2.52 13,887 415 2.99 10,179 196 1.93
Available for sale 200,069 7,022 3.51 262,967 8,851 3.37 174,526 7,602 4.36
Held to maturity -- -- -- -- -- -- 56,845 3,762 6.62
Margin accounts 14,117 802 5.68 14,349 689 4.80 17,883 830 4.64
Federal Home Loan Bank stock 22,262 919 4.13 21,388 855 4.00 20,136 932 4.63
Other interest-earning assets 4,958 60 1.21 21,415 257 1.20 86,318 1,382 1.60
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest-earning
assets $2,029,580 113,441 5.59 1,871,942 111,663 5.97 1,891,829 125,960 6.66
Non-interest-earning assets 132,972 116,685 103,504
---------- ---------- ----------
Total assets $2,162,552 $1,988,627 $1,995,333
---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Checking accounts $ 302,936 $ 2,386 0.79% $ 308,816 $ 3,112 1.01% $ 279,894 $ 5,319 1.90%
Savings accounts 314,588 1,361 0.43 335,843 2,347 0.70 299,048 4,946 1.65
Certificates of deposit 773,019 24,614 3.18 763,704 25,441 3.33 850,054 34,668 4.08
Other borrowed funds 402,942 12,017 2.98 230,276 9,352 4.06 216,420 9,303 4.30
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest-bearing
liabilities 1,793,485 40,378 2.25 1,638,639 40,252 2.46 1,645,416 54,236 3.30
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Non-interest-bearing liabilities 114,277 72,536 80,969
---------- ---------- ----------
Total liabilities 1,907,762 1,711,175 1,726,385
Shareholders' equity 254,790 277,452 268,948
---------- ---------- ----------
Total liabilities and equity $2,162,552 $1,988,627 $1,995,333
---------- ---------- ----------
Net interest income and
interest rate spread $ 73,063 3.34% $ 71,411 3.51% $ 71,724 3.36%
-------- ------ -------- ------ -------- ------
Net interest margin 3.60% 3.81% 3.79%
------ ------ ------
Average interest-earning assets
to average interest-bearing
liabilities 113.16% 114.24% 114.98%
------ ------ ------
(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
EX. 13-9
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,
----------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
------------------------------ -------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
----------------- increase ------------------ increase
Rate Volume (decrease) Rate Volume (decrease)
------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans $(7,071) $10,878 $ 3,807 $(10,564) $ (803) $(11,367)
Loans held for sale (2) (499) (501) (226) 933 707
Securities:
Trading (53) 374 321 132 87 219
Available for sale 398 (2,227) (1,829) (1,016) 2,265 1,249
Held to maturity -- -- -- (1,881) (1,881) (3,762)
Margin accounts 124 (11) 113 30 (171) (141)
Federal Home Loan Bank stock 28 36 64 (142) 65 (77)
Other interest-earning assets 2 (199) (197) (281) (844) (1,125)
------- ------- ------- -------- ------- --------
Total interest-earning assets $ 6,574 $ 8,352 $ 1,778 $(13,948) $ (349) $(14,297)
------- ------- ------- -------- ------- --------
Interest-bearing liabilities:
Checking accounts (846) (140) (986) (2,829) 704 (2,125)
Savings accounts (668) (58) (726) (3,303) 622 (2,681)
Certificates of deposit (1,143) 316 (827) (5,935) (3,292) (9,227)
Other borrowed funds (1,462) 4,127 2,665 (307) 356 49
------- ------- ------- -------- ------- --------
Total interest-bearing liabilities $(4,119) $ 4,245 $ 126 $(12,374) $(1,610) $(13,984)
------- ------- ------- -------- ------- --------
Change in net interest income $ 1,652 $ (313)
------- --------
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE
SHEET ARRANGEMENTS
The following table presents, as of December 31, 2004, 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 detail 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
--------- -------- ----------- ---------- ---------- --------
(Dollars in thousands)
Operating leases 8 $ 1,199 $ 1,816 $ 1,245 $ 425 $ 4,685
Deposits without a stated maturity 10 698,667 -- -- -- 698,667
Certificates of deposit 10 347,062 296,242 180,981 -- 824,285
Federal Home Loan Bank borrowings 11 215,435 157,300 31,500 18,920 423,355
Other borrowed funds 11 60,148 -- -- -- 60,148
--- -------- -------- -------- ------- --------
Discussion of loan commitments is included in Note 5 to the consolidated
financial statements. In addition, United Community has commitments under
benefit plans as described in Note 16 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.
Further discussion of this proceeding and its progress is included in Note 12 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 that requires the
Home Savings Board to review quarterly reports related to interest rate
EX. 13-10
risk and annually set exposure limits for Home Savings as a guide to management
in setting and implementing day to day operating strategies.
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 an NPV 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 also are
incorporated into the model. These assumptions inherently are uncertain and, as
a result, the model cannot measure precisely 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. As noted, in a
falling rate environment, Home Savings would experience a decline in net
interest income and, as such, would be out of compliance with internal policy
limitations if rates would fall 100 basis points. Home Savings continues to
monitor its interest rate exposure to declining rates. See the table below for
Board adopted policy limits. Management feels, however, that rising rates are
the most likely scenario in the near term. The Board has been made aware of
management's recommendations and will continue to monitor the risk. All other
percentage changes fall within the policy limits set by the Board of Directors
of Home Savings.
Year Ended December 31, 2004
---------------------------------------------------------------------------------
NPV as % of portfolio value of assets Next 12 months Net interest income
----------------------------------------- -------------------------------------
Change in
rates
(Basis Internal policy Internal policy
points) NPV Ratio limitations Change in % $ Change limitations % Change
- --------- --------- --------------- ----------- -------- --------------- --------
+300 13.75% 5.00% (0.41)% $ 3,028 (15.00)% 4.22%
+200 14.09 6.00 (0.06) 2,318 (10.00) 3.23
+100 14.27 6.00 0.11 1,506 (5.00) 2.10
Static 14.16 7.00 -- -- -- --
(100) 13.22 6.00 (0.93) (3,856) (5.00) (5.37)
(200) N/A N/A N/A N/A (15.00) N/A
(300) N/A N/A N/A N/A (20.00) N/A
----- ---- ----- ------- ------ -----
N/A - Due to a continuing low interest environment, it is not possible to
calculate results for these scenarios.
Year Ended December 31, 2003
--------------------------------------------------------------------------------
NPV as % of portfolio value of assets Next 12 months Net interest income
----------------------------------------- -------------------------------------
Change in
rates
(Basis Internal policy Internal policy
points) NPV Ratio limitations Change in % $ Change limitations % Change
- --------- --------- --------------- ----------- -------- --------------- --------
+300 13.54% 5.00% (0.50)% $ 658 (15.00)% 1.00%
+200 14.14 6.00 0.10 1,057 (10.00) 1.60
+100 14.32 6.00 0.28 1,097 (5.00) 1.66
Static 14.04 7.00 -- -- -- --
(100) 12.29 6.00 (1.75) (1,703) (5.00) (2.58)
(200) N/A N/A N/A N/A (15.00) N/A
(300) N/A N/A N/A N/A (20.00) N/A
----- ---- ----- ------- ------ -----
Due to changes in the composition of Home Savings' loan portfolio and with the
prolonged period of low interest rates, Home Savings continues to be more
sensitive to falling rates than rising rates. This increased sensitivity has
occurred because a greater proportion of Home Savings' loans can reprice
immediately and the prepayments on fixed-rate loans dramatically increase. In
addition, the value of core deposits is diminished in a falling rate
environment.
EX. 13-11
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.
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.
Accordingly, Home Savings' earnings could be adversely affected during a
continued period of falling 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, 2004,
2003 and 2002.
Years ended December 31,
--------------------------------
2004 2003 2002
--------- --------- --------
(Dollars in thousands)
Net income $ 17,865 $ 22,940 $ 20,817
Adjustments to reconcile net income to net cash from
operating activities 10,230 20,152 (12,421)
--------- --------- --------
Net cash from operating activities 28,095 43,092 8,396
Net cash from investing activities (264,802) (127,776) (13,145)
Net cash from financing activities 195,833 54,903 (90,198)
--------- --------- --------
Net change in cash and cash equivalents (40,874) (29,781) (94,947)
Cash and cash equivalents at beginning of year 81,155 110,936 205,883
--------- --------- --------
Cash and cash equivalents at end of year $ 40,281 $ 81,155 $110,936
--------- --------- --------
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 Federal Home Loan Bank. 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, 2004, approximately $347.1 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 United
Community's common shares to fund employee benefit programs, stock options and
award programs and other corporate purposes. These purchases can be made in the
open market or in negotiated transactions from time to time, depending on market
conditions. United Community acquired 3,797,000 common shares for $47.8 million,
1,320,000 common shares for $12.4 million, and 559,000 common shares for $4.7
million during the years ended December 31, 2004, 2003 and 2002. United
Community has remaining authorization to repurchase 856,747 shares as of
December 31, 2004, under the current repurchase program. Management intends to
repurchase shares as authorized.
The shares purchased in 2004 are primarily the result of a self-tender offer
announced on January 26, 2004 and completed March 9, 2004. This offer was made
in order to provide liquidity to the Company's shareholders and to quickly
deploy excess capital in an efficient, cost-effective manner.
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).
EX. 13-12
The following table summarizes Home Savings' regulatory capital requirements and
actual capital at December 31, 2004.
Current Excess of actual capital Applicable
Actual capital minimum requirement over current requirement asset base
------------------ ------------------- ------------------------ ----------
Amount Percent Amount Percent Amount Percent Total
-------- ------- -------- ------- -------- ------- ----------
(Dollars in thousands)
Tangible capital $180,268 8.36% $ 32,326 1.50% $147,942 6.86% $2,155,099
Core capital 180,268 8.36 86,204 4.00 94,064 4.36 2,155,099
Risk-based capital 196,145 10.79 145,408 8.00 50,737 2.79 1,817,606
-------- ----- -------- ---- -------- ---- ----------
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 37,804,457 common shares of United Community stock issued and
31,224,760 shares outstanding and held by approximately 11,591 record holders as
of February 28, 2005. 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
------- ------- ------- -------
2004:
High $13.24 $13.99 $13.10 $11.95
Low 11.15 11.10 10.43 10.57
Close 13.24 13.00 11.37 11.20
Dividends
declared
and paid 0.075 0.075 0.075 0.075
------ ------ ------ ------
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
- ----------- ------ ------ ------ ------
EX. 13-13
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-----------------------
2004 2003
---------- ----------
(In thousands)
ASSETS
Cash and deposits with banks $ 36,886 $ 36,334
Federal funds sold 3,395 44,821
---------- ----------
Total cash and cash equivalents 40,281 81,155
---------- ----------
Securities:
Trading, at fair value 32,316 15,600
Available for sale, at fair value 198,404 227,525
Loans held for sale 59,099 37,715
Loans, net of allowance for loan losses of $15,877 and $15,111 1,815,976 1,576,494
Margin accounts 14,851 14,388
Federal Home Loan Bank stock, at cost 22,842 21,924
Premises and equipment, net 20,793 20,510
Accrued interest receivable 9,445 8,443
Real estate owned and other repossessed assets 1,682 1,299
Goodwill 33,593 33,593
Core deposit intangible 2,887 3,787
Cash surrender value of life insurance 21,406 20,496
Other assets 14,213 10,904
---------- ----------
TOTAL ASSETS $2,287,788 $2,073,833
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 84,965 $ 63,442
Interest bearing 1,437,987 1,360,256
---------- ----------
Total deposits 1,522,952 1,423,698
Borrowed funds:
Short-term 275,583 159,135
Long-term 207,920 179,328
---------- ----------
Total borrowed funds 483,503 338,463
Advance payments by borrowers for taxes and insurance 12,048 10,721
Accrued interest payable 1,089 970
Accrued expenses and other liabilities 15,844 20,145
---------- ----------
TOTAL LIABILITIES 2,035,436 1,793,997
---------- ----------
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 shares issued 142,337 139,526
Retained earnings 193,690 185,495
Accumulated other comprehensive income 1,063 1,124
Unearned compensation (14,930) (16,752)
Treasury stock, at cost, 2004 - 6,602,477 shares and
2003 - 3,718,542 shares (69,808) (29,557)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 252,352 279,836
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,287,788 $2,073,833
---------- ----------
See Notes to Consolidated Financial Statements.
EX. 13-14
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
(In thousands, except
per share data)
INTEREST INCOME
Loans $102,453 $ 98,646 $110,013
Loans held for sale 1,449 1,950 1,243
Securities:
Trading 736 415 196
Available for sale 7,022 8,851 7,602
Held to maturity -- -- 3,762
Margin accounts 802 689 830
Federal Home Loan Bank stock dividends 919 855 932
Other interest-earning assets 60 257 1,382
-------- -------- --------
Total interest income 113,441 111,663 125,960
-------- -------- --------
INTEREST EXPENSE
Deposits 28,361 30,900 44,933
Other borrowed funds 12,017 9,352 9,303
-------- -------- --------
Total interest expense 40,378 40,252 54,236
-------- -------- --------
Net interest income 73,063 71,411 71,724
Provision for loan losses 9,370 3,179 3,578
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 63,693 68,232 68,146
-------- -------- --------
NON-INTEREST INCOME
Brokerage commissions 17,189 14,925 13,677
Service fees and other charges 11,780 8,382 7,976
Underwriting and investment banking 1,029 1,528 312
Net gains (losses):
Securities available for sale 8 839 2,127
Trading securities (7) 850 (651)
Loans sold 3,192 11,707 5,919
Other (43) (105) (515)
Other income 2,961 2,719 2,961
-------- -------- --------
Total non-interest income 36,109 40,845 31,806
-------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 46,074 46,511 39,917
Occupancy 3,757 3,658 3,186
Equipment and data processing 9,086 9,459 8,309
Franchise tax 1,583 1,562 2,032
Advertising 1,853 2,232 2,167
Amortization of core deposit intangible 900 1,314 2,180
Other expenses 9,581 8,836 10,568
-------- -------- --------
Total non-interest expense 72,834 73,572 68,359
-------- -------- --------
INCOME BEFORE INCOME TAXES 26,968 35,505 31,593
INCOME TAXES 9,103 12,565 10,776
-------- -------- --------
NET INCOME $ 17,865 $ 22,940 $ 20,817
-------- -------- --------
EARNINGS PER SHARE
Basic $ 0.61 $ 0.73 $ 0.65
Diluted $ 0.60 $ 0.72 $ 0.65
-------- -------- --------
See Notes to Consolidated Financial Statements.
EX. 13-15
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, 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 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 (559) -- -- -- -- (4,662) (4,662)
Exercise of stock options 87 -- (16) -- -- 657 641
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 (1,320) -- -- -- -- (12,385) (12,385)
Exercise of stock options 160 4 (96) -- -- 1,185 1,093
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
Comprehensive income:
Net income -- -- 17,865 -- -- -- 17,865
Change in net unrealized gain (loss) on
securities, net of taxes of $33 -- -- -- (61) -- -- (61)
------ -------- -------- ------- -------- -------- --------
Comprehensive income -- -- 17,865 (61) -- -- 17,804
Shares allocated to ESOP participants -- 1,682 -- -- 1,822 -- 3,504
Purchase of treasury stock (3,797) -- -- -- -- (47,814) (47,814)
Exercise of stock options 913 1,129 (1,137) -- -- 7,563 7,555
Dividends paid, $0.30 per share -- -- (8,533) -- -- -- (8,533)
------ -------- -------- ------- -------- -------- --------
BALANCE DECEMBER 31, 2004 31,202 $142,337 $193,690 $ 1,063 $(14,930) $(69,808) $252,352
------ -------- -------- ------- -------- -------- --------
See Notes to Consolidated Financial Statements.
EX. 13-16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,865 $ 22,940 $ 20,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 9,370 3,179 3,578
Net gains (3,157) (12,441) (7,517)
Amortization of premiums and accretion of discounts 4,608 6,340 2,119
Depreciation and amortization 2,943 3,544 2,948
Federal Home Loan Bank stock dividends (919) (855) (932)
(Increase) decrease in interest receivable (1,002) 1,115 784
Increase (decrease) in interest payable 119 (156) (1,951)
(Increase) decrease in prepaid and other assets (5,869) (6,010) 3,827
(Decrease) increase in other liabilities (3,133) 4,195 (7,758)
(Increase) decrease in trading securities (16,716) (10,540) 3,292
Amortization of restricted stock compensation -- 1,446 2,121
(Increase) decrease in margin accounts (463) 421 6,170
Net principal disbursed on loans held for sale (155,664) (427,426) (253,261)
Proceeds from sale of loans held for sale 176,609 454,499 231,712
ESOP compensation 3,504 2,841 2,447
--------- --------- ---------
Net cash from operating activities 28,095 43,092 8,396
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal repayments and maturities of:
Securities available for sale 76,282 153,112 82,821
Securities held to maturity -- -- 25,679
Proceeds from sale of:
Securities available for sale 63,021 22,325 45,096
Securities held to maturity -- -- 932
Loans -- 93,983 108,895
Commercial loan participations 43,156 9,443 3,725
Premises and equipment 2 -- 27
Real estate owned 1,932 1,820 1,379
Purchases of:
Securities available for sale (111,667) (170,458) (187,144)
Securities held to maturity -- -- (999)
Bank owned life insurance -- (20,000) --
Net cash paid for acquisition -- -- (13,729)
Net principal disbursed on loans (120,527) (2,606) (48,590)
Loans purchased (213,802) (211,370) (27,335)
Purchases of premises and equipment (3,199) (4,025) (3,902)
--------- --------- ---------
Net cash from investing activities (264,802) (127,776) (13,145)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in NOW, savings and money market accounts 17,174 17,935 50,574
Net increase (decrease) in certificates of deposit 82,219 (75,475) (63,816)
Net increase in advance payments by borrowers
for taxes and insurance 1,327 4,725 1
Proceeds from Federal Home Loan Bank term advances 50,000 25,500 25,000
Repayment of Federal Home Loan Bank term advances (19,257) (11,144) (70,028)
Net change in other borrowed funds 114,297 114,083 (18,272)
Dividends paid (8,533) (9,429) (9,636)
Proceeds from exercise of stock options 6,420 941 365
Purchase of treasury stock (47,814) (12,233) (4,386)
--------- --------- ---------
Net cash from financing activities 195,833 54,903 (90,198)
--------- --------- ---------
Decrease in cash and cash equivalents (40,874) (29,781) (94,947)
Cash and cash equivalents, beginning of year 81,155 110,936 205,883
--------- --------- ---------
Cash and cash equivalents, end of year $ 40,281 $ 81,155 $ 110,936
--------- --------- ---------
See Notes to Consolidated Financial Statements
EX. 13-17
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
2004, Home Savings was doing business through 36 full-service banking branches
and 5 loan production offices. Loans and deposits are primarily generated from
the areas where banking branches are located. Substantially all loans are
secured by specific items of collateral including business assets, consumer
assets, and commercial and residential real estate. Commercial loans are
expected to be repaid from cash flow from operations of businesses. There are no
significant concentrations of loans to any one industry or customer. However,
the customers' ability to repay their loans is dependent on the real estate and
general economic conditions in our market area. Home Savings derives its income
predominantly from interest on loans, securities, and to a lesser extent,
non-interest income. Home Savings' principal expenses are interest paid on
deposits, Federal Home Loan Bank advances, and normal operating costs.
Consistent with internal reporting, Home Savings' operations are reported in one
operating segment, which is banking services. 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 14 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 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 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 classified as trading are held principally for
resale in the near term and are recorded at fair market value with any changes
in fair value included in income. Quoted market prices are used to determine the
fair value of trading securities. Restricted securities such as Federal Home
Loan Bank stock are carried at cost. Interest income includes amortization of
purchase premium or discount on debt securities. Premiums or discounts are
amortized on the level-yield method without anticipating prepayments. Gains and
losses on sales are recorded on the trade date and are based on the amortized
cost of the individual security sold.
Securities are written down to fair value when a decline in fair value is
other-than-temporary. Declines in the fair value of securities below their cost
that are other-than-temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: (1) the length of time and
extent that fair value has been less than cost, (2) the financial condition and
near term prospects of the issuer, and (3) the Company's intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value.
Loans Held for Sale
Loans held for sale consist of residential mortgage loans originated for
sale and other loans which have been identified for sale. These loans are
carried on the books at the lower of cost or fair market value, determined in
the aggregate.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the outstanding
principle balance, net of deferred loan fees and costs, and an allowance for
loan losses. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level-yield method without anticipating
prepayments.
Interest income is reported on the level-yield 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
180 days delinquent unless the loan is well secured
EX. 13-18
and in process of collection. Consumer loans are typically charged off no later
than 180 days past due. Past due status is based on the contractual terms of the
loan. 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. Nonaccrual loans are comprised principally of
loans 90 days past due as well as certain loans which are less than 90 days past
due, but where serious doubt exists as to the ability of the borrowers to comply
with the repayment terms. 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 future payments are reasonably
assured.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable
incurred credit losses. Loan losses are charged against the allowance when
management believes the uncollectablilty of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management
estimates the allowance balance required based on an analysis using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations, estimated collateral values, general economic
conditions in the market area 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.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired. The
general component covers pools of other loans and is based on historical loss
experience adjusted for current factors.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
facts and circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record, and the amount of shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral if the loan is collateral dependent. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer or residential loans
for impairment disclosures.
Servicing Assets
Servicing assets are recognized as separate assets when rights are acquired
through purchase or sale of financial assets. For sales of mortgage loans, a
portion of the cost of originating the loan is allocated to the servicing right
based on relative fair value. Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or alternatively, is
based on a valuation model that calculates the present value of estimated future
net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the
cost to service, discount rate, the custodial earnings rate, an inflation rate,
ancillary income, prepayment speeds and default rates and losses. Capitalized
servicing rights are reported in other assets and are amortized into
non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying assets.
Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Impairment is determined by
stratifying rights into tranches based on predominant risk characteristics, such
as original maturity, interest rate and loan type. Impairment is recognized
through a valuation allowance for an individual tranche. If the Company later
determines that all or a portion of the impairment no longer exists for a
particular tranche, a reduction of the allowance may be recorded as an increase
to income.
Servicing fee income is recorded for fees earned for servicing loans. The
fees are based on a contractual percentage of the outstanding principal, or a
fixed amount per loan, and are recorded as income when earned. The amortization
of mortgage servicing rights is netted against loan servicing fee income.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Buildings and related components are
depreciated and amortized using the straight-line method over the useful lives,
ranging from 7 years to 40 years, (or term of the lease, if shorter) of the
related assets. Furniture and fixtures are depreciated using the straight-line
method with useful lives ranging from 3 to 7 years.
Real Estate Owned and Other Repossessed Assets
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 after acquisition, 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. Other repossessed assets are carried at the lower of cost or
estimated fair value less estimated cost to sell after acquisition.
EX. 13-19
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 exempt and death benefit proceeds
received by Home Savings are tax-free. Income from these policies and changes in
the cash surrender value are recorded in other income.
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 FASB
Statement No. 123, "Accounting for Stock-Based Compensation", 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.
2004 2003 2002
------- ------- -------
(In thousands)
Net income as reported $17,865 $22,940 $20,817
Deduct: Stock-based compensation expense
determined under fair value method 1,855 2,165 1,411
------- ------- -------
Pro forma net income 16,010 20,775 19,406
------- ------- -------
Basic earnings per share as reported 0.61 0.73 0.65
Pro forma basic earnings per share 0.55 0.66 0.61
Diluted earnings per share as reported 0.60 0.72 0.65
Pro forma diluted earnings per share 0.54 0.65 0.61
------- ------- -------
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2004 2003 2002
----- ----- -----
Dividend yield 2.27% 3.34% 4.00%
Expected stock price volatility 22.73% 48.31% 38.31%
Risk-free interest rate 3.18% 3.98% 5.01%
Expected option life (in years) 7 10 10
----- ----- -----
EX. 13-20
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 the financial statement and tax bases 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 21.
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,
trading securities, margin accounts, short-term borrowings and advance payments
by borrowers for taxes and insurance.
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 12.
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 17. Fair
value estimates involve uncertainties and matters of significant judgment
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 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.
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, 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
security 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.
EX. 13-21
As a securities broker and dealer, all transactions purchased through
margin accounts 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: On March 9, 2004, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 105,
"Application of Accounting Principles to Loan Commitments" stating that the fair
value of loan commitments accounted for as a derivative instrument under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", should not consider expected future cash flows related to servicing
of the future loan. SAB 105 was effective for loan commitments accounted for as
derivatives entered into after March 31, 2004. The Company adopted the
provisions of SAB 105 as of April 1, 2004. The adoption of this standard did not
have a material impact on the Company's financial position or results of
operations.
In March 2004, the Emerging Issues Task Force (EITF) arrived at a Consensus
regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and
Application to Certain Investments". This Consensus provides additional guidance
on when an investment is considered impaired, whether impairment is
other-than-temporary, and measurement of impairment loss. It also requires
additional disclosure for annual reporting periods ending after June 15, 2004
and for other reporting periods beginning after June 15, 2004. In September
2004, FASB issued Staff Position 03-1-1 which delayed the effective date for
measurement and recognition guidance contained in paragraphs 10 through 20 of
EITF 03-1 due to additional proposed guidance. This delay does not suspend the
requirement to recognize other-than-temporary impairments as required by
existing authoritative literature. The Company currently has investments where
the current market value is less than the amortized cost. See Note 4 for further
discussion and the impact on the Company's financial position and results of
operations.
In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 03-3, "Accounting for Certain Loans
or Debt Securities Acquired in a Transfer." This SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes such loans acquired in purchase business
combinations and applies to all non-governmental entities, including
non-for-profit organizations. This SOP does not apply to loans originated by the
entity. This SOP is effective for loans acquired in fiscal years beginning on or
before December 2004, and within the scope of Practice Bulletin 6, paragraphs 7
and 8 of this SOP, as they apply to decreases in cash flows expected to be
collected, should it be applied prospectively for fiscal years beginning after
December 15, 2004. The Company adopted this SOP as of January 1, 2004 with no
material impact on its financial position or results of operations.
In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46(R), "Consolidation of Variable Interest Entities," (FIN
46-R). FIN 46-R requires that subsidiaries defined as variable interest entities
be consolidated by the enterprise that will absorb the majority of the entities'
expected losses if they occur, receive a majority of the variable interest
entities' residual returns if they occur, or both. The Company has no
subsidiaries that are considered to be variable interest entities, so the
adoption of FIN 46-R had no impact.
Newly Issued But Not Yet Effective Standards: FASB Statement No. 123(R),
"Share Based Payment" is concerned with an entities expensing of stock options
as an ordinary expense. It becomes effective for the Company beginning July 1,
2005. To the extent the Company makes future grants of stock options,
compensation expense will increase by the estimated fair value of options
granted.
Operating Segments
Internal financial information is primarily reported and aggregated in two
lines of business, banking services and investment services.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by Home Savings 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. See Note 15 for further discussion.
Reclassifications
Some items in the prior year financial statements were reclassified to
conform to the current presentation.
EX. 13-22
2. 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 asset acquired 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.
3. 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 $10.7
million and $11.4 million at December 31, 2004 and 2003, respectively.
4. SECURITIES
The components of securities are as follows:
December 31, 2004 December 31, 2003
---------------------------------- ----------------------------------
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 $ 88,317 $ 7 $(417) $ 58,748 $ 199 $ (24)
Corporate notes -- -- -- 5,062 38 --
Tax exempt municipal obligation 7 1 -- 10 2 --
Equity securities 7,169 1,459 -- 8,930 1,453 (902)
Mortgage-related securities 102,911 869 (364) 154,775 1,158 (273)
-------- ------ ----- -------- ------ -------
Total $198,404 $2,336 $(781) $227,525 $2,850 $(1,199)
======== ====== ===== ======== ====== =======
Debt securities available for sale by contractual maturity, repricing or
expected call date are shown below:
December 31, 2004
Fair Value
-----------------
(In thousands)
Due in one year or less $ 20,994
Due after one year through five years 67,330
Mortgage-related securities 102,911
--------
Total $191,235
========
Since equity securities do not have a contractual maturity, they are excluded
from the table above.
Proceeds, gross realized gains, losses and impairment charges of available
for sale securities were as follows:
2004 2003 2002
------- ------- -------
(In thousands)
Proceeds $63,021 $22,325 $45,096
Gross gains 1,425 847 2,127
Gross losses 15 8 --
Impairment charges 1,402 -- --
------- ------- -------
Securities pledged for public funds deposits were approximately $19.0
million and $12.9 million at December 31, 2004 and 2003, respectively. See
further discussion regarding pledged securities in Note 11.
EX. 13-23
United Community's trading securities are carried at fair value and consist
of the following:
2004 2003
------- -------
Debt Securities:
Obligations of U.S. government $28,587 $ 1,061
State and municipal obligations 1,657 10,102
Corporate bonds, debentures and notes 60 366
Mutual funds 2,012 4,071
------- -------
Total trading securities $32,316 $15,600
------- -------
Investments with a continuous unrealized loss position are as follows at
December 31, 2004:
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:
U.S. Treasury obligations and direct
obligations of US government
agencies $79,091 $(417) $ -- $ -- $ 79,091 $(417)
Mortgage-related securities 18,311 (216) 8,016 (148) 26,327 (364)
------- ----- ------ ----- -------- -----
Total temporarily impaired securities $97,402 $(633) $8,016 $(148) $105,418 $(781)
------- ----- ------ ----- -------- -----
Investments in an unrealized loss position were 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:
U.S. Treasury obligations and direct
obligations of US government
agencies $ 3,525 $ (24) $ -- $ -- $ 3,525 $ (24)
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
twenty-six U.S. treasury and agency positions along with three mortgage-related
securities. These securities are currently temporarily impaired due to the
current level of interest rates.
There are two mortgage-related securities that have been impaired for a
period greater than 12 months. Both of the securities are temporarily impaired
due to the current level of interest rates and are rated AAA. The securities
continue to pay down on schedule and management expects to receive all principal
and interest owed on the securities.
Home Savings owns $5.0 million par value of Fannie Mae preferred stock.
During the fourth quarter of 2004, Home Savings recorded an other-than-temporary
charge for the impairment of the Fannie Mae preferred stock, held in the
available for sale portfolio, of $1.4 million, pretax. The Company recorded the
charge because the market value of the stock has declined significantly in the
fourth quarter, following several negative announcements by Fannie Mae involving
regulatory actions, earnings restatements and management turnover. The Company
concluded that these events made the likelihood of future price appreciation
less certain in the near term and would extend the time period for a recovery of
the Company's investment cost beyond previous estimates.
EX. 13-24
5. LOANS
Portfolio loans consist of the following:
December 31,
-----------------------
2004 2003
---------- ----------
(In thousands)
Real Estate:
One- to four-family residential $ 690,413 $ 599,370
Multifamily residential 153,011 148,362
Nonresidential 289,755 291,588
Land 14,701 14,147
Construction:
One- to four-family residential 301,193 244,837
Multifamily and non-residential 47,230 27,586
---------- ----------
Total real estate 1,496,303 1,325,890
Consumer 267,646 218,762
Commercial 68,523 48,570
---------- ----------
Total loans 1,832,472 1,593,222
---------- ----------
Less:
Allowance for loan losses 15,877 15,111
Deferred loan fees (expenses), net 619 1,617
---------- ----------
Total 16,496 16,728
---------- ----------
Loans, net $1,815,976 $1,576,494
---------- ----------
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.
December 31,
-------------------------------------------------------
2004 2003
-------------------------- --------------------------
Fixed Rate Variable Rate Fixed Rate Variable Rate
---------- ------------- ---------- -------------
(In thousands)
Commitments to make loans $60,690 $304,371 $48,202 $230,683
Unused lines of credit 11,721 122,170 6,552 103,408
Terms of the commitments in both years extend up to six months, but are
generally less than two months. The fixed rate loan commitments have interest
rates ranging from 5.125% to 18% and maturities ranging from six months to 30
years.
At December 31, 2004 and 2003, there were $11.7 million and $7.6 million,
respectively, of outstanding standby letters of credit. These are issued to
guarantee the performance of a customer to a third party. Standby 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.
EX. 13-25
Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Year ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
(In thousands)
Balance, beginning of year $15,111 $15,099 $11,480
Acquired from Potters Financial Corp. -- -- 1,869
Provision for loan losses 9,370 3,179 3,578
Amounts charged off (9,060) (3,340) (1,967)
Recoveries 456 173 139
------- ------- -------
Balance, end of year $15,877 $15,111 $15,099
------- ------- -------
Nonaccrual loans were $20.9 million, $13.0 million and $14.4 million at
December 31, 2004, 2003 and 2002. Restructured loans were $1.3 million, $1.9
million and $1.3 million at December 31, 2004, 2003 and 2002. Loans that are
greater than ninety days past due and still accruing were $377,000 at December
31, 2004 and $1.3 million at December 31, 2003.
As of or for the year ended
December 31,
---------------------------
2004 2003 2002
------- ------ ------
(In thousands)
Impaired loans on which no specific valuation allowance was provided $ 7,898 $4,366 $2,365
Impaired loans on which specific valuation allowance was provided 7,320 1,514 4,032
------- ------ ------
Total impaired loans at year-end $15,218 $5,880 $6,397
------- ------ ------
Specific valuation allowances on impaired loans at year-end 1,691 277 2,122
Average impaired loans during year 10,683 6,628 5,652
Interest income recognized on impaired loans during the year 134 145 177
Interest income received on impaired loans during the year 307 288 128
Interest income potential based on original contract terms of impaired
loans 685 539 502
------- ------ ------
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 and/or directors of United Community, Home Savings
and Butler Wick:
(In thousands)
--------------
Balance as of December 31, 2003 $1,327
New loans to officers and/or directors 1,508
Loan payments during 2004 (380)
Reductions due to changes in officers and/or directors
(294)
------
Balance as of December 31, 2004 $2,161
------
6. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others, which are not reported in United
Community's assets, totaled $667.0 million and $633.2 million at December 31,
2004 and 2003.
Activity for capitalized mortgage servicing rights, included in other
assets, was as follows:
2004 2003 2002
------- ------- -------
(In thousands)
Balance, beginning of year $ 5,557 $ 3,603 $ 1,627
Originations 1,629 4,448 2,979
Amortized to expense (1,653) (2,494) (1,003)
------- ------- -------
Balance, end of year $ 5,533 $ 5,557 $ 3,603
------- ------- -------
Activity in the valuation allowance for mortgage servicing rights was as
follows:
2004 2003 2002
---- ----- ----
(In thousands)
Balance, beginning of year $(76) $ -- $ (22)
Impairment charges -- (415) (100)
Recoveries 76 339 122
---- ----- -----
Balance, end of year $ -- $ (76) $ --
---- ----- -----
EX. 13-26
Key economic assumptions used in measuring the value of mortgage servicing
rights at December 31, 2004 and 2003 were as follows:
2004 2003
------ ------
Weighted average prepayment rate 281.39 PSA 277.99 PSA
Weighted average life (in years) 5.41 6.04
Weighted average discount rate 8% 8%
Amounts held in custodial accounts for investors amounted to $6.1 million and
$5.6 million at December 31, 2004 and 2003, respectively.
7. SECURITIZATIONS
Home Savings sold $90.4 million in residential mortgage loans in
securitization transactions in 2003. The securities received in these
transactions were immediately sold. Gains of $4.2 million were recorded on the
sales. Home Savings retained servicing responsibilities for the loans, for which
it receives servicing fees approximating 0.40% of the outstanding balance of the
loans. There were no securitizations during 2004.
For the loans securitized in 2003, approximately $30.5 million 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, provided that on that date, 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 consecutively 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 obligation. As of December 31,
2004, approximately $18.2 million of these loans were still covered by the
recourse obligation.
Home Savings also services loans from securitizations prior to 2003.
Certain of these loans are covered by recourse or indemnification provisions
specific to those sales. At December 31, 2004, approximately $183,000 in loans
are covered by recourse agreements and approximately $12.2 million in loans are
covered by an indemnification agreement.
Cash flows from all securitizations of mortgage loans were as follows:
2004 2003
---- -------
(In thousands)
Securitization proceeds $ -- $93,983
Servicing fees received 331 418
EX. 13-27
An analysis of the activity in securitizations serviced by Home Savings
during 2004 and 2003 follows:
December 31,
--------------------
2004 2003
-------- ---------
(In thousands)
Balance at beginning 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%
New securitizations during the year:
Principal balance of loans -- 90,413
Fair value of servicing rights -- 741
Servicing rights as a % of principal n/a 0.82%
Principal payments received on loans securitized (41,348) (118,647)
Balance at end of year:
Principal balance of loans 87,413 128,761
Amortized cost of servicing rights 626 1,005
Servicing rights as a % of principal 0.72% 0.78%
-------- ---------
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,
--------------
2004 2003
----- ----
Other information at end of period:
Weighted average rate of loans 6.68% 6.73%
Weighted average maturity of loans in months 272 284
Principal balance of loans 30 days or more past
due (in thousands) $ 611 $546
Fair value assumptions
Discount rate 8.00% 8.00%
Weighted average prepayment assumptions 295PSA 364PSA
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,
---------------
2004 2003
------ ------
(In thousands)
Fair value at end of year $1,078 $1,362
Weighted average life (in months) 58 69
Projected fair value based on:
Increase in PSA of 50 981 1,251
Increase in PSA of 100 901 1,157
------ ------
The effect of adverse changes is hypothetical and should not be extrapolated to
other changes, as the effects are not linear.
8. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
----------------------------------
Estimated life 2004 2003
-------------- ------- -------
(In thousands)
Land $ 6,924 $ 6,188
Buildings up to 39 years 17,215 16,483
Leasehold improvements 10 years 1,421 1,110
Furniture and equipment 3-5 years 15,964 15,833
------- -------
41,524 39,614
Less: Accumulated depreciation and amortization 20,731 19,104
------- -------
Total $20,793 $20,510
------- -------
EX 13-28
Rent expense was $1.2 million for 2004, $1.0 million for 2003 and $924,000
for 2002. Rent commitments under noncancelable operating leases for offices were
as follows, before considering renewal options that generally are present:
(In thousands)
--------------
2005 $1,199
2006 993
2007 823
2008 704
2009 541
Thereafter 425
------
Total $4,685
======
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill was $33,593 at December 31, 2004, 2003, and 2002.
Acquired Intangible Assets
As of December 31,
-------------------------------------------------
2004 2003
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(In thousands)
Amortized intangible assets:
Core deposit intangibles $8,952 $6,065 $8,952 $5,165
------ ------ ------ ------
Total $8,952 $6,065 $8,952 $5,165
====== ====== ====== ======
Estimated amortization expense:
For the year ended:
December 31, 2005 $ 666
December 31, 2006 512
December 31, 2007 400
December 31, 2008 313
December 31, 2009 246
------
Aggregate amortization expense for the years ended December 31, 2004, 2003
and 2002, was $900,000, $1.3 million and $2.2 million, respectively.
10. DEPOSITS
Deposits consist of the following:
December 31,
-----------------------
2004 2003
---------- ----------
(In thousands)
Checking accounts:
Interest bearing $ 158,682 $ 115,724
Non-interest bearing 84,965 63,442
Savings accounts 308,187 312,210
Money market accounts 146,833 190,117
Certificates of deposit 824,285 742,205
---------- ----------
Total deposits $1,522,952 $1,423,698
---------- ----------
EX 13-29
Interest expense on deposits is summarized as follows:
Year Ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
(In thousands)
Interest bearing demand deposits and money
market accounts $ 2,386 $ 3,113 $ 5,319
Savings accounts 1,361 2,347 4,946
Certificates of deposit 24,614 25,440 34,668
------- ------- -------
Total $28,361 $30,900 $44,933
------- ------- -------
A summary of certificates of deposit by maturity follows:
December 31, 2004
-----------------
(In thousands)
Within 12 months $347,062
12 months to 24 months 167,623
Over 24 months to 36 months 128,619
Over 36 months to 48 months 82,713
Over 48 months 98,268
--------
Total $824,285
--------
A summary of certificates of deposit with balances of $100,000 or more by
maturity is as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
(In thousands)
Three months or less $ 14,957 $ 29,027
Over three months to six months 17,954 11,986
Over six months to twelve months 33,132 23,711
Over twelve months 113,339 83,686
-------- --------
Total $179,382 $148,410
-------- --------
Deposits in excess of $100,000 are not federally insured. Home Savings did
not have brokered deposits for the years ended December 31, 2004 or 2003.
11. OTHER BORROWED FUNDS
The following is a summary of short-term borrowings:
December 31,
-------------------------------------------------
2004 2003
----------------------- -----------------------
(In thousands)
Weighted Weighted
Amount average rate Amount average rate
-------- ------------ -------- ------------
Variable rate revolving lines of credit $ 17,866 1.55% $ 19,295 0.96%
Securities sold under repurchase
agreements 41,105 1.92 19,394 1.22
Transaction loans; 30 year amortization;
15 year balloon 1,177 7.42 1,196 7.42
Federal Home Loan Bank term advances due
in less than 1 year 20,151 4.94 18,000 4.83
Overnight Federal Home Loan Bank advances 195,284 2.20 101,250 1.03
-------- --------
Total short-term borrowings $275,583 $159,135
-------- --------
The average balance of short-term borrowings during 2004 was $231.3 million
and the maximum month-end balance during the year was $308.3 million.
EX. 13-30
The following is a summary of term Federal Home Loan Bank borrowings:
December 31, December 31,
2004 2003
----------------------- -----------------------
(In thousands)
Weighted Weighted
Year of Maturity Amount average rate Amount average rate
- ---------------- -------- ------------ -------- ------------
2005 $ -- --% $ 19,000 5.01%
2006 127,000 4.53 122,000 4.60
2007 30,500 5.01 15,500 3.64
2008 21,500 3.69 1,500 2.93
2009 10,000 3.56 -- --
2010 1,500 3.54 1,500 3.54
Thereafter 17,420 3.86 19,828 3.85
-------- --------
Total long-term $207,920 $179,328
-------- --------
Total borrowings $483,503 $338,463
-------- --------
Home Savings has available credit, subject to collateral requirements, with
the Federal Home Loan Bank of $632.3 million, of which $423.4 million was used
at December 31, 2004. All advances from the Federal Home Loan Bank of Cincinnati
are secured by a blanket mortgage collateral agreement for 125% of outstanding
advances, amounting to $529.3 million at December 31, 2004. Butler Wick has a
revolving line of credit, which is fully collateralized by securities valued at
$11.0 million and $24.0 million at December 31, 2004 and 2003, respectively.
Securities valued at $25.0 million are being held as collateral for a repurchase
agreement as of December 31, 2004. United Community has a revolving line of
credit for $10.0 million at Key Bank. At December 31, 2004, this line had an
outstanding balance of $3.5 million.
At December 31, 2004, Butler Wick had $24.1 million in repurchase
agreements outstanding with Lehman Brothers, Inc. under which Butler Wick sold
government agency securities classified as available for sale with a fair value
of $24.6 million. The securities underlying the repurchase agreements had a
weighted average maturity of 1.7 years at December 31, 2004 and are callable at
the option of either party. The securities are held at Lehman Brothers, Inc.
There were no repurchase agreements outstanding at December 31, 2003.
During 2002, United Community incurred approximately $1.3 million in costs
associated with the early extinguishment of debt with the Federal Home Loan
Bank. 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.
12. LOSS CONTINGENCY
In September 2003, an arbitration proceeding was initiated against Butler
Wick and a broker employed by Butler Wick asserting certain claims. In January
2005, all parties and their legal counsel agreed in principle to a settlement of
this matter. Finalization of the settlement is expected to be completed before
the end of March 2005. The settlement amount, which is not material to the
Company's financial condition or results of operations, has been accrued as of
December 31, 2004.
Home Savings is a party to litigation regarding a group of consumer loans
made to parties who purchased boats from a boat dealer with whom Home Savings
had a prior commercial loan relationship. Home Savings does not expect to incur
any material losses arising in or out of that litigation.
From time to time, the Company is involved in various lawsuits and claims
which arise in the normal course of business. Some of these proceedings seek
relief or damages that are substantial, and in some instances are filed as class
actions. Nonetheless, based upon the advice of counsel, management is of the
opinion that any liabilities that may result from these lawsuits and claims will
not have a material effect.
EX. 13-31
13. INCOME TAXES
The provision for income taxes consists of the following components:
Year ended December 31,
--------------------------
2004 2003 2002
------ ------- -------
(In thousands)
Current $9,914 $12,926 $11,986
Deferred (811) (361) (1,210)
------ ------- -------
Total $9,103 $12,565 $10,776
====== ======= =======
A reconciliation from tax at the statutory rate to the income tax provision
is as follows:
Year ended December 31,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Dollars Rate Dollars Rate Dollars Rate
------- ---- ------- ---- ------- ----
(In thousands)
Tax at statutory rate $9,439 35.0% $12,427 35.0% $11,057 35.0%
Increase (decrease) due to:
Tax exempt income (78) (0.3) (137) (0.4) (86) (0.3)
Change in valuation allowance -- -- -- -- (400) (1.3)
Life insurance (308) (1.1) (170) (0.5) -- --
State taxes (27) (0.1) (40) (0.1) (11) (--)
Other 77 0.3 485 1.4 216 0.7
------ ---- ------- ---- ------- ----
Income tax provision $9,103 33.8% $12,565 35.4% $10,776 34.1%
------ ---- ------- ---- ------- ----
Significant components of the deferred tax assets and liabilities are as
follows:
December 31,
-----------------
2004 2003
------- -------
(In thousands)
Deferred tax assets:
Loan loss reserves $ 5,557 $ 5,289
Postretirement benefits 1,372 1,464
Deferred loan fees 333 563
ESOP shares released 1,257 1,162
Compensation accruals 697 1,347
Investment valuation 491 --
Interest on non-accrual loans 508 366
Other 342 312
------- -------
Deferred tax assets 10,557 10,503
------- -------
Deferred tax liabilities:
Purchase accounting adjustments 1,373 2,140
Original issue discount 694 1,388
Federal Home Loan Bank stock dividends 5,448 5,126
Unrealized gain on securities available for sale 572 606
Mortgage servicing rights 1,937 1,919
Other 704 340
------- -------
Deferred tax liabilities 10,728 11,519
------- -------
Net deferred tax liability $ (171) $(1,016)
------- -------
Retained earnings at December 31, 2004 include approximately $21.1 million
for which no provision for federal income taxes has been made. This amount
represents the tax bad debt reserve at December 31, 1987, which is the end of
the Company's base year for purposes of calculating the bad debt deduction for
tax purposes. If this portion of retained earnings is used in the future for any
purpose other than to absorb bad debts, the amount used will be added to future
taxable income. The unrecorded deferred tax liability on the above amount at
December 31, 2004 was approximately $7.3 million.
14. 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, 2004, United Community paid regular dividends
in the amount of $8.5 million. While Home Savings' primary regulator is the
FDIC, the OTS has regulations that impose certain restrictions on payments of
dividends to United Community.
EX. 13-32
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, 2004, Home Savings had $20.6 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 $540,000, $837,000 and $1.3 million for the years ended
December 31, 2004, 2003 and 2002.
Liquidation Account
At the time of the Conversion, Home Savings established a liquidation
account, totaling $141.4 million, 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.
15. 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, 2004
-------------------------------------------------------------
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) $196,145 10.79% $145,408 8.00% $181,761 10.00%
Tier 1 capital (to risk-weighted assets) 180,268 9.92 * * 109,056 6.00
Leverage (Tier 1) capital (to adjusted
total assets) 180,268 8.36 86,204 4.00 107,755 5.00
Tangible capital (to adjusted
total assets) 180,268 8.36 32,326 1.50 * *
-------- ----- -------- ---- -------- -----
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 * *
-------- ----- -------- ----- -------- -----
* Ratio is not required under regulations.
As of December 31, 2004 and 2003, the FDIC and OTS, respectively
categorized Home Savings as well capitalized under the regulatory framework for
Prompt Corrective Action. There are no conditions or events since that
notification that management believes has changed the
EX. 13-33
Company or Home Savings' categorization. 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.
Management believes, as of December 31, 2004, 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, 2004, Butler Wick had net capital of $7.6
million, which was 44% of aggregate debit balances and $7.3 million in excess of
required minimum net capital.
16. BENEFIT PLANS
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 worked 20 years and attained a
minimum age of 60 by September 1, 2000, while in service with Home Savings. The
plan is unfunded and, as such, has no assets. Furthermore, 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. The benefit obligation was measured on December 31, 2004 and
2003. Information about changes in obligations of the benefit plan follows:
Year ended December 31,
-----------------------
2004 2003
------- -------
(In thousands)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,932 $ 3,686
Service cost 9 6
Interest cost 245 226
Actuarial (gain)/loss (140) 288
Benefits paid (304) (274)
------- -------
Benefit obligation at end of the year $ 3,742 $ 3,932
------- -------
Funded status of the plan $(3,742) $(3,932)
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (173) (34)
Prior service cost not yet recognized in net
periodic benefit cost (6) (6)
------- -------
Accrued benefit cost $(3,921) $(3,972)
------- -------
EX. 13-34
Components of net periodic benefit cost/(gain) are as follows:
Year Ended December 31,
-----------------------
2004 2003 2002
----- ----- -----
(In thousands)
Service cost $ 9 $ 6 $ 19
Interest cost 245 226 256
Expected return on plan assets -- -- --
Net amortization of prior service cost (1) (1) (1)
Recognized net actuarial gain -- (15) --
----- ----- -----
Net periodic benefit cost/(gain) $ 253 $ 216 $ 274
----- ----- -----
Assumptions used in the valuations were as follows:
Weighted average discount rate 5.75% 6.00% 6.75%
----- ----- -----
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 2004
valuation was 12% 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, 2004:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(In thousands)
Effect on total of service and interest cost components $ 24 $ (22)
Effect on the postretirement benefit obligation 356 (331)
---- -----
The Company anticipates contributions to the plan to fund benefits paid will
aggregate $2.9 million over the next ten years as follows:
2005 $ 297,000
2006 264,000
2007 279,000
2008 284,000
2009 293,000
2010-2014 1,483,000
----------
Total $2,900,000
==========
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 2004, 2003 and 2002, 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 2004, 2003 and 2002, the expense related to this
plan was approximately $458,000, $433,000 and $396,000, respectively.
Butler Wick also sponsors a defined contribution 401(k) savings plan, which
covers substantially all employees. Under the provisions of the plan, Butler
Wick's matching contribution is discretionary and may be changed from year to
year. For 2004, 2003 and 2002, 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 2004, 2003 and 2002, the expense related to this
plan was approximately $157,000, $133,000 and $132,000, respectively.
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. Additionally, 1,598,810 shares were purchased with the
return of capital distribution in 1999.
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 $3.5 million, $2.8 million and $2.4
million in compensation expense for the years ended December 31, 2004, 2003 and
2002, 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
EX. 13-35
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, 2004, 2003 and 2002 totaled 294,802, 294,802 and
294,802 and had a combined fair market value of $9.9 million. Shares remaining
not released or committed to be released for allocation at December 31, 2004
totaled 2,416,159 million and had a market value of approximately $27.1 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 vested
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 vested 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, 2004 and 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. There was no compensation expense recognized in 2004 as all shares
granted had previously vested. Compensation expense recognized in 2003 and 2002
related to the RRP was $1.2 million and $1.9 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 became 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 terminated 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 the Rabbi Trust, was $582,000, $1.6 million and $126,000 for 2004, 2003 and
2002.
Participants in the plan were permitted to select various mutual funds into
which participants could direct their investments. Each participant was able to
select up to four of these mutual funds in order to diversify his or her
allocations, and was permitted to make changes in fund selections periodically.
Participants were permitted to elect a lump sum distribution at vesting, or a
distribution in equal annual installments over a period of time not to exceed
five years. To the extent that the participant elected to be paid in
installments, his or her account will continue to be credited with investment
gains and debited with investment losses until his or her full investment is
distributed from the plan. The Company accrued the deferred compensation
obligation prorata over the vesting period through a charge to compensation
expense. Plan assets are included in trading securities in the Company's
financial statements and are recorded at fair value. Final vesting occurred on
August 12, 2004 and approximately 56% of plan assets were distributed at that
time. Until the final distribution is made, the Company will continue to record
income or expense as the market value of the remaining plan assets and
corresponding liability to participants fluctuates. Plan assets amounted to $2.0
million and $4.1 million at December 31, 2004 and 2003, respectively.
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 which have been granted as of December 31, 2004. 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:
EX. 13-36
As of December 31,
------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year 2,468,622 $ 7.60 1,909,615 $7.01 1,307,496 $6.79
Granted 754,403 12.73 742,654 8.97 715,710 7.40
Exercised (913,277) 7.03 (171,873) 7.08 (75,538) 6.84
Forfeited -- -- (11,774) 7.86 (38,053) 6.93
--------- ------ --------- ----- --------- -----
Outstanding at end of year 2,309,748 9.49 2,468,622 7.60 1,909,615 7.01
--------- ------ --------- ----- --------- -----
Options exercisable at year end 2,309,748 $ 9.49 2,468,622 $7.60 1,909,615 $7.01
--------- ------ --------- ----- --------- -----
Weighted-average fair value of options
granted during year $ 3.13 $3.65 $2.44
------ ----- -----
Outstanding stock options have a weighted average remaining life of 7.79
years and may be exercised on the range of $6.66 to $12.73.
17. 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 held for sale--The fair value of loans held for sale is based on market
quotes.
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.
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.
Borrowed funds--For short-term borrowings, fair value is estimated to be
carrying value. The fair value of other borrowings is based on current rates for
similar financing.
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, 2004 and 2003,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such
EX. 13-37
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, 2004 December 31, 2003
----------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ---------
(In thousands)
ASSETS:
Cash and cash equivalents $ 40,281 $ 40,281 $ 81,155 81,155
Securities:
Trading 32,316 32,316 15,600 15,600
Available for sale 198,404 198,404 227,525 227,525
Loans held for sale 59,099 59,383 37,715 37,824
Loans, net 1,815,976 1,838,983 1,576,494 1,603,241
Margin accounts 14,851 14,851 14,388 14,388
Federal Home Loan Bank stock 22,842 22,842 21,924 21,924
Accrued interest receivable 9,445 9,445 8,443 8,443
LIABILITIES:
Deposits:
Checking, savings and money market accounts (698,667) (698,667) (681,493) (681,493)
Certificates of deposit (824,285) (834,086) (742,205) (758,894)
Other borrowed funds (483,503) (485,400) (338,463) (344,703)
Advance payments by borrowers for taxes
and insurance (12,048) (12,048) (10,721) (10,721)
Accrued interest payable (1,089) (1,089) (970) (970)
---------- ---------- ---------- ---------
18. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings, net of amounts capitalized $40,259 $40,408 $56,093
Interest capitalized on borrowings 19 21 --
Income taxes 12,938 14,570 11,878
Supplemental schedule of noncash activities:
Loans transferred to held for sale 39,479 11,341 8,418
Transfers from loans to real estate owned 2,356 2,224 2,025
Securities held to maturity transferred to available for sale -- -- 54,927
------- ------- -------
EX. 13-38
19. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------
2004 2003
-------- --------
(In thousands)
ASSETS
Cash and deposits with banks $ 819 $ 1,082
Federal funds sold and other 14 43,213
-------- --------
Total cash and cash equivalents 833 44,295
Securities:
Trading 1,990 4,071
Available for sale 3,570 4,832
Note receivable inter-company 18,523 20,071
Accrued interest receivable -- 1
Investment in subsidiary-Home Savings 216,840 195,222
Investment in subsidiary-Butler Wick 16,764 15,388
Other assets 1,286 535
-------- --------
TOTAL ASSETS $259,806 $284,415
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed funds $ 3,500 $ --
Accrued interest payable 3 --
Accrued expenses and other liabilities 3,951 4,577
-------- --------
Total liabilities 7,454 4,577
-------- --------
TOTAL SHAREHOLDERS' EQUITY 252,352 279,836
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $259,806 $284,415
-------- --------
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
(In thousands)
INCOME
Cash dividends from subsidiary $ -- $22,000 $30,000
Interest income 1,680 1,871 2,191
Non-interest income 1,086 873 (574)
------- ------- -------
Total income 2,766 24,744 31,617
EXPENSES
Interest expense 14 -- --
Non-interest expenses 1,339 984 988
------- ------- -------
Total expenses 1,353 984 988
------- ------- -------
Income before income taxes 1,413 23,760 30,629
Income taxes 558 692 238
------- ------- -------
Income before equity in undistributed net earnings of
subsidiaries 855 23,068 30,391
Equity in undistributed net earnings of subsidiaries 17,010 (128) (9,574)
------- ------- -------
Net income $17,865 $22,940 $20,817
------- ------- -------
EX. 13-39
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 17,865 $ 22,940 $ 20,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of the subsidiaries (17,010) 128 9,574
Amortization of premiums and accretion of discounts -- -- 15
Security gains (948) -- (76)
Decrease (increase) in trading securities 2,081 (916) 614
Decrease (increase) in interest receivable 1 10 (10)
(Increase) decrease in other assets (751) (519) 4,333
Increase in accrued interest payable 3 -- --
(Decrease) increase in other liabilities (1,228) (1,764) 1,774
-------- -------- --------
Net cash from operating activities 13 19,879 37,041
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal repayments and maturities of:
Securities available for sale -- -- 3,708
Proceeds from sale of:
Securities available for sale 2,322 -- 162
Purchases of:
Securities available for sale (105) (527) (4,357)
ESOP loan repayment 735 534 335
-------- -------- --------
Net cash from investing activities 2,952 7 (152)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (8,533) (9,429) (9,636)
Net increase in borrowed funds 3,500 -- --
Purchase of treasury stock (47,814) (12,233) (4,386)
Exercise of stock options 6,420 941 365
-------- -------- --------
Net cash from financing activities (46,427) (20,721) (13,657)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (43,462) (835) 23,232
Cash and cash equivalents, beginning of year 44,295 45,130 21,898
-------- -------- --------
Cash and cash equivalents, end of year $ 833 $ 44,295 $ 45,130
-------- -------- --------
20. SEGMENT INFORMATION
United Community has two principal segments, banking and investment
services. Banking provides consumer and corporate banking services. Investment
services provide investment brokerage 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, 2004, 2003 and
2002 are as follows:
EX. 13-40
Banking Services Investment Services Eliminations Total
---------------- ------------------- ------------ ----------
(In thousands)
2004
RESULTS OF OPERATIONS
Total interest income $ 111,822 $ 1,619 -- $ 113,441
Total interest expense 39,971 407 -- 40,378
Provision for loan losses 9,370 -- -- 9,370
Net interest income after
provision for loan losses 62,481 1,212 -- 63,693
Non-interest income 11,629 24,480 -- 36,109
Non-interest expense 48,348 24,486 -- 72,834
---------- ------- --- ----------
Income before income taxes 25,762 1,206 -- 26,968
Income taxes 8,698 405 -- 9,103
---------- ------- --- ----------
Net income $ 17,064 $ 801 -- $ 17,865
---------- ------- --- ----------
SELECTED FINANCIAL INFORMATION
Total assets $2,229,705 $58,089 $(6) $2,287,788
Capital expenditures 2,928 271 -- 3,199
Depreciation and amortization 2,579 364 -- 2,943
---------- ------- --- ----------
2003
RESULTS OF OPERATIONS
Total interest income $ 110,510 $ 1,153 -- $ 111,663
Total interest expense 40,031 221 -- 40,252
Provision for loan losses 3,179 -- -- 3,179
Net interest income after
provision for loan losses 67,300 932 -- 68,232
Non-interest income 18,795 22,050 -- 40,845
Non-interest expense 50,277 23,295 -- 73,572
---------- ------- --- ----------
Income before income taxes 35,818 (313) -- 35,505
Income taxes 12,675 (110) -- 12,565
---------- ------- --- ----------
Net income $ 23,143 $ (203) -- $ 22,940
---------- ------- --- ----------
SELECTED FINANCIAL INFORMATION
Total assets $2,035,927 $37,958 $(2) $2,073,883
Capital expenditures 3,714 311 -- 4,025
Depreciation and amortization 3,049 495 -- 3,544
---------- ------- --- ----------
2002
RESULTS OF OPERATIONS
Total interest income $ 124,887 $ 1,073 -- $ 125,960
Total interest expense 54,018 218 -- 54,236
Provision for loan losses 3,578 -- -- 3,578
Net interest income after
provision for loan losses 67,291 855 -- 68,146
Non-interest income 12,442 19,364 -- 31,806
Non-interest expense 48,878 19,481 -- 68,359
---------- ------- --- ----------
Income before income taxes 30,855 738 -- 31,593
Income taxes 10,515 261 -- 10,776
---------- ------- --- ----------
Net income $ 20,340 $ 477 -- $ 20,817
---------- ------- --- ----------
SELECTED FINANCIAL INFORMATION
Total assets $1,963,390 $26,748 $(7) $1,990,131
Capital expenditures 3,656 246 -- 3,902
Depreciation and amortization 2,403 545 -- 2,948
---------- ------- --- ----------
EX. 13-41
21. 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. Stock options
for 754,403 shares were anti-dilutive for the year ended December 31, 2004. No
stock options were anti-dilutive for the years ended December 31, 2003 and 2002.
2004 2003 2002
------- ------- -------
(In thousands, except per
share data)
BASIC EARNINGS PER SHARE:
Net income applicable to common stock $17,865 $22,940 $20,817
Weighted average common shares
outstanding 29,185 31,353 31,859
------- ------- -------
Basic earnings per share $ 0.61 $ 0.73 $ 0.65
------- ------- -------
DILUTED EARNINGS PER SHARE:
Net income applicable to common stock $17,865 $22,940 $20,817
Weighted average common shares
outstanding 29,185 31,353 31,859
Dilutive effect of restricted stock -- -- 130
Dilutive effect of stock options 420 431 336
------- ------- -------
Weighted average common shares
outstanding for dilutive computation 29,605 31,784 32,325
------- ------- -------
Diluted earnings per share $ 0.60 $ 0.72 $ 0.65
------- ------- -------
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents summarized quarterly data for each of the
years indicated.
(Unaudited)
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
(In thousands, except per share data)
2004:
Total interest income $27,075 $27,639 $28,986 $29,741 $113,441
Total interest expense 9,067 9,488 10,497 11,326 40,378
------- ------- ------- ------- --------
Net interest income 18,008 18,151 18,489 18,415 73,063
Provision for loan losses 459 1,369 9,226 (1,684) 9,370
Non-interest income 10,331 8,666 8,678 8,434 36,109
Non-interest expense 19,514 17,770 17,718 17,832 72,834
Income taxes 2,893 2,676 29 3,505 9,103
------- ------- ------- ------- --------
Net income $ 5,473 $ 5,002 $ 194 $ 7,196 $ 17,865
------- ------- ------- ------- --------
Earnings per share:
Basic $ 0.18 $ 0.17 $ 0.01 $ 0.25 $ 0.61
Diluted 0.18 0.17 0.01 0.24 0.60
------- ------- ------- ------- --------
The change in the provision for loan losses between the second and third
quarter was primarily a result of the Company's determination that impairment
charges were necessary in the third quarter on certain consumer loans having
similar characteristics and loans to a commercial customer that relate to the
aforementioned consumer loans. The increase in the provision for loan losses had
a direct effect on pretax income, causing lower pretax income in the third
quarter and, subsequently, lower income tax expense. The change between the
second and third quarters was partially offset in the fourth quarter as
management continued to evaluate the level of collateral securing delinquent
one-to four-family residential mortgage loans. Additionally, specific reserves
assigned to certain commercial loans were deemed to be no longer necessary
because of improved credit quality and adequate collateral coverage. As a
result, the provision for loan losses decreased, pretax income increased and the
provision for income taxes increased. See Management's Discussion and Analysis
as well as Note 5, "Loans" for more details on the provision for loan losses and
Note 13, "Income Taxes" for more detail on the provision for income taxes.
EX. 13-42
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
(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
Non-interest income 7,975 13,169 10,303 9,398 40,845
Non-interest 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
------- ------- ------- ------- --------
EX. 13-43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
To the Shareholders and Board of Directors
United Community Financial Corp.
Youngstown, Ohio
We have audited the accompanying consolidated statements of financial condition
of United Community Financial Corp. as of December 31, 2004 and 2003 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three year period ended December 31, 2004. These
financial statements are the responsibility of United Community Financial
Corp.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003 and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Crowe Chizek and Company LLC
----------------------------------------
Crowe Chizek and Company LLC
Columbus, Ohio
February 17, 2005
EX. 13-44