.
.
.
EXHIBIT 13
SELECTED FINANCIAL AND OTHER DATA
Selected financial condition data:
At December 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Total assets $2,528,850 $2,287,788 $2,073,833 $1,990,131 $1,944,780
Cash and cash equivalents 37,545 40,281 81,155 110,936 205,883
Securities:
Trading, at fair value 10,812 32,316 15,600 5,060 8,352
Available for sale, at fair value 201,870 198,404 227,525 237,268 118,150
Held to maturity, at amortized cost -- -- -- -- 80,496
Loans held for sale 29,109 59,099 37,715 45,825 20,192
Loans, net 2,097,433 1,815,976 1,576,494 1,478,213 1,406,479
Federal Home Loan Bank stock, at cost 24,006 22,842 21,924 21,069 18,760
Cash surrender value of life insurance 22,260 21,406 20,496 -- --
Deposits 1,681,844 1,522,952 1,423,698 1,481,901 1,383,418
Borrowed funds 550,763 483,503 338,463 210,024 271,631
Total shareholders' equity 264,735 252,352 279,836 274,569 261,880
Summary of earnings:
Year ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest income $136,052 $113,441 $111,663 $125,960 $113,989
Interest expense 57,296 40,378 40,252 54,236 57,047
-------- -------- -------- -------- --------
Net interest income 78,756 73,063 71,411 71,724 56,942
Provision for loan losses 3,028 9,370 3,179 3,578 2,495
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 75,728 63,693 68,232 68,146 54,447
Non-interest income 38,260 36,109 40,845 31,806 28,449
Non-interest expenses 78,881 72,834 73,572 68,359 57,708
-------- -------- -------- -------- --------
Income before income taxes 35,107 26,968 35,505 31,593 25,188
Income taxes 11,910 9,103 12,565 10,776 9,509
-------- -------- -------- -------- --------
Net income $ 23,197 $ 17,865 $ 22,940 $ 20,817 $ 15,679
-------- -------- -------- -------- --------
EX. 13-1
Selected financial ratios and other data:
At or for the year ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Performance ratios:
Return on average assets (1) 0.96% 0.83% 1.15% 1.04% 0.97%
Return on average shareholders' equity (2) 8.89 7.01 8.27 7.74 6.03
Interest rate spread (3) 3.15 3.34 3.51 3.36 2.95
Net interest margin (4) 3.47 3.60 3.81 3.79 3.66
Non-interest expense to average assets 3.27 3.37 3.70 3.74 3.56
Efficiency ratio (5) 67.00 65.87 65.29 64.52 66.34
Average interest earning assets to
average interest bearing liabilities 112.41 113.16 114.24 114.98 119.23
Capital ratios:
Average equity to average assets 10.83 11.78 13.95 13.48 16.04
Shareholders' equity to assets at year end 10.47 11.03 13.49 13.80 13.47
Tier 1 leverage ratio 8.36 8.36 8.22 8.05 9.07
Tier 1 risk-based capital ratio 10.08 9.92 9.64 11.64 13.88
Total risk-based capital ratio 10.86 10.79 10.56 12.61 14.70
Asset quality ratios:
Nonperforming loans to loans, net (6) 1.22 1.24 1.02 1.06 0.89
Nonperforming assets to total assets at year end (7) 1.11 1.06 0.84 0.85 0.67
Allowance for loan losses as a percent of loans 0.74 0.87 0.96 1.02 0.82
Allowance for loan losses as a
percent of nonperforming loans (6) 61.26 70.38 93.66 96.20 92.13
Number of:
Loans 43,630 41,690 37,668 37,872 25,636
Deposits 183,565 173,997 169,920 173,528 164,753
Per share data:
Basic earnings (8) $ 0.81 $ 0.61 $ 0.73 $ 0.65 $ 0.49
Diluted earnings (8) 0.80 0.60 0.72 0.65 0.48
Book value (9) 8.52 8.09 8.21 7.79 7.34
Dividend per share 0.33 0.30 0.30 0.30 0.30
Dividend payout ratio (10) 41.25% 50.00% 41.67% 46.15% 62.50%
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest earning assets and
weighted average cost of interest bearing liabilities.
(4) Net interest income as a percentage of average interest earning assets.
(5) 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.
(6) Nonperforming loans consist of loans ninety days past due, loans less then
ninety days past due and not accruing and restructured loans.
(7) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans and other repossessed assets.
(8) Net income divided by average number of shares outstanding.
(9) Shareholders' equity divided by number of shares outstanding.
(10) 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,
37 full-service branches and six loan production offices located throughout Ohio
and western Pennsylvania. The principal business of Home Savings is providing
consumer and business banking services to its market area in Ohio and western
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 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 20 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 a full line of life insurance
and annuity products, personal and corporate financial planning, estate
planning, pension and profit sharing and investments in precious metals.
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 differ materially 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, the 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 $241.1 million, or 10.5%, from $2.3 billion at December
31, 2004 to $2.5 billion at December 31, 2005. The net change in assets was a
result of increases of $281.5 million, or 15.5%, in net loans, $3.5 million in
available for sale securities, $3.0 million in premises and equipment and $2.6
million in accrued interest receivable. These increases were partially offset by
decreases of $30.0 million in loans held for sale and $21.5 million in trading
securities. Total liabilities increased $228.7 million, or 11.2%, primarily as a
result of increases of $146.9 million in interest bearing deposits, $52.2
million in Federal Home Loan Bank advances, $15.1 million in repurchase
agreements and other borrowings and $12.0 million in non-interest bearing
deposits. United Community expects this growth trend to continue into 2006 as
new locations are opened to better service customer needs.
Net loans increased $281.5 million, or 15.5%, to $2.1 billion at December 31,
2005, compared to $1.8 billion at December 31, 2004. Much like the growth seen
last year, the most significant increases were in the one- to four-family
portfolio with a $58.9 million increase in permanent loans and an $88.4 million
increase in one- to four-family construction loans. Other increases in the loan
portfolio included a $55.9 million increase in consumer loans, a $32.5 million
increase in commercial loans and a $24.4 million increase in non-residential
real estate loans. 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 2005 and had approximately $101.7 million
outstanding at December 31, 2005. This represents an increase of $16.2 million
over the outstanding balance of $85.5 million included in net loans as of
December 31, 2004. Home Savings anticipates continued net growth in all loan
categories, which may increase the risk of loan losses. Non-residential real
estate lending generally is considered to involve a higher
EX. 13-3
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. Consumer lending also can 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.
See Note 4 to the consolidated financial statements for additional information
regarding the composition of net loans.
Loans held for sale were $29.1 million at December 31, 2005 compared to $59.1
million at December 31, 2004. 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. These loans
were transferred back to the portfolio in the first quarter of 2005 as
management had decided not to sell these loans. United Community also continued
to purchase residential mortgage loans from a number of correspondent lenders.
Home Savings continues purchasing adjustable rate loans and selling long term
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 decreased $21.5 million, or 66.5%, from December 31, 2004 to
December 31, 2005. The reduction is a result of a decrease in Butler Wick's
trading portfolio of $20.5 million. Additionally, trading securities held by
United Community for the Butler Wick Retention Plan decreased as approximately
55% of the remaining plan assets were distributed in August 2005, as all
participants are fully vested. Refer to note 16 of the consolidated financial
statements for further discussion of the retention plan.
Other assets increased $1.8 million during 2005. The increase is a result
primarily of increases in receivables due from brokers/dealers at Butler Wick of
$2.9 million and deferred mortgage servicing rights at Home Savings of $1.4
million. These increases were offset by decreases in deferred federal tax assets
of $1.6 million, a low-income housing investment at Home Savings of $357,000 and
a decrease in receivables for securities sold but not yet settled at United
Community of $390,000.
Funds not currently utilized for general corporate purposes are invested in
overnight funds and securities. Cash and cash equivalents decreased $2.7
million, or 6.8%, to $37.5 million at December 31, 2005 compared to $40.3
million at December 31, 2004. The decrease is primarily a result of increased
cash used for investments in securities partially offset by increased cash from
normal operations.
Available for sale securities increased $3.5 million during 2005 as a result of
purchases of $80.3 million offset by paydowns and maturities of $51.1 million
and sales of $20.9 million. The majority of United Community's available for
sale portfolio is held by Home Savings.
Home Savings has an investment 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
obligations, while generating competitive investment yields. Home Savings
recognized $910,000 as other non-interest income based on the cash value of the
policies in 2004 and $854,000 in 2005. The increase in the cash value of the
policies is tax exempt and any death benefit proceeds received by Home Savings
are tax-free.
Total deposits increased $158.9 million, or 10.4%, from $1.5 billion at December
31, 2004 to $1.7 billion at December 31, 2005, primarily as a result of an
increase in certificates of deposit of $241.8 million. This change was offset by
a decrease of $48.4 million in savings accounts and $44.1 million in checking
deposits. During 2005, Home Savings emphasized growth in certificates of deposit
in order to attract new customers. In addition, core deposit rates were kept at
historically low levels that led to some migration into certificates of deposit.
Management continually evaluates many variables when pricing deposits, including
cash requirements, liquidity targets, asset acquisition, liability mix and
interest rate risk. The increase in total deposits was used to partially fund
the increase in net loans in 2005.
Funds needed in excess of deposit growth are borrowed in the normal course of
business. Home Savings has an established credit relationship with the Federal
Home Loan Bank of Cincinnati under which the Bank can borrow up to $608.6
million. Of the total borrowing capacity at the Federal Home Loan Bank, Home
Savings has outstanding advances of $475.5 million at December 31, 2005, which
is an increase of $52.2 million compared to December 31, 2004. Their borrowings
are collateralized primarily by one- to four-family residential mortgage loans.
Repurchase agreements and other borrowings are also utilized by United
Community. Repurchase agreements have increased $30.0 million as a result of
Home Savings taking advantage of lower interest rates on this type of borrowing
compared to Federal Home Loan Bank advances. Partially offsetting this increase
was a decrease in the amount of other borrowings at Butler Wick. In 2004, Butler
Wick had increased its borrowing position to fund the purchase of trading
securities. These securities were sold in 2005 and the borrowing was repaid.
United Community continually evaluates funding alternatives and may borrow
additional funds in 2006 to satisfy funding requirements.
Total shareholders' equity increased $12.4 million, or 4.9%, from December 31,
2004 to December 31, 2005. The increase was primarily due to net income of $23.2
million which was partially offset by dividends of $9.5 million paid to
shareholders during the year, treasury stock purchases of $2.5 million, and a
decrease in accumulated other comprehensive income of $2.9 million. Accumulated
other comprehensive income decreased as a result of the change in market value
of available for sale securities at December 31, 2005 compared to December 31,
2004. Book value per share and tangible book value per share were $8.52 and
$7.37, respectively, as of December 31, 2005. Book value per share and tangible
book value per share were $8.09 and $6.92, respectively, as of December 31,
2004.
EX. 13-4
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
DECEMBER 31, 2004
NET INCOME--Net income for the year ended December 31, 2005 was $23.2 million,
compared to $17.9 million for the year ended December 31, 2004. This increase
was due primarily to an increase of $22.6 million in interest income, a
reduction in the provision for loan losses of $6.3 million and increased
non-interest income of $2.2 million. These changes were partially offset by an
increase in interest expense of $16.9 million, an increase in non-interest
expense of $6.0 million and an increased provision for income taxes of $2.8
million.
NET INTEREST INCOME--Net interest income for the year ended December 31, 2005,
grew by $5.7 million, or 7.8%, over the year ended December 31, 2004. The change
is due largely to an increase of $21.3 million in interest earned on loans,
offset by increases in interest expense on deposits of $9.6 million and interest
expense on Federal Home Loan Bank advances of $6.1 million. The increase of
$21.3 million in interest earned on loans is due primarily to growth in the
amount of outstanding loans, which accounted for additional interest earned of
$15.5 million. The remaining $5.8 million of the total increase in interest
earned on loans is a result of higher rates.
United Community's net interest margin for 2005 was 3.47%, which represents a
decrease of 13 basis points compared to 2004. Much of this compression resulted
from the flattening of the yield curve and the narrowing of spreads. Management
was pleased that the compression was so limited given the strong balance sheet
growth in the current interest rate environment. Efforts to change the
composition of the loan portfolio and deposit pricing throughout the year played
an important role in management's efforts to counteract the effects of the
flatter yield curve.
PROVISION FOR LOAN LOSSES--A provision for loan losses is charged to operations
to bring the total allowance for loan losses to a level considered by management
to be adequate, 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 $3.0
million in 2005 compared to a provision of $9.4 million in 2004, which included
impairment charges aggregating $8.4 million in the third quarter of 2004 related
to two loans made to a boat dealer and to a number of loans to purchasers of
boats from that dealer. Similar reserves were not required in 2005. The
allowance for loan losses totaled $15.7 million at December 31, 2005, which was
0.74% of net loans and 61.3% of nonperforming loans, compared to $15.9 million
at December 31, 2004, which was 0.87% of net loans and 70.4% of nonperforming
loans.
The decline in the relationship of the allowance for loan losses to total loans
and the decline in the allowance coverage ratio of nonperforming loans in 2005
is primarily a factor of the strong loan growth of $281.5 million discussed
earlier and a change in the mix of impaired loans. Of the loan growth, $147.3
million occurred on one- to four-family real estate loans and construction
loans. As a result of United Community's underwriting standards and stable real
estate values in its market area historical losses on this segment of the loan
portfolio have historically been low, mitigating the need for additional
provisions for loan losses. With respect to impaired loans, at December 31,
2005, impaired loans totaled $17.7 million of which $4.6 million had specific
valuation allowances of $667,000 allocated to them. In comparison, at December
31, 2004, impaired loans totaled $15.2 million of which $7.3 million had
specific valuation allowances of $1.7 million allocated to them. At December 31,
2005, more of the loans classified as impaired were secured by real estate
collateral with sufficient value to cover the outstanding loan balance. While
general allowance allocations have increased, specific allowance allocations
have decreased during the year.
NON-INTEREST INCOME--Non-interest income increased $2.2 million, or 6.0%, to
$38.3 million for the year ended December 31, 2005, from $36.1 million for the
year ended December 31, 2004. The increase was due primarily to increases in
brokerage commissions of $1.3 million due to increased brokerage activity at
Butler Wick, service fees and other charges of $691,000 and other income of
$753,000. These increases were offset by a lower gain realized on loans sold of
$942,000.
An increase 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 in 2004. This security was
sold in 2005, with no additional loss recognized.
The change in income from trading securities was a result of larger losses
recognized in Butler Wick's trading portfolio in 2004 versus 2005. In 2004,
Butler Wick sustained losses aggregating $142,000 on a portfolio of $30.3
million compared to gains aggregating $165,000 on a portfolio of $9.8 million in
2005. Lower gains were recognized on the retention plan at Butler Wick during
2005 compared to 2004. Gains recognized on the retention plan in 2005 were
$103,000 compared to $135,000 in 2004. Gains recognized on those assets will
decline further as a result of the distribution in August 2005 of 55% 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
2005 compared to 2004, resulting in a decrease in revenues of $153,000, from
$1.0 million to $876,000.
NON-INTEREST EXPENSE--Non-interest expenses rose $6.1 million during the year
ended December 31, 2005, compared to the same period in 2004, primarily as a
result of employee compensation and benefits increasing $5.7 million. The
increase is attributable to increased performance incentives as a result of
record earnings, greater commission expenses, rising healthcare costs and
increased personnel. Other expenses also increased consisting, in part, of legal
and audit fees. These increases were offset partially by a decrease in
advertising expense of $283,000.
EX. 13-5
FEDERAL INCOME TAXES--During the year ended December 31, 2005, United Community
recorded an $11.9 million provision for income taxes. This is an increase of
$2.8 million over the year ended December 31, 2004 as a result of higher pretax
income earned in 2005 compared to 2004. The effective tax rate at December 31,
2005 was 33.9% compared to 33.8% at 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, interest earned on margin
accounts at Butler Wick of $113,000 and 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 was 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 million as a result of paydowns,
maturities and sales of securities.
Interest expense increased slightly because a decline in interest expense on
deposits at Home Savings of $2.5 million was 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 checking 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.
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 primarily was 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 United Community learned that insufficient
collateral secured these loans. 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 70.4% of nonperforming loans compared to $15.1
million at December 31, 2003, which was 0.96% of net loans and 93.7% 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 change 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 reduced 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 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
United Community'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. 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.
EX. 13-6
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 were
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 lower commissions and bonuses paid at
Home Savings and a reduction in RRP expense as participants in that plan vested
in August 2003. Offsetting the reduction 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 33.8% in 2004 and 35.4% in 2003. Refer to Note 13 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 financial services 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 inherently
is 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.
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, non-residential mortgage loans, marine loans
and commercial 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.
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, about
which management must make assumptions considering future expectations based on
various factors, such as servicing costs, expected prepayment speeds and
discount rates.
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 by original maturity,
interest rate and loan type. 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.
EX. 13-7
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)
United Community's intent and ability 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,
-------------------------------------------------------------------------------------------
2005 2004 2003
----------------------------- ----------------------------- -----------------------------
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) $1,979,294 $123,749 6.25% $1,728,139 $102,453 5.93% $1,496,518 $ 98,646 6.59%
Loans held for sale 33,845 1,651 4.88 30,814 1,449 4.70 41,418 1,950 4.71
Securities:
Trading 29,777 943 3.17 29,221 736 2.52 13,887 415 2.99
Available for sale 186,404 7,227 3.88 200,069 7,022 3.51 262,967 8,851 3.37
Margin accounts 15,659 1,219 7.78 14,117 802 5.68 14,349 689 4.80
Federal Home Loan Bank stock 23,250 1,164 5.01 22,262 919 4.13 21,388 855 4.00
Other interest earning assets 3,867 99 2.56 4,958 60 1.21 21,415 257 1.20
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest earning assets $2,272,096 $136,052 5.98% $2,029,580 $113,441 5.59% $1,871,942 $111,663 5.97%
Non-interest earning assets 136,728 132,972 116,685
---------- ---------- ----------
Total assets $2,408,824 $2,162,552 $1,988,627
========== ========== ==========
Interest bearing liabilities:
Deposits:
Checking accounts $ 269,652 $ 3,231 1.20% $ 302,936 $ 2,386 0.79% $ 308,816 $ 3,112 1.01%
Savings accounts 287,714 1,201 0.42 314,588 1,361 0.43 335,843 2,347 0.70
Certificates of deposit 938,957 33,488 3.57 773,019 24,614 3.18 763,704 25,441 3.33
Federal Home Loan Bank advances 460,205 17,364 3.77 351,800 11,254 3.20 199,633 8,841 4.43
Repurchase agreements and other 64,776 2,012 3.11 51,142 763 1.49 30,643 511 1.67
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest bearing
liabilities $2,021,304 $ 57,296 2.83% $1,793,485 $ 40,378 2.25% $1,638,639 $ 40,252 2.46%
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Non-interest bearing liabilities 126,673 114,277 72,536
---------- ---------- ----------
Total liabilities $2,147,977 $1,907,762 $1,711,175
Shareholders' equity 260,847 254,790 277,452
---------- ---------- ----------
Total liabilities and equity $2,408,824 $2,162,552 $1,988,627
========== ========== ==========
Net interest income and
interest rate spread $ 78,756 3.15% $ 73,063 3.34% $ 71,411 3.51%
======== ====== ======== ====== ======== ======
Net interest margin 3.47% 3.60% 3.81%
====== ====== ======
Average interest earning assets
to average interest bearing
liabilities 112.41% 113.16% 114.24%
====== ====== ======
(1) Nonaccrual loans are included in the average balance.
EX. 13-9
The table below describes the extent to which changes in interest rates and
changes in volume of interest earning assets and interest bearing liabilities
have affected United Community's interest income and interest expense during the
periods indicated. For each category of interest earning assets and interest
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior period rate), (ii)
changes in rate (change in rate multiplied by prior period volume) and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated in
proportion to the changes due to volume and rate:
Year ended December 31,
---------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
------------------------------ ------------------------------
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 $5,815 $15,481 $ 21,296 $(7,071) $10,878 $ 3,807
Loans held for sale 56 146 202 (2) (499) (501)
Securities:
Trading 193 14 207 (53) 374 321
Available for sale 590 (385) 205 398 (2,227) (1,829)
Margin accounts 322 95 417 124 (11) 113
Federal Home Loan Bank stock 203 42 245 28 36 64
Other interest earning assets 49 (10) 39 2 (199) (197)
------ ------- -------- ------- ------- -------
Total interest earning assets $7,228 $15,383 $ 22,611 $(6,574) $ 8,352 $ 1,778
====== ======= ======== ======= ======= =======
Interest bearing liabilities:
Checking accounts 1,071 (226) 845 (846) (140) (986)
Savings accounts (47) (113) (160) (668) (58) (726)
Certificates of deposit 3,183 5,691 8,874 (1,143) 316 (827)
Federal Home Loan Bank advances 2,249 3,861 6,110 (1,383) 3,796 2,413
Repurchase agreements and other 1,002 247 1,249 (47) 299 252
------ ------- -------- ------- ------- -------
Total interest bearing liabilities $7,458 $ 9,460 $ 16,918 $(4,087) $ 4,213 $ 126
====== ======= ======== ======= ======= =======
Change in net interest income $ 5,693 $ 1,652
======== =======
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE
SHEET ARRANGEMENTS
The following table presents, as of December 31, 2005, 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 7 $ 957 $ 1,527 $ 1,044 $ 507 $ 4,035
Deposits without a stated maturity 9 615,844 -- -- -- 615,844
Certificates of deposit 9 541,614 365,982 116,760 41,761 1,066,117
Federal Home Loan Bank advances 10 360,752 88,952 13,300 12,545 475,549
Repurchase agreements and other borrowings 11 38,614 36,600 -- -- 75,214
Discussion of loan commitments is included in Note 4 to the consolidated
financial statements. In addition, United Community has commitments under
benefit plans as described in Note 16 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 United Community'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 has adopted an interest rate risk policy that
requires the Home Savings Board to review quarterly reports related to interest
rate risk and annually set exposure limits for Home Savings as a guide to
management in setting and implementing day to day operating strategies.
EX. 13-10
QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk analysis,
Home Savings uses the "net portfolio value" (NPV) methodology. Generally, NPV is
the discounted present value of the difference between incoming cash flows on
interest earning and other assets and outgoing cash flows on interest bearing
and other liabilities. The application of the methodology attempts to quantify
interest rate risk as the change in the NPV and net interest income that would
result from various levels of theoretical basis point changes in market interest
rates.
Home Savings uses a 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, for the
year ended December 31, 2005, the percentage changes fall within the policy
limits set by the Board of Directors of Home Savings as the minimum NPV ratio
and the maximum change in interest income the Home Savings Board deems advisable
in the event of various changes in interest rates. Home Savings continues to
monitor its interest rate exposure to declining rates. See the table below for
Board adopted policy limits.
Year Ended December 31, 2005
---------------------------------------------------------------------------------
NPV as % of portfolio value of assets Next 12 months net interest income
----------------------------------------- -------------------------------------
(Dollars in thousands)
Change in rates Internal policy Internal policy
(Basis points) NPV Ratio limitations Change in % $ Change limitations % Change
- --------------- --------- --------------- ----------- -------- --------------- --------
+300 11.90% 5.00% (1.35)% $ 322 (15.00)% 0.43%
+200 12.45 6.00 (0.80) 390 (10.00) 0.52
+100 12.88 6.00 (0.36) (276) (5.00) (0.37)
Static 13.24 7.00 -- -- -- --
(100) 13.08 6.00 (0.16) (649) (5.00) (0.87)
(200) 12.38 6.00 (0.86) (3,638) (15.00) (4.89)
(300) 10.98 5.00 (2.26) (10,678) (20.00) (14.37)
Year Ended December 31, 2004
---------------------------------------------------------------------------------
NPV as % of portfolio value of assets Next 12 months net interest income
----------------------------------------- -------------------------------------
(Dollars in thousands)
Change in rates Internal policy Internal policy
(Basis 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.
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.
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
EX. 13-11
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, 2005,
2004 and 2003.
Years ended December 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
(Dollars in thousands)
Net income $ 23,197 $ 17,865 $ 22,940
Adjustments to reconcile net income to net
cash from operating activities 92,222 10,230 20,152
--------- --------- ---------
Net cash from operating activities 115,419 28,095 43,092
Net cash from investing activities (335,345) (264,802) (127,776)
Net cash from financing activities 217,190 195,833 54,903
--------- --------- ---------
Net change in cash and cash equivalents (2,736) (40,874) (29,781)
Cash and cash equivalents at beginning of year 40,281 81,155 110,936
--------- --------- ---------
Cash and cash equivalents at end of year $ 37,545 $ 40,281 $ 81,155
========= ========= =========
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, 2005, approximately $541.6 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 be used for 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 232,400 common shares
for $2.5 million, 3,797,000 common shares for $47.8 million, and 1,320,000
common shares for $12.4 million during the years ended December 31, 2005, 2004
and 2003. United Community has remaining authorization to repurchase 624,347
shares as of December 31, 2005, under the current repurchase program.
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 United Community's shareholders and to 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, 2005.
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 $203,220 8.36% $ 36,449 1.50% $166,771 6.86% $2,429,909
Core capital 203,220 8.36 97,196 4.00 106,024 4.36 2,429,909
Risk-based capital 218,943 10.86 161,351 8.00 57,592 2.86 2,016,884
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 to
the consolidated financial statements.
MARKET PRICE AND DIVIDENDS
There were 37,804,457 common shares of United Community stock issued and
31,092,963 shares outstanding and held by approximately 11,227 record holders as
of February 28, 2006. 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
------- ------- ------- -------
2005:
High $ 11.53 $ 11.75 $ 11.75 $ 12.50
Low 10.00 10.05 10.53 10.28
Close 11.09 10.94 11.22 11.81
Dividends declared and paid 0.0825 0.0825 0.0825 0.0825
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
EX. 13-13
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Community is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. United
Community's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. United Community's internal control
over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of United
Community; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
United Community are being made only in accordance with authorizations of
management and directors of United Community; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of United Community's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Management assessed the
effectiveness of United Community's internal control over financial reporting as
of December 31, 2005. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our
assessment and those criteria, management concluded that United Community
maintained effective internal control over financial reporting as of December
31, 2005.
United Community's independent registered public accounting firm has issued
their report on management's assessment of United Community's internal control
over financial reporting. That report follows under the heading, Report of
Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting.
/S/ Douglas M. McKay /S/ Patrick A. Kelly
- ------------------------------------- ----------------------------------------
Douglas M. McKay, Chief Executive Patrick A. Kelly, Chief Financial
Officer Officer
February 1, 2006 February 1, 2006
EX. 13-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that United
Community Financial Corp. maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. United Community Financial Corp.
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that United Community Financial Corp.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, United
Community Financial Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of United Community Financial Corp. as of December 31, 2005
and 2004, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005 and our report dated February 1, 2006 expressed an unqualified opinion
on those consolidated financial statements.
/S/ Crowe Chizek and Company LLC
- -------------------------------------
Crowe Chizek and Company LLC
Cleveland, Ohio
February 1, 2006
EX. 13-15
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, 2005 and 2004, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of United
Community Financial Corp.'s internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 1, 2006 expressed an
unqualified opinion thereon.
/S/ Crowe Chizek and Company LLC
- -------------------------------------
Crowe Chizek and Company LLC
Cleveland, Ohio
February 1, 2006
EX. 13-16
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-----------------------
2005 2004
---------- ----------
(In thousands)
ASSETS
Cash and deposits with banks $ 36,043 $ 36,886
Federal funds sold 1,502 3,395
---------- ----------
Total cash and cash equivalents 37,545 40,281
---------- ----------
Securities:
Trading, at fair value 10,812 32,316
Available for sale, at fair value 201,870 198,404
Loans held for sale 29,109 59,099
Loans, net of allowance for loan losses of $15,723 and $15,877 2,097,433 1,815,976
Margin accounts 15,705 14,851
Federal Home Loan Bank stock, at cost 24,006 22,842
Premises and equipment, net 23,771 20,793
Accrued interest receivable 12,053 9,445
Real estate owned and other repossessed assets 2,514 1,682
Goodwill 33,593 33,593
Core deposit intangible 2,118 2,887
Cash surrender value of life insurance 22,260 21,406
Other assets 16,061 14,213
---------- ----------
TOTAL ASSETS $2,528,850 $2,287,788
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 96,918 $ 84,965
Interest bearing 1,584,926 1,437,987
---------- ----------
Total deposits 1,681,844 1,522,952
Borrowed funds:
Federal Home Loan Bank advances 475,549 423,355
Repurchase agreements and other 75,214 60,148
---------- ----------
Total borrowed funds 550,763 483,503
Advance payments by borrowers for taxes and insurance 14,322 12,048
Accrued interest payable 2,622 1,089
Accrued expenses and other liabilities 14,564 15,844
---------- ----------
TOTAL LIABILITIES 2,264,115 2,035,436
---------- ----------
Commitments and contingent liabilities (Note 4 and Note 12) -- --
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 143,896 142,337
Retained earnings 207,120 193,690
Accumulated other comprehensive income (loss) (1,845) 1,063
Unearned compensation (13,108) (14,930)
Treasury stock, at cost, 2005 - 6,742,345 shares and 2004 - 6,602,477 shares (71,328) (69,808)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 264,735 252,352
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,528,850 $2,287,788
========== ==========
See Notes to Consolidated Financial Statements.
EX. 13-17
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(In thousands,
except per share data)
INTEREST INCOME
Loans $123,749 $102,453 $ 98,646
Loans held for sale 1,651 1,449 1,950
Securities:
Trading 943 736 415
Available for sale 7,227 7,022 8,851
Margin accounts 1,219 802 689
Federal Home Loan Bank stock dividends 1,164 919 855
Other interest earning assets 99 60 257
-------- -------- --------
Total interest income 136,052 113,441 111,663
-------- -------- --------
INTEREST EXPENSE
Deposits 37,920 28,361 30,900
Federal Home Loan Bank advances 17,364 11,254 8,841
Repurchase agreements and other 2,012 763 511
-------- -------- --------
Total interest expense 57,296 40,378 40,252
-------- -------- --------
Net interest income 78,756 73,063 71,411
Provision for loan losses 3,028 9,370 3,179
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 75,728 63,693 68,232
-------- -------- --------
NON-INTEREST INCOME
Brokerage commissions 18,508 17,189 14,925
Service fees and other charges 12,471 11,780 8,382
Underwriting and investment banking 876 1,029 1,528
Net gains (losses):
Securities available for sale 195 8 839
Trading securities 268 (7) 850
Loans sold 2,250 3,192 11,707
Other (22) (43) (105)
Other income 3,714 2,961 2,719
-------- -------- --------
Total non-interest income 38,260 36,109 40,845
-------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 51,301 46,074 46,511
Occupancy 4,115 3,757 3,658
Equipment and data processing 9,067 9,086 9,459
Franchise tax 1,894 1,583 1,562
Advertising 1,570 1,853 2,232
Amortization of core deposit intangible 769 900 1,314
Other expenses 10,165 9,581 8,836
-------- -------- --------
Total non-interest expense 78,881 72,834 73,572
-------- -------- --------
INCOME BEFORE INCOME TAXES 35,107 26,968 35,505
INCOME TAXES 11,910 9,103 12,565
-------- -------- --------
NET INCOME $ 23,197 $ 17,865 $ 22,940
======== ======== ========
EARNINGS PER SHARE
Basic $ 0.81 $ 0.61 $ 0.73
Diluted $ 0.80 $ 0.60 $ 0.72
======== ======== ========
See Notes to Consolidated Financial Statements.
EX. 13-18
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, 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
Comprehensive income:
Net income -- -- 23,197 -- -- -- 23,197
Change in net unrealized gain (loss) on
securities, net of taxes of $1,565 -- -- -- (2,908) -- -- (2,908)
-------- ------- --------
Comprehensive income -- -- 23,197 (2,908) -- -- 20,289
Shares allocated to ESOP participants -- 1,432 -- -- 1,822 -- 3,254
Purchase of treasury stock (233) -- -- -- -- (2,499) (2,499)
Exercise of stock options 93 127 (305) -- -- 979 801
Dividends paid, $0.33 per share -- -- (9,462) -- -- -- (9,462)
------ -------- -------- ------- -------- -------- --------
BALANCE DECEMBER 31, 2005 31,062 $143,896 $207,120 $(1,845) $(13,108) $(71,328) $264,735
====== ======== ======== ======= ======== ======== ========
See Notes to Consolidated Financial Statements.
EX. 13-19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,197 $ 17,865 $ 22,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,028 9,370 3,179
Net gains on loans (2,250) (3,192) (11,707)
Net gains on other assets (173) 35 (734)
Amortization of premiums and accretion of discounts 2,139 4,608 6,340
Depreciation and amortization 2,347 2,943 3,544
Federal Home Loan Bank stock dividends (1,164) (919) (855)
(Increase) decrease in interest receivable (2,608) (1,002) 1,115
Increase (decrease) in interest payable 1,533 119 (156)
Increase in prepaid and other assets (4,273) (5,869) (6,010)
Increase (decrease) in other liabilities 412 (3,133) 4,195
Decrease (increase) in trading securities 21,504 (16,716) (10,540)
Amortization of restricted stock compensation -- -- 1,446
(Increase) decrease in margin accounts (854) (463) 421
Net principal disbursed on loans held for sale (154,873) (155,664) (427,426)
Proceeds from sale of loans held for sale 224,200 176,609 454,499
ESOP compensation 3,254 3,504 2,841
--------- --------- ---------
Net cash from operating activities 115,419 28,095 43,092
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal repayments and maturities of:
Securities available for sale 51,100 76,282 153,112
Proceeds from sale of:
Securities available for sale 20,883 63,021 22,325
Loans -- -- 93,983
Commercial loan participations 1,500 43,156 9,443
Nonperforming loans 6,173 -- --
Premises and equipment 169 2 --
Real estate owned and other repossessed assets 3,999 1,932 1,820
Purchases of:
Securities available for sale (80,301) (111,667) (170,458)
Bank owned life insurance -- -- (20,000)
Net principal disbursed on loans (46,836) (120,527) (2,606)
Loans purchased (286,653) (213,802) (211,370)
Purchases of premises and equipment (5,379) (3,199) (4,025)
--------- --------- ---------
Net cash from investing activities (335,345) (264,802) (127,776)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in checking, savings and money market accounts (82,940) 17,174 17,935
Net increase (decrease) in certificates of deposit 241,883 82,219 (75,475)
Net increase in advance payments by borrowers
for taxes and insurance 2,274 1,327 4,725
Proceeds from Federal Home Loan Bank advances 122,345 50,000 25,500
Repayment of Federal Home Loan Bank advances (70,151) (19,257) (11,144)
Net change in repurchase agreements and other 15,066 114,297 114,083
Dividends paid (9,462) (8,533) (9,429)
Proceeds from exercise of stock options 674 6,420 941
Purchase of treasury stock (2,499) (47,814) (12,233)
--------- --------- ---------
Net cash from financing activities 217,190 195,833 54,903
--------- --------- ---------
Decrease in cash and cash equivalents (2,736) (40,874) (29,781)
Cash and cash equivalents, beginning of year 40,281 81,155 110,936
--------- --------- ---------
Cash and cash equivalents, end of year $ 37,545 $ 40,281 $ 81,155
--------- --------- ---------
See Notes to Consolidated Financial Statements
EX. 13-20
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 registered
with the Securities and Exchange Commission (SEC) and a member of the National
Association of Securities Dealers (NASD) and the Chicago Stock Exchange, 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. At the end of 2005,
Home Savings was doing business through 37 full-service banking branches and 6
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 the 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 21 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 value 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 ability and 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
principal 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.
EX. 13-21
Interest income includes amortization of net deferred loan fees and costs
over the loan term. Interest income on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless the loan is well
secured 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 United Community 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, United Community 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 United Community
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,
generally ranging from 20 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. 13-22
Goodwill and Core Deposit Intangible
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.
Core deposit intangible assets arose from whole bank acquisitions. They are
initially measured at fair value and then are amortized on an accelerated method
over their estimated useful lives, generally 15 to 20 years.
Cash Surrender Value of Life Insurance
Bank owned life insurance represents insurance on the lives of certain
employees where Home Savings is the beneficiary. This life insurance provides a
long-term asset to offset long-term benefit liabilities, while generating
competitive investment yields. The 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.
Commissions and Service Fees
Commissions are recognized when earned which is generally the settlement
date of the security. Service fees are assessed to customer accounts on a
regular basis. Trust fees are recognized in income on the accrual basis. Fees
are assessed to customer accounts on a regularly scheduled basis and are
generally based on the value of the assets under management.
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.
2005 2004 2003
------- ------- -------
(In thousands)
Net income as reported $23,197 $17,865 $22,940
Deduct: Stock-based compensation expense
determined under fair value method -- 1,855 2,165
------- ------- -------
Pro forma net income $23,197 $16,010 $20,775
------- ------- -------
Basic earnings per share as reported 0.81 0.61 0.73
Pro forma basic earnings per share 0.81 0.55 0.66
Diluted earnings per share as reported 0.80 0.60 0.72
Pro forma diluted earnings per share 0.80 0.54 0.65
------- ------- -------
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
EX. 13-23
2005 2004 2003
---- ----- -----
Dividend yield N/A 2.27% 3.34%
Expected stock price volatility N/A 22.73% 48.31%
Risk-free interest rate N/A 3.18% 3.98%
Expected option life (in years) N/A 7 10
Income Taxes
Deferred income taxes, which result from temporary differences in the
recognition of income and expense for financial statement and tax return
purposes, are included in the calculation of income tax expense. The effect on
deferred tax assets and liabilities of a change in income tax rates is
recognized in income in the period that includes the enactment date.
Deferred income tax assets and liabilities are recorded for differences
between 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.
Commission Revenue and Expense
Securities transactions and related commission revenue and expense are
recorded on a settlement date basis, generally the third business day following
the trade date. The effect on the financial statements of using the settlement
date basis rather than trade date basis is not material.
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 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.
EX. 13-24
Butler Wick's customer financing and securities settlement activities
require Butler Wick to pledge customer securities as collateral in support of
various secured financing sources such as bank loans and securities loaned. In
the event the counterparty is unable to meet its contractual obligation to
return customer securities pledged as collateral, Butler Wick may be exposed to
the risk of acquiring the securities at prevailing market prices in order to
satisfy its customer obligations. Butler Wick controls this risk by monitoring
the market value of securities pledged on a daily basis and by requiring
adjustments of collateral levels in the event of excess market exposure. In
addition, Butler Wick establishes credit limits for such activities and monitors
compliance on a daily basis.
As a securities broker and dealer, 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. United Community adopted the
provisions of SAB 105 as of April 1, 2004. The adoption of this standard did not
have a material impact on United Community's financial position or results of
operations.
In November 2005, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) 115-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." This FSP provides additional
guidance on when an investment in a debt or equity security should be considered
impaired and when that impairment should be considered other-than-temporary and
recognized as a loss in earnings. Specifically, the guidance clarifies that an
investor should recognize an impairment loss no later than when the impairment
is deemed other-than-temporary, even if a decision not to sell has been made.
The FSP also requires certain disclosures about unrealized losses that have not
been recognized as other-than-temporary impairments. See Note 3 for further
discussion and the impact on United Community's financial position and results
of operations.
Newly Issued But Not Yet Effective Accounting Standards: Financial
Accounting Standard (FAS) 123, Revised, requires companies to record
compensation cost for stock options provided to employees in return for
employment service. The cost is measured at the fair value of the options when
granted, and this cost is expensed over the employment service period, which is
normally the vesting period of the options. This will apply to awards granted or
modified in fiscal years beginning in 2006. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. The
effect on results of operations will depend on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided, and so cannot currently be
predicted. See Note 16 for further discussion of stock options.
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 and Butler Wick 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.
2. CASH AND CASH EQUIVALENTS
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. These reserves, which consisted of
vault cash at Home Savings, totaled approximately $11.7 million and $10.7
million at December 31, 2005 and 2004, respectively. At year end 2005 and 2004,
cash of $16,000 has been segregated in a special reserve bank account for the
benefit of customers of Butler Wick under Rule 15c3-3 of the Securities and
Exchange Commission.
EX. 13-25
3. SECURITIES
The components of securities are as follows:
December 31, 2005 December 31, 2004
---------------------------------- ----------------------------------
Gross Gross Gross Gross
Fair Unrealized Unrealized Fair Unrealized Unrealized
Available for Sale Value Gains Losses Value Gains Losses
- ------------------ -------- ---------- ---------- -------- ---------- ----------
(In thousands)
U.S. Treasury and agency securities $ 88,799 $ -- $(1,493) $ 88,317 $ 7 $(417)
Tax exempt municipal obligation 3 -- -- 7 1 --
Equity securities 2,962 661 -- 7,169 1,459 --
Mortgage-related securities 110,106 73 (2,159) 102,911 869 (364)
-------- ---- ------- -------- ------ -----
Total $201,870 $734 $(3,652) $198,404 $2,336 $(781)
======== ==== ======= ======== ====== =====
Debt securities available for sale by contractual maturity, repricing or
expected call date are shown below:
December 31, 2005
-----------------
Fair Value
----------
(In thousands)
Due in one year or less $ 23,815
Due after one year through five years 55,191
Due after five years through ten years 9,796
Mortgage-related securities 110,106
--------
Total $198,908
========
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:
2005 2004 2003
------- ------- -------
(In thousands)
Proceeds $20,883 $63,021 $22,325
Gross gains 239 1,425 847
Gross losses 44 15 8
Impairment charges -- 1,402 --
Securities pledged for public funds deposits were approximately $24.6
million and $19.0 million at December 31, 2005 and 2004, respectively. See
further discussion regarding pledged securities in Note 11.
United Community's trading securities are carried at fair value and consist
of the following:
2005 2004
------- -------
(In thousands)
Debt Securities:
Obligations of U.S. government $ 2,531 $28,587
State and municipal obligations 7,061 1,657
Corporate bonds, debentures and notes 224 60
Mutual funds 996 2,012
------- -------
Total trading securities $10,812 $32,316
======= =======
EX. 13-26
Securities available for sale in a continuous unrealized loss position are
as follows at December 31, 2005:
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 and agencies $ 35,128 $ (499) $53,671 $ (994) $ 88,799 $(1,493)
Mortgage-related 86,993 (1,383) 19,887 (776) 106,880 (2,159)
-------- ------- ------- ------- -------- -------
Total temporarily impaired securities $122,121 $(1,882) $73,558 $(1,770) $195,679 $(3,652)
======== ======= ======= ======= ======== =======
Securities available for sale in an 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 and agencies $79,091 $(417) $ -- $ -- $ 79,091 $(417)
Mortgage-related 18,311 (216) 8,016 (148) 26,327 (364)
------- ----- ------ ----- -------- -----
Total temporarily impaired securities $97,402 $(633) $8,016 $(148) $105,418 $(781)
======= ===== ====== ===== ======== =====
All of the securities that are temporarily impaired at December 31, 2005,
are impaired due to the current level of interest rates. All of these securities
are debentures and continue to pay on schedule and management expects to receive
all principal and interest owed on the securities.
Home Savings owned $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. United Community recorded
the charge because the market value of the stock had declined significantly in
the fourth quarter, following several negative announcements by Fannie Mae
involving regulatory actions, earnings restatements and management turnover.
United Community 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 United Community's investment cost beyond previous estimates. The
security was subsequently sold in 2005.
4. LOANS
Portfolio loans consist of the following:
December 31,
-----------------------
2005 2004
---------- ----------
(In thousands)
Real Estate:
One- to four-family residential $ 749,362 $ 690,413
Multi-family residential 154,702 153,011
Non-residential 314,124 289,755
Land 14,979 14,701
Construction:
One- to four-family residential 389,558 301,193
Multi-family and non-residential 66,788 47,230
---------- ----------
Total real estate 1,689,513 1,496,303
Consumer 323,515 267,646
Commercial 100,977 68,523
---------- ----------
Total loans 2,114,005 1,832,472
========== ==========
Less:
Allowance for loan losses 15,723 15,877
Deferred loan fees, net 849 619
---------- ----------
Total 16,572 16,496
---------- ----------
Loans, net $2,097,433 $1,815,976
========== ==========
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, may require payment of a fee and may expire unused.
Commitments to extend credit at fixed rates expose Home Savings to some degree
of interest rate risk. Home Savings evaluates each customer's
EX. 13-27
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,
-------------------------------------------------------
2005 2004
-------------------------- --------------------------
Fixed Rate Variable Rate Fixed Rate Variable Rate
---------- ------------- ---------- -------------
(In thousands)
Commitments to make loans $40,290 $ 56,322 $33,688 $ 46,730
Undisbursed loans in process 36,059 228,054 27,002 257,641
Unused lines of credit 29,896 112,632 11,721 122,170
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 5.49% to 18% and maturities ranging from six months to 30
years.
At December 31, 2005 and 2004, there were $19.1 million and $11.7 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.
Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Year ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(In thousands)
Balance, beginning of year $15,877 $15,111 $15,099
Provision for loan losses 3,028 9,370 3,179
Amounts charged off (4,085) (9,060) (3,340)
Recoveries 903 456 173
------- ------- -------
Balance, end of year $15,723 $15,877 $15,111
======= ======= =======
Nonaccrual loans were $24.3 million, $20.9 million and $13.0 million at
December 31, 2005, 2004 and 2003. Restructured loans were $825,000, $1.3 million
and $1.9 million at December 31, 2005, 2004 and 2003. Loans that are greater
than ninety days past due and still accruing were $563,000 at December 31, 2005,
$377,000 at December 31, 2004 and $1.3 million at December 31, 2003.
As of or for the year ended
December 31,
---------------------------
2005 2004 2003
-------- ------- ------
(In thousands)
Impaired loans on which no specific valuation allowance was provided $13,119 $ 7,898 $4,366
Impaired loans on which specific valuation allowance was provided 4,573 7,320 1,514
------- ------- ------
Total impaired loans at year-end $17,692 $15,218 $5,880
------- ------- ------
Specific valuation allowances on impaired loans at year-end 667 1,691 277
Average impaired loans during year 15,209 10,683 6,628
Interest income recognized on impaired loans during the year 386 134 145
Interest income received on impaired loans during the year 403 307 288
Interest income potential based on original contract terms of impaired loans 1,503 685 539
======= ======= ======
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, 2004 $ 2,161
New loans to officers and/or directors 1,046
Loan payments during 2005 (140)
Reductions due to changes in officers and/or directors (1,039)
-------
Balance as of December 31, 2005 $ 2,028
=======
EX. 13-28
5. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others, which are not reported in United
Community's assets, totaled $816.0 million and $667.0 million at December 31,
2005 and 2004.
Activity for capitalized mortgage servicing rights, included in other
assets, was as follows:
2005 2004 2003
------- ------- -------
(In thousands)
Balance, beginning of year $ 5,533 $ 5,557 $ 3,603
Originations 2,961 1,629 4,448
Amortized to expense (1,571) (1,653) (2,494)
------- ------- -------
Balance, end of year $ 6,923 $ 5,533 $ 5,557
======= ======= =======
Activity in the valuation allowance for mortgage servicing rights was as
follows:
2005 2004 2003
---- ---- -----
(In thousands)
Balance, beginning of year $-- $(76) $ --
Impairment charges -- -- (415)
Recoveries -- 76 339
--- ---- -----
Balance, end of year $-- $ -- $ (76)
=== ==== =====
Key economic assumptions used in measuring the value of mortgage servicing
rights at December 31, 2005 and 2004 were as follows:
2005 2004
------- -------
Weighted average prepayment rate 278 PSA 281 PSA
Weighted average life (in years) 5.11 5.41
Weighted average discount rate 8% 8%
Amounts held in custodial accounts for investors amounted to $7.4 million and
$6.1 million at December 31, 2005 and 2004, respectively.
Estimated amortization expense for each of the next five years is as follows:
2006 $1,334
2007 1,333
2008 1,327
2009 1,235
2010 872
6. 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 2005 or 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,
2006, 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,
2005, approximately $425,000 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, 2005, approximately $181,000 in loans
are covered by recourse agreements and approximately $8.9 million in loans are
covered by an indemnification agreement.
EX. 13-29
Cash flows from all securitizations of mortgage loans were as follows:
2005 2004
------ -----
(In thousands)
Securitization proceeds $ -- $ --
Servicing fees received 261 331
An analysis of the activity in securitizations serviced by Home Savings during
2005 and 2004 follows:
December 31,
-------------------
2005 2004
-------- --------
(In thousands)
Balance at beginning 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%
New securitizations during the year:
Principal balance of loans -- --
Fair value of servicing rights -- --
Servicing rights as a % of principal n/a n/a
Principal payments received on loans securitized (18,597) (41,348)
Balance at end of year:
Principal balance of loans 68,816 87,413
Amortized cost of servicing rights 448 626
Servicing rights as a % of principal 0.65% 0.72%
======== ========
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,
-------------------
2005 2004
-------- --------
Other information at end of period:
Weighted average rate of loans 6.65% 6.68%
Weighted average maturity of loans in months 262 272
Principal balance of loans 30 days or more past
due (in thousands) $ 1,289 $ 611
Fair value assumptions
Discount rate 8.00% 8.00%
Weighted average prepayment assumptions 290 PSA 295 PSA
The following table indicates how the fair value of the servicing rights might
decline if the assumptions change unfavorably in two different magnitudes:
December 31,
---------------
2005 2004
------ ------
(In thousands)
Fair value at end of year $1,042 $1,078
Weighted average life (in months) 46 58
Projected fair value based on:
Increase in PSA of 50 954 981
Increase in PSA of 100 881 901
====== ======
The effect of adverse changes is hypothetical and should not be extrapolated to
other changes, as the effects are not linear.
EX. 13-30
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
-----------------
Estimated life 2005 2004
-------------- ------- -------
(In thousands)
Land $ 7,498 $ 6,924
Buildings up to 39 years 19,536 17,215
Leasehold improvements 10 years 1,461 1,421
Furniture and equipment 3-5 years 17,891 15,964
------- -------
46,386 41,524
Less: Accumulated depreciation and amortization 22,615 20,731
------- -------
Total $23,771 $20,793
======= =======
Rent expense was $1.4 million for 2005, $1.3 million for 2004 and $1.1
million for 2003. Rent commitments under noncancelable operating leases for
offices were as follows, before considering renewal options that generally are
present:
(In thousands)
2006 $ 957
2007 798
2008 729
2009 521
2010 523
Thereafter 507
------
Total $4,035
======
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill was $33.6 million at December 31, 2005, 2004, and 2003 and relates to
acquisitions of The Industrial Savings and Loan Association in 2001 and Potter's
Bank in 2002.
Acquired Intangible Assets
As of December 31,
-------------------------------------------------
2005 2004
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(In thousands)
Amortized intangible assets:
Core deposit intangibles $8,952 $6,834 $8,952 $6,065
------ ------ ------ ------
Total $8,952 $6,834 $8,952 $6,065
====== ====== ====== ======
Estimated amortization
expense:
For the year ended:
December 31, 2006 $ 492
December 31, 2007 383
December 31, 2008 300
December 31, 2009 235
December 31, 2010 186
Aggregate amortization expense for the years ended December 31, 2005, 2004
and 2003, was $769,000, $900,000 and $1.3 million, respectively.
EX. 13-31
9. DEPOSITS
Deposits consist of the following:
December 31,
-----------------------
2005 2004
---------- ----------
(In thousands)
Checking accounts:
Interest bearing $ 114,565 $ 158,682
Non-interest bearing 96,918 84,965
Savings accounts 259,811 308,187
Money market accounts 144,433 146,833
Certificates of deposit 1,066,117 824,285
---------- ----------
Total deposits $1,681,844 $1,522,952
========== ==========
Interest expense on deposits is summarized as follows:
Year Ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(In thousands)
Interest bearing demand deposits and money market accounts $ 3,231 $ 2,386 $ 3,113
Savings accounts 1,201 1,361 2,347
Certificates of deposit 33,488 24,614 25,440
------- ------- -------
Total $37,920 $28,361 $30,900
======= ======= =======
A summary of certificates of deposit by maturity follows:
December 31, 2005
-----------------
(In thousands)
Within 12 months $ 541,614
12 months to 24 months 268,435
Over 24 months to 36 months 97,547
Over 36 months to 48 months 42,479
Over 48 months 116,042
----------
Total $1,066,117
==========
A summary of certificates of deposit with balances of $100,000 or more by
maturity is as follows:
December 31, 2005 December 31, 2004
----------------- -----------------
(In thousands)
Three months or less $ 35,900 $ 14,957
Over three months to six months 34,033 17,954
Over six months to twelve months 40,200 33,132
Over twelve months 102,550 113,339
-------- --------
Total $212,683 $179,382
======== ========
Deposits in excess of $100,000 are not federally insured. Home Savings did
not have brokered deposits for the years ended December 31, 2005 and 2004.
EX. 13-32
10. FEDERAL HOME LOAN BANK ADVANCES
The following is a summary of Federal Home Loan Bank advances:
December 31,
-------------------------------------------------
2005 2004
----------------------- -----------------------
(In thousands)
Weighted Weighted
Year of maturity Amount average rate Amount average rate
---------------- -------- ------------ -------- ------------
2006 $360,752 4.21% $342,435 3.23%
2007 66,501 3.80 30,500 5.01
2008 22,451 3.69 21,500 3.69
2009 10,913 3.56 10,000 3.56
2010 2,387 3.54 1,500 3.54
Thereafter 12,545 3.86 17,420 3.86
-------- --------
Total Federal Home Loan Bank advances $475,549 $423,355
======== ========
Home Savings has available credit, subject to collateral requirements, with the
Federal Home Loan Bank of $608.6 million, of which $475.5 million is
outstanding. Of the $475.5 million, a total of $35.0 million is callable. $25.0
million matures in February 2006 and $10.0 is callable quarterly and matures in
February 2009. All advances must be secured by eligible collateral as specified
by the Federal Home Loan Bank. Accordingly, United Community has a blanket
pledge of its one- to four-family mortgages and multi-family loans as collateral
for the advances outstanding at December 31, 2005. The required minimum ratio of
collateral to advances is 135% for one- to four-family loans and 150% for
multi-family loans.
11. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER BORROWINGS
The following is a summary of securities sold under an agreement to
repurchase and other borrowings:
December 31,
-----------------------------------------------
2005 2004
---------------------- ----------------------
(In thousands)
Weighted Weighted
Amount average rate Amount average rate
------- ------------ ------- ------------
Securities sold under agreement to
repurchase-term $45,520 3.73% $41,105 1.92%
Other borrowings 29,694 3.20 19,043 1.91
------- ---- ------- ----
Total repurchase agreements and other $75,214 3.52% $60,148 1.92%
======= ==== ======= ====
Securities sold under agreements to repurchase are secured primarily by
mortgage-backed securities with a fair value of approximately $53.7 million at
December 31, 2005 and $50.6 at December 31, 2004. Securities sold under
agreements to repurchase are typically held by the brokerage firm in a wholesale
transaction and by an independent third party when they are for retail
customers. At maturity, the securities underlying the agreements are returned to
United Community. Other borrowings consist primarily of lines of credit,
payables to customers and payables to broker/dealers. United Community has a
line of credit with a correspondent bank which has a stated maturity of
September 2008. All other borrowings have no stated maturity.
12. LOSS CONTINGENCY
United Community and its subsidiaries are not parties to any other material
litigation other than those arising in the normal course of business. While it
is impossible to determine the ultimate resolution of these contingent matters,
management believes any resulting liability would not have a material effect
upon United Community's financial statements.
EX. 13-33
13. INCOME TAXES
The provision for income taxes consists of the following components:
Year ended December 31,
--------------------------
2005 2004 2003
------- ------ -------
(In thousands)
Current $12,396 $9,914 $12,926
Deferred (486) (811) (361)
------- ------ -------
Total $11,910 $9,103 $12,565
======= ====== =======
A reconciliation from tax at the statutory rate to the income tax provision
is as follows:
Year ended December 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Dollars Rate Dollars Rate Dollars Rate
------- ---- ------- ---- ------- ----
(In thousands)
Tax at statutory rate $12,287 35.0% $9,439 35.0% $12,427 35.0%
Increase (decrease) due to:
Tax exempt income (78) (0.2) (78) (0.3) (137) (0.4)
Life insurance (288) (0.8) (308) (1.1) (170) (0.5)
State taxes (4) (0.0) (27) (0.1) (40) (0.1)
Other (7) (0.0) 77 0.3 485 1.4
------- ---- ------ ---- ------- ----
Income tax provision $11,910 34.0% $9,103 33.8% $12,565 35.4%
======= ==== ====== ==== ======= ====
Significant components of the deferred tax assets and liabilities are as
follows:
December 31,
------------------
2005 2004
------- --------
(In thousands)
Deferred tax assets:
Loan loss reserves $ 5,503 $ 5,557
Postretirement benefits 1,428 1,372
Deferred loan fees 363 333
ESOP shares released 1,308 1,257
Compensation accruals 348 697
Unrealized loss on securities available for sale 993 --
Investment valuation -- 491
Interest on non-accrual loans 883 508
Other 716 342
------- -------
Deferred tax assets 11,542 10,557
------- -------
Deferred tax liabilities:
Purchase accounting adjustments 622 1,373
Original issue discount -- 694
Federal Home Loan Bank stock dividends 5,855 5,448
Unrealized gain on securities available for sale -- 572
Mortgage servicing rights 2,423 1,937
Other 762 704
------- -------
Deferred tax liabilities 9,662 10,728
------- -------
Net deferred tax asset (liability) $ 1,880 $ (171)
======= =======
Retained earnings at December 31, 2005 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
United Community'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, 2005 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, 2005, United Community paid regular dividends
in the amount of $9.5 million. While
EX. 13-34
Home Savings' primary regulator is the FDIC, the OTS has regulations that impose
certain restrictions on payments of dividends to United Community.
Home Savings must file an application with, and obtain approval from, the
OTS (i) if the proposed distribution would cause total distributions for the
calendar year to exceed net income for that year to date plus retained net
income (as defined) for the preceding two years; (ii) if Home Savings would not
be at least adequately capitalized following the capital distribution; (iii) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between Home Savings and the OTS or
the FDIC, or any condition imposed on Home Savings in an OTS-approved
application or notice. If Home Savings is not required to file an application,
it must file a notice of the proposed capital distribution with the OTS. As of
December 31, 2005, Home Savings had $38.6 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 $122,000, $540,000 and $837,000 for the years ended
December 31, 2005, 2004 and 2003.
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, 2005
-------------------------------------------------------------
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) $218,943 10.86% $161,351 8.00% $201,688 10.00%
Tier 1 capital (to risk-weighted assets) 203,220 10.08 * * 121,013 6.00
Leverage (Tier 1) capital (to adjusted
total assets) 203,220 8.36 97,196 4.00 121,495 5.00
Tangible capital (to adjusted
total assets) 203,220 8.36 36,449 1.50 * *
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 * *
* Ratio is not required under regulations.
As of December 31, 2005 and 2004, 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
EX. 13-35
United Community 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, 2005, 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, 2005, Butler Wick had net capital of $8.5
million, which was 48% of aggregate debit balances and $8.1 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, 2005 and
2004. Information about changes in obligations of the benefit plan follows:
Year ended December 31,
-----------------------
2005 2004
------- -------
(In thousands)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,742 $ 3,932
Service cost 1 9
Interest cost 215 245
Actuarial (gain)/loss 471 (140)
Benefits paid (271) (304)
------- -------
Benefit obligation at end of the year $ 4,158 $ 3,742
------- -------
Funded status of the plan $(4,158) $(3,742)
Unrecognized net (gain)/loss from past experience different
from that assumed and effects of changes in assumptions 297 (173)
Prior service cost not yet recognized in net
periodic benefit cost (5) (6)
------- -------
Accrued benefit cost $(3,866) $(3,921)
------- -------
Components of net periodic benefit cost/(gain) are as follows:
Year Ended December 31,
-----------------------
2005 2004 2003
---- ----- -----
(In thousands)
Service cost $ 1 $ 9 $ 6
Interest cost 215 245 226
Expected return on plan assets -- -- --
Net amortization of prior service cost -- (1) (1)
Recognized net actuarial gain -- -- (15)
----- ----- -----
Net periodic benefit cost/(gain) $ 216 $ 253 $ 216
----- ----- -----
Assumptions used in the valuations were as follows:
Weighted average discount rate 5.50% 5.75% 6.00%
----- ----- -----
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 2005
valuation was 11% and was assumed to decrease to 5.5% for the year 2012 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, 2005:
EX. 13-36
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(In thousands)
Effect on total of service and interest cost components $ 21 $ (18)
Effect on the postretirement benefit obligation 394 (345)
United Community anticipates contributions to the plan to fund benefits paid
will aggregate $3.1 million over the next ten years as follows:
2006 $ 271,000
2007 278,000
2008 291,000
2009 301,000
2010 314,000
2011-2015 1,677,000
----------
Total $3,132,000
==========
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 2005, 2004 and 2003, 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 2005, 2004 and 2003, the expense related to this
plan was approximately $477,000, $458,000 and $433,000, 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 2005, 2004 and 2003, 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 2005, 2004 and 2003, the expense related to this
plan was approximately $168,000, $157,000 and $133,000, 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 $3.3 million, $3.5 million and $2.8
million in compensation expense for the years ended December 31, 2005, 2004 and
2003, respectively, related to the ESOP. Unallocated shares are considered
neither outstanding shares for computation of basic earnings per share nor
potentially dilutive securities for computation of diluted earnings per share.
Dividends on unallocated ESOP shares are reflected as a reduction in the loan
(and Home Savings' contribution is reduced accordingly). Shares released or
committed to be released for allocation during the years ended December 31,
2005, 2004 and 2003 totaled 294,802; 294,802 and 294,802 and had a combined fair
market value of $10.5 million. Shares remaining not released or committed to be
released for allocation at December 31, 2005 totaled 2,121,358 and had a market
value of approximately $25.1 million.
Recognition and Retention Plan
On July 12, 1999, shareholders approved 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
EX. 13-37
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, 2005 and 2004, 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 2005 and 2004 as all
shares granted had previously vested. Compensation expense recognized in 2003
related to the RRP was $1.2 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 $145,000, $582,000 and $1.6 million for 2005, 2004 and
2003.
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. United Community accrued the deferred compensation
obligation prorata over the vesting period through a charge to compensation
expense. Plan assets are included in trading securities in United Community'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. On August 12, 2005, approximately 55% of the remaining plan assets were
distributed to remaining participants in the plan. Until the final distribution
is made, United Community 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 $992,000 and $2.0 million at
December 31, 2005 and 2004, 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 prior to 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:
As of December 31,
------------------------------------------------------------------
2005 2004 2003
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year 2,309,748 $9.49 2,468,622 $ 7.60 1,909,615 $7.01
Granted -- -- 754,403 12.73 742,654 8.97
Exercised (92,532) 7.28 (913,277) 7.03 (171,873) 7.08
Forfeited -- -- -- -- (11,774) 7.86
--------- ----- --------- ------ --------- -----
Outstanding at end of year 2,217,216 9.59 2,309,748 9.49 2,468,622 7.60
--------- ----- --------- ------ --------- -----
Options exercisable at year end 2,217,216 $9.59 2,309,748 $ 9.49 2,468,622 $7.60
--------- ----- --------- ------ --------- -----
Weighted-average fair value of
options granted during year N/A $ 3.13 $3.65
------ -----
Outstanding stock options have a weighted average remaining life of 6.99
years and may be exercised in the range of $6.66 to $12.73.
Employee Stock Purchase Plan
During 2005, United Community established an employee stock purchase plan
(ESPP). Under this plan, United Community provides employees of Home Savings and
Butler Wick the opportunity to purchase United Community Financial Corporation's
common shares through payroll deduction. Participation in the plan is voluntary
and payroll deductions are made on an after-tax basis. The maximum amount an
employee can have deducted is nine hundred dollars per biweekly pay. Shares are
purchased on the open market and
EX. 13-38
administrative fees are paid by United Community. Expense related to this plan
is a component of the Shareholder Dividend Reinvestment Plan and the expense
recognized is considered immaterial.
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.
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, 2005 and 2004,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
EX. 13-39
December 31, 2005 December 31, 2004
------------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ---------- ----------
(In thousands)
ASSETS:
Cash and cash equivalents $ 37,545 $ 37,545 $ 40,281 $ 40,281
Securities:
Trading 10,812 10,812 32,316 32,316
Available for sale 201,870 201,870 198,404 198,404
Loans held for sale 29,109 29,403 59,099 59,383
Loans, net 2,097,433 2,100,474 1,815,976 1,838,983
Margin accounts 15,705 15,705 14,851 14,851
Federal Home Loan Bank stock 24,006 24,006 22,842 22,842
Accrued interest receivable 12,053 12,053 9,445 9,445
LIABILITIES:
Deposits:
Checking, savings and money market accounts (615,726) (615,726) (698,667) (698,667)
Certificates of deposit (1,066,117) (1,061,686) (824,285) (834,086)
Federal Home Loan Bank advances (475,549) (472,012) (423,355) (425,135)
Repurchase agreements and other (75,214) (75,263) (60,148) (60,265)
Advance payments by borrowers for taxes
and insurance (14,322) (14,322) (12,048) (12,048)
Accrued interest payable (2,622) (2,622) (1,089) (1,089)
18. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings, net of amounts capitalized $55,764 $40,259 $40,408
Interest capitalized on borrowings 42 19 21
Income taxes 9,615 12,938 14,570
Supplemental schedule of noncash activities:
Loans transferred to held for sale 74,144 39,479 11,341
Loans transferred from held for sale 37,075 -- --
Transfers from loans to real estate owned 4,935 2,356 2,224
EX. 13-40
19. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------
2005 2004
-------- --------
(In thousands)
ASSETS
Cash and deposits with banks $ 479 $ 819
Federal funds sold and other 21 14
-------- --------
Total cash and cash equivalents 500 833
Securities:
Trading 992 1,990
Available for sale 2,962 3,570
Note receivable inter-company 16,847 18,523
Investment in subsidiary-Home Savings 236,621 216,840
Investment in subsidiary-Butler Wick 15,174 16,764
Other assets 158 1,286
-------- --------
TOTAL ASSETS $273,254 $259,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other $ 6,600 $ 3,500
Accrued interest payable 51 3
Accrued expenses and other liabilities 1,868 3,951
-------- --------
Total liabilities 8,519 7,454
-------- --------
TOTAL SHAREHOLDERS' EQUITY 264,735 252,352
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $273,254 $259,806
======== ========
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
(In thousands)
INCOME
Cash dividends from subsidiary $ 7,000 $ -- $22,000
Interest income 1,530 1,680 1,871
Non-interest income 166 1,086 873
------- ------- -------
Total income 8,696 2,766 24,744
EXPENSES
Interest expense 406 14 --
Non-interest expenses 1,395 1,339 984
------- ------- -------
Total expenses 1,801 1,353 984
------- ------- -------
Income before income taxes 6,895 1,413 23,760
Income tax (benefit) expense (49) 558 692
------- ------- -------
Income before equity in undistributed net earnings of subsidiaries 6,944 855 23,068
Equity in undistributed net earnings of subsidiaries 16,253 17,010 (128)
------- ------- -------
Net income $23,197 $17,865 $22,940
======= ======= =======
EX. 13-41
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 23,197 $ 17,865 $ 22,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of the subsidiaries (16,253) (17,010) 128
Security gains (62) (948) --
Decrease (increase) in trading securities 998 2,081 (916)
Decrease (increase) in interest receivable -- 1 10
Decrease (increase) in other assets 1,128 (751) (519)
Increase in accrued interest payable 47 3 --
Decrease in other liabilities (1,948) (1,228) (1,764)
-------- -------- --------
Net cash from operating activities 7,107 13 19,879
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Securities available for sale 99 2,322 --
Purchases of:
Securities available for sale (227) (105) (527)
ESOP loan repayment 875 735 534
-------- -------- --------
Net cash from investing activities 747 2,952 7
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (9,462) (8,533) (9,429)
Net increase in borrowed funds 3,100 3,500 --
Purchase of treasury stock (2,499) (47,814) (12,233)
Exercise of stock options 674 6,420 941
-------- -------- --------
Net cash from financing activities (8,187) (46,427) (20,721)
-------- -------- --------
Decrease in cash and cash equivalents (333) (43,462) (835)
Cash and cash equivalents, beginning of year 833 44,295 45,130
-------- -------- --------
Cash and cash equivalents, end of year $ 500 $ 833 $ 44,295
======== ======== ========
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, 2005, 2004 and
2003 are as follows:
EX. 13-42
Banking Investment
Services Services Eliminations Total
---------- ---------- ------------ ----------
(In thousands)
2005
RESULTS OF OPERATIONS
Total interest income $ 133,794 $ 2,258 -- $ 136,052
Total interest expense 56,357 939 -- 57,296
Provision for loan losses 3,028 -- -- 3,028
Net interest income after
provision for loan losses 74,409 1,319 -- 75,728
Non-interest income 12,184 26,076 -- 38,260
Non-interest expense 53,413 25,468 -- 78,881
---------- ------- ---- ----------
Income before income taxes 33,180 1,927 -- 35,107
Income taxes 11,234 676 -- 11,910
---------- ------- ---- ----------
Net income $ 21,946 $ 1,251 -- $ 23,197
========== ======= ==== ==========
SELECTED FINANCIAL INFORMATION
Total assets $2,488,771 $40,122 $(43) $2,528,850
Capital expenditures 5,029 320 -- 5,379
Depreciation and amortization 2,026 321 -- 2,347
---------- ------- ---- ----------
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 (loss) before income taxes 35,818 (313) -- 35,505
Income taxes 12,675 (110) -- 12,565
---------- ------- ---- ----------
Net income (loss) $ 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
EX. 13-43
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. Stock options for 754,403
shares were anti-dilutive for the years ended December 31, 2005 and 2004. No
stock options were anti-dilutive for the year ended December 31, 2003.
2005 2004 2003
------- ------- -------
(In thousands, except per share data)
BASIC EARNINGS PER SHARE:
Net income applicable to common stock $23,197 $17,865 $22,940
Weighted average common shares
outstanding 28,809 29,185 31,353
------- ------- -------
Basic earnings per share $ 0.81 $ 0.61 $ 0.73
------- ------- -------
DILUTED EARNINGS PER SHARE:
Net income applicable to common stock $23,197 $17,865 $22,940
Weighted average common shares
outstanding 28,809 29,185 31,353
Dilutive effect of stock options 330 420 431
------- ------- -------
Weighted average common shares
outstanding for dilutive computation 29,139 29,605 31,784
------- ------- -------
Diluted earnings per share $ 0.80 $ 0.60 $ 0.72
------- ------- -------
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)
2005:
Total interest income $30,763 $32,853 $35,106 $37,330 $136,052
Total interest expense 12,011 13,518 15,044 16,723 57,296
------- ------- ------- ------- --------
Net interest income 18,752 19,335 20,062 20,607 78,756
Provision for loan losses 633 418 702 1,275 3,028
Non-interest income 8,868 10,297 9,772 9,323 38,260
Non-interest expense 19,657 19,399 19,437 20,388 78,881
Income taxes 2,449 3,317 3,304 2,840 11,910
------- ------- ------- ------- --------
Net income $ 4,881 $ 6,498 $ 6,391 $ 5,427 $ 23,197
------- ------- ------- ------- --------
Earnings per share:
Basic $ 0.17 $ 0.23 $ 0.22 $ 0.19 $ 0.81
Diluted 0.17 0.22 0.22 0.19 0.80
Non-interest expense increased between the third and fourth quarters
largely due to an increase in employee compensation and benefits. The increase
is attributable to increased performance incentives as a result of record
earnings, greater commission expenses, rising healthcare costs and increased
personnel. Other expenses also increased consisting, in part, of legal and audit
fees.
EX. 13-44
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 United Community'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 4, "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. 13-45