10-Q 1 e10-q.txt UNITED COMMUNITY FINANCIAL CORP. 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-24399 UNITED COMMUNITY FINANCIAL CORP. (Exact name of registrant as specified in its charter) Ohio 34-1856319 ----------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 275 Federal Plaza West Youngstown, Ohio 44503-1203 --------------- ------------ (Address of principal executive offices) (Zip Code) (330) 742-0500 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if change since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 37,756,582 common shares as of July 31, 2000 2 TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition as of June 30, 2000 and December 31,1999......................... 1 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2000 and 1999 ............... 2 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 .............................. 3 Notes to Consolidated Financial Statements ................ 4-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7-13 Item 3. Quantitative and Qualitative Disclosure about Market Risk.. 13 PART II. OTHER INFORMATION............................................... 14 Signatures............................................................... 15 EXHIBITS................................................................. 16-17 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
UNITED COMMUNITY FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited) June 30, December 31, 2000 1999 ----------- ----------- (In thousands) ASSETS: Cash and deposits with banks $ 23,654 $ 30,759 Federal funds sold and other 622 80,686 ----------- ----------- Total cash and cash equivalents 24,276 111,445 ----------- ----------- Investment securities: Trading (amortized cost of $5,161 and $7,647, respectively) 5,161 7,657 Available for sale (amortized cost of $145,501 and $163,515, respectively) 144,102 161,904 Held to maturity (fair value of $884 and $1,098, respectively) 875 1,091 Mortgage-backed securities: Available for sale (amortized cost of $106,330 and $116,569, respectively) 102,863 113,559 Held to maturity (fair value of $121,959 and $135,993, respectively) 125,115 138,079 Loans, net (including allowance for loan losses of $6,324 and $6,405, respectively) 781,432 723,087 Margin accounts 42,462 32,751 Federal Home Loan Bank stock 13,287 12,825 Premises and equipment 9,995 9,252 Accrued interest receivable 8,656 8,347 Real estate owned 302 158 Other assets 11,043 7,418 ----------- ----------- TOTAL ASSETS $ 1,269,569 $ 1,327,573 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits $ 830,019 $ 834,087 Other borrowed funds 151,410 213,578 Advance payments by borrowers for taxes and insurance 3,960 4,038 Accrued interest payable 1,997 4,168 Accrued expenses and other liabilities 22,625 14,834 ----------- ----------- TOTAL LIABILITIES $ 1,010,011 $ 1,070,705 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock-no par value; 1,000,000 shares authorized and unissued at June 30, 2000 -- -- Common stock-no par value; 499,000,000 shares authorized; 37,756,582 shares issued and outstanding at June 30, 2000 136,616 136,509 Retained earnings 154,546 153,553 Other comprehensive income (3,163) (3,003) Unearned stock compensation (28,441) (30,191) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 259,558 256,868 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,269,569 $ 1,327,573 =========== ===========
See Notes to Consolidated Financial Statements. 1 4 UNITED COMMUNITY FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 30, ----------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (In thousands) (In thousands) INTEREST INCOME Loans $ 15,050 $ 13,503 $ 29,364 $ 26,757 Mortgage-backed securities: Available for sale 1,727 1,699 3,540 3,151 Held to maturity 2,236 2,814 4,589 5,863 Investment securities: Trading 30 22 71 49 Available for sale 2,104 2,231 4,335 3,907 Held to maturity 17 8 34 97 Margin accounts 926 524 1,671 918 FHLB stock dividend 239 212 463 419 Other interest-earning assets 91 1,377 232 3,275 ------------ ------------ ------------ ------------ Total interest income 22,420 22,390 44,299 44,436 INTEREST EXPENSE Interest expense on deposits 8,268 7,488 16,429 14,996 Interest expense on other borrowed funds 2,103 276 4,025 470 ------------ ------------ ------------ ------------ Total interest expense 10,371 7,764 20,454 15,466 ------------ ------------ ------------ ------------ NET INTEREST INCOME 12,049 14,626 23,845 28,970 PROVISION FOR LOAN LOSS ALLOWANCES -- 25 -- 100 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS ALLOWANCES 12,049 14,601 23,845 28,870 ------------ ------------ ------------ ------------ NONINTEREST INCOME Commissions 4,238 4,224 9,622 8,328 Service fees and other charges 1,385 1,234 2,640 2,310 Underwriting and investment banking 192 92 214 494 Net gains (losses): Mortgage-backed securities -- (7) -- 40 Investment securities (14) -- (4) -- Trading securities (144) 40 227 (18) Other (4) (10) (3) (9) Other income 204 188 416 365 ------------ ------------ ------------ ------------ Total noninterest income 5,857 5,761 13,112 11,510 ------------ ------------ ------------ ------------ NONINTEREST EXPENSES Salaries and employee benefits 8,470 7,864 18,098 15,693 Occupancy 532 515 988 973 Equipment and data processing 1,446 1,308 2,746 2,557 Deposit insurance premiums 43 114 84 230 Franchise tax 932 474 1,865 936 Advertising 316 394 817 738 Other expenses 1,488 1,374 3,070 3,007 ------------ ------------ ------------ ------------ Total noninterest expenses 13,227 12,043 27,668 24,134 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 4,679 8,319 9,289 16,246 INCOME TAXES 1,709 3,017 3,217 5,818 ------------ ------------ ------------ ------------ NET INCOME $ 2,970 $ 5,302 $ 6,072 $ 10,428 ============ ============ ============ ============ EARNINGS PER SHARE: Basic and diluted $ 0.09 $ 0.16 $ 0.18 $ 0.31 Average common shares outstanding 32,903,672 33,898,237 32,913,530 33,877,622 Average common and common equivalent shares outstanding 33,442,391 33,898,237 33,438,734 33,877,622
See Notes to Consolidated Financial Statements. 2 5
UNITED COMMUNITY FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ---------------------------- 2000 1999 --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,072 $ 10,427 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan loss allowances -- 100 Net losses (gains) 7 (31) Accretion of discounts and amortization of premiums (186) (309) Depreciation 713 676 ESOP compensation 1,019 1,069 Amortization of restricted stock compensation 839 -- FHLB stock dividends (462) (418) Decrease in trading securities 2,496 961 Increase in margin accounts (9,711) (11,933) Increase in interest receivable (310) (1,525) Increase in prepaid and other assets (3,626) (2,883) Decrease in accounts receivable -- 63 (Decrease) increase in interest payable (2,171) 132 Increase in other liabilities 7,877 5,455 --------- --------- Net cash provided by operating activities 2,557 1,784 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity 13,015 28,018 Mortgage-backed securities available for sale 10,198 16,178 Investment securities held to maturity 693 5,000 Investment securities available for sale 24,066 5,000 Proceeds from sale of: Investment securities available for sale 8,502 -- Mortgage-backed securities available for sale -- 4,951 Purchases of: Investment securities available for sale (14,729) (102,505) Investment securities held to maturity (476) -- Mortgage-backed securities available for sale -- (50,532) Net principal disbursed on loans (53,572) (29,614) Loans purchased (4,603) -- Purchases of premises and equipment (1,456) (690) Other 30 81 --------- --------- Net cash used in investing activities (18,332) (124,113) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in NOW, savings and money market accounts (3,481) 15,899 Net decrease in certificates of deposit (587) (11,555) Net decrease in advance payments by borrowers for taxes and insurance (78) (198) Net (decrease) increase in borrowed funds (62,168) 15,523 Dividends paid (5,080) (4,819) --------- --------- Net cash (used in) provided by financing activities (71,394) 14,850 --------- --------- Decrease in cash and cash equivalents (87,169) (107,479) Cash and cash equivalents, beginning of period 111,445 171,874 --------- --------- Cash and cash equivalents, end of period $ 24,276 $ 64,395 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest on deposits and borrowings $ 22,696 $ 15,331 Income taxes 885 5,017 Supplemental schedule of noncash activities: Transfers from loans to real estate owned 178 156
See Notes to Consolidated Financial Statements. 3 6 UNITED COMMUNITY FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings & Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. Home Savings has 14 offices located throughout Mahoning, Columbiana and Trumbull Counties in northeastern Ohio. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for three wholly owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Through these subsidiaries, Butler Wick's business includes investment brokerage services, which it has conducted for over 70 years, and a network of integrated financial services, including asset management, trust and estate services, public finance and insurance. Butler Wick and its subsidiaries have ten offices throughout northeastern Ohio and western Pennsylvania. See Note 2 for a more detailed description of the acquisition of Butler Wick. The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for fair statement of results for the interim periods. Financial data for all prior periods have been restated to reflect the third quarter 1999 acquisition of Butler Wick, which was accounted for as a pooling of interests. The results of operations for the six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1999, contained in United Community's Form 10-K for the year ended December 31, 1999. 2. ACQUISITION OF BUTLER WICK CORP. On August 12, 1999, United Community acquired Butler Wick, which became a wholly owned subsidiary of United Community. In connection with the acquisition, United Community issued approximately 1.7 million common shares in exchange for all of Butler Wick's outstanding shares. The acquisition was accounted for by the pooling of interests method. Accordingly, the assets, liabilities and shareholders' equity of Butler Wick were recorded on the books of United Community at their values as reported on the books of Butler Wick immediately prior to the consummation of the acquisition by United Community. This presentation required the restatement of prior periods as if the companies had been combined for all periods presented. 4 7 3. COMPREHENSIVE INCOME United Community's comprehensive income for the three and six months ended June 30, 2000 and 1999 are as follows:
Three Months Ended June 30, ---------------------------- 2000 1999 ------ ------- (In thousands) Net income $2,970 $ 5,302 Unrealized holding gains (losses) arising during the period, net of tax effect of $169 and ($808), respectively 306 (1,474) Reclassification adjustment for losses included in net income, net of tax effect of $5 and ($14), respectively 9 (26) ------ ------- Comprehensive income $3,285 $ 3,802 ====== ======= Six Months Ended June 30, -------------------------- 2000 1999 ------ ------- (In thousands) Net income $ 6,072 $ 10,427 Unrealized holding losses arising during the period, net of tax effect of ($86) and ($1,047), respectively (162) (1,918) Reclassification adjustment for losses included in net income, net of tax effect of $1 and ($14), respectively 2 (26) ------- -------- Comprehensive income $ 5,912 $ 8,483 ======= ========
4. SEGMENT INFORMATION Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires financial disclosure and descriptive information about reportable operating segments, based on how chief decision-makers manage the business. United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and corporate banking services. Investment advisory services provide an investment brokerage and a network of integrated financial services. Condensed statements of income and selected financial information by operating segment for the three and six months ended June 30, 2000 and 1999 are as follows: THREE MONTHS ENDED JUNE 30, 2000
Investment Advisory Retail Banking Services Eliminations Total -------------------------------------------------------------------------------------------------------- (In thousands) Interest income $21,936 $ 983 $ 499 $22,420 Interest expense 10,315 555 499 10,371 ------- ------- ------- ------- Net interest income after provision for loan loss 11,621 428 -- 12,049 Non-interest income 374 5,483 -- 5,857 Non-interest expense 7,815 5,412 -- 13,227 ------- ------- ------- ------- Income before tax 4,180 499 -- 4,679 Income tax 1,529 180 -- 1,709 ------- ------- ------- ------- Net income $ 2,651 $ 319 $ -- $ 2,970 ======= ======= ======= =======
5 8
THREE MONTHS ENDED JUNE 30, 1999 Investment Advisory Retail Banking Services Eliminations Total --------------------------------------------------------------------------------------------------------- (In thousands) Interest income $22,362 $ 574 $ 546 $22,390 Interest expense 8,037 273 546 7,764 Provision for loan loss 25 -- -- 25 ------- ------- ------- ------- Net interest income after provision for loan loss 14,300 301 -- 14,601 Non-interest income 504 5,257 -- 5,761 Non-interest expense 7,113 4,930 -- 12,043 ------- ------- ------- ------- Income before tax 7,691 628 -- 8,319 Income tax 2,800 217 -- 3,017 ------- ------- ------- ------- Net income $ 4,891 $ 411 $ -- $ 5,302 ======= ======= ======= ======= SIX MONTHS ENDED JUNE 30, 2000 Investment Advisory Retail Banking Services Eliminations Total -------------------------------------------------------------------------------------------------------- (In thousands) Interest income $43,507 $ 1,791 $ 999 $44,299 Interest expense 20,457 996 999 20,454 ------- ------- ------- ------- Net interest income after provision for loan loss 23,050 795 -- 23,845 Non-interest income 1,210 11,902 -- 13,112 Non-interest expense 15,802 11,866 -- 27,668 ------- ------- ------- ------- Income before tax 8,458 831 -- 9,289 Income tax 2,918 299 -- 3,217 ------- ------- ------- ------- Net income $ 5,540 $ 532 $ -- $ 6,072 ======= ======= ======= ======= SIX MONTHS ENDED JUNE 30, 1999 Investment Advisory Retail Banking Services Eliminations Total --------------------------------------------------------------------------------------------------------- (In thousands) Interest income $44,508 $ 1,021 $ 1,093 $44,436 Interest expense 16,091 468 1,093 15,466 Provision for loan loss 100 -- -- 100 ------- ------- ------- ------- Net interest income after provision for loan loss 28,317 553 -- 28,870 Non-interest income 894 10,616 -- 11,510 Non-interest expense 14,227 9,907 -- 24,134 ------- ------- ------- ------- Income before tax 14,984 1,262 -- 16,246 Income tax 5,382 436 -- 5,818 ------- ------- ------- ------- Net income $ 9,602 $ 826 $ -- $10,428 ======= ======= ======= =======
6 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNITED COMMUNITY FINANCIAL CORP. At or For the Three At or For the Six Months Ended Months Ended June 30, June 30, ----------------------- ---------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA: (1) 2000 1999 2000 1999 ----------- --------- -------- ---------- Performance ratios: Return on average assets (2) 0.96% 1.62% 0.98% 1.60% Return on average equity (3) 4.59% 4.43% 4.70% 4.37% Interest rate spread (4) 3.07% 3.14% 3.05% 3.11% Net interest margin (5) 4.02% 4.61% 3.98% 4.58% Noninterest expense to average assets 4.26% 3.69% 4.47% 3.71% Efficiency ratio (6) 73.87% 59.07% 74.87% 59.62% Average interest-earning assets to average interest- bearing liabilities 127.41% 159.83% 127.31% 160.12% Capital ratios: Average equity to average assets 20.88% 36.64% 20.86% 36.69% Equity to assets, end of period 20.44% 36.44% 20.44% 36.44% Tangible capital 13.53% 27.00% 13.53% 27.00% Core capital 13.53% 27.00% 13.53% 27.00% Risk-based capital 23.86% 50.42% 23.86% 50.42% Asset quality ratio: Nonperforming loans to total loans at end of period (7) 0.51% 0.80% 0.51% 0.80% Nonperforming assets to average assets (8) 0.34% 0.43% 0.34% 0.44% Nonperforming assets to total assets at end of period (8) 0.34% 0.43% 0.34% 0.43% Allowance for loan losses as a percent of loans 0.80% 0.93% 0.80% 0.93% Allowance for loan losses as a percent of nonperforming loans (7) 159.25% 116.84% 159.25% 116.84% Number of full service offices 14 14 14 14 Number of full service brokerage offices 10 10 10 10 Per share data: Basic earnings per share (9) $ 0.09 $ 0.16 $ 0.18 $ 0.31 Diluted earnings per share (9) 0.09 0.16 0.18 0.31 Book value (10) 7.63 14.11 7.63 14.11 _________________________________________________________ (1) Ratios for the three and six month periods are annualized where appropriate. (2) Net income divided by average total assets. (3) Net income divided by average total equity. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (5) Net interest income as a percentage of average interest-earning assets. (6) Noninterest expense divided by the sum of net interest income and noninterest income. (7) Nonperforming loans consist of nonaccrual loans and restructured loans. (8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. (9) Net income divided by average number of shares outstanding, adjusted for the dilutive effect of restrictive stock, as necessary. (10) Equity divided by number of shares outstanding less unallocated ESOP shares.
7 10 COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND DECEMBER 31, 1999 Total assets were $1.3 billion at June 30, 2000, a $58.0 million, or 4.4%, decrease compared to December 31, 1999. The primary reasons for the decrease in total assets were a decrease in cash and cash equivalents of $87.2 million and a decrease in securities of $44.2 million. These decreases were partially offset by increases of $58.3 million in net loans, $9.7 million in margin accounts and a $3.6 million increase in other assets primarily due to a $1.9 million increase in prepaid Ohio franchise taxes, a $642,000 increase in deferred tax assets and a $584,000 increase in receivables. Net loans increased $58.3 million, or 8.1%, to $781.4 million at June 30, 2000, compared to $723.1 million at December 31, 1999. The most significant increase was in commercial loans, which increased $33.9 million, or 38.3%. Mortgage loans increased $17.9 million, or 3.02%, and consumer loans increased $6.5 million, or 15.4%. In accordance with strategic goals, Home Savings hired several individuals to manage and develop existing and new loan products to continue loan growth. In July 2000, Home Savings has also announced plans to open loan origination offices in the Cleveland, Akron, Canton and Stow markets to expand its geographic market. Home Savings is aware that there can be risks associated with this type of expansion. Funds that are available for general corporate purposes, such as loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds, investment securities and mortgage-related securities. Overnight funds decreased $80.1 million, or 99.2%, to $622,000 at June 30, 2000 from $80.7 million at December 31, 1999. Securities available for sale, which include both investment and mortgage-related securities, decreased $28.5 million, or 10.3%, since December 31, 1999. Securities held to maturity, which also consist of both investment securities and mortgage-related securities, decreased $13.2 million, or 9.5%, since December 31, 1999. The net decrease in overnight funds and securities, along with a $7.1 million decrease in cash and deposits with banks, were primarily used to reduce other borrowed funds by $62.2 million, reduce deposits $4.1 million, fund an increase in net loans of $58.3 million and fund an increase in margin accounts of $9.7 million. Trading securities, which consist of investment securities, decreased $2.5 million, or 32.6%, to $5.2 million at June 30, 2000. Securities available for sale, in conjunction with overnight funds, enable United Community to utilize excess funds while providing a great deal of liquidity and flexibility as United Community pursues other investment opportunities. Nonaccrual and restructured loans have been relatively stable since December 31, 1999. At June 30, 2000, total nonaccrual and restructured loans accounted for 0.51% of net loans receivable, compared to 0.54% at December 31, 1999. Total nonperforming assets were 0.34% of total assets as of June 30, 2000 compared to 0.30% as of December 31, 1999. Total deposits decreased $4.1 million from $834.1 million at December 31, 1999 to $830.0 million at June 30, 2000. The decrease was due to a decrease in savings accounts of $7.2 million and certificates of deposits of $671,000, which were partially offset by an increase in checking accounts of $3.6 million. Other borrowed funds decreased $62.2 million to $151.4 million at June 30, 2000 compared to $213.6 million at December 31, 1999. This decrease was funded by decreases in cash and cash equivalents and investments. As of June 30, 2000, $110.5 million of the other borrowed funds consisted of short term Federal Home Loan Bank advances. The remaining funds consist of a revolving line of credit and other short-term borrowings. Accrued expenses and other liabilities increased $7.8 million to $22.6 million at June 30, 2000 compared to $14.8 million at December 31, 1999. This increase is primarily due to an increase of $3.1 million in accrued federal income taxes, an increase in outstanding office checks of $2.6 million and an increase in deferred compensation related to the Butler Wick retention plan of $625,000. Shareholders' equity increased $2.7 million, or 1.0%, to $259.6 million at June 30, 2000 from $256.9 million at December 31, 1999. The increase was primarily due to earnings for the six months, which were partially offset by quarterly dividends of $0.075 per share paid in March and June of 2000. Book value per share was $7.63 as of June 30, 2000. 8 11 COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 NET INCOME. Net income for the three months ended June 30, 2000 was $3.0 million, or $0.09 per diluted share. Net income for the comparable period in 1999 was $5.3 million, or $0.16 per diluted share. The primary reason for the decrease in net income of $2.3 million for the three months ended June 30, 2000, compared to the same period in 1999, was a decrease of $2.6 million in net interest income and an increase in noninterest expense of $1.2 million. United Community's annualized return on average assets and return on average equity were 0.96% and 4.59%, respectively, for the three months ended June 30, 2000. The annualized return on average assets and return on average equity for the comparable period in 1999 were 1.62% and 4.43%, respectively. NET INTEREST INCOME. Net interest income declined $2.6 million for the three months ended June 30, 2000, compared to the second quarter of 1999, primarily due to an increase in interest expense of $2.6 million. The increase in interest expense was due to two factors. First, interest on other borrowed funds increased $1.8 million due to an increase in borrowed funds in connection with the $6.00 per share special capital distribution paid in October 1999. The second factor was an increase in expense on deposits of $780,000, which was due to an increase in average deposits and interest rates for the three months ended June 30, 2000 compared to the same period in 1999. PROVISION FOR LOAN LOSSES. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for estimated losses based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. No provision for loan loss allowance was recorded for the second quarter of 2000, compared to a provision of $25,000 for the second quarter of 1999. Home Savings' allowance for loan losses totaled $6.3 million at June 30, 2000, which was 0.80% of total loans. NONINTEREST INCOME. Noninterest income increased $96,000, or 1.7%, from $5.8 million for the three months ended June 30, 1999, to $5.9 million for the three months ended June 30, 2000. The primary reason for the increase was a $151,000 increase in service fees and other charges and a $100,000 increase in underwriting and investment banking. These increases were partially offset by a $184,000 loss on trading securities. NONINTEREST EXPENSE. Total noninterest expense increased $1.2 million, or 9.8%, to $13.2 million for the three months ended June 30, 2000, from $12.0 million for the three months ended June 30, 1999. The increase was primarily due to an increase in salaries and employee benefits of $606,000 and an increase in franchise tax expense of $458,000. The increase in salaries and employee benefits for the second quarter of 2000 was primarily due to recognition of expenses related to the United Community Recognition and Retention Plan and the Butler Wick Retention Plan and expenses related to new hires and merit increases between the periods. Home Savings' franchise tax is based on its level of equity at year-end. Franchise tax expense has increased due to Home Savings having higher equity for its 2000 tax return compared to its 1999 tax return. FEDERAL INCOME TAXES. The provision for federal income taxes decreased $1.3 million, or 43.4%, for the three months ended June 30, 2000, compared to the three months ended June 30, 1999, primarily due to the lower pre-tax income for the second quarter of 2000 compared to the second quarter of 1999. The effective tax rates were 36.5% and 36.3% for the three months ended June 30, 2000 and 1999, respectively. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 NET INCOME. Net income for the six months ended June 30, 2000 was $6.1 million, or $0.18 per diluted share. Net income for the comparable period in 1999 was $10.4 million, or $0.31 per diluted share. The primary reason for the decrease in net income of $4.3 million for the six months ended June 30, 2000, compared to the same period in 1999, was a decrease of $5.1 million in net interest income and an increase in noninterest expense of $3.5 million. These increases were partially offset by a $1.6 million increase in noninterest income. United Community's annualized return on average assets and return on average equity were 0.98% and 4.70%, 9 12 respectively, for the six months ended June 30, 2000. The annualized return on average assets and return on average equity for the comparable period in 1999 were 1.60% and 4.37%, respectively. NET INTEREST INCOME. Net interest income declined $5.1 million for the six months ended June 30, 2000, compared to the same period of 1999, primarily due to an increase in interest expense of $5.0 million. The increase in interest expense was due to two factors. First, interest on other borrowed funds increased $3.6 million due to an increase in borrowed funds in connection with the $6.00 per share special capital distribution paid in October 1999. The second factor was an increase in expense on deposits of $1.4 million, which was due to an increase in average deposits of $39.8 million and an increase in interest rates from June 30, 1999 to June 30, 2000. PROVISION FOR LOAN LOSSES. No provision for loan losses was recorded for the six months ended June 30, 2000, compared to a provision of $100,000 for the six months ended June 30, 1999. The decrease in the provision resulted from management's consideration of the same factors previously mentioned. NONINTEREST INCOME. Noninterest income increased $1.6 million, or 13.9%, from $11.5 million for the six months ended June 30, 1999, to $13.1 million for the six months ended June 30, 2000. The primary reason for the increase was a $1.3 million increase in commissions earned by Butler Wick due to an increase in the volume of brokerage transactions. NONINTEREST EXPENSE. Total noninterest expense increased $3.5 million, or 14.6%, to $27.7 million for the six months ended June 30, 2000, from $24.1 million for the six months ended June 30, 1999. The increase was primarily due to an increase in salaries and employee benefits of $2.4 million and an increase in franchise tax expense of $929,000. The increase in salaries and employee benefits for the six months ended June 30, 2000 was primarily due to expenses related to the Butler Wick Retention Plan and the United Community Recognition and Retention Plan. The remainder of the increase is primarily due to increases in commissions paid due to an increase in the volume of brokerage transactions at Butler Wick, new hires and merit increases between the periods. Home Savings' franchise tax is based on its level of equity at year-end. Franchise tax expense has increased due to Home Savings having higher equity for its 2000 tax return compared to its 1999 tax return. FEDERAL INCOME TAXES. The provision for federal income taxes decreased $2.6 million, or 44.7%, for the six months ended June 30, 2000, compared to the six months ended June 30, 1999, primarily due to the lower pre-tax income for the first six months of 2000 compared to the first six months of 1999. The effective tax rates were 34.6% and 35.8% for the six months ended June 30, 2000 and 1999, respectively. 10 13 UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEETS The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended June 30, 2000 and June 30, 1999. Average balance calculations were based on daily balances.
THREE MONTHS ENDED JUNE 30, ----------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------- AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE ---------- ---------- --------- ---------- ---------- --------- (IN THOUSANDS) Interest-earning assets: Net loans (1) $ 750,572 $ 15,050 8.02% $ 677,037 $ 13,503 7.98% Mortgage-backed securities: Available for sale 106,130 1,727 6.51% 111,347 1,699 6.10% Held to maturity 128,597 2,236 6.96% 161,476 2,814 6.97% Investment securities: Trading 6,517 30 1.84% 1,777 22 4.95% Available for sale 144,228 2,104 5.84% 159,575 2,231 5.59% Held to maturity 1,125 17 6.04% 654 8 4.89% Margin accounts 42,881 926 8.64% 29,725 524 7.05% Other interest-earning assets 19,107 330 6.91% 128,664 1,589 4.94% ---------- ---------- --------- ---------- ---------- --------- Total interest-earning assets 1,199,157 22,420 7.48% 1,270,255 22,390 7.05% Noninterest-earning assets 41,680 35,910 ---------- ---------- Total assets $1,240,837 $1,306,165 ========== ========== Interest-bearing liabilities: Checking and demand accounts $ 147,288 $ 1,022 2.78% $ 126,194 $ 764 2.42% Savings accounts 218,833 1,353 2.47% 224,277 1,384 2.47% Certificates of deposit 443,474 5,893 5.32% 423,562 5,340 5.04% Other borrowed funds 131,566 2,103 6.39% 20,744 276 5.32% ---------- ---------- --------- ---------- ---------- --------- Total interest-bearing liabilities 941,161 10,371 4.41% 794,777 7,764 3.91% ---------- --------- ---------- --------- Noninterest-bearing liabilities 40,595 32,755 ---------- ---------- Total liabilities 981,756 827,532 Equity 259,081 478,633 ---------- ---------- Total liabilities and equity $1,240,837 $1,306,165 ========== ========== Net interest income and Interest rate spread $ 12,049 3.07% $ 14,626 3.14% ========== ========== ========== ========= Net interest margin 4.02% 4.61% ========== ========= Average interest-earning assets to average interest-bearing liabilities 127.41% 159.83% ========= ========= ____________________ (1) Nonaccrual loans are included in the average balance.
11 14 UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEETS The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the six month periods ended June 30, 2000 and June 30, 1999. Average balance calculations were based on daily balances.
SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------------- AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Interest-earning assets: Net loans (1) $ 739,663 $ 29,364 7.94% $ 670,683 $ 26,757 7.98% Mortgage-backed securities: Available for sale 108,853 3,540 6.50% 103,481 3,151 6.09% Held to maturity 131,867 4,589 6.96% 168,270 5,863 6.97% Investment securities: Trading 6,616 71 2.15% 3,148 49 3.11% Available for sale 149,357 4,335 5.80% 139,001 3,907 5.62% Held to maturity 1,143 35 6.12% 3,175 97 6.11% Margin accounts 39,588 1,671 8.44% 26,500 918 6.93% Other interest-earning assets 21,155 694 6.56% 150,527 3,694 4.91% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 1,198,242 44,299 7.39% 1,264,785 44,436 7.03% Noninterest-earning assets 40,631 35,763 ---------- ---------- Total assets $1,238,873 $1,300,548 ========== ========== Interest-bearing liabilities: Checking and demand accounts $ 145,406 $ 1,963 2.70% $ 120,686 $ 1,413 2.34% Savings accounts 220,358 2,722 2.47% 224,850 2,760 2.45% Certificates of deposit 445,982 11,744 5.27% 426,428 10,823 5.08% Other borrowed funds 129,443 4,025 6.22% 17,914 470 5.25% ---------- ---------- ---------- ---------- ---------- --------- Total interest-bearing liabilities 941,189 20,454 4.35% 789,878 15,466 3.92% ---------- ---------- ---------- --------- Noninterest-bearing liabilities 39,257 33,488 ---------- ---------- Total liabilities 980,446 823,366 Equity 258,427 477,182 ---------- ---------- Total liabilities and equity $1,238,873 $1,300,548 ========== ========== Net interest income and Interest rate spread $ 23,845 3.05% $ 28,970 3.11% ========== ========= ========== ========== Net interest margin 3.98% 4.58% ========= ========== Average interest-earning assets to average interest-bearing liabilities 127.31% 160.12% =========== ========= ------------------------------ (1) Nonaccrual loans are included in the average balance.
12 15
UNITED COMMUNITY FINANCIAL CORP. RATE/VOLUME ANALYSIS For the Three Months Ended June 30, For the Six Months Ended June 30, -------------------------------------- -------------------------------------- 2000 vs. 1999 2000 vs. 1999 -------------------------------------- -------------------------------------- Increase Increase (decrease) due to Total (decrease) due to Total ------------------------ increase --------------------- increase Rate Volume (decrease) Rate Volume (decrease) --------- -------- ---------- -------- ------- --------- (In thousands) (In thousands) Interest-earning assets: Loans $ 73 $ 1,474 $ 1,547 $ (131) $ 2,738 $ 2,607 Mortgage-backed securities: Available for sale 95 (67) 28 221 168 389 Held to maturity (6) (572) (578) (7) (1,267) (1,274) Investment securities: Trading securities (2) 10 8 (9) 31 22 Available for sale 105 (232) (127) 130 298 428 Held to maturity 2 7 9 -- (63) (63) Margin accounts 135 267 402 232 521 753 Other interest-earning assets 1,107 (2,366) (1,259) 1,933 (4,932) (2,999) ------- ------- ------- ------- ------- ------- Total interest-earning assets $ 1,509 $(1,479) 30 $ 2,369 $(2,506) (137) ======= ======= ======= ======= ======= ======= Interest-bearing liabilities: Savings accounts 3 (34) (31) 18 (56) (38) Checking accounts 120 138 258 235 315 550 Certificates of deposit 296 257 553 415 506 921 Other borrowed funds 66 1,761 1,827 104 3,451 3,555 ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities $ 485 $ 2,122 2,607 $ 772 $ 4,216 4,988 ======= ======= ------- ======= ======= ------- Change in net interest income $(2,577) $(5,125) ======= =======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK A comprehensive qualitative and quantitative analysis regarding Home Savings' market risk was disclosed in United Community's 1999 Annual Report under the caption "Asset and Liability Management and Market Risk." No material change in the methodology has occurred. Home Savings continues to fall under the criteria of being well capitalized under all interest rate shock scenarios required by the Office of Thrift Supervision's Thrift Bulletin 13a. 13 16 PART II. OTHER INFORMATION UNITED COMMUNITY FINANCIAL CORP. ITEMS 1, 3 AND 5 - NOT APPLICABLE ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS On May 30, 2000, United Community registered 3,471,562 shares for the Long-Term Incentive Plan approved by shareholders on July 12, 1999. On March 23, 2000, stock options to purchase 638,483 shares were granted to key individuals of Home Savings and Butler Wick at an exercise price of $6.97. As of June 30, 2000 none of the options have been exercised. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 27, 2000, United Community held its Annual Meeting of Shareholders. In connection therewith, two matters were submitted to shareholders for a vote. First, shareholders elected six directors to the terms indicated by the following votes:
Director Term expiring in For Withhold ---------------------------- ---------------- ----------------- Herbert F. Schuler, Sr. 2001 28,041,314 1,381,849 Donald J. Varner 2001 27,988,122 1,435,041 John F. Zimmerman, Jr. 2001 28,013,412 1,409,751 Richard M. Barrett 2002 27,946,768 1,476,395 Thomas J. Cavalier 2002 27,974,480 1,448,683 Douglas M. McKay 2002 27,812,530 1,610,633
The shareholders also ratified the selection of Deloitte & Touche LLP, certified public accountants, as auditors for the 2000 fiscal year by the following vote:
For Against Abstain --------------------- ----------------- ---------------- 28,246,865 804,061 372,237
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit Number Description ............... ........................................................... 10.1 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and David G. Lodge, dated June 9, 2000. 10.1 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Patrick W. Bevack, dated June 19, 2000. 11 Statement regarding computation of earnings per share 27 Financial Data Schedule - EDGAR only b. Reports on Form 8-K On April 19, 2000 United Community filed a Form 8-K disclosing operating results for the quarter ended March 31, 2000. 14 17 UNITED COMMUNITY FINANCIAL CORP. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED COMMUNITY FINANCIAL CORP. Date: August 11, 2000 /s/ Douglas M. McKay ------------------------------------------ Douglas M. McKay, President Date: August 11, 2000 /s/ Patrick A. Kelly ------------------------------------------ Patrick A. Kelly, Treasurer 15