10-Q 1 l89647ae10-q.txt UNITED COMMUNITY FINANCIAL CORP 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-24399 UNITED COMMUNITY FINANCIAL CORP. (Exact name of registrant as specified in its charter) Ohio 34-1856319 ----------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 275 Federal Plaza West Youngstown, Ohio 44503-1203 ---------------- ---------- (Address of principal executive offices) (Zip Code) (330) 742-0500 --------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 35,913,842 common shares as of July 31, 2001 2 TABLE OF CONTENTS -----------------
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition as of June 30, 2001 and December 31, 2000........................................................................ 1 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2001 and 2000 .................................................................. 2 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 .................................................................. 3 Notes to Consolidated Financial Statements .............................................. 4 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 8-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 14 PART II. OTHER INFORMATION............................................................................. 15 Signatures............................................................................................. 16 EXHIBITS............................................................................................... 17
3 UNITED COMMUNITY FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
June 30, December 31, 2001 2000 ----------- ------------ (dollars in thousands) ASSETS: Cash and deposits with banks $ 113,194 $ 23,479 Federal funds sold and other 16,322 22,493 ----------- ----------- Total cash and cash equivalents 129,516 45,972 ----------- ----------- Investment securities: Trading (amortized cost of $6,759 and $5,927, respectively) 6,763 5,933 Available for sale (amortized cost of $48,936 and $98,267, respectively) 49,883 98,445 Held to maturity (fair value of $996 and $900, respectively) 985 876 Mortgage-related securities: Available for sale (amortized cost of $87,737 and $92,059, respectively) 88,443 91,731 Held to maturity (fair value of $95,795 and $108,229, respectively) 93,712 107,684 Loans, net (including allowance for loan losses of $7,063 and $6,553, respectively) 1,047,698 876,653 Margin accounts 26,572 33,361 Federal Home Loan Bank stock 14,293 13,793 Premises and equipment 12,042 11,939 Accrued interest receivable 7,900 7,701 Real estate owned 337 359 Other assets 7,082 5,752 ----------- ----------- TOTAL ASSETS $ 1,485,226 $ 1,300,199 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits $ 967,468 $ 900,413 Other borrowed funds 237,463 114,317 Advance payments by borrowers for taxes and insurance 4,035 4,152 Accrued interest payable 4,316 2,933 Accrued expenses and other liabilities 15,324 16,485 ----------- ----------- TOTAL LIABILITIES 1,228,606 1,038,300 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock-no par value; 1,000,000 shares authorized and unissued at June 30, 2001 -- -- Common stock-no par value; 499,000,000 shares authorized; 37,799,309 and 37,800,497 shares issued, respectively 137,020 136,967 Retained earnings 156,207 155,026 Accumulated other comprehensive income (loss) 1,074 (98) Unearned stock compensation (24,922) (26,674) Treasury stock, at cost; 1,858,500 and 483,500 shares, respectively (12,759) (3,322) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 256,620 261,899 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,485,226 $ 1,300,199 =========== ===========
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, ------------------------------- --------------------------------- 2001 2000 2001 2000 ------------ ------------ ----------- ------------- (dollars in thousands (dollars in thousands except per share data) except per share data) INTEREST INCOME Loans $ 19,399 $ 15,050 $ 37,472 $ 29,364 Mortgage-related securities: Available for sale 1,412 1,727 2,876 3,540 Held to maturity 1,652 2,236 3,434 4,589 Investment securities: Trading 34 30 65 71 Available for sale 1,022 2,104 2,355 4,335 Held to maturity 13 17 26 34 Margin accounts 455 926 1,123 1,671 FHLB stock dividend 254 239 500 463 Other interest-earning assets 404 91 832 232 ------------ ------------ ------------ ------------ Total interest income 24,645 22,420 48,683 44,299 INTEREST EXPENSE Deposits 10,717 8,268 21,001 16,429 Other borrowed funds 1,527 2,103 2,923 4,025 ------------ ------------ ------------ ------------ Total interest expense 12,244 10,371 23,924 20,454 ------------ ------------ ------------ ------------ NET INTEREST INCOME 12,401 12,049 24,759 23,845 PROVISION FOR LOAN LOSS ALLOWANCES 250 -- 580 -- ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS ALLOWANCES 12,151 12,049 24,179 23,845 ------------ ------------ ------------ ------------ NONINTEREST INCOME Commissions 3,421 4,238 7,012 9,622 Service fees and other charges 1,848 1,385 3,767 2,640 Underwriting and investment banking fees 321 192 383 214 Net gains (losses): Mortgage-related securities 48 -- 140 -- Investment securities -- (14) 246 (4) Trading securities 216 (144) (195) 227 Loans sold 55 -- 81 -- Other 14 (4) 5 (3) Other income 195 204 468 416 ------------ ------------ ------------ ------------ Total noninterest income 6,118 5,857 11,907 13,112 ------------ ------------ ------------ ------------ NONINTEREST EXPENSES Salaries and employee benefits 8,534 8,470 16,399 18,098 Occupancy 621 532 1,194 988 Equipment and data processing 1,775 1,446 3,394 2,746 Deposit insurance premiums 43 43 84 84 Franchise tax 504 932 1,014 1,865 Advertising 436 316 987 817 Other expenses 1,639 1,488 3,259 3,070 ------------ ------------ ------------ ------------ Total noninterest expenses 13,552 13,227 26,331 27,668 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 4,717 4,679 9,755 9,289 INCOME TAXES 1,779 1,709 3,614 3,217 ------------ ------------ ------------ ------------ NET INCOME $ 2,938 $ 2,970 $ 6,141 $ 6,072 ============ ============ ============ ============ EARNINGS PER SHARE: Basic and diluted $ 0.09 $ 0.09 $ 0.19 $ 0.18 Average basic shares outstanding 31,824,605 32,903,672 32,245,620 32,913,530 Average diluted shares outstanding 32,048,424 33,442,391 32,429,561 33,438,734
See Notes to Consolidated Financial Statements. 2 5 UNITED COMMUNITY FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, ----------------------------- 2001 2000 --------- --------- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,141 $ 6,072 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan loss allowances 580 -- Net (gains) losses (472) 7 Accretion of discounts and amortization of premiums (492) (186) Depreciation 1,070 713 ESOP compensation 972 1,019 Amortization of restricted stock compensation 834 839 FHLB stock dividends (500) (462) (Increase) decrease in trading securities (830) 2,496 Decrease (increase) in margin accounts 6,789 (9,711) Increase in interest receivable (199) (310) Increase in prepaid and other assets (1,959) (3,626) Increase (decrease) in interest payable 1,383 (2,171) (Decrease) increase in other liabilities (1,161) 7,877 --------- --------- Net cash provided by operating activities 12,156 2,557 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal repayments and maturities of: Mortgage-related securities held to maturity 12,488 13,015 Mortgage-related securities available for sale 16,106 10,198 Investment securities held to maturity 500 693 Investment securities available for sale 51,744 24,066 Proceeds from sale of: Mortgage-related securities held to maturity 1,454 -- Mortgage-related securities available for sale 15,839 -- Investment securities available for sale 6,438 8,502 Loans 6,370 -- Purchases of: Investment securities available for sale (8,581) (14,729) Investment securities held to maturity (585) (476) Mortgage-related securities available for sale (27,555) -- Net principal disbursed on loans (176,354) (53,572) Loans purchased (1,350) (4,603) Purchases of premises and equipment (1,173) (1,456) Other 360 30 --------- --------- Net cash used in investing activities (104,299) (18,332) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in NOW, savings and money market accounts 17,726 (3,481) Net increase (decrease) in certificates of deposit 49,329 (587) Net decrease in advance payments by borrowers for taxes and insurance (117) (78) Proceeds from FHLB advances 100,000 -- Net increase (decrease) in other borrowed funds 23,146 (62,168) Dividends paid (4,960) (5,080) Purchase of treasury stock (9,437) -- --------- --------- Net cash provided by (used in) financing activities 175,687 (71,394) --------- --------- Increase (decrease) in cash and cash equivalents 83,544 (87,169) Cash and cash equivalents, beginning of period 45,972 111,445 --------- --------- Cash and cash equivalents, end of period $ 129,516 $ 24,276 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest on deposits and borrowings $ 22,541 $ 22,625 Income taxes 3,105 885 Supplemental schedule of noncash activities: Transfers from loans to real estate owned 336 178
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 17 full service offices located throughout Mahoning, Columbiana and Trumbull Counties and four loan production offices in the Cleveland, Canton, Stow and Mentor areas 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 11 full service offices and one trust office throughout northeastern Ohio and western Pennsylvania. The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for fair statement of results for the interim periods. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. 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, 2000, contained in United Community's Form 10-K for the year ended December 31, 2000. 2. COMPREHENSIVE INCOME United Community's comprehensive income for the three and six months ended June 30, 2001 and 2000 are as follows: Three months ended June 30, --------------------------- 2001 2000 ------- ------- (In thousands) Net income $ 2,938 $ 2,970 Unrealized holding gains arising during the period, net of tax effect of $34 and $169, respectively 96 324 Reclassification adjustment for gains included in net income, net of tax effect of ($17) and ($5), respectively (31) (9) ------- ------- Comprehensive income $ 3,003 $ 3,285 ======= ======= 4 7 Six months ended June 30, ------------------------- 2001 2000 --------- ------- (In thousands) Net income $ 6,141 $ 6,072 Unrealized holding gains (losses) arising during the period, net of tax effect of $631 and ($86), respectively 1,383 (162) Reclassification adjustment for gains (losses) included in net income, net of tax effect of ($114) and $1, respectively (211) 2 ------- ------- Comprehensive income $ 7,313 $ 5,912 ======= ======= 3. SALE OF MORTGAGE-RELATED SECURITIES During the six months ended June 30, 2001, Home Savings sold approximately $1.5 million of mortgage-related securities held to maturity with outstanding balances of less than 15% of the principal outstanding at acquisition. A gain of approximately $61,000 was recorded on the sale. There were no sales of mortgage-related securities held to maturity during the six months ended June 30, 2000. 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, 2001 and 2000 are as follows: THREE MONTHS ENDED JUNE 30, 2001
Investment Retail Banking Advisory Services Eliminations Total ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Interest income $ 24,741 $ 510 $606 $ 24,645 Interest expense 12,645 205 606 12,244 Provision for loan loss 250 - - 250 ------------- ------------- ----------- ------------ Net interest income after provision for loan loss 11,846 305 - 12,151 Non-interest income 1,137 4,981 - 6,118 Non-interest expense 8,023 5,529 - 13,552 ------------- ------------- ----------- ------------ Income before tax 4,960 (243) - 4,717 Income tax expense (benefit) 1,858 (79) - 1,779 ------------- ------------- ----------- ------------ Net income (loss) $ 3,102 $ (164) $ - $ 2,938 ============= ============= =========== ============
5 8 THREE MONTHS ENDED JUNE 30, 2000
Investment Retail Banking Advisory Services Eliminations Total ----------------------------------------------------------------------------------------------------------------------------- (In thousands) Interest income $ 21,936 $ 983 $499 $ 22,420 Interest expense 10,315 555 499 10,371 Provision for loan loss - - - - --------------- ------------- ----------- ------------- 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 expense 1,529 180 - 1,709 --------------- ------------- ----------- ------------- Net income $ 2,651 $ 319 $ - $ 2,970 =============== ============= =========== =============
SIX MONTHS ENDED JUNE 30, 2001
Investment Retail Banking Advisory Services Eliminations Total ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Interest income $ 48,789 $ 1,231 $1,337 $ 48,683 Interest expense 24,707 554 1,337 23,924 Provision for loan loss 580 - - 580 ------------- ------------- ----------- ------------ Net interest income after provision for loan loss 23,502 677 - 24,179 Non-interest income 1,901 10,006 - 11,907 Non-interest expense 15,928 10,403 - 26,331 ------------- ------------- ----------- ------------ Income before tax 9,475 280 - 9,755 Income tax expense 3,507 107 - 3,614 ------------- ------------- ----------- ------------ Net income $ 5,968 $ 173 $ - $ 6,141 ============= ============= =========== ============
SIX MONTHS ENDED JUNE 30, 2000
Investment Retail Banking Advisory Services Eliminations Total ----------------------------------------------------------------------------------------------------------------------------- (In thousands) Interest income $ 43,507 $ 1,791 $999 $ 44,299 Interest expense 20,457 996 999 20,454 Provision for loan loss - - - - ------------- ------------- ----------- ------------ 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 expense 2,918 299 - 3,217 ------------- ------------- ----------- ------------ Net income $ 5,540 $ 532 $ - $ 6,072 ============= ============= =========== ============
6 9 5. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The FASB delayed the effective date of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. United Community adopted SFAS No. 133 and SFAS No. 138 as of January 1, 2001, which adoption did not have a material impact on United Community's financial position or results of operations. In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Adoption of this statement did not have, and is not anticipated to have, a material impact on United Community's financial position or results of operations. In June 2001, FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only impact United Community's financial statements if it enters into a business combination. Also in June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this Statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. United Community is required to adopt this Statement on January 1, 2002 and early adoption is not permitted. United Community had no intangible assets as of June 30, 2001, however, as a result of this Statement, goodwill resulting from the acquisition of Industrial Bancorp, Inc. on July 1, 2001 (see Note 6) will not be amortized. 6. SUBSEQUENT EVENT On July 1, 2001, United Community acquired all of the capital stock of Industrial Bancorp, Inc., the holding company for The Industrial Savings and Loan Association (Industrial Savings), an Ohio-chartered savings and loan association, through the merger of Home Savings' subsidiary, UCFC Acquisition Subsidiary, Inc. into Industrial Bancorp, Inc. Industrial Savings was then merged into Home Savings. Home Savings will account for the acquisition as a purchase and will include Industrial Bancorp's results of operations from the effective date of the acquisition in its 2001 financial statements. At June 30, 2001, Industrial Bancorp had total assets of $424.1 million and total deposits of $313.6 million. Based on Industrial Bancorp's 4,284,751 outstanding shares, the acquisition was valued at $87.3 million, which was paid in cash. 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNITED COMMUNITY FINANCIAL CORP.
At or For the At or For the Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, SELECTED FINANCIAL RATIOS AND OTHER DATA: (1) 2001 2000 2001 2000 ------------- ------------ ----------- ---------- Performance ratios: Return on average assets (2) 0.86% 0.96% 0.92% 0.98% Return on average equity (3) 4.55% 4.59% 4.72% 4.70% Interest rate spread (4) 2.83% 3.07% 2.87% 3.05% Net interest margin (5) 3.73% 4.02% 3.81% 3.98% Noninterest expense to average assets 3.95% 4.26% 3.93% 4.47% Efficiency ratio (6) 73.18% 73.87% 72.36% 74.87% Average interest-earning assets to average interest- bearing liabilities 124.55% 127.41% 125.48% 127.31% Capital ratios: Average equity to average assets 18.79% 20.88% 19.39% 20.86% Equity to assets, end of period 17.28% 20.44% 17.28% 20.44% Tangible capital (7) 12.89% 13.53% 12.89% 13.53% Core capital (7) 12.89% 13.53% 12.89% 13.53% Risk-based capital (7) 21.46% 23.86% 21.46% 23.86% Asset quality ratios: Nonperforming loans to total loans at end of period (8) 0.62% 0.51% 0.62% 0.51% Nonperforming assets to average assets (9) 0.50% 0.34% 0.51% 0.34% Nonperforming assets to total assets at end of period 0.46% 0.34% 0.46% 0.34% Allowance for loan losses as a percent of loans 0.67% 0.80% 0.67% 0.80% Allowance for loan losses as a percent of nonperforming loans (8) 108.38% 159.25% 108.38% 159.25% Per share data: Basic earnings per share (10) $ 0.09 $ 0.09 $ 0.19 $ 0.18 Diluted earnings per share (10) $ 0.09 $ 0.09 $ 0.19 $ 0.18 Dividends per share $ 0.075 $ 0.075 $ 0.15 $ 0.15 Book value per share (11) $ 7.90 $ 7.63 $ 7.90 $ 7.63 Number of full service banking offices 17 14 17 14 Number of loan production offices 4 -- 4 -- Number of full service brokerage offices 11 10 11 10 Number of trust offices 1 -- 1 --
(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, excluding gains and losses. (7) Home Savings only. (8) Nonperforming loans consist of nonaccrual loans and restructured loans. (9) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. (10) Net income divided by average number of shares outstanding. (11) Equity divided by number of shares outstanding. 8 11 FORWARD LOOKING STATEMENTS Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate to United Community or its management are intended to identify such forward looking statements. United Community's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND DECEMBER 31, 2000 Total assets were $1.5 billion at June 30, 2001, a $185.0 million, or 14.2%, increase compared to December 31, 2000. The primary reasons for the increase in total assets were increases in cash and cash equivalents and loans of $83.5 million and $171.0 million, respectively. Increases in deposits of $67.1 million and other borrowed funds of $123.1 million and a reduction of $48.6 million in investment securities available for sale funded these increases. Cash and cash equivalents increased primarily as a result of funds borrowed from the Federal Home Loan Bank in anticipation of the Industrial Bancorp acquisition. Net loans increased $171.0 million, or 19.5%, to $1.0 billion at June 30, 2001, compared to $876.7 million at December 31, 2000. The most significant increase was in one-to-four family residential loans, which increased $83.1 million, or 13.6%. Commercial loans increased $58.1 million, or 41.8%, and consumer loans increased $16.3 million, or 28.0%. Home Savings is expecting continual growth in all loan categories, which will increase the risk of loan losses. Non-residential real estate lending is generally considered to involve a higher degree of risk than residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Funds that are available for general corporate purposes, such as loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds and investment and mortgage-related securities available for sale. Federal funds sold and other overnight funds decreased $6.2 million, or 27.4%, to $16.3 million at June 30, 2001 from $22.5 million at December 31, 2000. Securities available for sale, which include both investment and mortgage-related securities, decreased $51.9 million, or 27.3%, since December 31, 2000. Securities held to maturity, which also consist of both investment securities and mortgage-related securities, decreased $13.9 million, or 12.8%, since December 31, 2000. Trading securities, which consist of investment securities, increased $830,000, or 14.0%, to $6.8 million at June 30, 2001. The net decrease in overnight funds and securities, along with increases in deposits and other borrowed funds, was primarily used to fund increases in net loans of $171.0 million. 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 decreased approximately $3.3 million to $6.5 million at June 30, 2001 from $9.8 million at December 31, 2000, primarily due to a $2.8 million nonresidential real estate loan that was paid off. At June 30, 2001, total nonaccrual and restructured loans accounted for 0.62% of net loans receivable, compared to 1.10% at December 31, 2000. Total nonperforming assets, which include nonaccrual and restructured loans and real estate owned, were 0.46% of total assets as of June 30, 2001 and 0.77% as of December 31, 2000. Total deposits increased $67.1 million from $900.4 million at December 31, 2000 to $967.5 million at June 30, 2001. The increase was due to a $49.3 million increase in certificates of deposit and a $16.4 million increase in checking accounts. The increases in certificates of deposit and checking accounts were primarily due to Home Savings competitively pricing these products. Other borrowed funds increased $123.1 million to $237.5 million at June 30, 2001 compared to $114.3 million at December 31, 2000. This increase was due to $87.0 million borrowed from the Federal Home Loan Bank in anticipation of the Industrial Bancorp acquisition and other borrowings to fund loan growth. As of June 30, 2001, $101.5 million and $105.0 million of the other borrowed funds consisted of short-term and long-term Federal Home Loan Bank advances, respectively. The remaining funds consist of a revolving line of credit and other short-term borrowings. 9 12 Shareholders' equity decreased $5.3 million, or 2.0%, to $256.6 million at June 30, 2001 from $261.9 million at December 31, 2000. The decrease was primarily due to the quarterly dividends of $0.075 per share paid in March and June 2001 and treasury stock purchases, offset by earnings for the six months and an increase in other comprehensive income. Book value per share was $7.90 as of June 30, 2001. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 NET INCOME. Net income for the three months ended June 30, 2001 was $2.9 million, or $0.09 per diluted share, compared to net income of $3.0 million, or $0.09 per diluted share, for the three months ended June 30, 2000. Net interest income increased $352,000 and noninterest income increased $261,000, which increases were substantially offset by a $250,000 increase in provision for loan losses and a $325,000 increase in noninterest expense. United Community's annualized return on average assets and return on average equity were 0.86% and 4.55%, respectively, for the three months ended June 30, 2001. The annualized return on average assets and return on average equity for the comparable period in 2000 were 0.96% and 4.59%, respectively. NET INTEREST INCOME. Net interest income increased $352,000, or 2.9%, for the three months ended June 30, 2001, compared to the second quarter of 2000, primarily due to an increase in interest income on loans as a result of a higher loan volume, and a decrease in interest expense on borrowed funds, partially offset by lower interest income on mortgage-related and investment securities and margin accounts and an increase in interest expense on deposits. PROVISION FOR LOAN LOSS ALLOWANCES. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable losses based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. Due to growth in the loan portfolio, the provision for loan loss allowances was $250,000 for the second quarter of 2001 compared to no additional provision being booked in the second quarter of 2000. Home Savings anticipates additional growth in the loan portfolio which may have further impact on the loan loss provision in the future. Home Savings' allowance for loan losses totaled $7.1 million at June 30, 2001, which was 0.67% of total loans, compared to 0.80% at June 30, 2000. NONINTEREST INCOME. Noninterest income increased $261,000, or 4.5%, from $5.9 million for the three months ended June 30, 2000, to $6.1 million for the three months ended June 30, 2001. Increases in service fees and other charges, underwriting and investment banking fees and gains on trading securities, offset by a decline in commission income, resulted in the increase. NONINTEREST EXPENSE. Total noninterest expense increased $325,000, or 2.5%, to $13.6 million for the three months ended June 30, 2001, from $13.2 million for the three months ended June 30, 2000. The increase was primarily due to an increase in equipment and data processing expenses, as lower franchise taxes offset increases in advertising and other expenses. FEDERAL INCOME TAXES. The provision for federal income taxes increased $70,000 for the three months ended June 30, 2001, compared to the three months ended June 30, 2000. The effective tax rates were 37.7% and 36.5% for the three months ended June 30, 2001 and 2000, respectively. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 NET INCOME. Net income for the six months ended June 30, 2001 was $6.1 million, or $0.19 per diluted share. Net income for the comparable period in 2000 was $6.1 million, or $0.18 per diluted share. Net interest income for the six months ended June 30, 2001 increased $914,000 and noninterest expenses declined $1.3 million, while the provision for loan losses and income taxes increased $580,000 and $397,000, respectively, and noninterest income declined $1.2 million. United Community's annualized return on average assets and return on average equity were 0.92% and 4.72%, respectively, for the six months ended June 30, 2001. The annualized return on average assets and return on average equity for the comparable period in 2000 were 0.98% and 4.70%, respectively. 10 13 NET INTEREST INCOME. Net interest income increased $914,000 for the six months ended June 30, 2001, compared to the same period of 2000, primarily due to an increase in loan interest income of $8.1 million and a decrease of $1.1 million in interest expense on other borrowed funds, substantially offset by an increase of $4.6 million in interest expense on deposits and decreases of $1.8 million in interest income on mortgage-related securities and $2.0 million in interest income on investment securities available for sale. PROVISION FOR LOAN LOSS ALLOWANCES. Due to growth in the loan portfolio, the provision for loan loss allowances was $580,000 for the first six months of 2001 compared to no additional provision being booked in the comparable period of 2000. Home Savings anticipates further growth in the loan portfolio, which may have further impact on the loan loss provision in the future. Home Savings' allowance for loan losses totaled $7.1 million at June 30, 2001, which was 0.67% of total loans, compared to 0.80% at June 30, 2000. NONINTEREST INCOME. Noninterest income declined $1.2 million, or 9.2%, from $13.1 million for the six months ended June 30, 2000, to $11.9 million for the six months ended June 30, 2001. Declines of $2.6 million in commission income at Butler Wick and $422,000 in trading securities gains were partially offset by increases of $1.1 million in service fees and other charges and higher gains on the sale of mortgage-related and investment securities and loans. The lower commission income is attributable to the overall volatility of the stock market, which has led to fewer transactions throughout the brokerage industry. NONINTEREST EXPENSE. Total noninterest expense declined $1.3 million, or 4.8%, to $26.3 million for the six months ended June 30, 2001, from $27.7 million for the six months ended June 30, 2000. The decrease was primarily due to decreases of $1.7 million in salaries and employee benefits and $851,000 in franchise taxes. These decreases were partially offset by increases in equipment and data processing, occupancy, advertising and other expenses. The decline in salaries and employee benefits for the six months ended June 30, 2001 was primarily due to the decline in commission income and lower expenses related to the Butler Wick Retention Plan. FEDERAL INCOME TAXES. The provision for federal income taxes increased $397,000, or 12.3%, for the six months ended June 30, 2001, compared to the six months ended June 30, 2000. The effective tax rates were 37.0% and 34.6% for the six months ended June 30, 2001 and 2000, respectively. 11 14 UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEET The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three month periods ended June 30, 2001 and 2000. Average balance calculations were based on daily balances.
THREE MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 2001 2000 ---------------------------------------------------------------------------- AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE ---------- ---------- ------ ---------- ---------- ------ (DOLLARS IN THOUSANDS) Interest-earning assets: Net loans (1) $ 984,995 $ 19,399 7.88% $ 750,572 $ 15,050 8.02% Mortgage-related securities: Available for sale 94,068 1,412 6.00% 106,130 1,727 6.51% Held to maturity 97,512 1,652 6.78% 128,597 2,236 6.96% Investment securities: Trading 6,366 34 2.14% 6,517 30 1.84% Available for sale 66,400 1,022 6.16% 144,228 2,104 5.84% Held to maturity 901 13 5.77% 1,125 17 6.04% Margin accounts 26,902 455 6.77% 42,881 926 8.64% Other interest-earning assets 51,287 658 5.13% 19,107 330 6.91% ---------- ---------- ------ ---------- ---------- ------ Total interest-earning assets 1,328,431 24,645 7.42% 1,199,157 22,420 7.48% Noninterest-earning assets 45,083 41,680 ---------- ---------- Total assets $1,373,514 $1,240,837 ========== ========== Interest-bearing liabilities: Checking and demand accounts $ 151,829 $ 1,113 2.93% $ 147,288 $ 1,022 2.78% Savings accounts 199,758 1,136 2.27% 218,833 1,353 2.47% Certificates of deposit 579,160 8,468 5.85% 443,474 5,893 5.32% Other borrowed funds 135,841 1,527 4.50% 131,566 2,103 6.39% ---------- ---------- ------ ---------- ---------- ------ Total interest-bearing liabilities 1,066,588 12,244 4.59% 941,161 10,371 4.41% ---------- ------ ---------- ------ Noninterest-bearing liabilities 48,787 40,595 ---------- ---------- Total liabilities 1,115,375 981,756 Equity 258,139 259,081 ---------- ---------- Total liabilities and equity $1,373,514 $1,240,837 ========== =========== Net interest income and interest rate spread $ 12,401 2.83% $ 12,049 3.07% ========== ======= ========== ====== Net interest margin 3.73% 4.02% ======= ====== Average interest-earning assets to average interest-bearing liabilities 124.55% 127.41% ======= =======
--------------------------------- (1) Nonaccrual loans are included in the average balance. 12 15 UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEET The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the six month periods ended June 30, 2001 and 2000. Average balance calculations were based on daily balances.
Six Months Ended June 30, ------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------ Average Interest Average Interest outstanding earned/ Yield/ outstanding earned/ Annualized Yield/ balance paid rate balance paid interest rate ---------- ------- ------ ---------- ------- ------- ------ (Dollars in thousands) Interest-earning assets: Net loans (1) $ 940,607 $37,472 7.97% $739,663 $29,364 $57,256 7.94% Mortgage-related securities: Available for sale 93,665 2,876 6.14% 108,853 3,540 7,256 6.50% Held to maturity 101,073 3,434 6.80% 131,867 4,589 9,412 6.96% Investment securities: Trading 6,262 65 2.08% 6,616 71 164 2.15% Available for sale 77,662 2,355 6.06% 149,357 4,335 8,920 5.80% Held to maturity 890 26 5.84% 1,143 35 68 6.12% Margin accounts 29,888 1,123 7.51% 39,588 1,671 2,984 8.44% Other interest-earning assets 48,451 1,332 5.50% 21,155 694 1,456 6.56% ---------- ------- ------ ---------- ------- ------- ------ Total interest-earning assets 1,298,498 48,683 7.50% 1,198,242 44,299 87,516 7.39% Noninterest-earning assets 42,825 40,631 ---------- ---------- Total assets $1,341,323 $1,238,873 ========== ========== Interest-bearing liabilities: Checking and demand accounts $ 149,031 $ 2,191 2.94% $ 145,406 $ 1,963 $ 3,764 2.70% Savings accounts 199,238 2,247 2.26% 220,358 2,722 5,476 2.47% Certificates of deposit 566,345 16,564 5.85% 445,982 11,744 23,404 5.27% Other borrowed funds 120,236 2,923 4.86% 129,443 4,025 7,688 6.22% ---------- ------- ------ ---------- ------- ------- ------ Total interest-bearing liabilities 1,034,850 23,925 4.62% 941,189 20,454 40,332 4.35% ------- ------ ------- ------- ------ Noninterest-bearing liabilities 46,364 39,257 ---------- ---------- Total liabilities 1,081,214 980,446 Equity 260,109 258,427 ---------- ---------- Total liabilities and equity $1,341,323 $1,238,873 ========== ========== Net interest income and interest rate spread $24,758 2.87% $28,845 $47,184 3.05% ======= ====== ======= ======= ====== Net interest margin 3.81% 3.98% ====== ===== Average interest-earning assets to average interest-bearing liabilities 125.48% 127.31% ====== ======
----------------------------------------- (1) Nonaccrual loans are included in the average balance. 13 16 UNITED COMMUNITY FINANCIAL CORP. RATE/VOLUME ANALYSIS
For the three months ended June 30, For the six months ended June 30, ----------------------------------------- --------------------------------------- 2001 vs. 2000 2001 vs. 2000 ----------------------------------------- --------------------------------------- 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 $(263) $ 4,612 $ 4,349 $ 103 $ 8,005 $ 8,108 Mortgage-related securities: Available for sale (128) (187) (315) (190) (474) (664) Held to maturity (56) (528) (584) (106) (1,049) (1,155) Investment securities: Trading securities 5 (1) 4 (2) (4) (6) Available for sale 123 (1,205) (1,082) 204 (2,184) (1,980) Held to maturity (1) (3) (4) (2) (6) (8) Margin accounts (173) (298) (471) (170) (378) (548) Other interest-earning assets (59) 387 328 (92) 729 637 ----- ------- ------- ------- ------- ------- Total interest-earning assets $(552) $ 2,777 2,225 $ (255) $ 4,639 4,384 ===== ======= ------- ======= ======= ------- Interest-bearing liabilities: Savings accounts (104) (113) (217) (226) (249) (475) Checking accounts 59 32 91 178 50 228 Certificates of deposit 636 1,939 2,575 1,402 3,418 4,820 Other borrowed funds (647) 71 (576) (831) (271) (1,102) ----- ------- ------- ------- ------- ------- Total interest-bearing liabilities $ (56) $ 1,929 1,873 $ 523 $ 2,948 3,471 ===== ======= ------- ======= ======= ------- Change in net interest income $ 352 $ 913 ======= =======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A comprehensive qualitative and quantitative analysis regarding Home Savings' market risk was disclosed in United Community's 2000 Annual Report under the caption "Asset and Liability Management and Market Risk." No material change in the methodology or results has occurred. 14 17 PART II. OTHER INFORMATION UNITED COMMUNITY FINANCIAL CORP. ITEMS 1, 2, 3, AND 5 - NOT APPLICABLE ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 26, 2001, United Community held its Annual Meeting of Shareholders. In connection therewith, two matters were submitted to shareholders for a vote. First, shareholders elected three directors to terms expiring in 2003 by the following votes: Director For Withheld -------- --- -------- Herbert F. Schuler, Sr. 32,272,930 1,173,762 Donald J. Varner 31,252,993 2,193,699 John F. Zimmerman, Jr. 32,262,221 1,184,471 Directors continuing in office with terms expiring after 2001 are Richard M. Barrett, Thomas J. Cavalier and Douglas M. McKay. The shareholders also ratified the selection of Crowe, Chizek and Company LLP as auditors for the 2001 fiscal year by the following vote: For Against Abstain --- ------- ------- 32,462,956 569,777 413,959 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit Number Description ........ ...................................................... 3.1 Articles of Incorporation 3.2 Amended Code of Regulations 11 Statement regarding computation of earnings per share b. Reports on Form 8-K On April 18, 2001, United Community filed a Form 8-K disclosing operating results for the quarter ended March 31, 2001. 15 18 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 13, 2001 /s/ Douglas M. McKay ------------------------------------------- Douglas M. McKay, President Date: August 13, 2001 /s/ Patrick A. Kelly ------------------------------------------- Patrick A. Kelly, Treasurer 16 19 UNITED COMMUNITY FINANCIAL CORP. EXHIBIT 3.1 ----------- Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on March 13, 1998 with the Securities and Exchange Commission (SEC), Exhibit 3.1. EXHIBIT 3.2 ----------- Incorporated by reference to the 1998 Form 10-K filed by United Community on March 31, 1999 with the SEC, Exhibit 3.2. 17