-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JU8DnuN9B7XldfWijuLt+8BUpg0wk3fbyYG7yy5kYZguyLPgqE9eTDA2HA17Hv9J LWeHSpXlQvWQfjT6sTdf0g== 0000950152-03-003631.txt : 20030328 0000950152-03-003631.hdr.sgml : 20030328 20030328144246 ACCESSION NUMBER: 0000950152-03-003631 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMMUNITY FINANCIAL CORP CENTRAL INDEX KEY: 0000707886 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 341856319 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24399 FILM NUMBER: 03624585 BUSINESS ADDRESS: STREET 1: 275 FEDERAL PLAZA WEST CITY: YOUNGSTOWN STATE: OH ZIP: 44503-1203 BUSINESS PHONE: 3307420500 10-K 1 l99172ae10vk.txt UNITED COMMUNITY FINANCIAL CORP. 10-K/FYE 12-31-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] 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: 0-024399 UNITED COMMUNITY FINANCIAL CORP. ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1856319 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 275 Federal Plaza West, Youngstown, Ohio 44503 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number: (330) 742-0500 Securities registered pursuant to Section 12(b) of the Act: None None ----------------- ------------------------------------------- (Title of Class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common shares, no par value per share -------------------------------------- (Title of Class) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X No Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last reported sale on June 28, 2002 was approximately $309.3 million and on March 24, 2003 was approximately $295.6 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of March 24, 2003, there were 34,514,965 of the Registrant's Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-K - Portions of 2002 Annual Report to Shareholders Part III of Form 10-K - Portions of Proxy Statement for the 2003 Annual Meeting of Shareholders TABLE OF CONTENTS
Item Number Page ------ ---- PART I 1. Description of Business General..........................................................................1 Discussion of Forward-Looking Statements.........................................1 Lending Activities...............................................................2 Investment Activities............................................................11 Sources of Funds.................................................................15 Competition......................................................................17 Employees........................................................................17 Regulation.......................................................................18 2. Description of Property............................................................19 3. Legal Proceedings..................................................................22 4. Submission of Matters to a Vote of Security Holders................................22 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters..............22 6. Selected Financial Data............................................................22 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................22 7A. Quantitative and Qualitative Disclosures About Market Risk.........................22 8. Financial Statements and Supplemental Data.........................................22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................22 PART III 10. Directors and Executive Officers of the Registrant.................................22 11. Executive Compensation.............................................................23 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters................................................................23 13. Certain Relationships and Related Transactions.....................................23 14. Controls and Procedures............................................................23 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................24 Signatures.................................................................................25 Certifications.............................................................................26 Exhibit Index..............................................................................28
PART I ITEM 1. DESCRIPTION OF BUSINESS 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, Butler Wick Corp. (Butler Wick) became a wholly-owned subsidiary of United Community. As a savings and loan holding company, United Community is subject to regulation, supervision and examination by the OTS, the Division and the Securities and Exchange Commission (SEC). United Community's primary activity is holding the common stock of Home Savings and Butler Wick. Consequently, the following discussion focuses primarily on the business of Home Savings and Butler Wick. United Community's Internet site, http://www.ucfconline.com, contains a hyperlink to NASDAQ where United Community's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after United Community has filed the report with the SEC. Home Savings was organized as a mutual savings association under Ohio law in 1889. Home Savings is subject to supervision and regulation by the Office of Thrift Supervision (OTS), the Ohio Department of Commerce, Division of Financial Institutions (Division) and the Federal Deposit Insurance Corporation (FDIC). Home Savings is a member of the Federal Home Loan Bank (FHLB) of Cincinnati and the deposits of Home Savings are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (SAIF). Home Savings conducts business from its main office located in Youngstown, Ohio, 34 full-service branches and five loan production offices located in northcentral and northeastern Ohio. The principal business of Home Savings is the origination of mortgage loans on one- to four-family residential real estate located in Home Savings' primary market area, which consists of Ashland, Columbiana, Erie, Hancock, Huron, Mahoning, Richland, Sandusky, Seneca and Trumbull Counties. 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, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans. For liquidity and interest rate risk management purposes, Home Savings invests in various financial instruments discussed in the investment section. 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 and maturities of securities. Interest on loans and other investments is Home Savings' primary source of income. Home Savings' principal expense is interest paid on deposit accounts. 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 three wholly-owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Butler Wick conducts business from its main office located in Youngstown, Ohio, eight offices located in the northeastern Ohio and two offices in the 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, IRA's, money market accounts and certificates of deposit. Butler Wick also offers investments in precious metals and a full line of life insurance and annuity products, personal and corporate financial planning, estate planning, pension and profit sharing. DISCUSSION OF FORWARD-LOOKING STATEMENTS When used in this Form 10-K the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the 1 meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in United Community's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings' market area, demand for investments in Butler Wick's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community's financial performance and could cause United Community's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. LENDING ACTIVITIES GENERAL. Home Savings' principal lending activity is the origination of conventional real estate loans secured by one- to four-family residences located in Home Savings' primary market area. Home Savings also originates loans secured by multifamily and nonresidential real estate and originates loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer credits, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans. 2 LOAN PORTFOLIO COMPOSITION. The following table presents certain information regarding the composition of United Community's loan portfolio at the dates indicated:
At December 31, 2002 2001 2000 Percent of Percent of Percent of Amount Total loans Amount Total loans Amount Total loans ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Real estate loans: Permanent One- to four-family $ 889,199 56.02% $ 984,141 65.38% $ 618,112 65.22% Multifamily 79,760 5.05 60,691 4.06 24,085 2.54 Nonresidential 236,581 14.99 153,368 10.25 137,976 14.56 Land 5,812 0.37 11,432 0.76 5,172 0.55 ---------- ---------- ---------- ---------- ---------- ---------- Total permanent 1,211,352 76.43 1,209,632 80.44 785,345 82.87 Construction loans: One- to four-family 122,234 7.74 115,853 7.74 57,955 6.11 Multifamily and nonresidential 35,600 2.26 26,883 1.80 11,389 1.20 ---------- ---------- ---------- ---------- ---------- ---------- Total construction 157,834 10.00 142,736 9.54 69,344 7.31 ---------- ---------- ---------- ---------- ---------- ---------- Total real estate loans 1,369,186 86.43 1,352,368 89.98 854,689 90.18 Consumer loans Home equity 109,671 6.94 48,671 3.25 20,147 2.13 Auto 36,052 2.28 21,703 1.45 5,171 0.55 Education -- -- 5,280 0.35 3,850 0.40 Other (1) 9,797 0.63 35,095 2.34 29,177 3.08 ---------- ---------- ---------- ---------- ---------- ---------- Total consumer 155,520 9.85 110,749 7.40 58,345 6.16 Commercial loans 58,639 3.72 39,226 2.62 34,657 3.66 ---------- ---------- ---------- ---------- ---------- ---------- Total loans 1,583,345 100.00% 1,502,343 100.00% 947,691 100.00% ========== ========== ========== Less net items 105,132 95,864 71,038 ---------- ---------- ---------- Total loans, net $1,478,213 $1,406,479 $ 876,653 ========== ========== ==========
1999 1998 Percent of Percent of Amount total loans Amount Total loans ------- ----------- ------ ----------- (Dollars in thousands) Real estate loans: Permanent One- to four-family $ 546,888 70.92% $ 516,767 73.84% Multifamily 7,838 1.02 8,172 1.17 Nonresidential 116,690 15.13 65,756 9.39 Land 299 0.04 190 0.03 ---------- ---------- ---------- ---------- Total permanent 671,715 87.11 590,885 84.43 Construction loans: One- to four-family 27,486 3.57 25,691 3.67 Multifamily and nonresidential 1,637 0.21 833 0.12 ---------- ---------- ---------- ---------- Total construction 29,123 3.78 26,524 3.79 ---------- ---------- ---------- ---------- Total real estate loans 700,838 90.89 617,409 88.22 Consumer loans Home equity 19,151 2.48 18,321 2.62 Auto 1,130 0.15 1,603 0.23 Education 3,860 0.50 3,993 0.57 Other (1) 18,998 2.46 17,856 2.55 ---------- ---------- ---------- ---------- Total consumer 43,139 5.59 41,773 5.97 Commercial loans 27,119 3.52 40,637 5.81 ---------- ---------- ---------- ---------- Total loans 771,096 100.00% 699,819 100.00% ========== ========== Less net items 48,009 42,321 ---------- ---------- Total loans, net $ 723,087 $ 657,498 ========== ==========
- ---------------------------- (1) Consists of overdraft protection loans and loans to individuals secured by demand accounts, deposits, boats and one- to four-family residences. 3 LOAN MATURITY. The following table sets forth certain information as of December 31, 2002, regarding the dollar amount of loans maturing in Home Savings' portfolio based on their contractual terms to maturity. Demand loans and other loans having no stated schedule of repayments or no stated maturity are reported as due in one year or less. Mortgage loans originated by Home Savings generally include due-on-sale clauses that provide Home Savings with the contractual right to deem the loan immediately due and payable in the event the borrower transfers the ownership of the property without Home Savings' consent. The table does not include the effects of possible prepayments or scheduled repayments.
Principal repayments contractually due in the --------------------------------------------- years ended December 31, ------------------------ 2008 and 2003 2004-2007 thereafter Total ---- --------- ------------ ----- (In thousands) Construction loans: One-to-four family $ 26,259 $ 23,615 $ 72,360 $122,234 Multifamily and nonresidential 1,287 9,870 24,443 35,600 Commercial loans 28,029 25,436 5,174 58,639
The next table sets forth the dollar amount of all loans due after December 31, 2003, which have fixed or adjustable interest rates:
Due after December 31, 2003 --------------------------- (In thousands) -------------- Fixed rate $ 83,412 Adjustable rate 77,486 -------- $ 160,898
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending activity of Home Savings is the origination of conventional loans secured by first mortgages on one- to four-family residences, primarily single-family homes, located within Home Savings' primary market area. At December 31, 2002, Home Savings' one- to four-family residential real estate loans totaled approximately $889.2 million, or 56.0% of total loans. At December 31, 2002, $7.5 million, or 0.85%, of Home Savings' one-to four-family loans were nonperforming. OTS regulations and Ohio law limit the amount which Home Savings may lend in relationship to the appraised value of the real estate and improvements that secure the loan at the time of loan origination. In accordance with such regulations, Home Savings makes loans on one- to four-family residences of up to 97% of the value of the real estate and improvements thereon (LTV), although the majority of such loans have LTVs of 80% or less. Loans on single-family, owner-occupied residences located in low-income or moderate-income census tracts are granted up to a 97% LTV, although Home Savings requires private mortgage insurance on the portion of the principal amount that exceeds 85% of the appraised value of the property securing the loan. Home Savings currently offers fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs) for terms of up to 30 years. Although Home Savings' loan portfolio includes a significant amount of 30-year fixed-rate loans, most loans currently originated by Home Savings are 15-year fixed-rate loans. The interest rate adjustment periods on ARMs are typically one or three years. The maximum interest rate adjustment on most of the ARMs is 2.0% on any adjustment date and a total of 6.0% over the life of the loan. The interest rate adjustments on one-year and three-year ARMs presently offered by Home Savings are indexed to the weekly average rate on the one-year and three-year U.S. Treasury securities, respectively. Rate adjustments are computed by adding a stated margin to the index. Home Savings does not offer ARMs to borrowers on one- to four-family residences with LTVs in excess of 95%. 4 Home Savings issues standby loan origination commitments to qualified borrowers primarily for the purchase of single-family residential real estate. Such commitments are made on specified terms and conditions and are made for periods of up to 60 days, during which time the interest rate is locked in. LOANS SECURED BY MULTIFAMILY RESIDENCES. Home Savings originates loans secured by multifamily properties which contain more than four units. Multifamily loans are offered with adjustable rates of interest, which adjust according to a specified index, and typically have terms ranging from five to ten years and LTVs of up to 75%. Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. Home Savings attempts to reduce the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the project and by obtaining personal guaranties on loans made to corporations and partnerships. Home Savings requires borrowers to submit financial statements annually to enable Home Savings to monitor the loan and requires an assignment of rents. At December 31, 2002, loans secured by multifamily properties totaled approximately $79.8 million, or 5.1% of total loans. The largest loan had a principal balance of $4.9 million and was performing according to its terms. There was approximately $138,000 in multifamily loans that were considered nonperforming at December 31, 2002. LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Home Savings originates loans secured by nonresidential real estate. Home Savings' nonresidential real estate loans have adjustable rates, terms of up to 25 years and generally LTVs of up to 80%. Among the properties securing Home Savings' nonresidential real estate loans are shopping centers, hotels, motels and freezer warehouses. The majority of such properties are located within Home Savings' primary lending area. Home Savings has been involved for over 20 years in freezer warehouse financing through a Youngstown area real estate developer who specializes in the construction of freezer facilities. Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Home Savings has endeavored to reduce such risk by evaluating the credit history of the borrower, the location of the real estate, the financial condition of the borrower, the quality and characteristics of the income stream generated by the property and the appraisals supporting the property's valuation. At December 31, 2002, Home Savings' largest loan secured by nonresidential real estate had a balance of $11.4 million and was performing according to its terms. At December 31, 2002, approximately $236.6 million, or 15.0%, of Home Savings' total loans were secured by mortgages on nonresidential real estate, of which $1.6 million was considered nonperforming at December 31, 2002. CONSTRUCTION LOANS. Home Savings makes loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. Residential construction loans are made to both owner-occupants and to builders on a speculative (unsold) basis. Construction loans to owner-occupants are structured as permanent loans with fixed or adjustable rates of interest and terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only. Construction loans for one- to four-family residences have LTVs of up to 95%, and construction loans for commercial, multifamily and nonresidential properties have LTVs of up to 75%, with the value of the land included as part of the owner's equity. At December 31, 2002, Home Savings had approximately $157.8 million, or 10.0% of its total loans, invested in construction loans, including $122.2 million in one- to four-family residential construction and approximately $35.6 million in multifamily and nonresidential construction loans. Approximately 30% of Home Savings' construction loans to builders are made for homes for which the builder does not have a contract with a buyer. Home Savings, however, generally limits speculative loans to builders with whom Home Savings has a long-standing relationship and limits the number of outstanding loans on unsold homes under construction within a specific area. Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties because construction loans are more difficult to appraise and to monitor. Loan funds are advanced upon 5 the security of the project under construction. In the event a default on a construction loan occurs and foreclosure follows, Home Savings must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. Nonperforming construction loans at December 31, 2002 amounted to $3.1 million. Home Savings also originates a limited number of loans secured by vacant land for the construction of single-family houses. Home Savings' land loans are generally fixed-rate loans for terms up to five years and require a LTV of 75% or less. At December 31, 2002, approximately $5.8 million, or 0.37%, of Home Savings' total loans were secured by land loans made to individuals intending primarily to construct and occupy single-family residences on the properties. COMMERCIAL LOANS. Home Savings makes commercial loans to businesses in its primary market area, including traditional lines of credit, revolving lines of credit, term loans and acquisition and development loans. The LTV ratios for commercial loans depend upon the nature of the underlying collateral, but generally commercial loans are made with LTVs of 50 to 85% and have adjustable interest rates. Lines of credit and revolving credits are generally priced on a floating rate basis, which is tied to the prime rate or U.S. Treasury bill rate. Term and time loans are usually adjustable, but can have fixed rates of interest, and have terms of one to five years. At December 31, 2002, Home Savings had approximately $58.6 million, or 3.7% of total loans, invested in commercial loans. The majority of these loans are secured by a security interest in inventory, accounts receivable, machinery, investment property, vehicles or other assets of the borrower. Home Savings also originates unsecured commercial loans including lines of credit for periods of less than 12 months, short-term loans and, occasionally, term loans for periods of up to 36 months. These loans are underwritten based on the creditworthiness of the borrowers and the guarantors. As a result of the addition of experienced loan personnel and the implementation of enhanced underwriting procedures, Home Savings intends to increase its unsecured commercial loan volume in the future. Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependent on the income stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial loans, if any, often consists of rapidly depreciating assets. Nonperforming commercial loans at December 31, 2002 amounted to $952,000. CONSUMER LOANS. Home Savings originates various types of consumer loans, including home equity loans, education loans, loans secured by savings accounts, vehicle loans and unsecured loans. Consumer loans are made at fixed and adjustable rates of interest and for varying terms based on the type of loan. Consumer loans secured by a deposit or savings account are made for up to 100% of the principal balance of the account and generally have adjustable rates, which adjust based on the weekly average yield on U.S. Treasury securities plus a margin. For new automobiles, loans are originated for up to 100% of the MSRP value of the car with terms of up to 66 months, and for used automobiles, loans are made for up to the average trade value of the car model and a term of up to five years. All automobile loans are originated indirectly by approved auto dealerships. At December 31, 2002, automobile loans amounted to $36.1 million, or 23.2%, of Home Savings' consumer loan portfolio. Home Savings makes closed-end home equity loans in an amount which, when added to the prior indebtedness secured by the real estate, does not exceed 90% of the estimated value of the real estate. Home equity loans are typically secured by a second mortgage on the real estate. Home Savings frequently holds the first mortgage, although Home Savings will make home equity loans in cases where another lender holds the first mortgage. Home Savings also offers home equity loans with a line of credit feature. Home equity loans are made with adjustable and fixed rates of interest. Fixed-rate home equity loans have terms of ten years but can be called after five years. Rate adjustments on adjustable home equity loans are determined by adding a 3.0% margin for loans on one- to four-family residences of up to 80% LTV or by adding a 4.0% margin for loans on one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury index. At December 31, 2002, approximately $109.7 million, or 70.6%, of Home Savings' consumer loan portfolio consisted of home equity loans. Consumer loans may entail greater credit risk than do residential mortgage loans. The risk of default on consumer loans increases during periods of recession, high unemployment, and other adverse economic conditions. Although Home Savings has not had significant delinquencies on consumer loans, no assurance can be provided that delinquencies will not 6 increase. Nonperforming consumer loans as a percentage of outstanding consumer loans amounted to 0.46%, 0.39% and 0.79% at December 31, 2002, 2001 and 2000, respectively. At December 31, 2002, Home Savings had approximately $155.5 million, or 9.85% of its total loans, invested in consumer loans. Home Savings anticipates a moderate increase in its consumer loan portfolio in the future as a result of increased cross-selling efforts to existing customers. LOAN SOLICITATION AND PROCESSING. The lending activities of Home Savings are subject to the written, non-discriminatory underwriting standards and loan origination procedures approved by Home Savings' Board of Directors (Board). Loan originations are generally obtained from existing customers and members of the local community and from referrals by real estate brokers, lawyers, accountants, and current and former customers. Home Savings also advertises in the local print media, radio and television. Each of Home Savings' 34 offices and 4 loan production offices have loan personnel who can accept loan applications, which are then forwarded to Home Savings' Underwriting Department for processing and approval. In underwriting real estate loans, Home Savings typically obtains a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate that will be given as security for the loan is prepared by one of Home Savings' in-house licensed appraisers or an approved fee appraiser. For certain large nonresidential real estate loans, the appraisal is conducted by an outside fee appraiser whose report is reviewed by Home Savings' chief appraiser. Upon the completion of the appraisal and the receipt of information on the credit history of the borrower, the loan application is submitted for review to the appropriate persons. Commercial, residential and nonresidential real estate loans up to $1.0 million may be approved by an authorized executive officer. Loan requests of $1.0 million to $15.0 million require the approval of the Loan Committee. All loans of $15.0 million or more require approval by three executive officers and a majority of the Board. Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name Home Savings as an insured mortgagee. Home Savings generally obtains an attorney's opinion of title, although title insurance may be obtained on larger nonresidential real estate loans. The procedure for approval of construction loans is the same as for permanent real estate loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. Home Savings also evaluates the feasibility of the proposed construction project and the experience and record of the builder. Once approved, the construction loan is disbursed in installments based upon periodic inspections of construction progress. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any. LOAN ORIGINATIONS AND PURCHASES AND SALE OF MORTGAGE LOANS. Historically, Home Savings has originated substantially all of the loans in its portfolio and has held them until maturity. Nevertheless, Home Savings' residential loans are generally made on terms and conditions and documented to conform to the secondary market guidelines for sale to the Federal Home Loan Mortgage Company (FHLMC) and other institutional investors in the secondary market. Education loans are sold, once the borrower leaves school, to the Student Loan Marketing Association. Home Savings does not originate first mortgage loans insured by the Federal Housing Authority or guaranteed by the Veterans Administration, but it has purchased such loans as well as participation interests in such loans. In June 2002, Home Savings securitized and sold $107.9 million in fixed rate single family mortgage loans, and sold an additional $226.6 million of fixed rate mortgage loans during 2002. Home Savings generally retains the servicing rights on the sale of loans originated in the geographic area surrounding its full service branches, and sells loans generated by its loan production offices servicing released. Home Savings anticipates continued participation in the secondary mortgage loan market to maintain its desired risk profile. At December 31, 2002, Home Savings had $31.3 million of outstanding commitments to originate loans and $130.5 million available to borrowers under consumer and commercial lines of credit. At December 31, 2002, Home Savings had $54.5 million in undisbursed funds related to construction loans in process. 7 LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the aggregate amount that Home Savings may lend to any one borrower to an amount equal to 15.0% of Home Savings' unimpaired capital and unimpaired surplus (Lending Limit Capital). A savings association may lend to one borrower an additional amount not to exceed 10.0% of Home Savings' Lending Limit Capital if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. Based on such limits, Home Savings could lend approximately $24.5 million to one borrower at December 31, 2002. The largest amount Home Savings had outstanding to one borrower at December 31, 2002, was $17.5 million, which consisted of two loans secured by first mortgages on commercial buildings. At December 31, 2002, these loans were performing in accordance with their terms. DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Home Savings attempts to maintain a high level of asset quality through sound underwriting policies and aggressive collection practices. The Collections Department of Home Savings uses a collection program to monitor and review the status of loans. When a loan payment has not been made by the sixteenth of the month, a past due notice is sent to the customer. Once a loan is 20 days delinquent, the account is turned over to a collector, who will continue to try to bring the loan current through telephone calls, personal visits and letters until the loan has been delinquent 60 to 75 days. If the loan has not been brought current by the 75th day, the loan will be reviewed for foreclosure consideration. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding balance in relation to the original indebtedness, the extent of the delinquency, the borrower's ability and willingness to cooperate in curing the delinquency and any environmental issues that may need to be addressed. Once the foreclosure is approved by the Collection Manager, the Vice President of Loan Administration and the Executive Committee, it is turned over to outside legal counsel. The following table reflects the amount of loans in a delinquent status as of the dates indicated:
At December 31, ---------------------------------------------------------------------------- 2002 2001 ---- ---- Percent of Percent of total total Number Amount loans Number Amount loans ------ ------ ------ ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 364 $21,757 1.38% 348 $18,450 1.22% 60-89 days 126 5,852 0.37 127 4,848 0.32 90 days or over 207 14,424 0.91 237 10,889 0.72 ------- ------- ---- ------- ------- ---- Total delinquent loans 697 $42,033 2.66% 712 $34,187 2.26% ======= ======= ==== ======= ======= ====
Nonperforming assets include nonaccruing loans, restructured loans, real estate acquired by foreclosure or by deed-in-lieu thereof and repossessed assets. Loans are reviewed through monthly reports to the Board and weekly reports to senior management and are placed on nonaccrual status when collection in full is considered doubtful by management. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent cash payments are generally applied to interest income unless, in the opinion of management, the collection of principal and interest is doubtful. In those cases, subsequent cash payments are applied to principal. 8 The following table sets forth information with respect to Home Savings' nonperforming loans and other assets at the dates indicated:
At December 31, --------------------------------------------- 2002 2001 2000 ---- ---- ---- (Dollars in thousands) Nonperforming loans: Nonaccrual loans Real estate loans: One- to four-family $ 7,567 $ 5,813 $ 2,966 Multifamily and nonresidential 2,049 775 3,019 Construction (net of loans in process) and land 3,141 3,398 1,741 ------- ------- ------- Total real estate loans 12,757 9,986 7,726 Consumer 715 434 457 Commercial 952 469 1,360 ------- ------- ------- Total nonaccrual loans 14,424 10,889 9,543 Restructured real estate loans 1,271 1,572 208 ------- ------- ------- Total nonperforming loans 15,695 12,461 9,751 Real estate acquired through foreclosure and other repossessed assets 1,150 477 359 ------- ------- ------- Total nonperforming assets $16,845 $12,938 $10,110 ======= ======= ======= Nonperforming loans as a percent of total loans 1.01% 0.89% 1.10% Nonperforming assets as a percent of total assets 0.83 0.67 0.77 Allowance for loan losses as a percent of nonperforming loans 97.62 92.13 67.79 Allowance for loan losses as a percent of total loans before allowance 1.01 0.81 0.74
At December 31, ------------------------ 1999 1998 ---- ---- (Dollars in thousands) Nonperforming loans: Nonaccrual loans Real estate loans: One- to four-family $ 2,923 $ 3,655 Multifamily and nonresidential 82 378 Construction (net of loans in process) and land 272 233 ------- ------- Total real estate loans 3,277 4,266 Consumer 132 317 Commercial 206 1,146 ------- ------- Total nonaccrual loans 3,615 5,729 Restructured real estate loans 317 1,832 ------- ------- Total nonperforming loans 3,932 7,561 Real estate acquired through foreclosure and other repossessed assets 157 78 ------- ------- Total nonperforming assets $ 4,089 $ 7,639 ======= ======= Nonperforming loans as a percent of total loans 0.54% 1.15% Nonperforming assets as a percent of total assets 0.30 0.59 Allowance for loan losses as a percent of nonperforming loans 164.86 84.62 Allowance for loan losses as a percent of total loans before allowance 0.88 0.96
For 2002, approximately $597,000 in additional interest income would have been recorded had nonaccrual and restructured loans been accruing pursuant to contractual terms. During 2002, interest collected on such loans and included in net income was approximately $386,000. Nonperforming assets increased approximately $3.9 million, or 30.2%, to $16.8 million at December 31, 2002, from $12.9 million at December 31, 2001. This increase is due to a variety of factors, including loans acquired from Potters in 2002, and is not due to a single relationship. At December 31, 2002, total nonaccrual and restructured loans accounted for 1.01% of net loans receivable, compared to 0.89% at December 31, 2001. Total nonperforming assets were 0.83% of total assets as of December 31, 2002, an increase of 0.16% from 0.67% as of December 31, 2001. Real estate acquired in settlement of loans is classified separately on the balance sheet at the lower of cost or fair value as of the date of acquisition. After foreclosure, the loan is written down to the value of the underlying collateral by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income or loss on disposition, are included in other expenses. At December 31, 2002, the carrying value of real estate acquired in settlement of loans was $972,000 and consisted of thirteen single-family properties, one non-residential property and one property secured by land. In addition to the nonperforming loans identified above, other loans may be identified as having potential credit problems that result in those loans being classified by our internal loan review function. These potential problem loans, which have not exhibited the more severe weaknesses generally present in nonperforming loans, amounted to $3.5 million, net of applicable reserves, at December 31, 2002. Home Savings classifies its assets in accordance with federal regulations. Problem assets are classified as "special mention," "substandard," "doubtful" or "loss." "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that Home Savings will sustain some loss if the deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable 9 and (ii) there is a high possibility of loss. An asset classified as "loss" is considered uncollectible and of such little value that its continuance as an asset of Home Savings is not warranted. Federal regulations also contain a "special mention" category, consisting of assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving management's close attention. Home Savings classifies its commercial loans on a periodic basis, not less often than annually, according to a nine-level risk rating system that includes, in addition to the "substandard," "doubtful" and "loss," categories discussed above, further classifications of "prime," "good," "satisfactory," "fair," "watch" and "uncertain." Commercial loans that are classified "prime," "good," "satisfactory" or "fair" possess levels of risk, if any, which are generally acceptable to Home Savings. A loan which is classified as "uncertain" represents a loan for which there is insufficient current information on the borrower to evaluate the primary source of payment. A loan may only be maintained as "uncertain" for 90 days while additional information is obtained, subject to one 90-day extension by the Commercial Loan Manager or a higher level officer. Home Savings analyzes each classified asset quarterly to determine whether changes in the classifications are appropriate under the circumstances. Such analysis focuses on a variety of factors, including the amount of, and the reasons for, any delinquency, the use of the real estate securing the loan, the financial condition of the borrower, and the appraised value of the real estate. As such factors change, the classification of the asset will change accordingly. ALLOWANCE FOR LOAN LOSSES. Management establishes the allowance for loan losses at a level it believes adequate to absorb probable losses inherent in the loan portfolio. Management bases its determination of the adequacy of the allowance upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio and current economic conditions. Consequently, these estimates are particularly susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level. In determining the adequacy of the allowance for loan loss, management reviews and evaluates on a quarterly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Review Committee and allocated to the loan. Other loans not specifically reviewed by management are evaluated using the historical charge-off experience ratio calculated by type of loan. The historical charge-off experience ratio factors into account the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied and any other known factors which may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed quarterly and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends or actual principal charge-off. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentration and the effect changing economic conditions have on Home Savings. 10 The following table sets forth an analysis of Home Savings' allowance for loan losses for the periods indicated:
Year ended December 31, ------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at beginning of period $ 11,480 $ 6,553 $ 6,405 $ 6,398 $ 5,982 Provision for loan losses 3,578 2,495 300 100 650 Charge-offs: Real estate (347) (89) (83) (60) (47) Consumer (410) (283) (38) (65) (72) Commercial (1,210) (55) (80) -- (151) -------- -------- -------- -------- -------- Total charge-offs (1,967) (427) (201) (125) (270) -------- -------- -------- -------- -------- Recoveries: Real estate 71 13 17 21 25 Consumer 65 10 9 9 10 Commercial 3 9 23 2 1 -------- -------- -------- -------- -------- Total recoveries 139 32 49 32 36 -------- -------- -------- -------- -------- Net recoveries (charge-offs) (1,828) (395) (152) (93) (234) Acquisition of Industrial -- 2,795 -- -- -- Acquisition of Potters 1,869 -- -- -- -- -------- -------- -------- -------- -------- Balance at end of year $ 15,099 $ 11,480 $ 6,553 $ 6,405 $ 6,398 ======== ======== ======== ======== ======== Ratio of net charge-offs to average net loans (0.12)% (0.03)% (0.02)% (0.01)% (0.04)% Ratio of net charge-offs to recovery of loan loss allowances (12.11)% (14.55)% (50.67)% (93.00)% (36.00)%
The following table sets forth the allocation of the allowance for loan losses by category. The allocations are based on management's assessment of the risk characteristics of each of the components of the total loan portfolio and are subject to change as and when the risk factors of each component change. The allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in any category.
At December 31, --------------------------------------------------------------------------------------------------- 2002 2001 2000 ---- ---- ---- Percent of loans in Percent of loans in Percent of loans in each category each category each category Amount to total loans Amount to total loans Amount to total loans ------ ------------------- ------ ------------------- ------ ------------------ (Dollars in thousands) Real estate loans $11,017 72.97% $ 8,339 72.64% $ 4,117 62.83% Consumer loans 1,947 12.89 975 8.49 566 8.64 Commercial loans 2,135 14.14 2,166 18.87 1,870 28.54 ------- ------- ------- ------- ------- ------- Total $15,099 100.00% $11,480 100.00% $ 6,553 100.00% ======= ======= ======= ======= ======= =======
At December 31, -------------------------------------------------------------------------- 1999 1998 ---- ---- Percent of loans in Percent of loans in each category each category Amount to total loans Amount to total loans ------ ------------------- ------ -------------------- (Dollars in thousands) Real estate loans $4,182 65.29% $4,220 65.96% Consumer loans 555 8.67 611 9.55 Commercial loans 1,668 26.04 1,567 24.49 ------ ------ ------ ------ Total $6,405 100.00% $6,398 100.00% ====== ====== ====== ======
INVESTMENT ACTIVITIES GENERAL. Investment and mortgage-related securities are classified upon acquisition as available for sale, held to maturity, or trading. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss, net of taxes, reflected as a component of retained earnings. Securities classified as held to maturity are carried at amortized cost. Securities classified as trading are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of income. United Community, Home Savings and Butler Wick recognize premiums and discounts 11 in interest income over the period to maturity or call by the level yield method and realized gains or losses on the sale of debt securities based on the amortized cost of the specific securities sold. HOME SAVINGS INVESTMENT ACTIVITY. Federal regulations and Ohio law permit Home Savings to invest in various types of marketable securities, including interest-bearing deposits in other financial institutions, federal funds, U.S. Treasury and agency obligations, mortgage-related securities, and certain other specified investments. The Board has adopted an investment policy which authorizes management to make investments in U.S. Treasury obligations, U.S. Federal agency and federally-sponsored corporation obligations, mortgage-related securities issued or sponsored by Federal National Mortgage Association (FNMA), FHLMC, Government National Mortgage Association (GNMA), as well as private issuers, investment-grade municipal obligations, creditworthy, unrated securities issued by municipalities in which an office of Home Savings is located, investment-grade corporate debt securities, investment-grade asset-backed securities, certificates of deposit that are fully-insured by the FDIC, bankers' acceptances, federal funds and money market funds. Home Savings' investment policy is designed primarily to provide and maintain liquidity within regulatory guidelines, to maintain a balance of high quality investments to minimize risk, and to maximize return without sacrificing liquidity and safety. The investment activities of Home Savings are supervised by Home Savings' Asset/Liability Committee and investment purchases are monitored weekly by the Executive Committee. Home Savings maintains a significant portfolio of mortgage-related securities and CMOs, which are rated the highest credit quality by a nationally recognized rating agency. Mortgage-related securities are issued by FNMA, GNMA and FHLMC. Mortgage-related securities generally entitle Home Savings to receive a portion of the cash flows from an identified pool of mortgages. GNMA securities, FNMA securities and a majority of Home Savings' FHLMC securities are guaranteed by the issuing agency as to timely payment of principal and interest. The balance of Home Savings' FHLMC securities are guaranteed as to timely payment of interest and eventual payment of principal. The CMOs are a type of debt security issued by a special-purpose entity that aggregates pools of mortgages and mortgage-related securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into tranches or classes which have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages, as opposed to pass through mortgage-related securities where cash flows are distributed pro rata to all security holders. In contrast to mortgage-related securities from which cash flow is received (and hence, prepayment risk is shared) pro rata by all securities holders, the cash flow from the mortgages or mortgage-related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage-related securities resulting from unexpected prepayment activity. Home Savings is exposed to prepayment risk and reinvestment risk to the extent that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Mortgage- related securities enable Home Savings to generate positive interest rate spreads with minimal administrative expense and reduce credit risk due to either guarantees provided by the issuer or the high credit rating by the rating agency. Mortgage- related securities classified as available for sale also provide Home Savings with an additional source of liquid funds. Home Savings also invests in investment grade corporate notes which mature within three years or less. The notes, which include debentures and collateralized notes, generally provide a spread above the risk-free rate afforded by comparable maturity U.S. Treasury securities. BUTLER WICK INVESTMENT ACTIVITY. Butler Wick holds securities through three subsidiaries, Butler Wick & Co., Inc., Butler Wick Trust Company and Butler Wick Asset Management. Butler Wick & Co., Inc. invests in municipal securities and, to a lesser extent, government agency securities for sale to clients. These securities are held as available for sale. Butler Wick & Co., Inc. does not make markets in equity securities. In order to qualify as a fiduciary in both the State of Ohio and in the Commonwealth of Pennsylvania, Butler Wick Trust Company deposited United States Government obligations having a principal value of $100,000 with the Federal Reserve Bank for each state. In addition to these deposits, U.S. Government obligations are owned by Butler Wick Trust Company. All of these securities are classified as held to maturity. UNITED COMMUNITY INVESTMENT ACTIVITIES. Funds maintained by United Community for general corporate purposes, including possible acquisitions, are invested in investment grade corporate notes, federally-sponsored corporate 12 obligations, and equity securities. In addition, United Community invests in Eurodollars, which is a short-term investment. These types of investments provide a great deal of liquidity and flexibility. The maturities of United Community's consolidated available for sale and held to maturity marketable securities at December 31, 2002 excluding FHLB stock, and equity securities, are indicated in the following table:
At December 31, 2002 --------------------------------------------------------------------- After one through One year or less Five years Total -------------------- -------------------- ----------------------------------- Amortized Average Amortized Average Amortized Fair Average cost yield cost Yield cost value Yield --------- -------- --------- ------- --------- ------- ------- (Dollars in thousands) Short-term investments: Federal funds $12,105 1.16% -- -- $12,105 $12,105 1.16% Eurodollars 42,774 1.16 -- -- 42,774 42,774 1.16 Money market funds 21,157 1.27 -- -- 21,157 21,157 1.27 Travelers cash 1,481 1.33 -- -- 1,481 1,481 1.33 Liquid cash 241 1.15 -- -- 241 241 1.15 ------- ---- ------- ------- ---- Total short-term investments $77,758 1.19% -- -- $77,758 $77,758 1.19% ======= ==== ======= ======= ==== Investment securities: Available for sale $51,032 3.60% $18,790 3.45% $69,822 $70,572 3.56% Total investment securities $51,032 3.60% $18,790 3.45% $69,822 $70,572 3.56% ======= ==== ======= ==== ======= ======= ====
13 The following table sets forth the amortized cost and fair value of United Community's consolidated available for sale and held to maturity marketable securities, FHLB stock, and mortgage-related securities at the dates indicated.
At December 31, ------------------------------------------------------------------------------------ 2002 2001 ------------------------ -------------------------------------------------------- Fair % of Amortized % of Fair % of Value Total Cost Total Value Total --------- --------- --------- ---------- --------- ------- (Dollars in thousands) Available for sale: Short-term investments: Federal funds $ 12,105 3.60% $148,111 38.01% Money market funds 21,157 6.29 1,238 0.32 Eurodollars 42,774 12.73 20,710 5.32 Other 1,722 0.51 237 0.06 FHLB stock 21,069 6.27 18,760 4.82 Equity investments 7,994 2.38 11,828 3.04 Marketable securities: U.S. Treasury obligations 1,636 0.49 4,093 1.05 U.S. Government agency obligations 51,331 15.27 21,067 5.41 Corporate notes 17,592 5.23 14,093 3.62 Tax exempt municipal bonds 13 0.01 -- -- Mortgage-related securities: FHLMC 62,596 18.62 15,202 3.90 FNMA 60,322 17.95 29,381 7.54 GNMA 14,054 4.18 2,701 0.69 Private issues 21,730 6.47 19,785 5.08 Total available for sale 336,095 100.00 307,206 78.86 -------- -------- -------- -------- Held to maturity: Mortgage-related securities: U.S. Treasury obligations -- -- 1,197 0.31 1,202 0.31 U.S. Government agency obligations -- -- 501 0.13 493 0.13 GNMA -- -- 2,391 0.62 2,532 0.65 FHLMC -- -- 50,896 13.20 51,810 13.30 FNMA -- -- 25,511 6.62 26,302 6.75 -------- -------- -------- -------- -------- -------- Total held to maturity -- -- 80,496 20.88 82,339 21.14 -------- -------- -------- -------- -------- -------- Total investment portfolio $336,095 100.00% $385,545 100.00% $389,545 100.00% ======== ======== ======== ======== ======== ========
At December 31, -------------------------------------------------------- 2000 ------------------------------------------------------- Amortized % of Fair % of Cost Total Value Total --------- --------- --------- ------- (Dollars in thousands) Available for sale: Short-term investments: Federal funds $ 2,442 0.73% Money market funds 180 0.05 Eurodollars 19,643 5.85 Other 228 0.06 FHLB stock 13,793 4.11 Equity investments 7,411 2.21 Marketable securities: U.S. Treasury obligations 7,526 2.24 U.S. Government agency obligations 37,916 11.30 Corporate notes 45,592 13.59 Tax exempt municipal bonds -- -- Mortgage-related securities: FHLMC 16,669 4.97 FNMA 41,423 12.34 GNMA -- -- Private issues 33,639 10.02 Total available for sale 226,462 67.48 -------- -------- Held to maturity: Mortgage-related securities: U.S. Treasury obligations 876 0.26 900 0.27 U.S. Government agency obligations -- -- -- -- GNMA 3,599 1.07 3,703 1.10 FHLMC 69,375 20.70 69,560 20.73 FNMA 34,710 10.36 34,966 10.42 -------- -------- -------- -------- Total held to maturity 108,560 32.39 109,129 32.52 -------- -------- -------- -------- Total investment portfolio $335,172 100.00% $335,591 100.00% ======== ======== ======== ========
14 SOURCES OF FUNDS GENERAL. Deposits have traditionally been the primary source of Home Savings' funds for use in lending and other investment activities. In addition to deposits, Home Savings derives funds from interest payments and principal repayments on loans and income on other earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate in response to general interest rates and money market conditions. Home Savings may also borrow from the FHLB, as well as other suitable lenders, as a source of funds. DEPOSITS. Deposits are attracted principally from within Home Savings' primary market area through the offering of a selection of deposit instruments, including regular passbook savings accounts, demand deposits, individual retirement accounts (IRAs), NOW accounts, money market accounts, and certificates of deposit. Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are monitored weekly by the Executive Committee. Home Savings does not use brokers to attract deposits. The amount of deposits from outside Home Savings' primary market area is not significant. The following table sets forth the dollar amount of deposits in the various types of accounts offered by Home Savings at the dates indicated:
At December 31,2002 For the Year Ended December 31, 2002 ------------------- --------------------------------------- Percent Weighted Percent Weighted of total average Average of average average Amount deposits rate balance deposits rate ------ -------- --------- ------- -------- --------- (Dollars in thousands) Noninterest bearing demand $ 56,452 3.81% -% $ 80,969 5.36% -% NOW and money market accounts 304,830 20.57 1.57 279,894 18.54 1.9 Savings accounts 302,276 20.40 1.26 299,048 19.80 1.65 Certificates of deposit 818,343 55.22 3.88 850,054 56.30 4.08 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits $1,481,901 100.00% 2.72% $1,509,965 100.00% 2.98% ========== ========== ========== ========== ========== ==========
For the Year Ended December 31, 2001 For the Year Ended December 31, 2000 ---------------------------------------- --------------------------------------- Percent Weighted Percent Weighted Average of average average Average of average average balance deposits rate balance deposits rate -------- -------- -------- -------- -------- ------ (Dollars in thousands) Noninterest bearing demand $ 55,088 4.73% -% $ 41,699 4.80% -% NOW and money market accounts 184,120 15.81 2.96 145,649 16.77 2.86 Savings accounts 228,485 19.62 2.28 213,342 24.56 2.47 Certificates of deposit 696,633 59.84 5.36 467,823 53.86 5.55 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits $1,164,326 100.00% 4.12% $ 868,513 100.00% 4.08% ========== ========== ========== ========== ========== ==========
Total deposits increased by $98.5 million, or 7.12%, from December 31, 2001, to December 31, 2002. 15 The following table shows rate and maturity information for Home Savings' certificates of deposit at December 31, 2002:
Over Over Up to 1 year to 2 years to Rate one year 2 years 3 years Thereafter Total ---- -------- -------- -------- ---------- ----- (In thousands) 4.00% or less $340,015 $103,279 $ 37,967 $ 11,492 $492,771 4.01% to 6.00% 86,782 22,735 23,488 93,305 226,310 6.01% to 8.00% 58,682 5,943 33,103 1,534 99,262 8.01% to 10.00% -- -- -- -- -- -------- -------- -------- -------- -------- Total certificates of deposit $485,479 $131,975 $ 94,558 $106,331 $818,343 ======== ======== ======== ======== ======== Percent of total certificates of deposit 59.32% 16.13% 11.56% 12.99% 100.00%
At December 31, 2002, approximately $485.5 million of Home Savings' certificates of deposit 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. If, however, Home Savings is unable to renew the maturing certificates for any reason, borrowings of up to $681.7 million are available from the FHLB of Cincinnati. The following table presents the amount of Home Savings' certificates of deposit of $100,000 or more by the time remaining until maturity at December 31, 2002:
Maturity Amount -------- ------ (In thousands) Three months or less $ 36,778 Over 3 months to 6 months 34,551 Over 6 months to 12 months 30,642 Over 12 months 65,748 -------- Total $167,719 ========
Based on past experience, management believes that a substantial percentage of the above certificates will be renewed with Home Savings at maturity. 16 The following table sets forth Home Savings' deposit account balance activity for the periods indicated:
Year ended December 31, ----------------------------------- 2002 2001 ----- ---- (Dollars in thousands) Beginning balance $1,383,418 $ 900,413 Net increase in deposits 53,919 434,233 ---------- ---------- Net deposits before interest credited 1,437,337 1,334,646 Interest credited 44,564 48,772 ---------- ---------- Ending balance $1,481,901 $1,383,418 ========== ========== Net increase $ 98,483 $ 483,005 ========== ========== Percent increase 7.12% 53.64%
BORROWINGS. The FHLB system functions as a central reserve bank providing credit for its member institutions and certain other financial institutions. As a member in good standing of the FHLB of Cincinnati, Home Savings is authorized to apply for advances, provided certain standards of creditworthiness have been met. Under current regulations, an association must meet certain qualifications to be eligible for FHLB advances. The extent to which an association is eligible for such advances will depend upon whether it meets the Qualified Thrift Lender (QTL) test. If an association meets the QTL test, the association will be eligible for 100% of the advances it would otherwise be eligible to receive. If an association does not meet the QTL test, the association will be eligible for such advances only to the extent it holds specified QTL test assets. At December 31, 2002, Home Savings was in compliance with the QTL test. Home Savings may borrow up to $681.7 million from the FHLB, and had $183.0 million outstanding advances at December 31, 2002. Butler Wick borrows on a secured basis to fund client receivables. Short-term bank loans bear interest at the federal funds rate plus 1% and are payable on demand. The loans are fully collateralized by marketable securities from both customers' margin accounts and securities owned by Butler Wick. Short-term borrowings also take the form of securities loaned to other broker/dealers. Short-term borrowings are available to Butler Wick to the extent of the loan value of the marketable securities. COMPETITION Home Savings faces competition for deposits and loans from other savings and loan associations, credit unions, banks and mortgage originators in Home Savings' primary market area. The primary factors in competition for deposits are customer service, convenience of office location and interest rates. Home Savings competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. Butler Wick offers retail brokerage, asset management, and trust services to clients primarily in northeastern Ohio and western Pennsylvania. In each of these businesses, Butler Wick competes with both regional and national firms. As a full service broker, Butler Wick competes based on personal service rather than price. Butler Wick Asset Management Company and Butler Wick Trust Company are the only such locally owned and managed financial services providers. EMPLOYEES At December 31, 2002, Home Savings and Butler Wick had 605 and 169 full-time equivalent employees, respectively. Home Savings and Butler Wick believe that relations with their employees are good. Home Savings offers health, life and disability benefits to all employees, a 401(k) plan and an employee stock ownership plan for its eligible employees. Home Savings had a defined benefit pension plan, which was terminated effective July 31, 1999. Home Savings offered a post-retirement health plan for its eligible employees. The benefits of this plan were curtailed in 2000. Butler Wick offers health, life and disability benefits to all employees, a 401(k) plan, a profit sharing plan and a retention plan for 17 its eligible employees. None of the employees of Home Savings or Butler Wick are represented by a collective bargaining unit. REGULATION United Community is a unitary savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (HOLA), and is subject to regulation, examination, and oversight by the OTS, although there are generally no restrictions on the activities of United Community unless the OTS determines that there is reasonable cause to believe that an activity constitutes a serious risk to the financial safety, soundness, or stability of Home Savings. Home Savings is subject to regulation, examination, and oversight by the OTS, the Division and the FDIC, and is also subject to certain provisions of the Federal Reserve Act. Butler Wick is subject to regulation by the SEC and NASD Regulation, Inc. United Community, Home Savings and Butler Wick are also subject to the provisions of the Ohio Revised Code applicable to corporations generally, including laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties to Ohio. The OTS, the FDIC, the Division, the SEC and the NASD each have various powers to initiate supervisory measures or formal enforcement actions if United Community or the subsidiary they regulate does not comply with applicable regulations. If the grounds provided by law exist, the OTS, the FDIC or the Division may place Home Savings in conservatorship or receivership. Home Savings is also subject to regulatory oversight under various consumer protection and fair lending laws which govern, among other things, truth-in-lending disclosures, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of Home Savings to open a new branch or engage in a merger. Federal law prohibits Home Savings from making a capital distribution to anyone or paying management fees to any person having control of Home Savings if, after such distribution or payment, Home Savings would be undercapitalized. In addition, Home Savings may not pay any dividends if, as a result, its net worth would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. 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 Home Savings' retained net income for the preceding two years; (ii) if Home Savings would not be at least adequately capitalized following the capital distribution; or (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. In December 2002, Home Savings paid a dividend to United Community of $30.0 million. Loans by Home Savings to executive officers, directors, and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders, and their related interests cannot exceed specified limits. Most loans to directors, executive officers, and principal shareholders must be approved in advance by a majority of the "disinterested" members of the Board with any "interested" director not participating. All loans to directors, executive officers, and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. All other transactions between Home Savings and its affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (FRA). United Community and Butler Wick are affiliates of Home Savings for this purpose. Under federal law and regulations, no person, directly or indirectly, or acting in concert with others, may acquire control of Home Savings or United Community without 60 days' prior notice to the OTS. "Control" is generally defined as having more than 25% ownership or voting power; however, ownership or voting power of more than 10% may be deemed "control" if certain factors are in place. If the acquisition of control is by a company, the acquirer must obtain approval, rather than give notice, of the acquisition as a savings and loan holding company. In addition, any merger of Home Savings must be approved by the OTS as well as the Division. Further, any merger of United Community in which United Community is not the resulting company must also be approved by both the OTS and the Division. 18 ITEM 2. DESCRIPTION OF PROPERTY The following table sets forth certain information at December 31, 2002, regarding the properties on which the main office, the branch offices and the loan production offices of Home Savings are located:
Owned or Year Net book Location leased opened value Deposits - -------- --------- ------ ------ -------- (In thousands) 275 Federal Plaza West Owned 1919 $ 4,374 $ 81,147 Youngstown, Ohio 32 State Street Owned 1916 288 101,301 Struthers, Ohio 4005 Hillman Way Owned 1958 434 96,502 Boardman, Ohio 650 East State Street Owned 1925 166 85,480 Salem, Ohio 6000 Mahoning Avenue Leased 1959 19 90,259 Austintown, Ohio 7525 Market Street Owned 1971 583 132,699 Boardman, Ohio 4259 Kirk Road Owned 1975 528 103,933 Austintown, Ohio 202 South Main Street Owned 1975 449 94,857 Poland, Ohio 3500 Belmont Avenue Owned 1976 283 79,864 Youngstown, Ohio 29 North Broad Street Owned 1977 255 46,563 Canfield, Ohio 980 Great East Plaza Leased 1980 10 30,911 Niles, Ohio One University Plaza Leased 2000 36 1,592 1059-1060 Kilcawley Center Youngstown, Ohio 127 North Market Street Owned 1987 117 33,365 East Palestine, Ohio 210 West Lincoln Way Owned 1987 301 20,923 Lisbon, Ohio 2996 McCartney Road Leased 2000 136 4,947 Youngstown, Ohio 14825 South Avenue Ext Owned 1997 727 30,045 Columbiana, Ohio 4625 North River Road Owned 2000 1,199 17,298 Warren, Ohio
19
Owned or Year Net book Location leased opened value Deposits - -------- --------- ------ ------ -------- (In thousands) 30 East Main Street Owned 1994 1,064 31,683 Ashland, Ohio 203 North Sandusky Street (1) Owned 1993 -- N/A Bellevue, Ohio 211 North Sandusky Street Owned 1972 728 56,669 Bellevue, Ohio 255 North Main Street Owned 1975 104 15,141 Clyde, Ohio 1500 Bright Road Owned 1993 932 17,077 Findlay, Ohio 321 West State Street Owned 1987 171 17,024 Fremont, Ohio 40 East Main Street Owned 1999 400 11,246 Lexington, Ohio 50 West Main Street (2) Owned 1976 677 49,012 Norwalk, Ohio 51 West Main Street (2)(3) Owned 1992 -- N/A Norwalk, Ohio 4112 Milan Road Owned 1988 409 17,536 Sandusky, Ohio 48 East Market Street Owned 1983 342 51,428 Tiffin, Ohio 796 West Market Street Owned 1990 217 10,867 Tiffin, Ohio 301 Myrtle Avenue Owned 1977 200 36,120 Willard, Ohio 121 Blossom Centre Leased 22 1,080 Willard, Ohio 519 Broadway (4) Owned 1903 466 N/A East Liverpool, Ohio 530 Broadway Owned 1982 621 64,084 East Liverpool, Ohio 15575 ST RT 170 Leased 1983 329 32,359 Calcutta, Ohio 46635 Y & O Road Owned 1975 245 10,324 Glenmoor, Ohio 998 Third Street Owned 2001 1,134 3,281 Beaver, Pennsylvania 7707 Mentor Ave Leased 2002 285 533 Mentor, Ohio 3690 Orange Place Leased 2000 181 N/A Beachwood, Ohio
20 6011 Navarre Road, S.W Leased 2000 21 N/A Canton, Ohio Pointe View Professional Park Leased 2000 16 N/A 4831 Darrow Rd. #106 Stow, Ohio 7330 Southern Blvd Leased 1998 52 N/A Boardman, Ohio
(1) Office facility of appraisal staff. (2) Book value and deposit totals are combined for the two Norwalk offices. (3) Drive-up facility only. (4) Office facility for East Liverpool staff. The following table sets forth certain information at December 31, 2002, regarding the properties on which the main office and the branch offices of Butler Wick are located:
Owned or Year Location Leased opened -------- ------ ------ City Center One Bldg., Suite 700 Leased 1926 Youngstown, OH 44503 960 W. State Street Leased 1959 Alliance, OH 44601 1284 Liberty Street Leased 1932 Franklin, PA 16322 1 E. State Street Leased 1932 Sharon, PA 16146 25651 Detroit Road Leased 1990 Cleveland, OH 44145 3685 Stutz Drive, Suite 201 Leased 1999 Canfield, OH 44406 149 N Water Street Leased 1981 Kent, OH 44240 Howland Professional Centre Leased 1932 425 Niles-Cortland Road SE Bldg. A, Suite 201 Warren, Ohio Howland Professional Centre Leased 2000 425 Niles-Cortland Road SE Bldg. A, Suite 202 Warren, Ohio 4522 Fulton Drive NW Leased 1990 Canton, OH 44718 100 S. Broadway, 2nd Floor Leased 1956 Salem, OH 44460
21 ITEM 3. LEGAL PROCEEDINGS United Community is not presently involved in any material legal proceedings. From time to time, United Community is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by Home Savings and incidental to its securities business offered by Butler Wick. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information contained in the 2002 Annual Report to Shareholders of United Community (Annual Report) under the caption "Market Price and Dividends" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The information contained in the Annual Report under the caption "Selected Financial Ratios and Other Data" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Annual Report under the caption "Asset and Liability Management and Market Risk" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements appearing in the Annual Report and the report of Crowe Chizek and Company LLP dated February 7, 2003, are incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the Proxy Statement for the 2003 Annual Meeting of Shareholders of United Community (Proxy Statement), filed with the Securities and Exchange Commission (Commission) on March 25, 2003, under the captions "Election of Directors," "Incumbent Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. 22 ITEM 11. EXECUTIVE COMPENSATION The information contained in the Proxy Statement under the captions "Board Meetings, Committees and compensation" and "Compensation of Executive Officers," is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information contained in the Proxy Statement under the caption "Ownership of UCFC Shares" is incorporated herein by reference. United Community maintains the United Community Financial Corp. 1999 Long-Term Incentive Plan ("Incentive Plan") and the United Community Financial Corp. Recognition and Retention Plan and Trust Agreement ("RRP") under which it may issue equity securities to its directors, officers and employees in exchange for goods or services. The Incentive Plan and the RRP were approved by United Community's shareholders at the 1999 Special Meeting of Shareholders. The following table shows, as of December 31, 2002, the number of common shares issuable upon the exercise of outstanding stock options, the weighted average exercise price of those stock options, and the number of common shares remaining for future issuance under the Incentive Plan and the RRP, excluding shares issuable upon exercise of outstanding stock options. EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c) - ------------------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING AVAILABLE FOR TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a)) - ------------------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders.................... 1,909,615 $7.01 1,188 (1) - -------------------------------------------------------------------------------------------------------------------------------
(1) All of these shares are available for future issuance under the RRP. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Proxy Statement under the caption "Compensation of Executive Officers --Certain Transactions" is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, an evaluation was carried out by United Community's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) of the Securities Exchange Act of 1934). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community's disclosure 23 controls and procedures are effective. Subsequent to the date of their evaluation, there were no significant changes in United Community's internal controls or in other factors that could significantly affect these controls. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (c) EXHIBITS 3.1 Articles of Incorporation 3.2 Amended Code of Regulations 10 Material Contracts 11 Statement Regarding Computation of Per Share Earnings 13 Portions of the 2002 Annual Report to Shareholders 16 Letter regarding change in certifying accountants 20 Proxy Statement for 2003 Annual Meeting of Shareholders 21 Subsidiaries of Registrant 23.1 Crowe, Chizek and Company LLP Consent 23.2 Deloitte and Touche LLP Consent 99.1 Independent Auditors' Report from Deloitte and Touche LLP 99.2 Certification of Financial Statements by Chief Executive Officer 99.3 Certification of Financial Statements by Chief Financial Officer (a) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (b) REPORTS ON FORM 8-K. On October 16, 2002, a Form 8-K was filed for Item 5, Other Events, providing the third quarter financial information news release. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /S/ Douglas M. McKay ----------------------------------- Douglas M. McKay, President (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /S/ Douglas M. McKay /S/ Richard M. Barrett ---------------------------------------------------- -------------------------------------------------------------------- Douglas M. McKay, President and Director Richard M. Barrett, Director Date: March 19, 2003 Date: March 19, 2003 /S/ Richard J. Schiraldi /S/ Donald J. Varner ---------------------------------------------------- -------------------------------------------------------------------- Richard J. Schiraldi, Director Donald J. Varner, Director Date March 19, 2003 Date: March 19, 2003 /S/ Herbert F. Schuler, Sr. /S/ Patrick A. Kelly ---------------------------------------------------- -------------------------------------------------------------------- Herbert F. Schuler, Sr., Director Patrick A. Kelly, Treasurer (Principal Financial Officer) Date: March 19, 2003 Date: March 19, 2003 /S/ Thomas J. Cavalier ---------------------------------------------------- Thomas J. Cavalier, Director Date: March 19, 2003
25 UNITED COMMUNITY FINANCIAL CORP. CERTIFICATION I, Douglas M. McKay, certify that: 1) I have reviewed this annual report on Form 10-K of United Community Financial Corp. 2) Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period by this annual report; 3) Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Douglas M. McKay - -------------------- Douglas M. McKay Chief Executive Officer March 28, 2003 26 UNITED COMMUNITY FINANCIAL CORP. CERTIFICATION I, Patrick A. Kelly, certify that: 1) I have reviewed this annual report on Form 10-K of United Community Financial Corp. 2) Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period by this annual report; 3) Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 4) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 5) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Patrick A. Kelly - -------------------------------------------- Patrick A. Kelly Chief Financial Officer March 28, 2003 27 INDEX TO EXHIBITS
Exhibit Number - ---------------- 3.1 Articles of Incorporation Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on March 13, 1998 (S-1) with the Securities and Exchange Commission (SEC), Exhibit 3.1 3.2 Amended Code of Regulations Incorporated by reference to the 1998 10-K filed by United Community on March 31, 1999, Exhibit 3.2 10.1 The Home Savings and Loan Company of Incorporated by reference to the 2001 10-K filed Youngstown, Ohio Employee Stock Ownership Plan by United Community on March 29, 2002, Exhibit 10.1 10.2 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.2 Douglas M. McKay, dated December 29, 2000. 10.3 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.3 Donald J. Varner, dated December 29, 2000. 10.4 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.4 Patrick A. Kelly, dated December 29, 2000. 10.5 Employment Agreement between Butler Wick Corp. Incorporated by reference to the 1999 10-K filed and Thomas J. Cavalier, dated August 12, 1999 by United Community on March 29, 2000, Exhibit 10.5 10.6 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed and Loan Company of Youngstown, Ohio and David by United Community on March 30, 2001, Exhibit 10.6 G. Lodge, dated December 29, 2000. 10.7 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.7 Patrick W. Bevack, dated December 29, 2000. 11 Statement Regarding Computation of Per Share Incorporated by reference to Note 20 to the Earnings Financial Statements included in the Annual Report in Exhibit 13 13 Portions of the 2002 Annual Report to Shareholders 20 Proxy Statement for 2003 Annual Meeting of Incorporated by reference to the Proxy Shareholders Statement, filed with the Securities and Exchange Commission on March 25, 2003. 21 Subsidiaries of Registrant 23.1 Crowe, Chizek and Company LLP Consent 23.2 Deloitte and Touche LLP Consent 99.1 Independent Auditors' Report from Deloitte and Touche LLP 99.2 Certification of Financial Statements by Chief Executive Officer 99.3 Certification of Financial Statements by Chief Financial Officer
28 EX-13 3 l99172aexv13.htm EXHIBIT 13 exv13
 

EXHIBIT 13

SELECTED FINANCIAL AND OTHER DATA

                                           
Selected financial condition data:   At December 31,
     
      2002   2001   2000   1999   1998
     
 
 
 
 
      (In thousands)
Total assets
   $ 1,990,131     $ 1,944,780     $ 1,300,199     $ 1,327,573     $ 1,297,689  
Cash and cash equivalents
     110,936       205,883       45,972       111,445       172,409  
Securities:
                                        
 
Trading
     5,060       8,352       5,933       7,657       2,804  
 
Available for sale
     237,268       118,150       190,176       275,463       211,090  
 
Held to maturity
     —       80,496       108,560       139,170       187,992  
Loans, net
     1,478,213       1,406,479       876,653       723,087       657,498  
Loans held for sale
     45,825       20,192       —       —       —  
FHLB stock
     21,069       18,760       13,793       12,825       11,958  
Deposits
     1,481,901       1,383,418       900,413       834,087       777,583  
Other borrowed funds
     210,024       271,631       114,317       213,578       26,727  
Total shareholders’ equity
     274,569       261,880       261,899       256,868       474,821  
                                         
Summary of earnings:   Year ended December 31,
   
    2002   2001   2000   1999   1998
   
 
 
 
 
    (In thousands)
Interest income
   $ 126,693     $ 113,989     $ 91,622     $ 89,971     $ 87,755  
Interest expense
     54,236       57,047       44,104       34,284       36,570  
 
    
     
     
     
     
 
Net interest income
     72,457       56,942       47,518       55,687       51,185  
Provision for loan loss allowances
     3,578       2,495       300       100       650  
 
    
     
     
     
     
 
Net interest income after provision for loan loss allowances
     68,879       54,447       47,218       55,587       50,535  
Noninterest income
     31,073       28,449       24,754       22,721       22,137  
Noninterest expenses (1)(2)(3)
     68,359       57,708       54,307       61,037       56,931  
 
    
     
     
     
     
 
Income before income taxes
     31,593       25,188       17,665       17,271       15,741  
Income taxes
     10,776       9,509       6,051       6,876       5,612  
 
    
     
     
     
     
 
Net income
   $ 20,817     $ 15,679     $ 11,614     $ 10,395     $ 10,129  
 
    
     
     
     
     
 

(1)   For the year ended December 31, 2000, noninterest expense included a $2.9 million gain on postretirement benefits curtailment and a $1.0 million loss on pension termination.
(2)   For the year ended December 31, 1999, noninterest expense included $6.4 million compensation expense as a result of the $6.00 per share special capital distribution paid on Recognition and Retention Plan (RRP) shares.
(3)   For the year ended December 31, 1998, noninterest expense included $11.8 million as a result of the contribution to the Home Savings and Loan Charitable Foundation (Foundation).

 

 

Selected financial ratios and other data:

                                           
      At or for the year ended December 31,
     
      2002   2001   2000   1999   1998
     
 
 
 
 
Performance ratios: (1)
                                        
 
Return on average assets (2)
     1.04 %     0.97 %     0.92 %     0.79 %     0.83 %
 
Return on average equity (3)
     7.74       6.03       4.47       2.46       3.41  
 
Interest rate spread (4)
     3.40       2.95       2.91       2.98       3.28  
 
Net interest margin (5)
     3.83       3.66       3.89       4.38       4.32  
 
Noninterest expense to average assets
     3.43       3.56       4.30       4.66       4.66  
 
Efficiency ratio (6)
     64.52       66.34       75.14       77.85       77.65  
 
Average interest-earning assets to average interest-bearing liabilities
     114.98       119.23       127.08       152.09       133.59  
Capital ratios:
                                        
 
Average equity to average assets
     13.48       16.04       20.57       32.25       24.30  
 
Shareholders’ equity to assets at year end
     13.80       13.47       20.14       19.35       36.59  
 
Tangible capital
     8.05       9.07       14.51       26.75       26.80  
 
Core capital
     8.05       9.07       14.51       26.75       26.80  
 
Risk-based capital
     12.61       14.70       24.33       50.41       51.51  
Asset quality ratios:
                                        
 
Nonperforming loans to loans at year end (7)
     1.01       0.89       1.10       0.54       1.15  
 
Nonperforming assets to average assets (8)
     0.82       0.80       0.79       0.31       0.63  
 
Nonperforming assets to total assets at year end (8)
     0.83       0.67       0.77       0.30       0.59  
 
Allowance for loan losses as a percent of loans
     1.01       0.81       0.74       0.88       0.96  
 
Allowance for loan losses as a percent of nonperforming loans (7)
     97.62       92.13       67.79       164.86       84.62  
Number of:
                                        
 
Loans
     37,872       25,636       22,699       20,274       19,628  
 
Deposits
     173,528       164,753       115,785       106,196       105,426  
Per share data: (9)
                                        
 
Basic earnings (10)
   $ 0.65     $ 0.49     $ 0.35     $ 0.31     $ 0.10  
 
Diluted earnings (10)
     0.65       0.48       0.35       0.30       0.10  
 
Book value (11)
     7.79       7.34       7.02       6.80       13.38  
 
Dividend payout ratio (12)
     46.15 %     62.50 %     85.71 %     100.00 %     75.00 %

(1)   Performance ratios for 2000 reflect the $2.9 million gain on postretirement benefits curtailment and the $1.0 million loss on pension termination. Performance ratios for 1999 reflect the $6.4 million employee benefit expense related to the $6.00 per share special capital distribution paid on the RRP shares. Performance ratios for 1998 reflect the $11.8 million contribution to the Foundation.
(2)   Net income divided by average total assets. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the return on average assets would have been 0.80% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the return on average assets would have been 1.16% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the return on average assets would have been 1.43% for the year ended December 31, 1998.
(3)   Net income divided by average total equity. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the return on average equity would have been 3.90% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the return on average equity would have been 3.60% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the return on average equity would have been 5.89% for the year ended December 31, 1998.
(4)   Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.
(5)   Net interest income as a percentage of average interest-earning assets.
(6)   Noninterest expense divided by the sum of net interest income and noninterest income. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, the efficiency ratio would have been 78.22% for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, the efficiency ratio would have been 69.52% for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, the efficiency ratio would have been 61.73% for the year ended December 31, 1998.
(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)   For purpose of displaying six months earnings per share for 1998, it is assumed the Conversion took place as of July 1, 1998.
(10)   Net income divided by average number of shares outstanding. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, basic and diluted earnings per share would have been $0.31for the year ended December 31, 2000. Excluding the effect of the employee benefit expense related to the special capital distribution paid on the RRP shares, basic earnings per share would have been $0.45 and diluted earnings per share would have been $0.44 for the year ended December 31, 1999. Excluding the effect of the contribution to the Foundation, basic and diluted earnings per share would have been $0.32 for the year ended December 31, 1998.
(11)   Shareholders’ equity divided by number of shares outstanding.
(12)   Historical per share dividends declared and paid for the year divided by the diluted earnings per share for the year.

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

United Community Financial Corp. (United Community) was incorporated for the purpose of owning all of the outstanding stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings). On August 12, 1999, United Community acquired Butler Wick Corp. (Butler Wick). On July 1, 2001, United Community acquired Industrial Bancorp, Inc. (Industrial), which was accounted for as a purchase. Accordingly, the results of Industrial’s operations from the effective date of acquisition have been included in United Community’s 2001 financial statements. On April 1, 2002, United Community acquired Potters Financial Corporation (Potters), which was accounted for as a purchase. Accordingly, the results of Potters’ operations from the effective date of acquisition have been included in United Community’s 2002 financial statements. See note 2 to the consolidated financial statements for a more detailed discussion of these acquisitions.

United Community acquired $313.6 million in deposits from the Industrial acquisition and $113.8 million from the Potters acquisition. Deposits in branches acquired from Industrial have grown to $315.1 million, while deposits in branches acquired from Potters have declined to $110.1 million. We anticipate deposit growth in both of these areas going forward.

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.

Changes in Financial Condition

Total assets increased $45.4 million, or 2.3%, from $1.94 billion at December 31, 2001 to $1.99 billion at December 31, 2002, primarily as a result of the Potters acquisition. Net loans increased $71.7 million, or 5.1%, loans held for sale increased $25.6 million, or 126.9% and securities increased $35.3 million, or 17.1%. Decreases in cash and cash equivalents of $94.9 million, or 46.1%, and margin accounts of $6.2 million, or 29.4%, and increases in deposits of $98.5 million, or 7.1%, funded the increases in loans and securities. We anticipate continued growth resulting from our expansion into new markets as a result of the 2001 and 2002 acquisitions.

Net loans increased $71.7 million, or 5.1%, to $1.48 billion at December 31, 2002, compared to $1.41 billion at December 31, 2001, of which $112.1 million is attributable to the Potters acquisition. The most significant increases were $83.2 million in non-residential real estate loans, $44.8 in consumer loans, $19.4 million in commercial loans, $19.1 million in multifamily real estate loans and $15.1 million in construction loans. These increases, totaling $181.6 million, were partially offset by a $94.9 million decline in real estate loans secured by one-to four -family residences as a result of the sale of approximately $107.9 million in fixed rate loans out of the portfolio in the second quarter of 2002 to help reduce interest rate risk. Home Savings anticipates continued net growth in all loan categories, which will increase the risk of loan losses. Non-residential real estate lending is generally considered to involve a higher degree of risk than residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties.

Home Savings became active in the secondary market during 2001. Loans held for sale were $45.8 million at December 31, 2002 compared to $20.2 million at December 31, 2001. Home Savings will continue to sell fixed rate loans going forward as a part of its strategic plan to help manage interest rate risk.

Funds not currently utilized for general corporate purposes, including loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds and securities. Overnight funds decreased $92.5 million, or 54.3%, to $77.8 million at December 31, 2002 compared to $170.3 million at December 31, 2001. The decrease in overnight funds was primarily used to fund a net increase in securities of $35.3 million and an increase in net loans of $71.7 million. During 2002, management decided to reclassify investments in the held to maturity portfolio and designate them as available for sale. During the fourth quarter of 2002, United Community sold approximately $31.1 million in mortgage related securities to take advantage of the current economic conditions. Securities available for sale increased $119.1 million, or 100.8%, which was offset by decreases of $80.5 million, or 100%, in securities held to maturity and $3.3 million, or 39.4%, in trading securities.

Total deposits increased $98.5 million, or 7.1%, from $1.38 billion at December 31, 2001 to $1.48 billion at December 31, 2002. The deposit increase included a $67.2 million increase in demand accounts and a $44.9 million increase in savings accounts, which were partially offset by a decrease of $13.6 million in certificates of deposit. During 2002, $113.8 million in deposits were acquired from Potters. The net decrease was attributable to CD’s that were not renewed due to the current interest rate environment.

Other borrowed funds decreased $61.6 million, or 22.7%, at December 31, 2002 compared to December 31, 2001. The primary reason for the decrease was the maturity of borrowings from the Federal Home Loan Bank (FHLB) and the early extinguishment of FHLB debt. During 2002, United Community determined that it was advantageous to extinguish debt early and incur associated fees due to current economic conditions and cash inflow from loans sold. Other borrowed funds were used primarily to fund the purchase of Potters and loan growth. United Community may borrow funds in 2003 to satisfy funding requirements.

Total shareholders’ equity increased $12.7 million, or 4.8%, from December 31, 2001 to December 31, 2002. The increase was primarily due to earnings for the year, an increase in accumulated other comprehensive income and a decrease in unearned stock

 

 

compensation, offset by quarterly dividend payments and treasury stock purchases. United Community acquired 529,200 shares of common stock for $4.4 million during the year ended December 31, 2002. As of December 31, 2002, United Community has authorization to purchase up to 1,158,832 additional shares under its current repurchase agreement. Book value per share was $7.79 as of December 31, 2002.

Comparison of Operating Results for the Years Ended December 31, 2002 and December 31, 2001

Net Income—Net income for the year ended December 31, 2002 was $20.8 million, compared to $15.7 million for the year ended December 31, 2001. The primary reason for the increase was a $15.5 million increase in net interest income and a $2.6 million increase in noninterest income. These increases were partially offset by a $10.7 million increase in noninterest expense and a $1.1 million increase in the provision for loan loss allowances. Diluted earnings per share for the year ended December 31, 2002 were $0.65 compared to diluted earnings per share of $0.48 for the year ended December 31, 2001.

Net Interest Income—Net interest income increased $15.5 million, or 27.2%, to $72.5 million in 2002 from $56.9 million for 2001. Total interest income increased $12.7 million and interest expense decreased $2.8 million. The increase in total interest income was primarily due to an increase in interest on loans of $17.8 million, which was partially offset by a decrease in interest earned on securities of $3.9 million and a decrease in income on margin accounts of $944,000. The average balance of interest-earning assets increased $334.0 million for the year ended December 31, 2002 compared to 2001. The average yield on interest-earning assets decreased to 6.70% in 2002 compared to 7.32% in 2001. The decrease in interest expense was primarily due to a decrease in interest expense on deposits of $3.1 million. The average balance of interest-bearing liabilities increased $338.9 million and the average rate paid decreased to 3.30% for 2002 from 4.37% for 2001. The interest rate spread increased 45 basis points to 3.40% for 2002 from 2.95% for 2001 as a result of the 107 basis point decrease in the cost of interest-bearing liabilities partially offset by a 62 basis point decrease in the yield on interest-earning assets. We anticipate that the average rate paid on interest-bearing liabilities will not decrease significantly going forward. As a result, net interest income could be negatively impacted in a continuing declining interest rate environment. However, we are well positioned in the event of a mild increase in interest rates.

Provision for Loan Losses—Provisions for loan losses are charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable estimated losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses was $3.6 million in 2002 compared to a provision of $2.5 million in 2001. The primary reasons for the increase in the provision is the loan growth experienced in 2002, an increase in nonperforming loans of $3.2 million from December 31, 2001 to December 31, 2002, an increase in loans charged off, an increase in delinquencies, current economic conditions and loans originated in new market areas. Additional factors that contributed to the increase in the provision include a shift in the mix of the portfolio as a result of the sale of mortgage loans and an increase in loans on the watch list. If the current economic conditions continue, additional reserves may need to be established to provide for probable future losses. The allowance for loan losses totaled $15.1 million at December 31, 2002, which was 1.01% of total loans and 97.62% of nonperforming loans.

Noninterest Income—Noninterest income increased $2.6 million, or 9.2%, to $31.1 million for the year ended December 31, 2002, from $28.4 million for the year ended December 31, 2001. The increase was primarily due to an increase of $1.7 million in net gains recognized on the sale of securities, an increase of $1.0 million in other income, a $469,000 increase in gains recognized on the sale of loans and a $467,000 increase in service fees and other charges. Since Anthem is Home Savings’ health care provider, Home Savings received shares of Anthem stock through the demutualization of Anthem, Inc. and subsequently sold the stock. To recognize the receipt of the stock, other income was increased by $847,000. To recognize the subsequent sale of the stock, a gain of $476,000 was recognized on the sale of investment securities. These increases were partially offset by a $1.0 million decline in underwriting and investment banking income and a $552,000 recognized loss primarily due to the disposal of fixed assets in 2002.

Noninterest Expense—Noninterest expense increased $10.7 million to $68.4 million for 2002, from $57.7 million in 2001. The primary reasons for the increase is an increase in salaries and employee benefits of $5.4 million, an increase in occupancy expense of $611,000, an increase in advertising expense of $229,000, a $931,000 increase in equipment and data processing and a $509,000 increase in the amortization of the core deposit intangible, all of which are primarily related to the Industrial and Potters acquisitions. Although approximately $4.4 million of the increase in salaries and employee benefits is attributable to the acquisitions, the increase in salaries and employee benefits is also attributable to an increase in commissions paid to loan originators of $472,000 as a result of increased loan volume, an increase in ESOP expense of $373,000 due to the increase in United Community’s stock price and an increase in RRP expense as a result of additional grants that vested in 2002. Also contributing to the increase in noninterest expense was a $3.0 million increase in other expenses. The increase in other expense is primarily due to an increase of $954,000 in bank fees as a result of the early extinguishment of debt. Increases in supervisory fees, telephone expense, postage, couriers, SAIF premiums and protection costs also added to the increase.

Federal Income Taxes—Federal income taxes increased $1.3 million, or 13.3%, in 2002 compared to 2001, primarily due to higher pretax income in 2002. The effective tax rate was 34% in 2002 and 38% in 2001. The primary reason for the reduction in effective tax rate is related to the reversal of a $400,000 valuation allowance that was established in 1999 in relation to the contribution United Community made to the Home Savings Charitable Foundation. Based on current levels of taxable income, management believes that the tax benefit related to the contribution will be completely utilized. Refer to Note 12 to the consolidated financial statements for a further analysis of the effective tax rate.

 

 

Comparison of Operating Results for the Years Ended December 31, 2001 and December 31, 2000

Net Income—Net income for the year ended December 31, 2001 was $15.7 million, compared to $11.6 million for the year ended December 31, 2000. The primary reason for the increase was a $9.4 million increase in net interest income and a $3.7 million increase in noninterest income. These increases were partially offset by a $3.4 million increase in noninterest expense and a $2.2 million increase in the provision for loan loss allowances. Diluted earnings per share for the year ended December 31, 2001 were $0.48 compared to diluted earnings per share of $0.35 for the year ended December 31, 2000.

Net Interest Income—Net interest income increased $9.4 million, or 19.8%, to $56.9 million in 2001 from $47.5 million for 2000. Total interest income increased $22.4 million and interest expense increased $12.9 million. The increase in total interest income was primarily due to an increase in interest on loans of $30.1 million, which was partially offset by a decrease in interest earned on securities of $8.1 million and a decrease in income on margin accounts of $1.8 million. The average balance of interest-earning assets increased $335.4 million for the year ended December 31, 2001 compared to 2000. The average yield on interest-earning assets decreased to 7.32% in 2001 compared to 7.50% in 2000. The increase in interest expense was primarily due to an increase in interest expense on deposits of $12.6 million, due to an increase in the weighted average balance of deposits. The average balance of interest-bearing liabilities increased $344.6 million, or 35.8%, and the average rate paid decreased to 4.37% for 2001 from 4.59% for 2000. The interest rate spread increased 4 basis points to 2.95% for 2001 from 2.91% for 2000 as a result of the 22 basis point decrease in the cost of interest-bearing liabilities partially offset by a 18 basis point decrease in the yield on interest-earning assets.

Provision for Loan Losses—Due to growth in the loan portfolio, increases in nonperforming and delinquent loans and economic conditions, the provision for loan loss allowance was $2.5 million in 2001 compared to a provision of $300,000 in 2000. The primary reasons for the increase in the provision is the loan growth experienced in 2001, an increase in nonperforming loans of $2.8 million from December 31, 2000 to December 31, 2001, an increase in delinquencies, current economic conditions and loans originated in new market areas. Additional factors that contributed to the increase in the provision during the fourth quarter include a shift in the mix of the portfolio and an increase in loans on the watch list. The allowance for loan losses totaled $11.5 million at December 31, 2001, which was 0.80% of total loans and 92.13% of nonperforming loans.

Noninterest Income—Noninterest income increased $3.7 million, or 14.9%, to $28.4 million for the year ended December 31, 2001, from $24.8 million for the year ended December 31, 2000. The increase was primarily due to an increase of $5.5 million recognized on the sale of loans and a $2.2 million increase in service fees and other charges. These increases were partially offset by a $3.8 million decline in commission income and a $1.1 million decrease in gains recognized on trading securities in 2001.

Noninterest Expense—Noninterest expense increased $3.4 million to $57.7 million for 2001, from $54.3 million in 2000. The primary reasons for the increase are a $1.6 million increase in equipment and data processing, a $1.7 million increase in the amortization of the core deposit intangible related to the Industrial acquisition and a $1.1 million increase in other expenses. These increases were partially offset by a $1.7 million decline in salaries and employee benefits primarily due to lower commissions earned at Butler Wick and a $1.7 million decline in franchise tax due to lower equity for Home Savings in 2001 compared to 2000. A $2.9 million gain on the curtailment of postretirement benefits and a $1.8 million loss on the termination of the Home Savings’ pension plan, which both occurred in 2000, also contributed to the change in noninterest expense.

Federal Income Taxes—Federal income taxes increased $3.5 million, or 57.1%, in 2001 compared to 2000, primarily due to higher pretax income in 2001. The effective tax rate was 38% in 2001 and 34% in 2000. Refer to Note 12 to the consolidated financial statements for a further analysis of the effective tax rate.

Critical Accounting Policies and Estimates

The accounting and reporting policies of United Community are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgements.

The most significant accounting policies followed by United Community are presented in Note 1 to the consolidated financial statements. Accounting and reporting policies for the allowance for loan losses and mortgage servicing rights are deemed critical since they involve the use of estimates and require significant management judgements. United Community provides further detail on the methodology and reporting of the allowance for loan losses in Note 5 and mortgage servicing rights in Note 6.

Yields Earned and Rates Paid

The following table sets forth certain information relating to United Community’s average balance sheet information and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances. Nonaccruing loans have been included in the table as loans carrying a

 

 

zero yield. The average balance for securities available for sale is computed using the carrying value and the average yield on securities available for sale has been computed using the historical amortized average balance.

                                                                             
        Year ended December 31,
       
        2002   2001   2000
       
 
 
        Average   Interest           Average   Interest           Average   Interest        
        outstanding   earned/   Yield/   outstanding   earned/   Yield/   outstanding   earned/   Yield/
        balance   paid   rate   balance   paid   rate   balance   paid   rate
       
 
 
 
 
 
 
 
 
        (In thousands)
Interest-earning assets:
                                                                        
 
Net loans (1)
   $ 1,507,591     $ 110,746       7.35 %   $ 1,185,202     $ 92,933       7.84 %   $ 785,437     $ 62,836       8.00 %
 
Net loans held for sale
     18,351       1,243       6.77       12,440       886       7.12       —       —       —  
 
Securities:
                                                                        
   
Trading
     10,179       196       1.93       6,359       151       2.37       6,325       145       2.29  
   
Available for sale
     174,526       7,602       4.36       152,657       8,864       5.81       237,985       14,633       6.15  
   
Held to maturity
     56,845       3,762       6.62       94,670       6,400       6.76       125,909       8,713       6.92  
 
Margin accounts
     17,883       830       4.64       26,637       1,774       6.66       41,288       3,565       8.63  
 
FHLB stock
     20,136       932       4.63       15,822       1,078       6.81       13,181       968       7.34  
 
Other interest-earning assets
     86,318       1,382       1.60       64,006       1,903       2.97       12,263       762       6.21  
 
 
    
     
     
     
     
     
     
     
     
 
   
Total interest-earning assets
     1,891,829       126,693       6.70       1,557,793       113,989       7.32       1,222,388       91,622       7.50  
Noninterest-earning assets
     103,504                       64,049                       41,214                  
 
    
                     
                     
                 
   
Total assets
   $ 1,995,333                     $ 1,621,842                     $ 1,263,602                  
 
    
                     
                     
                 
Interest-bearing liabilities:
                                                                        
 
Deposits:
                                                                        
   
Checking accounts
   $ 279,894     $ 5,319       1.90 %   $ 184,120     $ 5,446       2.96 %   $ 145,649     $ 4,167       2.86 %
   
Savings accounts
     299,048       4,946       1.65       228,485       5,212       2.28       213,342       5,271       2.47  
   
Certificates of deposit
     850,054       34,668       4.08       696,633       37,353       5.36       467,823       25,956       5.55  
 
Other borrowed funds
     216,420       9,303       4.30       197,294       9,036       4.58       135,108       8,710       6.45  
 
 
    
     
     
     
     
     
     
     
     
 
 
Total interest-bearing liabilities
     1,645,416       54,236       3.30       1,306,532       57,047       4.37       961,922       44,104       4.59  
 
 
    
     
     
     
     
     
     
     
     
 
Noninterest-bearing liabilities
     80,969                       55,088                       41,699                  
 
    
                     
                     
                 
   
Total liabilities
     1,726,385                       1,361,620                       1,003,621                  
Shareholders’ equity
     268,948                       260,222                       259,981                  
 
    
                     
                     
                 
 
Total liabilities and equity
   $ 1,995,333                     $ 1,621,842                     $ 1,263,602                  
 
    
                     
                     
                 
 
Net interest income and interest rate spread
           $ 72,457       3.40 %           $ 56,942       2.95 %           $ 47,518       2.91 %
 
            
     
             
     
             
     
 
Net interest margin
                     3.83 %                     3.66 %                     3.89 %
 
                    
                     
                     
 
Average interest-earning assets to average interest-bearing liabilities
                     114.98 %                     119.23 %                     127.08 %
 
                    
                     
                     
 

(1) Nonaccrual loans are included in the average balance.

 

 

     The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected United Community’s interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior period rate), (ii) changes in rate (change in rate multiplied by prior period volume) and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated in proportion to the changes due to volume and rate:

                                                     
        Year ended December 31,
       
        2002 vs. 2001   2001 vs. 2000
       
 
        Increase           Increase        
        (decrease) due to   Total   (decrease) due to   Total
       
  increase  
  increase
        Rate   Volume   (decrease)   Rate   Volume   (decrease)
       
 
 
 
 
 
                        (In thousands)                
Interest-earning assets:
                                                
 
Loans
   $ (5,387 )   $ 23,200     $ 17,813     $ (1,223 )   $ 31,320     $ 30,097  
 
Loans held for sale
     (41 )     398       357       —       886       886  
 
Securities:
                                                
   
Trading
     (21 )     66       45       5       1       6  
   
Available for sale
     (2,958 )     1,696       (1,262 )     (739 )     (5,030 )     (5,769 )
   
Held to maturity
     (132 )     (2,506 )     (2,638 )     (193 )     (2,120 )     (2,313 )
 
Margin accounts
     (453 )     (491 )     (944 )     (702 )     (1,089 )     (1,791 )
 
FHLB stock
     (975 )     829       (146 )     (62 )     172       110  
 
Other interest-earning assets
     (2,130 )     1,609       (521 )     (161 )     1,302       1,141  
 
 
    
     
     
     
     
     
 
   
Total interest-earning assets
   $ (12,097 )   $ 24,801     $ 12,704     $ (3,075 )   $ 25,442     $ 22,367  
 
 
    
     
     
     
     
     
 
Interest-bearing liabilities:
                                                
 
Checking accounts
   $ 279     $ (406 )   $ (127 )   $ 145     $ 1,134     $ 1,279  
 
Savings accounts
     2,159       (2,425 )     (266 )     (788 )     729       (59 )
 
Certificates of deposit
     (33,547 )     30,862       (2,685 )     (840 )     12,237       11,397  
 
Other borrowed funds
     (462 )     729       267       (553 )     879       326  
 
 
    
     
     
     
     
     
 
   
Total interest-bearing liabilities
   $ (31,571 )   $ 28,760     $ (2,811 )   $ (2,036 )   $ 14,979     $ 12,943  
 
 
    
     
     
     
     
     
 
Change in net interest income
                   $ 15,515                     $ 9,424  
 
 
                
                 
 

Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements

The following table presents, as of December 31, 2002, United Community’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

                                                 
    Payments Due In
   
    Note   One Year   One to   Three to   Over        
    Reference   or Less   Three Years   Five Years   Five Years   Total
   
 
 
 
 
 
    (In Thousands)
Operating leases
     8       298       618       651       335       1,902  
Deposits without a stated maturity
     10       663,558       —       —       —       663,558  
Certificates of deposit
     10       485,479       226,533       106,010       321       818,343  
Federal funds borrowed
     11       10,893       37,357       132,930       1,792       182,972  
Borrowed funds
     11       27,052       —       —       —       27,052  

     A schedule of significant commitments as of December 31, 2002 follows:

           
(In thousands)
Commitment to originate:
        
 
Mortgage loans
   $ 27,915  
 
Other loans
     135  
Unfunded lines of credit
     130,518  
Net commitments to sell mortgage loans
     64,396  

     Further discussion of these commitments is included in Note 5 to the consolidated financial statements. In addition, United Community has commitments under benefit plans as described in Note 15 to the consolidated financial statements.

 

 

Asset and Liability Management and Market Risk

     Qualitative Aspects of Market Risk. The principal market risk affecting United Community is interest rate risk. United Community is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Interest rate risk is defined as the sensitivity of a company’s earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk, the Board of Directors of Home Savings, which accounts for most of the assets and liabilities of United Community, has adopted an interest rate risk policy which requires the Home Savings Board to review quarterly reports related to interest rate risk and to set exposure limits for Home Savings as a guide to senior management in setting and implementing day to day operating strategies.

United Community is subject to minimal equity price risk because its investment in equity securities, other than stock in the FHLB of Cincinnati, is only 0.40% of total assets. United Community is not affected by foreign currency exchange rate risk or commodity price risk.

Quantitative Aspects of Market Risk. As part of its interest rate risk analysis, Home Savings uses the “net portfolio value” (NPV) methodology. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV and net interest income that would result from various levels of theoretical basis point changes in market interest rates.

Home Savings uses a net portfolio value and earnings simulation model prepared internally as its primary method to identify and manage its interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies.

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. The percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income that the Home Savings Board of Directors deems advisable in the event of various changes in interest rates.

                                                         
Year ended December 31, 2002
                            NPV as % of portfolio   Next 12 months
Change   Net portfolio value   value of assets   Net interest income
in rates  
 
 
(Basis points)   $ Amount   $ Change   % Change   NPV Ratio   Change in %   $ Change   % Change
 
 
 
 
 
 
 
(In thousands)
+300
   $ 240,891     $ (22,216 )     (8.44 )%     13.57 %     (0.20 )%   $ (1,882 )     (2.74 )%
+200
     255,933       (7,174 )     (2.73 )     14.03       0.26       (594 )     (0.87 )
+100
     268,153       5,046       1.92       14.31       0.54       363       0.53  
Static
     263,107       —       —       13.77       —       —       —  
(100)
     220,472       (42,635 )     (16.20 )     11.52       (2.25 )     (3,017 )     (4.40 )
(200)
     N/A       N/A       N/A       N/A       N/A       N/A       N/A  
(300)
     N/A       N/A       N/A       N/A       N/A       N/A       N/A  

N/A – Due to a continuing low interest rate environment, it is not possible to calculate results for these scenarios.

                                                         
Year ended December 31, 2001
                            NPV as % of portfolio   Next 12 months
Change   Net portfolio value   value of assets   Net interest income
in rates  
 
 
(Basis points)   $ Amount   $ Change   % Change   NPV Ratio   Change in %   $ Change   % Change
 
 
 
 
 
 
 
(In thousands)
+300
   $ 161,540     $ (97,516 )     (37.64 )%     9.22 %     (4.42 )%   $ (12,781 )     (20.68 )%
+200
     197,038       (62,018 )     (23.94 )     10.93       (2.71 )     (8,487 )     (13.74 )
+100
     230,742       (28,314 )     (10.93 )     12.45       (1.19 )     (4,551 )     (7.36 )
Static
     259,056       —       —       13.64       —       —       —  
(100)
     263,862       4,806       1.86       13.73       0.09       942       1.52  
(200)
     256,439       (2,617 )     (1.01 )     13.30       (0.34 )     806       1.30  
(300)
     245,353       (13,703 )     (5.29 )     12.73       (0.91 )     (720 )     (1.16 )

 

 

     Historically, Home Savings’ NPV has been more sensitive to increases in interest rates than to decreases. This sensitivity to increases in rates occurred principally because, as rates increased, borrowers were less likely to prepay fixed-rate loans than when interest rates declined, and the majority of Home Savings’ loans have fixed rates of interest. With the current prolonged period of low interest rates, however, Home Savings’ present NPV is more sensitive to falling rates. This increased sensitivity occurs because the frequency of prepayments on fixed-rate loans dramatically increase and the value of core deposits is greatly diminished. Although loan demand is adversely affected by rising interest rates, the resulting decline in the frequency of prepayments may increase Home Savings’ NPV.

     As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.

     The Board of Directors and management of Home Savings believe that certain factors afford Home Savings the ability to operate successfully despite its exposure to interest rate risk. Home Savings manages its interest rate risk by maintaining capital in excess of regulatory requirements. See “Liquidity and Capital.”

Potential Impact of Changes in Interest Rates. Home Savings’ profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and securities and interest expense on deposits and borrowings. Like most financial institutions, Home Savings’ short-term interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond its control. Home Savings’ interest-earning assets consist primarily of long-term, fixed-rate and adjustable-rate mortgage loans and securities which adjust more slowly to changes in interest rates than its interest bearing liabilities which are primarily deposits. Accordingly, Home Savings’ earnings could be adversely affected during periods of rising interest rates.

Liquidity and Capital

     United Community’s liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities. These activities are summarized below for the years ended December 31, 2002, 2001 and 2000.

                         
    Years ended December 31,
   
    2002   2001   2000
   
 
 
    (In thousands)
Net income
   $ 20,817     $ 15,679     $ 11,614  
Adjustments to reconcile net income to net cash from operating activities
     215,207       128,008       6,562  
 
    
     
     
 
Net cash provided by operating activities
     236,024       143,687       18,176  
Net cash used in investing activities
     (240,773 )     (237,608 )     (37,365 )
Net cash (used in) provided by financing activities
     (90,198 )     253,832       (46,284 )
 
    
     
     
 
Net change in cash and cash equivalents
     (94,947 )     159,911       (65,473 )
Cash and cash equivalents at beginning of year
     205,883       45,972       111,445  
 
    
     
     
 
Cash and cash equivalents at end of year
   $ 110,936     $ 205,883     $ 45,972  
 
    
     
     
 

The principal sources of funds for United Community are deposits, loan repayments, maturities of securities, borrowings from financial institutions and other funds provided by operations. Home Savings also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition. Investments in liquid assets maintained by United Community, Home Savings and Butler Wick are based upon management’s assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset and liability management program. At December 31, 2002, approximately $485.5 million of Home Savings’ certificates of deposit are expected to mature within one year. Based on past experience and Home Savings’ prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with Home Savings at maturity, although there can be no assurance that this will occur.

The Board of Directors has authorized an ongoing program to purchase shares of United Community’s common stock to fund employee benefit programs, stock options and award programs and other corporate purposes. These purchases can be made in the open market or negotiated transactions, from time to time, depending on market conditions. United Community acquired 529,200 shares of common stock for $4.4 million, 1,604,126 shares of common stock for $11.0 million and 483,500 shares of common stock for $3.3 million during the years ended December 31, 2002, 2001 and 2000. United Community has remaining authorization to repurchase 1,158,832 shares as of December 31, 2002. Management intends to repurchase shares as authorized.

Home Savings is required by OTS regulations to meet certain minimum capital requirements. Current capital requirements call for tangible capital of 1.5% of adjusted tangible assets, 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 core capital and general valuation allowances) of 8% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk).

The following table summarizes Home Savings’ regulatory capital requirements and actual capital at December 31, 2002.

                                                         
                                    Excess of actual        
                                    capital over current   Applicable
    Actual capital   Current requirement   requirement   asset base
   
 
 
 
    Amount   Percent   Amount   Percent   Amount   Percent   Total
   
 
 
 
 
 
 
    (In thousands)
Tangible capital
   $ 150,821       8.05 %   $ 28,108       1.50 %   $ 122,713       6.55 %   $ 1,873,858  
Core capital
     150,821       8.05       74,954       4.00       75,867       4.05       1,873,858  
Risk-based capital
     163,419       12.61       103,656       8.00       59,763       4.61       1,295,694  
 
    
     
     
     
     
     
     
 

Accounting and Reporting Developments

     A discussion of recently issued accounting pronouncements and their impact on United Community’s Consolidated Financial Statements is provided in Note 1 of the Notes to Consolidated Financial Statements.

Market Price and Dividends

There were 37,802,477 common shares of United Community stock issued and 34,764,534 shares outstanding and held by approximately 12,889 record holders as of February 24, 2003. United Community’s common shares are traded on The Nasdaq Stock Market® under the symbol “UCFC”. Quarterly stock prices and dividends declared are shown in the following table.

                                                                                   
      First   Second   Third   Fourth           First   Second   Third   Fourth
      Quarter   Quarter   Quarter   Quarter           Quarter   Quarter   Quarter   Quarter
     
 
 
 
         
 
 
 
2002:
                                           2001:                                  
High
   $ 8.13             $ 9.39     $ 9.15     $ 8.99     High   $ 7.063     $ 8.700     $ 8.200     $ 7.700  
Low
     7.05               7.43       8.35       8.45     Low     6.422       6.250       6.800       6.600  
Close
     7.40               9.36       8.85       8.65     Close     6.625       8.700       7.050       7.200  
Dividends
                                           Dividends                                
 
declared
                                           declared                                
 
and paid
     0.075               0.075       0.075       0.075     and paid     0.075       0.075       0.075       0.075  

 

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                     
        December 31,
       
        2002   2001
       
 
        (In thousands)
Assets
                
Cash and deposits with banks
   $ 33,178     $ 35,587  
Federal funds sold
     77,758       170,296  
 
    
     
 
 
Total cash and cash equivalents
     110,936       205,883  
 
    
     
 
Securities:
                
 
Trading
     5,060       8,352  
 
Available for sale
     237,268       118,150  
 
Held to maturity (fair value 2001- $82,339)
     —       80,496  
Loans held for sale
     45,825       20,192  
Loans, net (including allowance for loan losses of $15,099 and $11,480)
     1,478,213       1,406,479  
Margin accounts
     14,809       20,979  
Federal Home Loan Bank stock
     21,069       18,760  
Premises and equipment
     20,002       17,481  
Accrued interest receivable
     9,558       9,575  
Real estate owned
     994       477  
Goodwill
     33,593       19,664  
Core deposit intangible
     5,101       6,312  
Other assets
     7,703       11,980  
 
    
     
 
   
Total assets
   $ 1,990,131     $ 1,944,780  
 
    
     
 
Liabilities and Shareholders’ Equity
                
Liabilities
                
Deposits
   $ 1,481,901     $ 1,383,418  
Other borrowed funds
     210,024       271,631  
Advance payments by borrowers for taxes and insurance
     5,996       5,760  
Accrued interest payable
     1,126       2,983  
Accrued expenses and other liabilities
     16,515       19,108  
 
    
     
 
   
Total liabilities
     1,715,562       1,682,900  
 
    
     
 
Shareholders’ Equity
                
Preferred stock-no par value; 1,000,000 shares authorized and unissued
     —       —  
Common stock—no par value; 499,000,000 shares authorized; 37,803,269 and 37,754,086 shares issued
     138,207       136,903  
Retained earnings
     172,080       160,915  
Accumulated other comprehensive income
     2,363       1,402  
Unearned compensation
     (19,724 )     (22,988 )
Treasury stock, at cost, 2002 - 2,558,214 shares and 2001 - 2,086,500 shares
     (18,357 )     (14,352 )
 
    
     
 
   
Total shareholders’ equity
     274,569       261,880  
 
    
     
 
   
Total liabilities and shareholders’ equity
   $ 1,990,131     $ 1,944,780  
 
    
     
 

See Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS OF INCOME

                             
        Year ended December 31,
       
        2002   2001   2000
       
 
 
        (In thousands, except per share data)
Interest income
                        
 
Loans
   $ 110,746     $ 92,933     $ 62,836  
 
Loans held for sale
     1,243       886       —  
 
Investment securities:
                        
   
Trading
     196       151       145  
   
Available for sale
     7,602       8,864       14,633  
   
Held to maturity
     3,762       6,400       8,713  
 
Margin accounts
     830       1,774       3,565  
 
FHLB stock dividend
     932       1,078       968  
 
Other interest-earning assets
     1,382       1,903       762  
 
 
    
     
     
 
   
Total interest income
     126,693       113,989       91,622  
 
 
    
     
     
 
Interest expense
                        
 
Interest expense on deposits
     44,933       48,011       35,394  
 
Interest expense on other borrowed funds
     9,303       9,036       8,710  
 
 
    
     
     
 
Total interest expense
     54,236       57,047       44,104  
 
 
    
     
     
 
Net interest income
     72,457       56,942       47,518  
Provision for loan losses
     3,578       2,495       300  
 
 
    
     
     
 
Net interest income after provision for loan losses
     68,879       54,447       47,218  
 
 
    
     
     
 
Noninterest income
                        
 
Commissions
     13,677       13,411       17,176  
 
Service fees and other charges
     8,224       7,757       5,607  
 
Underwriting and investment banking
     312       1,316       646  
 
Net gains (losses):
                        
   
Securities available for sale
     2,127       392       151  
   
Trading securities
     (651 )     (869 )     241  
   
Loans sold
     5,919       5,450       —  
   
Other
     (515 )     37       (2 )
 
Other income
     1,980       955       935  
 
 
    
     
     
 
   
Total noninterest income
     31,073       28,449       24,754  
 
 
    
     
     
 
Noninterest expenses
                        
 
Salaries and employee benefits
     39,917       34,528       36,193  
 
Gain on postretirement curtailment
     —       —       (2,928 )
 
Loss on pension termination
     —       —       1,008  
 
Occupancy
     3,186       2,575       2,093  
 
Equipment and data processing
     8,309       7,378       5,807  
 
Franchise tax
     2,032       2,010       3,710  
 
Advertising
     2,167       1,938       1,924  
 
Amortization of core deposit intangible
     2,180       1,671       —  
 
Other expenses
     10,568       7,608       6,500  
 
 
    
     
     
 
   
Total noninterest expenses
     68,359       57,708       54,307  
 
 
    
     
     
 
Income before income taxes
     31,593       25,188       17,665  
Income taxes
     10,776       9,509       6,051  
 
 
    
     
     
 
Net income
   $ 20,817     $ 15,679     $ 11,614  
 
 
    
     
     
 
Earnings Per Share
                        
 
Basic
   $ 0.65     $ 0.49     $ 0.35  
 
Diluted
   $ 0.65     $ 0.48     $ 0.35  

See Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

                                                           
                              Accumulated                        
                              Other                        
      Shares   Common   Retained   Comprehensive   Unearned   Treasury        
      Outstanding   Stock   Earnings   Income (Loss)   Compensation   Stock   Total
     
 
 
 
 
 
 
      (In thousands, except per share data)
Balance January 1, 2000
     37,758     $ 136,509     $ 153,553     $ (3,003 )   $ (30,191 )   $ —     $ 256,868  
Comprehensive income:
                                                        
 
Net income
     —       —       11,614       —       —       —       11,614  
 
Change in net unrealized gain on securities, net of taxes of $1,565
     —       —       —       2,905       —       —       2,905  
 
    
     
     
     
     
     
     
 
Comprehensive income
     —       —       11,614       2,905       —       —       14,519  
Issuance of common shares for RRP
     46       295       —       —       (295 )     —       —  
Amortization of restricted common stock Compensation
     —       54       —       —       1,964       —       2,018  
Forfeiture of restricted common stock
     (3 )     (25 )     —       —       25       —       —  
Shares distributed by ESOP trust
     —       134       —       —       1,823       —       1,957  
Purchase of treasury stock
     (484 )     —       —       —       —       (3,322 )     (3,322 )
Dividends paid, $0.30 per share
     —       —       (10,141 )     —       —       —       (10,141 )
 
    
     
     
     
     
     
     
 
Balance December 31, 2000
     37,317       136,967       155,026       (98 )     (26,674 )     (3,322 )     261,899  
Comprehensive income:
                                                        
 
Net income
     —       —       15,679       —       —       —       15,679  
 
Change in net unrealized gain on securities, net of taxes of $808
     —       —       —       1,500       —       —       1,500  
 
    
     
     
     
     
     
     
 
Comprehensive income
     —       —       15,679       1,500       —       —       17,179  
Amortization of restricted common stock Compensation
     —       62       —       —       1,622       —       1,684  
Forfeiture of restricted common stock
     (46 )     (290 )     —       —       242       —       (48 )
Shares distributed by ESOP trust
     —       164       —       —       1,822       —       1,986  
Purchase of treasury stock
     (1,604 )     —       —       —       —       (11,038 )     (11,038 )
Reissuance of common stock
     1       —       —       —       —       8       8  
Dividends paid, $0.30 per share
     —       —       (9,790 )     —       —       —       (9,790 )
 
    
     
     
     
     
     
     
 
Balance December 31, 2001
     35,668       136,903       160,915       1,402       (22,988 )     (14,352 )     261,880  
Comprehensive income:
                                                        
 
Net income
     —       —       20,817       —       —       —       20,817  
 
Reclassification of HTM securities
     —       —       —       1,704       —       —       1,704  
 
Change in net unrealized gain (loss) on securities, net of taxes of $517
     —       —       —       (743 )     —       —       (743 )
 
    
     
     
     
     
     
     
 
Comprehensive income
     —       —       20,817       961       —       —       21,778  
Issuance of common shares for RRP
     70       592       —       —       (592 )     —       —  
Amortization of restricted common stock compensation
     —       215       —       —       1,947       —       2,162  
Forfeiture of restricted common stock
     (21 )     (128 )     —       —       87       —       (41 )
Shares distributed by ESOP trust
     —       625       —       —       1,822       —       2,447  
Purchase of treasury stock
     (529 )     —       —       —       —       (4,386 )     (4,386 )
Reissuance of common stock
     57       —       (16 )     —       —       381       365  
Dividends paid, $0.30 per share
     —       —       (9,636 )     —       —       —       (9,636 )
 
    
     
     
     
     
     
     
 
Balance December 31, 2002
     35,245     $ 138,207     $ 172,080     $ 2,363     $ (19,724 )   $ (18,357 )   $ 274,569  
 
    
     
     
     
     
     
     
 

See Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

                               
          Year ended December 31,
         
          2002   2001   2000
         
 
 
          (In thousands)
Cash Flows from Operating Activities
                        
Net income
   $ 20,817     $ 15,679     $ 11,614  
Adjustments to reconcile net income to net cash provided by operating activities:
                        
   
Provision for loan loss allowances
     3,578       2,495       300  
   
Loss on pension termination
     —       —       1,008  
   
Gain on postretirement curtailment
     —       —       (2,928 )
   
Net gains
     (7,517 )     (5,895 )     (149 )
   
Accretion of discounts and amortization of premiums
     2,119       (2,095 )     (447 )
   
Depreciation
     2,948       2,223       1,573  
   
FHLB stock dividends
     (932 )     (1,078 )     (968 )
   
Decrease in interest receivable
     784       621       646  
   
Decrease in interest payable
     (1,951 )     (734 )     (1,235 )
   
Decrease (increase) in other assets
     3,827       (4,620 )     (907 )
   
(Decrease) increase in other liabilities
     (7,758 )     3,419       4,580  
   
Decrease (increase) in trading securities
     3,292       (2,419 )     1,724  
   
Amortization of restricted stock compensation
     2,121       1,636       2,018  
   
Decrease (increase) in margin accounts
     6,170       12,382       (610 )
   
Increase in loans held for sale
     (25,633 )     (20,192 )     —  
   
Proceeds from sale of loans held for sale
     231,712       140,279       —  
   
ESOP compensation
     2,447       1,986       1,957  
 
    
     
     
 
     
Net cash provided by operating activities
     236,024       143,687       18,176  
 
    
     
     
 
Cash Flows from Investing Activities
                        
 
Proceeds from principal repayments and maturities of:
                        
   
Securities available for sale
     82,821       107,001       101,096  
   
Securities held to maturity
     25,679       28,685       27,411  
 
Proceeds from sale of:
                        
   
Securities available for sale
     45,095       22,435       27,893  
   
Securities held to maturity
     932       1,454       3,757  
   
Loans
     112,620       42,805       —  
   
Fixed assets
     27       —       —  
   
Real estate owned
     1,379       839       —  
 
Purchases of:
                        
   
Securities available for sale
     (187,143 )     (42,890 )     (39,407 )
   
Securities held to maturity
     (999 )     (2,082 )     (476 )
 
Net cash paid for acquisition
     (13,729 )     (69,844 )     —  
 
Net principal disbursed on loans
     (276,218 )     (312,206 )     (141,391 )
 
Loans purchased
     (27,335 )     (11,036 )     (12,274 )
 
Purchases of premises and equipment
     (3,902 )     (2,769 )     (4,262 )
 
Other
     —       —       288  
 
    
     
     
 
     
Net cash used in investing activities
     (240,773 )     (237,608 )     (37,365 )
 
    
     
     
 
Cash Flows from Financing Activities
                        
 
Net increase (decrease) in NOW, savings and money market accounts
     50,574       97,277       (16,114 )
 
Net (decrease) increase in certificates of deposit
     (63,816 )     70,050       82,440  
 
Net increase in advance payments by borrowers for taxes and insurance
     1       319       114  
 
Proceeds from FHLB advances and other long term debt
     26,239       193,000       —  
 
Repayment of FHLB advances and other long term debt
     (70,051 )     (20,000 )     —  
 
Net decrease in other borrowed funds
     (19,488 )     (65,994 )     (99,261 )
 
Dividends paid
     (9,636 )     (9,790 )     (10,141 )
 
Proceeds from exercise of stock options
     365       8       —  
 
Purchase of treasury stock
     (4,386 )     (11,038 )     (3,322 )
 
    
     
     
 
     
Net cash provided by (used in) financing activities
     (90,198 )     253,832       (46,284 )
 
    
     
     
 
(Decrease) increase in cash and cash equivalents
     (94,947 )     159,911       (65,473 )
Cash and cash equivalents, beginning of year
     205,883       45,972       111,445  
 
    
     
     
 
Cash and cash equivalents, end of year
   $ 110,936     $ 205,883     $ 45,972  
 
    
     
     
 

See Notes to Consolidated Financial Statements

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting policies of United Community Financial Corp. (United Community), a unitary savings and loan holding company, The Home Savings and Loan Company of Youngstown, Ohio (Home Savings), an Ohio chartered savings and loan company, and Butler Wick Corp. (Butler Wick), an investment brokerage firm, conform to generally accepted accounting principles 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 northeastern Ohio and western Pennsylvania. At the end of 2002, Home Savings was doing business through 34 full-service banking branches and 4 loan production offices. Loans and deposits are primarily generated from the areas where banking branches are located. Home Savings derives its income predominantly from interest on loans, securities, and to a lesser extent, noninterest income. Home Savings’ principal expenses are interest paid on deposits and normal operating costs. Home Savings’ operations are principally in the savings and loan industry. Consistent with internal reporting Home Savings’ operations are reported in one operating segment, which is retail banking. On August 12, 1999, United Community acquired Butler Wick, the parent company for three wholly owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Butler Wick has 12 office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations throughout northeastern Ohio and western Pennsylvania. Butler Wick’s operations are reported in a separate operating segment, which is investment advisory services.

Basis of Presentation

     The consolidated financial statements include the accounts of United Community and its subsidiaries. All material inter-company transactions have been eliminated. Certain prior period data has been reclassified to conform to current period presentation.

Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments, fair value of servicing rights, impairment of goodwill and core deposit intangible and status of contingencies are particularly subject to change.

Securities

     Securities are classified as available for sale, held to maturity or trading upon their acquisition. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at estimated fair value with the unrealized holding gain or loss reported in other comprehensive income. Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities classified as trading are carried at estimated fair market value with the unrealized holding gains and losses included in income. Other securities such as Federal Home Loan Bank stock are carried at cost. Securities are written down to fair value when a decline in fair value is not temporary.

Loans

     Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances. For balance sheet presentation, the balances are presented net of unearned interest, deferred fees or costs and allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.

     Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

     All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

 

Allowance for Loan Losses

     The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management’s determination of the adequacy of the allowance is based upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, the nature and volume of the loan portfolio, current economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

     A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogenous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Premises and Equipment

     Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives, ranging from 3 years to 31 1/2 years, (or term of the lease, if shorter) of the related assets.

Real Estate Owned

     Real estate owned, including property acquired in settlement of foreclosed loans, is carried at the lower of cost or estimated fair value less estimated cost to sell after foreclosure, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs relating to the development and improvement of real estate owned are capitalized, whereas costs relating to holding and maintaining the property are charged to expense.

Servicing Assets

     Servicing assets represent the allocated value of retained servicing rights on loans sold or securitized. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates and, secondarily, as to prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.

Intangibles

     Purchased intangibles, primarily goodwill and core deposit value, are recorded at cost. Core deposit value is amortized over the estimated life. Goodwill is evaluated for impairment on a periodic basis.

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 financial assets are transferred from time to time to a third party in exchange for ownership of a security based on those loans. Such transfers are recorded as a sale when control has been relinquished, with a gain or loss recorded on the sale. The gain or loss is calculated based on the cash received versus the carrying value of the assets transferred. If some interests, such as servicing assets and cash reserve accounts, are retained, the carrying value of all assets sold and retained is allocated to each asset based on fair value at sale date. Fair values are based on market quotes or on the present value of future expected cash flows using estimates of credit losses, prepayment rates, interest rates, and discount rates.

Loan Fees

     Loan origination fees received for loans, net of direct origination costs, are deferred and amortized to interest income over the contractual lives of the loans using the level yield method. Fees received for loan commitments that are expected to be drawn, based on Home Savings’ experience with similar commitments, are deferred and amortized over the lives of the loans using the level yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. Unamortized deferred loan fees or costs related to loans paid off are included in income. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses. Amortization of net deferred fees is discontinued for loans that are deemed to be nonperforming.

Stock Compensation

     Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value.

     Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

 

 

                         
    2002   2001   2000
   
 
 
    (In Thousands)
Net income as reported
   $ 20,817     $ 15,679     $ 11,614  
Deduct: Stock-based compensation expense Determined under fair value method
     1,411       1,011       1,336  
 
    
     
     
 
Pro Forma net income
     19,406       14,668       10,278  
 
    
     
     
 
Basic earnings per share as reported
     0.65       0.49       0.35  
Pro Forma basic earnings per share
     0.61       0.46       0.31  
Diluted earnings per share as reported
     0.65       0.48       0.35  
Pro forma diluted earnings per share
     0.61       0.45       0.31  
 
    
     
     
 

     The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.

                         
    2002   2001   2000
   
 
 
Dividend yield
     4.00 %     4.59 %     2.47 %
Expected stock price volatility
     38.31 %     33.63 %     89.26 %
Risk-free interest rate
     5.01 %     5.08 %     6.62 %
Expected option life (In years)
     10       10       10  
 
    
     
     
 

Income Taxes

     The provision for federal income taxes is based upon earnings reported for financial statement purposes rather than amounts reported on United Community’s income tax returns. 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 annually for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established, based on the weight of available evidence, when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities.

Employee Stock Ownership Plan

     The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

Earnings Per Share

     Basic Earnings Per Share (EPS) are based on the weighted average number of common shares outstanding during the year. Diluted EPS are based on the weighted average number of common shares and common share equivalents outstanding during the year. See further discussion at Note 20.

Statements of Cash Flows

     For purposes of the statement of cash flows, United Community considers all highly liquid investments with a term of three months or less to be cash equivalents. Net cash flows are reported for loan and deposit transactions.

Loss Contingencies
 
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

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 16. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Comprehensive Income

 

 

     Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity.

Newly Issued But Not Yet Effective Accounting Standards

     New accounting standards on asset retirement obligation, restructuring activities and exit costs and operating leases were issued in 2002. Management determined that when the new accounting standards are adopted in 2003 they will not have a material impact on United Community’s financial condition or results of operations.

Execution, Settlement and Financing of Securities Transactions

     In the normal course of business, Butler Wick’s activities involve the execution, settlement, and financing of various securities transactions. These activities may expose Butler Wick to risk in the event the customer is unable to fulfill its contractual obligations. Butler Wick maintains cash and margin accounts for its customers located primarily in northeastern Ohio and western Pennsylvania.

     Butler Wick’s customer securities activities are transacted on either a cash or margin basis. In margin transactions, Butler Wick extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in customer’s accounts. In connection with these activities, Butler Wick executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. Such transactions may expose Butler Wick to significant off-balance-sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy its obligations, Butler Wick may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligations. Butler Wick seeks to control the risks associated with its customers’ activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. Butler Wick monitors required margin levels daily and, pursuant to such guidelines, requires the customer to deposit additional collateral or to reduce positions when necessary.

     Butler Wick’s customer financing and securities settlement activities require Butler Wick to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, Butler Wick may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. Butler Wick controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, Butler Wick establishes credit limits for such activities and monitors compliance on a daily basis.

     As a securities broker and dealer, a substantial portion of Butler Wick’s transactions are collateralized. Butler Wick’s exposure to credit risk associated with nonperformance in fulfilling contractual obligations pursuant to securities transaction 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 standby 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.

Early Extinguishment of Debt

In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which address the accounting for early extinguishment of debt. Upon adopting this Statement, any gains or losses form the early extinguishment of debt that do not meet specific criteria for classification as an extraordinary item are no longer classified as an extraordinary item and should be reclassified. United Community adopted this statement April 1, 2002 and has subsequently reclassified the loss on early extinguishment of debt, previously recognized as an extraordinary item, as an ordinary expense.

Reclassifications

     Some items in the prior year financial statements were reclassified to conform to the current presentation.

2. ACQUISITIONS

On April 1, 2002, United Community acquired all of the capital stock of Potters Financial Corporation, the holding company for Potters Bank, an Ohio-chartered state savings bank. Potters Bank was merged into Home Savings. The assets acquired consisted principally of loans and securities.

United Community accounted for the acquisition as a purchase and has included Potters’ results of operations from the effective date of the acquisition in its 2002 financial statements. Based on Potters 991,546 outstanding shares, the acquisition was valued at $23.6 million, which was paid in cash. The excess of the aggregate purchase price over the fair market value of net assets acquired, or goodwill, was approximately $11.7 million. In accordance with SFAS No. 142, goodwill is not amortized, but instead is evaluated for impairment. The core deposit intangible is subject to amortization on an accelerated basis over an estimated life of 20 years. Because the merger was structured as a tax free exchange, none of the goodwill is expected to be deductible for tax purposes.

 

 

Management believes the acquisition of Potters helped accomplish its strategic goal of geographic expansion by strengthening Home Savings presence in Columbiana County in Ohio and by giving it a presence in Pennsylvania. Home Savings will be able to enhance the ability to compete in these key markets by offering a new array of products, such as Internet banking, to Potters’ customers. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

           
      At April 1, 2002
     
      (In thousands)
Cash and securities
   $ 11,474  
Loans, net
     112,071  
Premises and equipment
     1,787  
Goodwill
     11,719  
Core deposit intangible
     968  
Other assets
     1,552  
 
    
 
Total assets acquired
   $ 139,571  
 
    
 
Deposits
   $ 113,791  
Other borrowed funds
     2,000  
Other liabilities
     1,534  
 
    
 
Total liabilities assumed
   $ 117,325  
 
    
 
 
Net assets acquired
   $ 22,246  
 
    
 

The following summarized unaudited pro forma financial information for the periods ended December 31, 2002 and 2001 assumes the Potters Financial Corporation acquisition occurred as of January 1, 2001:

                 
    December 31, 2002   December 31, 2001
   
 
    (In thousands, except per share data)
Net interest income after provision for loan losses
   $ 67,200     $ 57,237  
Net income
     22,050       15,200  
Diluted earnings per share
   $ 0.69     $ 0.47  

Pro forma excludes acquisition related charges.

     On July 1, 2001, United Community acquired all of the capital stock of Industrial Bancorp, Inc., the holding company for The Industrial Savings and Loan Association (Industrial Savings), an Ohio-chartered savings and loan association, through the merger of Home Savings’ subsidiary, UCFC Acquisition Subsidiary, Inc. into Industrial Bancorp, Inc. Industrial Savings was then merged into Home Savings. The assets acquired consisted principally of loans and securities.

United Community accounted for the acquisition as a purchase and has included Industrial Bancorp’s results of operations from the effective date of the acquisition in its 2001 financial statements. Based on Industrial Bancorp’s 4,284,751 outstanding shares, the acquisition was valued at $87.3 million, which was paid in cash. The excess of the aggregate purchase price over the fair market value of net assets acquired, or goodwill, was approximately $21.9 million. In accordance with SFAS No. 142, goodwill is not amortized, but instead is evaluated for impairment. The core deposit intangible is subject to amortization on an accelerated basis over an estimated life of 15 years. Because the merger was structured as a tax free exchange, none of the goodwill is expected to be deductible for tax purposes.

3. CASH AND CASH EQUIVALENTS

     Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. These reserves, which consisted of vault cash and deposits at the Federal Reserve Bank, totaled approximately $14.7 million and $15.5 million at December 31, 2002 and 2001.

 

 

4. SECURITIES

     The components of securities are as follows:

                         
    December 31, 2002
   
            Gross   Gross
    Fair   Unrealized   Unrealized
    Value   Gains   Losses
   
 
 
    (In thousands)
Available for Sale
                        
U.S. Treasury and agency securities
   $ 52,967     $ 495     $ —  
Corporate notes
     17,592       253       —  
Tax exempt municipals
     13       2       —  
Equity securities
     7,994       526       384  
Mortgage-related securities
     158,702       2,789       46  
 
    
     
     
 
Total investment securities
   $ 237,268     $ 4,065     $ 430  
 
    
     
     
 
                           
      December 31, 2001
     
              Gross   Gross
      Fair   Unrealized   Unrealized
      Value   Gains   Losses
     
 
 
      (In thousands)
Available for Sale
                        
U.S. Treasury and agency securities
   $ 25,160     $ 488     $ 20  
Corporate notes
     14,093       288       —  
Equity securities
     11,828       496       131  
Mortgage-related securities
     67,069       1,082       46  
 
    
     
     
 
 
Total securities available for sale
     118,150       2,354       197  
 
    
     
     
 
                                   
              Gross   Gross        
      Carrying   Unrealized   Unrealized   Fair
      Amount   Gains   Losses   Value
     
 
 
 
Held to Maturity
                                
U.S. Treasury and agency securities
     1,698       18       21       1,695  
Mortgage-related securities
     78,798       1,937       91       80,644  
 
    
     
     
     
 
 
Total securities held to maturity
   $ 80,496       1,955       112       82,339  
 
    
     
     
     
 

     The weighted average interest rate on marketable securities was 3.47% and 5.28% at December 31, 2002 and 2001, respectively. The corporate notes consist primarily of medium-term notes issued by corporations with investment grade ratings.

     Securities available for sale by contractual maturity, repricing or expected call date are shown below:

           
      December 31, 2002
      Fair Value
     
      (In thousands)
Due in one year or less
   $ 51,399  
Due after one year through five years
     19,173  
Mortgage related securities
     158,702  
 
    
 
 
Total
   $ 229,274  
 
    
 

Equity securities do not have a contractual maturity.

     During the fourth quarter 2002, Untied Community transferred securities with a carrying value of $54.6 million previously classified as held to maturity to available for sale. The unrealized gain on the securities transferred totaled $2.6 million. Management transferred these securities to provide more flexibility in managing interest rate risk. Future security purchases will all be classified as available for sale.

 

 

     Sales of available for sale securities were as follows:

                         
    2002   2001   2000
   
 
 
    (In thousands)
Proceeds
   $ 46,027     $ 23,889     $ 31,650  
Gross gains
     2,127       442       234  
Gross losses
     —       50       83  

     Securities pledged for public funds deposits were approximately $35.3 million and $52.1 million at December 31, 2002 and 2001, respectively.

     United Community’s trading securities consist of commercial paper, government obligations and an investment in mutual funds for the Butler Wick Retention Plan.

5. LOANS

     Loans consist of the following:

                       
          December 31,
         
          2002   2001
         
 
          (In thousands)
Real Estate:
                
Permanent:
                
 
One- to four-family
   $ 889,199     $ 984,141  
 
Multifamily
     79,760       60,691  
 
Nonresidential
     236,581       153,368  
 
Land
     5,812       11,432  
Construction:
                
 
One- to four-family
     122,234       115,853  
 
Multifamily and non residential
     35,600       26,883  
 
 
    
     
 
   
Total real estate
     1,369,186       1,352,368  
Consumer
     155,520       110,749  
Commercial
     58,639       39,226  
 
 
    
     
 
   
Total loans
     1,583,345       1,502,343  
 
 
    
     
 
Less:
                
 
Loans in process
     85,340       77,493  
 
Allowance for loan losses
     15,099       11,480  
 
Deferred loan fees (expenses), net
     4,693       6,891  
 
 
    
     
 
   
Total
     105,132       95,864  
 
 
    
     
 
     
Loans, net
   $ 1,478,213     $ 1,406,479  
 
 
    
     
 

     Loans with adjustable rates included above totaled $533.3 million and $387.4 million at December 31, 2002 and 2001. Substantially all such loans have contractual interest rates that increase or decrease at periodic intervals no greater than three years, or have original terms to maturity of three years or less. Adjustable-rate loans reprice primarily based upon U.S. Treasury security rates.

     Nonresidential real estate loans are typically collateralized by the property. Commercial loans are collateralized by accounts receivable, inventory and other assets used in the borrowers’ business. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers’ residence.

     At December 31, 2002 and 2001, loans serviced for the benefit of others, not included in the detail above, totaled $386.4 million and $178.9 million.

     Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments extend over various periods of time with the majority of such commitments disbursed within a sixty-day period. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit at fixed rates expose Home Savings to some degree of interest rate risk. Home Savings evaluates each customer’s creditworthiness on a case-by-case basis. The type or amount of collateral obtained varies and is based on management’s credit evaluation of the potential borrower. Home Savings normally has a number of outstanding commitments to extend credit. At December 31, 2002, there were outstanding commitments to originate $16.0 million of fixed-rate mortgage loans and other loans (with interest rates that ranged from 4.50% to 7.75%), $12.0 million of

 

 

adjustable-rate loans, and $135,000 of commercial loans. Terms of the commitments extend up to six months, but are generally less than two months.

     At December 31, 2002, there were also outstanding unfunded consumer lines of credit of $67.2 million, which are adjustable-rate based on the one-year U.S. Treasury index, and commercial lines of credit of $63.2 million, which are adjustable-rate based on the prime lending index. Generally, all lines of credit are renewable on an annual basis. Home Savings does not expect all of these lines to be used by the borrowers.

     At December 31, 2002, there were $8.7 million of outstanding stand-by letters of credit. These are issued to guarantee the performance of a customer to a third party. Stand-by letters of credit are generally contingent upon the failure of the customer to perform according to the terms of an underlying contract with the third party.

     Home Savings’ business activity is principally with customers located in Ohio. Except for residential loans in Home Savings’ market area, Home Savings has no other significant concentrations of credit risk.

Allowance for Loan Losses

     Changes in the allowance for loan losses are as follows:

                           
      Year ended December 31,
     
      2002   2001   2000
     
 
 
      (In thousands)
Balance, beginning of year
   $ 11,480     $ 6,553     $ 6,405  
 
Acquired from Industrial Bancorp
     —       2,795       —  
 
Acquired from Potters Financial Corp.
     1,869       —       —  
 
Provision for loan losses
     3,578       2,495       300  
 
Amounts charged off
     (1,967 )     (395 )     (201 )
 
Recoveries
     139       32       49  
 
    
     
     
 
Balance, end of year
   $ 15,099     $ 11,480     $ 6,553  
 
    
     
     
 

     Nonperforming loans (loans 90 days past due and restructured loans) were $15.7 million, $12.5 million, and $9.7 million at December 31, 2002, 2001 and 2000.

                   
      As of or for the
      year ended
      December 31,
     
      2002   2001
     
 
      (In thousands)
Impaired loans on which no specific valuation allowance was provided
   $ 2,365     $ 1,718  
Impaired loans on which specific valuation allowance was provided
     1,561       1,169  
 
    
     
 
 
Total impaired loans at year-end
     3,926       2,887  
Specific valuation allowances on impaired loans at year-end
     1,204       751  
Average impaired loans during year
     3,183       1,953  
Interest income recognized on impaired loans during the year
     177       163  
Interest income received on impaired loans during the year
     128       145  
Interest income potential based on original contract terms of impaired loans
     281       190  
 
    
     
 

     Nonperforming and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

     Directors and officers of United Community, Home Savings and Butler Wick are customers of Home Savings in the ordinary course of business. Loans to directors and officers have terms consistent with those offered to other customers. The following describes loans to officers or directors of United Community, Home Savings and Butler Wick:

         
    (In thousands)
Balance as of December 31, 2001
   $ 1,336  
New loans to officers and directors
     615  
Loan payments during 2002
     413  
Reductions due to changes in board or officer memberships
     63  
 
    
 
Balance as of December 31, 2002
   $ 1,475  
 
    
 

 

 

6. MORTGAGE BANKING ACTIVITIES

During 2001, Home Savings became active in the secondary market. Mortgage loans serviced for others, which are not reported in other assets, totaled $386.4 million and $178.9 million at December 31, 2002 and 2001.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows:

                   
      2002   2001
     
 
      (In Thousands)
Balance, beginning of year
   $ 1,605     $ —  
 
Additions
     2,979       1,322  
 
Acquired from Industrial Bancorp
     —       509  
 
Amortized to expense
     (1,003 )     (204 )
 
    
     
 
Balance, end of year
   $ 3,603     $ 1,627  
 
    
     
 

     Activity in the valuation allowance for mortgage servicing rights was as follows:

                   
      2002   2001
     
 
      (In Thousands)
Balance, beginning of year
   $ (22 )   $ —  
 
Additions
     (100 )     (22 )
 
Recoveries
     122       —  
 
    
     
 
Balance, end of year
   $ —     $ (22 )
 
    
     
 

7. SECURITIZATIONS

Home Savings sold $107.9 million and $110.6 million in residential mortgage loans in securitization transactions in 2002 and 2001 respectively. The securities received in these transactions were then immediately sold. Gains of $4.6 million and $2.0 million were recorded on the sales. Home Savings retained servicing responsibilities for the loans, for which it receives servicing fees approximating 0.25% of the outstanding balance of the loans.

For the loans securitized in 2001, approximately $16.5 million of the loans had loan to value ratios greater than 80% and did not have mortgage insurance on the delivery date. These loans were sold with recourse to Home Savings. This recourse will terminate for each loan when that loan remains current for a period of 12 consecutive scheduled monthly payments from the date of the last delinquency. As of December 31, 2002, approximately $767,000 of these loans were still covered by the recourse obligation.

In addition, approximately $63.7 million of the loans sold in 2001 did not comply with the title insurance or attorney opinion of title requirements of the purchaser. Home Savings has agreed to indemnify the purchaser in the event of any default, loss or delay in enforcement that arises as a result of the failure to comply with the title insurance or attorney opinion of title requirements. As of December 31, 2002, approximately $41.8 million of these loans were still covered by the indemnity agreement.

Approximately $205,000 in loans are included in both the recourse and indemnity agreements as of December 31, 2002.

For the loans securitized in 2002, approximately $33.9 million of the loans had loan to value ratios greater than 80% and did not have enough mortgage insurance on the delivery date. These loans were sold with recourse to Home Savings. This recourse will terminate for each loan on June 30, 2004, provided that on that date, the loan is not thirty days or more delinquent. If this criteria is not met, the recourse obligation on that loan will continue until such time as the loan becomes and remains current for a period of twelve consecutive scheduled monthly payments from the date of the last delinquency. Home Savings reduced the recorded gain from the securitization by the fair value of the recourse obligation. As of December 31, 2002, approximately $29.9 million of these loans were still covered by the recourse obligation.

During 2002 and 2001, Home Savings securitized one-to- four family residential mortgage loans and retained the rights to service those loans. An analysis of the activity in securitizations serviced by Home Savings during 2002 follows:

             
        (In Thousands)
Balance at January 1, 2002:
        
 
Principal balance of loans
   $ 102,487  
 
Amortized cost of servicing rights
     929  
 
Servicing rights as a % of principal
     0.91 %

 

 

             
        (In Thousands)
New securitizations during the year:
        
 
Principal balance of loans
     107,897  
 
Fair value of servicing rights
     1,215  
 
Servicing rights as a % of principal
     1.13 %
Principal payments received on loans securitized
     53,389  
Balance at December 31, 2002:
        
 
Principal balance of loans
     156,995  
 
Amortized cost of servicing rights
     1,350  
 
Servicing rights as a % of principal
     0.86 %
Other information at end of period
        
 
Weighted average rate
     6.99 %
 
Weighted average maturity in months
     240  
 
Fair value assumptions
        
   
Discount rate
     8.00 %
   
Weighted average prepayment assumptions
   249PSA
   
Anticipated delinquency
     1.00 %

Cash flows from all securitizations of mortgage loans were as follows in 2002:

         
  (In Thousands)
Securitization proceeds
   $ 108,895  
Servicing fees received
     356  

In the securitization transaction, the company retained residual interest in the form of servicing assets. The servicing assets represent the allocated value of retained servicing rights on the loans securitized. The following table indicates how fair value might decline if the assumptions change unfavorably in two different magnitudes:

           
      (In Thousands)
Fair value at December 31, 2002
   $ 1,427  
Weighted average life (in months)
     74  
Projected fair value based on :
        
 
Increase in PSA of 50
     1,307  
 
Increase in PSA of 100
     1,208  

The effect of adverse changes is hypothetical and should not be extrapolated to other changes, as the effects are not linear.

An analysis of the activity in securitizations serviced by Home Savings during 2001 follows:

             
        (In Thousands)
Balance at January 1, 2001:
        
 
Principal balance of loans
   $ —  
 
Amortized cost of servicing rights
     —  
 
Servicing rights as a % of principal
     —  
New securitizations during the year:
        
 
Principal balance of loans
     110,619  
 
Fair value of servicing rights
     1,012  
 
Servicing rights as a % of principal
     0.91 %
Principal payments received on loans collateralized
     8,132  
Balance at December 31, 2001:
        
 
Principal balance of loans
     102,487  
 
Amortized cost of servicing rights
     929  
 
Servicing rights as a % of principal
     0.91 %
Other information at end of period
        
 
Weighted average rate
     7.14 %
 
Weighted average maturity in months
     244  
 
Fair value assumptions
        
   
Discount rate
     8.00 %
   
Weighted average prepayment assumptions
   229PSA
   
Anticipated delinquency
     1.00 %

 

 

Cash flows from all securitizations of mortgage loans were as follows in 2001:

         
    (Dollars in thousands)
Securitization proceeds
   $ 114,041  
Servicing fees received
     44  

In the securitization transaction, the company retained residual interest in the form of servicing assets totaling $1.0 million. The servicing assets represent the allocated value of retained servicing rights on the loans securitized. The following table indicates how fair value might decline if the assumptions change unfavorably in two different magnitudes:

           
Fair value at December 31, 2001
   $ 929  
Weighted average life (in months)
     82  
Projected fair value based on :
        
 
Increase in PSA of 50
     882  
 
Increase in PSA of 100
     839  

The effect of adverse changes is hypothetical and should not be extrapolated to other changes, as the effects are not linear.

8. PREMISES AND EQUIPMENT

     Premises and equipment consist of the following:

                   
      December 31,
     
      2002   2001
     
 
      (In thousands)
Land and improvements
   $ 4,898     $ 4,180  
Buildings
     14,590       16,033  
Leasehold improvements
     1,106       1,208  
Furniture and equipment
     14,557       14,042  
 
    
     
 
 
     35,151       35,463  
Less: Accumulated depreciation and amortization
     15,149       17,982  
 
    
     
 
 
Total
   $ 20,002     $ 17,481  
 
    
     
 

Rent expense was $334,000 for 2002, $212,000 for 2001 and $135,000 for 2000. Rent commitments under noncancelable operating leases for offices were as follows, before considering renewal options that generally are present.

           
      (In thousands)
2003
   $ 298  
2004
     307  
2005
     311  
2006
     322  
2007
     329  
Thereafter
     335  
 
    
 
 
Total
   $ 1,902  
 
    
 

9. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in the carrying amount of goodwill for the year is as follows:

         
    (In thousands)
Balance as of June 30, 2001
   $ —  
Goodwill acquired during the period
     19,664  
 
    
 
Balance as of December 31, 2001
     19,664  
Goodwill acquired during the period
     13,929  
 
    
 
Balance as of December 31, 2002
   $ 33,593  
 
    
 

 

 

Acquired Intangible Assets

                                     
        As of December 31,
       
        2002   2001
       
 
        Gross Carrying   Accumulated   Gross Carrying   Accumulated
        Amount   Amortization   Amount   Amortization
       
 
 
 
        (In thousands)
Amortized intangible assets:
                                
 
Core deposit intangibles
   $ 8,952     $ 3,851     $ 7,983       1,671  
 
 
    
     
     
     
 
   
Total
   $ 8,952     $ 3,851     $ 7,983     $ 1,671  
 
 
    
     
     
     
 
Aggregate amortization expense:
                                
 
For the year ended December 31, 2001
                   $ 1,671          
 
For the year ended December 31, 2002
   $ 2,180                          
Estimated amortization expense:
                                
 
For the year ended:
                                
 
December 31, 2003
   $ 1,314                          
 
December 31, 2004
     899                          
 
December 31, 2005
     666                          
 
December 31, 2006
     512                          
 
December 31, 2007
     400                          
 
December 31, 2008
     313                          

10. DEPOSITS

     Deposits consist of the following:

                   
      December 31,
     
      2002   2001
     
 
      (In Thousands)
Checking accounts:
                
 
Interest-bearing
   $ 110,657     $ 106,631  
 
Noninterest-bearing
     56,452       36,176  
Savings accounts
     302,276       257,417  
Money market accounts
     194,173       151,251  
Certificates of deposit
     818,343       831,943  
 
 
    
     
 
Total deposits
   $ 1,481,901     $ 1,383,418  
 
 
    
     
 

     Interest expense on deposits is summarized as follows:

                           
      Year Ended December 31,
     
      2002   2001   2000
     
 
 
      (In thousands)
Interest-bearing demand deposits
   $ 5,319     $ 5,446     $ 4,166  
Savings accounts
     4,946       5,212       5,272  
Certificates of deposit
     34,668       37,353       25,956  
 
    
     
     
 
 
Total
   $ 44,933     $ 48,011     $ 35,394  
 
    
     
     
 

 

 

     A summary of certificates of deposit by maturity follows:

           
    December 31, 2002
   
    (In thousands)
Within 12 months
   $ 485,479  
12 months to 24 months
     131,975  
24 months to 36 months
     94,558  
36 months to 48 months
     18,374  
Over 48 months
     87,957  
 
    
 
 
Total
   $ 818,343  
 
    
 

A summary of certificates of deposit with balances of $100,000 or more by maturity is as follows:

                   
      December 31, 2002   December 31, 2001
     
 
      (In thousands)
Three months or less
   $ 36,778     $ 32,987  
Over three months to six months
     34,551       20,492  
Over six months to twelve months
     30,642       59,432  
Over twelve months
     65,748       52,917  
 
    
     
 
 
Total
   $ 167,719     $ 165,828  
 
    
     
 

     Deposits in excess of $100,000 are not federally insured. Home Savings did not have brokered deposits for the years ended December 31, 2002 and 2001.

11. OTHER BORROWED FUNDS

     The following is a summary of other short-term borrowings:

                                   
      December 31,
     
      2002   2001
     
 
      (In Thousands)
              Weighted           Weighted
      Amount   average rate   Amount   average rate
     
 
 
 
Variable interest revolving line of credit
   $ 11,221       1.05 %   $ 19,326       1.85 %
Securities sold under repurchase agreement
     14,614       1.56 %     23,998       2.83 %
Transaction loans; 30 year amortization; 15 year balloon
     1,217       7.43 %     —       —  
 
    
     
     
     
 
 
Total
   $ 27,052             $ 43,324          
 
    
             
         

     The following is a summary of FHLB borrowings:

                                     
        December 31,   December 31,
        2002   2001
       
 
        (In Thousands)
                Weighted           Weighted
Year of Maturity   Amount   average rate   Amount   average rate
 
 
 
 
   
2002
   $ —       — %   $ 35,157       4.63  
   
2003
     10,893       4.44 %     20,150       4.69  
   
2004
     18,742       4.73 %     43,000       4.56  
   
2005
     18,615       5.14 %     18,000       5.19  
   
2006
     118,509       4.66 %     112,000       4.73  
   
2007
     14,421       3.75 %     —       —  
 
Thereafter
     1,792       3.70 %     —       —  
   
 
    
     
     
     
 
   
Total
   $ 182,972             $ 228,307          
 
    
             
         
Total borrowings
   $ 210,024             $ 271,631          
 
    
             
         

 

 

Home Savings has available credit with the FHLB of $681.7 million, of which $183.0 million was used at December 31, 2002. All advances from the FHLB of Cincinnati are secured by a blanket mortgage collateral agreement for 125% of outstanding advances, amounting to $228.8 million at December 31, 2002. Butler Wick has a revolving line of credit, which is fully collateralized by securities valued at $6.6 million and $4.7 million at December 31, 2002 and 2001. Securities worth $22.3 million are being held at the Federal Reserve Bank as collateral for a repurchase agreement as of December 31, 2002.

During 2002, United Community incurred approximately $1.3 million in costs associated with the early extinguishment of debt with FHLB. Management established that it was advantageous to extinguish debt early and incur the associated fees due to the current economic conditions and cash inflows from loans sold.

12. INCOME TAXES

     The provision for income taxes consists of the following components:

                           
      Year ended December 31,
     
      2002   2001   2000
     
 
 
      (In Thousands)
Current
   $ 11,986     $ 7,374     $ 5,673  
Deferred
     (1,210 )     2,135       378  
 
    
     
     
 
 
Total
   $ 10,776     $ 9,509     $ 6,051  
 
    
     
     
 

     A reconciliation from tax at the statutory rate to the income tax provision is as follows:

                                                     
        Year ended December 31,
       
        2002   2001   2000
       
 
 
        Dollars   Rate   Dollars   Rate   Dollars   Rate
       
 
 
 
 
 
        (In Thousands)
Tax at statutory rate
   $ 11,057       35.0 %   $ 8,816       35.0 %   $ 6,183       35.0 %
Increase (decrease) due to:
                                                
   
Intangible amortization
     —       —       585       2.3       —       —  
 
Change in valuation allowance
     (400 )     (1.3 )     —       —       —       —  
 
State taxes
     (11 )     —       (29 )     (0.1 )     140       0.8  
 
Other
     130       0.4       137       0.6       (272 )     (1.5 )
 
    
     
     
     
     
     
 
Income tax provision
   $ 10,776       34.1 %   $ 9,509       37.8 %   $ 6,051       34.3 %
 
    
     
     
     
     
     
 

     Significant components of the deferred tax assets and liabilities are as follows. A valuation allowance has been established as discussed below:

                       
          December 31,
         
          2002   2001
         
 
          (In thousands)
Deferred tax assets:
                
 
Charitable contribution
   $ 394     $ 1,734  
 
Loan loss reserves
     5,293       4,018  
 
Postretirement benefits
     1,023       1,460  
 
Deferred loan fees
     1,093       2,456  
 
ESOP shares released
     1,026       852  
 
Compensation accruals
     721       1,512  
 
Other
     1,206       —  
 
 
    
     
 
     
Deferred tax assets
     10,756       12,032  
 
 
    
     
 
Deferred tax liabilities:
                
 
Purchase accounting adjustments
     2,841       2,186  
 
Original issue discount
     2,082       3,716  
 
FHLB stock dividends
     4,827       4,211  
 
Post 1987 tax bad debts
     —       532  
 
Unrealized gain on securities available for sale
     1,272       755  
 
Loan servicing
     1,261       562  
 
Other
     516       830  
 
 
    
     
 
 
Deferred tax liabilities
     12,799       12,792  
 
 
    
     
 
 
Valuation Allowance
     —       (400 )
 
 
    
     
 
   
Net deferred tax (liability) asset
   $ (2,043 )     ($1,160 )
 
 
    
     
 

 

 

     During 1996, legislation was passed that repealed Section 593 of the Internal Revenue Code for taxable years beginning after December 31, 1995. Section 593 allowed thrift institutions, including Home Savings, to use the percentage-of-taxable income bad debt accounting method, if more favorable than the specific charge-off method, for federal income tax purposes. The excess reserves (deduction based on the percentage of taxable income less the deduction based on the specific charge-off method) accumulated post-1987 are required to be recaptured ratably over a six-year period beginning in 1996. The recapture has no effect on Home Savings’ statement of income as income taxes were provided for in prior years in accordance with SFAS 109, “Accounting for Income Taxes.” The timing of this recapture was delayed for two years because Home Savings originated more residential loans in that period than the average originations in the past six years. Beginning in 1998, Home Savings began to recapture the excess reserves in the amount of $6.1 million resulting in payments totaling $2.1 million, which have been previously accrued. The pre-1988 reserve provisions are subject only to recapture requirements in the case of certain excess distributions to, and redemptions of, shareholders or if Home Savings no longer qualifies as a “bank.” Tax bad debt deductions accumulated prior to 1988 by Home Savings are approximately $21.1 million. A deferred income tax liability of $7.3 million has not been provided on these bad debt deductions and no recapture of these amounts is anticipated.

     In December 1998, Home Savings made a charitable contribution of 1,183,438 shares of United Community’s stock to the Home Savings Charitable Foundation valued at approximately $11.8 million. Charitable contributions can only be deducted to the extent of 10% of taxable income, subject to certain adjustments, for the period in which the contribution is made. Any excess may be carried forward for a period of five years to be offset against future taxable income. A deferred tax asset in the amount of $400,000 is recorded at December 31, 2002. Home Savings had previously provided a deferred tax asset valuation allowance of $400,000 against this amount. This valuation allowance was reversed in 2002 based upon management’s projections that the contribution carryforward will be fully utilized in 2003.

13. 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, 2002, United Community paid regular dividends in the amount of $9.6 million. Home Savings’ primary regulator, 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.

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 $1.3 million, $217,000 and $80,000 for the year ended December 31, 2002, 2001 and 2000, respectively.

Liquidation Account

     At the time of the Conversion, Home Savings established a liquidation account, totaling $141.4, which was equal to its regulatory capital as of the latest practicable date prior to the Conversion. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for the accounts then held.

14. 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 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).

 

 

                                                 
    As of December 31, 2002
   
                    Minimum   To Be Well Capitalized
                    Capital   Under Prompt Corrective
    Actual   Requirements   Action Provisions
   
 
 
    Amount   Ratio   Amount   Ratio   Amount   Ratio
   
 
 
 
 
 
    (In Thousands)
Total capital (to risk-weighted assets)
   $ 163,419       12.61 %   $ 103,656       8.00 %   $ 129,569       10.00 %
Tier 1 capital (to risk-weighted assets)
     150,821       11.64       *       *       77,742       6.00  
Core (Tier 1) capital (to adjusted total assets)
     150,821       8.05       74,954       4.00       93,693       5.00  
Tangible capital (to adjusted total assets)
     150,821       8.05       28,108       1.50       *       *  
                                                 
    As of December 31, 2001
   
                    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)
   $ 178,196       14.70 %   $ 96,961       8.00 %   $ 121,202       10.00 %
Tier 1 capital (to risk-weighted assets)
     168,233       13.88       *       *       72,721       6.00  
Core (Tier 1) capital (to adjusted total assets)
     168,233       9.07       74,228       4.00       92,785       5.00  
Tangible capital (to adjusted total assets)
     168,233       9.07       27,836       1.50       *       *  

*Ratio is not required under regulations.

     As of December 31, 2002 and 2001, the OTS categorized Home Savings as well capitalized under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, Home Savings must maintain minimum Core, Tier 1 and total capital ratios as set forth in the table above. There are no conditions or events since that notification that have changed Home Savings’ category.

     Management believes, as of December 31, 2002, 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, 2002, Butler Wick had net capital of $8.1 million, which was 49% of aggregate debit balances and $7.7 million in excess of required minimum net capital.

15. BENEFIT PLANS

Defined Benefit Pension Plan

     Home Savings terminated its pension plan, effective July 31, 1999, subject to applicable regulatory approval. During 1999, Home Savings received approval to terminate the plan from the Pension Benefit Guaranty Corporation and Home Savings received final approval from the Internal Revenue Service in 2000. Home Savings settled its pension obligations in July 2000 and recorded a termination loss of $1.0 million.

Other Postretirement Benefit Plans

     In addition to Home Savings’ retirement plans, Home Savings sponsors a defined benefit health care plan that was curtailed in 2000 to provide postretirement medical benefits for employees who have worked 20 years and attained a minimum age of 60 by September 1, 2000, while in service with Home Savings. The plan is contributory and contains minor cost-sharing features such as deductibles and coinsurance. In addition, postretirement life insurance coverage is provided for employees who were participants prior to December 10, 1976. The life insurance plan is non-contributory. Home Savings’ policy is to pay premiums monthly, with no pre-funding.

     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 2002 valuation was 26 percent and was assumed to decrease to 5.5 percent for the year 2007 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:

                 
    1 Percentage   1 Percentage
    Point Increase   Point Decrease
   
 
    (In thousands)
Effect on total of service and interest cost components
   $ 25     $ 25  
Effect on the postretirement benefit obligation
   $ 372     $ 354  
 
    
     
 
                 
    Year ended December 31,
   
    2002   2001
   
 
    Postretirement   Postretirement
    Plan   Plan
   
 
    (In thousands)
Change in Benefit Obligation:
                
Benefit obligation at beginning of year
   $ 2,861     $ 2,442  
Service cost
     19       13  
Interest cost
     256       194  
Actuarial loss/(gain)
     787       400  
Benefit paid
     (237 )     (188 )
 
    
     
 
Benefit obligation at end of the year
   $ 3,686     $ 2,861  
 
    
     
 
Funded status of the plan
   $ (3,686 )   $ (2,861 )
Unrecognized net (gain) from past experience different from that assumed and effects of changes in assumptions
     (337 )     (1,123 )
Prior service cost not yet recognized in net periodic benefit cost
     (7 )     (8 )
 
    
     
 
(Accrued) pension cost
   $ (4,030 )   $ (3,992 )
 
    
     
 
                                 
    Year Ended December 31,
   
    2002   2001   2000
   
 
 
    Post-   Post-   Defined   Post-
    retirement   Retirement   Benefit   retirement
    Plan   Plan   Plan   Plan
   
 
 
 
    (In thousands)
Service cost
   $ 19     $ 13     $ —     $ 151  
Interest cost
     256       194       218       299  
Expected return on plan assets
     —       —       (307 )     —  
Net amortization of prior service cost
     (1 )     (1 )     —       (18 )
Recognized net actuarial gain
     —       (1,167 )     —       (488 )
Loss on termination
     —       —       1,097       —  
 
    
     
     
     
 
Net periodic benefit cost/(gain)
     274       (961 )     1,008       (56 )
Curtailment
     —       —       —       (2,928 )
 
    
     
     
     
 
Net periodic benefit cost/(gain) after curtailment
   $ 274     $ (961 )   $ 1,008     $ (2,984 )
 
    
     
     
     
 

 

 

     Assumptions used in the valuations were as follows:

                                 
    Year Ended December 31,
   
    2002   2001   2000   2000
    Post-   Post-   Defined   Post-
    retirement   Retirement   Benefit   retirement
    Plan   Plan   Plan   Plan
   
 
 
 
    (In thousands)
Weighted average discount rate
     6.75 %     7.25 %     6.50 %     7.75 %
Expected long-term rate of return on plan assets
     N/A       N/A       5.50       N/A  
 
    
     
     
     
 

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 2002, 2001 and 2000, 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 2002, 2001 and 2000, the expense related to this plan was approximately $396,000, $308,000 and $230,000.

     Butler Wick also sponsors a defined contribution 401(k) savings plan, which covers substantially all employees who have completed one year of service. Under the provisions of the plan, Butler Wick’s matching contribution is discretionary and may be changed from year to year. For 2002, 2001 and 2000, 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 2002, 2001 and 2000, the expense related to this plan was approximately $132,000, $126,000 and $120,000.

Employee Stock Ownership Plan

     In conjunction with the Conversion, United Community established an Employee Stock Ownership Plan (ESOP) for the benefit of the employees of United Community and Home Savings. All full-time employees who meet certain age and years of service criteria are eligible to participate in the ESOP. An ESOP is a tax-qualified retirement plan designed to invest primarily in the stock of United Community. The ESOP borrowed $26.8 million from United Community to purchase 2,677,250 shares in conjunction with the conversion. The term of the loan is 15 years and is being repaid primarily with contributions from Home Savings to the ESOP.

     The loan is collateralized by the shares of common stock held by the ESOP. As the note is repaid, shares are released from collateral based on the proportion of the payment in relation to total payments required to be made on the loan. The shares released from collateral are then allocated to participants on the basis of compensation as described in the plan. Compensation expense is determined by multiplying the average per share market price of United Community’s stock during the period by the number of shares to be released. United Community recognized approximately $2.4 million, $2.1 million and $2.0 million in compensation expense for the years ended December 31, 2002, 2001 and 2000, 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, 2002, 2001 and 2000 totaled 294,802, 294,802 and 300,679 and had a combined fair market value of $7.7 million. Shares remaining not released or committed to be released for allocation at December 31, 2002 totaled 3.0 million and had a market value of approximately $26.0 million.

Recognition and Retention Plan

     On July 12, 1999, shareholders approved the United Community Financial Corp. Recognition and Retention Plan (RRP). The purpose of the plan is to reward and retain directors, officers and employees of United Community and Home Savings who are in key positions of responsibility by providing them with an ownership interest in United Community. Under the RRP, recipients are entitled to receive dividends and have voting rights on their respective shares, but are restricted from selling or transferring the shares prior to vesting.

     In August 1999, United Community awarded 1,342,334 common shares to eligible individuals. Approximately one-fifth of the number of shares awarded, or 268,638 shares, vested on the date of grant. The remaining 1,073,696 shares vest ratably on each of the first four anniversary dates of the plan. In August 2000, United Community awarded 46,291 common shares to eligible individuals. Approximately two-fifths of the number of shares awarded, or 18,517 shares, vested on the date of grant. The remaining 27,774 shares vest ratably on each of the first three anniversary dates of the plan. In August 2002, United Community awarded 69,677 common shares to eligible individuals. Approximately one-half of the shares awarded, or 34,839 shares, vested on the date of grant. The remaining 34,838 shares vest on the first anniversary date. Shares available for future grants at December 31, 2002, 2001 and 2000 were 1,188 shares, 50,371 shares and 3,960 shares.

     The aggregate fair market value of the unvested RRP shares is considered unearned compensation at the time of grant and is amortized over the vesting period. Compensation expense recognized in 2002, 2001 and 2000 related to the RRP was $1.9 million, $1.6 million and $2.0 million.

 

 

Retention Plan

     In connection with the Butler Wick acquisition, United Community established and funded a $3.7 million retention plan into a Rabbi Trust. Participants in the retention plan become vested in their benefits after five years of service, subject to acceleration in the event of a change in control of United Community or Butler Wick. If a participant voluntarily leaves the employ of Butler Wick or a subsidiary, or is fired for cause, before the expiration of the five-year vesting period, the participant will forfeit all funds in the plan. If a participant dies, becomes disabled or retires at or after age 65 and prior to the expiration of the five-year vesting period, the participant, or the participant’s estate, will be entitled to receive the funds allocated to him or her under the plan, increased for any earnings or reduced for any loss on such funds, at the end of the five-year vesting period. Retention plan expense, including fair value adjustments related to the assets in Rabbi Trust, was $126,000, $(73,000) and $1.0 million for 2002, 2001 and 2000.

Long-Term Incentive Plan

     On July 12, 1999, shareholders approved the United Community Financial Corp. Long-Term Incentive Plan (Incentive Plan). The purpose of the Incentive Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings and Butler Wick, by facilitating their purchase of an ownership interest in United Community.

     The Incentive Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the stock at the grant date. The maximum number of common shares that may be issued under the plan is 3,471,562. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant. A summary of activity in the plan is as follows:

                                                 
    As of December 31,
   
    2002   2001   2000
   
 
 
            Weighted average           Weighted average           Weighted average
    Shares   exercise price   Shares   exercise price   Shares   exercise price
   
 
 
 
 
 
Outstanding at beginning of year
     1,307,496     $ 6.79       629,085     $ 6.97       —     $ —  
Granted
     715,710       7.40       771,390       6.66       638,483       6.97  
Exercised
     75,538       6.84       1,126       6.66       —       —  
Forfeited
     38,053       6.93       91,853       6.95       9,398       6.97  
 
    
     
     
     
     
     
 
Outstanding at end of year
     1,909,615       7.01       1,307,496       6.79       629,085       6.97  
 
    
     
     
     
     
     
 
Options exercisable at year end
     1,909,615     $ 7.01       1,307,496     $ 6.79       629,085       6.97  
 
    
     
     
     
     
     
 
Weighted-average fair value of options granted during year
           $ 2.44             $ 1.83             $ 2.44  
 
            
             
             
 

16. 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.

Investment Securities—Fair values are based on quoted market prices, dealer quotes and prices obtained from independent pricing services.

Loans—The fair value is estimated by discounting the future cash flows using the current market rates for loans of similar maturities with adjustments for market and credit risks.

Loans held for sale—The fair value of loans held for sale is based on market quotes.

Federal Home Loan Bank stock—The fair value is estimated to be the carrying value, which is par. All transactions in the capital stock of the Federal Home Loan Bank are executed at par.

 

 

Deposits—The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.

Other borrowed funds—The fair value of borrowings is the amount payable on demand at the reporting date.

Off balance sheet commitments—The fair value of commitments is not materially different from the nominal value.

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, 2002 and 2001. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

                                       
          December 31, 2002   December 31, 2001
         
 
          Carrying   Fair   Carrying   Fair
          Value   Value   Value   Value
         
 
 
 
          (In thousands)
Assets:
                                
Cash and cash equivalents
   $ 110,936     $ 110,936     $ 205,883     $ 205,883  
 
Securities:
                                
   
Trading
     5,060       5,060       8,352       8,352  
   
Available for sale
     237,268       237,268       118,150       118,150  
   
Held to maturity
     —       —       80,496       82,339  
 
Loans held for sale
     45,825       46,828       20,192       20,425  
 
Loans
     1,478,213       1,510,558       1,406,479       1,422,685  
 
Margin accounts
     14,809       14,809       20,979       20,979  
 
Federal Home Loan Bank stock
     21,069       21,069       18,760       18,760  
 
Accrued interest receivable
     20,002       20,002       17,481       17,481  
Liabilities:
                                
 
Deposits:
                                
   
Checking, savings and money market accounts
     (663,558 )     (663,558 )     (551,475 )     (551,475 )
   
Certificates of deposit
     (818,343 )     (835,753 )     (831,943 )     (835,375 )
 
Other borrowed funds
     (210,024 )     (220,029 )     (271,631 )     (275,161 )
 
Advance payments by borrowers for taxes and insurance
     (5,996 )     (5,996 )     (5,760 )     (5,760 )
 
Accrued interest payable
     (1,126 )     (1,126 )     (2,983 )     (2,983 )
 
    
     
     
     
 

 

 

17. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

     Supplemental disclosures of cash flow information are summarized below:

                             
        Year Ended December 31,
       
        2002   2001   2000
       
 
 
        (In thousands)
Supplemental disclosures of cash flow information:
                        
 
Cash paid during the year for:
                        
   
Interest on deposits and borrowings
   $ 56,093     $ 62,963     $ 45,334  
   
Income taxes
     11,878       7,471       5,941  
Supplemental schedule of noncash activities:
                        
   
Loans transferred to held for sale
     8,418       120,981       —  
   
Transfers from loans to real estate owned
     2,025       851       493  
   
Securities held to maturity transferred to available for sale
     54,927       —       —  
   
 
    
     
     
 

18. PARENT COMPANY FINANCIAL STATEMENTS

Condensed Statement of Financial Condition

                       
          December 31,
         
          2002   2001
         
 
          (In thousands)
Assets
                
 
Cash and deposits with banks
   $ 447     $ 343  
 
Federal funds sold and other
     44,683       21,555  
 
 
    
     
 
   
Total cash and cash equivalents
     45,130       21,898  
 
Securities:
                
     
Trading
     3,155       3,769  
     
Available for sale
     3,375       2,795  
 
Note receivable
     21,506       22,831  
 
Accrued interest receivable
     11       2  
 
Investment in subsidiary-Home Savings
     191,845       195,452  
 
Investment in subsidiary-Butler Wick
     13,960       13,303  
 
Other assets
     —       4,176  
 
 
    
     
 
   
Total assets
   $ 278,982     $ 264,226  
 
 
    
     
 
Liabilities and Shareholders’ Equity
                
 
Accrued expenses and other liabilities
   $ 4,413     $ 2,346  
 
 
    
     
 
   
Total liabilities
     4,413       2,346  
 
 
    
     
 
 
Total shareholders’ equity
     274,569       261,880  
 
 
    
     
 
   
Total liabilities and shareholders’ equity
   $ 278,982     $ 264,226  
 
 
    
     
 

Condensed Statement of Income

                             
        Year ended December 31,
       
        2002   2001   2000
       
 
 
        (In thousands)
Income
                        
 
Cash dividends from subsidiary
   $ 30,000     $ —     $ 158,000  
 
Interest income
     2,191       3,752       5,806  
 
Noninterest income
     (574 )     (862 )     227  
 
 
    
     
     
 
   
Total income
     31,617       2,890       164,033  
Expenses
                        
 
Interest expense
     —       385       1,152  
 
Noninterest expenses
     988       986       1,078  
 
 
    
     
     
 
   
Total expenses
     988       1,371       2,230  
 
 
    
     
     
 
Income before income taxes
     30,629       1,519       161,803  
Income taxes
     238       602       1,069  
 
 
    
     
     
 
Income before equity in undistributed net earnings of subsidiary
     30,391       917       160,734  
Equity in undistributed net earnings of subsidiary
     (9,574 )     14,762       (149,120 )
 
 
    
     
     
 
   
Net income
   $ 20,817     $ 15,679     $ 11,614  
 
 
    
     
     
 

 

 

Condensed Statement of Cash Flows

                             
        Year ended December 31,
       
        2002   2001   2000
       
 
 
        (In thousands)
Cash Flows from Operating Activities
                        
 
Net Income
   $ 20,817     $ 15,679     $ 11,614  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                        
   
Equity in undistributed earnings of the subsidiaries
     9,574       (14,762 )     149,120  
   
Amortization of premiums and accretion of discounts
     15       (1 )     (22 )
   
Net (gains) losses
     (76 )     (1 )     19  
   
Decrease (increase) in interest receivable
     (10 )     370       719  
   
Decrease (increase) in other assets
     4,333       (4,294 )     (54 )
   
Decrease in accrued interest payable
     —       —       (1,642 )
   
Increase (decrease) in other liabilities
     1,774       (789 )     (254 )
   
Decrease (increase) in trading securities
     614       803       (241 )
 
 
    
     
     
 
   
Net cash provided by (used in) operating activities
     37,041       (2,995 )     159,259  
 
 
    
     
     
 
Cash Flows from Investing Activities
                        
 
Proceeds from principal repayments and maturities of:
                        
   
Securities available for sale
     3,708       37,665       25,000  
 
Proceeds from sale of:
                        
   
Securities available for sale
     162       350       473  
 
Purchases of:
                        
   
Securities available for sale
     (4,357 )     (356 )     (924 )
 
ESOP loan repayment
     335       146       (37 )
 
 
    
     
     
 
   
Net cash (used in) provided by investing activities
     (152 )     37,805       24,512  
 
 
    
     
     
 
Cash Flows from Financing Activities
                        
 
Dividends paid
     (9,636 )     (9,790 )     (10,141 )
 
Net decrease in borrowed funds
     —       (12,000 )     (173,000 )
 
Purchase of treasury stock
     (4,386 )     (11,038 )     (3,322 )
 
Exercise of stock options
     365       8       —  
 
 
    
     
     
 
   
Net cash provided by (used in) financing activities
     (13,657 )     (32,820 )     (186,463 )
 
 
    
     
     
 
Increase (decrease) in cash and cash equivalents
     23,232       1,990       (2,692 )
Cash and cash equivalents, beginning of year
     21,898       19,908       22,600  
 
 
    
     
     
 
Cash and cash equivalents, end of year
   $ 45,130     $ 21,898     $ 19,908  
 
 
    
     
     
 

19. SEGMENT INFORMATION

     SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for the manner in which public enterprises report information about operating segments in financial statements. United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and business banking services. Investment advisory services provide investment brokerage services and a network of integrated financial services. The accounting policies of the segments are the same as those described in Note 1. Condensed statements of income and selected financial information by operating segment for the years ended December 31, 2002, 2001 and 2000 are as follows:

 

 

                                   
      Retail Banking   Investment Advisory Services   Eliminations   Total
     
 
 
 
      (In thousands)
2002
                                
Results of Operations
                                
 
Total interest income
   $ 127,423     $ 1,073     $ (1,803 )   $ 126,693  
 
Total interest expense
     55,821       218       (1,803 )     54,236  
 
Net interest income after provision for loan loss
     68,024       855       —       68,879  
 
Noninterest income
     11,709       19,364       —       31,073  
 
Noninterest expense
     48,878       19,481       —       68,359  
 
 
    
     
     
     
 
 
Income before tax
     30,855       738       —       31,593  
 
Income tax
     10,515       261       —       10,776  
 
 
    
     
     
     
 
 
Net income
   $ 20,340     $ 477       —     $ 20,817  
 
 
    
     
     
     
 
Selected Financial Information
                                
 
Total assets
   $ 2,191,205     $ 26,748     $ (227,822 )   $ 1,990,131  
 
Capital expenditures
     3,656       246       —       3,902  
 
Depreciation and amortization
     2,403       545       —       2,948  
2001
                                
Results of Operations
                                
 
Total interest income
   $ 114,295     $ 1,982     $ (2,288 )   $ 113,989  
 
Total interest expense
     58,516       819       (2,288 )     57,047  
 
Net interest income after provision for loan loss
     53,284       1,163       —       54,447  
 
Noninterest income
     8,659       19,790       —       28,449  
 
Noninterest expense
     37,434       20,274       —       57,708  
 
 
    
     
     
     
 
 
Income before tax
     24,509       679       —       25,188  
 
Income tax
     9,263       246       —       9,509  
 
 
    
     
     
     
 
 
Net income
   $ 15,246     $ 433     $ —     $ 15,679  
 
 
    
     
     
     
 
Selected Financial Information
                                
 
Total assets
   $ 2,145,275     $ 35,977     $ (236,472 )   $ 1,944,780  
 
Capital expenditures
     2,407       362       —       2,769  
 
Depreciation and amortization
     1,675       548       —       2,223  
2000
                                
Results of Operations
                                
 
Total interest income
   $ 90,844     $ 3,804     $ (3,026 )   $ 91,622  
 
Total interest expense
     45,001       2,129       (3,026 )     44,104  
 
Net interest income after provision for loan loss
     45,543       1,675       —       47,218  
 
Noninterest income
     2,590       22,164       —       24,754  
 
Noninterest expense
     31,721       22,586       —       54,307  
 
 
    
     
     
     
 
 
Income before tax
     16,412       1,253       —       17,665  
 
Income tax
     5,599       452       —       6,051  
 
 
    
     
     
     
 
 
Net income
   $ 10,813     $ 801     $ —     $ 11,614  
 
 
    
     
     
     
 
Selected Financial Information
                                
 
Total assets
   $ 1,484,541     $ 41,027     $ (225,369 )   $ 1,300,199  
 
Capital expenditures
     3,743       519       —       4,262  
 
Depreciation and amortization
     1,098       475       —       1,573  

20. EARNINGS PER SHARE

     Earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options and the RRP. No shares of common stock were anti-dilutive for the periods ended December 31, 2002 and 2001. There were 621,922 shares of common stock that were not considered for the diluted earnings per share calculation for the period ended December 31, 2000, as they were anti-dilutive.

 

 

                         
    2002   2001   2000
   
 
 
    (In thousands, except per share data)
Basic Earnings Per Share:
                        
Net income applicable to common stock
   $ 20,817     $ 15,679     $ 11,614  
Weighted average common shares outstanding
     31,767       32,176       33,186  
 
    
     
     
 
Basic earnings per share
   $ 0.65     $ 0.49     $ 0.35  
 
    
     
     
 
Diluted Earnings Per Share:
                        
Net income applicable to common stock
   $ 20,817     $ 15,679     $ 11,614  
Weighted average common shares outstanding
     31,859       32,176       33,186  
Dilutive effect of restricted stock
     130       154       130  
Dilutive effect of stock options
     336       35       —  
 
    
     
     
 
Weighted average common shares outstanding for dilutive computation
     32,325       32,365       33,316  
 
    
     
     
 
Diluted earnings per share
   $ 0.65     $ 0.48     $ 0.35  
 
    
     
     
 

21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summary of Quarterly Financial Information

     The following table presents summarized quarterly data for each of the years indicated.

                                           
              (Unaudited)        
      First   Second   Third   Fourth   Total
      Quarter   Quarter   Quarter   Quarter   Year
     
 
 
 
 
      (In thousands, except per share data)
2002:
                                        
Total interest income
   $ 31,263     $ 32,598     $ 31,770     $ 31,062     $ 126,693  
Total interest expense
     14,893       13,726       13,152       12,465       54,236  
 
    
     
     
     
     
 
Net interest income
     16,370       18,872       18,618       18,597       72,457  
Provision for loan loss allowances
     696       532       750       1,600       3,578  
Noninterest income
     7,758       8,372       6,274       8,669       31,073  
Noninterest expense
     16,752       17,365       15,973       18,269       68,359  
Income taxes
     2,425       3,350       2,964       2,037       10,776  
 
    
     
     
     
     
 
Net income
   $ 4,255     $ 5,997     $ 5,205     $ 5,360     $ 20,817  
 
    
     
     
     
     
 
Earnings per share:
                                        
 
Basic
     0.13       0.19       0.16       0.17       0.65  
 
Diluted
     0.13       0.19       0.16       0.17       0.65  
2001:
                                        
Total interest income
   $ 24,038     $ 24,645     $ 32,872     $ 32,434     $ 113,989  
Total interest expense
     11,681       12,244       16,819       16,303       57,047  
 
    
     
     
     
     
 
Net interest income
     12,357       12,401       16,053       16,131       56,942  
Provision for loan loss allowances
     330       250       465       1,450       2,495  
Noninterest income
     5,788       6,118       5,236       11,307       28,449  
Noninterest expense
     12,779       13,552       14,518       16,859       57,708  
Income taxes
     1,834       1,779       2,341       3,555       9,509  
 
    
     
     
     
     
 
Net income
   $ 3,202     $ 2,938     $ 3,965     $ 5,574     $ 15,679  
 
    
     
     
     
     
 
Earnings per share:
                                        
 
Basic
     0.10       0.09       0.12       0.18       0.49  
 
Diluted
     0.10       0.09       0.12       0.17       0.48  

 

 

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors
United Community Financial Corp.
Youngstown, OH

     We have audited the accompanying consolidated statements of financial condition of United Community Financial Corp. as of December 31, 2002 and 2001 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended December 31, 2002 and 2001. These financial statements are the responsibility of United Community’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The 2000 financial statements were audited by other auditors, whose report dated January 24, 2001 expressed an unqualified opinion on those statements.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Community Financial Corp. as of December 31, 2002 and 2001 and the results of its operations and cash flows for the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America.

 
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP

Cleveland, Ohio
February 7, 2003

  EX-21 4 l99172aexv21.txt EXHIBIT 21 . . . EXHIBIT 21 SUBSIDIARIES
Name State of Incorporation - ---- ---------------------- The Home Savings and Loan Company of Youngstown, Ohio Ohio Butler Wick Corp Ohio
EX-23.1 5 l99172aexv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement (No. 333-38028, 333-86015 and 333-100081) on Form S-8 of United Community Financial Corp. of our report dated February 7, 2003, on the consolidated statements of financial condition of United Community Financial Corp. as of December 31, 2002 and 2001 and for the years then ended which report appears in the Annual Report on Form 10-K of United Community Financial Corp. for the year ended December 31, 2002. /s/ Crowe, Chizek and Company LLP Cleveland, Ohio March 28, 2003 EX-23.2 6 l99172aexv23w2.txt EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT United Community Financial Corp. We consent to the incorporation by reference in Registration Statement Nos. 333-38028, 333-86015 and 333-100081 of United Community Financial Corp. on Forms S-8 of our report dated January 24, 2001, incorporated by reference in this Annual Report on Form 10-K of United Community Financial Corp. for the year ended December 31, 2002. /s/ Deloitte and Touche LLP Cleveland, Ohio March 28, 2003 EX-99.1 7 l99172aexv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors United Community Financial Corp. We have audited the accompanying consolidated statements of income, shareholders' equity, and cash flows of United Community Financial Corp. and subsidiaries for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of United Community Financial Corp. and subsidiaries for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte and Touche LLP Cleveland, Ohio January 24, 2001 EX-99.2 8 l99172aexv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 UNITED COMMUNITY FINANCIAL CORP. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of United Community Financial Corp. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas M. McKay, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Douglas M. McKay - -------------------- Douglas M. McKay Chief Executive Officer March 28, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.3 9 l99172aexv99w3.txt EXHIBIT 99.3 EXHIBIT 99.3 UNITED COMMUNITY FINANCIAL CORP. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of United Community Financial Corp. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick A. Kelly, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Patrick A. Kelly - -------------------------------------------- Patrick A. Kelly Chief Financial Officer March 28, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 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