-----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, MI9b/NOpBodl1wuvPxhSYib/q65B4vYzu3i2SqX3m/LhJKJlzWAYNhfzqZdDNCwr n8JHUc+rEuHIEB15Pz2gbA== 0000950152-04-001882.txt : 20040312 0000950152-04-001882.hdr.sgml : 20040312 20040312155616 ACCESSION NUMBER: 0000950152-04-001882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 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: 04666159 BUSINESS ADDRESS: STREET 1: 275 FEDERAL PLAZA WEST CITY: YOUNGSTOWN STATE: OH ZIP: 44503-1203 BUSINESS PHONE: 3307420500 10-K 1 l06124ae10vk.txt UNITED COMMUNITY FINANCIAL GROUP-10K/FYE 12-31-03 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, 2003 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. [ ] 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 30, 2003 was approximately $304.9 million and on March 8, 2004 was approximately $416.3 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 8, 2004, there were 31,100,670 of the Registrant's Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-K - Portions of 2003 Annual Report to Shareholders Part III of Form 10-K - Portions of Proxy Statement for the 2004 Annual Meeting of Shareholders TABLE OF CONTENTS
Item Number Page - ------ ---- PART I 1. Description of Business General ...................................................................................... 1 Discussion of Forward-Looking Statements ..................................................... 2 Lending Activities ........................................................................... 2 Investment Activities ........................................................................ 11 Sources of Funds ............................................................................. 13 Competition .................................................................................. 15 Employees .................................................................................... 16 Regulation ................................................................................... 16 2. Description of Property ........................................................................ 18 3. Legal Proceedings .............................................................................. 21 4. Submission of Matters to a Vote of Security Holders ............................................ 21 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters .......................... 21 6. Selected Financial Data ........................................................................ 21 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 21 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................... 21 8. Financial Statements and Supplemental Data ..................................................... 21 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... 21 9A. Controls and Procedures ........................................................................ 21 PART III 10. Directors and Executive Officers of the Registrant ............................................. 22 11. Executive Compensation ......................................................................... 22 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ............................................................................ 22 13. Certain Relationships and Related Transactions ................................................. 23 14. Principal Accountant Fees and Services ......................................................... 23 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................ 23 Signatures ........................................................................................... 24 Exhibit Index ........................................................................................ 25
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. United Community's Internet site, http://www.ucfconline.com, contains a hyperlink to the Securities and Exchange commission (SEC) where United Community's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 Insider Reports 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. As a savings and loan holding company, United Community is subject to regulation, supervision and examination by the OTS, the Division of Financial Institutions of the Ohio Department of Commerce (Division) and the 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. Home Savings was organized as a mutual savings association under Ohio law in 1889. During 2003, Home Savings changed its charter from a state-chartered savings and loan association to a state-chartered savings bank. Home Savings is subject to supervision and regulation by the Federal Deposit Insurance Corporation (FDIC), and the Division. 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, 35 full-service branches and six loan production offices located throughout Ohio and western Pennsylvania. The principal business of Home Savings is the origination of mortgage loans on one- to four-family residential real estate located in Home Savings' primary market area, which consists of Ashland, Columbiana, Cuyahoga, Erie, Geauga, Hancock, Huron, Lake, Mahoning, Montgomery, Richland, Sandusky, Seneca, Summit and Trumbull counties in Ohio and Beaver County in Pennsylvania. Home Savings also originates loans secured by nonresidential real estate. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer loans. For liquidity and interest rate risk management purposes, Home Savings invests in various financial instruments as discussed below under "Investment Activities." Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC, principal repayments of loans, borrowings from the FHLB 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 and other borrowings and salaries and benefits paid to our employees. Operating results are dependent to a significant degree on the net interest income of Home Savings, which is the difference between interest earned on loans and other investments and interest paid on deposits and borrowed funds. Like most thrift institutions, Home Savings' interest income and interest expense are significantly affected by general economic conditions and by the policies of various regulatory authorities. Butler Wick is the parent company for two wholly-owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick conducts business from its main office located in Youngstown, Ohio and 12 offices located in northeastern Ohio and western Pennsylvania. Butler Wick primarily sells common and preferred stocks, but also offers an array of government, corporate and municipal bonds, unit trusts, mutual funds, IRAs, money market accounts and certificates of deposit. Butler Wick also offers investments in precious metals and a full line of life insurance and annuity products, personal and corporate financial planning, estate planning, pension and profit sharing. 1 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 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, which could cause actual results to differ materially from results 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, 2003 2002 2001 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 $ 602,480 34.10% $ 889,199 56.02% $ 984,141 65.38% Multifamily 149,547 8.47 79,760 5.05 60,691 4.06 Nonresidential 309,467 17.52 236,581 14.99 153,368 10.25 Land 14,511 0.82 5,812 0.37 11,432 0.76 ------------- ------------- ------------- ------------ ------------- ------------- Total permanent 1,076,005 60.91 1,211,352 76.43 1,209,632 80.44 Construction loans: One- to four-family 358,890 20.32 122,234 7.74 115,853 7.74 Multifamily and nonresidential 46,165 2.61 35,600 2.26 26,883 1.80 ------------- ------------- ------------- ------------ ------------- ------------- Total construction 405,055 22.93 157,834 10.00 142,736 9.54 ------------- ------------- ------------- ------------ ------------- ------------- Total real estate loans 1,481,060 83.84 1,369,186 86.43 1,352,368 89.98 Consumer loans: Home equity 134,053 7.59 109,671 6.94 48,671 3.25 Auto 48,219 2.73 36,052 2.28 21,703 1.45 Education - - - - 5,280 0.35 Other (1) 36,491 2.06 9,797 0.63 35,095 2.34 ------------- ------------- ------------- ------------ ------------- ------------- Total consumer 218,763 12.38 155,520 9.85 110,749 7.40 Commercial loans 66,835 3.78 58,639 3.72 39,226 2.62 ------------- ------------- ------------- ------------ ------------- ------------- Total loans 1,766,658 100.00% 1,583,345 100.00% 1,502,343 100.00% ============= ============ ============= Less net items 190,164 105,132 95,864 ------------- ------------- ------------- Total loans, net $ 1,576,494 $ 1,478,213 $ 1,406,479 ============= ============= ============= At December 31, 2000 1999 Percent of Percent of Amount total loans Amount Total loans ------------- ------------- ---------- ----------- (Dollars in thousands) Real estate loans: Permanent One- to four-family $ 618,112 65.22% $ 546,888 70.92% Multifamily 24,085 2.54 7,838 1.02 Nonresidential 137,976 14.56 116,690 15.13 Land 5,172 0.55 299 0.04 ------------- ------------- ---------- ----------- Total permanent 785,345 82.87 671,715 87.11 Construction loans: One- to four-family 57,955 6.11 27,486 3.57 Multifamily and nonresidential 11,389 1.20 1,637 0.21 ------------- ------------- ---------- ----------- Total construction 69,344 7.31 29,123 3.78 ------------- ------------- ---------- ----------- Total real estate loans 854,689 90.18 700,838 90.89 Consumer loans: Home equity 20,147 2.13 19,151 2.48 Auto 5,171 0.55 1,130 0.15 Education 3,850 0.40 3,860 0.50 Other (1) 29,177 3.08 18,998 2.46 ------------- ------------- ---------- ----------- Total consumer 58,345 6.16 43,139 5.59 Commercial loans 34,657 3.66 27,119 3.52 ------------- ------------- ---------- ----------- Total loans 947,691 100.00% 771,096 100.00% ============= =========== Less net items 71,038 48,009 ------------- ---------- Total loans, net $ 876,653 $ 723,087 ============= ==========
- -------- (1) Consists of overdraft protection loans and loans to individuals secured by demand accounts, deposits and other consumer assets. 3 LOAN MATURITY. The following table sets forth certain information as of December 31, 2003, 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, ------------ 2009 and 2004 2005-2008 thereafter Total -------- --------- ---------- ------- (In thousands) Construction loans: One-to-four family $ 85,712 $196,834 $ 76,344 $358,890 Multifamily and nonresidential 497 16,249 29,419 46,165 Commercial loans 34,345 28,142 4,348 66,835
The next table sets forth the dollar amount of all loans reported above as due after December 31, 2004, which have fixed or adjustable interest rates:
Due after December 31, 2004 --------------------------- (In thousands) Fixed rate $ 68,758 Adjustable rate 282,578 ---------- $ 351,336 ===========
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, 2003, Home Savings' one- to four-family residential real estate loans totaled approximately $602.5 million, or 34.1% of total loans. At December 31, 2003, $7.1 million, or 1.2%, of Home Savings' one- to four-family loans were nonperforming. FDIC 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 for investment. 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, 2003, loans secured by multifamily properties totaled approximately $149.5 million, or 8.5% of total loans. The largest loan had a principal balance of $13.3 million and was performing according to its terms. There was approximately $59,000 in multifamily loans that were considered nonperforming at December 31, 2003. 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, office buildings, hotels and motels. The majority of such properties are located within Home Savings' primary lending area. 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, 2003, Home Savings' largest loan secured by nonresidential real estate had a balance of $11.5 million and was performing according to its terms. At December 31, 2003, approximately $309.5 million, or 17.5%, of Home Savings' total loans were secured by mortgages on nonresidential real estate, of which $1.3 million was considered nonperforming at December 31, 2003. 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, 2003, approximately $14.5 million, or 0.82%, 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. 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 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, 2003, Home Savings had approximately $405.0 million, or 22.9% of its total loans, invested in construction loans, including $358.9 million in one- to four-family residential construction and approximately $46.2 million in multifamily and nonresidential construction loans. Approximately 75% 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. 5 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 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, 2003 amounted to $1.7 million. 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, 2003, automobile loans amounted to $48.2 million, or 22.0%, 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, 2003, approximately $134.1 million, or 61.3%, 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 increase. Nonperforming consumer loans as a percentage of outstanding consumer loans amounted to 0.41% at December 31, 2003. At December 31, 2003, Home Savings had approximately $218.8 million, or 12.4% 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. 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, 2003, Home Savings had approximately $66.8 million, or 3.8% 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. Home savings had $25.3 million in unsecured commercial loans as of December 31, 2003. 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. 6 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, 2003 amounted to $1.9 million. 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' 35 offices and six 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, PURCHASES AND SALES. 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 2003, Home Savings securitized and sold $90.4 million in fixed rate single family mortgage loans, and sold an additional $443.2 million of fixed rate mortgage loans during 2003 as part of its ongoing mortgage banking operations. 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, 2003, Home Savings had $24.5 million of outstanding commitments to originate loans and $231.5 million available to borrowers under consumer and commercial lines of credit. At December 31, 2003, Home Savings had $132.8 million in undisbursed funds related to construction loans in process. During 2003, Home Savings entered into an agreement to purchase one- to four-family construction loans from another institution. Loans purchased under this agreement earn a floating rate of interest, are guaranteed as to principal and interest by a third party and may be for the purpose of constructing either pre-sold or speculative homes. At December 31, 7 2003, approximately $101.9 million was outstanding under this program. Home Savings anticipates continuing purchases of loans under this program in 2004. LOANS TO ONE BORROWER LIMITS. 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 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 $25.8 million to one borrower at December 31, 2003. The largest amount Home Savings had outstanding to one borrower at December 31, 2003, was $21.4 million, which consisted of four loans secured by first mortgages on commercial buildings. At December 31, 2003, 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, ---------------------------------------------------------------------------------------------- 2003 2002 ------------------------------------------ ------------------------------------------ Percent of Percent of total total Number Amount loans Number Amount loans ------ ------ ---------- ------ ------ ---------- (Dollars in thousands) Loans delinquent for: 30-59 days 250 $ 8,478 0.48% 364 $21,757 1.38% 60-89 days 75 2,877 0.16 126 5,852 0.37 90 days or over 211 12,981 0.73 207 14,424 0.91 ------- ------- ------- ------- ------- ------- Total delinquent loans 536 $24,336 1.37% 697 $42,033 2.66% ======= ======= ======= ======= ======= =======
Nonperforming assets include nonaccruing loans, restructured loans, real estate acquired by foreclosure or by deed-in-lieu thereof and repossessed assets. Once a loan becomes 90 days delinquent, it is placed on non-accrual status. 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, --------------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (Dollars in thousands) Nonperforming loans: Nonaccrual loans Real estate loans: One- to four-family $ 7,121 $ 7,567 $ 5,813 $ 2,966 $ 2,923 Multifamily and nonresidential 1,315 2,049 775 3,019 82 Construction (net of loans in process) and land 1,724 3,141 3,398 1,741 272 ------- ------- ------- ------- ------- Total real estate loans 10,160 12,757 9,986 7,726 3,277 Consumer 888 715 434 457 132 Commercial 1,933 952 469 1,360 206 ------- ------- ------- ------- ------- Total nonaccrual loans 12,981 14,424 10,889 9,543 3,615 Restructured real estate loans 1,853 1,271 1,572 208 317 ------- ------- ------- ------- ------- Total nonperforming loans 14,834 15,695 12,461 9,751 3,932 Real estate acquired through foreclosure and other repossessed assets 1,299 1,150 477 359 157 ------- ------- ------- ------- ------- Total nonperforming assets $16,133 $16,845 $12,938 $10,110 $ 4,089 ======= ======= ======= ======= ======= Nonperforming loans as a percent of total loans 0.93% 0.95% 0.89% 1.10% 0.54% Nonperforming assets as a percent of total assets 0.82 0.81 0.67 0.77 0.30 Allowance for loan losses as a percent of nonperforming loans 100.70 100.98 92.13 67.79 164.86 Allowance for loan losses as a percent of total loans before allowance 0.94 0.94 0.81 0.74 0.88
For 2003, approximately $1.1 million in additional interest income would have been recorded had nonaccrual and restructured loans been accruing pursuant to contractual terms. During 2003, interest collected on such loans and included in net income was approximately $575,000. Nonperforming assets decreased approximately $712,000, or 4.2%, to $16.1 million at December 31, 2003, from $16.8 million at December 31, 2002. This decrease is due to a variety of factors, including more aggressive collection procedures and an accelerated foreclosure process, and is not due to a single relationship. At December 31, 2003, total nonaccrual and restructured loans accounted for 0.93% of net loans receivable, compared to 0.95% at December 31, 2002. Total nonperforming assets were 0.82% of total assets as of December 31, 2003, a decrease of 0.01% from 0.81% as of December 31, 2002. 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. At 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, 2003, the carrying value of real estate acquired in settlement of loans was $1.3 million and consisted of $1.28 million in single-family properties and $16,000 in 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 $14.2 million, net of applicable reserves, at December 31, 2003. 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 and (ii) there 9 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 incurred 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, -------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (Dollars in thousands) Balance at beginning of period $ 15,099 $ 11,480 $ 6,553 $ 6,405 $ 6,398 Provision for loan losses 3,179 3,578 2,495 300 100 Charge-offs: Real estate (2,111) (347) (89) (83) (60) Consumer (650) (410) (283) (38) (65) Commercial (579) (1,210) (55) (80) - -------- -------- -------- -------- -------- Total charge-offs (3,340) (1,967) (427) (201) (125) -------- -------- -------- -------- -------- Recoveries: Real estate 94 71 13 17 21 Consumer 41 65 10 9 9 Commercial 38 3 9 23 2 -------- -------- -------- -------- -------- Total recoveries 173 139 32 49 32 -------- -------- -------- -------- -------- Net recoveries (charge-offs) (3,167) (1,828) (395) (152) (93) Acquisition of Industrial - - 2,795 - - Acquisition of Potters - 1,869 - - - -------- -------- -------- -------- -------- Balance at end of year $ 15,111 $ 15,099 $ 11,480 $ 6,553 $ 6,405 ======== ======== ======== ======== ======== Ratio of net charge-offs to average net loans (0.21)% (0.12)% (0.03)% (0.02)% (0.01)%
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, -------------------------------------------------------------------------------------------------- 2003 2002 2001 ---------------------------- ------------------------------ ---------------------------- Percent of Percent of Percent of loans in each loans in each loans in each category category category Amount to total loans Amount to total loans Amount to total loans ------- -------------- ------- ---------------- ------- -------------- (Dollars in thousands) Real estate loans $10,796 71.44% $11,017 72.97% $ 8,339 72.64% Consumer loans 2,670 17.67 1,947 12.89 975 8.49 Commercial loans 1,645 10.89 2,135 14.14 2,166 18.87 ------- ------- ------- ------- ------- ------- Total $15,111 100.00% $15,099 100.00% $11,480 100.00% ======= ======= ======= ======= ======= ======= At December 31, -------------------------------------------------------------- 2000 1999 ----------------------------- ---------------------------- Percent of loans Percent of loans in each category in each category Amount to total loans Amount to total loans ------- ---------------- ------- ---------------- (Dollars in thousands) Real estate loans $ 4,117 62.83% $ 4,182 65.29% Consumer loans 566 8.64 555 8.67 Commercial loans 1,870 28.54 1,668 26.04 ------- ------ ------- ------ Total $ 6,553 100.00% $ 6,405 100.00% ======= ====== ======= ======
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 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. 11 HOME SAVINGS INVESTMENT ACTIVITIES. 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. 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 of the issuer. 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 ACTIVITIES. Butler Wick holds securities through two subsidiaries, Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick & Co., Inc. invests in municipal securities and, to a lesser extent, government agency securities for sale to clients. Butler Wick's securities are carried at fair value with gains and losses recognized currently. 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. 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 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. 12 The following table presents the amortized cost, fair value and weighted average yield of securities at December 31, 2003 by maturity:
At December 31, 2003 --------------------------------------------------------------------------------------------- No stated After one year through Five years through maturity One year or less five years ten years ------------------- --------------------- ------------------------- ----------------- Amortized Average Amortized Average Amortized Average Amortized Average cost yield cost yield cost yield cost yield --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in thousands) Securities: US government agencies and corporations $ - -% $28,106 2.66% $45,487 2.55% $ - -% States and political subdivisions - - 29 5.25 9 10.45 34 5.50 Mortgage related securities - - 47 7.31 3,841 8.05 1,616 8.31 Other securities (a) 12,450 1.99 - - - - - - ------- ------- ------- ------- Total securities $12,450 1.99% $28,182 2.67% $49,337 2.98% $ 1,650 8.25% ======= ======= ======= =======
At December 31, 2003 ----------------------------------------------------------- After ten years Total ----------------------- ------------------------------- Amortized Average Amortized Average Fair cost yield cost yield value ---- ----- ---- ----- ----- (Dollars in thousands) Securities: US government agencies and corporations $ - -% $ 73,593 2.59% $ 73,788 States and political subdivisions 997 4.90 1,069 4.98 1,071 Mortgage related securities 148,874 4.24 154,375 4.38 155,266 Other securities (a) - - 12,450 2.00 13,000 -------- -------- -------- Total securities $149,871 4.24% $241,490 3.74% $243,125 ======== ======== ========
(a) Yield on equity securities only; mutual funds excluded 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. 13 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, 2003 For the Year Ended December 31, 2003 ------------------------------------------- -------------------------------------------- Percent Weighted Percent Weighted of total average Average of average average Amount deposits rate balance deposits rate ------ -------- ---- ------- -------- ---- (Dollars in thousands) Noninterest bearing demand $ 63,442 4.46% -% $ 61,273 4.17% -% NOW and money market accounts 305,841 21.48 0.81 308,816 21.01 1.01 Savings accounts 312,210 21.93 0.52 335,843 22.85 0.70 Certificates of deposit 742,205 52.13 3.16 763,704 51.97 3.33 ---------- ------ ---------- ------ Total deposits $1,423,698 100.00% 1.72% $1,469,636 100.00% 2.10% ========== ====== ========== ======
For the Year Ended December 31, 2002 For the Year Ended December 31, 2001 ----------------------------------------- -------------------------------------------- Percent Weighted Percent Weighted Average of average average Average of average average balance deposits rate balance deposits rate ------- -------- ---- ------- -------- ---- (Dollars in thousands) Noninterest bearing demand $ 45,806 3.10% -% $ 25,585 2.25% -% NOW and money market accounts 279,894 18.98 1.90 184,120 16.23 2.96 Savings accounts 299,048 20.28 1.65 228,485 20.13 2.28 Certificates of deposit 850,054 57.64 4.08 696,633 61.39 5.36 ---------- ------ ---------- ------ Total deposits $1,474,802 100.00% 3.05% $1,134,823 100.00% 4.23% ========== ====== ========== ======
Total deposits decreased by $58.2 million, or 3.9%, from December 31, 2002, to December 31, 2003. The following table shows rate and maturity information for Home Savings' certificates of deposit at December 31, 2003:
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 $310,540 $ 93,072 $ 22,692 $ 71,992 $498,296 4.01% to 6.00% 25,804 44,220 15,404 116,781 202,209 Greater than 6.01% 6,050 34,112 1,496 42 41,700 -------- -------- -------- -------- -------- Total certificates of deposit $342,394 $171,404 $ 39,592 $188,815 $742,205 ======== ======== ======== ======== ======== Percent of total certificates of deposit 46.13% 23.09% 5.33% 25.44% 100.00%
At December 31, 2003, approximately $342.4 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 $434.2 million are available from the FHLB of Cincinnati. 14 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, 2003:
Maturity Amount -------- ------ (In thousands) Three months or less $ 29,027 Over 3 months to 6 months 11,986 Over 6 months to 12 months 23,711 Over 12 months 83,686 -------- Total $148,410 ========
Based on past experience, management believes that a substantial percentage of the above certificates will be renewed with Home Savings at maturity. The following table sets forth Home Savings' deposit account balance activity for the periods indicated:
Year ended December 31, ---------------------------------- 2003 2002 ----------- ----------- (Dollars in thousands) Beginning balance $ 1,481,901 $ 1,383,418 Net (decrease)increase in deposits (90,117) 53,919 ----------- ----------- Net deposits before interest credited 1,391,784 1,437,337 Interest credited 31,914 44,564 ----------- ----------- Ending balance $ 1,423,698 $ 1,481,901 =========== =========== Net (decrease)/increase $ (58,203) $ 98,483 =========== =========== Percent (decrease)/increase (3.93)% 7.12%
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, 2003, Home Savings was in compliance with the QTL test. Home Savings may borrow up to $434.2 million from the FHLB, and had $298.6 million outstanding advances at December 31, 2003. 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. 15 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 Trust Company is the only such locally owned and managed financial services providers. EMPLOYEES At December 31, 2003, Home Savings and Butler Wick had 604 and 175 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. Butler Wick offers health, life and disability benefits to all employees, a 401(k) plan, a profit sharing plan and a retention plan for 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 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 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, each company controlling an undercapitalized institution will comply with its capital restoration plan until the institution has been adequately capitalized on average during each of the four preceding calendar quarters and must provide adequate assurances of performance. Federal Reserve Board regulations currently require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $45.4 million (subject to an exemption of up to $6.6 million), and of 10% of net transaction accounts in excess of $45.4 million. At December 31, 2003, Home Savings was in compliance with its reserve requirements. 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. United Community and Butler Wick are affiliates of Home Savings for this purpose. 16 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, a statutory limitation on the acquisition of control of an Ohio savings bank requires the written approval of the Division prior to the acquisition by any person or entity of a controlling interest in an Ohio association. Control exists, for purposes of Ohio law, when any person or entity which, either directly or indirectly, or acting in concert with one or more other persons or entities, owns, controls, holds with power to vote, or holds proxies representing, 15% or more of the voting shares or rights of an association, or controls in any manner the election or appointment of a majority of the directors. Ohio law also requires that certain acquisitions of voting securities that would result in the acquiring shareholder owning 20%, 33 1/3% or 50% of the outstanding voting securities of United Community must be approved in advance by the holders of at least a majority of the outstanding voting shares represented at a meeting at which a quorum is present and a majority of the portion of the outstanding voting shares represented at such a meeting, excluding the voting shares by the acquiring shareholder. Federal law generally prohibits a savings and loan holding company, such as United Community, from controlling any other savings association or savings and loan holding company, without prior approval of the OTS, or from acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof, which is not a subsidiary. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such holding company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. 17 ITEM 2. DESCRIPTION OF PROPERTY The following table sets forth certain information at December 31, 2003, regarding the properties on which offices of Home Savings are located:
Owned or Year Net book Location leased opened value Deposits -------- ------ ------ -------- -------- (In thousands) 275 Federal Plaza West Owned 1919 $ 4,423 $ 71,208 Youngstown, Ohio 32 State Street Owned 1916 288 100,342 Struthers, Ohio 4005 Hillman Way Owned 1958 405 89,902 Boardman, Ohio 650 East State Street Owned 1925 184 83,873 Salem, Ohio 6000 Mahoning Avenue Leased 1959 60 85,970 Austintown, Ohio 7525 Market Street Owned 1971 546 128,405 Boardman, Ohio 4259 Kirk Road Owned 1975 554 101,923 Austintown, Ohio 202 South Main Street Owned 1975 432 91,126 Poland, Ohio 3500 Belmont Avenue Owned 1976 280 70,016 Youngstown, Ohio 29 North Broad Street Owned 1977 246 46,226 Canfield, Ohio 980 Great East Plaza Leased 1980 7 28,700 Niles, Ohio One University Plaza Leased 2000 43 1,776 1059-1060 Kilcawley Center Youngstown, Ohio 127 North Market Street Owned 1987 116 32,217 East Palestine, Ohio 210 West Lincoln Way Owned 1987 288 20,752 Lisbon, Ohio 2996 McCartney Road Leased 2000 119 4,597 Youngstown, Ohio 14825 South Avenue Ext. Owned 1997 698 30,520 Columbiana, Ohio 4625 North River Road Owned 2000 1,142 16,890 Warren, Ohio
18
Owned or Year Net book Location Leased Opened Value Deposits -------- ------ ------ -------- --------- (In thousands) 30 East Main Street Owned 1994 $ 1,031 $ 27,831 Ashland, Ohio 203 North Sandusky Street Owned 1993 - N/A Bellevue, Ohio 211 North Sandusky Street Owned 1972 613 53,021 Bellevue, Ohio 255 North Main Street Owned 1975 99 10,281 Clyde, Ohio 1500 Bright Road Owned 1993 900 18,146 Findlay, Ohio 321 West State Street Owned 1987 579 16,433 Fremont, Ohio 40 East Main Street Owned 1999 369 12,190 Lexington, Ohio 50 West Main Street (1) Owned 1976 660 46,079 Norwalk, Ohio 51 West Main Street (1)(2) Owned 1992 - N/A Norwalk, Ohio 4112 Milan Road Owned 1988 392 17,419 Sandusky, Ohio 48 East Market Street Owned 1983 302 46,167 Tiffin, Ohio 796 West Market Street Owned 1990 196 10,950 Tiffin, Ohio 301 Myrtle Avenue Owned 1977 179 35,314 Willard, Ohio 121 Blossom Centre, Suite A Leased 93 1,408 Willard, Ohio 530 Broadway Street Owned 1982 566 57,363 East Liverpool, Ohio 15575 ST RT 170 Leased 1983 278 32,438 Calcutta, Ohio 46635 Y & O Road Owned 1975 201 9,555 Glenmoor, Ohio 998 Third Street Owned 2001 1,082 6,963 Beaver, Pennsylvania 7707 Mentor Ave Leased 2002 221 16,361 Mentor, Ohio 7075 North Aurora Rd. Owned 2003 1,848 1,047 Aurora, Ohio 250 E Wilson Bridge Rd. Leased 2003 45 N/A Columbus, Ohio
19 3690 Orange Place, Suite 250 Leased 2000 $ 191 N/A Beachwood, Ohio 2211 South Dixie Dr 2003 - N/A Dayton, Ohio Pointe View Professional Park Leased 2000 11 N/A 4831 Darrow Rd. #106 Stow, Ohio 7330 Southern Blvd Leased 1998 38 N/A Boardman, Ohio
(1) Book value and deposit totals are combined for the two Norwalk offices. (2) Drive-up facility only. The following table sets forth certain information at December 31, 2003, 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, Ohio 960 W. State Street Leased 1959 Alliance, Ohio 1284 Liberty Street Leased 1932 Franklin, Pennsylvania 1 E. State Street Leased 1932 Sharon, Pennsylvania 25651 Detroit Road Leased 1990 Cleveland, Ohio 3685 Stutz Drive, Suite 201 Leased 1999 Canfield, Ohio 265 West Main Street, Suite 101 Leased 1980 Kent, Ohio 425 Niles-Cortland Road SE Leased 1932 Bldg. A, Suite 201 Warren, Ohio 4522 Fulton Drive NW Leased 1990 Canton, Ohio 100 S. Broadway, 2nd Floor Leased 1956 Salem, Ohio 3637 Medina Road Leased 1997 Medina, Ohio 3690 Orange Place, Suite 350 Leased 2003 Beachwood, Ohio 175 South Third Street, Suite 230 Leased 2000 Columbus, Ohio
20 Two Nationwide Plaza, Suite 770 Leased 2003 280 N. High Street Columbus, Ohio 11 W Monument Ave., Suite 100 Leased 2002 Dayton, Ohio
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 conducted 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 2003 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 Data 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 LLC dated January 28, 2004, 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. ITEM 9A. CONTROLS AND PROCEDURES 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) as of December 31, 2003. Based on their evaluation, the Chief Executive Officer and 21 Chief Financial Officer have concluded that United Community's disclosure controls and procedures are effective. During the last quarter of fiscal 2003, there were no changes in United Community's internal controls over financial reporting that materially affected , or is likely to materially affect, these controls as of December 31, 2003. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the Proxy Statement for the 2004 Annual Meeting of Shareholders of United Community (Proxy Statement), to be filed with the Securities and Exchange Commission (Commission) on or about March 24, 2004, under the captions "Election of Directors," "Incumbent Directors," "Board Meeting and Compensation," "Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Audit Committee Report" is incorporated herein by reference. United Community has adopted a code of ethics applicable to all officers, directors and employees that complies with SEC requirements. A copy of the code may be obtained upon written request to Patrick A. Kelly, Chief Financial Officer, United Community Financial Corp., 275 Federal Plaza W, Youngstown, Ohio 44503. 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, 2003, 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 REMAINING AVAILABLE FOR NUMBER OF SECURITIES FUTURE ISSUANCE UNDER TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a)) - ------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders.......................... 2,468,622 $7.60 754,403 - ------------------------------------------------------------------------------------------------------------------------------
22 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information contained in the Proxy Statement under the caption "Audit Fees" is incorporated herein by reference. 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 2003 Annual Report to Shareholders 20 Proxy Statement for 2004 Annual Meeting of Shareholders 21 Subsidiaries of Registrant 23 Crowe, Chizek and Company LLC Consent 31.1 Section 302 Certification by Chief Executive Officer 31.2 Section 302 Certification by Chief Financial Officer 32 Certification of Financial Statements by Chief Executive Officer and 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 15, 2003, United Community filed an 8-K under disclosing operating results for the quarter ended September 30, 2003 under Item 12. 23 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 12, 2004 Date: March 12, 2004 /S/ Richard J. Schiraldi /S/ David C. Sweet - -------------------------------------------------- ---------------------------------------------------------- Richard J. Schiraldi, Director David C. Sweet, Director Date: March 12, 2004 Date: March 12, 2004 /S/ Herbert F. Schuler, Sr. /S/ Patrick A. Kelly - -------------------------------------------------- ---------------------------------------------------------- Herbert F. Schuler, Sr., Director Patrick A. Kelly, Treasurer (Principal Financial Officer) Date: March 12, 2004 Date: March 12, 2004 /S/ Thomas J. Cavalier - -------------------------------------------------- Thomas J. Cavalier, Director Date: March 12, 2004
24 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 via Edgar, film number 99582343, Exhibit 3.2 10.1 The Home Savings and Loan Company of Youngstown, Incorporated by reference to the 2001 10-K filed by United Ohio Employee Stock Ownership Plan Community on March 29, 2002 via Edgar, film number 02593161, Exhibit 10.1 10.2 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Douglas M. McKay, dated December 29, 2000. 10.3 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Patrick W. Bevack, dated December 29, 2000. 10.4 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Patrick A. Kelly, dated December 29, 2000. 10.5 Employment Agreement between Butler Wick Corp. Incorporated by reference to the 1999 10-K filed by United and Thomas J. Cavalier, dated August 12, 1999 Community on March 29, 2000 via Edgar, film number 582478, Exhibit 10.5 10.6 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and David G. Lodge, dated December 29, 2000. 10.7 United Community 1999 Long-Term Incentive Plan Incorporated by reference to the Proxy Statement filed by United community via Edgar on June 7, 1999, file number 9964170 (1999 Proxy), Exhibit A 10.8 United Community Recognition and Retention Plan and Incorporated by reference to the 1999 Proxy, Exhibit B Trust Agreement 11 Statement Regarding Computation of Per Share Earnings Incorporated by reference to Note 22 to the Financial Statements included in the Annual Report in Exhibit 13 13 Portions of the 2003 Annual Report to Shareholders 20 Proxy Statement for 2004 Annual Meeting of Incorporated by reference to the Proxy Statement, to be filed Shareholders with the Securities and Exchange Commission on or about March 24, 2004. 21 Subsidiaries of Registrant 23 Crowe Chizek and Company LLC Consent 31.1 Section 302 Certification by Chief Executive Officer 31.2 Section 302 Certification by Chief Financial Officer 32 Certification of Financial Statements by Chief Executive Officer and Chief Financial Officer
25 EX-10.2 3 l06124aexv10w2.txt EXHIBIT 10.2 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 31st day of December, 2003 ("Effective Date") by and between The Home Savings and Loan Company of Youngstown, Ohio, a savings and loan association incorporated under Ohio Law (hereinafter referred to as the "COMPANY"), and Douglas M. McKay, an individual (hereinafter referred to as the "EXECUTIVE"); WITNESSETH: WHEREAS, the EXECUTIVE is currently employed as the Chief Executive Officer and Chairman of the COMPANY; WHEREAS, as a result of the skill, knowledge and experience of the EXECUTIVE, the Board of Directors of the COMPANY desires to continue to retain the services of the EXECUTIVE as the Chief Executive Officer and Chairman of the COMPANY; WHEREAS, the EXECUTIVE desires to serve as the Chief Executive Officer and Chairman of the COMPANY; and WHEREAS, the EXECUTIVE and the COMPANY desire to enter into this AGREEMENT to set forth the terms and conditions of the employment relationship between the COMPANY and the EXECUTIVE; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the COMPANY and the EXECUTIVE, each party intending to be legally bound, hereby agree as follows: 1. Employment and Term. (a) Term. Upon the terms and subject to the conditions of this AGREEMENT, the COMPANY hereby employs the EXECUTIVE, and the EXECUTIVE hereby accepts employment, as the Chief Executive Officer and Chairman of the COMPANY. The term of this AGREEMENT shall commence on December 31, 2003 and shall end on December 31, 2006, unless extended by the COMPANY, with the consent of the EXECUTIVE, as provided in subsection (b) of this Section 1 (hereinafter referred to, together with such extensions, as the "TERM"). (b) Extension. Additionally, on, or before, each annual anniversary date of the Effective Date, the Term of Agreement shall be extended for up to an additional one-year period beyond the then effective Term upon a determination and resolution of the Board of Directors that the performance of the Executive has met the requirements and standards of the Board, and that the Term of such Agreement shall be extended for such additional period. References herein to the Term of this Agreement shall refer both to the initial term and successive terms. Any such extension shall be subject to the consent of the EXECUTIVE. 2. Duties of the EXECUTIVE. (a) General Duties and Responsibilities. The EXECUTIVE shall serve as the Chief Executive Officer and Chairman of the COMPANY. Subject to the direction of the Board of Directors of the COMPANY and such EXECUTIVE'S manager, the EXECUTIVE shall perform all duties and shall have all powers which are commonly incident to the office of Chief Executive Officer and Chairman or which, consistent therewith, are delegated to him by the Board of Directors. (b) Devotion of Entire Time to the Business of the COMPANY. The EXECUTIVE shall devote his entire productive time, ability and attention during normal business hours throughout the TERM to the faithful performance of his duties under this AGREEMENT. The EXECUTIVE shall not directly or indirectly render any services of a business, commercial or professional nature to any person or organization other than the COMPANY, United Community Financial Corp. (hereinafter referred to as the "HOLDING COMPANY"), or its subsidiaries without the prior written consent of the Board of Directors of the COMPANY; provided, however, that the EXECUTIVE shall not be precluded from (i) vacations and other leave time in accordance with Section 3 (d) below, (ii) reasonable participation in community, civic, charitable or similar organizations, (iii) reasonable participation in industry-related activities, including, but not limited to, attending state and national trade association meetings and serving as an officer, director or trustee of a state or national trade association or Federal Home Loan Bank, (iv) serving as an officer or director of the HOLDING COMPANY or its subsidiaries and receiving a salary, director's fees or other compensation or benefits, as appropriate, or (v) pursuing personal investments which do not interfere or conflict with the performance of the EXECUTIVE'S duties to the COMPANY. (c) Standards. During the Term of this Agreement, the Executive shall perform his duties in accordance with such reasonable standards expected of executives with comparable positions in comparable organizations and as may be established from time to time by the Board of Directors. 3. Remuneration. (a) Compensation. The EXECUTIVE shall receive during the TERM compensation established by the applicable Compensation Committee of the Boards of Directors. It is the intent of the COMPANY that the EXECUTIVE'S compensation shall include the following components: (1) a base salary, payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. 2 (b) Annual Review. On or before December 31st of each year, commencing during the year including the Effective Date, the annual base salary of the EXECUTIVE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $329,600.00, based upon the EXECUTIVE'S individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). (c) Executive Benefit Programs. During the TERM, the EXECUTIVE shall be entitled to participate in all formally established benefit, bonus, insurance, profit sharing plans, stock benefit plans and similar programs (hereinafter collectively referred to as "BENEFIT PLANS"), in accordance with the terms and conditions of such BENEFIT PLANS that are maintained by the COMPANY or the HOLDING COMPANY from time to time and all EXECUTIVE benefit plans or programs hereafter adopted in writing by the Board of Directors of the COMPANY or the HOLDING COMPANY for which senior management personnel of the COMPANY are eligible. Notwithstanding any statement to the contrary contained elsewhere in this AGREEMENT, the COMPANY may at any time discontinue or terminate any BENEFIT PLAN now existing or hereafter adopted, to the extent permitted by the terms of such BENEFIT PLAN, and shall not be required to compensate the EXECUTIVE for such discontinuance or termination to the extent such discontinuance or termination pertains to all employees of the COMPANY who are eligible participants at the time. (d) Vacation and Sick Leave. The EXECUTIVE shall be entitled, without loss of pay, to be absent voluntarily from the performance of his duties under this AGREEMENT, in accordance with the policies periodically established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. The EXECUTIVE shall be entitled to annual sick leave as established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. (e) Expenses. The COMPANY shall pay or reimburse the EXECUTIVE for reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties under this AGREEMENT, including participation in industry-related activities upon furnishing timely documentation to the COMPANY of such expenses incurred. 4. Termination of Employment. (a) General. The employment of the EXECUTIVE shall terminate at any time during the TERM: (i) at the option of the COMPANY, upon the delivery by the COMPANY of written notice of termination to the EXECUTIVE with or without "Cause" (as defined hereinafter), or (ii) at the option of the EXECUTIVE, upon delivery by the EXECUTIVE of written notice of termination to the COMPANY if the present capacity or circumstances in which the EXECUTIVE is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties or responsibilities substantially inconsistent with those normally associated with the EXECUTIVE'S position described in Section 2 (a) of 3 this AGREEMENT, change of title or removal as a director of the COMPANY or the HOLDING COMPANY, the requirement that the EXECUTIVE regularly perform his principal executive functions more than thirty-five (35) miles from his primary office as it existed of the date of this AGREEMENT or the EXECUTIVE'S benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (b), (c), (d) and (e) of this Section 4 shall govern the obligations of the COMPANY to the EXECUTIVE upon the occurrence of the events described in such subparagraphs. If the EXECUTIVE terminates this AGREEMENT without the written consent of the COMPANY, other than pursuant to Section 4(a)(ii) of this AGREEMENT, the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination and the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this AGREEMENT. This non-compete provision shall not apply in the event the EXECUTIVE terminates employment pursuant to Section 4(a)(ii) of this AGREEMENT. The provisions of this subparagraph 4(a) shall survive the termination of this AGREEMENT. (b) Termination for Cause. In the event that the COMPANY terminates the employment of the EXECUTIVE during the TERM because of the EXECUTIVE'S personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure or refusal to perform the duties and responsibilities assigned in this AGREEMENT, willful violation of any law, rule or regulation (other than traffic violations or other minor offenses), or final cease-and-desist order or material breach of any provision of this AGREEMENT (hereinafter collectively referred to as "Cause"), the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination. (c) Termination in Connection with CHANGE OF CONTROL. In the event that the employment of the EXECUTIVE is terminated by COMPANY within one (1) year before or after a CHANGE OF CONTROL (hereinafter defined) for any reason other than Cause, death, or disability, or within one (1) year before or after a CHANGE OF CONTROL the Executive's employment is terminated at the EXECUTIVE'S option as provided in Section 4 (a) (ii) above, then the following shall occur: (i) The COMPANY shall promptly pay to the EXECUTIVE or to his beneficiaries, dependents or estate an amount equal to the product of three (3) multiplied by the EXECUTIVE'S "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder LESS one dollar ($1.00) (hereinafter collectively referred to as "SECTION 280G"). (ii) The EXECUTIVE, his dependents, beneficiaries and estate shall: continue to be covered at the COMPANY'S expense under all health and welfare benefit 4 plans of the COMPANY in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. (iv) For purposes of this Agreement, a "CHANGE OF CONTROL" shall mean any one of the following events: (A) the acquisition of ownership or power to vote more than 20% of the voting stock of the COMPANY or the HOLDING COMPANY, provided that acquisition of ownership or power to vote by a qualified employee stock ownership plan sponsored by the Company shall not be considered a CHANGE OF CONTROL; (B) the acquisition of the ability to control the election of a majority of the directors of COMPANY or the HOLDING COMPANY (C) during any period of three or less consecutive years individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY; (D) the acquisition by any person or entity of "control" of the COMPANY within the meaning of 12 C.F.R. Section 303.81(c); or (E) an event that would be required to be reported in response to Item 1 (a) of Form 8-K or Item 6 (e) of Schedule 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT. 5 For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EXECUTIVE and any person or persons with whom the EXECUTIVE is "acting in concert" within the meaning of 12 C.F.R. Section 303.81 (b). (v) "Golden Parachute" Provision. In the event that any payments pursuant to this Section 4(c) would result in or contribute to the imposition of a penalty tax pursuant to SECTION 280G and Internal Revenue Code Section 4999, such payments shall be reduced to the maximum amount which may be paid under SECTION 280G without exceeding such limits. Any payments made to the EXECUTIVE pursuant to this AGREEMENT are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (vi) In the event the EXECUTIVE'S employment terminates pursuant to this Section 4 (c), the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or HOLDING COMPANY is doing business for a period of eight (8) months from the EXECUTIVE'S date of employment termination. In exchange for EXECUTIVE'S agreement concerning non-competition, the COMPANY agrees to pay EXECUTIVE eight (8) months of base salary. (d) Death of the EXECUTIVE. The TERM shall automatically expire upon the death of the EXECUTIVE. In such event, the EXECUTIVE'S estate shall be entitled to receive the EXECUTIVE'S monthly base salary continuation for ninety (90) days following the day death occurred, except as otherwise specified herein. (e) Disability of the EXECUTIVE. If the EXECUTIVE is unable to perform the essential functions of the position assigned by reason of illness or incapacity for a period up to one hundred and fifty (150) consecutive days, then, despite the COMPANY'S efforts to reasonably accommodate such illness or incapacity, the COMPANY may terminate this Agreement upon written notice to EXECUTIVE. Upon termination, the EXECUTIVE may be eligible for long term disability benefits under the COMPANY'S disability plan, subject to the terms and conditions of that plan. In the event that the EXECUTIVE is (and continues to be) eligible for long term disability benefits under the COMPANY'S disability plan, then the EXECUTIVE shall be entitled to be covered under the health and life insurance welfare benefits plans in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT for a period of two (2) years after the effective date of the EXECUTIVE'S termination of employment; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any 6 qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (f) Other Termination. In the event that the employment of the EXECUTIVE is terminated by the COMPANY before expiration of the TERM for any reason other than death, termination for Cause or termination in connection with a CHANGE OF CONTROL, or disability, then the following shall occur: (i) The COMPANY shall be obligated to continue to pay on at least a monthly basis, until the expiration of the TERM, to the EXECUTIVE, his designated beneficiaries or his estate, the total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EXECUTIVE in the twelve month period prior to the termination of employment. (ii) The EXECUTIVE shall continue to be covered at the EXECUTIVE'S expense under all health and welfare benefits plans, in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. 5. Withholding. All payments required to be made by the COMPANY hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to Federal, State and local tax and other payroll deductions as the COMPANY may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. Indemnification; Insurance. (a) Indemnification. The COMPANY agrees to indemnify the Executive and his heirs, executors, and administrators to the fullest extent permitted under applicable law and regulations, including, without limitation 12 U.S.C. Section 1828(k), against any and all expenses and liabilities reasonably incurred by the Executive in connection with or arising out of 7 any action, suit or proceeding in which the Executive may be involved by reason of having been a director or officer of the Bank or any of its subsidiaries, whether or not the Executive is a director or officer at the time of incurring any such expenses or liabilities. Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs and attorney's fees and the cost of reasonable settlements. The Executive shall be entitled to indemnification in respect of a settlement only if the Board of Directors of the Company has approved such settlement. Notwithstanding anything herein to the contrary, (I) indemnification for expenses shall not extend to matters for which the Executive has been terminated for, and (ii) the obligations of this Section shall survive the termination of this Agreement. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. (b) Insurance. During the Term of the Agreement, the COMPANY shall provide the Executive (and his heirs, executors, and administrators) with coverage under a directors' and officers' liability policy at the COMPANY's expense, at least equivalent to such coverage otherwise provided to the other directors and senior officers of the COMPANY. 7. Special Regulatory Events. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EXECUTIVE shall be as follows in the event of the following circumstances: (a) If the EXECUTIVE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY'S affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY'S obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY may pay the EXECUTIVE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended; (b) If the EXECUTIVE is removed and/or permanently prohibited from participating in the conduct of the COMPANY'S affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under this AGREEMENT shall terminate as of the effective date of such order; provided, however, that vested rights of the EXECUTIVE shall not be affected by such termination; (c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EXECUTIVE shall not be affected; (d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Superintendent of 8 Savings Banks, Department of Commerce (hereinafter referred to as "Superintendent"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority continued in Section 13(c) of the FDIA or (ii) by the Superintendent, or his or her designee, at any time the Superintendent approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Superintendent to be in an unsafe or unsound condition; provided, however that no vested rights of the EXECUTIVE shall not be affected by any such termination. 8. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect. 9. Confidential Information. The EXECUTIVE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EXECUTIVE agrees not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use of such information is otherwise legally in the public domain. The EXECUTIVE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the HOLDING COMPANY, its subsidiaries, or affiliates, or any of the businesses operated by them, and the EXECUTIVE confirms that such information constitutes the exclusive property of the COMPANY. The provisions of this Section 9 shall survive the termination or expiration of this Agreement. 10. Non-assignability. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EXECUTIVE, by the EXECUTIVE, his beneficiaries or legal representatives without the COMPANY'S prior written consent; provided, however, that nothing in this Section 10 shall preclude the EXECUTIVE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or legal representatives of the EXECUTIVE or his estate from assigning any rights hereunder to the person or persons entitled thereto. 11. No Attachment. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 9 12. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the benefit of, the EXECUTIVE and the COMPANY and its successors and assigns. 13. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto. 14. Waiver. No term or condition of this AGREEMENT shall deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived. 15. Severability. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EXECUTIVE shall be deemed reinstated to the full extent permitted by law, as this AGREEMENT had not been executed. 16. Headings. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT. 17. Governing Law. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing. 18. Effect of Prior Agreements. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EXECUTIVE. 19. Arbitration. Any dispute concerning the interpretation or application of this AGREEMENT that cannot be resolved by mutual agreement of the COMPANY and EXECUTIVE must be submitted for determination by an impartial arbitrator selected in accordance with the American Arbitration Association's Employment Dispute Resolution Rules. 20. Notices. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows: 10 11 If to the COMPANY: Chairman and CEO The Home Savings and Loan Company Of Youngstown, Ohio 275 Federal Plaza West Youngstown, Ohio 44503 If to the EXECUTIVE: Douglas M. McKay 8288 Maplevale Drive Canfield Ohio 44406 IN WITNESS WHEREOF, the COMPANY has caused this AGREEMENT to be executed by its duly authorized officer, and the EXECUTIVE has signed this AGREEMENT, each as of the day and year first above written. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By: /s/ Donald J. Varner -------------------- Director /s/ Douglas M. McKay -------------------- Douglas M. McKay 12 EX-10.4 4 l06124aexv10w4.txt EXHIBIT 10.4 EXHIBIT 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 31st day of December, 2003 ("Effective Date") by and between The Home Savings and Loan Company of Youngstown, Ohio, a savings and loan association incorporated under Ohio Law (hereinafter referred to as the "COMPANY"), and Patrick A. Kelly, an individual (hereinafter referred to as the "EXECUTIVE"); WITNESSETH: WHEREAS, the EXECUTIVE is currently employed as the Senior Vice President and Treasurer of the COMPANY; WHEREAS, as a result of the skill, knowledge and experience of the EXECUTIVE, the Board of Directors of the COMPANY desires to continue to retain the services of the EXECUTIVE as the Senior Vice President and Treasurer of the COMPANY; WHEREAS, the EXECUTIVE desires to serve as the Senior Vice President and Treasurer of the COMPANY; and WHEREAS, the EXECUTIVE and the COMPANY desire to enter into this AGREEMENT to set forth the terms and conditions of the employment relationship between the COMPANY and the EXECUTIVE; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the COMPANY and the EXECUTIVE, each party intending to be legally bound, hereby agree as follows: 1. Employment and Term. (a) Term. Upon the terms and subject to the conditions of this AGREEMENT, the COMPANY hereby employs the EXECUTIVE, and the EXECUTIVE hereby accepts employment, as the Senior Vice President and Treasurer of the COMPANY. The term of this AGREEMENT shall commence on December 31, 2003 and shall end on December 31, 2006, unless extended by the COMPANY, with the consent of the EXECUTIVE, as provided in subsection (b) of this Section 1 (hereinafter referred to, together with such extensions, as the "TERM"). (b) Extension. Additionally, on, or before, each annual anniversary date of the Effective Date, the Term of Agreement shall be extended for up to an additional one-year period beyond the then effective Term upon a determination and resolution of the Board of Directors that the performance of the Executive has met the requirements and standards of the Board, and that the Term of such Agreement shall be extended for such additional period. References herein to the Term of this Agreement shall refer both to the initial term and successive terms. Any such extension shall be subject to the consent of the EXECUTIVE. 2. Duties of the EXECUTIVE. (a) General Duties and Responsibilities. The EXECUTIVE shall serve as the Senior Vice President and Treasurer of the COMPANY. Subject to the direction of the Board of Directors of the COMPANY and such EXECUTIVE'S manager, the EXECUTIVE shall perform all duties and shall have all powers which are commonly incident to the office of Senior Vice President and Treasurer or which, consistent therewith, are delegated to him by the Board of Directors. (b) Devotion of Entire Time to the Business of the COMPANY. The EXECUTIVE shall devote his entire productive time, ability and attention during normal business hours throughout the TERM to the faithful performance of his duties under this AGREEMENT. The EXECUTIVE shall not directly or indirectly render any services of a business, commercial or professional nature to any person or organization other than the COMPANY, United Community Financial Corp. (hereinafter referred to as the "HOLDING COMPANY"), or its subsidiaries without the prior written consent of the Board of Directors of the COMPANY; provided, however, that the EXECUTIVE shall not be precluded from (i) vacations and other leave time in accordance with Section 3 (d) below, (ii) reasonable participation in community, civic, charitable or similar organizations, (iii) reasonable participation in industry-related activities, including, but not limited to, attending state and national trade association meetings and serving as an officer, director or trustee of a state or national trade association or Federal Home Loan Bank, (iv) serving as an officer or director of the HOLDING COMPANY or its subsidiaries and receiving a salary, director's fees or other compensation or benefits, as appropriate, or (v) pursuing personal investments which do not interfere or conflict with the performance of the EXECUTIVE'S duties to the COMPANY. (c) Standards. During the Term of this Agreement, the Executive shall perform his duties in accordance with such reasonable standards expected of executives with comparable positions in comparable organizations and as may be established from time to time by the Board of Directors. 3. Remuneration. (a) Compensation. The EXECUTIVE shall receive during the TERM compensation established by the applicable Compensation Committee of the Boards of Directors. It is the intent of the COMPANY that the EXECUTIVE'S compensation shall include the following components: (1) a base salary, payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. 2 (b) Annual Review. On or before December 31st of each year, commencing during the year including the Effective Date, the annual base salary of the EXECUTIVE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $227,115.00, based upon the EXECUTIVE'S individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). (c) Executive Benefit Programs. During the TERM, the EXECUTIVE shall be entitled to participate in all formally established benefit, bonus, insurance, profit sharing plans, stock benefit plans and similar programs (hereinafter collectively referred to as "BENEFIT PLANS"), in accordance with the terms and conditions of such BENEFIT PLANS that are maintained by the COMPANY or the HOLDING COMPANY from time to time and all EXECUTIVE benefit plans or programs hereafter adopted in writing by the Board of Directors of the COMPANY or the HOLDING COMPANY for which senior management personnel of the COMPANY are eligible. Notwithstanding any statement to the contrary contained elsewhere in this AGREEMENT, the COMPANY may at any time discontinue or terminate any BENEFIT PLAN now existing or hereafter adopted, to the extent permitted by the terms of such BENEFIT PLAN, and shall not be required to compensate the EXECUTIVE for such discontinuance or termination to the extent such discontinuance or termination pertains to all employees of the COMPANY who are eligible participants at the time. (d) Vacation and Sick Leave. The EXECUTIVE shall be entitled, without loss of pay, to be absent voluntarily from the performance of his duties under this AGREEMENT, in accordance with the policies periodically established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. The EXECUTIVE shall be entitled to annual sick leave as established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. (e) Expenses. The COMPANY shall pay or reimburse the EXECUTIVE for reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties under this AGREEMENT, including participation in industry-related activities upon furnishing timely documentation to the COMPANY of such expenses incurred. 4. Termination of Employment. (a) General. The employment of the EXECUTIVE shall terminate at any time during the TERM: (i) at the option of the COMPANY, upon the delivery by the COMPANY of written notice of termination to the EXECUTIVE with or without "Cause" (as defined hereinafter), or (ii) at the option of the EXECUTIVE, upon delivery by the EXECUTIVE of written notice of termination to the COMPANY if the present capacity or circumstances in which the EXECUTIVE is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties or responsibilities substantially inconsistent with those normally associated with the EXECUTIVE'S position described in Section 2 (a) of 3 this AGREEMENT, change of title or removal as a director of the COMPANY or the HOLDING COMPANY, the requirement that the EXECUTIVE regularly perform his principal executive functions more than thirty-five (35) miles from his primary office as it existed of the date of this AGREEMENT or the EXECUTIVE'S benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (b), (c), (d) and (e) of this Section 4 shall govern the obligations of the COMPANY to the EXECUTIVE upon the occurrence of the events described in such subparagraphs. If the EXECUTIVE terminates this AGREEMENT without the written consent of the COMPANY, other than pursuant to Section 4(a)(ii) of this AGREEMENT, the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination and the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this AGREEMENT. This non-compete provision shall not apply in the event the EXECUTIVE terminates employment pursuant to Section 4(a)(ii) of this AGREEMENT. The provisions of this subparagraph 4(a) shall survive the termination of this AGREEMENT. (b) Termination for Cause. In the event that the COMPANY terminates the employment of the EXECUTIVE during the TERM because of the EXECUTIVE'S personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure or refusal to perform the duties and responsibilities assigned in this AGREEMENT, willful violation of any law, rule or regulation (other than traffic violations or other minor offenses), or final cease-and-desist order or material breach of any provision of this AGREEMENT (hereinafter collectively referred to as "Cause"), the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination. (c) Termination in Connection with CHANGE OF CONTROL. In the event that the employment of the EXECUTIVE is terminated by COMPANY within one (1) year before or after a CHANGE OF CONTROL (hereinafter defined) for any reason other than Cause, death, or disability, or within one (1) year before or after a CHANGE OF CONTROL the Executive's employment is terminated at the EXECUTIVE'S option as provided in Section 4 (a) (ii) above, then the following shall occur: (i) The COMPANY shall promptly pay to the EXECUTIVE or to his beneficiaries, dependents or estate an amount equal to the product of three (3) multiplied by the EXECUTIVE'S "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder LESS one dollar ($1.00) (hereinafter collectively referred to as "SECTION 280G"). (ii) The EXECUTIVE, his dependents, beneficiaries and estate shall: continue to be covered at the COMPANY'S expense under all health and welfare benefit 4 plans of the COMPANY in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. (iv) For purposes of this Agreement, a "CHANGE OF CONTROL" shall mean any one of the following events: (A) the acquisition of ownership or power to vote more than 20% of the voting stock of the COMPANY or the HOLDING COMPANY, provided that acquisition of ownership or power to vote by a qualified employee stock ownership plan sponsored by the Company shall not be considered a CHANGE OF CONTROL; (B) the acquisition of the ability to control the election of a majority of the directors of COMPANY or the HOLDING COMPANY (C) during any period of three or less consecutive years individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY; (D) the acquisition by any person or entity of "control" of the COMPANY within the meaning of 12 C.F.R. Section 303.81(c); or (E) an event that would be required to be reported in response to Item 1 (a) of Form 8-K or Item 6 (e) of Schedule 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT. 5 For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EXECUTIVE and any person or persons with whom the EXECUTIVE is "acting in concert" within the meaning of 12 C.F.R. Section 303.81 (b). (v) "Golden Parachute" Provision. In the event that any payments pursuant to this Section 4(c) would result in or contribute to the imposition of a penalty tax pursuant to SECTION 280G and Internal Revenue Code Section 4999, such payments shall be reduced to the maximum amount which may be paid under SECTION 280G without exceeding such limits. Any payments made to the EXECUTIVE pursuant to this AGREEMENT are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (vi) In the event the EXECUTIVE'S employment terminates pursuant to this Section 4 (c), the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or HOLDING COMPANY is doing business for a period of eight (8) months from the EXECUTIVE'S date of employment termination. In exchange for EXECUTIVE'S agreement concerning non-competition, the COMPANY agrees to pay EXECUTIVE eight (8) months of base salary. (d) Death of the EXECUTIVE. The TERM shall automatically expire upon the death of the EXECUTIVE. In such event, the EXECUTIVE'S estate shall be entitled to receive the EXECUTIVE'S monthly base salary continuation for ninety (90) days following the day death occurred, except as otherwise specified herein. (e) Disability of the EXECUTIVE. If the EXECUTIVE is unable to perform the essential functions of the position assigned by reason of illness or incapacity for a period up to one hundred and fifty (150) consecutive days, then, despite the COMPANY'S efforts to reasonably accommodate such illness or incapacity, the COMPANY may terminate this Agreement upon written notice to EXECUTIVE. Upon termination, the EXECUTIVE may be eligible for long term disability benefits under the COMPANY'S disability plan, subject to the terms and conditions of that plan. In the event that the EXECUTIVE is (and continues to be) eligible for long term disability benefits under the COMPANY'S disability plan, then the EXECUTIVE shall be entitled to be covered under the health and life insurance welfare benefits plans in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT for a period of two (2) years after the effective date of the EXECUTIVE'S termination of employment; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any 6 qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (f) Other Termination. In the event that the employment of the EXECUTIVE is terminated by the COMPANY before expiration of the TERM for any reason other than death, termination for Cause or termination in connection with a CHANGE OF CONTROL, or disability, then the following shall occur: (i) The COMPANY shall be obligated to continue to pay on at least a monthly basis, until the expiration of the TERM, to the EXECUTIVE, his designated beneficiaries or his estate, the total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EXECUTIVE in the twelve month period prior to the termination of employment. (ii) The EXECUTIVE shall continue to be covered at the EXECUTIVE'S expense under all health and welfare benefits plans, in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. 5. Withholding. All payments required to be made by the COMPANY hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to Federal, State and local tax and other payroll deductions as the COMPANY may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. Indemnification; Insurance. (a) Indemnification. The COMPANY agrees to indemnify the Executive and his heirs, executors, and administrators to the fullest extent permitted under applicable law and regulations, including, without limitation 12 U.S.C. Section 1828(k), against any and all expenses and liabilities reasonably incurred by the Executive in connection with or arising out of 7 any action, suit or proceeding in which the Executive may be involved by reason of having been a director or officer of the Bank or any of its subsidiaries, whether or not the Executive is a director or officer at the time of incurring any such expenses or liabilities. Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs and attorney's fees and the cost of reasonable settlements. The Executive shall be entitled to indemnification in respect of a settlement only if the Board of Directors of the Company has approved such settlement. Notwithstanding anything herein to the contrary, (I) indemnification for expenses shall not extend to matters for which the Executive has been terminated for, and (ii) the obligations of this Section shall survive the termination of this Agreement. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. (b) Insurance. During the Term of the Agreement, the COMPANY shall provide the Executive (and his heirs, executors, and administrators) with coverage under a directors' and officers' liability policy at the COMPANY's expense, at least equivalent to such coverage otherwise provided to the other directors and senior officers of the COMPANY. 7. Special Regulatory Events. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EXECUTIVE shall be as follows in the event of the following circumstances: (a) If the EXECUTIVE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY'S affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY'S obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY may pay the EXECUTIVE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended; (b) If the EXECUTIVE is removed and/or permanently prohibited from participating in the conduct of the COMPANY'S affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under this AGREEMENT shall terminate as of the effective date of such order; provided, however, that vested rights of the EXECUTIVE shall not be affected by such termination; (c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EXECUTIVE shall not be affected; (d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Superintendent of 8 Savings Banks, Department of Commerce (hereinafter referred to as "Superintendent"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority continued in Section 13(c) of the FDIA or (ii) by the Superintendent, or his or her designee, at any time the Superintendent approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Superintendent to be in an unsafe or unsound condition; provided, however that no vested rights of the EXECUTIVE shall not be affected by any such termination. 8. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect. 9. Confidential Information. The EXECUTIVE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EXECUTIVE agrees not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use of such information is otherwise legally in the public domain. The EXECUTIVE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the HOLDING COMPANY, its subsidiaries, or affiliates, or any of the businesses operated by them, and the EXECUTIVE confirms that such information constitutes the exclusive property of the COMPANY. The provisions of this Section 9 shall survive the termination or expiration of this Agreement. 10. Non-assignability. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EXECUTIVE, by the EXECUTIVE, his beneficiaries or legal representatives without the COMPANY'S prior written consent; provided, however, that nothing in this Section 10 shall preclude the EXECUTIVE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or legal representatives of the EXECUTIVE or his estate from assigning any rights hereunder to the person or persons entitled thereto. 11. No Attachment. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 9 12. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the benefit of, the EXECUTIVE and the COMPANY and its successors and assigns. 13. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto. 14. Waiver. No term or condition of this AGREEMENT shall deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived. 15. Severability. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EXECUTIVE shall be deemed reinstated to the full extent permitted by law, as this AGREEMENT had not been executed. 16. Headings. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT. 17. Governing Law. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing. 18. Effect of Prior Agreements. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EXECUTIVE. 19. Arbitration. Any dispute concerning the interpretation or application of this AGREEMENT that cannot be resolved by mutual agreement of the COMPANY and EXECUTIVE must be submitted for determination by an impartial arbitrator selected in accordance with the American Arbitration Association's Employment Dispute Resolution Rules. 20. Notices. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows: 10 11 If to the COMPANY: Chairman and CEO The Home Savings and Loan Company Of Youngstown, Ohio 275 Federal Plaza West Youngstown, Ohio 44503 If to the EXECUTIVE: Patrick A. Kelly 45 Timber Run Court Canfield, Ohio 44406 IN WITNESS WHEREOF, the COMPANY has caused this AGREEMENT to be executed by its duly authorized officer, and the EXECUTIVE has signed this AGREEMENT, each as of the day and year first above written. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By: /s/ Douglas M. McKay -------------------- Chairman and Chief Executive Officer /s/ Patrick A. Kelly --------------------- Patrick A. Kelly 12 EX-10.6 5 l06124aexv10w6.txt EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 31st day of December, 2003 ("Effective Date") by and between The Home Savings and Loan Company of Youngstown, Ohio, a savings and loan association incorporated under Ohio Law (hereinafter referred to as the "COMPANY"), and David G. Lodge, an individual (hereinafter referred to as the "EXECUTIVE"); WITNESSETH: WHEREAS, the EXECUTIVE is currently employed as the President and Chief Operating Officer of the COMPANY; WHEREAS, as a result of the skill, knowledge and experience of the EXECUTIVE, the Board of Directors of the COMPANY desires to continue to retain the services of the EXECUTIVE as the President and Chief Operating Officer of the COMPANY; WHEREAS, the EXECUTIVE desires to serve as the President and Chief Operating Officer of the COMPANY; and WHEREAS, the EXECUTIVE and the COMPANY desire to enter into this AGREEMENT to set forth the terms and conditions of the employment relationship between the COMPANY and the EXECUTIVE; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the COMPANY and the EXECUTIVE, each party intending to be legally bound, hereby agree as follows: 1. Employment and Term. (a) Term. Upon the terms and subject to the conditions of this AGREEMENT, the COMPANY hereby employs the EXECUTIVE, and the EXECUTIVE hereby accepts employment, as the President and Chief Operating Officer of the COMPANY. The term of this AGREEMENT shall commence on December 31, 2003 and shall end on December 31, 2006, unless extended by the COMPANY, with the consent of the EXECUTIVE, as provided in subsection (b) of this Section 1 (hereinafter referred to, together with such extensions, as the "TERM"). (b) Extension. Additionally, on, or before, each annual anniversary date of the Effective Date, the Term of Agreement shall be extended for up to an additional one-year period beyond the then effective Term upon a determination and resolution of the Board of Directors that the performance of the Executive has met the requirements and standards of the Board, and that the Term of such Agreement shall be extended for such additional period. References herein to the Term of this Agreement shall refer both to the initial term and successive terms. Any such extension shall be subject to the consent of the EXECUTIVE. 2. Duties of the EXECUTIVE. (a) General Duties and Responsibilities. The EXECUTIVE shall serve as the President and Chief Operating Officer of the COMPANY. Subject to the direction of the Board of Directors of the COMPANY and such EXECUTIVE'S manager, the EXECUTIVE shall perform all duties and shall have all powers which are commonly incident to the office of President and Chief Operating Officer or which, consistent therewith, are delegated to him by the Board of Directors. (b) Devotion of Entire Time to the Business of the COMPANY. The EXECUTIVE shall devote his entire productive time, ability and attention during normal business hours throughout the TERM to the faithful performance of his duties under this AGREEMENT. The EXECUTIVE shall not directly or indirectly render any services of a business, commercial or professional nature to any person or organization other than the COMPANY, United Community Financial Corp. (hereinafter referred to as the "HOLDING COMPANY"), or its subsidiaries without the prior written consent of the Board of Directors of the COMPANY; provided, however, that the EXECUTIVE shall not be precluded from (i) vacations and other leave time in accordance with Section 3 (d) below, (ii) reasonable participation in community, civic, charitable or similar organizations, (iii) reasonable participation in industry-related activities, including, but not limited to, attending state and national trade association meetings and serving as an officer, director or trustee of a state or national trade association or Federal Home Loan Bank, (iv) serving as an officer or director of the HOLDING COMPANY or its subsidiaries and receiving a salary, director's fees or other compensation or benefits, as appropriate, or (v) pursuing personal investments which do not interfere or conflict with the performance of the EXECUTIVE'S duties to the COMPANY. (c) Standards. During the Term of this Agreement, the Executive shall perform his duties in accordance with such reasonable standards expected of executives with comparable positions in comparable organizations and as may be established from time to time by the Board of Directors. 3. Remuneration. (a) Compensation. The EXECUTIVE shall receive during the TERM compensation established by the applicable Compensation Committee of the Boards of Directors. It is the intent of the COMPANY that the EXECUTIVE'S compensation shall include the following components: (1) a base salary, payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. 2 (b) Annual Review. On or before December 31st of each year, commencing during the year including the Effective Date, the annual base salary of the EXECUTIVE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $227,115.00, based upon the EXECUTIVE'S individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). (c) Executive Benefit Programs. During the TERM, the EXECUTIVE shall be entitled to participate in all formally established benefit, bonus, insurance, profit sharing plans, stock benefit plans and similar programs (hereinafter collectively referred to as "BENEFIT PLANS"), in accordance with the terms and conditions of such BENEFIT PLANS that are maintained by the COMPANY or the HOLDING COMPANY from time to time and all EXECUTIVE benefit plans or programs hereafter adopted in writing by the Board of Directors of the COMPANY or the HOLDING COMPANY for which senior management personnel of the COMPANY are eligible. Notwithstanding any statement to the contrary contained elsewhere in this AGREEMENT, the COMPANY may at any time discontinue or terminate any BENEFIT PLAN now existing or hereafter adopted, to the extent permitted by the terms of such BENEFIT PLAN, and shall not be required to compensate the EXECUTIVE for such discontinuance or termination to the extent such discontinuance or termination pertains to all employees of the COMPANY who are eligible participants at the time. (d) Vacation and Sick Leave. The EXECUTIVE shall be entitled, without loss of pay, to be absent voluntarily from the performance of his duties under this AGREEMENT, in accordance with the policies periodically established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. The EXECUTIVE shall be entitled to annual sick leave as established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. (e) Expenses. The COMPANY shall pay or reimburse the EXECUTIVE for reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties under this AGREEMENT, including participation in industry-related activities upon furnishing timely documentation to the COMPANY of such expenses incurred. 4. Termination of Employment. (a) General. The employment of the EXECUTIVE shall terminate at any time during the TERM: (i) at the option of the COMPANY, upon the delivery by the COMPANY of written notice of termination to the EXECUTIVE with or without "Cause" (as defined hereinafter), or (ii) at the option of the EXECUTIVE, upon delivery by the EXECUTIVE of written notice of termination to the COMPANY if the present capacity or circumstances in which the EXECUTIVE is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties or responsibilities substantially inconsistent with those normally associated with the EXECUTIVE'S position described in Section 2 (a) of 3 this AGREEMENT, change of title or removal as a director of the COMPANY or the HOLDING COMPANY, the requirement that the EXECUTIVE regularly perform his principal executive functions more than thirty-five (35) miles from his primary office as it existed of the date of this AGREEMENT or the EXECUTIVE'S benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (b), (c), (d) and (e) of this Section 4 shall govern the obligations of the COMPANY to the EXECUTIVE upon the occurrence of the events described in such subparagraphs. If the EXECUTIVE terminates this AGREEMENT without the written consent of the COMPANY, other than pursuant to Section 4(a)(ii) of this AGREEMENT, the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination and the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this AGREEMENT. This non-compete provision shall not apply in the event the EXECUTIVE terminates employment pursuant to Section 4(a)(ii) of this AGREEMENT. The provisions of this subparagraph 4(a) shall survive the termination of this AGREEMENT. (b) Termination for Cause. In the event that the COMPANY terminates the employment of the EXECUTIVE during the TERM because of the EXECUTIVE'S personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure or refusal to perform the duties and responsibilities assigned in this AGREEMENT, willful violation of any law, rule or regulation (other than traffic violations or other minor offenses), or final cease-and-desist order or material breach of any provision of this AGREEMENT (hereinafter collectively referred to as "Cause"), the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination. (c) Termination in Connection with CHANGE OF CONTROL. In the event that the employment of the EXECUTIVE is terminated by COMPANY within one (1) year before or after a CHANGE OF CONTROL (hereinafter defined) for any reason other than Cause, death, or disability, or within one (1) year before or after a CHANGE OF CONTROL the Executive's employment is terminated at the EXECUTIVE'S option as provided in Section 4 (a) (ii) above, then the following shall occur: (i) The COMPANY shall promptly pay to the EXECUTIVE or to his beneficiaries, dependents or estate an amount equal to the product of three (3) multiplied by the EXECUTIVE'S "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder LESS one dollar ($1.00) (hereinafter collectively referred to as "SECTION 280G"). (ii) The EXECUTIVE, his dependents, beneficiaries and estate shall: continue to be covered at the COMPANY'S expense under all health and welfare benefit 4 plans of the COMPANY in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. (iv) For purposes of this Agreement, a "CHANGE OF CONTROL" shall mean any one of the following events: (A) the acquisition of ownership or power to vote more than 20% of the voting stock of the COMPANY or the HOLDING COMPANY, provided that acquisition of ownership or power to vote by a qualified employee stock ownership plan sponsored by the Company shall not be considered a CHANGE OF CONTROL; (B) the acquisition of the ability to control the election of a majority of the directors of COMPANY or the HOLDING COMPANY (C) during any period of three or less consecutive years individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY; (D) the acquisition by any person or entity of "control" of the COMPANY within the meaning of 12 C.F.R. Section 303.81(c); or (E) an event that would be required to be reported in response to Item 1 (a) of Form 8-K or Item 6 (e) of Schedule 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT. 5 For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EXECUTIVE and any person or persons with whom the EXECUTIVE is "acting in concert" within the meaning of 12 C.F.R. Section 303.81 (b). (v) "Golden Parachute" Provision. In the event that any payments pursuant to this Section 4(c) would result in or contribute to the imposition of a penalty tax pursuant to SECTION 280G and Internal Revenue Code Section 4999, such payments shall be reduced to the maximum amount which may be paid under SECTION 280G without exceeding such limits. Any payments made to the EXECUTIVE pursuant to this AGREEMENT are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (vi) In the event the EXECUTIVE'S employment terminates pursuant to this Section 4 (c), the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or HOLDING COMPANY is doing business for a period of eight (8) months from the EXECUTIVE'S date of employment termination. In exchange for EXECUTIVE'S agreement concerning non-competition, the COMPANY agrees to pay EXECUTIVE eight (8) months of base salary. (d) Death of the EXECUTIVE. The TERM shall automatically expire upon the death of the EXECUTIVE. In such event, the EXECUTIVE'S estate shall be entitled to receive the EXECUTIVE'S monthly base salary continuation for ninety (90) days following the day death occurred, except as otherwise specified herein. (e) Disability of the EXECUTIVE. If the EXECUTIVE is unable to perform the essential functions of the position assigned by reason of illness or incapacity for a period up to one hundred and fifty (150) consecutive days, then, despite the COMPANY'S efforts to reasonably accommodate such illness or incapacity, the COMPANY may terminate this Agreement upon written notice to EXECUTIVE. Upon termination, the EXECUTIVE may be eligible for long term disability benefits under the COMPANY'S disability plan, subject to the terms and conditions of that plan. In the event that the EXECUTIVE is (and continues to be) eligible for long term disability benefits under the COMPANY'S disability plan, then the EXECUTIVE shall be entitled to be covered under the health and life insurance welfare benefits plans in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT for a period of two (2) years after the effective date of the EXECUTIVE'S termination of employment; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any 6 qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (f) Other Termination. In the event that the employment of the EXECUTIVE is terminated by the COMPANY before expiration of the TERM for any reason other than death, termination for Cause or termination in connection with a CHANGE OF CONTROL, or disability, then the following shall occur: (i) The COMPANY shall be obligated to continue to pay on at least a monthly basis, until the expiration of the TERM, to the EXECUTIVE, his designated beneficiaries or his estate, the total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EXECUTIVE in the twelve month period prior to the termination of employment. (ii) The EXECUTIVE shall continue to be covered at the EXECUTIVE'S expense under all health and welfare benefits plans, in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. 5. Withholding. All payments required to be made by the COMPANY hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to Federal, State and local tax and other payroll deductions as the COMPANY may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. Indemnification; Insurance. (a) Indemnification. The COMPANY agrees to indemnify the Executive and his heirs, executors, and administrators to the fullest extent permitted under applicable law and regulations, including, without limitation 12 U.S.C. Section 1828(k), against any and all expenses and liabilities reasonably incurred by the Executive in connection with or arising out of 7 any action, suit or proceeding in which the Executive may be involved by reason of having been a director or officer of the Bank or any of its subsidiaries, whether or not the Executive is a director or officer at the time of incurring any such expenses or liabilities. Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs and attorney's fees and the cost of reasonable settlements. The Executive shall be entitled to indemnification in respect of a settlement only if the Board of Directors of the Company has approved such settlement. Notwithstanding anything herein to the contrary, (I) indemnification for expenses shall not extend to matters for which the Executive has been terminated for, and (ii) the obligations of this Section shall survive the termination of this Agreement. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. (b) Insurance. During the Term of the Agreement, the COMPANY shall provide the Executive (and his heirs, executors, and administrators) with coverage under a directors' and officers' liability policy at the COMPANY's expense, at least equivalent to such coverage otherwise provided to the other directors and senior officers of the COMPANY. 7. Special Regulatory Events. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EXECUTIVE shall be as follows in the event of the following circumstances: (a) If the EXECUTIVE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY'S affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY'S obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY may pay the EXECUTIVE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended; (b) If the EXECUTIVE is removed and/or permanently prohibited from participating in the conduct of the COMPANY'S affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under this AGREEMENT shall terminate as of the effective date of such order; provided, however, that vested rights of the EXECUTIVE shall not be affected by such termination; (c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EXECUTIVE shall not be affected; (d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Superintendent of 8 Savings Banks, Department of Commerce (hereinafter referred to as "Superintendent"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority continued in Section 13(c) of the FDIA or (ii) by the Superintendent, or his or her designee, at any time the Superintendent approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Superintendent to be in an unsafe or unsound condition; provided, however that no vested rights of the EXECUTIVE shall not be affected by any such termination. 8. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect. 9. Confidential Information. The EXECUTIVE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EXECUTIVE agrees not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use of such information is otherwise legally in the public domain. The EXECUTIVE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the HOLDING COMPANY, its subsidiaries, or affiliates, or any of the businesses operated by them, and the EXECUTIVE confirms that such information constitutes the exclusive property of the COMPANY. The provisions of this Section 9 shall survive the termination or expiration of this Agreement. 10. Non-assignability. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EXECUTIVE, by the EXECUTIVE, his beneficiaries or legal representatives without the COMPANY'S prior written consent; provided, however, that nothing in this Section 10 shall preclude the EXECUTIVE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or legal representatives of the EXECUTIVE or his estate from assigning any rights hereunder to the person or persons entitled thereto. 11. No Attachment. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 9 12. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the benefit of, the EXECUTIVE and the COMPANY and its successors and assigns. 13. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto. 14. Waiver. No term or condition of this AGREEMENT shall deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived. 15. Severability. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EXECUTIVE shall be deemed reinstated to the full extent permitted by law, as this AGREEMENT had not been executed. 16. Headings. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT. 17. Governing Law. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing. 18. Effect of Prior Agreements. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EXECUTIVE. 19. Arbitration. Any dispute concerning the interpretation or application of this AGREEMENT that cannot be resolved by mutual agreement of the COMPANY and EXECUTIVE must be submitted for determination by an impartial arbitrator selected in accordance with the American Arbitration Association's Employment Dispute Resolution Rules. 20. Notices. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows: 10 11 If to the COMPANY: Chairman and CEO The Home Savings and Loan Company Of Youngstown, Ohio 275 Federal Plaza West Youngstown, Ohio 44503 If to the EXECUTIVE: David G. Lodge 9560 Windy Lakes Circle Chargrin Falls, Ohio 44023 IN WITNESS WHEREOF, the COMPANY has caused this AGREEMENT to be executed by its duly authorized officer, and the EXECUTIVE has signed this AGREEMENT, each as of the day and year first above written. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By:/s/ Douglas M. McKay ----------------------------- Chairman and Chief Executive Officer /s/ David G. Lodge ------------------------------- David G. Lodge 12 EX-10.7 6 l06124aexv10w7.txt EXHIBIT 10.7 EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"), is entered into this 31st day of December, 2003 ("Effective Date") by and between The Home Savings and Loan Company of Youngstown, Ohio, a savings and loan association incorporated under Ohio Law (hereinafter referred to as the "COMPANY"), and Patrick W. Bevack, an individual (hereinafter referred to as the "EXECUTIVE"); WITNESSETH: WHEREAS, the EXECUTIVE is currently employed as the Executive Vice President and Chief Financial Officer of the COMPANY; WHEREAS, as a result of the skill, knowledge and experience of the EXECUTIVE, the Board of Directors of the COMPANY desires to continue to retain the services of the EXECUTIVE as the Executive Vice President and Chief Financial Officer of the COMPANY; WHEREAS, the EXECUTIVE desires to serve as the Executive Vice President and Chief Financial Officer of the COMPANY; and WHEREAS, the EXECUTIVE and the COMPANY desire to enter into this AGREEMENT to set forth the terms and conditions of the employment relationship between the COMPANY and the EXECUTIVE; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the COMPANY and the EXECUTIVE, each party intending to be legally bound, hereby agree as follows: 1. Employment and Term. (a) Term. Upon the terms and subject to the conditions of this AGREEMENT, the COMPANY hereby employs the EXECUTIVE, and the EXECUTIVE hereby accepts employment, as the Executive Vice President and Chief Financial Officer of the COMPANY. The term of this AGREEMENT shall commence on December 31, 2003 and shall end on December 31, 2006, unless extended by the COMPANY, with the consent of the EXECUTIVE, as provided in subsection (b) of this Section 1 (hereinafter referred to, together with such extensions, as the "TERM"). (b) Extension. Additionally, on, or before, each annual anniversary date of the Effective Date, the Term of Agreement shall be extended for up to an additional one-year period beyond the then effective Term upon a determination and resolution of the Board of Directors that the performance of the Executive has met the requirements and standards of the Board, and that the Term of such Agreement shall be extended for such additional period. References herein to the Term of this Agreement shall refer both to the initial term and successive terms. Any such extension shall be subject to the consent of the EXECUTIVE. 2. Duties of the EXECUTIVE. (a) General Duties and Responsibilities. The EXECUTIVE shall serve as the Executive Vice President and Chief Financial Officer of the COMPANY. Subject to the direction of the Board of Directors of the COMPANY and such EXECUTIVE'S manager, the EXECUTIVE shall perform all duties and shall have all powers which are commonly incident to the office of Executive Vice President and Chief Financial Officer or which, consistent therewith, are delegated to him by the Board of Directors. (b) Devotion of Entire Time to the Business of the COMPANY. The EXECUTIVE shall devote his entire productive time, ability and attention during normal business hours throughout the TERM to the faithful performance of his duties under this AGREEMENT. The EXECUTIVE shall not directly or indirectly render any services of a business, commercial or professional nature to any person or organization other than the COMPANY, United Community Financial Corp. (hereinafter referred to as the "HOLDING COMPANY"), or its subsidiaries without the prior written consent of the Board of Directors of the COMPANY; provided, however, that the EXECUTIVE shall not be precluded from (i) vacations and other leave time in accordance with Section 3 (d) below, (ii) reasonable participation in community, civic, charitable or similar organizations, (iii) reasonable participation in industry-related activities, including, but not limited to, attending state and national trade association meetings and serving as an officer, director or trustee of a state or national trade association or Federal Home Loan Bank, (iv) serving as an officer or director of the HOLDING COMPANY or its subsidiaries and receiving a salary, director's fees or other compensation or benefits, as appropriate, or (v) pursuing personal investments which do not interfere or conflict with the performance of the EXECUTIVE'S duties to the COMPANY. (c) Standards. During the Term of this Agreement, the Executive shall perform his duties in accordance with such reasonable standards expected of executives with comparable positions in comparable organizations and as may be established from time to time by the Board of Directors. 3. Remuneration. (a) Compensation. The EXECUTIVE shall receive during the TERM compensation established by the applicable Compensation Committee of the Boards of Directors. It is the intent of the COMPANY that the EXECUTIVE'S compensation shall include the following components: (1) a base salary, payable in installments not less often than monthly; (2) cash incentive compensation, payable not less often than annually; and (3) long term incentive compensation. 2 (b) Annual Review. On or before December 31st of each year, commencing during the year including the Effective Date, the annual base salary of the EXECUTIVE shall be reviewed by the Board of Directors of the COMPANY and shall be set at an amount not less than $176,594.00, based upon the EXECUTIVE'S individual performance and such other factors as the Board of Directors may deem appropriate (hereinafter referred to as the "ANNUAL REVIEW"). (c) Executive Benefit Programs. During the TERM, the EXECUTIVE shall be entitled to participate in all formally established benefit, bonus, insurance, profit sharing plans, stock benefit plans and similar programs (hereinafter collectively referred to as "BENEFIT PLANS"), in accordance with the terms and conditions of such BENEFIT PLANS that are maintained by the COMPANY or the HOLDING COMPANY from time to time and all EXECUTIVE benefit plans or programs hereafter adopted in writing by the Board of Directors of the COMPANY or the HOLDING COMPANY for which senior management personnel of the COMPANY are eligible. Notwithstanding any statement to the contrary contained elsewhere in this AGREEMENT, the COMPANY may at any time discontinue or terminate any BENEFIT PLAN now existing or hereafter adopted, to the extent permitted by the terms of such BENEFIT PLAN, and shall not be required to compensate the EXECUTIVE for such discontinuance or termination to the extent such discontinuance or termination pertains to all employees of the COMPANY who are eligible participants at the time. (d) Vacation and Sick Leave. The EXECUTIVE shall be entitled, without loss of pay, to be absent voluntarily from the performance of his duties under this AGREEMENT, in accordance with the policies periodically established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. The EXECUTIVE shall be entitled to annual sick leave as established by the Board of Directors of the COMPANY for senior management officials of the COMPANY. (e) Expenses. The COMPANY shall pay or reimburse the EXECUTIVE for reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties under this AGREEMENT, including participation in industry-related activities upon furnishing timely documentation to the COMPANY of such expenses incurred. 4. Termination of Employment. (a) General. The employment of the EXECUTIVE shall terminate at any time during the TERM: (i) at the option of the COMPANY, upon the delivery by the COMPANY of written notice of termination to the EXECUTIVE with or without "Cause" (as defined hereinafter), or (ii) at the option of the EXECUTIVE, upon delivery by the EXECUTIVE of written notice of termination to the COMPANY if the present capacity or circumstances in which the EXECUTIVE is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties or responsibilities substantially inconsistent with 3 those normally associated with the EXECUTIVE'S position described in Section 2 (a) of this AGREEMENT, change of title or removal as a director of the COMPANY or the HOLDING COMPANY, the requirement that the EXECUTIVE regularly perform his principal executive functions more than thirty-five (35) miles from his primary office as it existed of the date of this AGREEMENT or the EXECUTIVE'S benefits provided under this AGREEMENT are reduced, unless the benefit reductions are part of a Company-wide reduction. The following subsections (b), (c), (d) and (e) of this Section 4 shall govern the obligations of the COMPANY to the EXECUTIVE upon the occurrence of the events described in such subparagraphs. If the EXECUTIVE terminates this AGREEMENT without the written consent of the COMPANY, other than pursuant to Section 4(a)(ii) of this AGREEMENT, the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination and the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or the HOLDING COMPANY is doing business for the unexpired TERM of this AGREEMENT. This non-compete provision shall not apply in the event the EXECUTIVE terminates employment pursuant to Section 4(a)(ii) of this AGREEMENT. The provisions of this subparagraph 4(a) shall survive the termination of this AGREEMENT. (b) Termination for Cause. In the event that the COMPANY terminates the employment of the EXECUTIVE during the TERM because of the EXECUTIVE'S personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure or refusal to perform the duties and responsibilities assigned in this AGREEMENT, willful violation of any law, rule or regulation (other than traffic violations or other minor offenses), or final cease-and-desist order or material breach of any provision of this AGREEMENT (hereinafter collectively referred to as "Cause"), the EXECUTIVE shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such termination. (c) Termination in Connection with CHANGE OF CONTROL. In the event that the employment of the EXECUTIVE is terminated by COMPANY within one (1) year before or after a CHANGE OF CONTROL (hereinafter defined) for any reason other than Cause, death, or disability, or within one (1) year before or after a CHANGE OF CONTROL the Executive's employment is terminated at the EXECUTIVE'S option as provided in Section 4 (a) (ii) above, then the following shall occur: (i) The COMPANY shall promptly pay to the EXECUTIVE or to his beneficiaries, dependents or estate an amount equal to the product of three (3) multiplied by the EXECUTIVE'S "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder LESS one dollar ($1.00) (hereinafter collectively referred to as "SECTION 280G"). 4 (ii) The EXECUTIVE, his dependents, beneficiaries and estate shall: continue to be covered at the COMPANY'S expense under all health and welfare benefit plans of the COMPANY in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. (iv) For purposes of this Agreement, a "CHANGE OF CONTROL" shall mean any one of the following events: (A) the acquisition of ownership or power to vote more than 20% of the voting stock of the COMPANY or the HOLDING COMPANY, provided that acquisition of ownership or power to vote by a qualified employee stock ownership plan sponsored by the Company shall not be considered a CHANGE OF CONTROL; (B) the acquisition of the ability to control the election of a majority of the directors of COMPANY or the HOLDING COMPANY (C) during any period of three or less consecutive years individuals who at the beginning of such period constitute the Board of Directors of the COMPANY or the HOLDING COMPANY cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the COMPANY or the HOLDING COMPANY was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the COMPANY or the HOLDING COMPANY; (D) the acquisition by any person or entity of "control" of the COMPANY within the meaning of 12 C.F.R. Section 303.81(c); or (E) an event that would be required to be reported in response to Item 1 (a) of Form 8-K or Item 6 (e) of Schedule 14A pursuant to the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "EXCHANGE ACT"), or any successor thereto, whether or not any class of securities of the Corporation is registered under the EXCHANGE ACT. 5 For purposes of this paragraph, the term "person" refers to an individual or corporation, partnership, trust, association or other organization, but does not include the EXECUTIVE and any person or persons with whom the EXECUTIVE is "acting in concert" within the meaning of 12 C.F.R. Section 303.81 (b). (v) "Golden Parachute" Provision. In the event that any payments pursuant to this Section 4(c) would result in or contribute to the imposition of a penalty tax pursuant to SECTION 280G and Internal Revenue Code Section 4999, such payments shall be reduced to the maximum amount which may be paid under SECTION 280G without exceeding such limits. Any payments made to the EXECUTIVE pursuant to this AGREEMENT are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (vi) In the event the EXECUTIVE'S employment terminates pursuant to this Section 4 (c), the EXECUTIVE shall not engage in the financial institutions business as a director, officer, EXECUTIVE or consultant for any business or enterprise which competes with the principal business of the COMPANY or the HOLDING COMPANY or any of their subsidiaries within Mahoning, Trumbull and Columbiana counties or any other geographic area in which the COMPANY or HOLDING COMPANY is doing business for a period of eight (8) months from the EXECUTIVE'S date of employment termination. In exchange for EXECUTIVE'S agreement concerning non-competition, the COMPANY agrees to pay EXECUTIVE eight (8) months of base salary. (d) Death of the EXECUTIVE. The TERM shall automatically expire upon the death of the EXECUTIVE. In such event, the EXECUTIVE'S estate shall be entitled to receive the EXECUTIVE'S monthly base salary continuation for ninety (90) days following the day death occurred, except as otherwise specified herein. (e) Disability of the EXECUTIVE. If the EXECUTIVE is unable to perform the essential functions of the position assigned by reason of illness or incapacity for a period up to one hundred and fifty (150) consecutive days, then, despite the COMPANY'S efforts to reasonably accommodate such illness or incapacity, the COMPANY may terminate this Agreement upon written notice to EXECUTIVE. Upon termination, the EXECUTIVE may be eligible for long term disability benefits under the COMPANY'S disability plan, subject to the terms and conditions of that plan. In the event that the EXECUTIVE is (and continues to be) eligible for long term disability benefits under the COMPANY'S disability plan, then the EXECUTIVE shall be entitled to be covered under the health and life insurance welfare benefits plans in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT for a period of two (2) years after the effective date of the EXECUTIVE'S termination of employment; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any 6 qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (f) Other Termination. In the event that the employment of the EXECUTIVE is terminated by the COMPANY before expiration of the TERM for any reason other than death, termination for Cause or termination in connection with a CHANGE OF CONTROL, or disability, then the following shall occur: (i) The COMPANY shall be obligated to continue to pay on at least a monthly basis, until the expiration of the TERM, to the EXECUTIVE, his designated beneficiaries or his estate, the total compensation in effect at the time of termination pursuant to Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the EXECUTIVE in the twelve month period prior to the termination of employment. (ii) The EXECUTIVE shall continue to be covered at the EXECUTIVE'S expense under all health and welfare benefits plans, in which the EXECUTIVE was a participant prior to the effective date of the termination of his employment as if the EXECUTIVE were still employed under this AGREEMENT until the earlier of the expiration of the TERM or the date on which the EXECUTIVE is included in another employer's benefit plans as a full-time EXECUTIVE; be eligible for benefit distribution from any of the COMPANY'S stock benefit plans in accordance with the terms and conditions of any such plans; but the EXECUTIVE shall not accrue any further benefit, vesting, or service credits under any qualified retirement plans maintained by the COMPANY after the effective date of the EXECUTIVE'S termination of employment. (iii) The EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this AGREEMENT by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the EXECUTIVE offset in any manner the obligations of the COMPANY hereunder, except as specifically stated in subparagraph (ii) above. 5. Withholding. All payments required to be made by the COMPANY hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to Federal, State and local tax and other payroll deductions as the COMPANY may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. Indemnification; Insurance. (a) Indemnification. The COMPANY agrees to indemnify the Executive and his heirs, executors, and administrators to the fullest extent permitted under applicable law and regulations, including, without limitation 12 U.S.C. Section 1828(k), against any and all expenses and liabilities reasonably incurred by the Executive in connection with or arising out of 7 any action, suit or proceeding in which the Executive may be involved by reason of having been a director or officer of the Bank or any of its subsidiaries, whether or not the Executive is a director or officer at the time of incurring any such expenses or liabilities. Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs and attorney's fees and the cost of reasonable settlements. The Executive shall be entitled to indemnification in respect of a settlement only if the Board of Directors of the Company has approved such settlement. Notwithstanding anything herein to the contrary, (I) indemnification for expenses shall not extend to matters for which the Executive has been terminated for, and (ii) the obligations of this Section shall survive the termination of this Agreement. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. (b) Insurance. During the Term of the Agreement, the COMPANY shall provide the Executive (and his heirs, executors, and administrators) with coverage under a directors' and officers' liability policy at the COMPANY's expense, at least equivalent to such coverage otherwise provided to the other directors and senior officers of the COMPANY. 7. Special Regulatory Events. Notwithstanding the provisions of Section 4 of this AGREEMENT, the obligations of the COMPANY to the EXECUTIVE shall be as follows in the event of the following circumstances: (a) If the EXECUTIVE is suspended and/or temporarily prohibited from participating in the conduct of the COMPANY'S affairs by a notice served under section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), the COMPANY'S obligations under this AGREEMENT shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the COMPANY may pay the EXECUTIVE all or part of the compensation withheld while the obligations in this AGREEMENT were suspended and reinstate, in whole or in part, any of the obligations that were suspended; (b) If the EXECUTIVE is removed and/or permanently prohibited from participating in the conduct of the COMPANY'S affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the COMPANY under this AGREEMENT shall terminate as of the effective date of such order; provided, however, that vested rights of the EXECUTIVE shall not be affected by such termination; (c) If the COMPANY is in default, as defined in section 3(x)(1) of the FDIA, all obligations under this AGREEMENT shall terminate as of the date of default; provided, however, that vested rights of the EXECUTIVE shall not be affected; (d) All obligations under this AGREEMENT shall be terminated, except to the extent of a determination that the continuation of this AGREEMENT is necessary for the continued operation of the COMPANY, (i) by the Superintendent of 8 Savings Banks, Department of Commerce (hereinafter referred to as "Superintendent"), or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the COMPANY under the authority continued in Section 13(c) of the FDIA or (ii) by the Superintendent, or his or her designee, at any time the Superintendent approves a supervisory merger to resolve problems related to the operation of the COMPANY or when the COMPANY is determined by the Superintendent to be in an unsafe or unsound condition; provided, however that no vested rights of the EXECUTIVE shall not be affected by any such termination. 8. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall preclude the COMPANY or the HOLDING COMPANY from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "COMPANY" as used herein, shall mean such other corporation or entity, and this AGREEMENT shall continue in full force and effect. 9. Confidential Information. The EXECUTIVE acknowledges that during his employment he will learn and have access to confidential information regarding the COMPANY and its customers and businesses. The EXECUTIVE agrees not to disclose or use for his own benefit, or the benefit of any other person or entity, any confidential information, unless or until the COMPANY consents to such disclosure or use of such information is otherwise legally in the public domain. The EXECUTIVE shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the HOLDING COMPANY, its subsidiaries, or affiliates, or any of the businesses operated by them, and the EXECUTIVE confirms that such information constitutes the exclusive property of the COMPANY. The provisions of this Section 9 shall survive the termination or expiration of this Agreement. 10. Non-assignability. Neither this AGREEMENT nor any right or interest hereunder shall be assignable by the EXECUTIVE, by the EXECUTIVE, his beneficiaries or legal representatives without the COMPANY'S prior written consent; provided, however, that nothing in this Section 10 shall preclude the EXECUTIVE from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or legal representatives of the EXECUTIVE or his estate from assigning any rights hereunder to the person or persons entitled thereto. 11. No Attachment. Except as required by law, no right to receive payment under this AGREEMENT shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 9 12. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the benefit of, the EXECUTIVE and the COMPANY and its successors and assigns. 13. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended, except by an instrument in writing signed by the parties hereto. 14. Waiver. No term or condition of this AGREEMENT shall deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this AGREEMENT, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived. 15. Severability. If, for any reason, any provision of this AGREEMENT is held invalid, such invalidity shall not affect the other provisions of this AGREEMENT not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT between the COMPANY (or any predecessor thereof) and the EXECUTIVE shall be deemed reinstated to the full extent permitted by law, as this AGREEMENT had not been executed. 16. Headings. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this AGREEMENT. 17. Governing Law. This AGREEMENT has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing. 18. Effect of Prior Agreements. This AGREEMENT contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the COMPANY or any predecessor of the COMPANY and the EXECUTIVE. 19. Arbitration. Any dispute concerning the interpretation or application of this AGREEMENT that cannot be resolved by mutual agreement of the COMPANY and EXECUTIVE must be submitted for determination by an impartial arbitrator selected in accordance with the American Arbitration Association's Employment Dispute Resolution Rules. 20. Notices. Any notice or other communication required or permitted pursuant to this AGREEMENT shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows: 10 11 If to the COMPANY: Chairman and CEO The Home Savings and Loan Company Of Youngstown, Ohio 275 Federal Plaza West Youngstown, Ohio 44503 If to the EXECUTIVE: Patrick W. Bevack 6075 Castlehill Drive Highland Heights, Ohio 44143 IN WITNESS WHEREOF, the COMPANY has caused this AGREEMENT to be executed by its duly authorized officer, and the EXECUTIVE has signed this AGREEMENT, each as of the day and year first above written. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO By:/s/ Douglas M. McKay -------------------- Chairman and Chief Executive Officer /s/ Patrick W. Bevack --------------------- Patrick W. Bevack EX-13 7 l06124aexv13.txt EXHIBIT 13 . . . EXHIBIT 13 SELECTED FINANCIAL AND OTHER DATA Selected financial condition data:
At December 31, -------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------------- (In thousands) Total assets $2,073,833 $ 1,990,131 $ 1,944,780 $ 1,300,199 $1,327,573 Cash and cash equivalents 81,155 110,936 205,883 45,972 111,445 Securities: Trading 15,600 5,060 8,352 5,933 7,657 Available for sale 227,525 237,268 118,150 190,176 275,463 Held to maturity - - 80,496 108,560 139,170 Bank owned life insurance 20,496 - - - - Loans, net 1,576,494 1,478,213 1,406,479 876,653 723,087 Loans held for sale 37,715 45,825 20,192 - - FHLB stock 21,924 21,069 18,760 13,793 12,825 Deposits 1,423,698 1,481,901 1,383,418 900,413 834,087 Other borrowed funds 338,463 210,024 271,631 114,317 213,578 Total shareholders' equity 279,836 274,569 261,880 261,899 256,868 --------------------------------------------------------------------------------------
Summary of earnings:
Year ended December 31, -------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------------- (In thousands) Interest income $ 111,663 $ 125,960 $ 113,989 $ 91,622 $ 89,971 Interest expense 40,252 54,236 57,047 44,104 34,284 -------------------------------------------------------------------------------------- Net interest income 71,411 71,724 56,942 47,518 55,687 Provision for loan loss allowances 3,179 3,578 2,495 300 100 -------------------------------------------------------------------------------------- Net interest income after provision for loan loss allowances 68,232 68,146 54,447 47,218 55,587 Noninterest income 40,845 31,806 28,449 24,754 22,721 Noninterest expenses (1)(2) 73,572 68,359 57,708 54,307 61,037 -------------------------------------------------------------------------------------- Income before income taxes 35,505 31,593 25,188 17,665 17,271 Income taxes 12,565 10,776 9,509 6,051 6,876 -------------------------------------------------------------------------------------- Net income $ 22,940 $ 20,817 $ 15,679 $ 11,614 $ 10,395 --------------------------------------------------------------------------------------
(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. Selected financial ratios and other data:
At or for the year ended December 31, 2003 2002 2001 2000 1999 ----------------------------------------------------------------------- Performance ratios: (1) Return on average assets (2) 1.15% 1.04% 0.97% 0.92% 0.79% Return on average equity (3) 8.27 7.74 6.03 4.47 2.46 Interest rate spread (4) 3.51 3.36 2.95 2.91 2.98 Net interest margin (5) 3.81 3.79 3.66 3.89 4.38 Noninterest expense to average assets 3.70 3.74 3.56 4.30 4.66 Efficiency ratio (6) 65.29 64.52 66.34 75.14 77.85 Average interest-earning assets to average interest-bearing liabilities 114.24 114.98 119.23 127.08 152.09 Capital ratios: Average equity to average assets 13.95 13.48 16.04 20.57 32.25 Shareholders' equity to assets at year end 13.49 13.80 13.47 20.14 19.35 Tangible capital 8.22 8.05 9.07 14.51 26.75 Core capital 9.64 8.05 9.07 14.51 26.75 Risk-based capital 10.56 12.61 14.70 24.33 50.41 Asset quality ratios: Nonperforming loans to loans at year end (7) 0.94 0.95 0.89 1.10 0.54 Nonperforming assets to average assets (8) 0.82 0.81 0.80 0.79 0.31 Nonperforming assets to total assets at year end(8) 0.79 0.81 0.67 0.77 0.30 Allowance for loan losses as a percent of loans 0.96 0.94 0.81 0.74 0.88 Allowance for loan losses as a percent of nonperforming loans (7) 100.70 100.98 92.13 67.79 164.86 Number of: Loans 37,668 37,872 25,636 22,699 20,274 Deposits 169,920 173,528 164,753 115,785 106,196 Per share data: Basic earnings (9) $ 0.73 $ 0.65 $ 0.49 $ 0.35 $ 0.31 Diluted earnings (9) 0.72 0.65 0.48 0.35 0.30 Book value (10) 8.21 7.79 7.34 7.02 6.80 Dividend per share 0.30 0.30 0.30 0.30 0.30 Dividend payout ratio (11) 41.67% 46.15% 62.50% 85.71% 100.00%
(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. (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. (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. (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. (7) Nonperforming loans consist of nonaccrual loans and restructured loans. (8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. (9) Net income divided by average number of shares outstanding. Excluding the effects of the gain on postretirement benefits curtailment and the loss on pension termination, basic and diluted earnings per share would have been $0.31 for the year ended December 31, 2000. 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. (10) Shareholders' equity divided by number of shares outstanding. (11) Historical per share dividends declared and paid for the year divided by the diluted earnings per share for the year. 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), an investment brokerage/advisory firm, in a transaction accounted for as a pooling of interests. 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 3 to the consolidated financial statements for a more detailed discussion of these acquisitions. The following discussion and analysis of the financial condition and results of operations of United Community and its subsidiaries should be read in conjunction with the consolidated financial statements, and the notes thereto, included in this Annual Report. FORWARD-LOOKING STATEMENTS Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipate," "plan," "expect," "believe," and similar expressions as they relate to United Community or its management are intended to identify such forward looking statements. United Community's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. CHANGES IN FINANCIAL CONDITION Total assets increased $83.7 million, or 4.2%, from $2.0 billion at December 31, 2002 to $2.1 billion at December 31, 2003. The net change in assets was a result of increases of $98.3 million, or 6.7%, in loans, $20.5 million in bank owned life insurance and $3.2 million in other assets which were partially offset by decreases of $29.8 million, or 26.8%, in cash and cash equivalents and $8.1 million, or 17.7%, in loans held for sale. Total liabilities increased $78.4 million, or 4.6%, as a result of a $128.4 million, or 61.2%, increase in other borrowed funds offset by a decrease of $58.2 million, or 3.9%, in deposits. We anticipate continued balance sheet growth resulting from our expansion into new markets, including ongoing benefits from the 2001 and 2002 acquisitions. Net loans increased $98.3 million, or 6.7%, to $1.6 billion at December 31, 2003, compared to $1.5 billion at December 31, 2002. The most significant increases were $236.7 million in one-to four-family construction loans, $72.9 million in nonresidential real estate loans, $69.8 million in multifamily real estate loans, $63.2 million in consumer loans, $10.5 million in multifamily construction loans, $8.7 million in land loans and $8.2 million in commercial loans. The increase in one-to four-family construction loans was partially offset by an increase of $88.1 million in loans in process. During 2003, Home Savings entered into an agreement to purchase one- to four-family construction loans from another institution. Loans purchased under this agreement earn a floating rate of interest, are guaranteed as to principal and interest by a third party and may be for the purpose of constructing either pre-sold or speculative homes. At December 31, 2003, approximately $101.9 million was outstanding under this program. Home Savings anticipates continuing purchases of loans under this program in 2004. The opening of an office in the Columbus, Ohio area specializing in construction lending also contributed to this increase. Real estate loans secured by one-to four-family residences declined $286.7 million as a result of the sale of approximately $90.4 million of fixed rate loans from the portfolio to help manage interest rate risk and continued refinancing activity of loans in the portfolio as a result of the interest rate environment. 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. Loans held for sale were $37.7 million at December 31, 2003 compared to $45.8 million at December 31, 2002. The balance of loans held for sale at any point in time includes loans that have not yet been sold and loans that have been sold with future delivery dates. Home Savings actively manages its pipeline of loans in process utilizing forward sale contracts to minimize exposure to rising interest rates. Home Savings will continue to sell fixed rate loans going forward as a part of its strategic plan to help manage interest rate risk. As interest rates rise, loan origination volumes generally decline, thus resulting in fewer loans available for sale, and potentially lower gains on the sale of those assets. 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 $32.9 million, or 42.4%, to $44.8 million at December 31, 2003 compared to $77.8 million at December 31, 2002. The decrease in overnight funds was used to partially fund an increase in net loans of $98.3 million. During the second quarter of 2003, Home Savings invested $20.0 million in bank owned life insurance, which represents insurance on the lives of certain employees where Home Savings is the beneficiary. Bank owned life insurance provides a long-term asset to offset long- term benefit liabilities, while generating competitive investment yields. Home Savings has recognized a $496,000 increase in the cash value of the policies, which is tax deferred. Any death benefit proceeds received by Home Savings are tax-free. Total deposits decreased $58.2 million, or 3.9%, from $1.5 billion at December 31, 2002 to $1.4 billion at December 31, 2003, primarily as a result of a decline in certificates of deposit of $76.1 million. This change was partially offset by increases of $9.9 million in savings accounts and $12.1 million in checking accounts. During 2003, Home Savings emphasized growing core deposit accounts that may be more likely to generate lasting customer relationships. Certificate of deposit pricing was less aggressive due to the availability of lower cost funding alternatives. Management continually evaluates many variables, including cash requirements, liquidity targets, asset acquisition, liability mix and gap targets when pricing deposits. 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 and Potters have declined to $295.2 million and $106.3 million, respectively. Other borrowed funds increased $128.4 million, or 61.2%, at December 31, 2003 compared to December 31, 2002. The change consists of increases of $101.2 million in short-term FHLB advances, $14.4 million in long-term FHLB advances, $8.1 million in other short-term borrowings and $4.7 million of securities sold under repurchase agreements. These increases were used to fund the increases in loans and to offset the decrease in deposits. United Community continually evaluates funding alternatives and may borrow additional funds in 2004 to satisfy funding requirements. Total shareholders' equity increased $5.3 million, or 1.9%, from December 31, 2002 to December 31, 2003. The increase was primarily due to earnings for the year and a decrease in unearned stock compensation, offset by quarterly dividend payments, treasury stock purchases and a decrease in accumulated other comprehensive income. United Community acquired 1.3 million shares of common stock for $12.2 million during the year ended December 31, 2003. As of December 31, 2003, United Community has authorization to purchase up to 856,747 additional shares under its current repurchase program. On January 28, 2004, United Community offered to purchase up to 4 million shares, or approximately 11.7% of its outstanding shares, from shareholders at a price of $12.50 per share. The offer expires on March 1, 2004. This transaction is expected to result in a decrease in cash and cash equivalents of approximately $43 million, an increase in borrowings of approximately $4.2 million and a decrease in Shareholders' equity of approximately $47.2 million, assuming all 4 million shares are repurchased. Book value and tangible per share were $8.21 and $7.11, respectively as of December 31, 2003. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002 NET INCOME -- Net income for the year ended December 31, 2003 was $22.9 million, compared to $20.8 million for the year ended December 31, 2002, primarily due to an increase of $9.0 million in noninterest income and a $399,000 decline in the provision for loan loss allowances. This increase was partially offset by a $313,000 decline in net interest income and a $5.2 million increase in noninterest expense. Diluted earnings per share for the year ended December 31, 2003 were $0.72 compared to diluted earnings per share of $0.65 for the year ended December 31, 2002. NET INTEREST INCOME -- Net interest income decreased $313,000, or 0.4%, to $71.4 million in 2003 from $71.7 million for 2002. Total interest income decreased $14.3 million and interest expense declined $14.0 million. The decrease in total interest income was primarily due to decreases in interest earned on loans of $11.4 million, interest earned on securities of $2.3 million and other interest earning assets of $1.1 million. The average balance of interest-earning assets declined $19.9 million for the year ended December 31, 2003 compared to 2002. The average yield on interest-earning assets decreased to 5.97% in 2003 compared to 6.66% in 2002. The decrease in interest expense was primarily due to a decrease in interest expense on deposits of $14.0 million. The average balance of interest-bearing liabilities decreased $6.8 million and the average rate paid decreased to 2.46% for 2003 from 3.30% for 2002. The net result of these changes was a 2 basis point increase in the net interest margin to 3.81% for 2003 from 3.79% for 2002. 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 believe we are well positioned in the event of a gradual 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 $3.2 million in 2003 compared to a provision of $3.6 million in 2002, primarily as a result of declines in nonperforming loans and delinquent loans. The decision to diversify the mix of loans in the portfolio in recent years to include more construction, consumer, commercial and commercial real estate loans involved the acceptance of a relatively higher level of credit risk. As a result, this may require a higher provision for loan losses than if the portfolio remained primarily comprised of one- to four-family mortgage loans. The allowance for loan losses totaled $15.1 million at December 31, 2003, which was 0.96% of total loans and 100.7% of nonperforming loans. NONINTEREST INCOME -- Noninterest income increased $9.0 million, or 28.4%, to $40.8 million for the year ended December 31, 2003, from $31.8 million for the year ended December 31, 2002. The increase was primarily due to increases of $5.8 million in net gains recognized on the sale of loans, $1.5 million in gains recognized on trading securities, $1.2 million in commissions earned and $1.2 million in underwriting and investment banking income. During 2003, Home Savings sold a total of $536.6 million in mortgage loans, including $90.4 million in loans out of the portfolio, compared to total sales of $338.7 million in 2002, including $107.9 million from the portfolio. As a result of declining one - to four -family residential loan volumes, the gain on related sales is expected to decline. The change in trading securities was a result of a $1.5 million increase in the value of securities held for the Butler Wick retention plan. The changes in commissions and underwriting are predominately related to an increase in the dollar volume of bond issues underwritten by Butler Wick in 2003. These increases were partially offset by a $1.3 million decline in gains recognized on the sale of securities as a result of $21.3 million of security sales during 2003 compared to $46.0 million in 2002. Gains recognized in 2002 include $476,000 from the sale of stock received in the Anthem demutualization, which Home Savings received since Anthem is Home Savings' health insurance provider. To recognize the receipt of the stock, other income was increased by $847,000 in 2002. The $242,000 decrease in other income during 2003 was a result of the non-recurring receipt of the Anthem stock in 2002, partially offset by $496,000 income recognized from the investment in bank owned life insurance in 2003. NONINTEREST EXPENSE -- Noninterest expense increased $5.2 million to $73.6 million for 2003, from $68.4 million in 2002. The primary reasons for the increase is an increase in salaries and employee benefits of $6.6 million and an increase in equipment and data processing of $1.2 million. The primary reasons for the increase in salaries and employee benefits include $2.5 million in additional expense related to post retirement costs as a result of rising health care costs and a $1.5 million increase in the value of the Butler Wick retention plan. Additional factors that contributed to the increase include increases in commissions and bonuses paid, as a result of increased loan volumes and increased dollar volumes of bond deals, and a full year of expense for personnel from the acquisition of Potters as opposed to nine months worth of expense in 2002. The change in equipment and data processing is a result of increased depreciation for a new teller system and phone system, computer and equipment upgrades to run the new system and a full year of depreciation for Potters in 2003 compared to nine months in 2002. These increases were partially offset by a $1.7 million decline in other expense mainly as a result of a $954,000 decline in bank fees as a result of the early extinguishment of debt in 2002. Decreases in supervisory fees, telephone expense and SAIF premiums also contributed to the decline. FEDERAL INCOME TAXES -- Federal income taxes increased $1.8 million, or 10.2%, in 2003 compared to 2002, primarily due to higher pretax income in 2003. The effective tax rate was 35% in 2003 and 34% in 2002. The primary reason for the increase in effective tax rate is related to the reversal in 2002 of a $400,000 valuation allowance that was established in 1999 in relation to the contribution United Community made to the Home Savings Charitable Foundation. Based on current levels of taxable income, management believes that the tax benefit related to the contribution will be completely utilized. Refer to Note 14 to the consolidated financial statements for a further analysis of the effective tax rate. 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 reasons for the increase were a $14.8 million increase in net interest income and a $3.4 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 $14.8 million, or 26.0%, to $71.7 million in 2002 from $56.9 million for 2001. Total interest income increased $12.0 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 $17.1 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 6.66% 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 41 basis points to 3.36% 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 66 basis point decrease in the yield on interest-earning assets. PROVISION FOR LOAN LOSSES -- 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, 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. The allowance for loan losses totaled $15.1 million at December 31, 2002, which was 0.94% of total loans and 100.98% of nonperforming loans. NONINTEREST INCOME -- Noninterest income increased $3.4 million, or 11.8%, to $31.8 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 $2.0 million in other income, a $469,000 increase in gains recognized on the sale of loans and a $219,000 increase in service fees and other charges. Since Anthem is Home Savings' health insurance 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 14 to the consolidated financial statements for a further analysis of the effective tax rate. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The accounting and reporting policies of United Community are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Application of these principles requires management to make estimates, assumptions and 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 6 and mortgage servicing rights in Note 7. 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, ----------------------------------------------------------------------------------------------- 2003 2002 2001 ----------------------------------------------------------------------------------------------- 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) $1,496,518 $98,646 6.59% $ 1,507,591 $110,013 7.30% $1,185,202 $ 92,933 7.84% Net loans held for sale 41,418 1,950 4.71 18,351 1,243 6.77 12,440 886 7.12 Securities: Trading 13,887 415 2.99 10,179 196 1.93 6,359 151 2.37 Available for sale 262,967 8,851 3.37 174,526 7,602 4.36 152,657 8,864 5.81 Held to maturity - - - 56,845 3,762 6.62 94,670 6,400 6.76 Margin accounts 14,349 689 4.80 17,883 830 4.64 26,637 1,774 6.66 FHLB stock 21,388 855 4.00 20,136 932 4.63 15,822 1,078 6.81 Other interest-earning assets 21,415 257 1.20 86,318 1,382 1.60 64,006 1,903 2.97 ----------------------------------------------------------------------------------------------- Total interest-earning assets 1,871,942 111,663 5.97 1,891,829 125,960 6.66 1,557,793 113,989 7.32 Noninterest-earning assets 116,685 103,504 64,049 ----------------------------------------------------------------------------------------------- Total assets $1,988,627 $ 1,995,333 $1,621,842 =============================================================================================== Interest-bearing liabilities: Deposits: Checking accounts $ 308,816 $ 3,112 1.01% $ 279,894 $ 5,319 1.90% $ 184,120 $ 5,446 2.96% Savings accounts 335,843 2,347 0.70 299,048 4,946 1.65 228,485 5,212 2.28 Certificates of deposit 763,704 25,441 3.33 850,054 34,668 4.08 696,633 37,353 5.36 Other borrowed funds 203,276 9,352 4.06 216,420 9,303 4.30 197,294 9,036 4.58 ----------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,638,639 40,252 2.46 1,645,416 54,236 3.30 1,306,532 57,047 4.37 ----------------------------------------------------------------------------------------------- Noninterest-bearing liabilities 72,536 80,969 55,088 ----------------------------------------------------------------------------------------------- Total liabilities 1,711,175 1,726,385 1,361,620 Shareholders' equity 277,452 268,948 260,222 =============================================================================================== Total liabilities and equity $1,988,627 $ 1,995,333 $1,621,842 =============================================================================================== Net interest income and interest rate spread $71,411 3.51% $ 71,724 3.36% $ 56,942 2.95% =============================================================================================== Net interest margin 3.81% 3.79% 3.66% =============================================================================================== Average interest-earning assets to average interest-bearing liabilities 114.24% 114.98% 119.23% ===============================================================================================
(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, ---------------------------------------------------------------------- 2003 vs. 2002 2002 vs. 2001 ---------------------------------------------------------------------- Increase Increase (decrease) due to Total (decrease) due to Total ------------------ increase ------------------- increase Rate Volume (decrease) Rate Volume (decrease) ---------------------------------------------------------------------- (In thousands) Interest-earning assets: Loans $ (10,564) $ (803) $ (11,367) $ (5,846) $22,926 $ 17,080 Loans held for sale (226) 933 707 (41) 398 357 Securities: Trading 132 87 219 (21) 66 45 Available for sale (1,016) 2,265 1,249 (2,958) 1,696 (1,262) Held to maturity (1,881) (1,881) (3,762) (132) (2,506) (2,638) Margin accounts 30 (171) (141) (453) (491) (944) FHLB stock (142) 65 (77) (975) 829 (146) Other interest-earning assets (281) (844) (1,125) (2,130) 1,609 (521) ---------------------------------------------------------------------- Total interest-earning assets $ (13,948) $ (349) $ (14,297) $ (12,556) $24,527 $ 11,971 ====================================================================== Interest-bearing liabilities: Checking accounts (2,829) 704 (2,125) $ 279 $ (406) $ (127) Savings accounts (3,303) 622 (2,681) 2,159 (2,425) (266) Certificates of deposit (5,935) (3,292) (9,227) (33,547) 30,862 (2,685) Other borrowed funds (307) 356 49 (462) 729 267 ---------------------------------------------------------------------- Total interest-bearing liabilities $ (12,374) $(1,610) $ (13,984) $ (31,571) $28,760 $ (2,811) ====================================================================== Change in net interest income $ (313) $ 14,782 ======================================================================
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS The following table presents, as of December 31, 2003, 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 9 $ 1,128 $ 1,958 $ 1,277 $ 555 $ 4,918 Deposits without a stated maturity 11 681,493 - - - - Certificates of deposit 11 342,394 210,996 188,707 108 742,205 Federal Home Loan Bank borrowings 12 119,250 141,000 17,000 21,328 298,578 Other borrowed funds 12 39,885 - - - 39,885 ---------------------------------------------------------------------------
A schedule of significant commitments as of December 31, 2003 follows:
(In thousands) Commitment to originate: Mortgage loans $19,760 Other loans 4,770 Unfunded lines of credit 77,424 Net commitments to sell mortgage loans 7,216
Further discussion of these commitments is included in Note 6 to the consolidated financial statements. In addition, United Community has commitments under benefit plans as described in Note 17 to the consolidated financial statements. In September 2003, an arbitration proceeding was initiated against Butler Wick seeking compensatory and punitive damages, interest and other costs in connection with alleged losses experienced in the claimants' brokerage account. Butler Wick has denied these claims. Further discussion of this proceeding is included in Note 13 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 0.20% 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, 2003 - ------------------------------------------------------------------------------------------------------------------ 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 $ 248,137 $ (28,816) (10.40)% 13.54% (0.50)% $ 658 1.00% +200 266,586 (10,367) (3.74) 14.14 0.10 1,057 1.60 +100 276,775 (178) (0.06) 14.32 0.28 1,097 1.66 Static 276,953 - - 14.04 - - - (100) 243,845 (33,108) (11.95) 12.29 (1.75) (1,703) (2.58) (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, 2003 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
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 prepayments on fixed-rate loans dramatically increase and the value of core deposits is diminished. 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 sustained 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, 2003, 2002 and 2001.
Years ended December 31, --------------------------------- 2003 2002 2001 --------------------------------- (In thousands) Net income $ 22,940 $ 20,817 $ 15,679 Adjustments to reconcile net income to net cash from operating activities 20,152 (12,421) 113,747 --------------------------------- Net cash from operating activities 43,092 8,396 129,426 Net cash from investing activities (127,776) (13,145) (223,346) Net cash from financing activities 54,903 (90,198) 253,831 --------------------------------- Net change in cash and cash equivalents (29,781) (94,947) 159,911 Cash and cash equivalents at beginning of year 110,936 205,883 45,972 --------------------------------- Cash and cash equivalents at end of year $ 81,115 $ 110,936 $ 205,883 =================================
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, 2003, approximately $342.4 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 1,302,085 shares of common stock for $12.2 million, 529,200 shares of common stock for $4.4 million and 1,604,126 shares of common stock for $11.0 million during the years ended December 31, 2003, 2002 and 2001. During the fourth quarter of 2003, United Community completed the repurchase program previously announced on October 23, 2000. United Community has remaining authorization to repurchase 856,747 shares as of December 31, 2003 under the current repurchase program. Management intends to repurchase shares as authorized. Home Savings is required by federal regulations to meet certain minimum capital requirements. Current capital requirements call for tangible capital of 1.5% of adjusted tangible assets, leverage, also known as core capital (which for Home Savings consists solely of tangible capital) of 4.0% of adjusted total assets and risk-based capital (which for Home Savings consists of leverage capital and the allowance for loan losses) of 8% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk). The following table summarizes Home Savings' regulatory capital requirements and actual capital at December 31, 2003.
Current Excess of actual capital Applicable Actual capital minimum requirement over current requirement asset base ------------------------------------------------------------------------------------------------ Amount Percent Amount Percent Amount Percent Total ------------------------------------------------------------------------------------------------ (In thousands) Tangible capital $ 157,160 8.22% $ 28,674 1.50% $ 128,486 6.72% $ 1,911,621 Core capital 157,160 8.22 76,465 4.00 80,695 4.22 1,911,621 Risk-based capital 172,271 10.56 130,465 8.00 41,806 2.56 1,630,814 ================================================================================================
On January 28, 2004, United Community offered to purchase up to 4 million shares, or approximately 11.7% of its outstanding shares, from shareholders at a price of $12.50 per share. The offer expires on March 1, 2004. This transaction is expected to result in a decrease in cash and cash equivalents of approximately $43 million, an increase in Borrowings of approximately $4.2 million and a decrease in Shareholders' equity of approximately $47.2 million, assuming all 4 million shares are repurchased. Home Savings will remain well capitalized by all three measures (tangible, core and risk-based) at the conclusion of this transaction. 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 37,807,457 common shares of United Community stock issued and 34,559,783 shares outstanding and held by approximately 12,824 record holders as of February 17, 2004. United Community's common shares are traded on The Nasdaq Stock Market(R) under the symbol "UCFC". Quarterly stock prices and dividends declared are shown in the following table.
First Second Third Fourth Quarter Quarter Quarter Quarter - --------------------------------------------------- 2003: High $ 9.07 $ 9.70 $ 10.00 $ 12.00 Low 8.60 8.74 9.11 9.75 Close 8.82 9.22 9.90 11.41 Dividends declared and paid 0.075 0.075 0.075 0.075 - ---------------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter - ----------------------------------------------------- 2002: High $ 8.13 $ 9.39 $ 9.15 $ 8.99 Low 7.05 7.43 8.35 8.45 Close 7.40 9.36 8.85 8.65 Dividends declared and paid 0.075 0.075 0.075 0.075 - -----------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, --------------------------------- 2003 2002 --------------------------------- (In thousands) ASSETS Cash and deposits with banks $ 36,334 $ 33,178 Federal funds sold 44,821 77,758 --------------------------------- Total cash and cash equivalents 81,155 110,936 --------------------------------- Securities: Trading, at fair value 15,600 5,060 Available for sale, at fair value 227,525 237,268 Loans held for sale 37,715 45,825 Loans, net (including allowance for loan losses of $15,111 and $15,099) 1,576,494 1,478,213 Margin accounts 14,388 14,809 Federal Home Loan Bank stock 21,924 21,069 Premises and equipment 20,510 20,002 Accrued interest receivable 8,443 9,558 Real estate owned 1,299 994 Goodwill 33,593 33,593 Core deposit intangible 3,787 5,101 Cash surrender value of life insurance 20,496 - Other assets 10,904 7,703 --------------------------------- TOTAL ASSETS $2,073,833 $ 1,990,131 --------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $ 63,442 $ 56,452 Interest bearing 1,360,256 1,425,449 Borrowed funds: Short-term 159,135 37,945 Long-term 179,328 172,079 Advance payments by borrowers for taxes and insurance 10,721 5,996 Accrued interest payable 970 1,126 Accrued expenses and other liabilities 20,145 16,515 --------------------------------- TOTAL LIABILITIES 1,793,997 1,715,562 --------------------------------- SHAREHOLDERS' EQUITY Preferred stock-no par value; 1,000,000 shares authorized and unissued - - Common stock -- no par value; 499,000,000 shares authorized; 37,804,457 and 37,803,269 shares issued 139,526 138,207 Retained earnings 185,495 172,080 Accumulated other comprehensive income 1,124 2,363 Unearned compensation (16,752) (19,724) Treasury stock, at cost, 2003 - 3,718,542 shares and 2002 - 2,558,214 shares (29,557) (18,357) --------------------------------- TOTAL SHAREHOLDERS' EQUITY 279,836 274,569 --------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,073,833 $ 1,990,131 ---------------------------------
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, ---------------------------------------------- 2003 2002 2001 ---------------------------------------------- (In thousands, except per share data) INTEREST INCOME Loans $98,646 $ 110,013 $92,933 Loans held for sale 1,950 1,243 886 Securities: Trading 415 196 151 Available for sale 8,851 7,602 8,864 Held to maturity - 3,762 6,400 Margin accounts 689 830 1,774 FHLB stock dividend 855 932 1,078 Other interest-earning assets 257 1,382 1,903 ---------------------------------------------- Total interest income 111,663 125,960 113,989 ---------------------------------------------- INTEREST EXPENSE Interest expense on deposits 30,900 44,933 48,011 Interest expense on other borrowed funds 9,352 9,303 9,036 ---------------------------------------------- Total interest expense 40,252 54,236 57,047 ---------------------------------------------- Net interest income 71,411 71,724 56,942 Provision for loan losses 3,179 3,578 2,495 ---------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 68,232 68,146 54,447 ---------------------------------------------- NONINTEREST INCOME Brokerage commissions 14,925 13,677 13,411 Service fees and other charges 8,382 7,976 7,757 Underwriting and investment banking 1,528 312 1,316 Net gains (losses): Securities available for sale 839 2,127 392 Trading securities 850 (651) (869) Loans sold 11,707 5,919 5,450 Other (105) (515) 37 Other income 2,719 2,961 955 ---------------------------------------------- Total noninterest income 40,845 31,806 28,449 ---------------------------------------------- NONINTEREST EXPENSES Salaries and employee benefits 46,511 39,917 34,528 Occupancy 3,658 3,186 2,575 Equipment and data processing 9,459 8,309 7,378 Franchise tax 1,562 2,032 2,010 Advertising 2,232 2,167 1,938 Amortization of core deposit intangible 1,314 2,180 1,671 Other expenses 8,836 10,568 7,608 ---------------------------------------------- Total noninterest expenses 73,572 68,359 57,708 ---------------------------------------------- INCOME BEFORE INCOME TAXES 35,505 31,593 25,188 INCOME TAXES 12,565 10,776 9,509 ---------------------------------------------- NET INCOME $22,940 $ 20,817 $15,679 ---------------------------------------------- EARNINGS PER SHARE Basic $ 0.73 $ 0.65 $ 0.49 Diluted $ 0.72 $ 0.65 $ 0.48 ----------------------------------------------
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 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 allocated to ESOP participants - 164 - - 1,822 - 1,986 Purchase of treasury stock (1,604) - - - - (11,038) (11,038) Exercise of stock options 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 allocated to ESOP participants - 625 - - 1,822 - 2,447 Purchase of treasury stock (529) - - - - (4,386) (4,386) Exercise of stock options 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 Comprehensive income: Net income - - 22,940 - - - 22,940 Change in net unrealized gain (loss) on securities, net of taxes of $745 - - - (1,239) - - (1,239) ---------------------------------------------------------------------------------------- Comprehensive income - - 22,940 (1,239) - - 21,701 Issuance of common shares for RRP 2 23 - - (23) - Amortization of restricted common stock compensation - 280 - - 1,169 - 1,449 Forfeiture of restricted common stock (1) (7) - - 4 - (3) Shares allocated to ESOP participants - 1,019 - - 1,822 - 2,841 Purchase of treasury stock (1,302) - - - - (12,233) (12,233) Exercise of stock options 142 4 (96) - - 1,033 941 Dividends paid, $0.30 per share - - (9,429) - - - (9,429) ------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 2003 34,086 $ 139,526 $ 185,495 $ 1,124 $ (16,752) $(29,557) $ 279,836 ------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------------------- 2003 2002 2001 ------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $22,940 $ 20,817 $ 15,679 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,179 3,578 2,495 Net (gains) losses (12,441) (7,517) (5,895) Amortization of premiums and accretion of discounts 6,340 2,119 (2,095) Depreciation 3,544 2,948 2,223 FHLB stock dividends (855) (932) (1,078) Decrease in interest receivable 1,115 784 621 Decrease in interest payable (156) (1,951) (734) (Increase) decrease in other assets (6,010) 3,827 (4,620) Increase (decrease) in other liabilities 4,195 (7,758) 3,419 (Increase) decrease in trading securities (10,540) 3,292 (2,419) Amortization of restricted stock compensation 1,446 2,121 1,636 Decrease in margin accounts 421 6,170 12,382 Net principal disbursed on loans held for sale (427,426) (253,261) (34,453) Proceeds from sale of loans held for sale 454,499 231,712 140,279 ESOP compensation 2,841 2,447 1,986 ------------------------------------------------- Net cash from operating activities 43,092 8,396 129,426 ------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from principal repayments and maturities of: Securities available for sale 153,112 82,821 107,001 Securities held to maturity - 25,679 28,685 Proceeds from sale of: Securities available for sale 22,325 45,096 22,435 Securities held to maturity - 932 1,454 Loans 103,426 112,620 42,805 Premises and equipment - 27 - Real estate owned 1,820 1,379 839 Purchases of: Securities available for sale (170,458) (187,144) (42,890) Securities held to maturity - (999) (2,082) Bank owned life insurance (20,000) - - Net cash paid for acquisition - (13,729) (69,844) Net principal disbursed on loans (2,606) (48,590) (297,944) Loans purchased (211,370) (27,335) (11,036) Purchases of premises and equipment (4,025) (3,902) (2,769) ------------------------------------------------- Net cash from investing activities (127,776) (13,145) (223,346) ------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in NOW, savings and money market accounts 17,935 50,574 97,277 Net (decrease) increase in certificates of deposit (75,475) (63,816) 70,050 Net increase in advance payments by borrowers for taxes and insurance 4,725 1 319 Proceeds from FHLB advances and other long term debt 25,500 26,239 193,000 Repayment of FHLB advances and other long term debt (11,164) (70,051) (20,000) Net change in other borrowed funds 114,103 (19,488) (65,994) Dividends paid (9,429) (9,636) (9,790) Proceeds from exercise of stock options 941 365 7 Purchase of treasury stock (12,233) (4,386) (11,038) ------------------------------------------------- Net cash from financing activities 54,903 (90,198) 253,831 ------------------------------------------------- (Decrease) increase in cash and cash equivalents (29,781) (94,947) 159,911 Cash and cash equivalents, beginning of year 110,936 205,883 45,972 ------------------------------------------------- Cash and cash equivalents, end of year $81,155 $110,936 $205,883 -------------------------------------------------
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 bank, and Butler Wick Corp. (Butler Wick), an investment brokerage firm, conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking, thrift and brokerage industries. A summary of the more significant accounting policies follows. Nature of Operations United Community was incorporated under Ohio law in February 1998 by Home Savings in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. The business of Home Savings is providing consumer and business banking service to its market area in Ohio and western Pennsylvania. During 2003, Home Savings changed its charter to a state chartered savings bank. At the end of 2003, Home Savings was doing business through 35 full-service banking branches and 6 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 two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick has 13 office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations throughout Ohio and western Pennsylvania. Butler Wick's operations are reported in a separate operating segment, which is investment 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, carrying value of goodwill and core deposit intangible assets and status of contingencies are particularly subject to change. Securities Securities are classified as available for sale, 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. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. 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 deferred fees or costs and allowance for loan losses. 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. Subsequent recoveries, if any, are credited to the allowance. 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 Land is carried at cost. 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 39 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 to the extent that fair value is less than the capitalized amount for a grouping. Goodwill and Other Intangible Assets Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit intangible assets arising from whole bank acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives. Cash Surrender Value of Life Insurance Bank owned life insurance represents insurance on the lives of certain employees where Home Savings is the beneficiary. Bank owned life insurance provides a long-term asset to offset long-term benefit liabilities, while generating competitive investment yields. Bank owned life insurance is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings' policy cash value are tax deferred and death benefit proceeds received by Home Savings are tax-free. Long-term Assets Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Securitizations Some loans are transferred from time to time to a third party in exchange for ownership of a security based on those loans. Such transfers are recorded as a sale when control has been relinquished, with a gain or loss recorded on the sale. The gain or loss is calculated based on the cash received versus the carrying value of the assets transferred. If some interests, such as servicing assets and cash reserve accounts, are retained, the carrying value of all assets sold and retained is allocated to each asset based on fair value at sale date. Fair values are based on market quotes or on the present value of future expected cash flows using estimates of credit losses, prepayment rates, interest rates, and discount rates. Loan Fees Loan origination fees received for loans, net of direct origination costs, are deferred and amortized to interest income over the contractual lives of the loans using the level yield method. Fees received for loan commitments that are expected to be drawn, based on Home Savings' experience with similar commitments, are deferred and amortized over the lives of the loans using the level yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. Unamortized deferred loan fees or costs related to loans paid off are included in income. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses. Amortization of net deferred fees is discontinued for loans that are deemed to be nonperforming. Stock Compensation Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of 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.
2003 2002 2001 --------------------------------------------- (In thousands) Net income as reported $22,940 $ 20,817 $ 15,679 Deduct: Stock-based compensation expense determined under fair value method 2,165 1,411 1,011 --------------------------------------------- Pro Forma net income 20,775 19,406 14,668 --------------------------------------------- Basic earnings per share as reported 0.73 0.65 0.49 Pro Forma basic earnings per share 0.66 0.61 0.46 Diluted earnings per share as reported 0.72 0.65 0.48 Pro forma diluted earnings per share 0.65 0.61 0.45 ---------------------------------------------
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
2003 2002 2001 ----------------------- Dividend yield 3.34% 4.00% 4.59% Expected stock price volatility 48.31% 38.31% 33.63% Risk-free interest rate 3.98% 5.01% 5.08% Expected option life (In years) 10 10 10 -----------------------
Income Taxes Deferred income taxes, which result from temporary differences in the recognition of income and expense for financial statement and tax return purposes, are included in the calculation of income tax expense. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets and liabilities are recorded for differences between 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. Unearned ESOP shares are not considered outstanding for this calculation. See further discussion at Note 22. 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. See further discussion at Note 13. 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 18. 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. 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 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 transactions can be directly impacted by volatile trading markets, which may impair the customer's ability to satisfy its obligations to Butler Wick. Off Balance Sheet Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. New Accounting Standards Adoption of New Accounting Standards: During 2003, the Company adopted FASB Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, FASB Statement 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest Entities. Adoption of the new standards did not materially affect the Company's operating results or financial condition. Operating Segments Internal financial information is primarily reported and aggregated in two lines of business, retail banking and broker/dealer investment advisory services. Dividend Restriction Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders. These restrictions currently pose no practical limit on the ability of the bank or holding company to pay dividends at historical levels. Reclassifications Some items in the prior year financial statements were reclassified to conform to the current presentation. 2. SUBSEQUENT EVENT On January 28, 2004, United Community offered to purchase up to 4 million shares, or approximately 11.7% of its outstanding shares, from shareholders at a price of $12.50 per share. The offer expires on March 1, 2004. This transaction is expected to result in a decrease in cash and cash equivalents of approximately $43 million, an increase in borrowings of approximately $4.2 million and a decrease in shareholders' equity of approximately $47.2 million, assuming all 4 million shares are repurchased. 3. ACQUISITIONS On April 1, 2002, United Community acquired all of the capital stock of Potters Financial Corporation, the holding company for Potters Bank, an Ohio-chartered state savings bank. Potters Bank was merged into Home Savings. The assets acquired consisted principally of loans and securities. United Community accounted for the acquisition as a purchase and has included Potters' results of operations from the effective date of the acquisition in its 2002 financial statements. Based on Potters 991,546 outstanding shares, the acquisition was valued at $23.6 million, which was paid in cash. The excess of the aggregate purchase price over the fair market value of net identifiable assets acquired, or goodwill, was approximately $11.7 million. In accordance with SFAS No. 142, goodwill is not amortized, but instead is evaluated for impairment. The core deposit intangible 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. 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 identifiable 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. 4. 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 $11.4 million and $14.7 million at December 31, 2003 and 2002. 5. SECURITIES The components of securities are as follows:
December 31, 2003 December 31, 2002 --------------------------------------------------------------------------- Gross Gross Gross Gross Fair Unrealized Unrealized Fair Unrealized Unrealized Value Gains Losses Value Gains Losses --------------------------------------------------------------------------- (In thousands) Available for Sale U.S. Treasury and agency securities $ 58,748 $ 199 $ (24) $ 52,967 $ 495 $ - Corporate notes 5,062 38 - 17,592 253 - Tax exempt municipals 10 2 - 13 2 - Equity securities 8,930 1,453 (902) 7,994 526 (384) Mortgage-related securities 154,775 1,158 (273) 158,702 2,789 (46) --------------------------------------------------------------------------- Total $ 227,525 $ 2,850 $ (1,199) $237,268 $4,065 $ (430) ---------------------------------------------------------------------------
The weighted average interest rate on marketable securities was 4.65% and 3.47% at December 31, 2003 and 2002, 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, 2003 ------------------ Fair Value ------------------ (In thousands) Due in one year or less $ 33,866 Due after one year through five years 29,954 Mortgage related securities 154,775 ------------------ Total $218,595 ------------------
Equity securities do not have a contractual maturity. During the fourth quarter of 2002, United 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:
2003 2002 2001 -------------------------------------------- (In thousands) Proceeds $22,325 $45,096 $22,435 Gross gains 847 2,127 442 Gross losses 8 - 50 --------------------------------------------
Securities pledged for public funds deposits were approximately $12.9 million and $35.3 million at December 31, 2003 and 2002, respectively. See further discussion regarding pledged securities in Note 12. United Community's trading securities consist of commercial paper, government obligations and an investment in mutual funds for the Butler Wick Retention Plan. Investments in an unrealized loss position are as follows at December 31, 2003:
Less than 12 months 12 months or more Total ----------------------------------------------------------------------------- Unrealized Unrealized Unrealized Fair value loss Fair value loss Fair value loss ----------------------------------------------------------------------------- (In thousands) Description of securities: US Treasury obligations and direct obligations of US government agencies $ 3,525 $ (24) $ - $ - $ 3,525 $ (24) Corporate notes - - - - - - Tax exempt municipals - - - - - - Mortgage related securities 35,678 (263) 223 (10) 35,901 (273) ----------------------------------------------------------------------------- Subtotal, debt securities 39,203 (287) 223 (10) 39,426 (297) Equity securities - - 4,098 (902) 4,098 (902) ----------------------------------------------------------------------------- Total temporarily impaired securities $ 39,203 $ (287) $ 4,321 $ (912) $ 43,524 $ (1,199) -----------------------------------------------------------------------------
The securities that have been impaired less than twelve months include three U.S. treasury and agency positions along with seven mortgage related securities. These securities have unrealized losses due to the current level of interest rates. Securities that have been impaired for a period greater than twelve months include two mortgage related securities and one position in FNMA preferred stock. The two mortgage related securities were originated in the late eighties, have low coupons and have relatively small balances. These factors make the securities fairly liquid. The securities continue to pay down and management expects to receive all principal owed on the securities. The FNMA preferred security is a floating rate security which resets every two years based on the two-year treasury. At the time of purchase in August of 2000, the yield curve was inverted. Since that time, the yield curve has become very steep and the attractiveness of this security has fallen. Management expects the value of the security to improve as rates rise and the yield curve begins to flatten. 6. LOANS Loans consist of the following:
December 31, ---------------------------------- 2003 2002 ---------------------------------- (In thousands) Real Estate: Permanent: One- to four-family $ 602,480 $ 889,199 Multifamily 149,547 79,760 Nonresidential 309,467 236,581 Land 14,511 5,812 Construction: One- to four-family 358,890 122,234 Multifamily and non residential 46,165 35,600 ---------------------------------- Total real estate 1,481,060 1,369,186 Consumer 218,763 155,520 Commercial 66,835 58,639 ---------------------------------- Total loans 1,766,658 1,583,345 ---------------------------------- Less: Loans in process 173,436 85,340 Allowance for loan losses 15,111 15,099 Deferred loan fees (expenses), net 1,617 4,693 ---------------------------------- Total 190,164 105,132 ---------------------------------- Loans, net $ 1,576,494 $ 1,478,213 ----------------------------------
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, 2003, there were outstanding commitments to originate $10.3 million of fixed-rate mortgage loans and other loans (with interest rates that ranged from 4.39% to 13.50%), $13.8 million of adjustable-rate loans, and $450,000 of commercial loans. 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, 2003, there were also outstanding unfunded consumer lines of credit of $77.1 million, which are adjustable-rate based on the prime interest rate, and commercial lines of credit of $155.2 million, which are adjustable-rate based on the prime lending index. At December 31, 2002, there were outstanding unfunded consumer lines of credit of $67.2 million, which were adjustable-rate based on the one year U.S. Treasury index, and commercial lines of credit of $63.2 million, which were 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, 2003 and 2002, there were $7.6 million and $8.7 million, respectively, 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, ---------------------------------------------------- 2003 2002 2001 ---------------------------------------------------- (In thousands) Balance, beginning of year $ 15,099 $11,480 $ 6,553 Acquired from Industrial Bancorp - - 2,795 Acquired from Potters Financial Corp. - 1,869 - Provision for loan losses 3,179 3,578 2,495 Amounts charged off (3,340) (1,967) (395) Recoveries 173 139 32 ---------------------------------------------------- Balance, end of year $ 15,111 $15,099 $ 11,480 ----------------------------------------------------
Nonaccrual loans (loans 90 days past due) were $13.0 million, $14.4 million and $10.9 million at December 31, 2003, 2002 and 2001. Restructured loans were $1.9 million, $1.3 million and $1.6 million at December 31, 2003, 2002 and 2001.
As of or for the year ended December 31, 2003 2002 2001 ----------------------------------------------- (In thousands) Impaired loans on which no specific valuation allowance was provided $4,366 $2,365 $1,718 Impaired loans on which specific valuation allowance was provided 1,514 4,032 1,169 ----------------------------------------------- Total impaired loans at year-end 5,880 6,397 2,887 Specific valuation allowances on impaired loans at year-end 277 2,122 751 Average impaired loans during year 6,628 5,652 1,953 Interest income recognized on impaired loans during the year 145 177 163 Interest income received on impaired loans during the year 288 128 145 Interest income potential based on original contract terms of impaired loans 539 502 190 -----------------------------------------------
Nonaccrual, restructured and impaired loans are defined differently. Some loans may be included in all three categories, whereas other loans may only be included in one or two of the categories. Directors and officers of United Community, Home Savings and Butler Wick are customers of Home Savings in the ordinary course of business. The following describes loans to officers or directors of United Community, Home Savings and Butler Wick:
(In thousands) -------------- Balance as of December 31, 2002 $ 1,475 New loans to officers and directors 603 Loan payments during 2003 (634) Reductions due to changes in board or officer memberships (117) -------- Balance as of December 31, 2003 $ 1,327 --------
7. MORTGAGE BANKING ACTIVITIES Mortgage loans serviced for others, which are not reported in United Community's assets, totaled $633.2 million and $386.4 million at December 31, 2003 and 2002. Activity for capitalized mortgage servicing rights, included in other assets, was as follows:
2003 2002 2001 --------------------------------------- (In thousands) Balance, beginning of year $3,603 $ 1,627 $ 1,322 Additions 4,448 2,979 509 Amortized to expense (2,494) (1,003) (204) --------------------------------------- Balance, end of year $5,557 $ 3,603 $ 1,627 ---------------------------------------
Activity in the valuation allowance for mortgage servicing rights was as follows:
2003 2002 2001 ------------------------------------ (In thousands) Balance, beginning of year $ - $ (22) $ - Additions (415) (100) (22) Recoveries 339 122 - ------------------------------------ Balance, end of year $(76) $ - $ (22) ------------------------------------
8. SECURITIZATIONS Home Savings sold $90.4 million and $107.9 million in residential mortgage loans in securitization transactions in 2003 and 2002, respectively. The securities received in these transactions were then immediately sold. Gains of $4.2 million and $4.6 million were recorded on the sales. Home Savings retained servicing responsibilities for the loans, for which it receives servicing fees approximating 0.40% and 0.26%, respectively, of the outstanding balance of the loans. For the loans securitized in 2003 and 2002, approximately $30.5 million and $33.9 million, respectively, of the loans had loan to value ratios greater than 80% and did not have sufficient mortgage insurance coverage on the delivery date. These loans were sold with recourse to Home Savings. This recourse obligation will terminate for each loan on June 30, 2005 and June 30, 2004, respectively, provided that on those dates, the applicable loan is not thirty days or more delinquent. If this criteria is not met, the recourse agreement on that loan will continue until such time as the loan becomes and remains current for a period of twelve consecutive scheduled monthly payments from the date of the last delinquency. Home Savings reduced the recorded gain from the securitizations by the fair value of the recourse obligations. As of December 31, 2003, approximately $23.6 million and $12.3 million, respectively, of these loans were still covered by the recourse obligations. Home Savings also services loans from a securitization prior to 2002. Some of these loans are covered by recourse and/or indemnification provisions specific to that sale. At December 31, 2003, approximately $257,000 in loans are covered by a recourse agreement, approximately $19.0 million in loans are covered by an indemnification agreement, and approximately $92,000 in loans are covered by both recourse and indemnification agreements. Cash flows from all securitizations of mortgage loans were as follows:
2003 2002 ------------------------------------ (In thousands) Securitization proceeds $93,983 $108,895 Servicing fees received 418 356
An analysis of the activity in securitizations serviced by Home Savings during 2003 and 2002 follows:
December 31, 2003 2002 --------------------------------------- (In thousands) Balance at beginning of year: Principal balance of loans $156,995 $102,487 Amortized cost of servicing rights 1,350 929 Servicing rights as a % of principal 0.86% 0.91% New securitizations during the year: Principal balance of loans 90,413 107,897 Fair value of servicing rights 741 1,215 Servicing rights as a % of principal 0.82% 1.13% Principal payments received on loans securitized (118,647) (53,389) Balance at end of year: Principal balance of loans 128,761 156,995 Amortized cost of servicing rights 1,005 1,350 Servicing rights as a % of principal 0.78% 0.86% ---------------------------------------
In the securitization transactions, Home Savings retained residual interests in the form of servicing assets. The servicing assets represent the allocated value of retained servicing rights on the loans securitized.
December 31, 2003 2002 -------------------------------------- Other information at end of period Weighted average rate of loans 6.73% 6.99% Weighted average maturity of loans in months 284 290 Principal balance of loans 30 days or more past due (in thousands) $546 $243 Fair value assumptions Discount rate 8.00% 8.00% Weighted average prepayment assumptions 364 PSA 249 PSA
The following table indicates how the fair value of the servicing rights might decline if the assumptions change unfavorably in two different magnitudes:
December 31, ------------------------------------------- 2003 2002 ------------------------------------------- (In thousands) Fair value at end of year $1,362 $1,427 Weighted average life (in months) 69 74 Projected fair value based on: Increase in PSA of 50 1,251 1,307 Increase in PSA of 100 1,157 1,208
The effect of adverse changes is hypothetical and should not be extrapolated to other changes, as the effects are not linear. 9. PREMISES AND EQUIPMENT Premises and equipment consist of the following:
December 31, ------------------------------------------------------------- Estimated life 2003 2002 ------------------------------------------------------------- (In thousands) Land and improvements $ 6,188 $ 4,898 Buildings up to 39 years 16,483 14,590 Leasehold improvements 10 years 1,110 1,106 Furniture and equipment 3-5 years 15,833 14,557 ------------------------------------------------------------- 39,614 35,151 Less: Accumulated depreciation and amortization 19,104 15,149 ------------------------------------------------------------- Total $ 20,510 $20,002 -------------------------------------------------------------
Rent expense was $1.0 million for 2003, $924,000 for 2002 and $937,000 for 2001. Rent commitments under noncancelable operating leases for offices were as follows, before considering renewal options that generally are present:
(In thousands) -------------- 2004 $ 1,128 2005 1,090 2006 868 2007 692 2008 585 Thereafter 555 ------- Total $ 4,918 -------
10. GOODWILL AND INTANGIBLE ASSETS Goodwill The change in the carrying amount of goodwill for the year is as follows:
(In thousands) -------------- Balance as of December 31, 2001 $19,664 Goodwill acquired during the period 13,929 ------- Balance as of December 31, 2002 $33,593 Goodwill acquired during period - ------- Balance as of December 31, 2003 $33,593 -------
Acquired Intangible Assets
As of December 31, 2003 2002 ---------------------------------------------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ---------------------------------------------------------------------- (In thousands) Amortized intangible assets: Core deposit intangibles $ 8,952 $ 5,165 $ 8,952 $ 3,851 ---------------------------------------------------------------------- Total $ 8,952 $ 5,165 $ 8,952 $ 3,851 ---------------------------------------------------------------------- Estimated amortization expense: For the year ended: December 31, 2004 $ 899 December 31, 2005 666 December 31, 2006 512 December 31, 2007 400 December 31, 2008 313
Aggregate amortization expense for the years ended December 31, 2003, 2002 and 2001 were $1.3 million, $2.2 million and $1.7 million, respectively. 11. DEPOSITS Deposits consist of the following:
December 31, ------------------------------- 2003 2002 ------------------------------- (In thousands) Checking accounts: Interest-bearing $ 115,724 $ 110,657 Noninterest-bearing 63,442 56,452 Savings accounts 312,210 302,276 Money market accounts 190,117 194,173 Certificates of deposit 742,205 818,343 ------------------------------- Total deposits $ 1,423,698 $ 1,481,901 -------------------------------
Interest expense on deposits is summarized as follows:
Year Ended December 31, ---------------------------------------------------- 2003 2002 2001 ------- ------------- ------- (In thousands) Interest-bearing demand deposits $ 3,113 $ 5,319 $ 5,446 Savings accounts 2,347 4,946 5,212 Certificates of deposit 25,440 34,668 37,353 ------- ------- ------- Total $30,900 $44,933 $48,011 ------- ------- -------
A summary of certificates of deposit by maturity follows:
December 31, 2003 ----------------- (In thousands) Within 12 months $342,394 12 months to 24 months 171,404 24 months to 36 months 39,592 36 months to 48 months 89,714 48 months to 60 months 79,368 Over 60 months 19,733 -------- Total $742,205 --------
A summary of certificates of deposit with balances of $100,000 or more by maturity is as follows:
December 31, 2003 December 31, 2002 ------------------------------------------------ (In thousands) Three months or less $ 29,027 $ 36,778 Over three months to six months 11,986 34,551 Over six months to twelve months 23,711 30,642 Over twelve months 83,686 65,748 -------- --------- Total $148,410 $ 167,719 -------- ---------
Deposits in excess of $100,000 are not federally insured. Home Savings did not have brokered deposits for the years ended December 31, 2003 and 2002. 12. OTHER BORROWED FUNDS The following is a summary of short-term borrowings:
December 31, ------------------------------------------------------------------ 2003 2002 ------------------------------------------------------------------ (In thousands) Weighted Weighted Amount average rate Amount average rate -------- ------------ ------- ------------ Variable interest revolving line of $ 19,295 0.96% $11,221 1.05% credit Securities sold under repurchase 19,394 1.22% 14,614 1.56% agreement Transaction loans; 30 year 1,196 7.42% 1,217 7.43% amortization; 15 year balloon Overnight FHLB advances 101,250 1.03% - -% -------- ------- Total short-term borrowings $141,135 $27,052 -------- -------
The following is a summary of term FHLB borrowings:
December 31, December 31, 2003 2002 --------------------------------------------------------------------- (In thousands) Weighted Weighted Year of Maturity Amount average rate Amount average rate - ---------------------------------------------------------------------------------------------------------------- 2003 $ - -% $ 10,893 4.44% 2004 18,000 4.83 18,742 4.73% 2005 19,000 5.01 18,615 5.14% 2006 122,000 4.60 118,509 4.66% 2007 15,500 3.64 14,421 3.75% 2008 1,500 2.93 - -% Thereafter 21,328 3.83 1,792 3.70% --------- --------- Total $ 197,328 $ 182,972 --------- --------- Total term borrowings $ 338,463 $ 210,024 --------- ---------
Home Savings has available credit, subject to collateral requirements, with the FHLB of $434.2 million, of which $298.6 million was used at December 31, 2003. All advances from the FHLB of Cincinnati are secured by a blanket mortgage collateral agreement for 125% of outstanding advances, amounting to $373.2 million at December 31, 2003. Butler Wick has a revolving line of credit, which is fully collateralized by securities valued at $24.0 million and $6.6 million at December 31, 2003 and 2002. Securities worth $27.4 million are being held at the Federal Reserve Bank as collateral for a repurchase agreement as of December 31, 2003. 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. 13. LOSS CONTINGENCY In September 2003, an arbitration proceeding was initiated against Butler Wick and a broker employed by Butler Wick asserting certain claims. The claimants seek compensatory damages of $6.9 million, interest of 10% per annum; litigation costs, including attorneys' fees, and punitive damages of at least $7.0 million in connection with alleged losses experienced in their securities brokerage account. Butler Wick and the broker responded in November 2003 by filing a Statement of Answer in which they denied the claims. The parties have not selected an arbitration panel, scheduled a hearing date, or exchanged documents. Butler Wick intends to vigorously defend the claims. It is not possible to make a reasonable estimate of financial exposure, if any, at this time, and no loss accruals have been recorded in connection with this matter. 14. INCOME TAXES The provision for income taxes consists of the following components:
Year ended December 31, ---------------------------------------------------- 2003 2002 2001 ---------------------------------------------------- (In thousands) Current $12,926 $11,986 $7,374 Deferred (361) (1,210) 2,135 ------- ------- ------ Total $12,565 $10,776 $9,509 ------- ------- ------
A reconciliation from tax at the statutory rate to the income tax provision is as follows:
Year ended December 31, ---------------------------------------------------------------------------- 2003 2002 2001 Dollars Rate Dollars Rate Dollars Rate ---------------------------------------------------------------------------- (In thousands) Tax at statutory rate $ 12,427 35.0% $11,057 35.0% $8,816 35.0% Increase (decrease) due to: Intangible amortization - - - - 585 2.3 Change in valuation allowance - - (400) (1.3) - - State taxes (40) (0.1) (11) (-) (29) (0.1) Other 178 0.5 130 0.4 137 0.6 -------- ---- ------- ---- ------ ---- Income tax provision $ 12,565 35.4% $10,776 34.1% $9,509 37.8% -------- ---- ------- ---- ------ ----
Significant components of the deferred tax assets and liabilities are as follows:
December 31, -------------------------- 2003 2002 -------------------------- (In thousands) Deferred tax assets: Charitable contribution $ - $ 394 Loan loss reserves 5,289 5,293 Postretirement benefits 1,464 1,023 Deferred loan fees 563 1,093 ESOP shares released 1,162 1,026 Compensation accruals 1,347 721 Other 678 1,206 --------- --------- Deferred tax assets 10,503 10,756 --------- --------- Deferred tax liabilities: Purchase accounting adjustments 2,140 2,841 Original issue discount 1,388 2,082 FHLB stock dividends 5,126 4,827 Unrealized gain on securities available for sale 606 1,272 Loan servicing 1,919 1,261 Other 340 516 --------- --------- Deferred tax liabilities 11,519 12,799 --------- --------- Net deferred tax liability $ (1,016) $ (2,043) --------- ---------
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. 15. 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, 2003, United Community paid regular dividends in the amount of $9.4 million. While Home Savings' primary regulator is the FDIC, the OTS has regulations that impose certain restrictions on payments of dividends to United Community. Home Savings must file an application with, and obtain approval from, the OTS (i) if the proposed distribution would cause total distributions for the calendar year to exceed net income for that year to date plus retained net income (as defined) for the preceding two years; (ii) if Home Savings would not be at least adequately capitalized following the capital distribution; (iii) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between Home Savings and the OTS or the FDIC, or any condition imposed on Home Savings in an OTS-approved application or notice. If Home Savings is not required to file an application, it must file a notice of the proposed capital distribution with the OTS. As of December 31, 2003, Home Savings had $4.4 million of retained earnings that could be distributed without requiring the prior approval of the OTS. Other Comprehensive Income Other comprehensive income included in the Consolidated Statements of Shareholders' Equity consists solely of unrealized gains and losses on available for sale securities. The change includes reclassification of gains or losses on sales of securities of $545,000, $1.3 million and $217,000 for the years ended December 31, 2003, 2002 and 2001. 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. 16. REGULATORY CAPITAL REQUIREMENTS Home Savings is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on United Community. The regulations require Home Savings to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of Home Savings' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Home Savings' capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Home Savings to maintain minimum amounts and ratios of Leverage (or Core) and Tangible capital (as defined in the regulations) to adjusted total assets (as defined) and of total capital (as defined) to risk-weighted assets (as defined). Actual and required capital amounts and ratios are presented below.
As of December 31, 2003 Minimum To Be Well Capitalized Capital Under Prompt Corrective Actual Requirements Action Provisions ----------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------------- (In thousands) Total capital (to risk-weighted assets) $172,271 10.56% $130,465 8.00% $163,081 10.00% Tier 1 capital (to risk-weighted assets) 157,160 9.64 * * 97,849 6.00 Leverage (Tier 1) capital (to adjusted total assets) 157,160 8.22 76,465 4.00 95,581 5.00 Tangible capital (to adjusted total assets) 157,160 8.22 28,674 1.50 * * ------- ---- ------- ---- -------- -----
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 Leverage (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 * * ------- ----- -------- ---- -------- -----
*Ratio is not required under regulations. As of December 31, 2003 and 2002, the FDIC and OTS, respectively 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 Leverage, 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, 2003, 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, 2003, Butler Wick had net capital of $8.2 million, which was 50% of aggregate debit balances and $7.9 million in excess of required minimum net capital. 17. BENEFIT PLANS 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. Information about changes in obligations of the benefit plan follows:
Year ended December 31, --------------------------------------- 2003 2002 --------------------------------------- Postretirement Plan --------------------------------------- (In thousands) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 3,686 $ 2,861 Service cost 6 19 Interest cost 226 256 Actuarial loss 288 787 Benefits paid (274) (237) -------- -------- Benefit obligation at end of the year $ 3,932 $ 3,686 -------- -------- Funded status of the plan $ (3,932) $ (3,686) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (34) (337) Prior service cost not yet recognized in net periodic benefit cost (6) (7) -------- -------- Accrued benefit cost $ (3,972) $ (4,030) -------- --------
Components of net periodic benefit cost/(gain) are as follows:
Year Ended December 31, ----------------------------------- 2003 2002 2001 ----------------------------------- Postretirement Plan ----------------------------------- (In thousands) Service cost $ 6 $ 19 $ 13 Interest cost 226 256 194 Expected return on plan assets - - - Net amortization of prior service cost (1) (1) (1) Recognized net actuarial gain (15) - (1,167) ---- ----- ------- Net periodic benefit cost/(gain) 216 274 (961) ---- ----- ------- Assumptions used in the valuations were as follows: Weighted average discount rate 6.00% 6.75% 7.25% ---- ----- -------
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 2003 valuation was 20% and was assumed to decrease to 5.5% for the year 2011 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trend rates would have the following effects as of December 31, 2003:
1 Percentage 1 Percentage Point Increase Point Decrease ------------------------------------- (In thousands) Effect on total of service and interest cost components $ 22 $ (19) Effect on the postretirement benefit obligation $378 $ (328) ---- ------
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 2003, 2002 and 2001, 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 2003, 2002 and 2001, the expense related to this plan was approximately $433,000, $396,000 and $308,000. 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 2003, 2002 and 2001, 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 2003, 2002 and 2001, the expense related to this plan was approximately $133,000, $132,000 and $126,000. 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 $2.8 million, $2.4 million and $2.1 million in compensation expense for the years ended December 31, 2003, 2002 and 2001, 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, 2003, 2002 and 2001 totaled 294,802, 294,802 and 294,802 and had a combined fair market value of $10.1 million. Shares remaining not released or committed to be released for allocation at December 31, 2003 totaled 2.7 million and had a market value of approximately $30.9 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 vested on the first anniversary date. In August 2003, United Community awarded 2,376 common shares to eligible individuals, all of which vested immediately upon grant. As of December 31, 2003, there are no shares available for future grants. The aggregate fair market value of the unvested RRP shares is considered unearned compensation at the time of grant and is amortized over the vesting period. Compensation expense recognized in 2003, 2002 and 2001 related to the RRP was $1.2 million, $1.9 million and $1.6 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 $1.6 million, $126,000 and $(73,000) for 2003, 2002 and 2001. 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, -------------------------------------------------------------------------------------- 2003 2002 2001 -------------------------------------------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price -------------------------------------------------------------------------------------- Outstanding at beginning of year 1,909,615 $7.01 1,307,496 $ 6.79 629,085 $6.97 Granted 742,654 8.97 715,710 7.40 771,390 6.66 Exercised (171,873) 7.08 (75,538) 6.84 (1,126) 6.66 Forfeited (11,774) 7.86 (38,053) 6.93 (91,853) 6.95 --------- ----- --------- ------ --------- ----- Outstanding at end of year 2,468,622 7.60 1,909,615 7.01 1,307,496 6.79 --------- ----- --------- ------ --------- ----- Options exercisable at year end 2,468,622 $7.60 1,909,615 $ 7.01 1,307,496 $6.79 --------- ----- --------- ------ --------- ----- Weighted-average fair value of options granted during year $3.65 $ 2.44 $1.83 ----- ------ -----
Outstanding stock options have a weighted average remaining life of 7.79 years and may be exercised on the range of $6.656 to $8.97. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by United Community using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that United Community could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, margin accounts, accrued interest receivable and payable and advance payments by borrowers for taxes and insurance -- The carrying amounts as reported in the Statements of Financial Condition are a reasonable estimate of fair value due to their short-term nature. Securities -- Fair values are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Loans -- 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 considered to be nominal. Limitations -- Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time United Community's entire holdings of a particular financial instrument. Because no market exists for a significant portion of United Community's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2003 and 2002. 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, 2003 December 31, 2002 ---------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------------------------------------------------------------------- (In thousands) ASSETS: Cash and cash equivalents $ 81,155 $ 81,155 $ 110,936 $ 110,936 Securities: Trading 15,600 15,600 5,060 5,060 Available for sale 227,525 227,525 237,268 237,268 Loans held for sale 37,715 37,824 45,825 46,828 Loans 1,576,494 1,603,241 1,478,213 1,510,558 Margin accounts 14,388 14,388 14,809 14,809 Federal Home Loan Bank stock 21,924 21,924 21,069 21,069 Accrued interest receivable 8,443 8,443 20,002 20,002 LIABILITIES: Deposits: Checking, savings and money market accounts (681,493) (681,493) (663,558) (663,558) Certificates of deposit (742,205) (758,894) (818,343) (835,753) Other borrowed funds (338,463) (344,703) (210,024) (220,029) Advance payments by borrowers for taxes and insurance (10,721) (10,721) (5,996) (5,996) Accrued interest payable (970) (970) (1,126) (1,126) ---------- ---------- ---------- ----------
19. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31, ---------------------------------------------------- 2003 2002 2001 ---------------------------------------------------- (In thousands) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest on deposits and borrowings, net of amounts capitalized $40,408 $ 56,093 $ 62,963 Interest capitalized on borrowings 21 - - Income taxes 14,570 11,878 7,471 Supplemental schedule of noncash activities: Loans transferred to held for sale 11,341 8,418 120,981 Transfers from loans to real estate owned 2,224 2,025 851 Securities held to maturity transferred to available for sale - 54,927 - ------- -------- --------
20. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, ------------------------------------------ 2003 2002 ------------------------------------------ (In thousands) ASSETS Cash and deposits with banks $ 1,082 $ 447 Federal funds sold and other 43,213 44,683 --------- --------- Total cash and cash equivalents 44,295 45,130 Securities: Trading 4,071 3,155 Available for sale 4,832 3,375 Note receivable 20,071 21,506 Accrued interest receivable 1 11 Investment in subsidiary-Home Savings 195,222 191,845 Investment in subsidiary-Butler Wick 15,388 13,960 Other assets 535 - --------- --------- TOTAL ASSETS $ 284,415 $ 278,982 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Accrued expenses and other liabilities $ 4,577 $ 4,413 --------- --------- Total liabilities 4,577 4,413 --------- --------- TOTAL SHAREHOLDERS' EQUITY 279,836 274,569 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 284,415 $ 278,982 --------- ---------
CONDENSED STATEMENTS OF INCOME
Year ended December 31, ----------------------------------------------------------- 2003 2002 2001 ----------------------------------------------------------- (In thousands) INCOME Cash dividends from subsidiary $ 22,000 $ 30,000 $ - Interest income 1,871 2,191 3,752 Noninterest income 873 (574) (862) -------- -------- -------- Total income 24,744 31,617 2,890 EXPENSES Interest expense - - 385 Noninterest expenses 984 988 986 -------- -------- -------- Total expenses 984 988 1,371 -------- -------- -------- Income before income taxes 23,760 30,629 1,519 Income taxes 692 238 602 -------- -------- -------- Income before equity in undistributed net earnings of subsidiaries 23,068 30,391 917 Equity in undistributed net earnings of subsidiaries (128) (9,574) 14,762 -------- -------- -------- Net income $ 22,940 $ 20,817 $ 15,679 -------- -------- --------
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, --------------------------------------------- 2003 2002 2001 --------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 22,940 $ 20,817 $ 15,679 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of the subsidiaries 128 9,574 (14,762) Amortization of premiums and accretion of discounts - 15 (1) Net gains - (76) (1) Decrease (increase) in interest receivable 10 (10) 370 (Increase) decrease in other assets (519) 4,333 (4,294) (Decrease) increase in other liabilities (1,764) 1,774 (789) (Increase) decrease in trading securities (916) 614 803 --------- -------- -------- Net cash from operating activities 19,879 37,041 (2,995) --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from principal repayments and maturities of: Securities available for sale - 3,708 37,665 Proceeds from sale of: Securities available for sale - 162 350 Purchases of: Securities available for sale (527) (4,357) (356) ESOP loan repayment 534 335 146 --------- -------- -------- Net cash from investing activities 7 (152) 37,805 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (9,429) (9,636) (9,790) Net decrease in borrowed funds - - (12,000) Purchase of treasury stock (12,233) (4,386) (11,038) Exercise of stock options 941 365 8 --------- -------- -------- Net cash from financing activities (20,721) (13,657) (32,820) --------- -------- -------- (Decrease) increase in cash and cash equivalents (835) 23,232 1,990 Cash and cash equivalents, beginning of year 45,130 21,898 19,908 --------- -------- -------- Cash and cash equivalents, end of year $ 44,295 $ 45,130 $ 21,898 --------- -------- --------
21. 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 broker dealer/investment advisory services. Retail banking provides consumer and business banking services. Broker dealer/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, 2003, 2002 and 2001 are as follows:
Broker/Dealer Investment ------------------------ Retail Banking Advisory Services Eliminations Total -------------- ----------------- ------------ ----- 2003 RESULTS OF OPERATIONS Total interest income $ 112,203 $ 1,153 $ (1,693) $ 111,663 Total interest expense 41,724 221 (1,693) 40,252 Net interest income after provision for loan loss 3,179 - - 3,179 Noninterest income 18,795 22,050 - 40,845 Noninterest expense 50,277 23,295 - 73,572 ---------- ------- ---------- ---------- Income before tax 35,818 (313) - 35,505 Income tax 12,675 (110) - 12,565 ---------- ------- ---------- ---------- Net income $ 23,143 $ (203) - $ 22,940 ---------- ------- ---------- ---------- SELECTED FINANCIAL INFORMATION Total assets $2,267,792 $37,958 $ (231,867) $2,073,883 Capital expenditures 3,714 311 - 4,025 Depreciation and amortization 3,049 495 - 3,544 ---------- ------- ---------- ---------- (In thousands) 2002 RESULTS OF OPERATIONS Total interest income $ 126,690 $ 1,073 $ (1,803) $ 125,960 Total interest expense 55,821 218 (1,803) 54,236 Net interest income after provision for loan loss 67,291 855 - 68,146 Noninterest income 12,442 19,364 - 31,806 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 ---------- ------- ---------- ----------
22. 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, 2003, 2002 and 2001.
2003 2002 2001 ----------------------------------------------------- (In thousands, except per share data) BASIC EARNINGS PER SHARE: - ------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $22,940 $20,817 $ 15,679 Weighted average common shares outstanding 31,353 31,859 32,176 ------- ------- -------- Basic earnings per share $ 0.73 $ 0.65 $ 0.49 ------- ------- -------- DILUTED EARNINGS PER SHARE: Net income applicable to common stock $22,940 $20,817 $ 15,679 Weighted average common shares outstanding 31,353 31,859 32,176 Dilutive effect of restricted stock - 130 154 Dilutive effect of stock options 431 336 35 ------- ------- -------- Weighted average common shares outstanding for dilutive computation 31,784 32,325 32,365 ------- ------- -------- Diluted earnings per share $ 0.72 $ 0.65 $ 0.48 ------- ------- --------
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 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) 2003: Total interest income $ 29,741 $ 28,304 $ 27,045 $ 26,573 $111,663 Total interest expense 11,232 10,177 9,515 9,328 40,252 -------- -------- -------- -------- -------- Net interest income 18,509 18,127 17,530 17,245 71,411 Provision for loan losses 696 1,702 571 210 3,179 Noninterest income 7,975 13,169 10,303 9,398 40,845 Noninterest expense 18,155 18,729 18,369 18,319 73,572 Income taxes 2,653 3,837 3,110 2,965 12,565 -------- -------- -------- -------- -------- Net income $ 4,980 $ 7,028 $ 5,783 $ 5,149 $ 22,940 -------- -------- -------- -------- -------- Earnings per share: Basic $ 0.16 $ 0.22 $ 0.18 $ 0.17 $ 0.73 Diluted 0.16 0.22 0.17 0.17 0.72 -------- -------- -------- -------- --------
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------------------------------------------------------- (In thousands, except per share data) 2002: Total interest income $ 31,126 $ 32,458 $ 31,548 $ 30,828 $125,960 Total interest expense 14,893 13,726 13,152 12,465 54,236 -------- -------- -------- -------- -------- Net interest income 16,233 18,732 18,396 18,363 71,724 Provision for loan losses 696 532 750 1,600 3,578 Noninterest income 7,895 8,512 6,496 8,903 31,806 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 -------- -------- -------- -------- --------
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, 2003 and 2002 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 2003. 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. 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, 2003 and 2002 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe Chizek and Company LLC ------------------------------------ Crowe Chizek and Company LLC Cleveland, Ohio January 28, 2004 EX-21 8 l06124aexv21.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 9 l06124aexv23.txt EXHIBIT 23 EXHIBIT 23 ---------- INDEPENDENT AUDITORS' CONSENT We consent to incorporation by reference in the registration statements (No. 333-38028, No. 333-86015, and 333-100081) on Form S-8 of United Community Financial Corp. of our report dated January 28, 2004, relating to the consolidated statements of financial condition of United Community Financial Corp. as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 2003, which report in incorporated by reference in the December 31, 2003 Annual Report on Form 10-K of United Community Financial Corp. /s/Crowe Chizek and Company LLC ------------------------------- Crowe Chizek and Company LLC Cleveland, Ohio March 9, 2004 EX-31.1 10 l06124aexv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Douglas M. McKay - -------------------- Douglas M. McKay Chief Executive Officer March 12, 2004 EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Patrick A. Kelly - -------------------- Patrick A. Kelly Chief Financial Officer March 12, 2004 EX-32 11 l06124aexv32.txt EXHIBIT 32 EXHIBIT 32 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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we 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 /s/ Patrick A. Kelly - -------------------- ----------------------- Douglas M. McKay Patrick A. Kelly Chief Executive Officer Chief Financial Officer March 12, 2004 March 12, 2004 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. -----END PRIVACY-ENHANCED MESSAGE-----