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