UNITED COMMUNITY FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-24399

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


Ohio		34-1856319

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

275 Federal Plaza West Youngstown, Ohio		44503-1203
(Address of principal executive offices)		(Zip Code)

(330) 742-0500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

31,145,230 common shares as of April 30, 2004.

PART 1 — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	March 31,			December 31,
	2004			2003
	(unaudited)
	(In thousands)
Assets
Cash and deposits with banks	$	31,123		$	36,334
Federal funds sold and other		2,757			44,821

Total cash and cash equivalents		33,880			81,155

Securities:
Trading, at fair value		28,159			15,600
Available for sale, at fair value		190,179			227,525
Loans held for sale, net		20,771			37,715
Loans, net (including allowance for loan losses of $15,253 and $15,111, respectively)		1,670,314			1,576,494
Margin accounts		13,869			14,388
Federal Home Loan Bank stock		22,142			21,924
Premises and equipment		20,874			20,510
Accrued interest receivable		8,518			8,443
Real estate owned		1,449			1,299
Goodwill		33,593			33,593
Core deposit intangible		3,530			3,787
Cash surrender value of life insurance		20,735			20,496
Other assets		15,322			10,904

Total assets	$	2,083,335		$	2,073,833

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Interest bearing	$	1,358,779		$	1,360,256
Noninterest bearing		69,550			63,442
Borrowed funds:
Short-term		172,242			159,135
Long-term		177,850			179,328
Advance payments by borrowers for taxes and insurance		8,284			10,721
Accrued interest payable		1,009			970
Accrued expenses and other liabilities		52,812			20,145

Total liabilities		1,840,526			1,793,997

Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued at March 31, 2004		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 and 37,804,457 shares issued, respectively		140,076			139,526
Retained earnings		187,910			185,495
Other comprehensive income		1,639			1,124
Unearned stock compensation		(16,296	)		(16,752	)
Treasury stock, at cost, 6,670,900 and 3,718,542 shares, respectively		(70,520	)		(29,557	)

Total shareholders’ equity		242,809			279,836

Total liabilities and shareholders’ equity	$	2,083,335		$	2,073,833

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	For the Three Months Ended
	March 31,
	2004			2003
	(In thousands)
Interest income
Loans	$	24,341		$	25,914
Loans available for sale		224			496
Securities:
Trading		105			72
Available for sale		2,011			2,694
Margin accounts		165			171
FHLB stock dividend		218			208
Other interest-earning assets		11			186

Total interest income		27,075			29,741
Interest expense
Interest expense on deposits		6,544			9,029
Interest expense on other borrowed funds		2,523			2,203

Total interest expense		9,067			11,232

Net interest income		18,008			18,509
Provision for loan losses		459			696

Net interest income after provision for loan losses		17,549			17,813

Noninterest income
Brokerage commissions		4,652			3,175
Service fees and other charges		2,890			1,800
Underwriting and investment banking		372			118
Net gains (losses):
Securities		688			496
Loans sold		901			2,010
Trading securities		149			(148	)
Other		(9	)		(59	)
Other income		688			583

Total noninterest income		10,331			7,975

Noninterest expenses
Salaries and employee benefits		12,665			10,901
Occupancy		914			829
Equipment and data processing		2,335			2,344
Franchise tax		431			488
Advertising		619			587
Amortization of core deposit intangible		257			389
Other expenses		2,293			2,617

Total noninterest expenses		19,514			18,155

Income before income taxes		8,366			7,633
Income taxes		2,893			2,653

Net income	$	5,473		$	4,980

Comprehensive income	$	5,988		$	4,496
Earnings per share:
Basic	$	0.18		$	0.16
Diluted	$	0.18		$	0.16

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three Months Ended March 31,
	2004			2003
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	5,473		$	4,980
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		459			696
Net gains		(1,580	)		(2,447	)
Amortization of premiums and accretion of discounts		1,294			1,250
Depreciation		781			948
ESOP compensation		896			647
Amortization of restricted stock compensation		—			427
FHLB stock dividends		(218	)		(208	)
Increase in trading securities		(12,559	)		(14,878	)
Decrease in margin accounts		519			848
(Increase) decrease in interest receivable		(75	)		86
Increase in prepaid and other assets		(5,049	)		(1,906	)
Increase in interest payable		39			164
Net principal disbursed on loans held for sale		(24,747	)		(104,329	)
Proceeds from sale of loans held for sale		42,572			115,659
Increase in other liabilities		22,390			1,012

Net cash from operating activities		30,195			2,949

Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		7,018			42,720
Proceeds from sale of:
Securities available for sale		42,597			8,242
Real estate owned		539			18
Commercial loan participations		4,868			—
Purchases of:
Securities available for sale		(1,200	)		(104,859	)
Net principal (disbursed) repaid on loans		(53,984	)		36,095
Loans purchased		(46,135	)		(37,726	)
Purchases of premises and equipment		(1,137	)		(1,477	)

Net cash from investing activities		(47,434	)		(56,987	)

Cash Flows from Financing Activities
Net increase in NOW, savings and money market accounts		8,153			13,488
Net decrease in certificates of deposit		(3,470	)		(26,186	)
Net (decrease) increase in advance payments by borrowers for taxes and insurance		(2,437	)		1,855
Repayment of FHLB advances and other long term debt		(165	)		(48	)
Net change in other borrowed funds		11,795			18,325
Dividends paid		(2,130	)		(2,382	)
Proceeds from the exercise of stock options		4,410			335
Purchase of treasury stock		(46,192	)		(7,896	)

Net cash from financing activities		(30,036	)		(2,509	)

Decrease in cash and cash equivalents		(47,275	)		(56,547	)
Cash and cash equivalents, beginning of period		81,155			110,936

Cash and cash equivalents, end of period	$	33,880		$	54,389

Supplemental disclosures of cash flow information Cash paid during the period for:
Interest on deposits and borrowings	$	9,027		$	11,395
Income taxes		2,935			720
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned		698			317

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)


									Accumulated Other
	Shares			Common		Retained			Comprehensive		Unearned			Treasury
	Outstanding			Stock		Earnings			Income		Compensation			Stock			Total
									(In thousands, except per share data)
Balance December 31, 2003		34,086		$	139,526	$	185,495		$	1,124	$	(16,752	)	$	(29,557	)	$	279,836

Comprehensive income:
Net income							5,473											5,473
Change in net unrealized gain on securities, net of taxes of $277										515								515

Comprehensive income							5,473			515								5,988
Shares allocated to ESOP participants		—			441		—			—		456			—			897
Purchase of treasury stock		(3,667	)		—		—			—		—			(46,192	)		(46,192	)
Exercise of stock options		715			109		(928	)		—		—			5,229			4,410
Dividends paid, $0.075 per share		—			—		(2,130	)		—		—			—			(2,130	)

Balance March 31, 2004		31,134		$	140,076	$	187,910		$	1,639	$	(16,296	)	$	(70,520	)	$	242,809

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. 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 FASB Statement 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.


	For the Three Months
	Ended March 31,
	2004		2003
	(In thousands)
Net income as reported	$	5,473	$	4,980
Deduct: Stock-based compensation expense determined under fair value method		1,855		2,201

Pro Forma net income	$	3,618	$	2,779

Basic earnings per share as reported	$	0.18	$	0.16
Pro forma basic earnings per share	$	0.12	$	0.09
Diluted earnings per share as reported	$	0.18	$	0.16
Pro forma diluted earnings per share	$	0.12	$	0.09

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


	2004			2003
Dividend yield		2.27	%		3.34	%
Expected stock price volatility		22.73	%		48.31	%
Risk-free interest rate		3.18	%		3.98	%
Expected option life (In years)		7			10

2. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings & Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. Home Savings has 35 full service offices and six loan production offices throughout Ohio and western Pennsylvania. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick has thirteen office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations throughout Ohio and western Pennsylvania.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003, contained in United Community’s Form 10-K for the year ended December 31, 2003.

3. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported as assets, totaled $633.8 million at March 31, 2004.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows in 2004:


	(In thousands)
Balance, beginning of year	$	5,557
Additions		263
Amortized to expense		(393	)

Balance, end of period	$	5,427

Activity in the valuation allowance for mortgage servicing rights was as follows in 2004:


	(In thousands)
Balance, beginning of year	$	(76	)
Additions		—
Recoveries		76

Balance, end of period	$	—

4. SEGMENT INFORMATION

United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and corporate banking services. Investment advisory services provides investment brokerage and a network of integrated financial services. Condensed statements of income by operating segment for the three months ended March 31, 2004 and 2003 are as follows:

Three Months Ended March 31, 2004


	Retail Banking		Investment Advisory Services		Eliminations			Total
			(In thousands)
Interest income	$	27,183	$	287	$	(395	)	$	27,075
Interest expense		9,422		40		(395	)		9,067
Provision for loan loss		459		—		—			459

Net interest income after provision for loan loss		17,302		247		—			17,549
Non-interest income		3,604		6,727		—			10,331
Non-interest expense		12,935		6,579		—			19,514

Income before tax		7,971		395		—			8,366
Income tax expense		2,774		119		—			2,893

Net income	$	5,197	$	276	$	—		$	5,473


			PAGE
Part I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition as of March 31, 2004 (Unaudited)and December 31, 2003		1
		Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003 (Unaudited)		2
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited)		3
		Consolidated Statement of Shareholders' Equity as of March 31, 2004 (Unaudited)		4
		Notes to Consolidated Financial Statements		5-8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		9-14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		15
	Item 4.	Controls and Procedures		15
Part II.OTHER INFORMATION				16
Signatures				18
Exhibits				19-22
EX-31.1 302 CEO Cert
EX-31.2 302 CFO Cert
EX-32 906 Certifications

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