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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 September 30, 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   (IRS Employer
incorporation or organization)   Identification Number)
     
275 Federal Plaza West    
Youngstown, Ohio
   44503-1203
(Address of principal executive offices)   (Zip Code)

(330) 742-0500

(Registrant’s telephone number, including area code)

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

     
Yes [X]   No [ ]

Indicate 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.

31,190,325 common shares as of October 29, 2004.

 

TABLE OF CONTENTS

     
    PAGE
   
   
  1
  2
  3
  4
  5-11
  12-20
  21
  22
   
  23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (None)
    
Item 3. Defaults Upon Senior Securities (None)
    
Item 4. Submission of Matters to a Vote of Security Holders (None)
    
Item 5. Other Information (None)
    
  23
  24
Exhibits
  25-28
 EX-31.1 Section 302 Certification by Chief Executive Officer
 EX-31.2 Section 302 Certification by Chief Financial Officer
 EX-32 Certification of Statements by Chief Executive Officer and Chief Financial Officer

 

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PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
                 
    September 30,   December 31,
    2004
   2003
    (Dollars in thousands,
    except share data)
Assets:
                
Cash and deposits with banks
   $ 33,595     $ 36,334  
Federal funds sold and other
     1,586       44,821  
 
    
 		      
 		  
Total cash and cash equivalents
     35,181       81,155  
 
    
 		      
 		  
Securities:
                
Trading, at fair value
     28,827       15,600  
Available for sale, at fair value
     189,863       227,525  
Loans, net (including allowance for loan losses of $25,128 and $15,111, respectively)
     1,772,411       1,576,494  
Loans held for sale, net
     58,837       37,715  
Margin accounts
     14,055       14,388  
Federal Home Loan Bank stock, at cost
     22,601       21,924  
Premises and equipment, net
     20,668       20,510  
Accrued interest receivable
     9,456       8,443  
Real estate owned
     699       1,299  
Goodwill
     33,593       33,593  
Core deposit intangible
     3,087       3,787  
Cash surrender value of life insurance
     21,193       20,496  
Other assets
     13,787       10,904  
 
    
 		      
 		  
Total assets
   $ 2,224,258     $ 2,073,833  
 
    
 		      
 		  
Liabilities and Shareholders’ Equity
                
Liabilities:
                
Deposits:
                
Interest-bearing
   $ 1,429,373     $ 1,360,256  
Noninterest-bearing
     75,522       63,442  
Other borrowed funds:
                
Short-term
     265,325       159,135  
Long-term
     186,626       179,328  
Advance payments by borrowers for taxes and insurance
     6,525       10,721  
Accrued interest payable
     1,067       970  
Accrued expenses and other liabilities
     14,820       20,145  
 
    
 		      
 		  
Total liabilities
     1,979,258       1,793,997  
 
    
 		      
 		  
Shareholders’ Equity
                
Preferred stock-no par value; 1,000,000 shares authorized and unissued at September 30, 2004
     —       —  
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 and 37,804,457 shares issued, respectively
     140,928       139,526  
Retained earnings
     188,703       185,495  
Other comprehensive income
     821       1,124  
Unearned stock compensation
     (15,386 )     (16,752 )
Treasury stock, at cost, 6,627,870 and 3,718,542 shares, respectively
     (70,066 )     (29,557 )
 
    
 		      
 		  
Total shareholders’ equity
     245,000       279,836  
 
    
 		      
 		  
Total liabilities and shareholders’ equity
   $ 2,224,258     $ 2,073,833  
 
    
 		      
 		  

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
   September 30,
    2004
   2003
   2004
   2003
    (Dollars in thousands, except per share data)
Interest income
                                
Loans
   $ 26,411     $ 24,053     $ 76,025     $ 74,776  
Loans held for sale
     161       621       605       1,645  
Securities:
                                
Trading
     207       130       484       316  
Available for sale
     1,739       1,833       5,331       6,964  
Margin accounts
     218       171       556       513  
FHLB stock dividend
     239       217       677       637  
Other interest-earning assets
     11       20       32       240  
 
    
 		      
 		      
 		      
 		  
Total interest income
     28,986       27,045       83,710       85,091  
Interest expense
                                
Interest expense on deposits
     7,298       7,115       20,531       23,923  
Interest expense on other borrowed funds
     3,199       2,400       8,521       7,000  
 
    
 		      
 		      
 		      
 		  
Total interest expense
     10,497       9,515       29,052       30,923  
 
    
 		      
 		      
 		      
 		  
Net interest income
     18,489       17,530       54,658       54,168  
Provision for loan losses
     9,226       571       11,053       2,969  
 
    
 		      
 		      
 		      
 		  
Net interest income after provision for loan losses
     9,263       16,959       43,605       51,199  
 
    
 		      
 		      
 		      
 		  
Noninterest income
                                
Brokerage commissions
     4,001       3,923       12,548       11,012  
Service fees and other charges
     3,052       2,234       8,642       5,666  
Underwriting and investment banking
     229       720       802       1,025  
Net gains (losses):
                                
Available for sale securities
     16       —       1,089       496  
Trading securities
     (115 )     128       (52 )     437  
Loans sold
     807       2,449       2,496       10,888  
Other
     (25 )     —       (22 )     (45 )
Other income
     713       849       2,162       1,965  
 
    
 		      
 		      
 		      
 		  
Total noninterest income
     8,678       10,303       27,665       31,444  
 
    
 		      
 		      
 		      
 		  
Noninterest expense
                                
Salaries and employee benefits
     11,227       11,679       35,045       34,519  
Occupancy
     924       968       2,758       2,713  
Equipment and data processing
     2,276       2,401       6,811       7,219  
Franchise tax
     428       372       1,288       1,238  
Advertising
     225       556       1,444       1,755  
Amortization of core deposit intangible
     213       307       700       1,035  
Other expenses
     2,425       2,086       6,956       6,773  
 
    
 		      
 		      
 		      
 		  
Total noninterest expenses
     17,718       18,369       55,002       55,252  
 
    
 		      
 		      
 		      
 		  
Income before income taxes
     223       8,893       16,268       27,391  
Income taxes
     29       3,110       5,599       9,600  
 
    
 		      
 		      
 		      
 		  
Net income
   $ 194     $ 5,783     $ 10,669     $ 17,791  
 
    
 		      
 		      
 		      
 		  
Comprehensive income
   $ 1,918     $ 5,012     $ 10,366     $ 16,555  
Earnings per share
                                
Basic
   $ 0.01     $ 0.18     $ 0.36     $ 0.56  
Diluted
   $ 0.01     $ 0.17     $ 0.36     $ 0.55  

See Notes to Consolidated Financial Statements.

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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
                     10,669                               10,669  
Change in net unrealized gain on securities, net of taxes of $(163)
                             (303 )                     (303 )
 
                    
 		      
 		                      
 		  
Comprehensive income
                     10,669       (303 )                     10,366  
Shares allocated to ESOP participants
             1,293                       1,366               2,659  
Purchase of treasury stock
     (3,667 )                                     (46,192 )     (46,192 )
Exercise of stock options, net
     758       109       (1,064 )                     5,683       4,728  
Dividends paid, $0.225 per share
                     (6,397 )                             (6,397 )
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance September 30, 2004
     31,177     $ 140,928     $ 188,703     $ 821     $ (15,386 )   $ (70,066 )   $ 245,000  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Nine Months Ended September 30,
    2004
   2003
    (Dollars in thousands)
Cash Flows from Operating Activities
                
Net income
   $ 10,669     $ 17,791  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for loan losses
     11,053       2,969  
Net gains
     (3,563 )     (11,339 )
Amortization of premiums and accretion of discounts
     3,530       4,973  
Depreciation
     2,329       2,736  
ESOP compensation
     2,659       2,033  
Amortization of restricted stock compensation
     —       1,363  
FHLB stock dividends
     (677 )     (637 )
Increase in trading securities
     (13,227 )     (7,675 )
Decrease in margin accounts
     333       585  
(Increase) decrease in interest receivable
     (1,013 )     514  
(Increase) in prepaid and other assets
     (4,847 )     (6,502 )
Increase (decrease) in interest payable
     97       (27 )
Net principal disbursed on loans held for sale
     (105,647 )     (393,303 )
Proceeds from sale of loans held for sale
     126,163       403,478  
(Decrease) increase in other liabilities
     (5,163 )     3,539  
 
    
 		      
 		  
Net cash from operating activities
     22,696       20,498  
 
    
 		      
 		  
Cash Flows from Investing Activities
                
Proceeds from principal repayments and maturities of:
                
Securities available for sale
     40,664       125,687  
Proceeds from sale of:
                
Securities available for sale
     52,696       8,242  
Real estate owned
     2,002       1,262  
Commercial loan participations
     43,156       —  
Fixed assets
     1       —  
Purchases of:
                
Securities available for sale
     (56,231 )     (135,367 )
Bank owned life insurance
     —       (20,000 )
Net principal (disbursed) repaid on loans
     (152,384 )     116,153  
Loans purchased
     (138,855 )     (158,972 )
Purchases of premises and equipment
     (2,463 )     (2,467 )
 
    
 		      
 		  
Net cash from investing activities
     (211,414 )     (65,462 )
 
    
 		      
 		  
Cash Flows from Financing Activities
                
Net increase in NOW, savings and money market accounts
     10,357       7,238  
Net increase (decrease) in certificates of deposit
     70,956       (60,682 )
Net (decrease) increase in advance payments by borrowers for taxes and insurance
     (4,196 )     2,373  
Proceeds from FHLB advances and other long term debt
     35,000       22,500  
Repayment of FHLB advances and other long term debt
     (18,499 )     (10,269 )
Net change in other borrowed funds
     96,987       21,180  
Dividends paid
     (6,397 )     (7,098 )
Proceeds from the exercise of stock options
     4,728       698  
Purchase of treasury stock
     (46,192 )     (9,178 )
 
    
 		      
 		  
Net cash from financing activities
     142,744       (33,238 )
 
    
 		      
 		  
Decrease in cash and cash equivalents
     (45,974 )     (78,202 )
Cash and cash equivalents, beginning of period
     81,155       110,936  
 
    
 		      
 		  
Cash and cash equivalents, end of period
   $ 35,181     $ 32,734  
 
    
 		      
 		  
Supplemental disclosures of cash flow information
               
Cash paid during the period for:
                
Interest on deposits and borrowings
   $ 28,955     $ 30,950  
Interest capitalized on borrowings
     11       —  
Income taxes
     9,538       10,595  
Supplemental schedule of noncash activities:
                
Transfers from loans to loans held for sale
     39,479       —  
Transfers from loans to real estate owned
     1,426       853  

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings & Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. During 2003, Home Savings changed its charter to a state savings bank charter. Home Savings has 36 full service offices and five loan production offices throughout northern and central 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 15 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) that are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the nine months ended September 30, 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.

     2. 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 Nine Months
    Ended September 30,
    2004
   2003
    (Dollars in thousands,
    except per share data)
Net income as reported
   $ 10,669     $ 17,791  
Deduct: Stock-based compensation expense determined under fair value method
     1,855       2,196  
 
    
 		      
 		  
Pro Forma net income
   $ 8,814     $ 15,595  
 
    
 		      
 		  
Basic earnings per share as reported
   $ 0.36     $ 0.56  
Pro forma basic earnings per share
   $ 0.30     $ 0.49  
Diluted earnings per share as reported
   $ 0.36     $ 0.55  
Pro forma diluted earnings per share
   $ 0.30     $ 0.49  

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The pro forma effects are computed using option pricing models, employing 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  

     3. IMPAIRED LOANS

     Impaired loans consist of the following:

                 
    As of or For the   As of or For the
    Nine Months Ended   Twelve Months Ended
    September 30, 2004
   December 31, 2003
    (In thousands)
Impaired loans on which no specific valuation allowance was provided
   $ 4,568     $ 4,366  
Impaired loans on which specific valuation allowance was provided
     16,232       1,514  
 
    
 		      
 		  
Total impaired loans at period-end
   $ 20,800     $ 5,880  
 
    
 		      
 		  
Specific valuation allowances on impaired loans at period-end
   $ 8,924     $ 277  
Average impaired loans during year
   $ 9,549     $ 6,628  
Interest income recognized on impaired loans during the year
   $ 273     $ 145  
Interest income received on impaired loans during the year
   $ 196     $ 288  
Interest income potential based on original contract terms of impaired loans
   $ 383     $ 539  

     4. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported as assets, totaled $646.7 million at September 30, 2004 and $633.2 million at December 31, 2003.

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

                 
    September 30, 2004
   December 31, 2003
    (Dollars in thousands)
Balance, beginning of year
   $ 5,557     $ 3,603  
Additions
     1,081       4,448  
Amortized to expense
     (1,269 )     (2,494 )
 
    
 		      
 		  
Balance, end of period
   $ 5,369     $ 5,557  
 
    
 		      
 		  

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

                 
    September 30, 2004
   December 31, 2003
    (Dollars in thousands)
Balance, beginning of year
   $ (76 )   $ —  
Additions
     —       (415 )
Recoveries
     76       339  
 
    
 		      
 		  
Balance, end of period
   $ —     $ (76 )
 
    
 		      
 		  

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     5. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that was curtailed in 2000 to provide postretirement medical benefits for employees who had 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.

Components of net periodic benefit cost/(gain) are as follows: