UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
| o | 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.
| 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
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
| PAGE | ||||||||
| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 - 11 | ||||||||
| 12-17 | ||||||||
| 18 | ||||||||
| 19 | ||||||||
| 20 | ||||||||
| 20 | ||||||||
Item 3. Defaults Upon Senior Securities (None) |
||||||||
Item 4. Submission of Matters to a Vote of Security Holders (None) |
||||||||
Item 5.Other Information (None) |
||||||||
| 20 | ||||||||
| 21 | ||||||||
Exhibits |
22-25 | |||||||
| EX-31.1 Section 302 Certification by Chief Executive | ||||||||
| EX-31.2 Section 302 Certification by Chief Financial | ||||||||
| EX-32 Certification of Statements by CEO & CFO | ||||||||
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED COMMUNITY FINANCIAL CORP.
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands, except per share data) | ||||||||
Assets: |
||||||||
Cash and deposits with banks |
$ | 38,730 | $ | 36,886 | ||||
Federal funds sold and other |
1,580 | 3,395 | ||||||
Total cash and cash equivalents |
40,310 | 40,281 | ||||||
Securities: |
||||||||
Trading, at fair value |
37,419 | 32,316 | ||||||
Available for sale, at fair value |
184,283 | 198,404 | ||||||
Loans, net of allowance for loan losses of $15,773 and $15,877, respectively |
1,918,864 | 1,815,976 | ||||||
Loans held for sale |
20,438 | 59,099 | ||||||
Margin accounts |
14,938 | 14,851 | ||||||
Federal Home Loan Bank stock, at cost |
23,096 | 22,842 | ||||||
Premises and equipment, net |
21,987 | 20,793 | ||||||
Accrued interest receivable |
10,241 | 9,445 | ||||||
Real estate owned and other repossessed assets |
2,980 | 1,682 | ||||||
Goodwill |
33,593 | 33,593 | ||||||
Core deposit intangible |
2,701 | 2,887 | ||||||
Cash surrender value of life insurance |
21,616 | 21,406 | ||||||
Other assets |
12,710 | 14,213 | ||||||
Total assets |
$ | 2,345,176 | $ | 2,287,788 | ||||
Liabilities and Shareholders’ Equity
|
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Interest bearing |
$ | 1,462,421 | $ | 1,437,987 | ||||
Non-interest bearing |
84,559 | 84,965 | ||||||
Total deposits |
1,546,980 | 1,522,952 | ||||||
Borrowed funds: |
||||||||
Short-term |
309,826 | 275,583 | ||||||
Long-term |
207,755 | 207,920 | ||||||
Total borrowed funds |
517,581 | 483,503 | ||||||
Advance payments by borrowers for taxes and insurance |
8,573 | 12,048 | ||||||
Accrued interest payable |
1,275 | 1,089 | ||||||
Accrued expenses and other liabilities |
17,855 | 15,844 | ||||||
Total liabilities |
2,092,264 | 2,035,436 | ||||||
Shareholders’ Equity |
||||||||
Preferred stock-no par value; 1,000,000 shares authorized and unissued
at March 31, 2005 |
— | — | ||||||
Common stock-no par value; 499,000,000 shares authorized; 37,804,457
shares issued |
142,675 | 142,337 | ||||||
Retained earnings |
196,064 | 193,690 | ||||||
Accumulated other comprehensive income |
(963 | ) | 1,063 | |||||
Unearned stock compensation |
(14,475 | ) | (14,930 | ) | ||||
Treasury stock, at cost, 6,654,951 and 6,602,477 shares, respectively |
(70,389 | ) | (69,808 | ) | ||||
Total shareholders’ equity |
252,912 | 252,352 | ||||||
Total liabilities and shareholders’ equity |
$ | 2,345,176 | $ | 2,287,788 | ||||
See Notes to Consolidated Financial Statements.
1
UNITED COMMUNITY FINANCIAL CORP.
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands, except per share data) | ||||||||
Interest income |
||||||||
Loans |
$ | 27,718 | $ | 24,341 | ||||
Loans held for sale |
508 | 224 | ||||||
Securities: |
||||||||
Trading |
246 | 105 | ||||||
Available for sale |
1,753 | 2,011 | ||||||
Margin accounts |
271 | 165 | ||||||
Federal Home Loan Bank stock dividends |
253 | 218 | ||||||
Other interest earning assets |
14 | 11 | ||||||
Total interest income |
30,763 | 27,075 | ||||||
Interest expense |
||||||||
Interest expense on deposits |
8,029 | 6,544 | ||||||
Interest expense on borrowed funds |
3,982 | 2,523 | ||||||
Total interest expense |
12,011 | 9,067 | ||||||
Net interest income |
18,752 | 18,008 | ||||||
Provision for loan losses |
633 | 459 | ||||||
Net interest income after provision for
loan losses |
18,119 | 17,549 | ||||||
Non-interest income |
||||||||
Brokerage commissions |
4,624 | 4,652 | ||||||
Service fees and other charges |
3,118 | 2,890 | ||||||
Underwriting and investment banking |
121 | 372 | ||||||
Net gains (losses): |
||||||||
Available for sale securities |
239 | 688 | ||||||
Trading securities |
(218 | ) | 149 | |||||
Loans sold |
248 | 901 | ||||||
Other |
5 | (9 | ) | |||||
Other income |
731 | 688 | ||||||
Total non-interest income |
8,868 | 10,331 | ||||||
Non-interest expense |
||||||||
Salaries and employee benefits |
12,612 | 12,665 | ||||||
Occupancy |
1,048 | 914 | ||||||
Equipment and data processing |
2,329 | 2,335 | ||||||
Franchise tax |
526 | 431 | ||||||
Advertising |
304 | 619 | ||||||
Amortization of core deposit intangible |
186 | 257 | ||||||
Other expenses |
2,652 | 2,293 | ||||||
Total non-interest expenses |
19,657 | 19,514 | ||||||
Income before income taxes |
7,330 | 8,366 | ||||||
Income taxes |
2,449 | 2,893 | ||||||
Net income |
$ | 4,881 | $ | 5,473 | ||||
Comprehensive income |
$ | 2,855 | $ | 5,988 | ||||
Earnings per share |
||||||||
Basic |
$ | 0.17 | $ | 0.18 | ||||
Diluted |
$ | 0.17 | $ | 0.18 | ||||
See Notes to Consolidated Financial Statements.
2
UNITED COMMUNITY FINANCIAL CORP.
| 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, 2004 |
31,202 | $ | 142,337 | $ | 193,690 | $ | 1,063 | $ | (14,930 | ) | $ | (69,808 | ) | $ | 252,352 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
4,881 | 4,881 | ||||||||||||||||||||||||||
Change in net unrealized gain/(loss) on
securities, net of taxes of $(1,091) |
(2,026 | ) | (2,026 | ) | ||||||||||||||||||||||||
Comprehensive income |
4,881 | (2,026 | ) | 2,855 | ||||||||||||||||||||||||
Shares allocated to ESOP participants |
338 | 455 | 793 | |||||||||||||||||||||||||
Purchase of treasury stock |
(91 | ) | (989 | ) | (989 | ) | ||||||||||||||||||||||
Exercise of stock options |
38 | (130 | ) | 408 | 278 | |||||||||||||||||||||||
Dividends paid, $0.0825 per share |
(2,377 | ) | (2,377 | ) | ||||||||||||||||||||||||
Balance March 31, 2005 |
31,149 | $ | 142,675 | $ | 196,064 | $ | (963 | ) | $ | (14,475 | ) | $ | (70,389 | ) | $ | 252,912 | ||||||||||||
See Notes to Consolidated Financial Statements.
3
UNITED COMMUNITY FINANCIAL CORP.
| Three Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands) | ||||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 4,881 | $ | 5,473 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Provision for loan losses |
633 | 459 | ||||||
Net gains |
(492 | ) | (1,580 | ) | ||||
Amortization of premiums and accretion of discounts |
992 | 1,294 | ||||||
Depreciation and amortization |
594 | 781 | ||||||
ESOP compensation |
793 | 896 | ||||||
FHLB stock dividends |
(253 | ) | (218 | ) | ||||
Increase in trading securities |
(5,103 | ) | (12,559 | ) | ||||
(Increase) decrease in margin accounts |
(87 | ) | 519 | |||||
Increase in interest receivable |
(796 | ) | (75 | ) | ||||
Decrease (increase) in prepaid and other assets |
935 | (5,049 | ) | |||||
Increase in interest payable |
186 | 39 | ||||||
Net principal disbursed on loans held for sale |
(37,220 | ) | (24,747 | ) | ||||
Proceeds from sale of loans held for sale |
39,061 | 42,572 | ||||||
Increase in other liabilities |
3,102 | 22,390 | ||||||
Net cash from operating activities |
7,226 | 30,195 | ||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from principal repayments and maturities of: |
||||||||
Securities available for sale |
18,100 | 7,018 | ||||||
Proceeds from sale of: |
||||||||
Securities available for sale |
17,328 | 42,597 | ||||||
Real estate owned and other repossessed assets |
633 | 539 | ||||||
Commercial loan participations |
— | 4,868 | ||||||
Non-performing loans |
5,953 | — | ||||||
Purchases of: |
||||||||
Securities available for sale |
(24,386 | ) | (1,200 | ) | ||||
Net principal disbursed on loans |
(18,039 | ) | (53,984 | ) | ||||
Loans purchased |
(56,568 | ) | (46,135 | ) | ||||
Purchases of premises and equipment |
(1,780 | ) | (1,137 | ) | ||||
Net cash from investing activities |
(58,759 | ) | (47,434 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Net (decrease) increase in NOW, savings and money market
accounts |
(30,425 | ) | 8,153 | |||||
Net increase (decrease) in certificates of deposit |
54,472 | (3,470 | ) | |||||
Net decrease in advance payments by borrowers
for taxes and insurance |
(3,475 | ) | (2,437 | ) | ||||
Repayment of FHLB advances and other long term debt |
(165 | ) | (165 | ) | ||||
Net change in other borrowed funds |
34,243 | 11,795 | ||||||
Dividends paid |
(2,377 | ) | (2,130 | ) | ||||
Proceeds from the exercise of stock options |
278 | 6,011 | ||||||
Purchase of treasury stock |
(989 | ) | (47,793 | ) | ||||
Net cash from financing activities |
51,562 | (30,036 | ) | |||||
Decrease in cash and cash equivalents |
29 | (47,275 | ) | |||||
Cash and cash equivalents, beginning of period |
40,281 | 81,155 | ||||||
Cash and cash equivalents, end of period |
$ | 40,310 | $ | 33,880 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest on deposits and borrowings, net of amounts capitalized |
$ | 11,824 | $ | 9,027 | ||||
Interest capitalized on borrowings |
10 | — | ||||||
Income taxes |
10 | 2,935 | ||||||
Supplemental schedule of noncash activities: |
||||||||
Loans transferred to the portfolio from held for sale |
37,075 | — | ||||||
Transfers from loans to real estate owned and other repossessed
assets |
1,927 | 698 | ||||||
See Notes to Consolidated Financial Statements.
4
UNITED COMMUNITY FINANCIAL CORP.
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. 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 14 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 three months ended March 31, 2005, are not necessarily indicative of the results to be expected for the year ending December 31, 2005. 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, 2004, contained in United Community’s Form 10-K for the year ended December 31, 2004.
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, “Accounting for Stock-Based Compensation,” 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.
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands, | ||||||||
| except per share data) | ||||||||
Net income as reported |
$ | 4,881 | $ | 5,473 | ||||
Deduct: Stock-based compensation expense
determined under fair value method |
— | 1,855 | ||||||
Pro Forma net income |
$ | 4,881 | $ | 3,618 | ||||
Basic earnings per share as reported |
$ | 0.17 | $ | 0.18 | ||||
Pro forma basic earnings per share |
$ | 0.17 | $ | 0.12 | ||||
Diluted earnings per share as reported |
$ | 0.17 | $ | 0.18 | ||||
Pro forma diluted earnings per share |
$ | 0.17 | $ | 0.12 | ||||
5
The pro forma effects are computed using option pricing models, employing the following weighted-average assumptions as of grant date:
| 2005 | 2004 | |||||||
Dividend yield |
n/a | 2.27 | % | |||||
Expected stock price volatility |
n/a | 22.73 | % | |||||
Risk-free interest rate |
n/a | 3.18 | % | |||||
Expected option life (In years) |
n/a | 7 | ||||||
3. SECURITIES
United Community categorizes securities as available for sale and trading. Components of the available for sale portfolio are as follows:
| March 31, 2005 | December 31, 2004 | |||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||
| Fair | Unrealized | Unrealized | Fair | Unrealized | Unrealized | |||||||||||||||||||
| Value | Gains | Losses | Value | Gains | Losses | |||||||||||||||||||
U.S. Treasury and agency
securities |
$ | 78,122 | $ | — | $ | (1,323 | ) | $ | 88,317 | $ | 7 | $ | (417 | ) | ||||||||||
Corporate notes |
7 | 1 | — | — | — | — | ||||||||||||||||||
Tax exempt municipal obligation |
— | — | — | 7 | 1 | — | ||||||||||||||||||
Equity securities |
6,858 | 1,059 | — | 7,169 | 1,459 | — | ||||||||||||||||||
Mortgage-related securities |
99,296 | 266 | (1,562 | ) | 102,911 | 869 | (364 | ) | ||||||||||||||||
Total |
$ | 184,283 | $ | 1,326 | $ | (2,885 | ) | $ | 198,404 | $ | 2,336 | $ | (781 | ) | ||||||||||
United Community’s trading securities are carried at fair value and consist of the following:
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands) | ||||||||
Debt Securities: |
||||||||
Obligations of U.S. government |
$ | 30,779 | $ | 28,587 | ||||
State and municipal obligations |
725 | 1,657 | ||||||
Corporate bonds, debentures and notes |
119 | 60 | ||||||
CMOs and mortgage backed securities |
3,820 | — | ||||||
Mutual funds |
1,976 | 2,012 | ||||||
Total trading securities |
$ | 37,419 | $ | 32,316 | ||||
6
4. LOANS
Portfolio loans consist of the following:
| March 31, 2005 |
December 31, 2004 |
|||||||
| (Dollars in thousands) | ||||||||
Real Estate: |
||||||||