-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pl+0+GZK2w58CCsWIY7da6wFpBSb3bUlzFR2BrHdmHlQSEdxNpNN5/dI+5Xe/bdM Zz2dXWNpQpgvx0FXmQruhQ== 0000912057-00-014325.txt : 20000411 0000912057-00-014325.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMMUNITY FINANCIAL CORP CENTRAL INDEX KEY: 0000707886 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 341856319 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24399 FILM NUMBER: 582478 BUSINESS ADDRESS: STREET 1: 275 FEDERAL PLAZA WEST CITY: YOUNGSTOWN STATE: OH ZIP: 44503-1203 BUSINESS PHONE: 3307420500 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________to___________________ Commission File Number: 0-024399 UNITED COMMUNITY FINANCIAL CORP. --------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1856319 ---------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 275 Federal Plaza West, Youngstown, Ohio 44503 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (330) 742-0500 ------------------ Securities registered pursuant to Section 12(b) of the Act: None None ------------------ --------------------------------------------- (Title of Class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common shares, no par value per share ----------------------------------------- (Title of Class) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes / X / No / / Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / X / The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last reported sale of March 24, 2000, was $223.9 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of March 6, 2000 there were 37,756,582 of the Registrant's Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-K - Portions of 1999 Annual Report to Shareholders Part III of Form 10-K - Portions of Proxy Statement for the 2000 Annual Meeting of Shareholders TABLE OF CONTENTS
Item Number Page - ------ ---- PART I 1. Description of Business General---------------------------------------------------------------------------------------1 Discussion of Forward-Looking Statements------------------------------------------------------1 Lending Activities----------------------------------------------------------------------------2 Investment Activities-------------------------------------------------------------------------12 Sources of Funds------------------------------------------------------------------------------16 Competition-----------------------------------------------------------------------------------19 Employees-------------------------------------------------------------------------------------19 Year 2000 Considerations----------------------------------------------------------------------19 Regulation------------------------------------------------------------------------------------19 2. Description of Property-------------------------------------------------------------------------21 3. Legal Proceedings-------------------------------------------------------------------------------22 4. Submission of Matters to a Vote of Security Holders---------------------------------------------22 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters---------------------------23 6. Selected Financial Data-------------------------------------------------------------------------23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-----------23 7A. Quantitative and Qualitative Disclosures About Market Risk--------------------------------------23 8. Financial Statements and Supplemental Data------------------------------------------------------23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure------------23 PART III 10. Directors and Executive Officers of the Registrant----------------------------------------------24 11. Executive Compensation--------------------------------------------------------------------------24 12. Security Ownership of Certain Beneficial Owners and Management----------------------------------24 13. Certain Relationships and Related Transactions--------------------------------------------------24 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K---------------------------------24 Signatures------------------------------------------------------------------------------------------------26 Exhibit Index---------------------------------------------------------------------------------------------27
PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL United Community Financial Corp. (United Community) was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) issued upon the conversion of Home Savings from a mutual savings association to a permanent capital stock savings association (Conversion). The Conversion was completed on July 8, 1998. On August 12, 1999, Butler Wick Corp. (Butler Wick) became a wholly-owned subsidiary of United Community. Home Savings was organized as a mutual savings association under Ohio law in 1889. As an Ohio savings association, Home Savings is subject to supervision and regulation by the Office of Thrift Supervision (OTS), the Ohio Department of Commerce, Division of Financial Institutions (Division) and the Federal Deposit Insurance Corporation (FDIC). Home Savings is a member of the Federal Home Loan Bank (FHLB) of Cincinnati and the deposits of Home Savings are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (SAIF). As a savings and loan holding company, United Community is subject to regulation, supervision and examination by the OTS, the Division and the Securities and Exchange Commission (SEC). United Community's primary activity is holding the common stock of Home Savings and Butler Wick. Consequently, the following discussion focuses primarily on the business of Home Savings and Butler Wick. Home Savings conducts business from its main office located in Youngstown, Ohio and 13 full-service branches, located in the Northern Ohio communities of Austintown, Boardman, Canfield, Columbiana, East Palestine, Liberty, Lisbon, Niles, Poland, Salem and Struthers. The principal business of Home Savings is the origination of mortgage loans on one- to four-family residential real estate located in Home Savings' primary market area, which consists of northern Columbiana County, Mahoning County and southern Trumbull County. Home Savings also originates loans secured by nonresidential real estate. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer loans, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans. For liquidity and interest rate risk management purposes, Home Savings invests in various financial instruments discussed in the investment section. Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC, principal repayments of loans and maturities of securities. Interest on loans and other investments is Home Savings' primary source of income. Home Savings' principal expense is interest paid on deposit accounts. Operating results are dependent to a significant degree on the net interest income of Home Savings, which is the difference between interest earned on loans and other investments and interest paid on deposits. Like most thrift institutions, Home Savings' interest income and interest expense are significantly affected by general economic conditions and by the policies of various regulatory authorities. Butler Wick is the parent company for three wholly-owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Butler Wick conducts business from its main office located in Youngstown, Ohio, seven offices located in the Northern Ohio communities of Alliance, Cleveland, Canfield, Kent, Warren, Canton, and Salem and two offices in the Western Pennsylvania communities of Franklin and Sharon. Butler Wick primarily sells common and preferred stocks, but also offers an array of government, corporate and municipal bonds, unit trusts, mutual funds, IRA's, money market accounts and certificates of deposit. Butler Wick also offers investments in precious metals and a full line of life insurance and annuity products, personal and corporate financial planning, estate planning, pension and profit sharing. DISCUSSION OF FORWARD-LOOKING STATEMENTS When used in this Form 10-K or in future filings by United Community with the Securities and Exchange Commission, in United Community's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and 1 uncertainties including changes in economic conditions in United Community's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings' market area, demand for investments in Butler Wick's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community's financial performance and could cause United Community's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. LENDING ACTIVITIES GENERAL. Home Savings' principal lending activity is the origination of conventional real estate loans secured by one- to four-family residences located in Home Savings' primary market area. Home Savings also originates loans secured by multifamily and nonresidential real estate and originates loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer credits, including home equity loans, education loans, loans secured by savings accounts, motor vehicles, boats and recreational vehicles and unsecured loans. 2 LOAN PORTFOLIO COMPOSITION. The following table presents certain information regarding the composition of Home Savings' loan portfolio at the dates indicated:
At December 31, ------------------------------------------------------------------------- 1999 1998 1997 ---------------------- ------------------------ ----------------------- Percent of Percent of Percent of Amount Total loans Amount Total loans Amount Total loans -------- ------------ --------- ------------- --------- ----------- (Dollars in thousands) Real estate loans: Permanent One- to four-family $546,888 70.92% $516,767 73.84% $489,677 74.19% Multifamily 7,838 1.02 8,172 1.17 8,944 1.36 Nonresidential 28,701 3.72 31,308 4.47 33,479 5.07 Land 299 0.04 190 0.03 285 0.04 --------- -------- ---------- --------- ---------- -------- Total permanent 583,726 75.70 556,437 79.51 532,385 80.66 Construction loans: One- to four-family 27,486 3.57 25,691 3.67 24,044 3.64 Multifamily and nonresidential 1,637 0.21 833 0.12 325 0.05 --------- -------- ---------- --------- ---------- -------- Total construction 29,123 3.78 26,524 3.79 24,369 3.69 --------- -------- ---------- --------- ---------- -------- Total real estate loans 612,849 79.48 582,961 83.30 556,754 84.35 Consumer loans Home equity 19,151 2.48 18,321 2.62 17,097 2.59 Auto 1,130 0.15 1,603 0.23 2,457 0.37 Education 3,860 0.50 3,993 0.57 3,479 0.53 Other (1) 18,998 2.46 17,856 2.55 20,355 3.08 --------- -------- ---------- --------- ---------- -------- Total consumer 43,139 5.59 41,773 5.97 43,388 6.57 Commercial loans 115,108 14.93 75,085 10.73 59,897 9.08 --------- -------- ---------- --------- ---------- -------- Total loans 771,096 100.00% 699,819 100.00% 660,039 100.00% ======= ========= ========= Less net items 48,009 42,321 26,803 --------- ---------- ---------- Total loans, net $723,087 $657,498 $633,236 ========= ========== ==========
----------------------------------------------------- 1996 1995 ----------------------------------------------------- Percent of Percent of Amount Total loans Amount Total loans ----------------------------------------------------- Real estate loans: Permanent One- to four-family $482,089 75.23% $428,213 75.39% Multifamily 8,778 1.37 16,042 2.82 Nonresidential 35,315 5.51 36,845 6.48 Land 195 0.03 1,280 0.23 ---------- --------- ---------- --------- Total permanent 526,377 82.14 482,380 84.92 Construction loans: One- to four-family 27,610 4.31 19,804 3.49 Multifamily and nonresidential 490 0.08 597 0.11 ---------- --------- ---------- --------- Total construction 28,100 4.39 20,401 3.60 ---------- --------- ---------- --------- Total real estate loans 554,477 86.53 502,781 88.52 Consumer loans Home equity 14,581 2.28 11,439 2.01 Auto 3,486 0.54 4,582 0.81 Education 2,701 0.42 2,788 0.49 Other (1) 18,837 2.94 17,384 3.06 ---------- --------- ---------- --------- Total consumer 39,605 6.18 36,193 6.37 Commercial loans 46,742 7.29 29,043 5.11 ---------- --------- ---------- --------- Total loans 640,824 100.00% 568,017 100.00% ========= ========= Less net items 23,901 21,328 ---------- ---------- Total loans, net $616,923 $546,689 ========== ==========
- -------------------------- (1) Consists of overdraft protection loans and loans to individuals secured by demand accounts, deposits, automobiles, boats and one- to four-family residences. 3 LOAN MATURITY. The following table sets forth certain information as of December 31, 1999, regarding the dollar amount of loans maturing in Home Savings' portfolio based on their contractual terms to maturity. Demand loans and other loans having no stated schedule of repayments or no stated maturity are reported as due in one year or less. Mortgage loans originated by Home Savings generally include due-on-sale clauses that provide Home Savings with the contractual right to deem the loan immediately due and payable in the event the borrower transfers the ownership of the property without Home Savings' consent. The table does not include the effects of possible prepayments or scheduled repayments.
Principal repayments contractually due in the years ended December 31, --------------------------------------------------------------------------------------- 2003 - 2005 - 2010 - 2015 and 2000 2001 2002 2004 2009 2014 thereafter Total ---- ---- ------ --------- ------ ------ ---------- ----- (In thousands) Residential real estate loans(1) $35,895 $29,183 $30,101 $62,204 $158,865 $116,131 $150,306 $582,685 Nonresidential real estate loans 1,839 3,567 2,122 4,676 10,085 5,373 2,502 30,164 Commercial loans 36,883 13,116 10,011 12,399 20,198 14,241 8,260 115,108 Consumer loans 5,346 4,772 3,897 5,186 21,201 1,736 1,001 43,139 ----- ----- ----- ----- ------ ----- ----- ------ Total $79,963 $50,638 $46,131 $84,465 $210,349 $137,481 $162,069 $771,096 ======= ======= ======= ======= ======== ======== ======== ========
- ------------------- (1) Includes permanent and construction loans for one- to four-family and multi-family properties and land loans. The next table sets forth the dollar amount of all loans due after December 31, 2000, which have fixed or adjustable interest rates:
Due after December 31, 2000 ----------------------------- (In thousands) Fixed rate of interest $545,995 Adjustable rate of interest 145,138 ---------- $691,133 ==========
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending activity of Home Savings is the origination of conventional loans secured by first mortgages on one- to four-family residences, primarily single-family homes, located within Home Savings' primary market area. At December 31, 1999, Home Savings' one- to four-family residential real estate loans totaled approximately $546.9 million, or 70.9% of total loans. At December 31, 1999, $2.9 million, or 0.5%, of Home Savings' one-to four-family loans were nonperforming. OTS regulations and Ohio law limit the amount which Home Savings may lend in relationship to the appraised value of the real estate and improvements which will secure the loan at the time of loan origination. In accordance with such regulations, Home Savings makes loans on one- to four-family residences of up to 97% of the value of the real estate and improvements thereon (LTV), although the majority of such loans have LTVs of 80% or less. Loans on single-family, owner-occupied residences located in low-to-moderate income census track locations are granted up to a 97% LTV, although Home Savings requires private mortgage insurance on the portion of the principal amount that exceeds 85% of the appraised value of the property securing the loan. Home Savings currently offers fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs) for terms of up to 30 years. Although Home Savings' loan portfolio includes a significant amount of 30-year fixed-rate loans, most loans currently originated by Home Savings are 15-year fixed-rate loans. The interest rate adjustment periods on ARMs are typically one or three years. The maximum interest rate adjustment on most of the ARMs is 2.0% on any adjustment date and a total of 6.0% over the life of the loan. The interest rate adjustments on one-year and three-year ARMs presently offered by Home Savings are indexed to the weekly average rate on the one-year and three-year U.S. Treasury securities, respectively. Rate adjustments are computed by adding a stated margin, to the index. Home Savings does not offer ARMs to borrowers on one- to four-family residences with LTVs of 95%. -4- Home Savings issues standby loan origination commitments to qualified borrowers primarily for the purchase of single-family residential real estate. Such commitments are made on specified terms and conditions and are made for periods of up to 60 days, during which time the interest rate is locked in. LOANS SECURED BY MULTIFAMILY RESIDENCES. Home Savings originates loans secured by multifamily properties which contain more than four units, although this is not a significant component of Home Savings' lending activities. Multifamily loans are offered with adjustable rates of interest, which adjust according to a specified index, and typically have terms ranging from five to ten years and LTVs of up to 75%. Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. Home Savings attempts to reduce the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the project and by obtaining personal guaranties on loans made to corporations and partnerships. Home Savings requires borrowers to submit financial statements annually to enable Home Savings to monitor the loan and requires an assignment of rents. At December 31, 1999, loans secured by multifamily properties totaled approximately $7.8 million, or 1.0% of total loans. The largest loan had a principal balance of $1.4 million. LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Home Savings originates loans secured by nonresidential real estate. Home Savings' nonresidential real estate loans have adjustable rates, terms of up to 25 years and generally LTVs of up to 80%. Among the properties securing Home Savings' nonresidential real estate loans are shopping centers, hotels, motels and freezer warehouses. The majority of such properties are located within Home Savings' primary lending area. Home Savings has been involved for over 20 years in freezer warehouse financing through a Youngstown area real estate developer who specializes in the construction of freezer facilities. Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Home Savings has endeavored to reduce such risk by evaluating the credit history of the borrower, the location of the real estate, the financial condition of the borrower, the quality and characteristics of the income stream generated by the property and the appraisals supporting the property's valuation. At December 31, 1999, Home Savings' largest loan secured by nonresidential real estate had a balance of $7.2 million and was performing according to its terms. At December 31, 1999, approximately $28.7 million, or 3.7%, of Home Savings' total loans were secured by mortgages on nonresidential real estate. CONSTRUCTION LOANS. Home Savings makes loans for the construction of one- to four-family residences, multifamily properties and nonresidential real estate projects. Residential construction loans are made to both owner-occupants and to builders on a speculative (unsold) basis. Construction loans to owner-occupants are structured as permanent loans with fixed or adjustable rates of interest and terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only at a fixed rate. Construction loans for one- to four-family residences have LTVs of up to 85%, and construction loans for commercial, multifamily and nonresidential properties have LTVs of up to 75%, with the value of the land included as part of the owner's equity. At December 31, 1999, Home Savings had approximately $29.1 million, or 3.8% of its total loans, invested in construction loans, including $27.5 million in one- to four-family residential construction and approximately $173,000 in multifamily construction loans. No commercial construction loans were outstanding at that date. Approximately 50% of Home Savings' construction loans to builders are made for homes to which the builder does not have a contract with a buyer. Home Savings, however, generally limits speculative loans to builders with whom Home Savings has a long-standing relationship and limits the number of outstanding loans on unsold homes under construction within a specific area. Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties because construction loans are more difficult to appraise and to monitor. Loan funds are advanced upon -5- the security of the project under construction. In the event a default on a construction loan occurs and foreclosure follows, Home Savings must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. Home Savings also originates a limited number of loans secured by vacant land for the construction of single-family houses. Home Savings' land loans are generally fixed-rate loans for terms up to five years and require a LTV of 75% or less. At December 31, 1999, approximately $299,000, or 0.04%, of Home Savings' total loans were secured by land loans made to individuals intending to construct and occupy single-family residences on the properties. COMMERCIAL LOANS. Home Savings makes commercial loans to businesses in its primary market area, including traditional lines of credit, revolving lines of credit, term loans and acquisition and development loans. The LTV ratios for commercial loans depend upon the nature of the underlying collateral, but generally commercial loans are made with LTVs of 50 to 75% and have adjustable interest rates. Lines of credit and revolving credits are generally priced on a floating rate basis, which is tied to the prime rate or U.S. Treasury bill rate. Term and time loans are usually adjustable, but can have fixed rates of interest and terms from one to five years. At December 31, 1999, Home Savings had approximately $115.1 million, or 14.9% of total loans, invested in commercial loans. The majority of these loans are secured by a security interest in inventory, accounts receivable, machinery, investment property, vehicles or other assets of the borrower. Home Savings also originates unsecured commercial loans including lines of credit for periods of less than 12 months, short-term loans and, occasionally, term loans for periods of up to 36 months. These loans are underwritten based on the creditworthiness of the borrowers and the guarantors. As a result of the addition of experienced loan personnel and the implementation of enhanced underwriting procedures, Home Savings intends to increase its unsecured commercial loan volume in the future. Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependent on the income stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial loans, if any, often consists of rapidly depreciating assets. CONSUMER LOANS. Home Savings originates various types of consumer credit loans, including home equity loans, education loans, loans secured by savings accounts, vehicle loans and unsecured loans. Consumer loans are made at fixed and adjustable rates of interest and for varying terms based on the type of loan. Consumer loans secured by a deposit or savings account are made for up to 90% of the principal balance of the account and generally have adjustable rates, which adjust based on the weekly average yield on U.S. Treasury securities plus a margin. For new automobiles, loans are originated for up to 90% of the value of the car with terms of up to five years, and for used automobiles, loans are made for up to the average value of the car model and a term of four years. All automobile loans are originated directly by Home Savings. At December 31, 1999, automobile loans amounted to $1.1 million, or 0.2%, of Home Savings' consumer loan portfolio. Home Savings makes closed-end home equity loans in an amount, which when added to the prior indebtedness secured by the real estate, does not exceed 90% of the estimated value of the real estate. Home equity loans are typically secured by a second mortgage on the real estate. Home Savings frequently holds the first mortgage, although Home Savings will make home equity loans in cases where another lender holds the first mortgage. Home Savings also offers home equity loans with a line of credit feature. Home equity loans are made with adjustable and fixed rates of interest. Fixed-rate home equity loans have terms of ten years but can be called after five years. Rate adjustments on adjustable home equity loans are determined by adding a 3.0% margin for loans on one- to four-family residences of up to 80% LTV or by adding a 4.0% margin for loans on one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury index. At December 31, 1999, approximately $19.2 million, or 2.5%, of Home Savings' consumer loan portfolio consisted of home equity loans. Consumer loans may entail greater credit risk than do residential mortgage loans. The risk of default on consumer loans increases during periods of recession, high unemployment, and other adverse economic conditions. Although Home Savings has not had significant delinquencies on consumer loans, no assurance can be provided that delinquencies will not increase. -6- At December 31, 1999, Home Savings had approximately $43.1 million, or 5.6% of its total loans, invested in consumer loans. Home Savings anticipates a moderate increase in its consumer loan portfolio in the future as a result of increased cross-selling efforts to existing customers. LOAN SOLICITATION AND PROCESSING. The lending activities of Home Savings are subject to the written, non-discriminatory underwriting standards and loan origination procedures approved by Home Savings' Board of Directors (Board). Loan originations are generally obtained from existing customers and members of the local community and from referrals by real estate brokers, lawyers, accountants, and current and former customers. Home Savings also advertises in the local print media, radio and television. Each of Home Savings' 14 offices has loan personnel who can accept loan applications, which are then forwarded to Home Savings' Underwriting Department for processing and approval. In underwriting real estate loans, Home Savings typically obtains a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate that will be given as security for the loan is prepared by one of Home Savings' in-house licensed appraisers or an approved fee appraiser. For certain large nonresidential real estate loans, the appraisal will be conducted by an outside fee appraiser whose report is reviewed by Home Savings' chief appraiser. Upon the completion of the appraisal and the receipt of information on the credit history of the borrower, the application for a loan is submitted for review to the appropriate persons. Commercial, residential and nonresidential real estate loans up to $1.0 million may be approved by an authorized loan officer or executive officer. All loans of $1.0 million or more require approval by two executive officers and a majority of the Board of Directors. Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name Home Savings as an insured mortgagee. Home Savings generally obtains an attorney's opinion of title, although title insurance may be obtained on larger nonresidential real estate loans. The procedure for approval of construction loans is the same as for permanent real estate loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. Home Savings also evaluates the feasibility of the proposed construction project and the experience and record of the builder. Once approved, the construction loan is disbursed in installments based upon periodic inspections of construction progress. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any. LOAN ORIGINATIONS AND PURCHASES. Historically, Home Savings has originated substantially all of the loans in its portfolio and has held them until maturity. Nevertheless, Home Savings' residential loans are generally made on terms and conditions and documentation which conform to the secondary market guidelines for sale to the Federal Home Loan Mortgage Company (FHLMC) and other institutional investors in the secondary market. Education loans are sold, once the borrower has graduated, to the Student Loan Marketing Association. Home Savings does not originate first mortgage loans insured by the Federal Housing Authority or guaranteed by the Veterans Administration, but it has purchased such loans as well as participation interests in such loans. -7- Home Savings has not sold any loans during the years ended December 31, 1999, 1998 and 1997. The following table presents Home Savings' total loan origination and repayment activity for the years indicated:
Year ended December 31, ---------------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Loans originated: Real estate: Permanent: One- to four-family $113,651 $140,344 $ 68,303 Multifamily 63 - - Nonresidential 292 340 218 Land 750 810 - -------- -------- -------- Total permanent 114,756 141,494 68,521 Construction: One- to four-family 28,695 28,226 25,440 Multifamily 340 180 1,390 -------- -------- -------- Total construction 29,035 28,406 26,830 -------- -------- -------- Total real estate loans originated 143,791 169,900 95,351 Consumer 15,631 15,535 17,038 Commercial 85,454 44,050 20,968 -------- -------- -------- Total loans originated 244,876 229,485 133,357 Loans purchased - 11 116 -------- -------- -------- Total loans originated and purchased 244,876 229,496 133,473 Principal repayments 179,906 205,791 119,120 -------- -------- -------- Net increase in loans $ 64,970 $ 23,705 $ 14,353 ======== ======== ========
At December 31, 1999, Home Savings had $18.5 million of outstanding commitments to originate loans and $42.6 million available to borrowers under consumer and commercial lines of credit. At December 31, 1999, Home Savings had $11.6 million in undisbursed funds related to construction loans in process. LOAN ORIGINATION AND OTHER FEES. Home Savings realizes loan origination fees and other fee income from its lending activities. A fee of 2.0% of the loan amount, up to $1,000, is charged for fixed-rate residential real estate loans and Home Savings charges an origination fee of 2.0% of the loan amount, up to $850, for adjustable-rate residential real estate loans. Loan origination fees for nonresidential real estate loans and commercial loans are negotiated on an individual basis. In addition, Home Savings realizes income from late payment charges and fees for other miscellaneous services. Loan origination fees and other fees are a volatile source of income, varying with the volume of lending, loan repayments and general economic conditions. All nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 91 as an adjustment to yield for the life of the related loan. LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the aggregate amount that Home Savings may lend to any one borrower to an amount equal to 15.0% of Home Savings' unimpaired capital and unimpaired surplus (Lending Limit Capital). A savings association may lend to one borrower an additional amount not to exceed 10.0% of Home Savings' Lending Limit Capital if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. Based on such limits, Home Savings could lend approximately $49.0 million to one borrower at December 31, 1999. The largest amount Home Savings had outstanding to one borrower at December 31, 1999, was $9.9 million, which -8- consisted of three loans secured by a first mortgage on freezer warehouses. At December 31, 1999, this loan was performing in accordance with its terms. DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Home Savings attempts to maintain a high level of asset quality through sound underwriting policies and aggressive collection practices. At the beginning of each month, the Collections Department of Home Savings receives a report on all delinquent loans. When a loan payment has not been made by the fifteenth of the month, a late notice is sent and a penalty of five percent of the payment due is assessed. Once a loan is 60 days delinquent, a second notice is sent and the Collections Department contacts the borrower by telephone. The Collections Department will generally continue to attempt to bring the loan current through telephone calls or personal visits until the loan has been delinquent 90 to 120 days. If the loan has not been brought current by the 120th day, a member of the Collections Department will present the loan to Home Savings' Pre-Foreclosure Committee which meets weekly. If the Pre-Foreclosure Committee agrees to recommend the commencement of foreclosure proceedings, the loan is presented to the Executive Committee of the Board of Home Savings (Executive Committee) which normally refers the loan to Home Savings' in-house legal staff. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding balance in relation to the original indebtedness, the extent of the delinquency, the borrower's ability and willingness to cooperate in curing the delinquency and any environmental issues that may need to be addressed. The following table reflects the amount of loans in a delinquent status as of the dates indicated:
At December 31, ---------------------------------------------------------------- 1999 1998 ----------------------------- ------------------------------- Percent of Percent of total total Number Amount loans Number Amount loans ------ ------ ------- ------ ------ ------- (Dollars in thousands) Loans delinquent for: 30-59 days 284 $10,775 1.49% 232 $ 8,236 1.25% 60-89 days 93 3,298 .46 89 2,462 0.37 90 days or over 156 3,615 .50 189 5,729 0.87 ---- ------- ---- ----- ------- ---- Total delinquent loans 533 $17,688 2.45% 510 $16,427 2.49% ==== ======= ==== ===== ======= ====
Nonperforming assets include nonaccruing loans, restructured loans, real estate acquired by foreclosure or by deed-in-lieu thereof, in-substance foreclosures and repossessed assets. Loans are reviewed through monthly reports to the Board and weekly reports to senior management and are placed on nonaccrual status when collection in full is considered doubtful by management. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent cash payments are generally applied to interest income unless, in the opinion of management, the collection of principal and interest is doubtful. In those cases, subsequent cash payments would be applied to principal. -9- The following table sets forth information with respect to Home Savings' nonperforming loans and other assets at the dates indicated:
At December 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (Dollars in thousands) Nonperforming loans: Nonaccrual loans Real estate loans: One- to four-family $ 2,923 $ 3,655 $ 5,540 $ 5,343 $ 3,542 Multifamily and nonresidential 82 378 649 704 1,082 Construction (net of loans in process) and land 272 233 769 491 7 ------- ------- ------- ------- ------- Total real estate loans 3,277 4,266 6,958 6,538 4,631 Consumer 132 317 404 517 298 Commercial 206 1,146 2,129 2,059 260 ------- ------- ------- ------- ------- Total nonaccrual loans 3,615 5,729 9,491 9,114 5,189 Restructured real estate loans 317 1,832 644 698 891 ------- ------- ------- ------- ------- Total nonperforming loans 3,932 7,561 10,135 9,812 6,080 Real estate acquired through foreclosure and other repossessed assets 157 78 55 29 46 ------- ------- ------- ------- ------- Total nonperforming assets $ 4,089 $ 7,639 $10,190 $ 9,841 $ 6,126 ======= ======= ======= ======= ======= Nonperforming loans as a percent of loans 0.54% 1.15% 1.60% 1.59% 1.11% Nonperforming assets as a percent of total assets 0.30 0.59 0.95 0.90 0.56 Allowance for loan losses as a percent of nonperforming loans 164.86 84.62 59.02 51.37 84.18 Allowance for loan losses as a percent of total loans before allowance 0.88 0.96 0.94 0.81 0.93
For 1999, approximately $335,000 in interest income would have been recorded had nonaccruing and restructured loans been accruing pursuant to contractual terms. During 1999 interest collected on such loans and included in net income was approximately $174,000. Nonaccrual and restructured loans decreased approximately $3.5 million to $4.1 million at December 31, 1999, from $7.6 million at December 31, 1998. Nonaccrual one- to four-family mortgage loans and commercial loans decreased $732,000 and $940,000, respectively. The reduction of the one- to four-family loans was due to a number of loans becoming current on their payments. The reduction in nonaccrual commercial loans was the result of one loan being reclassified as restructured. The reduction in restructured real estate loans is primarily due to a $1.3 million loan being reclassified as not restructured. At December 31, 1999, total nonaccrual and restructured loans accounted for 0.54% of net loans receivable, compared to 1.15% at December 31, 1998. Total nonperforming assets were 0.30% of total assets as of December 31, 1999, a decrease of 0.29% from 0.59% as of December 31, 1998. Real estate acquired in settlement of loans is classified separately on the balance sheet at fair value as of the date of acquisition. After foreclosure, the loan is written down to the value of the underlying collateral by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income or loss on disposition, are included in other expenses. At December 31, 1999, the carrying value of real estate acquired in settlement of loans was $157,000, and consisted of three single-family properties. Home Savings classifies its assets in accordance with federal regulations. Problem assets are classified as "special mention", "substandard," "doubtful" or "loss." "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that Home Savings will sustain some loss if the deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable and (ii) there is a high possibility of loss. An asset classified as "loss" is considered uncollectible and of such little value that its continuance as an asset of Home Savings is not warranted. Federal regulations also contain a "special mention" category, -10- consisting of assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving management's close attention. Home Savings classifies its commercial loans on a periodic basis, not less often than annually, according to a nine-level risk rating system that includes, in addition to the "substandard," "doubtful" and "loss," categories discussed above, further classifications of "prime," "good," "satisfactory," "fair," "watch" and "uncertain." Commercial loans that are classified "prime," "good," "satisfactory" or "fair" possess levels of risk, if any, which are generally acceptable to Home Savings. "Watch" assets are the equivalent of "special mention" assets discussed above and a loan which is classified as "uncertain" represents a loan for which there is insufficient current information on the borrower to evaluate the primary source of payment. A loan may only be maintained as "uncertain" for 90 days while additional information is obtained, subject to one 90-day extension by the Commercial Loan Manager or a higher level officer. The aggregate amounts of Home Savings' classified assets at the dates indicated were as follows:
At December 31, --------------------- 1999 1998 ------ ------ (In thousands) Classified assets: Substandard $4,323 $8,034 Doubtful - - Loss 148 95 ------ ------ Total classified assets $4,471 $8,129 ====== ======
Home Savings analyzes each classified asset quarterly to determine whether changes in the classifications are appropriate under the circumstances. Such analysis focuses on a variety of factors, including the amount of, and the reasons for, any delinquency, the use of the real estate securing the loan, the financial condition of the borrower, and the appraised value of the real estate. As such factors change, the classification of the asset will change accordingly. Home Savings establishes a general allowance for loan losses for any loan classified as special mention, substandard or doubtful. If an asset, or portion thereof, is classified as loss, Home Savings establishes a specific allowance for loss in the amount of 100% of the portion of the asset classified loss or charges off the portion of any real estate loan deemed to be uncollectible. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. 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, overall growth in the loan portfolio and current economic conditions. Consequently, these estimates are particularly susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level. In determining the adequacy of the allowance for loan loss, management reviews and evaluates on a quarterly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Classification Committee and allocated to the loan. Other loans not specifically reviewed by management are evaluated using the historical charge-off experience ratio calculated by type of loan. The historical charge-off experience ratio factors into account the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied and any other known factors which may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed quarterly and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends or actual principal charge-off. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentration and the closely associated effect changing economic conditions have on Home Savings. -11- The following table sets forth an analysis of Home Savings' allowance for loan losses for the periods indicated:
Year ended December 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of period $ 6,398 $ 5,982 $ 5,040 $ 5,118 $ 5,111 Provision for (recovery of) loan loss allowances 100 650 (1,546) - - Charge-offs: Real estate (60) (47) (403) (28) (373) Consumer (65) (72) (43) (57) (21) Commercial - (151) - - - ------- ------- ------- ------- ------- Total charge-offs (125) (270) (446) (85) (394) ------- ------- ------- ------- ------- Recoveries: Real estate 21 25 2,930 4 365 Consumer 9 10 4 3 10 Commercial 2 1 - - 26 ------- ------- ------- ------- ------- Total recoveries 32 36 2,934 7 401 ------- ------- ------- ------- ------- Net recoveries (charge-offs) (93) (234) 2,488 (78) 7 ------- ------- ------- ------- ------- Balance at end of year $ 6,405 $ 6,398 $ 5,982 $ 5,040 $ 5,118 ======= ======= ======= ======= ======= Ratio of net recoveries (charge-offs) to average net loans (0.01)% (0.04)% 0.40% (0.01)% 0.00% Ratio of net recoveries (charge-offs) to provision for (recovery of) loan loss allowances (93.00)% (36.00)% 160.93% N/A N/A
The following table sets forth the allocation of the allowance for loan losses by category. The allocations are based on management's assessment of the risk characteristics of each of the components of the total loan portfolio and are subject to change as and when the risk factors of each component change. The allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in any category.
At December 31, ----------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of loans in each loans in each loans in each loans in each loans in each category category category category category Amount to total loans Amount to total loans Amount to total loans Amount to total loans Amount to total loans ------ -------------- ------ -------------- ------ -------------- ------ -------------- ------ -------------- (Dollars in thousands) Real estate loans $4,182 79.48% $4,220 83.30% $4,242 84.35% $4,561 86.53% $4,585 88.52% Consumer loans 555 5.59 611 5.97 673 6.57 322 6.18 376 6.37 Commercial loans 1,668 14.93 1,567 10.73 1,067 9.08 157 7.29 157 5.11 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $6,405 100.00% $6,398 100.00% $5,982 100.00% $5,040 100.00% $5,118 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES GENERAL. Investment and mortgage related securities are classified upon acquisition as available for sale, held to maturity, or trading. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss, net of taxes, reflected as a component of retained earnings. Securities classified as held to maturity are carried at amortized cost. Securities classified as trading are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of income. Home Savings recognizes premiums and discounts in interest income over the period to maturity by the level yield method and realized gains or losses on the sale of debt securities based on the amortized cost of the specific securities sold. -12- HOME SAVINGS INVESTMENT ACTIVITY. Federal regulations and Ohio law permit Home Savings to invest in various types of investment securities, including interest-bearing deposits in other financial institutions, federal funds, U.S. Treasury and agency obligations, mortgage related-securities, and certain other specified investments. The Board has adopted an investment policy which authorizes management to make investments in U.S. Treasury obligations, U.S. Federal agency and federally-sponsored corporation obligations, mortgage-related securities issued or sponsored by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA), and collateralized mortgage obligations (CMOs) issued or sponsored by FNMA and FHLMC, as well as private issuers, investment-grade municipal obligations, creditworthy, unrated securities issued by municipalities in which an office of Home Savings is located, investment-grade corporate debt securities, investment-grade asset-backed securities, certificates of deposit that are fully-insured by the FDIC, bankers' acceptances, federal funds and money market funds . Home Savings' investment policy is designed primarily to provide and maintain liquidity within regulatory guidelines, to maintain a balance of high quality investments to minimize risk, and to maximize return without sacrificing liquidity and safety. The investment activities of Home Savings are supervised by Home Savings' Investment Committee and investment purchases are monitored weekly by the Executive Committee. Home Savings maintains a significant portfolio of mortgage-backed securities and CMOs. Mortgage -backed securities are sponsored by FNMA, GNMA and FHLMC. Mortgage-backed securities generally entitle Home Savings to receive a portion of the cash flows from an identified pool of mortgages. GNMA securities, FNMA securities and a majority of Home Savings' FHLMC securities are guaranteed by the issuing agency as to timely payment of principal and interest. The balance of Home Savings' FHLMC securities are guaranteed as to timely payment of interest and eventual payment of principal. The CMOs, which are rated the highest credit quality by a nationally recognized rating agency, are a type of debt security issued by a special-purpose entity that aggregrates pools of mortgages and mortgage-related securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into tranches or classes which have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages, as opposed to pass through mortgage-backed securities where cash flows are distributed pro rata to all security holders. In contrast to mortgage-backed securities from which cash flow is received (and hence, prepayment risk is shared) pro rata by all securities holders, the cash flow from the mortgages or mortgage-related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage-related securities resulting from unexpected prepayment activity. Home Savings is exposed to prepayment risk and reinvestment risk to the extent that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Mortgage related securities enable Home Savings to generate positive interest rate spreads with minimal administrative expense and reduce credit risk due to either guarantees provided by the issuer or the high credit rating by the rating agency. Mortgage related securities classified as available for sale also provide Home Savings with an additional source of liquid funds. Home Savings also invests in short maturity, medium-term corporate notes of investment grade. The notes, which include debentures and collateralized notes, generally provide a spread above the risk-free rate afforded by comparable maturity U.S. Treasury securities. BUTLER WICK INVESTMENT ACTIVITIES. Butler Wick holds securities in three subsidiaries, Butler Wick & Co Inc., Butler Wick Trust Company (Ohio) and Butler Wick Trust Company (Pennsylvania). Butler Wick & Co., Inc. invests in municipal securities and to a lesser extent government agency securities for sale to clients. These securities are held as available for sale. Butler Wick & Co., Inc does not make markets in equity securities. In order to qualify as a fiduciary in both the State of Ohio and in the Commonwealth of Pennsylvania, Butler Wick Trust Company deposited United States Government obligations having a principal value of $100,000 with the Federal Reserve Bank for each state of incorporation. In addition to these deposits, U.S. Government obligations are owned by Butler Wick Trust Company (OH). All of these securities are classified as held to maturity. UNITED COMMUNITY INVESTMENT ACTIVITIES. Funds maintained by United Community for general corporate purposes, including possible acquisitions, are invested in investment grade corporate notes, federally-sponsored corporate -13- obligations, and equity securities. In addition, United Community invests in Eurodollars, which is a short-term investment. These types of investments provide a great deal of liquidity and flexibility. -14- The following table sets forth the amortized cost and fair value of United Community's consolidated available for sale and held to maturity investment securities, FHLB stock, and mortgage-related securities at the dates indicated.
At December 31 ------------------------------------------------------------------------------ 1999 1998 ------------------------------------- ------------------------------------- Amortized % of Fair % of Amortized % of Fair % of Cost Total Value Total Cost Total Value Total --------- ------- -------- ------- --------- ------- -------- ------- (Dollars in thousands) Available for sale: Short-term investments: Federal funds $ 58,118 11.33% $ 58,118 11.48% $ 12,798 2.27% $ 12,798 2.25% Money market funds 22,224 4.33 22,224 4.39 5,002 0.89 5,002 0.88 Eurodollars 129 0.03 129 0.03 133,813 23.74 133,813 23.52 Other 215 0.04 215 0.04 2,162 0.38 2,162 0.38 FHLB stock 12,825 2.50 12,825 2.53 11,958 2.12 11,958 2.10 Equity investments 1,864 0.36 1,715 0.34 1,312 0.24 1,312 0.23 Investment securities: U.S. Treasury obligations 10,026 1.96 10,024 1.98 15,045 2.67 15,376 2.70 U.S. Government agency obligations 47,879 9.34 47,316 9.35 13,000 2.31 13,060 2.30 Corporate notes 102,341 19.96 101,444 20.05 82,249 14.59 82,452 14.49 Tax exempt municipal bonds 1,405 0.27 1,405 0.28 - - - - Mortgage-backed securities: FHLMC 24,992 4.87 24,667 4.87 38,732 6.87 39,450 6.94 FNMA 23,920 4.66 22,869 4.52 19,691 3.49 19,811 3.48 Private issues 439 0.09 429 0.08 2,106 0.37 2,029 0.36 Collateralized mortgage obligations: FNMA 26,350 5.14 25,832 5.10 13,075 2.32 13,046 2.29 Private issues 40,868 7.98 39,762 7.86 24,753 4.39 24,554 4.32 -------- ------ ------- ------ -------- ------ -------- ------ Total available for sale 373,595 72.86 368,974 72.90 375,696 66.65 376,823 66.24 -------- ------ ------- ------ -------- ------ -------- ------ Held to maturity: Investment securities: U.S. Treasury obligations 1,091 0.21 1,098 0.22 4,993 0.89 5,016 0.88 Mortgage-backed securities: GNMA 5,191 1.02 5,262 1.04 7,057 1.25 7,413 1.31 FHLMC 87,245 17.01 85,604 16.92 114,208 20.26 116,443 20.47 FNMA 45,643 8.90 45,127 8.92 61,734 10.95 63,154 11.10 -------- ------ ------- ------ -------- ------ -------- ------ Total held to maturity 139,170 27.14 137,091 27.10 187,992 33.35 192,026 33.76 -------- ------ ------- ------ -------- ------ -------- ------ Total investment portfolio $512,765 100.00% $506,065 100.00% $563,688 100.00% $568,849 100.00% ======== ======= ======== ======= ======== ======= ======== ======= At December 31 ------------------------------------ 1997 ------------------------------------ Amortized % of Fair % of Cost Total Value Total --------- ------- -------- ------ (Dollars in thousands) Available for sale: Short-term investments: Federal funds $ 19,879 5.22% $ 19,879 5.15% Money market funds - - - - Eurodollars - - - - Other - - - - FHLB stock 11,136 2.92 11,136 2.88 Equity investments 148 0.04 143 0.04 Investment securities: U.S. Treasury obligations 20,072 5.27 20,224 5.24 U.S. Government agency obligations 5,000 1.31 5,038 1.30 Corporate notes 14,019 3.68 14,140 3.66 Tax exempt municipal bonds - - - - Mortgage-backed securities: FHLMC 54,039 14.19 54,827 14.20 FNMA 5,265 1.38 5,345 1.38 Private issues 2,322 0.61 2,244 0.58 Collateralized mortgage obligations: FNMA - - - - Private issues - - - - -------- ------ -------- ------ Total available for sale 131,880 34.62 132,976 34.43 -------- ------ -------- ------ Held to maturity: Investment securities: U.S. Treasury obligations 5,168 1.36 5,213 1.35 Mortgage-backed securities: GNMA 9,077 2.38 9,492 2.46 FHLMC 156,988 41.22 158,939 41.16 FNMA 77,783 20.42 79,555 20.60 -------- ------ -------- ------ Total held to maturity 249,016 65.38 253,199 65.57 -------- ------ -------- ------ Total investment portfolio $380,896 100.00% $386,175 100.00% ======== ======= ======== =======
-15- The maturities of United Community's consolidated available for sale and held to maturity investment securities at December 31, 1999, excluding FHLB stock, and equity securities, are indicated in the following table:
At December 31, 1999 ------------------------------------------------------------ After one through One year or less five years Total ------------------ ------------------ --------------------------- Amortized Average Amortized Average Amortized Fair Average cost yield cost Yield cost value Yield --------- ------- --------- ------- --------- ----- ------- (Dollars in thousands) Short-term investments: Federal funds $58,118 5.31% - - $ 58,118 $ 58,118 5.31% Eurodollars 129 5.28 - - 129 129 5.28 Money market funds 22,224 4.87 - - 22,224 22,224 4.87 Liquid cash 215 5.24 - - 215 215 5.24 ------- ---- -------- -------- ----- Total short-term investments $80,686 5.19 - - $ 80,686 $ 80,686 5.19% ======= ==== ======== ======== ===== Investment securities: Available for sale $83,860 5.54% $77,791 5.91% $161,651 $160,189 5.76% Held to maturity 693 5.17 398 6.18 1,091 1,098 5.53 ------- ---- ------- ---- -------- -------- ---- Total investment securities $84,553 5.54% $78,189 5.91% $162,742 $161,287 5.76% ======= ==== ======= ==== ======== ======== ====
SOURCES OF FUNDS GENERAL. Deposits have traditionally been the primary source of Home Savings' funds for use in lending and other investment activities. In addition to deposits, Home Savings derives funds from interest payments and principal repayments on loans and income on earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate in response to general interest rates and money market conditions. Home Savings may also borrow from the FHLB as a source of funds. DEPOSITS. Deposits are attracted principally from within Home Savings' primary market area through the offering of a selection of deposit instruments, including regular passbook savings accounts, demand deposits, individual retirement accounts (IRAs), NOW accounts, money market accounts, and certificates of deposit. Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are monitored weekly by the Executive Committee. Home Savings does not use brokers to attract deposits. The amount of deposits from outside Home Savings' primary market area is not significant. -16- The following table sets forth the dollar amount of deposits in the various types of accounts offered by Home Savings at the dates indicated:
At December 31, ------------------------------------------------------------------------------ 1999 1998 ----------------------------------- ------------------------------------- Percent Weighted Percent Weighted of total average of total average Amount deposits rate Amount deposits rate ------ -------- -------- ------ -------- -------- (Dollars in thousands) Checking accounts: Interest-bearing $ 72,642 8.71% 1.27% $ 69,284 8.91% 1.86% Noninterest-bearing 9,981 1.19 - 6,933 0.89 - Savings accounts 223,038 26.74 2.50 224,840 28.92 2.50 Money market accounts 73,698 8.84 3.71 44,764 5.76 2.57 -------- ------ ------ -------- Total transaction accounts 379,359 45.48 - 345,821 44.48 - Certificates of deposit: 4.00% or less 595 0.07 - 506 0.06 - 4.01% - 6.00% 384,455 46.09 - 374,090 48.11 - 6.01% - 8.00% 69,286 8.31 - 57,166 7.35 - 8.01% - 10.00% 392 0.05 - - - - -------- ------ ------ -------- ------ ------ Total certificates of deposit 454,728 54.52 5.26 431,762 55.52 5.35 -------- ------ ------ -------- ------ ------ Total deposits $834,087 100.00% 3.99% $777,583 100.00% 4.02% ======== ======= ====== ======== ======= ======
Total deposits increased by $56.5 million, or 7.3%, from December 31, 1998, to December 31, 1999. The following table shows rate and maturity information for Home Savings' certificates of deposit at December 31, 1999:
At December 31, 1999 -------------------------------------------------------- Over Over Up to 1 year to 2 years to Rate one year 2 years 3 years Thereafter Total ---- -------- --------- ---------- ---------- ----- (In thousands) 4.00% or less $ 373 $ 6 $ - $ 216 $ 595 4.01% to 6.00% 288,468 53,093 21,612 21,282 384,455 6.01% to 8.00% 36,829 7,932 20,041 4,484 69,286 8.01% to 10.00% 392 - - - 392 -------- -------- -------- -------- -------- Total certificates of deposit $326,062 $ 61,031 $ 41,653 $ 25,982 $454,728 ======== ======== ======== ======== ======== Percent of total certificates Of deposit 71.71 13.42 9.16 5.71 100.00%
At December 31, 1999, approximately $326.1 million of Home Savings' certificates of deposit mature within one year. Based on past experience and Home Savings' prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with Home Savings at maturity. If, however, Home Savings is unable to renew the maturing certificates for any reason, borrowings of up to $256 million are available from the FHLB of Cincinnati. -17- The following table presents the amount of Home Savings' certificates of deposit of $100,000 or more by the time remaining until maturity at December 31, 1999:
Maturity Amount -------- ------ (In thousands) Three months or less $10,397 Over 3 months to 6 months 11,407 Over 6 months to 12 months 6,496 Over 12 months 12,764 ------- Total $41,064 =======
Management believes that a substantial percentage of the above certificates will be renewed with Home Savings at maturity. The following table sets forth Home Savings' deposit account balance activity for the periods indicated:
Year ended December 31, ----------------------- 1999 1998 -------- --------- (Dollars in thousands) Beginning balance $777,583 $ 886,808 Net increase (decrease) in deposits 26,806 (145,153) ------ -------- Net deposits before interest credited 804,389 741,655 Interest credited 29,698 35,928 ------ ------ Ending balance $834,087 $777,583 ======== ======== Net increase (decrease) $56,504 $(109,225) ======= ========== Percent increase (decrease) 7.27% (12.32)%
BORROWINGS. The FHLB system functions as a central reserve bank providing credit for its member institutions and certain other financial institutions. As a member in good standing of the FHLB of Cincinnati, Home Savings is authorized to apply for advances from the FHLB of Cincinnati, provided certain standards of creditworthiness have been met. Under current regulations, an association must meet certain qualifications to be eligible for FHLB advances. The extent to which an association is eligible for such advances will depend upon whether it meets the Qualified Thrift Lender (QTL) test. If an association meets the QTL test, Home Savings will be eligible for 100% of the advances it would otherwise be eligible to receive. If an association does not meet the QTL test, the association will be eligible for such advances only to the extent it holds specified QTL test assets. At December 31, 1999, Home Savings was in compliance with the QTL test. Although Home Savings may borrow up to $256 million from the FHLB, there were no outstanding advances at December 31, 1999. In January 2000, however, Home Savings borrowed $110 million in short term FHLB advances. Butler Wick borrows on a secured basis to fund client receivables. Short-term bank loans bear interest at the federal funds rate plus 1% and are payable on demand. The loans are fully collateralized by marketable securities from both customers' margin account securities and securities owned by Butler Wick. Short-term borrowings also take the form of securities loaned to other broker/dealers. Short-term borrowings are available to Butler Wick to the extent of the loan value of the marketable securities. During 1999, United Community borrowed $185.0 million from a commercial bank to provide part of the funds for the special capital distribution. During January 2000, the $185.0 million loan was repaid. -18- COMPETITION Home Savings faces competition for deposits and loans from other savings and loan associations, credit unions, banks and mortgage originators in Home Savings' primary market area. The primary factors in competition for deposits are customer service, convenience of office location and interest rates. Home Savings competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. Butler Wick offers retail brokerage, asset management, and trust services to clients primarily in Eastern Ohio and Western Pennsylvania. In each of these businesses Butler Wick competes with both regional and national firms. As a full service broker, Butler Wick competes based on personal service rather than price. Butler Wick Asset Management Company and Butler Wick Trust Company are the only such locally owned and managed financial services providers. EMPLOYEES At December 31, 1999, Home Savings and Butler Wick had 430 and 153 full-time equivalent employees, respectively. Home Savings and Butler Wick believe that relations with their employees are good. Home Savings offers health, life and disability benefits to all employees, a 401(k) plan, an employee stock ownership plan and a post-retirement health plan for its eligible employees. Home Savings had a defined benefit pension plan, which was terminated effective July 31, 1999, subject to applicable regulatory approval. Butler Wick offers health, life and disability to all employees, a 401(k), profit sharing and a retention plan for its eligible employees. None of the employees of Home Savings or Butler Wick are represented by a collective bargaining unit. YEAR 2000 CONSIDERATIONS All year 2000 readiness activities contemplated by United Community were successfully implemented on or before December 31, 1999. On January 1, 2000, all mission critical facilities and transaction systems were successfully tested. The results of these tests indicate that no irregularities occurred as a result of or following the century date change. REGULATION United Community is a unitary savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (HOLA), and is subject to regulation, examination, and oversight by the OTS, although there are generally no restrictions on the activities of United Community unless the OTS determines that there is reasonable cause to believe that an activity constitutes a serious risk to the financial safety, soundness, or stability of Home Savings. Home Savings is subject to regulation, examination, and oversight by the OTS, the Division and the FDIC, and is also subject a certain provisions of the Federal Reserve Act. Butler Wick is subject to regulation by the SEC and NASD Regulation, Inc. United Community, Home Savings and Butler Wick are also subject to the provisions of the Ohio Revised Code applicable to corporations generally, including laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties to Ohio. The OTS, the FDIC, the Division, the SEC and the NASD each have various powers to initiate supervisory measures or formal enforcement actions if the United Community subsidiary they regulate does not comply with applicable regulations. If the grounds provided by law exist, the OTS, the FDIC or the Division may place Home Savings in conservatorship or receivership. Home Savings is also subject to regulatory oversight under various consumer protection and fair lending laws which govern, among other things, truth-in-lending disclosures, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of Home Savings to open a new branch or engage in a merger. Federal law prohibits Home Savings from making a capital distribution to anyone or paying management fees to any person having control of Home Savings if, after such distribution or payment, Home Savings would be undercapitalized. In addition, Home Savings may not pay any dividends if, as a result, its net worth would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. -19- 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 Home Savings' retained net income for that year to date plus the retained net income 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. Home Savings did not pay any dividends to United Community in 1999. In January, 2000, Home Savings paid a dividend to United Community of $170.0 million, which was used to pay a portion of the $185.0 million loan related to the $6.00 per share special capital distribution. Loans by Home Savings to executive officers, directors, and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders, and their related interests cannot exceed specified limits. Most loans to directors, executive officers, and principal shareholders must be approved in advance by a majority of the "disinterested" members of the Board with any "interested" director not participating. All loans to directors, executive officers, and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. All other transactions between Home Savings and its affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (FRA). United Community and Butler Wick are affiliates of Home Savings for this purpose. Under federal law and regulations, no person, directly or indirectly, or acting in concert with others, may acquire control of Home Savings or United Community without 60 days' prior notice to the OTS. "Control" is generally defined as having more than 25% ownership or voting power; however, ownership or voting power of more than 10% may be deemed "control" if certain factors are in place. If the acquisition of control is by a company, the acquiror must obtain approval, rather than give notice, of the acquisition as a savings and loan holding company. In addition, any merger of Home Savings must be approved by the OTS as well as the Division. Further, any merger of United Community in which United Community is not the resulting company must also be approved by both the OTS and the Division. -20- ITEM 2. DESCRIPTION OF PROPERTY The following table sets forth certain information at December 31, 1999, regarding the properties on which the main office and the branch offices of Home Savings are located:
Owned or Year Net book Location Leased opened value Deposits - -------- -------- ------ --------- -------- (In thousands) 275 Federal Plaza West Owned 1919 $970 $71,102 Youngstown, Ohio 32 State Street Owned 1916 292 88,250 Struthers, Ohio 4005 Hillman Way Owned 1958 503 98,169 Boardman, Ohio 650 East State Street Owned 1925 167 66,288 Salem, Ohio 6000 Mahoning Avenue Leased 1959 14 76,116 Austintown, Ohio 7525 Market Street Owned 1971 509 105,685 Boardman, Ohio 4259 Kirk Road Owned 1975 566 82,987 Austintown, Ohio 202 South Main Street Owned 1975 212 71,907 Poland, Ohio 3500 Belmont Avenue Owned 1976 305 60,613 Youngstown, Ohio 29 North Broad Street Owned 1977 278 34,751 Canfield, Ohio 980 Great East Plaza Leased 1980 11 19,937 Niles, Ohio 127 North Market Street Owned 1987 118 30,097 East Palestine, Ohio 210 West Lincoln Way Owned 1987 309 18,414 Lisbon, Ohio 148725 South Avenue Ext. Owned 1997 780 9,771 Columbiana, Ohio
- ---------------------------- -21- The following table sets forth certain information at December 31, 1999, regarding the properties on which the main office and the branch offices of Butler Wick are located:
Owned or Year Location Leased opened - -------- -------- ------ City Center One Bldg., Suite 700 Leased 1926 Youngstown, OH 44503 960 W. State Street Leased 1959 Alliance, OH 44601 1284 Liberty Street Leased 1932 Franklin, PA 16322 1 E. State Street Leased 1932 Sharon, PA 16146 25651 Detroit Road Leased 1990 Cleveland, OH 44145 3685 Stutz Drive, Suite 201 Leased 1999 Canfield, OH 44406 149 N Water Street Leased 1981 Kent, OH 44240 108 Main Street Leased 1932 Warren, OH 44481 3637 Medina Road, Suite 206* Leased 1997 Medina, OH 44256 4522 Fulton Drive NW Leased 1990 Canton, OH 44718 100 S. Broadway, 2nd Floor Leased 1956 Salem, OH 44460
* The Medina office is not a full service office, it is a satellite office of the Cleveland office. ITEM 3. LEGAL PROCEEDINGS United Community is not presently involved in any material legal proceedings. From time to time, United Community is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by Home Savings and incidental to its securities business offered by Butler Wick. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -22- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Quarterly stock price and dividends declared are shown in the following table.
MARKET PRICE AND DIVIDENDS --------------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 1999 --------------------------------------------------------------------------------------------------------------- 1999 High $14.375 $14.688 $14.875 $15.500 $15.500 Low 11.250 10.750 12.000 9.563 9.563 Close 11.750 14.688 13.813 9.938 9.938 Dividends declared and paid 0.075 0.075 0.075 0.075 0.030 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 1998 --------------------------------------------------------------------------------------------------------------- 1998 High N/A N/A $18.130 $15.000 $18.130 Low N/A N/A 13.500 12.880 12.880 Close N/A N/A 14.000 14.880 14.880 Dividends declared and paid N/A N/A N/A 0.075 0.075 ---------------------------------------------------------------------------------------------------------------
As of March 17, 2000, there were approximately 15,239 holders of United Community Stock. ITEM 6. SELECTED FINANCIAL DATA The information contained in the 1999 Annual Report to Shareholders of United Community (Annual Report) under the caption "Selected Financial Data and Other Data" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Annual Report under the caption "Asset and Liability Management and Market Risk" is incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Consolidated Financial Statements appearing in the Annual Report and the report of Deloitte & Touche LLP dated January 26, 2000, are incorporated herein by reference and attached hereto as part of Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 12, 1999, United Community acquired Butler Wick Corp. and changed Butler Wick's independent public auditors from Packer, Thomas & Co. to Deloitte & Touche LLP, the independent auditors of United Community. Packer, Thomas & Co. served as Butler Wick's independent public auditors from the fiscal year ended June 30, 1972 to the fiscal year ended June 25, 1999. The reports of Packer, Thomas & Co. on the consolidated financial statements of Butler Wick for the fiscal years ended June 25, 1999 and June 26, 1998, did not contain any adverse opinion or disclaimer of opinion nor was it qualified or modified as to audit scope or accounting principles nor did it include an explanatory paragraph for material uncertainties. There has not been any disagreement between Packer, Thomas & Co. and Butler Wick's management on any matter of accounting principles or practices, consolidated financial statement disclosure or audit scope or procedure. -23- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the Proxy Statement for the 2000 Annual Meeting of Shareholders of United Community (Proxy Statement), filed with the Securities and Exchange Commission (Commission) on March 24, 2000, under the captions "Proposal One - Election of Directors" and "Executive Officers," is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors - Certain Transactions" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Proxy Statement under the caption "Voting Securities and Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS 3.1 Articles of Incorporation 3.2 Amended Code of Regulations 10 Material Contracts 11 Statement Regarding Computation of Per Share Earnings 13 Portions of the 1999 Annual Report to Shareholders 20 Proxy Statement for 2000 Annual Meeting of Shareholders 21 Subsidiaries of Registrant 23.1 Deloitte & Touche LLP Consent 23.2 Packer, Thomas & Co. Consent 27 Financial Data Schedule 99 Independent Auditors' Report from Packer, Thomas & Co.
-24- (b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (c) REPORTS ON FORM 8-K. On October 20, 1999 an 8-K was filed for Item 5, Other Events, providing the third quarter financial information news release. -25- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED COMMUNITY FINANCIAL CORP. By: /S/ Douglas M. McKay ----------------------------------- Douglas M. McKay, President (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /S/ Douglas M. McKay /S/ Richard M. Barrett ----------------------------------------- --------------------------------- Douglas M. McKay, President and Director Richard M. Barrett, Director Date: March 29, 2000 Date: March 29, 2000 /S/ John F. Zimmerman, Jr. /S/ Donald J. Varner ----------------------------------------- --------------------------------- John F. Zimmerman, Jr., Director Donald J. Varner, Director Date March 29, 2000 Date: March 29, 2000 /S/ Herbert F. Schuler, Sr. /S/ Patrick A. Kelly ----------------------------------------- --------------------------------- Herbert F. Schuler, Sr., Director Patrick A. Kelly, Treasurer (Principal Financial Officer) Date: March 29, 2000 Date: March 29, 2000 /S/ Thomas J. Cavalier ----------------------------------------- Thomas J. Cavalier, Director Date: March 29, 2000
-26- INDEX TO EXHIBITS
Exhibit Number - -------------- 3.1 Articles of Incorporation Incorporated by reference to the Registration Statement on Form S-1 filed by UCFC on March 13, 1998 (S-1) with the Securities and Exchange Commission (SEC), Exhibit 3.1 3.2 Amended Code of Regulations Incorporated by reference to the 1998 10-K filed by UCFC on March 31, 1999, Exhibit 3.2 10.1 The Home Savings and Loan Company of Youngstown, Ohio Incorporated by reference to the Pre-Effective Amendment, Employee Stock Ownership Plan Exhibit 10.3 10.2 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Douglas Incorporated by reference to the 1998 10-K filed by UCFC on M. McKay, dated December 17, 1998. March 31, 1999, Exhibit 10.2 10.3 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Donald Incorporated by reference to the 1998 10-K filed by UCFC on J. Varner, dated December 17, 1998. March 31, 1999, Exhibit 10.3 10.4 Employment Agreement between The Home Savings and Loan Company of Youngstown, Ohio and Patrick A. Incorporated by reference to the 1998 10-K filed by UCFC on Kelly, dated December 17, 1998. March 31, 1999, Exhibit 10.4 10.5 Employment Agreement between Butler Wick Corp. and Thomas J. Cavalier, dated August 12, 1999 11 Statement Regarding Computation of Per Share Earnings Incorporated by reference to Note 18 to the Financial Statements included in the Annual Report in Exhibit 13 13 Portions of the 1999 Annual Report to Shareholders 20 Proxy Statement for 2000 Annual Meeting of Incorporated by reference to the Proxy Statement, filed with Shareholders the Securities and Exchange Commission on March 24, 2000 21 Subsidiaries of Registrant 23.1 Deloitte & Touche LLP Consent 23.2 Packer, Thomas & Co. Consent 27 Financial Data Schedule 99 Independent Auditors' Report from Packer, Thomas & Co.
-27- EX-10.5 2 EXHIBIT 10.5 EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into this 12th day of August, 1999, by and between Butler Wick Corp., an Ohio corporation (the "Employer"), and Thomas J. Cavalier, an individual (the "Employee"); WITNESSETH: WHEREAS, the Employee is currently employed as the President and Chief Executive Officer of the Employer, of Butler, Wick & Co., Inc., and of Butler Wick Asset Management Co., (the latter two companies being wholly-owned subsidiaries of the Employer); WHEREAS, the Employer and United Community Financial Corp., an Ohio corporation ("UCFC"), have entered into an Agreement and Plan of Merger dated April 15, 1999 (the "Merger Agreement"), pursuant to which UCFC will acquire all of the stock of the Employer; WHEREAS, the Employer and UCFC desire to be ensured of Employee's continued active participation in the business of Employer and its subsidiaries; and WHEREAS, in order to induce Employee to remain in the employ of Employer and in consideration of Employee agreeing to remain in the employ of Employer, the parties desire to specify the terms of such employment; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the Employer and the Employee hereby agree as follows: 1. EMPLOYMENT AND TERM. (a) TERM. Upon the terms and subject to the conditions of this Agreement, the Employer hereby employs the Employee and the Employee hereby accepts employment, as the President and Chief Executive Officer of the Employer, of Butler, Wick & Co., Inc., and of Butler Wick Asset Management Co. The term of this Agreement shall commence on August 12, 1999, and shall end on August 11, 2002, unless extended by the Employer, with the consent of the Employee, as provided in subsection (b) of this Section 1 (together with such extensions, the "Term"). (b) EXTENSION. On or before each anniversary of the date of this Agreement, the board of directors of the Employer (the "Board") shall review this Agreement and, upon approval by the Board, shall extend the Term of this Agreement for a one-year period beyond the then effective expiration date. Any such extension shall be subject to the written consent of the Employee. The Board shall document its reasons for extending the Term of this Agreement in the minutes of the meeting at which such action is taken. 2. DUTIES OF THE EMPLOYEE. (a) GENERAL DUTIES AND RESPONSIBILITIES. The Employee shall serve as the President 1 and Chief Executive Officer of the Employer, of Butler, Wick & Co., Inc., and of Butler Wick Asset Management Co. Subject to the direction of the Board, the Employee shall perform all duties and shall have all powers which are commonly incident to the offices of President and Chief Executive Officer or which, consistent therewith, are delegated to him by the Board. Such duties may include, but shall not be limited to, developing policies and strategic growth and business plans and objectives, directing and coordinating corporate programs, supervising and evaluating senior management members. (b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE EMPLOYER. The Employee shall devote his entire productive time, ability and attention during normal business hours throughout the Term to the faithful performance of his duties under this Agreement. The Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any person or organization other than the Employer, UCFC, or any subsidiary of the Employer or UCFC without the prior written consent of the Board; provided, however, that the Employee shall not be precluded from (i) vacations and other leave time in accordance with Section 3(f) below, (ii) reasonable participation in community, civic, charitable or similar organizations, (iii) reasonable participation in industry-related activities, including, but not limited to, attending state and national trade association or Young Presidents' Organization meetings and serving as an officer, director or trustee of a state or national trade association or the Young Presidents' Organization, (iv) serving as an officer or director of the Employer, UCFC or any subsidiary of the Employer or UCFC and receiving a salary, director's fees or other compensation or benefits, as appropriate, or (v) pursuing personal investments which do not interfere or conflict with the performance of the Employee's duties to the Employer and UCFC. (c) REPORTING OBLIGATIONS. The Employee shall report directly to the Board. 3. COMPENSATION. (a) ANNUAL SALARY. The Employee shall receive an annual salary of not less then $200,000, payable in equal installments not less often than monthly. (b) ANNUAL REVIEW. On or before August 12th of each year, commencing in 2000, the salary of the Employee shall be reviewed by the Board and shall be set at an amount not less than $200,000, based upon the Employee's individual performance and such other factors as the Board may deem appropriate (the "Annual Review"). The results of the Annual Review shall be reflected in the minutes of the Board. (c) BONUS PAYMENT. During the Term, the Employee shall be entitled to receive a bonus, payable not less often than annually, equal to the sum of the following components: (1) 2% of the first $500,000 of the Employer's operating profit; (2) 6% of the next $250,000 of the Employer's operating profit; (3) 8% of the next $250,000 of the Employer's operating profit; (4) 10% of the next $250,000 of the Employer's operating profit; (5) 12% of the next $250,000 of the Employer's operating profit; (6) 8% of the next $500,000 of the Employer's operating profit; and (7) 10% of any amount of the Employer's operating profit over $2.0 million. For purposes of this provision, the term "operating profit" shall mean the sum of the profits or losses of each of the Employer's subsidiaries, less the amount of bonuses paid to members of the Municipal Department of Butler, Wick & Co., Inc., the Capital Markets Group of Butler, Wick & Co., Inc. and the administrative and operations department of the Employer. (d) COMMISSIONS. The Employee shall be entitled to any and all commissions and 2 fees earned on client accounts in accordance with the formally established commission and fee programs of the Employer or its applicable subsidiary. (e) EMPLOYEE BENEFIT PROGRAMS. During the Term, the Employee shall be entitled to participate in all formally established employee benefit, bonus, pension, insurance and profit sharing plans and similar programs that are maintained by the Employer from time to time and all employee benefit plans or programs hereafter adopted in writing by the Board for which senior management personnel of the Employer are eligible (collectively, "Benefit Plans"), in accordance with the terms and conditions of such Benefit Plans. Notwithstanding any statement to the contrary contained elsewhere in this Agreement, the Employer may at any time discontinue or terminate any Benefit Plan now existing or hereafter adopted, to the extent permitted by the terms of such Benefit Plan, and shall not be required to compensate the Employee for such discontinuance or termination to the extent such discontinuance or termination pertains to all employees of the Employer who are eligible participants at the time. (f) VACATION AND SICK LEAVE. The Employee shall be entitled, without loss of pay, to be absent voluntarily from the performance of his duties under this Agreement, in accordance with the policies periodically established by the Board for senior management officials of the Employer. The Employee shall be entitled to annual sick leave as established by the Board for senior management officials of the Employer. (g) EXPENSES. The Employer shall pay or reimburse the Employee in the amount of $666.67 per month for all reasonable entertainment expenses incurred by the Employee, and shall pay all of Employee's reasonable travel and miscellaneous expenses incurred in connection with the performance of his duties under this Agreement. 4. TERMINATION OF EMPLOYMENT. (a) GENERAL. The employment of the Employee shall terminate at any time during the Term (i) at the option of the Employer, upon the delivery by the Employer of written notice of termination to the Employee, or (ii) at the option of the Employee, upon delivery by the Employee of written notice of termination to the Employer if the present capacity or circumstances in which the Employee is employed are materially adversely changed (including, but not limited to, a material reduction in responsibilities or authority or the assignment of duties or responsibilities substantially inconsistent with those normally associated with the Employee's position described in Section 2(a) of this Agreement, change of title or removal as a director of UCFC, the Employer or any subsidiary of the Employer, the requirement that the Employee regularly perform his principal executive functions more than thirty-five (35) miles from his primary office as of the date of this Agreement or the Employee's benefits provided under this Agreement are reduced, unless the benefit reductions are part of a company-wide reduction). The following subsections (A), (B) and (C) of this Section 4(a) shall govern the obligations of the Employer to the Employee upon the occurrence of the events described in such subparagraphs: (A) TERMINATION FOR CAUSE. In the event that the Employer terminates the employment of the Employee during the Term because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure or refusal to perform the duties and responsibilities assigned in this Agreement, willful violation of any law, rule or regulation (other than traffic violations or other minor offenses), or final cease-and-desist order or material breach of any provision of this Agreement ("Cause"), the Employee shall not receive, and shall have no right to receive, any compensation or other benefits for any period after such 3 termination. (B) TERMINATION IN CONNECTION WITH CHANGE OF CONTROL. In the event that the employment of the Employee is terminated by the Employer in connection with a Change of Control (hereinafter defined) for any reason other than Cause or is terminated by the Employee as provided in Section 4(a)(ii) above, then the following shall occur: (I) The Employer shall promptly pay to the Employee or to his beneficiaries, dependents or estate an amount equal to the product of 2.99 multiplied by the Employee's "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder ("Section 280G"); (II) The Employee shall continue to be covered at the Employer's expense under all health, life and disability plans of the Employer, as described in Section 3(c) of this Agreement, in which the Employee was a participant prior to the effective date of the termination of his employment as if the Employee were still employed under this Agreement until the earlier of the expiration of the Term or the date on which the Employee is included in another employer's benefit plans as a full-time employee; and (III) The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the Employee offset in any manner the obligations of the Employer hereunder, except as specifically stated in subparagraph (II) above. (C) TERMINATION NOT IN CONNECTION WITH CHANGE OF CONTROL. In the event that the employment of the Employee is terminated by the Employer before the expiration of the Term for any reason other than death, disability, termination for Cause or termination in connection with a Change of Control, then the following shall occur: (I) The Employee shall continue to participate in the retention plan established pursuant to Section 6.10 of the Merger Agreement; (II) The Employer shall be obligated to continue to pay on at least a monthly basis, until the expiration of the Term, to the Employee, his designated beneficiaries or his estate, the total compensation in effect at the time of termination pursuant to Section 3 above; (III) The Employer shall continue to provide to the Employee, at the Employer's expense, health, life and disability benefits, as described in Section 3(e) of this Agreement, substantially equal to those being provided to the Employee at the date of termination of his employment until the earliest to occur of the expiration of the Term or the date on which the Employee is included in another employer's benefit plans as a full-time employee; (IV) The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the Employee offset in any manner the obligations of the Employer hereunder, except as specifically stated in subparagraph III above. (b) DEATH OF THE EMPLOYEE. The Term shall automatically expire upon the death of the Employee. In such event, the Employee's estate shall be entitled to receive the compensation due the 4 Employee through the last day of the calendar month in which the death occurred, except as otherwise specified herein. (c) "GOLDEN PARACHUTE" PROVISION. In the event that any payments pursuant to this Section 4 would result in the imposition of a penalty tax pursuant to Section 280G, such payments shall be reduced to the maximum amount which may be paid under Section 280G without exceeding such limits. (d) DEFINITION OF "CHANGE OF CONTROL." A "Change of Control" shall mean any one of the following events: (i) the acquisition of ownership or power to vote more than 25% of the voting stock of the Employer or UCFC; (ii) the acquisition of the ability to control the election of a majority of the directors of the Employer or UCFC; (iii) prior to August 11, 2002, individuals who constitute the Board of Directors of the Employer or UCFC as of the date of this Agreement cease for any reason to constitute at least a majority thereof; provided, however, that any individual whose election or nomination for election as a member of the Board of Directors of the Employer or UCFC was approved by a vote of at least two-thirds of the directors then in office shall be considered to have continued to be a member of the Board of Directors of the Employer or UCFC and no effect shall be given to changes in the composition of the Board due to the death, disability, retirement or resignation of any such person; or (iv) an event that would be required to be reported in response to Item l(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor thereto, whether or not any class of securities of UCFC is registered under the Exchange Act. Notwithstanding the foregoing, the acquisition by UCFC of thc stock of the Employer in accordance with the Merger Agreement shall not constitute a Change of Control. For purposes of this Agreement, an event shall be deemed to have occurred "in connection with a Change of Control" if such event occurs within one year before or after a Change of Control. (e) TERMINATION BY EMPLOYEE. If the Employee terminates this Agreement without the written consent of the Employer, other than pursuant to Section 4(a)(ii) of this Agreement, the Employee hereby agrees that during the unexpired Term: (i) he will not, and will not permit any of his affiliates to, alone, together or in association with others, either as principal, agent, owner, shareholder, officer, director, partner, lender, investor, independent contractor, consultant or in any other capacity, engage in, have a financial interest in or be in any way connected or affiliated with, or render advice or services to any person that engages in a business that would compete with the principal business of the Employer or UCFC or any of their subsidiaries within Mahoning, Trumbull, Columbiana, Portage, Cuyahoga, Medina or Stark Counties, Ohio, Mercer or Venango Counties, Pennsylvania; and (ii) he will not, and will not permit any affiliate, directly or indirectly, to solicit, divert, take away or interfere with the relationship of the Employer with any person who is or was a customer, or employee or supplier of the Employer at any time during the last twenty-four (24) month period immediately prior to the date of this Agreement. For proposes of this provision, the term "affiliate" of any specified person shall mean (i) a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person; (ii) any relative or spouse of such person, or any relative of such spouse, any one of 5 whom has the same home as such person; (iii) any trust or estate in which such person or any of thc persons specified in (ii) collectively own ten percent or more of the total beneficial interest or of which any of such persons serve as trustee, executor or in any similar capacity; or (iv) any corporation or other organization in which such person or any of the persons specified in (ii) are the beneficial owners collectively of ten percent or more of any class of equity securities or ten percent or more of the equity interest. For the purposes of this definition, "control" when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings relative to the foregoing. For purposes of this provision, the term "person" refers to an individual or corporation, partnership, trust, association or other organization. This provision shall not apply in the event of the termination of the employment of the Employee by the Employer prior to the expiration of the Term or the termination of the employment of the Employee by the Employee pursuant to Section 4(a)(ii) of this Agreement. 5. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Employer or UCFC from consolidating with, merging into, or transferring all, or substantially all, of their assets to another corporation that assumes all of their obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, and subject to the provisions pertaining to Change of Control contained herein, the term "Employer" as used herein, shall mean such other corporation or entity, and this Agreement shall continue in full force and effect. 6. CONFIDENTIAL INFORMATION. The Employee acknowledges that during his employment he will learn and have access to confidential information regarding the Employer and UCFC and its customers and businesses ("Confidential Information"). The Employee agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any Confidential Information, unless or until the Employer and UCFC consent in writing to such disclosure or use or the Confidential Information is otherwise legally in the public domain. The Employee shall not knowingly disclose or reveal to any unauthorized person any Confidential Information relating to the Employer or UCFC, their subsidiaries, or affiliates, or to any of the businesses operated by them, and the Employee confirms that the Confidential Information constitutes the exclusive property of the Employer or UCFC. The Employee shall not otherwise knowingly act or conduct himself to the material detriment of the Employer or UCFC, their subsidiaries, or affiliates or in a manner which is inimical or contrary to the interests of the Employer or UCFC. 7. NON-ASSIGNABILITY. Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee, his beneficiaries or legal representatives without the Employer's prior written consent; provided, however, that nothing in this Section 7 shall preclude the Employee from designating a beneficiary to receive any benefits payable hereunder upon his death or the executors, administrators or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereto. 8. NO ATTACHMENT. Except as required by law, no right to receive payment under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 9. BINDING AGREEMENT. This Agreement shall be binding upon, and inure to the benefit of, the Employee and the Employer and their respective permitted successors and assigns. 6 10. AMENDMENT OF AGREEMENT. This Agreement may not be modified or amended, except by an instrument in writing signed by the parties hereto. 11. WAIVER. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived. 12. SEVERABILITY. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect. If this Agreement is held invalid or cannot be enforced, then any prior Agreement between the Employer (or any predecessor thereof) and the Employee shall be deemed reinstated to the full extent permitted by law, as if this Agreement had not been executed. 13. HEADINGS. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 14. GOVERNING LAW. This Agreement has been executed and delivered in the State of Ohio and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of Ohio. 15. EFFECT OF PRIOR AGREEMENTS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Employer or any predecessor of the Employer and the Employee. 16. NOTICES. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows: If to the Employer: Butler Wick Corp. City Center One, Suite 700 Youngstown, Ohio 44501 Attention: Secretary With a copy to: United Community Financial Corp. 275 Federal Plaza West Youngstown, Ohio 44501 Attention: Chairman of the Board If to the Employee: 7 Thomas J. Cavalier 8371 Misty Ridge Trail Poland, Ohio 44514 IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officer, and the Employee has signed this Agreement, each as of the day and year first above written. Attest: Butler Wick Corp. /s/ Ralph T. Meacham By: /s/ Franklin S. Bennett Jr. - -------------------- ---------------------------- Its: Secretary --------------------------- Attest: /s/ Ralph T. Meacham /s/ Thomas J. Cavalier - -------------------- ---------------------- Thomas J. Cavalier 8 EX-13 3 EXHIBIT 13 SELECTED FINANCIAL DATA AND OTHER DATA
SELECTED FINANCIAL CONDITION DATA: AT DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Total assets $1,327,573 $1,297,689 $1,073,222 $1,093,053 $1,092,835 Cash and cash equivalents 111,445 172,409 36,404 21,440 43,310 Investment securities: Trading 7,657 2,804 2,475 2,026 1,983 Available for sale 161,904 112,200 39,545 14,659 32,125 Held to maturity 1,091 4,993 5,168 28,070 30,219 Mortgage-backed securities: Available for sale 113,559 98,890 62,416 84,466 100,005 Held to maturity 138,079 182,999 243,848 286,384 302,107 Loans, net 723,087 657,498 633,236 616,923 546,689 FHLB stock 12,825 11,958 11,136 10,370 9,675 Deposits 834,087 777,583 886,808 932,060 938,855 Other Borrowed Funds 213,578 26,727 17 9 8 Total equity 256,868 474,821 150,141 135,588 128,460
SUMMARY OF EARNINGS: YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Interest income $ 89,971 $ 87,755 $ 84,081 $ 82,749 $ 80,836 Interest expense 34,284 36,570 40,996 43,326 41,472 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 55,687 51,185 43,085 39,423 39,364 Provision for (recovery of) loan loss allowances 100 650 (1,546) - - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for (recovery of) loan loss allowances 55,587 50,535 44,631 39,423 39,364 Noninterest income 22,721 22,137 20,217 16,823 15,269 Noninterest expenses (1)(2)(3) 61,037 56,931 42,704 44,574 35,164 - ----------------------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 17,271 15,741 22,144 11,672 19,469 Provision for income taxes 6,876 5,612 7,717 3,916 7,063 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 10,395 $ 10,129 $ 14,427 $ 7,756 $ 12,406 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
(1) For the year ended December 31, 1999, noninterest expense included $6.4 million as a result of the $6.00 per share special capital distribution paid on Recognition and Retention Plan (RRP) shares. (2) For the year ended December 31, 1998, noninterest expense included $11.8 million as a result of the contribution to the Home Savings and Loan Charitable Foundation (Foundation). (3) For the year ended December 31, 1996, noninterest expense included a $5.9 million one-time assessment imposed on Home Savings as a result of legislation to recapitalize the Savings Association Insurance Fund (SAIF). 9
SELECTED FINANCIAL RATIOS AND OTHER DATA: AT OR FOR THE YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Performance ratios: (1) Return on average assets (2) 0.79% 0.83% 1.34% 0.70% 1.17% Return on average equity (3) 2.46 3.41 10.10 5.86 10.19 Interest rate spread (4) 2.98 3.28 3.50 3.11 3.29 Net interest margin (5) 4.38 4.32 4.10 3.66 3.80 Noninterest expense to average assets 4.66 4.66 3.96 4.05 3.31 Efficiency ratio (6) 77.85 77.65 67.46 79.25 64.36 Average interest-earning assets to average interest-bearing liabilities 152.09 133.59 115.34 113.69 112.78 Capital ratios: Average equity to average assets 32.25 24.30 13.23 12.01 11.48 Equity to assets at year end 19.35 36.59 13.99 12.40 11.75 Tangible capital 26.75 26.80 13.47 11.87 11.24 Core capital 26.75 26.80 13.47 11.87 11.24 Risk-based capital 50.41 51.51 28.85 26.15 26.65 Asset quality ratios: Nonperforming loans to loans at year end (7) 0.54 1.15 1.60 1.59 1.11 Nonperforming assets to average assets (8) 0.31 0.63 0.94 0.91 0.59 Nonperforming assets to total assets at year end (8) 0.30 0.59 0.95 0.90 0.56 Allowance for loans losses as a percent of loans 0.88 0.96 0.94 0.81 0.93 Allowance for loans losses as a percent of nonperforming loans (7) 164.86 84.62 59.02 51.37 84.18 Number of: Loans 20,274 19,628 19,173 18,826 17,736 Deposits 106,196 105,426 108,663 108,793 105,987 Per share data: (9) Basic earnings (10) $ 0.31 $ 0.10 N/A N/A N/A Diluted earnings (10) 0.30 0.10 N/A N/A N/A Book value (11) 7.46 14.03 N/A N/A N/A Dividend payout ratio (12) 100.00% 75.00% N/A N/A N/A
(1) 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, performance ratios for 1998 reflect the $11.8 million contribution to the Foundation and performance ratios for 1996 reflect the $5.0 million one-time assessment imposed on Home Savings as a result of legislation to recapitalize the SAIF. (2) Net income divided by average total assets. 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. Excluding the effect of the contribution to the Foundation, the return on average assets would have been 1.43% for the year ended December 31, 1998. Excluding the effect of the one-time SAIF assessment, the return on average assets would have been 1.05% for the year ended December 31, 1996. (3) Net income divided by average total equity. 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. Excluding the effect of the contribution to the Foundation, the return on average equity would have been 5.89% for the year ended December 31, 1998. Excluding the effect of the one-time SAIF assessment, the return on average equity would have been 8.73% for the year ended December 31, 1996. (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 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. Excluding the effect of the contribution to the Foundation, the efficiency ratio would have been 61.73% for the year ended December 31, 1998. Excluding the effect of the one-time SAIF assessment, the efficiency ratio would have been 68.79% for the year ended December 31, 1996. (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) For purpose of displaying six months earnings per share for 1998, it is assumed the conversion took place as of July 1, 1998. (10) Net income divided by average number of shares outstanding. 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. Excluding the effect of the contribution to the Foundation, basic and diluted earnings per share would have been $0.32 for the year ended December 31, 1998. (11) Equity divided by number of shares outstanding. (12) Historical per share dividends declared and paid for the year divided by the diluted earnings per share for the year. 10 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, which was accounted for as a pooling of interests. Accordingly, the consolidated financial statements of United Community for all periods prior to the acquisition have been restated to include the results of Butler Wick Corp. (Butler Wick). See Note 2 to the consolidated financial statements for discussion of the acquisition. The following discussion and analysis of the financial condition and results of operations of United Community and its subsidiaries Home Savings and Butler Wick should be read in conjunction with and with reference to the consolidated financial statements, and the notes thereto, included in this Annual Report. CHANGES IN FINANCIAL CONDITION On October 26, 1999, United Community paid a $6.00 per share special capital distribution to its shareholders. The aggregate distribution of $226.5 million had an impact on various aspects of United Community's financial condition. Due to tax and timing considerations, United Community borrowed $185.0 million from a commercial bank to provide part of the funds for the special capital distribution. The $185.0 million loan and growth in United Community's deposits more than offset the effects of the $226.5 million distribution, resulting in asset growth of $29.9 million during 1999. The use of borrowed funds, as well as the impact of the capital distribution on other aspects of United Community's financial condition, is discussed in further detail below. Total assets increased $29.9 million, or 2.3%, from $1.30 billion at December 31, 1998 to $1.33 billion at December 31, 1999. Net loans increased $65.6 million, or 10.0%, and investment securities increased $50.7 million, or 42.2%. Cash and cash equivalents decreased $61.0 million, or 35.4%, allowing United Community to reinvest in investment securities and fund a portion of loan originations. Net loans increased $65.6 million, or 10.0%, to $723.1 million at December 31, 1999, compared to $657.5 million at December 31, 1998. The most significant increases were a $40.0 million increase in commercial loans, which is an area where growth is likely to continue, and an increase in real estate loans secured by one- to four-family residences of $30.1 million, compared to the prior year. These increases were offset by a decrease of $2.6 million in nonresidential real estate loans. Funds not currently utilized for general corporate purposes, including loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds, investment securities and mortgage-backed securities. Investment securities and mortgage-backed securities available for sale increased $49.7 million and $14.7 million, respectively. These increases were offset by decreases in the investment securities and mortgage-backed securities held to maturity of $3.9 million and $44.9 million, respectively. Investment securities were favored over mortgage-backed securities due to the interest rate environment. In addition to shifting funds between the investment and mortgage-backed securities portfolio, United Community also shifted funds within portfolios between available for sale and held to maturity categories. Although the available for sale designation effects United Community's comprehensive income, the available for sale classification gives United Community greater liquidity and flexibility when other investment opportunities become available. Overnight funds provide similar flexibility, although they generally have a lower yield than investment securities. Total deposits increased $56.5 million, or 7.3%, from $777.6 million at December 31, 1998 to $834.1 million at December 31, 1999. This increase was primarily due to new savings products introduced by Home Savings in conjunction with deposits from the $6.00 per share special capital distribution. The deposit increase included a $28.9 million increase in money market accounts, a $23.0 million increase in certificate accounts and a $6.4 million increase in transaction accounts. These increases were offset by a $1.8 million decrease in savings accounts. Other borrowed funds increased $186.9 million at December 31, 1999 compared to December 31, 1998 in conjunction with the capital distribution. During January 2000, the $185.0 million commercial bank loan was repaid. The sources of funds for the repayment were cash and cash equivalents and $110.0 million of short term Federal Home Loan Bank (FHLB) advances. The FHLB advances, which have a lower interest rate than the commercial bank loan, will be utilized as part of the leveraging strategy. FHLB advances were not used originally to fund the capital distribution due to tax and timing issues in 1999. Total shareholders' equity decreased $217.9 million, or 45.9%, to $256.9 million at December 31, 1999 from $474.8 million at December 31, 1998, as a result of the special capital distribution. Book value per share was $7.46 as of December 31, 1999. United Community remains committed to managing its capital and will continue leveraging through economically viable and permissible activities. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 NET INCOME--Net income for the year ended December 31, 1999, was $10.4 million, compared to $10.1 million for the year ended December 31, 1998. An increase in net interest income of $4.5 million, primarily due to an increase in interest-earning assets, combined with a reduction in the average balance of interest-bearing liabilities, was offset by an increase in noninterest expense of $4.1 million, primarily due to a $6.4 million one-time compensation expense for the United Community Recognition and Retention Plan (RRP) due to the special capital distribution. Diluted earnings per share for the year ended December 31, 1999 were $0.30. There are no comparable per share earnings for 1998 as Home Savings was a mutual association until July of 1998, however, diluted earnings per share for the six months ended December 31, 1998 were $0.10. 11 NET INTEREST INCOME--Net interest income increased $4.5 million, or 8.8%, to $55.7 million in 1999 from $51.2 million for 1998. Total interest income increased $2.2 million and interest expense declined $2.3 million. The increase in total interest income was primarily due to an increase in interest income on securities of $3.3 million combined with an increase in interest on loans of $1.5 million, which were partially offset by a decrease in income on other interest-earning assets of $3.1 million. The average balance of interest-earning assets was $86.1 million higher for the year ended December 31, 1999 compared to 1998. The average yield on interest-earning assets decreased to 7.08% in 1999 compared to 7.41% in 1998. The decrease in interest expense was due to a decline in the weighted average interest rate and a reduction in the average balance due to the withdrawal of funds to purchase stock in the Conversion which occurred in July of 1998. The average balance of interest-bearing liabilities decreased $51.3 million, or 5.8%, and the average rate paid decreased to 4.10% for 1999 from 4.13% for 1998. The interest rate spread decreased 30 basis points to 2.98% for 1999 from 3.28% for 1998 as a result of the 33 basis point decrease in the yield on interest-earning assets and the 3 basis point decrease in the cost of interest-bearing liabilities. The $185.0 million loan was not obtained until October 1999 and, therefore, did not significantly affect the average balance or average cost of liabilities for 1999. 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 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. Due to growth in the loan portfolio, particularly in commercial loans, the provision for loan loss allowance was $100,000 in 1999 compared to an allowance of $650,000 in 1998. The decrease in the provision is attributable to a decrease in nonperforming loans and delinquency rates. The allowance for loan losses totaled $6.4 million at December 31, 1999, which was 0.88% of total loans. NONINTEREST INCOME--Noninterest income increased $584,000, or 2.6%, to $22.7 million for the year ended December 31, 1999, from $22.1 million for the year ended December 31, 1998. The increase was primarily due to a gain of $581,000 recognized on trading securities in 1999 related to the Butler Wick retention plan, compared to a loss of $21,000 in 1998. There were also increases in the commissions and services fees and other charges of $344,000 and $412,000, respectively, primarily due to an increase in sales of securities to Butler Wick customers. These increases were partially offset by a decrease in other noninterest income of $416,000 and losses recognized on the sale of securities of $22,000 in 1999. NONINTEREST EXPENSE--Noninterest expense increased $4.1 million to $61.0 million for 1999, from $56.9 million in 1998. This increase was primarily attributable to an increase in salaries and employee benefits of $14.3 million, primarily due to a $6.4 million one-time compensation expense due to the effect of the $6.00 per share special capital distribution on the RRP and $3.3 million in compensation expense for the first year of the RRP. The purpose of the RRP, which was approved by shareholders on July 12, 1999, 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. As of December 31, 1999 United Community had awarded 1,342,334 shares to eligible individuals. The awards vest over a five-year period, which began in August 1999. Also contributing to the increase in salaries and employee benefits was an increase in the Employee Stock Ownership Plan (ESOP) expense of $1.7 million due to the plan being outstanding for the entire year and $937,000 of expense related to the Butler Wick retention plan that was established in 1999. These increases were partially offset by a decrease in charitable contributions of $11.8 million due to United Community making a one-time donation to the Home Savings and Loan Charitable Foundation (Foundation) in 1998. Through the Foundation, United Community will continue to have an impact in the community in areas of education, civic pride, youth enrichment, cultural activities and health care. FEDERAL INCOME TAXES--Federal income taxes increased $1.3 million, or 22.5%, in 1999 compared to 1998, primarily due to an increase in book pre-tax income and a $400,000 valuation allowance recorded in 1999. The effective tax rate was 40% in 1999 and 36% in 1998. Refer to Note 10 to the consolidated financial statements for a further analysis of the effective tax rate. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 VS. DECEMBER 31, 1997 NET INCOME--Net income for the year ended December 31, 1998, was $10.1 million, compared to $14.4 million for the year ended December 31, 1997. The decline in net income resulted primarily from the contribution of $11.8 million to the Foundation in 1998 mentioned previously. Also contributing to the decline in 1998 was a recovery in 1997 of $3.3 million of interest and a loan loss recovery of $2.8 million in connection with three loans that had previously been charged off. These changes were partially offset by a $3.7 million increase in interest income and a $4.4 million decrease in interest expense. Earnings per share since the Conversion, for the six-month period ended December 31, 1998, was $0.10. There are no comparable per share earnings for 1997 as Home Savings was a mutual association. NET INTEREST INCOME--Net interest income increased $8.1 million, or 18.8%, to $51.2 million in 1998 from $43.1 million for 1997. Interest income increased $3.7 million and interest expense declined $4.4 million. The increase in interest income was primarily due to an increase in interest-earning assets as a result of the investment of proceeds from the Conversion. The average balance of interest-earning assets was $133.2 million higher for the year ended December 31, 1998 compared to 1997. The decrease in interest expense was due to a decline in the weighted average interest rate and a reduction in the average balance due to the withdrawal of funds to purchase stock in the Conversion. The interest rate spread decreased 22 basis points to 3.28% for 1998 from 3.50% for 1997 as United Community experienced a 58 basis point decrease in the yield on its interest-earning assets and a 36 basis point decrease in the cost of its interest-bearing liabilities. The interest rate spread was also impacted by the recovery of delinquent interest discussed above. 12 Interest income increased $3.7 million, or 4.4%, in 1998 from 1997. The average yield on interest-earning assets, including the effects of the recovery of delinquent interest in 1997 discussed above, decreased to 7.41% in 1998 from 7.99% in 1997. Without the $3.3 million recovery of delinquent interest, interest income for 1997 would have been $80.8 million, resulting in a $7.0 million, or 8.6%, increase when comparing 1998 to 1997. The resulting average yield on interest-earning assets would have been 7.68% for 1997 absent the $3.3 million recovery, approximately 31 basis points below the yield achieved as a result of the interest recovery and 27 basis points above the yield for 1998. Similarly, the interest rate spread would have been 3.18% for 1997 compared to 3.28% for 1998. Interest income on loans receivable decreased $1.1 million in 1998, primarily as a result of the recovery of interest in 1997. Without the 1997 recovery of interest, interest income on loans receivable would have increased $2.2 million from 1997 to 1998. The average yield on loans receivable without the recovery would have been 8.15% for 1997, compared to 8.26% for 1998. The average balance of net loans receivable increased $18.6 million for the year ended December 31, 1998 compared to 1997. The average balances of investment securities and other interest-earning assets increased by $162.6 million in 1998 compared to 1997, resulting in an additional $8.7 million of interest income for 1998. As previously stated, much of the proceeds from the Conversion were invested primarily in these instruments for liquidity and flexibility. The average balance of mortgage-backed securities decreased by $55.3 million during 1998 compared to 1997, resulting in a reduction of interest income of $4.5 million. The reduction in the average balance of mortgage-backed securities was due to repayments and maturities of mortgage-backed securities. Interest expense decreased $4.4 million, or 10.8%, from 1997 to 1998. The average balance of interest-bearing liabilities decreased $24.8 million, or 2.7%, primarily due to the withdrawal of deposits to purchase United Community shares. The average rate paid decreased to 4.13% in 1998 from 4.49% in 1997. PROVISION FOR LOAN LOSSES--An allowance of $650,000 was recorded in 1998 and a net recovery of $1.5 million was credited to operations in 1997. The recovery recorded in 1997 was due to the significant settlement of several large loans, which also affected Home Savings' total interest income for 1997. In 1997, Home Savings recovered $2.9 million that had been charged off in prior years. Approximately $2.8 million of the recovery was related to a $4.3 million loan. At December 31, 1998, Home Savings allowance for loan loss totaled $6.4 million, which equaled 0.96% of total loans. NONINTEREST INCOME--Noninterest income increased $1.9 million, or 9.50%, to $22.1 million for the year ended December 31, 1998, from $20.2 million for the year ended December 31, 1997. The increase was primarily due to an increase of $1.1 million in commissions earned by Butler Wick and an increase in service fees and other charges of $667,000 primarily related to increased fees for check services during the Conversion. The level of noninterest income was also impacted by an increase in automated teller machine service charges and NOW non-sufficient funds fees of approximately $84,000, and a rebate of approximately $29,000 from the Ohio Bureau of Workers' Compensation. These increases were offset by a decrease in underwriting and investment banking fees of $535,000 at Butler Wick. NONINTEREST EXPENSE--Noninterest expense increased $14.2 million to $56.9 million for 1998, from $42.7 million in 1997. This increase was primarily attributable to the charitable donation of $11.8 million to the Foundation and an increase of $2.1 million in salary and employee benefits primarily as a result of $921,000 in expense related to the implementation of the ESOP. FEDERAL INCOME TAXES--Federal income taxes decreased $2.1 million, or 27.3%, in 1998 compared to 1997, primarily due to lower pre-tax book income as a result of the contribution to the Foundation in 1998 and the recovery on the three loans in 1997 stated above. The effective tax rate was 36% in 1998 and 35% in 1997. 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. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ OUTSTANDING EARNED/ RATE OUTSTANDING EARNED/ RATE OUTSTANDING YIELD/ RATE BALANCE PAID BALANCE PAID BALANCE PAID - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Interest-earning assets: Net loans (1) $ 689,170 $ 54,564 7.92% $ 642,168 $ 53,063 8.26% $ 623,546 $ 54,148 8.68% Mortgage-backed securities: Available for sale 112,112 6,994 6.24 66,450 4,351 6.55 73,053 5,122 7.01 Held to maturity 157,108 10,946 6.97 218,510 15,344 7.02 267,242 19,024 7.12 Investment securities: Trading 4,300 134 3.12 2,480 86 3.47 1,700 85 5.00 Available for sale 166,465 9,409 5.65 70,997 4,195 5.91 33,897 2,170 6.40 Held to maturity 1,938 115 5.93 5,586 358 6.41 13,566 854 6.30 Margin accounts 29,297 2,207 7.53 22,569 1,673 7.41 15,180 1,211 7.98 Other interest-earning assets 110,644 5,602 5.06 156,185 8,685 5.56 23,531 1,467 6.23 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,271,034 89,971 7.08 1,184,945 87,755 7.41 1,051,715 84,081 7.99 Noninterest-earning assets 39,116 35,763 27,402 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $1,310,150 $1,220,708 1,079,117 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Deposits: Checking accounts $ 128,905 3,131 2.43 $ 123,742 2,619 2.12 $ 120,962 2,906 2.40 Savings accounts 223,438 5,533 2.48 273,765 7,115 2.60 248,914 7,387 2.97 Certificates of deposit 427,937 21,768 5.09 474,912 26,021 5.48 534,038 30,170 5.65 Other borrowed funds 55,438 3,852 6.95 14,596 815 5.58 7,927 533 6.72 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 835,718 34,284 4.10 887,015 36,570 4.13 911,841 40,996 4.49 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing liabilities 51,924 37,016 24,472 Total liabilities 887,642 924,031 936,313 Equity 422,508 296,677 142,804 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and equity $1,310,150 $1,220,708 $1,079,117 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and interest rate spread $ 55,687 2.98% $ 51,185 3.28%$ 43,085 3.50% - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin 4.38% 4.32% 4.10% - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Average interest-earning assets to average interest-bearing liabilities 152.09% 133.59% 115.34% - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
(1) Nonaccrual loans are included in the average balance. 14 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, - --------------------------------------------------------------------------------------------------------------------- 1999 VS. 1998 1998 VS. 1997 - --------------------------------------------------------------------------------------------------------------------- INCREASE INCREASE (DECREASE) DUE TO TOTAL (DECREASE) DUE TO TOTAL ----------------- INCREASE ----------------- INCREASE RATE VOLUME (DECREASE) RATE VOLUME (DECREASE) - --------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Interest-earning assets: Loans $(2,003) $ 3,504 $ 1,501 $(2,828) $ 1,743 $(1,085) Mortgage-backed securities: Available for sale (195) 2,838 2,643 (326) (445) (771) Held to maturity (119) (4,279) (4,398) (255) (3,425) (3,680) Investment securities: Trading (8) 56 48 (2) 3 1 Available for sale (174) 5,388 5,214 (153) 2,178 2,025 Held to maturity (25) (218) (243) 16 (512) (496) Margin accounts 28 506 534 (79) 541 462 Other interest-earning assets (724) (2,359) (3,083) (141) 7,359 7,218 - --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $(3,220) $ 5,436 2,216 $(3,768) $ 7,442 3,674 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Checking accounts 399 113 512 (356) 69 (287) Savings accounts (323) (1,259) (1,582) (1,385) 1,112 (273) Certificates of deposit (1,786) (2,467) (4,253) (887) (3,261) (4,148) Other borrowed funds 244 2,793 3,037 (71) 353 282 - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $(1,466) $ (820) (2,286) $(2,699) $(1,727) (4,426) - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 4,502 $ 8,100 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
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's investment in equity securities, other than stock in the FHLB of Cincinnati, is 0.13% of total assets, therefore, United Community is subject to minimal equity price risk. United Community is not affected by foreign currency exchange rate risk or commodity price 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. QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk analysis, Home Savings uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of its capital regulations and also considers the OTS methodology in light of the rate shock estimates contained in the quarterly rate shock risk reports prepared by an outside consulting firm that specializes in interest rate risk assessments as well as the sensitivity of earnings to changes in interest rates and the corresponding impact on net interest income. 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. 15 Home Savings uses a net portfolio value and earnings simulation model prepared by a third party 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 that the Home Savings Board of Directors deems advisable in the event of various changes in interest rates.
YEAR ENDED DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) +300 $ 294,526 $ (62,489) (17.50)% 27.07% (3.04)% $ (1,866) (3.85)% +200 314,065 (42,950) (12.03) 28.07 (2.04) (1,219) (2.51) +100 335,609 (21,406) (6.00) 29.13 (0.98) (568) (1.17) Static 357,015 - - 30.11 - - - (100) 375,959 18,944 5.31 30.89 0.78 399 0.82 (200) 376,848 19,833 5.56 30.61 0.50 (427) (0.88) (300) 369,746 12,731 3.57 29.88 (0.23) (2,832) (5.84)
YEAR ENDED DECEMBER 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) +300 $ 287,238 $ (57,587) (16.70)% 27.67% (2.72)% $ (2,098) (4.75)% +200 307,696 (37,129) (10.77) 28.73 (1.66) (1,259) (2.85) +100 327,953 (16,872) (4.89) 29.70 (0.69) (507) (1.15) Static 344,825 - - 30.39 - - - (100) 344,333 (492) (0.14) 30.00 (0.39) (553) (1.25) (200) 337,232 (7,593) (2.20) 29.19 (1.20) (2,345) (5.32) (300) 332,677 (12,148) (3.52) 28.54 (1.85) (4,068) (9.22)
As illustrated in the tables, Home Savings' NPV is more sensitive to increases in interest rates than to decreases. Home Savings' sensitivity to increases in rates occurs principally because, as rates increase, borrowers become less likely to prepay fixed-rate loans than when interest rates are declining, and the majority of Home Savings' loans have fixed rates of interest. In addition, loan demand is adversely affected by increases in interest rates. Thus, in a rising interest rate environment, the amount of interest Home Savings would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made, while the interest Home Savings would pay on its deposits would increase rapidly because deposits generally have shorter periods to repricing than loans. 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 well in excess of regulatory requirements. See "Liquidity and Capital." 16 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, 1999, 1998 and 1997.
YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) Net income $ 10,395 $ 10,129 $ 14,427 Adjustments to reconcile net income to net cash from operating activities 953 (3,243) (8,055) - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 11,348 6,886 6,372 Net cash (used in) provided by investing activities (89,097) (72,973) 45,826 Net cash provided by (used in) financing activities 17,320 202,092 (37,234) - ------------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents (60,429) 136,005 14,964 Cash and cash equivalents at beginning of year 171,874 36,404 21,440 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 111,445 $ 172,409 $ 36,404 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
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, 1999, approximately $326.1 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. OTS regulations presently require Home Savings to maintain an average daily balance of investments in United States Treasury, federal agency obligations and other investments in an amount equal to 4% of the sum of Home Savings' average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement is intended to provide a source of relatively liquid funds upon which Home Savings may rely, if necessary, to fund loan originations, deposit withdrawals or other short-term funding needs. As of December 31, 1999 Home Savings' liquidity ratio significantly exceeded the minimum requirements. Home Savings is required by OTS regulations to meet certain minimum capital requirements. Current capital requirements call for tangible capital of 1.5% of adjusted tangible assets, core capital (which for Home Savings consists solely of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for Home Savings consists of core capital and general valuation allowances) 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, 1999.
EXCESS OF ACTUAL CAPITAL APPLICABLE ACTUAL CAPITAL CURRENT REQUIREMENT OVER CURRENT REQUIREMENT ASSET - -------------------------------------------------------------------------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT TOTAL - -------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Tangible capital $ 320,119 26.75% $ 17,948 1.50% $ 302,171 25.25% $1,196,548 Core capital 320,119 26.75 35,896 3.00 284,223 23.75 1,196,548 Risk-based capital 326,376 50.41 51,794 8.00 274,582 42.41 647,426
ACCOUNTING AND REPORTING DEVELOPMENTS A discussion of recently issued accounting pronouncements and their impact on United Community's Consolidated Financial Statements is provided at page 26 in Note 1 to the Notes to Consolidated Financial Statements. 17 SUMMARY OF QUARTERLY FINANCIAL INFORMATION 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) 1999: Total interest income $22,046 $22,390 $22,699 $22,836 $89,971 Total interest expense 7,702 7,764 7,850 10,968 34,284 Net interest income 14,344 14,626 14,849 11,868 55,687 Provision for loan loss allowances 75 25 - - 100 Noninterest income 5,749 5,761 4,862 6,349 22,721 Noninterest expense 12,091 12,043 22,570 14,333 61,037 Income taxes 2,801 3,017 (916) 1,974 6,876 Net income (loss) 5,126 5,302 (1,943) 1,910 10,395 Earnings (loss) per share: Basic 0.15 0.16 (0.06) 0.06 $0.31 Diluted 0.15 0.16 (0.06) 0.05 $0.30 1998: Total interest income $20,089 $21,459 $23,661 $22,546 $87,755 Total interest expense 9,724 10,141 8,657 8,048 36,570 Net interest income 10,365 11,318 15,004 14,498 51,185 Provision for loan loss allowances 250 150 100 150 650 Noninterest income 4,815 5,479 6,104 5,739 22,137 Noninterest expense 10,375 10,786 23,593 12,177 56,931 Income taxes 1,592 2,055 (977) 2,942 5,612 Net income 2,963 3,806 (1,608) 4,968 10,129 Earnings (loss) per share (1): Basic N/A N/A (0.05) 0.15 0.10 Diluted N/A N/A (0.05) 0.15 0.10
(1) Earnings per share for the year ended 12/31/98 are based on net income for the six months ended 12/31/98. There were 37,758,166 common shares of United Community stock issued and 33,867,996 shares outstanding as of March 4, 2000. United Community's common stock trades on The Nasdaq Stock Market(R) under the symbol UCFC. Quarterly stock prices and dividends declared are shown in the following table. MARKET PRICE AND DIVIDENDS
- ------------------------------------------------------------------------------------------------------------------------------------ FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 1999 QUARTER QUARTER QUARTER QUARTER 1998 - ------------------------------------------------------------------------------------------------------------------------------------ 1999: 1998: High $14.375 $14.688 $14.875 $15.500 $15.500 High N/A N/A $18.130 $15.000 $18.130 Low 11.250 10.750 12.000 9.563 9.563 Low N/A N/A 13.500 12.880 12.880 Close 11.750 14.688 13.813 9.938 9.938 Close N/A N/A 14.000 14.880 14.880 Dividends Dividends declared declared and paid 0.075 0.075 0.075 0.075 0.030 and paid N/A N/A N/A 0.075 0.075 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
YEAR 2000 ISSUE All year 2000 readiness activities contemplated by United Community were successfully implemented on or before December 31, 1999. On January 1, 2000, all mission critical facilities and transaction systems were successfully tested. The results of these tests indicate that no irregularities occurred as a result of or following the century date change. 18 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) ASSETS Cash and deposits with banks $ 30,759 $ 18,634 Federal funds sold and other 80,686 153,775 - ---------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 111,445 172,409 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Investment securities: Trading (amortized cost of $7,647 and $2,327, respectively) 7,657 2,804 Available for sale (amortized cost of $163,515 and $111,606,respectively) 161,904 112,200 Held to maturity (fair value of $1,098 and $5,016, respectively) 1,091 4,993 Mortgage-backed securities: Available for sale (amortized cost of $116,569 and $98,357, respectively) 113,559 98,890 Held to maturity (fair value of $135,993 and $187,010, respectively) 138,079 182,999 Loans, net (including allowance for loan losses of $6,405 and $6,398, respectively) 723,087 657,498 Margin accounts 32,751 32,200 Federal Home Loan Bank stock 12,825 11,958 Premises and equipment 9,252 9,062 Accrued interest receivable 8,347 7,259 Real estate owned 158 78 Other assets 7,418 5,339 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,327,573 $ 1,297,689 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 834,087 $ 777,583 Other borrowed funds 213,578 26,727 Advance payments by borrowers for taxes and insurance 4,038 3,954 Accrued interest payable 4,168 672 Accrued expenses and other liabilities 14,834 13,932 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,070,705 822,868 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock-no par value; 1,000,000 shares authorized and unissued at December 31, 1999 Common stock-no par value; 499,000,000 shares authorized; 37,758,166 shares issued and 34,420,931 shares outstanding at December 31, 1999, and 32,829,670 shares outstanding at December 31, 1998 136,509 345,872 Retained earnings 153,553 154,078 Other comprehensive (loss) income (3,003) 733 Unearned compensation (30,191) (25,862) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 256,868 474,821 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,327,573 $ 1,297,689 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 19 CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME Loans $ 54,564 $ 53,063 $ 54,148 Mortgage-backed securities: Available for sale 6,994 4,351 5,122 Held to maturity 10,946 15,344 19,024 Investment securities: Trading 134 86 85 Available for sale 9,409 4,195 2,170 Held to maturity 115 358 854 Margin accounts 2,207 1,673 1,211 FHLB stock dividend 867 822 766 Other interest-earning assets 4,735 7,863 701 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 89,971 87,755 84,081 INTEREST EXPENSE Interest expense on deposits 30,432 35,755 40,463 Interest expense on other borrowed funds 3,852 815 533 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 34,284 36,570 40,996 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 55,687 51,185 43,085 PROVISION FOR (RECOVERY OF) LOAN LOSS ALLOWANCES 100 650 (1,546) - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSS ALLOWANCES 55,587 50,535 44,631 - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Commissions 16,186 15,842 14,712 Service fees and other charges 4,644 4,232 3,565 Underwriting and investment banking 636 743 1,278 Net gains (losses): Mortgage-backed securities 40 253 80 Investment securities (62) 40 -- Trading securities 581 (21) 16 Other (4) (68) (34) Other income 700 1,116 600 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 22,721 22,137 20,217 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries and employee benefits 43,348 29,039 26,954 Occupancy 2,031 1,953 1,815 Equipment and data processing 5,148 4,946 4,679 Deposit insurance premiums 458 631 588 Franchise tax 1,897 1,917 1,752 Advertising 1,455 1,447 1,310 Acquisition expense 478 -- -- Other expenses 6,222 5,154 4,999 Charitable contributions -- 11,844 607 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest expenses 61,037 56,931 42,704 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 17,271 15,741 22,144 INCOME TAXES 6,876 5,612 7,717 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 10,395 $ 10,129 $ 14,427 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE (1) Basic $ 0.31 $ 0.10 N/A Diluted $ 0.30 $ 0.10 N/A
(1) Earnings per share for the year ended 12/31/98 are based on income for the six months ended 12/31/98. See Notes to Consolidated Financial Statements. 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER (DOLLARS IN THOUSANDS, SHARES COMMON RETAINED COMPREHENSIVE UNEARNED EXCEPT PER SHARE AMOUNTS) OUTSTANDING STOCK EARNINGS INCOME COMPENSATION TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1996 - $3,123 $131,923 $542 - $135,588 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income - - 14,427 - - 14,427 Change in net unrealized gain on securities, net of taxes of $95 - - - 176 - 176 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income - - 14,427 176 - 14,603 Other - (49) - - - (49) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1997 - 3,074 146,350 718 - 150,142 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income - - 10,129 - - 10,129 Change in net unrealized gain on securities, net of taxes of $8 - - - 15 - 15 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income - - 10,129 15 - 10,144 Issuance of common shares 32,038 342,602 - - (26,773) 315,829 Issuance of common shares for purchase of Butler Wick 1,700 - - - - - Shares distributed by ESOP trust 91 238 - - 911 1,149 Dividends paid, $0.075 per share - - (2,401) - - (2,401) Other - (42) - - - (42) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1998 33,829 345,872 154,078 733 (25,862) 474,821 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Adjustment to convert Butler Wick to a calendar year end (1) - - (825) - - (825) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE JANUARY 1, 1999 33,829 345,872 153,253 733 (25,862) 473,996 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income - - 10,395 - - 10,395 Change in net unrealized (loss) on securities, net of taxes of ($2,012) - - - (3,736) - (3,736) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income - - 10,395 (3,736) - 6,659 Issuance of common shares for RRP 1,342 16,444 - - (16,444) - Amortization of restricted common stock compensation - 10,293 10,293 Shares distributed by ESOP trust 289 742 - - 1,822 2,564 Shares purchased by ESOP (1,039) - - - - - Special capital distribution, $6.00 per share - (226,549) - - - (226,549) Dividends paid, $0.30 per share - - (10,095) - - (10,095) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1999 $34,421 $136,509 $153,553 $(3,003) $(30,191) $256,868 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
(1) Butler Wick reported on a June 25, 1999 fiscal year end. Adjustment reflects Butler Wick activity for the six months ended June 25, 1999. See Notes to Consolidated Financial Statements. 21 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,395 $ 10,129 $ 14,427 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (recovery of) loan loss allowances 100 650 (1,546) Net (gains) losses 25 (223) (46) Accretion of discounts and amortization of premiums (472) (1,425) (1,090) Depreciation 1,356 1,415 1,379 FHLB stock dividends (867) (822) (766) (Increase) decrease in interest receivable (1,032) (855) 55 Increase (decrease) in interest payable 3,404 (116) (155) (Increase) decrease in prepaid and other assets (1,362) (3,614) 76 Increase (decrease) in other liabilities 4,511 (649) 2,865 (Increase) decrease in trading securities (4,294) 62 (449) Amortization of restricted stock compensation 10,293 -- -- Increase in margin accounts (13,272) (10,649) (8,378) ESOP compensation 2,563 1,149 -- Charitable contribution of stock -- 11,834 -- - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 11,348 6,886 6,372 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity 44,898 66,328 42,885 Mortgage-backed securities available for sale 27,353 19,452 19,094 Investment securities held to maturity 5,000 100 23,000 Investment securities available for sale 27,500 11,114 6,312 Proceeds from sale of: Mortgage-backed securities available for sale 4,951 13,145 3,065 Mortgage-backed securities held to maturity -- 2,764 -- Investment securities available for sale 21,511 -- -- Equity securities available for sale 2,454 465 -- Purchases of: Mortgage-backed securities available for sale (50,532) (69,119) -- Mortgage-backed securities held to maturity -- (8,047) -- Investment securities available for sale (101,039) (82,466) (30,876) Investment securities held to maturity (691) (299) (100) Equity securities available for sale (4,204) (1,588) (148) Principal collected on loans 179,906 205,791 119,120 Loans originated (244,876) (229,485) (133,357) Purchases of premises and equipment (1,565) (1,227) (3,368) Other 237 99 199 - ----------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (89,097) (72,973) 45,826 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in NOW, savings and money market accounts 33,539 (18,590) (16,842) Net increase (decrease) in certificates of deposit 22,966 (90,637) (28,410) Net increase (decrease) in advance payments by borrowers for taxes and insurance 84 239 (137) Net increase in borrowed funds 197,375 9,486 8,155 Special capital distribution (226,549) -- -- Net proceeds from the sale or issuance of common shares -- 303,995 -- Dividends paid (10,095) (2,401) -- - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 17,320 202,092 (37,234) - ----------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (60,429) 136,005 14,964 Cash and cash equivalents, beginning of year 172,409 36,404 21,440 Adjustment to convert Butler Wick to a calendar year end (1) (535) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 111,445 $ 172,409 $ 36,404 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
(1) Butler Wick reported on a June 25, 1999 fiscal year end. Adjustment reflects Butler Wick activity for the six months ended June 25, 1999. See Notes to Consolidated Financial Statements. 22 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), a state chartered savings and loan company, and Butler Wick Corp. (Butler Wick), an investment brokerage firm, conform to generally accepted accounting principles 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 northeastern Ohio. At the end of 1999, Home Savings was doing business through 14 full service banking branches. Loans and deposits are primarily generated from the areas where banking branches are located. Home Savings' income is derived 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 Corp., the parent company for three wholly-owned subsidiaries: Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick Trust Company. Butler Wick currently conducts business from 10 offices throughout northeastern Ohio and western Pennsylvania. Butler Wick provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. 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 Financial Corp. and its subsidiaries. All material inter-company transactions have been eliminated. Certain prior period data has been reclassified to conform to current period presentation. Financial data for all prior periods have been restated to reflect the third quarter 1999 acquisition of Butler Wick. The acquisition was accounted for as a pooling-of-interests. Refer to Note 2 discussing the contribution of Butler Wick to the consolidated income statement. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP United Community issued 34,715,625 common shares in connection with the Conversion. Gross proceeds from the offering were $347,156,250, which includes 2,677,250 shares issued to the United Community Financial Corp. Employee Stock Ownership Plan and 1,183,438 shares sold to Home Savings for transfer to the Home Savings Charitable Foundation. Conversion costs amounted to $4.6 million. Home Savings issued all its outstanding common stock to United Community in exchange for approximately one-half of the net proceeds. United Community accounted for the purchase in a manner similar to a pooling of interests whereby assets and liabilities of Home Savings maintain their historical cost basis in the consolidated company. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT AND MORTGAGE-BACKED SECURITIES Securities are classified as available for sale, held to maturity or trading upon their acquisition. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of equity, net of taxes. Securities classified as held to maturity are carried at amortized cost. Securities classified as trading are carried at estimated fair market value with the market value adjustment reflected on the statement of income. Premiums and discounts are recognized in interest income over the period to maturity by the level yield method. Realized gains or losses on the sale of debt securities are recorded based on the amortized cost of the specific securities sold. Security sales are recorded on a trade date basis. 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 on originated loans or unamortized premiums or discounts on purchased loans. Discounts and premiums are accreted or amortized using the interest method over the remaining period to contractual maturity. Unamortized net fees or costs are recognized upon early repayment of the loans. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses. 23 Loans intended for sale are carried at the lower of cost or estimated market value determined on an aggregate basis. Net unrealized losses are recognized through a valuation allowance by a charge to income. Gains or losses on the sale of loans are determined under the specific identification method. A loan (including a loan impaired under Statement of Financial Accounting Standard (SFAS) No. 114) is classified as nonaccrual when collectability is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). A loan may be considered impaired, but remain on accrual status, when the borrower demonstrates (by continuing to make payments) a willingness to keep the loan current and by reducing the delinquency to less than 90 days. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Cash receipts received on impaired loans are generally applied first to escrow requirements, then to delinquent interest, with any remainder to the principal balance. Loans are returned to full accrual status when the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). Loans are classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or the terms due to the inability of the borrower to meet the obligation under the original terms. A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In general, Home Savings considers a loan on income-producing properties to be impaired when the debt service ratio is less than 1.0 and it is not probable that all payments will be received in accordance with contractual terms. Loans on non-income producing properties are considered impaired whenever fair value of the underlying collateral is less than book value of the outstanding loan. Home Savings performs a review of all loans over $500,000 to determine if the impairment criteria have been met. If the impairment criteria have been met, a reserve is calculated, including all collection costs, according to the provisions of the SFAS No. 114. Most of Home Savings' loan portfolios are excluded from the scope of SFAS No. 114 because the pronouncement is generally not applicable to large groups of smaller-balance homogeneous loans such as residential mortgage and other consumer loans. For loans which are individually not significant ($500,000 or less) and represent a homogeneous population, Home Savings evaluates impairment based on the level and extent of delinquencies in the portfolio and Home Savings' prior charge-off experience with those delinquencies. Home Savings charges principal off at the earlier of (i) when a total loss of principal has been deemed to have occurred as a result of the book value exceeding the fair value, or (ii) when collection efforts have ceased. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. 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, overall growth in the loan portfolio and current economic conditions. Consequently, these estimates are particularly susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level. In determining the adequacy of the allowance for loan loss, management reviews and evaluates on a quarterly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Classification Committee and allocated to the loan. Other loans not specifically reviewed by management are evaluated using the historical charge-off experience ratio calculated by type of loan. The historical charge-off experience ratio factors into account the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied and any other known factors which may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed quarterly and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends or actual principal charge-off. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentration and the closely associated effect changing economic conditions have on Home Savings. PREMISES AND EQUIPMENT 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 (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. 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. 24 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. INCOME TAXES The provision for federal income taxes is based upon earnings reported for financial statement purposes rather than amounts reported on United Community's income tax returns. 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 annually 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. EARNINGS PER SHARE Basic "Earnings Per Share" (EPS) is based on the weighted average number of common shares outstanding during the year. Diluted EPS is based on the weighted average number of common shares and common share equivalents outstanding during the year. See further discussion at Note 18. 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. 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 investments and interest expense on deposits. 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 investments which adjust more slowly to changes in interest rates than its interest bearing liabilities which are deposits. Accordingly, Home Savings' earnings could be adversely affected during periods of rising interest rates. POTENTIAL IMPACT OF FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET AND CREDIT RISK 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 northeastern 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 transaction can be directly impacted by volatile trading markets, which may impair the customer's ability to satisfy its obligations to Butler Wick. 25 NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for years beginning after June 15, 2000. Management does not believe the adoption of this statement will have a material impact on United Community's financial condition and results of operations. 2. ACQUISITION OF BUTLER WICK CORP. On August 12, 1999, United Community acquired Butler Wick, a full service broker dealer for retail and institutional clients. In connection with the acquisition, United Community issued approximately 1.7 million common shares in exchange for all of Butler Wick's outstanding shares. The acquisition was accounted for by the pooling of interests method. Accordingly, the assets, liabilities and shareholders' equity of Butler Wick were recorded on the books of United Community at their values as reported on the books of Butler Wick immediately prior to the consummation of the acquisition by United Community. This presentation required the restatements of prior periods as if the companies had been combined for all years presented. The restatement for the Butler Wick acquisition was accomplished by combining Butler Wick's June 25, 1999 and 1998 fiscal year financial information with United Community's December 31, 1998 and 1997 calendar year financial information, respectively. In 1999, Butler Wick's fiscal year was conformed to United Community's calendar year. As a result of conforming fiscal periods, United Community's consolidated statements of income for the second half of 1998 and the first half of 1999 include Butler Wick's net income for the six months ended June 25, 1999 of $825,000. An adjustment to shareholder's equity removes the effect of including Butler Wick's financial results for both periods. The contributions of Butler Wick to consolidated net interest income, non-interest income and net income for the periods prior to the acquisition were as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 1999 1998 1997 ----------------- ---------- ----------- (IN THOUSANDS) (UNAUDITED) Net Interest Income United Community $28,417 $50,126 $42,222 Butler Wick 554 1,059 863 ----------------- ---------- ----------- Combined $28,971 $51,185 $43,085 ----------------- ---------- ----------- ----------------- ---------- ----------- Noninterest Income United Community $ 894 $ 2,289 $ 1,564 Butler Wick 10,617 19,848 18,653 ----------------- ---------- ----------- Combined $11,511 $22,137 $20,217 ----------------- ---------- ----------- ----------------- ---------- ----------- Net Income United Community $ 9,602 $ 8,699 $13,047 Butler Wick 825 1,430 1,380 ----------------- ---------- ----------- Combined $10,427 $10,129 $14,427 ----------------- ---------- ----------- ----------------- ---------- -----------
3. 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 $4.5 million and $3.7 million at December 31, 1999 and 1998, respectively. 26 4. INVESTMENT SECURITIES Investment securities are summarized as follows:
DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Available for Sale - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities $ 57,905 $ 8 $ 573 $ 57,340 Corporate notes 102,341 4 901 101,444 Equity securities 1,864 14 163 1,715 Tax exempt municipal securities 1,405 1,405 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale 163,515 26 1,637 161,904 Held to Maturity - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities 1,091 8 1 1,098 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities held to maturity 1,091 8 1 1,098 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities $164,606 $ 34 $ 1,638 $163,002 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Available for Sale - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities $ 28,045 $ 391 $ -- $ 28,436 Corporate notes 82,249 331 128 82,452 Equity securities 1,312 -- -- 1,312 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale 111,606 722 128 112,200 Held to Maturity - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities 4,993 23 -- 5,016 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities held to maturity 4,993 23 -- 5,016 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities $116,599 $ 745 $ 128 $117,216 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
The weighted average interest rate on investment securities was 5.59% and 5.87% at December 31, 1999 and 1998, respectively. The corporate notes consist primarily of medium-term notes issued by corporations with investment grade ratings. Investment securities available for sale by contractual maturity, repricing or expected call date are shown below:
DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------- AMORTIZED COST FAIR VALUE - ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Due in one year or less $ 83,860 $ 83,372 Due after one year through five years 77,791 76,817 Due after five years through ten years - - Due after ten years - - - ------------------------------------------------------------------------------------------------------------------------------- Total $ 161,651 $ 160,189 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
27 Investment securities held to maturity by contractual maturity, repricing or expected call date are shown below:
DECEMBER 31, 1999 - -------------------------------------------------------------------------------------------------------------------------- AMORTIZED COST FAIR VALUE - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Due in one year or less $ 693 $ 699 Due after one year through five years 398 399 Due after five years through ten years - - Due after ten years - - - -------------------------------------------------------------------------------------------------------------------------- Total $1,091 $1,098 - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
Proceeds on sales of investment and equity securities available for sale were approximately $24.0 million for the year ended December 31, 1999. There were realized gains of approximately $176,000 and realized losses of approximately $238,000 for the year ended December 31, 1999. Proceeds on sales of equity securities available for sale were approximately $465,000 for the year ended December 31, 1998. There were realized gains of approximately $40,000 and no realized losses for the year ended December 31, 1998. There were no sales of investment securities for the year ended December 31, 1997. There were no sales of investment securities held to maturity during the years ended December 31, 1999 and 1998. Securities pledged for public funds deposits were approximately $60.2 million and $2.4 million at December 31, 1999 and 1998, respectively. 5. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are summarized as follows:
DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Available for Sale - ------------------------------------------------------------------------------------------------------------------------------- Participation certificates: Government agency issues $ 48,912 $ 239 $1,615 $ 47,536 Private issues 439 - 10 429 Collateralized mortgage obligations: Government agency issues 26,350 - 518 25,832 Private issues 40,868 - 1,106 39,762 - ------------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities available for sale 116,569 239 3,249 113,559 Held to Maturity - ------------------------------------------------------------------------------------------------------------------------------- Participation certificates: Government and government agency issues 138,079 731 2,817 135,993 - ------------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities $254,648 $ 970 $6,066 $249,552 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
28
DECEMBER 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Available for Sale - ----------------------------------------------------------------------------------------------------------------------------- Participation certificates: Government agency issues $ 58,423 $ 893 $ 55 $ 59,261 Private issues 2,106 - 77 2,029 Collateralized mortgage obligations: Government agency issues 13,075 5 34 13,046 Private issues 24,753 - 199 24,554 - ----------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities available for sale 98,357 898 365 98,890 Held to Maturity - ----------------------------------------------------------------------------------------------------------------------------- Participation certificates: Government and government agency issues 182,999 4,071 60 187,010 - ----------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities $281,356 $4,969 $425 $285,900 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities are classified by type of interest payment as follows:
DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Available for Sale - ----------------------------------------------------------------------------------------------------------------------------- Adjustable rate: Private issues $ 439 $ 429 $ 571 $ 571 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Total adjustable rate 439 429 571 571 - ----------------------------------------------------------------------------------------------------------------------------- Fixed rate: Participation certificates: Government agency issues 48,912 47,536 58,423 59,261 Private issues 1,535 1,458 Collateralized mortgage obligations: Government agency issues 26,350 25,832 13,075 13,046 Private issues 40,868 39,762 24,753 24,554 - ----------------------------------------------------------------------------------------------------------------------------- Total fixed rate 116,130 113,130 97,786 98,319 - ----------------------------------------------------------------------------------------------------------------------------- Total available for sale 116,569 113,559 98,357 98,890 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Held to Maturity Adjustable rate: Participation certificates: Government agency issues 504 500 718 712 - ----------------------------------------------------------------------------------------------------------------------------- Total adjustable rate 504 500 718 712 - ----------------------------------------------------------------------------------------------------------------------------- Fixed rate: Participation certificates: Government and government agency issues 137,575 135,493 182,281 186,298 - ----------------------------------------------------------------------------------------------------------------------------- Total fixed rate 137,575 135,493 182,281 186,298 - ----------------------------------------------------------------------------------------------------------------------------- Total held to maturity 138,079 135,993 182,999 187,010 - ----------------------------------------------------------------------------------------------------------------------------- Total mortgage-backed securities $254,648 $249,552 $281,356 $285,900 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
29 Proceeds on sales of mortgage-backed securities available for sale were $4.9 million for the year ended December 31, 1999. There were realized gains of $40,000 and no realized losses for the year ended December 31, 1999. There were no sales of mortgage-backed securities held to maturity during the year ended December 31, 1999. Proceeds on sales of mortgage-backed securities available for sale were $13.1 million and $3.1 million for the years ended December 31, 1998 and 1997, respectively. There were realized gains of $147,000 and $80,000 for the years ended December 31, 1998 and 1997, respectively, and no realized losses for 1998 or 1997. Proceeds on sales of mortgage-backed securities held to maturity for the year ended December 31, 1998 were $2.8 million with an amortized cost of $2.7 million. Mortgage-backed securities sold from the held to maturity portfolio were less than 15% of the principal outstanding at acquisition. There were realized gains of $106,000 and no realized losses for the year ended December 31, 1998. There were no sales of mortgage-backed securities held to maturity during the year ended December 31, 1997. 6. LOANS Loans consist of the following:
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) Real Estate: Permanent: One- to four-family $546,888 $516,767 Multifamily 7,838 8,172 Non-residential 28,701 31,308 Land 299 190 Construction: One- to four-family 27,486 25,691 Multifamily and non-residential 1,637 833 - ------------------------------------------------------------------------------------------------------------------------------ Total real estate 612,849 582,961 Consumer 43,139 41,773 Commercial 115,108 75,085 - ------------------------------------------------------------------------------------------------------------------------------ Total loans 771,096 699,819 - ------------------------------------------------------------------------------------------------------------------------------ Less: Loans in process 36,693 31,026 Allowance for loan losses 6,405 6,398 Deferred loan fees, net 4,911 4,897 - ------------------------------------------------------------------------------------------------------------------------------ Total 48,009 42,321 - ------------------------------------------------------------------------------------------------------------------------------ Loans, net $723,087 $657,498 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
Loans with adjustable rates included above totaled $164.8 million and $161.1 million at December 31, 1999 and 1998, respectively. Substantially all such loans have contractual interest rates that increase or decrease at periodic intervals no greater than three years, or have original terms to maturity of three years or less. Adjustable-rate loans reprice primarily based upon U.S. Treasury security rates. Home Savings' primary lending area is Northeast Ohio. At December 31, 1999 and 1998, substantially all of Home Savings' gross loans were to borrowers in Ohio. Home Savings originates or purchases commercial real estate and business loans. These loans are considered by management to be of somewhat greater risk of uncollectibility than single-family residential real estate loans due to the dependency on income production or future development of real estate. The following table sets forth Home Savings' commercial real estate portfolios by type of collateral.
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL - ------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Strip shopping centers $ 1,481 5.16% $ 1,614 5.16% Office buildings 7,269 25.33 8,230 26.29 Warehouses 16,284 56.74 17,050 54.46 Hotel property 3,468 12.08 4,111 13.12 Other 199 0.69 303 0.97 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 28,701 100.00% $31,308 100.00% - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
30 Commercial real estate loans are typically collateralized by the property. Commercial loans are collateralized by accounts receivable, inventory and other assets used in the borrowers' business. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers' residence. At December 31, 1999, 1998 and 1997, loans serviced for the benefit of others, not included in the detail above, totaled $5.3 million, $6.0 million and $6.6 million, respectively. 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 exposes 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, 1999, there were outstanding commitments to originate $10.2 million of fixed-rate mortgage loans and other loans (with interest rates that ranged from 7.0% to 8.75%), $1.2 million of adjustable-rate loans, discounted, and $7.1 million of commercial loans. Terms of the commitments extend up to six months, but are generally less than two months. At December 31, 1999, there were also outstanding unfunded consumer lines of credit of $23.1 million, which are adjustable-rate based on the one-year U.S. Treasury index, and commercial lines of credit of $19.5 million, which are 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. 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, - ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Balance, beginning of year $ 6,398 $ 5,982 $ 5,040 Provision for (recovery of) loan loss allowances 100 650 (1,546) Amounts charged off (125) (270) (446) Recoveries 32 36 2,934 - ------------------------------------------------------------------------------------------------------------- Balance, end of year $ 6,405 $ 6,398 $ 5,982 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
Nonperforming loans (loans 90 days past due and restructured loans) were $3.9 million, $7.6 million and $10.2 million at December 31, 1999, 1998 and 1997, respectively.
AS OF OR FOR THE YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Impaired loans on which no specific valuation allowance was provided $3,568 $5,677 Impaired loans on which specific valuation allowance was provided 47 52 - -------------------------------------------------------------------------------------------------------------------------- Total impaired loans at year-end 3,615 5,729 Specific valuation allowances on impaired loans at year-end 47 52 Average impaired loans during year 3,919 6,830 Interest income recognized on impaired loans during the year 174 343 Interest income potential based on original contract terms of impaired loans 335 349 - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
Directors and officers of United Community, Home Savings and Butler Wick are customers of Home Savings in the ordinary course of business. Loans of directors and officers have terms consistent with those offered to other customers. At December 31, 1999 and 1998, loans to officers or directors of United Community, Home Savings and Butler Wick totaled approximately $1.3 million and $1.4 million, respectively. 31 7. PREMISES AND EQUIPMENT Premises and equipment consist of the following:
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Land and improvements $ 2,195 $ 1,952 Buildings 10,606 10,103 Leasehold improvements 1,069 1,018 Furniture and equipment 8,025 7,560 - ------------------------------------------------------------------------------------------------------------------------- 21,895 20,633 Less allowances for depreciation and amortization 12,643 11,571 - ------------------------------------------------------------------------------------------------------------------------- Total $ 9,252 $ 9,062 - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
8. DEPOSITS Deposits consist of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE - ---------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Checking accounts: Interest-bearing $ 72,642 1.27% $ 69,284 1.86% Noninterest-bearing 9,981 6,933 Savings accounts 223,038 2.50 224,840 2.50 Money market accounts 73,698 3.71 44,764 2.57 Certificates of deposit 454,728 5.26 431,762 5.35 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits $834,087 3.99% $777,583 4.02% - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Interest-bearing checking $ 1,180 $ 1,279 $ 1,165 Savings accounts 5,533 7,114 7,387 Money market accounts 1,951 1,340 1,741 Certificates of deposit 21,768 26,022 30,170 - ---------------------------------------------------------------------------------------------------------------------------- Total $30,432 $35,755 $40,463 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
A summary of certificates of deposit by maturity follows:
DECEMBER 31, 1999 - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------------------- Within 12 months $ 326,062 12 months to 24 months 61,031 24 months to 36 months 41,653 36 months to 48 months 18,745 Over 48 months 7,237 - ---------------------------------------------------------------------------------------------------------------------------- Total $ 454,728 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
32 A summary of certificates of deposit and other deposits with balances of $100,000 or more by maturity is as follows:
DECEMBER 31, 1999 CERTIFICATES OF CHECKING, SAVINGS AND DEPOSIT MONEY MARKET ACCOUNTS - ------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Three months or less $10,397 $47,681 Over three months to six months 11,407 - Over six months to twelve months 6,496 - Over twelve months 12,764 - - ---------------------------------------------------------------------------------------------------------------------------- Total $41,064 $47,681 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
Deposits in excess of $100,000 are not federally insured. Home Savings did not have brokered deposits for the years ended December 31, 1999 and 1998. 9. OTHER BORROWED FUNDS Other borrowed funds consist of the following:
DECEMBER 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Transaction loan, variable interest, due 120 days $185,000 $ - Variable interest revolving line of credit 28,558 26,727 Other 20 - - ---------------------------------------------------------------------------------------------------------------------------- Total $213,578 $26,727 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
10. INCOME TAXES The provision for income taxes consists of the following components:
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Current $6,822 $9,536 $7,542 Deferred 54 (3,924) 175 - ---------------------------------------------------------------------------------------------------------------------------- Total $6,876 $5,612 $7,717 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
A reconciliation from tax at the statutory rate to the income tax provision is as follows:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 DOLLARS RATE DOLLARS RATE DOLLARS RATE - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Tax at statutory rate $6,045 35.0% $5,509 35.0% $7,750 35.0% Increase (decrease) due to: Valuation of temporary differences 400 2.3 - - - - State taxes 230 1.3 94 0.6 - - Other 201 1.2 9 - (33) -0.1 - ------------------------------------------------------------------------------------------------------------------------------------ Income tax provision $6,876 39.8% $5,612 35.6% $7,717 34.9% - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
33 Significant components of the deferred tax assets and liabilities are as follows. A valuation allowance has been established as discussed below:
DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Deferred tax assets: Charitable contribution $ 3,269 $ 3,286 Loan loss reserves 2,241 2,239 Postretirement benefits 2,887 2,776 Deferred loan fees 1,719 1,714 Interest on non-accrual loans 92 122 Mark to market 1,617 - Other 197 - Valuation Allowance (400) - - --------------------------------------------------------------------------------------------------------------------- Deferred tax assets 11,622 10,137 - --------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Accelerated depreciation 80 379 Pension benefit obligations 353 309 Original issue discount 1,787 1,637 FHLB stock dividends 2,670 2,374 Post 1987 tax bad debts 1,075 1,614 Compensation accruals 317 - Mark-to-market - 394 Other - 47 - --------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities 6,282 6,754 - --------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 5,340 $ 3,383 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
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 $14.4 million. No deferred income taxes have been provided on these bad debt deductions and no recapture of these amounts is anticipated. In December 1998, Home Savings made a charitable contribution of 1,183,438 shares of United Community stock to the Home Savings Charitable Foundation in the amount of approximately $11.8 million. Charitable contributions can only be deducted to the extent of 10% of taxable income, subject to certain adjustments, for the period in which the contribution is made. Any excess may be carried forward for a period of five years to be offset against future taxable income. A deferred tax asset in the amount of $3.3 million was recorded in fiscal 1998. Home Savings provided a deferred tax asset valuation allowance of $400,000 in 1999. This valuation allowance reduced the contribution carryforward to a net amount, which Home Savings believes more likely than not that it could be realized based on Home Savings' estimate of its future earnings and the expected timing of temporary difference reversals. 11. 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, 1999, United Community paid regular dividends in the amount of $10.1 million. Home Savings' primary regulator, 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 Home Savings' retained net income for that year to date plus the retained net income 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. 34 OTHER COMPREHENSIVE INCOME Other comprehensive (loss) income included in the Consolidated Statements of Stockholders' Equity consists solely of unrealized gains and losses on available for sale securities. The change in net unrealized gain on available for sale securities includes reclassification adjustments to reclassify gains or losses for sales of the related security of $14,000, $122,000 and $52,000 for the year ended December 31, 1999, 1998 and 1997, respectively. LIQUIDATION ACCOUNT In accordance with federal regulations, at the time Home Savings converted from a mutual savings and loan association to a capital stock savings and loan association, Home Savings established a liquidation account, which amounted to approximately $141.4 million at the time of the conversion. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their accounts at Home Savings. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of Home Savings, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to their current adjusted qualifying balance before any distribution may be made to United Community as the sole shareholder of Home Savings. Under current regulations, Home Savings is not permitted to pay dividends on its stock if the effect would reduce its regulatory capital below the liquidation account. 12. 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 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).
AS OF DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------ MINIMUM TO BE WELL CAPITALIZED CAPITAL UNDER PROMPT CORRECTIVE ACTUAL REQUIREMENTS ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Total capital (to risk-weighted assets) $326,376 50.41% $ 51,794 8.00% $ 64,743 10.00% Tier 1 capital (to risk-weighted assets) 320,119 49.44 * * 38,846 6.00 Core (Tier 1) capital (to adjusted total assets) 320,119 26.75 35,896 3.00% 59,827 5.00 Tangible capital (to adjusted total assets) 320,119 26.75 17,948 1.50% * *
AS OF DECEMBER 31, 1998 - ------------------------------------------------------------------------------------------------------------------------ MINIMUM TO BE WELL CAPITALIZED CAPITAL UNDER PROMPT CORRECTIVE ACTUAL REQUIREMENTS ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Total capital (to risk-weighted assets) $305,919 51.51% $ 47,513 8.00% $ 59,391 10.00% Tier 1 capital (to risk-weighted assets) 299,617 50.45 * * 35,635 6.00 Core (Tier 1) capital (to adjusted total assets) 299,617 26.80 33,534 3.00% 55,890 5.00 Tangible capital (to adjusted total assets) 299,617 26.80 16,767 1.50% * *
*Ratio is not required under regulations. 35 As of December 31, 1999 and 1998, the OTS 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 Core, 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, 1999, 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 alternate 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 of the applicable exchange 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, 1999, Butler Wick had net capital of $6.8 million which was 20% of aggregate debit balances and $6.2 million in excess of required net capital. 13. BENEFIT PLANS DEFINED BENEFIT PENSION PLAN Home Savings has a defined benefit pension plan covering substantially all of its full-time employees. The benefits are based on years of service and the employee's compensation during the last five years of employment. Participants become 100% vested upon completion of five years of service. Home Savings' funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as Home Savings may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. As of December 31 1998, Home Savings amended the defined benefit pension plan to freeze benefit accruals effective December 31, 1998. A curtailment gain recognized as a result of freezing the plan was not significant. Home Savings terminated the plan, effective July 31, 1999, subject to applicable regulatory approval. During 1999, Home Savings received approval to terminate the plan from the Pension Benefit Guaranty Corporation and Home Savings received final approval from the Internal Revenue Service in 2000. Home Savings expects to record a settlement loss of approximately $1.0 million in 2000. OTHER POSTRETIREMENT BENEFIT PLANS In addition to Home Savings' retirement plans, Home Savings sponsors a defined benefit health care plan for all employees who began employment with Home Savings before January 1, 2000, that provides postretirement medical benefits to full-time employees who have worked 20 years and attained a minimum of age 60, and 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. 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 1999 valuation was 7 percent and 1998 valuation was 8 percent and was assumed to decrease 1 percent per year to 6 percent for the year 2000 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:
1 PERCENTAGE 1 PERCENTAGE POINT INCREASE POINT DECREASE - ---------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Effect on total of service and interest cost components $141 $ (106) Effect on the postretirement benefit obligation $995 $ (747)
36
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT PLAN PLAN PLAN PLAN - ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 7,836 $ 5,375 $ 8,612 $ 5,250 Service cost -- 247 435 229 Interest cost 378 327 557 325 Actuarial (gain)/loss (1,955) (783) 2,529 (110) Benefit paid (73) (113) (178) (319) Curtailment -- -- (4,119) -- - ----------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of the year $ 6,186 $ 5,053 $ 7,836 $ 5,375 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 8,858 -- $ 7,445 -- Actual return of plan assets 952 -- 1,016 -- Employer contribution 555 -- 575 -- Benefits paid (73) -- (178) -- - ----------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of the year $ 10,292 $ 0 $ 8,858 $ 0 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Funded status of the plan $ 4,106 $ (5,053) $ 1,022 $ (5,375) Unrecognized net (gain)/loss from past experience different from that assumed and effects of changes in assumptions (3,098) (2,910) -- (2,249) Prior service cost not yet recognized in net periodic benefit cost -- (315) -- (343) - ----------------------------------------------------------------------------------------------------------------------- (Accrued)/prepaid pension cost $ 1,008 $ (8,278) $ 1,022 $ (7,967) - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- DEFINED POST- DEFINED POST- DEFINED POST- BENEFIT RETIREMENT BENEFIT RETIREMENT BENEFIT RETIREMENT PLAN PLAN PLAN PLAN PLAN PLAN - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Service cost $ - $247 $ 435 $ 229 $ 376 $ 208 Interest cost 378 327 557 325 530 332 Expected return on plan assets (511) - (609) - (495) - Net amortization of prior service cost - (26) 43 (26) (92) (26) Recognized net actuarial loss/(gain) - (124) 10 (123) 74 (108) - ---------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost (133) 424 $ 436 $ 405 $ 393 $ 406 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Assumptions used in the valuations were as follows:
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- DEFINED POST- DEFINED POST- DEFINED POST- BENEFIT RETIREMENT BENEFIT RETIREMENT BENEFIT RETIREMENT PLAN PLAN PLAN PLAN PLAN PLAN - ---------------------------------------------------------------------------------------------------------------------------------- Weighted average discount rate 6.50% 7.50% 5.50% 6.50% 7.00% 7.00% Rate of increase in future compensation levels N/A N/A N/A N/A 6.00 N/A Expected long-term rate of return on plan assets 5.50 N/A 8.00 N/A 8.00 N/A - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
The prior service cost is being amortized using the straight-line method over the average remaining service period of participants expected to receive benefits. 37 401(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 1999, Home Savings' match was 50% of pre-tax contributions, up to a maximum of 6% of the employees' base pay, and for 1998 and 1997, Home Savings' match was 25% of pre-tax contributions, up to a maximum of 6% of the employees' base pay. In addition, in 1997 Home Savings paid a 1% discretionary contribution to all employees who were eligible to participate in the plan. Participants become 100% vested in Home Savings contributions upon completion of five years of service. For the years ended 1999, 1998 and 1997, the expense related to this plan was approximately $237,000, $134,000 and $468,000, respectively. 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 1999, 1998 and 1997, 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 1999, 1998 and 1997, the expense related to this plan was approximately $119,000, $118,000 and $101,000, respectively. 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 $3.0 and $1.3 million in compensation expense for the years ended December 31, 1999 and 1998, 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, 1999 and 1998 totaled 228,926 and 91,088, respectively. Shares remaining not released or committed to be released for allocation at December 31, 1999 totaled 3,337,235 and had a market value of approximately $33.2 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 will vest ratably on each of the first four anniversary dates of the plan. Shares available for future grants at December 31, 1999 were 46,291. The aggregate fair market value of the unvested RRP shares is considered unearned compensation at the time of grant and is amortized over the four-year vesting period. Compensation expense recognized in 1999 related to the RRP was $10.3 million which included accelerated expense of $6.4 million related to the $6.00 per share special capital distribution. 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 will 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 $937,000 for 1999. 38 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, by facilitating their purchase of an ownership interest in United Community. The Incentive Plan provides for granting of stock options, stock appreciation rights, stock awards, cash awards and such other awards or combination thereof as the Benefits Committee of the Board of Directors may determine. The maximum number of shares that may be issued pursuant to such awards is approximately 3.5 million. As of December 31, 1999, no shares were awarded under the Incentive Plan. 14. 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, CASH EQUIVALENTS, 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. MORTGAGE-BACKED AND INVESTMENT 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. 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. 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, 1999 and 1998. 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. 39
DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) ASSETS: Cash and cash equivalents $111,445 $111,445 $172,409 $ 172,409 Investment securities: Trading 7,657 7,657 2,804 2,804 Held to maturity 1,091 1,098 4,993 5,016 Available for sale 161,904 161,904 112,200 112,200 Mortgage-backed securities: Held to maturity 138,079 135,993 182,999 187,010 Available for sale 113,559 113,559 98,890 98,890 Loans 723,087 717,059 657,498 668,600 Margin accounts 32,751 32,751 32,200 32,200 Federal Home Loan Bank stock 12,825 12,825 11,958 11,958 Accrued interest receivable 8,347 8,347 7,259 7,259 LIABILITIES: Deposits: Checking, savings and money market accounts 379,359 379,359 345,821 345,821 Certificates of deposit 454,728 455,299 431,762 434,716 Other borrowed funds 213,578 213,578 26,727 26,727 Advance payments by borrowers for taxes and insurance 4,038 4,038 3,954 3,954 Accrued interest payable 4,168 4,168 672 672 - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
15. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE Supplemental disclosures of cash flow information are summarized below:
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest on deposits and borrowings $30,880 $36,737 $41,151 Income taxes 6,004 9,885 6,210 Supplemental schedule of noncash activities: Transfers from loans to real estate owned 313 191 372 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
Equity securities do not have a contractual maturity. 40 16. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED STATEMENT OF FINANCIAL CONDITION DECEMBER 31, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- (IN THOUSANDS) Assets Cash and deposits with banks $ 246 $ 98 Federal funds sold and other 22,354 138,815 - -------------------------------------------------------------------------------- Total cash and cash equivalents 22,600 138,913 Investment securities: Trading 4,330 -- Available for sale 63,692 -- Note receivable 25,186 26,235 Accrued interest receivable 1,091 -- Investment in subsidiary 328,702 310,526 Other assets 285 20 - -------------------------------------------------------------------------------- Total assets $445,886 $475,694 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Other borrowed funds 185,000 -- Accrued expenses and other liabilities 4,018 873 - -------------------------------------------------------------------------------- Total liabilities 189,018 873 - -------------------------------------------------------------------------------- Total stockholders' equity 256,868 474,821 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $445,886 $475,694 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME DECEMBER 31, - -------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------- (IN THOUSANDS) Income Interest income $ 8,564 $ 3,711 Non-interest income 443 -- - -------------------------------------------------------------------------------------- Total income 9,007 3,711 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- EXPENSES Interest expense 2,670 883 Other expenses 1,520 273 - -------------------------------------------------------------------------------------- Total expenses 4,190 1,156 - -------------------------------------------------------------------------------------- Income before income taxes 4,817 2,555 Income taxes 2,060 1,040 - -------------------------------------------------------------------------------------- Income before undistributed net earnings of subsidiary 2,757 1,515 Equity in undistributed net earnings of subsidiary 7,638 8,614 - -------------------------------------------------------------------------------------- Net income $10,395 $10,129 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
41 CONDENSED STATEMENT OF CASH FLOWS
DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 10,395 $ 10,129 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in earnings of the subsidiaries (7,638) (8,614) Amortization of premiums and accretion of discounts (26) -- Net (gains) losses 140 -- Increase in interest receivable (1,071) (20) Increase in other assets (285) -- Increase in accrued interest payable 2,670 -- (Decrease) increase in other liabilities (177) 873 Increase in trading securities (4,331) -- Issuance of stock for Charitable Foundation -- 11,834 - ---------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (323) 14,202 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: Investment securities available for sale 21,511 -- Equity securities available for sale 585 -- Purchases of: Investment securities available for sale (84,302) -- Equity securities available for sale (2,414) -- ESOP loan repayment 274 335 Purchase of capital stock of subsidiary -- (177,218) - ---------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (64,346) (176,883) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (10,095) (2,401) Special capital distribution (226,549) -- Net increase in borrowed funds 185,000 -- Net proceeds from the sale or issuance of common shares -- 303,995 - ---------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (51,644) 301,594 - ---------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (116,313) 138,913 Cash and cash equivalents, beginning of year 138,913 -- - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 22,600 $ 138,913 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
17. 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. With the acquisition of Butler Wick in 1999, United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and business banking services. 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, 1999, 1998 and 1997 are as follows: 42
INVESTMENT RETAIL BANKING ADVISORY SERVICES ELIMINATIONS TOTAL - ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1999 RESULTS OF OPERATIONS Total interest income $ 89,634 $ 2,415 $ 2,078 $ 89,971 Total interest expense 35,200 1,162 2,078 34,284 Net interest income after provision for loan loss 54,334 1,253 -- 55,587 Non-interest income 2,285 20,436 -- 22,721 Non-interest expense 40,637 20,400 -- 61,037 - ------------------------------------------------------------------------------------------------------------- Income before tax 15,982 1,289 -- 17,271 Income tax 6,356 520 -- 6,876 - ------------------------------------------------------------------------------------------------------------- Net income $ 9,626 $ 769 -- $ 10,395 - ------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION Total assets $1,639,856 $ 41,841 $ 354,124 $1,327,573 Capital expenditures 1,248 317 -- 1,565 Depreciation and amortization 937 419 -- 1,356 1998 RESULTS OF OPERATIONS Total interest income $ 87,596 $ 1,874 $ 1,715 $ 87,755 Total interest expense 37,470 815 1,715 36,570 Net interest income after provision for loan loss 49,476 1,059 -- 50,535 Non-interest income 2,289 19,848 -- 22,137 Non-interest expense 38,217 18,714 -- 56,931 - ------------------------------------------------------------------------------------------------------------- Income before tax 13,548 2,193 -- 15,741 Income tax 4,849 763 -- 5,612 - ------------------------------------------------------------------------------------------------------------- Net income $ 8,699 $ 1,430 -- $ 10,129 - ------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION Total assets $1,594,164 $ 40,384 $ 336,859 $1,297,689 Capital expenditures 621 606 -- 1,227 Depreciation and amortization 1,022 393 -- 1,415 1997 RESULTS OF OPERATIONS Total interest income $ 82,685 $ 1,396 $ -- $ 84,081 Total interest expense 40,463 533 -- 40,996 Net interest income after provision for loan loss 43,768 863 -- 44,631 Non-interest income 1,564 18,653 -- 20,217 Non-interest expense 25,303 17,401 -- 42,704 - ------------------------------------------------------------------------------------------------------------- Income before tax 20,029 2,115 -- 22,144 Income tax 6,982 735 -- 7,717 - ------------------------------------------------------------------------------------------------------------- Net income $ 13,047 $ 1,380 -- $ 14,427 - ------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION Total assets $1,044,993 $ 28,229 $ -- $1,073,222 Capital expenditures 2,414 954 -- 3,368 Depreciation and amortization 1,080 299 -- 1,379
43 18. EARNINGS PER SHARE For the purpose of computing weighted average shares outstanding, shares issued in the conversion on July 8, 1998 were assumed to have been outstanding since July 1, 1998. Earnings per share has been computed for the years ended December 31, 1999 and 1998 as follows:
1999 1998 - --------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BASIC EARNINGS PER SHARE: - --------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock (1) $10,395 $ 3,360 Weighted average common shares outstanding 33,907 33,791 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.31 $ 0.10 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE: - --------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock (1) $10,395 $ 3,360 Weighted average common shares outstanding 33,907 33,791 Dilutive effect of restricted stock 292 -- - --------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding for dilutive computation 34,199 33,791 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.30 $ 0.10 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Net income for 1998 is for the six months ended 12/31/98 INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS UNITED COMMUNITY FINANCIAL CORP. We have audited the accompanying consolidated statements of financial condition of United Community Financial Corp. (United Community) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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. The consolidated financial statements give retroactive effect to the merger of United Community and Butler Wick Corp., which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the statement of financial condition of Butler Wick Corp. as of June 25, 1999, or the related statements of income, stockholders' equity and cash flows of Butler Wick Corp. for the years ended June 25, 1999 and June 26, 1998, which statements reflect total assets of $40.4 million as of June 25, 1999 and net income of $1.4 million for both of the respective years ended June 25, 1999 and June 26, 1998. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Butler Wick Corp. for such periods, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Community Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP CLEVELAND, OHIO January 26, 2000 44 EX-21 4 EXHIBIT 21 UNITED COMMUNITY FINANCIAL CORP. EXHIBIT 21 ---------- SUBSIDIARIES
Name State of Incorporation - ---- ---------------------- The Home Savings and Loan Company of Youngstown, Ohio Ohio Butler Wick Corp Ohio
EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT United Community Financial Corp. We consent to the incorporation by reference in Registration Statement No. 333-86015 of United Community Financial Corp. on Form S-8 of our report dated January 26, 2000 (which expresses an unqualified opinion and refers to the report of other auditors on the financial statements of Butler Wick Corp. which was merged with United Community Financial Corp.) and incorporated by reference in this Annual Report on Form 10-K of United Community Financial Corp. for the year ended December 31, 1999. /s/ Deloitte & Touche LLP Cleveland, Ohio March 28,2000 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board Directors United Community Financial Corp. We consent to incorporation by reference in the Registration Statement No. 333-86015 of United Community Financial Corp. on Form S-8 of our report dated July 28, 1999 relating to the consolidated statement of financial condition of Butler Wick Corp. and Subsidiaries as of June 25, 1999 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years ended June 25, 1999 and June 26, 1998, which report has been incorporated by reference in the December, 1999 annual report on Form 10-K of United Community Financial Corp. Packer Thomas /s/ Packer, Thomas & Co. Youngstown, Ohio March 28, 2000 EX-27 7 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UNITED COMMUNITY FINANCIAL CORP. AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 30,759 0 80,686 7,657 275,463 139,170 137,091 723,087 6,405 1,327,573 834,087 0 236,618 0 0 0 136,509 120,359 1,327,573 54,564 27,598 7,809 89,971 30,432 34,284 55,687 100 559 61,037 17,271 17,271 0 0 10,395 0.31 0.30 4.38 3,615 0 317 0 6,398 125 32 6,405 6,405 0 0
EX-27.1 8 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED CONSOLIDATED FINANCIAL STATEMENTS OF UNITED COMMUNITY FINANCIAL CORP. TO INCLUDE BUTLER WICK AS OF AND FOR ALL PERIODS AN EXHIBIT 27 HAS BEEN REQUIRED TO BE FILED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 6-MOS 3-MOS YEAR 9-MOS DEC-31-1999 DEC-31-1999 DEC-31-1999 DEC-31-1998 DEC-31-1998 JAN-01-1999 JAN-01-1999 JAN-01-1999 JAN-01-1998 JAN-01-1998 SEP-30-1999 JUN-30-1999 MAR-31-1999 DEC-31-1998 SEP-30-1998 16,345 15,852 14,668 18,634 21,495 0 0 0 0 0 43,219 48,543 152,137 153,775 197,299 6,746 2,413 2,943 2,804 2,943 317,307 333,272 226,347 295,199 150,316 145,128 155,512 166,996 187,992 205,853 144,265 155,838 170,127 192,026 211,335 710,030 687,474 670,865 657,498 644,369 6,422 6,446 6,461 6,398 6,261 1,311,657 1,313,778 1,296,949 1,297,689 1,283,022 777,541 781,927 781,301 777,583 769,628 0 0 0 0 0 276,635 53,122 38,844 42,285 41,161 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 136,016 346,030 345,953 345,872 345,750 121,465 132,699 130,851 128,949 126,482 1,311,657 1,313,778 1,296,949 1,297,689 1,283,021 40,515 26,757 13,254 53,063 39,774 20,550 13,066 6,293 24,334 17,988 6,071 4,612 2,499 10,358 7,455 67,136 44,435 22,046 87,755 65,217 22,504 14,995 7,507 35,755 27,096 23,316 15,464 7,702 36,570 28,530 43,820 28,971 14,344 51,185 36,687 100 100 75 650 500 40 40 0 272 402 46,705 24,136 12,093 56,931 44,754 13,387 16,245 7,926 15,741 7,831 13,387 16,245 7,926 15,741 7,831 0 0 0 0 0 0 0 0 0 0 8,485 10,427 5,125 10,129 5,162 0.25 0.31 0.15 0.10 0 0.25 0.31 0.15 0.10 0 4.60 4.58 4.55 4.32 4.21 3,687 3,805 4,856 5,729 5,633 0 0 0 0 0 1,651 1,712 1,822 1,832 1,924 0 0 0 0 0 6,398 6,398 6,398 5,982 5,982 96 67 22 (270) 241 18 13 9 36 20 6,422 6,446 6,461 6,398 6,261 6,422 6,446 6,461 6,398 6,261 0 0 0 0 0 0 0 0 0 0
EX-99 9 EXHIBIT 99 EXHIBIT 99 REPORT OF INDEPENDENT AUDITORS STOCKHOLDERS AND BOARD OF DIRECTORS BUTLER WICK CORP. We have audited the accompanying consolidated statements of financial condition of Butler Wick Corp. and Subsidiaries as of June 25, 1999 and June 26, 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of Butler Wick's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial position of Butler Wick Corp. and Subsidiaries as of June 25, 1999 and June 26, 1998 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Packer, Thomas & Co. Youngstown, Ohio July 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----