<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-24399
UNITED COMMUNITY FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Ohio 34-1856319
----------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
275 Federal Plaza West
Youngstown, Ohio 44503-1203
---------------- ----------
(Address of principal executive offices) (Zip Code)
(330) 742-0500
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if change
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
32,082,997 common shares as of September 30, 1998
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TABLE OF CONTENTS
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PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of September 30, 1998 and December 31, 1997................... 1
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997......................... 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997.................... 3
Notes to Consolidated Financial Statements....................... 4 - 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 6 - 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 13
PART II. OTHER INFORMATION.................................................... 14
Signatures ............................................................... 15
EXHIBITS ............................................................... 16 - 18
</TABLE>
<PAGE>
ITEM 1. Financial Statements
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited)
-------------------- -------------------
(In thousands)
<S> <C> <C>
ASSETS:
Cash and deposits with banks $ 20,185 $ 14,618
Federal funds sold and other 197,299 19,879
-------------- --------------
Total cash and cash equivalents 217,484 34,497
-------------- --------------
Investment securities:
Available for sale, at fair value (amortized cost of $79,696 and $39,091,
respectively) 80,625 39,402
Held to maturity (fair value of $5,030 and $5,013,
respectively) 4,987 4,968
Mortgage-backed securities:
Available for sale, at fair value (amortized cost of $68,649 and $61,633,
respectively) 69,691 62,423
Held to maturity (fair value of $206,305 and $247,986,
respectively) 200,866 243,848
Loans, net (including allowance for loan losses
of $6,261 and $5,982, respectively) 644,369 633,236
Federal Home Loan Bank stock 11,751 11,136
Premises and equipment 7,600 7,930
Accrued interest receivable 6,516 6,414
Real estate owned 37 55
Other assets 5,300 1,084
-------------- --------------
TOTAL ASSETS $ 1,249,226 $ 1,044,993
============== ==============
LIABILITIES AND EQUITY:
LIABILITIES:
Deposits $ 769,628 $ 886,808
Advance payments by borrowers for taxes
and insurance 2,221 3,715
Accrued interest payable 736 845
Post-retirement benefit obligation 7,886 7,647
Accrued expenses and other liabilities 6,290 4,625
-------------- --------------
Total liabilities 786,761 903,640
-------------- --------------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Preferred stock-no par value; 1,000,000 shares authorized and
unissued at September 30, 1998
Common stock-no par value; 499,000,000 shares authorized;
34,715,625 shares issued-and 32,082,997 outstanding at
September 30, 1998
Paid in capital 342,717
Retained-earnings 144,779 140,636
Net unrealized gain on available for sale securities,
net of taxes of $697 and $385, respectively 1,295 717
Unearned compensation (26,326)
-------------- --------------
TOTAL EQUITY 462,465 141,353
-------------- --------------
TOTAL LIABILITIES AND EQUITY $ 1,249,226 $ 1,044,993
============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- --------- --------
(In thousands, except (In thousands,
per share data) except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 13,470 $ 13,013 $ 39,774 $ 41,311
Mortgage-backed securities:
Available for sale 912 1,243 2,906 3,956
Held to maturity 3,638 4,659 11,997 14,579
Investment securities:
Available for sale 1,028 625 2,750 1,529
Held to maturity 80 137 238 733
FHLB stock dividend 211 196 615 566
Other interest-earning assets 3,873 167 5,627 449
----------- ----------- ---------- -----------
Total interest income 23,212 20,040 63,907 63,123
INTEREST EXPENSE:
Interest expense on deposits 8,462 10,089 27,978 30,465
----------- ----------- ---------- -----------
NET INTEREST INCOME 14,750 9,951 35,929 32,658
PROVISION FOR (RECOVERY OF) LOAN LOSSES 100 500 (2,246)
----------- ----------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
(RECOVERY OF) LOAN LOSSES 14,650 9,951 35,429 34,904
----------- ----------- ---------- -----------
NONINTEREST INCOME:
Service fees and other charges 307 305 887 764
Net gains (losses):
Mortgage-backed securities 253
Other gains (losses) (14) (58) (21)
Other income 438 95 725 317
----------- ----------- ---------- -----------
Total noninterest income 745 386 1,807 1,060
----------- ----------- ---------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 4,180 3,534 11,325 10,663
Occupancy 366 294 1,006 909
Equipment and data processing 669 566 1,961 1,752
Deposit insurance premiums 135 144 410 445
Franchise tax 479 438 1,438 1,314
Advertising 263 234 872 761
Other expenses 686 737 2,115 2,030
Charitable contributions 11,835 150 11,844 456
----------- ----------- ---------- -----------
Total noninterest expenses 18,613 6,097 30,971 18,330
----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (3,218) 4,240 6,265 17,634
INCOME TAXES (BENEFIT) (1,196) 1,338 2,122 5,885
----------- ----------- ---------- -----------
NET INCOME (LOSS) $(2,022) $2,902 $4,143 $ 11,749
=========== =========== ========== ===========
Earnings per share (1):
Basic $ (0.06) N/A N/A N/A
=========== =========== ========== ===========
Diluted $ (0.06) N/A N/A N/A
=========== =========== ========== ===========
Average common shares outstanding 32,060,686 N/A N/A N/A
=========== =========== ========== ===========
</TABLE>
(1) For purpose of displaying earnings per share it is assumed the conversion
took place as of July 1, 1998.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
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UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
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(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,143 $ 11,749
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan losses 500 (2,246)
Net (gains) losses (195) 21
Accretion of discounts and amortization of premiums (1,096) (799)
Depreciation 776 803
FHLB stock dividends (615) (566)
Increase in interest receivable (102) (182)
Decrease in interest payable (109) (15)
Increase in post retirement benefit obligation 239 249
Increase in prepaid and other assets (4,216) (596)
Increase in other liabilities 1,352 2,181
Change in unearned compensation 562
Charitable contribution 11,834
----------- --------------
Net cash provided by operating activities 13,073 10,599
----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity 48,396 31,334
Mortgage-backed securities available for sale 13,108 15,204
Investment securities held to maturity 20,000
Investment securities available for sale 3,215 3,566
Proceeds from sale of:
Mortgage-backed securities available for sale 13,145
Mortgage-backed securities held to maturity 2,764
Purchases of:
Investment securities available for sale (43,889) (30,876)
Mortgage-backed securities available for sale (32,960)
Mortgage-backed securities held to maturity (8,047)
Principal collected on loans 151,021 85,998
Loans originated and acquired (161,777) (96,945)
Proceeds from disposal of real estate owned 71 110
Purchases of premises and equipment (454) (2,262)
----------- --------------
Net cash (used in) provided by investing activities (15,407) 26,129
----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in NOW, Savings and Money Market
Accounts (30,503) (18,533)
Net decrease in Certificates of Deposit (86,677) (24,598)
Net decrease in advance payments by borrowers
for taxes and insurance (1,494) (1,985)
Net proceeds from the sale or issuance of common shares 303,995
----------- --------------
Net cash provided by (used in) financing activities 185,321 (45,116)
----------- --------------
Increase (decrease) in cash and cash equivalents 182,987 (8,388)
Cash and cash equivalents, beginning of period 34,497 19,668
----------- --------------
Cash and cash equivalents, end of period $217,484 $ 11,280
=========== ==============
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest on deposits and borrowings $ 28,087 $ 30,480
Income taxes 4,200 4,600
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned 105 360
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
United Community Financial Corp. (the "Holding Company") was incorporated under
Ohio law in February 1998 by The Home Savings & Loan Company of Youngstown, Ohio
(the "Company") in connection with the conversion of the Company from an Ohio
mutual savings and loan association to an Ohio capital stock savings and loan
association, the issuance of the Company's stock to the Holding Company and the
offer and sale of the Holding Company's common stock by the Holding Company (the
"Conversion"). Upon consummation of the Conversion on July 8, 1998, the Holding
Company became the unitary savings and loan holding company for the Company. See
Note 2 for a more detailed description of the mutual to stock conversion.
The accompanying consolidated financial statements of the Holding Company have
been prepared in accordance with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for fair
statement of results for the interim periods.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998. The consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1997, contained in the Holding Company's
prospectus dated May 15, 1998.
2. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On December 9, 1997, the Board of Directors of the Company adopted a Plan of
Conversion to convert from an Ohio mutual savings and loan association to an
Ohio capital stock savings and loan association. The conversion was
accomplished through the formation of the Holding Company in February, 1998,
the adoption of an Ohio stock charter, the sale of all of the Company's stock
to the Holding Company on July 8, 1998 and the issuance of the Holding
Company's stock on July 8, 1998.
The Holding Company issued 34,715,625 shares in connection with the Conversion.
Gross proceeds from the offering were $347,156,250, which includes the $10 value
of the 2,677,250 shares issued to the United Community Financial Corp. Employee
Stock Ownership Plan and 1,183,438 shares sold to the Company for transfer to
the Home Savings Charitable Foundation.
Conversion costs amounted to $4.6 million.
The Company issued all its outstanding capital stock to the Holding Company in
exchange for approximately one-half of the net proceeds. The Holding Company
accounted for the purchase in a manner similar to a pooling of interests whereby
assets and liabilities of the Company maintain their historical cost basis in
the consolidated company.
3. EARNINGS PER COMMON SHARE
Earnings per share has been computed for the quarter ended September 30, 1998
based upon weighted average common shares outstanding of 32,060,686. For the
purposes 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 for all prior periods are not presented as there was no
common stock issued or outstanding.
<PAGE>
4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", was issued in June 1997 and became effective on January
1, 1998. This statement requires companies to report all items that are
recognized as components of comprehensive income under accounting standards. The
Company's comprehensive income for the three and nine months ended September 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1998 1997
-------------- -----------
(In thousands)
<S> <C> <C>
Net income (loss) $(2,022) $ 2,902
Unrealized holding gains arising
during the period, net of tax effect of
$321 and $202, respectively 595 376
----------- -----------
Comprehensive income $(1,427) $ 3,278
=========== ===========
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
------------- -----------
(In thousands)
<S> <C> <C>
Net income $ 4,143 $ 11,749
Unrealized holding gains arising
during the period, net of tax effect of
$312 and $108, respectively 578 201
Reclassification adjustment for gains included in net
income, net of tax effect of ($23) (42)
----------- -----------
Comprehensive income $ 4,679 $ 11,950
=========== ===========
</TABLE>
5. SALE OF HELD TO MATURITY MORTGAGE-BACKED SECURITIES
In January 1998, the Company sold approximately $114,000 of mortgage-backed
securities held to maturity with outstanding balances less than 15% of the
principal outstanding since acquisition. A gain of approximately $5,500 was
recorded on the sale. In April 1998, the Company sold approximately $2.6 million
of mortgage-backed securities held to maturity with outstanding balances less
than 15% of the principal outstanding since acquisition. A gain of approximately
$100,000 was recorded on the sale. There were no sales of mortgage-backed
securities held to maturity during the three month period ended September 30,
1998.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNITED COMMUNITY FINANCIAL CORP.
<TABLE>
<CAPTION>
At or For the Three At or For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------ ------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1) 1998 1997 1998 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Performance ratios:
Return on average assets (2) (0.62)% 1.10% 0.47% 1.48%
Return on average equity (3) (1.87) 8.41 2.30 11.82
Interest rate spread (4) 3.12 3.29 3.33 3.66
Net interest margin (5) 4.64 3.87 4.22 4.20
Noninterest expense to average assets 5.70 2.31 3.53 2.30
Efficiency ratio (6) 120.12 58.98 82.07 54.36
Average interest-earning assets to average interest-
bearing liabilities 157.11 114.80 126.97 113.92
Capital ratios:
Average equity to average assets 33.15 13.08 20.53 12.48
Equity to assets, end of period 37.02 13.42 37.02 13.42
Tangible capital 26.61 13.42 26.61 13.42
Core capital 26.61 13.42 26.61 13.42
Risk-based capital 54.26 28.28 54.26 28.28
Asset quality ratios:
Nonperforming loans to total loans at end of period (7) 1.17 1.46 1.17 1.46
Nonperforming assets to average assets (8) 0.58 0.89 0.65 0.89
Nonperforming assets to total assets at end of period (8) 0.61 0.90 0.61 0.90
Allowance for loan losses as a percent of loans 0.96 0.83 0.96 0.83
Allowance for loan losses as a percent of
nonperforming loans (7) 82.85 57.68 82.85 57.68
Number of full service offices 14 15 14 15
Per share data (9):
Basic earnings per share (10) (0.06) N/A N/A N/A
Diluted earnings per share (10) (0.06) N/A N/A N/A
Book value (11) 14.42 N/A N/A N/A
</TABLE>
- ---------------------------------------------------------
(1) Ratios for the three and nine-month periods are annualized where
appropriate. Ratios for 1998 period are affected by the $11.8 million
contribution to the Home Savings and Loan Charitable Foundation.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(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.
(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 earnings per share it is assumed conversion took
place as of July 1, 1998.
(10) Net income divided by average number of shares outstanding.
(11) Equity divided by number of shares outstanding.
6
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Equity increased $321.1 million to $462.5 million at September 30, 1998 from
$141.4 million at December 31, 1997. This increase was primarily attributable to
the sale of United Community Financial Corp.'s stock in connection with the
mutual to stock conversion of The Home Savings and Loan Company which was
completed on July 8, 1998.
Due to the stock conversion, total assets increased by $204.2 million from
December 31, 1997 to September 30, 1998.
Net loans increased $11.1 million, or 1.75% to $644.3 million at September 30,
1998 compared to $633.2 million at December 31, 1997.
Funds that are not currently needed for general corporate purposes, including
loan originations, enhanced customer services and possible acquisitions are
invested at this time in overnight funds, investment securities and mortgage
backed securities. Overnight funds increased $177.4 million to $197.3 million at
September 30, 1998 from $19.9 million at December 31, 1997. Investment
securities available for sale increased $41.2 million since December 31, 1997.
The increase in overnight funds and investment securities available for sale
enable funds from the stock conversion to be fully employed while providing a
great deal of liquidity and flexibility as the Company pursues other alternative
investment opportunities.
Total deposits decreased $117.2 million from December 31, 1997. This reduction
was primarily due to deposits withdrawn for the purchase of United Community
Financial Corp.'s stock. The deposits decrease equated to a $19.3 million
reduction in savings accounts, $11.2 million decrease in Transaction accounts
and $86.7 million reduction in certificate accounts.
Nonaccrual and restructured loans decreased approximately $2.6 million to
$7.6 million at September 30, 1998 from $10.2 million at December 31, 1997.
Nonaccrual one- to four-family mortgage loans and commercial loans each
decreased by $1.5 million. The reduction of the one- to four-family loans was
due to a number of loans becoming current on their payments, not any one
particular loan. The reduction in nonaccrual commercial loans was the result
of two loans being reclassified restructured and several more being brought
current. Nonaccrual construction loans decreased $451,000 at September 30,
1998 compared to December 31, 1997 due to several loans becoming current. At
September 30, 1998, total nonaccrual and restructured loans accounted for
1.17% of net loans receivable, compared to 1.60% at December 31, 1997. Total
non-performing assets were .61% of total assets as of September 30, 1998, a
decrease of .37% from .98% as of December 31, 1997 .
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
NET INCOME. A loss was incurred for the three months ended September 30, 1998 of
$2.0 million or $.06 per common share which was due to an $11.8 million
contribution to The Home Savings and Loan Company Charitable Foundation
(Foundation). Without the contribution to the Foundation, net income would have
been $5.7 million or $.18 earnings per common share. Net income for the
comparable period in the prior year was $2.9 million. Book value per share was
$14.42 as of September 30, 1998. United Community Financial Corp. believes that
the contribution of common shares to the Foundation will benefit the long-term
value of the Company's community banking franchise by enabling the communities
it serves to share in the potential growth and success of the Company and the
Holding Company.
A more direct comparison of operating results is to compare pretax core earnings
for the two periods. Core earnings are defined as pre-tax earnings adjusted for
securities sales transactions and unusual or nonrecurring expense or income
items. Core earnings for the three months ended September 30, 1998 were $8.6
million compared to $4.2 million in the prior year period. The increase of $4.4
million in core earnings was due to an increase in net interest income.
7
<PAGE>
The following table summarizes the components of adjusted pretax core earnings:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997
------------- --------------
(In thousands)
<S> <C> <C>
Net interest income $ 14,750 $ 9,751
Provision for loan losses 100 0
Noninterest income excluding gains and losses 745 400
Noninterest expense 6,779 5,947
------------- --------------
Adjusted pretax core earnings $8,616 $ 4,204
------------- --------------
------------- --------------
</TABLE>
NET INTEREST INCOME. Net interest income increased $4.8 million or 48.2% for the
third quarter of 1998 compared to the third quarter of 1997. Two factors
contributed to this increase in net interest income. The first was an increase
in interest-earning assets for the third quarter 1998 compared to the third
quarter 1997, due to the stock conversion. The second was a decrease in
interest-bearing deposits combined with a reduction in interest rates of the
interest bearing liabilities as a result of the interest rate environment for
the third quarter 1998 versus the third quarter 1997.
PROVISION FOR LOAN LOSSES. The provision for loan loss allowances increased
$100,000 in the third quarter of 1998, as a result of continuing growth in the
loan portfolio. During the three months ended September 30, 1998, the Company
had charge-offs of $17,000 and recoveries of $6,000. At September 30, 1998, the
Company's allowance for loan losses totaled $6.3 million, which was .97% of
total loans.
NONINTEREST INCOME. Noninterest income increased $359,000 or 93.0% to $745,000
for the three months ended September 30, 1998, from $386,000 for the three
months ended September 30, 1997. The increase was primarily due to fees and
commissions related to check services during the subscription offering.
NONINTEREST EXPENSE. Total noninterest expense increased $12.5 million to $18.6
million for the third quarter 1998 from $6.1 million for the third quarter 1997.
As stated above, $11.8 million of this increase was due to the contribution to
the Foundation. Employee compensation expense for the ESOP of approximately
$625,000 also added to the increase for noninterest expense for the third
quarter 1998.
FEDERAL INCOME TAXES. The provision for federal income taxes decreased $2.5
million or 189.4% for the third quarter of 1998, compared to the third quarter
of 1997. This was primarily due to the lower pre-tax income for the third
quarter of 1998 as a result of the contribution to the Foundation as stated
above.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
NET INCOME. Net income for the nine months ended September 30, 1998 was $4.1
million, compared to $11.7 million for the nine month period in 1997. The change
in the current period is primarily due to the contribution to the Foundation.
Also contributing to the change in the current period, when compared to the
previous period, was a recovery in June 1997 of two loans that had previously
been charged off, resulting in a recovery of $3.1 million of interest and a loan
loss recovery of $2.8 million.
Core earnings, as defined above, for the nine months ended September 30, 1998
were $17.9 million compared to $12.0 million in the prior year period. The
increase of $5.9 million in core earnings was primarily due to an increase in
net interest income.
8
<PAGE>
The following table summarizes the components of adjusted pretax core earnings:
<TABLE>
Nine Months Ended
September 30,
---------------------------------
1998 1997
----------- --------------
(In thousands)
<S> <C> <C>
Net interest income $ 35,929 $ 29,350
Provision for loan losses 500 600
Noninterest income excluding gains and losses 1,612 1,081
Noninterest expense 19,137 17,880
----------- -----------
Adjusted pretax core earnings $ 17,904 $ 11,951
----------- -----------
----------- -----------
</TABLE>
NET INTEREST INCOME. Net interest income increased $3.3 million or 10% for the
nine month period ended September 30, 1998, compared to the nine month period
ended September 30, 1997. Exclusive of the non-recurring loan recovery of $3.1
million of interest, in the prior year discussed above, along with an additional
loan recovery of $0.2 million of interest in September 1997, net interest income
increased $6.6 million for the current nine month period as a result of a higher
volume of earning assets along with the reduction of interest
bearing-liabilities and interest rates paid on the liabilities as mentioned
earlier.
PROVISION FOR LOAN LOSSES. The provision for loan loss allowances increased
$500,000 for the nine month period of 1998, as a result of an increase in the
total loan portfolio. During the nine months ended September 30, 1998, the
Company had charge-offs of $241,000 and recoveries of $20,000.
NONINTEREST INCOME. Noninterest income increased $747,000 or 70.5% to $1.8
million for the nine months ended September 30, 1998, from $1.1 million for
the nine months ended September 30, 1997. The increase was primarily due to a
gain of approximately $253,000 on the sale of mortgage-backed securities
along with fees and commissions related to check services during the
subscription offering. Also, there was an increase in automated teller
machine service charges and NOW non-sufficient funds fees of approximately
$106,000, and a rebate of approximately $29,000 from the Ohio Bureau of
Workers' Compensation.
NONINTEREST EXPENSE. In the current nine month period noninterest expense
totaled $31.0 million, an increase of $12.6 million compared to the same period
in 1997. As stated earlier, this was attributable to the contribution of $11.8
million to the Foundation and the employee compensation expense of $625,000 for
the ESOP.
FEDERAL INCOME TAXES. The provision for federal income taxes decreased $3.8
million or 63.9% for the nine month period ended September 30, 1998, compared to
the nine month period ended September 30, 1997. This was primarily due to the
lower pre-tax income for the 1998 period as a result of the contribution to the
Foundation in 1998 and significant recovery of the delinquent loans in 1997, as
stated above.
9
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS
The following table presents the total dollar amounts of interest income and
interest expense on the indicated amounts of average interest-earning assets or
interest-bearing liabilities together with the weighted average interest rates
for the three month periods ended September 30, 1998 and 1997. Average balance
calculations were based on daily balances.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
-------------- ----------- ---------- ------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans (1) $ 645,962 $ 13,470 8.34% $ 625,959 $ 13,013 8.32%
Mortgage-backed securities:
Available for sale 54,691 912 6.67 70,996 1,243 7.00
Held to maturity 208,908 3,638 6.97 262,387 4,659 7.10
Investment securities:
Available for sale 68,440 1,028 6.01 38,344 625 6.52
Held to maturity 4,983 80 6.42 8,977 137 6.10
Other interest-earning assets 289,510 4,085 5.64 22,700 363 6.40
-------------- ----------- -------- ------------- ----------- --------
Total interest-earning assets 1,272,494 23,213 7.30 1,029,363 20,040 7.79
Noninterest-earning assets 32,973 26,108
-------------- -------------
Total assets $1,305,467 $ 1,055,471
============== =============
Interest-bearing liabilities:
Checking and demand accounts $ 122,463 645 2.11 $ 120,603 722 2.39
Savings accounts 245,154 1,811 2.95 247,384 1,845 2.98
Certificates of deposit 442,321 6,007 5.43 528,657 7,522 5.69
-------------- ----------- -------- ------------- ----------- --------
Total interest-bearing liabilities 809,938 8,463 4.18 896,644 10,089 4.50
----------- -------- ----------- --------
Noninterest-bearing liabilities 62,810 20,816
-------------- -------------
Total liabilities 872,748 917,460
Equity 432,719 138,011
-------------- -------------
Total liabilities and equity $1,305,467 $ 1,055,471
============== =============
Net interest income and
interest rate spread $ 14,750 3.12% $ 9,951 3.29%
=========== ======== =========== ========
Net interest margin 4.64% 3.87%
======== ========
Average interest-earning assets
to average interest-bearing liabilities 157.11% 114.80%
======== ========
</TABLE>
- ----------------------------------
(1) Nonaccrual loans are included in the average balance.
10
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS
The following table presents the total dollar amounts of interest income and
interest expense on the indicated amounts of average interest-earning assets or
interest-bearing liabilities together with the weighted average interest rates
for the nine month periods ended September 30, 1998 and 1997. Average balance
calculations were based on daily balances.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
-------------- ----------- ---------- ------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans (1) $ 639,312 $ 39,774 8.30% $ 620,740 $ 41,311 8.87%
Mortgage-backed securities:
Available for sale 57,682 2,906 6.72 75,047 3,956 7.03
Held to maturity 227,268 11,997 7.04 272,648 14,579 7.13
Investment securities:
Available for sale 60,944 2,750 6.02 31,598 1,529 6.45
Held to maturity 4,861 238 6.53 15,602 733 6.26
Other interest-earning assets 145,912 6,243 5.70 21,410 1,015 6.32
-------------- ----------- -------- ------------- ----------- --------
Total interest-earning assets 1,135,979 63,908 7.50 1,037,045 63,123 8.12
Noninterest-earning assets 33,208 24,996
-------------- -------------
Total assets $1,169,187 $ 1,062,041
============== =============
Interest-bearing liabilities:
Checking and demand accounts $126,847 2,058 2.16 $ 121,438 2,193 2.41
Savings accounts 278,674 5,690 2.72 250,848 5,573 2.96
Certificates of deposit 489,132 20,231 5.51 538,017 22,699 5.63
-------------- ----------- -------- ------------- ----------- --------
Total interest-bearing liabilities 894,653 27,979 4.17 910,303 30,465 4.46
----------- -------- ----------- --------
Noninterest-bearing liabilities 34,448 19,165
-------------- -------------
Total liabilities 929,101 929,468
Equity 240,086 132,573
-------------- -------------
Total liabilities and equity $1,169,187 $ 1,062,041
============== =============
Net interest income and
interest rate spread $ 35,929 3.33% $ 32,658 3.66%
=========== ========= =========== =========
Net interest margin 4.22% 4.20%
========= =========
Average interest-earning assets to
average interest-bearing liabilities 126.97% 113.92%
========= =========
</TABLE>
- ----------------------------------
(1) Nonaccrual loans are included in the average balance.
11
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
RATE/VOLUME ANALYSIS
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 the Company'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:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
1998 vs. 1997 1998 vs. 1997
------------------------------------- ------------------------------------
Increase Total Increase Total
(decrease) due to increase (decrease) due to increase
------------------------ -----------------------
Rate Volume (decrease) Rate Volume (decrease)
-------- ---------- ------------ ------- ---------- -----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 40 $ 417 $ 457 $ (2,841) $ 1,304 $(1,537)
Mortgage-backed securities:
Available for sale (57) (274) (331) (169) (881) (1,050)
Held to maturity (88) (933) (1,021) (184) (2,398) (2,582)
Investment securities:
Available for sale (45) 448 403 (96) 1,317 1,221
Held to maturity 8 (65) (57) 32 (527) (495)
Other interest-earning assets (38) 3,760 3,722 (89) 5,317 5,228
----------- ----------- ----------- ---------- ---------- ---------
Total interest-earning assets $ (180) $ 3,353 3,173 $ (3,347) $ 4,132 785
=========== =========== ----------- ========== ========== ---------
Interest-bearing liabilities:
Savings accounts $ (17) $ (17) (34) $ (316) $ 433 117
Checking accounts (88) 11 (77) (240) 105 (135)
Certificates of deposit (330) (1,185) (1,515) (439) (2,029) (2,468)
----------- ----------- ----------- ---------- ---------- ---------
Total interest-bearing liabilities $ (435) $(1,191) (1,626) $ (995) $(1,491) (2,486)
=========== =========== ----------- ========== ========== ---------
Change in net interest income $ 4,799 $ 3,271
=========== ==========
</TABLE>
- ------------------------------------------
(1) The change due to rate for the nine month period reflects a recovery of past
due interest due to loan loss recovery.
12
<PAGE>
YEAR 2000
With the Year 2000 approaching, there is concern that the change of date could
affect any system that relies on computers, computer software programs or
computer chips. Many computer systems have been designed to store and recognize
the year in two digits rather than four digits and to assume that the first two
digits are 19. Beginning in the year 2000, therefore, the possibility exists
that some computer systems may misinterpret "00" as 1900 instead of 2000. If not
remedied, such a scenario could expose the company to business risks resulting
from the interruption or shut-down of normal business operations.
To prepare for the change, the Company formed a Year 2000 compliance initiative
group to oversee all necessary corrective activities. A Year 2000 project plan
was initiated to communicate about potential business risks, assess systems and
operations, perform and/or track all renovations, and test and implement
renovated systems. Throughout the Company, operations and equipment have been
evaluated to identify those which could be affected by the date change. These
include PC's, teller terminals, ATM's, telephones, security and surveillance
equipment, heating and cooling systems and elevators. Where appropriate,
improvements or replacements have been contracted or completed for each system.
Most important among those is our core processing system which has been
remediated for Year 2000 operation, tested and implemented in September, 1998,
six months ahead of plan.
Our Year 2000 compliance efforts also include anticipation of internal and
external system and support failures as well as development of contingency plans
for mission-critical functions. In this phase, we have begun to identify core
business processes and prioritize risks; define potential failures and analyze
the impact; prepare alternative procedures and activation dates; and validate
such contingency plans by testing and independent review. We expect to complete
development of contingency plans by December 31, 1998, and we will continue to
test those procedures throughout 1999.
Cost allocations to complete renovation and testing of our systems for Year 2000
compliance have been estimated at $414,000, with $117,000 of that earmarked for
1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's Conversion Prospectus. No material changes in the
methodology or results in the interest rate sensitivity have occurred.
13
<PAGE>
PART II. OTHER INFORMATION
UNITED COMMUNITY FINANCIAL CORP.
ITEM 1 - NOT APPLICABLE
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of proceeds - As discussed in Note 1 to Notes to Consolidated Financial
Statements under Item 1 of this Quarterly Report, the Conversion was
completed on July 8, 1998. In connection therewith:
1. The effective date of the Registration Statement on Form S-1, as amended
(File No. 333-47957) ("Registration Statement"), was May 14, 1998.
2. The offering closed on July 8, 1998 with the sale of all securities
registered pursuant to the Registration Statement. Trident Securities,
Inc., CIBC Oppenheimer Corp. and McDonald and Company Securities,
Inc. acted as the marketing agents for the Offering.
3. The Holding Company issued 34,715,625 shares in connection with
the Conversion. Gross proceeds from the offering were $347,156,250, which
includes the $10 value of the 2,677,250 shares issued to the United
Community Financial Corp. Employee Stock Ownership Plan and 1,183,438
shares sold to the Company for transfer to the Home Savings Charitable
Foundation.
4. Conversion costs amounted to $4.6 million.
ITEMS 3, 4 AND 5 - NOT APPLICABLE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------------------------------------------------
<S> <C>
11 Statement regarding computation of earnings per share
27 Financial Data Schedule - EDGAR only
</TABLE>
b. Reports on Form 8-K
On October 21, 1998 the Company filed a form 8-K disclosing
operating results for the quarter ended September 30, 1998.
14
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements 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.
Date: November 16, 1998 /s/ Douglas M. McKay
------------------------------
Douglas M. McKay, President
Date: November 16, 1998 /s/ Patrick A. Kelly
-------------------------------
Patrick A. Kelly, Treasurer
15
<PAGE>
UNITED COMMUNITY FINANCIAL CORP.
EXHIBIT 11
COMPUTATIONS OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997
----------- --------------
(Dollars in thousands,
except per share data)
<S> <C> <C>
EARNINGS PER SHARE (1):
Weighted average number of common
shares outstanding 32,060,686 N/A
=========== ==============
Net income (loss) $ (2,022) N/A
=========== ==============
Basic earnings per share $ (0.06) N/A
=========== ==============
Diluted earnings per share $ (0.06) N/A
=========== ==============
</TABLE>
- ----------------------
(1) For the purposes 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 for all prior periods are not presented
as there was no common stock issued or outstanding.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED COMMUNITY FINANCIAL CORP. AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20,185
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 197,299
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,316
<INVESTMENTS-CARRYING> 205,853
<INVESTMENTS-MARKET> 211,335
<LOANS> 644,369
<ALLOWANCE> 6,261
<TOTAL-ASSETS> 1,249,226
<DEPOSITS> 769,628
<SHORT-TERM> 0
<LIABILITIES-OTHER> 17,133
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 462,465
<TOTAL-LIABILITIES-AND-EQUITY> 1,249,226
<INTEREST-LOAN> 39,774
<INTEREST-INVEST> 17,891
<INTEREST-OTHER> 6,242
<INTEREST-TOTAL> 63,907
<INTEREST-DEPOSIT> 27,095
<INTEREST-EXPENSE> 27,978
<INTEREST-INCOME-NET> 35,929
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 253
<EXPENSE-OTHER> 30,971
<INCOME-PRETAX> 6,265
<INCOME-PRE-EXTRAORDINARY> 6,265
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,143
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.22
<LOANS-NON> 5,633
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,924
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,982
<CHARGE-OFFS> 241
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 6,261
<ALLOWANCE-DOMESTIC> 6,261
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
