FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
UNITED COMMUNITY FINANCIAL CORP.
(Exact name of the registrant as specified in its charter)
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OHIO
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0-024399
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34-1856319 |
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(State or other jurisdiction of incorporation)
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(Commission File No.)
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(IRS Employer I.D. No.) |
275 West Federal Street, Youngstown, Ohio 44503-1203
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (330) 742-0500
Not Applicable
(Former name or former address, if changed 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. 30,051,773 common shares as of October 31, 2008.
TABLE OF CONTENTS
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PAGE |
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1 |
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2 |
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3 |
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4 |
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5-17 |
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18-29 |
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30 |
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31 |
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32 |
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32 |
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32 |
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Item 3. Defaults Upon Senior Securities (None) |
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Item 4. Submission of Matters to a Vote of Security Holders (None) |
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Item 5. Other Information (None) |
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32 |
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33 |
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Exhibits |
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34-37 |
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EX-31.1 |
EX-31.2 |
EX-32 |
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(Dollars in thousands) |
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Assets: |
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Cash and deposits with banks |
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$ |
29,096 |
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$ |
33,266 |
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Federal funds sold and other |
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4,050 |
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4,097 |
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Total cash and cash equivalents |
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33,146 |
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37,363 |
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Securities: |
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Trading, at fair value |
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10,364 |
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5,064 |
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Available for sale, at fair value |
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300,726 |
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244,753 |
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Loans, net of allowance for loan losses of $33,186 and $32,006, respectively |
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2,248,382 |
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2,236,988 |
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Loans held for sale |
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7,525 |
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87,236 |
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Federal Home Loan Bank stock, at cost |
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26,464 |
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25,432 |
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Premises and equipment, net |
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26,282 |
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27,521 |
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Accrued interest receivable |
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11,040 |
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13,077 |
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Real estate owned and other repossessed assets |
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20,549 |
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10,510 |
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Goodwill |
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33,593 |
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Core deposit intangible |
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949 |
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1,169 |
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Cash surrender value of life insurance |
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24,764 |
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24,053 |
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Other assets |
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16,514 |
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13,280 |
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Total assets |
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$ |
2,726,705 |
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$ |
2,760,039 |
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Liabilities and Shareholders Equity |
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Liabilities: |
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Deposits: |
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Interest bearing |
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$ |
1,811,585 |
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$ |
1,768,757 |
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Non-interest bearing |
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105,489 |
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106,449 |
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Total deposits |
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1,917,074 |
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1,875,206 |
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Federal Home Loan Bank advances |
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418,434 |
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437,253 |
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Repurchase agreements and other borrowings |
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135,096 |
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149,533 |
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Advance payments by borrowers for taxes and insurance |
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11,766 |
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17,853 |
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Accrued interest payable |
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5,174 |
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7,837 |
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Accrued expenses and other liabilities |
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4,805 |
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2,643 |
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Total liabilities |
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2,492,349 |
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2,490,325 |
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Shareholders Equity |
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Preferred stock-no par value; 1,000,000 shares authorized and unissued |
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Common stock-no par value; 499,000,000 shares authorized; 37,804,457
shares issued and 30,051,773 shares outstanding |
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146,710 |
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146,683 |
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Retained earnings |
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177,881 |
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213,727 |
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Accumulated other comprehensive income (loss) |
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(245 |
) |
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661 |
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Unearned employee stock ownership plan shares |
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(8,098 |
) |
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(9,465 |
) |
Treasury stock, at cost, 7,752,684 shares |
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(81,892 |
) |
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(81,892 |
) |
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Total shareholders equity |
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234,356 |
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269,714 |
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Total liabilities and shareholders equity |
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$ |
2,726,705 |
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$ |
2,760,039 |
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See Notes to Consolidated Financial Statements.
1
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(Dollars in thousands, except per share data) |
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Interest income |
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Loans |
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$ |
33,503 |
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$ |
38,463 |
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$ |
103,246 |
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$ |
115,381 |
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Loans held for sale |
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76 |
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223 |
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|
352 |
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768 |
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Securities: |
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Trading |
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81 |
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54 |
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211 |
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179 |
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Available for sale |
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3,823 |
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3,029 |
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10,978 |
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9,062 |
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Federal Home Loan Bank stock dividends |
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352 |
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417 |
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1,032 |
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|
1,229 |
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Other interest earning assets |
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87 |
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204 |
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348 |
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600 |
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Total interest income |
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37,922 |
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42,390 |
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116,167 |
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127,219 |
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Interest expense |
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Deposits |
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14,461 |
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|
|
16,886 |
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46,007 |
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50,436 |
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Federal Home Loan Bank advances |
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3,069 |
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5,757 |
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9,952 |
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16,384 |
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Repurchase agreements and other |
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1,477 |
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1,869 |
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5,141 |
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4,968 |
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Total interest expense |
|
|
19,007 |
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|
|
24,512 |
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61,100 |
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|
71,788 |
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Net interest income |
|
|
18,915 |
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|
|
17,878 |
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|
|
55,067 |
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|
55,431 |
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Provision for loan losses |
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|
8,995 |
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|
5,363 |
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14,709 |
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|
10,432 |
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|
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Net interest income after provision for
loan losses |
|
|
9,920 |
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|
|
12,515 |
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|
40,358 |
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44,999 |
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Non-interest income |
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|
|
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|
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|
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Brokerage commissions |
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6,820 |
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6,475 |
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20,460 |
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19,764 |
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Service fees and other charges |
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|
3,513 |
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|
3,705 |
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|
|
10,973 |
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|
11,048 |
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Underwriting and investment banking |
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|
483 |
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|
113 |
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|
718 |
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|
358 |
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Net gains (losses): |
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Securities available for sale |
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|
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|
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|
988 |
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Other than temporary impairment of securities |
|
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(5,029 |
) |
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|
|
|
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(5,029 |
) |
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Trading securities |
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|
(4 |
) |
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|
3 |
|
|
|
(53 |
) |
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|
51 |
|
Loans sold |
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|
292 |
|
|
|
892 |
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|
|
2,871 |
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|
|
2,079 |
|
Other |
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|
(1,164 |
) |
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|
(143 |
) |
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|
(2,837 |
) |
|
|
(546 |
) |
Other income |
|
|
1,052 |
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|
|
1,064 |
|
|
|
3,353 |
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|
|
2,989 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Total non-interest income |
|
|
5,963 |
|
|
|
12,109 |
|
|
|
31,444 |
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|
|
35,743 |
|
|
|
|
|
|
|
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|
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Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Salaries and employee benefits |
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|
14,136 |
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|
|
13,733 |
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|
|
43,767 |
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|
|
42,374 |
|
Goodwill impairment charge |
|
|
33,593 |
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|
|
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|
33,593 |
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Occupancy |
|
|
1,281 |
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|
|
1,232 |
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|
3,902 |
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|
3,588 |
|
Equipment and data processing |
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|
2,473 |
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|
2,156 |
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6,947 |
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|
6,777 |
|
Franchise tax |
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|
495 |
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|
543 |
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|
|
1,642 |
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|
|
1,657 |
|
Advertising |
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|
395 |
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|
325 |
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|
|
1,134 |
|
|
|
1,032 |
|
Amortization of core deposit intangible |
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|
69 |
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|
88 |
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|
220 |
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|
281 |
|
Other expenses |
|
|
4,910 |
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|
|
2,655 |
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|
|
11,760 |
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|
7,765 |
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Total non-interest expenses |
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|
57,352 |
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|
|
20,732 |
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|
|
102,965 |
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|
|
63,474 |
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|
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|
|
|
|
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|
|
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Income (loss) before income tax expense (benefit) |
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|
(41,469 |
) |
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|
3,892 |
|
|
|
(31,163 |
) |
|
|
17,268 |
|
Income tax expense (benefit) |
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|
(2,915 |
) |
|
|
1,309 |
|
|
|
619 |
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|
|
6,085 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(38,554 |
) |
|
$ |
2,583 |
|
|
$ |
(31,782 |
) |
|
$ |
11,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(35,135 |
) |
|
$ |
4,771 |
|
|
$ |
(32,688 |
) |
|
$ |
10,998 |
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.34 |
) |
|
$ |
0.09 |
|
|
$ |
(1.11 |
) |
|
$ |
0.39 |
|
Diluted |
|
$ |
(1.34 |
) |
|
$ |
0.09 |
|
|
$ |
(1.11 |
) |
|
$ |
0.38 |
|
See Notes to Consolidated Financial Statements.
2
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
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|
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Unearned |
|
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|
|
|
|
|
|
|
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|
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|
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|
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Accumulated |
|
Employee |
|
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|
|
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|
|
|
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|
|
|
|
|
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|
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Other |
|
Stock |
|
|
|
|
|
|
Shares |
|
Common |
|
Retained |
|
Comprehensive |
|
Ownership |
|
Treasury |
|
|
|
|
Outstanding |
|
Stock |
|
Earnings |
|
Income (Loss) |
|
Plan Shares |
|
Stock |
|
Total |
|
|
(Amounts in thousands, except share data) |
Balance December 31, 2007 |
|
|
30,052 |
|
|
$ |
146,683 |
|
|
$ |
213,727 |
|
|
$ |
661 |
|
|
$ |
(9,465 |
) |
|
$ |
(81,892 |
) |
|
$ |
269,714 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
(31,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,782 |
) |
Change in net unrealized
gain/(loss) on securities
and postretirement liabilities,
net of reclassification
and taxes of $488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(906 |
) |
|
|
|
|
|
|
|
|
|
|
(906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,688 |
) |
Shares allocated to ESOP participants |
|
|
|
|
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
1,367 |
|
|
|
|
|
|
|
1,244 |
|
Stock based compensation |
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150 |
|
Dividends paid, $0.1425 per share |
|
|
|
|
|
|
|
|
|
|
(4,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,064 |
) |
|
|
|
Balance September 30, 2008 |
|
|
30,052 |
|
|
$ |
146,710 |
|
|
$ |
177,881 |
|
|
$ |
(245 |
) |
|
$ |
(8,098 |
) |
|
$ |
(81,892 |
) |
|
$ |
234,356 |
|
|
|
|
See Notes to Consolidated Financial Statements.
3
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(31,782 |
) |
|
$ |
11,183 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
14,709 |
|
|
|
10,432 |
|
Net losses on impaired securities |
|
|
5,029 |
|
|
|
|
|
Net gains on loans held for sale and other assets |
|
|
(1,322 |
) |
|
|
(1,584 |
) |
Amortization of premiums and accretion of discounts |
|
|
1,304 |
|
|
|
1,803 |
|
Depreciation and amortization |
|
|
2,169 |
|
|
|
2,327 |
|
ESOP compensation |
|
|
1,244 |
|
|
|
2,205 |
|
Stock based compensation |
|
|
150 |
|
|
|
|
|
FHLB stock dividends |
|
|
(1,032 |
) |
|
|
|
|
(Increase) decrease in trading securities |
|
|
(5,353 |
) |
|
|
5,873 |
|
Decrease in interest receivable |
|
|
2,037 |
|
|
|
261 |
|
Goodwill impairment charge |
|
|
33,593 |
|
|
|
|
|
Increase in prepaid and other assets |
|
|
(4,882 |
) |
|
|
(4,126 |
) |
(Decrease) increase in interest payable |
|
|
(2,663 |
) |
|
|
2,511 |
|
Net principal disbursed on loans held for sale |
|
|
(127,407 |
) |
|
|
(161,119 |
) |
Proceeds from sale of loans held for sale |
|
|
209,989 |
|
|
|
175,084 |
|
Increase (decrease) in other liabilities |
|
|
2,649 |
|
|
|
(3,410 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
98,432 |
|
|
|
41,440 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from principal repayments and maturities of: |
|
|
|
|
|
|
|
|
Available for sale securities |
|
|
48,366 |
|
|
|
40,736 |
|
Proceeds from sale of: |
|
|
|
|
|
|
|
|
Available for sale securities |
|
|
49,399 |
|
|
|
|
|
Real estate owned and other repossessed assets |
|
|
10,875 |
|
|
|
2,753 |
|
Purchases of: |
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
(158,915 |
) |
|
|
(45,717 |
) |
Net principal repaid on loans |
|
|
23,891 |
|
|
|
78,666 |
|
Loans purchased |
|
|
(73,823 |
) |
|
|
(140,425 |
) |
Purchases of premises and equipment |
|
|
(903 |
) |
|
|
(3,364 |
) |
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
(101,110 |
) |
|
|
(67,351 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net (decrease) increase in NOW, savings and money market accounts |
|
|
(34,622 |
) |
|
|
14,358 |
|
Net increase (decrease) in certificates of deposit |
|
|
76,490 |
|
|
|
(54,076 |
) |
Net decrease in advance payments by borrowers for taxes and insurance |
|
|
(6,087 |
) |
|
|
(5,878 |
) |
Proceeds from FHLB advances |
|
|
581,000 |
|
|
|
581,353 |
|
Repayment of FHLB advances |
|
|
(599,819 |
) |
|
|
(541,064 |
) |
Net change in other borrowed funds |
|
|
(14,437 |
) |
|
|
49,104 |
|
Dividends paid |
|
|
(4,064 |
) |
|
|
(8,166 |
) |
Proceeds from the exercise of stock options |
|
|
|
|
|
|
176 |
|
Purchase of treasury stock |
|
|
|
|
|
|
(9,709 |
) |
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
(1,539 |
) |
|
|
26,098 |
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(4,217 |
) |
|
|
187 |
|
Cash and cash equivalents, beginning of period |
|
|
37,363 |
|
|
|
35,637 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
33,146 |
|
|
$ |
35,824 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
UNITED
COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
United Community Financial Corp. (United Community) was incorporated under Ohio law in February
1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the
conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital
stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998,
United Community became the unitary thrift holding company for Home Savings. Home Savings, a
state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio,
39 full-service branches and six loan production offices located throughout Ohio and western
Pennsylvania. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community
on August 12, 1999. Butler Wick is the parent company for two wholly-owned subsidiaries: Butler
Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick conducts business from its main office
located in Youngstown, Ohio and 22 offices located in northeastern Ohio, western Pennsylvania, and
western New York.
The accompanying consolidated financial statements of United Community have been prepared in
accordance with instructions relating to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the nine months ended September 30, 2008, are not necessarily
indicative of the results to be expected for the year ending December 31, 2008. 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, 2007, contained in United Communitys
Form 10-K for the year ended December 31, 2007.
Some items in the prior year financial statements were reclassified to conform to the current
presentation.
2. RECENT ACCOUNTING DEVELOPMENTS
In July 2006, the Emerging Issues Task Force (EITF) of FASB issued a draft abstract for EITF Issue
No. 06-04, Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangement. This draft abstract from EITF reached a consensus that
for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an
employer should recognize a liability for future benefits in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions. The Task Force concluded
that a liability for the benefit obligation under SFAS No. 106 has not been settled through the
endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus
reached in EITF Issue No. 06-04. This new accounting standard became effective for fiscal years
beginning after December 15, 2007. At September 30, 2008, United Community and its subsidiaries
owned $24.8 million of bank owned life insurance. The adoption of this standard had no impact on
United Communitys consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. This Statement establishes a fair value hierarchy about the assumptions
used to measure fair value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years beginning after November
15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB
Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The impact of adoption was not material.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. The standard provides companies with an option to report selected financial
assets and liabilities at fair value and establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. United Community did not elect the fair value option
for any financial assets or financial liabilities as of January 1, 2008, the effective date of the
standard.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments
Recorded at Fair Value through Earnings (SAB 109). Previously, SAB 105, Application of
Accounting Principles to Loan Commitments, stated that in
5
measuring the fair value of a derivative loan commitment, a company should not incorporate the
expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes
SAB 105 and indicates that the expected net future cash flows related to the associated servicing
of the loan should be included in measuring fair value for all written loan commitments that are
accounted for at fair value through earnings. SAB 105 also indicated that internally-developed
intangible assets should not be recorded as part of the fair value of a derivative loan commitment,
and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. United Communitys adoption of this
bulletin did not have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) (revised version of SFAS No. 141), Business
Combinations. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, to
be measured at their fair values as of that date. SFAS No. 141(R) replaces SFAS No. 141s
cost-allocation process, which required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on their estimated fair values. SFAS
No. 141(R) applies to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 31, 2008. United
Community has not determined what impact this standard may have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51. SFAS No. 160 amends ARB 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling interest. This
pronouncement is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited. United Community has not
determined what impact this standard may have on its consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. SFAS
No. 161 requires enhanced disclosures about an entitys derivative and hedging activities and
thereby improves the transparency of financial reporting. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. United
Community is currently evaluating the impact of SFAS No. 161 on its disclosures.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of
Generally Accepted Accounting Principles. This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. This statement will be effective 60
days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411. The adoption of SFAS No. 162 is not expected to impact United Communitys
consolidated financial statements.
On February 20, 2008, the FASB issued Staff Position FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions, to resolve questions about the accounting
for repurchase financings. This FSP is effective for repurchase financings in which the initial
transfer is entered into in fiscal years beginning after November 15, 2008. Management is
currently evaluating the impact, if any, of FSP 140-3 on United Communitys consolidated financial
statements.
On April 25, 2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the list of factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of recognized intangible assets under
SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 140-3 is effective for financial
statements issued for fiscal years and interim periods beginning after December 15, 2008. The
adoption of FSP FAS 140-3 is not expected to impact United Communitys consolidated financial
statements.
On May 9, 2008, the FASB issued Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP
APB 14-1 is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. The adoption of FSP APB 14-1 is not expected to impact United
Communitys consolidated financial statements.
On June 16, 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities. The FSP addresses
whether instruments granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in computing earnings per
share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128,
Earnings Per Share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 is not
expected to impact United Communitys consolidated financial statements.
6
3. STOCK COMPENSATION
On July 12, 1999, shareholders approved the United Community Financial Corp. 1999 Long-Term
Incentive Plan (1999 Plan). The purpose of the 1999 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 and Butler Wick, by facilitating their purchase of an ownership interest in United
Community.
The 1999 Plan provides for the grant of options, which may qualify as either incentive or
nonqualified stock options. The incentive plan provides that option prices will not be less than
the fair market value of the share at the grant date. The maximum number of common shares that may
be issued under the plan is 3,471,562. There are currently 264,924 shares remaining in the plan
that could be granted. All of the options awarded became exercisable on the date of grant. The
option period expires 10 years from the date of grant.
On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term
Incentive Plan (2007 Plan). The purpose of the 2007 Plan is the same as that of the 1999 Plan.
The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of
restricted stock shares, stock options, performance awards, stock appreciation rights (SARs), or
other forms of stock-based incentive awards. There were 237,072 stock options granted in the first
quarter of 2008 under the 2007 Plan. All of the options awarded became exercisable on the date of
grant. The option period expires 10 years from the date of grant. United Community recognized
$161,000 in expenses related to this grant.
A summary of activity in the plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
Weighted |
|
intrinsic |
|
|
|
|
|
|
average |
|
value (in |
|
|
Shares |
|
exercise price |
|
thousands) |
|
Outstanding at beginning of year |
|
|
2,043,856 |
|
|
$ |
9.66 |
|
|
|
|
|
Granted |
|
|
237,072 |
|
|
|
6.05 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(244,396 |
) |
|
|
8.83 |
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,036,532 |
|
|
$ |
9.34 |
|
|
$ |
|
|
|
Options exercisable at end of period |
|
|
2,036,532 |
|
|
$ |
9.34 |
|
|
$ |
|
|
|
Information related to the stock option plan during the quarter follows (dollars in thousands, except per share amount):
|
|
|
|
|
|
|
September 30, |
|
|
2008 |
|
Intrinsic value of options exercised |
|
$ |
|
|
Cash received from option exercises |
|
|
|
|
Tax benefit realized from option exercises |
|
|
|
|
Weighted average fair value of options granted, per share |
|
|
0.68 |
|
|
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes
valuation model that uses assumptions noted in the table below. Expected volatilities are based on
historical volatilities of United Communitys common shares. United Community uses historical data
to estimate option exercises and post-vesting termination behavior. The expected term of options
granted is based on historical data and represents the period of time that options granted are
expected to be outstanding, which takes into account that the options are not transferable. The
risk-free interest rate for the expected term of the option is based on the US Treasury yield curve
in effect at the time of the grant.
7
The fair value of options granted was determined using the following weighted-average assumptions
as of grant date.
|
|
|
|
|
Risk-free interest rate |
|
|
3.03 |
% |
Expected term (years) |
|
|
5 |
|
Expected stock volatility |
|
|
23.8 |
|
Dividend yield |
|
|
6.28 |
% |
|
Outstanding stock options have a weighted average remaining life of 4.81 years and may be exercised
in the range of $6.05 to $12.73.
4. SECURITIES
United Community categorizes securities as available for sale and trading. Components of the
available for sale portfolio are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
Value |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Gains |
|
|
Losses |
|
U.S. Treasury and
government
sponsored entities
securities |
|
$ |
49,433 |
|
|
$ |
194 |
|
|
$ |
(269 |
) |
|
$ |
84,388 |
|
|
$ |
337 |
|
|
$ |
(126 |
) |
Equity securities |
|
|
1,849 |
|
|
|
104 |
|
|
|
(564 |
) |
|
|
7,064 |
|
|
|
221 |
|
|
|
(494 |
) |
Mortgage-related securities |
|
|
249,444 |
|
|
|
1,045 |
|
|
|
(1,431 |
) |
|
|
153,301 |
|
|
|
977 |
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
300,726 |
|
|
$ |
1,343 |
|
|
$ |
(2,264 |
) |
|
$ |
244,753 |
|
|
$ |
1,535 |
|
|
$ |
(1,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Savings holds in its available-for-sale securities portfolio a Fannie Mae auction rate pass
through trust security with a cost basis of $5.0 million. This security represents an interest in
a trust that is collateralized with Fannie Mae non-cumulative preferred stock. The market value of
the security held by the Company declined following the September 7, 2008 announcement of the
appointment of a conservator for Fannie Mae. Because the effects of the conservatorship may
trigger the redemption provisions of the trust, UCFC management determined it was necessary for the
Company to recognize a write-down of $4.7 million in the third quarter of 2008. The Company also
owns an equity interest in the common shares of another financial institution, which has traded
below the Companys cost basis for more than twelve months and is not expected to recover in the
near term. The Company has taken a write-down of $353,000 on this investment.
The equity securities that have gross unrealized losses at September 30, 2008, are investments in
the common shares of regional financial institutions. These institutions continue to report strong
capital ratios and a reasonable level of nonperforming loans. Management believes that they have
been temporarily impaired as a result of the downturn in the financial sector and that this will be
a temporary situation. Management has the intent and ability to hold these investments for the
foreseeable future.
Securities pledged for public funds deposits were approximately $15.7 million at September 30,
2008, and $19.0 million at December 31, 2007. Securities sold under an agreement to repurchase are
secured primarily by mortgage-backed securities with a fair value of approximately $119.5 million
at September 30, 2008, and $121.4 million at December 31, 2007.
8
United Communitys trading securities are carried at fair value and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
US Treasury and government sponsored
entities |
|
$ |
1,543 |
|
|
$ |
1,054 |
|
State and municipal obligations |
|
|
8,672 |
|
|
|
3,636 |
|
Corporate bonds, debentures and notes |
|
|
149 |
|
|
|
62 |
|
Mutual funds |
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
Total trading securities |
|
$ |
10,364 |
|
|
$ |
5,064 |
|
|
|
|
|
|
|
|
5. LOANS
Portfolio loans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Real Estate: |
|
|
|
|
|
|
|
|
One- to four-family residential |
|
$ |
900,970 |
|
|
$ |
871,019 |
|
Multifamily residential |
|
|
197,504 |
|
|
|
179,535 |
|
Nonresidential |
|
|
390,606 |
|
|
|
359,070 |
|
Land |
|
|
24,272 |
|
|
|
22,818 |
|
Construction: |
|
|
|
|
|
|
|
|
One- to four-family residential |
|
|
282,284 |
|
|
|
357,153 |
|
Multifamily and non-residential |
|
|
32,228 |
|
|
|
25,191 |
|
|
|
|
|
|
|
|
Total real estate |
|
|
1,827,864 |
|
|
|
1,814,786 |
|
Consumer |
|
|
358,454 |
|
|
|
349,447 |
|
Commercial |
|
|
93,449 |
|
|
|
103,208 |
|
|
|
|
|
|
|
|
Total loans |
|
|
2,279,767 |
|
|
|
2,267,441 |
|
Less: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
33,186 |
|
|
|
32,006 |
|
Deferred loan fees, net |
|
|
(1,801 |
) |
|
|
(1,553 |
) |
|
|
|
|
|
|
|
Total |
|
|
31,385 |
|
|
|
30,453 |
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
2,248,382 |
|
|
$ |
2,236,988 |
|
|
|
|
|
|
|
|
Changes in the allowance for loan loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of or For the |
|
|
|
|
|
|
Nine Months |
|
|
As of or For the |
|
|
|
Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Balance, beginning of year |
|
$ |
32,006 |
|
|
$ |
16,955 |
|
Provision for loan losses |
|
|
14,709 |
|
|
|
28,750 |
|
Amounts charged off |
|
|
(14,121 |
) |
|
|
(14,220 |
) |
Recoveries |
|
|
592 |
|
|
|
521 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
33,186 |
|
|
$ |
32,006 |
|
|
|
|
|
|
|
|
9
Non-accrual loans were $99.2 million and $97.5 million at September 30, 2008, and December 31,
2007, respectively. Restructured loans were $3.2 million at September 30, 2008 and $2.3 million at
December 31, 2007. Loans greater than 90 days past due and still accruing interest were $3.8
million and $1.2 million at September 30, 2008 and December 31, 2007, respectively.
Impaired loans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of or For |
|
|
|
|
|
|
the Nine |
|
|
As of or For |
|
|
|
Months Ended |
|
|
the Year |
|
|
|
September 30, |
|
|
Ended |
|
|
|
2008 |
|
|
December 31, 2007 |
|
|
|
(Dollars in thousands) |
|
Impaired loans on which no specific valuation allowance was provided |
|
$ |
37,494 |
|
|
$ |
30,475 |
|
Impaired loans on which a specific valuation allowance was provided |
|
|
44,432 |
|
|
|
53,902 |
|
|
|
|
|
|
|
|
Total impaired loans at period-end |
|
$ |
81,926 |
|
|
$ |
84,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific valuation allowances on impaired loans at period-end |
|
$ |
11,561 |
|
|
$ |
13,165 |
|
Average impaired loans during the period |
|
|
82,087 |
|
|
|
63,468 |
|
Interest income recognized on impaired loans during the period |
|
|
424 |
|
|
|
348 |
|
Interest income received on impaired loans during the period |
|
|
424 |
|
|
|
348 |
|
6. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others, which are not reported in United Communitys assets, totaled
$928.2 million at September 30, 2008, and $876.1 million at December 31, 2007.
Activity for capitalized mortgage servicing rights, included in other assets, was as follows:
|
|
|
|
|
|
|
|
|
|
|
As of or for the |
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
As of or for the |
|
|
|
September 30, |
|
|
Year Ended |
|
|
|
2008 |
|
|
December 31, 2007 |
|
|
|
(Dollars in thousands) |
|
Balance, beginning of year |
|
$ |
6,184 |
|
|
$ |
6,820 |
|
Originations |
|
|
1,179 |
|
|
|
1,268 |
|
Amortized to expense |
|
|
(1,494 |
) |
|
|
(1,904 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
5,869 |
|
|
$ |
6,184 |
|
|
|
|
|
|
|
|
Activity in the valuation allowance for mortgage servicing rights was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Balance, beginning of year |
|
$ |
(562 |
) |
|
$ |
(435 |
) |
Impairment charges |
|
|
(5 |
) |
|
|
(562 |
) |
Recoveries |
|
|
562 |
|
|
|
435 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
(5 |
) |
|
$ |
(562 |
) |
|
|
|
|
|
|
|
Fair value of mortgage servicing rights as of September 30, 2008 was approximately $9.9 million and
at December 31, 2007 was $8.7 million.
10
Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2008
and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Weighted average prepayment rate |
|
180 PSA |
|
272 PSA |
Weighted average life (in years) |
|
|
3.60 |
|
|
|
3.87 |
|
Weighted average discount rate |
|
|
8 |
% |
|
|
8 |
% |
7. OTHER POSTRETIREMENT BENEFIT PLANS
Home Savings sponsors a defined benefit health care plan. The plan was curtailed in 2000, but
continues to provide postretirement medical benefits for employees who had worked 20 years and
attained a minimum age of 60 by September 1, 2000, while in service with Home Savings. The plan is
contributory and contains minor cost-sharing features such as deductibles and coinsurance. In
addition, postretirement life insurance coverage is provided for employees who were participants
prior to December 10, 1976. The life insurance plan is non-contributory. Home Savings policy is
to pay premiums monthly, with no pre-funding.
Components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
49 |
|
|
|
56 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
Net amortization of prior service cost |
|
|
(1 |
) |
|
|
(1 |
) |
Net amortization of actuarial gain |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
45 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used in the
valuations were as follows: |
|
|
|
|
|
|
|
|
Weighted average discount rate |
|
|
6.00 |
% |
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
145 |
|
|
|
167 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
Net amortization of prior service cost |
|
|
(1 |
) |
|
|
(1 |
) |
Net amortization of actuarial gain |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
135 |
|
|
$ |
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used in the
valuations were as follows: |
|
|
|
|
|
|
|
|
Weighted average discount rate |
|
|
6.00 |
% |
|
|
5.50 |
% |
11
8. FAIR VALUE MEASUREMENT
Statement 157 establishes a fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that
the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions
about the assumptions that market participants would use in pricing an asset or liability.
The fair values of trading securities and securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges or matrix pricing. This is a
mathematical technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying on the securities
relationship to other benchmark quoted securities.
Impaired loans are measured at fair value on a nonrecurring basis in the normal course of business
and are subject to adjustments based on the value of the underlying collateral.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2008 Using: |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
|
|
|
Significant |
|
|
|
|
|
|
for Identical |
|
Significant Other |
|
Unobservable |
|
|
September 30, |
|
Assets |
|
Observable |
|
Inputs |
|
|
2008 |
|
(Level 1) |
|
Inputs (Level 2) |
|
(Level 3) |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
10,364 |
|
|
$ |
10,364 |
|
|
$ |
|
|
|
$ |
|
|
Available for sale securities |
|
|
300,726 |
|
|
|
1,524 |
|
|
|
299,202 |
|
|
|
|
|
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2008 Using: |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
|
|
|
Significant |
|
|
|
|
|
|
for Identical |
|
Significant Other |
|
Unobservable |
|
|
September 30, |
|
Assets |
|
Observable |
|
Inputs |
|
|
2008 |
|
(Level 1) |
|
Inputs (Level 2) |
|
(Level 3) |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
32,871 |
|
|
|
|
|
|
|
|
|
|
$ |
32,871 |
|
Impaired loans, which are usually measured for impairment using the fair value of the collateral,
had a carrying amount of $81.9 million at September 30, 2008, and $84.4 million at December 31,
2007. Of these, $32.9 million were carried at fair value at September 30, 2008, compared to $53.9
million at December 31, 2007. The specific valuation on these loans increased from $13.2 million
at December 31, 2008, to $11.6 million at September 30, 2008.
12
9. |
|
STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE |
Supplemental disclosures of cash flow information are summarized below.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
September 30, 2007 |
|
|
(Dollars in thousands) |
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest on deposits and borrowings, net of amounts capitalized |
|
$ |
63,763 |
|
|
$ |
69,277 |
|
Interest capitalized on borrowings |
|
|
|
|
|
|
17 |
|
Income taxes |
|
|
3,859 |
|
|
|
9,434 |
|
Supplemental schedule of noncash activities: |
|
|
|
|
|
|
|
|
Transfers from loans to real estate owned and other repossessed assets |
|
|
23,754 |
|
|
|
11,720 |
|
10. SEGMENT INFORMATION
United Community has two principal segments, banking and investment services. Banking
provides consumer and commercial banking services. Investment services provide investment
brokerage and a network of integrated financial services. Condensed statements of income
by operating segment for the three and nine months ended September 30, 2008 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2008 |
|
|
|
Banking |
|
|
Investment |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
37,748 |
|
|
$ |
174 |
|
|
$ |
37,922 |
|
Interest expense |
|
|
18,951 |
|
|
|
56 |
|
|
|
19,007 |
|
Provision for loan loss |
|
|
8,995 |
|
|
|
|
|
|
|
8,995 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan loss |
|
|
9,802 |
|
|
|
118 |
|
|
|
9,920 |
|
Securities available for sale write-down |
|
|
(5,029 |
) |
|
|
|
|
|
|
(5,029 |
) |
Non-interest income |
|
|
2,654 |
|
|
|
8,338 |
|
|
|
10,992 |
|
Goodwill impairment charge |
|
|
33,593 |
|
|
|
|
|
|
|
33,593 |
|
Non-interest expense |
|
|
15,923 |
|
|
|
7,836 |
|
|
|
23,759 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax |
|
|
(42,089 |
) |
|
|
620 |
|
|
|
(41,469 |
) |
Income tax expense (benefit) |
|
|
(3,132 |
) |
|
|
217 |
|
|
|
(2,915 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(38,957 |
) |
|
$ |
403 |
|
|
$ |
(38,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2007 |
|
|
|
Banking |
|
|
Investment |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Total |
|
|
|
(Dollars in thousands) |
Interest income |
|
$ |
42,105 |
|
|
$ |
285 |
|
|
$ |
42,390 |
|
Interest expense |
|
|
24,433 |
|
|
|
79 |
|
|
|
24,512 |
|
Provision for loan loss |
|
|
5,363 |
|
|
|
|
|
|
|
5,363 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan loss |
|
|
12,309 |
|
|
|
206 |
|
|
|
12,515 |
|
Non-interest income |
|
|
4,121 |
|
|
|
7,988 |
|
|
|
12,109 |
|
Non-interest expense |
|
|
13,462 |
|
|
|
7,270 |
|
|
|
20,732 |
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
2,968 |
|
|
|
924 |
|
|
|
3,892 |
|
Income tax expense |
|
|
983 |
|
|
|
326 |
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,985 |
|
|
$ |
598 |
|
|
$ |
2,583 |
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2008 |
|
|
|
Banking |
|
|
Investment |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
115,577 |
|
|
$ |
590 |
|
|
$ |
116,167 |
|
Interest expense |
|
|
60,923 |
|
|
|
177 |
|
|
|
61,100 |
|
Provision for loan loss |
|
|
14,709 |
|
|
|
|
|
|
|
14,709 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan loss |
|
|
39,945 |
|
|
|
413 |
|
|
|
40,358 |
|
Securities available for sale write-down |
|
|
(5,029 |
) |
|
|
|
|
|
|
(5,029 |
) |
Non-interest income |
|
|
11,833 |
|
|
|
24,640 |
|
|
|
36,473 |
|
Goodwill impairment charge |
|
|
33,593 |
|
|
|
|
|
|
|
33,593 |
|
Non-interest expense |
|
|
46,047 |
|
|
|
23,325 |
|
|
|
69,372 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax |
|
|
(32,891 |
) |
|
|
1,728 |
|
|
|
(31,163 |
) |
Income tax expense (benefit) |
|
|
(3 |
) |
|
|
622 |
|
|
|
619 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(32,888 |
) |
|
$ |
1,106 |
|
|
$ |
(31,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2007 |
|
|
|
Banking |
|
|
Investment |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
126,370 |
|
|
$ |
849 |
|
|
$ |
127,219 |
|
Interest expense |
|
|
71,525 |
|
|
|
263 |
|
|
|
71,788 |
|
Provision for loan loss |
|
|
10,432 |
|
|
|
|
|
|
|
10,432 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan loss |
|
|
44,413 |
|
|
|
586 |
|
|
|
44,999 |
|
Non-interest income |
|
|
11,436 |
|
|
|
24,307 |
|
|
|
35,743 |
|
Non-interest expense |
|
|
41,310 |
|
|
|
22,164 |
|
|
|
63,474 |
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
14,539 |
|
|
|
2,729 |
|
|
|
17,268 |
|
Income tax expense |
|
|
5,145 |
|
|
|
940 |
|
|
|
6,085 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,394 |
|
|
$ |
1,789 |
|
|
$ |
11,183 |
|
|
|
|
|
|
|
|
|
|
|
14
11. EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted earnings per share is computed using the weighted average
number of shares determined for the basic computation plus the dilutive effect of potential common
shares that could be issued under outstanding stock options. There were 2,036,537 stock options
that were antidilutive for the period ending September 30, 2008. There were stock options for
717,247 shares that were antidilutive for the period ending September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except per share data) |
|
Net income applicable to common stock |
|
$ |
(38,554 |
) |
|
$ |
2,583 |
|
|
$ |
(31,782 |
) |
|
$ |
11,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
28,692 |
|
|
|
28,489 |
|
|
|
28,561 |
|
|
|
28,792 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
for dilutive computation |
|
|
28,692 |
|
|
|
28,532 |
|
|
|
28,561 |
|
|
|
28,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share as reported |
|
$ |
(1.34 |
) |
|
$ |
0.09 |
|
|
$ |
(1.11 |
) |
|
$ |
0.39 |
|
Diluted earnings per share as reported |
|
$ |
(1.34 |
) |
|
$ |
0.09 |
|
|
$ |
(1.11 |
) |
|
$ |
0.38 |
|
12. OTHER BORROWINGS
Included in other borrowings is $14.9 million outstanding at September 30, 2008 under a Credit
Agreement between JP Morgan Chase Bank, N.A., (JP Morgan) and United Community, dated September 12,
2005, as amended on July 18, 2007, and March 28, 2008, (the Credit Agreement). The Credit
Agreement provided United Community with a line of credit of up to $40.0 million.
The Credit Agreement sets forth numerous covenants with which United Community must comply. At
December 31, 2007, the ratio of Home Savings loans past due 90 days or more and still accruing
interest, all non-accrual loans, all restructured loans and leases and all other non-performing
loans to its total loans and Other Real Estate Owned exceeded the level permitted in the Credit
Agreement. JP Morgan would not agree to waive the default and notified United Community that it
would not advance any new funds and that a default rate of interest equal to the one month LIBOR
plus 5.25% would be charged on the outstanding principal balance.
On March 28, 2008, United Community and JP Morgan amended the Credit Agreement to provide, among
other things, (1) a waiver of all existing defaults under the credit agreement, (2) that no new
funds would be advanced to United Community on the line of credit, and (3) an increase in the
allowable non-performing asset ratio to 6.50% of total loans and REO. As of September 30, 2008,
that ratio was 5.52%.
On August 29, 2008, United Community and JP Morgan amended the Credit Agreement in response to the
event of default that occurred when United Community entered into a Stipulation and Consent to
Issuance of Order to Cease and Desist with the Office of Thrift Supervision (OTS) and United
Communitys wholly owned subsidiary, The Home Savings and Loan Company of Youngstown, Ohio, entered
into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the Federal
Deposit Insurance Corporation (FDIC) and State of Ohio, Division of Financial Institutions (Ohio
Division). The Amendment waived the events of default and extended the maturity date of the
borrowings until January 31, 2009. In connection with the Amendment, United Community made a
principal payment of $1.4 million to reduce the amount of borrowings to $14.9 million at September
30, 2008 and pledged additional collateral.
13. BROKERED CERTIFICATES OF DEPOSIT
To supplement its funding needs, United Community began obtaining brokered certificates of deposit
in 2007. Such deposits have maturities ranging from six months to two years. The total balance of
brokered certificates of deposit was $185.2 million at September 30, 2008 and $39.9 million at
December 31, 2007. Home Savings cannot obtain additional brokered certificates of deposit without
prior consent of the FDIC and Ohio Division.
15
14. REGULATORY ENFORCEMENT ACTION
On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to
Issuance of Order to Cease and Desist (OTS Order) with the OTS. Simultaneously, the board of
directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease
and Desist (Bank Order) with the FDIC and the Ohio Division. Although United Community and Home
Savings have agreed to the issuance of the OTS Order and the Bank Order, respectively, neither has
admitted or denied any allegations of unsafe or unsound banking practices, or any legal or
regulatory violations. No monetary penalties were assessed by the OTS, the FDIC, or the Ohio
Division.
The OTS Order requires UCFC to obtain OTS approval prior to: (i) incurring or increasing its debt
position; (ii) repurchasing any UCFC stock; or (iii) paying any dividends. The OTS Order also
requires UCFC to develop a debt reduction plan and submit the plan to the OTS for approval.
The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain
actions, including: (i) retaining a bank consultant to assess Home Savings management needs and
submitting a management plan that identifies officer positions needed, identifies and establishes
board and internal operating committees, evaluates Home Savings senior officers, and provides for
the hiring of any additional personnel; (ii) seeking regulatory approval prior to adding any
individuals to the board of directors or employing any individual as a senior executive officer of
Home Savings; (iii) not extending additional credit to classified borrowers; (iv) establishing a
compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies
and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent
loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and
construction, land development, and land loans; (vii) establishing board of directors committees to
evaluate and approve certain loans and oversee Home Savings compliance with the Bank Order; (viii)
revising its loan policy and enhancing its underwriting and credit administration functions; (ix)
developing a strategic plan and budget and profit plan; (x) correcting all violations of laws,
rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its
Tier 1 capital to 8% and its total risk based capital to 12% by December 31, 2008; and (xii)
seeking regulatory approval prior to declaring or paying any cash dividend. At September 30, 2008,
Home Savings Tier 1 capital was 7.43% and its total risk based capital was 11.78%. Because of the
consent to the Bank Order, Home Savings is deemed adequately capitalized for regulatory capital
purposes.
United Community and Home Savings are moving toward compliance with the OTS Order and Bank Order.
As part of its plan to improve capital, the Company may sell securities or other assets, restrict lending
activities and paydown subordinated debt and invest the capital in Home Savings.
15. GOODWILL
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets
(as amended), requires goodwill to be tested for impairment on an annual basis, or more frequently
if circumstances indicate that an asset might be impaired, by comparing the fair value of such
goodwill to its recorded or carrying amount. If the carrying amount of the goodwill exceeds the
fair value, an impairment charge must be recorded in an amount equal to the excess. Based on the
level that United Community shares had been trading and other factors, management determined that
it would be appropriate under the guidance of SFAS No. 142, to test the value of the goodwill
previously recorded as a result of the mergers with Industrial Bancorp, Inc. in 2001 and Potters
Financial Corporation in 2002 for goodwill impairment during the third quarter of 2008. As a
result of impairment testing performed, the Company recorded an impairment charge of $33.6 million.
The fair value of goodwill was estimated using a number of measurement methods. These included the
application of various metrics from bank sale transactions for institutions comparable to Home
Savings, including the application of market-derived multiples of tangible book value and earnings,
as well as estimations of the present value of future cash flows. Home Savings management
reviewed the valuation of the fair value of Home Savings with the Audit Committee and concluded
that Home Savings should recognize an impairment charge and write down its goodwill to a balance of
zero.
16. PARTICIPATION IN THE U.S. TREASURY CAPITAL PURCHASE PROGRAM
On October 3, 2008, Congress passed the Emergency Stabilization Act of 2008 (EESA), which
provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to
help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act
is the Treasury Capital Purchase Program (CPP) , which provides direct equity investment of
perpetual preferred stock by the Treasury in qualified financial institutions. The program is
voluntary and requires an institution to comply with a number of restrictions and provisions,
including limits on executive compensation, stock redemptions and declaration of dividends.
Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury.
The CPP provides
16
for a minimum investment of 1% of risk-weighted assets, with a maximum investment equal to the
lesser of 3% of total risk-weighted assets or $25 billion. The perpetual preferred stock
investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury
investment, and a dividend of 9% thereafter. The CPP also requires the Treasury to receive
warrants for common stock equal to 15% of the capital invested by the Treasury. Participation in
the program is not automatic and subject to approval by the Treasury.
The Company has applied for participation in the CPP.
17. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) included in the Consolidated Statements of Shareholders Equity consists
of unrealized gains and losses on available for sale securities and changes in unrealized gains and
losses on postretirement liability. The change includes reclassification of losses on sales of
securities and impairment charges, net of tax of $1.4 million at September 30, 2008, and $21,000 at
December 31, 2007.
Other comprehensive income (loss) components and related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Unrealized holding gain (loss) on securities
available for sale and postretirement benefits |
|
$ |
2,647 |
|
|
$ |
3,016 |
|
Reclassification adjustment for losses (gains)
realized in income |
|
|
4,041 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) |
|
|
(1,394 |
) |
|
|
3,011 |
|
Tax effect (35%) |
|
|
(488 |
) |
|
|
1,054 |
|
|
|
|
|
|
|
|
Net of tax amount |
|
$ |
(906 |
) |
|
$ |
1,957 |
|
|
|
|
|
|
|
|
The following is a summary of accumulated other comprehensive income (loss) balances, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Current |
|
|
Balance at |
|
|
|
December 31, |
|
|
Period |
|
|
September 30, |
|
|
|
2007 |
|
|
Change |
|
|
2008 |
|
Unrealized gains (losses) on securities
available for sale |
|
$ |
359 |
|
|
$ |
(906 |
) |
|
$ |
(547 |
) |
Unrealized gains on post-retirement benefits |
|
|
302 |
|
|
|
|
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
661 |
|
|
$ |
(906 |
) |
|
$ |
(245 |
) |
|
|
|
|
|
|
|
|
|
|
17
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNITED COMMUNITY FINANCIAL CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Three |
|
At or For the Nine |
|
|
Months Ended |
|
Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Selected financial ratios and other data: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (2) |
|
|
(5.57 |
)% |
|
|
0.38 |
% |
|
|
(1.54 |
)% |
|
|
0.55 |
% |
Return on average equity (3) |
|
|
(54.84 |
)% |
|
|
3.63 |
% |
|
|
(14.96 |
)% |
|
|
5.21 |
% |
Interest rate spread (4) |
|
|
2.61 |
% |
|
|
2.33 |
% |
|
|
2.48 |
% |
|
|
2.42 |
% |
Net interest margin (5) |
|
|
2.92 |
% |
|
|
2.78 |
% |
|
|
2.84 |
% |
|
|
2.88 |
% |
Non-interest expense to average assets |
|
|
8.29 |
% |
|
|
3.05 |
% |
|
|
4.99 |
% |
|
|
3.12 |
% |
Efficiency ratio (6) |
|
|
76.24 |
% |
|
|
68.52 |
% |
|
|
74.01 |
% |
|
|
68.94 |
% |
Average interest-earning assets to average interest-
bearing liabilities |
|
|
110.52 |
% |
|
|
111.86 |
% |
|
|
111.22 |
% |
|
|
112.35 |
% |
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets |
|
|
10.17 |
% |
|
|
10.47 |
% |
|
|
10.29 |
% |
|
|
10.56 |
% |
Equity to assets, end of period |
|
|
8.59 |
% |
|
|
10.10 |
% |
|
|
8.59 |
% |
|
|
10.10 |
% |
Tier 1 leverage ratio |
|
|
7.43 |
% |
|
|
8.03 |
% |
|
|
7.43 |
% |
|
|
8.03 |
% |
Tier 1 risk-based capital ratio |
|
|
9.86 |
% |
|
|
9.94 |
% |
|
|
9.86 |
% |
|
|
9.94 |
% |
Total risk-based capital ratio |
|
|
11.78 |
% |
|
|
12.44 |
% |
|
|
11.78 |
% |
|
|
12.44 |
% |
Asset quality ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans at end of period (7) |
|
|
4.73 |
% |
|
|
4.40 |
% |
|
|
4.73 |
% |
|
|
4.40 |
% |
Non-performing assets to average assets (8) |
|
|
4.58 |
% |
|
|
4.14 |
% |
|
|
4.61 |
% |
|
|
4.15 |
% |
Non-performing assets to total assets at end of period |
|
|
4.65 |
% |
|
|
4.10 |
% |
|
|
4.65 |
% |
|
|
4.10 |
% |
Allowance for loan losses as a percent of loans |
|
|
1.45 |
% |
|
|
1.03 |
% |
|
|
1.45 |
% |
|
|
1.03 |
% |
Allowance for loan losses as a percent of
non-performing loans (7) |
|
|
31.23 |
% |
|
|
23.61 |
% |
|
|
31.23 |
% |
|
|
23.61 |
% |
Office data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of full service banking offices |
|
|
39 |
|
|
|
38 |
|
|
|
39 |
|
|
|
38 |
|
Number of loan production offices |
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
Number of brokerage offices |
|
|
21 |
|
|
|
20 |
|
|
|
21 |
|
|
|
21 |
|
Number of trust offices |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share (9) |
|
$ |
(1.34 |
) |
|
$ |
0.09 |
|
|
$ |
(1.11 |
) |
|
$ |
0.39 |
|
Diluted earnings (loss) per share (9) |
|
$ |
(1.34 |
) |
|
$ |
0.09 |
|
|
$ |
(1.11 |
) |
|
$ |
0.38 |
|
Book value (10) |
|
$ |
7.80 |
|
|
$ |
9.21 |
|
|
$ |
7.80 |
|
|
$ |
9.21 |
|
Tangible book value (11) |
|
$ |
7.77 |
|
|
$ |
8.05 |
|
|
$ |
7.77 |
|
|
$ |
8.05 |
|
Market value as a percent of book value (12) |
|
|
64 |
% |
|
|
78 |
% |
|
|
64 |
% |
|
|
78 |
% |
|
|
|
(1) |
|
Ratios for the three and nine month periods are annualized where appropriate. |
|
(2) |
|
Net income (loss) divided by average total assets. |
|
(3) |
|
Net income (loss) 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, excluding the amortization of core deposit intangible and goodwill impairment charge, divided by the sum of net interest income and noninterest income, excluding securities write-downs and
gains and losses on securities and other. |
|
(7) |
|
Nonperforming loans consist of loans ninety days past due, loans less than ninety days past due and not accruing interest and restructured loans. |
|
(8) |
|
Nonperforming assets consist of nonperforming loans and real estate owned and other repossessed assets. |
|
(9) |
|
Earnings per share are computed by dividing net income ( loss) by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number
of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. |
|
(10) |
|
Equity divided by number of shares outstanding. |
|
(11) |
|
Equity minus goodwill and core deposit intangible divided by number of shares outstanding. |
|
(12) |
|
Market value divided by book value. UCFC shares closed at $5.00 per share on September 30, 2008, as quoted on the NASDAQ stock market. |
18
Forward Looking Statements
When used in this Form 10-Q 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 uncertainties including changes in economic
conditions in United Communitys 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 Wicks market area and competition, that could cause actual results to differ
materially from results 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
Communitys financial performance and could cause United Communitys actual results for future
periods to differ materially from any opinions or statements expressed with respect to future
periods in any current statements.
Comparison of Financial Condition at September 30, 2008 and December 31, 2007
Total assets decreased $33.3 million to $2.7 billion at September 30, 2008, compared to December
31, 2007. The change was attributable to decreases in loans held for sale of $79.7 million,
goodwill of $33.6 million, cash and cash equivalents of $4.2 million, accrued interest receivable
of $2.0 million and premises and equipment of $1.2 million. These decreases were offset partially
by increases in securities available for sale of $56.0 million, net loans of $11.4 million, real
estate owned and other repossessed assets of $10.0 million and other assets of $3.2 million.
Cash and cash equivalents decreased $4.2 million to $33.1 million at September 30, 2008, compared
to $37.4 million at December 31, 2007. This change is primarily the result of a decrease in checks
awaiting deposit at the Federal Reserve and cash maintained at Home Savings branch locations.
These decreases were partially offset by an increase in cash maintained in Home Savings account at
the Federal Reserve.
The trading securities portfolio increased $5.3 million to $10.4 million at September 30, 2008,
from $5.1 million at December 31, 2007. This change resulted primarily from an increase in Butler
Wicks portfolio of $5.0 million in state and municipal securities and an increase of $149,000 in
US Treasury and government sponsored securities, offset by decreases of $312,000 in mutual fund
investments. Butler Wicks increase in trading securities is due to normal trading activity and
securities Butler Wick holds in inventory.
Available for sale securities increased $56.0 million, or 22.9%, from December 31, 2007, to
September 30, 2008. Home Savings purchased $157.1 million in securities during the first nine
months of 2008 and Butler Wick purchased $1.9 million. These purchases were partially offset by
sales of $48.4 million at Home Savings and paydowns and maturities of $50.1 million at Home Savings
and $2.6 million at Butler Wick. The remaining difference is primarily a result of changes in the
market valuation of the portfolio, including the $4.7 million write-down of the Fannie Mae
security, net of any amortization or accretion.
Net loans increased $11.4 million from December 31, 2007, to September 30, 2008. Real estate loans
increased $13.1 million and consumer loans increased $9.0 million. The overall increase in loans
is attributable primarily to higher originations and purchases of loans offset partially by
paydowns during the period.
The allowance for loan losses increased to $33.2 million, or 1.45% of portfolio loans and 31.2% of
nonperforming loans as of September 30, 2008, from $32.0 million or 1.41% of portfolio loans as of
December 31, 2007. Provisions totaling $14.9 million during the nine months ended September 30,
2008 were substantially offset by charge-offs totaling $14.1 million. .Management establishes the
allowance for loan losses at a level it believes adequate to absorb probable losses incurred in the
loan portfolio. Management bases its determination of the adequacy of the allowance upon estimates
derived from an analysis of individual credits, prior and current loss experience, loan portfolio
delinquency levels, overall growth in the loan portfolio, current economic conditions, and results
of regulatory examinations. Furthermore, in determining the level of the allowance for loan loss,
management reviews and evaluates on a monthly basis the necessity of a reserve for individual loans
classified by management. The specifically allocated reserve for a classified loan is determined
based on managements estimate of the borrowers ability to repay the loan given the availability
of collateral, other sources of cash flow and legal remedies available to Home Savings. Once a
review is completed, the need for a specific reserve is determined by the Home Savings Asset Review
Committee and allocated to the loan. Other loans not reviewed specifically by management are
evaluated as a homogeneous group of loans (e.g., performing single-family residential mortgage
loans and all consumer credit except marine loans) using the historical charge-off experience ratio
specific to each type of loan. The historical charge-off experience ratio considers the
homogeneous nature of the loans, the geographical lending areas involved, regulatory examination
findings, specific grading systems applied, and any other known factors that may impact the ratios
used. Specific reserves on individual loans and historical ratios are reviewed periodically and
adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming
trends, or actual principal charge-offs. These factors are
19
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance For Loan Losses |
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2007 |
|
|
Provision |
|
|
Recovery |
|
|
Chargeoff |
|
|
2008 |
|
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
2,803 |
|
|
$ |
1,781 |
|
|
$ |
17 |
|
|
$ |
(2,276 |
) |
|
$ |
2,325 |
|
Multifamily residential |
|
|
2,365 |
|
|
|
2,123 |
|
|
|
3 |
|
|
|
(641 |
) |
|
|
3,850 |
|
Nonresidential |
|
|
4,488 |
|
|
|
607 |
|
|
|
3 |
|
|
|
(575 |
) |
|
|
4,523 |
|
Land |
|
|
629 |
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,285 |
|
|
|
4,365 |
|
|
|
23 |
|
|
|
(3,492 |
) |
|
|
11,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential |
|
|
11,892 |
|
|
|
5,528 |
|
|
|
10 |
|
|
|
(6,391 |
) |
|
|
11,039 |
|
Multifamily and nonresidential |
|
|
607 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
12,499 |
|
|
|
5,516 |
|
|
|
10 |
|
|
|
(6,391 |
) |
|
|
11,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity |
|
|
1,260 |
|
|
|
1,054 |
|
|
|
|
|
|
|
(1,186 |
) |
|
|
1,128 |
|
Auto |
|
|
447 |
|
|
|
(134 |
) |
|
|
33 |
|
|
|
(72 |
) |
|
|
274 |
|
Marine |
|
|
1,468 |
|
|
|
264 |
|
|
|
62 |
|
|
|
(316 |
) |
|
|
1,478 |
|
Recreational vehicle |
|
|
2,050 |
|
|
|
(89 |
) |
|
|
103 |
|
|
|
(616 |
) |
|
|
1,448 |
|
Other |
|
|
260 |
|
|
|
256 |
|
|
|
260 |
|
|
|
(447 |
) |
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,485 |
|
|
|
1,351 |
|
|
|
458 |
|
|
|
(2,637 |
) |
|
|
4,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
|
2,375 |
|
|
|
1,540 |
|
|
|
|
|
|
|
(1,417 |
) |
|
|
2,498 |
|
Unsecured |
|
|
1,362 |
|
|
|
1,937 |
|
|
|
101 |
|
|
|
(184 |
) |
|
|
3,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,737 |
|
|
|
3,477 |
|
|
|
101 |
|
|
|
(1,601 |
) |
|
|
5,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,006 |
|
|
$ |
14,709 |
|
|
$ |
592 |
|
|
$ |
(14,121 |
) |
|
$ |
33,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Nonperforming loans consist of loans past due 90 days or more, loans past due less than 90 days
that are on nonaccrual status, and restructured loans. Nonperforming loans were $106.3 million, or
4.73% of net loans, at September 30, 2008, compared to $101.1 million, or 4.52% of net loans, at
December 31, 2007. The schedule below summarizes the change in nonperforming loans for the first
nine months of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Loans |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2008 Interest |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Foregone |
|
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
16,923 |
|
|
$ |
12,752 |
|
|
$ |
4,171 |
|
|
$ |
472 |
|
Multifamily residential |
|
|
15,490 |
|
|
|
13,604 |
|
|
|
1,886 |
|
|
|
623 |
|
Nonresidential |
|
|
13,679 |
|
|
|
13,597 |
|
|
|
82 |
|
|
|
110 |
|
Land |
|
|
3,717 |
|
|
|
3,700 |
|
|
|
17 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
49,809 |
|
|
|
43,653 |
|
|
|
6,156 |
|
|
|
1,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential |
|
|
42,363 |
|
|
|
44,680 |
|
|
|
(2,317 |
) |
|
|
245 |
|
Multifamily and nonresidential |
|
|
816 |
|
|
|
825 |
|
|
|
(9 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
43,179 |
|
|
|
45,505 |
|
|
|
(2,326 |
) |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity |
|
|
2,123 |
|
|
|
2,454 |
|
|
|
(331 |
) |
|
|
61 |
|
Auto |
|
|
196 |
|
|
|
211 |
|
|
|
(15 |
) |
|
|
|
|
Marine |
|
|
2,617 |
|
|
|
1,714 |
|
|
|
903 |
|
|
|
66 |
|
Recreational vehicle |
|
|
790 |
|
|
|
376 |
|
|
|
414 |
|
|
|
23 |
|
Other |
|
|
22 |
|
|
|
64 |
|
|
|
(42 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,748 |
|
|
|
4,819 |
|
|
|
929 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
|
4,027 |
|
|
|
4,554 |
|
|
|
(527 |
) |
|
|
406 |
|
Unsecured |
|
|
288 |
|
|
|
184 |
|
|
|
104 |
|
|
|
51 |
|
Total |
|
|
4,315 |
|
|
|
4,738 |
|
|
|
(423 |
) |
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured Loans |
|
|
3,199 |
|
|
|
2,341 |
|
|
|
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonperforming Loans |
|
$ |
106,250 |
|
|
$ |
101,056 |
|
|
$ |
5,194 |
|
|
$ |
2,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $4.2 million increase in nonperforming loans secured by one-to four-family properties was
primarily a result of the overall increase in the number of loans becoming 90 or more days past
due. The decrease in nonperforming construction loans was primarily the result of Home Savings
taking into possession property collateralizing three lending relationships totaling $12.5 million
in the first quarter of 2008.
A loan is impaired when, based on current information and events, it is probable that Home Savings
will be unable to collect both the contractual interest payments and the contractual principal
payments, as scheduled in the loan agreement. The net decrease in impaired loans, as shown in the
following table, of $2.5 million during the period relates primarily to Home Savings taking
possession of property collateralizing $12.5 of one-to four-family residential loans and property
collateralizing $3.7 million of nonresidential real estate loans.
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Permanent |
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
2,252 |
|
|
$ |
2,681 |
|
|
$ |
(429 |
) |
Multifamily residential |
|
|
15,770 |
|
|
|
13,604 |
|
|
|
2,166 |
|
Nonresidential |
|
|
13,817 |
|
|
|
13,597 |
|
|
|
220 |
|
Land |
|
|
3,700 |
|
|
|
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
35,539 |
|
|
|
33,582 |
|
|
|
1,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans |
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential |
|
|
38,639 |
|
|
|
43,518 |
|
|
|
(4,879 |
) |
Multifamily and nonresidential |
|
|
816 |
|
|
|
825 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
39,455 |
|
|
|
44,343 |
|
|
|
(4,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Auto |
|
|
|
|
|
|
|
|
|
|
|
|
Boat |
|
|
2,617 |
|
|
|
1,714 |
|
|
|
903 |
|
Recreational vehicle |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,617 |
|
|
|
1,714 |
|
|
|
903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
|
4,027 |
|
|
|
4,554 |
|
|
|
(527 |
) |
Unsecured |
|
|
288 |
|
|
|
184 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,315 |
|
|
|
4,738 |
|
|
|
(423 |
) |
|
|
|
|
|
|
|
|
|
|
Total Impaired Loans |
|
$ |
81,926 |
|
|
$ |
84,377 |
|
|
|
(2,451 |
) |
|
|
|
|
|
|
|
|
|
|
Other nonperforming assets, consisting of real estate and other consumer property acquired in the
settlement of loans, totaled $20.5 million at September 30, 2008, compared to $10.5 million at
December 31, 2007. The $10.0 million increase is primarily attributable to the acquisition of
properties having an estimated market value of $13.3 million that collateralized commercial
construction loans primarily in the central Ohio market area and three properties with a combined
estimated market value of $1.2 million that secured three commercial real estate loans located in
northeast Ohio. Home Savings disposed of land with a value of $3.1 million in the first quarter of
2008, partially offsetting the increase. Other consumer property, such as boats, recreational
vehicles, and automobiles that were received by Home Savings in the satisfaction of loans, makes up
the remainder of the change.
Loans held for sale decreased $79.7 million, or 91.4%, to $7.5 million at September 30, 2008,
compared to $87.2 million at December 31, 2007. The change in loans held for sale was due largely
to loans that were designated for sale in the fourth quarter of 2007 and were sold in February
2008, with a gain of $1.5 million. Home Savings sells newly originated loans as part of its risk
management strategy and anticipates doing so in the future.
Federal Home Loan Bank stock grew to $26.5 million at September 30, 2008, compared to $25.4 million
at December 31, 2007. During the first nine months of 2008, the Federal Home Loan Bank paid a
stock dividend in lieu of a cash dividend to its member banks.
Home Savings maintains a contra account for uncollected interest for loans on non-accrual status
that represents the reduction in interest income from the time the borrower stopped making payments
until the loan is repaid, charged off or the default is cured and performance resumes. The
increases in these reserves, from $12.2 million at December 31, 2007, to $14.6 million at September
30, 2008, and the impact of the loan sale mentioned above, were the primary reasons that accrued
interest receivable decreased $2.0 million to $11.0 million at September 30, 2008, compared to
$13.1 million at December 31, 2007.
22
At December 31, 2007, United Community has recorded $33.6 million in goodwill in connection with
two acquisitions completed in 2001 and 2002. Goodwill is not amortized. Generally Accepted
Accounting Principles (GAAP) require the Company to perform an impairment test on goodwill
annually, or more frequently if events or changes in circumstances indicate that the asset might be
impaired, by comparing the fair value of goodwill to its carrying amount. If the carrying amount
exceeds the fair value, an impairment charge must be recognized in an amount equal to that excess.
GAAP does not permit an increase to goodwill if, in future valuations, the fair value of the asset
exceeds its carrying cost. As a result of impairment testing performed, the Company recorded an
impairment charge of $33.6 million. The Company decided it was appropriate to perform the analysis
in the third quarter based primarily on the price at which its shares were trading.
Other assets increased $3.2 million to $16.5 million at September 30, 2008, compared to $13.3
million at December 31, 2007. Home Savings had increases in deferred federal income taxes of
$437,000 related to the market valuation of available for sale securities, prepaid Ohio franchise
tax of $526,000, cash due on payments of mortgage-backed securities of $1.2 million and $242,000 in
deferred mortgage servicing rights. Butler Wick had an increase in other assets, such as deferred
taxes and prepaid assets, of $967,000.
Total deposits increased $41.9 million to $1.9 billion at September 30, 2008, compared to December
31, 2007. This change was due primarily to an increase of $145.1 million in brokered certificates
of deposit offset by a $68.6 million decrease in retail certificates of deposit and a $34.7 million
decrease in money market accounts and other demand deposit accounts. To supplement its funding
needs, United Community began obtaining brokered certificates of deposit in 2007. Such deposits
have maturities ranging from six months to two years. The total balance of brokered certificates
of deposit was $185.2 million at September 30, 2008 and $39.9 million at December 31, 2007. Home
Savings cannot obtain additional brokered certificates of deposit without prior consent of the FDIC
and Ohio Division.
Federal Home Loan Bank advances decreased $18.8 million during the first nine months of 2008,
reflecting a decrease in overnight advances of $11.8 million and a decrease in term advances of
$7.0 million. Home Savings had approximately $170.5 million in unused borrowing capacity at the
FHLB at September 30, 2008. Repurchase agreements and other borrowed funds, including United
Communitys line of credit with JP Morgan Chase Bank, N.A., decreased $14.4 million to $135.1
million at September 30, 2008 from $149.5 million at December 31, 2007. The maturity date of
this line of credit is January 31, 2009.
Advance payments by borrowers for taxes and insurance decreased $6.1 million during the first nine
months of 2008. Payments for real estate taxes and property insurance made on behalf of customers
of Home Savings account for $3.1 million of the decrease. In addition, funds held for payments
received on loans sold where servicing was retained by Home Savings decreased $3.0 million.
Accrued interest payable declined from $7.8 million at December 31, 2007, to $5.2 million at
September 30, 2008. The decrease was primarily due to a decrease in interest accrued on retail
certificates of deposit of $4.6 million, partially offset by increases in interest accrued on
brokered certificates of deposit of $1.7 million and money market and other demand accounts of
$335,000.
Accrued expenses and other liabilities increased $2.2 million, to $4.8 million at September 30,
2008 from $2.6 million at December 31, 2007. Home Savings had an increase in accrued liabilities
for official check remittances of $1.3 million. Butler Wick had an increase in accrued expenses
and other liabilities due largely to securities sold but not yet settled over the end of the
period. These increases were offset by a decrease in accrued federal income tax at Home Savings of
$2.4 million.
Shareholders equity decreased $35.4 million, to $234.4 million at September 30, 2008, from $269.7
million at December 31, 2007. Earnings of $1.1 million from Butler Wick for the first nine months
of 2008 were more than offset by a $31.9 million net loss recognized by Home Savings. Dividend
payments to shareholders of $4.1 million and changes in available for sale securities, net of tax,
of $906,000 also contributed to the decrease. United Community reduced its quarterly dividend to
$0.0475 per share in the second quarter of 2008 and paid no dividend in the third quarter of 2008.
Continuing credit quality issues and the cease and desist orders consented to in August 2008 could
have an adverse impact on future dividends. If the Company participates in the CPP, it will not be
able to increase its dividend with out consent of the OTS.
The $33.6 million impairment charge to goodwill will not impact regulatory capital as goodwill is
excluded from equity for regulatory capital purposes.
United Community and Home Savings have regulators that have established minimum capital ratios for
banks, thrifts and bank holding companies. The net unrealized gain or loss on available for sale
securities is generally not included in computing regulatory capital. The Cease and Desist Orders
consented to in August 2008, require Home Savings to be at and maintain a Tier 1 capital ratio of
8% and a total risk-based capital ratio of 12%. This must be achieved by December 31, 2008. At
September 30, 2008, Home Savings reported a Tier 1 ratio of 7.43% and a total risk based capital
ratio of 11.78%. The Company has developed a capital enhancement plan and expects to reach the
ordered threshold before December 31, 2008. Discussion of this capital plan can be found
under the caption Impact of Cease and Desist Orders on Future Earnings found at the end of this
Management Discussion and Analysis..
23
Comparison of Operating Results for the Three Months Ended
September 30, 2008 and September 30, 2007
Net Income (Loss). United Community recognized a net loss for the three months ended September 30,
2008, of $38.6 million, or $(1.34) per diluted share, compared to net income of $2.6 million, or
$0.09 per diluted share, for the three months ended September 30, 2007. Compared with the third
quarter of 2007, net interest income increased $1.0 million, the provision for loan losses
increased $3.6 million, non-interest income decreased $6.1 million, and non-interest expense
increased $36.6 million primarily as a result of the goodwill impairment. United Communitys
annualized return on average assets and return on average equity were (5.57)% and (54.84)%,
respectively, for the three months ended September 30, 2008. The annualized return on average
assets and return on average equity for the comparable period in 2007 were 0.38% and 3.63%,
respectively.
Net Interest Income. Net interest income for the three months ended September 30, 2008, was $18.9
million compared to $17.9 million for the same period last year. Interest income decreased $4.5
million in the third quarter of 2008 compared to the third quarter of 2007. The change in interest
income was due primarily to decreases in interest earned on net loans. Home Savings had a decrease
in the average balance of net loans of $27.6 million and a reduction of 81 basis points in the rate
earned on those loans during the third quarter of 2008, as compared to the same quarter in 2007.
This decrease was offset partially by an increase in interest earned on available for sale
securities, as the average balance of those assets grew by $59.1 million and the yield earned on
those securities increased eight basis points.
Total interest expense decreased $5.5 million for the quarter ended September 30, 2008, as compared
to the same quarter last year. The change was due primarily to a reduction of $2.7 million in
interest paid on Federal Home Loan Bank advances. A decrease in interest paid on deposits of $2.4
million also contributed to the change. Interest paid on certificates of deposit decreased
$991,000. Interest paid on other interest-bearing deposits such as money market accounts and
savings accounts, decreased $1.4 million, primarily reflecting a reduction of 157 basis points in
the cost of money market accounts and a reduction of 77 basis points in the cost of certificates of
deposit, which more than offset the impact of an increase in the average balance of those accounts.
The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was due to
a decrease in the average balance of those funds of $84.5 million and a rate decrease on those
borrowings of 172 basis points in the third quarter compared to the same quarter in 2007. The rate
on short term advances from the Federal Home Loan Bank has decreased due to the Federal Reserves
action to drop the federal funds rate over the past year. The average balance of certificates of
deposit increased based on managements decision to utilize brokered certificates of deposit as a
means of enhancing liquidity at Home Savings. The decrease in interest expense on repurchase
agreements and other borrowings was due primarily to a decrease in the rate paid on these
alternative borrowings of 95 basis points.
The following table shows the impact of interest rate and outstanding balance (volume) changes
compared to the third quarter of last year. The interest rate spread for the three months ended
September 30, 2008, grew to 2.61% compared to 2.33% for the quarter ended September 30, 2007. Net
interest margin increased 14 basis points to 2.92% for the three months ended September 30, 2008
compared to 2.78% for the same quarter in 2007.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
|
2008 vs. 2007 |
|
|
|
Increase |
|
|
Total |
|
|
|
(decrease) due to |
|
|
increase |
|
|
|
Rate |
|
|
Volume |
|
|
(decrease) |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(4,497 |
) |
|
$ |
(463 |
) |
|
$ |
(4,960 |
) |
Loans held for sale |
|
|
(25 |
) |
|
|
(122 |
) |
|
|
(147 |
) |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
2 |
|
|
|
25 |
|
|
|
27 |
|
Available for sale |
|
|
54 |
|
|
|
740 |
|
|
|
794 |
|
FHLB stock |
|
|
(77 |
) |
|
|
12 |
|
|
|
(65 |
) |
Other interest-earning assets |
|
|
(120 |
) |
|
|
3 |
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
(4,663 |
) |
|
$ |
195 |
|
|
$ |
(4,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts |
|
|
14 |
|
|
|
1 |
|
|
|
15 |
|
NOW and money market accounts |
|
|
(1,696 |
) |
|
|
247 |
|
|
|
(1,449 |
) |
Certificates of deposit |
|
|
(2,694 |
) |
|
|
1,703 |
|
|
|
(991 |
) |
Federal Home Loan Bank advances |
|
|
(1,777 |
) |
|
|
(911 |
) |
|
|
(2,688 |
) |
Repurchase agreements and other |
|
|
(341 |
) |
|
|
(51 |
) |
|
|
(392 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
(6,494 |
) |
|
$ |
989 |
|
|
|
(5,505 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
|
|
|
|
|
|
|
|
$ |
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses. A provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level considered by management to be adequate, based on managements
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. The provision for loan losses increased by $3.6 million, to $9.0
million for the three months ended September 30, 2008, compared to $5.4 million for the same period
in 2007. The $9.0 million provision was primarily the result of the recurring assessments of the
portfolio.
Non-interest Income. Non-interest income decreased $6.1 million, or 50.8%, to $6.0 million for the
three months ended September 30, 2008, from $12.1 million for the three months ended September 30,
2007, primarily as a result of the write down of $4.7 million for the Fannie Mae security and the
write down of $353,000 on the stock owned by the Company in another financial institution. In
addition, United Community recognized an increase in losses of $1.0 million, on the value of other
real estate owned by Home Savings obtained in the settlement of nonperforming loans. These losses
were partially offset by modest increases in brokerage commissions and underwriting and investment
banking income.
Non-interest Expense. Total non-interest expense increased $36.6 million for the three months ended
September 30, 2008, compared to the three months ended September 30, 2007. The increase is due
primarily to the recognition of the #33.6 million impairment charge associated an evaluation of
goodwill, as previously mentioned. The Company also incurred additional expenses associated with
deposit insurance premiums, consulting fees and expenses required to maintain other real estate
owned prior to its sale. Expenses to maintain other real estate owned are expected to remain high
through the rest of 2008 due to the increase in the number of properties acquired by Home Savings
in resolving nonperforming loans, as well as legal expenses and other collection expenses
associated with Home Savings nonperforming loans.
Comparison of Operating Results for the Nine Months Ended
September 30, 2008 and September 30 2007
Net Income (Loss). United Community incurred a net loss for the nine months ended September 30,
2008, of $31.8 million, or $(1.11) per diluted share, compared to net income of $11.2 million, or
$0.38 per diluted share, for the nine months ended September 30, 2007. During the first nine
months of 2008, net interest income decreased $364,000, the provision for loan losses increased
$4.2
25
million, non-interest income decreased $4.3 million, and non-interest expense increased $39.5
million. United Communitys annualized return on average assets and return on average equity were
(1.54)% and (14.96)%, respectively, for the nine months ended September 30, 2008. The annualized
return on average assets and return on average equity for the comparable period in 2007 were 0.55%
and 5.21%, respectively.
Net Interest Income. Net interest income for the nine months ended September 30, 2008, was $55.1
million compared to $55.4 million for the same period last year. Interest income decreased $11.1
million for the first nine months of 2008 compared to the first nine of 2007. The change in
interest income was due primarily to decreases in interest earned on net loans. The average
balance of net loans decreased $14.9 million, and the rate earned on those loans decreased 68 basis
points. This decrease was offset partially by an increase in interest earned on available for sale
securities, as the average balance of those assets grew by $46.9 million and the yield earned on
those securities increased ten basis points.
Total interest expense decreased $10.7 million for the nine months ended September 30, 2008, as
compared to the same period last year. The change was due primarily to decreases in interest paid
on Federal Home Loan Bank advances of $6.3 million, and interest expense on deposits of $4.4
million. These decreases were partially offset by an increase in the cost of repurchase agreements
and other borrowings of $173,000.
The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a
decrease in the average balance of those funds of $51.4 million and a rate decrease on those
borrowings of 153 basis points when comparing the nine months ended September 30, 2008 to the nine
months ended September 30, 2007. As previously mentioned, Home Savings sold loans in February 2008
that were designated for sale in the fourth quarter of 2007. Some of the proceeds from that sale
were used to pay down these advances. Additionally, the rate on short term borrowings from the
Federal Home Loan Bank has decreased due to the Federal Reserves action to drop the federal funds
rate over the past year.
Interest expense on deposits decreased $4.4 million when comparing the nine months ended September
30, 2008, to September 30, 2007. This change was due primarily to the overall decrease in the rate
paid for these deposits of 150 basis points despite an increase in the average balance of
certificates of deposit of $33.1 million. The average balance of certificates of deposit increased
based on managements decision to utilize brokered certificates of deposit as a means of enhancing
liquidity at Home Savings. Notwithstanding an increase in the average balance of interest bearing
demand deposit and money market accounts, a decrease in the rate paid on those deposits of 117
basis points also contributed to the decrease.
The following table shows the impact of interest rate and outstanding balance (volume) changes
compared to the first nine months of last year. The interest rate spread for the nine months ended
September 30, 2008, was 2.48% compared to 2.42% for the nine months ended September 30, 2007. Net
interest margin compressed 4 basis points to 2.84% for the nine months ended September 30, 2008
compared to 2.88% for the same period in 2007.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2008 vs. 2007 |
|
|
|
Increase |
|
|
Total |
|
|
|
(decrease) due to |
|
|
increase |
|
|
|
Rate |
|
|
Volume |
|
|
(decrease) |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(11,376 |
) |
|
$ |
(759 |
) |
|
$ |
(12,135 |
) |
Loans held for sale |
|
|
(107 |
) |
|
|
(309 |
) |
|
|
(416 |
) |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
3 |
|
|
|
29 |
|
|
|
32 |
|
Available for sale |
|
|
185 |
|
|
|
1,731 |
|
|
|
1,916 |
|
FHLB stock |
|
|
(214 |
) |
|
|
17 |
|
|
|
(197 |
) |
Other interest-earning assets |
|
|
(258 |
) |
|
|
6 |
|
|
|
(252 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
(11,767 |
) |
|
$ |
715 |
|
|
$ |
(11,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts |
|
|
(170 |
) |
|
|
169 |
|
|
|
(1 |
) |
NOW and money market accounts |
|
|
(4,225 |
) |
|
|
1,704 |
|
|
|
(2,521 |
) |
Certificates of deposit |
|
|
(3,132 |
) |
|
|
1,225 |
|
|
|
(1,907 |
) |
Federal Home Loan Bank advances |
|
|
(4,712 |
) |
|
|
(1,720 |
) |
|
|
(6,432 |
) |
Repurchase agreements and other |
|
|
(336 |
) |
|
|
509 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
(12,575 |
) |
|
$ |
1,887 |
|
|
|
(10,688 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
|
|
|
|
|
|
|
|
$ |
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses. The provision for loan losses increased by $4.3 million, to $14.7
million for the nine months ended September 30, 2008, compared to $10.4 million for the same period
in 2007. The $14.7 million provision was primarily the result of the monthly assessments of the
portfolio.
Non-interest Income. Non-interest income decreased $4.3 million, or 12.0%, to $31.4 million for the
nine months ended September 30, 2008, from $35.7 million for the nine months ended September 30,
2007. The primary cause of the decrease was the write-down of the Fannie Mae auction rate pass
through trust security and the write-down of the shares owned by the Company of another financial
institution, as previously mentioned. In addition, United Community incurred increased losses on
the disposition of property acquired in the resolution of nonperforming loans. These losses were
offset partially by increased gains recognized on the sale of loans and the sale of available for
sale securities. Gains recognized on the sale of loans during the first nine months of 2008
included $1.5 million in gains recognized on the sale of $76.5 million of loans designated for sale
in the fourth quarter of 2007 and sold in February 2008. Also in the first nine months of 2008,
Home Savings sold approximately $48.4 million in callable agency securities classified as available
for sale and recognized a gain of approximately $802,000. The remaining gain recognized was the
result of an ownership interest by Home Savings in Visa, Inc.
Non-interest Expense. Total non-interest expense increased $39.5 million for the nine months ended
September 30, 2008, compared to the nine months ended September 30, 2007. The increase is largely
attributable to the impairment charge associated with goodwill, as mentioned above. The Company
also incurred additional expenses associated with deposit insurance premiums, consulting fees and
expenses required to maintain other real estate owned prior to its sale. Expenses to maintain
other real estate owned and FDIC insurance premiums are expected to remain high through the rest of
2008, as previously mentioned. An increase in salaries and employee benefits related to one-time
severance costs and hospitalization related expenses at Home Savings also contributed to the
change. Butler Wick also paid higher commissions and recognized additional expenses related to
signing bonuses paid to new brokers in 2008.
Impact of Cease and Desist Orders on Future Earnings. United Community and Home Savings expect to
incur higher expenses related to compliance with the Cease and Desist Orders (Orders) consented to
in August 2008. Higher consulting fees are expected, resulting from the hiring of specialized
consultants to assess personnel needs, enhance risk management policies and practices,
enhance credit administration, and assist with the development and implementation
of Home Savings strategic plan. These expenses are expected to be recognized in the fourth
quarter and will aggregate approximately $200,000. Federal deposit
insurance premiums are also expected to increase and are forecasted to be approximately $1.4 million in the fourth quarter
of 2008.
The Orders
require Home Savings to refine the methodology surrounding the allowance for loan and lease
losses. Any changes in methodology are not expected to result in
material changes to the adequacy of the allowance for loan and lease
losses. The Orders also require Home Savings to develop and implement
a plan to reduce classified assets and delinquent loans. Management believes
these assets are properly valued at September 30, 2008, but
cannot predict the future value of those assets. Furthermore, Home
Savings must enhance loan policies, underwriting and credit administration functions, which
may limit future growth and interest income.
The Orders prohibit United Community from incurring additional debt without prior approval, and to
develop a debt reduction plan. Compliance with this provision will
have a minimal impact on the Companys
liquidity but will reduce borrowing expenses over time. Furthermore,
United Community must seek regulatory approval before declaring a dividend payment to
shareholders. This may adversely affect the price at which the Companys shares are traded.
Home
Savings is required to increase its capital ratios by the end of the year, and maintain those
levels over time. A capital enhancement plan is being developed and may include the reduction of
certain types of lending and the sale of available for sale
securities. Home Savings has received regulatory approval to prepay
its $14.0 million subordinated note to United Community.
Following this payment, United Community will invest the capital in
Home Savings. The Company has also applied for participation in The Capital Purchase Program
announced by the U.S. Treasury on October 14, 2008, as part of the Troubled Asset Relief Program.
27
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, 2008 and
2007. Average balance calculations were based on daily balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Paid |
|
|
Cost |
|
|
Balance |
|
|
Paid |
|
|
Cost |
|
|
|
(Dollars In thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans (1) |
|
$ |
2,235,986 |
|
|
$ |
33,503 |
|
|
|
5.99 |
% |
|
$ |
2,263,546 |
|
|
$ |
38,463 |
|
|
|
6.80 |
% |
Net loans held for sale |
|
|
7,241 |
|
|
|
76 |
|
|
|
4.20 |
% |
|
|
18,605 |
|
|
|
223 |
|
|
|
4.79 |
% |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
8,421 |
|
|
|
81 |
|
|
|
3.90 |
% |
|
|
5,701 |
|
|
|
54 |
|
|
|
3.79 |
% |
Available for sale |
|
|
305,024 |
|
|
|
3,823 |
|
|
|
5.01 |
% |
|
|
245,884 |
|
|
|
3,029 |
|
|
|
4.93 |
% |
FHLB stock |
|
|
26,116 |
|
|
|
352 |
|
|
|
5.39 |
% |
|
|
25,432 |
|
|
|
417 |
|
|
|
6.56 |
% |
Other interest-earning assets |
|
|
9,308 |
|
|
|
87 |
|
|
|
3.74 |
% |
|
|
9,169 |
|
|
|
204 |
|
|
|
8.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,592,096 |
|
|
|
37,922 |
|
|
|
5.85 |
% |
|
|
2,568,337 |
|
|
|
42,390 |
|
|
|
6.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
174,186 |
|
|
|
|
|
|
|
|
|
|
|
151,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,766,282 |
|
|
|
|
|
|
|
|
|
|
$ |
2,719,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market accounts |
|
$ |
427,339 |
|
|
$ |
2,115 |
|
|
|
1.98 |
% |
|
$ |
401,458 |
|
|
$ |
3,564 |
|
|
|
3.55 |
% |
Savings accounts |
|
|
183,209 |
|
|
|
206 |
|
|
|
0.45 |
% |
|
|
182,720 |
|
|
|
191 |
|
|
|
0.42 |
% |
Certificates of deposit |
|
|
1,207,454 |
|
|
|
12,140 |
|
|
|
4.02 |
% |
|
|
1,096,057 |
|
|
|
13,131 |
|
|
|
4.79 |
% |
Federal Home Loan Bank advances |
|
|
385,506 |
|
|
|
3,069 |
|
|
|
3.18 |
% |
|
|
470,031 |
|
|
|
5,758 |
|
|
|
4.90 |
% |
Repurchase agreements and other |
|
|
141,827 |
|
|
|
1,477 |
|
|
|
4.17 |
% |
|
|
145,860 |
|
|
|
1,868 |
|
|
|
5.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,345,335 |
|
|
|
19,007 |
|
|
|
3.24 |
% |
|
|
2,296,126 |
|
|
|
24,512 |
|
|
|
4.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
139,754 |
|
|
|
|
|
|
|
|
|
|
|
138,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,485,089 |
|
|
|
|
|
|
|
|
|
|
|
2,434,959 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
281,193 |
|
|
|
|
|
|
|
|
|
|
|
284,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
2,766,282 |
|
|
|
|
|
|
|
|
|
|
$ |
2,719,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest
rate spread |
|
|
|
|
|
$ |
18,915 |
|
|
|
2.61 |
% |
|
|
|
|
|
$ |
17,878 |
|
|
|
2.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
2.78 |
% |
Average interest-earning assets
to average interest-bearing
liabilities |
|
|
|
|
|
|
|
|
|
|
110.52 |
% |
|
|
|
|
|
|
|
|
|
|
111.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual loans are included in the average balance at a yield of 0%. |
28
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, 2008 and
2007. Average balance calculations were based on daily balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Paid |
|
|
Cost |
|
|
Balance |
|
|
Paid |
|
|
Cost |
|
|
|
(Dollars In thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans (1) |
|
$ |
2,240,853 |
|
|
$ |
103,246 |
|
|
|
6.14 |
% |
|
$ |
2,255,789 |
|
|
$ |
115,381 |
|
|
|
6.82 |
% |
Net loans held for sale |
|
|
10,690 |
|
|
|
352 |
|
|
|
4.39 |
% |
|
|
19,633 |
|
|
|
768 |
|
|
|
5.22 |
% |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
7,572 |
|
|
|
211 |
|
|
|
3.73 |
% |
|
|
6,503 |
|
|
|
179 |
|
|
|
3.67 |
% |
Available for sale |
|
|
296,538 |
|
|
|
10,978 |
|
|
|
4.94 |
% |
|
|
249,681 |
|
|
|
9,062 |
|
|
|
4.84 |
% |
FHLB stock |
|
|
25,776 |
|
|
|
1,032 |
|
|
|
5.34 |
% |
|
|
25,432 |
|
|
|
1,229 |
|
|
|
6.44 |
% |
Other interest-earning assets |
|
|
7,921 |
|
|
|
348 |
|
|
|
5.86 |
% |
|
|
7,844 |
|
|
|
600 |
|
|
|
10.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,589,350 |
|
|
|
116,167 |
|
|
|
5.98 |
% |
|
|
2,564,882 |
|
|
|
127,219 |
|
|
|
6.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
163,989 |
|
|
|
|
|
|
|
|
|
|
|
145,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,753,339 |
|
|
|
|
|
|
|
|
|
|
$ |
2,709,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market accounts |
|
$ |
446,017 |
|
|
$ |
7,766 |
|
|
|
2.32 |
% |
|
$ |
392,939 |
|
|
$ |
10,287 |
|
|
|
3.49 |
% |
Savings accounts |
|
|
181,038 |
|
|
|
584 |
|
|
|
0.43 |
% |
|
|
189,422 |
|
|
|
585 |
|
|
|
0.41 |
% |
Certificates of deposit |
|
|
1,152,175 |
|
|
|
37,657 |
|
|
|
4.36 |
% |
|
|
1,119,117 |
|
|
|
39,564 |
|
|
|
4.71 |
% |
Federal Home Loan Bank advances |
|
|
397,083 |
|
|
|
9,952 |
|
|
|
3.34 |
% |
|
|
448,487 |
|
|
|
16,384 |
|
|
|
4.87 |
% |
Repurchase agreements and other |
|
|
151,749 |
|
|
|
5,141 |
|
|
|
4.52 |
% |
|
|
132,976 |
|
|
|
4,968 |
|
|
|
4.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,328,062 |
|
|
|
61,100 |
|
|
|
3.50 |
% |
|
|
2,282,941 |
|
|
|
71,788 |
|
|
|
4.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
142,074 |
|
|
|
|
|
|
|
|
|
|
|
140,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,470,136 |
|
|
|
|
|
|
|
|
|
|
|
2,423,672 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
283,203 |
|
|
|
|
|
|
|
|
|
|
|
286,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
2,753,339 |
|
|
|
|
|
|
|
|
|
|
$ |
2,709,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest
rate spread |
|
|
|
|
|
$ |
55,067 |
|
|
|
2.48 |
% |
|
|
|
|
|
$ |
55,431 |
|
|
|
2.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
2.88 |
% |
Average interest-earning assets
to average interest-bearing
liabilities |
|
|
|
|
|
|
|
|
|
|
111.22 |
% |
|
|
|
|
|
|
|
|
|
|
112.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual loans are included in the average balance at a yield of 0%. |
29
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Qualitative Aspects of Market Risk. The principal market risk affecting United Community is
interest rate 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 companys earnings and net asset values to changes in
interest rates. As part of its efforts to monitor and manage the interest rate risk, Home Savings,
which accounts for most of the assets and liabilities of United Community, has adopted an interest
rate risk policy that 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 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. 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.
Home Savings uses a NPV and earnings simulation model prepared internally 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 also are incorporated into the model. These
assumptions inherently are uncertain and, as a result, the model cannot measure precisely 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. Due to the current low level of treasury rates, values for a decline in
rates of 200 and 300 basis points are not calculated for the quarter ended September 30, 2008. As
noted, for the quarter ended September 30, 2008, the percentage changes fall within the policy
limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum
change in interest income the Home Savings Board deems advisable in the event of various changes in
interest rates. See the table below for Board adopted policy limits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2008 |
|
|
NPV as % of portfolio value of assets |
|
Next 12 months net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal policy |
|
|
|
|
|
|
|
|
Internal policy |
|
|
|
|
|
|
|
|
|
limitations on |
|
|
Change in rates |
|
|
|
|
|
limitations as to |
|
|
|
|
|
|
|
|
|
maximum |
|
|
(Basis points) |
|
NPV Ratio |
|
minimum % |
|
Change in % |
|
$ Change |
|
change |
|
% Change |
|
|
|
+300 |
|
|
7.91 |
% |
|
|
5.00 |
% |
|
|
(2.71 |
)% |
|
$ |
(7,970 |
) |
|
|
(15.00 |
)% |
|
|
(10.20 |
)% |
+200 |
|
|
9.03 |
|
|
|
6.00 |
|
|
|
(1.59 |
) |
|
|
(4,881 |
) |
|
|
(10.00 |
) |
|
|
(6.24 |
) |
+100 |
|
|
9.77 |
|
|
|
6.00 |
|
|
|
(0.86 |
) |
|
|
(2,111 |
) |
|
|
(5.00 |
) |
|
|
(2.70 |
) |
Static |
|
|
10.62 |
|
|
|
7.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100) |
|
|
10.72 |
|
|
|
6.00 |
|
|
|
0.10 |
|
|
|
903 |
|
|
|
(5.00 |
) |
|
|
1.16 |
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
NPV as % of portfolio value of assets |
|
Next 12 months net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Change in rates |
|
|
|
|
|
Internal policy |
|
|
|
|
|
|
|
|
|
Internal policy |
|
|
(Basis points) |
|
NPV Ratio |
|
limitations |
|
Change in % |
|
$ Change |
|
limitations |
|
% Change |
|
|
|
+ 300 |
|
|
7.99 |
% |
|
|
5.00 |
% |
|
|
(1.48 |
)% |
|
$ |
(7,009 |
) |
|
|
(15.00 |
)% |
|
|
(9.93 |
)% |
+ 200 |
|
|
8.73 |
|
|
|
6.00 |
|
|
|
(0.75 |
) |
|
|
(4,353 |
) |
|
|
(10.00 |
) |
|
|
(6.17 |
) |
+ 100 |
|
|
9.29 |
|
|
|
6.00 |
|
|
|
(0.18 |
) |
|
|
(2,139 |
) |
|
|
(5.00 |
) |
|
|
(3.03 |
) |
Static |
|
|
9.47 |
|
|
|
7.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100) |
|
|
9.53 |
|
|
|
6.00 |
|
|
|
0.05 |
|
|
|
2,723 |
|
|
|
(5.00 |
) |
|
|
3.86 |
|
(200) |
|
|
8.82 |
|
|
|
6.00 |
|
|
|
(0.66 |
) |
|
|
3,467 |
|
|
|
(15.00 |
) |
|
|
4.91 |
|
(300) |
|
|
7.90 |
|
|
|
5.00 |
|
|
|
(1.57 |
) |
|
|
3,397 |
|
|
|
(20.00 |
) |
|
|
4.81 |
|
|
Due to changes in the composition of Home Savings funding mix since December 2007, Home Savings
sensitivity to rising rates has increased slightly. Therefore, Home Savings remains liability
sensitive. Management is comfortable with Home Savings interest rate risk position and with its
outlook for interest rates over the next year.
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.
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
securities and interest expense on deposits and borrowings. Like most financial institutions, Home
Savings short-term interest income and interest expense are affected significantly by changes in
market interest rates and other economic factors beyond its control.
In the last nine months, Home Savings has begun to see the positive impact of a steeper yield
curve. The net interest margin continues to improve, despite a high level of nonperforming assets,
as certificates of deposit reprice at much lower levels supported by loan yields that have
stabilized.
ITEM 4. Controls and Procedures
An evaluation was carried out by United Communitys management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of United Communitys disclosure controls
and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as
of September 30, 2008. Based on their evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that United Communitys disclosure controls and procedures are effective.
During the quarter ended September 30, 2008, there were no changes in United Communitys internal
controls over financial reporting that have materially affected or are reasonably likely to affect
materially United Communitys internal controls over financial reporting.
31
PART II. OTHER INFORMATION
UNITED COMMUNITY FINANCIAL CORP.
ITEM 1 Legal Proceedings
United Community and its subsidiaries are parties to litigation arising in the normal course of
business. While it is impossible to determine the ultimate resolution of these contingent matters,
management believes any resulting liability would not have a material effect upon United
Communitys financial statements.
ITEM 1A Risk Factors
Item 1A of
United Communitys Form 10-K for the year ended
December 31, 2007 presents risk factors that may impact United
Communitys future results. In light of recent cease and Desist
Orders consented to by Home Savings and United Community, those risk
factors are supplemented by the following risk factor:
Cease
and desist orders restrict dividends and certain business
activities.
United
Communitys ability to pay regular quarterly dividends to
shareholders and to pay interest on United Communitys debt
depends to a large extent upon the dividends received from Home
Savings. The Bank Orders prohibit Home Savings from paying dividends
to United Community without prior regulatory approval. In addition,
the OTS Orders prohibit United Community from paying dividends to
shareholders without prior regulatory approval.
Management
believes that United Community, on a stand-alone basis, currently has
adequate resources to meet its current obligations, which are
primarily interest payments on a $14.9 million line of credit.
However, in the longer term, United Communitys ability to
service debt depends on its ability to receive dividends from Home
Savings and Butler Wick and, when debt matures, on its ability to
renew, refinance or pay down the line of credit. Furthermore, the OTS
Orders prohibit United Community to issue or renew debt without prior
approval. We cannot predict whether regulatory approval will be received for payments of dividends by Home Savings to United
Community, or for the payment of future dividends by United Community to shareholders or how
long these restrictions will remain in effect.
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
There have been no purchases of treasury shares during the quarter ended September 30, 2008.
ITEM 6 Exhibits
Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
3.1
|
|
Articles of Incorporation |
|
|
|
3.2
|
|
Amended Code of Regulations |
|
|
|
31.1
|
|
Section 302 Certification by Chief Executive Officer |
|
|
|
31.2
|
|
Section 302 Certification by Chief Financial Officer |
|
|
|
32
|
|
Certification of Statements by Chief Executive Officer and Chief Financial Officer |
32
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 10, 2008 |
/S/ Douglas M. McKay
|
|
|
Douglas M. McKay |
|
|
Chief Executive Officer |
|
|
|
|
|
Date: November 10, 2008 |
/S/ James R. Reske
|
|
|
James R. Reske, CFA |
|
|
Chief Financial Officer |
|
|
33
UNITED COMMUNITY FINANCIAL CORP.
Exhibit 3.1
Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on
March 13, 1998 with the Securities and Exchange Commission (SEC), Exhibit 3.1.
Exhibit 3.2
Incorporated by reference to the 1998 Form 10-K filed by United Community on March 31, 1999 with
the SEC, film number 99582343, Exhibit 3.2.
34