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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-024399
UNITED COMMUNITY FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Ohio 34-1856319
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
275 Federal Plaza West, Youngstown, Ohio 44503
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (330) 742-0500
Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value per share
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(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such requirements for the past 90 days.
Yes X No
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
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The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the last reported sale on June 28, 2002
was approximately $309.3 million and on March 24, 2003 was approximately $295.6
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 24, 2003, there were 34,514,965 of the Registrant's Common
Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 2002 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement for the 2003 Annual Meeting
of Shareholders
TABLE OF CONTENTS
Item
Number Page
------ ----
PART I
1. Description of Business
General..........................................................................1
Discussion of Forward-Looking Statements.........................................1
Lending Activities...............................................................2
Investment Activities............................................................11
Sources of Funds.................................................................15
Competition......................................................................17
Employees........................................................................17
Regulation.......................................................................18
2. Description of Property............................................................19
3. Legal Proceedings..................................................................22
4. Submission of Matters to a Vote of Security Holders................................22
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters..............22
6. Selected Financial Data............................................................22
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................22
7A. Quantitative and Qualitative Disclosures About Market Risk.........................22
8. Financial Statements and Supplemental Data.........................................22
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................22
PART III
10. Directors and Executive Officers of the Registrant.................................22
11. Executive Compensation.............................................................23
12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters................................................................23
13. Certain Relationships and Related Transactions.....................................23
14. Controls and Procedures............................................................23
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................24
Signatures.................................................................................25
Certifications.............................................................................26
Exhibit Index..............................................................................28
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
United Community Financial Corp. (United Community) was incorporated in
the State of Ohio in February 1998 for the purpose of owning all of the
outstanding capital stock of The Home Savings and Loan Company of Youngstown,
Ohio (Home Savings) issued upon the conversion of Home Savings from a mutual
savings association to a permanent capital stock savings association
(Conversion). The Conversion was completed on July 8, 1998. On August 12, 1999,
Butler Wick Corp. (Butler Wick) became a wholly-owned subsidiary of United
Community.
As a savings and loan holding company, United Community is subject to
regulation, supervision and examination by the OTS, the Division and the
Securities and Exchange Commission (SEC). United Community's primary activity is
holding the common stock of Home Savings and Butler Wick. Consequently, the
following discussion focuses primarily on the business of Home Savings and
Butler Wick.
United Community's Internet site, http://www.ucfconline.com, contains a
hyperlink to NASDAQ where United Community's annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge as soon as
reasonably practicable after United Community has filed the report with the SEC.
Home Savings was organized as a mutual savings association under Ohio
law in 1889. Home Savings is subject to supervision and regulation by the Office
of Thrift Supervision (OTS), the Ohio Department of Commerce, Division of
Financial Institutions (Division) and the Federal Deposit Insurance Corporation
(FDIC). Home Savings is a member of the Federal Home Loan Bank (FHLB) of
Cincinnati and the deposits of Home Savings are insured up to applicable limits
by the FDIC in the Savings Association Insurance Fund (SAIF).
Home Savings conducts business from its main office located in
Youngstown, Ohio, 34 full-service branches and five loan production offices
located in northcentral and northeastern Ohio. The principal business of Home
Savings is the origination of mortgage loans on one- to four-family residential
real estate located in Home Savings' primary market area, which consists of
Ashland, Columbiana, Erie, Hancock, Huron, Mahoning, Richland, Sandusky, Seneca
and Trumbull Counties. Home Savings also originates loans secured by
nonresidential real estate. In addition to real estate lending, Home Savings
originates commercial loans and various types of consumer loans, including home
equity loans, education loans, loans secured by savings accounts, motor
vehicles, boats and recreational vehicles and unsecured loans. For liquidity and
interest rate risk management purposes, Home Savings invests in various
financial instruments discussed in the investment section. Funds for lending and
other investment activities are obtained primarily from savings deposits, which
are insured up to applicable limits by the FDIC, principal repayments of loans
and maturities of securities.
Interest on loans and other investments is Home Savings' primary source
of income. Home Savings' principal expense is interest paid on deposit accounts.
Operating results are dependent to a significant degree on the net interest
income of Home Savings, which is the difference between interest earned on loans
and other investments and interest paid on deposits and borrowed funds. Like
most thrift institutions, Home Savings' interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
Butler Wick is the parent company for three wholly-owned subsidiaries:
Butler Wick & Co., Inc., Butler Wick Asset Management Company and Butler Wick
Trust Company. Butler Wick conducts business from its main office located in
Youngstown, Ohio, eight offices located in the northeastern Ohio and two offices
in the western Pennsylvania. Butler Wick primarily sells common and preferred
stocks, but also offers an array of government, corporate and municipal bonds,
unit trusts, mutual funds, IRA's, money market accounts and certificates of
deposit. Butler Wick also offers investments in precious metals and a full line
of life insurance and annuity products, personal and corporate financial
planning, estate planning, pension and profit sharing.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
When used in this Form 10-K 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
1
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 Community's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in Home
Savings' market area, demand for investments in Butler Wick's market area and
competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. United
Community cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. United
Community advises readers that the factors listed above could affect United
Community's financial performance and could cause United Community's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
United Community does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
LENDING ACTIVITIES
GENERAL. Home Savings' principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in Home Savings' primary market area. Home Savings also originates loans secured
by multifamily and nonresidential real estate and originates loans for the
construction of one- to four-family residences, multifamily properties and
nonresidential real estate projects. In addition to real estate lending, Home
Savings originates commercial loans and various types of consumer credits,
including home equity loans, education loans, loans secured by savings accounts,
motor vehicles, boats and recreational vehicles and unsecured loans.
2
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information regarding the composition of United Community's loan portfolio at
the dates indicated:
At December 31,
2002 2001 2000
Percent of Percent of Percent of
Amount Total loans Amount Total loans Amount Total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Real estate loans:
Permanent
One- to four-family $ 889,199 56.02% $ 984,141 65.38% $ 618,112 65.22%
Multifamily 79,760 5.05 60,691 4.06 24,085 2.54
Nonresidential 236,581 14.99 153,368 10.25 137,976 14.56
Land 5,812 0.37 11,432 0.76 5,172 0.55
---------- ---------- ---------- ---------- ---------- ----------
Total permanent 1,211,352 76.43 1,209,632 80.44 785,345 82.87
Construction loans:
One- to four-family 122,234 7.74 115,853 7.74 57,955 6.11
Multifamily and nonresidential 35,600 2.26 26,883 1.80 11,389 1.20
---------- ---------- ---------- ---------- ---------- ----------
Total construction 157,834 10.00 142,736 9.54 69,344 7.31
---------- ---------- ---------- ---------- ---------- ----------
Total real estate loans 1,369,186 86.43 1,352,368 89.98 854,689 90.18
Consumer loans
Home equity 109,671 6.94 48,671 3.25 20,147 2.13
Auto 36,052 2.28 21,703 1.45 5,171 0.55
Education -- -- 5,280 0.35 3,850 0.40
Other (1) 9,797 0.63 35,095 2.34 29,177 3.08
---------- ---------- ---------- ---------- ---------- ----------
Total consumer 155,520 9.85 110,749 7.40 58,345 6.16
Commercial loans 58,639 3.72 39,226 2.62 34,657 3.66
---------- ---------- ---------- ---------- ---------- ----------
Total loans 1,583,345 100.00% 1,502,343 100.00% 947,691 100.00%
========== ========== ==========
Less net items 105,132 95,864 71,038
---------- ---------- ----------
Total loans, net $1,478,213 $1,406,479 $ 876,653
========== ========== ==========
1999 1998
Percent of Percent of
Amount total loans Amount Total loans
------- ----------- ------ -----------
(Dollars in thousands)
Real estate loans:
Permanent
One- to four-family $ 546,888 70.92% $ 516,767 73.84%
Multifamily 7,838 1.02 8,172 1.17
Nonresidential 116,690 15.13 65,756 9.39
Land 299 0.04 190 0.03
---------- ---------- ---------- ----------
Total permanent 671,715 87.11 590,885 84.43
Construction loans:
One- to four-family 27,486 3.57 25,691 3.67
Multifamily and nonresidential 1,637 0.21 833 0.12
---------- ---------- ---------- ----------
Total construction 29,123 3.78 26,524 3.79
---------- ---------- ---------- ----------
Total real estate loans 700,838 90.89 617,409 88.22
Consumer loans
Home equity 19,151 2.48 18,321 2.62
Auto 1,130 0.15 1,603 0.23
Education 3,860 0.50 3,993 0.57
Other (1) 18,998 2.46 17,856 2.55
---------- ---------- ---------- ----------
Total consumer 43,139 5.59 41,773 5.97
Commercial loans 27,119 3.52 40,637 5.81
---------- ---------- ---------- ----------
Total loans 771,096 100.00% 699,819 100.00%
========== ==========
Less net items 48,009 42,321
---------- ----------
Total loans, net $ 723,087 $ 657,498
========== ==========
- ----------------------------
(1) Consists of overdraft protection loans and loans to individuals secured
by demand accounts, deposits, boats and one- to four-family residences.
3
LOAN MATURITY. The following table sets forth certain information as
of December 31, 2002, regarding the dollar amount of loans maturing in Home
Savings' portfolio based on their contractual terms to maturity. Demand loans
and other loans having no stated schedule of repayments or no stated maturity
are reported as due in one year or less. Mortgage loans originated by Home
Savings generally include due-on-sale clauses that provide Home Savings with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers the ownership of the property without Home Savings' consent.
The table does not include the effects of possible prepayments or scheduled
repayments.
Principal repayments contractually due in the
---------------------------------------------
years ended December 31,
------------------------
2008 and
2003 2004-2007 thereafter Total
---- --------- ------------ -----
(In thousands)
Construction loans:
One-to-four family $ 26,259 $ 23,615 $ 72,360 $122,234
Multifamily and nonresidential 1,287 9,870 24,443 35,600
Commercial loans 28,029 25,436 5,174 58,639
The next table sets forth the dollar amount of all loans due after
December 31, 2003, which have fixed or adjustable interest rates:
Due after December 31, 2003
---------------------------
(In thousands)
--------------
Fixed rate $ 83,412
Adjustable rate 77,486
--------
$ 160,898
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of Home Savings is the origination of conventional loans secured by
first mortgages on one- to four-family residences, primarily single-family
homes, located within Home Savings' primary market area. At December 31, 2002,
Home Savings' one- to four-family residential real estate loans totaled
approximately $889.2 million, or 56.0% of total loans. At December 31, 2002,
$7.5 million, or 0.85%, of Home Savings' one-to four-family loans were
nonperforming.
OTS regulations and Ohio law limit the amount which Home Savings may
lend in relationship to the appraised value of the real estate and improvements
that secure the loan at the time of loan origination. In accordance with such
regulations, Home Savings makes loans on one- to four-family residences of up to
97% of the value of the real estate and improvements thereon (LTV), although the
majority of such loans have LTVs of 80% or less. Loans on single-family,
owner-occupied residences located in low-income or moderate-income census tracts
are granted up to a 97% LTV, although Home Savings requires private mortgage
insurance on the portion of the principal amount that exceeds 85% of the
appraised value of the property securing the loan.
Home Savings currently offers fixed-rate mortgage loans and
adjustable-rate mortgage loans (ARMs) for terms of up to 30 years. Although Home
Savings' loan portfolio includes a significant amount of 30-year fixed-rate
loans, most loans currently originated by Home Savings are 15-year fixed-rate
loans. The interest rate adjustment periods on ARMs are typically one or three
years. The maximum interest rate adjustment on most of the ARMs is 2.0% on any
adjustment date and a total of 6.0% over the life of the loan. The interest rate
adjustments on one-year and three-year ARMs presently offered by Home Savings
are indexed to the weekly average rate on the one-year and three-year U.S.
Treasury securities, respectively. Rate adjustments are computed by adding a
stated margin to the index. Home Savings does not offer ARMs to borrowers on
one- to four-family residences with LTVs in excess of 95%.
4
Home Savings issues standby loan origination commitments to qualified
borrowers primarily for the purchase of single-family residential real estate.
Such commitments are made on specified terms and conditions and are made for
periods of up to 60 days, during which time the interest rate is locked in.
LOANS SECURED BY MULTIFAMILY RESIDENCES. Home Savings originates loans
secured by multifamily properties which contain more than four units.
Multifamily loans are offered with adjustable rates of interest, which adjust
according to a specified index, and typically have terms ranging from five to
ten years and LTVs of up to 75%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Home Savings attempts to reduce the risk associated with
multifamily lending by evaluating the creditworthiness of the borrower and the
projected income from the project and by obtaining personal guaranties on loans
made to corporations and partnerships. Home Savings requires borrowers to submit
financial statements annually to enable Home Savings to monitor the loan and
requires an assignment of rents.
At December 31, 2002, loans secured by multifamily properties totaled
approximately $79.8 million, or 5.1% of total loans. The largest loan had a
principal balance of $4.9 million and was performing according to its terms.
There was approximately $138,000 in multifamily loans that were considered
nonperforming at December 31, 2002.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Home Savings originates
loans secured by nonresidential real estate. Home Savings' nonresidential real
estate loans have adjustable rates, terms of up to 25 years and generally LTVs
of up to 80%. Among the properties securing Home Savings' nonresidential real
estate loans are shopping centers, hotels, motels and freezer warehouses. The
majority of such properties are located within Home Savings' primary lending
area. Home Savings has been involved for over 20 years in freezer warehouse
financing through a Youngstown area real estate developer who specializes in the
construction of freezer facilities.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Home Savings has endeavored to reduce
such risk by evaluating the credit history of the borrower, the location of the
real estate, the financial condition of the borrower, the quality and
characteristics of the income stream generated by the property and the
appraisals supporting the property's valuation.
At December 31, 2002, Home Savings' largest loan secured by nonresidential real
estate had a balance of $11.4 million and was performing according to its terms.
At December 31, 2002, approximately $236.6 million, or 15.0%, of Home Savings'
total loans were secured by mortgages on nonresidential real estate, of which
$1.6 million was considered nonperforming at December 31, 2002.
CONSTRUCTION LOANS. Home Savings makes loans for the construction of
one- to four-family residences, multifamily properties and nonresidential real
estate projects. Residential construction loans are made to both owner-occupants
and to builders on a speculative (unsold) basis. Construction loans to
owner-occupants are structured as permanent loans with fixed or adjustable rates
of interest and terms of up to 30 years. During the first year, while the
residence is being constructed, the borrower is required to pay interest only.
Construction loans for one- to four-family residences have LTVs of up to 95%,
and construction loans for commercial, multifamily and nonresidential properties
have LTVs of up to 75%, with the value of the land included as part of the
owner's equity. At December 31, 2002, Home Savings had approximately $157.8
million, or 10.0% of its total loans, invested in construction loans, including
$122.2 million in one- to four-family residential construction and approximately
$35.6 million in multifamily and nonresidential construction loans.
Approximately 30% of Home Savings' construction loans to builders are
made for homes for which the builder does not have a contract with a buyer. Home
Savings, however, generally limits speculative loans to builders with whom Home
Savings has a long-standing relationship and limits the number of outstanding
loans on unsold homes under construction within a specific area.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties because
construction loans are more difficult to appraise and to monitor. Loan funds are
advanced upon
5
the security of the project under construction. In the event a default on a
construction loan occurs and foreclosure follows, Home Savings must take control
of the project and attempt either to arrange for completion of construction or
dispose of the unfinished project.
Nonperforming construction loans at December 31, 2002 amounted to $3.1
million.
Home Savings also originates a limited number of loans secured by vacant
land for the construction of single-family houses. Home Savings' land loans are
generally fixed-rate loans for terms up to five years and require a LTV of 75%
or less. At December 31, 2002, approximately $5.8 million, or 0.37%, of Home
Savings' total loans were secured by land loans made to individuals intending
primarily to construct and occupy single-family residences on the properties.
COMMERCIAL LOANS. Home Savings makes commercial loans to businesses in
its primary market area, including traditional lines of credit, revolving lines
of credit, term loans and acquisition and development loans. The LTV ratios for
commercial loans depend upon the nature of the underlying collateral, but
generally commercial loans are made with LTVs of 50 to 85% and have adjustable
interest rates. Lines of credit and revolving credits are generally priced on a
floating rate basis, which is tied to the prime rate or U.S. Treasury bill rate.
Term and time loans are usually adjustable, but can have fixed rates of
interest, and have terms of one to five years.
At December 31, 2002, Home Savings had approximately $58.6 million, or
3.7% of total loans, invested in commercial loans. The majority of these loans
are secured by a security interest in inventory, accounts receivable, machinery,
investment property, vehicles or other assets of the borrower. Home Savings also
originates unsecured commercial loans including lines of credit for periods of
less than 12 months, short-term loans and, occasionally, term loans for periods
of up to 36 months. These loans are underwritten based on the creditworthiness
of the borrowers and the guarantors. As a result of the addition of experienced
loan personnel and the implementation of enhanced underwriting procedures, Home
Savings intends to increase its unsecured commercial loan volume in the future.
Commercial loans are generally deemed to entail significantly greater
risk than real estate lending. The repayment of commercial loans is typically
dependent on the income stream and successful operation of a business, which can
be affected by economic conditions. The collateral for commercial loans, if any,
often consists of rapidly depreciating assets.
Nonperforming commercial loans at December 31, 2002 amounted to
$952,000.
CONSUMER LOANS. Home Savings originates various types of consumer loans,
including home equity loans, education loans, loans secured by savings accounts,
vehicle loans and unsecured loans. Consumer loans are made at fixed and
adjustable rates of interest and for varying terms based on the type of loan.
Consumer loans secured by a deposit or savings account are made for up to 100%
of the principal balance of the account and generally have adjustable rates,
which adjust based on the weekly average yield on U.S. Treasury securities plus
a margin.
For new automobiles, loans are originated for up to 100% of the MSRP
value of the car with terms of up to 66 months, and for used automobiles, loans
are made for up to the average trade value of the car model and a term of up to
five years. All automobile loans are originated indirectly by approved auto
dealerships. At December 31, 2002, automobile loans amounted to $36.1 million,
or 23.2%, of Home Savings' consumer loan portfolio.
Home Savings makes closed-end home equity loans in an amount which, when
added to the prior indebtedness secured by the real estate, does not exceed 90%
of the estimated value of the real estate. Home equity loans are typically
secured by a second mortgage on the real estate. Home Savings frequently holds
the first mortgage, although Home Savings will make home equity loans in cases
where another lender holds the first mortgage. Home Savings also offers home
equity loans with a line of credit feature. Home equity loans are made with
adjustable and fixed rates of interest. Fixed-rate home equity loans have terms
of ten years but can be called after five years. Rate adjustments on adjustable
home equity loans are determined by adding a 3.0% margin for loans on one- to
four-family residences of up to 80% LTV or by adding a 4.0% margin for loans on
one- to four-family residences of up to 90% LTV to the one-year U.S. Treasury
index. At December 31, 2002, approximately $109.7 million, or 70.6%, of Home
Savings' consumer loan portfolio consisted of home equity loans.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment, and other adverse economic conditions. Although
Home Savings has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not
6
increase. Nonperforming consumer loans as a percentage of outstanding consumer
loans amounted to 0.46%, 0.39% and 0.79% at December 31, 2002, 2001 and 2000,
respectively.
At December 31, 2002, Home Savings had approximately $155.5 million, or
9.85% of its total loans, invested in consumer loans. Home Savings anticipates a
moderate increase in its consumer loan portfolio in the future as a result of
increased cross-selling efforts to existing customers.
LOAN SOLICITATION AND PROCESSING. The lending activities of Home Savings
are subject to the written, non-discriminatory underwriting standards and loan
origination procedures approved by Home Savings' Board of Directors (Board).
Loan originations are generally obtained from existing customers and members of
the local community and from referrals by real estate brokers, lawyers,
accountants, and current and former customers. Home Savings also advertises in
the local print media, radio and television.
Each of Home Savings' 34 offices and 4 loan production offices have loan
personnel who can accept loan applications, which are then forwarded to Home
Savings' Underwriting Department for processing and approval. In underwriting
real estate loans, Home Savings typically obtains a credit report, verification
of employment and other documentation concerning the creditworthiness of the
borrower. An appraisal of the fair market value of the real estate that will be
given as security for the loan is prepared by one of Home Savings' in-house
licensed appraisers or an approved fee appraiser. For certain large
nonresidential real estate loans, the appraisal is conducted by an outside fee
appraiser whose report is reviewed by Home Savings' chief appraiser. Upon the
completion of the appraisal and the receipt of information on the credit history
of the borrower, the loan application is submitted for review to the appropriate
persons. Commercial, residential and nonresidential real estate loans up to $1.0
million may be approved by an authorized executive officer. Loan requests of
$1.0 million to $15.0 million require the approval of the Loan Committee. All
loans of $15.0 million or more require approval by three executive officers and
a majority of the Board.
Borrowers are required to carry satisfactory fire and casualty insurance
and flood insurance, if applicable, and to name Home Savings as an insured
mortgagee. Home Savings generally obtains an attorney's opinion of title,
although title insurance may be obtained on larger nonresidential real estate
loans.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Home
Savings also evaluates the feasibility of the proposed construction project and
the experience and record of the builder. Once approved, the construction loan
is disbursed in installments based upon periodic inspections of construction
progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan, and the value of the collateral, if any.
LOAN ORIGINATIONS AND PURCHASES AND SALE OF MORTGAGE LOANS.
Historically, Home Savings has originated substantially all of the loans in its
portfolio and has held them until maturity. Nevertheless, Home Savings'
residential loans are generally made on terms and conditions and documented to
conform to the secondary market guidelines for sale to the Federal Home Loan
Mortgage Company (FHLMC) and other institutional investors in the secondary
market. Education loans are sold, once the borrower leaves school, to the
Student Loan Marketing Association. Home Savings does not originate first
mortgage loans insured by the Federal Housing Authority or guaranteed by the
Veterans Administration, but it has purchased such loans as well as
participation interests in such loans.
In June 2002, Home Savings securitized and sold $107.9 million in fixed
rate single family mortgage loans, and sold an additional $226.6 million of
fixed rate mortgage loans during 2002. Home Savings generally retains the
servicing rights on the sale of loans originated in the geographic area
surrounding its full service branches, and sells loans generated by its loan
production offices servicing released. Home Savings anticipates continued
participation in the secondary mortgage loan market to maintain its desired risk
profile.
At December 31, 2002, Home Savings had $31.3 million of outstanding
commitments to originate loans and $130.5 million available to borrowers under
consumer and commercial lines of credit. At December 31, 2002, Home Savings had
$54.5 million in undisbursed funds related to construction loans in process.
7
LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the
aggregate amount that Home Savings may lend to any one borrower to an amount
equal to 15.0% of Home Savings' unimpaired capital and unimpaired surplus
(Lending Limit Capital). A savings association may lend to one borrower an
additional amount not to exceed 10.0% of Home Savings' Lending Limit Capital if
the additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral." In
applying this limit, the regulations require that loans to certain related or
affiliated borrowers be aggregated.
Based on such limits, Home Savings could lend approximately $24.5
million to one borrower at December 31, 2002. The largest amount Home Savings
had outstanding to one borrower at December 31, 2002, was $17.5 million, which
consisted of two loans secured by first mortgages on commercial buildings. At
December 31, 2002, these loans were performing in accordance with their terms.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Home
Savings attempts to maintain a high level of asset quality through sound
underwriting policies and aggressive collection practices.
The Collections Department of Home Savings uses a collection program to
monitor and review the status of loans. When a loan payment has not been made by
the sixteenth of the month, a past due notice is sent to the customer. Once a
loan is 20 days delinquent, the account is turned over to a collector, who will
continue to try to bring the loan current through telephone calls, personal
visits and letters until the loan has been delinquent 60 to 75 days. If the loan
has not been brought current by the 75th day, the loan will be reviewed for
foreclosure consideration. A decision as to whether and when to initiate
foreclosure proceedings is based on such factors as the amount of the
outstanding balance in relation to the original indebtedness, the extent of the
delinquency, the borrower's ability and willingness to cooperate in curing the
delinquency and any environmental issues that may need to be addressed. Once the
foreclosure is approved by the Collection Manager, the Vice President of Loan
Administration and the Executive Committee, it is turned over to outside legal
counsel.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
At December 31,
----------------------------------------------------------------------------
2002 2001
---- ----
Percent of Percent of
total total
Number Amount loans Number Amount loans
------ ------ ------ ------ ------ -----
(Dollars in thousands)
Loans delinquent for:
30-59 days 364 $21,757 1.38% 348 $18,450 1.22%
60-89 days 126 5,852 0.37 127 4,848 0.32
90 days or over 207 14,424 0.91 237 10,889 0.72
------- ------- ---- ------- ------- ----
Total delinquent loans 697 $42,033 2.66% 712 $34,187 2.26%
======= ======= ==== ======= ======= ====
Nonperforming assets include nonaccruing loans, restructured loans, real
estate acquired by foreclosure or by deed-in-lieu thereof and repossessed
assets.
Loans are reviewed through monthly reports to the Board and weekly
reports to senior management and are placed on nonaccrual status when collection
in full is considered doubtful by management. Interest accrued and unpaid at the
time a loan is placed on nonaccrual status is charged against interest income.
Subsequent cash payments are generally applied to interest income unless, in the
opinion of management, the collection of principal and interest is doubtful. In
those cases, subsequent cash payments are applied to principal.
8
The following table sets forth information with respect to Home
Savings' nonperforming loans and other assets at the dates indicated:
At December 31,
---------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Nonperforming loans:
Nonaccrual loans
Real estate loans:
One- to four-family $ 7,567 $ 5,813 $ 2,966
Multifamily and nonresidential 2,049 775 3,019
Construction (net of loans in process) and land 3,141 3,398 1,741
------- ------- -------
Total real estate loans 12,757 9,986 7,726
Consumer 715 434 457
Commercial 952 469 1,360
------- ------- -------
Total nonaccrual loans 14,424 10,889 9,543
Restructured real estate loans 1,271 1,572 208
------- ------- -------
Total nonperforming loans 15,695 12,461 9,751
Real estate acquired through foreclosure and other repossessed assets 1,150 477 359
------- ------- -------
Total nonperforming assets $16,845 $12,938 $10,110
======= ======= =======
Nonperforming loans as a percent of total loans 1.01% 0.89% 1.10%
Nonperforming assets as a percent of total assets 0.83 0.67 0.77
Allowance for loan losses as a percent of nonperforming loans 97.62 92.13 67.79
Allowance for loan losses as a percent of total loans before allowance 1.01 0.81 0.74
At December 31,
------------------------
1999 1998
---- ----
(Dollars in thousands)
Nonperforming loans:
Nonaccrual loans
Real estate loans:
One- to four-family $ 2,923 $ 3,655
Multifamily and nonresidential 82 378
Construction (net of loans in process) and land 272 233
------- -------
Total real estate loans 3,277 4,266
Consumer 132 317
Commercial 206 1,146
------- -------
Total nonaccrual loans 3,615 5,729
Restructured real estate loans 317 1,832
------- -------
Total nonperforming loans 3,932 7,561
Real estate acquired through foreclosure and other repossessed assets 157 78
------- -------
Total nonperforming assets $ 4,089 $ 7,639
======= =======
Nonperforming loans as a percent of total loans 0.54% 1.15%
Nonperforming assets as a percent of total assets 0.30 0.59
Allowance for loan losses as a percent of nonperforming loans 164.86 84.62
Allowance for loan losses as a percent of total loans before allowance 0.88 0.96
For 2002, approximately $597,000 in additional interest income would
have been recorded had nonaccrual and restructured loans been accruing pursuant
to contractual terms. During 2002, interest collected on such loans and included
in net income was approximately $386,000.
Nonperforming assets increased approximately $3.9 million, or 30.2%, to
$16.8 million at December 31, 2002, from $12.9 million at December 31, 2001.
This increase is due to a variety of factors, including loans acquired from
Potters in 2002, and is not due to a single relationship. At December 31, 2002,
total nonaccrual and restructured loans accounted for 1.01% of net loans
receivable, compared to 0.89% at December 31, 2001. Total nonperforming assets
were 0.83% of total assets as of December 31, 2002, an increase of 0.16% from
0.67% as of December 31, 2001.
Real estate acquired in settlement of loans is classified separately on
the balance sheet at the lower of cost or fair value as of the date of
acquisition. After foreclosure, the loan is written down to the value of the
underlying collateral by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged against operating expenses.
Operating expenses of such properties, net of related income or loss on
disposition, are included in other expenses. At December 31, 2002, the carrying
value of real estate acquired in settlement of loans was $972,000 and consisted
of thirteen single-family properties, one non-residential property and one
property secured by land.
In addition to the nonperforming loans identified above, other loans may
be identified as having potential credit problems that result in those loans
being classified by our internal loan review function. These potential problem
loans, which have not exhibited the more severe weaknesses generally present in
nonperforming loans, amounted to $3.5 million, net of applicable reserves, at
December 31, 2002.
Home Savings classifies its assets in accordance with federal
regulations. Problem assets are classified as "special mention," "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that Home Savings will sustain
some loss if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable
9
and (ii) there is a high possibility of loss. An asset classified as "loss" is
considered uncollectible and of such little value that its continuance as an
asset of Home Savings is not warranted. Federal regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Home Savings classifies its commercial loans on a periodic basis, not
less often than annually, according to a nine-level risk rating system that
includes, in addition to the "substandard," "doubtful" and "loss," categories
discussed above, further classifications of "prime," "good," "satisfactory,"
"fair," "watch" and "uncertain."
Commercial loans that are classified "prime," "good," "satisfactory" or
"fair" possess levels of risk, if any, which are generally acceptable to Home
Savings. A loan which is classified as "uncertain" represents a loan for which
there is insufficient current information on the borrower to evaluate the
primary source of payment. A loan may only be maintained as "uncertain" for 90
days while additional information is obtained, subject to one 90-day extension
by the Commercial Loan Manager or a higher level officer.
Home Savings analyzes each classified asset quarterly to determine
whether changes in the classifications are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of, and the
reasons for, any delinquency, the use of the real estate securing the loan, the
financial condition of the borrower, and the appraised value of the real estate.
As such factors change, the classification of the asset will change accordingly.
ALLOWANCE FOR LOAN LOSSES. Management establishes the allowance for loan
losses at a level it believes adequate to absorb probable losses inherent 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 and current economic conditions. Consequently, these
estimates are particularly susceptible to changes that could result in a
material adjustment to results of operations. The provision for loan losses
represents a charge against current earnings in order to maintain the allowance
for loan losses at an appropriate level.
In determining the adequacy of the allowance for loan loss, management
reviews and evaluates on a quarterly basis the necessity of a reserve for
individual loans classified by management. The specifically allocated reserve
for a classified loan is determined based on management's estimate of the
borrower's ability to repay the loan given the availability of collateral, other
sources of cash flow, and legal options available to Home Savings. Once a review
is completed, the need for a specific reserve is determined by the Home Savings
Asset Review Committee and allocated to the loan. Other loans not specifically
reviewed by management are evaluated using the historical charge-off experience
ratio calculated by type of loan. The historical charge-off experience ratio
factors into account the homogeneous nature of the loans, the geographical
lending areas involved, regulatory examination findings, specific grading
systems applied and any other known factors which may impact the ratios used.
Specific reserves on individual loans and historical ratios are reviewed
quarterly and adjusted as necessary based on subsequent collections, loan
upgrades or downgrades, nonperforming trends or actual principal charge-off.
When evaluating the adequacy of the allowance for loan losses, consideration is
given to geographic concentration and the effect changing economic conditions
have on Home Savings.
10
The following table sets forth an analysis of Home Savings'
allowance for loan losses for the periods indicated:
Year ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 11,480 $ 6,553 $ 6,405 $ 6,398 $ 5,982
Provision for loan losses 3,578 2,495 300 100 650
Charge-offs:
Real estate (347) (89) (83) (60) (47)
Consumer (410) (283) (38) (65) (72)
Commercial (1,210) (55) (80) -- (151)
-------- -------- -------- -------- --------
Total charge-offs (1,967) (427) (201) (125) (270)
-------- -------- -------- -------- --------
Recoveries:
Real estate 71 13 17 21 25
Consumer 65 10 9 9 10
Commercial 3 9 23 2 1
-------- -------- -------- -------- --------
Total recoveries 139 32 49 32 36
-------- -------- -------- -------- --------
Net recoveries (charge-offs) (1,828) (395) (152) (93) (234)
Acquisition of Industrial -- 2,795 -- -- --
Acquisition of Potters 1,869 -- -- -- --
-------- -------- -------- -------- --------
Balance at end of year $ 15,099 $ 11,480 $ 6,553 $ 6,405 $ 6,398
======== ======== ======== ======== ========
Ratio of net charge-offs
to average net loans (0.12)% (0.03)% (0.02)% (0.01)% (0.04)%
Ratio of net charge-offs to recovery of loan loss allowances (12.11)% (14.55)% (50.67)% (93.00)% (36.00)%
The following table sets forth the allocation of the allowance for loan
losses by category. The allocations are based on management's assessment of the
risk characteristics of each of the components of the total loan portfolio and
are subject to change as and when the risk factors of each component change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the use of the allowance to absorb losses in any category.
At December 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Percent of loans in Percent of loans in Percent of loans in
each category each category each category
Amount to total loans Amount to total loans Amount to total loans
------ ------------------- ------ ------------------- ------ ------------------
(Dollars in thousands)
Real estate loans $11,017 72.97% $ 8,339 72.64% $ 4,117 62.83%
Consumer loans 1,947 12.89 975 8.49 566 8.64
Commercial loans 2,135 14.14 2,166 18.87 1,870 28.54
------- ------- ------- ------- ------- -------
Total $15,099 100.00% $11,480 100.00% $ 6,553 100.00%
======= ======= ======= ======= ======= =======
At December 31,
--------------------------------------------------------------------------
1999 1998
---- ----
Percent of loans in Percent of loans in
each category each category
Amount to total loans Amount to total loans
------ ------------------- ------ --------------------
(Dollars in thousands)
Real estate loans $4,182 65.29% $4,220 65.96%
Consumer loans 555 8.67 611 9.55
Commercial loans 1,668 26.04 1,567 24.49
------ ------ ------ ------
Total $6,405 100.00% $6,398 100.00%
====== ====== ====== ======
INVESTMENT ACTIVITIES
GENERAL. Investment and mortgage-related securities are classified upon
acquisition as available for sale, held to maturity, or trading. Securities
classified as available for sale are carried at estimated fair value with the
unrealized holding gain or loss, net of taxes, reflected as a component of
retained earnings. Securities classified as held to maturity are carried at
amortized cost. Securities classified as trading are carried at estimated fair
value with the unrealized holding gain or loss reflected as a component of
income. United Community, Home Savings and Butler Wick recognize premiums and
discounts
11
in interest income over the period to maturity or call by the level yield method
and realized gains or losses on the sale of debt securities based on the
amortized cost of the specific securities sold.
HOME SAVINGS INVESTMENT ACTIVITY. Federal regulations and Ohio law
permit Home Savings to invest in various types of marketable securities,
including interest-bearing deposits in other financial institutions, federal
funds, U.S. Treasury and agency obligations, mortgage-related securities, and
certain other specified investments. The Board has adopted an investment policy
which authorizes management to make investments in U.S. Treasury obligations,
U.S. Federal agency and federally-sponsored corporation obligations,
mortgage-related securities issued or sponsored by Federal National Mortgage
Association (FNMA), FHLMC, Government National Mortgage Association (GNMA), as
well as private issuers, investment-grade municipal obligations, creditworthy,
unrated securities issued by municipalities in which an office of Home Savings
is located, investment-grade corporate debt securities, investment-grade
asset-backed securities, certificates of deposit that are fully-insured by the
FDIC, bankers' acceptances, federal funds and money market funds. Home Savings'
investment policy is designed primarily to provide and maintain liquidity within
regulatory guidelines, to maintain a balance of high quality investments to
minimize risk, and to maximize return without sacrificing liquidity and safety.
The investment activities of Home Savings are supervised by Home Savings'
Asset/Liability Committee and investment purchases are monitored weekly by the
Executive Committee.
Home Savings maintains a significant portfolio of mortgage-related
securities and CMOs, which are rated the highest credit quality by a nationally
recognized rating agency. Mortgage-related securities are issued by FNMA, GNMA
and FHLMC. Mortgage-related securities generally entitle Home Savings to receive
a portion of the cash flows from an identified pool of mortgages. GNMA
securities, FNMA securities and a majority of Home Savings' FHLMC securities are
guaranteed by the issuing agency as to timely payment of principal and interest.
The balance of Home Savings' FHLMC securities are guaranteed as to timely
payment of interest and eventual payment of principal. The CMOs are a type of
debt security issued by a special-purpose entity that aggregates pools of
mortgages and mortgage-related securities and creates different classes of
securities with varying maturities and amortization schedules, as well as a
residual interest, with each class possessing different risk characteristics.
The cash flows from the underlying collateral are generally divided into
tranches or classes which have descending priorities with respect to the
distribution of principal and interest repayment of the underlying mortgages, as
opposed to pass through mortgage-related securities where cash flows are
distributed pro rata to all security holders. In contrast to mortgage-related
securities from which cash flow is received (and hence, prepayment risk is
shared) pro rata by all securities holders, the cash flow from the mortgages or
mortgage-related securities underlying CMOs is paid in accordance with
predetermined priority to investors holding various tranches of such securities
or obligations. A particular tranche of CMOs may therefore carry prepayment risk
that differs from that of both the underlying collateral and other tranches.
Accordingly, CMOs attempt to moderate risks associated with conventional
mortgage-related securities resulting from unexpected prepayment activity.
Home Savings is exposed to prepayment risk and reinvestment risk to the
extent that actual prepayments will differ from those estimated in pricing the
security, which may result in adjustments to the net yield on such securities.
Mortgage- related securities enable Home Savings to generate positive interest
rate spreads with minimal administrative expense and reduce credit risk due to
either guarantees provided by the issuer or the high credit rating by the rating
agency. Mortgage- related securities classified as available for sale also
provide Home Savings with an additional source of liquid funds. Home Savings
also invests in investment grade corporate notes which mature within three years
or less. The notes, which include debentures and collateralized notes, generally
provide a spread above the risk-free rate afforded by comparable maturity U.S.
Treasury securities.
BUTLER WICK INVESTMENT ACTIVITY. Butler Wick holds securities through
three subsidiaries, Butler Wick & Co., Inc., Butler Wick Trust Company and
Butler Wick Asset Management. Butler Wick & Co., Inc. invests in municipal
securities and, to a lesser extent, government agency securities for sale to
clients. These securities are held as available for sale. Butler Wick & Co.,
Inc. does not make markets in equity securities.
In order to qualify as a fiduciary in both the State of Ohio and in the
Commonwealth of Pennsylvania, Butler Wick Trust Company deposited United States
Government obligations having a principal value of $100,000 with the Federal
Reserve Bank for each state. In addition to these deposits, U.S. Government
obligations are owned by Butler Wick Trust Company. All of these securities are
classified as held to maturity.
UNITED COMMUNITY INVESTMENT ACTIVITIES. Funds maintained by United
Community for general corporate purposes, including possible acquisitions, are
invested in investment grade corporate notes, federally-sponsored corporate
12
obligations, and equity securities. In addition, United Community invests in
Eurodollars, which is a short-term investment. These types of investments
provide a great deal of liquidity and flexibility.
The maturities of United Community's consolidated available for sale and held to
maturity marketable securities at December 31, 2002 excluding FHLB stock, and
equity securities, are indicated in the following table:
At December 31, 2002
---------------------------------------------------------------------
After one through
One year or less Five years Total
-------------------- -------------------- -----------------------------------
Amortized Average Amortized Average Amortized Fair Average
cost yield cost Yield cost value Yield
--------- -------- --------- ------- --------- ------- -------
(Dollars in thousands)
Short-term investments:
Federal funds $12,105 1.16% -- -- $12,105 $12,105 1.16%
Eurodollars 42,774 1.16 -- -- 42,774 42,774 1.16
Money market funds 21,157 1.27 -- -- 21,157 21,157 1.27
Travelers cash 1,481 1.33 -- -- 1,481 1,481 1.33
Liquid cash 241 1.15 -- -- 241 241 1.15
------- ---- ------- ------- ----
Total short-term investments $77,758 1.19% -- -- $77,758 $77,758 1.19%
======= ==== ======= ======= ====
Investment securities:
Available for sale $51,032 3.60% $18,790 3.45% $69,822 $70,572 3.56%
Total investment securities $51,032 3.60% $18,790 3.45% $69,822 $70,572 3.56%
======= ==== ======= ==== ======= ======= ====
13
The following table sets forth the amortized cost and fair value of United
Community's consolidated available for sale and held to maturity marketable
securities, FHLB stock, and mortgage-related securities at the dates indicated.
At December 31,
------------------------------------------------------------------------------------
2002 2001
------------------------ --------------------------------------------------------
Fair % of Amortized % of Fair % of
Value Total Cost Total Value Total
--------- --------- --------- ---------- --------- -------
(Dollars in thousands)
Available for sale:
Short-term investments:
Federal funds $ 12,105 3.60% $148,111 38.01%
Money market funds 21,157 6.29 1,238 0.32
Eurodollars 42,774 12.73 20,710 5.32
Other 1,722 0.51 237 0.06
FHLB stock 21,069 6.27 18,760 4.82
Equity investments 7,994 2.38 11,828 3.04
Marketable securities:
U.S. Treasury obligations 1,636 0.49 4,093 1.05
U.S. Government agency obligations 51,331 15.27 21,067 5.41
Corporate notes 17,592 5.23 14,093 3.62
Tax exempt municipal bonds 13 0.01 -- --
Mortgage-related securities:
FHLMC 62,596 18.62 15,202 3.90
FNMA 60,322 17.95 29,381 7.54
GNMA 14,054 4.18 2,701 0.69
Private issues 21,730 6.47 19,785 5.08
Total available for sale 336,095 100.00 307,206 78.86
-------- -------- -------- --------
Held to maturity:
Mortgage-related securities:
U.S. Treasury obligations -- -- 1,197 0.31 1,202 0.31
U.S. Government agency obligations -- -- 501 0.13 493 0.13
GNMA -- -- 2,391 0.62 2,532 0.65
FHLMC -- -- 50,896 13.20 51,810 13.30
FNMA -- -- 25,511 6.62 26,302 6.75
-------- -------- -------- -------- -------- --------
Total held to maturity -- -- 80,496 20.88 82,339 21.14
-------- -------- -------- -------- -------- --------
Total investment portfolio $336,095 100.00% $385,545 100.00% $389,545 100.00%
======== ======== ======== ======== ======== ========
At December 31,
--------------------------------------------------------
2000
-------------------------------------------------------
Amortized % of Fair % of
Cost Total Value Total
--------- --------- --------- -------
(Dollars in thousands)
Available for sale:
Short-term investments:
Federal funds $ 2,442 0.73%
Money market funds 180 0.05
Eurodollars 19,643 5.85
Other 228 0.06
FHLB stock 13,793 4.11
Equity investments 7,411 2.21
Marketable securities:
U.S. Treasury obligations 7,526 2.24
U.S. Government agency obligations 37,916 11.30
Corporate notes 45,592 13.59
Tax exempt municipal bonds -- --
Mortgage-related securities:
FHLMC 16,669 4.97
FNMA 41,423 12.34
GNMA -- --
Private issues 33,639 10.02
Total available for sale 226,462 67.48
-------- --------
Held to maturity:
Mortgage-related securities:
U.S. Treasury obligations 876 0.26 900 0.27
U.S. Government agency obligations -- -- -- --
GNMA 3,599 1.07 3,703 1.10
FHLMC 69,375 20.70 69,560 20.73
FNMA 34,710 10.36 34,966 10.42
-------- -------- -------- --------
Total held to maturity 108,560 32.39 109,129 32.52
-------- -------- -------- --------
Total investment portfolio $335,172 100.00% $335,591 100.00%
======== ======== ======== ========
14
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of Home
Savings' funds for use in lending and other investment activities. In addition
to deposits, Home Savings derives funds from interest payments and principal
repayments on loans and income on other earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
in response to general interest rates and money market conditions. Home Savings
may also borrow from the FHLB, as well as other suitable lenders, as a source of
funds.
DEPOSITS. Deposits are attracted principally from within Home Savings'
primary market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, demand deposits, individual
retirement accounts (IRAs), NOW accounts, money market accounts, and
certificates of deposit. Interest rates paid, maturity terms, service fees, and
withdrawal penalties for the various types of accounts are monitored weekly by
the Executive Committee. Home Savings does not use brokers to attract deposits.
The amount of deposits from outside Home Savings' primary market area is not
significant.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Home Savings at the dates indicated:
At December 31,2002 For the Year Ended December 31, 2002
------------------- ---------------------------------------
Percent Weighted Percent Weighted
of total average Average of average average
Amount deposits rate balance deposits rate
------ -------- --------- ------- -------- ---------
(Dollars in thousands)
Noninterest bearing demand $ 56,452 3.81% -% $ 80,969 5.36% -%
NOW and money market accounts 304,830 20.57 1.57 279,894 18.54 1.9
Savings accounts 302,276 20.40 1.26 299,048 19.80 1.65
Certificates of deposit 818,343 55.22 3.88 850,054 56.30 4.08
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $1,481,901 100.00% 2.72% $1,509,965 100.00% 2.98%
========== ========== ========== ========== ========== ==========
For the Year Ended December 31, 2001 For the Year Ended December 31, 2000
---------------------------------------- ---------------------------------------
Percent Weighted Percent Weighted
Average of average average Average of average average
balance deposits rate balance deposits rate
-------- -------- -------- -------- -------- ------
(Dollars in thousands)
Noninterest bearing demand $ 55,088 4.73% -% $ 41,699 4.80% -%
NOW and money market accounts 184,120 15.81 2.96 145,649 16.77 2.86
Savings accounts 228,485 19.62 2.28 213,342 24.56 2.47
Certificates of deposit 696,633 59.84 5.36 467,823 53.86 5.55
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $1,164,326 100.00% 4.12% $ 868,513 100.00% 4.08%
========== ========== ========== ========== ========== ==========
Total deposits increased by $98.5 million, or 7.12%, from December 31,
2001, to December 31, 2002.
15
The following table shows rate and maturity information for Home
Savings' certificates of deposit at December 31, 2002:
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Thereafter Total
---- -------- -------- -------- ---------- -----
(In thousands)
4.00% or less $340,015 $103,279 $ 37,967 $ 11,492 $492,771
4.01% to 6.00% 86,782 22,735 23,488 93,305 226,310
6.01% to 8.00% 58,682 5,943 33,103 1,534 99,262
8.01% to 10.00% -- -- -- -- --
-------- -------- -------- -------- --------
Total certificates of deposit $485,479 $131,975 $ 94,558 $106,331 $818,343
======== ======== ======== ======== ========
Percent of total certificates of deposit 59.32% 16.13% 11.56% 12.99% 100.00%
At December 31, 2002, approximately $485.5 million of Home Savings'
certificates of deposit mature within one year. Based on past experience and
Home Savings' prevailing pricing strategies, management believes that a
substantial percentage of such certificates will be renewed with Home Savings at
maturity. If, however, Home Savings is unable to renew the maturing certificates
for any reason, borrowings of up to $681.7 million are available from the FHLB
of Cincinnati.
The following table presents the amount of Home Savings' certificates of
deposit of $100,000 or more by the time remaining until maturity at December 31,
2002:
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 36,778
Over 3 months to 6 months 34,551
Over 6 months to 12 months 30,642
Over 12 months 65,748
--------
Total $167,719
========
Based on past experience, management believes that a substantial percentage of
the above certificates will be renewed with Home Savings at maturity.
16
The following table sets forth Home Savings' deposit account balance
activity for the periods indicated:
Year ended December 31,
-----------------------------------
2002 2001
----- ----
(Dollars in thousands)
Beginning balance $1,383,418 $ 900,413
Net increase in deposits 53,919 434,233
---------- ----------
Net deposits before interest credited 1,437,337 1,334,646
Interest credited 44,564 48,772
---------- ----------
Ending balance $1,481,901 $1,383,418
========== ==========
Net increase $ 98,483 $ 483,005
========== ==========
Percent increase 7.12% 53.64%
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, Home
Savings is authorized to apply for advances, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender (QTL) test. If an association meets the QTL
test, the association will be eligible for 100% of the advances it would
otherwise be eligible to receive. If an association does not meet the QTL test,
the association will be eligible for such advances only to the extent it holds
specified QTL test assets. At December 31, 2002, Home Savings was in compliance
with the QTL test. Home Savings may borrow up to $681.7 million from the FHLB,
and had $183.0 million outstanding advances at December 31, 2002.
Butler Wick borrows on a secured basis to fund client receivables.
Short-term bank loans bear interest at the federal funds rate plus 1% and are
payable on demand. The loans are fully collateralized by marketable securities
from both customers' margin accounts and securities owned by Butler Wick.
Short-term borrowings also take the form of securities loaned to other
broker/dealers. Short-term borrowings are available to Butler Wick to the extent
of the loan value of the marketable securities.
COMPETITION
Home Savings faces competition for deposits and loans from other savings
and loan associations, credit unions, banks and mortgage originators in Home
Savings' primary market area. The primary factors in competition for deposits
are customer service, convenience of office location and interest rates. Home
Savings competes for loan originations primarily through the interest rates and
loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is affected by, among other things, the
general availability of lendable funds, general and local economic conditions,
current interest rate levels and other factors which are not readily
predictable.
Butler Wick offers retail brokerage, asset management, and trust
services to clients primarily in northeastern Ohio and western Pennsylvania. In
each of these businesses, Butler Wick competes with both regional and national
firms. As a full service broker, Butler Wick competes based on personal service
rather than price. Butler Wick Asset Management Company and Butler Wick Trust
Company are the only such locally owned and managed financial services
providers.
EMPLOYEES
At December 31, 2002, Home Savings and Butler Wick had 605 and 169
full-time equivalent employees, respectively. Home Savings and Butler Wick
believe that relations with their employees are good. Home Savings offers
health, life and disability benefits to all employees, a 401(k) plan and an
employee stock ownership plan for its eligible employees. Home Savings had a
defined benefit pension plan, which was terminated effective July 31, 1999. Home
Savings offered a post-retirement health plan for its eligible employees. The
benefits of this plan were curtailed in 2000. Butler Wick offers health, life
and disability benefits to all employees, a 401(k) plan, a profit sharing plan
and a retention plan for
17
its eligible employees. None of the employees of Home Savings or Butler Wick are
represented by a collective bargaining unit.
REGULATION
United Community is a unitary savings and loan holding company within
the meaning of the Home Owners Loan Act, as amended (HOLA), and is subject to
regulation, examination, and oversight by the OTS, although there are generally
no restrictions on the activities of United Community unless the OTS determines
that there is reasonable cause to believe that an activity constitutes a serious
risk to the financial safety, soundness, or stability of Home Savings. Home
Savings is subject to regulation, examination, and oversight by the OTS, the
Division and the FDIC, and is also subject to certain provisions of the Federal
Reserve Act. Butler Wick is subject to regulation by the SEC and NASD
Regulation, Inc. United Community, Home Savings and Butler Wick are also subject
to the provisions of the Ohio Revised Code applicable to corporations generally,
including laws which restrict takeover bids, tender offers and control-share
acquisitions involving public companies which have significant ties to Ohio.
The OTS, the FDIC, the Division, the SEC and the NASD each have various
powers to initiate supervisory measures or formal enforcement actions if United
Community or the subsidiary they regulate does not comply with applicable
regulations. If the grounds provided by law exist, the OTS, the FDIC or the
Division may place Home Savings in conservatorship or receivership. Home Savings
is also subject to regulatory oversight under various consumer protection and
fair lending laws which govern, among other things, truth-in-lending
disclosures, equal credit opportunity, fair credit reporting and community
reinvestment. Failure to abide by federal laws and regulations governing
community reinvestment could limit the ability of Home Savings to open a new
branch or engage in a merger.
Federal law prohibits Home Savings from making a capital distribution to
anyone or paying management fees to any person having control of Home Savings
if, after such distribution or payment, Home Savings would be undercapitalized.
In addition, Home Savings may not pay any dividends if, as a result, its net
worth would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. Home Savings must file an application with, and obtain approval
from, the OTS (i) if the proposed distribution would cause total distributions
for the calendar year to exceed net income for that year to date plus Home
Savings' retained net income for the preceding two years; (ii) if Home Savings
would not be at least adequately capitalized following the capital distribution;
or (iii) if the proposed distribution would violate a prohibition contained in
any applicable statute, regulation or agreement between Home Savings and the OTS
or the FDIC, or any condition imposed on Home Savings in an OTS-approved
application or notice. If Home Savings is not required to file an application,
it must file a notice of the proposed capital distribution with the OTS. In
December 2002, Home Savings paid a dividend to United Community of
$30.0 million.
Loans by Home Savings to executive officers, directors, and principal
shareholders and their related interests must conform to the lending limit on
loans to one borrower, and the total of such loans to executive officers,
directors, principal shareholders, and their related interests cannot exceed
specified limits. Most loans to directors, executive officers, and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the Board with any "interested" director not participating. All loans
to directors, executive officers, and principal shareholders must be made on
terms substantially the same as offered in comparable transactions with the
general public or as offered to all employees in a company-wide benefit program,
and loans to executive officers are subject to additional limitations. All other
transactions between Home Savings and its affiliates must comply with Sections
23A and 23B of the Federal Reserve Act (FRA). United Community and Butler Wick
are affiliates of Home Savings for this purpose.
Under federal law and regulations, no person, directly or indirectly, or
acting in concert with others, may acquire control of Home Savings or United
Community without 60 days' prior notice to the OTS. "Control" is generally
defined as having more than 25% ownership or voting power; however, ownership or
voting power of more than 10% may be deemed "control" if certain factors are in
place. If the acquisition of control is by a company, the acquirer must obtain
approval, rather than give notice, of the acquisition as a savings and loan
holding company. In addition, any merger of Home Savings must be approved by the
OTS as well as the Division. Further, any merger of United Community in which
United Community is not the resulting company must also be approved by both the
OTS and the Division.
18
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31, 2002,
regarding the properties on which the main office, the branch offices and the
loan production offices of Home Savings are located:
Owned or Year Net book
Location leased opened value Deposits
- -------- --------- ------ ------ --------
(In thousands)
275 Federal Plaza West Owned 1919 $ 4,374 $ 81,147
Youngstown, Ohio
32 State Street Owned 1916 288 101,301
Struthers, Ohio
4005 Hillman Way Owned 1958 434 96,502
Boardman, Ohio
650 East State Street Owned 1925 166 85,480
Salem, Ohio
6000 Mahoning Avenue Leased 1959 19 90,259
Austintown, Ohio
7525 Market Street Owned 1971 583 132,699
Boardman, Ohio
4259 Kirk Road Owned 1975 528 103,933
Austintown, Ohio
202 South Main Street Owned 1975 449 94,857
Poland, Ohio
3500 Belmont Avenue Owned 1976 283 79,864
Youngstown, Ohio
29 North Broad Street Owned 1977 255 46,563
Canfield, Ohio
980 Great East Plaza Leased 1980 10 30,911
Niles, Ohio
One University Plaza Leased 2000 36 1,592
1059-1060 Kilcawley Center
Youngstown, Ohio
127 North Market Street Owned 1987 117 33,365
East Palestine, Ohio
210 West Lincoln Way Owned 1987 301 20,923
Lisbon, Ohio
2996 McCartney Road Leased 2000 136 4,947
Youngstown, Ohio
14825 South Avenue Ext Owned 1997 727 30,045
Columbiana, Ohio
4625 North River Road Owned 2000 1,199 17,298
Warren, Ohio
19
Owned or Year Net book
Location leased opened value Deposits
- -------- --------- ------ ------ --------
(In thousands)
30 East Main Street Owned 1994 1,064 31,683
Ashland, Ohio
203 North Sandusky Street (1) Owned 1993 -- N/A
Bellevue, Ohio
211 North Sandusky Street Owned 1972 728 56,669
Bellevue, Ohio
255 North Main Street Owned 1975 104 15,141
Clyde, Ohio
1500 Bright Road Owned 1993 932 17,077
Findlay, Ohio
321 West State Street Owned 1987 171 17,024
Fremont, Ohio
40 East Main Street Owned 1999 400 11,246
Lexington, Ohio
50 West Main Street (2) Owned 1976 677 49,012
Norwalk, Ohio
51 West Main Street (2)(3) Owned 1992 -- N/A
Norwalk, Ohio
4112 Milan Road Owned 1988 409 17,536
Sandusky, Ohio
48 East Market Street Owned 1983 342 51,428
Tiffin, Ohio
796 West Market Street Owned 1990 217 10,867
Tiffin, Ohio
301 Myrtle Avenue Owned 1977 200 36,120
Willard, Ohio
121 Blossom Centre Leased 22 1,080
Willard, Ohio
519 Broadway (4) Owned 1903 466 N/A
East Liverpool, Ohio
530 Broadway Owned 1982 621 64,084
East Liverpool, Ohio
15575 ST RT 170 Leased 1983 329 32,359
Calcutta, Ohio
46635 Y & O Road Owned 1975 245 10,324
Glenmoor, Ohio
998 Third Street Owned 2001 1,134 3,281
Beaver, Pennsylvania
7707 Mentor Ave Leased 2002 285 533
Mentor, Ohio
3690 Orange Place Leased 2000 181 N/A
Beachwood, Ohio
20
6011 Navarre Road, S.W Leased 2000 21 N/A
Canton, Ohio
Pointe View Professional Park Leased 2000 16 N/A
4831 Darrow Rd. #106
Stow, Ohio
7330 Southern Blvd Leased 1998 52 N/A
Boardman, Ohio
(1) Office facility of appraisal staff.
(2) Book value and deposit totals are combined for the two Norwalk offices.
(3) Drive-up facility only.
(4) Office facility for East Liverpool staff.
The following table sets forth certain information at December
31, 2002, regarding the properties on which the main office and the branch
offices of Butler Wick are located:
Owned or Year
Location Leased opened
-------- ------ ------
City Center One Bldg., Suite 700 Leased 1926
Youngstown, OH 44503
960 W. State Street Leased 1959
Alliance, OH 44601
1284 Liberty Street Leased 1932
Franklin, PA 16322
1 E. State Street Leased 1932
Sharon, PA 16146
25651 Detroit Road Leased 1990
Cleveland, OH 44145
3685 Stutz Drive, Suite 201 Leased 1999
Canfield, OH 44406
149 N Water Street Leased 1981
Kent, OH 44240
Howland Professional Centre Leased 1932
425 Niles-Cortland Road SE
Bldg. A, Suite 201
Warren, Ohio
Howland Professional Centre Leased 2000
425 Niles-Cortland Road SE
Bldg. A, Suite 202
Warren, Ohio
4522 Fulton Drive NW Leased 1990
Canton, OH 44718
100 S. Broadway, 2nd Floor Leased 1956
Salem, OH 44460
21
ITEM 3. LEGAL PROCEEDINGS
United Community is not presently involved in any material legal
proceedings. From time to time, United Community is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Home Savings and incidental to its securities
business offered by Butler Wick.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the 2002 Annual Report to Shareholders of
United Community (Annual Report) under the caption "Market Price and Dividends"
is incorporated herein by reference and attached hereto as part of Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the Annual Report under the caption
"Selected Financial Ratios and Other Data" is incorporated herein by reference
and attached hereto as part of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference and attached hereto as part of
Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Annual Report under the caption "Asset
and Liability Management and Market Risk" is incorporated herein by reference
and attached hereto as part of Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements appearing in the Annual Report and
the report of Crowe Chizek and Company LLP dated February 7, 2003, are
incorporated herein by reference and attached hereto as part of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement for the 2003 Annual
Meeting of Shareholders of United Community (Proxy Statement), filed with the
Securities and Exchange Commission (Commission) on March 25, 2003, under the
captions "Election of Directors," "Incumbent Directors," "Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated
herein by reference.
22
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the captions
"Board Meetings, Committees and compensation" and "Compensation of Executive
Officers," is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information contained in the Proxy Statement under the caption
"Ownership of UCFC Shares" is incorporated herein by reference.
United Community maintains the United Community Financial Corp. 1999 Long-Term
Incentive Plan ("Incentive Plan") and the United Community Financial Corp.
Recognition and Retention Plan and Trust Agreement ("RRP") under which it may
issue equity securities to its directors, officers and employees in exchange for
goods or services. The Incentive Plan and the RRP were approved by United
Community's shareholders at the 1999 Special Meeting of Shareholders.
The following table shows, as of December 31, 2002, the number of common shares
issuable upon the exercise of outstanding stock options, the weighted average
exercise price of those stock options, and the number of common shares remaining
for future issuance under the Incentive Plan and the RRP, excluding shares
issuable upon exercise of outstanding stock options.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a))
- -------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders.................... 1,909,615 $7.01 1,188 (1)
- -------------------------------------------------------------------------------------------------------------------------------
(1) All of these shares are available for future issuance under the RRP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers --Certain Transactions" is incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out by United Community's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) of
the Securities Exchange Act of 1934). Based on their evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that United
Community's disclosure
23
controls and procedures are effective. Subsequent to the date of their
evaluation, there were no significant changes in United Community's internal
controls or in other factors that could significantly affect these controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(c) EXHIBITS
3.1 Articles of Incorporation
3.2 Amended Code of Regulations
10 Material Contracts
11 Statement Regarding Computation of Per Share Earnings
13 Portions of the 2002 Annual Report to Shareholders
16 Letter regarding change in certifying accountants
20 Proxy Statement for 2003 Annual Meeting of Shareholders
21 Subsidiaries of Registrant
23.1 Crowe, Chizek and Company LLP Consent
23.2 Deloitte and Touche LLP Consent
99.1 Independent Auditors' Report from Deloitte and Touche LLP
99.2 Certification of Financial Statements by Chief Executive
Officer
99.3 Certification of Financial Statements by Chief Financial
Officer
(a) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.
(b) REPORTS ON FORM 8-K. On October 16, 2002, a Form 8-K was filed for
Item 5, Other Events, providing the third quarter financial information news
release.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED COMMUNITY FINANCIAL CORP.
By: /S/ Douglas M. McKay
-----------------------------------
Douglas M. McKay, President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
/S/ Douglas M. McKay /S/ Richard M. Barrett
---------------------------------------------------- --------------------------------------------------------------------
Douglas M. McKay, President and Director Richard M. Barrett, Director
Date: March 19, 2003 Date: March 19, 2003
/S/ Richard J. Schiraldi /S/ Donald J. Varner
---------------------------------------------------- --------------------------------------------------------------------
Richard J. Schiraldi, Director Donald J. Varner, Director
Date March 19, 2003 Date: March 19, 2003
/S/ Herbert F. Schuler, Sr. /S/ Patrick A. Kelly
---------------------------------------------------- --------------------------------------------------------------------
Herbert F. Schuler, Sr., Director Patrick A. Kelly, Treasurer (Principal Financial Officer)
Date: March 19, 2003 Date: March 19, 2003
/S/ Thomas J. Cavalier
----------------------------------------------------
Thomas J. Cavalier, Director
Date: March 19, 2003
25
UNITED COMMUNITY FINANCIAL CORP.
CERTIFICATION
I, Douglas M. McKay, certify that:
1) I have reviewed this annual report on Form 10-K of United Community
Financial Corp.
2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period by this
annual report;
3) Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
the annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Douglas M. McKay
- --------------------
Douglas M. McKay
Chief Executive Officer
March 28, 2003
26
UNITED COMMUNITY FINANCIAL CORP.
CERTIFICATION
I, Patrick A. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of United Community
Financial Corp.
2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period by this
annual report;
3) Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
the annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
4) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
5) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Patrick A. Kelly
- --------------------------------------------
Patrick A. Kelly
Chief Financial Officer
March 28, 2003
27
INDEX TO EXHIBITS
Exhibit Number
- ----------------
3.1 Articles of Incorporation Incorporated by reference to the Registration
Statement on Form S-1 filed by United Community
on March 13, 1998 (S-1) with the Securities and
Exchange Commission (SEC), Exhibit 3.1
3.2 Amended Code of Regulations Incorporated by reference to the 1998 10-K filed
by United Community on March 31, 1999, Exhibit 3.2
10.1 The Home Savings and Loan Company of Incorporated by reference to the 2001 10-K filed
Youngstown, Ohio Employee Stock Ownership Plan by United Community on March 29, 2002, Exhibit 10.1
10.2 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed
and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.2
Douglas M. McKay, dated December 29, 2000.
10.3 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed
and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.3
Donald J. Varner, dated December 29, 2000.
10.4 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed
and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.4
Patrick A. Kelly, dated December 29, 2000.
10.5 Employment Agreement between Butler Wick Corp. Incorporated by reference to the 1999 10-K filed
and Thomas J. Cavalier, dated August 12, 1999 by United Community on March 29, 2000, Exhibit 10.5
10.6 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed
and Loan Company of Youngstown, Ohio and David by United Community on March 30, 2001, Exhibit 10.6
G. Lodge, dated December 29, 2000.
10.7 Employment Agreement between The Home Savings Incorporated by reference to the 2000 10-K filed
and Loan Company of Youngstown, Ohio and by United Community on March 30, 2001, Exhibit 10.7
Patrick W. Bevack, dated December 29, 2000.
11 Statement Regarding Computation of Per Share Incorporated by reference to Note 20 to the
Earnings Financial Statements included in the Annual
Report in Exhibit 13
13 Portions of the 2002 Annual Report to Shareholders
20 Proxy Statement for 2003 Annual Meeting of Incorporated by reference to the Proxy
Shareholders Statement, filed with the Securities and
Exchange Commission on March 25, 2003.
21 Subsidiaries of Registrant
23.1 Crowe, Chizek and Company LLP Consent
23.2 Deloitte and Touche LLP Consent
99.1 Independent Auditors' Report from Deloitte
and Touche LLP
99.2 Certification of Financial Statements by Chief
Executive Officer
99.3 Certification of Financial Statements by Chief
Financial Officer
28