UCFC feels drag of 2 charges on its balance sheet

By Don Shilling

When it bought a bank in East Liverpool, it paid $33.6 million more than the value of the assets.

YOUNGSTOWN — The parent company of Home Savings and Loan Co. lost $38.6 million in the third quarter as it tries to regain its financial footing.

The loss stemmed from two accounting charges and affected only the balance sheet, stressed Douglas McKay, chairman and chief executive of United Community Financial Corp. It was not an outlay of cash.

If the accounting charges were stripped away, the Youngstown-based company would have lost only $300,000. McKay said United Community broke even on its normal operations because the quarter also included expenses for consultants and other items required by federal regulators.

United Community, which also owns Butler Wick Corp. in Youngstown, has been under a cease-and-desist order since August because of its troubled finances. The order requires the company to reduce certain types of risky lending, stop paying dividends and improve its cash reserves.

The company’s stock lost 89 cents, or 19 percent, Wednesday to close at $3.78. It has traded between $2.51 and $8.74 in the past year.

The largest part of the quarterly loss was tied to a $33.6 million accounting charge related to the value of two bank acquisitions that United Community made in 2001 and 2002.

When one bank buys another, the part of the purchase price that exceeds the value of the assets is recorded on the balance sheet as “goodwill.”

When United Community bought Industrial Savings & Loan in Sandusky and Potters Bank in East Liverpool, it paid $33.6 million more than the value of the assets.

In a recent review, accountants suggested this “goodwill” be eliminated from the balance sheet because of the lower value of the assets and United Community’s stock, McKay said. In essence, United Community is saying that it would be paying less for the assets if it were acquiring them today, he said.

United Community also took an accounting charge of $4.7 million because of the lower value of its investment in Fannie Mae stock.

Fannie Mae is one of the organizations that buy mortgages on the secondary market, and its stock value took a drastic hit when it was placed under government control because of the current credit crisis.

McKay said bank officials continue to look for ways to increase United Community’s cash reserves so it can emerge from the extra scrutiny by regulators.

McKay said United Community is moving toward being able to restore normal lending but couldn’t say when that would occur. Lending levels are less than half what they were a year ago, he said.

One way to increase cash levels is to take an investment from the U.S. Treasury as part of the federal bailout plan.

McKay said bank officials haven’t decided whether they would accept the federal investment but have applied for funding.

Federal regulations say investments will not be made in banks that are about to fail but leave open the possibility of funding companies such as United Community that are working to meet some financial challenges, McKay said.

Another way of getting more money into the company is to accept private investment from investors or mutual funds, he said. Large investors have approached United Community because they think that banks that receive federal funds would be good investments, he said.

The private investments could raise cash through the issuing of common or preferred stock, he said.

United Community also is working to increase its cash on hand by restricting lending for land development and investment properties, he said. Lending is continuing for mortgages and to businesses, he said.

shilling@vindy.com