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United Community
Financial is overcoming the skeptical attitude about the Midwest, because they have been
very successful in that market with 4 times as many retail
branch facilities as they had 8 years ago
Financial
Community Banks
(UCFC-NASDAQ)
United Community Financial Corp.
275 Federal Plaza West
Youngstown, OH 44503-1203
Phone: 330-742-0500
Douglas M. McKay
Chairman, President & CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
August 3, 2006
BIO:
DOUGLAS M. MCKAY. Mr. McKay joined Home Savings in 1971. Since 1995, Mr. McKay has
served as Chief Executive Officer and Chairman of the Board of Home Savings, and from 1996
until 2000, served as President of Home Savings. Mr. McKay has been Chairman of the Board
and President of UCFC since its inception in 1998.
Company Profile:
United Community Financial Corp. (NASDAQ: UCFC) was created on June 19, 1998 and is the
holding company for The Home Savings
and Loan Company and Butler Wick Corp.
Home Savings is a
community-oriented financial institution that has been serving its customers since 1889.
The formation of the holding company, along with the conversion from a mutual savings and
loan association to a state-chartered stock savings bank, has enhanced Home Savings'
abilities to pursue acquisitions of other financial institutions or related businesses.
The additional flexibility provided by the conversion also allowed Home Savings to expand
the range of products and services offered to customers. With assets of $2.6 billion, Home
Savings operates 37 banking offices and six loan production offices throughout Ohio and
western Pennsylvania, employing nearly 700 people.
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, through its
subsidiaries, has served northeastern Ohio and western Pennsylvania since 1926, providing
securities brokerage, asset management, trust services, insurance products, public finance
and other underwriting services. Butler Wick has grown, opening new offices and
introducing new products and services that have generated profitable growth.
United Community Financial Corp. currently has a
nine-member board of directors and employs three officers.
CEOCFO: Mr. McKay, the roots of your company go back well
over 100 years. What was your vision when you became United Community Financial
Corp. and how has that developed?
Mr. McKay: “United Community Financial Corp was an
outgrowth of the original bank, which was Home Savings and Home Savings was founded in
1889. One of the founders was my great grandfather and he was the initial managing
officer; my grandfather, my father and I have each succeeded each other in that role. In
1995, I was elected to CEO and board chairman at the bank and in 1998, we did our IPO
converting from a mutual thrift to a publicly owned savings bank and that is when United
Community was created; United Community is our holding company. At that time, in 1998, was
the initial public offering that we raised approximately $350 million in new capital and
began to grow the bank. At that point we were somewhere under one billion in assets and
today, eight years later we are about 2.6 billion in assets. That is how United Community,
the holding company, came about. In those eight years, we have grown in many ways but we
have also bought two banks and folded them into our Bank. We also bought a trust and
brokerage firm and have it as another subsidiary. Therefore, we have several lines of
business’ going now.”
CEOCFO: Do you
anticipate purchasing additional banks?
Mr. McKay: “Yes we do. We are always on the lookout for
the right opportunity to partner with someone. We are very happy with the way we have
integrated the banks that we have purchased into our system. We have geographically spread
ourselves from where we were in 1998 in three counties in north eastern Ohio, to a market
area that now encompasses all of northern Ohio including Columbus and everything north of
that as well as some in western Pennsylvania. Therefore, the acquisition models that we
have had have worked well for us and we are anxious to do more when the right
opportunities come along.”
CEOCFO: What is the
economy like in the area that you service?
Mr. McKay: “It is kind of funny in that it is probably a
very well kept secret, meaning that a lot of the analysts and prospective investors that I
have talked to in other parts of the country think that in the Midwest and Ohio in
particular, think that things are pretty abysmal. Obviously, from our asset and earnings
growth over the last eight years, we have found northern Ohio to be a very vibrant and
attractive market. We have actually had to be a little restricted in the amount that we
grow. We have had to be very controlled based on our capital levels, which dictate how
large we can get. We could have been a lot larger if we had decided to access capital
markets to enable us to do that. The point is that in term of getting new customers,
growing earnings and spreading ourselves geographically, this Midwestern market has been
very strong and positive for us.”
CEOCFO: How do you break
down between consumer and commercial and would you like to see that mix change?
Mr. McKay: “Yes, we are deliberately changing that mix.
Eight years ago, asset mix was something like 80% single-family mortgage loans. We have
been particularly building commercial real estate, but commercial lending in general as
well as the consumer loan portfolio and staying active in mortgage lending. We are at the
point that mortgage lending now comprises something like 50% of our assets and the other
asset categories have been growing significantly.”
CEOCFO: How do you
attract new business, particularly in the areas in which you would like to grow?
Mr. McKay: “It is generally finding the right people.
Banking in our model, which is a community-banking model is about developing
relationships. We would not have been able to grow like this if we had not been able to
hire originators and deposit gatherers and others on the retail side as well as the
lending side that have had experience and good reputations throughout the state that we
serve. These are the people and the relationships that have been able to help us grow. We
have had to have a complete product line and have to have the kind of services and
products people want as well as pricing them properly. Although it still all boils down to
getting people who are good at what they do and have the right tools and training and have
the relationships in their community. We put a very high value on those kinds of
relationships.”
CEOCFO: How do you
maintain the personal touch in relationships as you continue to grow?
Mr. McKay: “It is a challenge and to be honest, I’m
not happy about how the personal attention has been diluted a little, at least for me. It
has really been a question of needing to delegate to other senior officers, the
responsibility to get out and be in touch with all of the various branch employees on a
regular basis. It is not like the days just eight years ago when I could personally sit
each morning at a branch and have coffee before opening, with the staff. In a years time I
would be able to meet and talk to virtually everyone. That is just not possible anymore. I
still try to do that to a smaller extent but it cannot be done. One of the things that we
do as an alternative to that is that we hold twice a year, some very large all employee
events such as cocktails, dinner, and some sort of program. It is not quite the same as
the old days, but it does help and give me a chance in mass to eventually speak to almost
everyone.”
CEOCFO: Are there any
products or services that you would like to add?
Mr. McKay: “Not really. We are constantly looking at
things that perhaps we should consider doing that we do not do now such as insurance
services, in particular title insurance or real-estate brokerage; things that are beyond
traditionally banking services. We look at it every now and then and up until now, we have
pretty much always been saying that we should “stick to our knitting”, stay
within the realm of banking and not get too distracted from that. We figure that if we
spread ourselves too thin, that we might not do quite as good of a job with our core
business.”
CEOCFO: What might a
customer find at a Home Savings Bank that they would not find elsewhere?
Mr. McKay: “I think it would be very easy for me say
what every banker would say, that we excel and distinguish ourselves from the basis of
service, which is true. I would say one thing that might surprise a customer is that we
really do try to decentralize a great deal of customer service related decision making. If
people have a question on a monthly account statement that they have received or something
that they do not understand or they think might be in error, we try to empower the staff
at each branch and department level to be able to resolve the problem. We really think
that in our business people do not want to hear that their request has to be sent to the
headquarters for the decision. We do not want the decision to be made by some faceless
person at the main office but by the people that they deal with each day. That situation
obviously doesn’t apply to production areas such as loan underwriting. We cannot
decentralize that and stay as efficient as we are now to each branch; but we do have
several loan production centers and our turnaround on that is quite quick. However, it is
more of the other service related issues where people come into a branch or call a branch
manager or salesperson that they have met and ask their question, and that person has the
authority and knowledge to resolve that problem on the spot.”
CEOCFO: Do you see new
branches and loan production offices in the future?
Mr. McKay: “Yes we are fairly active that way. We have
six loan production offices around the state. We are comfortable with that system right
now. With our retail branch network, we have been opening roughly two branches a year for
the last 4 years and we are in the same mode right now. We are interested in convenience
for the customers that we have as well as approaching some new markets, but new markets
for us are pretty hard to get into with the de novo branch. It is hard to find the people
that have those relationships to staff that branch, and it takes a while to build a new
branch up to a critical level in a completely new market. Instead of that, we are to
trying to fill in geographically the footprint that we have, and we have established a
retail branch network from Lake Erie down toward Columbus, and there are some areas there
that we cannot access through an acquisition. However, there are markets that we want to
be in so we do build to fill those in. As I said, we have been doing about two a year and
we have three being planned right now.”
CEOCFO: Please tell me
little bit about Butler Wick.
Mr. McKay: “Butler Wick is also based in Youngstown,
just like United Community and the Home Savings. It is a subsidiary of the holding company
as is the bank; the primary business, first and foremost is retail brokerage. They are
dealer brokers dealing in various stocks and bonds. They are also growing rapidly in their
Trust Division and their Capital Markets Group.”
CEOCFO: You just
released good earnings; please tell us what is happening now and how you continue to do
well.
Mr. McKay: “We have had what I think is fairly
remarkable earnings growth since our IPO. As I mentioned earlier, the IPO was in 1998, and
in 1999, we finished the year with around $4 million in net earnings. We have grown
exponentially since then, with $11 million in 2000, kept stepping up until we were
finished in 2005 with over $23 million in net income. We just released earnings last night
for the first half of 2006, so you can check the news services for that report for the
most current information. We are having a very strong 2006 and for the first 6 months of
this year, we are at $12.4 million in net income. Therefore, we are on a track to exceed
last year by several million dollars. We have set new earnings records in 7 of the past 8
years and 2006 is on track to make it 8 of 9.”
CEOCFO: Addressing
potential investors, why is this a good time to look at United Community and what do
people miss that they should know?
Mr. McKay: “We have a market cap of something like $390
million, so for certain kinds of investors, we are kind of small for their radar screen.
For others, people have been a little skeptical about the ability of management to
continue to deploy capital and grow earnings and the balance sheet the way we started out.
When speaking to investors groups, which we have been trying to do quite a lot lately to
get our story across to people that we are going to show our eighth consecutive year of
strong balance sheet growth and earnings growth. We often face a negative bias toward the Midwest
market, considered a slow growth area compared to some of the “hot spots” around
the country and in some aspects, there might be some truth to that. However, for United
Community, as we grow and spread across the state and eventually going beyond the borders
of Ohio; our growth record in terms of balance sheet items as well as earnings is as good
as anyone’s anywhere. What we want to do right now is explain to people what we have
done and that we see no barriers to continue to perform the way we have. We are a highly
capitalized organization, relative to other financial institutions, which means we are
able to continue our growth pattern. At the same time, our earnings are such that our
return on equity to share holders is nearly double the average of other thrifts in Ohio.
Therefore, we think that we operate an exceptional organization and once we get people to
notice us, we think that they will be interested to be investors.”
CEOCFO: Final thoughts
for our readers?
Mr. McKay: “The biggest bias that we face is probably a
skeptical attitude about the Midwest. In some ways, I hate to burst that myth, because it
is a market that we have been very successful in. I know that there are other very good
banks around the country that don’t want to be a part of it and that’s just fine
with us. Although we are one of the larger thrifts in the state of Ohio, compared to many
banking organizations in the country, we are quite small and we like it that way. We think
the people that we want as customers want personal service, community banking ideas, and
local decision-making. We found that we can grow; we have 4 times as many retail branch
facilities as we had 8 years ago and we can still provide that kind of personal banking
service and that is what we are committed to do.”
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