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EXCEL - IDEA: XBRL DOCUMENT - UNITED COMMUNITY FINANCIAL CORP | Financial_Report.xls |
EX-32 - EXHIBIT 32 - UNITED COMMUNITY FINANCIAL CORP | c20389exv32.htm |
EX-31.2 - EXHIBIT 31.2 - UNITED COMMUNITY FINANCIAL CORP | c20389exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - UNITED COMMUNITY FINANCIAL CORP | c20389exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
UNITED COMMUNITY FINANCIAL CORP.
(Exact name of the registrant as specified in its charter)
OHIO | 0-024399 | 34-1856319 | ||
(State or other jurisdiction of incorporation) | (Commission File No.) | (IRS Employer I.D. No.) |
275 West Federal Street, Youngstown, Ohio 44503-1203
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (330) 742-0500
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
30,984,344 common shares as of July 31, 2011.
TABLE OF CONTENTS
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54 | ||||||||
54 | ||||||||
54 | ||||||||
55 | ||||||||
56-59 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Assets: |
||||||||
Cash and deposits with banks |
$ | 25,085 | $ | 18,627 | ||||
Federal funds sold |
30,413 | 18,480 | ||||||
Total cash and cash equivalents |
55,498 | 37,107 | ||||||
Securities: |
||||||||
Available for sale, at fair value |
392,749 | 362,042 | ||||||
Loans held for sale |
4,824 | 10,870 | ||||||
Loans, net of allowance for loan losses of $46,223 and $50,883 |
1,509,399 | 1,649,486 | ||||||
Federal Home Loan Bank stock, at cost |
26,464 | 26,464 | ||||||
Premises and equipment, net |
21,489 | 22,076 | ||||||
Accrued interest receivable |
7,201 | 7,720 | ||||||
Real estate owned and other repossessed assets |
43,685 | 40,336 | ||||||
Core deposit intangible |
412 | 485 | ||||||
Cash surrender value of life insurance |
27,822 | 27,303 | ||||||
Other assets |
12,876 | 13,409 | ||||||
Total assets |
$ | 2,102,419 | $ | 2,197,298 | ||||
Liabilities and Shareholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Interest bearing |
$ | 1,559,045 | $ | 1,551,210 | ||||
Non-interest bearing |
138,752 | 138,571 | ||||||
Total deposits |
1,697,797 | 1,689,781 | ||||||
Borrowed funds: |
||||||||
Federal Home Loan Bank advances |
96,365 | 202,818 | ||||||
Repurchase agreements and other |
98,962 | 97,797 | ||||||
Total borrowed funds |
195,327 | 300,615 | ||||||
Advance payments by borrowers for taxes and insurance |
15,963 | 20,668 | ||||||
Accrued interest payable |
838 | 809 | ||||||
Accrued expenses and other liabilities |
9,352 | 9,370 | ||||||
Total liabilities |
1,919,277 | 2,021,243 | ||||||
Shareholders Equity: |
||||||||
Preferred stock-no par value; 1,000,000 shares authorized and unissued |
| | ||||||
Common stock-no par value; 499,000,000 shares authorized; 37,804,457
shares issued and 30,968,960 and 30,937,704 shares, respectively, outstanding |
142,513 | 142,318 | ||||||
Retained earnings |
111,910 | 111,049 | ||||||
Accumulated other comprehensive income (loss) |
923 | (4,778 | ) | |||||
Treasury stock, at cost, 6,835,497 and 6,866,753 shares, respectively |
(72,204 | ) | (72,534 | ) | ||||
Total shareholders equity |
183,142 | 176,055 | ||||||
Total liabilities and shareholders equity |
$ | 2,102,419 | $ | 2,197,298 | ||||
See Notes to Consolidated Financial Statements.
1
Table of Contents
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Interest income |
||||||||||||||||
Loans |
$ | 21,421 | $ | 24,918 | $ | 43,931 | $ | 50,761 | ||||||||
Loans held for sale |
41 | 69 | 107 | 139 | ||||||||||||
Available for sale securities |
3,094 | 2,896 | 5,941 | 5,481 | ||||||||||||
Federal Home Loan Bank stock dividends |
294 | 294 | 594 | 594 | ||||||||||||
Other interest earning assets |
13 | 8 | 22 | 15 | ||||||||||||
Total interest income |
24,863 | 28,185 | 50,595 | 56,990 | ||||||||||||
Interest expense |
||||||||||||||||
Deposits |
6,081 | 8,408 | 12,412 | 17,726 | ||||||||||||
Federal Home Loan Bank advances |
796 | 875 | 1,621 | 1,723 | ||||||||||||
Repurchase agreements and other |
928 | 931 | 1,850 | 1,854 | ||||||||||||
Total interest expense |
7,805 | 10,214 | 15,883 | 21,303 | ||||||||||||
Net interest income |
17,058 | 17,971 | 34,712 | 35,687 | ||||||||||||
Provision for loan losses |
8,244 | 10,310 | 10,436 | 22,760 | ||||||||||||
Net interest income after provision for loan losses |
8,814 | 7,661 | 24,276 | 12,927 | ||||||||||||
Non-interest income |
||||||||||||||||
Non-deposit investment income |
308 | 484 | 662 | 912 | ||||||||||||
Service fees and other charges |
1,588 | 424 | 3,041 | 2,175 | ||||||||||||
Net gains (losses): |
||||||||||||||||
Securities available for sale |
229 | 3,671 | 1,542 | 6,514 | ||||||||||||
Other -than-temporary loss in equity securities |
||||||||||||||||
Total impairment loss |
(28 | ) | | (38 | ) | | ||||||||||
Loss recognized in other comprehensive income |
| | | | ||||||||||||
Net impairment loss recognized in earnings |
(28 | ) | | (38 | ) | | ||||||||||
Mortgage banking income |
3,128 | 651 | 3,750 | 1,037 | ||||||||||||
Real estate owned and other repossessed assets |
(1,362 | ) | (1,755 | ) | (2,354 | ) | (3,239 | ) | ||||||||
Gain on sale of retail branch |
| | | 1,387 | ||||||||||||
Other income |
1,437 | 1,270 | 2,685 | 2,519 | ||||||||||||
Total non-interest income |
5,300 | 4,745 | 9,288 | 11,305 | ||||||||||||
Non-interest expense |
||||||||||||||||
Salaries and employee benefits |
7,686 | 9,105 | 15,370 | 17,279 | ||||||||||||
Occupancy |
856 | 839 | 1,761 | 1,843 | ||||||||||||
Equipment and data processing |
1,624 | 1,720 | 3,318 | 3,387 | ||||||||||||
Franchise tax |
402 | 503 | 871 | 1,014 | ||||||||||||
Advertising |
141 | 147 | 262 | 369 | ||||||||||||
Amortization of core deposit intangible |
36 | 45 | 73 | 93 | ||||||||||||
Deposit insurance premiums |
1,057 | 1,459 | 2,462 | 2,920 | ||||||||||||
Professional fees |
293 | 940 | 1,255 | 1,973 | ||||||||||||
Real estate owned and other repossessed asset expenses |
891 | 1,024 | 1,764 | 1,631 | ||||||||||||
Other expenses |
2,924 | 1,509 | 5,262 | 3,750 | ||||||||||||
Total non-interest expenses |
15,910 | 17,291 | 32,398 | 34,259 | ||||||||||||
Income (loss) before income taxes |
(1,796 | ) | (4,885 | ) | 1,166 | (10,027 | ) | |||||||||
Income tax expense (benefit) |
| | ||||||||||||||
Net income (loss) |
$ | (1,796 | ) | $ | (4,885 | ) | $ | 1,166 | $ | (10,027 | ) | |||||
2
Table of Contents
(Continued)
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Income (loss) available to common shareholders |
$ | (1,796 | ) | $ | (4,885 | ) | $ | 1,166 | $ | (10,027 | ) | |||||
Other comprehensive income |
||||||||||||||||
Unrealized gains (losses) on securities, net |
7,474 | 506 | 5,701 | 81 | ||||||||||||
Comprehensive income (loss) |
$ | 5,678 | $ | (4,379 | ) | $ | 6,867 | $ | (9,946 | ) | ||||||
Earnings (loss) per share |
||||||||||||||||
Basic |
$ | (0.06 | ) | $ | (0.16 | ) | $ | 0.04 | $ | (0.33 | ) | |||||
Diluted |
(0.06 | ) | (0.16 | ) | 0.04 | (0.33 | ) |
See Notes to Consolidated Financial Statements.
3
Table of Contents
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
(Unaudited)
Unearned | ||||||||||||||||||||||||||||
Employee | ||||||||||||||||||||||||||||
Accumulated | Stock | |||||||||||||||||||||||||||
Other | Ownership | |||||||||||||||||||||||||||
Shares | Common | Retained | Comprehensive | Plan | Treasury | |||||||||||||||||||||||
Outstanding | Stock | Earnings | Income (Loss) | Shares | Stock | Total | ||||||||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||
Balance December 31, 2010 |
30,938 | $ | 142,318 | $ | 111,049 | $ | (4,778 | ) | $ | | $ | (72,534 | ) | $ | 176,055 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
1,166 | 1,166 | ||||||||||||||||||||||||||
Change in net unrealized
gain/(loss)
on securities, net of taxes |
5,701 | 5,701 | ||||||||||||||||||||||||||
Comprehensive income |
6,867 | |||||||||||||||||||||||||||
Stock based compensation |
31 | 195 | (305 | ) | 330 | 220 | ||||||||||||||||||||||
Balance June 30, 2011 |
30,969 | $ | 142,513 | $ | 111,910 | $ | 923 | $ | | $ | (72,204 | ) | $ | 183,142 | ||||||||||||||
Balance December 31, 2009 |
30,898 | $ | 145,775 | $ | 148,674 | $ | 4,110 | $ | (5,821 | ) | $ | (72,955 | ) | $ | 219,783 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net loss |
(10,027 | ) | (10,027 | ) | ||||||||||||||||||||||||
Change in net unrealized
gain/(loss)
on securities, net of taxes |
81 | 81 | ||||||||||||||||||||||||||
Comprehensive loss |
(9,946 | ) | ||||||||||||||||||||||||||
Shares allocated to ESOP
participants |
(3,078 | ) | 5,821 | 2,743 | ||||||||||||||||||||||||
Stock based compensation |
111 | 111 | ||||||||||||||||||||||||||
Balance June 30, 2010 |
30,898 | $ | 142,808 | $ | 138,647 | $ | 4,191 | $ | | $ | (72,955 | ) | $ | 212,691 | ||||||||||||||
See Notes to Consolidated Financial Statements.
4
Table of Contents
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Cash Flows from Operating Activities |
||||||||
Net income (loss) |
$ | 1,166 | $ | (10,027 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
10,436 | 22,760 | ||||||
Mortgage banking income |
(3,750 | ) | (1,037 | ) | ||||
Net losses on real estate owned and other repossessed assets sold |
2,354 | 3,239 | ||||||
Net gain on retail branch sold |
| (1,387 | ) | |||||
Net gain on available for sale securities sold |
(1,542 | ) | (6,514 | ) | ||||
Net gains on other assets sold |
(10 | ) | (3 | ) | ||||
Other than temporary impairment of securities available for sale |
38 | | ||||||
Amortization of premiums and accretion of discounts |
601 | (1,149 | ) | |||||
Depreciation and amortization |
883 | 993 | ||||||
Decrease in interest receivable |
519 | 617 | ||||||
Increase (decrease) in interest payable |
29 | (397 | ) | |||||
Decrease (increase) in prepaid and other assets |
934 | 610 | ||||||
(Decrease) increase in other liabilities |
(16 | ) | 1,836 | |||||
Stock based compensation |
220 | 111 | ||||||
Net principal disbursed on loans originated for sale |
(57,577 | ) | (80,372 | ) | ||||
Proceeds from sale of loans originated for sale |
64,927 | 85,175 | ||||||
ESOP compensation |
| 2,743 | ||||||
Net cash from operating activities |
19,212 | 17,198 | ||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from principal repayments and maturities of: |
||||||||
Securities available for sale |
15,612 | 40,945 | ||||||
Proceeds from sale of: |
||||||||
Securities available for sale |
115,928 | 174,022 | ||||||
Real estate owned and other repossessed assets |
7,860 | 11,183 | ||||||
Premises and equipment |
10 | 20 | ||||||
Loans transferred from portfolio to held for sale |
87,533 | | ||||||
Purchases of: |
||||||||
Securities available for sale |
(156,349 | ) | (263,157 | ) | ||||
Principal disbursed on loans, net of repayments |
32,971 | 33,913 | ||||||
Loans purchased |
(2,129 | ) | (2,460 | ) | ||||
Purchases of premises and equipment |
(280 | ) | (161 | ) | ||||
Sale of retail branch |
| (22,158 | ) | |||||
Net cash from investing activities |
101,156 | (27,853 | ) | |||||
Cash Flows from Financing Activities |
||||||||
Net increase in checking, savings and money market accounts |
40,655 | 31,590 | ||||||
Net decrease in certificates of deposit |
(32,639 | ) | (78,352 | ) | ||||
Net decrease in advance payments by borrowers for taxes and insurance |
(4,705 | ) | (1,852 | ) | ||||
Proceeds from Federal Home Loan Bank advances |
206,000 | 509,200 | ||||||
Repayment of Federal Home Loan Bank advances |
(312,453 | ) | (454,750 | ) | ||||
Net change in repurchase agreements and other borrowed funds |
1,165 | 1,607 | ||||||
Net cash from financing activities |
(101,977 | ) | 7,443 | |||||
Change in cash and cash equivalents |
18,391 | (3,212 | ) | |||||
Cash and cash equivalents, beginning of period |
37,107 | 45,074 | ||||||
Cash and cash equivalents, end of period |
$ | 55,498 | $ | 41,862 | ||||
See Notes to Consolidated Financial Statements.
5
Table of Contents
UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. BASIS OF PRESENTATION
United Community Financial Corp. (United Community or the Company) was incorporated under Ohio law
in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in
connection with the conversion of Home Savings from an Ohio mutual savings and loan association to
an Ohio capital stock savings association (Conversion). Upon consummation of the Conversion on
July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home
Savings, a state-chartered savings bank, conducts business from its main office located in
Youngstown, Ohio, 38 full-service branches and seven loan production offices located throughout
Ohio and western Pennsylvania.
The accompanying consolidated financial statements of United Community have been prepared in
accordance with instructions relating to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the three and six months ended June 30, 2011, are not necessarily
indicative of the results to be expected for the year ending December 31, 2011. The consolidated
financial statements and notes thereto should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 2010, contained in United Communitys
Form 10-K for the year ended December 31, 2010.
Some items in the prior year financial statements were reclassified to conform to the current
presentation.
2. REGULATORY ENFORCEMENT ACTION
As previously disclosed, on August 8, 2008, the board of directors of United Community approved a
Stipulation and Consent to the Issuance of an Order to Cease and Desist (the OTS Order) with the
Office of Thrift Supervision (OTS). Simultaneously, the board of directors of Home Savings
approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the Bank Order)
with the Federal Deposit Insurance Corporation (FDIC) and the Division of Financial Institutions of
the Ohio Department of Commerce (Ohio Division). Although United Community and Home Savings have
agreed to the issuance of the OTS Order and the Bank Order, respectively, neither has admitted or
denied any allegations of unsafe or unsound banking practices, or any legal or regulatory
violations. No monetary penalties were assessed by the OTS, the FDIC, or the Ohio Division.
The OTS Order requires United Community to obtain OTS approval prior to: (i) incurring or
increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any
dividends. The OTS Order also requires United Community to develop a debt reduction plan and
submit the plan to the OTS for approval.
The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain
actions, including: (i) retaining a bank consultant to assess Home Savings management needs and
submitting a management plan that identifies officer positions needed, identifies and establishes
board and internal operating committees, evaluates Home Savings senior officers, and provides for
the hiring of any additional personnel; (ii) seeking regulatory approval prior to adding any
individuals to the board of directors or employing any individual as a senior executive officer of
Home Savings; (iii) not extending additional credit to classified borrowers; (iv) establishing a
compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies
and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent
loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and
construction, land development, and land loans; (vii) establishing board of directors committees to
evaluate and approve certain loans and oversee Home Savings compliance with the Bank Order; (viii)
revising its loan policy and enhancing its underwriting and credit administration functions; (ix)
developing a strategic plan and budget and profit plan; (x) correcting all violations of laws,
rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its
Tier 1 leverage ratio to 8.0% and its total risk-based capital ratio to 12.0% by December 31, 2008;
and (xii) seeking regulatory approval prior to declaring or paying any cash dividend. See Note
15 for details on current capital levels of Home Savings.
Both the OTS Order and the Bank Order remain in effect. Since the issuance of the Bank Order,
there has been no change in the requirements of that Order. The OTS Order, however, was
subsequently amended effective November 5, 2010. This amendment removed a requirement in the
original OTS Order to provide the OTS with a debt reduction plan and added a requirement to provide
the OTS with a capital plan. This capital plan is consistent with and incorporated into the
strategic planning process that Home
Savings has already been undertaking for the past two years under the terms of the Bank Order. The
capital plan was submitted to the OTS in December 2010.
6
Table of Contents
3. RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) issued new Accounting Standards Updates (ASU)
during the period. Below is a summary of each new ASU.
In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a
restructuring is a troubled debt restructuring. The amendments clarify the guidance for a
creditors evaluation of whether it has granted a concession and whether a debtor is experiencing
financial difficulties. With regard to determining whether a concession has been granted, the ASU
clarifies that creditors are precluded from using the effective interest method to determine
whether a concession has been granted. In the absence of using the effective interest method, a
creditor must now focus on other considerations such as the value of the underlying collateral,
evaluation of other collateral or guarantees, the debtors ability to access other funds at market
rates, interest rate increases and whether the restructuring results in a delay in payment that is
insignificant. Management is evaluating the impact of adoption on the Companys financial
statements.
ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value
Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends Topic 820,
Fair Value Measurements and Disclosures; to converge the fair value measurement guidance in U.S.
generally accepted accounting principles and International Financial Reporting Standards. ASU
2011-04 clarifies the application of existing fair value measurement requirements, changes certain
principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective
for annual periods beginning after December 15, 2011, and is not expected to have a significant
impact on the Companys financial statements.
ASU 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income. ASU
2011-05 amends Topic 220, Comprehensive Income, to require that all nonowner changes in
stockholders equity be presented in either a single continuous statement of comprehensive income
or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to
present, on the face of the financial statements, reclassification adjustments for items that are
reclassified from other comprehensive income to net income in the statement or statements where the
components of net income and the components of other comprehensive income are presented. The option
to present components of other comprehensive income as part of the statement of changes in
stockholders equity was eliminated. ASU 2011-05 is effective for annual periods beginning after
December 15, 2011, and is not expected to have a significant impact on the Companys financial
statements.
4. STOCK COMPENSATION
Stock Options:
On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term
Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance
the interests of United Community and its shareholders by enabling United Community to attract,
retain and reward directors, directors emeritus, managerial and other key employees of United
Community, including Home Savings, by facilitating their purchase of an ownership interest in
United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be
used for awards of restricted stock, stock options, performance awards, stock appreciation rights
(SARs), or other forms of stock-based incentive awards. There were 3,866 stock options granted in
the first quarter of 2011, all of which become exercisable on January 6, 2013. There were 12,746
stock options granted in the second quarter of 2011, 4,000 of which become exercisable on December
31, 2011, 4,000 of which become exercisable on December 31, 2012 and the remaining 4,746 become
exercisable on April 7, 2013. There were 423,695 stock options granted in 2010 and 32,000 stock
options granted in 2009 under the 2007 Plan. For 418,000 of the options granted in 2010, one-half
of the total options granted become exercisable on each of December 31, 2010 and 2011. The
remainder of the options granted in 2010 become exercisable on October 7, 2012. For the options
granted in 2009, one third of the total options granted become exercisable on each of December 31,
2009, 2010, and 2011. The options must be exercised within 10 years from the date of grant.
On July 12, 1999, shareholders approved the United Community Financial Corp. 1999 Long-Term
Incentive Plan (as amended, the 1999 Plan). The purpose of the 1999 Plan was the same as the 2007
Plan. The 1999 Plan terminated on May 20, 2009, although the 1999 Plan survives so long as options
issued under the 1999 Plan remain outstanding and exercisable.
The 1999 Plan provided for the grant of either incentive or nonqualified stock options. Options
were awarded at exercise prices that were not less than the fair market value of the share at the
grant date. The maximum number of common shares that could be issued under the plan was 3,569,766.
Because the 1999 Plan terminated, no additional options may be issued under it. All of the
options
awarded became exercisable on the date of grant except that options granted in 2009 became
exercisable over three years beginning on December 31, 2009. All options expire 10 years from the
date of grant.
7
Table of Contents
Expenses related to stock option grants are included with salaries and employee benefits. The
Company recognized $63,000 in stock option expenses for the three months ended June 30, 2011. The
Company recognized $160,000 in stock option expense for the six months ended June 30, 2011. The
Company expects to recognize additional expense of $193,000 for the remainder of 2011.
A summary of activity in the plans is as follows:
For the six months ended June 30, 2011 | ||||||||||||
Weighted | Aggregate | |||||||||||
average | intrinsic value | |||||||||||
Shares | exercise price | (in thousands) | ||||||||||
Outstanding at beginning of year |
2,237,322 | $ | 6.88 | |||||||||
Granted |
16,612 | 1.36 | ||||||||||
Exercised |
| | ||||||||||
Forfeited |
(212,953 | ) | 7.86 | |||||||||
Outstanding at end of period |
2,040,981 | $ | 6.73 | $ | | |||||||
Options exercisable at end of period |
1,722,608 | $ | 7.60 | $ | | |||||||
Information related to the stock option plans for the six months ended June 30, 2011 follows:
June 30, 2011 | ||||
Intrinsic value of options exercised |
n/a | |||
Cash received from option exercises |
n/a | |||
Tax benefit realized from option exercises |
n/a | |||
Weighted average fair value of options granted, per share |
$ | 0.89 |
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes
valuation model that uses assumptions including the risk-free interest rate, expected term,
expected stock volatility, and dividend yield. Expected volatilities are based on historical
volatilities of United Communitys common shares. United Community uses historical data to
estimate option exercises and post-vesting termination behavior. The expected term of options
granted is based on historical data and represents the period of time that options granted are
expected to be outstanding, which takes into account that the options are not transferable. The
risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant.
The fair value of options granted during the second quarter 2011 was determined using the following
weighted-average assumptions as of the grant date.
April 7, 2011 | April 28, 2011 | |||||||
Risk-free interest rate |
2.29 | % | 2.00 | % | ||||
Expected term (years) |
5 | 5 | ||||||
Expected stock volatility |
81.0 | 81.0 | ||||||
Dividend yield |
| % | | % |
Outstanding stock options have a weighted average remaining life of 4.55 years and may be exercised
in the range of $1.20 to $12.38.
8
Table of Contents
Restricted Stock Awards:
The 2007 Plan permits the issuance of awards to nonemployee directors. Compensation expense is
recognized over the vesting period of the awards based on the market value of the shares at the
issue date. A total of 71,135 restricted shares have been issued under the 2007 Plan; 31,256 of
which were issued in 2011 and 39,879 were issued in 2010. These restricted shares vest on the
first anniversary of the grant date. Expenses related to restricted stock awards are included with
salaries and employee benefits. The cost will be recognized over a weighted average period of one
year. The Company recognized approximately $33,000 in restricted stock award expenses for the
three months ended June 30, 2011. The Company recognized approximately $60,000 in restricted stock
award expenses for the six months ended June 30, 2011. The Company expects to recognize additional
expenses of approximately $25,000 for the remainder of 2011.
A summary of changes in the Companys nonvested restricted shares for the first six months of 2011
is as follows:
Weighted | ||||||||
average grant | ||||||||
Shares | date fair value | |||||||
Nonvested shares at January 1, 2011 |
39,879 | $ | 1.32 | |||||
Granted |
31,256 | 1.34 | ||||||
Vested |
(9,446 | ) | 1.32 | |||||
Forfeited |
| | ||||||
Nonvested shares at June 30, 2011 |
61,689 | $ | 1.33 | |||||
5. SECURITIES
Components of the available for sale portfolio are as follows:
June 30, 2011 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and government
sponsored entities securities |
$ | 64,598 | $ | 379 | $ | | $ | 64,977 | ||||||||
Equity securities |
164 | 140 | | 304 | ||||||||||||
Mortgage-backed securities GSE issued: |
||||||||||||||||
residential |
325,868 | 2,051 | (451 | ) | 327,468 | |||||||||||
Total |
$ | 390,630 | $ | 2,570 | $ | (451 | ) | $ | 392,749 | |||||||
December 31, 2010 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and government
sponsored entities securities |
$ | 65,099 | $ | | $ | (2,164 | ) | $ | 62,935 | |||||||
Equity securities |
235 | 159 | | 394 | ||||||||||||
Mortgage-backed securities GSE issued: |
||||||||||||||||
residential |
300,290 | 1,688 | (3,265 | ) | 298,713 | |||||||||||
Total |
$ | 365,624 | $ | 1,847 | $ | (5,429 | ) | $ | 362,042 | |||||||
9
Table of Contents
Debt securities available for sale by contractual maturity, repricing or expected call date are
shown below:
June 30, 2011 | ||||||||
Amortized cost | Fair value | |||||||
(Dollars in thousands) | ||||||||
Due in one year or less |
$ | | $ | | ||||
Due after one year through five years |
| | ||||||
Due after five years through ten years |
64,598 | 64,977 | ||||||
Mortgage-related securities |
325,867 | 327,468 | ||||||
Total |
$ | 390,465 | $ | 392,445 | ||||
Securities pledged for the Companys investment in VISA stock were approximately $5.8 million at
June 30, 2011 and $5.7 million at December 31, 2010. Securities pledged for public funds deposits
were $400,000 at June 30, 2011, and $864,000 at December 31, 2010. Securities sold under an
agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of
approximately $129.1 million at June 30, 2011, and $129.4 million at December 31, 2010.
United Community had no securities classified as trading as of June 30, 2011 or December 31, 2010.
The following table summarizes the investment securities with unrealized losses at June 30, 2011
and December 31, 2010 by aggregated major security type and length of time in a continuous
unrealized loss position:
June 30, 2011 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
U.S. Treasury and government
sponsored entities securities |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Mortgage-backed securities GSE issued: residential |
130,312 | (451 | ) | | | 130,312 | (451 | ) | ||||||||||||||||
Total |
$ | 130,312 | $ | (451 | ) | $ | | $ | | $ | 130,312 | $ | (451 | ) | ||||||||||
December 31, 2010 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
U.S. Treasury and government
sponsored entities securities |
$ | 62,935 | $ | (2,164 | ) | $ | | $ | | $ | 62,935 | $ | (2,164 | ) | ||||||||||
Mortgage-backed securities GSE issued: residential |
203,569 | (3,265 | ) | | | 203,569 | (3,265 | ) | ||||||||||||||||
Total |
$ | 266,504 | $ | (5,429 | ) | $ | | $ | | $ | 266,504 | $ | (5,429 | ) | ||||||||||
All of the U.S. Treasury and government sponsored entities mortgage backed securities that were
temporarily impaired at June 30, 2011, were impaired due to the current level of interest rates.
All of these securities continue to pay on schedule and management expects to receive all principal
and interest owed on these securities.
Proceeds from sales of securities available for sale were $115.9 million and $174.0 million for the
six months ended June 30, 2011 and 2010, respectively. Gross gains of $1.5 million and $6.5
million and no gross losses were realized on these sales during the first six months of 2011 and
2010, respectively.
10
Table of Contents
The Company evaluates its equity securities for impairment on a quarterly basis. In general, if a
security has been in an unrealized loss position for more than twelve months, the Company will
realize an Other Than Temporary Impairment (OTTI) charge on the
security. If the security has been in an unrealized loss position for less than twelve months, the
Company examines the capital levels, nonperforming asset ratios, and liquidity position of the
issuer to determine whether or not an OTTI charge is appropriate.
The Company recognized a $38,000 OTTI charge on equity investments in two other financial
institutions in the first six months of 2011. One financial institution consented to a regulatory
enforcement action, diminishing the chance of fair value recovery in the foreseeable future. The
other investment was trading below book value and management was not able to determine with
reasonable certainty that recovery would occur in the near-term.
As of June 30, 2011, the Companys security portfolio consisted of 36 securities, 11 of which were
in an unrealized loss position totaling approximately $451,000.
6. LOANS
Portfolio loans consist of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Real Estate: |
||||||||
One-to four-family residential |
$ | 693,435 | $ | 757,426 | ||||
Multi-family residential |
129,767 | 135,771 | ||||||
Nonresidential |
307,702 | 331,390 | ||||||
Land |
25,515 | 25,138 | ||||||
Construction: |
||||||||
One-to four-family residential and land development |
87,827 | 108,583 | ||||||
Multi-family and nonresidential |
5,524 | 15,077 | ||||||
Total real estate |
1,249,770 | 1,373,385 | ||||||
Consumer |
||||||||
Home equity |
212,578 | 220,582 | ||||||
Auto |
10,952 | 11,525 | ||||||
Marine |
6,069 | 7,285 | ||||||
Recreational vehicles |
32,584 | 35,671 | ||||||
Other |
3,892 | 4,390 | ||||||
Total consumer |
266,075 | 279,453 | ||||||
Commercial |
||||||||
Secured |
28,404 | 28,876 | ||||||
Unsecured |
9,950 | 17,428 | ||||||
Total commercial |
38,354 | 46,304 | ||||||
Total loans |
1,554,199 | 1,699,142 | ||||||
Less: |
||||||||
Allowance for loan losses |
46,223 | 50,883 | ||||||
Deferred loan costs, net |
(1,423 | ) | (1,227 | ) | ||||
Total |
44,800 | 49,656 | ||||||
Loans, net |
$ | 1,509,399 | $ | 1,649,486 | ||||
11
Table of Contents
Changes in the allowance for loan losses are as follows:
Three Months | Three Months | |||||||
ended | ended | |||||||
June 30, 2011 | June 30, 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | 46,415 | $ | 47,768 | ||||
Provision for loan losses |
8,244 | 10,310 | ||||||
Amounts charged off |
(9,030 | ) | (17,558 | ) | ||||
Recoveries |
594 | 208 | ||||||
Balance, end of year |
$ | 46,223 | $ | 40,728 | ||||
Six Months | Six Months | |||||||
ended | ended | |||||||
June 30, 2011 | June 30, 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | 50,883 | $ | 42,287 | ||||
Provision for loan losses |
10,436 | 22,760 | ||||||
Amounts charged off |
(16,256 | ) | (24,678 | ) | ||||
Recoveries |
1,160 | 379 | ||||||
Balance, end of year |
$ | 46,223 | $ | 40,748 | ||||
The following tables present activity and the balance in the allowance for loan losses and the
recorded investment in loans by portfolio segment and based on impairment method as of and for the
three and six months ended June 30, 2011 and the year ended December 31, 2010.
Allowance For Loan Losses | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Permanent | ||||||||||||||||||||||||
For the three months ended | Real Estate | Construction | Consumer | Commercial | ||||||||||||||||||||
June 30, 2011 | Loans | Loans | Loans | Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance (3/31/11) |
$ | 26,991 | $ | 5,774 | $ | 4,996 | $ | 8,654 | $ | | $ | 46,415 | ||||||||||||
Provision |
8,438 | 2,015 | 190 | (2,399 | ) | | 8,244 | |||||||||||||||||
Chargeoffs |
(4,295 | ) | (1,405 | ) | (767 | ) | (2,563 | ) | | (9,030 | ) | |||||||||||||
Recoveries |
237 | 145 | 125 | 87 | | 594 | ||||||||||||||||||
Net chargeoffs |
(4,058 | ) | (1,260 | ) | (642 | ) | (2,476 | ) | | (8,436 | ) | |||||||||||||
Ending balance (6/30/11) |
$ | 31,371 | $ | 6,529 | $ | 4,544 | $ | 3,779 | $ | | $ | 46,223 | ||||||||||||
Allowance For Loan Losses | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Permanent | ||||||||||||||||||||||||
For the six months ended | Real Estate | Construction | Consumer | Commercial | ||||||||||||||||||||
June 30, 2011 | Loans | Loans | Loans | Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance (12/31/10) |
$ | 28,066 | $ | 8,533 | $ | 5,260 | $ | 9,024 | $ | | $ | 50,883 | ||||||||||||
Provision |
9,992 | 1,551 | 782 | (1,889 | ) | | 10,436 | |||||||||||||||||
Chargeoffs |
(7,173 | ) | (3,757 | ) | (1,797 | ) | (3,529 | ) | | (16,256 | ) | |||||||||||||
Recoveries |
486 | 202 | 299 | 173 | | 1,160 | ||||||||||||||||||
Net chargeoffs |
(6,687 | ) | (3,555 | ) | (1,498 | ) | (3,356 | ) | | (15,096 | ) | |||||||||||||
Ending balance (6/30/11) |
$ | 31,371 | $ | 6,529 | $ | 4,544 | $ | 3,779 | $ | | $ | 46,223 | ||||||||||||
12
Table of Contents
(Continued)
Permanent | ||||||||||||||||||||||||
Real Estate | Construction | Consumer | Commercial | |||||||||||||||||||||
Loans | Loans | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Period-end amount allocated to: |
||||||||||||||||||||||||
Loans individually
evaluated for
impairment |
$ | 6,914 | $ | 3,727 | $ | | $ | 1,011 | $ | | $ | 11,652 | ||||||||||||
Loans collectively
evaluated for
impairment |
24,457 | 2,802 | 4,544 | 2,768 | | 34,571 | ||||||||||||||||||
Ending balance (6/30/11) |
$ | 31,371 | $ | 6,529 | $ | 4,544 | $ | 3,779 | $ | | $ | 46,223 | ||||||||||||
Period-end balances: |
||||||||||||||||||||||||
Loans individually
evaluated for
impairment |
$ | 105,604 | $ | 45,345 | $ | 1,169 | $ | 10,428 | $ | | $ | 162,546 | ||||||||||||
Loans collectively
evaluated for
impairment |
1,050,815 | 48,006 | 264,906 | 27,926 | | 1,391,653 | ||||||||||||||||||
Ending balance (6/30/11) |
$ | 1,156,419 | $ | 93,351 | $ | 266,075 | $ | 38,354 | $ | | $ | 1,554,199 | ||||||||||||
The unpaid principal balance is the total amount of the loan that is due to Home Savings. The
recorded investment includes the unpaid principal balance less any charge-offs or partial
charge-offs applied to specific loans. The unpaid principal balance and the recorded investment
exclude accrued interest receivable and deferred loan costs, both of which are immaterial.
Allowance For Loan Losses | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Permanent | ||||||||||||||||||||||||
For the twelve months ended | Real Estate | Construction | Consumer | Commercial | ||||||||||||||||||||
December 31, 2010 | Loans | Loans | Loans | Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance (12/31/09) |
$ | 15,288 | $ | 19,020 | $ | 4,959 | $ | 3,020 | $ | | $ | 42,287 | ||||||||||||
Provision |
40,595 | 10,028 | 4,079 | 7,725 | | 62,427 | ||||||||||||||||||
Chargeoffs |
(28,153 | ) | (20,648 | ) | (4,316 | ) | (1,962 | ) | | (55,079 | ) | |||||||||||||
Recoveries |
336 | 133 | 538 | 241 | | 1,248 | ||||||||||||||||||
Net chargeoffs |
(27,817 | ) | (20,515 | ) | (3,778 | ) | (1,721 | ) | | (53,831 | ) | |||||||||||||
Ending balance (12/31/10) |
$ | 28,066 | $ | 8,533 | $ | 5,260 | $ | 9,024 | $ | | $ | 50,883 | ||||||||||||
Period-end amount allocated to: |
||||||||||||||||||||||||
Loans individually
evaluated for impairment |
$ | 7,509 | $ | 3,360 | $ | | $ | 2,575 | $ | | $ | 13,444 | ||||||||||||
Loans collectively
evaluated for impairment |
20,557 | 5,173 | 5,260 | 6,449 | | 37,439 | ||||||||||||||||||
Ending balance (12/31/10) |
$ | 28,066 | $ | 8,533 | $ | 5,260 | $ | 9,024 | $ | | $ | 50,883 | ||||||||||||
Period-end balances: |
||||||||||||||||||||||||
Loans individually
evaluated for
impairment** |
$ | 101,410 | $ | 47,054 | $ | 1,547 | $ | 6,444 | $ | | $ | 156,455 | ||||||||||||
Loans collectively
evaluated for impairment |
1,148,315 | 76,606 | 277,906 | 39,860 | | 1,542,687 | ||||||||||||||||||
Ending balance (12/31/10) |
$ | 1,249,725 | $ | 123,660 | $ | 279,453 | $ | 46,304 | $ | | $ | 1,699,142 | ||||||||||||
** | Revised to include impaired loans without specific allocations. |
13
Table of Contents
Impaired loans are defined as loans which, based on current information and events, it is probable
that Home Savings will be unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement and the loan is non-homogeneous in
nature. Impaired loans can be divided into two categories: those with a specific valuation and
those without a specific valuation. In general, impaired loans without a specific valuation either
has sufficient collateral to support the loan balance, or any collateral shortfall that did exist
has been charged off such that the remaining loan balance is dully supported by collateral value
(less costs to sell).
Impaired loans consisted of the following:
As of or for | As of or for the | As of or for | ||||||||||
the six months | twelve months | the six months | ||||||||||
ended | ended | ended | ||||||||||
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(Dollars in thousands) | ||||||||||||
Impaired loans on which no specific valuation allowance was
provided |
$ | 82,499 | $ | 71,853 | $ | 82,736 | ||||||
Impaired loans on which specific valuation allowance was provided |
80,047 | 84,602 | 76,041 | |||||||||
Total impaired loans at end of period |
$ | 162,546 | $ | 156,455 | $ | 158,777 | ||||||
Specific valuation allowances on impaired loans at period-end |
11,652 | 13,444 | 10,029 | |||||||||
Average impaired loans during period |
162,868 | 144,977 | 138,791 | |||||||||
Interest income recognized on impaired loans during the period ** |
1,184 | 1,778 | 816 | |||||||||
Interest income received on impaired loans during the period ** |
2,412 | 4,570 | 816 |
** | Interest income recognized may be less than interest income received on an impaired
loan if, for example, payments received on nonaccrual impaired loans are applied to principal. |
14
Table of Contents
The following table presents loans individually evaluated for impairment by class of loans as of
and for the six months ended June 30, 2011:
Impaired Loans | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Allowance | ||||||||||||||||||||||||
Unpaid | for Loan | Average | Interest | Cash Basis | ||||||||||||||||||||
Principal | Recorded | Losses | Recorded | Income | Income | |||||||||||||||||||
Balance | Investment | Allocated | Investment | Recognized | Recognized | |||||||||||||||||||
With no specific allowance recorded |
||||||||||||||||||||||||
Permanent real estate |
||||||||||||||||||||||||
One-to four-family residential |
$ | 27,740 | $ | 23,725 | $ | | $ | 25,043 | $ | 212 | $ | 327 | ||||||||||||
Multifamily residential |
5,165 | 4,166 | | 3,144 | | 107 | ||||||||||||||||||
Nonresidential |
26,358 | 24,760 | | 21,536 | 225 | 459 | ||||||||||||||||||
Land |
9,229 | 7,469 | | 6,363 | 34 | 80 | ||||||||||||||||||
Total |
68,492 | 60,120 | | 56,086 | 471 | 973 | ||||||||||||||||||
Construction loans |
||||||||||||||||||||||||
One-to four-family residential |
32,932 | 19,487 | | 20,430 | 103 | 180 | ||||||||||||||||||
Multifamily and nonresidential |
| | | 255 | | | ||||||||||||||||||
Total |
32,932 | 19,487 | | 20,685 | 103 | 180 | ||||||||||||||||||
Consumer loans |
||||||||||||||||||||||||
Home Equity |
2,529 | 1,040 | | 1,243 | 3 | 15 | ||||||||||||||||||
Auto |
98 | 75 | | 66 | | 3 | ||||||||||||||||||
Marine |
| | | | | | ||||||||||||||||||
Recreational vehicle |
113 | 47 | | 47 | | 1 | ||||||||||||||||||
Other |
7 | 7 | | 7 | | | ||||||||||||||||||
Total |
2,747 | 1,169 | | 1,363 | 3 | 19 | ||||||||||||||||||
Commercial loans |
||||||||||||||||||||||||
Secured |
3,451 | 1,340 | | 1,502 | 13 | 14 | ||||||||||||||||||
Unsecured |
16,069 | 383 | | 385 | 5 | 27 | ||||||||||||||||||
Total |
19,520 | 1,723 | | 1,887 | 18 | 41 | ||||||||||||||||||
Total |
$ | 123,691 | $ | 82,499 | $ | | $ | 80,021 | $ | 595 | $ | 1,213 |
15
Table of Contents
(Continued)
Impaired Loans | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Allowance | ||||||||||||||||||||||||
Unpaid | for Loan | Average | Interest | Cash Basis | ||||||||||||||||||||
Principal | Recorded | Losses | Recorded | Income | Income | |||||||||||||||||||
Balance | Investment | Allocated | Investment | Recognized | Recognized | |||||||||||||||||||
With a specific allowance recorded |
||||||||||||||||||||||||
Permanent real estate |
||||||||||||||||||||||||
One-to four-family residential |
$ | 5,107 | $ | 4,702 | $ | 786 | $ | 2,253 | $ | 39 | $ | 58 | ||||||||||||
Multifamily residential |
4,894 | 2,858 | 224 | 5,951 | | 27 | ||||||||||||||||||
Nonresidential |
39,329 | 36,920 | 5,659 | 39,438 | 469 | 657 | ||||||||||||||||||
Land |
1,557 | 1,004 | 245 | 618 | 12 | 19 | ||||||||||||||||||
Total |
50,887 | 45,484 | 6,914 | 48,260 | 520 | 761 | ||||||||||||||||||
Construction loans |
||||||||||||||||||||||||
One-to four-family residential |
35,937 | 25,858 | 3,727 | 26,011 | 60 | 251 | ||||||||||||||||||
Multifamily and nonresidential |
| | | | | | ||||||||||||||||||
Total |
35,937 | 25,858 | 3,727 | 26,011 | 60 | 251 | ||||||||||||||||||
Consumer loans |
||||||||||||||||||||||||
Home Equity |
| | | | | | ||||||||||||||||||
Auto |
| | | | | | ||||||||||||||||||
Marine |
| | | | | | ||||||||||||||||||
Recreational vehicle |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Total |
| | | | | | ||||||||||||||||||
Commercial loans |
||||||||||||||||||||||||
Secured |
7,405 | 7,369 | 63 | 5,824 | 9 | 163 | ||||||||||||||||||
Unsecured |
2,090 | 1,336 | 948 | 2,752 | | 24 | ||||||||||||||||||
Total |
9,495 | 8,705 | 1,011 | 8,576 | 9 | 187 | ||||||||||||||||||
Total |
96,319 | 80,047 | 11,652 | 82,847 | 589 | 1,199 | ||||||||||||||||||
Total |
$ | 220,010 | $ | 162,546 | $ | 11,652 | $ | 162,868 | $ | 1,184 | $ | 2,412 | ||||||||||||
The difference between the unpaid principal balance of $220,010 and the recorded investment
of $162,546 (i.e. $57,464) represents amounts previously charged off by Home Savings. This amount,
plus any existing reserves of $11,652, totals $69,611, or 31.4% of the unpaid principal balance of
these loans.
16
Table of Contents
The following table presents the average recorded investment and interest income associated with
impaired loans for the three months ended June 30, 2011:
Impaired Loans | ||||||||||||
(Dollars in thousands) | ||||||||||||
Average | Cash Basis | |||||||||||
Recorded | Interest Income | Income | ||||||||||
Investment | Recognized | Recognized | ||||||||||
With no specific allowance recorded |
||||||||||||
Permanent real estate |
||||||||||||
One-to four-family residential |
$ | 25,373 | $ | 91 | $ | 152 | ||||||
Multifamily residential |
2,889 | | 64 | |||||||||
Nonresidential |
20,730 | 132 | 215 | |||||||||
Land |
6,087 | 23 | 58 | |||||||||
Total |
55,079 | 246 | 489 | |||||||||
Construction loans |
||||||||||||
One-to four-family residential |
20,666 | 76 | 93 | |||||||||
Multifamily and nonresidential |
319 | | | |||||||||
Total |
20,986 | 76 | 93 | |||||||||
Consumer loans |
||||||||||||
Home Equity |
1,294 | 1 | 6 | |||||||||
Auto |
64 | | 1 | |||||||||
Marine |
| | | |||||||||
Recreational vehicle |
47 | | | |||||||||
Other |
7 | | | |||||||||
Total |
1,412 | 1 | 7 | |||||||||
Commercial loans |
||||||||||||
Secured |
1,543 | 6 | 6 | |||||||||
Unsecured |
386 | 5 | 17 | |||||||||
Total |
1,929 | 11 | 23 | |||||||||
Total |
$ | 79,406 | $ | 334 | $ | 612 |
17
Table of Contents
(Continued)
Impaired Loans | ||||||||||||
(Dollars in thousands) | ||||||||||||
Average | Cash Basis | |||||||||||
Recorded | Interest Income | Income | ||||||||||
Investment | Recognized | Recognized | ||||||||||
With a specific allowance recorded |
||||||||||||
Permanent real estate |
||||||||||||
One-to four-family residential |
$ | 1,641 | $ | 39 | $ | 49 | ||||||
Multifamily residential |
6,725 | | 17 | |||||||||
Nonresidential |
40,067 | 205 | 290 | |||||||||
Land |
522 | 12 | 15 | |||||||||
Total |
48,955 | 256 | 371 | |||||||||
Construction loans |
||||||||||||
One-to four-family residential |
26,050 | 1 | 157 | |||||||||
Multifamily and nonresidential |
| | | |||||||||
Total |
26,050 | 1 | 157 | |||||||||
Consumer loans |
||||||||||||
Home Equity |
| | | |||||||||
Auto |
| | | |||||||||
Marine |
| | | |||||||||
Recreational vehicle |
| | | |||||||||
Other |
| | | |||||||||
Total |
| | | |||||||||
Commercial loans |
||||||||||||
Secured |
5,438 | (109 | ) | 45 | ||||||||
Unsecured |
3,106 | | 12 | |||||||||
Total |
8,544 | (109 | ) | 57 | ||||||||
Total |
$ | 83,549 | $ | 148 | $ | 585 | ||||||
Total |
$ | 162,955 | $ | 482 | $ | 1,197 | ||||||
18
Table of Contents
The following table presents loans individually evaluated for impairment by class of loans as
of December 31, 2010:
Impaired Loans | ||||||||||||
(Dollars in thousands) | ||||||||||||
Allowance | ||||||||||||
Unpaid | for Loan | |||||||||||
Principal | Recorded | Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
With no specific allowance recorded |
||||||||||||
Permanent real estate |
$ | 60,516 | $ | 44,666 | $ | | ||||||
Construction loans |
31,715 | 23,465 | | |||||||||
Consumer loans |
3,407 | 1,547 | | |||||||||
Commercial loans |
16,148 | 2,175 | | |||||||||
Total |
111,786 | 71,853 | | |||||||||
With a specific allowance recorded |
||||||||||||
Permanent real estate |
65,869 | 56,744 | 7,509 | |||||||||
Construction loans |
35,777 | 23,589 | 3,360 | |||||||||
Consumer loans |
| | | |||||||||
Commercial loans |
5,419 | 4,269 | 2,575 | |||||||||
Total |
107,065 | 84,602 | 13,444 | |||||||||
Total |
$ | 218,851 | $ | 156,455 | $ | 13,444 | ||||||
19
Table of Contents
The following tables present the recorded investment in nonaccrual loans and loans past due over 90
days and still on accrual by class of loans as of June 30, 2011:
Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing | ||||||||
(Dollars in thousands) | ||||||||
Loans past due | ||||||||
over 90 days | ||||||||
and still | ||||||||
Nonaccrual | accruing | |||||||
Real Estate Loans |
||||||||
Permanent |
||||||||
One-to four-family residential |
$ | 28,776 | $ | | ||||
Multifamily residential |
6,414 | | ||||||
Nonresidential |
36,382 | | ||||||
Land |
8,316 | | ||||||
Total |
79,888 | | ||||||
Construction Loans |
||||||||
One-to four-family residential |
42,268 | 1,121 | ||||||
Multifamily and nonresidential |
382 | | ||||||
Total |
42,650 | 1,121 | ||||||
Consumer Loans |
||||||||
Home Equity |
3,737 | | ||||||
Auto |
138 | | ||||||
Marine |
| | ||||||
Recreational vehicle |
1,861 | | ||||||
Other |
45 | | ||||||
Total |
5,781 | | ||||||
Commercial Loans |
||||||||
Secured |
8,073 | | ||||||
Unsecured |
1,577 | | ||||||
Total |
9,650 | | ||||||
Total |
$ | 137,969 | $ | 1,121 | ||||
20
Table of Contents
Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing | ||||||||
As of December 31, 2010 | ||||||||
(Dollars in thousands) | ||||||||
Loans past due | ||||||||
over 90 days | ||||||||
and still | ||||||||
Nonaccrual | accruing | |||||||
Real Estate Loans |
||||||||
Permanent |
||||||||
One-to four-family residential |
$ | 27,417 | $ | | ||||
Multifamily residential |
10,983 | | ||||||
Nonresidential |
39,838 | | ||||||
Land |
5,188 | | ||||||
Total |
83,426 | | ||||||
Construction Loans |
||||||||
One-to four-family residential |
40,077 | 3,944 | ||||||
Multifamily and nonresidential |
382 | 2,032 | ||||||
Total |
40,459 | 5,976 | ||||||
Consumer Loans |
||||||||
Home Equity |
3,179 | 210 | ||||||
Auto |
89 | | ||||||
Marine |
| | ||||||
Recreational vehicle |
93 | 144 | ||||||
Other |
10 | | ||||||
Total |
3,371 | 354 | ||||||
Commercial Loans |
||||||||
Secured |
1,822 | | ||||||
Unsecured |
4,123 | | ||||||
Total |
5,945 | | ||||||
Total |
$ | 133,201 | $ | 6,330 | ||||
21
Table of Contents
The following tables present an age analysis of past-due loans, segregated by class of loans as of
June 30, 2011:
Past Due Loans | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Greater | ||||||||||||||||||||||||
30-59 | 60-89 | than 90 | ||||||||||||||||||||||
Days | Days Past | Days Past | Total Past | Current | Total | |||||||||||||||||||
Past Due | Due | Due | Due | Loans | Loans | |||||||||||||||||||
Real Estate Loans |
||||||||||||||||||||||||
Permanent |
||||||||||||||||||||||||
One-to four-family
residential |
$ | 3,123 | $ | 1,881 | $ | 23,937 | $ | 28,941 | $ | 664,494 | $ | 693,435 | ||||||||||||
Multifamily residential |
256 | 249 | 5,094 | 5,599 | 124,168 | 129,767 | ||||||||||||||||||
Nonresidential |
1,697 | 1,564 | 34,604 | 37,865 | 269,837 | 307,702 | ||||||||||||||||||
Land |
415 | | 6,483 | 6,898 | 18,617 | 25,515 | ||||||||||||||||||
Total |
5,491 | 3,694 | 70,118 | 79,303 | 1,077,116 | 1,156,419 | ||||||||||||||||||
Construction Loans |
||||||||||||||||||||||||
One-to four-family
residential |
254 | 3,150 | 40,454 | 43,858 | 43,969 | 87,827 | ||||||||||||||||||
Multifamily and
nonresidential |
| | 382 | 382 | 5,142 | 5,524 | ||||||||||||||||||
Total |
254 | 3,150 | 40,836 | 44,240 | 49,111 | 93,351 | ||||||||||||||||||
Consumer Loans |
||||||||||||||||||||||||
Home Equity |
1,701 | 768 | 2,744 | 5,213 | 207,365 | 212,578 | ||||||||||||||||||
Auto |
81 | 18 | 77 | 176 | 10,776 | 10,952 | ||||||||||||||||||
Marine |
224 | | | 224 | 5,845 | 6,069 | ||||||||||||||||||
Recreational vehicle |
1,452 | 638 | 1,075 | 3,165 | 29,419 | 32,584 | ||||||||||||||||||
Other |
10 | 6 | 45 | 61 | 3,831 | 3,892 | ||||||||||||||||||
Total |
3,468 | 1,430 | 3,941 | 8,839 | 257,236 | 266,075 | ||||||||||||||||||
Commercial Loans |
||||||||||||||||||||||||
Secured |
178 | | 8,041 | 8,219 | 20,185 | 28,404 | ||||||||||||||||||
Unsecured |
42 | 74 | 1,041 | 1,157 | 8,793 | 9,950 | ||||||||||||||||||
Total |
220 | 74 | 9,082 | 9,376 | 28,978 | 38,354 | ||||||||||||||||||
Total |
$ | 9,433 | $ | 8,348 | $ | 123,977 | $ | 141,758 | $ | 1,412,441 | $ | 1,554,199 | ||||||||||||
22
Table of Contents
The following table presents an age analysis of past-due loans, segregated by class of loans as of
December 31, 2010:
Past Due Loans | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Greater | ||||||||||||||||||||||||
30-59 | 60-89 | than 90 | ||||||||||||||||||||||
Days Past | Days Past | Days Past | Total Past | Current | Total | |||||||||||||||||||
Due | Due | Due | Due | Loans | Loans | |||||||||||||||||||
Real Estate Loans |
||||||||||||||||||||||||
Permanent |
||||||||||||||||||||||||
One-to four-family
residential |
$ | 6,620 | $ | 2,351 | $ | 24,914 | $ | 33,885 | $ | 723,541 | $ | 757,426 | ||||||||||||
Multifamily residential |
326 | | 9,898 | 10,224 | 125,547 | 135,771 | ||||||||||||||||||
Nonresidential |
1,888 | 13,146 | 30,382 | 45,416 | 285,974 | 331,390 | ||||||||||||||||||
Land |
12 | 426 | 5,188 | 5,626 | 19,512 | 25,138 | ||||||||||||||||||
Total |
8,846 | 15,923 | 70,382 | 95,151 | 1,154,574 | 1,249,725 | ||||||||||||||||||
Construction Loans |
||||||||||||||||||||||||
One-to four-family
residential |
3,688 | 7,579 | 42,855 | 54,122 | 54,461 | 108,583 | ||||||||||||||||||
Multifamily and
nonresidential |
| | 2,414 | 2,414 | 12,663 | 15,077 | ||||||||||||||||||
Total |
3,688 | 7,579 | 45,269 | 56,536 | 67,124 | 123,660 | ||||||||||||||||||
Consumer Loans |
||||||||||||||||||||||||
Home Equity |
2,003 | 880 | 2,519 | 5,402 | 215,180 | 220,582 | ||||||||||||||||||
Auto |
194 | 56 | 87 | 337 | 11,188 | 11,525 | ||||||||||||||||||
Marine |
61 | | | 61 | 7,224 | 7,285 | ||||||||||||||||||
Recreational vehicle |
1,693 | 618 | 188 | 2,499 | 33,172 | 35,671 | ||||||||||||||||||
Other |
25 | 10 | 9 | 44 | 4,346 | 4,390 | ||||||||||||||||||
Total |
3,976 | 1,564 | 2,803 | 8,343 | 271,110 | 279,453 | ||||||||||||||||||
Commercial Loans |
||||||||||||||||||||||||
Secured |
163 | | 1,822 | 1,985 | 26,891 | 28,876 | ||||||||||||||||||
Unsecured |
43 | | 3,554 | 3,597 | 13,831 | 17,428 | ||||||||||||||||||
Total |
206 | | 5,376 | 5,582 | 40,722 | 46,304 | ||||||||||||||||||
Total |
$ | 16,716 | $ | 25,066 | $ | 123,830 | $ | 165,612 | $ | 1,533,530 | $ | 1,699,142 | ||||||||||||
Restructured loans were $58.6 million and $44.6 million at June 30, 2011 and December 31, 2010,
respectively. The Company has allocated $332,000 of specific reserves to customers whose loan
terms were modified in troubled debt restructurings as of June 30, 2011. The Company had allocated
$1.2 million of specific reserves to customers whose loan terms were modified in troubled debt
restructurings as of December 31, 2010. Troubled debt restructurings are considered impaired and
are included in the table above.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability
of borrowers to service their debt such as: current financial information, historical payment
experience, credit documentation, public information and current economic trends, among other
factors. The Company analyzes loans individually by classifying the loans as to credit risk. This
analysis includes homogenous loans past due 90 cumulative days, and all non-homogenous loans
including commercial loans and commercial real estate loans.
Asset quality ratings are divided into two groups: Pass (unclassified) and Classified. Within the
Pass group, loans that display potential weakness are risk rated as special mention. In addition,
there are three Classified risk ratings: substandard, doubtful and loss. These specific credit
risk categories are defined as follows:
Special Mention. Loans classified as special mention have potential weaknesses that deserve
managements close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan or of the institutions credit
position at some future date. Loans may be housed in this category for no longer than 12
months during which time information is obtained to determine if the credit should be
downgraded to the substandard category. |
23
Table of Contents
Substandard. Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so
classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected. |
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified
as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. |
Loss. Loans classified as loss are considered uncollectible and of such little value, that
continuance as assets is not warranted. Although there may be a chance of recovery on these
assets, it is not practical or desirable to defer writing off the asset. |
The Company monitors loans on a monthly basis to determine if they should be included in one of
the categories listed above. All impaired non-homogeneous credits classified as Substandard,
Doubtful or Loss are analyzed on an individual basis for a specific reserve requirement. This
analysis is performed on each individual credit at least annually or more frequently if
warranted. Loans that are not individually impaired and housed in the Pass risk category have a
loss factor percentage applied to the balance of the outstanding loan. |
24
Table of Contents
As of June 30, 2011 and December 31, 2010, and based on the most recent analysis performed,
the risk category of loans by class of loans is as follows:
Loans
June 30, 2011
(Dollars in thousands)
June 30, 2011
(Dollars in thousands)
Unclassified | Classified | |||||||||||||||||||||||||||
Special | Total | |||||||||||||||||||||||||||
Unclassified | Mention | Substandard | Doubtful | Loss | Classified | Total Loans | ||||||||||||||||||||||
Real Estate Loans |
||||||||||||||||||||||||||||
Permanent |
||||||||||||||||||||||||||||
One-to four-family
residential |
$ | 657,587 | $ | 1,763 | $ | 34,085 | $ | | $ | | $ | 34,085 | $ | 693,435 | ||||||||||||||
Multifamily
residential |
104,488 | 7,300 | 17,979 | | | 17,979 | 129,767 | |||||||||||||||||||||
Nonresidential |
184,198 | 17,012 | 106,492 | | | 106,492 | 307,702 | |||||||||||||||||||||
Land |
9,303 | 1,123 | 15,089 | | | 15,089 | 25,515 | |||||||||||||||||||||
Total |
955,576 | 27,198 | 173,645 | | | 173,645 | 1,156,419 | |||||||||||||||||||||
Construction Loans |
||||||||||||||||||||||||||||
One-to four-family
residential |
36,366 | 3,615 | 40,617 | 7,229 | | 47,846 | 87,827 | |||||||||||||||||||||
Multifamily and
nonresidential |
5,142 | | 382 | | | 382 | 5,524 | |||||||||||||||||||||
Total |
41,508 | 3,615 | 40,999 | 7,229 | | 48,228 | 93,351 | |||||||||||||||||||||
Consumer Loans |
||||||||||||||||||||||||||||
Home Equity |
208,616 | | 3,962 | | | 3,962 | 212,578 | |||||||||||||||||||||
Auto |
10,470 | 336 | 146 | | | 146 | 10,952 | |||||||||||||||||||||
Marine |
6,055 | 14 | | | | | 6,069 | |||||||||||||||||||||
Recreational vehicle |
30,689 | | 1,895 | | | 1,895 | 32,584 | |||||||||||||||||||||
Other |
3,839 | | 53 | | | 53 | 3,892 | |||||||||||||||||||||
Total |
259,669 | 350 | 6,056 | | | 6,056 | 266,075 | |||||||||||||||||||||
Commercial Loans |
||||||||||||||||||||||||||||
Secured |
17,619 | 280 | 10,505 | | | 10,505 | 28,404 | |||||||||||||||||||||
Unsecured |
6,361 | 176 | 2,502 | | 911 | 3,413 | 9,950 | |||||||||||||||||||||
Total |
23,980 | 456 | 13,007 | | 911 | 13,918 | 38,354 | |||||||||||||||||||||
Total |
$ | 1,280,733 | $ | 31,619 | $ | 233,707 | $ | 7,229 | $ | 911 | $ | 241,847 | $ | 1,554,199 | ||||||||||||||
25
Table of Contents
Loans
December 31, 2010
(Dollars in thousands)
December 31, 2010
(Dollars in thousands)
Unclassified | Classified | |||||||||||||||||||||||||||
Special | Total | |||||||||||||||||||||||||||
Unclassified | Mention | Substandard | Doubtful | Loss | Classified | Total Loans | ||||||||||||||||||||||
Real Estate Loans |
||||||||||||||||||||||||||||
Permanent |
||||||||||||||||||||||||||||
One-to four-family
residential |
$ | 723,814 | $ | 2,404 | $ | 31,208 | $ | | $ | | $ | 31,208 | $ | 757,426 | ||||||||||||||
Multifamily
residential |
106,839 | 6,900 | 22,032 | | | 22,032 | 135,771 | |||||||||||||||||||||
Nonresidential |
200,816 | 55,197 | 75,377 | | | 75,377 | 331,390 | |||||||||||||||||||||
Land |
9,677 | 1,100 | 14,361 | | | 14,361 | 25,138 | |||||||||||||||||||||
Total |
1,041,146 | 65,601 | 142,978 | | | 142,978 | 1,249,725 | |||||||||||||||||||||
Construction Loans |
||||||||||||||||||||||||||||
One-to four-family
residential |
47,308 | 6,122 | 55,021 | 132 | | 55,153 | 108,583 | |||||||||||||||||||||
Multifamily and
nonresidential |
1,091 | 13,604 | 382 | | | 382 | 15,077 | |||||||||||||||||||||
Total |
48,399 | 19,726 | 55,403 | 132 | | 55,535 | 123,660 | |||||||||||||||||||||
Consumer Loans |
||||||||||||||||||||||||||||
Home Equity |
216,994 | | 3,588 | | | 3,588 | 220,582 | |||||||||||||||||||||
Auto |
11,420 | | 105 | | | 105 | 11,525 | |||||||||||||||||||||
Marine |
7,285 | | 0 | | | | 7,285 | |||||||||||||||||||||
Recreational vehicle |
35,430 | | 241 | | | 241 | 35,671 | |||||||||||||||||||||
Other |
4,375 | | 15 | | | 15 | 4,390 | |||||||||||||||||||||
Total |
275,504 | | 3,949 | | | 3,949 | 279,453 | |||||||||||||||||||||
Commercial Loans |
||||||||||||||||||||||||||||
Secured |
14,608 | 1,327 | 12,134 | 807 | | 12,941 | 28,876 | |||||||||||||||||||||
Unsecured |
9,327 | 2,132 | 4,304 | 1,665 | | 5,969 | 17,428 | |||||||||||||||||||||
Total |
23,935 | 3,459 | 16,438 | 2,472 | | 18,910 | 46,304 | |||||||||||||||||||||
Total |
$ | 1,388,984 | $ | 88,786 | $ | 218,768 | $ | 2,604 | $ | | $ | 221,372 | $ | 1,699,142 | ||||||||||||||
26
Table of Contents
7. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others, which are not reported in United Communitys assets, totaled
$1.1 billion at both June 30, 2011, and December 31, 2010.
Activity for capitalized mortgage servicing rights, included in other assets, was as follows:
Six Months | Year Ended | |||||||
Ended | December 31, | |||||||
June 30, 2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | 6,400 | $ | 6,228 | ||||
Originations |
1,036 | 2,621 | ||||||
Amortized to expense |
(1,002 | ) | (2,449 | ) | ||||
Balance, end of period |
6,434 | 6,400 | ||||||
Less valuation allowance |
(58 | ) | (285 | ) | ||||
Net balance |
$ | 6,376 | $ | 6,115 | ||||
Activity in the valuation allowance for mortgage servicing rights was as follows:
Year Ended | ||||||||
Six Months Ended | December 31, | |||||||
June 30, 2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | (285 | ) | $ | (423 | ) | ||
Impairment charges |
| (1,279 | ) | |||||
Recoveries |
227 | 1,417 | ||||||
Balance, end of period |
$ | (58 | ) | $ | (285 | ) | ||
Fair value of mortgage servicing rights as of June 30, 2011 was approximately $9.3 million
and at December 31, 2010 was approximately $8.2 million.
Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2011 and
December 31, 2010 were as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Weighted average prepayment rate |
286 PSA | 322 PSA | ||||||
Weighted average life (in years) |
3.73 | 3.71 | ||||||
Weighted average discount rate |
8 | % | 8 | % |
27
Table of Contents
8. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
Real estate owned and other repossessed assets at June 30, 2011 and December 31, 2010 were as
follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Real estate owned and other repossessed assets |
$ | 51,161 | $ | 47,668 | ||||
Valuation allowance |
(7,476 | ) | (7,332 | ) | ||||
End of period |
$ | 43,685 | $ | 40,336 | ||||
Activity in the valuation allowance related to real estate owned was as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Beginning of year |
$ | 7,332 | $ | 7,867 | ||||
Additions charged to expense |
1,808 | 4,572 | ||||||
Direct write-downs |
(1,664 | ) | (5,107 | ) | ||||
End of period |
$ | 7,476 | $ | 7,332 | ||||
Expenses related to foreclosed and repossessed assets include:
For the three months ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Net loss on sales |
$ | 136 | $ | 775 | ||||
Provision for unrealized losses, net |
1,226 | 980 | ||||||
Operating expenses, net of rental income |
891 | 1,024 | ||||||
Total expenses |
$ | 2,253 | $ | 2,779 | ||||
For the six months ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Net loss on sales |
$ | 546 | $ | 875 | ||||
Provision for unrealized losses, net |
1,808 | 2,364 | ||||||
Operating expenses, net of rental income |
1,764 | 1,631 | ||||||
Total expenses |
$ | 4,118 | $ | 4,870 | ||||
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9. OTHER POSTRETIREMENT BENEFIT PLANS
Home Savings sponsors a defined benefit health care plan. The plan was curtailed in 2000, but
continues to provide postretirement medical benefits for employees who had worked 20 years and
attained a minimum age of 60 by September 1, 2000, while in service with Home Savings. The plan is
contributory and contains minor cost-sharing features such as deductibles and coinsurance. In
addition, postretirement life insurance coverage is provided for employees who were participants
prior to December 10, 1976. The life insurance plan is non-contributory. Home Savings policy is
to pay premiums monthly, with no pre-funding.
Components of net periodic benefit cost are as follows:
Three Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Service cost |
$ | | $ | | ||||
Interest cost |
33 | 47 | ||||||
Expected return on plan assets |
| | ||||||
Net amortization of prior service cost |
| | ||||||
Recognized net actuarial gain |
(19 | ) | | |||||
Net periodic benefit cost |
$ | 14 | $ | 47 | ||||
Assumptions used in the valuations were as follows: |
||||||||
Weighted average discount rate |
5.00 | % | 5.75 | % |
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Service cost |
$ | | $ | | ||||
Interest cost |
66 | 94 | ||||||
Expected return on plan assets |
| | ||||||
Net amortization of prior service cost |
| | ||||||
Recognized net actuarial gain |
(38 | ) | | |||||
Net periodic benefit cost |
$ | 28 | $ | 94 | ||||
Assumptions used in the valuations were as follows: |
||||||||
Weighted average discount rate |
5.00 | % | 5.75 | % |
10. FAIR VALUE MEASUREMENT
Fair value is the exchange price that would be received for an asset if paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. There are three levels
of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that
the entity has the ability to access as of the measurement date. |
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data. |
Level 3: Significant unobservable inputs that reflect a reporting entitys own beliefs about the
assumptions that market participants would use in pricing an asset or liability. |
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United Community uses the following methods and significant assumptions to estimate the fair value
of each type of financial instrument:
Available for sale securities: The fair values of securities available for sale are determined by
obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix
pricing, which is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but rather by relying on
the securities relationship to other benchmark quoted securities (Level 2 inputs).
Impaired loans: The fair value of impaired loans with specific allocations of the allowance for
loan losses is generally based on recent real estate appraisals. These appraisals may utilize a
single valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are typically
significant and result in a Level 3 classification of the inputs for determining fair value.
Foreclosed assets: Nonrecurring adjustments to certain commercial and residential real estate
properties classified as other real estate owned (OREO) are measured at the lower of carrying
amount or fair value, less costs to sell. Fair values are generally based on third party appraisals
of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds
the fair value, less costs to sell, an impairment loss is recognized.
Mortgage servicing rights: Fair value is based on market prices for comparable mortgage servicing
contracts, when available, or alternatively based on a valuation model that calculates the present
value of estimated future net servicing income.
Loans held for sale: Loans held for sale are carried at the lower of cost or fair value, as
determined by outstanding commitments, from third party investors.
Assets and Liabilities Measured on a Recurring Basis: Assets and liabilities measured at fair value
on a recurring basis are summarized below:
Fair Value Measurements at June 30, 2011 Using: | ||||||||||||||||
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
June 30, | Assets | Inputs | Inputs | |||||||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Available for sale securities |
||||||||||||||||
US Treasury and government
sponsored entities securities |
$ | 64,977 | $ | | $ | 64,977 | $ | | ||||||||
Equity securities |
304 | 304 | | | ||||||||||||
Mortgage-backed GSE securities: residential |
327,468 | | 327,468 | | ||||||||||||
Fair Value Measurements at December 31, 2010 Using: | ||||||||||||||||
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
December 31, | Assets | Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Available for sale securities |
||||||||||||||||
US Treasury and government
sponsored entities securities |
$ | 62,935 | $ | | $ | 62,935 | $ | | ||||||||
Equity securities |
394 | 394 | | | ||||||||||||
Mortgage-backed GSE securities: residential |
298,713 | | 298,713 | |
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Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at June 30, 2011 Using: | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
June 30, | Identical Assets | Inputs | Inputs | |||||||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Permanent real estate loans |
$ | 38,570 | $ | | $ | | $ | 38,570 | ||||||||
Construction loans |
22,131 | | | 22,131 | ||||||||||||
Commercial loans |
7,694 | | | 7,694 | ||||||||||||
Mortgage servicing assets |
1,117 | | 1,117 | | ||||||||||||
Foreclosed assets |
||||||||||||||||
Permanent real estate loans |
3,572 | | | 3,572 | ||||||||||||
Construction loans |
10,622 | | | 10,622 |
Fair Value Measurements at December 31, 2010 Using: | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Permanent real estate loans |
$ | 49,235 | $ | | $ | | $ | 49,235 | ||||||||
Construction loans |
20,229 | | | 20,229 | ||||||||||||
Commercial loans |
1,694 | | | 1,694 | ||||||||||||
Loans held for sale |
10,845 | | 10,845 | | ||||||||||||
Mortgage servicing assets |
2,278 | | 2,278 | | ||||||||||||
Foreclosed assets |
||||||||||||||||
Permanent real estate loans |
3,930 | | | 3,930 | ||||||||||||
Construction loans |
10,527 | | | 10,527 |
Impaired loans with specific allocations of the allowance for loan losses, carried at fair value,
which are measured for impairment using the fair value of the collateral for collateral dependent
loans, had a carrying amount of $80.0 million at June 30, 2011, with a specific valuation allowance
of $11.7 million. This resulted in an additional provision for loan losses of $7.0 million during
the three months ended June 30, 2011 and $12.6 million for the six months ended June 30, 2011.
Impaired loans with specific allocations of the allowance for loan losses, carried at fair value,
which are measured for impairment using the fair value of the collateral for collateral dependent
loans, had a carrying amount of $76.0 million at June 30, 2010, with a specific valuation allowance
of $10.0 million, resulting in additional provision for loan losses of $5.9 million during three
months ended June 30, 2010, and $11.7 million for the six months ended June 30, 2010. Impaired
loans with specific allocations of the allowance for loan losses, carried at fair value, which are
measured for impairment using the fair value of the collateral for collateral dependent loans, had
a carrying amount of $84.6 million at December 31, 2010, with a specific valuation allowance of
$13.4 million, resulting in additional provision for loan losses of $47.9 million during 2010.
Mortgage servicing rights had a carrying amount of $1.2 million with a valuation allowance of
$58,000 at June 30, 2011, resulting in no additional expenses during the three and six months ended
June 30, 2011. Mortgage servicing rights are valued by an independent
third party that is active in purchasing and selling these instruments. The value reflects the
characteristics of the underlying loans discounted at a market multiple.
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Foreclosed assets, carried at fair value, which are measured for impairment using the fair value of
the property less estimated selling costs, had a carrying amount of $21.7 million, with a valuation
allowance of $7.5 million at June 30, 2011. This resulted in additional expenses of $1.2 million
during the three months ended June 30, 2011 and $1.8 million for the six months ended June 30,
2011.
In accordance with generally accepted accounting principles, the carrying value and estimated fair
values of financial instruments, at June 30, 2011 and December 31, 2010, were as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 55,498 | $ | 55,498 | $ | 37,107 | $ | 37,107 | ||||||||
Available for sale securities |
392,749 | 392,749 | 362,042 | 362,042 | ||||||||||||
Loans held for sale |
4,824 | 4,877 | 10,870 | 10,870 | ||||||||||||
Loans, net |
1,509,399 | 1,524,651 | 1,649,486 | 1,675,610 | ||||||||||||
Federal Home Loan Bank stock |
26,464 | n/a | 26,464 | n/a | ||||||||||||
Accrued interest receivable |
7,201 | 7,201 | 7,720 | 7,720 | ||||||||||||
Liabilities: |
||||||||||||||||
Deposits: |
||||||||||||||||
Checking, savings and money market accounts |
(819,957 | ) | (819,957 | ) | (779,301 | ) | (779,301 | ) | ||||||||
Certificates of deposit |
(877,840 | ) | (892,551 | ) | (910,480 | ) | (925,325 | ) | ||||||||
Federal Home Loan Bank advances |
(96,365 | ) | (103,093 | ) | (202,818 | ) | (210,497 | ) | ||||||||
Repurchase agreements and other |
(98,962 | ) | (109,738 | ) | (97,797 | ) | (107,299 | ) | ||||||||
Advance payments by borrowers for taxes
and insurance |
(15,963 | ) | (15,963 | ) | (20,668 | ) | (20,668 | ) | ||||||||
Accrued interest payable |
(838 | ) | (838 | ) | (809 | ) | (809 | ) |
Fair value of financial instruments:
The estimated fair values of financial instruments have been determined by United Community using
available market information and appropriate valuation methodologies. Considerable judgment is
required in interpreting market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that United Community
could realize in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, accrued interest receivable and payable and advance payments by
borrowers for taxes and insuranceThe carrying amounts as reported in the Statements of Financial
Condition are a reasonable estimate of fair value due to their short-term nature.
SecuritiesFair values are based on quoted market prices, dealer quotes, and prices obtained from
independent pricing services.
Loans held for saleThe fair value of loans held for sale is based on market quotes.
LoansThe fair value is estimated by discounting the future cash flows using the current market
rates for loans of similar maturities with adjustments for market and credit risks.
Federal Home Loan Bank stockIt is not practical to determine the fair value of Federal Home Loan
Bank stock due to restrictions placed on its transferability.
DepositsThe fair value of demand deposits, savings accounts and money market deposit accounts is
the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates
of deposit is estimated using rates currently offered for deposits of similar remaining maturities.
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Borrowed fundsFor short-term borrowings, fair value is estimated to be carrying value. The fair
value of other borrowings is based on current rates for similar financing.
LimitationsFair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time United Communitys entire
holdings of a particular financial instrument. Because no market exists for a significant portion
of United Communitys financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in nature, involve
uncertainties and matters of significant judgment, and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. For example, a significant asset not
considered a financial asset is premises and equipment. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
11. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below.
For the six months ended | ||||||||
June 30, 2011 | June 30, 2010 | |||||||
(Dollars in thousands) | ||||||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest on deposits and borrowings |
$ | 15,854 | $ | 21,700 | ||||
Supplemental schedule of noncash activities: |
||||||||
Transfers from loans to real estate owned and other repossessed assets |
13,562 | 25,505 | ||||||
Transfers from loans to loans held for sale |
86,584 | |
12. SEGMENT INFORMATION
All of the Companys financial service operations are considered by management to be aggregated in
one reportable operating segment, which is banking services.
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13. EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted earnings per share is computed using the weighted average
number of common shares determined for the basic computation plus the dilutive effect of potential
common shares that could be issued under outstanding stock options. Stock options for 2,040,846
shares were anti-dilutive for the three months ended June 30, 2011. There were 2,253,741 stock
options for shares that were anti-dilutive for the three months ended June 30, 2010. Stock options
for 2,039,678 shares were anti-dilutive for the six months ended June 30, 2011. There were
2,260,493 stock options for shares that were anti-dilutive for the six months ended June 30, 2010.
Three Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Numerator: |
||||||||
Net loss |
$ | (1,796 | ) | $ | (4,885 | ) | ||
Denominator: |
||||||||
Weighted average common shares outstandingbasic |
30,932 | 30,093 | ||||||
Dilutive effect of stock options |
| | ||||||
Weighted average common shares outstandingdilutive |
30,932 | 30,039 | ||||||
Basic earnings (loss) per share: |
(0.06 | ) | (0.16 | ) | ||||
Dilutive earnings (loss) per share: |
(0.06 | ) | (0.16 | ) |
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Numerator: |
||||||||
Net income (loss) |
$ | 1,166 | $ | (10,027 | ) | |||
Denominator: |
||||||||
Weighted average common shares outstandingbasic |
30,925 | 29,997 | ||||||
Dilutive effect of stock options |
1 | | ||||||
Weighted average common shares outstandingdilutive |
30,926 | 29,997 | ||||||
Basic earnings (loss) per share: |
0.04 | (0.33 | ) | |||||
Dilutive earnings (loss) per share: |
0.04 | (0.33 | ) |
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14. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) included in the Consolidated Statements of Shareholders Equity
consists of unrealized gains and losses on available for sale securities and changes in unrealized
gains and losses on postretirement liability. The change includes reclassification of gains on
sales of securities of $1.5 million and impairment charges of $38,000 at June 30, 2011, and gains
on sales of securities of $6.5 million and no impairment charges at June 30, 2010.
Other comprehensive income (loss) components and related tax effects for the three month periods
are as follows:
Three months ended | ||||||||
June 30, | June 30, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Unrealized holding gain (loss) on securities available for sale |
$ | 7,675 | $ | 4,449 | ||||
Reclassification adjustment for net gains realized in income |
(201 | ) | (3,671 | ) | ||||
Net unrealized gain |
7,474 | 778 | ||||||
Tax effect |
| (272 | ) | |||||
Net of tax amount |
$ | 7,474 | $ | 506 | ||||
Six months ended | ||||||||
June 30, | June 30, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Unrealized holding gain (loss) on securities available for sale |
$ | 7,205 | $ | 6,639 | ||||
Reclassification adjustment for net gains realized in income |
(1,504 | ) | (6,514 | ) | ||||
Net unrealized gains |
5,701 | 125 | ||||||
Tax effect |
| (44 | ) | |||||
Net of tax amount |
$ | 5,701 | $ | 81 | ||||
The following is a summary of accumulated other comprehensive income (loss) balances, net of tax:
Current | ||||||||||||
Balance at | Period | Balance at | ||||||||||
December 31, 2010 | Change | June 30, 2011 | ||||||||||
Unrealized gains (losses) on securities available for sale |
$ | (5,673 | ) | $ | 5,701 | $ | 28 | |||||
Unrealized gains on post-retirement benefits |
895 | | 895 | |||||||||
Total |
$ | (4,778 | ) | $ | 5,701 | $ | 923 | |||||
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15. REGULATORY CAPITAL REQUIREMENTS
Home Savings is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Home Savings and United Community. The regulations require Home Savings to meet
specific capital adequacy guidelines and the regulatory framework for prompt corrective action that
involve quantitative measures of Home Savings assets, liabilities, and certain off balance sheet
items as calculated under regulatory accounting practices. Home Savings capital classification is
also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation for capital adequacy require Home Savings to
maintain minimum amounts and ratios of Tier 1 (or Core) capital (as defined in the regulations) to
average total assets (as defined) and of total risk-based capital (as defined) to risk-weighted
assets (as defined). Actual and statutory required capital amounts and ratios for Home Savings are
presented below.
As of June 30, 2011 | ||||||||||||||||
Minimum Capital | ||||||||||||||||
Actual | Requirements Per Bank Order | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Total risk-based capital to risk-weighted assets |
$ | 198,561 | 13.47 | % | $ | 176,887 | 12.00 | % | ||||||||
Tier 1 capital to risk-weighted assets |
179,792 | 12.20 | % | * | * | |||||||||||
Tier 1 capital to average total assets (Tier 1 leverage ratio) |
179,792 | 8.40 | % | 171,261 | 8.00 | % |
As of June 30, 2011 | ||||||||||||||||
To Be Well Capitalized Under | ||||||||||||||||
Minimum Capital | Prompt Corrective Action | |||||||||||||||
Requirements Per Regulation | Provisions** | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Total risk-based capital to risk-weighted assets |
$ | 117,925 | 8.00 | % | $ | 147,406 | 10.00 | % | ||||||||
Tier 1 capital to risk-weighted assets |
* | * | 88,444 | 6.00 | % | |||||||||||
Tier 1 capital to average total assets (Tier 1 leverage ratio) |
85,631 | 4.00 | % | 107,038 | 5.00 | % |
As of December 31, 2010 | ||||||||||||||||
Minimum Capital | ||||||||||||||||
Actual | Requirements Per Bank Order | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Total risk-based capital to risk-weighted assets |
$ | 197,891 | 12.54 | % | $ | 189,412 | 12.00 | % | ||||||||
Tier 1 capital to risk-weighted assets |
177,776 | 11.26 | % | * | * | |||||||||||
Tier 1 capital to average total assets (Tier 1 leverage ratio) |
177,776 | 7.84 | % | 181,513 | 8.00 | % |
As of December 31, 2010 | ||||||||||||||||
To Be Well Capitalized Under | ||||||||||||||||
Minimum Capital | Prompt Corrective Action | |||||||||||||||
Requirements Per Regulation | Provisions** | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Total risk-based capital to risk-weighted assets |
$ | 126,274 | 8.00 | % | $ | 157,843 | 10.00 | % | ||||||||
Tier 1 capital to risk-weighted assets |
* | * | 94,706 | 6.00 | % | |||||||||||
Tier 1 capital to average total assets (Tier 1 leverage ratio) |
90,757 | 4.00 | % | 113,446 | 5.00 | % |
* | Amount/Ratio is not required under the Bank Order or regulations. |
|
** | As of June 30, 2011
and December 31,2010, respectively, the FDIC and OTS categorized
Home Savings as adequately capitalized pursuant to the Bank Order and
OTS Order (as amended) discussed in Note 2. Home Savings cannot be
considered well capitalized while the Bank Order is in place. |
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As of June 30, 2011 and December 31, 2010, respectively, the FDIC and OTS categorized Home Savings
as adequately capitalized pursuant to the Bank Order and OTS Order (as amended) discussed in Note
2. Home Savings cannot be considered well capitalized while the Bank Order is in place. The Bank
Order requires Home Savings to measure its Tier 1 Leverage Ratio and Total Risk-based Capital Ratio
at the end of every quarter. Under the terms of the Bank Order, if Home Savings Tier 1 Leverage
Ratio falls below 8.0% or if its Total Risk-based Capital Ratio falls below 12.0% at the end of any
given quarter, then Home Savings must restore its capital ratios to the required levels within 90
days. At December 31, 2010, Home Savings Tier 1 Leverage Ratio was 7.84% and its Total Risk-based
Capital Ratio was 12.54%. Under the terms of the Bank Order, Home Savings was required to and
successfully achieved the 8.0% Tier 1 Leverage Ratio by March 31, 2011.
Before July 21, 2011, the OTS was the federal regulator of savings associations and their holding
companies. On July 21, 2010, financial regulatory reform legislation entitled the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law,
substantially altering the regulation of savings associations and savings and loan holding
companies. The Dodd-Frank Act required the transfer of OTS functions to the Office of the
Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the Board of
Governors of the Federal Reserve System (FRB), as of July 21, 2011. More specifically, as of July
21, 2011, United Community ceased to be regulated by the OTS and is now regulated by the FRB.
Events beyond managements control, such as fluctuations in interest rates or a downturn in the
economy in areas in which Home Savings loans and securities are concentrated, could adversely
affect future earnings, and consequently Home Savings ability to meet its future capital
requirements. Refer to Note 2 for a complete discussion of the regulatory enforcement actions.
16. INCOME TAXES
Management recorded a valuation allowance against deferred tax assets at June 30, 2011 and December
31, 2010, based on its estimate of future reversal and utilization. When determining the amount of
deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a
benefit, the Company conducts a regular assessment of all available information. This information
includes, but is not limited to, taxable income in prior periods, projected future income, and
projected future reversals of deferred tax items. Based on these criteria, the Company determined
that it was necessary to establish a full valuation allowance against the entire net deferred tax
asset.
37
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
UNITED COMMUNITY FINANCIAL CORP.
At or For the Three | At or For the Six | |||||||||||||||
Months Ended | Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Selected financial ratios and other data: (1) |
||||||||||||||||
Performance ratios: |
||||||||||||||||
Return on average assets (2) |
-0.34 | % | -0.85 | % | 0.11 | % | -0.87 | % | ||||||||
Return on average equity (3) |
-3.95 | % | -8.91 | % | 1.29 | % | -9.05 | % | ||||||||
Interest rate spread (4) |
3.19 | % | 3.06 | % | 3.25 | % | 3.03 | % | ||||||||
Net interest margin (5) |
3.39 | % | 3.30 | % | 3.45 | % | 3.29 | % | ||||||||
Non-interest expense to average assets |
2.97 | % | 2.99 | % | 3.02 | % | 2.98 | % | ||||||||
Efficiency ratio (6) |
67.49 | % | 82.92 | % | 72.07 | % | 80.72 | % | ||||||||
Average interest-earning assets to average interest-bearing liabilities |
112.85 | % | 112.93 | % | 112.68 | % | 113.14 | % | ||||||||
Capital ratios: |
||||||||||||||||
Average equity to average assets |
8.49 | % | 9.48 | % | 8.45 | % | 9.63 | % | ||||||||
Equity to assets, end of period |
8.71 | % | 9.19 | % | 8.71 | % | 9.19 | % | ||||||||
Tier 1 leverage ratio |
8.40 | % | 8.71 | % | 8.40 | % | 8.71 | % | ||||||||
Tier 1 risk-based capital ratio |
12.20 | % | 11.90 | % | 12.20 | % | 11.90 | % | ||||||||
Total risk-based capital ratio |
13.47 | % | 13.16 | % | 13.47 | % | 13.16 | % | ||||||||
Asset quality ratios: |
||||||||||||||||
Non-performing loans to total loans at end of period (7) |
9.21 | % | 8.69 | % | 9.21 | % | 8.69 | % | ||||||||
Non-performing assets to average assets (8) |
8.54 | % | 8.53 | % | 8.52 | % | 8.57 | % | ||||||||
Non-performing assets to total assets at end of period (8) |
8.69 | % | 8.52 | % | 8.69 | % | 8.52 | % | ||||||||
Allowance for loan losses as a percent of loans |
2.91 | % | 2.23 | % | 2.91 | % | 2.23 | % | ||||||||
Allowance for loan losses as a percent of nonperforming loans (7) |
32.51 | % | 26.25 | % | 32.51 | % | 26.25 | % | ||||||||
Texas ratio (9)
|
80.18 | % | 77.99 | % | 80.18 | % | 77.99 | % | ||||||||
Total classified assets as a percent of Tier 1 capital |
134.51 | % | 111.23 | % | 134.51 | % | 111.23 | % | ||||||||
Total classified loans as a percent of Tier 1 capital and ALLL |
107.48 | % | 92.49 | % | 107.48 | % | 92.49 | % | ||||||||
Total classified assets as a percent of Tier 1 capital and ALLL |
126.89 | % | 109.89 | % | 126.89 | % | 109.89 | % | ||||||||
Net charge-offs as a percent of average loans |
2.11 | % | 3.84 | % | 1.87 | % | 2.66 | % | ||||||||
Total 90+ days past due as a percent of total loans |
8.21 | % | 7.40 | % | 8.21 | % | 7.40 | % | ||||||||
Office data: |
||||||||||||||||
Number of full service banking offices |
38 | 38 | 38 | 38 | ||||||||||||
Number of loan production offices |
7 | 6 | 7 | 6 | ||||||||||||
Per share data: |
||||||||||||||||
Basic earnings (loss) (10) |
$ | (0.06 | ) | $ | (0.16 | ) | $ | 0.04 | $ | (0.33 | ) | |||||
Diluted earnings (loss) (10) |
(0.06 | ) | (0.16 | ) | 0.04 | (0.33 | ) | |||||||||
Book value (11) |
5.91 | 6.88 | 5.91 | 6.88 | ||||||||||||
Tangible book value (12) |
5.90 | 6.87 | 5.90 | 6.87 |
Notes: | ||
1. | Ratios for the three and six month periods are annualized where appropriate |
|
2. | Net income (loss) divided by average total assets |
|
3. | Net income (loss) divided by average total equity |
|
4. | Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities |
|
5. | Net interest income as a percentage of average interest-earning assets |
|
6. | Noninterest expense, excluding the amortization of core deposit intangible, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary
impairment charges, gains and losses on foreclosed assets, and gain on the sale of a retail branch |
|
7. | Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing |
|
8. | Nonperforming assets consist of nonperforming loans, real estate owned and other repossessed assets |
|
9. | Nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses |
|
10. | Net income (loss) divided by the number of basic or diluted shares outstanding |
|
11. | Shareholders equity divided by number of shares outstanding |
|
12. | Shareholders equity minus core deposit intangible divided by the number of shares outstanding |
38
Table of Contents
Forward Looking Statements
When used in this Form 10-Q the words or phrases will likely result, are expected to,
will continue, is anticipated, estimate, project or similar expressions are intended to
identify forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including
changes in economic conditions in United Communitys market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in Home Savings market area, and
competition, that could cause actual results to differ materially from results presently
anticipated or projected. United Community cautions readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. United Community advises
readers that the factors listed above could affect United Communitys financial performance and
could cause United Communitys actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current statements. United
Community undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made.
Comparison of Financial Condition at June 30, 2011 and December 31, 2010
Total assets decreased $94.9 million to $2.1 billion at June 30, 2011, compared to December
31, 2010. Contributing to the change were decreases in net loans of $140.1 million and loans held
for sale of $6.0 million. These decreases were partially offset by increases in available for sale
securities of $30.7 million and real estate owned and other repossessed assets of $3.3 million.
Net loans decreased $140.1 million during the first six months of 2011. The primary source of the
decrease was a bulk mortgage loan sale that took place in the second quarter of 2011. The Company
sold $70.4 million in fixed rate 15 and 30-year residential mortgage loans and subsequently
realized a $2.7 million gain. These mortgage loans were specifically identified based on seasoned
loan guidelines using Fannie Mae eligibility criteria and designated for sale as the Companys
protracted period of lower rates and prepayment speeds erode the value of the loans. In addition,
reinvestment of proceeds into investment securities provides the Company with more liquidity
options. Further contributing to the decline was the reduction in the Companys construction and
segments of its commercial real estate loan portfolios as a result of executing its strategic
objective of reducing specific concentrations in these portfolios in the current economic
environment.
Available for sale securities increased $30.7 million during the first six months of 2011 as a
result of various securities transactions initiated in the first half of 2011. During the first
six months of 2011, the Company sold approximately $114.6 million in securities, realizing $1.5
million in gains. These sales were completed in part to realize a portion of the gains in the
portfolio due to continued spread tightening on mortgage-backed and agency securities. The Company
offset these sales with $156.3 million in purchases of additional securities. These purchases of
higher coupon mortgage-backed securities were made to partially offset the effect of the bulk loan
sale. This action will afford the Company some yield protection should longer term rates begin to
rise and/or prepayment speeds begin to slow. Maturities and paydowns of $15.4 million accounted
for the remainder of the change.
The allowance for loan losses decreased to $46.2 million, which is 2.91% of the net loan portfolio
and 32.51% of nonperforming loans as of June 30, 2011, down from $50.9 million or 2.99% of the net
loan portfolio and 36.47% of nonperforming loans as of December 31, 2010. A loan loss provision
totaling $10.4 million during the six months ended June 30, 2011 was offset by net charge-offs
totaling $15.1 million. Loan losses are charged against the allowance when the uncollectability of
a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home
Savings allowance for loan loss methodology includes allowance allocations calculated in
accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance
with ASC Topic 450, Contingencies. Accordingly, the methodology is based on an analysis using
past loan loss experience, the nature and volume of the portfolio, information about specific
borrower situations, estimated collateral values, general economic conditions in the market area
and other factors. The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired. The general component of
the allowance covers pools of loans evaluated as a homogeneous group using a historical charge-off
experience factor applied to each pool of loans. The historical charge-off experience factor is
also adjusted for certain environmental factors. Home Savings process for determining the
appropriate level of the allowance for possible loan losses is designed to account for credit
deterioration as it occurs. The provision for possible loan losses reflects loan quality trends,
including the levels of and trends related to nonaccrual loans, past due loans, classified loans
and net charge-offs or recoveries, among other factors.
39
Table of Contents
Allowance For Loan Losses | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
December 31, | June 30, | |||||||||||||||||||
2010 | Provision | Recovery | Chargeoff | 2011 | ||||||||||||||||
Real Estate Loans |
||||||||||||||||||||
Permanent |
||||||||||||||||||||
One-to four-family residential |
$ | 8,139 | $ | 2,050 | $ | 318 | $ | (1,743 | ) | $ | 8,764 | |||||||||
Multifamily residential |
5,082 | (647 | ) | 82 | (1,696 | ) | 2,821 | |||||||||||||
Nonresidential |
12,559 | 6,389 | 46 | (2,957 | ) | 16,037 | ||||||||||||||
Land |
2,286 | 2,200 | 40 | (777 | ) | 3,749 | ||||||||||||||
Total |
28,066 | 9,992 | 486 | (7,173 | ) | 31,371 | ||||||||||||||
Construction Loans |
||||||||||||||||||||
One-to four-family residential |
8,260 | 1,620 | 202 | (3,656 | ) | 6,427 | ||||||||||||||
Multifamily and nonresidential |
273 | (69 | ) | | (101 | ) | 103 | |||||||||||||
Total |
8,533 | 1,551 | 202 | (3,757 | ) | 6,529 | ||||||||||||||
Consumer Loans |
||||||||||||||||||||
Home Equity |
2,964 | (37 | ) | 67 | (664 | ) | 2,330 | |||||||||||||
Auto |
104 | (38 | ) | 23 | (5 | ) | 84 | |||||||||||||
Marine |
361 | 360 | | (576 | ) | 145 | ||||||||||||||
Recreational vehicle |
1,519 | 668 | 53 | (432 | ) | 1,808 | ||||||||||||||
Other |
312 | (171 | ) | 156 | (120 | ) | 177 | |||||||||||||
Total |
5,260 | 782 | 299 | (1,797 | ) | 4,544 | ||||||||||||||
Commercial Loans |
||||||||||||||||||||
Secured |
2,611 | (661 | ) | 56 | (1,045 | ) | 961 | |||||||||||||
Unsecured |
6,413 | (1,228 | ) | 117 | (2,484 | ) | 2,818 | |||||||||||||
Total |
9,024 | (1,889 | ) | 173 | (3,529 | ) | 3,779 | |||||||||||||
Total |
$ | 50,883 | $ | 10,436 | $ | 1,160 | $ | (16,256 | ) | $ | 46,223 | |||||||||
In the first half of 2011, the level of the allowance for loan losses decreased $4.7 million when
compared to December 31, 2010. Furthermore, during the first half of 2011, the level of net loans
charged off exceeded the loan loss provision by approximately $4.7 million. It can further be
noted that timing differences can exist between the period in which an initial provision is
recognized and the subsequent period in which the loss is confirmed and the resulting charge-off
recognized. As a result, it is possible to have charge-offs exceed the provision for loan losses
in the various loan categories. There were three major categories, multifamily residential,
one-to four-family residential construction and commercial loans (both secured and unsecured),
where the level of charge-offs exceeded the provision recognized in 2011. In the fourth quarter of
2010, Home Savings incurred substantial provision expense to increase both the general and specific
reserves based on deterioration experienced in the loan portfolio in these three loan categories.
In the first half of 2011, certain loans were charged off where reserves were established in a
previous period. This action can cause the level of loan charge-offs to exceed the provision
expense in the current reporting period.
The $1.7 million in charge-offs in multifamily residential loans exceeded the provision by $2.3
million which was comprised of three relationships that had $991,000 in specific reserves at
December 31, 2010 in anticipation of probable incurred losses in connection with these loans.
Additionally, the principal balance of loans in this category declined $6.0 million during 2011
resulting in reduced general reserves being required. The historical charge-off factor has also
decreased in this category in the first half of 2011.
One-to four-family residential construction loan charge-offs exceeded provision expense by
approximately $2.0 million in 2011. With regard to the $3.7 million in charge-offs, the Bank had
reserved $3.3 million at December 31, 2010. Although these one-to four-family residential
construction loan principal balances have declined $30.3 million, the historical loss experience
has resulted in an increase in the historical charge-off experience factor and thus a provision of
$1.6 million was recorded in the first half of 2011.
A total of 24 loans comprise the $3.5 million in secured and unsecured commercial loan charge-offs
which exceeded the provision by $5.4 million in 2011. As of December 31, 2010, Home Savings had
set aside $2.9 million in reserves on these loans. Principal
balances in this category have declined $8.0 million since December 31, 2010, to $38.4 million, of
which $10.3 million has been individually evaluated for impairment by the Bank. Additionally, a
majority of the decrease in these loans was in the unsecured category, which typically requires
higher allowance for loan loss levels than secured loans, resulting in a reduced provision for
loans at June 30, 2011.
40
Table of Contents
Accordingly, as a result of reserves being established in previous periods, a decline in principal
balances and changes in historical factors, the level of charge-offs for the year has exceeded the
provision for loan losses in these loan categories.
A nonhomogeneous loan is considered impaired when, based on current information and events, it is
probable that Home Savings will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value and the strength of
guarantors (if any). Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and
circumstances surrounding the loans and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, the amount of shortfall in relation to
the principal and interest owed. Impairment is measured on a loan-by-loan basis by the fair value
of the collateral if the loan is collateral dependent, the present value of expected future cash
flows discounted at the loans effective interest rate, or the market value of the loan. The
following table summarizes the change in impaired loans during the first six months of 2011.
Impaired Loans | ||||||||||||
(Dollars in thousands) | ||||||||||||
June 30, | December 31, | |||||||||||
2011 | 2010 | Change | ||||||||||
Real Estate Loans |
||||||||||||
Permanent |
||||||||||||
One-to four-family residential |
$ | 28,427 | $ | 25,493 | $ | 2,935 | ||||||
Multifamily residential |
7,024 | 11,487 | (4,463 | ) | ||||||||
Nonresidential |
61,680 | 59,243 | 2,437 | |||||||||
Land |
8,473 | 5,569 | 2,903 | |||||||||
Total |
105,604 | 101,792 | 3,812 | |||||||||
Construction Loans |
||||||||||||
One-to four-family residential |
45,345 | 46,672 | (1,327 | ) | ||||||||
Multifamily and nonresidential |
| | | |||||||||
Total |
45,345 | 46,672 | (1,327 | ) | ||||||||
Consumer Loans |
||||||||||||
Home Equity |
1,040 | 1,438 | (398 | ) | ||||||||
Auto |
75 | 55 | 20 | |||||||||
Boat |
| | | |||||||||
Recreational vehicle |
47 | 47 | | |||||||||
Other |
7 | 7 | | |||||||||
Total |
1,169 | 1,547 | (378 | ) | ||||||||
Commercial Loans |
||||||||||||
Secured |
8,709 | 2,171 | 6,538 | |||||||||
Unsecured |
1,719 | 4,273 | (2,554 | ) | ||||||||
Total |
10,428 | 6,444 | 3,984 | |||||||||
Total Impaired Loans |
$ | 162,546 | $ | 156,455 | $ | 6,091 | ||||||
The increase in impaired loans is primarily attributable to eight loans aggregating $23.1 million,
for which, in the opinion of management, Home Savings will not be able to collect all payments of
principal or interest due thereon according to their respective contractual terms. These loans
were partially offset by eight loans aggregating $14.1 million being resolved and removed from
impaired status. A loan may be resolved through foreclosure and repossession by Home Savings,
charged off, sold to a third-party, or by long-term performance according to contractual terms.
41
Table of Contents
Included in impaired loans above are certain loans Home Savings considers to be troubled debt
restructurings. A loan is considered a troubled debt restructuring if Home Savings grants a
concession to a borrower that would otherwise not be given based on economic or legal reasons
related to the borrowers financial difficulties. The objective of a troubled debt restructuring
is to make the best of a bad situation. A troubled debt restructuring may include, but is not
necessarily limited to, one or a combination of the following:
| Transfer from the borrower to Home Savings of receivables from third parties, real
estate, or other assets to fully or partially satisfy a debt (including a transfer
resulting from foreclosure or repossession). |
||
| Issuance or other granting of an equity interest to Home Savings by the borrower to
satisfy fully or partially a debt unless the equity interest is granted pursuant to
existing terms for converting the debt into an equity interest. |
||
| Modification of the terms of a debt, such as one or a combination of: |
| Reduction of the stated interest rate for the remaining original life of the debt, |
||
| Extension of the maturity date or dates at a stated interest rate lower
than the current market rate for new debt with similar risk, |
||
| Reduction of the face amount or maturity amount of the debt as stated in
the instrument or other agreement, and/or |
||
| Reduction of accrued interest. |
A debt restructuring is not necessarily a troubled debt restructuring for purposes of this
definition even if the borrower is experiencing some financial difficulties. In general, a
borrower that can obtain funds from other sources at market interest rates at or near those on
non-troubled debt is not considered to be involved in a troubled debt restructuring. A troubled
debt restructuring is not involved if:
| the fair value of cash, other assets, or an equity interest accepted by Home Savings
from a borrower in full satisfaction of its receivable at least equals the recorded
investment in the loan; |
||
| the fair value of cash, other assets, or an equity interest transferred by a borrower to
Home Savings in full settlement of its loan at least equals the carrying amount of the
loan; |
||
| Home Savings reduces the effective interest rate on the loan primarily to reflect a
decrease in market interest rates in general or a decrease in the risk so as to maintain a
relationship with a borrower that can readily obtain funds from other sources at the
current market interest rate; or |
||
| Home Savings issues, in exchange for the original loan, a new marketable loan having an
effective interest rate based on its market price that is at or near the current market
interest rates of loans with similar maturity dates and stated interest rates issued by
other banks. |
42
Table of Contents
The change in troubled debt restructurings for the six months ended June 30, 2011 is as follows:
Troubled Debt Restructurings | ||||||||||||
June 30, | December 31, | |||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Real Estate Loans |
||||||||||||
Permanent |
||||||||||||
One-to four-family |
$ | 13,424 | $ | 10,830 | $ | 2,594 | ||||||
Multifamily residential |
4,656 | 2,410 | 2,246 | |||||||||
Nonresidential |
22,096 | 22,313 | (217 | ) | ||||||||
Land |
1,770 | 1,344 | 426 | |||||||||
Total |
41,946 | 36,897 | 5,049 | |||||||||
Construction Loans |
||||||||||||
One-to four-family residential |
7,533 | 6,879 | 654 | |||||||||
Multifamily and nonresidential |
| | | |||||||||
Total |
7,533 | 6,879 | 654 | |||||||||
Consumer Loans |
||||||||||||
Home Equity |
54 | 347 | (293 | ) | ||||||||
Auto |
26 | 9 | 17 | |||||||||
Marine |
| | | |||||||||
Recreational vehicle |
| | | |||||||||
Other |
7 | 7 | | |||||||||
Total |
87 | 363 | (276 | ) | ||||||||
Commercial Loans |
||||||||||||
Secured |
8,980 | 348 | 8,632 | |||||||||
Unsecured |
66 | 84 | (18 | ) | ||||||||
Total |
9,046 | 432 | 8,614 | |||||||||
Total Restructured Loans |
$ | 58,612 | $ | 44,571 | $ | 14,041 | ||||||
Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain
on nonaccrual status for a period of at least six months until the borrower has demonstrated a
willingness and ability to make the restructured loan payments. Troubled debt restructured loans
that were on nonaccrual status aggregated $28.1 million and $11.2 million at June 30, 2011 and
December 31, 2010, respectively. Such loans are considered nonperforming loans. The increase in
nonaccruing troubled debt restructured loans can largely be attributed to four loans aggregating
$12.6 million, for which, in the opinion of management, Home Savings will not be able to collect
all payments of principal or interest due according to contractual terms. Troubled debt
restructured loans that were accruing according to their terms aggregated $30.5 million and $33.3
million at June 30, 2011 and December 31, 2010, respectively.
43
Table of Contents
Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing.
Nonperforming loans were $139.1 million, or 9.21% of net loans, at June 30, 2011, compared to
$139.5 million, or 8.46% of net loans, at December 31, 2010. The schedule below summarizes the
change in nonperforming loans for the first six months of 2011.
Nonperforming Loans | ||||||||||||
(Dollars in thousands) | ||||||||||||
June 30, | December 31, | |||||||||||
2011 | 2010 | Change | ||||||||||
Real Estate Loans |
||||||||||||
Permanent |
||||||||||||
One-to four-family residential |
$ | 28,776 | $ | 27,417 | $ | 1,359 | ||||||
Multifamily residential |
6,414 | 10,983 | (4,569 | ) | ||||||||
Nonresidential |
36,382 | 39,838 | (3,456 | ) | ||||||||
Land |
8,316 | 5,188 | 3,128 | |||||||||
Total |
79,888 | 83,426 | (3,538 | ) | ||||||||
Construction Loans |
||||||||||||
One-to four-family residential |
43,389 | 44,022 | (633 | ) | ||||||||
Multifamily and nonresidential |
382 | 2,413 | (2,031 | ) | ||||||||
Total |
43,771 | 46,435 | (2,664 | ) | ||||||||
Consumer Loans |
||||||||||||
Home Equity |
3,737 | 3,389 | 348 | |||||||||
Auto |
138 | 89 | 49 | |||||||||
Marine |
| | | |||||||||
Recreational vehicle |
1,861 | 237 | 1,624 | |||||||||
Other |
45 | 10 | 35 | |||||||||
Total |
5,781 | 3,725 | 2,056 | |||||||||
Commercial Loans |
||||||||||||
Secured |
8,073 | 1,822 | 6,251 | |||||||||
Unsecured |
1,577 | 4,122 | (2,545 | ) | ||||||||
Total |
9,650 | 5,944 | 3,706 | |||||||||
Total Nonperforming Loans |
$ | 139,090 | $ | 139,530 | $ | (440 | ) | |||||
During the first six months of 2011, one secured commercial loan, one nonresidential loan and two
land loans, aggregating $15.1 million, became nonperforming. This was offset by a total of eleven
loans (two multifamily loans, six nonresidential loans, one nonresidential construction loan and
two commercial loans) being resolved through foreclosure, sales and chargeoffs.
Loans held for sale decreased $6.0 million, or 55.6%, to $4.8 million at June 30, 2011, compared to
$10.9 million at December 31, 2010. Over the six months ended June 30, 2011, Home Savings has
intentionally reduced the volume of loans originated for sale and focused on portfolio
originations. Home Savings continues to sell a portion of newly originated mortgage loans into the
secondary market as part of its risk management strategy and anticipates continuing to do so in the
future.
Federal Home Loan Bank stock remained at $26.5 million for June 30, 2011, and December 31, 2010.
During the first six months of 2011, the Federal Home Loan Bank paid a cash dividend in lieu of a
stock dividend to its member banks.
44
Table of Contents
Real estate owned and other repossessed assets increased $3.3 million, or 8.3%, during the six
months ended June 30, 2011, as compared to the year ended December 31, 2010. The following table
summarizes the activity in real estate owned and other repossessed assets during the period:
(Dollars in thousands) | ||||||||||||
Real Estate Owned | Repossessed Assets | Total | ||||||||||
Balance at Beginning of period |
$ | 39,914 | $ | 422 | $ | 40,336 | ||||||
Acquisitions |
12,942 | 666 | 13,608 | |||||||||
Sales, net of gains |
(8,039 | ) | (412 | ) | (8,451 | ) | ||||||
Change in valuation allowance |
(1,808 | ) | | (1,808 | ) | |||||||
Balance at End of period |
$ | 43,009 | $ | 676 | $ | 43,685 | ||||||
The following table depicts the type of property secured in the satisfaction of loans and the
valuation allowance associated with each type as of June 30, 2011:
Valuation | Net | |||||||||||
Balance | Allowance | Balance | ||||||||||
(Dollars in thousands) | ||||||||||||
Real estate owned |
||||||||||||
One-to four-family |
$ | 11,059 | $ | (306 | ) | $ | 10,753 | |||||
Multifamily residential |
4,721 | (17 | ) | 4,704 | ||||||||
Nonresidential |
5,629 | (630 | ) | 4,999 | ||||||||
One-to four-family residential construction |
27,415 | (6,523 | ) | 20,892 | ||||||||
Land |
1,661 | | 1,661 | |||||||||
Total real estate owned |
50,485 | (7,476 | ) | 43,009 | ||||||||
Repossessed assets |
||||||||||||
Auto |
| | | |||||||||
Marine |
200 | | 200 | |||||||||
Recreational vehicle |
476 | | 476 | |||||||||
Total repossessed assets |
676 | | 676 | |||||||||
Total real estate owned and other repossessed assets |
$ | 51,161 | $ | (7,476 | ) | $ | 43,685 | |||||
Property acquired in the settlement of loans is recorded at the fair market value of the property
secured less costs to sell. Appraisals are obtained at least annually on properties that exceed
$1.0 million in value. Based on current appraisals, a valuation allowance may be established to
reflect properly the asset at fair market value. The increase in the valuation allowance on
property acquired in relation to one-to four-family residential construction loans was due to the
decline in market value of those properties. Home Savings engages experienced professionals to
sell real estate owned and other repossessed assets in a timely manner.
Total deposits increased $8.0 million to $1.7 billion at June 30, 2011, compared to December 31,
2010. The primary cause for the increase in deposits was due to an overall increase in core
deposits. As certificates of deposit renewed, the Company was able to successfully retain these
deposits in other interest-bearing non-time deposit accounts. Home Savings has also engaged a
service through which it can obtain additional liquidity in the form of deposits from bank holding
companies, credit unions and other financial institutions. As of June 30, 2011, Home Savings had
no brokered deposits.
Federal Home Loan Bank advances decreased $106.5 million during the first six months of 2011, due
primarily to lower funding needs as a result of lower net loans during the period. Home Savings
had approximately $228.4 million in unused borrowing capacity at the FHLB at June 30, 2011.
Advance payments by borrowers for taxes and insurance decreased $4.7 million during the first six
months of 2011. Remittance of real estate taxes and property insurance made on behalf of customers
of Home Savings accounted for $2.6 million of the decrease. In addition, funds held for payments
received on loans sold where servicing was retained by Home Savings decreased $4.8 million.
Shareholders equity increased $7.1 million to $183.1 million at June 30, 2011, from $176.1 million
at December 31, 2010. The change occurred primarily due to the adjustment to other comprehensive
income for the valuation of available for sale securities during the period and, to a lesser
extent, the net income recognized by the Company in the period.
45
Table of Contents
Comparison of Operating Results for the Three Months Ended
June 30, 2011 and June 30, 2010
June 30, 2011 and June 30, 2010
Net Income (Loss). United Community recognized a net loss for the three months ended June 30,
2011, of $1.8 million, or $(0.06) per diluted share, compared to a net loss of $4.9 million, or
$(0.16) per diluted share, for the three months ended June 30, 2010. The primary cause of the
change was lower provision for loan losses recognized during the second quarter of 2011. Compared
with the second quarter of 2010, net interest income decreased $913,000, the provision for loan
losses decreased $2.1 million, non-interest income increased $555,000, and non-interest expense
decreased $1.4 million. United Communitys annualized return on average assets and return on
average equity were (0.34)% and (3.95)%, respectively, for the three months ended June 30, 2011.
The annualized return on average assets and return on average equity for the comparable period in
2010 were (0.85)% and (8.91)%, respectively.
Net Interest Income. Net interest income for the three months ended June 30, 2011 was $17.1
million compared to $18.0 for the three months ended June 30, 2010. Total interest income
decreased $3.3 million in the second quarter of 2011 compared to the second quarter of 2010,
primarily as a result of a decrease of $204.1 million in the average balance of outstanding loans.
United Community also experienced a decrease in the yield on net loans of 17 basis points. The
change was driven, in part, by the bulk mortgage loan sale in the second quarter of 2011. Further
contributing to the decline was the reduction in the Companys construction and segments of its
commercial real estate loan portfolios as a result of executing its strategic objective of reducing
specific concentrations in these portfolios in the current economic environment.
Total interest expense decreased $2.4 million for the quarter ended June 30, 2011, as compared to
the same quarter last year. The change was due primarily to reductions of $2.3 million in interest
paid on deposits. The overall decrease in interest expense was attributable to a shift in deposit
balances from certificates of deposit to relatively less expensive non-time deposits. The average
outstanding balance of certificates of deposit declined by $73.2 million, while non-time deposits
increased by $53.2 million. Also contributing to the change was a reduction of 68 basis points in
the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 20
basis points.
Primarily in the third quarter of 2008, Home Savings offered a 42-month time deposit product (the
Step CDs) to it customers in order to maintain adequate levels of liquidity as Home Savings
entered into the Bank order with regulators. While the Step CDs offered a blended rate over the
42-month term consistent with other 42-month certificates of deposit being offered in Home Savings
market at that time, the interest rate paid on Step CDs increases in regular intervals over the
life of the deposit, such that in the final six months of the deposit prior to maturity, the rate
paid is 6.50%. This product generated approximately
$140.0 million in deposits, substantially all of which will
mature in the first quarter of 2012.
The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a
decrease in the average balance of those funds of $125.8 million, despite an increase in the
average rate on those borrowings of 125 basis points in the second quarter of 2011 compared to the
same quarter in 2010. The increase in rate is due to the change in the mix of borrowings, in that
Home Savings had minimal overnight advances in the second quarter of 2011 with the FHLB. The
decrease in interest expense on repurchase agreements and other borrowings was due primarily to a
decrease in the cost of those liabilities of 7 basis points despite an increase in their average
balances of $1.4 million.
The following table shows the impact of interest rate and outstanding balance (volume) changes
compared to the second quarter of last year. The interest rate spread for the three months ended
June 30, 2011, grew to 3.19% compared to 3.06% for the quarter ended June 30, 2010. The net
interest margin increased nine basis points to 3.39% for the three months ended June 30, 2011
compared to 3.30% for the same quarter in 2010.
46
Table of Contents
For the Three Months Ended June 30 | ||||||||||||
2011 vs. 2010 | ||||||||||||
Increase | Total | |||||||||||
(decrease) due to | increase | |||||||||||
Rate | Volume | (decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans |
$ | (749 | ) | $ | (2,748 | ) | $ | (3,497 | ) | |||
Loans held for sale |
(13 | ) | (15 | ) | (28 | ) | ||||||
Investment securities: |
||||||||||||
Available for sale |
(106 | ) | 304 | 198 | ||||||||
FHLB stock |
| | | |||||||||
Other interest-earning assets |
3 | 2 | 5 | |||||||||
Total interest-earning assets |
$ | (865 | ) | $ | (2,457 | ) | $ | (3,322 | ) | |||
Interest-bearing liabilities: |
||||||||||||
Savings accounts |
(91 | ) | 35 | (56 | ) | |||||||
NOW and money market accounts |
(238 | ) | 49 | (189 | ) | |||||||
Certificates of deposit |
(1,551 | ) | (531 | ) | (2,082 | ) | ||||||
Federal Home Loan Bank advances |
(192 | ) | 113 | (79 | ) | |||||||
Repurchase agreements and other |
(17 | ) | 14 | (3 | ) | |||||||
Total interest-bearing liabilities |
$ | (2,089 | ) | $ | (320 | ) | (2,409 | ) | ||||
Change in net interest income |
$ | (913 | ) | |||||||||
Provision for Loan Losses. A provision for loan losses is charged to income to bring the
total allowance for loan losses to a level considered by management to be adequate, based on
managements evaluation of such factors as the delinquency status of loans, current economic
conditions, the net realizable value of the underlying collateral, changes in the composition of
the loan portfolio and prior loan loss experience. The provision for loan losses decreased to $8.2
million in the second quarter of 2011, compared to $10.3 million in the second quarter of 2010.
This $2.1 million decrease in the provision for loan losses is primarily a result of a decrease in
the commercial loan portfolio of $4.0 million, a decrease in the permanent one-to four-family
residential real estate portfolio of $3.1 million and a decrease in the multifamily permanent real
estate portfolio of $1.6 million. These decreases are being driven primarily by decreases in the
volume of outstanding commercial loans of $8.0 million, permanent one-to four-family residential
real estate loans of $64.0 million and $6.0 million in the volume of outstanding multifamily
permanent real estate loans as of June 30, 2011, compared to balance outstanding at December 31,
2010.
Noninterest Income. Noninterest income increased in the second quarter of 2011 to $5.3 million, as
compared to $4.7 million in the second quarter of 2010. Affecting this comparison was the
recognition of increased service fees due to a valuation allowance of $1.3 million for mortgage
servicing rights being established in the second quarter of 2010. The second quarter of 2011 also
reflected lower security gains of $3.4 million that were included in the second quarter of 2010.
Finally, the second quarter of 2011 included a gain of $2.7 million from a bulk mortgage loan sale.
Noninterest Expense. Noninterest expense was $15.9 million in the second quarter of 2011, compared
to $17.3 million in the second quarter of 2010. The decrease in noninterest expense was driven by
lower salaries and employee benefits paid to employees. This decrease was driven primarily because
of the suspension of a matching contribution to the 401(k) plan for 2011 and, to a lesser extent,
the Employee Stock Ownership Plans repayment in 2010 of the loan made by the Company to the ESOP.
Partially offsetting this change was an increase in other expenses due to the acceleration of
expenses associated with negative escrow on loans in bankruptcy or foreclosure. Home Savings began
recognizing these expenses sooner after determining the possibility of collection was remote.
47
Table of Contents
Comparison of Operating Results for the Six Months Ended
June 30, 2011 and June 30, 2010
June 30, 2011 and June 30, 2010
Net Income (Loss). United Community recognized net income for the six months ended June 30, 2011,
of $1.2 million, or $0.04 per diluted share, compared to a net loss of $10.0 million, or $(0.33)
per diluted share, for the six months ended June 30, 2010. The primary cause of the change was
lower provision for loan losses recognized during the first six months of 2011. Compared with the
first six months of 2010, net interest income decreased $975,000, the provision for loan losses
decreased $12.3 million, non-interest income decreased $2.0 million, and non-interest expense
decreased $1.9 million. United Communitys annualized return on average assets and return on
average equity were 0.11% and 1.29%, respectively, for the six months ended June 30, 2011. The
annualized return on average assets and return on average equity for the comparable period in 2010
were (0.87)% and (9.05)%, respectively.
Net Interest Income. Net interest income for the six months ended June 30, 2011, was $34.7 million
compared to $35.7 million for the six months ended June 30, 2010. Total interest income decreased
$6.4 million in the first six months of 2011 compared to the first six months of 2010, primarily as
a result of a decrease of $209.6 million in the average balance of outstanding loans. United
Community also experienced a decrease in the yield on net loans of 13 basis points. The Companys
construction and segments of its commercial real estate loan portfolios declined as a result of
executing its strategic objective of reducing specific concentrations in these portfolios in the
current economic environment. The bulk mortgage loan sale also had decreased the average balance
of net loans during the period.
Total interest expense decreased $5.4 million for the six months ended June 30, 2011, as compared
to the same period last year. The change was due primarily to reductions of $5.3 million in
interest paid on deposits. The overall decrease in interest expense was attributable to a shift in
deposit balances from certificates of deposit to relatively less expensive non-time deposits. The
average outstanding balance of certificates of deposit declined by $95.4 million, while non-time
deposits increased by $49.1 million. Also contributing to the change was a reduction of 73 basis
points in the cost of certificates of deposit.
Primarily in the third quarter of 2008, Home Savings offered a 42-month time deposit product (the
Step CDs) to its customers in order to maintain adequate levels of liquidity as Home Savings
entered into the Bank order with regulators. While the Step CDs offered a blended rate over the
42-month term consistent with other 42-month certificates of deposit being offered in Home Savings
market at that time, the interest rate paid on Step CDs increases in regular intervals over the
life of the deposit, such that in the final six months of the deposit prior to maturity, the rate
paid is 6.50%. This product generated approximately
$140.0 million in deposits, substantially all of which will
mature in the first quarter of 2012.
The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a
decrease in the average balance of those funds of $84.3 million, despite an increase in the average
rate on those borrowings of 90 basis points in the first six months of 2011 compared to the same
period in 2010. The increase in rate is due to the change in the mix of borrowings, in that Home
Savings had no overnight advances with the FHLB at June 30, 2011. The decrease in interest expense
on repurchase agreements and other borrowings was due primarily to a decrease in the cost of those
liabilities of 7 basis points despite an increase in their average balances of $1.8 million.
48
Table of Contents
The following table shows the impact of interest rate and outstanding balance (volume) changes
compared to the first six months of last year. The interest rate spread for the six months ended
June 30, 2011, grew to 3.24% compared to 3.01% for the six months ended June 30, 2010. The net
interest margin increased 16 basis points to 3.45% for the six months ended June 30, 2011 compared
to 3.29% for the same period in 2010.
For the Six Months Ended June 30, | ||||||||||||
2011 vs. 2010 | ||||||||||||
Increase | Total | |||||||||||
(decrease) due to | increase | |||||||||||
Rate | Volume | (decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans |
$ | (1,113 | ) | $ | (5,717 | ) | $ | (6,830 | ) | |||
Loans held for sale |
(15 | ) | (17 | ) | (32 | ) | ||||||
Investment securities: |
||||||||||||
Available for sale |
(396 | ) | 856 | 460 | ||||||||
FHLB stock |
| | | |||||||||
Other interest-earning assets |
5 | 2 | 7 | |||||||||
Total interest-earning assets |
$ | (1,519 | ) | $ | (4,876 | ) | $ | (6,395 | ) | |||
Interest-bearing liabilities: |
||||||||||||
Savings accounts |
(153 | ) | 56 | (97 | ) | |||||||
NOW and money market accounts |
(542 | ) | 111 | (431 | ) | |||||||
Certificates of deposit |
(3,385 | ) | (1,401 | ) | (4,786 | ) | ||||||
Federal Home Loan Bank advances |
(353 | ) | 251 | (102 | ) | |||||||
Repurchase agreements and other |
(45 | ) | 41 | (4 | ) | |||||||
Total interest-bearing liabilities |
$ | (4,478 | ) | $ | (942 | ) | (5,420 | ) | ||||
Change in net interest income |
$ | (975 | ) | |||||||||
Provision for Loan Losses. A provision for loan losses is charged to income to bring the
total allowance for loan losses to a level considered by management to be adequate, based on
managements evaluation of such factors as the delinquency status of loans, current economic
conditions, the net realizable value of the underlying collateral, changes in the composition of
the loan portfolio and prior loan loss experience. The provision for loan losses decreased to
$10.4 million in the first six months of 2011, compared to $22.8 million in the first six months of
2010. This $12.3 million decrease in the provision for loan losses is primarily a result of a
decrease in all loan portfolio segments. Specifically, the permanent real estate portfolio
decreased $3.4 million, the construction portfolio decreased $2.5 million, the consumer portfolio
decreased $1.5 million and the commercial portfolio decreased $5.0 million. These decreases are
being driven primarily by a decrease in the volume of outstanding loans.
Noninterest Income. Noninterest income decreased in the first half of 2011 to $9.3 million, as
compared to the first half of 2010 of $11.3 million. Driving the decrease in noninterest income
was the recognition of lower gains on the sale of fewer available for sale securities and the gain
recognized on the sale of Home Savings Findlay, Ohio branch in the prior year. Partially
offsetting these declines was an increase in mortgage banking income due to the $2.7 million gain
recognized on the aforementioned bulk mortgage loan sale.
Noninterest Expense. Noninterest expense was $32.4 million in the first six months of 2011,
compared to $34.3 million in the first six months of 2010. The decrease in noninterest expense was
driven by lower salaries and employee benefits paid to employees. This decrease was driven
primarily because of the suspension of a matching contribution to the 401(k) plan for 2011 and, to
a lesser extent, the Employee Stock Ownership Plans repayment in 2010 of the loan made by the
Company to the ESOP. Partially offsetting this change was an increase in other expenses due to the
acceleration of expenses associated with negative escrow on loans in bankruptcy or foreclosure.
Home Savings began recognizing these expenses sooner after determining the possibility of
collection was remote.
49
Table of Contents
UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS
AVERAGE BALANCE SHEETS
The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average
interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended
June 30, 2011 and 2010. Average balance calculations were based on daily balances.
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Cost | Balance | Paid | Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Net loans (1) |
$ | 1,601,672 | $ | 21,421 | 5.35 | % | $ | 1,805,746 | $ | 24,918 | 5.52 | % | ||||||||||||
Net loans held for sale |
3,401 | 41 | 4.82 | % | 4,466 | 69 | 6.18 | % | ||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
Available for sale |
351,029 | 3,094 | 3.53 | % | 315,794 | 2,896 | 3.67 | % | ||||||||||||||||
Federal Home Loan Bank stock |
26,464 | 294 | 4.44 | % | 26,464 | 294 | 4.44 | % | ||||||||||||||||
Other interest-earning assets |
29,021 | 13 | 0.18 | % | 23,621 | 8 | 0.14 | % | ||||||||||||||||
Total interest-earning assets |
2,011,587 | 24,863 | 4.94 | % | 2,176,091 | 28,185 | 5.18 | % | ||||||||||||||||
Noninterest-earning assets |
129,300 | 135,107 | ||||||||||||||||||||||
Total assets |
$ | 2,140,887 | $ | 2,311,198 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW and money market accounts |
$ | 434,973 | $ | 621 | 0.57 | % | $ | 411,555 | $ | 810 | 0.79 | % | ||||||||||||
Savings accounts |
241,968 | 147 | 0.24 | % | 212,153 | 203 | 0.38 | % | ||||||||||||||||
Certificates of deposit |
888,732 | 5,313 | 2.39 | % | 961,958 | 7,395 | 3.07 | % | ||||||||||||||||
Federal Home Loan Bank advances |
118,558 | 796 | 2.69 | % | 244,326 | 875 | 1.43 | % | ||||||||||||||||
Repurchase agreements and other |
98,345 | 928 | 3.77 | % | 96,969 | 931 | 3.84 | % | ||||||||||||||||
Total interest-bearing liabilities |
1,782,576 | 7,805 | 1.75 | % | 1,926,961 | 10,214 | 2.12 | % | ||||||||||||||||
Noninterest-bearing liabilities |
176,545 | 165,026 | ||||||||||||||||||||||
Total liabilities |
1,959,121 | 2,091,987 | ||||||||||||||||||||||
Equity |
181,766 | 219,211 | ||||||||||||||||||||||
Total liabilities and equity |
$ | 2,140,877 | $ | 2,311,198 | ||||||||||||||||||||
Net interest income and interest
rate spread |
$ | 17,058 | 3.19 | % | $ | 17,971 | 3.06 | % | ||||||||||||||||
Net interest margin |
3.39 | % | 3.30 | % | ||||||||||||||||||||
Average interest-earning assets
to average interest-bearing liabilities |
112.85 | % | 112.93 | % | ||||||||||||||||||||
(1) | Nonaccrual loans are included in the average balance at a yield of 0%. |
50
Table of Contents
UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS
AVERAGE BALANCE SHEETS
The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average
interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the six month periods ended
June 30, 2011 and 2010. Average balance calculations were based on daily balances.
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Cost | Balance | Paid | Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Net loans (1) |
$ | 1,616,856 | $ | 43,931 | 5.43 | % | $ | 1,826,479 | $ | 50,761 | 5.56 | % | ||||||||||||
Net loans held for sale |
5,189 | 107 | 4.12 | % | 5,954 | 139 | 4.67 | % | ||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
Available for sale |
339,733 | 5,941 | 3.50 | % | 286,434 | 5,481 | 3.83 | % | ||||||||||||||||
Federal Home Loan Bank stock |
26,464 | 594 | 4.49 | % | 26,464 | 594 | 4.49 | % | ||||||||||||||||
Other interest-earning assets |
26,933 | 22 | 0.16 | % | 23,931 | 15 | 0.12 | % | ||||||||||||||||
Total interest-earning assets |
2,015,175 | 50,595 | 5.02 | % | 2,169,262 | 56,990 | 5.23 | % | ||||||||||||||||
Noninterest-earning assets |
129,590 | 132,205 | ||||||||||||||||||||||
Total assets |
$ | 2,144,765 | $ | 2,301,467 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW and money market accounts |
$ | 430,361 | $ | 1,256 | 0.58 | % | $ | 405,623 | $ | 1,687 | 0.83 | % | ||||||||||||
Savings accounts |
234,165 | 314 | 0.27 | % | 209,809 | 411 | 0.39 | % | ||||||||||||||||
Certificates of deposit |
896,336 | 10,842 | 2.42 | % | 991,735 | 15,628 | 3.15 | % | ||||||||||||||||
Federal Home Loan Bank advances |
128,848 | 1,621 | 2.52 | % | 213,155 | 1,723 | 1.62 | % | ||||||||||||||||
Repurchase agreements and other |
98,763 | 1,850 | 3.75 | % | 96,978 | 1,854 | 3.82 | % | ||||||||||||||||
Total interest-bearing liabilities |
1,788,473 | 15,883 | 1.78 | % | 1,917,300 | 21,303 | 2.22 | % | ||||||||||||||||
Noninterest-bearing liabilities |
175,105 | 162,606 | ||||||||||||||||||||||
Total liabilities |
1,963,578 | 2,079,906 | ||||||||||||||||||||||
Equity |
181,187 | 221,561 | ||||||||||||||||||||||
Total liabilities and equity |
$ | 2,144,765 | $ | 2,301,467 | ||||||||||||||||||||
Net interest income and interest
rate spread |
$ | 34,712 | 3.24 | % | $ | 35,687 | 3.01 | % | ||||||||||||||||
Net interest margin |
3.45 | % | 3.29 | % | ||||||||||||||||||||
Average interest-earning assets to
average interest-bearing liabilities |
112.68 | % | 113.14 | % | ||||||||||||||||||||
(1) | Nonaccrual loans are included in the average balance at a yield of 0%. |
51
Table of Contents
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
Qualitative Aspects of Market Risk. The principal market risk affecting United Community is
interest rate risk. United Community is subject to interest rate risk to the extent that its
interest earning assets reprice differently than its interest bearing liabilities. Interest rate
risk is defined as the sensitivity of United Communitys earnings and net asset values to changes
in interest rates. As part of its efforts to monitor and manage the interest rate risk, the Board
of Directors of Home Savings has adopted an interest rate risk policy that requires the Home
Savings Board to review quarterly reports related to interest rate risk and annually set exposure
limits for Home Savings as a guide to management in setting and implementing day to day operating
strategies.
Quantitative Aspects of Market Risk. As part of its interest rate risk analysis, Home Savings uses
the net portfolio value (NPV) and net interest income methodology. Generally, NPV is the
discounted present value of the difference between incoming cash flows on interest earning and
other assets and outgoing cash flows on interest bearing and other liabilities. The application of
the methodology attempts to quantify interest rate risk as the change in the NPV and net interest
income that would result from various levels of theoretical basis point changes in market interest
rates.
Home Savings uses an NPV and earnings simulation model prepared internally as its primary method to
identify and manage its interest rate risk profile. The model is based on actual cash flows and
repricing characteristics for all financial instruments and incorporates market-based assumptions
regarding the impact of changing interest rates on future volumes and the prepayment rate of
applicable financial instruments. Assumptions based on the historical behavior of deposit rates
and balances in relation to changes in interest rates also are incorporated into the model. These
assumptions are inherently uncertain and, as a result, the model cannot precisely measure NPV or
net interest income or precisely predict the impact of fluctuations in interest rates on net
interest rate changes as well as changes in market conditions and management strategies.
Presented below are analyses of Home Savings interest rate risk as measured by changes in NPV and
net interest income for instantaneous and sustained parallel shifts of 100 basis point increments
in market interest rates. As noted, for the quarter ended June 30, 2011, the percentage changes
fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV
ratio and the maximum change in interest income the Home Savings Board deems advisable in the event
of various changes in interest rates. See the table below for Board adopted policy limits.
Quarter Ended June 30, 2011 | ||||||||||||||||||||||||||||
NPV as % of portfolio value of assets | Next 12 months net interest income |
|||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Change in | Internal policy |
|||||||||||||||||||||||||||
rates | Internal | limitations | Internal | |||||||||||||||||||||||||
(Basis | NPV | policy | Change in | on NPV | policy | |||||||||||||||||||||||
points) | Ratio | limitations | % | Change | $ Change | limitations | % Change | |||||||||||||||||||||
300 |
9.01 | % | 6.00 | % | -0.96 | % | 25.00 | % | $ | 2,486 | -15.00 | % | 3.99 | % | ||||||||||||||
200 |
9.69 | 7.00 | -0.28 | 25.00 | 2,365 | -10.00 | 3.80 | |||||||||||||||||||||
100 |
10.16 | 7.00 | 0.19 | 25.00 | 1,480 | -5.00 | 2.38 | |||||||||||||||||||||
Static |
9.97 | 8.00 | | | | | |
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Year Ended December 31, 2010 | ||||||||||||||||||||||||||||
NPV as % of portfolio value of assets | Next 12 months net interest income |
|||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Change in | Internal policy |
|||||||||||||||||||||||||||
rates | Internal | limitations | Internal | |||||||||||||||||||||||||
(Basis | NPV | policy | Change in | on NPV | policy | |||||||||||||||||||||||
points) | Ratio | limitations | % | Change | $ Change | limitations | % Change | |||||||||||||||||||||
300 |
7.37 | % | 6.00 | % | -2.04 | % | 25.00 | % | $ | (121 | ) | -15.00 | % | -0.17 | % | |||||||||||||
200 |
8.33 | 7.00 | -1.08 | 25.00 | 123 | -10.00 | 0.17 | |||||||||||||||||||||
100 |
9.08 | 7.00 | -0.33 | 25.00 | 215 | -5.00 | 0.30 | |||||||||||||||||||||
Static |
9.41 | 8.00 | | | | | |
Due to a low interest rate environment, it was not possible to calculate results for a drop in
interest rates.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV
approach. For example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market interest rates. In
addition, the interest rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, expected rates of prepayment on
loans and early withdrawal levels from certificates of deposit may deviate significantly from those
assumed in making risk calculations.
Potential Impact of Changes in Interest Rates. Home Savings profitability depends to a large
extent on its net interest income, which is the difference between interest income from loans and
securities and interest expense on deposits and borrowings. Like most financial institutions, Home
Savings short-term interest income and interest expense are affected significantly by changes in
market interest rates and other economic factors beyond its control.
In the last twelve months, Home Savings has experienced the positive impact of a steeper yield
curve. The net interest margin has benefited from the repricing of certificates of deposit at
lower levels as loan yields have stabilized.
ITEM 4. | Controls and Procedures |
An evaluation was carried out by United Communitys management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of United Communitys disclosure controls
and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as
of June 30, 2011. Based on their evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that United Communitys disclosure controls and procedures were effective as
of June 30, 2011. During the quarter ended June 30, 2011, there were no changes in United
Communitys internal controls over financial reporting that have materially affected or are
reasonably likely to materially affect United Communitys internal controls over financial
reporting.
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PART II. OTHER INFORMATION
UNITED COMMUNITY FINANCIAL CORP.
ITEM 1 | - Legal Proceedings |
United Community and its subsidiaries are parties to litigation arising in the normal course of
business. While it is impossible to determine the ultimate resolution of these contingent matters,
management believes any resulting liability would not have a material effect upon United
Communitys financial statements.
ITEM 1A | - Risk Factors |
There have been no significant changes in United Communitys risk factors as outlined in United
Communitys Form 10-K for the period ended December 31, 2010. The risk factors described in the
Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to the Company or that management currently deems to be
immaterial also may materially adversely affect the Companys business, financial condition and/or
operating results. Moreover, the Company undertakes no obligation and disclaims any intention to
publish revised information or updates to forward looking statements contained in such risk factors
or in any other statement made at any time by the Company or any of its directors, officers,
employees or other representatives, unless and until any such revisions or updates are expressly
required to be disclosed by securities laws or regulations.
ITEM 2 | - Unregistered Sales of Equity Securities and Use of Proceeds |
There were no purchases of UCFC shares during the quarter ended June 30, 2011.
ITEM 6 | - Exhibits |
Exhibits
Exhibit Number | Description | |||
3.1 | Articles of Incorporation |
|||
3.2 | Amended Code of Regulations |
|||
10.1 | Executive Incentive Plan |
|||
10.2 | State Bonus and Retention Plan |
|||
31.1 | Section 302 Certification by Chief Executive Officer |
|||
31.2 | Section 302 Certification by Chief Financial Officer |
|||
32 | Certification of Statements by Chief Executive Officer and
Chief Financial Officer |
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UNITED COMMUNITY FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized. |
UNITED COMMUNITY FINANCIAL CORP. |
||||
Date: August 12, 2011 | /s/ Patrick W. Bevack | |||
Patrick W. Bevack | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
Date: August 12, 2011 | /s/ James R. Reske | |||
James R. Reske, CFA | ||||
Treasurer and Chief Financial Officer (Principal Financial Officer) | ||||
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UNITED COMMUNITY FINANCIAL CORP.
Exhibit 3.1
Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on
March 13, 1998 with the Securities and Exchange Commission (SEC), Exhibit 3.1.
Exhibit 3.2
Incorporated by reference to the 1998 Form 10-K filed by United Community on March 31, 1999 with
the SEC, film number 99582343, Exhibit 3.2.
Exhibit 10.1
Incorporated by reference to the Form 8-K filed by United Community on May 4, 2011 with the SEC,
film number 11811040, Exhibit 10.1.
Exhibit 10.2
Incorporated by reference to the Form 8-K filed by United Community on May 4, 2011 with the SEC,
film number 11811040, Exhibit 10.2.
56