ucfc-10q_20160331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

¨

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

 

000-024399

 

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)

Registrant’s 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  x    No  ¨

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  x    No  ¨

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

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 47,448,240 common shares as of April 30, 2016.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

PAGE

Part I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

Consolidated Statements of Financial Condition as of March 31, 2016 (Unaudited) and December 31, 2015

3

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

4

 

 

 

Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2016 and 2015 (Unaudited)

6

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

7

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8-46

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

47-53

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

54

 

 

 

Item 4.

 

Controls and Procedures

55

 

Part II.OTHER INFORMATION

56

 

 

 

Item 1.

 

Legal Proceedings

56

 

 

 

Item 1A.

 

Risk Factors

56

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 3.

 

Defaults Upon Senior Securities (None)

57

 

 

 

Item 4.

 

Mine Safety Disclosures (None)

57

 

 

 

Item 5.

 

Other Information (None)

57

 

 

 

Item 6.

 

Exhibits

58

 

Signatures

59

 

Exhibits

60

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

Cash and deposits with banks

 

$

22,191

 

 

$

20,528

 

Federal funds sold

 

 

18,379

 

 

 

15,382

 

Total cash and cash equivalents

 

 

40,570

 

 

 

35,910

 

Securities:

 

 

 

 

 

 

 

 

Available for sale, at fair value

 

 

365,369

 

 

 

357,670

 

Held to maturity, (fair value of $108,702 and $109,644, respectively)

 

 

107,838

 

 

 

110,699

 

Loans held for sale, at lower of cost or market

 

 

3,991

 

 

 

9,085

 

Loans held for sale, at fair value

 

 

32,007

 

 

 

26,716

 

Loans, net of allowance for loan losses of $16,903 and $17,712

 

 

1,359,146

 

 

 

1,316,192

 

Federal Home Loan Bank stock, at cost

 

 

18,068

 

 

 

18,068

 

Premises and equipment, net

 

 

20,594

 

 

 

20,678

 

Accrued interest receivable

 

 

5,783

 

 

 

5,978

 

Real estate owned and other repossessed assets, net

 

 

1,846

 

 

 

2,727

 

Goodwill and other intangible assets

 

 

1,620

 

 

 

 

Core deposit intangible

 

 

17

 

 

 

30

 

Cash surrender value of life insurance

 

 

54,731

 

 

 

54,366

 

Other assets

 

 

24,850

 

 

 

29,870

 

Total assets

 

$

2,036,430

 

 

$

1,987,989

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Interest bearing

 

$

1,235,783

 

 

$

1,208,238

 

Non-interest bearing

 

 

230,831

 

 

 

227,505

 

Total deposits

 

 

1,466,614

 

 

 

1,435,743

 

Borrowed funds:

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

 

 

 

 

 

 

Long-term Federal Home Loan Bank advances

 

 

47,170

 

 

 

46,975

 

Short-term Federal Home Loan Bank advances

 

 

244,000

 

 

 

232,000

 

Total Federal Home Loan Bank advances

 

 

291,170

 

 

 

278,975

 

Repurchase agreements and other

 

 

529

 

 

 

535

 

Total borrowed funds

 

 

291,699

 

 

 

279,510

 

Advance payments by borrowers for taxes and insurance

 

 

16,247

 

 

 

21,174

 

Accrued interest payable

 

 

110

 

 

 

53

 

Accrued expenses and other liabilities

 

 

9,956

 

 

 

7,264

 

Total liabilities

 

 

1,784,626

 

 

 

1,743,744

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock-no par value; 1,000,000 shares authorized and no shares issued and

   outstanding

 

 

 

 

 

 

Common stock-no par value; 499,000,000 shares authorized; 54,138,910 shares

   issued and 47,506,526 and 47,517,644 shares, respectively, outstanding

 

 

173,578

 

 

 

174,304

 

Retained earnings

 

 

142,075

 

 

 

140,819

 

Accumulated other comprehensive income (loss)

 

 

(12,938

)

 

 

(19,220

)

Treasury stock, at cost, 6,632,384 and 6,621,266 shares, respectively

 

 

(50,911

)

 

 

(51,658

)

Total shareholders’ equity

 

 

251,804

 

 

 

244,245

 

Total liabilities and shareholders’ equity

 

$

2,036,430

 

 

$

1,987,989

 

 

See Notes to Consolidated Financial Statements. 

 

 

 

3


 

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands, except per share data)

 

Interest income

 

 

 

 

 

 

 

 

Loans

 

$

13,801

 

 

$

12,691

 

Loans held for sale

 

 

332

 

 

 

294

 

Securities available for sale, nontaxable

 

 

123

 

 

 

 

Securities available for sale, taxable

 

 

1,935

 

 

 

2,861

 

Securities held to maturity, nontaxable

 

 

55

 

 

 

 

Securities held to maturity, taxable

 

 

577

 

 

 

 

Federal Home Loan Bank stock dividends

 

 

182

 

 

 

182

 

Other interest earning assets

 

 

15

 

 

 

6

 

Total interest income

 

 

17,020

 

 

 

16,034

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

1,612

 

 

 

1,533

 

Federal Home Loan Bank advances

 

 

530

 

 

 

305

 

Repurchase agreements and other

 

 

5

 

 

 

316

 

Total interest expense

 

 

2,147

 

 

 

2,154

 

Net interest income

 

 

14,873

 

 

 

13,880

 

Provision (recovery) for loan losses

 

 

2,155

 

 

 

(184

)

Net interest income after provision for loan losses

 

 

12,718

 

 

 

14,064

 

Non-interest income

 

 

 

 

 

 

 

 

Non-deposit investment income

 

 

300

 

 

 

292

 

Mortgage servicing fees

 

 

698

 

 

 

674

 

Deposit related fees

 

 

1,326

 

 

 

1,065

 

Mortgage servicing rights valuation

 

 

(435

)

 

 

(161

)

Mortgage servicing rights amortization

 

 

(468

)

 

 

(443

)

Other service fees

 

 

18

 

 

 

17

 

Net gains (losses):

 

 

 

 

 

 

 

 

Securities available for sale (includes $153 and $11,

   respectively, accumulated other comprehensive income

   reclassifications for unrealized net gains on available

   for sale securities)

 

 

153

 

 

 

11

 

Mortgage banking income

 

 

1,382

 

 

 

1,553

 

Real estate owned and other repossessed assets, net

 

 

(13

)

 

 

(90

)

Card fees

 

 

881

 

 

 

816

 

Other income

 

 

816

 

 

 

384

 

Total non-interest income

 

 

4,658

 

 

 

4,118

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits (includes $(278) and $0, respectively,

   accumulated other comprehensive income reclassifications from

   prior service credit on postretirement plan).

 

 

7,088

 

 

 

7,176

 

Occupancy

 

 

862

 

 

 

918

 

Equipment and data processing

 

 

1,835

 

 

 

1,672

 

Franchise tax

 

 

442

 

 

 

326

 

Advertising

 

 

127

 

 

 

142

 

Amortization of core deposit intangible

 

 

13

 

 

 

14

 

FDIC insurance premiums

 

 

326

 

 

 

326

 

Other insurance premiums

 

 

89

 

 

 

84

 

Legal and consulting fees

 

 

197

 

 

 

217

 

Other professional fees

 

 

70

 

 

 

376

 

Real estate owned and other repossessed asset expenses

 

 

72

 

 

 

141

 

Other expenses

 

 

1,343

 

 

 

1,289

 

Total non-interest expenses

 

 

12,464

 

 

 

12,681

 

Income before income taxes

 

 

4,912

 

 

 

5,501

 

Income tax expense (includes $151 and $4 income tax expense from reclassification items)

 

 

1,592

 

 

 

1,815

 

Net income

 

$

3,320

 

 

$

3,686

 

(Continued)

4


 

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2016

 

 

 

2015

 

 

 

(Dollars in thousands, except per share data)

 

Net income

 

$

3,320

 

 

$

3,686

 

Other comprehensive income

 

 

 

 

 

 

 

 

Unrealized gain on securities, available for sale, net of  reclassifications

 

 

 

 

 

 

 

 

and tax of $3,460 and $2,094, respectively

 

 

6,429

 

 

 

3,890

 

Accretion of unrealized losses on securities transferred from available

 

 

 

 

 

 

 

 

for sale to held to maturity, net of tax of $18 and $0, respectively

 

 

34

 

 

 

 

Accretion of unrecognized actuarlial gains and amortization of prior service credit on

 

 

 

 

 

 

 

 

postretirement plan, net of tax of $(97) and $0, respectively recognized in net income

 

 

(181

)

 

 

 

Total other comprehensive income

 

 

6,282

 

 

 

3,890

 

Comprehensive income

 

$

9,602

 

 

$

7,576

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

0.07

 

Diluted

 

 

0.07

 

 

 

0.07

 

 

See Notes to Consolidated Financial Statements.

 

 

 

5


 

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common

Shares

Outstanding

 

 

Common

Stock

 

 

Retained

Earnings

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

 

 

(Dollars in thousands, except per share data)

 

Balance January 1, 2016

 

 

47,517,644

 

 

$

174,304

 

 

$

140,819

 

 

$

(19,220

)

 

$

(51,658

)

 

$

244,245

 

Net income

 

 

 

 

 

 

 

 

 

 

3,320

 

 

 

 

 

 

 

 

 

 

 

3,320

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,282

 

 

 

 

 

 

 

6,282

 

Stock option exercises

 

 

8,000

 

 

 

 

 

 

 

(51

)

 

 

 

 

 

 

62

 

 

 

11

 

Stock option expenses

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Restricted stock grants

 

 

159,238

 

 

 

(947

)

 

 

(285

)

 

 

 

 

 

 

1,232

 

 

 

 

Restricted stock forfeitures

 

 

(1,014

)

 

 

3

 

 

 

7

 

 

 

 

 

 

 

(10

)

 

 

 

Restricted stock expense

 

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

215

 

Purchase of James & Sons Insurance

 

 

262,705

 

 

 

 

 

 

(541

)

 

 

 

 

 

 

2,049

 

 

 

1,508

 

Cash dividend payments ($0.025 per share)

 

 

 

 

 

 

 

 

 

 

(1,194

)

 

 

 

 

 

 

 

 

 

 

(1,194

)

Treasury stock purchases

 

 

(440,047

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,586

)

 

 

(2,586

)

Balance March 31, 2016

 

 

47,506,526

 

 

$

173,578

 

 

$

142,075

 

 

$

(12,938

)

 

$

(50,911

)

 

$

251,804

 

 

 

 

Common

Shares

Outstanding

 

 

Common

Stock

 

 

Retained

Earnings

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

 

 

(Dollars in thousands, except per share data)

 

Balance January 1, 2015

 

 

49,239,004

 

 

$

174,385

 

 

$

128,512

 

 

$

(19,998

)

 

$

(42,764

)

 

$

240,135

 

Net income

 

 

 

 

 

 

 

 

 

 

3,686

 

 

 

 

 

 

 

 

 

 

 

3,686

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,890

 

 

 

 

 

 

 

3,890

 

Stock option exercises

 

 

8,000

 

 

 

 

 

 

 

(54

)

 

 

 

 

 

 

70

 

 

 

16

 

Stock option expenses

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Restricted stock grants

 

 

125,026

 

 

 

(664

)

 

 

(427

)

 

 

 

 

 

 

1,091

 

 

 

 

Restricted stock forfeitures

 

 

(8,091

)

 

 

6

 

 

 

14

 

 

 

 

 

 

 

(52

)

 

 

(32

)

Restricted stock expense

 

 

 

 

 

 

190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

190

 

Cash dividend payments ($0.01 per share)

 

 

 

 

 

 

 

 

 

 

(493

)

 

 

 

 

 

 

 

 

 

 

(493

)

Treasury stock purchases

 

 

(54,527

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(294

)

 

 

(294

)

Balance March 31, 2015

 

 

49,309,412

 

 

$

173,923

 

 

$

131,238

 

 

$

(16,108

)

 

$

(41,949

)

 

$

247,104

 

 

See Notes to Consolidated Financial Statements.

 

 

 

6


 

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

Net income

 

$

3,320

 

 

$

3,686

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Provision (recovery) for loan losses

 

 

2,155

 

 

 

(184

)

Mortgage banking income

 

 

(579

)

 

 

(992

)

Changes in fair value on loans held for sale

 

 

(804

)

 

 

(561

)

Net losses on real estate owned and other repossessed assets sold

 

 

13

 

 

 

90

 

Net gain on available for sale securities sold

 

 

(153

)

 

 

(11

)

Net (gain) loss on other assets sold

 

 

(2

)

 

 

 

Amortization of premiums and accretion of discounts

 

 

1,848

 

 

 

76

 

Depreciation and amortization

 

 

559

 

 

 

510

 

Net change in interest receivable

 

 

195

 

 

 

555

 

Net change  in interest payable

 

 

57

 

 

 

34

 

Net change in prepaid and other assets

 

 

(629

)

 

 

(987

)

Net change in other liabilities

 

 

(305

)

 

 

345

 

Stock based compensation

 

 

218

 

 

 

147

 

Net principal disbursed on loans originated for sale

 

 

(51,429

)

 

 

(55,885

)

Proceeds from sale of loans held for sale

 

 

52,104

 

 

 

46,925

 

Net change in deferred tax assets

 

 

1,437

 

 

 

3,765

 

Cash surrender value of life insurance

 

 

(365

)

 

 

(332

)

Net change in interest rate caps

 

 

3

 

 

 

54

 

Net cash from operating activities

 

 

7,643

 

 

 

(2,765

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Proceeds from the principal repayments and maturities of securities available for sale

 

 

8,211

 

 

 

7,477

 

Proceeds from the principal repayments and maturities of securities held to maturity

 

 

2,739

 

 

 

 

Proceeds from the sale of securities available for sale

 

 

18,134

 

 

 

5,153

 

Proceeds from the sale of real estate owned and other repossessed assets

 

 

1,171

 

 

 

751

 

Proceeds from the sale of loans held for investment

 

 

1

 

 

 

 

Proceeds from the sale of premises and equipment

 

 

2

 

 

 

 

Purchases of premises and equipment

 

 

(467

)

 

 

(290

)

Principal disbursed on loans, net of repayments

 

 

(36,809

)

 

 

(19,110

)

Loans purchased

 

 

(8,681

)

 

 

(1,304

)

Purchase of securities available for sale

 

 

(21,496

)

 

 

 

Net cash received in acquisition

 

 

43

 

 

 

 

Net cash from investing activities

 

 

(37,152

)

 

 

(7,323

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net increase in checking, savings and money market accounts

 

 

45,534

 

 

 

64,632

 

Net decrease in certificates of deposit

 

 

(14,663

)

 

 

(5,724

)

Net decrease in advance payments by borrowers for taxes and insurance

 

 

(4,927

)

 

 

(5,375

)

Net change in short-term FHLB advances

 

 

12,000

 

 

 

(34,000

)

Repayments of repurchase agreements and other borrowed funds

 

 

(6

)

 

 

(6

)

Proceeds from the exercise of stock options

 

 

11

 

 

 

16

 

Dividends paid

 

 

(1,194

)

 

 

(493

)

Purchase of treasury stock

 

 

(2,586

)

 

 

(277

)

Net cash from financing activities

 

 

34,169

 

 

 

18,773

 

Change in cash and cash equivalents

 

 

4,660

 

 

 

8,685

 

Cash and cash equivalents, beginning of period

 

 

35,910

 

 

 

32,980

 

Cash and cash equivalents, end of period

 

$

40,570

 

 

$

41,665

 

See Notes to Consolidated Financial Statements

 

 

 

7


 

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 (the 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, 31 retail banking offices and loan production centers located throughout Ohio, western Pennsylvania and West Virginia.  On January 29, 2016, United Community acquired Forge Financial Services Inc. d/b/a James & Sons Insurance Company of Youngstown Ohio.  James & Sons Insurance, a subsidiary of United Community, is engaged in the business of selling insurance including auto, commercial, homeowners and life-health insurance.

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 (U.S. GAAP) 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 months ended March 31, 2016, are not necessarily indicative of the results to be expected for the year ending December 31, 2016. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes contained in United Community’s Form 10-K for the year ended December 31, 2015.

The consolidated financial statements include the accounts of United Community and its subsidiaries.  All material inter-company transactions have been eliminated.  Some items in the prior year financial statements were reclassified to conform to the current presentation. These reclassifications had no effect on prior year consolidated statements of operations or shareholders’ equity.

 

 

2.

RECENT ACCOUNTING DEVELOPMENTS

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The ASU amends the current consolidation guidance and affects both the variable interest entity and voting interest entity consolidation models. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance as of January 1, 2016 did not have an impact on the Company’s consolidated financial statements.

8


 

In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2017.  Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The ASU will require all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Key provisions include the elimination of “windfall pools” and removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable.  Additionally, the simplification permits entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification of the award.  Entities are now permitted to make accounting policy elections for the impact of forfeitures on the recognition of expense for share-based payment awards.  Lastly, there are two provisions that are only available to companies that are nonpublic business entities, as defined in ASC 718: (i) a practical expedient for determining the expected term of certain share-based awards, which would be adopted prospectively, and (ii) a one-time opportunity to change its measurement basis for all liability-classified awards to intrinsic value upon adoption of the ASU.  The new guidance is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period.  For all other entities, it is effective for annual periods beginning after December 17, 2017, and interim periods within annual periods after December 15, 2018.  Early adoption is permitted in any interim or annual period, with adjustments reflected as of the beginning of the fiscal year of adoption.  Management has elected not to early-adopt this ASU and is evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.    

 

 

3.

STOCK COMPENSATION

Stock Options:

On April 30, 2015, shareholders approved the United Community Financial Corp. 2015 Long Term Incentive Compensation Plan (the 2015 Plan). The purpose of the 2015 Plan is to provide a means through which United Community may attract and retain employees and non-employee directors, to provide incentives that align their interest with those of United Community’s shareholders and promote the success of United Community’s business.  All employees and non-employee directors are eligible to participate in the 2015 Plan.  The 2015 Plan provides for the issuance of up to 1,200,000 shares that are to be used for awards of stock options, stock awards, stock units, stock appreciation rights, annual bonus awards and long-term incentive awards.

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 was 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 was terminated on April 30, 2015 upon the adoption of the 2015 Plan, although the 2007 Plan survives so long as awards issued under the 2007 Plan remain outstanding and exercisable.  The 2007 Plan provided for the issuance of up to 2,000,000 shares that were to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards.

9


 

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 1999 Plan was 3,569,766. Because the 1999 Plan terminated, no additional options may be issued under it.

There were no stock options granted in the three months ended March 31, 2016 and there were 2,192 stock options granted in the three months ended March 31, 2015. The options must be exercised within 10 years from the date of grant.  Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $3,000 in stock option expense for the three months ended March 31, 2016.  The Company recognized $6,000 in stock option expense for the three months ended March 31, 2015. The Company expects to recognize additional expense of $5,000 for the remainder of 2016, and $1,000 in 2017.

A summary of activity in the plans is as follows:

 

 

For the three months ended

 

 

March 31, 2016

 

 

 

 

 

 

Weighted

 

 

Aggregate

 

 

 

 

 

 

average

 

 

intrinsic value

 

 

Shares

 

 

exercise price

 

 

(in thousands)

 

Outstanding at beginning of year

 

572,323

 

 

$

2.56

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

Exercised

 

(8,000

)

 

 

1.48

 

 

 

 

 

Forfeited and expired

 

(600

)

 

 

2.10

 

 

 

 

 

Outstanding at end of period

 

563,723

 

 

 

2.58

 

 

$

1,854

 

Options exercisable at end of period

 

551,775

 

 

 

2.53

 

 

$

1,845

 

 

Information related to the stock option plans for the three months ended March 31, 2016 and 2015 follows:

 

 

March 31, 2016

 

 

March 31, 2015

 

Intrinsic value of options exercised

$

33,920

 

 

$

26,400

 

Cash received from option exercises

 

11,000

 

 

 

16,000

 

Tax benefit realized from option exercises

 

 

 

 

 

Weighted average fair value of options granted, per share

$

 

 

$

1.93

 

 

As of March 31, 2016, the cost of nonvested stock options is expected to be recognized over a weighted-average period of 1.25 years.

The Company did not grant options during the three months ended March 31, 2016.  The fair value of options granted during the three months ended March 31, 2015 was determined using the following weighted-average assumptions as of the grant date:

 

 

Three months ended

 

 

March 31, 2015

 

Risk-free interest rate

 

1.49

%

Expected term (years)

 

5

 

Expected stock volatility

 

36.66

%

Dividend yield

 

0.75

%

 

Outstanding stock options at March 31, 2016 have a weighted average remaining life of 3.80 years and may be exercised in the range of $1.20 to $5.89.

10


 

Restricted Stock Awards:

The 2007 Plan permitted and the 2015 plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at March 31, 2016 aggregated 370,510, of which 67,103 will vest during the remainder of 2016, 127,316 will vest in 2017, 97,224 will vest in 2018 and 78,867 will vest in 2019. Expenses related to restricted stock awards are charged to salaries and employee benefits and are recognized over the vesting period of the awards based on the fair value of the shares at the grant date. The Company recognized approximately $215,000 and $190,000 in restricted stock award expenses for the three months ended March 31, 2016 and 2015, respectively. The Company expects to recognize additional expenses of approximately $667,000 in 2016, $549,000 in 2017, $383,000 in 2018 and $102,000 in 2019.  The total average per share value of shares vested during the three months ended March 31, 2016 was $5.70.

A summary of changes in the Company’s nonvested restricted shares for the three months ended March 31, 2016 is as follows:

 

 

For the three months ended

 

 

March 31, 2016

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

average

 

 

 

 

 

 

grant date

 

 

Shares

 

 

fair value

 

Nonvested at beginning of year

 

260,490

 

 

$

4.68

 

Granted

 

159,238

 

 

$

5.95

 

Vested

 

(48,204

)

 

$

4.74

 

Forfeited

 

(1,014

)

 

$

3.59

 

Nonvested shares at end of period

 

370,510

 

 

$

5.22

 

 

Executive Incentive Plan

The Executive Incentive Plan (EIP) provides incentive compensation awards to certain officers of the Company. Executive incentive awards are generally based upon the actual performance of the Company and individual participant performance for the twelve months ending December 31, compared to the actual performance of a peer group during the same twelve month period. The target incentive awards for each year are measured as a percentage of the base salary of participating officers.  Once the awards under the EIP are calculated, they are paid 80% in cash and 20% in restricted stock. The restricted stock vest equally over three years, beginning on the first anniversary of the date the restricted stock is issued.  The Company incurred $76,000 in expense for the restricted stock portion of the EIP and $325,000 for the cash portion of the EIP for the three months ended March 31, 2016, respectively.  The Company incurred $68,000 in expense for the restricted stock portion of the EIP and $168,000 for the cash portion of the EIP for the three months ended March 31, 2015, respectively.  Restricted stock expenses for the EIP are included in the total restricted stock expenses discussed above.  

Long-term Incentive Plan

The Long-term Incentive Plan (LTIP) provides a long-term incentive compensation opportunity to certain executive officers, whose participation and target award opportunities will be approved by the Compensation Committee of the Board of Directors. Each participant in the LTIP will be granted a target number of Performance Share Units (PSUs).  Target PSUs will be determined as a percentage of base salary and translated into share units based on the Company’s average stock price at the appropriate measurement date.  The performance period for the annual grant for a given year will be from January 1, year 1 through December 31, year 3.   The Company incurred $96,000 for the LTIP for the three months ended March 31, 2016.  The Company incurred $48,000 in expense for the LTIP for the three months ended March 31, 2015.

 

 

 

11


 

 

4.

SECURITIES  

Components of the available for sale portfolio are as follows:

 

 

 

March 31, 2016

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

unrealized

 

 

unrealized

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government sponsored entities' securities

 

$

208,369

 

 

$

4,529

 

 

$

 

 

$

212,898

 

States of the U.S. and political subdivisions

 

 

35,294

 

 

 

463

 

 

 

(17

)

 

 

35,740

 

Mortgage-backed GSE securities: residential

 

 

115,650

 

 

 

1,081

 

 

 

 

 

 

116,731

 

Total

 

$

359,313

 

 

$

6,073

 

 

$

(17

)

 

$

365,369

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

unrealized

 

 

unrealized

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government sponsored entities' securities

 

$

221,500

 

 

$

159

 

 

$

(3,009

)

 

$

218,650

 

States of the U.S. and political subdivisions

 

 

10,848

 

 

 

192

 

 

 

 

 

 

11,040

 

Mortgage-backed GSE securities: residential

 

 

129,155

 

 

 

55

 

 

 

(1,230

)

 

 

127,980

 

Total

 

$

361,503

 

 

$

406

 

 

$

(4,239

)

 

$

357,670

 

 

Components of held to maturity securities portfolio are as follows:

 

 

 

March 31, 2016

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

unrecognized

 

 

unrecognized

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

 

 

(Dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed GSE securities: residential

 

$

97,467

 

 

$

606

 

 

$

 

 

$

98,073

 

States of the U.S. and political subdivisions

 

 

10,371

 

 

 

258

 

 

 

 

 

 

10,629

 

Total

 

$

107,838

 

 

$

864

 

 

$

 

 

$

108,702

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

unrecognized

 

 

unrecognized

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

 

 

(Dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed GSE securities: residential

 

$

100,322

 

 

$

 

 

$

(1,203

)

 

$

99,119

 

States of the U.S. and political subdivisions

 

 

10,377

 

 

 

148

 

 

 

 

 

 

10,525

 

Total

 

$

110,699

 

 

$

148

 

 

$

(1,203

)

 

$

109,644

 

 

12


 

Debt securities available for sale by contractual maturity, repricing or expected call date are shown below:

 

 

 

March 31, 2016

 

 

 

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

 

 

189,869

 

 

 

193,962

 

Due after ten years

 

 

53,794

 

 

 

54,676

 

Mortgage-backed GSE securities: residential

 

 

115,650

 

 

 

116,731

 

Total

 

$

359,313

 

 

$

365,369

 

Debt securities held to maturity by contractual maturity, repricing or expected call date are shown below:

 

 

 

March 31, 2016

 

 

 

Amortized cost

 

 

Fair value

 

 

 

(Dollars in thousands)

 

Due in one year or less

 

$

1,100

 

 

$

1,107

 

Due after one year through five years

 

 

 

 

 

 

Due after five years through ten years

 

 

3,270

 

 

 

3,370

 

Due after ten years

 

 

6,001

 

 

 

6,152

 

Mortgage-backed GSE securities: residential

 

 

97,467

 

 

 

98,073

 

Total

 

$

107,838

 

 

$

108,702

 

 

 

Securities pledged for public funds were approximately $138.5 million at March 31, 2016 and $107.1 million at December 31, 2015.  

Securities available for sale that have been in an unrealized loss position for less than twelve months or twelve months or more are as follows:

 

 

 

March 31, 2016

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair

 

 

Unrealized loss

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

 

(Dollars in thousands)

 

Description of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government sponsored entities

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

States of the U.S. and political subdivisions

 

 

8,272

 

 

 

(17

)

 

 

 

 

 

 

 

 

8,272

 

 

 

(17

)

Mortgage-backed GSE securities: residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

8,272

 

 

$

(17

)

 

$

 

 

$

 

 

$

8,272

 

 

$

(17

)

 

 

 

December 31, 2015

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair

 

 

Unrealized loss

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

 

(Dollars in thousands)

 

Description of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government sponsored entities

 

$

139,876

 

 

$

(1,654

)

 

$

55,055

 

 

$

(1,355

)

 

$

194,931

 

 

$

(3,009

)

Mortgage-backed GSE securities: residential

 

 

100,585

 

 

 

(842

)

 

 

14,278

 

 

 

(388

)

 

 

114,863

 

 

 

(1,230

)

Total temporarily impaired securities

 

$

240,461

 

 

$

(2,496

)

 

$

69,333

 

 

$

(1,743

)

 

$

309,794

 

 

$

(4,239

)

13


 

Securities held to maturity that have been in an unrecognized loss position for less than twelve months or twelve months or more are as follows: 

 

 

 

March 31, 2016

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair

 

 

Unrealized loss

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

 

(Dollars in thousands)

 

Description of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed GSE securities: residential

 

$

 

 

$

 

 

$

75,672

 

 

$

(860

)

 

$

75,672

 

 

$

(860

)

States of the U.S. and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

 

 

$

 

 

$

75,672

 

 

$

(860

)

 

$

75,672

 

 

$

(860

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair

 

 

Unrealized loss

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

value

 

 

Loss

 

 

 

(Dollars in thousands)

 

Description of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed GSE securities: residential

 

$

22,723

 

 

$

(289

)

 

$

76,396

 

 

$

(2,390

)

 

$

99,119

 

 

$

(2,679

)

States of the U.S. and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

22,723

 

 

$

(289

)

 

$

76,396

 

 

$

(2,390

)

 

$

99,119

 

 

$

(2,679

)

During the third quarter of 2015, Home Savings transferred securities with a total amortized cost of $105.3 million with a corresponding fair value of $103.8 million from available for sale to held to maturity.  The net unrealized loss, net of taxes, on these securities at the date of transfer was $999,000.  The fair value at the date of transfer becomes the securities’ new cost basis.  The unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield.  The amortization of the unamortized holding loss reported in accumulated other comprehensive income will directly offset the effect on interest income from the accretion of the reduced amortized cost for the transferred securities.  Because of this transfer, the total losses less than 12 months and greater than 12 months reported in the table above will not agree to the unrealized losses reported in the inventory of held to maturity securities.  The inventory table reports unrealized gains and losses based upon the transferred securities adjusted cost basis and current fair value.  The reporting of losses less than 12 months and greater than 12 months represents that actual period of time that these securities have been in an unrealized loss position and the securities amortized cost basis as if the transfer did not occur.  

All of the U.S. Treasury and government sponsored entities (GSE) securities that were temporarily impaired at March 31, 2016 and December 31, 2015, were impaired due to the level of interest rates at that time of purchase compared to current interest rates. Unrealized losses on these securities have not been recognized into income as of March 31, 2016 and December 31, 2015 because the issuer’s securities are of high credit quality (rated AA or higher), it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. There is risk that longer term rates could rise further resulting in greater unrealized losses.  The Company expects to realize all interest and principal on these securities and has no intent to sell and more than likely will not be required to sell these securities before their anticipated recovery.

At March 31, 2016 and December 31, 2015, all of the mortgage-backed securities held by the Company were issued by U.S. government sponsored agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company did not consider these securities to be other-than-temporarily impaired at March 31, 2016 or December 31, 2015. The Company expects to realize all interest and principal on these securities.

At March 31, 2016, all of the obligations of U.S. states and political subdivisions were temporarily impaired due to the level of interest rates at that time.  Unrealized losses on these securities have not been recognized into income as of March 31, 2016 because the issuer’s securities are of high credit quality (rated AA or higher), it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions.

 

14


 

Proceeds from the sale of available for sale securities were $18.1 million and $5.2 million for the three months ended March 31, 2016 and 2015, respectively.  Gross gains of $153,000 and $11,000 were realized on these sales during the three months ended March 31, 2016 and 2015, respectively. Income tax expense related to net realized gains was $54,000 and $4,000 for the three months ended March 31, 2016 and 2015, respectively.

 

 

 

5.

LOANS

Portfolio loans consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

Multifamily

 

$

80,581

 

 

$

80,170

 

Nonresidential

 

 

184,279

 

 

 

175,456

 

Land

 

 

8,938

 

 

 

9,301

 

Construction

 

 

49,858

 

 

 

38,812

 

Secured

 

 

79,074

 

 

 

63,182

 

Unsecured

 

 

4,182

 

 

 

2,831

 

Total commercial loans

 

 

406,912

 

 

 

369,752

 

Residential mortgage loans

 

 

 

 

 

 

 

 

One-to four-family

 

 

741,401

 

 

 

733,685

 

Construction

 

 

38,994

 

 

 

40,898

 

Total residential mortgage loans

 

 

780,395

 

 

 

774,583

 

Consumer loans

 

 

 

 

 

 

 

 

Home equity

 

 

158,933

 

 

 

161,338

 

Auto

 

 

13,752

 

 

 

11,348

 

Marine

 

 

2,603

 

 

 

2,699

 

Recreational vehicle

 

 

9,677

 

 

 

10,656

 

Other

 

 

2,358

 

 

 

2,217

 

Total consumer loans

 

 

187,323

 

 

 

188,258

 

Total loans

 

 

1,374,630

 

 

 

1,332,593

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

16,903

 

 

 

17,712

 

Deferred loan costs, net

 

 

(1,419

)

 

 

(1,311

)

Total

 

 

15,484

 

 

 

16,401

 

Loans, net

 

$

1,359,146

 

 

$

1,316,192

 

 

15


 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and are based on impairment method as of March 31, 2016 and December 31, 2015 and activity for the three months ended March 31, 2016 and 2015.

Allowance For Loan Losses

 

 

 

Commercial

Loans

 

 

Residential

Loans

 

 

Consumer

Loans

 

 

Total

 

 

 

(Dollars in thousands)

 

For the three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

8,077

 

 

$

6,630

 

 

$

3,005

 

 

$

17,712

 

Provision (recovery)

 

 

2,724

 

 

 

(594

)

 

 

25

 

 

 

2,155

 

Charge-offs

 

 

(2,346

)

 

 

(362

)

 

 

(479

)

 

 

(3,187

)

Recoveries

 

 

66

 

 

 

62

 

 

 

95

 

 

 

223

 

Ending balance

 

$

8,521

 

 

$

5,736

 

 

$

2,646

 

 

$

16,903

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,029

 

 

$

1,407

 

 

$

586

 

 

$

3,022

 

Loans collectively evaluated for impairment

 

 

7,492

 

 

 

4,329

 

 

 

2,060

 

 

 

13,881

 

Ending balance

 

$

8,521

 

 

$

5,736

 

 

$

2,646

 

 

$

16,903

 

Period-end balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

14,180

 

 

$

18,791

 

 

$

9,640

 

 

$

42,611

 

Loans collectively evaluated for impairment

 

 

392,732

 

 

 

761,604

 

 

 

177,683

 

 

 

1,332,019

 

Ending balance

 

$

406,912

 

 

$

780,395

 

 

$

187,323

 

 

$

1,374,630

 

 

Allowance For Loan Losses

 

 

 

Commercial

Loans

 

 

Residential

Loans

 

 

Consumer

Loans

 

 

Total

 

For the three months ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,690

 

 

$

8,517

 

 

$

3,480

 

 

$

17,687

 

Provision (recovery)

 

 

158

 

 

 

(871

)

 

 

529

 

 

 

(184

)

Charge-offs

 

 

(15

)

 

 

(166

)

 

 

(531

)

 

 

(712

)

Recoveries

 

 

112

 

 

 

186

 

 

 

132

 

 

 

430

 

Ending balance

 

$

5,945

 

 

$

7,666

 

 

$

3,610

 

 

$

17,221

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

568

 

 

$

1,541

 

 

$

707

 

 

$

2,816

 

Loans collectively evaluated for impairment

 

 

7,509

 

 

 

5,089

 

 

 

2,298

 

 

 

14,896

 

Ending balance

 

$

8,077

 

 

$

6,630

 

 

$

3,005

 

 

$

17,712

 

Period-end balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

9,698

 

 

$

19,348

 

 

$

10,613

 

 

$

39,659

 

Loans collectively evaluated for impairment

 

 

360,054

 

 

 

755,235

 

 

 

177,645

 

 

 

1,292,934

 

Ending balance

 

$

369,752

 

 

$

774,583

 

 

$

188,258

 

 

$

1,332,593

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required 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. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

16


 

Other loans not reviewed specifically by management are evaluated as a homogenous group of loans (generally single-family residential mortgage loans and all consumer credits except marine loans) using a loss factor applied to the outstanding loan balance to determine the level of reserve required. This loss factor consists of two components, a quantitative and a qualitative component. The quantitative component is based on a historical analysis of all charged-off loans, net of recoveries. In determining the qualitative factors, consideration is given to such attributes as lending policies, economic conditions, nature and volume of the portfolio, management, loan quality trend, loan review, collateral value, concentrations, economic cycles and other external factors.  As of March 31, 2016, the Company evaluated 15 quarters of net charge-off history and applied this information to the current period.  This component is combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding balance of homogenous loans.

 

17


 

The following table presents loans individually evaluated for impairment by class of loans as of and for three months ended March 31, 2016:

Impaired Loans

(Dollars in thousands)

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Allowance

for Loan

Losses

Allocated

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Cash Basis

Income

Recognized

 

With no specific allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

97

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Nonresidential

 

 

1,042

 

 

 

212

 

 

 

 

 

 

259

 

 

 

1

 

 

 

1

 

Land

 

 

3,922

 

 

 

384

 

 

 

 

 

 

384

 

 

 

 

 

 

 

Construction

 

 

3,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

3,860

 

 

 

3,700

 

 

 

 

 

 

3,700

 

 

 

 

 

 

 

Unsecured

 

 

1,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

13,638

 

 

 

4,296

 

 

 

 

 

 

4,343

 

 

 

1

 

 

 

1

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

7,875

 

 

 

6,081

 

 

 

 

 

 

5,974

 

 

 

20

 

 

 

14

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

7,875

 

 

 

6,081

 

 

 

 

 

 

5,974

 

 

 

20

 

 

 

14

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

1,951

 

 

 

1,332

 

 

 

 

 

 

1,525

 

 

 

3

 

 

 

2

 

Auto

 

 

15

 

 

 

9

 

 

 

 

 

 

12

 

 

 

 

 

 

 

Marine

 

 

546

 

 

 

303

 

 

 

 

 

 

287

 

 

 

 

 

 

 

Recreational vehicle

 

 

534

 

 

 

289

 

 

 

 

 

 

184

 

 

 

1

 

 

 

1

 

Other

 

 

3

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

 

Total consumer loans

 

 

3,049

 

 

 

1,936

 

 

 

 

 

 

2,011

 

 

 

4

 

 

 

3

 

Total

 

$

24,562

 

 

$

12,313

 

 

$

 

 

$

12,328

 

 

$

25

 

 

$

18

 

With a specific allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Nonresidential

 

 

11,348

 

 

 

8,924

 

 

 

936

 

 

 

6,954

 

 

 

109

 

 

 

107

 

Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

1,054

 

 

 

960

 

 

 

93

 

 

 

642

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

12,402

 

 

 

9,884

 

 

 

1,029

 

 

 

7,596

 

 

 

109

 

 

 

107

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

12,710

 

 

 

12,710

 

 

 

1,407

 

 

 

13,096

 

 

 

189

 

 

 

136

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

12,710

 

 

 

12,710

 

 

 

1,407

 

 

 

13,096

 

 

 

189

 

 

 

136

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

6,857

 

 

 

6,857

 

 

 

497

 

 

 

7,047

 

 

 

110

 

 

 

90

 

Auto

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marine

 

 

159

 

 

 

159

 

 

 

3

 

 

 

161

 

 

 

2

 

 

 

2

 

Recreational vehicle

 

 

688

 

 

 

688

 

 

 

86

 

 

 

905

 

 

 

7

 

 

 

7

 

Other

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

Total consumer loans

 

 

7,704

 

 

 

7,704

 

 

 

586

 

 

 

8,117

 

 

 

119

 

 

 

99

 

Total

 

 

32,816

 

 

 

30,298

 

 

 

3,022

 

 

 

28,809

 

 

 

417

 

 

 

342

 

Total impaired loans

 

$

57,378

 

 

$

42,611

 

 

$

3,022

 

 

$

41,137

 

 

$

442

 

 

$

360

 

 

18


 

The following tables present loans individually evaluated for impairment by class of loans as of and for three months ended March 31, 2015:

Impaired Loans

(Dollars in thousands)

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Allowance

for Loan

Losses

Allocated

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Cash Basis

Income

Recognized

 

With no specific allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

197

 

 

$

85

 

 

$

 

 

$

86

 

 

$

 

 

$

 

Nonresidential

 

 

4,258

 

 

 

2,450

 

 

 

 

 

 

3,880

 

 

 

1

 

 

 

1

 

Land

 

 

3,958

 

 

 

532

 

 

 

 

 

 

532

 

 

 

 

 

 

 

Construction

 

 

1,126

 

 

 

188

 

 

 

 

 

 

439

 

 

 

 

 

 

 

Secured

 

 

3,898

 

 

 

3,700

 

 

 

 

 

 

3,704

 

 

 

 

 

 

 

Unsecured

 

 

1,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

14,926

 

 

 

6,955

 

 

 

 

 

 

8,641

 

 

 

1

 

 

 

1

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

6,134

 

 

 

4,649

 

 

 

 

 

 

5,341

 

 

 

18

 

 

 

10

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

6,134

 

 

 

4,649

 

 

 

 

 

 

5,341

 

 

 

18

 

 

 

10

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

2,294

 

 

 

1,679

 

 

 

 

 

 

1,739

 

 

 

9

 

 

 

6

 

Auto

 

 

40

 

 

 

32

 

 

 

 

 

 

61

 

 

 

 

 

 

 

Marine

 

 

519

 

 

 

293

 

 

 

 

 

 

189

 

 

 

2

 

 

 

2

 

Recreational vehicle

 

 

97

 

 

 

69

 

 

 

 

 

 

181

 

 

 

1

 

 

 

1

 

Other

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

Total consumer loans

 

 

2,950

 

 

 

2,073

 

 

 

 

 

 

2,173

 

 

 

12

 

 

 

9

 

Total

 

$

24,010

 

 

$

13,677

 

 

$

 

 

$

16,155

 

 

$

31

 

 

$

20

 

With a specific allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

 

$

 

 

$

21

 

 

$

 

 

$

 

Nonresidential

 

 

6,550

 

 

 

6,367

 

 

 

586

 

 

 

3,644

 

 

 

37

 

 

 

37

 

Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

2,815

 

 

 

863

 

 

 

93

 

 

 

1,338

 

 

 

 

 

 

 

Secured

 

 

324

 

 

 

324

 

 

 

3

 

 

 

324

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

9,689

 

 

 

7,554

 

 

 

682

 

 

 

5,327

 

 

 

37

 

 

 

37

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

14,595

 

 

 

14,595

 

 

 

1,707

 

 

 

14,630

 

 

 

228

 

 

 

138

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

14,595

 

 

 

14,595

 

 

 

1,707

 

 

 

14,630

 

 

 

228

 

 

 

138

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

9,256

 

 

 

9,256

 

 

 

687

 

 

 

9,662

 

 

 

169

 

 

 

114

 

Auto

 

 

5

 

 

 

5

 

 

 

 

 

 

7

 

 

 

 

 

 

 

Marine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreational vehicle

 

 

716

 

 

 

716

 

 

 

117

 

 

 

737

 

 

 

13

 

 

 

6

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total consumer loans

 

 

9,977

 

 

 

9,977

 

 

 

804

 

 

 

10,406

 

 

 

182

 

 

 

120

 

Total

 

 

34,261

 

 

 

32,126

 

 

 

3,193

 

 

 

30,363

 

 

 

447

 

 

 

295

 

Total impaired loans

 

$

58,271

 

 

$

45,803

 

 

$

3,193

 

 

$

46,518

 

 

$

478

 

 

$

315

 

 

19


 

The following table present loans individually evaluated for impairment by class of loans as of December 31, 2015:

Impaired Loans

(Dollars in thousands)

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Allowance

for Loan

Losses

Allocated

 

With no specific allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

165

 

 

$

 

 

$

 

Nonresidential

 

 

1,215

 

 

 

306

 

 

 

 

Land

 

 

3,922

 

 

 

384

 

 

 

 

Construction

 

 

3,593

 

 

 

 

 

 

 

Secured

 

 

3,884

 

 

 

3,700

 

 

 

 

Unsecured

 

 

1,132

 

 

 

 

 

 

 

Total commercial loans

 

 

13,911

 

 

 

4,390

 

 

 

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

7,607

 

 

 

5,866

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

7,607

 

 

 

5,866

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

2,245

 

 

 

1,718

 

 

 

 

Auto

 

 

20

 

 

 

14

 

 

 

 

Marine

 

 

496

 

 

 

271

 

 

 

 

Recreational vehicle

 

 

121

 

 

 

78

 

 

 

 

Other

 

 

3

 

 

 

3

 

 

 

 

Total consumer loans

 

 

2,885

 

 

 

2,084

 

 

 

 

Total

 

$

24,403

 

 

$

12,340

 

 

$

 

With a specific allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

 

$

 

Nonresidential

 

 

5,164

 

 

 

4,984

 

 

 

565

 

Land

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Secured

 

 

324

 

 

 

324

 

 

 

3

 

Unsecured

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

5,488

 

 

 

5,308

 

 

 

568

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

13,482

 

 

 

13,482

 

 

 

1,541

 

Construction

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

13,482

 

 

 

13,482

 

 

 

1,541

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

7,236

 

 

 

7,236

 

 

 

522

 

Auto

 

 

 

 

 

 

 

 

 

Marine

 

 

163

 

 

 

163

 

 

 

3

 

Recreational vehicle

 

 

1,122

 

 

 

1,122

 

 

 

181

 

Other

 

 

8

 

 

 

8

 

 

 

1

 

Total consumer loans

 

 

8,529

 

 

 

8,529

 

 

 

707

 

Total

 

 

27,499

 

 

 

27,319

 

 

 

2,816

 

Total impaired loans

 

$

51,902

 

 

$

39,659

 

 

$

2,816

 

 

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 chargeoffs or partial chargeoffs applied to specific loans. The unpaid principal balance and the recorded investment both exclude accrued interest receivable and deferred loan costs, both of which are immaterial.

20


 

 

Within secured and nonresidential impaired loans, there are two related credits with a total principal balance outstanding of $7.0 million.  The source of repayment for the loan resides in funds held in escrow by a court that has administered foreclosure and receivership proceedings surrounding the loan.  The loan has been subject to protracted litigation and a reserve of $546,000 was placed on one of the loans during 2015.  

 

Home Savings reclassifies a collateralized mortgage loan and consumer loans secured by real estate to real estate owned and other repossessed assets once it has either obtained legal title to the real estate collateral or the borrower voluntarily conveys all interest in the real property to the Bank to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  The table below presents loans that are in the process of foreclosure at March 31, 2016 and December 31, 2015, but legal title, deed in lieu of foreclosure or similar legal agreement to the property has not yet been obtained:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

Mortgage loans in process of foreclosure

 

$

2,690

 

 

$

2,360

 

 

$

1,294

 

 

$

1,162

 

Consumer loans in process of foreclosure

 

 

1,036

 

 

 

799

 

 

 

845

 

 

 

643

 

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of March 31, 2016:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing

As of March 31, 2016

 

 

 

Nonaccrual

 

 

Loans past due

over 90 days and

still accruing

 

 

 

(Dollars in thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

Nonresidential

 

 

7,557

 

 

 

 

Land

 

 

384

 

 

 

 

Construction

 

 

 

 

 

 

Secured

 

 

4,652

 

 

 

 

Unsecured

 

 

 

 

 

 

Total commercial loans

 

 

12,593

 

 

 

 

Residential mortgage loans

 

 

 

 

 

 

 

 

One-to four-family

 

 

5,312

 

 

 

 

Construction

 

 

 

 

 

 

Total residential mortgage loans

 

 

5,312

 

 

 

 

Consumer Loans

 

 

 

 

 

 

 

 

Home equity

 

 

1,635

 

 

 

 

Auto

 

 

28

 

 

 

 

Marine

 

 

249

 

 

 

 

Recreational vehicle

 

 

285

 

 

 

 

Other

 

 

3

 

 

 

 

Total consumer loans

 

 

2,200

 

 

 

 

Total nonaccrual loans and loans past due over 90 days and still accruing

 

$

20,105

 

 

$

 

 

21


 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of December 31, 2015:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing

As of December 31, 2015

 

 

 

Nonaccrual

 

 

Loans past due

over 90 days and

still accruing

 

 

 

(Dollars in thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

Nonresidential

 

 

3,599

 

 

 

 

Land

 

 

384

 

 

 

 

Construction

 

 

 

 

 

 

Secured

 

 

4,016

 

 

 

 

Unsecured

 

 

 

 

 

 

Total commercial loans

 

 

7,999

 

 

 

 

Residential mortgage loans

 

 

 

 

 

 

 

 

One-to four-family

 

 

6,181

 

 

 

 

Construction

 

 

 

 

 

 

Total residential mortgage loans

 

 

6,181

 

 

 

 

Consumer Loans

 

 

 

 

 

 

 

 

Home equity

 

 

1,804

 

 

 

 

Auto

 

 

23

 

 

 

 

Marine

 

 

218

 

 

 

 

Recreational vehicle

 

 

511

 

 

 

 

Other

 

 

11

 

 

 

 

Total consumer loans

 

 

2,567

 

 

 

 

Total nonaccrual loans and loans past due over 90 days and still accruing

 

$

16,747

 

 

$

 

 

22


 

The following table presents an age analysis of past-due loans, segregated by class of loans as of March 31, 2016:

Past Due Loans

(Dollars in thousands)

 

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

Greater

than 90

Days Past

Due

 

 

Total Past

Due

 

 

Current

Loans

 

 

Total Loans

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

 

$

 

 

$

 

 

$

80,581

 

 

$

80,581

 

Nonresidential

 

 

29

 

 

 

9

 

 

 

3,504

 

 

 

3,542

 

 

 

180,737

 

 

 

184,279

 

Land

 

 

 

 

 

 

 

 

384

 

 

 

384

 

 

 

8,554

 

 

 

8,938

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,858

 

 

 

49,858

 

Secured

 

 

 

 

 

 

 

 

4,652

 

 

 

4,652

 

 

 

74,422

 

 

 

79,074

 

Unsecured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,182

 

 

 

4,182

 

Total commercial loans

 

 

29

 

 

 

9

 

 

 

8,540

 

 

 

8,578

 

 

 

398,334

 

 

 

406,912

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

2,346

 

 

 

1,449

 

 

 

5,069

 

 

 

8,864

 

 

 

732,537

 

 

 

741,401

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,994

 

 

 

38,994

 

Total residential mortgage loans

 

 

2,346

 

 

 

1,449

 

 

 

5,069

 

 

 

8,864

 

 

 

771,531

 

 

 

780,395

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

511

 

 

 

380

 

 

 

1,631

 

 

 

2,522

 

 

 

156,411

 

 

 

158,933

 

Automobile

 

 

3

 

 

 

 

 

 

26

 

 

 

29

 

 

 

13,723

 

 

 

13,752

 

Marine

 

 

163

 

 

 

 

 

 

109

 

 

 

272

 

 

 

2,331

 

 

 

2,603

 

Recreational vehicle

 

 

115

 

 

 

5

 

 

 

285

 

 

 

405

 

 

 

9,272

 

 

 

9,677

 

Other

 

 

3

 

 

 

4

 

 

 

3

 

 

 

10

 

 

 

2,348

 

 

 

2,358

 

Total consumer loans

 

 

795

 

 

 

389

 

 

 

2,054

 

 

 

3,238

 

 

 

184,085

 

 

 

187,323

 

Total loans

 

$

3,170

 

 

$

1,847

 

 

$

15,663

 

 

$

20,680

 

 

$

1,353,950

 

 

$

1,374,630

 

 

23


 

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2015:

Past Due Loans

(Dollars in thousands)

 

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

Greater

than 90

Days Past

Due

 

 

Total Past

Due

 

 

Current

Loans

 

 

Total Loans

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

 

 

$

 

 

$

 

 

$

 

 

$

80,170

 

 

$

80,170

 

Nonresidential

 

 

 

 

 

 

 

 

3,558

 

 

 

3,558

 

 

 

171,898

 

 

 

175,456

 

Land

 

 

 

 

 

 

 

 

384

 

 

 

384

 

 

 

8,917

 

 

 

9,301

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,812

 

 

 

38,812

 

Secured

 

 

488

 

 

 

 

 

 

4,016

 

 

 

4,504

 

 

 

58,678

 

 

 

63,182

 

Unsecured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,831

 

 

 

2,831

 

Total commercial loans

 

 

488

 

 

 

 

 

 

7,958

 

 

 

8,446

 

 

 

361,306

 

 

 

369,752

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

3,843

 

 

 

635

 

 

 

5,901

 

 

 

10,379

 

 

 

723,306

 

 

 

733,685

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,898

 

 

 

40,898

 

Total residential mortgage loans

 

 

3,843

 

 

 

635

 

 

 

5,901

 

 

 

10,379

 

 

 

764,204

 

 

 

774,583

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

961

 

 

 

268

 

 

 

1,788

 

 

 

3,017

 

 

 

158,321

 

 

 

161,338

 

Automobile

 

 

5

 

 

 

 

 

 

10

 

 

 

15

 

 

 

11,333

 

 

 

11,348

 

Marine

 

 

 

 

 

51

 

 

 

117

 

 

 

168

 

 

 

2,531

 

 

 

2,699

 

Recreational vehicle

 

 

71

 

 

 

 

 

 

494

 

 

 

565

 

 

 

10,091

 

 

 

10,656

 

Other

 

 

15

 

 

 

1

 

 

 

11

 

 

 

27

 

 

 

2,190

 

 

 

2,217

 

Total consumer loans

 

 

1,052

 

 

 

320

 

 

 

2,420

 

 

 

3,792

 

 

 

184,466

 

 

 

188,258

 

Total loans

 

$

5,383

 

 

$

955

 

 

$

16,279

 

 

$

22,617

 

 

$

1,309,976

 

 

$

1,332,593

 

 

As of March 31, 2016 and December 31, 2015, the Company has a recorded investment in troubled debt restructurings of $25.5 million and $26.3 million, respectively.  The Company has allocated $2.0 million and $2.3 million of specific allowance for those loans at March 31, 2016 and December 31, 2015, respectively.  The Company has committed to lend additional amounts totaling up to $23,000 and $42,000 at March 31, 2016 and December 31, 2015, respectively.  

24


 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2016:

 

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Recorded

Investment

 

 

 

 

 

 

 

(In thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

 

 

$

 

 

$

 

Nonresidential

 

 

1

 

 

 

88

 

 

 

88

 

Land

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

1

 

 

 

88

 

 

 

88

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

2

 

 

 

219

 

 

 

237

 

Construction

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

2

 

 

 

219

 

 

 

237

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

1

 

 

 

20

 

 

 

20

 

Auto

 

 

 

 

 

 

 

 

 

Marine

 

 

 

 

 

 

 

 

 

Recreational vehicle

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Total consumer loans

 

 

1

 

 

 

20

 

 

 

20

 

Total restructured loans

 

 

4

 

 

$

327

 

 

$

345

 

 

The troubled debt restructurings described above increased the allowance for loan losses by $5,000 and resulted in $30,000 in charge-offs during the three months ended March 31, 2016.

25


 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2015:

 

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Recorded

Investment

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

 

 

$

 

 

$

 

Nonresidential

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

 

 

 

 

 

 

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

5

 

 

 

441

 

 

 

454

 

Construction

 

 

 

 

 

 

 

 

 

Total residential mortgage loans

 

 

5

 

 

 

441

 

 

 

454

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

2

 

 

 

354

 

 

 

354

 

Auto

 

 

 

 

 

 

 

 

 

Marine

 

 

 

 

 

 

 

 

 

Recreational vehicle

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Total consumer loans

 

 

2

 

 

 

354

 

 

 

354

 

Total restructured loans

 

 

7

 

 

$

795

 

 

$

808

 

 

 

The troubled debt restructurings described above increased the allowance for loan losses by $58,000, and resulted in no chargeoffs during the three months ended March 31, 2015.

26


 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within a twelve month cycle following the modification during the period ended March 31, 2016:

 

 

 

Number

of loans

 

 

Recorded

Investment

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

Multifamily

 

 

 

 

$

 

Nonresidential

 

 

 

 

 

 

Land

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Secured

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

Total commercial loans

 

 

 

 

 

 

Residential mortgage loans

 

 

 

 

 

 

 

 

One-to four-family

 

 

2

 

 

 

25

 

Construction

 

 

 

 

 

 

Total residential mortgage loans

 

 

2

 

 

 

25

 

Consumer loans

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

Auto

 

 

 

 

 

 

Marine

 

 

 

 

 

 

Recreational vehicle

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total consumer loans

 

 

 

 

 

 

Total restructured loans

 

 

2

 

 

$

25

 

 

The troubled debt restructurings that subsequently defaulted described above resulted in $3,000 in charge-offs during the three months ended March 31, 2016, and had no effect on the provision for loan losses.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within a twelve month cycle following the modification during the period ended March 31, 2015:

 

 

 

Number

of loans

 

 

Recorded

Investment

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial loans

 

 

 

 

 

 

 

 

Multifamily

 

 

 

 

$

 

Nonresidential

 

 

 

 

 

 

Land

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Secured

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

Total commercial loans

 

 

 

 

 

 

Residential mortgage loans

 

 

 

 

 

 

 

 

One-to four-family

 

 

2

 

 

 

217

 

Construction

 

 

 

 

 

 

Total residential mortgage loans

 

 

2

 

 

 

217

 

Consumer loans

 

 

 

 

 

 

 

 

Home equity

 

 

1

 

 

 

15

 

Auto

 

 

 

 

 

 

Marine

 

 

 

 

 

 

Recreational vehicle

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total consumer loans

 

 

1

 

 

 

15

 

Total restructured loans

 

 

3

 

 

$

232

 

27


 

 

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three months ended March 31, 2015, and had no effect on the provision for loan losses.

A troubled debt restructuring is considered to be in payment default once it is 30 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s internal underwriting policy.

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 homogeneous loans past due 90 cumulative days, and all non-homogeneous loans including commercial loans and commercial real estate loans. Smaller balance homogeneous loans are primarily monitored by payment status.

Asset quality ratings are divided into two groups: Pass (unclassified) and Classified. Within the unclassified group, certain 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 weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

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.

28


 

As of March 31, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loans

March 31, 2016

(Dollars in thousands)

 

 

 

 

Unclassified

 

 

Classified

 

 

 

 

Unclassified

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Loss

 

 

Total

Classified

 

 

Total Loans

 

Commercial Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

$

76,001

 

 

$

3,685

 

 

$

895

 

 

$

 

 

$

 

 

$

895

 

 

$

80,581

 

Nonresidential

 

 

 

164,085

 

 

 

2,416

 

 

 

17,778

 

 

 

 

 

 

 

 

 

17,778

 

 

 

184,279

 

Land

 

 

 

8,554

 

 

 

 

 

 

384

 

 

 

 

 

 

 

 

 

384

 

 

 

8,938

 

Construction

 

 

 

49,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,858

 

Secured

 

 

 

68,611

 

 

 

22

 

 

 

10,441

 

 

 

 

 

 

 

 

 

10,441

 

 

 

79,074

 

Unsecured

 

 

 

4,081

 

 

 

 

 

 

101

 

 

 

 

 

 

 

 

 

101

 

 

 

4,182

 

Total commercial loans

 

 

 

371,190

 

 

 

6,123

 

 

 

29,599

 

 

 

 

 

 

 

 

 

29,599

 

 

 

406,912

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

 

735,464

 

 

 

107

 

 

 

5,830

 

 

 

 

 

 

 

 

 

5,830

 

 

 

741,401

 

Construction

 

 

 

38,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,994

 

Total residential mortgage loans

 

 

 

774,458

 

 

 

107

 

 

 

5,830

 

 

 

 

 

 

 

 

 

5,830

 

 

 

780,395

 

Consumer Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

157,121

 

 

 

 

 

 

1,812

 

 

 

 

 

 

 

 

 

1,812

 

 

 

158,933

 

Auto

 

 

 

13,719

 

 

 

2

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

 

 

13,752

 

Marine

 

 

 

2,300

 

 

 

 

 

 

303

 

 

 

 

 

 

 

 

 

303

 

 

 

2,603

 

Recreational vehicle

 

 

 

9,385

 

 

 

 

 

 

292

 

 

 

 

 

 

 

 

 

292

 

 

 

9,677

 

Other

 

 

 

2,355

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

2,358

 

Total consumer loans

 

 

 

184,880

 

 

 

2

 

 

 

2,441

 

 

 

 

 

 

 

 

 

2,441

 

 

 

187,323

 

Total loans

 

 

$

1,330,528

 

 

$

6,232

 

 

$

37,870

 

 

$

 

 

$

 

 

$

37,870

 

 

$

1,374,630

 

 

29


 

Loans

December 31, 2015

(Dollars in thousands)

 

 

 

Unclassified

 

 

Classified

 

 

 

Unclassified

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Loss

 

 

Total

Classified

 

 

Total Loans

 

Commercial Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

75,535

 

 

$

3,727

 

 

$

908

 

 

$

 

 

$

 

 

$

908

 

 

$

80,170

 

Nonresidential

 

 

151,415

 

 

 

4,121

 

 

 

19,920

 

 

 

 

 

 

 

 

 

19,920

 

 

 

175,456

 

Land

 

 

8,917

 

 

 

 

 

 

384

 

 

 

 

 

 

 

 

 

384

 

 

 

9,301

 

Construction

 

 

38,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,812

 

Secured

 

 

53,801

 

 

 

3,037

 

 

 

6,344

 

 

 

 

 

 

 

 

 

6,344

 

 

 

63,182

 

Unsecured

 

 

2,728

 

 

 

 

 

 

103

 

 

 

 

 

 

 

 

 

103

 

 

 

2,831

 

Total commercial loans

 

 

331,208

 

 

 

10,885

 

 

 

27,659

 

 

 

 

 

 

 

 

 

27,659

 

 

 

369,752

 

Residential mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

726,922

 

 

 

111

 

 

 

6,652

 

 

 

 

 

 

 

 

 

6,652

 

 

 

733,685

 

Construction

 

 

40,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,898

 

Total residential mortgage loans

 

 

767,820

 

 

 

111

 

 

 

6,652

 

 

 

 

 

 

 

 

 

6,652

 

 

 

774,583

 

Consumer Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

159,371

 

 

 

 

 

 

1,967

 

 

 

 

 

 

 

 

 

1,967

 

 

 

161,338

 

Auto

 

 

11,304

 

 

 

2

 

 

 

42

 

 

 

 

 

 

 

 

 

42

 

 

 

11,348

 

Marine

 

 

2,428

 

 

 

 

 

 

271

 

 

 

 

 

 

 

 

 

271

 

 

 

2,699

 

Recreational vehicle

 

 

10,157

 

 

 

 

 

 

499

 

 

 

 

 

 

 

 

 

499

 

 

 

10,656

 

Other

 

 

2,206

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

 

 

2,217

 

Total consumer loans

 

 

185,466

 

 

 

2

 

 

 

2,790

 

 

 

 

 

 

 

 

 

2,790

 

 

 

188,258

 

Total loans

 

$

1,284,494

 

 

$

10,998

 

 

$

37,101

 

 

$

 

 

$

 

 

$

37,101

 

 

$

1,332,593

 

 

 

 

6.

MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion as of March 31, 2016 and December 31, 2015. Mortgage banking income is comprised of gains recognized on the sale of loans and changes in fair value of mortgage banking derivatives.

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:

 

 

March 31, 2016

 

  

December 31, 2015

 

 

(Dollars in thousands)

 

Mortgage loan portfolios serviced for:

 

 

 

  

 

 

 

FHLMC

$

896,553 

  

  

$

878,300

  

FNMA

 

228,074 

  

  

 

233,026

  

 

Customer escrow balances with loans serviced for FHLMC and FNMA totaled $12.0 and $13.2 million at March 31, 2016 and December 31, 2015, respectively.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Balance, beginning of period

 

$

5,686

 

 

$

5,535

 

Originations

 

 

509

 

 

 

451

 

Amortized to expense

 

 

(468

)

 

 

(443

)

Balance, end of period

 

 

5,727

 

 

 

5,543

 

Less valuation allowance

 

 

(474

)

 

 

(219

)

Net balance

 

$

5,253

 

 

$

5,324

 

 

30


 

Activity in the valuation allowance for mortgage servicing rights was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Balance, beginning of period

 

$

(39

)

 

$

(58

)

Impairment charges

 

 

(435

)

 

 

(161

)

Recoveries

 

 

 

 

 

 

Balance, end of period

 

$

(474

)

 

$

(219

)

 

The fair value of mortgage servicing rights as of March 31, 2016, was approximately $8.0 million and at December 31, 2015, the fair value was approximately $9.1 million.

Key economic assumptions in measuring the value of mortgage servicing rights at March 31, 2016, and December 31, 2015, were as follows:

 

 

March 31, 2016

 

December 31, 2015

Weighted average prepayment rate

252 PSA

 

192 PSA

Weighted average life (in years)

3.43

 

3.47

Weighted average discount rate

9.00%

 

9.00%

 

 

 

7.

OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at March 31, 2016 and December 31, 2015 were as follows:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(Dollars in thousands)

 

Real estate owned and other repossessed assets

$

2,970

 

 

$

3,956

 

Valuation allowance

 

(1,124

)

 

 

(1,229

)

End of period

$

1,846

 

 

$

2,727

 

 

Activity in the valuation allowance was as follows:

 

 

Three Months Ended

 

 

March 31, 2016

 

 

March 31, 2015

 

 

(Dollars in thousands)

 

Beginning of period

$

1,229

 

 

$

1,423

 

Additions charged to expense

 

1

 

 

 

80

 

Reductions due to sales

 

(106

)

 

 

(259

)

End of period

$

1,124

 

 

$

1,244

 

 

Expenses related to foreclosed and repossessed assets include:

 

 

Three Months Ended

 

 

March 31, 2016

 

 

March 31, 2015

 

 

(Dollars in thousands)

 

Net (gain) loss on sales

$

12

 

 

$

10

 

Provision for unrealized losses, net

 

1

 

 

 

80

 

Operating expenses, net of rental income

 

72

 

 

 

141

 

Total expenses

$

85

 

 

$

231

 

 

 

31


 

 

8.

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 entity’s own beliefs about the assumptions that market participants would use in pricing an asset or liability.

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). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

Impaired loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are individually evaluated at least annually for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Home Savings. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with the independent data sources such as recent market data or industry-wide statistics. In addition to the Special Assets Department review, a third party independent review is also performed.  On an annual basis, Home Savings compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. At the time a property is acquired and classified as real estate owned, the fair value is determined utilizing the most appropriate method. A fair value in excess of $250,000 will be supported by an appraisal. After determination of fair value, each property will be recorded at the lower of cost (i.e., recorded investment in the loan) or the estimated net realizable value on the date of transfer to real estate owned. In determining net realizable value, reductions to fair market value may be taken for estimated costs of sale, conditions that must be remedied immediately upon acquisition, and other factors that negatively impact the marketability and prompt sale of the property.

Mortgage servicing rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, 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. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

32


 

Loans held for sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

 

Loans held for sale, at fair value:  The Company elected the fair value option for all permanent construction loans held for sale originated on or after January 1, 2015. The fair value of the Company’s construction perm loans held for sale was determined based on quoted prices for similar loans in active markets.  The fair value of permanent construction loans held for sale is determined, based on the committed loan amount, using quoted prices for similar assets, adjusted for specific attributes of that loan and other unobservable market data, such as time it takes to complete the project (Level 3).  The Company elected the fair value option for all residential mortgage loans held for sale originated on or after March 1, 2016. The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets (Level 2).

Interest rate caps: Home Savings uses an independent third party that performs a market valuation analysis for interest rate caps. The methodology used consists of a discounted cash flow model, all future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The yield curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes from Reuters, which handle up to 30-year swap maturities (Level 3). Assumptions used in the valuation of interest rate caps are back-tested for reasonableness on a quarterly basis using an independent source along with a third party service.

Purchased and written certificate of deposit option: Home Savings periodically enters into written and purchased option derivative instruments to facilitate the Power CD. The written and purchased options are mirror derivative instruments which are carried at fair value on the consolidated balance sheets. Home Savings uses an independent third party that performs a market valuation analysis for purchased and written certificate of deposit options. (Level 2)

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 March 31, 2016 Using:

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

March 31,

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government sponsored entities' securities

$

212,898

 

 

$

 

 

$

212,898

 

 

$

 

States of the U.S. and political subdivisions

 

35,740

 

 

 

 

 

 

35,740

 

 

 

 

 

Mortgage-backed GSE securities: residential

 

116,731

 

 

 

 

 

 

116,731

 

 

 

 

Loans held for sale, at fair value

 

32,007

 

 

 

 

 

 

5,247

 

 

 

26,760

 

Interest rate caps

 

 

 

 

 

 

 

 

 

 

 

Purchased certificate of deposit option

 

913

 

 

 

 

 

 

913

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written certificate of deposit option

 

913

 

 

 

 

 

 

913

 

 

 

 

33


 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015 Using:

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

December 31,

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government sponsored entities' securities

$

218,650

 

 

$

 

 

$

218,650

 

 

$

 

States of the U.S. and political subdivisions

 

11,040

 

 

 

 

 

 

11,040

 

 

 

 

 

Mortgage-backed GSE securities: residential

 

127,980

 

 

 

 

 

 

127,980

 

 

 

 

Loans held for sale, at fair value

 

26,716

 

 

 

 

 

 

 

 

 

26,716

 

Interest rate caps

 

3

 

 

 

 

 

 

 

 

 

3

 

Purchased certificate of deposit option

 

805

 

 

 

 

 

 

805

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written certificate of deposit option

 

805

 

 

 

 

 

 

805

 

 

 

 

 

There were no transfers between Level 1 and Level 2 during 2016 or 2015.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and 2015.  

 

 

Loans Held for Sale, At Fair Value

 

 

For the Three Months Ended March 31,

 

 

2016

 

 

2015

 

 

(Dollars in thousands)

 

Balance of recurring Level 3 assets at beginning of period

$

26,716

 

 

$

 

Total gains (losses) for the period

 

 

 

 

 

 

 

Included in change in fair value of loans held for sale

 

669

 

 

 

561

 

Included in other comprehensive income

 

 

 

 

 

Originations/Draws on construction perm loans

 

16,687

 

 

 

1,047

 

Amortization

 

 

 

 

 

Sales

 

(17,312

)

 

 

 

Balance of recurring Level 3 assets at end of period

$

26,760

 

 

$

1,608

 

 

 

Interest Rate Caps

 

 

For the Three Months Ended March 31,

 

 

2016

 

 

2015

 

 

(Dollars in thousands)

 

Balance of recurring Level 3 assets at beginning of period

$

3

 

 

$

180

 

Total gains (losses) for the period

 

 

 

 

 

 

 

Included in other income

 

127

 

 

 

75

 

Included in other comprehensive income

 

 

 

 

 

Purchases

 

 

 

 

 

Amortization

 

(130

)

 

 

(129

)

Sales

 

 

 

 

 

Balance of recurring Level 3 assets at end of period

$

 

 

$

126

 

 

There were no transfers between Level 2 and Level 3 during 2016 or 2015.

34


 

The following table presents quantitative information about recurring Level 3 fair value measurements at March 31, 2016:

 

 

 

 

 

 

Valuation

 

Unobservable

 

 

 

Fair Value

 

 

Technique(s)

 

Input(s)

 

Range

Loans held for sale, at fair value

$

26,760

 

 

Comparable sales

 

Time discount

 

0.00-1.80%

Interest rate caps

 

 

 

Discounted cash flow

 

Discount rate

 

0.49-1.18%

 

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2015:

 

 

 

 

 

 

Valuation

 

Unobservable

 

 

 

Fair Value

 

 

Technique(s)

 

Input(s)

 

Range

Loans held for sale, at fair value

$

26,716

 

 

Comparable sales

 

Time discount

 

0.00-1.80%

Interest rate caps

 

3

 

 

Discounted cash flow

 

Discount rate

 

0.49-1.18%

 

The fair value of interest rate caps was determined using proprietary models from third-party sources taking into account such factors as size of the transaction, the lack of a quoted market and the custom-tailored nature of the transaction. The fair value is inclusive of interest accruals, as applicable.

The fair value of loans held for sale, at fair value was determined using pricing from a quoted market, discounted for the length of time to the completion of the construction project.

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 March 31, 2016 Using:

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

March 31,

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

$

6,458

 

 

$

 

 

$

 

 

$

6,458

 

Secured

 

546

 

 

 

 

 

 

 

 

 

546

 

Residential loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

867

 

 

 

 

 

 

 

 

 

867

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

3

 

 

 

 

 

 

 

 

 

3

 

Auto

 

4

 

 

 

 

 

 

 

 

 

4

 

Marine

 

163

 

 

 

 

 

 

 

 

 

163

 

Recreational vehicle

 

213

 

 

 

 

 

 

 

 

 

213

 

Mortgage servicing rights

 

2,704

 

 

 

 

 

 

2,704

 

 

 

 

Other real estate owned, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans

 

785

 

 

 

 

 

 

 

 

 

785

 

Nonresidential loans

 

175

 

 

 

 

 

 

 

 

 

175

 

Residential loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

344

 

 

 

 

 

 

 

 

 

344

 

35


 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015 Using:

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

December 31,

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

$

2,857

 

 

$

 

 

$

 

 

$

2,857

 

Land

 

175

 

 

 

 

 

 

 

 

 

175

 

Residential loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

1,493

 

 

 

 

 

 

 

 

 

1,493

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

392

 

 

 

 

 

 

 

 

 

392

 

Auto

 

1

 

 

 

 

 

 

 

 

 

1

 

Mortgage servicing rights

 

604

 

 

 

 

 

 

604

 

 

 

 

Other real estate owned, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans

 

785

 

 

 

 

 

 

 

 

 

785

 

Nonresidential loans

 

175

 

 

 

 

 

 

 

 

 

175

 

Residential loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

1,088

 

 

 

 

 

 

 

 

 

1,088

 

 

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 net carrying amount of $8.3 million at March 31, 2016, that includes a specific valuation allowance of $1.0 million. This resulted in an increase of the provision for loan losses of $3.0 million during the three months ended March 31, 2016.  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 net carrying amount of $4.5 million at March 31, 2015, which includes a specific valuation allowance of $678,000. This resulted in a decrease in the provision for loan losses of $35,000 for the three months ended March 31, 2015.  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 net carrying amount of $4.9 million at December 31, 2015, that includes a specific valuation allowance of $548,000.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral dependent impaired loans included in the above table primarily relate to the adjustment between carrying values versus appraised value. During the reported periods, discounts applied to appraisals for estimated selling costs were 10%.

At March 31, 2016, mortgage servicing rights carried at fair value were $2.7 million, resulting in a net valuation allowance of $474,000 at March 31, 2016.  At March 31, 2015, mortgage servicing rights, carried at fair value totaled $1.5 million, resulting in a net valuation allowance of $219,000.  At December 31, 2015, mortgage servicing rights carried at fair value were $604,000.  Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments.  Net impairment (recovery) reflected in other income totaled $435,000 for the three months ended March 31, 2016.  Net impairment reflected in other income totaled $161,000 for the three months ended March 31, 2015.  The value reflects the characteristics of the underlying loans.  

At March 31, 2016, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, and had a net carrying amount of $1.3 million, with a valuation allowance of $1.1 million. This resulted in additional expenses of $1,000 during the three months ended March 31, 2016.  At March 31, 2015, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, and had a net carrying amount of $2.9 million with a valuation allowance of $1.2 million. This resulted in additional expenses of $80,000 during the three months ended March 31, 2015. At December 31, 2015, other real estate owned had a net carrying amount of $2.0 million, with a valuation allowance of $1.2 million.

36


 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, 2016:

 

 

 

Fair Value

 

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range     (Weighted Average)

Impaired loans:

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

$

6,458

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-35.00%  (14.14%)

Secured

 

 

546

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-27.47%  (13.74%)

Residential loans

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

 

867

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-10.77%  (4.27%)

Consumer loans

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

3

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-17.85%  (8.93%)

Auto

 

 

4

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-10.00%  (10.00%)

Marine

 

 

163

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-37.00%  (37.00%)

Recreational vehicle

 

 

213

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-37.00%  (37.00%)

Other real estate owned, net

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

Construction loans

 

 

785

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-50.00%  (21.71%)

Nonresidential loans

 

 

175

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

40.00%-60.00%  (50.00%)

Residential loans

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

 

344

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-40.50%  (15.51%)

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2015:

 

 

 

Fair Value

 

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range     (Weighted Average)

Impaired loans:

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

$

2,857

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

9.19%-12.38%  (10.79%)

Land

 

 

175

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-27.47%  (13.74%)

Residential loans

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

 

1,493

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-10.77%  (4.27%)

Consumer loans

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

392

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-17.85%  (8.93%)

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

Construction loans

 

 

785

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-50.00%  (21.71%)

Nonresidential loans

 

 

175

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

40.00%-60.00%  (50.00%)

Residential loans

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

 

1,088

 

 

Sales comparison approach

 

Adjustment for differences between comparable sales

 

0.00%-40.50%  (15.51%)

37


 

Auto loans were excluded from the table above as their value is considered immaterial.

The Company has elected the fair value option for newly originated residential mortgage and permanent construction loans held for sale.  These loans are intended for sale and the Company believes that fair value is the best indicator of the resolution of these loans.  Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment.  None of these loans are 90 or more days past due nor on nonaccrual status as of March 31, 2016.  

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(Dollars in thousands)

 

Aggregate fair value

 

$

32,007

 

 

$

26,716

 

Contractual balance

 

 

29,684

 

 

 

25,197

 

Gain (loss)

 

 

2,323

 

 

 

1,519

 

 

The total amount of gains and losses from changes in fair value included in earnings for the three months ended March 31, 2016 for loans held for sale, at fair value were:

 

 

 

For the Three Months Ended

 

 

 

March 31, 2016

 

 

March 31, 2015

 

 

 

(Dollars in thousands)

 

Interest  income

 

$

 

 

$

 

Interest expense

 

 

 

 

 

 

Change in fair value

 

 

803

 

 

 

561

 

Total change in fair value

 

$

803

 

 

$

561

 

 

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at March 31, 2016 and December 31, 2015, were as follows:

 

 

 

 

 

 

Fair Value Measurements at March 31, 2016 Using:

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

40,570

 

 

$

40,570

 

 

$

 

 

$

 

Available for sale securities

 

365,369

 

 

 

 

 

 

365,369

 

 

 

 

Held to maturity securities

 

107,838

 

 

 

 

 

 

107,595

 

 

 

1,107

 

Loans held for sale

 

3,991

 

 

 

 

 

 

4,079

 

 

 

 

Loans held for sale, at fair value

 

32,007

 

 

 

 

 

 

5,247

 

 

 

26,760

 

Loans, net

 

1,359,146

 

 

 

 

 

 

 

 

 

1,365,391

 

FHLB stock

 

18,068

 

 

n/a

 

 

n/a

 

 

n/a

 

Accrued interest receivable

 

5,783

 

 

 

 

 

 

2,095

 

 

 

3,688

 

Interest rate caps

 

 

 

 

 

 

 

 

 

 

 

Purchased certificate of deposit option

 

913

 

 

 

 

 

 

913

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking, savings and money market accounts

 

(1,026,318

)

 

 

(1,026,318

)

 

 

 

 

 

 

Certificates of deposit

 

(440,296

)

 

 

 

 

 

(444,173

)

 

 

 

FHLB advances

 

(291,170

)

 

 

 

 

 

(291,070

)

 

 

 

Repurchase agreements and other

 

(529

)

 

 

 

 

 

(540

)

 

 

 

Advance payments by borrowers for taxes and insurance

 

(16,247

)

 

 

(16,247

)

 

 

 

 

 

 

Accrued interest payable

 

(110

)

 

 

 

 

 

(110

)

 

 

 

Written certificate of deposit option

 

(913

)

 

 

 

 

 

(913

)

 

 

 

38


 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015 Using:

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

35,910

 

 

$

35,910

 

 

$

 

 

$

 

Available for sale securities

 

357,670

 

 

 

 

 

 

357,670

 

 

 

 

Held to maturity securities

 

110,699

 

 

 

 

 

 

108,536

 

 

 

1,108

 

Loans held for sale

 

9,085

 

 

 

 

 

 

9,207

 

 

 

 

Loans held for sale, at fair value

 

26,716

 

 

 

 

 

 

 

 

 

26,716

 

Loans, net

 

1,316,192

 

 

 

 

 

 

 

 

 

1,322,338

 

FHLB stock

 

18,068

 

 

n/a

 

 

n/a

 

 

n/a

 

Accrued interest receivable

 

5,978

 

 

 

 

 

 

2,276

 

 

 

3,702

 

Interest rate caps

 

3

 

 

 

 

 

 

 

 

 

3

 

Purchased certificate of deposit option

 

805

 

 

 

 

 

 

805

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking, savings and money market accounts

 

(980,783

)

 

 

(980,783

)

 

 

 

 

 

 

Certificates of deposit

 

(454,960

)

 

 

 

 

 

(459,433

)

 

 

 

FHLB advances

 

(278,975

)

 

 

 

 

 

(279,053

)

 

 

 

Repurchase agreements and other

 

(535

)

 

 

 

 

 

(548

)

 

 

 

Advance payments by borrowers for taxes and insurance

 

(21,174

)

 

 

(21,174

)

 

 

 

 

 

 

Accrued interest payable

 

(53

)

 

 

 

 

 

(53

)

 

 

 

Written certificate of deposit option

 

(805

)

 

 

 

 

 

(805

)

 

 

 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Held to maturity securities

Fair values for held to maturity securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows.

(d) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification; fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification; and impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(e) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts approximate their

39


 

fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed and variable rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Other Borrowings

Short-term borrowings, generally maturing within 90 days, approximate their fair values resulting in a Level 2 classification. The fair values of Home Savings long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification, depending on the classification of the underlying asset or liability.

(h) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

 

 

9.

STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

 

 

For the Three Months Ended March 31,

 

 

2016

 

 

2015

 

 

(Dollars in thousands)

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid  during the period for:

 

 

 

 

 

 

 

Interest on deposits and borrowings

$

2,090

 

 

$

2,120

 

Supplemental schedule of noncash activities:

 

 

 

 

 

 

 

Transfers from loans to real estate owned and other repossessed assets

 

303

 

 

 

493

 

 

 

40


 

 

10.

EARNINGS PER SHARE  

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but also excludes awards considered participating securities. Stock options for 71,891 shares were anti-dilutive for the three months ended March 31, 2016 and stock options for 74,083 shares were anti-dilutive for the three months ended March 31, 2015.  

 

 

For the Three Months Ended March 31,

 

 

2016

 

 

2015

 

 

(Dollars in thousands, except per share data)

 

Net income per consolidated statements of income

$

3,320

 

 

$

3,686

 

Net income allocated to participating securities

 

(22

)

 

 

(21

)

Net income allocated to common stock

$

3,298

 

 

$

3,665

 

 

 

 

 

 

 

 

 

Basic earnings per common share computation:

 

 

 

 

 

 

 

Distributed earnings allocated to common stock

$

1,188

 

 

$

493

 

Undistributed earnings allocated to common stock

 

2,110

 

 

 

3,172

 

Net income allocated to common stock

$

3,298

 

 

$

3,665

 

Weighted average common shares outstanding, including shares

   considered participating securities

 

47,587

 

 

 

49,291

 

Less: Average participating securities

 

(315

)

 

 

(269

)

Weighted average shares

 

47,272

 

 

 

49,022

 

Basic earnings per common share

$

0.07

 

 

$

0.07

 

 

 

 

 

 

 

 

 

Diluted earnings per common share computation:

 

 

 

 

 

 

 

Net income allocated to common stock

$

3,298

 

 

$

3,665

 

Weighted average common shares outstanding for basic

   earnings per common share

 

47,272

 

 

 

49,022

 

Add: Dilutive effects of assumed exercises of stock options

 

279

 

 

 

273

 

Weighted average shares and dilutive potential common shares

 

47,551

 

 

 

49,295

 

Diluted earnings per common share

$

0.07

 

 

$

0.07

 

 

 

 

11.

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, disproportional tax effects and changes in unrealized gains and losses on the postretirement liability. The change includes reclassification of net gains or (losses) and impairment charges on sales of securities of $153,000 and $11,000 for the three months ended March 31, 2016 and 2015, respectively.  Reclassifications also include amortization of unrealized gains on postretirement plan and accretion of unrealized loss on held to maturity securities.    

41


 

Other comprehensive income (loss) components and related tax effects for the three-month periods are as follows:

 

 

Unrealized

Gains (Losses)

on Securities

Available for

Sale

 

Disproportionate

Tax Effect from

Securities

Available for

Sale

 

Losses on

Securities

Transferred

From

Available for

Sale

to Held to

Maturity

 

Unrealized

Gains (Losses)

from

Postretirement

Plan

 

Disproportionate

Tax Effect from

Postretirement

Plan

 

Total

 

March 31, 2016

(Dollars in thousands)

 

Balances at beginning of period, net

   of tax

$

(2,492

)

$

(17,110

)

$

(960

)

$

831

 

$

511

 

$

(19,220

)

Other comprehensive income

   before reclassifications

 

6,528

 

 

 

 

 

 

 

 

 

 

6,528

 

Amortization of unrealized gains of

   postretirement plan

   recognized in other

   comprehensive income

 

 

 

 

 

 

 

(181

)

 

 

 

(181

)

Accretion of unrealized losses of

   securities transferred from

   available for sale to held to

   maturity recognized in other

   comprehensive income

 

 

 

 

 

34

 

 

 

 

 

 

34

 

Reclassification adjustment for

   gains realized in income

 

(99

)

 

 

 

 

 

 

 

 

 

(99

)

Net current period other

   comprehensive income

 

6,429

 

 

 

 

34

 

 

(181

)

 

 

 

6,282

 

Balances at end of period, net of

   tax

$

3,937

 

$

(17,110

)

$

(926

)

$

650

 

$

511

 

$

(12,938

)

 

 

Unrealized

Gains (Losses)

on Securities

Available for

Sale

 

Disproportionate

Tax Effect from

Securities

Available for

Sale

 

Unrealized

Gains (Losses)

from

Postretirement

Plan

 

Disproportionate

Tax Effect from Postretirement

Plan

 

Total

 

March 31, 2015

(Dollars in thousands)

 

Balances at beginning of period, net

   of tax

$

(4,315

)

$

(17,110

)

$

916

 

$

511

 

$

(19,998

)

Other comprehensive income before

   reclassifications

 

3,897

 

 

 

 

 

 

 

 

3,897

 

Reclassification adjustment for

   gains realized in income

 

(7

)

 

 

 

 

 

 

 

(7

)

Net current period other comprehensive

   income

 

3,890

 

 

 

 

 

 

 

 

3,890

 

Balances at end of period, net of tax

$

(425

)

$

(17,110

)

$

916

 

$

511

 

$

(16,108

)

 

As of June 30, 2014, management concluded it was more likely than not that the Company’s net deferred tax asset (DTA) would be realized and accordingly determined a full deferred tax valuation allowance was no longer required. Upon reversal of the former full deferred tax valuation allowance as of June 30, 2014, certain disproportionate tax effects are retained in accumulated other comprehensive income (loss) totaling approximately a ($16.6) million loss. Almost the entire disproportionate tax effect is attributable to valuation allowance expense recorded through other comprehensive income (loss) on the tax benefit of losses sustained on the available for sale securities portfolio while the Company was in a full deferred tax valuation allowance. This valuation allowance was appropriately reversed through continuing operations at June 30, 2014, leaving the original expense in accumulated other comprehensive income (loss), where it will remain in accordance with the Company’s election of the “portfolio approach”, until such time as the Company would cease to have an available for sale security portfolio.

42


 

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended March 31, 2016:

 

 

Amount Reclassified

 

Affected Line Item on

 

From Accumulated

 

the Statement Where

Details About Accumulated Other Comprehensive

Other Comprehensive

 

Net Income is

Income Components

Income

 

Presented

 

(Dollars in thousands)

 

 

Realized net gains on the sale of available for sale securities

$

(153

)

Net gains on securities available for sale

 

 

54

 

Tax expense

 

 

(99

)

Net of tax

Amortization of postretirement benefits prior service costs

 

(278

)

Reduction in salaries and employee benefits

 

 

97

 

Tax expense

 

 

(181

)

Net of tax

Total reclassification during the period

$

(280

)

Increase to net income

 

The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended March 31, 2015:

 

 

Amount Reclassified

 

Affected Line Item on

 

From Accumulated

 

the Statement Where

Details About Accumulated Other Comprehensive

Other Comprehensive

 

Net Income is

Income Components

Income

 

Presented

 

(Dollars in thousands)

 

 

Realized net gains on the sale of available for sale securities

$

(11

)

Net gains on securities available for sale

 

 

4

 

Tax expense

Total reclassification during the period

$

(7

)

Net of tax, increase to net income

 

 

 

12.

REGULATORY CAPITAL REQUIREMENTS

Home Savings and United Community are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible 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 in keeping with 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 of capital, risk weightings, and other factors.

The Basel III Capital Rules establish a common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), a minimum Tier 1 capital to risk-based assets requirement (6% of risk-weighted assets) and assigns a risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also require unrealized gains and losses on certain available-for-sale securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. In connection with the adoption of the Basel III Capital Rules, United Community and Home Savings elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1.  The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital risk-based weighted assets in addition to the amount necessary to meeting its minimum risk-based capital requirements.

The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The capital conservation buffer for 2016 is 0.625%.  The final rule also implemented consolidated capital requirements.

43


 

Quantitative measures established by regulation for capital adequacy require Home Savings to maintain minimum 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).  United Community and Home Savings’ Common Equity Tier 1 capital consists of common stock and related paid-in capital, net of treasury stock, and retained earnings. Common Equity Tier 1 for both United Community and Home Savings is reduced by intangible assets, net of associated deferred tax liabilities and subject to transition provisions. Actual and regulatory required capital ratios for Home Savings, along with the dollar amount of capital implied by such ratios, are presented below.

 

 

March 31, 2016

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Under Prompt

 

 

 

 

 

 

 

 

 

 

Requirements For Capital

 

 

Corrective Action

 

 

Actual

 

 

Adequacy Purposes

 

 

Provisions

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

(Dollars in thousands)

 

Total capital (to risk-weighted assets)

$

245,669

 

 

 

18.39

%

 

$

115,224

 

 

 

8.625

%

 

$

133,594

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

228,894

 

 

 

17.13

%

 

 

88,506

 

 

 

6.625

%

 

 

106,875

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

228,894

 

 

 

17.13

%

 

 

68,467

 

 

 

5.125

%

 

 

86,836

 

 

 

6.50

%

Tier 1 capital (to average assets)**

 

228,894

 

 

 

11.53

%

 

 

79,427

 

 

 

4.000

%

 

 

99,284

 

 

 

5.00

%

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Under Prompt

 

 

 

 

 

 

 

 

 

 

Requirements

 

 

Corrective Action

 

 

Actual

 

 

Per Regulation

 

 

Provisions

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

(Dollars in thousands)

 

Total capital (to risk-weighted assets)

$

240,697

 

 

 

18.72

%

 

$

102,879

 

 

 

8.00

%

 

$

128,599

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

224,486

 

 

 

17.46

%

 

 

77,159

 

 

 

6.00

%

 

 

102,879

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

224,486

 

 

 

17.46

%

 

 

57,869

 

 

 

4.50

%

 

 

83,589

 

 

 

6.50

%

Tier 1 capital (to average assets)**

 

224,486

 

 

 

11.46

%

 

 

78,347

 

 

 

4.00

%

 

 

97,934

 

 

 

5.00

%

**

Tier 1 Leverage Capital Ratio

Management believes that as of March 31, 2016 and December 31, 2015, Home Savings meets all capital adequacy requirements to which they were subject.  As of March 31, 2016 and December 31, 2015, Home Savings was considered well capitalized.

 

The components of Home Savings’ regulatory capital are as follows:

 

 

March 31, 2016

 

 

December 31, 2015

 

Total shareholders' equity

$

230,771

 

 

$

220,872

 

Add (deduct)

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

12,954

 

 

 

19,236

 

Intangible assets

 

(10

)

 

 

(12

)

Disallowed deferred tax assets

 

(14,821

)

 

 

(15,610

)

Disallowed capitalized mortgage loan servicing rights

 

 

 

 

 

Tier 1 Capital

 

228,894

 

 

 

224,486

 

Allowance for loan losses and allowance for unfunded lending commitments

   limited to 1.25% of total risk-weighted assets

 

16,775

 

 

 

16,211

 

Total risk-based capital

$

245,669

 

 

$

240,697

 

 

44


 

Actual and regulatory required consolidated capital ratios for United Community, along with the dollar amount of capital implied by such ratios, are presented below.

 

 

March 31, 2016

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Under Prompt

 

 

 

 

 

 

 

 

 

 

Requirements For Capital

 

 

Corrective Action

 

 

Actual

 

 

Adequacy Purposes

 

 

Provisions

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

(Dollars in thousands)

 

Total capital (to risk-weighted assets)

$

264,236

 

 

 

19.81

%

 

$

115,024

 

 

 

8.625

%

 

$

133,361

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

247,478

 

 

 

18.56

%

 

 

88,351

 

 

 

6.625

%

 

 

106,689

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

247,478

 

 

 

18.56

%

 

 

68,347

 

 

 

5.125

%

 

 

86,684

 

 

 

6.50

%

Tier 1 capital (to average assets)**

 

247,478

 

 

 

12.46

%

 

 

79,425

 

 

 

4.000

%

 

 

99,281

 

 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Under Prompt

 

 

 

 

 

 

 

 

 

 

Requirements For Capital

 

 

Corrective Action

 

 

Actual

 

 

Adequacy Purposes

 

 

Provisions

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

(Dollars in thousands)

 

Total capital (to risk-weighted assets)

$

261,732

 

 

 

20.35

%

 

$

102,886

 

 

 

8.00

%

 

$

128,608

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

245,503

 

 

 

19.09

%

 

 

77,165

 

 

 

6.00

%

 

 

102,886

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

245,503

 

 

 

19.09

%

 

 

57,874

 

 

 

4.50

%

 

 

83,595

 

 

 

6.50

%

Tier 1 capital (to average assets)**

 

245,503

 

 

 

12.53

%

 

 

78,348

 

 

 

4.00

%

 

 

97,934

 

 

 

5.00

%

 

The components of United Community’s consolidated regulatory capital are as follows:

 

 

March 31, 2016

 

 

December 31, 2015

 

Total shareholders' equity

$

251,804

 

 

$

244,245

 

Add (deduct)

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

12,938

 

 

 

19,220

 

Intangible assets

 

(10

)

 

 

(12

)

Disallowed deferred tax assets

 

(17,254

)

 

 

(17,950

)

Disallowed capitalized mortgage loan servicing rights

 

 

 

 

 

Tier 1 Capital

 

247,478

 

 

 

245,503

 

Allowance for loan losses and allowance for unfunded lending commitments

   limited to 1.25% of total risk-weighted assets

 

16,758

 

 

 

16,229

 

Total risk-based capital

$

264,236

 

 

$

261,732

 

 

 

45


 

 

13.

INCOME TAXES  

Significant components of the deferred tax assets and liabilities are as follows:

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

 

(Dollars in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

 

Loan loss reserves

$

5,916

 

 

$

6,199

 

Postretirement benefits

 

459

 

 

 

564

 

Depreciation

 

671

 

 

 

611

 

Other real estate owned valuation

 

393

 

 

 

430

 

Tax credits carryforward

 

995

 

 

 

951

 

Unrealized loss on securities available for sale

 

 

 

 

1,341

 

Unrealized loss on securities held to maturity

 

499

 

 

 

517

 

Interest on nonaccrual loans

 

650

 

 

 

834

 

Net operating loss carryforward

 

16,259

 

 

 

16,903

 

Purchase accounting adjustment

 

91

 

 

 

90

 

Accrued bonuses

 

321

 

 

 

723

 

Other

 

106

 

 

 

50

 

Deferred tax assets

 

26,360

 

 

 

29,213

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Deferred loan fees

 

581

 

 

 

510

 

Federal Home Loan Bank stock dividends

 

4,585

 

 

 

4,585

 

Mortgage servicing rights

 

1,839

 

 

 

1,976

 

FHLB prepayment penalty

 

990

 

 

 

1,059

 

Unrealized gains on securities available for sale

 

2,120

 

 

 

 

Postretirement benefits accrual

 

350

 

 

 

447

 

Prepaid expenses

 

292

 

 

 

215

 

Deferred tax liabilities

 

10,757

 

 

 

8,792

 

Net deferred tax asset

$

15,603

 

 

$

20,421

 

 

As of March 31, 2016, the net DTA was $15.6 million, and as of December 31, 2015, the net DTA was $20.4 million.

The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

United Community’s net operating loss of $46.5 million at March 31, 2016 will be carried forward to use against future taxable income. The net operating loss carryforwards begin to expire in the year ending December 31, 2030. In addition, United Community is carrying forward $995,000 of alternative minimum tax credits. The alternative minimum tax credits are carried forward indefinitely.

 

 

 

14.

BUSINESS COMBINATION

On January 29, 2016, the Company completed the purchase of Forge Financial Services, Inc. d/b/a James & Sons Insurance Company of Youngstown, Ohio.  James & Sons Insurance is engaged in the business of selling insurance including auto, commercial, homeowners and life-health insurance.  Under the purchase agreement, the Company paid $1.5 million in stock and $360,000 in cash in connection with this acquisition.  There were no acquisition related costs recognized for the three months ended March 31, 2016.  The fair value of the 262,705 common shares issued, as part of the consideration paid for James & Sons Insurance, was determined based on the closing price per share for the 20 consecutive trading days ending five business days prior to January 29, 2016.  Total assets purchased was $2.3 million, including $1.6 million in goodwill and other intangible assets.  The Company is waiting for independent valuations to separate other intangible assets from goodwill.

 

 

46


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

 

 

 

For the Three Months Ended March 31,

 

Selected financial ratios and other data: (1)

 

2016

 

 

2015

 

Performance ratios:

 

 

 

 

 

 

 

 

Return on average assets (2)

 

 

0.66

%

 

 

0.80

%

Return on average equity (3)

 

 

5.33

%

 

 

5.99

%

Interest rate spread (4)

 

 

3.09

%

 

 

3.11

%

Net interest margin (5)

 

 

3.21

%

 

 

3.24

%

Noninterest expense to average assets

 

 

2.49

%

 

 

2.75

%

Efficiency ratio (6)

 

 

63.90

%

 

 

70.07

%

Average interest-earning assets to average interest-bearing liabilities

 

 

124.75

%

 

 

124.51

%

Capital ratios:

 

 

 

 

 

 

 

 

Average equity to average assets

 

 

12.45

%

 

 

13.32

%

Equity to assets, end of period

 

 

12.36

%

 

 

13.28

%

Tier 1 leverage ratio (Bank only)

 

 

11.53

%

 

 

11.99

%

Common equity Tier 1 capital (Bank only)

 

 

17.13

%

 

 

19.23

%

Tier 1 risk-based capital ratio (Bank only)

 

 

17.13

%

 

 

19.23

%

Total risk-based capital ratio (Bank only)

 

 

18.39

%

 

 

20.48

%

Asset quality ratios:

 

 

 

 

 

 

 

 

Nonperforming loans to net loans at end of period (7)

 

 

1.48

%

 

 

1.72

%

Nonperforming assets to average assets (8)

 

 

1.10

%

 

 

1.26

%

Nonperforming assets to total assets at end of period

 

 

1.08

%

 

 

1.25

%

Allowance for loan losses as a percent of loans

 

 

1.23

%

 

 

1.45

%

Allowance for loan losses as a percent of nonperforming loans (7)

 

 

84.07

%

 

 

85.69

%

Texas ratio (9)

 

 

8.17

%

 

 

8.79

%

Total classified assets as a percent of Tier 1 Capital

   (Bank only)

 

 

17.35

%

 

 

18.62

%

Total classified loans as a percent of Tier 1 Capital and ALLL

   (Bank only)

 

 

15.41

%

 

 

15.94

%

Total classified assets as a percent of Tier 1 Capital and ALLL

   (Bank only)

 

 

16.16

%

 

 

17.26

%

Net chargeoffs as a percent of average loans

 

 

0.89

%

 

 

0.10

%

Total 90+ days past due as a percent of net loans

 

 

1.15

%

 

 

1.31

%

Per share data:

 

 

 

 

 

 

 

 

Basic earnings per common share (10)

 

$

0.07

 

 

$

0.07

 

Diluted earnings per common share (10)

 

 

0.07

 

 

 

0.07

 

Book value per common share (11)

 

 

5.30

 

 

 

5.01

 

Tangible book value per common share (12)

 

 

5.27

 

 

 

5.01

 

Cash dividend per common share

 

 

0.025

 

 

 

0.01

 

Dividend payout ratio (13)

 

 

35.71

%

 

 

13.45

%

 

Notes:

1.

Ratios for the three-month periods are annualized where appropriate

2.

Net income divided by average total assets

3.

Net income 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 percent of average interest-earning assets

6.

Noninterest expense, excluding the amortization of the core deposit intangible and prepayment penalty, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities and gains and losses on foreclosed assets

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 ALLL

10.

Net income divided by the number of basic or diluted shares outstanding

47


 

11.

Shareholders’ equity divided by number of shares outstanding  

12.

Shareholders’ equity minus core deposit intangible divided by number of shares outstanding

13.

Historical per share dividends declared and paid for the period divided by the diluted earnings per share for that year

Forward-Looking Statements

When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “plan 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 Community’s 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 Community’s financial performance and could cause United Community’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made.

Material Changes in Financial Condition at March 31, 2016 and December 31, 2015

Total assets increased $48.4 million to $2.0 billion at March 31, 2016, compared to December 31, 2015. Contributing to the change were increases in net loans of $43.0 million, available for sale securities of $7.7 million and loans held for sale at fair value of $5.3 million.

Funds not currently utilized for general corporate purposes are invested in overnight funds. Cash and cash equivalents increased $4.7 million during the first three months of 2016.

The increase in available for sale securities was the result of purchases of approximately $24.5 million, of which $3.0 million hasn’t settled as of March 31, 2016, along with the recognition of unrealized gains of $9.9 million during the three months ended March 31, 2016.  Partially offsetting this activity were maturities, paydowns and amortization of securities totaling $8.7 million and sales of $18.1 million.  The unrealized gain in the available for sale portfolio was $6.1 million at March 31, 2016, compared to an unrealized loss of $3.8 million at December 31, 2015.

Net loans increased $43.0 million during the first three months of 2016. The increase was a combination of growth in commercial real estate and commercial and industrial loans during the period. See Note 5 to the consolidated financial statements for additional information regarding the composition of net loans.

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for loan losses charged to expense. The allowance for loan losses was $16.9 million at March 31, 2016, down from $17.7 million at December 31, 2015. The allowance for loan losses as a percentage of loans was 1.23% at March 31, 2016, compared to 1.33% at December 31, 2015. The allowance for loan losses as a percentage of nonperforming loans was 84.07% at March 31, 2016, compared to 105.76% at December 31, 2015. 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”. As of March 31, 2016, the Company evaluated 15 quarters of net charge-off history and applied this information to the current period.  This component is combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding balance of homogenous loans.

During the first three months of 2016, the Company recorded a loan loss provision of $2.2 million. This recognition was primarily due to the growth of the loan portfolio, a loss recognized on a commercial real estate loan, partially offset by improvements in qualitative factors.  During the first quarter of 2016, the Company determined that based upon recently received information an impairment charge to a specific loan was required. After a review of one long-held nonresidential commercial real estate loan, the Company concluded that this loan had become impaired because the borrower is unlikely to perform their obligation in accordance with the terms and conditions of the loan.  The Company took a charge of $2.2 million in the first quarter of 2016 to write the loan down to fair value.  In addition, a specific reserve was established to cover probable future costs.  

A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that the collection of the full amount of principal and interest is no longer probable. The total outstanding balance of all impaired loans was $42.6 million at March 31, 2016 as compared to $39.7 million at December 31, 2015.

48


 

Included in impaired loans above are certain loans Home Savings considers to be troubled debt restructurings (TDR). A loan is considered a TDR if Home Savings grants a concession to a debtor experiencing financial difficulty, that it would otherwise not consider. The concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. If the debtor is not currently experiencing financial difficulties, but would probably be in payment default in the future without the modification, then this type of restructure also could be considered a TDR.

TDR loans aggregated $25.5 million at March 31, 2016 compared to $26.3 million at December 31, 2015.  Of the $25.5 million at March 31, 2016, $22.5 million were performing loans according to their modified terms.  The remaining balance of TDR loans of $3.0 million were considered nonperforming.  

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $20.1 million, or 1.48% of net loans, at March 31, 2016, compared to $16.7 million, or 1.27% of net loans, at December 31, 2015.

Loans held for sale, carried at lower of cost or market, were $3.9 million at March 31, 2016, compared to $9.1 million at December 31, 2015. Loans held for sale, carried at fair value, were $32.0 million at March 31, 2016, compared to $26.7 million at December 31, 2015. The change was primarily attributable to the originations of permanent construction loans during the period.  These loans are not sold until construction of the residence is complete, which is usually within nine to ten months of origination.  Additionally, in the first quarter of 2016, Home Savings elected the fair value option for all newly originated fixed rate mortgage loans held for sale.  Home Savings continues to sell most of its newly originated fixed rate mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

Real estate owned and other repossessed assets decreased $881,000, or 32.3%, during the three months ended March 31, 2016.  Real estate owned and other repossessed assets are recorded at the fair market value of the property less costs to sell. Appraisals are obtained at least annually on real estate properties that exceed $1.0 million in value. A valuation allowance may be established on any property to properly reflect the asset at fair value.  

Goodwill increased $1.6 million during the first three months of 2016, due to the completion of the purchase of James & Sons Insurance Company announced on January 29, 2016.  

Bank Owned Life Insurance (BOLI) is maintained on select officers and employees of Home Savings whereby Home Savings is the beneficiary. BOLI is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings’ policy cash surrender value are tax exempt and death benefit proceeds received by Home Savings are tax-free. Income from these policies and changes in the cash surrender value are recorded in other income. There is no post-termination coverage, split dollar or other benefits provided to participants covered by the BOLI. Home Savings recognized $365,000 and $331,000, as other non-interest income based on the change in cash value of the policies in the three months ended March 31, 2016 and 2015, respectively.

Other assets decreased $5.0 million, largely due to the change in net deferred tax assets (DTA) during the first three months of 2016.  As of March 31, 2016, the net DTA was $15.6 million, compared to $20.4 million at December 31, 2015.  

Total deposits increased $30.9 million to $1.5 billion at March 31, 2016, compared to $1.4 billion at December 31, 2015.  Non-interest bearing accounts increased $3.3 million, or 1.5%.  During the same period, interest-bearing deposits increased 2.3%, or $27.5 million, which can be attributed to Home Savings’ continued efforts in attracting public funds.  As of March 31, 2016, Home Savings had $126.4 million in public funds.  As of December 31, 2015, Home Savings had $91.3 million in public funds.        

FHLB advances increased from $279.0 million at December 31, 2015 to $291.2 million at March 31, 2016.  The change was due to an increase in overnight advances.

Advance payments by borrowers for taxes and insurance decreased $4.9 million during the first three months of 2016. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $1.9 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $3.0 million in the same period.

Shareholders’ equity increased $7.6 million to $251.8 million at March 31, 2016, from $244.2 million at December 31, 2015. During the first three months of the year, regular earnings and an increase in other comprehensive income of $6.3 million as a result of changes in the value of available for sale securities contributed to the increase. The Company continued its common share repurchase program, purchasing approximately 440,000 shares having a cost of $2.6 million.  Also affecting the change, the Company issued 262,705 shares for the purchase of James & Sons Insurance.

49


 

Book value per common share as of March 31, 2016 was $5.30 as compared to $5.14 per common share as of December 31, 2015. Book value per share is calculated as total common equity divided by the number of common shares outstanding. Book value was impacted by the overall change in equity as mentioned above.

Material Changes in Results of Operations for the Three Months Ended

March 31, 2016 and March 31, 2015

Net Income. United Community recognized net income for the three months ended March 31, 2016, of $3.3 million, or $0.07 per diluted common share compared to net income of $3.7 million for the three months ended March 31, 2015, or $0.07 per diluted share.

The decrease in earnings for the first quarter of 2016, compared to the same quarter last year, was primarily a result of higher provision for loan losses, which was partially offset by higher net interest income due to loan growth and the positive impact of the prepayment of a repurchase agreement.  Also mitigating the decrease in earnings was a $540,000 increase in non-interest income. In addition, the Company recorded a reduction of $217,000 in non-interest expenses.  

Net Interest Income. Net interest income was $14.9 million in the first quarter of 2016 up from the $13.9 million recorded in the first quarter of 2015.  Net interest margin was 3.21% for the first quarter of 2016 compared to 3.24% in the first quarter of 2015.

Total interest income increased by $986,000 in the first quarter of 2016 compared to the same period in 2015, to $17.0 million from $16.0 million. The increase is a result of an increase in average net loans and loans held for sale and the interest earned on this higher average balance.  Average net loans increased $179.5 million in the first quarter compared to the same period in 2015 and yields declined 26 basis points to 4.15% for the three months ended March 31, 2016 from 4.41% for the same period in 2015. Average loans held for sale increased $8.7 million in the first quarter compared to the same period in 2015, while yields declined to 3.76% for the three months ended March 31, 2016 from 4.42% for the same period in 2015. Interest income from net loans increased to $13.8 million for the quarter ended March 31, 2016 compared to $12.7 million for the same period in 2015, and income from loans held for sale increased to $332,000 for the quarter ended March 31, 2016 compared to $294,000 for the same period in 2015.  These increases were partially offset by a decline of $171,000 in income on available for sale and held to maturity securities.

Interest expense decreased by $7,000 in the first quarter of 2016 to $2.1 million compared to the same period in 2015. This decrease was due to a six basis point decline in the average cost of interest-bearing liabilities in the first quarter of 2016 primarily due to the prepayment of a repurchase agreement in the fourth quarter of 2015. Interest expense related to interest-bearing deposits was $1.6 million in the first quarter of 2016 compared to $1.5 million in the first quarter of 2015.  Expenses on FHLB advances and securities sold under repurchase agreements and other borrowings were $530,000 and $5,000 respectively in the first quarter of 2016 compared to $305,000 and $316,000 respectively for the same period in 2015.  

50


 

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended March 31, 2016 and 2015, was 3.09 % and 3.11%, respectively. The net interest margin decreased three basis points to 3.21% for the three months ended March 31, 2016 compared to 3.24% for the same period in 2015.

 

 

 

For the Three Months Ended March 31,

 

 

 

2016 vs. 2015

 

 

 

Increase

 

 

Total

 

 

 

(decrease) due to

 

 

increase

 

 

 

Rate

 

 

Volume

 

 

(decrease)

 

 

 

(Dollars in thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

(679

)

 

$

1,789

 

 

$

1,110

 

Loans held for sale

 

 

(32

)

 

 

70

 

 

 

38

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale-taxable

 

 

1

 

 

 

(927

)

 

 

(926

)

Available for sale-nontaxable

 

 

94

 

 

 

95

 

 

 

189

 

Held to maturity-taxable

 

 

288

 

 

 

289

 

 

 

577

 

Held to maturity-nontaxable

 

 

42

 

 

 

41

 

 

 

83

 

Federal Home Loan Bank stock

 

 

 

 

 

 

 

 

 

Other interest earning assets

 

 

10

 

 

 

(1

)

 

 

9

 

Total interest earning assets

 

$

(276

)

 

$

1,356

 

 

$

1,080

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

 

 

$

1

 

 

$

1

 

Checking accounts

 

 

30

 

 

 

6

 

 

 

36

 

Certificates of deposit

 

 

(4

)

 

 

46

 

 

 

42

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

 

 

 

 

 

 

Long-term advances

 

 

27

 

 

 

4

 

 

 

31

 

Short-term advances

 

 

123

 

 

 

71

 

 

 

194

 

Repurchase agreements and other

 

 

(26

)

 

 

(285

)

 

 

(311

)

Total interest bearing liabilities

 

$

150

 

 

$

(157

)

 

 

(7

)

Change in net interest income

 

 

 

 

 

 

 

 

 

$

1,087

 

 

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 management’s 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 Company recognized a loan loss provision of $2.2 million in the first quarter of 2016, compared to a recovery of $184,000 in the first quarter of 2015.  The increase in provision expense during the first quarter of 2016 was driven by strong loan growth.  Additionally, the Company recorded a charge of $2.2 million for the three months ended March 31, 2016, related to one long-held nonresidential commercial real estate loan, as discussed above.  For the first quarter of 2016, net chargeoffs to average outstanding loans was 89 basis points on an annualized basis.  This compares to 10 basis points for the same period last year.

Noninterest Income. Noninterest income in the first quarter of 2016 was $4.7 million, as compared to noninterest income for the first quarter of 2015 of $4.1 million. Increased deposit related fees drove the change in noninterest income along with the benefit of insurance related income from James & Sons Insurance now being recognized.      

Noninterest Expense. Non-interest expense was $12.5 million for the first quarter of 2016 compared to $12.7 million for the first quarter of 2015, a decrease of $217,000.  Significantly affecting this comparison was a reduction of other professional fees due to a change in supervisory exam fees.    

Income Taxes. During the three months ended March 31, 2016, the Company recognized a tax expense of $1.6 million on pre-tax income of $4.9 million, compared to a tax expense of $1.8 million on pre-tax income of $5.5 million for the three months ended March 31, 2015.  The primary reason for the variance was lower pre-tax income and the Company’s investment in non-taxable municipal securities.

51


 

Liquidity

United Community's liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities.

The principal sources of funds for United Community are deposits, loan repayments, maturities of securities, borrowings from financial institutions, repurchase agreements and other funds provided by operations.  Home Savings also has the ability to borrow from the Federal Home Loan Bank.  While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition.  Investments in liquid assets maintained by United Community and Home Savings are based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset and liability management program.  At March 31, 2016, approximately $203.2 million of Home Savings’ certificates of deposit were expected to mature within one year.  Based on past experience and Home Savings’ prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with Home Savings at maturity, although there can be no assurance that this will occur.

Home Savings’ Asset/Liability Committee (ALCO) is responsible for establishing and monitoring liquidity guidelines, policies and procedures.  ALCO uses a variety of methods to monitor the liquidity position of Home Savings including a liquidity analysis that measures potential sources and uses of funds over future time periods out to one year.  ALCO also performs contingency funding analyses to determine Home Savings’ ability to meet potential liquidity needs under stress scenarios that cover varying time horizons ranging from immediate to long-term.

At March 31, 2016, United Community had total on-hand liquidity, defined as cash and cash equivalents, unencumbered securities and additional FHLB borrowing capacity, of $506.4 million.

52


 

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three months ended March 31, 2016 and 2015. Average balance calculations were based on daily balances.

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

Average

 

 

Interest

 

 

 

 

 

 

Average

 

 

Interest

 

 

 

 

 

 

 

outstanding

 

 

earned/

 

 

Yield/

 

 

outstanding

 

 

earned/

 

 

Yield/

 

 

 

balance

 

 

paid

 

 

rate

 

 

balance

 

 

paid

 

 

rate

 

 

 

(Dollars in thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans (1)

 

$

1,331,265

 

 

$

13,801

 

 

 

4.15

%

 

$

1,151,729

 

 

$

12,691

 

 

 

4.41

%

Loans held for sale

 

 

35,359

 

 

 

332

 

 

 

3.76

%

 

 

26,633

 

 

 

294

 

 

 

4.42

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale-taxable

 

 

337,226

 

 

 

1,935

 

 

 

2.30

%

 

 

498,777

 

 

 

2,861

 

 

 

2.29

%

Available for sale-nontaxable (2)

 

 

18,134

 

 

 

189

 

 

 

4.17

%

 

 

 

 

 

 

 

 

%

Held to maturity-taxable

 

 

99,043

 

 

 

577

 

 

 

2.33

%

 

 

 

 

 

 

 

 

%

Held to maturity-nontaxable (2)

 

 

10,375

 

 

 

83

 

 

 

3.20

%

 

 

 

 

 

 

 

 

%

Federal Home Loan Bank stock

 

 

18,068

 

 

 

182

 

 

 

4.03

%

 

 

18,068

 

 

 

182

 

 

 

4.03

%

Other interest earning assets

 

 

18,130

 

 

 

15

 

 

 

0.33

%

 

 

20,362

 

 

 

6

 

 

 

0.12

%

Total interest earning assets

 

 

1,867,600

 

 

 

17,114

 

 

 

3.67

%

 

 

1,715,569

 

 

 

16,034

 

 

 

3.74

%

Non-interest earning assets

 

 

133,988

 

 

 

 

 

 

 

 

 

 

 

132,105

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,001,588

 

 

 

 

 

 

 

 

 

 

$

1,847,674

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking accounts

 

$

481,350

 

 

 

266

 

 

 

0.22

%

 

$

469,224

 

 

 

230

 

 

 

0.20

%

Savings accounts

 

 

283,892

 

 

 

41

 

 

 

0.06

%

 

 

278,163

 

 

 

40

 

 

 

0.06

%

Certificates of deposit

 

 

447,459

 

 

 

1,305

 

 

 

1.17

%

 

 

431,690

 

 

 

1,263

 

 

 

1.17

%

Federal Home Loan Bank advances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term advances

 

 

47,043

 

 

 

289

 

 

 

2.46

%

 

 

46,261

 

 

 

258

 

 

 

2.23

%

Short-term advances

 

 

236,747

 

 

 

241

 

 

 

0.41

%

 

 

121,978

 

 

 

47

 

 

 

0.15

%

Repurchase agreements and other

 

 

532

 

 

 

5

 

 

 

3.76

%

 

 

30,555

 

 

 

316

 

 

 

4.14

%

Total interest bearing liabilities

 

$

1,497,023

 

 

 

2,147

 

 

 

0.57

%

 

$

1,377,871

 

 

 

2,154

 

 

 

0.63

%

Non-interest bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

228,308

 

 

 

 

 

 

 

 

 

 

 

196,049

 

 

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

27,111

 

 

 

 

 

 

 

 

 

 

 

27,596

 

 

 

 

 

 

 

 

 

Total noninterest bearing liabilities

 

 

255,419

 

 

 

 

 

 

 

 

 

 

 

223,645

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

1,752,442

 

 

 

 

 

 

 

 

 

 

$

1,601,516

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

249,146

 

 

 

 

 

 

 

 

 

 

 

246,158

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

2,001,588

 

 

 

 

 

 

 

 

 

 

$

1,847,674

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

 

$

14,967

 

 

 

3.09

%

 

 

 

 

 

$

13,880

 

 

 

3.11

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.21

%

 

 

 

 

 

 

 

 

 

 

3.24

%

Average interest earning assets to average interest

   bearing liabilities

 

 

 

 

 

 

 

 

 

 

124.75

%

 

 

 

 

 

 

 

 

 

 

124.51

%

 

(1)

Nonaccrual loans are included in the average balance at a yield of 0%.

(2)

Yields are on a fully taxable equivalent basis.

 

 

53


 

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 Community’s 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 to 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 inherently are uncertain and, as a result, the model cannot measure precisely NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies.

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates.  As noted, for the year ended December 31, 2015, and the quarter ended March 31, 2016, 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 March 31, 2016

 

NPV as % of portfolio value of assets

 

 

Next 12 months net interest income

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Change

in rates

(Basis points)

 

NPV Ratio

 

 

Internal

policy

limitations

 

 

Change

in %

 

 

Internal

policy

limitations

on NPV

Change

 

 

$ Change

 

 

Internal

policy

limitations

 

 

% Change

 

400

 

 

11.51

%

 

 

6.00

%

 

 

(1.19

)%

 

 

30.00

%

 

$

(4,686

)

 

 

(20.00

)%

 

 

(7.69

)%

300

 

 

12.18

%

 

 

6.00

%

 

 

(0.53

)%

 

 

25.00

%

 

 

(3,448

)

 

 

(15.00

)%

 

 

(5.66

)%

200

 

 

12.67

%

 

 

7.00

%

 

 

(0.03

)%

 

 

20.00

%

 

 

(2,263

)

 

 

(10.00

)%

 

 

(3.71

)%

100

 

 

12.99

%

 

 

7.00

%

 

 

0.29

%

 

 

15.00

%

 

 

(1,177

)

 

 

(5.00

)%

 

 

(1.93

)%

Static

 

 

12.70

%

 

 

9.00

%

 

 

%

 

 

0.00

%

 

 

 

 

 

%

 

 

%

 

Year Ended December 31, 2015

 

NPV as % of portfolio value of assets

 

 

Next 12 months net interest income

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Change

in rates

(Basis points)

 

NPV Ratio

 

 

Internal

policy

limitations

 

 

Change

in %

 

 

Internal

policy

limitations

on NPV

Change

 

 

$ Change

 

 

Internal

policy

limitations

 

 

% Change

 

400

 

 

11.91

%

 

 

6.00

%

 

 

(1.71

)%

 

 

30.00

%

 

$

(4,740

)

 

 

(20.00

)%

 

 

(7.95

)%

300

 

 

12.59

%

 

 

6.00

%

 

 

(1.03

)%

 

 

25.00

%

 

 

(3,585

)

 

 

(15.00

)%

 

 

(6.01

)%

200

 

 

13.19

%

 

 

7.00

%

 

 

(0.43

)%

 

 

20.00

%

 

 

(2,484

)

 

 

(10.00

)%

 

 

(4.16

)%

100

 

 

13.65

%

 

 

7.00

%

 

 

0.03

%

 

 

15.00

%

 

 

(1,365

)

 

 

(5.00

)%

 

 

(2.29

)%

Static

 

 

13.62

%

 

 

9.00

%

 

 

%

 

 

0.00

%

 

 

 

 

 

%

 

 

%

 

Due to a low interest rate environment, it was not meaningful to calculate results for a drop in interest rates.

54


 

As with any method of measuring interest rate risk, certain shortcomings are inherent in the above approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.

Potential Impact of Changes in Interest Rates. Home Savings’ profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and securities and interest expense on deposits and borrowings. Like most financial institutions, Home Savings’ short-term interest income and interest expense are affected significantly by changes in market interest rates and other economic factors beyond its control.

ITEM 4. Controls and Procedures.

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2016. Based on their evaluation, the Chief Executive Officer and Principal Accounting Officer have concluded that United Community’s disclosure controls and procedures as of March 31, 2016, were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act (i) was recorded, processed, summarized and reported on a timely basis, including those controls and procedures designed to ensure that such information is accumulated and communicated to management, including United Community’s Chief Executive Officer and Principal Accounting Officer, to allow timely decisions regarding required disclosure. During the quarter ended March 31, 2016, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

 

 

 

55


 

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 Community’s financial statements.

ITEM 1A. Risk Factors.

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Annual Report on Form 10-K for the period ended December 31, 2015.  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 Company’s 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.

 

(a)

On January 29, 2016, the Company completed the purchase of Forge Financial Services, Inc. d/b/a James & Sons Insurance Company of Youngstown, Ohio.  James & Sons Insurance is engaged in the business of selling insurance including auto, commercial, homeowners and life-health insurance.  Under the purchase agreement, the Company issued 262,705 United Community common shares and paid $360,000 for the acquisition of James & Sons Insurance.  The fair value of the 262,705 common shares issued was $1.5 million and was determined based on the closing price per share for the 20 consecutive trading days ending five business days prior to January 29, 2016.  Total assets purchased were $2.3 million, including $1.6 million in goodwill.  The unregistered common shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).  The Company relied upon representations made to it by the Seller, Forge Industries, Inc, including that it understood that (i) the shares were not being registered, (ii) the Company was selling the shares to the Seller in reliance upon an exemption under the Securities Act, (iii) the Seller was acquiring the Company’s common shares solely for its own account for investment purposes, and not with a view to the distribution of the shares, (iv) the Seller is a sophisticated investor with knowledge and experience in business and financial matters and that it received, sufficient financial information concerning the Company to evaluate the merits and the risks inherent in holding the Company’s common shares, (vi) it is able to bear the economic risk and lack of liquidity inherent in holding the Company’s common shares and (vii) it is an accredited investor as the term is defined in Rule 501 of the Securities Act.

 

(b)

Not applicable

 

(c)

The following table provides information concerning purchases of United Community’s common shares made by United Community during the three months ended March 31, 2016:

 

Period

 

Total number of

common shares purchased

 

 

Average price paid

per common share

 

 

Total number of

common shares

purchased as part of

publicly announced

plans

 

 

Maximum number

of shares that may

yet be purchased

under the plan

 

January 1 through January 31, 2016 (1)

 

 

3,074

 

 

$

5.36

 

 

 

 

 

 

746,789

 

February 1 through February 29, 2016

 

 

298,600

 

 

$

5.88

 

 

 

298,600

 

 

 

448,189

 

March 1 through March 31, 2016 (2)

 

 

138,373

 

 

$

5.87

 

 

 

131,941

 

 

 

316,248

 

Total

 

 

440,047

 

 

$

5.88

 

 

 

430,541

 

 

 

316,248

 

 

(1)

In January 2016, United Community purchased 3,074 shares at an average price of $5.36 per share from employees that used shares to pay employment taxes during the period.  The purchase of these shares were not part of United Community’s share repurchase program.  

(2)

United Community purchased 6,432 shares at an average price of $6.08 per share from employees that used shares to pay employment taxes during the period.  The purchase of these shares were not part of United Community’s share repurchase program.  

56


 

(3)

United Community’s stock repurchase program was publically announced on December 29, 2014 in a press release, which can be found in United Community’s Form 8-K filed December 29, 2014.  The repurchase program permitted the purchase of up to 2,500,000 shares.  There is no expiration date or specified purchase price for the plan. 

ITEM 3. Defaults Upon Senior Securities

Not Applicable

ITEM 4.  Mine Safety Disclosures

Not applicable

ITEM 5.  Other Information

Not applicable

 

 

 

 

57


 

ITEM 6. Exhibits.

 

Exhibit Number

  

Description

 

    3.1

  

 

Articles of Incorporation, including amendments

 

    3.2

  

 

Amended Code of Regulations

 

  31.1

  

 

Section 302 Certification by Chief Executive Officer

 

  31.2

  

 

Section 302 Certification by Principal Accounting Officer

 

  32

  

 

Certification of Statements by Chief Executive Officer and Principal Accounting Officer

 

101

  

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Unaudited Consolidated Financial Statements.

 

 

 

58


 

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: May 9, 2016

 

 

 

/S/ Gary M. Small 

 

 

 

Gary M. Small

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

Date: May 9, 2016

 

 

 

/S/ Timothy W. Esson 

 

 

 

Timothy W. Esson

Executive Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

59


 

UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

Incorporated by reference to the Form 10-Q filed by United Community on May 7, 2015 with the SEC, film number 15842770, 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.

60