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UCFC > SEC Filings for UCFC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for UNITED COMMUNITY FINANCIAL CORP

Form 10-Q for UNITED COMMUNITY FINANCIAL CORP


13-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

                        UNITED COMMUNITY FINANCIAL CORP.



                                                  At or For the Three               At or For the Nine
                                                      Months Ended                     Months Ended
                                                     September 30,                     September 30,
                                                  2012             2011            2012             2011
Selected financial ratios and other data:
(1)
Performance ratios:
Return on average assets (2)                        -5.67 %         -1.69 %          -1.56 %         -0.48 %
Return on average equity (3)                       -53.53 %        -18.98 %         -15.56 %         -5.61 %
Interest rate spread (4)                             3.00 %          2.97 %           3.15 %          3.15 %
Net interest margin (5)                              3.17 %          3.18 %           3.34 %          3.36 %
Non-interest expense to average assets               3.66 %          2.78 %           3.45 %          2.94 %
Efficiency ratio (6)                                93.62 %         79.67 %          82.61 %         74.27 %
Average interest-earning assets to average
interest-bearing liabilities                       118.34 %        113.30 %         117.12 %        112.86 %
Capital ratios:
Average equity to average assets                    10.60 %          8.90 %          10.02 %          8.60 %
Equity to assets, end of period                      9.37 %          8.82 %           9.37 %          8.82 %
Tier 1 leverage ratio                                8.27 %          8.13 %           8.27 %          8.13 %
Tier 1 risk-based capital ratio                     14.59 %         11.98 %          14.59 %         11.98 %
Total risk-based capital ratio                      15.85 %         13.25 %          15.85 %         13.25 %
Asset quality ratios:
Nonperforming loans to total loans at end
of period (7)                                        4.16 %          9.33 %           4.16 %          9.33 %
Nonperforming assets to average assets (8)           3.52 %          8.22 %           3.39 %          8.10 %
Nonperforming assets to total assets at
end of period (8)                                    3.65 %          8.32 %           3.65 %          8.32 %
Allowance for loan losses as a percent of
loans                                                1.79 %          2.98 %           1.79 %          2.98 %
Allowance for loan losses as a percent of
nonperforming loans (7)                             43.06 %         32.94 %          43.06 %         32.94 %
Texas ratio (9)                                     34.89 %         76.12 %          34.89 %         76.12 %
Total classified loans as a percent of
Tier 1 capital (10)                                 37.02 %        132.26 %          37.02 %        132.26 %
Total classified loans as a percent of
Tier 1 capital and ALLL                             32.85 %        105.14 %          32.85 %        105.14 %
Total classified assets as a percent of
Tier 1 capital and ALLL (10)                        44.21 %        122.93 %          44.21 %        122.93 %
Net charge-offs as a percent of average
loans                                               13.57 %          3.75 %           6.15 %          2.46 %
Total 90+ days past due as a percent of
total loans                                          3.70 %          7.59 %           3.70 %          7.59 %
Office data:
Number of full service banking offices                 34              38               34              38
Number of loan production offices                       8               7                8               7
Per share data:
Basic earnings (loss) (11)                     $    (0.82 )      $  (0.29 )      $   (0.70 )      $  (0.25 )
Diluted earnings (loss) (11)                        (0.82 )         (0.29 )          (0.70 )         (0.25 )
Book value (12)                                      5.22            5.90             5.22            5.90
Tangible book value (13)                             5.21            5.88             5.21            5.88

Notes:

1. Ratios for the three and nine month periods are annualized where appropriate

2. Net income (loss) divided by average total assets

3. Net income (loss) divided by average total equity

4. Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities

5. Net interest income as a percentage of average interest-earning assets

6. Noninterest expense, excluding the amortization of core deposit intangible and prepayment penalties, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary impairment charges, gains and losses on foreclosed assets, and gain on the sale of a retail branch

7. Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing

8. Nonperforming assets consist of nonperforming loans, real estate owned and other repossessed assets

9. Nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses

10. Classified assets include classified loans, real estate owned and other repossessed assets

11. Net income (loss) divided by the number of basic or diluted shares outstanding

12. Shareholders' equity divided by number of shares outstanding

13. Shareholders' equity minus core deposit intangible divided by the number of shares outstanding


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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.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets decreased $199.7 million to $1.8 billion at September 30, 2012, compared to December 31, 2011. Contributing to the change was a decrease in net loans of $278.9 million and a decrease in real estate owned and other repossessed assets of $13.3 million, which were offset partially by an increase in available for sale securities of $92.2 million.

The level of assets was affected by Home Savings' successful completion of a bulk sale of a substantial amount of the Bank's troubled loans, along with other assets, to an unrelated party on September 30, 2012. Total assets included in the bulk sale had an unpaid principal balance of $147.8 million as of the closing date, comprised of loans with an unpaid principal balance of $146.7 million and other real estate owned with a principal balance of $1.1 million. The loans included in the bulk sale had a book balance as of the closing date of $113.7 million. Of these loans, $91.6 million were classified, $63.3 million were nonperforming and $53.0 million were noncurrent (all figures are book balance prior to the effect of any reserves). The loans included in the bulk sale had reserves totaling $8.0 million, for a net book balance of $105.7 million. Together with the other real estate owned included in the sale, the net book balance of the assets included in the bulk sale totaled $106.8 million. The Bank received $77.4 million in cash for these assets.

In the first nine months of 2012, the Company sold approximately $281.8 million in securities, recognizing $5.2 million in net gains on the sales. The Company also purchased securities with a face value of $424.9 million to replace the securities sold during the period and to replace loan balances that continued to decline. Maturities, paydowns and the change in the unrealized gain on the portfolio also contributed to the change in the size of the securities portfolio.

Net loans decreased $278.9 million during the first nine months of 2012. The primary source of the decrease was a bulk asset sale completed in the third quarter of 2012. The loans associated with this sale had an unpaid principal balance of $113.7 million. Chargeoffs in excess of reserves for this transaction aggregated $30.2 million. The discussion below, including impaired loans, troubled debt restructured loans and nonperforming loans each include the impact of the asset sale.


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The following table summarizes the trend in the allowance for loan losses as of September 30, 2012:

                                                                           Allowance For Loan Losses
                                                                                 (In thousands)
                                                                                                              Net
                                                                                                          (Chargeoffs)
                                                                                                            Recovery
                                                                                                           from Bulk
                                         12/31/2011       Provision        Recovery      Chargeoff         Asset Sale         9/30/2012
Real Estate Loans
Permanent
One-to four-family residential          $      7,802     $    15,784      $      117     $   (2,099 )    $      (14,752 )    $     6,852
Multifamily residential                        2,689           4,887             263         (1,377 )            (5,174 )          1,288
Nonresidential                                16,801          12,114             274        (10,868 )           (14,382 )          3,939
Land                                           4,031            (246 )            39         (1,984 )            (1,436 )            404

Total                                         31,323          32,539             693        (16,328 )           (35,744 )         12,483

Construction Loans
One-to four-family residential                 4,400           2,367              71         (3,209 )            (2,134 )          1,495
Multifamily and nonresidential                    93             (74 )           120             (4 )                -               135

Total                                          4,493           2,293             191         (3,213 )            (2,134 )          1,630

Consumer Loans
Home Equity                                    2,026           2,231             280           (649 )              (759 )          3,129
Auto                                              77             (28 )            10             (8 )                -                51
Marine                                           509              16              10           (113 )               (57 )            365
Recreational vehicle                           1,888              80              52         (1,157 )                -               863
Other                                             76             123             227           (271 )                (6 )            149

Total                                          4,576           2,422             579         (2,198 )              (822 )          4,557

Commercial Loans
Secured                                          654             240              31           (225 )                (1 )            699
Unsecured                                      1,225            (271 )           164           (982 )               543              679

Total                                          1,879             (31 )           195         (1,207 )               542            1,378

Total                                   $     42,271     $    37,223      $    1,658     $  (22,946 )    $      (38,158 )    $    20,048

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for possible loan losses charged to expense. The allowance for loan losses decreased to $20.0 million at September 30, 2012, from $42.3 million at December 31, 2011, a decrease of $22.2 million. The allowance for loan losses as a percentage of loans was 1.79% at September 30, 2012, compared to 2.79% at December 31, 2011. However, the allowance for loan losses as a percentage of nonperforming loans was 43.06% at September 30, 2012, compared to 34.34% at December 31, 2011, due to the decrease in nonperforming loans following the bulk asset sale described above. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings' allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, "Receivables," and allowance allocations calculated in accordance with ASC Topic 450, "Contingencies". Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. Reserves from loans included in the asset sale mentioned above were treated as charges against the allowance in the third quarter of 2012. The ASC 310 reserve, or where applicable the ASC 450 reserve, as it related to loans included in the bulk asset sale were treated as chargeoffs in the ASC 450 methodology of determining loan loss ratios. Home Savings' process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net chargeoffs or recoveries, among other factors.

The decrease in the allowance for loan losses in the first nine months of 2012 was primarily a result of net chargeoffs associated with loans sold in the bulk asset sale and more specifically, nonresidential real estate. At September 30, 2012, the allowance assigned to the permanent nonresidential real estate portfolio aggregated $3.9 million, a decrease of $12.9 million from the previous year-end.


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During the nine months ended September 30, 2012, the level of net loans charged off, excluding chargeoffs from the bulk asset sale, exceeded the loan loss provision by approximately $18.2 million. Timing differences can exist between the period in which an initial provision is recognized and the subsequent period in which the loss is confirmed and the resulting chargeoff recognized. As a result, in any given period, it is possible to have chargeoffs exceed the provision for loan losses in the various loan categories. All major categories had the level of chargeoffs exceed the provision recognized in the first nine months of 2012. In the first nine months of 2012, certain loans were charged off where reserves were established in a previous period.

Net chargeoffs exceeded the loan loss provision by $12.9 million in the nonresidential real estate category. This was impacted by the level of outstanding loans in the category, which declined by $125.5 million since December 31, 2011, thereby reducing the needed level of the allowance for loan losses. The primary reason for this decline in loans was the bulk asset sale mentioned above. Also affecting the comparison was the resolution of one commercial loan relationship consisting of seven loans, which represented the Company's largest classified loan relationship, in the second quarter of 2012. Five of the seven loans in this relationship were nonresidential loans. The resolution of this loan relationship resulted in a $20.8 million decline in loan principal balances. Based on facts and circumstances that occurred in the second quarter of 2012, a chargeoff of $5.9 million in nonresidential loans was recognized in the second quarter as a part of this resolution. Reserves of $1.1 million were established on these specific loans in prior periods, resulting in a net loss of $4.8 million in the second quarter. Of the remaining $5.1 million in nonresidential chargeoffs, reserves of $7.9 million had been established in prior periods.

Accordingly, as a result of adequate reserves being established in previous periods, a decline in principal balances outstanding and changes in historical loss factors at September 30, 2012, the required level of allowance for loan loss and provision for loan loss has declined. The following table summarizes the affect the bulk loan sale had on the loan portfolio.

                                        June 30, 2012            September 30, 2012
Asset Quality Measure (1)               (As  Reported)             (As Reported)               Change
                                                                (In thousands)
Classified Loans                       $        171,839         $             58,373         $ (113,466 )
Other Real Estate Owned and Other
Repossessed Assets                     $         24,778         $             20,206         $   (4,572 )
Total Classified Assets                $        196,617         $             78,579         $ (118,038 )
Classified Assets/(Tier 1 + ALLL)                 91.41 %                      43.75 %           -47.66 %
Total Nonperforming Loans              $        114,529         $             46,557         $  (67,972 )
Allowance for Loan Losses              $         30,933         $             20,048         $  (10,885 )
Reserves/Nonperforming Loans                      27.01 %                      43.06 %            16.05 %
Nonperforming Assets/Total Assets                  7.31 %                       3.65 %            -3.66 %
Noncurrent Loans (30 + Days
Delinquent)                            $        109,785         $             51,220         $  (58,565 )
Texas Ration (2)                                  62.59 %                      34.89 %           -27.70 %

(1) Dollar amounts in thousands. All dollar amounts shown are book balance prior to any reserves

(2) Texas Ratio is defined as nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses

A non-homogeneous loan is considered impaired when, based on current information and events, it is probable that Home Savings will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the strength of guarantors (if any). Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the fair value of the collateral if the loan is collateral dependent, or, in rare cases, by the present value of expected future cash flows discounted at the loan's effective interest rate or the market value of the loan. The following table summarizes the change in impaired loans during the first nine months of 2012.


Table of Contents
                                     Impaired Loans
                                 (Dollars in thousands)
                                      September 30,       December 31,
                                          2012                2011           Change
    Real Estate Loans
    Permanent
    One-to four-family residential   $        15,594     $       30,287     $ (14,693 )
    Multifamily residential                    1,526              6,592        (5,066 )
    Nonresidential                            18,260             66,503       (48,243 )
    Land                                       6,182             11,908        (5,726 )

    Total                                     41,562            115,290       (73,728 )

    Construction Loans
    One-to four-family residential             9,980             30,587       (20,607 )
    Multifamily and nonresidential                -                  -             -

    Total                                      9,980             30,587       (20,607 )

    Consumer Loans
    Home Equity                                4,956              3,139         1,817
    Auto                                          52                 59            (7 )
    Boat                                         170                482          (312 )
    Recreational vehicle                         673                 47           626
    Other                                          7                  7            -

    Total                                      5,858              3,734         2,124

    Commercial Loans
    Secured                                    1,801              3,511        (1,710 )
    Unsecured                                     43                445          (402 )

    Total                                      1,844              3,956        (2,112 )

    Total Impaired Loans             $        59,244     $      153,567     $ (94,323 )

The decrease in impaired loans can be largely attributed to the bulk asset sale and, to a lesser extent, the resolution of loans through principal payments, charge offs, sale of the loan or collateral, or by Home Savings taking possession of the collateral. The decline in impaired loans attributable to the bulk asset sale aggregated $76.1 million.

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 the debtor 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.

A TDR may include, but is not necessarily limited to, one or a combination of the following:

Modification of the terms of a debt, such as one or a combination of:

Reduction of the stated interest rate for the remaining original life of the loan;

Extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk;

Reduction of the face amount or maturity amount of the loan as stated in the instrument or other agreement; or

Reduction of accrued interest.

Transfer from the borrower to Home Savings of receivables from third parties, real estate, or other assets to fully or partially satisfy a debt (including a transfer resulting from foreclosure or repossession).

Issuance or other granting of an equity interest to Home Savings by the borrower to satisfy fully or partially a loan unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.


Table of Contents

A debt restructuring is not necessarily a TDR for purposes of this definition even if the borrower is experiencing some financial difficulties. A TDR is not involved if:

the fair value of cash, other assets, or an equity interest accepted by Home Savings from a borrower in full satisfaction of its loan at least equals the recorded investment in the loan;

the fair value of cash, other assets, or an equity interest transferred by a borrower to Home Savings in full settlement of its loan at least equals the carrying amount of the loan;

Home Savings reduces the effective interest rate on the loan primarily to reflect a decrease in market interest rates in general or a decrease in the risk so as to maintain a relationship with a borrower that can readily obtain funds from other sources at the current market interest rate; or

Home Savings issues, in exchange for the original loan, a new marketable loan having an effective interest rate based on its market price that is at or near the current market interest rates of loans with similar maturity dates and stated interest rates issued by other banks.

The change in TDRs for the nine months ended September 30, 2012 is as follows:

                              Troubled Debt Restructurings
                                      September 30,       December 31,
                                          2012                2011           Change
                                                  (Dollars in thousands)
    Real Estate Loans
    Permanent
    One-to four-family               $        13,244     $       16,648     $  (3,404 )
    Multifamily residential                       -               3,273        (3,273 )
    Nonresidential                             1,262             19,666       (18,404 )
    Land                                         162              3,325        (3,163 )

    Total                                     14,668             42,912       (28,244 )

    Construction Loans
    One-to four-family residential             1,285              2,936        (1,651 )
    Multifamily and nonresidential                -                  -             -

    Total                                      1,285              2,936        (1,651 )

    Consumer Loans
    Home Equity                                4,181              1,895         2,286
    Auto                                          -                  21           (21 )
    Marine                                        -                  -             -
    Recreational vehicle                          -                  -             -
    Other                                          7                  7            -

    Total                                      4,188              1,923         2,265

    Commercial Loans
    Secured                                    1,362              3,073        (1,711 )
    Unsecured                                     30                 54           (24 )

    Total                                      1,392              3,127        (1,735 )

    Total Restructured Loans         $        21,533     $       50,898     $ (29,365 )

. . .

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