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Section 1: 10-K (10-K)

ucfc-10k_20181231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2018

OR

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

For the transition period from             to             

Commission File Number: 0-024399

 

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34-1856319

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

275 West Federal Street, Youngstown, Ohio

 

44503

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number: (330) 742-0500

Securities registered pursuant to Section 12(b) of the Act:

 

Common shares, no par value per share

 

 

Nasdaq Global Market

(Title of Class)

 

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      Yes       No  

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes        No  

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       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes       No  

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this 10-K.  

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 or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Small reporting company  

 

 

 

Emerging growth company  

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).    Yes      No  

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last reported sale on June 30, 2018 was approximately $527.1 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

As of March 8, 2019, there were 49,128,875 of the Registrant’s Common Shares outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K - Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders

 

 

 

 


 

TABLE OF CONTENTS

 

Item

Number

 

 

 

Page

 

 

 

 

 

 

 

PART I

 

 

1.

 

Business

 

 

 

 

General

 

1

 

 

Discussion of Forward-Looking Statements

 

1

 

 

Lending Activities

 

3

 

 

Investment Activities

 

12

 

 

Sources of Funds

 

14

 

 

Competition

 

15

 

 

Employees

 

16

 

 

Regulation

 

16

1A.

 

Risk Factors

 

23

1B.

 

Unresolved Staff Comments

 

31

2.

 

Properties

 

31

3.

 

Legal Proceedings

 

31

4.

 

Mine Safety Disclosures

 

32

 

 

 

 

 

 

 

PART II

 

 

5.

 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

33

6.

 

Selected Financial Data

 

35

7.

 

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

 

37

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

8.

 

Financial Statements and Supplementary Data

 

50

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

122

9A.

 

Controls and Procedures

 

122

9B.

 

Other Information

 

122

 

 

 

 

 

 

 

PART III

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

122

11.

 

Executive Compensation

 

122

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

123

13.

 

Certain Relationships and Related Transactions and Director Independence

 

123

14.

 

Principal Accounting Fees and Services

 

123

 

 

 

 

 

 

 

PART IV

 

 

15.

 

Exhibits, Financial Statement Schedules

 

124

 

 

 

 

 

Signatures

 

126

 

 

 

 

 

 

 


 

PART I

 

 

Item 1.

Business

DISCUSSION OF FORWARD-LOOKING STATEMENTS

When used in this Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including government intervention in the U.S. financial markets, changes in economic conditions in the United Community Financial Corp.’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in our market area, competition and those risks discussed under “Item 1A – Risk Factors” in this Annual Report on Form 10-K, that could cause actual results to differ materially from results presently anticipated or projected. United Community Financial Corp. (United Community, we or our) cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We advise readers that the factors listed above could affect United Community’s financial performance and could cause our 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 does not undertake, and specifically disclaims, any obligation to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

United Community was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of Home Savings Bank (Home Savings or the Bank) issued upon the conversion of Home Savings from a mutual savings association to a permanent capital stock savings association (Conversion). The Conversion was completed on July 8, 1998. On January 31, 2017, United Community completed an acquisition of Ohio Legacy Corp. (OLCB) and merger of United Community’s wholly-owned subsidiary bank with and into Premier Bank & Trust, OLCB’s wholly-owned subsidiary bank (PB&T), with PB&T as the surviving bank following the merger. As a result of this acquisition, United Community became a financial holding company and its surviving subsidiary bank became an Ohio-chartered bank with the name “Home Savings Bank.” The acquisition of OLCB and related merger with PB&T are discussed in further detail below under the heading “Acquisitions.”

In addition to the Bank, United Community also operates through its subsidiaries, HSB Insurance, LLC, HSB Capital, LLC and HSB Insurance, Inc. HSB Capital, LLC was formed as an Ohio limited liability company by United Community during 2016 for the purpose of providing mezzanine funding for customers of the Bank. Mezzanine loans are offered by HSB Capital, LLC to customers in United Community’s market area, as defined below, and are expected to be repaid from the cash flow from operations of the business.  

HSB Insurance, LLC, (d/b/a James & Sons Insurance) is a wholly-owned insurance subsidiary of United Community that was formed on April 6, 2016 to acquire James & Sons Insurance. As a result of this acquisition, HSB Insurance, LLC now offers a variety of insurance products for business and residential customers, including auto, homeowners, life-health, commercial, surety bonds and aviation, within United Community’s market area, as defined below.

HSB Insurance, Inc., was formed on June 1, 2017 as a Delaware-based captive insurance company that is a wholly-owned subsidiary of United Community.  HSB Insurance, Inc. insures against certain risks that are unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible; by pooling resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.  HSB Insurance, Inc. is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.

The term “Company” is used in this Annual Report on Form 10-K to refer to United Community and its subsidiaries, collectively.

Our filings with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. These filings are also available on the SEC’s web-site at http://www.sec.gov free of charge as soon as reasonably practicable after we have filed the above referenced reports.

1


 

United Community’s Internet site, ir.ucfconline.com, contains a hyperlink to the Securities and Exchange Commission (SEC) where United Community’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 Insider Reports and amendments to those reports that are filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge, as soon as reasonably practicable after United Community has filed any such report with, or furnished it to, the SEC.  The contents of our website are not incorporated into, or otherwise made a part of, this Annual Report on Form 10-K.  

As a financial holding company, United Community is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (FRB) and the SEC. United Community’s primary activity is holding the common shares of Home Savings. Consequently, the following discussion focuses primarily on the business of Home Savings.

Home Savings was organized as a mutual savings association under Ohio law in 1889. Currently, Home Savings is an Ohio-chartered bank, subject to the supervision and regulation by the Federal Deposit Insurance Corporation (FDIC) and the Division of Financial Institutions (ODFI) of the Ohio Department of Commerce (Ohio Division). Home Savings is a member of the Federal Home Loan Bank of Cincinnati (FHLB) and the deposits of Home Savings are insured up to applicable limits by the FDIC.

Home Savings conducts business from its main office located in Youngstown, Ohio, and through 35 retail banking offices, three wealth management offices and 12 loan production centers located throughout Ohio, western Pennsylvania and West Virginia. The principal business of Home Savings is the origination of mortgage loans, including construction loans, on residential and nonresidential real estate located in Home Savings’ primary market area, which consists of Ashland, Belmont, Columbiana, Cuyahoga, Erie, Franklin, Geauga, Huron, Lake, Lucas, Mahoning, Portage, Richland, Stark, Summit and Trumbull Counties in Ohio, Allegheny and Beaver Counties in Pennsylvania and Monongalia County in West Virginia. In addition to real estate lending, Home Savings originates commercial loans and various types of consumer loans. For liquidity and interest rate risk management purposes, Home Savings invests in various financial instruments as discussed below under the heading “Investment Activities.” Funds for lending and other investment activities are obtained primarily from retail deposits, which are insured up to applicable limits by the FDIC, principal repayments of loans, borrowings from the FHLB, repurchase agreements and maturities of securities.

Interest on loans and other investments is Home Savings’ primary source of income. Home Savings’ principal expenses are interest paid on deposit accounts and other borrowings, as well as salaries and benefits paid to employees. Operating results are dependent to a significant degree on the net interest income of Home Savings, which is the difference between interest earned on loans and other investments and interest paid on deposits and borrowed funds. Like most financial institutions, Home Savings’ interest income and interest expense can be affected significantly by general economic conditions and by the policies of various regulatory authorities.

As of December 31, 2018, the FDIC categorized Home Savings as well capitalized.

ACQUISITIONS

On January 29, 2016, United Community acquired James & Sons Insurance, an insurance agency that offers a variety of insurance products for business and residential customers, which include auto, homeowners, life-health, commercial, surety bonds, and aviation.  James & Sons Insurance was merged into HSB Insurance, LLC, a wholly-owned subsidiary of United Community, with HSB Insurance, LLC as the surviving entity following the merger. This acquisition marked the initial step in the formation of The Home Savings Insurance Group. During fiscal year 2017, United Community completed two additional acquisitions to expand the product offerings and market area of HSB Insurance, LLC.  On February 28, 2017, HSB Insurance, LLC acquired Eich Brothers Insurance, an insurance agency that offers insurance products for business and residential customers, including auto, commercial, homeowners and life-health.  On July 1, 2017, HSB Insurance, LLC acquired Stevens Insurance Agency, which offers insurance products for business and residential customers, including auto, commercial, homeowners and life-health. On July 1, 2018, HSB Insurance, LLC acquired certain assets of Steinhauser Insurance Agency which offers property and casualty insurance for business and personal needs.  Home Savings intends to expand its insurance business via organic growth coupled with a selective acquisition strategy.

2


 

On January 31, 2017, United Community completed its acquisition of OLCB.  Immediately following the acquisition of OLCB, Home Savings was merged into PB&T, and PB&T changed its name to “Home Savings Bank.”  In connection with the acquisition, United Community issued 3,033,604 United Community common shares and paid $19,958,724.19 to OLCB shareholders.   As a result of the acquisition, United Community became a financial holding company and its wholly owned subsidiary became an Ohio-chartered bank.

LENDING ACTIVITIES

General. Home Savings’ principal lending activity is the origination of conventional residential real estate loans, commercial real estate loans, commercial and industrial loans, and various types of consumer loans, including home equity loans and lines of credit, loans secured by deposit accounts and investments, direct and indirect auto lending and unsecured loans, primarily originated in Home Savings’ market area.

 

 

 

3


 

Loan Portfolio Composition. The following table presents certain information regarding the composition of Home Savings’ loan portfolio at the dates indicated:

 

 

 

At December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

Amount

 

 

Percent of

total loans

 

 

Amount

 

 

Percent of

total loans

 

 

Amount

 

 

Percent of

total loans

 

 

Amount

 

 

Percent of

total loans

 

 

Amount

 

 

Percent of

total loans

 

 

 

(Dollars in thousands)

 

Commercial Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

134,143

 

 

 

6.12

%

 

$

120,480

 

 

 

5.98

%

 

$

93,597

 

 

 

6.16

%

 

$

80,170

 

 

 

6.02

%

 

$

60,546

 

 

 

5.20

%

Nonresidential

 

 

409,979

 

 

 

18.71

%

 

 

381,611

 

 

 

18.93

%

 

 

231,401

 

 

 

15.23

%

 

 

175,456

 

 

 

13.17

%

 

 

121,595

 

 

 

10.44

%

Land

 

 

16,830

 

 

 

0.77

%

 

 

15,162

 

 

 

0.75

%

 

 

8,373

 

 

 

0.55

%

 

 

9,301

 

 

 

0.70

%

 

 

9,484

 

 

 

0.81

%

Construction

 

 

141,686

 

 

 

6.47

%

 

 

116,863

 

 

 

5.80

%

 

 

68,158

 

 

 

4.49

%

 

 

38,812

 

 

 

2.91

%

 

 

16,064

 

 

 

1.38

%

Secured

 

 

233,306

 

 

 

10.65

%

 

 

177,994

 

 

 

8.83

%

 

 

95,343

 

 

 

6.27

%

 

 

63,182

 

 

 

4.74

%

 

 

45,088

 

 

 

3.87

%

Unsecured

 

 

6,987

 

 

 

0.32

%

 

 

10,506

 

 

 

0.52

%

 

 

7,386

 

 

 

0.49

%

 

 

2,831

 

 

 

0.21

%

 

 

134

 

 

 

0.01

%

Total commercial loans

 

 

942,931

 

 

 

43.04

%

 

 

822,616

 

 

 

40.80

%

 

 

504,258

 

 

 

33.19

%

 

 

369,752

 

 

 

27.75

%

 

 

252,911

 

 

 

21.71

%

Residential Mortgage Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

 

927,255

 

 

 

42.33

%

 

 

870,939

 

 

 

43.20

%

 

 

762,926

 

 

 

50.21

%

 

 

733,685

 

 

 

55.06

%

 

 

694,105

 

 

 

59.58

%

Construction

 

 

43,435

 

 

 

1.98

%

 

 

49,092

 

 

 

2.43

%

 

 

35,695

 

 

 

2.35

%

 

 

40,898

 

 

 

3.07

%

 

 

37,113

 

 

 

3.19

%

Total residential mortgage loans

 

 

970,690

 

 

 

44.31

%

 

 

920,031

 

 

 

45.63

%

 

 

798,621

 

 

 

52.56

%

 

 

774,583

 

 

 

58.13

%

 

 

731,218

 

 

 

62.77

%

Consumer Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

185,661

 

 

 

8.48

%

 

 

195,852

 

 

 

9.71

%

 

 

165,054

 

 

 

10.86

%

 

 

161,338

 

 

 

12.11

%

 

 

154,776

 

 

 

13.28

%

Auto

 

 

78,686

 

 

 

3.59

%

 

 

64,364

 

 

 

3.19

%

 

 

39,609

 

 

 

2.60

%

 

 

11,348

 

 

 

0.85

%

 

 

5,902

 

 

 

0.51

%

Marine

 

 

1,206

 

 

 

0.06

%

 

 

1,526

 

 

 

0.08

%

 

 

1,796

 

 

 

0.12

%

 

 

2,699

 

 

 

0.20

%

 

 

3,917

 

 

 

0.34

%

Recreational Vehicle

 

 

4,347

 

 

 

0.20

%

 

 

5,696

 

 

 

0.28

%

 

 

7,602

 

 

 

0.50

%

 

 

10,656

 

 

 

0.80

%

 

 

14,054

 

 

 

1.21

%

Other (1)

 

 

7,141

 

 

 

0.33

%

 

 

6,056

 

 

 

0.30

%

 

 

2,537

 

 

 

0.17

%

 

 

2,217

 

 

 

0.17

%

 

 

2,105

 

 

 

0.18

%

Total consumer loans

 

 

277,041

 

 

 

12.65

%

 

 

273,494

 

 

 

13.57

%

 

 

216,598

 

 

 

14.25

%

 

 

188,258

 

 

 

14.13

%

 

 

180,754

 

 

 

15.52

%

Total Loans

 

 

2,190,662

 

 

 

100.00

%

 

 

2,016,141

 

 

 

100.00

%

 

 

1,519,477

 

 

 

100.00

%

 

 

1,332,593

 

 

 

100.00

%

 

 

1,164,883

 

 

 

100.00

%

Less net items

 

 

13,820

 

 

 

 

 

 

 

16,264

 

 

 

 

 

 

 

15,900

 

 

 

 

 

 

 

16,401

 

 

 

 

 

 

 

16,790

 

 

 

 

 

Total Loans, net

 

$

2,176,842

 

 

 

 

 

 

$

1,999,877

 

 

 

 

 

 

$

1,503,577

 

 

 

 

 

 

$

1,316,192

 

 

 

 

 

 

$

1,148,093

 

 

 

 

 

 

(1)

Consists primarily of overdraft protection loans and loans to individuals secured by demand accounts, deposits and other consumer assets.

 

 

 

4


 

Loan Maturity. The following table sets forth certain information as of December 31, 2018, regarding the dollar amount of construction and commercial loans maturing in Home Savings’ portfolio based on their contractual terms to maturity. Demand and other loans having no stated schedule of repayments or no stated maturity are reported as due in one year or less. Mortgage loans originated by Home Savings always include due-on-sale clauses that provide Home Savings with the contractual right to deem the loan immediately due and payable in the event the borrower transfers the ownership of the property without Home Savings’ consent. The table does not include the effects of possible prepayments.

 

 

 

Principal payments contractually due in the years ended December 31,

 

 

 

2019

 

 

2020-2023

 

 

2024 and

thereafter

 

 

Total

 

 

 

(Dollars in thousands)

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage construction

 

$

 

 

$

 

 

$

43,435

 

 

$

43,435

 

Commercial construction

 

 

19,234

 

 

 

20,604

 

 

 

101,848

 

 

 

141,686

 

Commercial loans

 

 

20,540

 

 

 

81,974

 

 

 

137,779

 

 

 

240,293

 

Total

 

$

39,774

 

 

$

102,578

 

 

$

283,062

 

 

$

425,414

 

 

The table below sets forth the dollar amount of all loans reported above becoming due after December 31, 2018, which have fixed or adjustable interest rates:

 

 

 

Due after

December 31,

2019

 

 

 

(Dollars in thousands)

 

Fixed rate

 

$

110,726

 

Adjustable rate

 

 

274,914

 

 

 

$

385,640

 

 

Commercial Loans:

Multifamily. Home Savings originates loans secured by multifamily properties that contain more than four units. Multifamily loans are offered with adjustable and fixed rates of interest, which adjust according to a specified index, and typically have terms ranging from five to ten years and of the value of the real estate and improvements (LTV) of up to 80%.

Multifamily lending generally is considered to involve a higher degree of risk than one-to-four-family residential lending because the borrower typically depends upon income generated by the subject property to cover operating expenses and debt service. The profitability of a subject property can be affected by economic conditions, government policies and other factors beyond the control of the borrower. Home Savings attempts to mitigate the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the subject property and, in most cases, obtaining personal guarantees on loans made to corporations, limited liability companies and partnerships. Home Savings requires borrowers to submit financial statements annually to enable management to monitor the loan and requires an assignment of rents from borrowers.

At December 31, 2018, loans secured by multifamily properties totaled approximately $134.1 million, or 6.1% of total loans, of which $171,000, or 0.1% of Home Savings’ total multifamily loans, were considered nonperforming. New originations in this loan category totaled $43.2 million in 2018.

Nonresidential. Home Savings originates loans secured by nonresidential real estate, such as retail centers, office buildings, and industrial buildings. Home Savings’ nonresidential real estate loans typically have both fixed and adjustable rates, terms typically ranging from five to ten years and LTVs of up to 80%. The majority of such properties are located within Home Savings’ primary lending area.

Nonresidential real estate lending generally is considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Home Savings has endeavored to reduce such risk by evaluating the credit history of the borrower and their affiliates, the location of the real estate, analyzing the financial condition of the borrower, in most cases obtaining personal guarantees from the borrower or the borrower’s affiliates, and considering the quality and characteristics of the income stream generated by the property and the appraisal supporting the property’s valuation.

5


 

At December 31, 2018, approximately $410.0 million, or 18.7% of Home Savings’ total loans, were secured by mortgages on nonresidential real estate, of which $13,000, or 0.0% of Home Savings’ total nonresidential real estate loans, were considered nonperforming. New originations in this loan category totaled $68.7 million in 2018.

Land. Home Savings also originates a limited number of loans secured by vacant land. Home Savings’ land loans generally are fixed-rate loans for terms of up to five years and require a LTV of 65% or less. At December 31, 2018, approximately $16.8 million, or 0.8%, of Home Savings’ total loans were land loans. None of these loans were nonperforming at December 31, 2018. New originations in this loan category totaled $8.9 million in 2018.

Construction.  Home Savings originates loans for the construction of multifamily properties and nonresidential real estate projects.  Construction loans for multifamily and nonresidential properties typically have LTV at origination of up to 75% based on estimated value at completion, with the value of the land included as part of the owner’s equity.  

Construction loans involve greater underwriting and default risks than loans secured by mortgages on existing properties because construction loans are more difficult to appraise and to monitor.  Loan funds are advanced upon the security of the project under construction.  In the event a default on a construction loan occurs and foreclosure follows, Home Savings may take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project.  

At December 31, 2018, Home Savings had approximately $141.7 million, or 6.5% of its total loans, invested in commercial construction loans.  None of these loans were nonperforming at December 31, 2018.  New originations for commercial construction loans totaled $96.0 million in 2018.  

Secured and Unsecured. Home Savings makes commercial loans to businesses in its primary market area, including traditional lines of credit, revolving lines of credit and term loans. The collateral coverage ratios for commercial loans depend upon the nature of the underlying collateral. Lines of credit and revolving credits generally are priced on a floating rate basis, which is tied to the prime interest rate or LIBOR. Term loans usually have adjustable rates, but can have fixed rates of interest, and typically have terms of one to five years.

The repayment of commercial loans typically is dependent on the cash flow stream and successful operation of a business, which can be affected by economic conditions. The collateral for commercial term loans often consists of depreciating assets, which are generally matched to the amortization of the underlying loan.

At December 31, 2018, Home Savings had approximately $233.3 million invested in secured commercial loans and $7.0 million in unsecured commercial loans. The majority of these loans are secured by inventory, accounts receivable, equipment, investment property, vehicles or other assets of the borrower. These loans are underwritten based on the creditworthiness of the borrower and the guarantors, where applicable.

Nonperforming secured and unsecured commercial loans at December 31, 2018 amounted to $531,000, or 0.2% of total commercial secured and unsecured loans. New originations of commercial loans totaled $148.6 million in 2018, of which $146.9 million were secured.

Residential Mortgage Loans:

One-to-Four-Family. Home Savings mainly originates conventional loans secured by first mortgages on one-to-four-family residences primarily located within Home Savings’ market area.

Home Savings currently offers fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs). Although Home Savings’ loan portfolio includes a significant amount of 30-year fixed-rate loans, a considerable portion of fixed rate loans are originated for sale. The interest rate adjustment periods on ARMs are typically one, three, five, seven or ten years. The maximum interest rate adjustment on most of the ARMs is 2.0% on any adjustment date and a total of 6.0% over the life of the loan. The interest rate adjustments on three-year, five-year and ten-year ARMs presently offered by Home Savings are indexed to the weekly average rate on the one-year U.S. Treasury securities. Rate adjustments are computed by adding a stated margin to the index.

FDIC regulations and Ohio law limit the amount that Home Savings may lend in relationship to the appraised value of the real estate and improvements that secure the loan at the time of loan origination. In accordance with such regulations, Home Savings is permitted to make loans up to 100% of the LTV. Home Savings typically requires private mortgage insurance on the portion of the principal amount of the loan that exceeds 80% of the appraised value or sales price of the property (whichever is less) securing the loan.

6


 

Under certain circumstances, Home Savings will offer loans with LTVs exceeding 80% without private mortgage insurance. Customers may borrow up to 80% of the home’s appraised value and obtain a second loan or line of credit from Home Savings for up to 90% of the appraised value without having to purchase mortgage insurance. Home Savings also offers a first-time homebuyers product that permits an LTV of 97% without private mortgage insurance. Such loans involve a higher degree of risk because, in the event of a borrower default, the value of the underlying collateral may not satisfy the principal and interest outstanding on the loan. To reduce this risk, Home Savings underwrites all portfolio loans to Freddie Mac and Fannie Mae underwriting guidelines.

Currently, no interest-only, one-to-four-family loans are contained in the Home Savings’ mortgage loan portfolio.

Home Savings issues loan origination commitments to qualified borrowers primarily for the purchase of single-family residential real estate. Such commitments have specified terms and conditions and are made for periods of up to 60 days, during which time the interest rate is locked in. Home Savings utilizes various hedge strategies to mitigate its interest rate risk during this time period.

At December 31, 2018, Home Savings’ one-to-four-family residential real estate loans held in portfolio totaled approximately $927.3 million, or 42.3% of total loans. At December 31, 2018, $4.2 million, or 0.4%, of Home Savings’ one-to-four-family loans were nonperforming. New originations in this loan category totaled $258.8 million in 2018.

Construction.  Home Savings originates loans for the construction of one-to-four-family residences.  These construction loans to owner-occupants are structured as permanent loans with fixed or adjustable rates of interest and terms of up to 30 years.  During the construction phase, the borrower is required to pay interest only.  These loans have LTVs at origination of up to 95% with appropriate mortgage insurance.  

At December 31, 2018, Home Savings had approximately $141.7 million, or 6.5% of its total loans, invested in one-to-four-family residential construction loans.  All of these loans were performing according to the terms of their agreement as of December 31, 2018.  

New originations for residential mortgage construction loans to owner-occupants totaled $272.4 million in 2018.  The level of new originations exceeded the outstanding balance of these loans as not all funds have been drawn on such loans as of December 31, 2018.

Consumer Loans:

Home Savings originates various types of consumer loans, including home equity loans, home equity lines of credit, vehicle loans, unsecured loans, and cash-secured loans.  Home Savings generally does not originate recreational vehicle loans or marine loans. Consumer loans are made at fixed and variable rates of interest for different terms based on the type of loan.

Home Savings generally makes closed-end home equity loans and lines of credit in an amount that, when added to the prior indebtedness secured by the real estate, does not exceed 90% of the estimated value of the real estate. Home equity loans typically are secured by a second mortgage on the real estate. Home Savings frequently holds the first mortgage, although Home Savings will make home equity loans in cases where it sells the first mortgage or another lender holds the first mortgage. Home Savings also offers home equity lines of credit. Fixed-rate home equity loans typically have terms of ten years. Rate adjustments on adjustable home equity loans change based on the prime interest rate for loans on residences of up to 90% LTV regardless of lien position. At December 31, 2018, approximately $185.7 million, or 8.5%, of Home Savings’ total loan portfolio consisted of home equity loans. Home Savings also makes cash-secured consumer loans and investment-secured loans for up to 100% of the principal balance of the account. These loans generally have fixed rates tied to market conditions.

For new automobiles, loans are originated for up to 115% of the MSRP value of the car with terms of up to 78 months. For used automobiles, loans are made for up to the National Automobile Dealers Association (N.A.D.A.) retail value of the car model and a term of up to 78 months. Most automobile loans are originated indirectly through approved auto dealerships. At December 31, 2018, automobile loans totaled $78.7 million, or 3.6% of Home Savings’ total loan portfolio.

7


 

At December 31, 2018, Home Savings had approximately $277.0 million, or 12.7% of its total loans, invested in consumer loans. Nonperforming consumer loans at December 31, 2018, amounted to $1.7 million, or 0.6% of such loans. New originations of consumer loans totaled $99.7 million in 2018.

Lending Process:

Loan Solicitation and Processing. The lending activities of Home Savings are subject to the written, non-discriminatory underwriting standards and loan origination procedures approved by Home Savings’ Board of Directors (the Board). Loan originations generally are obtained from existing customers and members of the local community and from referrals by real estate brokers, lawyers, accountants, builders and current and former customers. Home Savings also advertises in the local print media, radio television, billboards and online.

Each of Home Savings’ retail banking offices and residential mortgage loan centers have loan personnel who can accept loan applications, which are then forwarded to Home Savings’ Credit Department for processing and approval. In underwriting real estate loans, Home Savings typically obtains a credit report and verification of employment and analyzes the cash flows of the borrower and other documentation concerning the creditworthiness of the borrower. Typically, an appraisal of the fair market value of the real estate that will be given as security for the loan is prepared by an approved independent fee appraiser. For all nonresidential real estate loans, the appraisal is conducted by an outside fee appraiser whose report is reviewed by a third-party appraisal review firm engaged by Home Savings. Upon the completion of the appraisal and the receipt of information on the credit history of the borrower, the loan application is submitted for review to the appropriate persons. Generally, all commercial requests and consumer loan requests of $500,000 or more and residential mortgage loan requests over $800,000 up to and including $5.0 million require the approval of the Officers’ Loan Committee or the appropriate Officer’s Loan Committee member. All loans that would cause the aggregate lending relationship to be greater than $5.0 million require approval from the Executive Officers’ Loan Committee.

Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name Home Savings as an insured mortgagee. Home Savings generally obtains a title guarantee or title insurance on real estate loans.

The procedure for approval of construction loans is the same as for permanent real estate loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. Home Savings also evaluates the feasibility of the proposed construction project and the experience and record of the builder. Once approved, the construction loan is disbursed in installments based upon periodic inspections of the construction progress and lien releases.

Consumer loans are underwritten based on the borrower’s credit history and an analysis of the borrower’s income and expenses, ability to repay the loan and the value of the collateral, if any.

Loan Originations, Purchases and Sales. Home Savings’ residential loans generally are made on terms and conditions and documented to conform to the secondary market guidelines for sale to Freddie Mac, Fannie Mae and other institutional and private investors in the secondary market. Home Savings originates first mortgage loans insured by the Federal Housing Authority and the Veteran’s Administration with the intention to sell in the secondary market.

Home Savings generally retains the servicing rights on the sale of loans originated in the geographic area surrounding its full-service branches. Home Savings anticipates continued participation in the secondary mortgage loan market to maintain its desired risk profile.

At December 31, 2018, Home Savings had $26.8 million of outstanding commitments to make mortgage loans with the intention to sell in the secondary market, as well as $277.5 million available to borrowers under consumer and commercial lines of credit and $60.3 million available in the OverdraftPrivilege™ program. At December 31, 2018, Home Savings had $128.3 million in funds related to commercial loans in process and $71.4 million related to construction loans in process under existing contractual obligations.

8


 

Loans to One Borrower Limits. Regulations generally limit the aggregate amount that Home Savings may lend to any one borrower to an amount equal to 15.0% of Home Savings’ unimpaired capital and unimpaired surplus (Lending Limit Capital). A bank may lend to one borrower an additional amount not to exceed 10.0% of Lending Limit Capital if the additional amount is fully secured by certain forms of readily marketable collateral. Real estate is not considered readily marketable collateral. In applying this limit, regulations require that loans to certain related or affiliated borrowers be aggregated.

Based on such limits, Home Savings could lend approximately $45.3 million to one borrower at December 31, 2018. The largest amount Home Savings had committed to one borrower at December 31, 2018, was $22.5 million in the form of three loans, of which $8.0 million was outstanding at December 31, 2018. At December 31, 2018, these commercial real estate loans were performing in accordance with their terms.

Delinquent Loans, Nonperforming Assets and Classified Assets. The following table reflects the amount of all loans in a delinquent status as of the dates indicated:

 

 

 

At December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Percent of net

 

 

 

 

 

 

 

 

 

 

Percent of net

 

 

 

Number

 

 

Amount

 

 

loans

 

 

Number

 

 

Amount

 

 

loans

 

 

 

(Dollars in thousands)

 

Loans delinquent for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 days

 

 

91

 

 

$

3,856

 

 

 

0.18

%

 

 

114

 

 

$

6,287

 

 

 

0.31

%

60-89 days

 

 

34

 

 

 

1,289

 

 

 

0.06

%

 

 

33

 

 

 

1,750

 

 

 

0.09

%

90 days or over

 

 

133

 

 

 

5,750

 

 

 

0.26

%

 

 

170

 

 

 

8,620

 

 

 

0.43

%

Total delinquent loans

 

 

258

 

 

$

10,895

 

 

 

0.50

%

 

 

317

 

 

$

16,657

 

 

 

0.83

%

 

Home Savings determines the past due status of loans based on the number of payments the loan is past due.

Nonperforming assets include loans past due 90 days and on a nonaccrual status, loans past due 90 days and still accruing, loans less than 90 days past due and on a nonaccrual status, real estate acquired by foreclosure or by deed-in-lieu of foreclosure and repossessed assets. Once a loan becomes 90 days delinquent, it generally is placed on nonaccrual status.

Loans are placed on nonaccrual status when collection in full is considered by management to be in doubt. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent cash payments received, if any, generally are applied to principal unless the remaining recorded investment in the asset (i.e., after charge-off of identified losses, if any) is deemed to be fully collectable. In those cases, subsequent cash payments are applied to principal and interest income in accordance with the original terms of the note.

Home Savings does not extend additional credit to borrowers whose loans are classified — i.e., loans that exhibit a well-defined weakness such that management determines that the loan should be classified as substandard, doubtful or loss — without approval by the applicable loan committee.

9


 

The following table sets forth information with respect to Home Savings’ nonperforming loans and other assets by year at the dates indicated:

 

 

 

At December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

Nonperforming loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily and nonresidential

 

$

171

 

 

$

1,493

 

 

$

3,546

 

 

$

3,599

 

 

$

5,874

 

Construction and land

 

 

13

 

 

 

9

 

 

 

34

 

 

 

384

 

 

 

1,582

 

Commercial and industrial

 

 

531

 

 

 

1,505

 

 

 

361

 

 

 

4,016

 

 

 

4,016

 

Total commercial loans

 

 

715

 

 

 

3,007

 

 

 

3,941

 

 

 

7,999

 

 

 

11,472

 

Residential mortgage loans:

 

 

4,170

 

 

 

6,076

 

 

 

6,084

 

 

 

6,181

 

 

 

6,816

 

Consumer Loans:

 

 

1,654

 

 

 

2,620

 

 

 

2,413

 

 

 

2,567

 

 

 

2,163

 

Total nonaccrual loans

 

 

6,539

 

 

 

11,703

 

 

 

12,438

 

 

 

16,747

 

 

 

20,451

 

Past due 90 days and still accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

 

 

6,539

 

 

 

11,703

 

 

 

12,438

 

 

 

16,747

 

 

 

20,451

 

Real estate acquired through foreclosure and

   other repossessed assets

 

 

1,088

 

 

 

1,253

 

 

 

1,777

 

 

 

2,727

 

 

 

3,467

 

Other classified assets

 

 

 

 

 

4,050

 

 

 

6,384

 

 

 

 

 

 

 

Total nonperforming assets

 

$

7,627

 

 

$

17,006

 

 

$

20,599

 

 

$

19,474

 

 

$

23,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

20,594

 

 

$

26,250

 

 

$

31,548

 

 

$

39,659

 

 

$

45,897

 

Nonperforming loans as a percent of loans, net

 

 

0.30

%

 

 

0.59

%

 

 

0.83

%

 

 

1.27

%

 

 

1.78

%

Nonperforming assets as a percent of total assets

 

 

0.27

%

 

 

0.64

%

 

 

0.94

%

 

 

0.98

%

 

 

1.30

%

Allowance for loan losses as a percent of

   nonperforming loans

 

 

312.63

%

 

 

181.17

%

 

 

153.26

%

 

 

105.76

%

 

 

86.48

%

Allowance for loan losses as a percent of loans, net

 

 

0.93

%

 

 

1.05

%

 

 

1.25

%

 

 

1.33

%

 

 

1.52

%

 

In 2018, net income did not include uncollected interest on nonperforming loans. During 2018, approximately $640,000 in additional interest income would have been recorded had nonaccrual loans been accruing pursuant to contractual terms.

A 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 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 shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the fair value of the collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the market value of the loan. Home Savings considers all troubled debt restructured loans as impaired.

During 2018, Home Savings experienced a decline in impaired loans of $5.7 million. Home Savings recognized a decrease in nonperforming secured commercial loans of approximately $974,000. Nonperforming residential one-to-four-family and home equity loans declined $3.1 million and $1.1 million, respectively.  Purchased credit impaired loans decreased $1.2 million.

Real estate acquired in settlement of loans is classified separately on the balance sheet at estimated fair value less costs to sell as of the date of acquisition. At foreclosure, the loan is written down to the value of the underlying collateral by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income or loss on disposition, are included in real estate owned and other repossessed asset expenses. At December 31, 2018, the carrying value of real estate and other repossessed assets acquired in settlement of loans was $1.1 million and consisted primarily of $868,000 in one-to-four-family residential properties, $181,000 secured by one-to-four-family residential construction properties and $39,000 in automobiles and recreational vehicles.

10


 

In addition to the classified loans identified above, other loans may be identified as having potential credit problems as a result of those loans being identified by our internal loan review function. These special mention loans, which have not exhibited the more severe weaknesses generally present in classified loans, amounted to $23.3 million, as of December 31, 2018, compared to $15.8 million as of December 31, 2017.

Allowance for Loan Losses. Management has established a methodology to calculate the allowance for loan losses at a level it believes adequate to absorb probable incurred losses in the loan portfolio. The methodology is reviewed regularly by the Board and is revised as conditions and circumstances within the Bank’s loan portfolio dictate. Management bases its determination of the adequacy of the allowance upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, current economic conditions and results of regulatory examinations. Furthermore, in determining the level of the allowance for loan losses, management reviews and evaluates on a monthly basis the necessity of a reserve for individual impaired loans classified by management. The specifically allocated reserve for a classified loan is determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, market value of collateral, other sources of cash flow and legal options available to Home Savings. Once a review is completed, a specific reserve is determined and allocated to the loan.

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, looking back 26 quarters as of December 31, 2018.  In determining the qualitative component, 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.   The quantitative and qualitative components are combined to arrive at the loss factor, which is applied to the average outstanding balance of homogenous loans.  At December 31, 2017, the Company evaluated 22 quarters of net charge-off history.    

In determining the qualitative factors, consideration is given to such factors as economic conditions, changes in the nature and volume of the portfolio, lending personnel, lending policies, past-due loan trends, and trends in collateral values. Specific reserves on individual loans and historical ratios are reviewed periodically and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends or actual principal charge-offs. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentrations and the effect that changing economic conditions have on Home Savings. These estimates are particularly susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level.

The following table sets forth an analysis of Home Savings’ allowance for loan losses for the periods indicated:

 

 

 

Year ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

Balance at beginning of period

 

$

21,202

 

 

$

19,087

 

 

$

17,712

 

 

$

17,687

 

 

$

21,116

 

Provision(recovery) for loan losses

 

 

699

 

 

 

4,253

 

 

 

5,387

 

 

 

2,135

 

 

 

(1,271

)

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

(1,255

)

 

 

(1,565

)

 

 

(3,722

)

 

 

(1,268

)

 

 

(1,656

)

Residential mortgage loans

 

 

(570

)

 

 

(1,218

)

 

 

(761

)

 

 

(1,301

)

 

 

(1,005

)

Consumer loans

 

 

(612

)

 

 

(815

)

 

 

(1,151

)

 

 

(1,257

)

 

 

(1,578

)

Total charge-offs

 

 

(2,437

)

 

 

(3,598

)

 

 

(5,634

)

 

 

(3,826

)

 

 

(4,239

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

463

 

 

 

693

 

 

 

858

 

 

 

733

 

 

 

1,011

 

Residential mortgage loans

 

 

218

 

 

 

235

 

 

 

133

 

 

 

388

 

 

 

242

 

Consumer loans

 

 

298

 

 

 

532

 

 

 

631

 

 

 

595

 

 

 

828

 

Total recoveries

 

 

979

 

 

 

1,460

 

 

 

1,622

 

 

 

1,716

 

 

 

2,081

 

Net charge-offs

 

 

(1,458

)

 

 

(2,138

)

 

 

(4,012

)

 

 

(2,110

)

 

 

(2,158

)

Balance at end of year

 

$

20,443

 

 

$

21,202

 

 

$

19,087

 

 

$

17,712

 

 

$

17,687

 

Ratio of net charge-offs to average net loans

 

 

(0.07

)%

 

 

(0.11

)%

 

 

(0.29

)%

 

 

(0.17

)%

 

 

(0.20

)%

 

11


 

At December 31, 2018, the allowance for loan losses was 0.93% of net loans and 312.6% of total nonperforming loans.

The following table sets forth the allocation of the allowance for loan losses by category. The allocations are based on management’s assessment of the risk characteristics of each of the components of the total loan portfolio and are subject to change when the risk factors of each component change. The allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in any category.

 

 

 

At December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of loans

 

 

 

 

 

 

of loans

 

 

 

 

 

 

of loans

 

 

 

 

 

 

of loans

 

 

 

 

 

 

of loans

 

 

 

 

 

 

 

in each

 

 

 

 

 

 

in each

 

 

 

 

 

 

in each

 

 

 

 

 

 

in each

 

 

 

 

 

 

in each

 

 

 

 

 

 

 

category to

 

 

 

 

 

 

category to

 

 

 

 

 

 

category to

 

 

 

 

 

 

category to

 

 

 

 

 

 

category to

 

 

 

Amount

 

 

total loans

 

 

Amount

 

 

total loans