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Section 1: 10-Q (10-Q)

ucfc-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2019

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      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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or 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

 

 

 

 

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

 

 

   

If an emerging growth company, indicate by check mark 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No  

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common shares, no par value

UCFC

Nasdaq Global Market

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 48,794,553 common shares as of April 30, 2019.

 

 

 

 


TABLE OF CONTENTS

 

 

PAGE

 

 

Part I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

Condensed Consolidated Statements of Financial Condition as of March 31, 2019 (Unaudited) and December 31, 2018

3

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

4

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2019 and 2018 (Unaudited)

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

7

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8-47

 

 

 

Item 2.

 

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

48-53

 

 

 

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)

56

 

 

 

Item 4.

 

Mine Safety Disclosures (None)

56

 

 

 

Item 5.

 

Other Information (None)

56

 

 

 

Item 6.

 

Exhibits

57

 

Signatures

58

 

2


PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

Cash and deposits with banks

 

$

41,920

 

 

$

34,380

 

Federal funds sold

 

 

35,277

 

 

 

26,605

 

Total cash and cash equivalents

 

 

77,197

 

 

 

60,985

 

Securities:

 

 

 

 

 

 

 

 

Trading

 

 

666

 

 

 

364

 

Available for sale

 

 

237,421

 

 

 

241,643

 

Held to maturity, (fair value of $74,748 and $75,075, respectively)

 

 

75,760

 

 

 

77,491

 

Loans held for sale, at fair value

 

 

77,676

 

 

 

91,472

 

Gross loans

 

 

2,235,995

 

 

 

2,197,285

 

Allowance for loan losses

 

 

(20,446

)

 

 

(20,443

)

Loans, net

 

 

2,215,549

 

 

 

2,176,842

 

Federal Home Loan Bank stock, at cost

 

 

16,702

 

 

 

19,144

 

Premises and equipment, net

 

 

22,012

 

 

 

21,930

 

Accrued interest receivable

 

 

8,873

 

 

 

9,080

 

Real estate owned and other repossessed assets, net

 

 

1,180

 

 

 

1,088

 

Goodwill

 

 

20,221

 

 

 

20,221

 

Customer list intangible

 

 

2,169

 

 

 

2,214

 

Core deposit intangible

 

 

1,521

 

 

 

1,603

 

Cash surrender value of life insurance

 

 

64,606

 

 

 

64,220

 

Other assets

 

 

30,488

 

 

 

23,060

 

Total assets

 

$

2,852,041

 

 

$

2,811,357

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

404,644

 

 

$

394,208

 

Interest bearing

 

 

 

 

 

 

 

 

Customer deposits

 

 

1,623,653

 

 

 

1,528,057

 

Brokered deposits

 

 

261,506

 

 

 

290,955

 

Total interest bearing deposits

 

 

1,885,159

 

 

 

1,819,012

 

Total deposits

 

 

2,289,803

 

 

 

2,213,220

 

Borrowed funds:

 

 

 

 

 

 

 

 

Short-term Federal Home Loan Bank advances

 

 

204,000

 

 

 

243,000

 

Repurchase agreements and other

 

 

254

 

 

 

224

 

Total borrowed funds

 

 

204,254

 

 

 

243,224

 

Advance payments by borrowers for taxes and insurance

 

 

19,542

 

 

 

27,192

 

Accrued interest payable

 

 

1,492

 

 

 

1,279

 

Accrued expenses and other liabilities

 

 

22,241

 

 

 

17,108

 

Total liabilities

 

 

2,537,332

 

 

 

2,502,023

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

   48,852,688 and 49,128,875 shares, respectively, outstanding

 

 

177,410

 

 

 

177,492

 

Retained earnings

 

 

197,286

 

 

 

192,062

 

Accumulated other comprehensive income (loss)

 

 

(18,416

)

 

 

(21,436

)

Treasury stock, at cost, 5,286,222 and 5,010,035 shares, respectively

 

 

(41,571

)

 

 

(38,784

)

Total shareholders’ equity

 

 

314,709

 

 

 

309,334

 

Total liabilities and shareholders’ equity

 

$

2,852,041

 

 

$

2,811,357

 

 

See Notes to Consolidated Financial Statements.

3


UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

For the Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in thousands, except per share data)

 

Interest income

 

 

 

 

 

 

 

 

Loans

 

$

25,856

 

 

$

22,759

 

Loans held for sale

 

 

1,007

 

 

 

858

 

Securities available for sale, nontaxable

 

 

307

 

 

 

388

 

Securities available for sale, taxable

 

 

1,263

 

 

 

1,215

 

Securities held to maturity, nontaxable

 

 

75

 

 

 

51

 

Securities held to maturity, taxable

 

 

379

 

 

 

422

 

Federal Home Loan Bank stock dividends

 

 

290

 

 

 

280

 

Other interest earning assets

 

 

224

 

 

 

77

 

Total interest income

 

 

29,401

 

 

 

26,050

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

6,574

 

 

 

3,097

 

Federal Home Loan Bank advances

 

 

641

 

 

 

1,420

 

Total interest expense

 

 

7,215

 

 

 

4,517

 

Net interest income

 

 

22,186

 

 

 

21,533

 

Provision for loan losses

 

 

61

 

 

 

407

 

Net interest income after provision for loan losses

 

 

22,125

 

 

 

21,126

 

Non-interest income

 

 

 

 

 

 

 

 

Insurance agency income

 

 

701

 

 

 

577

 

Brokerage income

 

 

370

 

 

 

272

 

Deposit related fees

 

 

1,341

 

 

 

1,300

 

Mortgage servicing fees

 

 

873

 

 

 

812

 

Mortgage servicing rights valuation

 

 

(499

)

 

 

9

 

Mortgage servicing rights amortization

 

 

(446

)

 

 

(500

)

Other service fees

 

 

38

 

 

 

38

 

Net Gains (losses):

 

 

 

 

 

 

 

 

Trading securities, including change in fair value

 

 

64

 

 

 

 

Securities available for sale (includes $144 and $139, respectively, accumulated other

   comprehensive income reclassifications for unrealized net gains on available for sale securities)

 

 

144

 

 

 

139

 

Mortgage banking income

 

 

1,676

 

 

 

1,358

 

Real estate owned and other repossessed assets, net

 

 

(31

)

 

 

(78

)

Debit/credit card fees

 

 

934

 

 

 

949

 

Trust fees

 

 

465

 

 

 

469

 

Increase in cash surrender value of life insurance

 

 

385

 

 

 

434

 

Other income

 

 

58

 

 

 

40

 

Total non-interest income

 

 

6,073

 

 

 

5,819

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,575

 

 

 

9,998

 

Occupancy

 

 

1,046

 

 

 

1,100

 

Equipment and data processing

 

 

2,292

 

 

 

2,154

 

Financial institutions tax

 

 

509

 

 

 

496

 

Advertising

 

 

390

 

 

 

235

 

Amortization of intangible assets

 

 

127

 

 

 

113

 

FDIC insurance premiums

 

 

331

 

 

 

290

 

Other insurance premiums

 

 

76

 

 

 

109

 

Legal and consulting fees

 

 

60

 

 

 

299

 

Other professional fees

 

 

587

 

 

 

391

 

Supervisory fees

 

 

34

 

 

 

42

 

Real estate owned and other repossessed asset expenses

 

 

39

 

 

 

36

 

Other expenses

 

 

1,608

 

 

 

1,337

 

Total non-interest expenses

 

 

17,674

 

 

 

16,600

 

Income before income taxes

 

 

10,524

 

 

 

10,345

 

Income tax expense (includes $30 and $29 income tax expense from reclassification items)

 

 

1,868

 

 

 

1,789

 

Net income

 

$

8,656

 

 

$

8,556

 

 

(Continued)

4


(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended

March 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

(Dollars in thousands, except per share data)

 

Net income

 

$

8,656

 

 

$

8,556

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities, available for sale, net of reclassifications

   and tax of $794 and $1,068, respectively

 

 

2,996

 

 

 

(4,020

)

Accretion of unrealized losses on securities transferred from available for sale

   to held to maturity, net of tax of $7 and $8, respectively

 

 

24

 

 

 

30

 

Total other comprehensive income (loss)

 

 

3,020

 

 

 

(3,990

)

Comprehensive income

 

$

11,676

 

 

$

4,566

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.17

 

Diluted

 

 

0.18

 

 

 

0.17

 

 

See Notes to Consolidated Financial Statements.

5


UNITED COMMUNITY FINANCIAL CORP.

CONDENSED 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, 2019

 

 

49,128,875

 

 

$

177,492

 

 

$

192,062

 

 

$

(21,436

)

 

$

(38,784

)

 

$

309,334

 

Net income

 

 

 

 

 

 

 

 

 

 

8,656

 

 

 

 

 

 

 

 

 

 

 

8,656

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,020

 

 

 

 

 

 

 

3,020

 

Stock option exercises

 

 

33,000

 

 

 

(187

)

 

 

 

 

 

 

 

 

 

 

257

 

 

 

70

 

Stock option expense

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Restricted stock grants

 

 

18,969

 

 

 

(148

)

 

 

 

 

 

 

 

 

 

 

148

 

 

 

 

Restricted stock forfeitures

 

 

(834

)

 

 

6

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

Restricted stock expense

 

 

 

 

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

143

 

Vesting of Long-term Incentive Plan

 

 

54,463

 

 

 

98

 

 

 

 

 

 

 

 

 

 

 

425

 

 

 

523

 

Cash dividend payments ($0.07 per share)

 

 

 

 

 

 

 

 

 

 

(3,432

)

 

 

 

 

 

 

 

 

 

 

(3,432

)

Treasury stock purchases

 

 

(381,785

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,611

)

 

 

(3,611

)

Balance March 31, 2019

 

 

48,852,688

 

 

$

177,410

 

 

$

197,286

 

 

$

(18,416

)

 

$

(41,571

)

 

$

314,709

 

 

 

 

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, 2018

 

 

49,800,126

 

 

$

177,458

 

 

$

167,852

 

 

$

(18,685

)

 

$

(32,360

)

 

$

294,265

 

Net income

 

 

 

 

 

 

 

 

 

 

8,556

 

 

 

 

 

 

 

 

 

 

 

8,556

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,990

)

 

 

 

 

 

 

(3,990

)

Stock option exercises

 

 

68,801

 

 

 

(284

)

 

 

 

 

 

 

 

 

 

 

513

 

 

 

229

 

Stock option expense

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

Restricted stock grants

 

 

27,702

 

 

 

(207

)

 

 

 

 

 

 

 

 

 

 

207

 

 

 

 

Restricted stock forfeitures

 

 

(807

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock expense

 

 

 

 

 

 

248

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

242

 

Vesting of Long-term Incentive Plan

 

 

36,871

 

 

 

69

 

 

 

 

 

 

 

 

 

 

 

275

 

 

 

344

 

Cash dividend payments ($0.06 per share)

 

 

 

 

 

 

 

 

 

 

(2,989

)

 

 

 

 

 

 

 

 

 

 

(2,989

)

Treasury stock purchases

 

 

(50,202

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(475

)

 

 

(475

)

Balance March 31, 2018

 

 

49,882,491

 

 

$

177,297

 

 

$

173,419

 

 

$

(22,675

)

 

$

(31,846

)

 

$

296,195

 

 

See Notes to Consolidated Financial Statements.

 

6


UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the three months ended

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

Net income

 

$

8,656

 

 

$

8,556

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

61

 

 

 

407

 

Mortgage banking income

 

 

(597

)

 

 

(3,840

)

Changes in fair value on loans held for sale

 

 

(1,079

)

 

 

2,482

 

Net losses on real estate owned and other repossessed assets sold

 

 

31

 

 

 

78

 

Net gain on available for sale securities sold

 

 

(144

)

 

 

(139

)

Net gain on trading securities sold and change in fair value

 

 

(64

)

 

 

 

Amortization of premiums and accretion of discounts

 

 

1,436

 

 

 

1,251

 

Depreciation and amortization

 

 

737

 

 

 

681

 

Net change in interest receivable

 

 

207

 

 

 

575

 

Net change in interest payable

 

 

213

 

 

 

266

 

Net change in prepaid and other assets

 

 

(8,371

)

 

 

1

 

Net change in other liabilities

 

 

5,978

 

 

 

(1,926

)

Stock based compensation

 

 

149

 

 

 

255

 

Net principal disbursed on loans originated for sale

 

 

(62,434

)

 

 

(68,826

)

Proceeds from sale of loans held for sale

 

 

77,122

 

 

 

73,983

 

Cash used in payment of operating leases

 

 

(321

)

 

 

 

Net change in right of use asset

 

 

(282

)

 

 

 

Net change in deferred tax assets

 

 

259

 

 

 

2,004

 

Net change in cash surrender value of life insurance

 

 

(385

)

 

 

(434

)

Net cash from operating activities

 

 

21,172

 

 

 

15,374

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

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

 

 

1,964

 

 

 

2,587

 

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

 

 

1,655

 

 

 

2,133

 

Proceeds from the sale of securities available for sale

 

 

17,145

 

 

 

4,661

 

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

 

 

397

 

 

 

172

 

Proceeds from the sale of loans held for investment

 

 

650

 

 

 

 

Proceeds from redemption of FHLB stock

 

 

2,442

 

 

 

 

Purchases of trading securities

 

 

(238

)

 

 

 

Purchases of available for sale securities

 

 

(11,321

)

 

 

 

Purchases of premises and equipment

 

 

(810

)

 

 

(374

)

Principal disbursed on loans, net of repayments

 

 

(25,586

)

 

 

(53,773

)

Loans purchased

 

 

(14,286

)

 

 

(8,465

)

Net cash from investing activities

 

 

(27,988

)

 

 

(53,059

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net change in checking, savings and money market accounts

 

 

92,683

 

 

 

58,111

 

Net change in certificates of deposit

 

 

(16,062

)

 

 

52,228

 

Net change in advance payments by borrowers for taxes and insurance

 

 

(7,650

)

 

 

(6,594

)

Net change in short-term FHLB advances

 

 

(39,000

)

 

 

(63,000

)

Net change in repurchase agreements and other borrowed funds

 

 

30

 

 

 

36

 

Proceeds from the exercise of stock options

 

 

70

 

 

 

229

 

Dividends paid

 

 

(3,432

)

 

 

(2,989

)

Purchase of treasury stock

 

 

(3,611

)

 

 

(475

)

Net cash from financing activities

 

 

23,028

 

 

 

37,546

 

Change in cash and cash equivalents

 

 

16,212

 

 

 

(139

)

Cash and cash equivalents, beginning of period

 

 

60,985

 

 

 

46,880

 

Cash and cash equivalents, end of period

 

$

77,197

 

 

$

46,741

 

 

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 in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings and Loan) issued upon the conversion of Home Savings and Loan from a mutual savings association to a permanent capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings and Loan.  Immediately following United Community’s acquisition of Ohio Legacy Corp. (OLCB) on January 31, 2017, Home Savings and Loan was merged into Premier Bank & Trust, OLCB’s wholly-owned, state-chartered bank subsidiary (PB&T), and the surviving bank changed its name to Home Savings Bank.  In connection with OLCB acquisition, United Community became a financial holding company, and Home Savings Bank, its wholly-owned bank subsidiary following the merger (Home Savings or the Bank), is now an Ohio bank.

Home Savings conducts its business from its main office located in Youngstown, Ohio, 33 retail banking offices (32 in Ohio and one in Pennsylvania).  Home Savings also has residential mortgage loan centers servicing Ohio, West Virginia, western Pennsylvania, northern Kentucky, and eastern Indiana.   

On January 29, 2016, United Community acquired James & Sons Insurance.  James & Sons Insurance was merged into HSB Insurance, LLC, a wholly-owned subsidiary of United Community.  HSB Insurance, LLC d/b/a James & Sons Insurance is an insurance agency that offers a wide variety of insurance products for business and residential customers, which include auto, homeowners, life-health, commercial, surety bonds and aviation. On February 28, 2017, James & Sons Insurance acquired Eich Brothers Insurance. Eich Brothers Insurance is an insurance agency that offers insurance products for business and residential customers, which include auto, commercial, homeowners and life-health.  On July 1, 2017, James & Sons Insurance acquired Stevens Insurance Agency, which offers insurance products for business and residential customers, including auto, commercial, homeowners and life-health.  On July 1, 2018, James & Sons Insurance acquired Steinhauser Insurance Agency which offers property and casualty insurance.      

HSB Capital, LLC, a wholly-owned subsidiary of United Community, was formed by United Community during 2016 for the purpose of providing mezzanine funding for customers.  Mezzanine loans are offered to customers in United Community’s market area and are expected to be repaid from the cash flow from the operations of the business.

HSB Insurance, Inc., a wholly-owned subsidiary of the Company which was formed and began operations on June 1, 2017, is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. HSB Insurance, Inc. pools resources with several other similar 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 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, 2019, are not necessarily indicative of the results to be expected for the year ending December 31, 2019. 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, 2018.

The consolidated financial statements include the accounts of United Community and its subsidiaries, Home Savings, HSB Insurance, LLC, HSB Capital, LLC and HSB Insurance, Inc.  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.

 

 

8


 

2.

RECENT ACCOUNTING DEVELOPMENTS

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The ASU amends existing guidance that requires lessees recognize the following for all leases (with the exception of short–term leases) at the commencement date (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Under the new guidance, lessor accounting is largely unchanged.  Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.  An entity may adopt the new guidance by either restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period presented or by recording a cumulative effect adjustment at the beginning of the period of adoption.  The Company used the approach of recording a cumulative effect adjustment at the beginning of the period of adoption, however, no cumulative effect adjustment was required to be recorded.  The new guidance includes a number of optional transition-related practical expedients.  The practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.  An entity that elects to apply these practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company elected to apply the practical expedients.  In 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-20, Leases (Topic 842): Narrow – Scope Improvements for Lessors.  These ASUs amend and clarify guidance in ASU 2016-02 and were being considered by the Company in determining the proper adoption of ASU 2016-02.  The adoption of this guidance on January 1, 2019, resulted in an approximate $5.2 million increase in right of use asset, $0.3 million increase in other assets and an approximate $5.5 million increase in lease liability.

In June 2016, the FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13).   ASU 2016-13 adds a new Topic 326 to the Accounting Standards Codification (Codification) and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years, and for interim periods with those fiscal years, beginning after December 15, 2019.  Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.  Management has aggregated and verified the necessary data and addressed any data-archiving improvements necessary for the implementation of this ASU. Management is in the process of evaluating various models to be used. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses.  The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and should be accounted for in accordance with Topic 842, Leases.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2017, the FASB ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.  ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings.

9


The new ASU will require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity.

The provisions of the new ASU related to down rounds are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted for all entities.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  These amendments revise and expand hedge accounting for both financial (e.g., interest rate) and commodity risks.  Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes.  It also makes certain targeted improvements to simplify the application of hedge accounting guidance.  This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption, including adoption in an interim period, is permitted. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period (i.e., the initial application date).  The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07).  The FASB issued ASU 2018-07 intending to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.  ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees.  The amendments in ASU 2018-07 are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.  Early adoption is permitted.  The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  This ASU modifies the disclosure objective paragraphs of ASU 820 to eliminate (1) “at a minimum” from the phrase “an entity shall disclose at a minimum” and (2) other similar “open ended” disclosure requirements to promote the appropriate exercise of discretion of entities.  The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted, including adoption in an interim period.  The Company is currently assessing the impact of ASU 2018-13 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 (SARs), 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 with respect to awards issued under the 2007 Plan that 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, SARs, or other forms of stock-based incentive awards.  Because the 2007 Plan terminated, no additional awards may be made under it.

10


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 with respect to options issued under the 1999 Plan that 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 under the 2015 Plan in the three months ended March 31, 2019  and 50,000 granted in the three months ended March 31, 2018. Pursuant to the terms of the 2015 Plan, any options granted must be exercised within 10 years from the date of grant.  Expenses related to prior stock option grants are included with salaries and employee benefits.  The Company recognized $6,000 and $13,000 in stock option expense for the three months ended March 31, 2019 and March 31, 2018, respectively.  The Company expects to recognize no additional stock option expense for the remainder of 2019.

A summary of option activity for the first quarter of 2019 in the 2015 Plan, the 2007 Plan and the 1999 Plan is as follows:

 

 

For the three months ended

 

 

March 31, 2019

 

 

 

 

 

 

Weighted

 

 

Aggregate

 

 

 

 

 

 

average

 

 

intrinsic value

 

 

Shares

 

 

exercise price

 

 

(in thousands)

 

Outstanding at beginning of year

 

223,432

 

 

$

3.93

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

Exercised

 

(33,000

)

 

 

2.10

 

 

 

 

 

Forfeited and expired

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

190,432

 

 

 

4.25

 

 

$

986

 

Shares subject to options exercisable at end of period

 

190,432

 

 

 

4.25

 

 

$

986

 

 

Information related to stock options for the three months ended March 31, 2019 and 2018 follows:

 

 

March 31, 2019

 

 

March 31, 2018

 

Intrinsic value of options exercised

$

242,000

 

 

$

439,000

 

Cash received from option exercises

 

70,000

 

 

 

229,000

 

Tax benefit realized from option exercises

 

13,000

 

 

 

65,000

 

Weighted average fair value of options granted, per share

$

 

 

$

1.54

 

 

Information related to stock options granted during the three months ended March 31, 2018 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

Risk-free interest rate

 

 

2.69

%

Expected term (years)

 

 

5

 

Expected stock volatility

 

 

19.86

%

Dividend yield

 

 

2.48

%

 

As of March 31, 2019, there were no nonvested stock options outstanding.

 

Outstanding stock options at March 31, 2019 have a weighted average remaining life of 3.74 years and may be exercised in the range of $1.20 to $9.66 per share.

Restricted Stock Awards:

The 2007 Plan permitted and the 2015 Plan permits the issuance of restricted stock awards to eligible employees and nonemployee directors. Nonvested shares at March 31, 2019 aggregated 128,337, of which 32,769 are expected to vest during the remainder of 2019, 32,444 in 2020, 59,551 in 2021 and 3,573 in 2022. Expense related to restricted stock awards is charged to salaries and employee benefits and is recognized over the vesting period of the awards based on the fair value of the shares at the grant date. The Company recognized approximately $143,000 in restricted stock award expense for the three months ended March 31, 2019. The Company recognized approximately $242,000 in restricted stock award expense for the three months ended March 31, 2018.  The Company expects to recognize additional expenses related to restricted stock awards of approximately $364,000 in 2019, $289,000 in 2020, $134,000 in 2021 and $39,000 in 2022.  The total average per share fair value of shares vested during the three months ended March 31, 2019 was $9.66.

11


A summary of changes in the Company’s nonvested restricted shares for the three months ended March 31, 2019 is as follows:

 

 

For the three months ended

 

 

March 31, 2019

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

average

 

 

 

 

 

 

grant date

 

 

Shares

 

 

fair value

 

Nonvested at beginning of year

 

210,713

 

 

$

8.15

 

Granted

 

18,969

 

 

$

9.40