Regulatory Enforcement Action

12 Months Ended

Dec. 31, 2012

Regulatory Enforcement Action [Abstract]

REGULATORY ENFORCEMENT ACTION

3. REGULATORY ENFORCEMENT ACTION

United Community is a unitary thrift holding company, and is regulated by the Board of Governors of the Federal Reserve System (FRB). On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order with the OTS (the Holding Company Order). Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the Bank Order) with the Federal Deposit Insurance Corporation (FDIC) and the Ohio Division of Financial Institutions (the Ohio Division), which was terminated as of March 30, 2012 and replaced with a Consent Order (the Consent Order). The Consent Order was terminated on January 31, 2013 immediately after the directors consented to a Memorandum of Understanding (MOU), as described below. Although United Community and Home Savings agreed to the issuance of the Holding Company Order, the Consent Order and the MOU, as the case may be, neither has admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. No monetary penalties were assessed by the OTS, the FDIC or the Ohio Division when these orders were issued.

The Holding Company Order requires United Community to obtain FRB approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The Holding Company Order also required United Community to develop a debt reduction plan and submit the plan to the OTS for approval. The Holding Company Order remains in effect and was amended November 5, 2010. The amendment removed the requirement in the original Holding Company Order to provide the OTS with a debt reduction plan and added a requirement to provide the OTS with a capital plan. The capital plan was consistent with and incorporated into the strategic planning process that Home Savings undertook when the Bank Order was issued. The capital plan was submitted to the OTS in December 2010. A revised capital plan was submitted to the FRB, FDIC and Ohio Division in December 2011 and a further revised capital plan was submitted in December 2012.

On March 30, 2012, Home Savings entered into a consent agreement with the FDIC and the Ohio Division that provided for the issuance of the Consent Order by the FDIC and Ohio Division. Immediately following the issuance of the Consent Order, the FDIC and Ohio Division terminated the previous Bank Order issued by the FDIC and Ohio Division on August 13, 2008.

The Consent Order required Home Savings, within specified timeframes, to take or refrain from certain actions, including that it shall: (i) continue to retain qualified management; (ii) seek regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extend additional credit to classified borrowers; (iv) revise its plan to reduce its classified assets, and, within six months, reduce total adversely classified assets to 75% of the level of classified assets as of May 31, 2011 (i.e., to $219.0 million by September 30, 2012) and, within twelve months, to 50% of the level of classified assets as of May 31, 2011 (i.e., to $146.0 million by March 31, 2013) (v) establish a comprehensive policy and methodology for determining the adequacy of the allowance for loan and lease losses (ALLL); (vi) adopt plans to reduce its classified assets and delinquent loans; (vii) adopt a plan to reduce certain loan concentrations; (viii) amend its strategic plan and budget and profit plan; (ix) increase its Tier 1 Leverage Capital Ratio to 9.0% and its Total Risk Based Capital Ratio to 12.0% by June 30, 2012, and revise its capital plan to achieve such capital levels; and (x) seek regulatory approval prior to declaring or paying any cash dividend.

On September 21, 2012, Home Savings completed a bulk sale of a substantial amount of the Bank’s troubled loans, along with other assets, to an unrelated party. As a result of the transaction, Home Savings exceeded the asset quality targets set forth in the Consent Order, as follows:

	Balance as of December 31, 2012		Required Consent Order Threshold by March 31, 2013
	(In thousands)
Classified Assets	$	78,319	$	146,100

Classified assets include classified loans and real estate owned and other repossessed assets. Refer to Note 5 for a discussion of classified loans. Refer to Note 7 for a discussion of real estate owned and other repossessed assets.

The Bank’s Tier 1 Leverage Capital Ratio at December 31, 2012, was 8.70%. While Home Savings was operating under a Consent Order as of December 31, 2012 requiring a minimum Tier 1 Leverage Capital Ratio of 9.0%, the Company worked closely with its regulators to keep them informed of the transaction and obtained their concurrence to complete the sale along with the Bank’s commitment to once again meet the 9.0% requirement by March 31, 2013.

In keeping with its capital plan, the Company engaged an investment banking advisory firm in June 2011 to advise the board and management on the Company’s strategic alternatives, including raising outside capital. On January 15, 2013, the Company announced that it intends to raise approximately $47.0 million in capital through a private offering and a rights offering. The Company has entered into Stock Purchase Agreements to issue approximately $39.9 million in securities through a private offering to accredited investors, and also has entered into Subscription Agreements to issue approximately $2.1 million in common shares to the Company’s directors, officers, consultants and affiliates. Following the closing of the private offering, the Company intends to commence a rights offering of approximately $5.0 million to existing shareholders at the same common share purchase price of $2.75 as paid by the investors in the private offerings. The shares that the non-affiliated investors as a group are purchasing in the private offering will represent approximately 29.0% of the Company’s outstanding shares following the offering (assuming the rights offering is fully subscribed); however, none of these new investors will own more than 4.9% of the Company as a result of the private offering. A portion of any capital raised by United Community will be contributed to Home Savings, with the remainder to be used for general corporate purposes.

On January 31, 2013, the Consent Order issued to Home Savings by the FDIC and the Ohio Division on March 30, 2012 was terminated. On January 31, 2013, Home Savings entered into a MOU with the FDIC and Ohio Division that requires Home Savings to submit certain plans and reports to the FDIC and the Ohio Division, to seek the FDIC’s and Ohio Division’s prior consent before issuing any dividends to United Community, and to maintain its Tier 1 Leverage Capital Ratio at 8.50% and its Total Risk Based Capital Ratio at 12.0%.

As of December 31, 2011 and 2012, the FDIC categorized Home Savings as adequately capitalized pursuant to the Bank Order and the Consent Order, respectively. However, because the Consent Order was terminated on January 31, 2013, Home Savings can now be considered well capitalized.

A failure to comply with the provisions of the MOU or the Holding Company Order could result in additional enforcement actions by the FDIC, Ohio Division or the FRB.

The regulators, at their discretion, have the ability to place additional requirements on both Home Savings and United Community.