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United Community Financial Corp. Posts Another Strong Quarter

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United Community Financial Corp. (Company) (Nasdaq: UCFC), parent company of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings), announced today that net income for the third quarter of 2014 totaled $2.9 million. The Company also reported net income of $47.4 million (including the recognition of $39.1 million of income tax benefit from the reversal of a deferred tax asset valuation reserve) for the nine months ended September 30, 2014.

Gary M. Small, President and Chief Executive Officer of United Community and Home Savings, commented that, “Our strong performance is evidence that our strategies are working. We have been able to grow our loan portfolio, manage expenses, reduce our funding costs and attract new customers. These are all signs that we are headed in the right direction.”

Net Loans

Net loans increased $90.8 million from $1.0 billion at December 31, 2013 to $1.1 billion at September 30, 2014. The increase was driven by an $84.2 million increase in one-to four-family residential loans. Commercial and commercial real estate loans also increased $12.2 million during this period. Commercial commitments also continue to show strong growth with an increase of $49.6 million, or 20.9% year to date.

Small noted, “We are very pleased with the third quarter loan activity, particularly in the commercial lending segment. The growth reflects the success we are experiencing in attracting new business.”

Net Interest Income and Margin

The Company’s net interest margin was 3.06% in the third quarter of 2014, up from 3.04% in the third quarter of 2013. The net interest margin for the nine months ended September 30, 2014 was 3.07% compared to 2.99% in the prior year period. Despite the prolonged period of low interest rates and downward pressure on loan yields, the Company continues to make progress in expanding its net interest margin. The expansion is attributable to loan growth coupled with declines in deposit and borrowing costs. At the end of September 2014, Home Savings prepaid one $30.0 million tranche of the Company’s repurchase agreements and incurred a $1.4 million prepayment charge. Due to the timing of the debt extinguishment, there was minimal impact on the third quarter margin. The debt prepayment actions are one of many efforts underway to reduce the Company’s funding costs.

Noninterest Income

Noninterest income increased to $4.2 million in the third quarter of 2014, compared to $3.5 million in the third quarter of 2013. A portfolio of bank equities was sold in the third quarter of 2014, resulting in the recognition of security gains of approximately $328,000. Additionally, Home Savings recognized reduction in losses incurred on the resolution of real estate owned of $192,000. The Company also recognized higher non-deposit investment income due to a higher sales volume in the third quarter of 2014, as compared to the same quarter last year. Offsetting these changes was a reduction in mortgage banking income of $219,000.

In the first nine months of 2014, noninterest income totaled $10.8 million, compared to $15.6 million in the first nine months of 2013. The difference in noninterest income year over year is due to security gains of approximately $2.6 million that were recognized in the first nine months of 2013. Also, during the first nine months of 2013, Home Savings recognized a $676,000 recovery on mortgage servicing rights. A similar recovery was not recognized in 2014. These declines over the same period in 2013 were offset partially by a reduction in losses incurred on the resolution of real estate owned of $1.3 million. Lastly, mortgage banking income has declined $2.3 million, which is being driven by lower mortgage production due to lower mortgage refinance activity.

Noninterest Expense

Noninterest expenses increased $724,000 for the quarter ending September 30, 2014, as compared to the same quarter last year. The third quarter of 2014 included a $1.4 million prepayment penalty on the early termination of a $30.0 million borrowing. Reduced FDIC insurance premiums, financial institutions taxes, legal and consulting fees partially offset the impact of the prepayment penalty.

Noninterest expense increased to $42.0 million during the first nine months of 2014 compared to $41.8 million in the first nine months of 2013. The first nine months of 2014 included charges related to cost reduction initiatives of $923,000 and the prepayment penalty of $1.4 million referenced above. Partially offsetting these expenses were decreases in financial institutions tax, FDIC insurance premiums and other expenses. Lower expenses due to the cost reduction initiatives will have a positive impact on earnings in the fourth quarter and beyond.

Small added, “The organization has effectively reduced the operating expense run rate by 9%. We are now much better prepared to invest in business initiatives designed to grow revenues and improve performance.”

Asset Quality

Nonperforming assets decreased 32% to $25.2 million as of September 30, 2014, compared to $36.8 million at September 30, 2013. On a linked quarter basis, nonperforming assets increased approximately $300,000. The ratio of nonperforming assets to assets at September 30, 2014 was 1.40% compared to 1.39% at June 30, 2014 and 2.72% at September 30, 2014. Net charge-offs to average loans were 0.19% for the nine months ended September 30, 2014, compared to 0.51% for the same period in 2013.

As a result of the improving metrics discussed above, the Company’s provision for loan losses continues to show improvement totaling $116,000 for the quarter ended September 30, 2014 and a negative provision of $1.5 million for the nine months ended September 30, 2014. The allowance for loan losses totaled $18.1 million at September 30, 2014 which was 1.59% of total loans at the end of the quarter.

Deferred Tax Asset Valuation

At the end of 2010, the Company established a deferred tax asset (“DTA”) valuation allowance. In the course of its periodic assessment of its DTA position, the Company was able to reverse this valuation allowance in the second quarter of 2014. The Company has determined that it is more likely than not it will be able to fully realize its net deferred tax asset, including its tax loss carryforward. This action resulted in the recognition of a $38.8 million income tax benefit in June of 2014.

Capital and Book Value per Common Share

The Board of Directors declared a quarterly cash dividend of $0.01 per common share payable November 14, 2014 to shareholders of record at the close of business November 3, 2014.

In addition, as part of the Company’s capital management strategies of maximizing shareholder value and returns, during the third quarter, the Company repurchased 778,400 shares of its stock.

Home Savings is a wholly-owned subsidiary of the Company and operates 32 full-service banking offices and nine loan production offices located throughout Ohio and western Pennsylvania. Additional information on the Company and Home Savings may be found on the Company’s web site: www.ucfconline.com.

When used in this press release, the words or phrases “believes,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project”, “will have”, “can expect” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company advises readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company 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.

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

September 30, December 31,
2014 2013

(Dollars in thousands)

Assets:

Cash and deposits with banks $ 20,059 $ 20,937
Federal funds sold 9,531 56,394
Total cash and cash equivalents 29,590 77,331
Securities:
Available for sale, at fair value 507,125 511,006
Loans held for sale 10,567 4,838
Loans, net of allowance for loan losses of $18,132 and $21,116 1,119,955 1,029,192
Federal Home Loan Bank stock, at cost 18,068 26,464
Premises and equipment, net 20,138 20,924
Accrued interest receivable 5,256 5,694
Real estate owned and other repossessed assets 4,487 6,341
Core deposit intangible 100 152
Cash surrender value of life insurance 46,048 44,972
Other assets 40,206 10,936
Total assets $ 1,801,540 $ 1,737,850
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing $ 1,164,745 $ 1,221,162
Non-interest bearing 181,632 170,590
Total deposits 1,346,377 1,391,752
Borrowed funds:
Federal Home Loan Bank advances 138,000 50,000
Repurchase agreements and other 60,563 90,578
Total borrowed funds 198,563 140,578
Advance payments by borrowers for taxes and insurance 13,350 20,060
Accrued interest payable 380 550
Accrued expenses and other liabilities 9,164 9,836
Total liabilities 1,567,834 1,562,776
Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and no shares outstanding
Common stock-no par value; 499,000,000 shares authorized; 54,138,910 shares
issued and 49,682,291 and 50,339,089 shares, respectively, outstanding 174,283 174,719
Retained earnings 126,229 81,515
Accumulated other comprehensive loss (26,310 ) (41,665 )
Treasury stock, at cost,4,456,619 and 3,799,821 shares, respectively (40,496 ) (39,495 )

Total shareholders’ equity

233,706 175,074

Total liabilities and shareholders’ equity

$ 1,801,540 $ 1,737,850

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2014 2014 2013 2014 2013
(Dollars in thousands, except per share data)

Interest income

Loans $ 12,436 $ 12,361 $ 12,233 $ 36,919 $ 37,067
Loans held for sale 114 74 80 237 247
Securities:
Available for sale 3,002 3,125 3,364 9,368 10,176
Federal Home Loan Bank stock dividends 180 230 280 677 840
Other interest earning assets 4 21 52 51 102
Total interest income 15,736 15,811 16,009 47,252 48,432

Interest expense

Deposits 1,548 1,627 1,847 4,852 5,843
Federal Home Loan Bank advances 537 524 529 1,579 1,576
Repurchase agreements and other 926 919 929 2,753 2,756
Total interest expense 3,011 3,070 3,305 9,184 10,175
Net interest income 12,725 12,741 12,704 38,068 38,257
Provision for loan losses 116 (1,614 ) 657 (1,465 ) 3,834
Net interest income after provision for loan losses 12,609 14,355 12,047 39,533 34,423
Non-interest income
Non-deposit investment income 408 407 275 1,156 1,189
Service fees and other charges
Mortgage servicing fees 678 686 702 2,053 2,104
Deposit related fees 1,321 1,331 1,471 3,850 4,065
Mortgage servicing rights valuation 2 (5 ) 30 (4 ) 676
Mortgage servicing rights amortization (435 ) (432 ) (482 ) (1,259 ) (1,712 )
Other service fees 3 13 3 74
Net gains (losses):
Securities available for sale 328 31 362 2,578
Mortgage banking income 676 312 895 1,600 3,927
Real estate owned and other repossessed assets charges, net (203 ) (42 ) (395 ) (628 ) (1,966 )
Card fees 837 852 821 2,461 2,734
Other income 559 298 218 1,242 1,956
Total non-interest income 4,174 3,438 3,548 10,836 15,625
Non-interest expense
Salaries and employee benefits 7,001 8,282 6,729 22,863 20,735
Occupancy 874 815 811 2,622 2,484
Equipment and data processing 1,791 1,963 1,698 5,552 5,240
Financial institutions tax 198 198 385 594 1,216
Advertising 181 247 226 617 646
Amortization of core deposit intangible 17 16 20 52 66
Prepayment penalty 1,396 1,396
FDIC assessment 295 327 598 875 1,755
Other insurance premiums 138 135 174 410 525
Professional fees
Legal and consulting fees 184 177 368 522 567
Other professional fees 555 617 393 1,564 1,476
Real estate owned and other repossessed asset expenses 189 137 354 539 1,140
Other expenses 1,433 1,312 1,772 4,415 5,910
Total non-interest expenses 14,252 14,226 13,528 42,021 41,760
Income before income taxes 2,531 3,567 2,067 8,348 8,288
Income tax expense (benefit) (369 ) (38,837 ) 350 (39,050 ) 500
Net income 2,900 42,404 1,717 47,398 7,788
Amortization of discount on preferred stock 6,751
Earnings available to common shareholders $ 2,900 $ 42,404 $ 1,717 $ 47,398 $ 1,037
Earnings per common share
Basic $ 0.06 $ 0.84 $ 0.03 $ 0.94 $ 0.02
Diluted 0.06 0.84 0.03 0.94 0.02
UNITED COMMUNITY FINANCIAL CORP.
SELECTED FINANCIAL HIGHLIGHTS
(Unaudited)
At or for the quarters ended
September 30, June 30, March 31, December 31, September 30,
2014 2014 2014 2013 2013
(Dollars in thousands, except per share data)

Financial Data

Total assets $ 1,801,540 $ 1,789,939 $ 1,749,144 $ 1,737,850 $ 1,756,202
Total loans, net 1,119,955 1,086,771 1,060,901 1,029,192 1,009,029
Total securities 507,125 516,637 517,388 511,006 542,811
Total deposits 1,346,377 1,375,474 1,398,067 1,391,752 1,410,610
Total shareholders’ equity 233,706 235,049 189,829 175,074 183,322
Net interest income 12,725 12,741 12,602 13,074 12,704
Provision for loan losses 116 (1,614 ) 33 282 657
Noninterest income 4,174 3,438 3,224 4,124 3,548
Noninterest expense 14,252 14,226 13,543 14,977 13,528
Income tax expense (benefit) (369 ) (38,837 ) 156 (300 ) 350
Net income 2,900 42,404 2,094 2,239 1,717
Share Data
Basic earnings (loss) per common share $ 0.06 $ 0.84 $ 0.04 $ 0.04 $ 0.03
Diluted earnings (loss) per common share 0.06 0.84 0.04 0.04 0.03
Book value per common share 4.70 4.66 3.76 3.48 3.65
Tangible book value per common share 4.70 4.66 3.76 3.47 3.65
Market value per common share 4.68 4.13 3.92 3.57 3.89
Common shares outstanding at end of period 49,682 50,452 50,422 50,339 50,225
Weighted average shares outstanding–basic 49,698 50,274 50,196 50,114 50,110
Weighted average shares outstanding–diluted 49,958 50,495 50,451 50,360 50,382
Key Ratios

Return on average assets (1)

0.66 % 9.67 % 0.48 % 0.51 % 0.39 %

Return on average equity (2)

4.99 % 84.84 % 4.52 % 4.82 % 3.75 %
Net interest margin 3.06 % 3.09 % 3.07 % 3.17 % 3.04 %
Efficiency ratio 84.87 % 87.77 % 83.45 % 85.89 % 81.14 %
Nonperforming loans to total loans, end of period 1.85 % 1.87 % 2.17 % 2.29 % 2.72 %
Nonperforming assets to total assets, end of period 1.40 % 1.39 % 1.58 % 1.72 % 2.10 %
Allowance for loan loss as a percent of loans, end of period 1.59 % 1.65 % 1.90 % 2.01 % 2.04 %
Delinquent loans to total loans, end of period 2.10 % 1.86 % 2.07 % 2.32 % 2.77 %

(1) Net income divided by average total assets

(2) Net income divided by average total equity

UNITED COMMUNITY FINANCIAL CORP.

SELECTED FINANCIAL HIGHLIGHTS

(Unaudited)

At or for the quarters ended

September 30,

June 30, March 31, December 31,

September 30,

2014

2014 2014 2013

2013

(Dollars in thousands)
Loan Portfolio Composition
Real Estate Loans
One-to four-family residential $ 669,270 $ 645,211 $ 610,879 $ 585,025 $ 575,791
Multi-family residential* 56,445 52,938 54,233 54,485 55,696
Nonresidential* 123,260 122,066 125,796 131,251 127,699
Land* 9,487 9,635 9,829 9,683 9,546
Construction Loans
One-to four-family residential and land development 52,735 51,974 55,082 53,349 38,932
Multi-family and nonresidential* 4,667 1,010 207
Total real estate loans 915,864 882,834 856,026 833,793 807,664
Consumer Loans 181,474 182,027 184,409 189,231 194,383
Commercial Loans 39,853 39,127 40,013 26,141 26,888
Total Loans 1,137,191 1,103,988 1,080,448 1,049,165 1,028,935
Less:
Allowance for loan losses 18,132 18,264 20,554 21,116 21,032
Deferred loan costs, net (896 ) (1,047 ) (1,007 ) (1,143 ) (1,126 )
Total 17,236 17,217 19,547 19,973 19,906
Loans, net $ 1,119,955 $ 1,086,771 $ 1,060,901 $ 1,029,192 $ 1,009,029
* Categories are considered commercial real estate
At or for the quarters ended
September 30, June 30, March 31, December 31, September 30,
2014 2014 2014 2013 2013
(Dollars in thousands)
Deposit Portfolio Composition
Checking accounts
Interest bearing checking accounts $ 131,266 $ 133,999 $ 136,031 $ 132,751 $ 134,766
Non-interest bearing checking accounts 181,631 185,411 185,620 170,590 167,167
Total checking accounts 312,897 319,410 321,651 303,341 301,933
Savings accounts 273,192 277,404 278,906 267,515 267,062
Money market accounts 313,513 326,738 329,163 328,625 331,449
Total non-time deposits 899,602 923,552 929,720 899,481 900,444
Retail certificates of deposit 446,774 451,922 468,347 492,271 510,166
Total certificates of deposit 446,774 451,922 468,347 492,271 510,166
Total deposits $ 1,346,376 $ 1,375,474 $ 1,398,067 $ 1,391,752 $ 1,410,610
Certificates of deposit as a percent of total deposits 33.18 % 32.86 % 33.50 % 35.37 % 36.17 %
UNITED COMMUNITY FINANCIAL CORP.
SELECTED FINANCIAL HIGHLIGHTS
(Unaudited)
At or for the quarters ended

September 30,

June 30,

March 31, December 31,

September 30,

2014

2014

2014 2013

2013

(Dollars in thousands)
Allowance For Loan Losses
Beginning balance $ 18,264 $ 20,554 $ 21,116 $ 21,032 $ 19,037
Provision 116 (1,614 ) 33 282 657
Net (chargeoffs) recoveries (248 ) (676 ) (595 ) (198 ) 1,338
Ending balance $ 18,132 $ 18,264 $ 20,554 $ 21,116 $ 21,032
Net (Charge-offs) Recoveries
Real Estate Loans
One-to four-family $ (278 ) $ (181 ) $ (163 ) $ 42 $ (201 )
Multi-family (135 ) (5 ) 13
Nonresidential (9 ) 56 (252 ) (29 ) (381 )
Land 12 10
Construction Loans
One-to four-family residential and land development (90 ) (330 ) (79 ) 451 1,876
Multi-family and nonresidential (620 )
Total real estate loans (377 ) (590 ) (499 ) (144 ) 1,317
Consumer Loans (29 ) (304 ) (233 ) (193 ) (143 )
Commercial Loans 158 218 137 139 164
Total $ (248 ) $ (676 ) $ (595 ) $ (198 ) $ 1,338
At or for the quarters ended

September 30,

June 30,

March 31, December 31, September 30,
2014

2014

2014 2013 2013
(Dollars in thousands)
Nonperforming Loans
Real Estate Loans
One-to four-family residential $ 4,700 $ 5,380 $ 6,133 $ 6,356 $ 6,127
Multi-family residential 114 133 1,158 641 705
Nonresidential 6,804 4,902 5,033 5,560 8,963
Land 531 532 532 496 628
Construction Loans
One-to four-family residential and land development 2,453 2,553 2,884 3,084 3,320
Total real estate loans 14,602 13,500 15,740 16,137 19,743
Consumer Loans 1,960 2,663 3,089 3,293 3,564
Commercial Loans 4,144 4,151 4,155 4,158 4,177
Total Loans $ 20,706 $ 20,314 $ 22,984 $ 23,588 $ 27,484
Total Nonperforming Loans and Nonperforming Assets
Past due 90 days and on nonaccrual status $ 18,114 $ 16,636 $ 18,708 $ 20,188 $ 20,946
Past due 90 days and still accruing 45 3,413
Past due 90 days 18,114 16,636 18,708 20,233 24,359
Past due less than 90 days and on nonaccrual 2,592 3,678 4,276 3,355 3,125
Total Nonperforming Loans 20,706 20,314 22,984 23,588 27,484
Other real estate owned 4,445 4,546 4,700 6,318 9,276
Repossessed assets 42 2 23 39
Total Nonperforming Assets $ 25,193 $ 24,862 $ 27,684 $ 29,929 $ 36,799
Total Troubled Debt Restructured Loans
Accruing $ 25,140 $ 25,905 $ 26,614 $ 26,577 $ 26,629
Nonaccruing 4,428 4,328 4,724 4,941 5,474
Total $ 29,568 $ 30,233 $ 31,338 $ 31,518 $ 32,103

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