United Community Financial Corp. Announces Third Quarter Results; Substantial Improvement In Asset Quality Measures

United Community Financial Corp. (Company) (Nasdaq: UCFC), holding company of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings), today reported a consolidated net loss of $26.9 million, or $(0.82) per diluted share, for the three months ended September 30, 2012. The loss was due primarily to a $33.0 million charge related to the bulk loan sale. The Company also reported a net loss of $23.0 million, or $(0.70) per diluted share, for the nine months ended September 30, 2012.

Selected third quarter results:
  • Delinquent loans were $51.2 million at September 30, 2012, down 59.6% year to date
  • Nonperforming assets were $66.8 million at September 30, 2012, down 57.4% year to date
  • Classified loans were $58.4 million at September 30, 2012, down 73.5% year to date
  • Home Savings’ Tier 1 leverage ratio was 8.27% and the total risk based capital ratio was 15.85%

Patrick W. Bevack, President and Chief Executive Officer of UCFC and Home Savings, commented that, “The bulk asset sale completed in September represented an enormous step forward for the Company. We have achieved a substantial improvement in our asset quality and a dramatic reduction in our risk profile, and have exceeded our regulatory asset quality targets well ahead of schedule.”

Asset Quality

Delinquent loans were $51.2 million at September 30, 2012, down $144.0 million, or 74.8%, from their high point of $195.2 million at March 31, 2010. Nonperforming loans at September 30, 2012 were $46.6 million, down $108.5 million, or 70.0%, from their high point of $155.1 million at June 30, 2010. Nonperforming assets were $66.8 million at September 30, 2012, down $130.4 million, or 66.1%, from their high point of $197.2 million at June 30, 2010. Significant improvement in asset quality in the third quarter was driven by the bulk sale. Of the loans sold in the bulk sale, $91.6 million were classified, $63.3 million were nonperforming and $53.0 million were noncurrent.

The provision for loan losses was $30.3 million for the third quarter of 2012, as compared to $6.3 million for the second quarter in 2012. The provision expense in the third quarter of 2012 included $29.4 million directly associated with the bulk sale.

  June 30, 2012   September 30, 2012  
Asset Quality Measure (1) (As Reported) (As Reported) Change
Classified Loans $ 171,839 $ 58,373 $ (113,466 )

Other Real Estate Owned and Other Repossessed Assets
$ 24,778 $ 20,206 $ (4,572 )
Total Classified Assets $ 196,617 $ 78,579 (118,038 )
Classified Assets/(Tier 1 + ALLL) 91.41 % 44.21 % -47.20 %
Total Nonperforming Loans $ 114,529 $ 46,557 $ (67,972 )
Allowance for Loan Losses $ 30,933 $ 20,048 $ (10,885 )
Allowance for Loan Losses/Nonperforming Loans 27.01 % 43.06 % 16.05 %
Nonperforming Assets/Total Assets 7.31 % 3.65 % -3.66 %
Noncurrent Loans (30+ Days Delinquent) $ 109,785 $ 51,220 $ (58,565 )
Texas Ratio (2) 62.59 % 34.89 % -27.70 %
 

(1) Dollar amounts in thousands. All dollar amounts shown are book balance prior to any allowance for loan losses(2) Texas Ratio is defined as nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses

Net Interest Income and Margin

Net interest income for the three months ended September 30, 2012 was $14.1 million, a decline of $2.3 million over the prior quarter. A decrease also was seen in the net interest margin, which changed 38 basis points from 3.55% during the second quarter to 3.17% during the third quarter.

Total interest income decreased $2.7 million in the third quarter of 2012 compared to the second quarter of 2012, primarily as a result of a decrease of $85.7 million in the average balance of outstanding loans.

Total interest expense decreased $411,000 for the quarter ended September 30, 2012, as compared to the previous quarter. The change was due primarily to a reduction of $342,000 in interest paid on deposits. The average outstanding balance of certificates of deposit declined by $34.2 million, while non-time deposits increased by $852,000. Also contributing to the change was a reduction of 10 basis points in the cost of certificates of deposit. Interest expense also improved due to the prepayment of $690,000 in term borrowings.

Net interest income for the nine months ended September 30, 2012, and September 30, 2011, was $46.4 million and $50.3 million, respectively. Despite a decrease of $3.9 million in net interest income, the net interest margin for the two periods was comparable. The net interest margin was 3.34% for the nine months ended September 30, 2012, and 3.36% the nine months ended September 30, 2011.

Total interest income decreased $13.3 million in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of a decrease of $283.7 million in the average balance of outstanding loans. This change in interest income was further impacted by a decrease in the yield on net loans of 30 basis points.

Total interest expense decreased $9.4 million for the nine months ended September 30, 2012, as compared to the same period last year. The change was due primarily to reductions of $8.1 million in interest paid on deposits. The overall decrease in interest expense was attributable to the maturity of the Step CDs and a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. The average outstanding balance of certificates of deposit declined by $212.0 million, while non-time deposits increased by $45.9 million. The decrease in certificates of deposit balances also can be attributable to the sale of four of the Bank’s branches, which took place in the fourth quarter of 2011. The maturing of the Step CDs led to a reduction of 84 basis points in the cost of certificates of deposit. The yield on non-time deposits declined 16 basis points.

Noninterest Income

Noninterest income decreased in the third quarter of 2012 to $3.8 million, as compared to $6.9 million in the second quarter of 2012. The $3.1 million decrease in noninterest income was largely driven by lower gains recognized on the sale of available for sale securities. Lower gains were driven by a decrease in the volume of sales in the third quarter of 2012 as compared to the prior quarter. Also affecting the decrease in noninterest income were higher losses recognized on the valuation and disposal of real estate owned in the third quarter. During the three months ended September 30, 2012, Home Savings increased the valuation allowance on certain properties to absorb estimated closing costs at the time of disposal.

Noninterest income increased in the first nine months of 2012 to $15.8 million, as compared to $11.2 million for the first nine months of 2011. Driving the increase in noninterest income were gains recognized on the sale of available for sale securities. In the first nine months of 2012, Home Savings sold securities totaling approximately $281.8 million and consequently recognized a $5.2 million gain. Fees generated on nondeposit investments increased $475,000 during the first nine months of 2012 as compared to the same period last year. The change was driven by the volume of investment activity in 2012. Some of Home Savings’ customers that had funds deposited in Step CDs that matured in the first quarter of 2012 were retained and their deposits were invested in various mutual funds and insurance annuities offered through Home Savings’ Investments Division. Finally, lower losses incurred on real estate owned and other repossessed assets during the nine months ended September 30, 2012, as compared to the same period last year, were the result of the need to mark fewer properties down to fair market value as real estate values have stabilized.

Noninterest Expense

Noninterest expense was $17.3 million in the third quarter of 2012 as compared to $17.0 million in the second quarter of 2012, or an increase of $287,000. Professional fees, including legal and other consultants, were higher during the third quarter of 2012 due to the engagement of professionals hired to assist management in completing the bulk sale. Professional fees specifically associated with the bulk asset sale aggregated $1.2 million. Primarily offsetting this increase in professional fees were lower prepayment penalties associated with the prepayment of FHLB term advances.

Noninterest expense was $50.9 million in the first nine months of 2012, compared to $47.0 million in the first nine months of 2011. This increase of $3.9 million was caused by an increase in salaries and employee benefits of $2.3 million and an increase in professional fees of $1.6 million. Partially offsetting these two increases was a decrease in real estate owned and other repossessed asset expenses of $621,000.

Capital and Book Value

Home Savings’ Tier 1 leverage ratio was 8.27% as of September 30, 2012, as compared to 9.32% at June 30, 2012. Home Savings’ total risk-based capital ratio was 15.85% at September 30, 2012, as compared to 16.43% at June 30, 2012. Tangible book value per share at September 30, 2012 was $5.21, as compared to $5.94 at June 30, 2012.

While Home Savings is still operating under a Consent Order requiring a minimum Tier 1 leverage ratio of 9.0%, the Company worked closely with its regulators to keep them informed of the bulk sale of problem assets that took place in the third quarter, and obtained their concurrence to complete the sale along with the Bank’s commitment to meet the 9.0% requirement by March 31, 2013.

Home Savings is a wholly-owned subsidiary of the Company and operates 34 full-service banking offices and eight 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” 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,
2012 2011
(Dollars in thousands)

Assets:
Cash and deposits with banks $ 20,904 $ 26,573
Federal funds sold and other   36,626     27,563  
Total cash and cash equivalents 57,530 54,136
Securities:
Available for sale, at fair value 551,795 459,598
Loans held for sale 9,076 12,727
Loans, net of allowance for loan losses of $20,048 and $42,271, respectively 1,100,328 1,379,276
Federal Home Loan Bank stock, at cost 26,464 26,464
Premises and equipment, net 21,355 19,175
Accrued interest receivable 5,660 6,741
Real estate owned and other repossessed assets 20,206 33,486
Core deposit intangible 263 346
Cash surrender value of life insurance 28,626 28,354
Other assets   9,641     10,384  
Total assets $ 1,830,944   $ 2,030,687  
 
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Interest bearing $ 1,331,281 $ 1,440,448
Noninterest bearing   159,361     148,049  
Total deposits 1,490,642 1,588,497
Borrowed funds:
Federal Home Loan Bank advances 50,000 128,155
Repurchase agreements and other   90,603     90,618  
Total borrowed funds 140,603 218,773
Advance payments by borrowers for taxes and insurance 14,121 23,282
Accrued interest payable 628 610
Accrued expenses and other liabilities   13,370     10,780  
Total liabilities   1,659,364     1,841,942  
 
Shareholders' Equity:
Preferred stock-no par value; 1,000,000 shares authorized and unissued - -
Common stock-no par value; 499,000,000 shares authorized; 37,804,457
shares issued and 32,891,495 and 32,597,762 shares, respectively, outstanding 128,228 128,031
Retained earnings 84,778 110,681
Accumulated other comprehensive income 10,303 5,032
Treasury stock, at cost, 4,912,962 and 5,206,695 shares, respectively   (51,729 )   (54,999 )
Total shareholders’ equity   171,580     188,745  
Total liabilities and shareholders’ equity $ 1,830,944   $ 2,030,687  
 
           
UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
     
For the Three Months Ended For the Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2012 2012 2011 2012 2011
(Dollars in thousands, except per share data)
Interest income
Loans $ 14,567 $ 16,959 $ 19,558 $ 49,182 $ 63,489
Loans held for sale 101 104 163 305 270
Securities:
Available for sale 3,219 3,540 3,323 10,253 9,264
Federal Home Loan Bank stock dividends 279 280 264 859 858
Other interest earning assets   25     11     13     48     35  
Total interest income 18,191 20,894 23,321 60,647 73,916
Interest expense
Deposits 2,600 2,942 5,972 9,574 18,384
Federal Home Loan Bank advances 535 613 793 1,880 2,414
Repurchase agreements and other   928     919     931     2,766     2,781  
Total interest expense   4,063     4,474     7,696     14,220     23,579  
Net interest income 14,128 16,420 15,625 46,427 50,337
Provision for loan losses   30,279     6,264     11,836     37,223     22,272  
Net interest income after provision for loan losses   (16,151 )   10,156     3,789     9,204     28,065  
Non-interest income
Non-deposit investment income 478 506 389 1,525 1,050
Service fees and other charges 793 901 203 4,011 3,244
Net gains (losses):
Securities available for sale 1,192 3,555 1,958 5,161 3,500
Other -than-temporary loss on equity securities
Total impairment loss - - (35 ) - (73 )
Loss recognized in other comprehensive income   -     -     -     -     -  
Net impairment loss recognized in earnings - - (35 ) - (73 )
Mortgage banking income 2,110 1,727 682 5,308 4,432
Real estate owned and other repossessed assets (1,795 ) (923 ) (2,627 ) (3,447 ) (4,981 )
Other income   974     1,183     1,346     3,234     4,032  
Total non-interest income   3,752     6,949     1,916     15,792     11,204  
Non-interest expense
Salaries and employee benefits 8,634 8,684 7,927 25,651 23,297
Occupancy 845 851 854 2,495 2,615
Equipment and data processing 1,665 1,720 1,592 5,074 4,910
Franchise tax 521 437 370 1,396 1,241
Advertising 134 211 204 486 466
Amortization of core deposit intangible 26 28 33 83 106
Prepayment penalty 65 738 - 803 -
Deposit insurance premiums 1,012 1,055 1,111 3,176 3,573
Professional fees 2,219 1,039 1,290 4,138 2,545
Real estate owned and other repossessed asset expenses 383 419 361 1,504 2,125
Other expenses   1,826     1,861     827     6,061     6,089  
Total non-interest expenses   17,330     17,043     14,569     50,867     46,967  
Income (loss) before income taxes (29,729 ) 62 (8,864 ) (25,871 ) (7,698 )
Income tax expense (benefit)   (2,838 )   -     -     (2,838 )   -  
Net income (loss) $ (26,891 ) $ 62   $ (8,864 ) $ (23,033 ) $ (7,698 )
 
Earnings (loss) per share
Basic $ (0.82 ) $ - $ (0.29 ) $ (0.70 ) $ (0.25 )
Diluted (0.82 ) - (0.29 ) (0.70 ) (0.25 )
 
 
UNITED COMMUNITY FINANCIAL CORP.
SELECTED FINANCIAL HIGHLIGHTS
(Unaudited)
         
At or for the quarters ended

September 30,2012

June 30,2012

March 31,2012

December 31,2011

September 30,2011
(In thousands, except per share data)
Financial Data
Total assets $ 1,830,944 $ 1,906,995 $ 2,041,964 $ 2,030,687 $ 2,071,001
Total loans, net 1,100,328 1,249,595 1,325,101 1,379,276 1,437,575
Total securities 551,795 431,040 530,283 459,598 416,460
Total deposits 1,490,642 1,541,699 1,571,859 1,588,497 1,687,941
Total shareholders' equity 171,580 195,631 190,014 188,745 182,697
Net interest income 14,128 16,420 15,879 14,838 15,625
Provision for loan losses 30,279 6,264 680 2,386 11,836
Noninterest income, excluding other-than-temporary impairment losses 3,752 6,949 5,091 12,037 1,951
Net impairment losses recognized in earnings - - - 16 35
Noninterest expense 17,330 17,043 16,494 16,545 14,569
Income tax expense (benefit) (2,838 ) - - - -
Net income (loss) (26,891 ) 62 3,796 7,928 (8,864 )
 
Share Data
Basic earnings (loss) per share $ (0.82 ) $ - $ 0.12 $ 0.25 $ (0.29 )
Diluted earnings (loss) per share (0.82 ) - 0.12 0.25 (0.29 )
Book value per share 5.22 5.95 5.78 5.79 5.90
Tangible book value per share 5.21 5.94 5.77 5.78 5.88
Market value per share 3.49 2.98 2.44 1.27 1.35
 
Shares outstanding at end of period 32,891 32,885 32,876 32,598 30,984
Weighted average shares outstanding--basic 32,751 32,802 32,693 31,295 30,896
Weighted average shares outstanding--diluted 32,987 32,843 23,697 31,295 30,896
 
Key Ratios
Return on average assets -5.67 % 0.01 % 0.74 % 1.53 % -1.69 %
Return on average equity -53.53 % 0.12 % 7.89 % 16.97 % -18.98 %
Net interest margin 3.17 % 3.55 % 3.30 % 3.04 % 3.18 %
Efficiency ratio 93.62 % 78.50 % 77.35 % 87.96 % 79.67 %
 
Capital Ratios
Tier 1 leverage ratio 8.27 % 9.32 % 8.96 % 8.61 % 8.13 %
Tier 1 risk-based capital ratio 14.59 % 15.16 % 13.94 % 13.30 % 11.98 %
Total risk-based capital ratio 15.85 % 16.43 % 15.21 % 14.57 % 13.25 %
Equity to assets 9.37 % 10.26 % 9.31 % 9.29 % 8.82 %
Tangible common equity to tangible assets 9.36 % 10.24 % 9.29 % 9.28 % 8.80 %
 
         
UNITED COMMUNITY FINANCIAL CORP.
SELECTED FINANCIAL HIGHLIGHTS
(Unaudited)
 
At or for the quarters ended

September 30,2012

June 30,2012

March 31,2012

December 31,2011

September 30,2011
(Dollars in thousands)
Loan Portfolio Composition
Real Estate Loans
One-to four-family residential $ 587,220 $ 635,756 $ 649,000 $ 667,375 $ 677,708
Multi-family residential* 82,518 98,545 114,493 120,991 125,370
Nonresidential* 150,693 229,303 263,891 276,198 303,165
Land* 16,363 19,113 19,735 23,222 22,172
Construction Loans
One-to four-family residential and land development 32,483 42,077 49,311 59,339 66,761
Multi-family and nonresidential*   4,480     4,528     4,527     4,528     4,528  
Total real estate loans 873,757 1,029,322 1,100,957 1,151,653 1,199,704
Consumer Loans 222,995 225,067 231,008 238,397 245,367
Commercial Loans   22,183     24,799     26,434     30,146     35,277  
Total Loans 1,118,935 1,279,188 1,358,399 1,420,196 1,480,348
Less:
Allowance for loan losses 20,048 30,933 34,523 42,271 44,162
Deferred loan costs, net   (1,441 )   (1,340 )   (1,225 )   (1,351 )   (1,389 )
Total   18,607     29,593     33,298     40,920     42,773  
Loans, net $ 1,100,328   $ 1,249,595   $ 1,325,101   $ 1,379,276   $ 1,437,575  
* Categories are considered commercial real estate
 
At or for the quarters ended

September 30,2012

June 30,2012

March 31,2012

December 31,2011

September 30,2011
(Dollars in thousands)
Deposit Portfolio Composition
Checking accounts
Interest bearing checking accounts $ 128,794 $ 126,502 $ 129,795 $ 119,298 $ 120,115
Non-interest bearing checking accounts   159,361     162,152     164,155     148,049     152,577  
Total checking accounts 288,155 288,654 293,950 267,347 272,692
Savings accounts 259,578 259,593 256,628 234,828 249,426
Money market accounts   345,428     344,750     339,824     314,907     327,751  
Total non-time deposits 893,161 892,997 890,402 817,082 849,869
Retail certificates of deposit   597,481     648,632     681,457     771,415     838,073  
Total certificates of deposit   597,481     648,632     681,457     771,415     838,073  
Total deposits $ 1,490,642   $ 1,541,629   $ 1,571,859   $ 1,588,497   $ 1,687,942  
Certificates of deposit as a percent of total deposits 40.08 % 42.07 % 43.35 % 48.56 % 49.65 %
 
         
UNITED COMMUNITY FINANCIAL CORP.
SELECTED FINANCIAL HIGHLIGHTS
(Unaudited)
 
At or for the quarters ended

September 30,2012

June 30,2012

March 31,2012

December 31,2011

September 30,2011
(Dollars in thousands)
 
Allowance For Loan Losses
Beginning balance $ 30,933 $ 34,523 $ 42,271 $ 44,162 $ 46,223
Provision 30,279 6,264 680 2,386 11,836
Net chargeoffs   (41,164 )   (9,854 )   (8,428 )   (4,277 )   (13,897 )
Ending balance $ 20,048   $ 30,933   $ 34,523   $ 42,271   $ 44,162  
 
Net Charge-offs
Real Estate Loans
One-to four-family $ 15,010 $ 962 $ 762 $ 366 $ 1,380
Multi-family 5,632 588 68 203 14
Nonresidential 15,340 7,057 2,579 975 3,693
Land 1,561 44 1,776 217 281
Construction Loans
One-to four-family residential and land development 2,658 516 2,098 1,874 6,737
Multi-family and nonresidential   (120 )   4     -     -     -  
Total real estate loans 40,081 9,171 7,283 3,635 12,105
Consumer Loans 1,536 160 745 493 864
Commercial Loans   (453 )   523     400     149     928  
Total $ 41,164   $ 9,854   $ 8,428   $ 4,277   $ 13,897  
 
 
At or for the quarters ended

September 30,2012

June 30,2012

March 31,2012

December 31,2011

September 30,2011
(Dollars in thousands)
Nonperforming Loans
Real Estate Loans
One-to four family residential $ 5,817 $ 26,705 $ 23,721 $ 26,637 $ 27,250
Multi-family residential 1,512 9,582 5,411 5,860 6,517
Nonresidential 17,484 43,103 41,871 42,902 44,243
Land 6,228 8,316 8,472 11,142 11,655
Construction Loans
One-to four-family residential and land development 9,527 18,335 22,455 27,104 31,166
Multi-family and nonresidential   -     -     -     -     -  
Total real estate loans 40,568 106,041 101,930 113,645 120,831
Consumer Loans 4,921 6,702 6,165 6,620 5,890
Commercial Loans   1,068     1,786     1,813     2,830     7,361  
Total Loans $ 46,557   $ 114,529   $ 109,908   $ 123,095   $ 134,082  
 
Total Nonperforming Loans and Nonperforming Assets
Past due 90 days and on nonaccrual status $ 41,335 $ 97,357 $ 91,153 $ 104,812 $ 102,890
Past due 90 days and still accruing   47     47     303     39     3  
Past due 90 days 41,382 97,404 91,456 104,851 102,893
Past due less than 90 days and on nonaccrual   5,175     17,125     18,452     18,244     31,189  
Total Nonperforming Loans 46,557 114,529 109,908 123,095 134,082
Other Real Estate Owned 19,732 24,325 28,517 32,946 37,697
Repossessed Assets   474     453     540     540     619  
Total Nonperforming Assets $ 66,763   $ 139,307   $ 138,965   $ 156,581   $ 172,398  
 
Total Troubled Debt Restructured Loans
Accruing $ 17,002 $ 18,530 $ 35,657 $ 33,146 $ 30,784
Non-accruing   4,531     14,250     15,161     17,752     16,932  
Total $ 21,533   $ 32,780   $ 50,818   $ 50,898   $ 47,716  
 

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