United Community Financial Corp. Announces Third Quarter Performance

Highlights for the third quarter of 2009:

• Net interest margin increased to 3.32% for the quarter
• Capital ratios increased to 8.68% (Tier 1 Leverage) and 13.02% (Total Risk-Based Capital)
• Tangible book value increased to $7.61 per share, up from $7.57 per share as of June 30, 2009

• Press Release
• Source: United Community Financial Corp.
• On 6:11 pm EDT, Wednesday October 21, 2009

YOUNGSTOWN, Ohio--(BUSINESS WIRE)--United Community Financial Corp. (Company) (NASDAQ: UCFC - News), holding company of The Home Savings and Loan Company (Home Savings), today reported a consolidated net loss of $867,000, or $(0.03) per diluted share, for the three months ended September 30, 2009. This compares to a net loss of $2.9 million, or $(0.10) per diluted share, for the three months ended June 30, 2009, and a net loss of $38.6 million, or $(1.31) per diluted share, for the three months ended September 30, 2008.

Related Quotes

Symbol	Price	Change
UCFC	1.56	+0.06

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The Company also reported a net loss for the nine months ended September 30, 2009, of $511,000, or $(0.02) per diluted share, compared to a net loss of $31.8 million, or $(1.07) per diluted share, for the nine months ended September 30, 2008.

The loss incurred for the third quarter of 2009 was primarily due to the provision for loan losses as well as write-downs of real estate owned by the Company. The provision for loan losses was $5.6 million and was driven largely by the economic climate in the markets in which the Company does business. The write-downs of real estate owned aggregated $3.9 million during the third quarter of 2009 and were attributable primarily to the decline in market value of certain commercial real estate properties owned by the Company. These costs were offset partially by an increase in net interest income and lower noninterest expenses.

Chairman, President and Chief Executive Officer Douglas M. McKay commented, “Asset quality improvement is and, for the past eighteen months, has been the Home Savings’ most important strategic objective. While deterioration continues, the pace of that deterioration has slowed significantly. Since August of last year we have taken many steps to bring these issues under control and we expect to see the results of our credit function reorganization, and some level of economic stabilization, within the next several quarters.”

Net Interest Income and Margin

Net interest income was $19.4 million in the third quarter of 2009, an increase from $18.7 million for the second quarter of 2009 and an increase from $18.8 million for the third quarter of 2008. Net interest income continued to improve during the third quarter due to an increase in the net interest margin, which increased from 3.12% in the second quarter of 2009 to 3.32% in the third quarter of 2009. The increase in the net interest margin was primarily due to the repricing of certificates of deposit and the replacement of maturing brokered certificates of deposit with lower cost funding.

On a year-to-year basis, the net interest margin for the nine months ended September 30, 2009, increased 33 basis points to 3.16% compared to 2.83% for the nine months ended September 30, 2008. Similar to that of the quarter-to-quarter comparison, the net interest margin increase was due primarily to decreases in the cost of funds exceeding declines in yields earned on loans and securities.

Asset Quality

The provision for loan losses decreased to $5.6 million in the third quarter of 2009, compared to $12.3 million in the second quarter of 2009 and $9.0 million in the third quarter of 2008. The provision for loan losses was $26.3 million for the nine months ended September 30, 2009, compared to $14.7 million for the nine months ended September 30, 2008. Net loan charge-offs were $6.6 million in the third quarter of 2009, compared to $10.3 million in the preceding quarter and $4.7 million in the third quarter a year ago. Net charge-offs in the third quarter of 2009 occurred primarily as a result of the performance and declining real estate values of the non-residential real estate and construction loan portfolios, although the net charge-offs also included partial charge-offs of select one-to four-family mortgage loans, multifamily loans and non-residential real estate loans, as Home Savings recognized losses on these loans to appropriately reflect the current value of the collateral.

The allowance for loan losses increased to $38.8 million, or 1.91% of the loan portfolio as of September 30, 2009, compared to $36.0 million or 1.61% of the loan portfolio as of December 31, 2008. Nonperforming assets, which consists of nonperforming loans, real estate owned and other repossessed assets, increased $5.4 million to $141.3 million at September 30, 2009, compared to $135.9 million at September 30, 2008. An increase in nonperforming loans of $7.1 million was offset partially by a decrease in other real estate owned due to increased sales and market valuation adjustments.

Noninterest Income

In the third quarter of 2009, the Company recognized noninterest income of $119,000, compared to $6.2 million in the preceding quarter and a loss of $2.4 million in the third quarter of 2008. The change in noninterest income recognized in the third quarter of 2009 as compared to the second quarter was primarily the result of a $2.8 million increase in losses recognized on the valuation and disposal of real estate owned, higher other-than-temporary-impairment charges on available for sale securities, fewer gains recognized on the sale of available for sale securities, and fewer gains recognized on the sale of loans. The Company recognized $3.9 million in losses in the third quarter of 2009 on real estate owned to reflect declining property values compared to $621,000 in the previous quarter. The change in noninterest income recognized in the third quarter of 2009 as compared to the same quarter last year was the result of a $4.6 million decrease in other-than-temporary-impairment charges on available for sale securities, offset primarily by an increase in losses of $2.8 million recognized on the valuation and disposal of real estate owned.

Noninterest income for the nine months ended September 30, 2009, was $9.1 million, compared to $6.8 million for the similar period in 2008. The increase in noninterest income recognized in the first nine months of 2009 compared to the first nine months of 2008 is due primarily to lower other-than-temporary-impairment charges recognized on available for sale securities, higher gains recognized on the sale of available for sale securities and higher gains on the sale of loans. These increases more than offset increases in losses recognized on the valuation and disposition of other real estate owned.

Noninterest Expense

Noninterest expense was $15.4 million in the third quarter of 2009, compared to $17.2 million in the second quarter of 2009 and $49.5 million for the third quarter of 2008. The decreased expense in the third quarter of 2009 as compared to the second quarter is a result of lower federal deposit insurance premiums, fewer expenses related to maintenance and real estate taxes on real estate owned and lower salary and employee benefit expenses. The change in deposit insurance was caused primarily by special assessments on all insured financial institutions levied during the second quarter of 2009. The decreased expense in the third quarter of 2009 as compared to the same quarter last year is a result of the recognition of a goodwill impairment charge of $33.6 million in the third quarter of 2008.

Noninterest expense was $49.0 million through the first nine months of 2009, compared to $79.6 million for the first nine months of 2008. The change is primarily a result of the goodwill impairment charge recognized in the third quarter of 2008, and decreased salary and employee benefit expenses in the third quarter of 2009. These positive changes were offset partially by increased federal deposit insurance premiums and higher expenses related to maintenance and real estate taxes on real estate owned.

Financial Condition

Total assets were $2.5 billion at September 30, 2009, a decrease of $155.9 million compared to December 31, 2008. The change is attributable to declines in all major segments of Home Savings’ loan portfolio. Home Savings’ construction and commercial loan portfolios declined due to the strategic objective of reducing concentrations in these portfolios. Furthermore, due to a much lower interest rate environment, refinance activity has accelerated in 2009. The result of this acceleration was a decline in the portfolio of one-to four-family loans as existing loans in the portfolio were refinanced and a majority of the newly originated loans were sold into the secondary market. The decrease in loans was partially offset by an increase in securities available for sale.

Total liabilities decreased by $156.9 million during the first nine months of 2009. Total deposits at September 30, 2009, were $1.8 billion, a decrease of $130.4 million from December 31, 2008 largely as a result of maturities of brokered deposits of $130.0 million during the first nine months of 2009 and a decrease of $39.0 million in retail certificates of deposit, which were partially offset by an increase of $42.3 million in savings and checking deposits.

Shareholders’ equity increased $1.0 million at September 30, 2009, compared to December 31, 2008. The change was primarily attributable to an increase in other comprehensive income, due to an increase in unrealized gains on available for sale securities offset by the net loss incurred during the first nine months of 2009. Tangible book value per share as of September 30, 2009, was $7.61, an increase from $7.57 as of December 31, 2008.

Home Savings is a wholly-owned subsidiary of the Company and operates 39 full-service banking offices and six 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” 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.

Home Savings
Media Contact:
Susan E. Stricklin, Vice President, Marketing, 330-742-0638
sstricklin@homesavings.com
OR
United Community Financial Corp.
Investor Contact:
James R. Reske, Chief Financial Officer, 330-742-0592
jreske@ucfconline.com