United Community Financial : UCFC Announces Record Earnings for the Third Quarter and Declares a Dividend

United Community Financial Corp. (Company) (NASDAQ: UCFC), parent company of Home Savings Bank (Home Savings), announced today third quarter net income of $10.5 million, an increase of 10.2% compared to the same quarter in 2018. Diluted earnings per share (“EPS”) totaled $0.218, a 14.7% improvement over the $0.190 per share reported for the quarter ended September 30, 2018.

Third quarter 2019 highlights:

• ROA of 1.46%, ROE of 13.1%, ROTE of 14.2% for the quarter
• Total loan growth of 6.1% annualized for the quarter
• Average customer deposit growth of 7.2% compared to third quarter 2018
• Fee income (noninterest income) increase of 14.1% compared to third quarter 2018
• Noninterest expense decrease of 4.8% compared to third quarter of 2018
• Pretax preprovision income of $13.6 million, a 13.3% increase compared to third quarter 2018
• Efficiency ratio of 52.2%
• Declared a dividend of $0.08 per common share

Gary M. Small, President and Chief Executive Officer of the Company commented, “We are very pleased to report a 10.2% earnings increase for the quarter in light of the very challenging rate environment the industry is experiencing.”

Small continued, “Strong loan growth, excellent residential mortgage origination efforts, and diligent expense management were the keys to success. Expect a continuation of this theme over the remainder of the year. We are very well positioned to deliver a strong financial contribution to the Home Savings/First Defiance combination slated for the first quarter of 2020.”

Strong Loan and Deposit Growth

Total loans grew $117.9 million (including loans held for sale), or 5.3%, during the last twelve months and $35.3 million, or 6.1% annualized, compared to the previous quarter. At September 30, 2019, total net loans (including loans held for sale) aggregated $2.4 billion.

The increase in total loans for the period was driven by an increase in commercial loans, which grew $62.3 million, or 6.7%, over the last twelve months. The growth in commercial loans in comparison to the prior quarter was $19.7 million, or 8.1% annualized. Mortgage loans (including loans held for sale) increased $52.9 million, or 5.1%, over the previous twelve months and increased $10.8 million, or 4.0% annualized, during the past three months. While consumer loan growth is flat over the last twelve months, the Company realized $4.1 million in growth for the quarter, a 6.0% annualized increase. The Company continues to see increases in its indirect auto business even as conditions remain challenging with regard to home equity balances.

Average quarterly customer deposits (which exclude brokered certificates of deposit) increased $140.4 million, or 7.2%, from September 30, 2018 and is flat compared to June 30, 2019. The growth in average customer deposits over the last twelve months was primarily driven by increases in interest bearing checking and money market accounts of $134.6 million or 21.2% and increases in non-interest bearing accounts of $29.1 million, or 7.6%. This was offset by declines in savings accounts and certificates of deposit. Much of this deposit growth is in business deposits which have increased 27.8% compared to the third quarter of 2018 and 5.0% over the past three months.

Net Interest Income and Margin

Net interest income totaled $21.6 million on a fully taxable equivalent (FTE) basis for the quarter ended September 30, 2019 compared to $21.7 million for the quarter ended September 30, 2018. Average earning assets grew $79.8 million during this time but it was offset by a 12 basis point decline in the net interest margin.

The net interest margin on an FTE basis was 3.21% for the third quarter of 2019 compared to 3.33% in the third quarter of 2018. Excluding the effects of purchase accounting adjustments, the net interest margin was 3.18% in the third quarter of 2019 compared to 3.27% in the third quarter of 2018. The 9 basis point decline in the net interest margin, excluding purchase accounting, was due to declining interest rates and an inverted yield curve.

The net interest margin on a linked quarter basis declined 12 basis points from 3.33% in the second quarter of 2019 to 3.21% in the third quarter of 2019. Excluding the effects of purchase accounting adjustments, the net interest margin was 3.18% in the third quarter of 2019 compared to 3.29% in the second quarter of 2019. The dramatic fall in interest rates in the third quarter along with continued treasury curve inversion continues to place pressure on margins. In addition, the funding pressures in the repo market in September increased funding costs associated with short term FHLB advance and short term brokered CDs decreasing margin by one basis point. The Company expects stabilization in its net interest margin at these levels in the fourth quarter as higher rate money market specials and CDs begin to reprice which should help to offset the continued decline in asset yields.

Asset Quality Remains Strong

Asset quality remained strong during the third quarter. At September 30, 2019, nonperforming loans aggregated $10.3 million compared to $12.9 million at the end of the previous quarter. The Company’s level of nonperforming loans did move up at the end of the previous quarter, primarily as a result of a single credit. A substantial portion of this credit was paid off in the current quarter, which reduced nonperforming loans. The allowance for loan losses at the end of the period, as a percent of nonperforming loans was 193.7%. The allowance for loan losses as a percent of loans totaled 0.88% at September 30, 2019 compared to .91% the previous quarter.

The Company recognized a provision for loan losses of $701,000 for the third quarter of 2019, compared to a negative provision of $51,000 in the third quarter of 2018. For nine months of the year the provision totaled $712,000 compared to $520,000 the previous year. Net charge offs to average loans were seven basis points for the nine months ended September 30, 2019 and delinquencies continue to trend downward.

Non-Interest Income

Non-interest income increased 14.1%, or $869,000, to $7.0 million for the third quarter of 2019 compared to $6.1 million for the same quarter last year. The primary reason for this is an increase in mortgage banking income (gain on sale) of $1.1 million along with solid increases in brokerage income, mortgage servicing fees and trading and security gains. This was offset by a decrease in the value of mortgage servicing rights of $330,000. The decrease in the mortgage servicing rights valuation was due to the dramatic drop in long term interest rates and the commensurate rise in mortgage prepayment speeds. At the end of the third quarter, the Company had a $1.9 million valuation allowance associated with its mortgage servicing rights. Steady or rising interest rates should allow the Company to recoup most of this allowance over the next 18 months.

The increase in mortgage banking income was primarily driven by increased margins when comparing the third quarter of 2019 to the third quarter of 2018. Pricing in the market has been much more disciplined in 2019 compared to 2018 while hedging costs for the construction loans being sold have been much lower in 2019.

Non-Interest Expense

Non-interest expense was $15.0 million for the third quarter of 2019 compared to $15.8 million during the third quarter of 2018, a decrease of $761,000, or 4.8%. This decrease was driven by a decline in salaries and benefits along with a reduction in FDIC expense related to a credit adjustment on premiums. The Company continues to focus on disciplined expense management as an offset to the challenging rate environment that exists today. The Company’s efficiency ratio improved to 52.2% for the current quarter versus 57.3% for the same quarter a year ago.

Dividend

On October 22, 2019, the Board of Directors declared a quarterly cash dividend of $0.08 per common share payable November 8, 2019 to shareholders of record November 1, 2019.

Conference Call

United Community Financial Corp. will host an earnings conference call on Wednesday, October 23, 2019, at 10:00 a.m. ET, to provide an overview of the Company's third quarter 2019 results and highlights. The conference call may be accessed by calling 1-877-272-7661 ten minutes prior to the start time. Please ask to be joined into the United Community Financial Corp. (UCFC) call. Additionally, a live webcast may be accessed from the Company’s website ir.ucfconline.com. Click on 3rd Quarter 2019 Conference Call on our corporate profile page to join the webcast.

Home Savings is a wholly owned subsidiary of the Company, offering a full line of commercial, wealth management and consumer banking products and services with 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. Additional information on the Company, Home Savings and James & Sons Insurance may be found on the Company’s web site: ir.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, competition, and the ability to close the merger of the Company with and into First Defiance Financial Corp. 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.