News Column

UNITED COMMUNITY FINANCIAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 8, 2014

UNITED COMMUNITY FINANCIAL CORP.

At or For the Three Months Ended March 31, 2014 2013 Selected financial ratios and other data: (1) Performance ratios: Return on average assets (2) 0.48 % 0.59 % Return on average equity (3) 4.52 % 6.14 % Interest rate spread (4) 2.91 % 2.85 % Net interest margin (5) 3.07 % 3.01 % Noninterest expense to average assets 3.10 % 3.05 % Efficiency ratio (6) 83.45 % 75.55 % Average interest-earning assets to average interest-bearing liabilities 121.07 % 118.44 % Capital ratios: Average equity to average assets 10.63 % 9.60 % Equity to assets, end of period 10.85 % 11.27 % Tier 1 leverage ratio 10.71 % 9.84 % Tier 1 risk-based capital ratio 18.42 % 17.02 % Total risk-based capital ratio 19.68 % 18.28 % Asset quality ratio: Nonperforming loans to total loans at end of period (7) 2.17 % 4.32 % Nonperforming assets to average assets (8) 1.59 % 3.32 % Nonperforming assets to total assets at end of period 1.58 % 3.30 % Allowance for loan losses as a percent of loans 1.90 % 2.07 % Allowance for loan losses as a percent of nonperforming loans (7) 89.43 % 48.81 % Texas ratio (9) 13.17 % 26.52 % Total classified assets as a percent of Tier 1 Capital 30.18 % 40.87 % Total classified loans as a percent of Tier 1 Capital and ALLL 25.01 % 28.60 % Total classified assets as a percent of Tier 1 Capital and ALLL 27.24 % 36.44 % Net chargeoffs as a percent of average loans 0.23 % 0.52 % Delinquent loans to total loans 2.07 % 4.51 % Total 90+ days past due as a percent of total loans 1.76 % 3.88 % Office data: Number of full service banking offices 33 33 Number of loan production offices 10 9 Per share data: Basic earnings (loss) (10) $ 0.04$ 0.06 Diluted earnings (loss) (10) 0.04 0.05 Book value (11) 3.76 4.81 Tangible book value (12) 3.76 4.81 Notes:



1. Ratios for the three month periods are annualized where appropriate

2. Net income divided by average total assets

3. Net income divided by average total equity

4. Difference between weighted average yield on interest-earning assets and

weighted average cost of interest-bearing liabilities

5. Net interest income as a percent of average interest-earning assets

49



--------------------------------------------------------------------------------

Table of Contents 6. Noninterest expense, excluding the amortization of core deposit intangible,

divided by the sum of net interest income and noninterest income, excluding

gains and losses on securities, other than temporary impairment charges,

gains and losses on foreclosed assets

7. Nonperforming loans consist of nonaccrual loans and loans past due ninety

days and still accruing

8. Nonperforming assets consist of nonperforming loans, real estate owned and

other repossessed assets

9. Nonperforming assets divided by the sum of tangible common equity and the

allowance for loan losses

10. Net income divided by the number of basic or diluted shares outstanding

11. Shareholders' equity divided by number of shares outstanding

12. Shareholders' equity minus core deposit intangible divided by number of

shares outstanding

13. United Community uses certain non-GAAP financial measures, such as the

tangible common equity to tangible common assets ratio (TCE), to provide

information for investors to effectively analyze financial trends of ongoing

business activities, and to enhance comparability with peers across the

financial sector. The Company believes TCE is useful because it is a measure

utilized by regulators, market analysts and investors in evaluating a

company's financial condition and capital strength. TCE, as defined by The

Company, represents common equity less core deposit intangible assets. A

reconciliation from our GAAP total equity to total assets ratio to the

non-GAAP tangible common equity to tangible assets ratio is presented below (dollars in thousands): At or For the Three Months Ended March 31, 2014 2013 Total assets $ 1,749,144$ 1,831,776 Less: Core deposit intangible 133 215 Tangible assets (Non-GAAP) $ 1,749,011$ 1,831,561 Total common equity $ 189,829$ 206,511 Less: Core deposit intangible 133



215

Tangible common equity (Non-GAAP) $ 189,696 $



206,296

Total equity/Total assets 10.85 %



11.27 %

Tangible common equity/Tangible assets (non-GAAP) 10.85 %

11.26 % Forward-Looking Statements When used in this Form 10-Q, the words or phrases "will likely result," "are expected to," "plan 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 United Community's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings' market area, and competition that could cause actual results to differ materially from results presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community's financial performance and could cause United Community's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made.



Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Total assets increased $11.3 million to $1.7 billion at March 31, 2014, compared to December 31, 2013. Contributing to the change were increases in available for sale securities of $6.4 million and net loans of $31.7 million, offset by decreases in cash and cash equivalents of $15.1 million, Federal Home Loan Bank stock of $8.4 million and real estate owned and other repossessed assets of $1.6 million. Funds not currently utilized for general corporate purposes are invested in overnight funds and available for sale securities. Cash and cash equivalents decreased during the first three months of 2014 as excess funds held on deposit at the Federal Reserve were used to fund loan growth during the quarter. 50



--------------------------------------------------------------------------------

Table of Contents

The increase in available for sale securities was the result of a positive market value adjustment of $12.6 million during the first quarter of 2014 offset by maturities, paydowns and amortization of securities totaling $6.2 million. Despite the reduction of the unrealized loss position on the available for sale securities portfolio, the balance of the unrealized loss position at March 31, 2014 was $27.8 million. The unrealized loss position is entirely driven by the level of interest rates and The Company expects to recover the loss as it expects to receive all principal and interest payments contractually due and it has the ability and intent to hold the securities until maturity. All of the securities are GSE issued debt or mortgage-backed securities and carry the same rating as the U.S. Government. The duration of the securities portfolio was approximately 6.7 years at March 31, 2014. There is risk that longer term rates could rise further resulting in greater unrealized losses, but it is also possible that longer term rates could fall resulting in the recovery of all of the unrealized losses. Management continues to allow the portfolio to decline as no new investment purchases are being considered at this time. In addition, the Company may look for opportunities to sell securities to reduce the portfolio or change the duration characteristics of the portfolio. Net loans increased $31.7 million during the first three months of 2014. Contributing to the increase was a combination of an increase in permanent construction and secured commercial loan demand during the period. See Note 6 to the consolidated financial statements for additional information regarding the composition of net loans. The following table summarizes the trend in the allowance for loan losses as of March 31, 2014: Allowance For Loan Losses (Dollars in thousands) December 31, March 31, 2013 Provision Recovery Chargeoff 2014 Real Estate Loans Permanent One-to four-family residential $ 8,319$ (64 )$ 152$ (315 )$ 8,092 Multifamily residential 610 198 - (5 ) 803 Nonresidential 4,791 114 40 (292 ) 4,653 Land 74 4 - - 78 Total 13,794 252 192 (612 ) 13,626 Construction Loans One-to four-family residential 2,281 (181 ) 21 (100 ) 2,021 Multifamily and nonresidential - 6 - - 6 Total 2,281 (175 ) 21 (100 ) 2,027 Consumer Loans Home Equity 3,552 (281 ) 44 (171 ) 3,144 Auto 35 (2 ) 3 (6 ) 30 Marine 40 32 12 - 84 Recreational vehicle 661 67 38 (144 ) 622 Other 14 10 77 (86 ) 15 Total 4,302 (174 ) 174 (407 ) 3,895 Commercial Loans Secured 686 283 16 - 985 Unsecured 53 (153 ) 166 (45 ) 21 Total 739 130 182 (45 ) 1,006 Total $ 21,116$ 33$ 569$ (1,164 )$ 20,554 The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for loan losses charged to expense. The allowance for loan losses was $20.6 million at March 31, 2014, down from $21.1 million at December 31, 2013. The allowance for loan losses as a percentage of loans was 1.90% at March 31, 2014, compared to 2.01% at December 31, 2013. The allowance for loan losses as a percentage of nonperforming loans was 89.43% at March 31, 2014, compared to 89.52% at December 31, 2013. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings' allowance for loan loss methodology includes 51



--------------------------------------------------------------------------------

Table of Contents

allowance allocations calculated in accordance with ASC Topic 310, "Receivables," and allowance allocations calculated in accordance with ASC Topic 450, "Contingencies". Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. Home Savings' process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net charge-offs or recoveries, among other factors. Chargeoffs exceeded provision in permanent real estate, construction and consumer loans in 2014. Home Savings individually analyzed a large portion of impaired mortgage and home equity loans in the first quarter of 2014. Many of these loans were deemed to have adequate collateral to cover any potential future losses. This analysis allowed Home Savings to release a portion of the reserves that had been set aside for potential losses on these loans. Loans that did not have adequate collateral were written down to fair value. A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that there is no longer reasonable assurance of the timely collection of the full amount of principal and interest. The total outstanding balance of all impaired loans was $48.1 million at March 31, 2014 as compared to $48.2 million at December 31, 2013. The schedule below summarizes impaired loans for March 31, 2014 and December 31, 2013. Impaired Loans (Dollars in thousands) March 31, December 31, 2014 2013 Change Real Estate Loans Permanent



One-to four-family residential $ 20,662$ 20,206$ 456

Multifamily residential 1,175 652 523 Nonresidential 5,343 5,879 (536 ) Land 487 487 - Total 27,667 27,224 443 Construction Loans One-to four-family residential 2,882 3,092



(210 )

Multifamily and nonresidential - - - Total 2,882 3,092 (210 ) Consumer Loans Home Equity 12,389 12,550 (161 ) Auto 60 66 (6 ) Boat 157 160 (3 ) Recreational vehicle 893 1,043 (150 ) Other 1 2 (1 ) Total 13,500 13,821 (321 ) Commercial Loans Secured 4,035 4,044 (9 ) Unsecured - - - Total 4,035 4,044 (9 ) Total Impaired Loans $ 48,084$ 48,181$ (97 ) Included in impaired loans above are certain loans Home Savings considers to be troubled debt restructurings (TDR). A loan is considered a TDR if Home Savings grants a concession to the debtor that it would otherwise not consider. The concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. If the debtor is not currently experiencing financial difficulties, but would probably be in payment default in the future without the modification, then this type of restructure also could be considered a TDR. 52



--------------------------------------------------------------------------------

Table of Contents

A TDR may include, but is not necessarily limited to, one or a combination of the following:

• Modification of the terms of a debt, such as one or a combination of: • Reduction of the stated interest rate for the remaining original life

of the loan; • Extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk; • Reduction of the face amount or maturity amount of the loan as stated in the instrument or other agreement; or • Reduction of accrued interest. • Transfer from the borrower to Home Savings of receivables from third



parties, real estate, or other assets to fully or partially satisfy a debt

(including a transfer resulting from foreclosure or repossession). • Issuance or other granting of an equity interest to Home Savings by the



borrower to satisfy fully or partially a loan unless the equity interest

is granted pursuant to existing terms for converting the debt into an equity interest. A debt restructuring is not necessarily a TDR for purposes of this definition even if the borrower is experiencing some financial difficulties. A TDR is not involved if:



• the fair value of cash, other assets, or an equity interest accepted by

Home Savings from a borrower in full satisfaction of its loan at least equals the recorded investment in the loan;



• the fair value of cash, other assets, or an equity interest transferred by

a borrower to Home Savings in full settlement of its loan at least equals the carrying amount of the loan;



• Home Savings reduces the effective interest rate on the loan primarily to

reflect a decrease in market interest rates in general or a decrease in

the risk so as to maintain a relationship with a borrower that can readily

obtain funds from other sources at the current market interest rate; or

• Home Savings issues, in exchange for the original loan, a new marketable

loan having an effective interest rate based on its market price that is at or near the current market interest rates of loans with similar maturity dates and stated interest rates issued by other banks. 53



--------------------------------------------------------------------------------

Table of Contents

The change in TDRs for the three months ended March 31, 2014 is as follows:

Troubled Debt Restructurings March 31, December 31, 2014 2013 Change (Dollars in thousands) Real Estate Loans Permanent One-to four-family $ 17,000$ 16,700$ 300 Multifamily residential 460 463 (3 ) Nonresidential 896 858 38 Land 487 487 - Total 18,843 18,508 335 Construction Loans One-to four-family residential 488 698



(210 )

Multifamily and nonresidential - - - Total 488 698 (210 ) Consumer Loans Home Equity 10,846 11,133 (287 ) Auto 9 10 (1 ) Marine - - - Recreational vehicle 827 836 (9 ) Other - - - Total 11,682 11,979 (297 ) Commercial Loans Secured 325 333 (8 ) Unsecured - - - Total 325 333 (8 )



Total Restructured Loans $ 31,338$ 31,518$ (180 )

The decrease in the level of TDR loans during the three months ended March 31, 2014 was attributable primarily to paydowns in accordance with terms of the loans.

Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain on nonaccrual status for a period of at least six months until the borrower has demonstrated a willingness and ability to make the restructured loan payments. TDR loans that were on nonaccrual status aggregated $4.7 million and $4.9 million at March 31, 2014 and December 31, 2013, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $26.6 million at March 31, 2014 and $26.6 million at December 31, 2013. Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $23.0 million, or 2.17% of net loans, at March 31, 2014, compared to $23.6 million, or 2.29% of net loans, at December 31, 2013. 54



--------------------------------------------------------------------------------

Table of Contents

The schedule below summarizes the change in nonperforming loans for the first three months of 2014. Nonperforming Loans (Dollars in thousands) March 31, December 31, 2014 2013 Change Real Estate Loans Permanent



One-to four-family residential $ 6,133$ 6,356$ (223 )

Multifamily residential 1,158 641 517 Nonresidential 5,033 5,560 (527 ) Land 532 496 36 Total 12,856 13,053 (197 ) Construction Loans One-to four-family residential 2,884 3,084



(200 )

Multifamily and nonresidential - - - Total 2,884 3,084 (200 ) Consumer Loans Home Equity 2,724 2,771 (47 ) Auto 80 110 (30 ) Marine 130 136 (6 ) Recreational vehicle 147 263 (116 ) Other 8 13 (5 ) Total 3,089 3,293 (204 ) Commercial Loans Secured 4,026 4,028 (2 ) Unsecured 129 130 (1 ) Total 4,155 4,158 (3 )



Total Nonperforming Loans $ 22,984$ 23,588$ (604 )

Loans held for sale decreased $608,000, or 12.6%, to $4.2 million at March 31, 2014, compared to $4.8 million at December 31, 2013. The change was primarily attributable to the timing of originations and sales during the period. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future. FHLB stock decreased to $18.1 million at March 31, 2014 compared to $26.5 million at December 31, 2013. During the first quarter of 2014, the FHLB redeemed 83,962 shares, having a historical cost of $8.4 million (or $100 per share). Home Savings received cash for the redemption. There was no gain or loss recognized on the redemption. Also during the quarter, the FHLB paid a cash dividend of $267,000 in lieu of a stock dividend to its member banks. 55



--------------------------------------------------------------------------------

Table of Contents

Real estate owned and other repossessed assets decreased $1.6 million, or 25.9%, during the three months ended March 31, 2014. The following table summarizes the activity in real estate owned and other repossessed assets during the period: Real Estate Repossessed Owned Assets Total (Dollars in thousands) Balance at Beginning of period $ 6,318 $ 23 $ 6,341 Acquisitions 233 - 233 Sales, net (1,559 ) (23 ) (1,582 ) Change in valuation allowance (292 ) -



(292 )

Balance at End of period $ 4,700 $ - $ 4,700

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of March 31, 2014: Valuation Net Balance Allowance Balance (Dollars in thousands) Real estate owned One-to four-family $ 2,571$ (431 )$ 2,140 Multifamily residential 113 (18 ) 95 Nonresidential 198 (60 ) 138 One-to four-family residential construction 5,136 (3,000 ) 2,136 Land 270 (79 ) 191 Total real estate owned 8,288 (3,588 ) 4,700 Repossessed assets Auto - - - Marine - - - Recreational vehicle - - - Total repossessed assets - - -



Total real estate owned and other repossessed assets $ 8,288$ (3,588 )$ 4,700

Real estate owned and other repossessed assets are recorded at the lower of (a) the loan's acquisition balance less cost to sell or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on nonresidential real estate properties that exceed $1.0 million in value and residential real estate properties that exceed $250,000 in value. Based on current appraisals, a valuation allowance may be established to properly reflect the asset at fair value. The increase in the valuation allowance on property acquired was due to the decline in market value of those properties. Bank Owned Life Insurance (BOLI) is maintained on select officers and employees of Home Savings whereby Home Savings is the beneficiary. BOLI is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings' policy cash surrender value are tax exempt and death benefit proceeds received by Home Savings are tax-free. Income from these policies and changes in the cash surrender value are recorded in other income. There is no post-termination coverage, split dollar or other encumbrance provided to participants covered by the BOLI. Home Savings recognized $350,000 and $226,000, as other non-interest income based on the change in cash value of the policies in the first quarters of 2014 and 2013, respectively. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, United Community conducts a regular assessment of all available evidence, both positive and negative. This evidence includes, but is not limited to, taxable income in prior periods, projected future income, projected future reversals of deferred tax items and the effects of tax law changes. Based on these criteria, and in particular projected usage of its net operating loss (NOL) carryforward, United Community determined that it was necessary to maintain a full valuation allowance against the deferred tax asset at March 31, 2014 and December 31, 2013. The determination was made in part because the Company remained in a three-year cumulative loss position, creating a rebuttable presumption that the Company cannot rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized. Furthermore, management has evaluated the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income compared to accumulated NOL carryforwards. As of March 31, 2014, the net deferred tax asset was $37.3 million and at December 31, 2013, the net deferred tax asset was $42.8 million, against which a full valuation allowance was maintained. The primary reason for the change in the net deferred tax asset (prior to any valuation allowance) was due to the change in unrealized losses on available for sale securities during the first quarter of 2014. Management will continue to conduct a regular assessment of the need to maintain a full valuation allowance against its deferred tax asset. To that end, management will continue to apply its judgment in weighing both positive and negative evidence in forming its conclusions regarding potential reversal of the net deferred tax asset valuation allowance. 56



--------------------------------------------------------------------------------

Table of Contents

Total deposits increased $6.3 million to $1.4 billion at March 31, 2014, compared to December 31, 2013. Savings and checking deposits both increased and were only partially offset by the decline in certificates of deposit. As of March 31, 2014, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $7.8 million during the first three months of 2014. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $1.8 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $6.0 million. Home Savings receives requests for reimbursements from both Freddie Mac and Fannie Mae to make them whole on loans sold to them in the secondary market. These loans were originated by Home Savings in the normal course, but such loans have certain defined weaknesses such that a settlement to the investor is required. For the three months ended March 31, 2014, Home Savings incurred expenses of $337,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $1.3 million at March 31, 2014. Management believes this reserve is appropriate given the historical losses incurred to date and the probability that future losses will be deemed certain. Other liabilities decreased $2.0 million to $7.8 million at March 31, 2014, from $9.8 million at December 31, 2013. The change was the result of the disbursement of funds associated with severance payments, incentive payments, legal and other consulting services, and the remittance of funds owed to the Small Business Administration after the sale of a collateral secured on a foreclosed loan. Shareholders' equity increased $14.8 million to $189.8 million at March 31, 2014, from $175.1 million at December 31, 2013. The change occurred as a result of net income for the quarter along with positive adjustments to other comprehensive income for the increased value of available for sale securities during the period. Accumulated other comprehensive income improved $12.6 million from December 31, 2013 to March 31, 2014. Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities included in other comprehensive income have not been recognized into income at March 31, 2014 and December 31, 2013 because the issuer's securities are of high credit quality (rated AA or higher), management does not intend to sell (and it is likely that management will not be required to sell) the securities prior to their anticipated recovery, and the decline in fair value is largely due to the rise in longer-term interest rates in 2013 and 2014. The fair value is expected to recover as the investments approach maturity. In July 2013, United Community's primary federal regulator, the FRB, and Home Savings' primary federal regulator, the FDIC, along with other regulatory agencies, published final rules (the Basel III Capital Rules) that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain available-for-sale securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital risk-based weighted assets in addition to the amount necessary to meeting its minimum risk-based capital requirements.



The final rule becomes effective for Home Savings on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements, effective January 1, 2015.

Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which Home Savings' loans and securities are concentrated, could adversely affect future earnings and consequently Home Savings' ability to meet its future capital requirements. Book value per common share as of March 31, 2014 was $3.76 as compared to $3.48 per common share as of December 31, 2013. Book value per share is calculated as total common equity divided by the number of common shares outstanding. Book value was impacted by the overall change in equity as mentioned above. Comparison of Operating Results for the Three Months Ended March 31, 2014 and March 31, 2013 Net Income. United Community recognized net income for the three months ended March 31, 2014, of $2.1 million, or $0.04 per diluted common share compared to net income of $2.7 million, before amortization of the discount on preferred stock for the three months ended March 31, 2013. As part of the capital raise in 2013, United Community issued preferred stock that was later converted to common stock. No dividend was declared or paid on the preferred stock. However, because the preferred stock was issued at a price below the then market price of our common stock, the difference is deemed a non-cash dividend under U.S. Generally Accepted Accounting Principles and is deducted in the calculation of net income available to common shareholders. Therefore, net income available to common shareholders as of March 31, 2013 was $1.9 million, or $0.05 per diluted share. Net interest income for the period decreased $315,000. The provision for loan losses decreased $2.0 million during the same period. Additionally, non-interest income and noninterest expense decreased $2.5 million and $321,000, respectively. United Community's annualized return on average assets and return on average equity were 0.48% and 4.52%, respectively, for the three months ended March 31, 2014. The annualized return on average assets and return on average equity for the comparable period in 2013 were 0.59% and 6.14%, respectively. Net Interest Income. Net interest income for the three months ended March 31, 2014 and 2013 was $12.6 million and $12.9 million, respectively. Net interest margin for the three months ended March 31, 2014 and 2013 was 3.07% and 3.01%, respectively. Total interest income decreased $731,000 in the first quarter of 2014 compared to the first quarter of 2013, primarily as a result of a decrease of $5.4 million in the average balance of outstanding loans as well as a decrease in the yield on net loans of 17 basis points. Further impacting the comparison, the Company also recognized a decrease in the average balance of available for sale securities of $86.2 million in the first quarter of 2014 as compared to the same quarter last year, despite an increase in the yield on those assets of 23 basis points. 57



--------------------------------------------------------------------------------

Table of Contents

Total interest expense decreased $416,000 for the quarter ended March 31, 2014, as compared to the same quarter last year. The change was due primarily to reductions of $410,000 in interest paid on deposits. The overall decrease in interest expense was partially attributable to a 9.3% growth in noninterest bearing deposits. Also contributing to the decrease between the two quarterly periods was a reduction of 8 basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the first quarter of 2014 declined by $69.0 million as compared to the first quarter of 2013. Furthermore, the average balance of non-time deposits decreased $10.6 million and the cost of non-time deposits decreased 5 basis points. The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended March 31, 2014, increased to 2.92% compared to 2.85% for the quarter ended March 31, 2013. The net interest margin increased six basis points to 3.07% for the three months ended March 31, 2014 compared to 3.01% for the same quarter in 2013. For the Three Months Ended March 31, 2014 vs. 2013 Increase Total (decrease) due to increase Rate Volume (decrease) (Dollars in thousands) Interest-earning assets: Loans $ (440 ) $ (65 ) $ (505 ) Loans held for sale 192 (232 ) (40 ) Investment securities: Available for sale 486 (673 ) (187 ) FHLB stock 26 (42 ) (16 ) Other interest-earning assets 6 11



17

Total interest-earning assets $ 270$ (1,001 )

$ (731 )

Interest-bearing liabilities: Savings accounts (43 ) 1 (42 ) NOW and money market accounts (54 ) (8 ) (62 ) Certificates of deposit (99 ) (207 ) (306 ) Federal Home Loan Bank advances (24 ) 19 (5 ) Repurchase agreements and other (1 ) -



(1 )

Total interest-bearing liabilities $ (221 )$ (195 )

(416 ) Change in net interest income $ (315 ) Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased to $33,000 in the first quarter of 2014, compared to $2.1 million in the first quarter of 2013. The decrease in the provision for loan losses is primarily a result of chargeoffs of $560,000 previously reserved associated with one commercial lending relationship that was settled in the first quarter of 2013. In addition, a $382,000 specific reserve was established in 2013 on another commercial relationship to adjust the net book value to an anticipated resolution balance. In 2014, Home Savings individually analyzed a large portion of impaired mortgage and home equity loans. Many of these loans were deemed to have adequate collateral which allowed Home Savings to release reserves that had been set aside for potential future losses on select loans. Noninterest Income. Noninterest income in the first quarter of 2014 was $3.2 million, as compared to noninterest income for the first quarter of 2013 of $5.7 million. The decrease in noninterest income was driven by decreases in investment advisory income, mortgage banking income, gains on the sale of available for sale securities and other income. The decrease in investment advisory income was the result of lower sales volume in the current quarter, as compared to the same quarter last year. A $50.5 million reduction in mortgage originations sold resulted in a $1.0 million decline in mortgage banking income. The change in gains recognized on the sale of available for sale securities was the result of sales made in the first quarter of 2013 that did not reoccur in the first quarter of 2014. The change in other income was the result of lower net rental income received on real estate owned in the current quarter, compared to the same quarter last year. Also, Home Savings recognized a recovery of $138,000 on interest rate caps in the first quarter of 2013. 58



--------------------------------------------------------------------------------

Table of Contents

Noninterest Expense. Noninterest expense was $13.5 million in the first quarter of 2014, compared to $13.9 million in the first quarter of 2013; a difference of $321,000. In the first quarter of 2014, other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. Reduced FDIC premiums of $301,000 and franchise/financial institutions tax expenses of $233,000 also contributed to the change. Reduced FDIC premiums are the result of the termination of all regulatory orders that the Bank had been operating under. The lower franchise/financial institutions tax is the result of a change on Ohio tax law. These reductions were offset by an increase of $707,000 in salaries and employee benefits, due primarily to annual wage and benefit increases, incentive accruals, and lower deferred salary expenses related to loan origination. Income Taxes. A $156,000 income tax expense was recognized for the first quarter of 2014 as a result of incurring a tax liability for alternative minimum tax (AMT) being recognized. Whereas the Company was able to apply regular operating loss carryforwards to its taxable income, the deduction for net operating loss carryforwards for AMT is limited to 90% of AMT income. The remaining AMT tax liability is assessed at a rate of 20%. 59



--------------------------------------------------------------------------------

Table of Contents UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEETS The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three month periods ended March 31, 2014 and 2013. Average balance calculations were based on daily balances. Three Months Ended March 31, 2014 2013 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Cost Balance Paid Cost (Dollars in thousands) Interest-earning assets: Net loans (1) $ 1,042,267$ 12,122 4.65 % $ 1,047,661$ 12,627 4.82 % Net loans held for sale 4,453 49 4.40 % 12,372 89 2.88 % Investment securities: Available for sale 516,023 3,241



2.51 % 602,177 3,428 2.28 % Federal Home Loan Bank stock

23,199 267 4.60 % 26,464 283 4.28 % Other interest-earning assets 53,409 26 0.19 % 27,812 9 0.13 % Total interest-earning assets 1,639,351 15,705 3.83 % 1,716,486 16,436 3.83 % Noninterest-earning assets 105,400 104,256 Total assets $ 1,744,751$ 1,820,742 Interest-bearing liabilities: NOW and money market accounts $ 464,083$ 230 0.20 % $ 477,041$ 292 0.24 % Savings accounts 271,892 45 0.07 % 269,484 87 0.13 % Certificates of deposit 477,523 1,402



1.17 % 546,521 1,708 1.25 % Federal Home Loan Bank advances

50,000 518 4.14 % 65,567 523 3.19 % Repurchase agreements and other 90,575 908 4.01 % 90,596 909 4.01 %



Total interest-bearing liabilities 1,354,073 3,103 0.92 % 1,449,209 3,519 0.97 %

Noninterest-bearing liabilities 205,202 196,760 Total liabilities 1,559,275 1,645,969 Equity 185,476 174,773 Total liabilities and equity $ 1,744,751$ 1,820,742 Net interest income and interest rate spread $ 12,602 2.91 % $ 12,917 2.86 % Net interest margin 3.07 % 3.01 % Average interest-earning assets to average interest-bearing liabilities 121.07 % 118.44 %



(1) Nonaccrual loans are included in the average balance at a yield of 0%.

60



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters