CEO of UCFC seeks answers for stock lag

The company's focus is improving collections on its commercial loans.
By DON SHILLING
VINDICATOR BUSINESS EDITOR
BOARDMAN -- The leader of United Community Financial Corp. is out to find out why the company's stock price has been lagging.
"I believe the market has been extremely hard on us," said Doug McKay, UCFC chairman and chief executive.
McKay said he plans to meet with industry analysts to try to change opinions of the Youngstown-based holding company for Home Savings and Loan Co. and Butler Wick Corp.
UCFC stock is trading at less than 11 a share after pushing over 13 last November.
The price decline can't be because of the company's earnings, McKay said at an annual meeting Thursday at Mr. Anthony's on South Avenue.
UCFC posted record earnings of 24.1 million in 2006, although its first-quarter earnings for this year were down. Its return on equity, a measure of profitability, was 8.7 percent last year, compared with a national average of 5.9 percent for other thrifts.
Return to shareholders shouldn't be a problem, McKay said. UCFC's dividend yield last year was 3.4 percent, compared with a national average among thrifts of 2.2 percent.
And UCFC's expenses shouldn't be an issue, McKay said. Its efficiency ratio -- the amount of money it spends to produce 1 in revenue -- was 65 cents, compared with a national average of 72 cents.
Despite the positive numbers, UCFC stock is trading at 14.5 times earnings, compared with a national average of 21.7.
"We're trying to get a handle on exactly why this would be," McKay said.
Possible reasons
He said there are three likely possibilities for why large investors are shying away from UCFC.
First, the quality of Home Savings' loan portfolio is a concern, he said. Loans that haven't been paid on for at least 90 days made up 2.4 percent of its portfolio last year, double the rate of 2005.
The problem is with loans to large commercial developments and loans to contractors building housing developments, McKay said. While the contractors have been hurt by a slowing economy, about 80 percent of the problem commercial loans have been affected by an unusual circumstance, such as a death or divorce in the owner's family, he said.
Returning these loans to active-payment status is the chief concern of management, he said.
Second, UCFC is struggling with a decline in net interest margin, as are other financial institutions, he said. This is the difference between the interest it pays for deposits and the interest it charges for loans.
The third factor that may be hurting UCFC is its location, McKay said. Investors may be reluctant to put their money into a company that operates in this region, particularly with the cutbacks being made by auto-related companies, he said.
"We are paying the price for the bad things that happened to Delphi, local hospitals and General Motors," he said.
Other actions
In addition to improving loan collections, McKay said UCFC also will continue to watch its expenses and improve its product offerings.
As for growth, McKay said UCFC officials will continue to study acquisitions but are being careful about not paying too much. Any acquisition would have to add to earnings immediately, he said.
Instead of an acquisition, the company also may open offices in other parts of the country that have stronger economies, he added.
Home Savings has 35 branches and five loan production offices in 18 counties in Ohio and Pennsylvania. Butler Wick, a stock brokerage, has 21 offices in 14 counties.
shilling@vindy.com