U.S. Markets closed

Edited Transcript of UCFC earnings conference call or presentation 17-Apr-19 2:00pm GMT

Q1 2019 United Community Financial Corp Earnings Call

Youngstown Apr 20, 2019 (Thomson StreetEvents) -- Edited Transcript of United Community Financial Corp earnings conference call or presentation Wednesday, April 17, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gary M. Small

United Community Financial Corp. - President, CEO & Director

* Matthew T. Garrity

United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank

* Timothy W. Esson

United Community Financial Corp. - CFO

================================================================================

Conference Call Participants

================================================================================

* Daniel Edward Cardenas

Raymond James & Associates, Inc., Research Division - Research Analyst

* James Prescott Beury

Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Robert Scott Siefers

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

================================================================================

Presentation

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

Operator [1]

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

Hello and welcome to the United Community First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to your host today Tim Esson. Please go ahead, sir.

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

Timothy W. Esson, United Community Financial Corp. - CFO [2]

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

Good morning, and thank you for participating in today's conference call. As always, before we begin, I would like to refer you to the company's forward-looking statements and risk factors that appear on the screen in front of you.

Additionally, the risk factors can be found at our Investor Relations website, ir.ucfconline.com.

This statement provides the standard cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in today's call.

In addition, a copy of the first quarter earnings release can be obtained at the same website.

With that said, I would now like to introduce Gary Small, President and CEO of both UCFC and Home Savings.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [3]

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

Thanks, Tim, and good morning to all. Thank you for joining us. We are pleased to report first quarter earnings of $8.7 million or $0.176 per share. From a distance, the results may appear relatively flat versus the prior year's first quarter results, however, as we peel back the figures you'll see why we are enthusiastic about the outcome.

We delivered solid loan growth on a linked quarter basis over 7% annualized, and first quarter always includes a share of pay downs, particularly around the CRE book and this year is no exception.

New business generation gathered momentum over the course of the quarter and we feel we're well positioned as we head into Q2. The positive growth for the quarter versus prior year first quarter was up over 6%, our seasonal municipal deposits make the year-over-year comparison a little bit more appropriate than linked quarter.

We continue to experience excellent growth in our business, non-interest-bearing and municipal deposit base. Business came in at -- up 24%, non-interest-bearing up over 8% and our public funds up over 27% over the same period last year.

Margin for the quarter fell right in line with expectations at 338 basis points and our deposit betas are holding steady.

While Wall Street may look a little confused from time to time, Main Street's looking really good. We closed the quarter with the lowest percentage of loans delinquency in our history across each of our major lending portfolios; that would be commercial, consumer and our residential mortgage portfolio, which is large for an organization our size. For the quarter, we experienced a single basis point of net charge-offs.

Falling interest rates created a bit of noise in the noninterest income category for the quarter. We adjusted our mortgage servicing rights asset downward by about $500,000 for the quarter, however, we did take advantage of the rate environment and exceeded our residential loan gain on sale expectations.

The additional gain on sale income combined with strong year-over-year improvement in our insurance agency revenue, brokerage fees and other trust fees helped offset the unfavorable MSR hit.

Noninterest income was up approximately 13% when you exclude the MSR valuation write-down versus same period last year.

We anticipate a continuous strong performance in our residential mortgage origination but less in the way of unfavorable MSR adjustments going forward.

Expenses ran a bit higher than normal as we incurred a onetime expense related -- of about $650,000 related to the realignment of our retail and wealth business units.

We expect to recoup these expenses over the remainder of the year with no change in our full year expense guidance provided in January.

Our sustainable growth figures are right on pace with credit and expense management well in hand. All in all, again, we're pleased with the quarter.

Now I'll ask Matt Garrity to cover our commercial and residential mortgage business units.

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [4]

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

Thanks, Gary.

As Gary mentioned, we delivered better-than-expected balance growth this quarter in our commercial business.

In addition, our mortgage business had a very solid start to 2019. Asset quality indicators remained excellent. Overall, we remain on target to achieve our 2019 expectations.

Our commercial business generated portfolio growth of close to 3.4% when comparing 12/31/18 balances to 3/31/19 balances.

On a trailing 12-month basis, commercial portfolio growth is in excess of 11.6%. We had expected growth to be relatively modest in the first quarter as a result of planned payoff activities and while some payoffs did run through the portfolio, it was not at the levels expected.

With that said, we expect second quarter payoffs to be significant and as a result, expect commercial balances to be flat or up slightly in the second quarter.

While activity levels in the first quarter were somewhat lower when compared to activity seen in recent quarters, we remain on track overall to achieve 10% to 12% balance growth for the full year.

The market remains very competitive both in terms of rate and structure and we remain committed to maintaining our credit discipline even if it comes at the expense of loan growth.

In our mortgage business, we had a very strong first quarter in terms of originations, saleable origination mix and gain on sale.

Margins stabilized somewhat in the first quarter and when combined with improved levels of saleable originations, gain on sale income improved by approximately 50% in the first quarter when compared to the prior quarter, and by over 23% when compared to the first quarter of 2018.

While we are pleased with the performance of the first quarter and our momentum kicking off the second quarter, the industry remains highly competitive, which has driven margin pressure.

Basically, we're very pleased overall with the first quarter but are not ready to say the tightest turn with respect to margin.

That being said, we're off to a very good start and on pace with respect to meeting our full year expectations.

Asset quality remained strong during the first quarter and while we remain vigilant for signs of weakness at this late stage in the economic cycle, our outlook remains positive.

Nonperforming loans as a percentage of net loans remained relatively flat when comparing the first quarter of 2019 to the prior quarter and down by over 45% when comparing the first quarter of 2019 to the first quarter of 2018.

Delinquency continues to improve and now stands at 0.41%.

Net charge-offs during the quarter were $58,000 or 1 basis point.

I would now like to turn the call over to Tim Esson, who will discuss our financial performance in greater detail.

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

Timothy W. Esson, United Community Financial Corp. - CFO [5]

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

Thank you, Matt.

Let me begin by reiterating Garrity's opening comment that Q1, again, demonstrated good, solid performance numbers along with positive growth in both loans and deposits in addition to the continuation of outstanding credit performance.

Our quarterly results at $0.176 per share on a fully diluted basis are consistent with our expectations for Q1.

Matt provided commentary regarding the 2 major sectors of the loan portfolio, however, let's touch briefly on the total portfolio.

Year-over-year, we saw the total gross loan portfolio increase $152.9 million or 7.3%.

On a linked quarter basis, total gross loans increased $38.7 million or approximately 7% annualized. Again, to reiterate, asset quality has remained very strong.

Looking further at the balance sheet. Average customer deposit growth, which excludes broker deposits, grew $29 million during the quarter and increased 6.1% year-over-year. Positively contributing to this increase was a 24% increase in business deposits paired with an 8.4% increase in noninterest bearing accounts.

Noninterest income when comparing Q1 of '19 with the same quarter last year increased 3%. 2 items have impacted that comparison. When these items are considered, net interest income for Q1 of '19 compared to last year would have increased 7%. These 2 items were: one, the payoff of one loan in Q1 of '18 that drove 18's margin up 8 basis points or approximately $0.5 million; and, two, the level of purchase accounting yield adjustments were higher in '18 than in the current period.

Again, absent of both the early payoff and the purchase accounting adjustments, the net interest margin for Q1 would be 332 compared to 330 for the same time last year.

As we discussed earlier, asset quality remains strong. We did recognize a provision for loan losses of $61,000 in the quarter, essentially to cover net charge-offs. Net charge-offs for the quarter were a minimal -- were minimal at 1 basis point. The allowance for our loan losses as compared to total loans was 0.91%. This percentage increases to 0.99% when combining the remaining fair value adjustments for loans acquired through acquisition in 2017.

Given our favorable asset quality, we would anticipate the provision in Q2 to be minimal.

Continuing on, noninterest income was $6.1 million in Q1, this level of performance is approximately 4.4% greater than Q1 of '18.

We did experience a fairly significant unfavorable mortgage servicing rights valuation adjustment of approximately $0.5 million in Q1 '19. Excluding this, the increase in noninterest income is 13.1%.

Also having an impact on current noninterest income was a very favorable increase in gain on sale of mortgage loans of 23.4% or $318,000 in comparison to the prior period. This favorable change along with increased mortgage service fees, greater insurance agency income and brokerage and trust fees help offset the charge for the mortgage servicing rights valuation in the quarter.

Noninterest expense was $17.7 million, an increase of 6.5% over the same period last year.

While higher than planned, it is anticipated these expenses will realign with plan in the remaining quarters. The current quarter is reflective of a onetime charge of $650,000 for organizational restructuring of the retail and wealth business.

Excluding this onetime event, noninterest expense would have increased 2.6% in comparison to the same time last year.

Expenses will balance out with plan as the year progresses. Consistent with guidance offered in January of this year, we anticipate there will be an approximately 1% to 2% increase in noninterest expense over the last year -- over last year's level.

The efficiency ratio is at 62.3% quarter to date, this number will decrease to the level of the mid-50s as expenses continue to align with the plan.

One final comment regarding our effective tax rate. On an FTE basis for the quarter, the rate is 18.4%.

With that said, I would now like to turn the call back to Gary Small.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [6]

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

Thanks, again, Tim.

For 2019 planning purposes, we had assumed a single Fed turn, mid-year in our budgeting process.

The absence of that turn or a 25 bp reduction from the Fed during the course of the year is not expected to have a meaningful impact on our margin expectations as a whole for the year.

We continue to expect earning asset growth of 6% to 7% for the year, loan growth coming in at 8% to 10% for the year.

Revenue growth is anticipated also at 6% to 7% with our expenses being in the up 1% to 2% category, pretty much as we had outlined in January.

Tim mentioned credit performance is likely to exceed our expectations. We'll wait until the end of Q2 to revise our guidance but certainly, Q1 results and the leading credit indicators are favorable at this point.

As the market stands today, I would expect that we'll have additional share repurchase activity at a pace pretty similar to what we saw in Q1. And if we continue on pace from an earnings perspective, you would expect a normal movement in our dividend which we usually defer until July, no change this year.

From a margin standpoint, 337, 338 was our January guidance, again, we were happy to hit the 338 we came in on and no change there. And we are encouraged by our residual real estate gain on sale margin, certainly, Q1 was better than what we had experienced last year. But as Matt mentioned, we'll wait to see that for a couple of quarters before we say we've got a trend going.

With that, operator, let's turn it over for questions.

================================================================================

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And your first question comes from Scott Siefers with Sandler O'Neill Partners.

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

Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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

Let's see, maybe Gary, just some thoughts on the full year margin guide still looking for 337 and 338. I think when you guys gave the guidance back in January, at that time it included -- I think, you were saying 3 to 4 basis points of favorable impact from purchase accounting benefits. I think that was a little higher in the first quarter so presumably, that wanes a bit. Does that mean the core margin could actually expand a bit from the, roughly, 332 or so that we had in the first quarter if I'm doing my math correctly?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [3]

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

I think your notes are correct. When you go to the purchase accounting, we've got 6 bps in there for the first quarter and I think, Tim, we're down to 3 to 4 bps by the fourth. So just the averaging of that would say, to stand still, we've got to pick up a couple of bps in margin. And we're still of that mind.

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

Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [4]

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

Okay. Perfect. And then, another lot of -- kind of some moving parts in the expense number but it sounds like we'll basically have a lower absolute level from here. Maybe just so that I'm sure we're all on the same page, is the appropriate expense base from which to model for this year just over $64 million or so for 2018, is that the core level that you guys are, kind of, basing off of when you say up 1% to 2% for the full year?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [5]

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

Off of our January guidance, if you took the posted results for last year, we were going to be up 1%. If you adjusted for one of our onetime expenses in the fourth quarter, I think, we had a termination expense, we would be up 2%. So I think your math is about right. And as we look at our expense over the course of the year in absolute terms, $65.3 million to $65.5 million has been our number and we still feel good about that.

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

Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [6]

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

Okay. And then, sorry to harp on this one but the $65.3 million to $65.5 million, that includes the unusual expense in the first quarter?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [7]

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

Yes, it does. It's just lump -- we look at it Scott, as we had 2 things in the first quarter that made it lumpy. That charge kind of comes in all when it comes in and then we had the MSR and we overcame that with great mortgage revenues, some additional margin income and -- versus our expectation, and another good credit quarter with no net charge-offs to speak of and that kind of covers the lumpiness of the quarter.

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

Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [8]

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

Yes. Okay, and, I guess, the message on expenses is regardless of what happened in the first quarter 2Q, 3Q, 4Q, it's going to be an absolute lower or at lower number on an absolute basis than what we saw in the 1Q?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [9]

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

Yes. Yes.

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

Operator [10]

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

And the next question comes from Michael Perito with KBW.

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

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [11]

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

I had a couple of other things I wanted to touch on. I guess just on the mortgage side, you mentioned that you guys are, kind of, going to stand pat for a little just to see what kind of a continuation here is after the first quarter but, I mean, my understanding is seasonally, obviously the first quarter, typically, due to various things, weather, holidays, whatever, that it's not the strongest mortgage quarter. So, I guess, as we think about the $1.7 million of gain on sale you did in the first quarter, I mean is this -- does that number, I mean, I would imagine seasonally it trends up in the second quarter, but I'm just curious if you have any more expanded thoughts about that trend?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [12]

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

I'll pass that over to Matt, but your assumption is correct. There -- the second and third quarter come in much stronger than the first. It's just we overperformed in such a way in the first. We're shy of saying we're going to over perform our expectations by as much in 2 and 3. But in absolute terms, you're right.

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [13]

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

Yes. Mike, this is Matt. And I think Gary said that well. As we built our budget, as you know the mortgage business is very seasonal with Q2 and Q3 being the stronger quarters. So we outperformed in the first quarter a fair amount better than our own expectations from a budget perspective. And frankly, the margins firmed up well for us. And our mix of sale or production was much better than we had planned for. Both very positive. We've got good momentum kicking off the second quarter. And, yes, on an absolute basis if those trends continue and our margins hold, we'll definitely see some improvement in Q2 and Q3 in absolute dollars compared to Q1. We're just, obviously -- having gone through 2018, which was a very difficult market for the entire mortgage industry or anybody in the business on the mortgage side, we would just like to see a little bit more data before we claim victory on the margin front.

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

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

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

Okay. Helpful. And does that -- if there is a pick -- I mean you mentioned 2018 being challenging. If I look back the last few years before that you guys were doing, call it, $6.5 million of revenue in the mortgage-banking income line and my guess is we're probably trending back towards something similar to that. I mean if that does occur, I know you're not ready to quite go there yet but if that does occur, does that have any type of material impact on the expense outlook, due to variable comp or anything of that nature?

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [15]

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

Not so much on the variable comp side because the margin is the margin and in terms of how we pay our people, they're not overly compensated if we do better on our margin. With that said, they're not penalized if margins are weaker, it's just not the way the mortgage business is set out. So that gain is if we can outperform that, that doesn't necessarily flow through to the sales force.

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

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [16]

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

Okay. A few other things I just want to hit really quickly, just on the loan growth, so it sounds like you guys are expecting, maybe, like low-single digit overall growth in the second quarter but then a stronger back half for the year. Is that fair?

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [17]

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

Mike, are you speaking to the commercial business now or overall?

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

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [18]

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

Just overall, given your comments about the slower commercial activity in the second quarter?

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [19]

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

Yes. I think that's a fair way to look at it. We think that -- we -- a lot of it is, it's hard to predict the timing in the commercial business of the payoffs. And you guys have heard us on the calls the last couple of years talk about that. And first quarter was no exception to that but we've got a lot of payoffs ready to land in the second quarter, which should make that business more flat, that line of our business. But our mortgage business continues to do well and we expect -- we'll expect to continue to have some growth. And, again, a little bit more growth in all of our business lines as the second half goes on.

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

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [20]

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

Okay. Switching to the other -- different part of the balance sheet, Gary, can you give us just some updated thoughts on the liquidity position of the bank and more specifically, the investment portfolio and cash position and how any -- near-term expectations about where those could trend? I mean I know you guys are targeting the 6% to 7% earning asset growth, which would suggest maybe some modest compression, I just wanted to confirm that that's how you were thinking about it?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [21]

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

Yes. We're running out of reduction, if you will, on the security side but we saw that we would be -- peeling down a few more -- exiting some taxes in positions that with the tax change has become less advantageous here but the -- in the individual market, there -- you're still getting price so that we can we reinvest in some higher earning assets of similar duration. So some will get reinvested, some we'll just use to fund loans and that's the drop. That's probably the last year that you'll really see much of a difference between earning asset growth, that 2% drop versus normal loan growth. We've got -- and I'll let Tim speak to this, from a true liquidity standpoint, when you carry a $1 billion of mortgages, we've got liquidity coming out of our ears, relative to our ability to fund the balance sheet but, again, just on the asset side, we took, and then we mentioned this, I think, in January, we took a more cautious view on our loan growth for this year coming through our planning process than we had in prior years. We would normally be telegraphing 12%-plus kind of loan growth, and this year we said 8% to 10% probably looks about right. And then, that just helps us that much more from a liquidity standpoint.

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

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [22]

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

Okay. And then, just lastly on the capital front, can you let us know what the average share price was on the 320,000 shares repurchased in the quarter? And as we think about the overall positioning here, Gary, I mean, obviously the TCE ratio bumped up again modestly this quarter but assuming you, kind of, move with the plan, which would probably be another penny dividend increase in July, 8% to 10% loan growth, is there room for continued share repurchase activity at the current levels? Are you comfortable with that, given the share prices? And just the overall positioning of the bank?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [23]

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

Yes. The average price of the shares brought in was at 9.42% I believe for the quarter, which as of today feels a little rich but we're okay from an overall standpoint. And at these prices we'll continue to buy at sort of the same pace that we have been buying, no big chunks, if you will. We'll just keep taking our slivers.

The capital plan is not a lot different than what we've expressed in the past, it's a nice problem to have, where our earnings are outpacing are uses for the equity. Keep some for M&A, keep some for the growth and give the rest back to the shareholders via dividend and repurchase. And keep a balanced approach, don't get overly enthused about any one of those or keep it balanced and that served us well over the last couple of years.

One more comment on the gain on sale, on the residential mortgage. When we think of our seasonality on that business, you expressed it correctly, obviously with the first quarter being down, but just for order of magnitude, our expectation on gain on sale from a budgeting perspective and so forth is 40% higher in Q2 than it is in Q1. So that gives you some order of magnitude and what we're not ready to say is, "Oh, we're going exceed that 40% by the same amount we exceeded it in the first quarter." We had a blowout in first quarter. We'd be happy to hit our number on Q2 but there is -- it is a big difference in the percentage between the 2 quarters.

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

Operator [24]

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

And the next question comes from Daniel Cardenas with Raymond James.

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

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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

Just a quick follow-up question on the loan side. Maybe a little bit of color on what line utilizations looked like in Q1, say, maybe versus Q4 and the year ago, in the like period?

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [26]

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

Dan, this is Matt. I don't have my line-utilization data with me this morning but we could follow-up with you. I would say, anecdotally, no meaningful increase in lines period-over-period, nothing significant that makes that up. We don't have a significantly size -- in the commercial space, we don't have a significant portfolio of unfunded lines so to speak or working capital facilities.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [27]

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

Have a great idea, when we do our reviews, the C&I lines, it's not as if they're loading up under some stress level or so forth, in fact, it's more the opposite, can we get them to use it. The C&I clients are still sitting on a butt load of cash and using their money sparingly. And then, the lines that we have relative to the CRE business, there is a lot more volatility in those balance movements as projects complete and can ramp-up.

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [28]

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

That's well said, Gary. I think the payoff activity that we'll see, Dan, that impacts our business is the planned payoff activity of CRE projects. They're finished and fully leased up and they're going off to the permanent market versus significant swings in line balances.

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

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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

Got you. Makes sense. All right and then, on the M&A front, I mean, it sounds like it's been fairly quiet here over the last quarter or so. But maybe some color on what you're seeing out there right now, is activity beginning to pick up? Any comments you can give us would be great.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [30]

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

Dan, I think directionally when we were having this discussion in January, it felt like there were more discussions afoot. No more books landing on the desk, if you will, but that the way '19 was queuing up, we were having more discussions and that continued to be the case over the 3 months and there are banks out there that are starting to feel the pinch. They may have skirted the issue of betas from one year but they're not skirting it at the second year, if you will. They may not have much going on on the left side of their balance sheet. They're feeling actual earnings compression and so forth, so. But again, having said that, folks are still making a nice return on assets relative to what they're accustomed to making, but the more forward-thinking folks are recognizing that there is more to be concerned about out there than there has been in the past. And the conversations are a little more productive.

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

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [31]

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

Great. And then, last question for me, maybe if you could give us an update on CECL, how that's coming along for you guys? And when do you think you'll be able to give us a little bit more color as to the potential impact that could have on capital and reserve levels?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [32]

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

I'll turn that one over to Tim.

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

Timothy W. Esson, United Community Financial Corp. - CFO [33]

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

All right. Well, let's just talk a minute or 2 here about CECL. Let me just briefly describe where we are. We've engaged Abrigo, formally known as Sage Works. That said, we are right now in the process of examining the impact of several different model elections in various economic environments and running parallel models but they're continuing -- continually changing as we look at some of the loss factors and what have you. But going forward, we're getting ready to, obviously, firm up some of the models. And that said, if we look at a number, we look at a number approximately -- rough number, maybe, $7 million to $8 million on the loan portfolio at this time. But keep in mind that's an approximation, it's early and that will definitely firm up here in the coming weeks.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [34]

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

And we can't express enough that that's sort of the range starts at about that with all the additional -- we have assets few additional assets, obviously, that we have set aside for. But the last time we really put a pen to pencil -- to paper on it, it was about a year ago and it's just been that much more of an improved credit environment and I think for all of us in the industry we're going to be adopting CECL at a time where the performance of the portfolio over the last few years is going to minimize the capital charge although it may add to the volatility of earnings once we start to return to more normal charge-off levels. So depending on what the rationale was for it, I don't think lack of volatility is going to be an outcome from a provision standpoint in a normal environment.

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

Operator [35]

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

And the next question comes from Scott Beury with Boenning and Scattergood.

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

James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [36]

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

So first question, I know that credit metrics overall have been really strong, obviously 1 basis point of charge-offs and the delinquencies you mentioned are at record lows. But just -- I was looking at -- you had about $1.5 million pop up in other classified assets, I believe? Just curious if you had any color on, kind of, what the nature of that was as well as the uptick in CRE non-accruals?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [37]

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

Well I'll let Matt speak to the CRE piece on the other asset category. We have a receivable out there, it's a court case. We had a receivable on some interests and what kept that from not being on the nonperforming list before was we had sort of a certainty around when the payout date would be. That certainty around the payout date has drifted away and so we popped it back on because without that certainty, we -- without a range of certainty, we should be carrying it as a nonperforming instead of a performing. So just a change in circumstances.

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [38]

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

And, Scott, this is Matt, if you're referring to the increase in the NPL level. We had a loan that is actually still current but has reliance on a third-party payment stream that is not really contractually binding in our mind. So while it is current and we don't have any indication that the third party will not continue to support the cash flow, we just thought it was prudent to make the call now in terms of making it nonperforming so it's a little bit of a conservative play. As I mentioned, the loan still pays and it's still current but we thought nonperforming was right -- was the right call to make now.

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

James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [39]

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

Understood. No, that made sense. I mean was that something that you were unaware of previously? That kind of the nature of that if I'm...

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [40]

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

No, Scott, we keep a pretty close tab on our portfolios, particularly, the ones that begin to show signs of stress. So this wasn't a loan that was a current loan or excuse me a nonclassified loan, a pass-rated loan that suddenly went from that category of NPL. It had been on our radar for a while.

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

James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [41]

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

Okay. Understood. I understand. And then, kind of, switching gears just on the mortgage. You have the breakout of purchase versus refi or the originations in the quarter?

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [42]

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

Sure. The refi percentage in our institution is a little bit lower than what you might see at other banks and part of that is the -- we've got a little bit more of a distributed model from a mortgage perspective, from a geography standpoint. Our -- we reach a little bit further beyond. So we're more of a low teens, low double-digit percentage in terms of refi production. We think if -- if you go back to like the really hot markets when there was big refi booms, that takes us more into the mid-to-high 20s as a percentage of our book. But right now, we're trending in the low teens, low double digits and that's been consistent for a while. We actually saw a nice bump in production of purchase-level activity, which we're really happy to see. That's -- we like that business.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [43]

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

60% of our business is new construction, not to the builder but to the individual, so that skews us low on the repurchase side as well. Oh, I'm sorry, on the refinance side.

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

James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [44]

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

Understood. Okay, that's really helpful. Yes, I'm just trying to get a sense whether, kind of, this rebound that we saw on the mortgage banking side, whether that was driven by a temporary jump in refi activity with the changes to the rate outlook.

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [45]

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

Yes. I think there's lots of conjecture on that. I think part of it was the end of -- the fourth quarter was just so difficult from a consumer's perspective with the market being the way it was and with some rebound in the first quarter I think consumer sentiment just got a little better and activity got better.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [46]

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

Yes. Scott, you're asking the right question because we asked that of ourselves early on and, kind of, as we examined our own book and the rates that are being carried on the book, that was a 40 bps. We feel like the 10 year will have to move before we would really feel an uptick in refi activity on our own book.

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

Matthew T. Garrity, United Community Financial Corp. - Executive VP of Commercial Lending & Credit Administration and Director of Home Savings Bank [47]

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

Yes. Yes, I think if you wanted to get back to -- if you think about the first half of '16, which was just a huge refi year in mortgage, rate -- the rates would need to move another -- in terms of the market, about another 70 basis points to get back to that level.

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

James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [48]

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

Excellent. No, that's great color. And then, lastly, just on the onetime charge, clearly, it's not a really large number or anything. But you made a comment that you expect to recoup that realignment through the expenses in the remainder of the year and I was wondering if you could just -- one for housekeeping, let me know what line item that restructuring charge went in? If it went through compensation, or other?

And then, secondly, just kind of any detail you could give on the dynamics of how you expect to recoup those expenses?

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [49]

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

The majority of the dollar figure went through compensation. We had some changes of -- in -- at the top of the house from a leadership standpoint. So there'd just be some absolute dollar differences there. We've also closed 2 locations in our branch network. Those were consolidations into existing branches. So you have an immediate pick up on people and so forth but you have some costs that go with that consolidation. So those are the 2 primary drivers, and those costs kind of would be smaller and spread all out through the P&L. We probably wouldn't have called it out if it didn't create such a lump in the first quarter. To Scott's earlier question, we wanted to make sure we were clear, not making -- we won't have a problem getting back to that number.

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

Operator [50]

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

And as that was the last question, this does conclude the question-and-answer session. I'd like to return the floor to Gary Small for any closing comments.

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

Gary M. Small, United Community Financial Corp. - President, CEO & Director [51]

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

Well, again, thank you, all, for joining us. I know that particularly this quarter, we're a little earlier than some out of the gate coming out this week. And we view that as a good thing because we get a good audience. But as more releases come out, if you have any follow-up questions or you're trying to do a compare/contrast based on what you're seeing with the other folks, please don't hesitate to give me a call and we'll do our best to get the information to you. Thanks very much.

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

Operator [52]

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

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.