Q1 2020 Earnings Call

Received over 2850 applications for funding through this program before the initial funding was fully utilized. We got 1051 applications approved by the FDA for four hundred fifteen point seven million dollars.

Interestingly we have not seen notable usage of lines of credit as total line usage is consistent with where it was in January and February.

Excluding the provision and expense we recorded in the first quarter related to covid-19. We were pleased with our financial results for the first quarter prior to the stay-at-home orders going into effect in our markets are generated solid loan growth in ended the quarter with $62 of lung growth or 5.7% annualized and deposits to forty seven point two million dollars or 4.3% Annualized wage order another bright spot for the quarter was the growth and Mortgage Banking Revenue, which increased 468.1% or 2.3 million dollars compared to the first quarter in the prior year as a finance has picked up due to the low interest rate environment.

Additionally, we took aggressive action with respect to deposit pricing during the quarter reacting to the federal reserve's interest-rate Cuts. Brian will discuss our margin further in his comments. How else is everyone knows the world changed in March which calls into question many things for the duration of the year. We still do not know when stay-at-home orders will be relaxed in our markets or when businesses will be allowed to reopen as a result. We are we sending our original guidance for 2020 and will not be giving guidance for the remainder of the year at this time as the impact of the pandemic on our local business communities and the timing of the return a more normal operations for local businesses is unknown.

For I throw it over to Brian. I just want to thank the members of the universe family. I could not be more impressed or proud of the way. Our employees have handled the current environment their attitude compassion flexibility and willingness to jump in wherever needed over the past six weeks says a lot about them as individuals and about the culture at Univest. I thank them for all of their amazing efforts and service to our customers communities each other and we'll now turn it over to Brian for some additional discussion on our results.

Thank you, Jeff. And I would also like to thank everyone for joining us today. I hope each of you your families and your friends are safe during this challenging time as Jeff mentioned. We reported earnings of $0.03 per share for the quarter wage, which was impacted by $0.55 of covid-19 related credit costs.

We adopted.

Cecil effective January 1st 2020 in conjunction with this adoption our reserve for loaning lease faucet loans and leases increased by 12.9 million hour reserve for investment wage increased by $300,000 and I'll Reserve unfunded commitments increased by one point 1 million. This was a total increase in reserves of 14.3 million, which resulted in an after-tax wage earnings adjustment of 11.3 million.

Total Cecil related charges for the quarter or 21.8 million this included expense of 20.3 million or 55 cents per share related to covid-19. And the resulting impact on economic forecasts used within our model excluding the covid-19 impact our Cecil credit cost for the quarter would have been one point five million dollars.

Through the adoption of sea salt and the first quarter provisioning our reserves for credit losses and unfunded commitments have increased by 35.7 million or 100% since December 31st, 2019, as of March 31st. Our Lounge for credit losses is 1.53% of total loans and leases.

I would now like to touch on two items related to the earnings release first despite. The Federal reserve's Emergency rate Cuts in early March net interest margin excluding purchase accounting and excess liquidity took one basis point compared to the fourth quarter of 2019. This was the result of certain liabilities repricing faster than a portion of our libor-based variable rate loans. However, this was a short-term benefit and we expect continued pressure on them. And nii as our variable loans continue to reprice in the second quarter.

During the quarter, we opportunistically sold 58 million dollars of lower-yielding Investments at a gain of $652,000 and extinguished a $35 borrowing with a one-time cost of $656,000. Subsequently. We were able to purchase replacement Investments with a slightly higher yield which were partially funded with a 4-year borrowing at a rate approximately 125 basis points less than the extinguished borrowing.

Second mortgage banking business had a very strong quarter net gain on Mortgage Banking activities, total two point seven million dollars which represented an increase of 2.3 million when compared to the first quarter of 2019. This was driven by strong refi activity, which accounted for approximately 60% of the origination volume for the quarter on previous calls. We had expressed Our intention to our proximity fifty million dollars of sub debt on March 30th, 2020 when it hit its five-year anniversary based on the current economic conditions. We elected not to redeem the subject. We now offer the ability to redeem it on a quarterly basis and we'll evaluate those options as economic conditions normalize.

Lastly as Jeff mentioned do to covid-19 uncertainty and the related impact on from stay-at-home orders and social distancing directives could have on our customers and our business is Thursday. We are resending the 2020 guidance that I provided on last quarter's call.

While we are operating in uncertain times our strong capital and liquidity positions us well to navigate this challenging environment that is it for my prepared remarks. We will be happy to answer any questions, operator. Would you please begin the question-and-answer session?

Well, I'll be there in question answer session to ask a question. And we press * then 1 on your touchtone phone for using a speaker phone. Please pick up your handset before pressing the keys withdraw your question, please press * then two is time will pause momentarily to assemble our roster.

First question comes from Michael Pare toh KB W, please. Go ahead.

Hey, good morning. Everyone. Glad to hear everyone's doing you know, reasonably. Well under the circumstances. Good morning Mike morning Mike. Thanks for taking the questions. I wanted to start on the south side of the house. It seems like a lot of your your your local. That are adopted Cecil or using kind of the Baseline Moody's forecast to drive some of your you know, GDP and unemployment assumptions. I guess is that particular to what what you guys utilize and can you maybe lay out in a bit more detail what some of the underlying macros assumptions that you're using to drive kind of the reserve level that you put up in the first quarter.

Sure, Mike this this is Brian. We use various economic factors across our loan segments including unemployment housing price index GDP retail sales Etc. We do use Moody's and for purposes of the March 31st calculation. We use Moody's Baseline forecast from March 27th.

Okay, so I mean it's reasonable, you know, obviously what you guys did in the first quarter. I think you know, it's fair to classify as kind of conservative and proactive but but having said that obviously there's a lot of unknowns out there. Right? So I mean as you see it now for weeks later after that March 27th consensus that you used. I mean there's probably room for a little bit more provision in the second quarter. Um, you know, I know it's nice to see even that far so not going to really ask to go beyond that. But is that a fair kind of sentiment you think at this point given what you know, yeah, I mean our practice is to use the most recent forecast as of the balance sheet that back date that said we don't really focus on forecasts that come out subsequent to the quarter and as it relates to the second quarter what's really going to matter is where the forecast ends at the end of June and it's certainly too early to tell exactly where those will lamp. Okay.

Okay, so all right that that makes sense. But as you guys look at the you know, how do you balance The the Reserve today against kind of stimulus and deferrals and and things of that nature. I mean, it seems like it's a little bit of a a tightrope. I mean you guys have an idea of how many clients are deferring and my guess is those clients could be at risk of you know coming on the other side not quite as strong. But yeah, there is a lot of stimulus going around. How did you guys kind of factor that in in when trying to decide kind of ultimate loss rates and and the reserve level?

Well the early.

From the cycle where we are here. I mean using the Baseline forecast. We we presume includes a little bit of contemplation of that as we didn't go to a more Draconian play forecast that said a 90-day deferral or 180-day type deferral it'll shift cash flows. But under a life of loan loss perspective. There isn't an over whelming Lee large assumption off of what that'll do over the life of the moans baked in currently.

Okay, a couple more things. I want to hit quickly now on the on the margin apologize if I missed it by was listening to your comments. I was just wondering if if you've had an idea of of what the the impact from the debt extinguishment would be on the second quarter name and and do you think it's enough to to kind of hold him, you know down a few basis points or do you think with the with the full quarters impact of all those cuts they'll be a decent amount of pressure on the margin in the second quarter. There's a lot of moving Parts when you look at him and then I I and II and you took the third quarter obviously PPP and the should clarify. Yes. Sorry Brian excluding PPP. I know obviously PPP could end up at the end of going to bring a lot of Mobility the fact, the pricing of wage board loans is also going to bring inherently some volatility. There's a slight benefit that will come from the the extinguishment of debt, but conversely by holding onto the subject Thursday.

Defense that goes along with that so I would think kind of just assuming that there will be downward pressure going forward due to Libor loans resetting just as a reminder during the first quarter of 1-month Libor average of 141 basis points, as of yesterday. It was at 57 basis points that are there will be pressure resulting from that. Yeah. I'm okay and then just lastly for me and I'll step back Jeff just on Capitol. What are you guys thinking at this point? Obviously, the first quarter was a little owners from a Catholic perspective you had Cecil in the area the big provision there and and growth was still pretty robust you I imagine, you know, the the the capital levels will will be a little bit higher going forward when you take some of those one-time items out and and the back probably a bit slower in the second quarter, but you, maybe you just on how you feel Capital levels are today and and and just just general thoughts around the dividend and whether you're comfortable kind of keeping that at this point with the uncertainty job.

Sure, Mike. Yeah, we feel good about where our capital is, you know, we obviously stress our Capital levels and feel good about where we are from a capital and liquidity perspective given the all the uncertainties that everybody's aware of going forward. We're comfortable that we have a good solid Capital position and where we are. We aren't going to be doing any buybacks on a consistent with pretty much everybody else in the industry. And you know at this point the dividend is obviously something the board looks at on a quarterly basis, but given our Capital levels and where we are we feel comfortable with the dividend perspective at least for the you know, the you know, the near-term as we go forward.

Great. Well, thank you guys for for the the added caller and and for taking the question this morning. Hope everyone stays well and talk more soon.

Next question comes from Frank schiraldi of Piper Sandler, please. Go ahead morning guys. I just wondered if Brian maybe you could talk a little bit about your concentrations in some of the more sensitive of areas like in a restaurant hotel as as you know, a percentage of the total loan book and and then the extent you have at the the amount of each set is is in deferral current. I'm sure Frank so from a Hospitality if we look at hotels motels in the lake, we're around a hundred seventy million dollars is our exposure there from an outstanding perspective food service and the like were around sixty million dollars. So that kind of gives you a sense on that side on the cre retail side outstandings are roughly two hundred and fifty million dead.

So that's really the higher quote unquote right now. Everything is is can be the entire risk when we have these stay at home and and shut down orders. But but the ones I know that are commonly talked about kind of them to be in that retail and Hospitality type space and that's the exposures that we have in the current book right now on the energy side. We don't have significant exposures at all.

Okay, and and do all of those areas have elevated deferrals at this point, I would imagine. Yeah, I mean on the hospitality side where around 60% is our default to 60% of our book has has some level of deferrals and then on the the remaining cre retail. We're in that 10 to 15% range.

And did you food service? Did you mention do you have that that the Net 10 to 15? Sorry. No, that's that's included in my 60% for total aggregate Hospitality between lunch and who's got you okay, and and just following up on that another sector just curious how you guys are feeling about the Atkins book took this environment any color you can you can offer their Frank? It's like, you know generally speaking or egg book continues to perform and quite frankly continues to grow because we largely serve those family-type Farms that are well-diversified and there's continues to be a need for their product via deg's Viet milk, et cetera. And even though milk said a declining level because the schools being closed and some other factors. There's the alternative uses for milk that can log

Used such as cheese. I

Et cetera, so we continue to feel good about what we're doing on the outside.

Okay, great. And then just finally just thinking about phase two of PPP sounded like you guys had plenty in the the hopper that off when the government ran out of the 350. So I would imagine do you think there's plenty of good, you know opportunity there how how large do you see that opportunity for a university right now Frank where we continue to get as many loans approved or apps approved at this point?

We believe that will have about 900 ready to go when Congress formally allocates the money when the house acts later today and we have a large team ready to hit go and work through the process so that 900 equates to somewhere in the neighborhood of eighty five million dollars of additional funding which would bring us very close to 5,000 loans and five hundred billion dollars.

Gotcha. Okay, great. Thank you. You're welcome. Thank you.

And if you have a question, please press * then 1.

This concludes our question-and-answer session with the turn the conference over to Mister Jeff Switzer for any closing remarks, please go ahead. Hey. Thank you, Nick, and thank you everyone for joining us today. Obviously very uncertain times and challenging times and most of all, I just hope that everybody listening staying safe social distancing and and taking care of yourself and your family and everybody's healthy. We look forward to talking to everybody again at the end of the second quarter, and hopefully we have a little more clarity on what's going on in the world. But until then as I said a safe and appreciate you participating today. Have a great day.

Conferences in L concluded thank you Tammy in today's presentation. You may now disconnect.