Q2 2020 Univest Financial Corp Earnings Call
Good day and was come to the Univest financial Corporation's second quarter Twentytwenty earnings Conference call.
These funds will be in listen only mode should the need assistance. Please signals from specialty by pressing the star Keystone advice zero.
After today's presentation will be an opportunity to ask questions.
To ask a question press Star then one on the Touchtone phone to withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to Jeff <unk>. So that's it done and steel off the only but you only best Financial Corporation. Please go ahead.
Thank you Sabrina good morning, Thank you to all of our listeners for joining US joining me on the call. This morning, as Mike <unk> President of Universe Bank and Trust, Brian Richardson, Our Chief Financial Officer.
Before we begin I'd like to start by saying I hope everyone listening to staying safe and you and your families are healthy.
I also need to remind everyone of the forward looking statements disclaimer. Please be advised that during the course of this conference call management May make forward looking statements that express management's intentions beliefs or expectations within the meaning of the federal securities laws.
The best actual results may differ materially from those contemplated by these forward looking statements.
Refer you to the forward looking cautionary statements in our earnings release and in our SEC filings.
Hopefully everyone had a chance to review our earnings release from yesterday, if not it could be found on our website at universe dot that under the Investor Relations tab.
We reported net income of $2.1 million during the second quarter or seven cents per share earnings for the quarter were significantly impacted by 19.9 million or 54 cents per share of expense related to covert 19, which was the result of changes in economic assumptions within our seasonal model.
As the economy continues to reopen combined with spikes in cases in certain parts of the country. There continues to be great uncertainty surrounding the pace of the economic recovery in our markets. This uncertainty isn't reflected in our c. so provisioning during the quarter.
In spite of the current economic environment, we continue to be pleased with the performance of our core business as our pretax pre provision income during the quarter increased $3.3 million or 15.1 per cent compared to the second quarter of the prior year with our pretax pre provision return on average assets for the quarter being 1.71%.
Our diversified business model continues to perform well in spite of the uncertain economic environment.
In accordance with the orders from the Governors of Pennsylvania, New Jersey, we continue to encourage our employees to work from home to the extent that they can.
We reopened all of our branch lobbies on June 29, and our customers have adapted to the safety protocols that are branches and our employees continue to provide the great service universe customers have been accustomed to.
Well loans were relatively flat during the quarter, excluding P.P.P. loans. This isn't out of a decrease of $94.5 million in commercial line utilization during the quarter.
We continue to see lending opportunities as the economy has reopened and customers and prospects have become more open to meetings across all of our lines of business, whether virtually or in person with masks and social just didn't thing in place.
Before I turn 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 continue to handle the current environment. While we continue to focus on the safety of our customers and employees as the economy has reopened our employees continue to figure out ways to serve our customers. It could be entities, ensuring we are part of moving our local ICANN.
These forward I will now turn it over to Brian for further discussion on our results.
Thank you, Jeff I would all I would also like to thank everyone for joining us today.
Each of you your families and your friends or healthy during this challenging time.
As Jeff mentioned, we reported earnings of seven cents per share for the quarter. The total provision for credit losses was $23.7 million. This included expense of 19.9 million were 54 cents per share related to covert 19, which was the result of changes in economic assumptions within our C. So model.
The core business continues to perform well with pretax pre provision return on average assets a 1.71% for the quarter.
I would now like to touch on for specific items related to the earnings release.
First excluding the Kobin 19 impact our provision for the quarter would have been $3.8 million. This includes 1.3 million related to a previously acquired loan which was transferred to Oreo during the second quarter.
Upon transfer or charge off of $2.7 million, which recorded of which 1.4 million. It was previously reserved the.
The property is currently under an agreement to sell and is expected to close during the third quarter.
It is important to note. This charge off was not cobot 19 related and it won't have been placed on nonaccrual in the first quarter of 2018.
Through the adoption of sea salt and our year to date provisioning our allowance for credit losses on loans and leases has increased to $50.9 million were 144% since December 30, Onest 2019.
As of June Thirtyth, our allowance for credit losses is 1.94% of total loans and leases when excluding PPP laws.
Second as expected we experienced net interest margin compression during the second quarter reported NIM of 3.18% decreased 30 basis points when compared to the first quarter.
Reported NIM was negatively impacted by 16 basis points of excess liquidity, which averaged $271 million during the quarter and nine basis points due to carrying low yielding PBP loans on the balance sheet.
Core margin, excluding excess liquidity and they have ppt impact was 3.43% a decrease of 11 basis points when compared to the first quarter.
Third as it relates to noninterest income our mortgage banking business continues to have a great year for the quarter. Our net gain on mortgage banking totaled $3.5 million, which represented a year over year increase of 2.7 million.
For the six months ended June Thirtyth 2020, our net gain on mortgage banking totaled $6.3 million, an increase of 5 million when compared to the same period in 2019.
This was driven by a 185% increase in revenue generating volume and a 48% increase in margins. Additionally, non interest income. It included swap fees of $1.7 million for the second quarter, which was an increase of 1.3 million compared to the second quarter of 2019.
This illustrates customers desire for longer term fixed rates, which are achieved the via interest rate swaps.
Fourth included as the last page of the earnings release is a table, which shows our portfolio concentrations and PPP and modification activity as of June Thirtyth.
We originated $510 million of PPP loans as of June Thirtyth, we had $11 million of net deferred fees on our balance sheet related to these loans.
Additionally, as of June Thirtyth, we had modified 1400, 20 loans and leases with a combined principal balance of approximately $720 million.
These modifications included principal and or interest payment deferrals with the majority having initial deferral period of 90 days with a potential extension for an additional 90 days.
These modifications were completed in accordance with the cares Act any inter agency statement on loan modifications and as such our not categorized as troubled debt restructurings.
It is important to note the new modification request have slowed considerably with only $8 million of new deferrals occurring so far in July.
In closing strong performance of the core business and our strong capital liquidity continue to position us well to navigate this uncertain environment.
That is it for my prepared remarks, we will be happy to answer any questions. Operator would you. Please begin the question answer session.
We will now begin the question and answer session.
Good question in mid Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then to.
At this time will pull his mom entirely to us our roster.
The first question from Frank Schiraldi from Piper Sandler. Please go ahead.
Hey, good morning, guys, it's actually Justin Crassly on for a Frank this morning.
Good morning, Justin.
So just starting with and I know, it's really kind of the wildcard for the back half the year and really depends on a number of moving parts, but just wondered if you could maybe provide us with your thinking on provisioning.
For the back half of the year I realize it's kind of tough to get you know to give you know for guide here in a pretty fluid and by environment. So maybe just any color you could give and your thoughts in a in a seasonal world the provisioning.
Third quarter and you know looking ahead here obviously the reserve stands at close to 2% now so just thoughts on that front.
Sure Justin This is Brian Richardson.
As you know, there's varying economic scenarios and assumptions that can be used in the seasonal methodology overall sense, our implementation of Cecil back on January Onest, we have consistently used the baseline economic forecast provided by Moodys arms. So in our policy is to use the last economic forecast as of the balance sheet date.
So for the second quarter that would have been as Jay as of June nine. So we've consistently applied that throughout as though the initial implementation through the first quarter and the second quarter. We've consistently use that all that baseline forecast that said it really depends on where that lands at the end of September of what third quarter provisioning would look like.
As well as the fourth quarter would be dependent on the last forecast.
In December.
I would note that the July seven forecast will not used in our model because again, we use the last one as of the balance sheet date, we did see some signs of stabilization. There. However, it is certainly too early to tell where things will land than a lock in change between now and the end of the third quarter.
Okay. That's helpful.
Then just on deferrals.
So you gave the detail it looks like they were up slightly.
From this time last quarter I was just wondering so you you grant the a 90 day deferral.
Imagine portion of those have come up for you know have expired.
Since I was wondering if you could provide any detail on sort of.
You know customers returning current I don't know if your grant second 90 day deferral period I'm, just any detailed there that you're seeing so far if you could provide that.
Yes, so far approximately 400 million were 57% of the total deferrals have reached the end of their initial 90 day deferral.
Of which approximately 45% or 180 million have been extended of the remaining 220 million. A 118 were approximately 55% have begun making our post deferral payments for that remaining population. The next 30 days or so we'll be very telling to see if those.
Relationships are able to resume payments on a normalized basis, where a further extensions are required.
Okay perfect I appreciate that and then just one last one quick one for me just on capital obviously on a reported basis you know the TC was down just given PPP, but it looks like if I'm doing my math right to Steven controlling for that capital is still down a little bit.
Parent that with two quarters of depressed earnings obviously, just given the reserve builds.
What sort of commentary can you sort of provide on the safety of the dividend here at this level.
Justin This is Jeff right now we feel comfortable about the capital position that we have.
The board obviously, we'll look at that every quarter, we know the dividend is important to our shareholders, especially our retail shareholders.
So they don't take it lightly but it is something that they will review on a quarterly basis, but at this point, we feel comfortable about our capital position.
Okay, great. Thank you for taking my questions guys.
Thank you.
Your next question is from Michael Perito of KBW. Please go ahead.
Hey, good morning to Alan.
One of Mike Mike.
Hi, Thanks for taking the questions I I wanted to piggyback on the provision question a little bit.
I think about kind of where you're at today, obviously, a very healthy preserve yeah. I think at this point most of your peers are using somewhat similar economic data I know, there's probably some variability but.
I don't really you guys is having a risky loan portfolio I I guess I seem to be a little get ahead of the game I was wondering if you could maybe just kind of dissect.
That gap a little bit for us further <unk> I understand you really can't tell us where forward provision is but as you try to understand kind of your methodology more I mean, it seems to be more conservative I was wondering if you could expand on I'll, let some of the drivers of that all that.
Sure Mike on this Brian as as I said I mean, we've used the consistent ALM approach with literally just using the baseline forecast for Moody's with no overlays currently from a positive or negative perspective, So I would like me as I tried to reconcile that to what other folks maybe don't I don't have insight into exactly what.
Overlays, they're doing or not but we are applying of consistent approach like I said of using the baseline forecast from Moody's.
Okay, and so in terms of kind of what.
I mean, I I assume you guys you some type of stress testing or loss rate modeling based on those assumptions that that kind of drive the seasonal model output is that correct.
Correct, we developed historical correlations to.
These various economic forecasts or economic factors and then based on the forecast of those factors is how our provisioning is driven from a discounted cash flow perspective.
And any sense on kind of how those those loss rates or assumptions compare to kind of the banks historic performance during periods of stress.
They were highly correlated in the past when we set it up and to the extent that unemployment was the driver in the past for example, we also utilize on housing price index GDP retail sales for all various loan segments. So those were highly correlated in the past again were an unprecedented times here so that correlation.
We'll see how that plays out as we navigate through the pandemic.
Hello.
That's helpful. Brian Thanks, and I guess, just kind of related but I was wondering if it's Jeff for Mike maybe you guys could provide a little bit more color kind of on the local economic conditions, maybe you know.
Especially kind of out in Lancaster, where I know that was big driver of your growth leading into the pandemic just what's happening how's the reopening trending.
<unk> costs.
Sorry, commercial customer confidence picking up by the insights that would be great.
And Mike So that's my time here.
I would tell you the local economy.
All things being equal was starting to open up.
If you look about our business lines, some customers are doing very well.
No.
Governor shutdown bars.
And put limitations on restaurants again.
But if you go market by market to be more specific to your question. The Lancaster markets doing really well I mean, we havent as you well now we have an agricultural base there that base continues to perform perform well.
And it's early and means in terms of how things are going to be going here. We're in frequent discussions with our customers across our footprint overall knock on wood at this point in time things seem to be going well, but we have to the also be honest with the fact that we have a lot of people that got PPP funds, Brian and Jeff had a pretty.
Extensive discussion on our deferrals so.
We're helping customers along at the same point in time, so as long as the economy doesn't shut down dramatically again.
I think we'll continue to progress and that's the big wildcard, obviously with Covance cases ramping up across the country.
Yeah.
Helpful. Thanks, Mike and then just lastly, kind of quick to Potter for me, but Brian or traffic you just provide some.
A couple.
Up and down pieces within Oxys income a non interest expense you know any kind of quick hit her thoughts you can provide us on the near term outlook for both of those two mortgage pipelines are they still strong you somewhat lower expense items in the quarter sustainable any any thoughts there would be great. Thank you.
Yes. This is Jeff on the noninterest income side, obviously wealth got hit with the downturn in the market in the towards the end of the first quarter with the recovery that happened in the market in the second quarter. We expect that will start will pick up some of that lost revenue.
As we start to bill encore end of quarter balances and in the monthly buildings that we do we do a combination monthly and quarterly.
Billing, so and we're starting to see customers be more willing to have discussions. So April was a low point on new business May was better June was even better and we're off to a good started in July on the well side. So we are starting to see a recovery there and obviously the market to market recovery health insurance, we got impacted by.
I will call customers laying off employees when you look at our employee benefit plan practice.
Look at Workers' comp insurance premiums got hit there as far as things have reopened and businesses are starting to bring back their employees were getting those premiums back. So we took a little hit in the second quarter on the revenue side, but we're starting to see that that's starting to recover a little bit so.
Mortgage continues to do extremely well.
The housing market is booming the refi market is booming so locally our mortgage operation, we don't see that slowing down right now is still continuing to do real well and we continue to add really high performing home loan consultants to our sales staff, which are proving.
Providing results real quickly so we're excited about that.
The expense idle showed over to Brian Yeah, and also on on the income side was there are certain activity based service charges and the like we did wave.
Overdraft fees and the like through the pandemic those turned back on at the beginning of the third quarter. So that's activity based and put some pressure on a non interest income with regards to those on the expense side.
Again, there's a fair bit of activity based thumb savings that occurred there with folks being on that home not conducting business meetings and the like with the stay at home orders.
We are self insured on medical insurance, so thats inherently activity based as well so we'll see some of those things start to tick up was.
Partially offset by that activity based income that was depressed as well for the second quarter. So I think as we start to return to a state a normal which will clearly we are not exactly sure when that will be those we wouldn't start to normalize as well, but you havent on both sides of the CNL. So there should be almond offsetting occurring there.
Great. Thank you guys appreciate stay well.
Thank you to Mike taking away.
<unk>.
Hi, Dan if you have a question. Please press Star then one.
This concludes our question answer session I would love to turn the conference back over to Jeff Hi, Sir for any closing remarks.
Thank you Sabrina and thank you to everyone for listening today.
While theres, obviously, a ton of uncertainty in the economy and with the Cobot 19 virus. We continue our core business does continue to perform very well, especially through the current environment. Our employees are continuing to great job, serving our customers and we're excited about the while our core business.
Has been able to throw off from an earnings standpoint during this environment.
Certainty will will continue for for some time Unfortunately.
But we have the strong business to continue to manage through this and the team to manage through this so we look forward to talking to everybody next quarter.
And all I would ask is that you where your masks and you stay safe have a good day.
The conference has now concluded. Thank you for attending todays presentation. You may now disconnect. Thank you.
[music].