Q2 2021 Univest Financial Corp Earnings Call
[music].
Good morning, and welcome to the Universe Financial Corporation second quarter of 2021 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Jeff's Schweitzer, President and C. E O of Universal Financial Corporation. Please go ahead.
Thank you Debbie and good morning, and thank you to all of our listeners for joining US joining me on the call. This morning, as my time President of the Universe Bank and Trust and Brian Richardson R Chief Financial Officer.
Where do we begin I would like to start by saying I hope everyone listening of staying safe and you and your families are healthy.
Also need to remind everyone of the forward looking statements disclaimer. Please be advised that during the course of this conference call mandated management may make forward looking statements that express management's intentions beliefs or expectations within the meaning of the federal securities laws.
You can invest actual results may differ materially from those contemplated by these forward looking statements I will refer you to the forward looking cautionary statements and our earnings release and in our SEC filings.
Hopefully everyone had a chance to review on earnings released from yesterday, if not it can be found on our website at universe Dot net under the Investor Relations tab.
We reported net income of $20.9 million during the second quarter or 71 cents per share. We were very pleased with our results for the quarter as we experienced strong loan growth of of $187.9 million or 15.4% annualized during the quarter, resulting in total of growth over the past 12 months of 621.6.
Dollars or 14 per cent, excluding pvp loans.
Generating this level of growth during a pandemic demonstrates the strength of our team and the commitment we have made to our customers and communities.
We also continue to see strong results in mortgage banking is due to the investments we have made of production talent and process enhancements over the past 2 years. Additionally, we had strong investment advisory income, which has increased 18.7 per cent in the first 6 months of the year compared to the same period in the prior year due to favourable market conditions and new relation.
Ships in spite of concerns over the adult of area activity on our markets continues to be solid and improving as our local economies have opened up.
Before I throw it over to Brian I, just want to thank the members of the universe family. They continue to do a wonderful job serving our customers our communities and each other as we continue to work through the current environment and move universe forward on now turn it over to Brian for further discussion on our results.
Thank you, Jeff and I would also like to thank everyone for joining us today.
In addition to demonstrating our continued ability to grow loans. We continue to have strong performance in our core business. During the first 6 months of the year, we produced of pretax Preprovision R. O a a of 1.72 per cent.
I would like to touch on 4 items from the earnings release.
First reported margin of 3.15 per cent was up 3 basis points compared to the first quarter.
[noise] reported him was negatively impacted by 10 basis points of excess liquidity, which averaged $175 million for the quarter.
P. P P loans, increasing them by 11 basis points and contributed $4.8 million to net interest income.
[noise] core margin, excluding excess liquidity and the P. P. P impact was 3.14% a decrease of 5 basis points when compared to the first quarter.
Core margin, excluding excess liquidity in the P. P. P impact is expected to expand slightly in the third quarter.
This reflects quarterly savings of approximately 850000 from the $75 million subordinated debt redemption at the end of the second quarter.
As it relates to P. P. P. As of June 30th 6.4 million of net differed fees remained on the balance sheet, which represents approximately 35% of the initial deferred fee amount.
Second during the second quarter, we recorded of reversal of provision for credit losses of.
59000, which was driven by a $2.8 million benefit due to favourable changes in economic related assumptions within our Seeiso model, primarily offset by reserves attributable 2 hour of 15.4% annualized loan growth during the quarter.
The allowance for credit loss coverage ratio, excluding PPP loans was 1.41% of June 30th compared to 1.46 per cent at March 31st and 1.94 per cent at June 30th 2020.
During the quarter are COVID-19 related to furrow activity reduced of 54.2 million or 1.1 per cent of the portfolio.
Net charge offs for the quarter and the first half of the year, where 2 basis points on an annualized basis.
Third noninterest income was up $2.2 million or 12.4% when compared to the second quarter of 2020.
As Jeff mentioned this growth was primarily fueled by our investment advisory line of business. Additionally, the second quarter included an 893000 bully death benefit claim.
Fourth noninterest expense increased 5.3 million or 14.8 per cent for the quarter and $6.1 million or $8, 1% for the first half of the year when compared to 2020.
These variances were partially driven by relatively low expenses and the comparable periods in 2020 due to COVID-19, and the related impacts.
Specifically capitalized compensation related to our PPP loans was $1.2 million lower in the second quarter of 2021.
And 664000 lower for the first half of 2021.
Additionally, variable compensation costs increased $1 million for the quarter and $1.7 million for the 6 months ended June 30th 2021, due to an overall increase in profitability and more specifically in our mortgage banking and wealth management lines of business.
Professional fees increased 751000 for the quarter and $1.2 million for the 6 months ended June 30th 2021.
Primarily attributable to increase consulting fees in support of R D and I and training initiatives as well as our Treasury management product enhancements.
During the first 6 months of 2021, we spent 781000 on these initiatives and we expect to incur approximately 650000 of additional expenses in the second half of the year related to these initiatives. These.
These expenses are not expected to reoccur in subsequent periods.
I believe the remainder of the earnings release with straightforward and I would now like to provide a few updates to a full year 2021 guidance.
First we had previously guided too on growth of 7% to 8% excluding PPP based on our strong year to day growth. We are increasing this guidance to 10%, which we expect to result in net interest income growth of 2% to 4% again, excluding PPP.
Second we had previously guided noninterest income contraction of 5% to 7% for the year based on the strong performance of our mortgage banking and investment advisory lines of business as well as our recently hired SBA team. We are now expecting noninterest income growth of 1% to 2% for the year.
Third we had previously guided noninterest expense growth of 2% to 4%.
Based on our continued investment in people and of previously discussed consulting initiatives and variable compensation costs, we are increasing our expense growth guidance to 4% to 6% for the year.
It is important to note the net impact of these guidance updates is accretive to pretax preprovision income.
That concludes my prepared remarks, we will be happy to answer any questions. Operator would you. Please begin the question and answer session.
We will now begin the question and answer session.
To ask a question you May price Star then 1 on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Frank.
Surreal knee with micro sampler. Please go ahead.
Well, there's enough hey, guys.
Or any of our angry.
Wondering about you know the the strong Lone Grove, obviously increased guide here.
What would.
What would you say the primary driver there is it is it you know some of the teams you guys of added sort of ramping up asking than you expected. It is it better demand your market or you know maybe that some of the M&A deal of that that was just from.
Riding uhm of greater amount of opportunity.
Yes, good morning, Frank It's Mike the first and foremost would be just the quality of our teams and the fact that we never stop lending.
During the pandemic.
We kept momentum again I think we've talked about this last call as well, we did get more conservative than on our underwriting guidance, but we kept of lending momentum going so customers and prospects knew that we were going to continue to lend and have done that so that's helped us the quality of our team has been outstanding and yes, we have seen pick up from some of the folks that we've how.
<unk>.
So it's all of the book all of the above but the real secret sauce continues to be just the strength and quality of the overall team.
Okay, and then just trying to drill down into some of the the fee income drivers of of.
Of the guide Brian you know.
Just wondering if you could give your thoughts on on a fair growth rate.
For the investment advisory business.
Over the next 12 months or so, especially given some of the potential opportunity and the market again related to to deals.
Yeah on the investment adviser side of course, there's the the market considerations, there, but assuming that things were to state to state flat, we'd expect kind of double digit of mid double digit growth is what we're expecting from a full year perspective year over year from 20 to 21.
Okay, Great and then driving that is just expanding the business.
Yes improvement of 1 from evaluation perspective, as well as new business and continuing to expand customer relationships yeah.
We've been added to the Schwab referral network as 1 of the Riaa's on that network and have a fully 50 branches that been assigned to us in the mid Atlantic area, and we haven't even started that yet we're getting all of the documents in order. So that'll help also on top of of what we're just doing normal organic growth.
Okay and then the other piece of it on fee income for me is.
A bit more volatile and more difficult to model is the mortgage.
Banking.
Business I know last what are you talking about the pipeline remaining strong they're moving more to.
Purchase activity as opposed to refi does that way of sort of Wayne's any expectation you can share on that side in terms of thoughts on given where margins are now given where volumes are you know what we can see in the back half of the year in terms of revenues and Mark.
Business.
Yeah. So overall pipelines are still strong Frank.
What you just said.
What has happened.
Simply that margins, which were on of gross basis nearing 4% last year.
Have kind of pulled down to the 275, 3% range. We expect that that will continue and absent anything else I would tell you that the third quarter will be fairly strong and unless and I hope this doesn't happen rates.
Drop dramatically again and Refis resurface.
The fourth quarter cyclicality should come into play our pipeline on right now is more of a slightly more than 50 per cent purchase which reflects the new hires and the strength of their relationships with realtors on the lake as we move forward.
Okay. So can we see that maybe I think it's usually stronger on the third quarter would that be the expectation vs on the <unk> resolved.
I don't necessarily say I would say it was stronger than 2.2 just because to accuse elevated because margins at the beginning of the <unk>, we're closer to that 3 and a half of the 375 range.
So we could see a pull back a little bit in the third quarter from where we were in the second quarter would be a reasonable expectation not gotcha.
Margaret.
If you looked at it on of historical basis. It would be of historic will be strong relative to historical third quarters, if you're looking at it to a refi dominated 4% margin now.
[laughter].
Okay. Thanks, Scott.
Oh.
The next question comes from Kim Switzer with K B W. Please go ahead.
Good morning. This is 10 switzer on from Mike Corita.
Good morning.
Good morning, see you guys had several expense items that you touched on.
They look like they're pretty temporary such as the Pvp origination kind of.
DNI train and you guys had some variable compensation going on as well. So I mean can you help us kind of quantify how many of these expenses this quarter kind of transitory and I was just trying to help us figure out what's going to exit the expense run rate going into 2022.
From an expense run right perspective, again, I think if we look at the full year that updated guidance that I have provided of 4% to 6% is reflective of the onetimers in the quarter any additional kind of onetimers that we expect related to those initiatives in the back half of the year.
Certainly not in a position at this point of view guidance for a full year of 2022 expense growth, but will be going through that budget process. Later this year will be a cubic communicating accordingly thereafter, but I do expect things to certainly be be normalizing overall at from an expense growth perspective, as we get these handful of items behind us.
Okay and as these.
2 more temporary cost come out when you baby replace those with other growth investments or something else like that already allow that to photo of the bottom line.
It was a case by case decisions, depending on the environment, obviously on certain things on digital into like everything continues to evolve in some incremental investments are required from time to time. However, we do understand the importance of operating leverage and will be focusing on maximizing that to the extent possible.
Okay, great and if I can move on to capital really quick you guys are really strong capital levels generating good returns, but also growth you are a little book pretty quickly here. So what are your capital of capital of priorities and do you have any plans on excess capital deployment and how you'd like to deal with that.
Yeah. This is Jeff.
On the capital front as we.
Said in the past kind of everything's on the table right now we want to make sure we have strong capital support the loan growth that we're continuing to see which is really exciting and very positive for us for the long term. Additionally, as we've talked in the past were actively trying to look for opportunities and wealth management of insurance from a nap.
[noise] mayonnaise standpoint.
And then once you peel that back even further than.
We would look at if depending on how things go on those fronts. We would always look at dividend buybacks et cetera. That's all on the table, but right now I would say it's of focus of organic growth, making sure. We were supporting that and then also looking for any opportunities keeping from dry powder in case of opportunities arrives on on the M&A from.
Okay, great. Thank you that's all from me.
Thank you.
The next question is from Matthew free, but again, if you have any questions. Please press side on 1.
Ask you Breeze on your on the podium now thank you.
Thank you.
Good morning.
I was hoping to me on a little bit more about the loan pipeline, maybe give us a sense for size on how to change your last 6 months and then perhaps.
Just some insight as to what geographies of showing strength of what product sets.
Good morning, Madam Mike.
Work in terms of the pipeline.
The second quarter, and and what projects to be the third quarter of the pipelines continue to look strong.
The biggest issue with regard to loan growth going forward here is going to be whether we get payoff activity that was on anticipated and the unanticipated payoff activity is largely of come because.
The market's pretty hot on our customers are have an opportunity to either sell their business and or if it's of CRE deal to sell.
Perhaps perhaps in this area of warehouse facility, which is very hot very strong at this point in time, it and they'd sell out of the size of again.
In terms of whether there are.
We continue to perform across all of our markets is the truth the.
The Lancaster market central market continues to be strong.
We continue to perform well there we continue to look for people to add to the team and as we look at your work and as we look at Cumberland of Dolphin counties.
And then what we call these kind of New Jersey area again same issue.
Very diversified loan book very strong across the board, we're not doing office in the traditional sense.
But whether it's C&I, whether it's CRE, it's been very strong our markets of performed well the economy of strong.
I think everybody knows of this area is more vaccinated in other parts of the country. So hopefully we continue to move forward without having any interruption as a result of of Delta variant.
But things look good and like I said, I, just want to repeat making sure because everybody will look at our loan growth and say can you do more of the reality is that we have to be looking out for what is the payoff activity that could net against that low growth as we move forward.
Understood. Okay, and then you mentioned competitive conditions, just maybe give us give us a sense for what incremental blended new loans are and and maybe where the competition is.
Hi, Matt this of Brian from a production for the quarter hour of traditional kind of C&I on CRE loans averaged around 3.21% on.
From a new production standpoint, that's out from around 3% in the first quarter. So of course, he got various on loan types like S blocks and some other things like that that have unique characteristics that can lower those of yields or have lower yields from ton of time, but if you'll get our traditional CNI and CRE production for the quarter were around of 320.
Okay.
And from a competitive perspective man I'll tell you that you still have people do on some things that we just won't match.
And don't want to go there.
So there is still some craziness out there.
I wish everybody of the best of luck, but there's levels on a fixed rate side, whether it's 5.7 or 10 years that we've just will not go to.
Got it okay.
Could you provide me with.
The percentage of of your loan portfolio, that's floating rate and.
Unencumbered by floors at this point I, just want to get a sense for if we do when an F C of fed hike.
How responsive O'neill to be on your end.
Yeah. So overall are again this is Brian our loan book is 43 per cent fixed 20% adjustable and the remainder on being.
37% is variable.
From a loan for perspective as of the end of the second quarter, we had $346 million of loans that were at their floors and in the money on.
They are about in the morning by about 70 basis point. So 2 to 3 moves there would be what it would take to get lift on knows the rest of the book on them.
What would happen is variable are adjustable depending on a reset dates would have more of an immediate impact in a rate increase environment.
Okay.
Just on the.
Just a couple of others on my end so just to clarify on expenses you mentioned.
You expect an additional I think 680000 of training fees in the back half of the year.
I mean of professional fees.
Are a bit higher already should we expect this level of to kind of continue or or ramp up higher for that 680, just wanted some clarification there.
Yeah, and just to clarify 650 in the back half of the year and that's related to DNI, our treasury on management product enhancements and training. So it wasn't simply just just training.
But I would not I would not expect there to be an incremental lift of solely related that at 650 from the second quarter to the third quarter in all honesty. You. If you. If you look at the kind of all and guidance of 46% economists expect expenses to be pretty level on a quarterly basis here on out.
Okay.
Thank you.
Last 1 from me the last couple of quarters. The tax rate has just been of touch higher than my projections.
Curious, if 19 percentage to kind of new normal or should we expect our version back to kind of 18, 18 and a half level.
And as we continue to have on income coming from PPP forgiveness into like that is providing upside in taxable income, which translates increase the effective tax rate. So in the near term I would think that current effective rate is a good.
A good indicator to the extent of Pvp income starts to kind of wind down then you would expect a reversion back to historical norms perfect. Okay. That's all I had thanks.
Thank you Matt.
At this time there are no further questions.
This concludes our question and answer session I would like to turn the conference back over to Jeff Schweitzer for any closing remarks.
Thank you Debbie and thank you to everybody for participating today. We appreciate your participation in your good questions and we look forward to talking to you again at the end of the third quarter have a great day and stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.