Q3 2021 Univest Financial Corp Earnings Call
Good morning, and welcome to the Universe Financial Corporation third quarter 2021 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please with no conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too please.
Please note. This event is being recorded I would now like to turn the conference over to Jeff Sweitzer Schweitzer President and CEO. Please go ahead.
Thank you Daniel and good morning, and thank you to all of our listeners for joining US joining me on the call. This morning.
President Universe, Great can trust and Brian Richardson R Chief Financial Officer.
Where do we begin I would like to start by saying I hope everyone listening is 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 are expectations within the meaning of the federal securities.
Laws universe actual results may differ materially from those contemplated by these forward looking statements.
Refer you to the forward looking cautionary statements and our earnings release, and then our SEC filings.
Hopefully everyone had a chance to review our earnings release from yesterday, if not it can be found on our website universe dot net under the Investor Relations tab.
We reported net income of $29 million during the third quarter or 71 cents per share. We were very pleased with our results for the quarter as we continue to experience strong loan production.
Even with payoffs due to the success of our customers, we experienced solid net loan growth of $92 million or seven 3% annualized during the quarter, resulting in total growth over the past 12 months, a $456 million or nine 7%, excluding PPP loans.
During the quarter, we recognize gains on the sale of SBA loans of $920000 as the investments we made earlier in the year and our new SBA team have begun paying off the.
Additionally, we continue to have strong investment advisory income, which increased 19.8% during the quarter and 19.1% in the first nine months of the year compared to the same period in the prior year due to favourable market conditions and new relationships.
Before I throw it over to Brian once again 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 adapt and work through the current environment and move universe forward Brian.
Thank you, Jeff and I would also like to thank everyone for joining us today during the first nine months of the year, we produced a pretax preprovision R O a 1.66%.
This is a direct reflection of the strength of our diversified business model and continued ability to grow loans.
I would like to touch on three items from the earnings release first reported margin of 3.11% was down four basis points compared to the second quarter reported NIM was negatively impacted by 27 basis points of excess liquidity, which averaged $490 million for the quarter compared to $175 million in the <unk>.
Quarter the.
The increase in excess liquidity was driven by $490 million seasonal increase in public funds and no forgiveness.
PPP loans totaling $167 million.
During the third quarter PPP loans increased NIM by 20 basis points and contributed $4.2 million to net interest income.
More margin, which excludes the impact of excess liquidity and PPP was 318% an increase of four basis points when compared to the second quarter.
Core margin is expected to be relatively flat in the fourth quarter.
As it relates to PPP as of September 30th $2.4 million of net deferred fees remained on the balance sheet, which represents approximately 13% of the initial differed fee amount.
Second during the third quarter, we recorded or reversal of provision for credit losses of 182000, which was driven by a $2.9 million benefit due to favourable changes in economic related assumptions within our Cecil model offset by reserves on loans securities an unfunded commitments.
The allowance for credit laws coverage ratio, excluding PPP loans was 136% as September 30th compared to 1.41% at June 30th and 1.95% at September 30th 2020.
During the quarter are COVID-19 related to federal activity declined to $18 1 million or 3% of the portfolio. We experienced net recoveries during the quarter of 75000 and net charge offs for the first nine months of the year totalled 456000, or one basis point on an annualized basis.
Third noninterest expense increased $4.7 million or $12, 3% for the quarter and $10.8 million or 9.5% for the first nine months of the year when compared to 2020.
In general these variances were partially driven by a relatively low expenses in the comparable periods in 2020 due to COVID-19, and the related impacts.
More specifically salaries benefits and commissions increased $2.6 million or $10, 7% for the quarter and $7.2 million or 10, 4% for the nine months ended September 30th 2021.
We continue to be aggressive in hiring talented revenue producers when presented with the opportunity. We have also experienced cost increases due to merit increases the impact of wage inflation and certain other variable costs very.
Burial incentive compensation costs increased 829000 for the quarter and $2.6 million for the nine months ended September 30th 2021, due to an overall increase in consolidated profitability and increased performance in certain lines of business like wealth management and.
Another example is medical costs, which increased 489000 for the quarter and 629000 for the nine months ended September 30th 2021, as elective and preventative claims returned to prepay endemic levels.
Professional fees increased 853000 for the quarter and $2 million for the nine months ended September 30th 2021, primarily attributable to increase consulting fees and support of our DNI in training initiatives as well as our Treasury management product and process enhancements during the first nine.
Months of 2021, we have spent $1.4 million on these initiatives and we expect to incur approximately 70000, a additional expense related to these in the fourth quarter of 2021, but are not anticipating these costs to continue in 2022.
I believe the remaining remainder of the earnings release with straightforward and I would now like to provide a few updates to a full year of 2021 guidance first I had previously guided to net interest income growth of 2% to 4%. Excluding PPP, we expect to finish the year on the higher end of that range.
Second last quarter I had for guided noninterest income growth of 1% to 2% for the year based on the strong performance of our mortgage banking and wealth management lines of business as well as the contributions from a recently hired SBA team. We are now expecting noninterest income growth of 4% to 5% for the year.
Third last quarter, I had guided noninterest expense growth of 4% to 6%.
Used on the continued investment in people and their previously discussed increase in variable cost and wage inflation, we are increasing our expense growth guidance to 6% to 8% for the year.
It is important to note the net impact of these guidance updates is accretive to pre tax free provision income.
That concludes my prepared remarks, we will be happy to answer any questions. Operator will you. Please begin the question and answer session.
Moving now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad using a speaker phone please pick up your handset.
Pressing the keys to enjoy your question. Please press Star then tail.
The first question comes from 10 have.
<unk> W. Please go ahead.
Hey, good morning, I'm on my period, Thanks for taking my question.
Good morning, good morning.
You you guys had a pretty big surge in deposits this quarter, what the public funds, which I know is pretty seasonal but it seems like was this may be a little bit stronger than normal seasonality and then would you expect any kind of reverse solar outflow over the next few quarters and just trying to judge you gave the guidance recording them I wasn't sure if that was it.
Including the cash impacted mob just trying to judge whether cash levels go from here and if you have any opportunity to deploy that ended the securities portfolio on the loans at that cast is sticking around.
And this is this is Brian as it relates to public funds growth is outsized compared to prior years. If you look at kind of the 930 balances compared to of this year compared to 930 last year were up about 350 million year over year I think that's really a function of just the overall excess liquidity that that's in the marketplace.
Race on from various stimulus initiatives and the like that.
That said, we would expect I mean, we as we continue to have strong growth on the loan side, we would expect that to continue to eat into our excess liquidity levels. As we progress forward as well is there is a normal seasonality dynamic to public funds and we'd expect that to wind down in the first through the fourth quarter net into the first and second quarters of next year that core.
NIM guidance that I had provided that is excluding excess liquidity when we're dealing with with levels that we are it gets kind of hard to predict with specificity exactly where that will go in the near term. So I think it's most appropriate that kind of stripped out when we're looking at coordinates.
Okay, Yeah that makes total sense and then talking about that core name you guys had pretty solid expansion. This quarter I think it was up four basis points. Excluding the cash what is kind of the main drivers behind that asset yields our.
Security of employment are you guys still able to lower some funding costs.
We have seen a reduction in on deposit costs, roughly three three basis points from 37 bps last quarter down to 34. This quarter. We continue to too violent exception priced accounts, we made some changes here in the fourth quarter.
Beginning of the fourth quarter, what you expect to result in.
Reductions going forward as well the other dynamic that was at play with the redemption of sub that back in July which helped arms or drive some of the expansion that you see here in the third quarter.
Great that things. Thank you for that and if I get a one more on the loans. It sounds like the competition dynamics on the market are pretty aggressive right now I just would like to hear you guys are seeing what pricing and Ah may be loosening terms by competitors anything like that.
Good morning time, it's my time, I would say, we see both of those.
The good news is the strength of our team and the ability to source.
Is rather significant pool of deals to consider allows us to.
Stay true to our knitting with regard to credit and also despite the competition's still be able to get deals.
At a pricing level that is appropriate for the current environment and loan pricing basically was consistent quarter over quarter.
So we are managing to maintain it.
Okay, great. Thank you for taking my questions.
Thank you.
As a reminder, if you have a question. Please press star one. The next question comes from Matthew Breeze as Stephen. Thank please go ahead.
Good morning.
Ornament warning warning that it just focused on expenses. So there was some moving parts the last few quarters.
And in the release, you discussed $1.4 million year to date in kind of training initiative cost how much of that occurred this quarter and as we think about getting into next year is it appropriate to not only backed out but you also mentioned an additional 70 K coming for the fourth quarter, maybe just help us level set and get a good core expense.
Run rate for for the beginning of next year.
Yeah, and I'd just to clarify there that 1.4 million wasn't just training initiatives it was various things including.
R DNI initiative as well as enhancements through our Treasury management products and processes. So there is a handful of things included there. It was about 500000 in the quarter related to those initiatives.
And it's a little bit early quite honestly to give full year or give guidance as we progress forward, but I would expect I mean that was incremental this year, we don't expect it to repeat.
In 2022, so I think it would be fair to adjust for that as your model forward, but again not in a position to give full year 22 guidance at this point totally appreciate the guidance I just want to get a get a good sense for what the base level is.
Sure.
You mentioned being aggressive and hiring of new talent I would just like to get a sense for with that kind of back office.
Talent with that.
Lenders, if its lenders and what arena as you also mentioned USPA team just kind of curious.
Besides scale and expectations for that team from a balance sheet and income statement perspective.
So the SBA team the phone we brought.
Three people over and they added another internally and there was already somebody internally setup doing SBA. So that team works with the RMS on across our commercial banking teams.
And they are assisting and driving SBA business, so they're not sourcing it necessarily independently we already had a source, they're just helping with an expertise in a delivery mechanism as well as an execution mechanism on the sales side of the equation.
In terms of just the overall.
Irene we are predominantly hiring on the producing revenue producing side that said there are a couple of positions that we think that we needed to add capabilities payments would be one area is Brian reference to treasury process and.
Product.
Consulting review, but the predominant amount of the hires that we're doing our own or on the revenue side, both on the commercial side.
And on the West side, it's really across all of our lines of business mortgage wealth insurance and commercial we've been.
Somewhat aggressively hiring on the production side.
Great Okay.
Next one from you just wanted to get a sense for the.
The size of the of the loan pipeline.
You all have done a fantastic job this year, putting up some some great.
Net loan growth just wanted to get a sense for the cancer that going forward and if the pipeline still supports kind of high single or low double digit loan growth.
The pipelines are still strong as Jeff alluded to and we met some last quarter's call.
The real issue with net loan growth, which isn't.
We still feel blessed and we still feels stronger relative to peers, but as.
The success of our customers in terms of payoff activity and that's because values are increasing and there's level of.
Consternation over what is going to be tax policy this year versus next year.
So that is going to continue at least for the foreseeable future being the biggest moderator of our net loan growth.
But new loan production, Matt continues to be very strong in the pipeline supports that.
Okay.
Last one for me I, just wanted to get a sense, maybe maybe honed down to the mortgage pipeline and get a sense for how gain on sale margins are holding up so far in the fourth quarter trying to get a sense for working on sale income could could come in next quarter.
From a just a percentage perspective, the gain on sale into the fourth quarter should be relatively consistent with what we saw in the third quarter.
We've been down year over year, but that has already started to occur in the second quarter trailing into the third quarter I don't see it changing dramatically in the fourth quarter that said refinance activity just because of rates be enough you're going to see.
Seasonal impact because purchase activity will slow is Thanksgiving and Christmas and hanukkah come into play.
That's all I had thanks for taking my questions. Thanks.
Thanks, Thanks Man.
This concludes that question and answer session I'd like to turn the conference back over to Mister <unk> closing remarks.
Thank you Danielle and thank you to everyone for listening in on our earnings call today as I mentioned in my comments were very pleased with our results and we have good momentum as we head into the fourth quarter.
Pretty much across the the organization. So hope everybody has a healthy and safe Halloween This weekend and.
Is up and has a good time and we look forward to talking to you at the end of our fourth quarter have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.