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spk01: Good day and welcome to the Unibest Financial Corporation third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded I would now like to turn the conference over to Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.
spk02: Thank you, Grant. And good morning and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Kime, President of Univest Bank and Trust, and Brian Richardson, our Chief Financial Officer. Before 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, or expectations within the meaning of the federal securities laws. UNIVEST's actual results may differ materially from those contemplated by these forward-looking statements. I will 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 can be found on our website at univest.net under the Investor Relations tab. We reported net income of $18.1 million during the third quarter, or 62 cents per share. As our local economy reopened during the end of the second quarter and into the third quarter, we have seen more activity and opportunities to grow our lines of business. We experienced strong loan and deposit growth during the quarter as loans increased $257.4 million and deposits increased $342.3 million. Our mortgage banking unit continues to set internal records with net gain on mortgage banking activities up $4.2 million, or 260%, compared to the same quarter in the prior year. Additionally, as detailed in our release, we continue to see improvement in our modified loans as the economy has reopened. with the percentage of modified loans as a result of COVID-19 decreasing to $191 million, or 4.1% of our loan portfolio. We continue to be pleased with the performance of our core diversified business model, as our pre-tax pre-provision income during the quarter increased $4.2 million, or 18.1%, compared to the third quarter of the prior year, with our pre-tax pre-provision return on average assets for the quarter being 1.73%. Additionally, on October 19th, we announced the consolidation or relocation of eight financial service centers, or 20% of our centers, as we continue to enhance our digital offerings, focus on efficiency, and adapt our business to changing customer preferences. Before I throw it over to Brian, I just want to thank the members of the Univest family. I continue to be very proud to be a part of this team. They have adapted to a new working environment while continuing to serve our customers, our communities, and each other while growing the business and moving the corporation forward. I'll now turn it over to Brian for further discussion on our results. Brian?
spk05: Thank you, Jeff, and I would also like to thank everyone for joining us today. As Jeff mentioned, we reported earnings of 62 cents per share for the quarter with a return on average assets of 1.15 percent, return on tangible common equity of 14.82 percent, and an efficiency ratio of 58 percent. I would now like to touch on four specific items related to the earnings release. First, our provision for credit losses was $3.9 million for the quarter, which was primarily driven by the $257.4 million increase in loans. During the third quarter, we saw stabilization in the economic assumptions used within our CECL model. As of September 30th, our allowance for credit losses was 1.95% of total loans and leases when excluding PPP loans. This represented an increase of one basis point compared to June 30th. Second, as expected, we experienced net interest margin compression during the third quarter. Reported NIM of 3.02% decreased 16 basis points when compared to the second quarter. Reported NIM was negatively impacted by 18 basis points of excess liquidity, which averaged $329 million for the quarter, and 10 basis points due to low-yielding PPP loans on the balance sheet. Core margin excluding excess liquidity and the PPP impact was 3.30%, a decrease of 13 basis points when compared to the second quarter. As a reminder, third quarter NIM was reduced by approximately six basis points due to the $100 million sub-debt issuance on August 5th. Third, as it relates to non-interest income, our mortgage banking business continues to have a great year. For the quarter, our net gain on mortgage banking totaled $5.9 million, which represented a year-over-year increase of $4.2 million. For the nine months ended September 30, 2020, our net gain on mortgage banking totaled $12.1 million, an increase of $9.2 million when compared to the same period in 2019. Additionally, non-interest income included swap fees of $2.3 million for the third quarter which was an increase of $2.2 million compared to the third quarter of 2019. For the nine months ended September 30th, 2020, swap fees totaled $4.1 million, representing an increase of $3.4 million when compared to 2019. Fourth, non-interest expense was slightly elevated due to compensation costs associated with strong performance of the mortgage banking business. Variable compensation costs for this business totaled $830,000 for the third quarter, This is an increase of $535,000 versus the third quarter of 2019. When you normalize expenses for these variable compensation costs and the FDIC assessment credit, which was recognized in the third quarter of 2019, expenses are up 1.98% year over year. As Jeff mentioned, on October 19th, we announced a plan to close or relocate 20% of our financial centers. Pre-tax one-time costs associated with this plan are estimated to be $1.7 million which will primarily be recognized during the fourth quarter of 2020. The estimated pre-tax annualized savings are approximately $2.4 million. It is important to note the plan includes two phases. As such, the expected pre-tax savings for 2021 is approximately $1.8 million. In closing, Our strong performance during the third quarter highlights the value of our diversified business model. This diversification enabled us to produce strong results despite the inherent headwinds from COVID-19 and the current interest rate 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?
spk01: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Michael Perito with KBW. Please go ahead.
spk03: Hey, Jeff, Brian, Mike. Good morning, guys. How are you? Good morning, Mike. Thanks for taking my questions. I had a few I wanted to hit quickly. One, just on the fee income side, obviously some environmental stuff that you guys mentioned on the mortgage side, but what I'm pretty sure is a record fee revenue quarter for you guys in history of the company. Just any thoughts on how that run rate could trend in 4Q. My guess is there's still some room for some elevation. And then as we look out to next year, you know, what are some of the core growth rates we should be thinking about for some of the lines of businesses?
spk04: Well, on the mortgage side of the equation, Mike, you know, the pipeline was still strong at the end of the third quarter. And, you know, we continue to, this month we believe we'll also set another record for monthly funded volume internally. So that will continue. You're seeing a mix of that business now going on a funded basis, and the third quarter was almost 50-50 between purchase and refi. We dipped down a little bit here, so we'll pick up a little bit on the refi side again over the last week or two. But refis are eventually gonna dry up, just a fact. And you'll see some seasonality with regard to purchase. I would expect that we'll be strong through November, and start to fade in December. But we're gonna get a good start on the first quarter as well, just because of the pipeline that we have in place. And ultimately, what's gonna happen on the mortgage side is you're gonna lose the refi volume next year, but purchase market, given the rates, I think will still be strong. It really comes down to what is the purchase inventory that's available for borrowers and buyers in our footprint. But we feel good about it. We've done a really good job in terms of recruiting additional loan officers, and we continue to grow that operation. So even though we will lose on the refi side and margins will come back to more of a normalized basis, we do feel good about growing that business longer term.
spk02: Yeah, and on the wealth side, we've seen customers coming back and being more open to talk, you know, second quarter was a low point for us on production. We're probably three-quarters of the way back on what we're adding from a new asset perspective on a quarterly basis right now as things have opened up. With that said, we have seen some headwinds when it comes to the TD branches that, you know, we have that arrangement with as they've remained closed and also the disruption of Schwab acquiring TD has really slowed that down significantly. But as, you know, as things start to clear up there and hopefully as we head into next year and things open up a little bit more, we should start to ramp that production back up. But, you know, with the market having recovered a decent amount, although obviously recent sell-offs, you know, we priced off of quarter end balances in a big way. So we expect that fourth quarter for wealth will be, you know, pretty comparable, maybe a little better than the third quarter. Insurance, for whatever reason, customers are more reluctant to change brokers of record right now. So that's been slower as far as building pipelines back up combined with impacts to premiums from employees being laid off from customers or workers' comp from employees being laid off. So we've had some headwinds there that we're trying to work through. That seems to be a little slower in coming back.
spk03: Do you think it's, you know, if we just kind of normalize for the security gains, I think you guys are on pace to do about, you know, call it $75.5 million, give or take, in 2020 on the non-interest income side. Do you think that it's reasonable to think that that figure could be, you know, in the ballpark similar next year, even with the mortgage environment kind of normalizing with some other items, probably?
spk05: No. So, we are currently going through our budget process and are not prepared to give specific guidance as it relates to 2021. However, there was favorability, as we know, on the mortgage side of things, as well as on the swap fee income side of things. The environment this year lent itself nicely to that line item. So I think there'd be a little bit of pressure on non-interest income overall if you look at it from a year-over-year basis going into 2021.
spk03: Okay, helpful. Um, and then, you know, Mike, you talked about the mortgage pipelines. What about the commercial pipelines? You know, the growth looks, um, you know, XPPP looked really strong in the third quarter. Curious, wondering if you could maybe provide a little bit more color on that and what you guys are expecting from a growth perspective going forward, given what you see in the environment today.
spk04: Yeah, sure. Um, so when you look at our third quarter growth, I think you also, you need to look at it in terms of there's some level of pent up demand that was second and third quarter related. Um, Our pipelines at the end of the third quarter were still good. Traditionally, our third quarter is our lower quarter, with the fourth quarter being stronger. I would see that we'll still have a very good fourth quarter by anybody's measure, but it will not be the same historical bump over the third quarter. It would be hard to do that, quite frankly. But we feel good about what we're doing here, Mike. And really what this is is a testament to a couple things. It would be the investment that we've made in our teams and the quality of those teams over the last couple of years. And we've also made sure that people know that we're still, customers to speak, know that we're still lending. Now we've used what we call our COVID-19 guidelines. So we've pulled back. We've been more conservative with regard to LTVs and making sure that the borrower slash guarantor has a strong track record of operation. And if it is commercial real estate, that the underlying tenant is a strong tenant that we believe can continue to thrive as we hopefully emerge out of this COVID-19 scenario at some point in time in early 2021. But overall, look, we feel good about what we've done, obviously, and I feel good about where we're going. It will just be more of a normalized run rate from what you've seen from us in the fourth quarter on an overall basis. Not traditionally what we've done in the fourth quarter, but, you know, still solid.
spk03: And at this point, as you sit here today, I mean, I think there's maybe not locally per se, but I think, you know, regionally, a lot of your peers are a bit more conservative on loan growth until we get into next year, depending on the pace of the economic recovery. But it would seem like you guys think there's enough activity in pipeline and market share opportunities to drive some level of consistent and meaningful growth next year?
spk04: We do. Right now, we're seeing a resurgence of cases, but I don't think that we're going to see a complete shutdown like we did early in the second quarter into the early part of the third quarter. You've got to have some level of you know, caution with regard to how case counts go. But as we near get closer to a vaccine, and I don't think that there's a political will to completely shut down the economy, we'll continue to grow. As we've said in different settings, we look at this and we are open, willing, and looking to lend, but they're also looking to lend on our conditions with more conservative underlying factors as we move forward. And the good news is Our team is incredibly good and has contacts, and we're able to continue to have that momentum and move forward under those conditions. Great.
spk03: And then just lastly, I'll step back, which is, Brian, can you repeat the variable comp component of the Q3 expense number? Sorry, I didn't get a chance to chat it down.
spk05: No problem, Mike. As it relates to simply the mortgage business, the variable comp quarter was $830,000. that represented an increase of $535,000 versus the third quarter of last year. With just the inherent seasonality in that business, I thought the most relevant reference point would be the third quarter of 2019.
spk03: And so as we think about expenses moving forward, I mean, is it fair to say, you know, so call it core expenses in the third quarter of... call it $37.7 million, make an assumption on variable mortgage comp, and then layer in the $2.4 million annual savings over the course of next year with a little inflation growth? Do you think that generally should capture how you guys are seeing it today, or are there other things we should consider?
spk05: Yeah, I mean, well, that was a full variable comp cost of $800. So I think when you want to normalize, you might want to take the $500,000, $535,000 off of the $38,000, $527,000. So you kind of be around $38 million, and then you can kind of normalize. from there. Okay.
spk07: All right. Thanks, guys. Appreciate it. Thank you, Mike.
spk01: Our next question will come from Frank Chiraldi with Piper Sandler. Please go ahead.
spk00: Hey, good morning, guys. It's actually Justin Crowley on today for Frank. Good morning, Justin. Good morning, Justin. um so just building off the uh the expense commentary um i guess you know when you look at the the consolidation plan and the savings um is there anything you're sort of seeing um that would i guess what i'm asking is how much of that savings should we kind of expect to see drop to the bottom line or are there other things whether it be on the digital side or what have you um that you know this pandemic has made has cause you to take a harder look at, places that you think that might be worthwhile investing in, just in light of, you know, the changing environment that we're in.
spk04: Yeah, so this is Mike Kime, and good morning. On an overall basis, we will continue to invest in technology, but we've made a significant investment already, so the incremental investment going forward isn't, at this point, overly significant. So while I just would not look at it as there's going to be a big step up on the data processing line for us, given that some things will fall off and we'll make additional investments as we move forward. So it would be incrementally picking up a little bit, but nothing of any magnitude. So when we look at the financial service centers, the majority of that savings that Brian referenced will fall to the bottom line. But it's also important to note, and we've announced this, that we've added and are expanding our footprint in Mechanicsburg, which is in Cumberland County, and Berks County, as well as in York, as we continue to grow the business. So we will have expenses related to that expansion.
spk00: Okay, that's helpful. And just as part of this consolidation, are you modeling or expecting any sort of attrition, or is that just going to be a small number in your eyes, just given the nature of the locations that you're consolidating?
spk04: Look, anything can happen, but historically our attrition rates have been very low. And with our increased investments in digital and the adoption by our customers,
spk00: coupled with the proximity of other financial centers locations we do not expect to see a significant amount of attrition okay and then just circling back to the loan growth discussion um it was helpful commentary there i guess i was just curious um if you had any detail on the geography breakdown perhaps you know How much of that was Lancaster? I know you spoke to that on the call last quarter. I believe you called out the agricultural team that was getting up and running and had some good production on the way. So I wasn't sure if that was a factor at all in the growth that we're seeing this quarter.
spk04: Yeah. Well, we now refer to it as Central Pennsylvania. And the ag team that operates in Central Pennsylvania continues to move forward. And the ag business was successful. It was and continues to be solid, so that was a good portion of what we did, but quite frankly, we grew loans across the entire footprint. We did CRE deals, like I said, that met the criteria when I discussed and answered Mike Perito's question in terms of the quality of the deals themselves being the guarantor, borrower, the underlying tenants, et cetera. It was a good mix, a solid mix across our footprint and across our diversified loan book also grew. So we feel really good about that and we believe that that will continue.
spk00: Great. I appreciate it. Thank you for taking my question, you guys. Thank you. You're welcome. Thank you. Thank you.
spk01: Our next question will come from Matthew Breeze with Stevens. Please go ahead.
spk06: Good morning. Morning, Matt. Good morning, Matt. Just a few for me. One, on the new cost plan, the two phases, what should we expect from Phase 1 and what should we expect from Phase 2?
spk05: The overall blended impact of that that you would anticipate for next year will be $1.8 million of savings. So full annualized impact is $2.4 million. When you kind of incorporate the fact that phase one is at the end of January, phase two is at the end of June, when you look at those specific items, it comes out the net savings for next year of $1.8 million on a pre-tax basis. Okay.
spk06: Okay. And then just on the new pipeline of loans, what's the blended yield and how does that compare to what's on the books today?
spk05: Okay. As you look at new production for the quarter, you kind of got to break it down between fixed and variable. On a fixed rate perspective, our average rate was 368. Our book's around 4% currently, so that's a point of reference. As it relates to variable, you got to split that out between swap loans and non-swap loans. On non-swap loans, we're seeing an average rate of about 290, which is call it roughly 260 to 270 over one month LIBOR. On swapped loans, we saw a spread of about 220, and we also received average fees of about 20 basis points, which helped drive that fee income line item that I spoke about. So you add that in, you're looking at a 237, 240 type aggregate spread. However, of course, that's split between net interest income and the fee income side of things, and you pull forward the fee piece largely into the current quarter.
spk06: Okay, so not knowing the breakdown of the pipeline between fixed rate and variable swap or non-swap, how would you characterize where loan yields are heading? Do you feel like they can stabilize here or head lower?
spk05: Loan yields overall would continue to kind of slide a little bit inherently. I mean, I think kind of that three mark, just low threes would be where production would be at. Inherently, when your book's at 4%, you're going to have continued pressure on the portfolio yield as we progress forward.
spk06: Okay. And then on the liquidity side, could you just remind us how much excess liquidity you think you're holding on to and what's the plan for deployment and over what timeframe?
spk05: So for the quarter, we had $329 million of excess liquidity. That's up from roughly $250 million during the second quarter. So we expect that to continue to run out. Of course, we have a public funds book, which billed during the quarter, so that contributed some to that, adding on $100 million of sub-debt, additionally added to that. But as we have loan growth and normal deposit outflows, we expect that to continue to diminish. It'll still be elevated in the fourth quarter. The $329 million, quite honestly, is a peak. I think it'll continue to trend down from there over the coming quarters.
spk06: Okay. And then just tying this all together, I know it's a challenge in this environment, but how would you characterize or what kind of NIM guidance would you provide for the coming quarters?
spk05: So for the fourth quarter, I think it would be reasonable to expect low to mid single-digit compression on a reported basis and slightly more as it relates to a core basis. Just simply, again, you get a benefit of reduced excess liquidity on a reported basis. You're not going to get that benefit on the core basis. So I think that would be the guidance here for the fourth quarter and continue to see how things move forward as we get into 2021. Great.
spk06: Okay. That's all I had. I appreciate you taking my questions. Thank you. Thanks, Matt.
spk01: Again, if you'd like to ask a question, there's star then one, star then one to ask your question. At this time, I'm showing no further questions, so this will conclude our question and answer session. I'd like to turn the conference back over to Jeff Schweitzer for any closing remarks.
spk02: Thank you, Grant, and thank you, everyone, for participating today. We feel really good about how the quarter ended. Obviously, also with our decrease in modified loans, that's trending in a positive direction, which is really good as things open up. Look forward to speaking to everybody at the end of the fourth quarter. Please stay safe and look forward to speaking to you in another three months. Have a good day.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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