United Financial Bancorp, Inc. (NASDAQ:UBNK)
Q4 2013 Earnings Call
January 24, 2014 10:30 AM ET
Jeff Sullivan - EVP and COO
Mark Roberts - EVP and CFO
Matthew Breese - Sterne Agee
Good morning, and welcome to the United Financial Bancorp Incorporated Fourth Quarter 2013 Year-End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions].
Before we begin, we 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 within the meaning of the federal securities laws. These statements are not historical facts; rather they are based on our current expectations regarding our business strategies, intended results and future performance. Forward-looking statements often include the words believe, expect, anticipate, intend, plan or words or phrases of similar meaning.
Forward-looking statements by their nature are subject to risks and uncertainties. A number of factors which are described in our filings with the Securities and Exchange Commission could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements.
All forward-looking statements discussed during this call are based on management’s current beliefs and assumptions and speak only as of the date and time they are made. We do not undertake to update such forward-looking statements. Please note this event is being recorded. I would now turn the conference over to Jeff Sullivan. Please go ahead.
Thank you, Andrew. Good morning everyone and welcome to our fourth quarter 2013 earnings call. I’m Jeff Sullivan, Chief Operating Officer of United Bank and I’m joined today by Mark Roberts, our Chief Financial Officer. Dick Collins our President and CEO is unfortunately unable to present on the call this morning.
The fourth quarter of 2013 marked a historic moment for United Financial and for United Bank. On November 14th we entered into a merger-of-equals agreement with Rockville Financial, a highly respected neighbor of ours, just south of the border in Connecticut. Our companies are very equal in many ways. In fact, as we measured the banks by different metrics such as earnings, market cap, balance sheet et cetera, it was almost a 50-50 split in the proportion that each bank was contributing with respect to each of those financial metrics.
The activity level around the merger was pretty robust throughout the fourth quarter and it continues into 2014. We can say with certainty that a merger-of-equals requires more work and more planning than a traditional acquisition. We hope that the end product will be a combination of the best attributes of both banks and we look forward to more dialogue on the details of the new company at a future date. We certainly want to thank our employees who are working so hard to build a better bank, while still giving great day-to-day service to our customers.
We are mindful that we still have our day-to-day business to run here at United and we continue to be faced with numerous challenges or headwinds in the current operating environment. During the third quarter of 2013, we engaged a thorough analysis of our processes and our operations with an eye toward cutting costs and creating more efficiency. We were cognizant of the challenges to growing earnings in this environment and we were looking for ways to breakthrough any bottlenecks or redundancies in our operations in order to continue to grow earnings at rates that would be satisfactory and in line with past performance.
These initiatives are still very much on our minds. However they have now become a part of the merger and integration discussion with Rockville. So, the implementation timeline will now coincide with our merger once we have final regulatory and shareholder approval.
I will now turn the call over to Mark Roberts for a review of the fourth quarter financials.
Thanks, Jeff and good morning everyone. I will begin by reviewing our operating results. Q4 net income was $4 million or $0.20 per diluted share, excluding merger related expenses totaling almost $600,000, a $277,000 gain from the sales of security and the related tax benefit of $36,000 for both of those items. Operating earnings for core totaled $4.3 million or $0.21 per diluted share, compared to net income of $4.6 million or $0.23 per share in the third quarter. The reduced core earnings were primarily due an increase in core expenses, offset in part by growth in total revenue. Core expenses including the merger related cost of $600,000 increased $573,000 or 4% to $15.4 million in Q4, reflecting higher levels of occupancy, data processing, professional services and marketing cost.
For the full year operating costs totaled $61 million, which was about 2.5% of average assets. Total revenue increased $269,000 or 1% to $22.6 million for the current quarter from $22.3 million in Q3, due in large part to gains from sales of securities. Net interest income was essentially flat at $19.4 million, reflecting 1% growth in [Indiscernible] assets offset by modest contraction in the net interest margin. The margin declined 3 basis points to 3.37% in Q4 as a result of a $100,000 reduction in fair value accounting adjustments and lower spreads. The core net interest margin excluding $660,000 of acquisition accounting adjustments was 3.25%, which 4 basis points lower than Q3.
Non-interest income totaled $3.2 million, $263,000 or 9% above last quarter’s reflecting a $277,000 gain from the sale of security and growth of $91,000 in wealth management income, and these items were partially offset by a decrease of about $100,000 in other income.
Shifting to the balance sheet, total assets increased $80 million or 3% in 2013, to almost $2.5 billion at year end. Total loans increased $66 million or 4% to almost $1.9 billion, reflecting growth of $45 million or 4% in the commercial portfolios and $25 million or 6% residential loans, partially offset by modest run off in our Consumer segments.
Loan growth is driven by strong origination volume totaling approximately $565 million, which is significantly higher than 2012. Balance sheet expansion was funded by an increase of $98 million or 5% in deposit balances. Core account balances grew $72 million or 6% to $1.2 billion at year end, reflecting successful business development and marketing efforts in the Springfield and Worcester Region, as well as our newest markets in Connecticut.
Asset quality remained healthy at year end with nonperforming loans to total loans ratio 87 basis points and the nonperforming assets to total assets ratios of 76 basis points. In addition, net charge-offs to average loans was 15 basis points for the full year.
We continue to maintain a conservative clean investment portfolio with over 85% of our securities backed by Government-sponsored enterprises or agencies. We remain well capitalized with a tangible equity-to-tangible assets ratio of over 10% and we continue to maintain a strong liquidity position.
I’ll now provide an update on capital management activities. For the fourth quarter we maintained our dividend at $0.11 per share and we didn’t repurchase any shares, primarily due to the merger announcement. During the full year, we repurchased 489,000 shares at an average cost of just under $15 and we have approximately 1.2 million shares remaining under current board approved programs at year end.
I’ll now turn it back to Jeff.
Thanks Mark. Before we open up the lines for questions, I wanted to touch base on a few other highlights of the quarter from an operational perspective. In terms of balance sheet asset loan growth in particular, we did have success in terms of new business development during 2013, as Mark mentioned kind of record levels with origination. There was some repositioning of our loan book as we did let some deals walk by choice because of rate and structure and repositioned it with new loan origination.
On the residential and consumer side, the consumer and residential loan growth held up during the year was just over $125 million in mortgage originations and another $58 million of consumer and home equity origination, which led to that growth in that segment of our loan portfolio. I should note that pipelines have dropped significantly on the residential side with the rise in the interest rates in the end of refinance cycle.
We are implementing plans to become much stronger in the purchase money business in a wider geography as we go forward. In terms of the commercial loan book, we should note that the unfunded commitments grew significantly from year end 2012 to 2013. At December 31, 2013, we had an increase of approximately $85 million in un-advanced funds in our construction loan portfolio with most of those being loans that would be constructed to permanent, so they will end up as permanent mortgages on our books. They’re not pure construction loans. And we also did have an increase in unfunded lines of credit during the year end in unfunded home equity lines, although that was a small amount of only $1 million.
So, on the commercial side, I believe that there were some timing aspects to it. The pipelines continue to be good for our commercial team, originations were good, and we expect that the construction projects will stay on track and those un advanced funds will be advanced as the construction progresses during the first couple of quarters of this year.
From a deposit side, overall we had good growth in core deposits of 6% year-to-year and to break that down by region, our commercial deposits really represent the fastest growing of that segment with 13% growth in commercial core deposits during the year. Commercial core balances now represent 35% of our total core balances and at the bank and it is the fastest growing segment as I mentioned.
On the retail side in our Springfield and Worcester markets, the growth was about equal, but because our Worcester platform is so much smaller, we actually had 16% core growth on the retail side in Worcester; that’s retail and commercial of total core growth during the year, about $24 million.
In our newly acquired Connecticut franchise, the former New England bank franchise, deposits were flat during the year, core deposits were flat during the year, we had some growth in non-core deposits, but the core deposits being flat was not a surprise to us. There were three branch closures in that market shortly after the acquisition of New England Bank and the United Bank name is a brand new name in the Connecticut marketplace as of the end of last year and so in our first year we were pleased to see no run off of balances in those remaining branches.
As we mentioned before, we continue to look at a vendor analysis and other ways to look at improving our non-interest expense and also looking at opportunities for ways to improve our non-interest income such as deposit service charges going forward into the New Year.
Once again, we thank you for your time and interest in our bank and I’ll now turn it back over to Andrew.
Thank you. We will now begin the question session. [Operator instructions]. The first question comes from Matthew Breese of Sterne Agee. Please go ahead.
Matthew Breese - Sterne Agee
I was hoping you could comment a little bit on how we should be thinking about expenses in the first half of ’14, excluding all the merger related cost.
I’ll take this one Matt, its Mark. As I noted in my presentation, expenses were up $573,000 to $15.4 million in Q4. Some of that was due to seasonality such as year-end audit expenses and branch maintenance and some other things, and then we also had an increase in OREO expenses of about $200,000 and we had announced in our previous call, our call for third quarter that we had expected expenses to pick up over $15 million and we think that holds true for the first quarter of this year as well. We’ll probably see a $100,000 or so reduction in expenses, Q1 on a core basis and we expect to be able to hold expenses to about 2% growth if we’re operating on a standalone basis for the full year.
Matthew Breese - Sterne Agee
That’s very helpful. Okay and then kind of touching on overall loan growth, you spoke about having solid origination levels and a good pipe. I was just hoping you could comment on your ability to grow loans in the first half of 2014 and to what extent you think you can, and maybe also comment on the level of payoffs you guys are seeing.
Okay Matt, this is Jeff. I think in terms, I’ll take your last question first, in terms of the amounts of payoffs; we have a higher level of payoffs than typical during the third quarter in particular but at some level even into the fourth quarter 2013.
A little bit of that was planned. We had one large project, real estate project on the books that we had been working on for a number of years and by design it was designed to be sold to a third party and that happened during the fourth quarter of last year. So that accounted for a chunk of the kind of flat commercial quarter that we saw there.
In terms of activity levels I would say that they are very steady in terms of prior quarters and so we don’t see any significant change in terms of the activity level of our lenders, the deals that are going to the loan committee. I guess if I were to go out on a limb, I would say that the rapid uptake in rates affected different banks in different ways and I think that we felt that we wanted to be reacting to the increased rates very proactively, and as a result there were some competitors who reacted more slowly or wanted to get those last few deals on the books before their loan committee told them to raise their rates and so we did lose some of those deals. In terms of structure, there’s also been a pretty competitive market for structure out there and we’re trying to stick to our knitting in terms of underwriting.
Matthew Breese - Sterne Agee
Okay. And how would you assess your ability to transfer the uptick in rates, you pass that on to customers, commercial real estate and its G&I loans.
You know, we’re quite pleased with it, because origination activity was so robust and we did -- we did what we needed to be doing in terms of our underwriting and in terms of our pricing, and so I think our team is performing very well and I would say that, I have great confidence in that they’ll continue to perform well in the future.
Matthew Breese - Sterne Agee
My last question, you know we saw a pretty nice pick up in the level of overall expenses from wealth management this quarter and I guess my question is really twofold. One is where are you seeing success, and how you’re going about doing that? And then two, and I don’t know if this is in the press release, but what’s your overall kind of assets under management and where was that this time last year?
I don’t have the number off the top of my head Matt. The assets under management were up about 30% year-to-year, but again, that’s not an exact number, that’s [indiscernible]. The success there is coming primarily from recurring revenue, fee based revenue for accounts that are structured that way as GAAP accounts where we get a fee on an annuitized basis as opposed to quick hits with commission income.
Although that said, our guys --our team does provide a lot of insurance sales for estate planning and for succession planning in business and I believe there was a decent price hit in the fourth quarter numbers that gave us a little boost there. But, primarily it is the increase in assets under management, the market being healthy and just good steady success, kind of picking up the momentum in that division.
Matthew Breese - Sterne Agee
So, barring any major move in the equity markets, there will be a little bit of pull back from that onetime gain or benefit you experienced this quarter, barring all that, it should be the new run rate, it sounds like.
I think that’s -- yes that’s an accurate statement.
Matthew Breese - Sterne Agee
And just a little more specific, when is the deal scheduled to close at this point?
Sometime during the second quarter. We filed our first amendment to the S4 earlier this month and so we continue to talk with the SEC about our application and go through the other regulatory approvals and we had initially announced that we had hoped to do it in the second quarter and we’re still on that timeframe.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Sullivan for any closing remarks.
Thank you, Andrew. Once again, we thank you all for attending today. We continue to appreciate the support that we get and thank our employees again for all of their hard work. This is a very exciting time and also a challenging time for our company and really owe our success to the continuing efforts of our employees and our team here, and so I wish you all a good day.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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