Univest Financial Corp (UVSP) 2016 Q3 法說會逐字稿

Good morning and welcome to the Univest Corporation of Pennsylvania's third-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to attend the conference over to Jeff Schweitzer, President and CEO of Univest Corporation of Pennsylvania.

Please go ahead.

Thank you, Amy, and good morning and thank you to all of our listeners for joining us today.

Joining me on this call this morning is Mike Keim, President of Univest Bank and Trust, and Roger Deacon, our Chief Financial Officer.

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 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 $58,000 during the third quarter.

As anticipated, our reported income includes after-tax $9.2 million of acquisition and integration expenses related to the acquisition of Fox Chase Bancorp.

Excluding these costs, earnings would have been $0.35 process.

Additionally, on a pro forma basis, we had solid loan growth during the quarter of $69 million or 2.2% unannualized along with deposit growth of $63 million or 2% unannualized.

During the quarter, we successfully completed the systems conversion of Fox Chase into Univest and closed two of the legacy Fox Chase branch locations in New Jersey, consolidating these locations into the existing Ocean City location.

Additionally, we are slated to close three more legacy Univest locations on November 1, consolidating these locations into existing locations which are located nearby as we continue to optimize our financial center footprint.

These closures were offset by the opening of our first financial center in Lancaster County in Willow Street to support the talent lift-out we executed on in the second quarter.

Now I'd like to open it up for questions that anybody might have today.

(Operator Instructions) Michael Perito, KBW.

Good morning guys.

A few questions.

I guess starting on maybe the loan growth outlook, had another strong quarter of growth, double-digit growth on the organic basis.

Can you maybe talk about the pipeline and maybe more specifically the Lancaster pipeline and maybe where balances are already?

Sure, Mike.

It's Mike Keim and good morning.

You know, pipelines remain healthy as we had talked about in the last earnings call.

We continue to believe that on an annual basis we will have loan growth in the 10% to 12% range.

That doesn't mean every single quarter we will be at that perspective, but we continue to see the growth and the pipeline supporting that going forward.

With regard to Lancaster, we finished the third quarter with approximately $34 million in balances from that group.

And as of yesterday that had grown to $43 million.

So we see healthy production actually coming on the books and we continue to see a pipeline that justifies that that pace of growth will continue.

Okay, that was helpful.

And then maybe a pivot question here, if I think about legacy Univest, you guys operated with kind of a loan to deposit ratio in that 90%-plus or minus range for it was really actually below that for quite a few years before last year.

Obviously, now it's back at 100%.

Sounds like the 10% to 12% loan growth outlook is unchanged.

What is the expectation in terms of funding that loan growth, and I guess how comfortable are you with that ratio rising into that 105% range at this point?

Hi Michael, it's Roger.

Yes, it's a very good question.

We are comfortable operating in a 100% to 110% type loan to deposit ratio.

Obviously, we would like that to be in the 100% range.

But what we'd like to do is have if anything you grow the loan book and you fund it with deposits a little bit more as a trailer as opposed to leading with it.

So if from time to time we go up to 102% or 103% in my mind that is okay.

And then we will have separate initiatives along the way to continue to fund that both on the commercial and consumer side.

I would add to that, Mike, we continue to have opportunities in the public fund market.

And as Roger said, we will have separate initiatives to continue growing on the commercial side as well as the consumer side.

On the consumer side, as you well know, that's a marathon in terms of continuing to grow those deposits.

So the more immediate impact will be on the public funds and commercial side.

And is that public fund commercial side, is the biggest opportunity there the Lancaster market?

Or are there other opportunities in the legacy market or Valley Green that are still meaningful?

The quick answer is yes, there's opportunities across the board.

We surely have opportunities in Lancaster.

We also have opportunities in the Lehigh Valley which we need to continue to pursue as well.

Yes, the nice thing with the public fund side is that's where the local positioning actually does come into play somewhat.

A lot of the school districts and such like to do business with banks in the market not necessarily headquartered out of state.

So we do see opportunities in our core market along with our expanded markets.

Okay.

And then maybe just one more balance sheet question.

The NIM came in just about where I was expecting it at least.

It seems like the cash position was maybe a little higher than what it needs to be, at least on an average basis.

Can you just remind us, it sounds like, obviously, if you are searching for public funds business my guess is the securities portfolio will probably be relatively flat at least from here, but can you does provide any updated thoughts on the cash and securities portion of the balance sheet as it overall continues to grow?

Yes, you are exactly right.

My plan would be to keep the investment portfolio at about the same size that it is now.

It's going to, obviously, we'll opportunistic in terms of timing our purchases and sales.

Over time then that becomes a slightly smaller percentage of the balance sheet.

But that would be the plan right now.

As it relates to your question about the cash, really we are in a borrowing position overnight.

So the cash to fund the balance sheet is really cash in the branches and in process clearing items.

It's not really cash that we are sitting -- it's not funds that we are sitting on.

Okay.

So I mean taking that at face value, it would sound like then I guess my next question would be the core margin expectation.

It sounds like it could be relatively steady from here.

Is that fair?

Or is there still enough asset side compression that we should expect some modest compression sequentially for the near future absent of higher rates?

Sure.

I think the bulk of our growth is still going to come through commercial.

And commercial pricing is still what I would say on average 50 basis points lower than our core portfolio right now.

So our core portfolio in commercial is about a [4.30] yield, new business is coming in on average around a [3.70], [3.75].

So what I've said in the past is, I think this is still true, I think we are going to see a couple basis points of compression per quarter.

Okay --

Assuming no change in the yield curve.

Can you remind us, at least as you guys see it all else equal what the impact would be to the NII, or the margin rather, if we did see a 25 basis point hike in December?

Sure.

It's not super material.

It's probably about 3 basis points on the 25 --

On the plus?

Yes, on the plus.

Correct.

I mean 50% of our commercial loan portfolio is variable.

Okay.

Thank you guys.

I appreciate it.

Matthew Breese, Piper Jaffray.

Good morning, everybody.

Just curious, what was the absolute dollar amount of total intangible assets at quarter end?

We have the goodwill and the intangible -- okay, the goodwill is $172 million.

Intangibles are $17 million, and that does include MSRs which are $6 million.

So the combination is $79 million.

No I'm sorry, $189 million.

$189 million total.

Yes.

Okay.

And then I know the message was third quarter, fourth quarter we are going to be somewhat noisy.

Can you just remind us of what remaining one-time items will occur in the fourth quarter and are we still on track to see clean results in first-quarter 2017?

Matt, it's Roger again.

I mean, that continues to be our plan is to start off 2017 with a clean first quarter.

As it relates to one-timers in the fourth quarter, there's not going to be much significant.

We may have a few items that we are looking into that will help continue to position ourselves for 2017.

But it shouldn't be too significant.

We still have some Fox Chase related costs that were in the third quarter.

Some of those will bleed into the fourth quarter.

But once you hit the first quarter that will be cleaned.

Does the systems conversion have any impact on service charges this quarter, especially on the Fox Chase side?

No.

Not that we are aware of.

Okay.

And then I know there are some moving parts in terms of consolidating branches and opening some new ones.

What would you expect is the operating expense run rate as we head into the first and second quarter of 2017?

Sure.

I think, Matt, it's in the range of $32 million to $32.5 million.

Okay.

And then my last one is can you remind us of your overall profitability goals in 2017 and beyond and perhaps comment on your confidence in achieving those goals?

Our overall profitability goals still haven't changed.

We are looking at north of a 110 ROA.

We are focused on -- we are very focused on efficiency ratio.

I know that is not necessarily a profitability goal but it helps drive it, getting that, continuing to drive that down into that 62, 63 range shorter term with the goal of long-term getting even further lower than that.

ROTCE on north of 13.5% to 14%.

So the goals that we have outlined in the presentations in the past, they haven't changed.

And we still feel confident that we can hit those as we get through 2017 into 2018.

That's all I had.

Thank you very much.

(Operator Instructions) Chris Reynolds, Neuberger Berman.

Good morning, gentlemen.

I have a question about new financial center capital spending cost and breakeven.

And I would think that the economics will vary quite a bit depending on whether it's the Valley Green Bank division or operating in Lancaster County.

Can you outline what that looks like?

Yes, Chris, it's Mike Keim.

And when you look at that breakeven, traditionally you would have looked at it as a level of deposits and loans.

With our diversified model we also look at it in terms of what are we driving with regard to the increases in the fee-driven business, so what do we from a mortgage perspective, what do we do from a wealth management perspective as well from an insurance perspective.

The reality is the occupancy cost in Lancaster market is dramatically lower than it would be in the Philadelphia market, which I think would make sense to everybody.

So as we consolidate branches we are trying to consolidate branches and get them to be in that $50 million in deposit per se per branch.

Now as we open up new ones in new markets that's, obviously, going to take a ramp-up period.

But when you combine that deposit base per branch with what we can sell from our other fee-driven businesses, that's how we look to drive to the, quite frankly, beyond a breakeven analysis for our new branch structure.

We are looking at and as we mentioned we will have closed 11 branches in the last year and change with regard to the existing centers.

And those savings that we are getting from those shutdowns is what we are using to invest in the new locations which expand the reach of our footprint and support all of our lines of businesses.

Okay, thank you.

Terrific.

(Operator Instructions) Michael Perito, KBW.

Hey, thanks for taking the follow-up guys.

A question stemming from the response on the target profitability goals.

Obviously, my hunch is that the non-interest income platform growth is a big driver of achieving those.

Can you maybe just give some comments on what you saw in the quarter?

It seems like the mortgage where you guys have hired some is starting to pick up some momentum.

I guess, where are we in that buildout?

Then maybe also some comments on the insurance and investment and trust platforms as well, please?

Yes, sure.

The insurance and investments, we, obviously, really like the diversified model.

We want to continue to grow the diversified model.

Our metrics have gotten a little skewed after buying two banks that were loan and deposit shops.

So our long-term goal is to continue to increase those percentages of income from non-interest income and continue to grow those.

With that said, it can't happen just organically because, obviously, the bank is a big engine that will continue to grow.

So for those lines of business to catch up it's got to be a combination of organic growth plus acquisitions.

And there is always opportunities out there, and while we are out of the acquisition market for banks, we continue to look at opportunities in those lines of business to fill out our footprint and fill out our capabilities.

With that said, we had a nice rise in the stock market in the third quarter, which always helps us then as we get paid on assets under supervision and as those grow we make more money.

Insurance on the organic is a slower growth 5% to 7% type of growth engine and that continues.

That has been our growth year to date from written premium and also on a revenue basis, and we feel comfortable with that.

I would say wealth, we are starting to see a change in the mix of our business more moving to growth we are seeing as an investment advisory, which is really nice.

That is where we have been focused on growing, and that has been growing significantly during the year while we've seen some runoff in the trust business because it's just a slower growth engine on the trust site.

So a change in that mix is a favorable thing long term for us, and we've been very focused on growing that investment advisory business.

We've built out the mortgage banking side and we have a team in the Lehigh Valley now that is really starting to produce.

We have built that over the past year and they are starting to contribute to production now, which is really nice.

We need to grow out Chester County more and into Lancaster now that we have entered that market so that we have a full diversified set of products and services in all of our markets.

Okay, thanks for that color.

And then I guess taking those comments altogether, obviously, your point is taking on as a percentage of your operating revenues organically it is going to be difficult just because you are growing loans 10% to 12% a year.

But I guess what is a realistic organic growth rate for your fee income platform as you see the opportunities in front of you today?

Well, it kind of varies by line.

As I said, insurance organically is more of a 5% to 7%, I'd say wealth is more than 8% to 10%.

Mortgage I will kick it over to Mike because they report up through him on what he sees.

We should see mid single digits, Mike.

To some degree on the mortgage side in terms of revenue growth it depends on where interest rates go.

And you are also going to have from quarter-to-quarter seasonality.

So we are going to come into absent a rate decrease and refis picking up you are going to see the purchase market where we operate in slow down a little bit until the February timeframe, February, early March.

But we continue, as Jeff referenced, we have not staffed up like we can and should in the Lancaster market nor the Chester market.

So we continued to see growth on the mortgage side.

It's just going to be realistically I think as it becomes more and more of a purchase market with less refinance volume you will see margins net up, gain on sale margins come down a little bit.

But we are also very focused on being more efficient as an organization and getting our cost per loan down.

So the mortgage business will continue to grow.

To some degree the revenue growth might be more in that 5% range.

But if we get more efficient like I know we can from an operating basis the pretax contribution could actually grow faster than that.

Okay.

Thanks for that.

Then just one last question from me on the credit side of things.

I think last time we spoke you guys had mentioned, not concern but just a closer watch on some areas in the Philly market.

And I guess how should we be thinking about incremental credit costs both I guess in terms of your views of credit overall in your markets plus taking into consideration that 10% to 12% growth expectation as we head into 2017?

Hey, Mike, it's Roger again.

So here's how we are thinking about the provision.

Obviously, you know that charge-offs are event driven and that's going to be a driver of it from a quarter-to-quarter basis.

But going forward we are going to provide for new loan growth and we are going to provide for charge-offs.

Loan growth in general is going to be at about a 75 to 80 basis point of loan growth.

And then I think on the charge-off front if you look this year we are at $3.3 million of charge-offs.

I think really $1 million to $1.2 million per quarter on average is probably an appropriate run rate.

Okay.

Thanks, guys.

I appreciate it.

(Operator Instructions) As we have no further questions, I would like to turn the conference back over to Jeff Schweitzer for closing remarks.

Thanks, Amy.

And I'd just like to thank everybody for participating this morning.

We appreciate your interest in Univest and your holdings in Univest.

And we look forward to getting back and talking to you in January after we release fourth-quarter earnings.

Have a great day.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.