Univest Financial Corp (UVSP) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Univest Corporation of Pennsylvania Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to Jeff Schweitzer, President and Chief Executive Officer of Univest Corporation of Pennsylvania.

Please go ahead, sir.

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

Joining me on the 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 $4.4 million during the second quarter or $0.15 per share.

Earnings for the quarter were significantly impacted by a $12.7 million charge-off or $0.34 per share related to alleged fraudulent activities perpetrated by one or more employees of a borrower for which we hold a participation interest, which was previously disclosed on the Form 8-K filed with the SEC on May 31, 2018.

This charge-off represented the entire remaining principal balance of the loan.

Excluding this charge-off, we were very pleased with the growth we experienced during the quarter and our overall results for the second quarter.

Loan growth for the quarter was strong as loans during the quarter grew 13.9% annualized, bringing annualized loan growth for the first 6 months of 2018 to 11%.

We continue to be comfortable with our previously communicated guidance of 8% to 10% growth in loans for the year.

Additionally, deposit growth kept pace during the quarter with loan growth as deposits grew 14.1% annualized during the quarter as some of our deposit initiatives have begun to produce positive results.

We are very pleased with our deposit growth during the quarter as June 30 is typically the low point for deposits due to the seasonality of public funds deposits.

Finally, we continue to see benefits from our diversified business model as revenues for the first 6 months of 2018 in our wealth management, which includes our trust operations and insurance lines of business, are up 10.2% and 7%, respectively, compared to the same period in the prior year.

I will now turn it over to Roger for some additional discussion on our results.

Thank you, Jeff, and I would also like to thank everyone for joining us today.

I'm going to discuss a couple of items from the earnings release.

First, as it relates to our earnings per share, as Jeff mentioned, we reported earnings of $0.15 per fully diluted share, which includes BOLI death benefit claims of $446,000 or $0.02 per share and the previously disclosed charge-off of $12.7 million, which was $0.34 per share net of tax.

Second, as it relates to our net interest margin.

Core net interest margin of 3.70% was flat compared to the same ratio for the first quarter of the year.

As noted in the exhibits to our press release, as compared to the prior quarter, our yield on the loan portfolio increased 11 basis points during the quarter, which benefited from the 25 basis point increase in the Fed funds rate in March as well as a modest increase of pricing on our new commercial loan originations.

This increase was offset by an increase in our cost on interest-bearing deposits of 11 basis points, which was due to pricing on our commercial CDs as well as increased exception pricing on money market accounts during the quarter.

Our CD promotion raised $64 million of deposits during the quarter, at an average rate of 2.50% for an average term of 40 months.

Our net interest income and margin have been helped by the fact that 35% of our loan portfolio is variable and another 16% is adjustable.

Additionally, noninterest-bearing deposits represent 29% of our total deposits, both which help make our balance sheet slightly asset-sensitive.

Due to the significant loan growth and stabilization of our margin, we would note that our reported net interest income increased 9.6% for the first half of 2018 as compared to the same period last year.

Excluding purchase accounting accretion, which has declined this year, our net interest income for the first half of 2018 has increased a solid 11.3% from the first half of last year.

Next, as it relates to our provision for loan losses.

Excluding the previously mentioned $12.7 million charge-off, the provision for the quarter was $2.7 million, slightly higher than our prior guidance of $2 million to $2.2 million per quarter.

The primary reason for this variance is the strong loan growth during the quarter.

We continue to be comfortable with our overall guidance for the provision of $2 million to -- $2.2 million per quarter.

Finally, as expected, our noninterest expense and our efficiency ratios declined this quarter as compared to the first quarter due to the seasonal nature of certain expenses.

We have no change to our prior guidance of $138 million of noninterest expense for the year, excluding restructuring charges.

This would represent an increase of 5.5% for the year.

I believe the press release was straightforward for the remaining items and accordingly, that's it for my prepared remarks.

We will be happy to answer any questions.

Operator, would you please begin the question-and-answer session?

(Operator Instructions) The first question will come from Michael Perito of KBW.

A couple of questions.

Wanted to start on the balance sheet growth.

Was curious if you could maybe just give us a little bit more color on both sides.

Obviously, it was pretty strong both on the loan and deposit side.

And wondering where you're seeing some of that new business pick up on both loans and deposits?

And obviously, there's been a lot of chatter from peers about competition increasing.

I'm sure you've seen that somewhat, but it seems like you're still having some success.

Curious what you guys are seeing in the market.

I would tell you, Mike, on the loan side, it's somewhat across-the-board as laid out in a couple of analyst reviews.

Competition does continue to increase, especially around the price having started the equation for us.

People are putting some of the tax benefit back into the price side of the equation.

We've held still.

We did a nice job during the quarter in terms of getting a nice mix between additional loans coming in on the fixed rate side as well as variable side.

So we're leveraging our team, we're leveraging the team out, (inaudible) of the market have continued to help us grow.

And we're getting margins that aren't totally moving in lockstep as far as the Fed has moved, but they are moving up and we're seeing solid growth there.

On the deposit side, we saw a pickup, we've got additional public funds, even though it's an -- lower point in the quarter or the year for us with regard to public funds.

We continue to go after public fund money.

We continue to work with our larger commercial customers to bring in additional deposit balances.

So really, it's across-the-board strategy with regard to us on the deposit side.

Roger referenced the CD specials and what we're doing on the consumer side.

There's a series of initiatives that we're after, and we're really seeing growth coming from all of those initiatives as we move forward.

Great.

And just on the -- both, I guess, lending and deposit side.

I mean, have you guys had any success on the hiring front?

And I mean, is there still a pipeline there?

Or has most of the dots pretty much held at this point?

We hired 4 relationship managers during the quarter.

We continue to go after and look for folks.

We're in active discussions all the time, Mike.

We'd love to do another lift out like we did in the previous, but those just aren't as easy to come by.

What we are seeing -- should we pick up 1 or 2 people and continue to bolster our teams?

Yes.

Yes.

And I guess, I would add to that, Mike, that we're not going to win it ourselves.

Do a number of hires, to the extent we can find good folks during the year, we're going to hire them if we can do that, yes.

All right.

And then, switching over to the credit side.

I understand the fraud situation and there's a lot of limitations of what you guys can actually say.

But I'm just curious, I mean, is there anything that we should be thinking about, I mean, maybe that drove the fraud like our economic conditions in a certain area are tougher, then business wasn't doing as well there?

Or is there anything at all that could potentially seep into the rest of the portfolio?

I mean, it seems pretty isolated, but just figured I'd ask if you guys are seeing anything at all that could be concerning today from this situation.

Mike, it's Roger.

Well, I mean, quite frankly, we really truly do view to this to be an isolated situation.

It does not appear that there's anything from a broader economic perspective that would have drove this situation.

It's very unfortunate.

It did happen, but we really believe it's isolated to this current situation.

Okay.

Then maybe actually just one last question for Jeff.

This capital deployment going forward, curious if there's been any change or update in how you guys are thinking about it?

My guess is, it's still primarily organic growth dividend.

But has there been any interesting things on the M&A side happening?

Or anything else that's been discussed internally that we should be aware of?

I would tell you, it is an organic growth strategy.

I do -- we are still open for business on acquisitions on the nonbank side.

Not that we're not open to looking at bank acquisitions, I just don't see as many opportunities out there or that are as exciting.

We're growing the size of a small bank every year right now with our organic growth strategy.

So to buy something right now would be probably more disruptive than additive.

But if an opportunity came across -- came along that was interesting, we would, obviously, take a look at it.

I will just think that we will have more opportunity on the nonbank side, wealth management, potentially insurance when you look a year out to execute on something there, then we would on the bank side.

The next question will be from Matthew Breese of Piper Jaffray.

Roger, maybe one for you.

The core margin came in a bit better than what I was looking for this quarter, and you had some positive commentary regarding the -- just where the kind of balance sheet is situated.

Shall we be expecting anything different on the core margin outlook?

Or can you give us some color there?

The only thing I would say is, we have seen -- I mean, the betas on the deposits are accelerating somewhat.

So the reason I just talked about the 11 basis points, there's increases on both sides of the balance sheet that are working.

So -- with this quarter, we'll have significant -- we plan to have significant growth in public funds that tends to have a higher beta.

So you can have a little bit of deposit cost increase higher than our loan increase, but not significant.

I've guided in the past the flat to declining a little bit, and I think that's where I am for this quarter as well.

In a range of maybe 1 to 3 basis points, is that there?

Yes, yes, yes.

And then, Mike, maybe on the new hires front.

You noted that there's 4 new RMs this quarter.

Could you tally that since the capital raise?

How many have been hired?

And is that more or less in line with your expectations when your raised to capital was to hire the amount of people that you have?

I'm going to go off memory here, somewhere around 8 RMs...

Yes.

(inaudible) in the first quarter.

Since we raised the capital, Matt.

And that would meet our expectations.

Like I said, we continue to be out there and are active in the market to recruit solid folks.

And if we can do it, we're going to continue to do it until -- reemphasize Roger's point, there's not a limitation, there's not a cap on quality folks that we can add if we think they can help us grow the organization going forward.

Okay.

And then as I think about the capital levels of the bank, still a little bit higher than when you were at the time of the capital raise.

Where should we think about that being levered down to over time?

Matt, I think, we're looking at 9% to slightly less than that.

Where -- the Basel III changes go into effect next year that requires an extra 50 basis points of capital.

So we're cognizant of that.

So we think -- used to be where in the half as a number, we'll probably target more of a 9%-type number.

Part of it is, we want to always have some extra room, should we want to deal to execute on a nonbank acquisition because it was a direct hit to capital because it's all goodwill and intangibles.

So we want to always have the flexibility to be able to execute on something like that.

Understood.

Okay.

Last one, just a good tax rate from here, expectations there?

Yes, Matt.

You could think about it 18.2% to 18.5% for the rest of this year.

And ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back over to Jeff Schweitzer for his closing remarks.

Thank you, Denise.

And thank you, everybody, for joining us this morning.

And absent as I said at the beginning of the call, the unfortunate fraud that we experienced from a customer this quarter, we were very excited about the results, strong loan growth, strong deposit growth, continued growth on the noninterest income side and the wealth and insurance lines.

So we feel good about where we're headed and look forward to talking to everybody at the end of the third quarter.

Have a great day.

Thank you, sir.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.