Univest Financial Corp (UVSP) 2018 Q3 法說會逐字稿

Good morning and welcome to the Univest Corporation of Pennsylvania's Third Quarter 2018 Earnings Conference Call.

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

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

Please go ahead.

Thank you, Brandon, 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 $15 million during the third quarter or $0.51 per share.

The third quarter is historically one of our slowest growth quarters for loans.

However, we did report solid loan growth of $47.8 million or 5% annualized, bringing our year-to-date loan growth to $246 million or 9.1% annualized.

We believe that we will come in at the higher end of our previously communicated guidance of 8% to 10% growth in loans for the year.

Additionally, deposit growth was strong for the quarter as deposits grew $199 million during the quarter or 22% annualized, primarily due to seasonal increases in public fund deposits.

As a result, we ended the quarter with loan-to-deposit ratio of 101.2%.

Finally, we continue to see benefits from our diversified business model as revenues for the first 9 months of 2018 in our wealth management, which includes our trust operations and insurance business lines, are up 9% and 6.2%, respectively, compared to the same period in the prior year.

I'll now throw 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'd like to start off by saying, I think we had a very good quarter.

For the quarter, we were happy to report return on average assets increased to 1.23% and return on tangible equity increased to 13.7%, respectively.

As it relates to our net interest margin, core net interest margin was 3.16%, which was down 2 basis points compared to 3.70% in the second quarter.

I would like to point out, as can be seen in the average balance sheets of the press release, that due to our strong deposit growth, we had, on average, about $40 million in excess cash during the quarter.

The impact of this excess liquidity was to reduce our core net interest margin by approximately 3 basis points.

We continue to see the benefits of the slightly asset-sensitive balance sheet with 33% of the loan portfolio's variable, 16% adjustable and only 51% fixed rate.

Since the fourth quarter of 2016, which was the first quarter with an interest rate increase after the combined merger with Fox Chase, our core net interest margin has increased 15 basis points from a 3.53% to 3.68%.

Additionally, during the same period of time, our cumulative loan yield beta is 26.2% compared to a lower cumulative deposit cost of funds beta of 21.5%.

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 9 months of 2018 as compared to the same period in 2017.

Excluding purchase accounting benefit, which was significant -- which declined significantly in 2018, our net interest income for the same period has increased a solid 11.5% from the first 9 months of 2017.

The provision for loan losses was $2.7 million for the quarter or slightly higher than our prior guidance of $2 million to $2.2 million.

The primary reason for this variance versus guidance is an incremental general reserve of $800,000 required for 1 large shared national credit loan, which was downgraded from special mention to substandard.

As everyone is aware, the provision for loan losses and credit losses is event-driven.

I continue to believe our run rate provision is $2 million to $2.2 million, rising modestly with the size of the balance sheet in 2019.

Fourth, as expected, our noninterest expense and our efficiency ratio continued to decline this quarter as compared to the first 2 quarters of the year.

We have no change to our prior guidance of $138 million of noninterest expense for 2018, excluding restructuring charges.

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

I believe the press release is straightforward for the remaining items.

And accordingly, that's it for my prepared remarks.

We'll be happy to answer any questions.

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

(Operator Instructions) Our first question comes from Michael Perito with KBW.

I have a few I want to hit on.

I want to start maybe on loan growth.

And I apologize, I got on the call a couple of minutes late, so I apologize if I missed anything at the beginning of the prepared remarks.

But on the loan growth outlook, obviously, the growth was decent this quarter.

I know the third quarter typically -- second and fourth quarter typically are strongest for you guys.

But curious how you guys are thinking about the outlook here.

Some of your regional peers have been talking up the competitive environment and the ability to kind of close on quality deal in the pipeline at good rate and structure.

And obviously, you guys have been moving west a little bit and seemingly, again, some good growth there.

So I'm just curious what your updated outlook on loan growth is and what you guys think is achievable with the environment you're seeing today.

Yes, Mike.

It's Mike Keim.

I would tell you that, with Jeff's comments, that we had previously stated a range of 8% to 10%.

And we believe that for the year, we'll be at the higher end of that range.

You are correct, and we've looked at a lot of our local competitors as well.

There is a lot of competition, primarily on price, but a little bit on structure as well in some of our core markets.

A good portion of our growth is coming from the Lancaster team that's growing, and we'll continue to do such.

When we look forward to next year, we're going to be looking at more of a budget of an 8% growth.

And is that reflective of -- that was helpful.

Is that reflective of a stable pipeline but a assumption around a lower closing rate?

Or do you think overall pipeline levels will be down year-on-year?

Well, pipelines year-over-year -- right now, we still have a good pipeline, and we will close through on the fourth quarter.

For us, looking forward, we'll be in -- we're just absorbing the market commentary that we're getting, and we just think it's probably more realistic to go into that 8% range.

Yes.

And Mike -- I would just add, Mike.

If you think about it on a dollar basis, 8% next year is approximately the same as the 9% to 10% in 2018.

I wish there was...

In a notional [equation].

Yes, the notional dollars.

So it's not -- from our perspective, it's not a significant reduction in what we believe we can produce as a company.

It's more of the size of the balance sheet.

No, that's fair.

And obviously, it's not -- I mean, it's 100 basis points, but just curious, what you guys are seeing because of some of the commentary.

So that was helpful.

Secondly, any thoughts, Roger, on that same point, especially with the pricing competition?

I mean, how much room is there in terms of pricing and the yields you're getting on incremental loan production in the market and kind of where you guys might start walking away from credits?

I understand it can be rare from credit to credit, but I guess, more broadly.

And then secondly, I guess, how does that kind of play into the margin as we move past next quarter?

Any initial thoughts on that?

Sure.

Our team has done a really good job of obtaining new credits at good rates.

During the quarter, the average rate on our new commercial loans was approximately 5.1%.

So we're north of 5% on our new credits, and we've seen nice increases over the last 3 quarters in that metric.

Yes, it is getting competitive.

What I'll tell you is it is a little bit as it relates to the whole P&L.

We're going through the budget process right now.

But our goal for next year is just to continue to improve our marginal operating leverage.

And so that's more at the macro level.

If I can improve that 200 to 300 basis points and grow revenues at a 7.5% to 8% and grow my expenses at 4.5% to 5%, I've won in that equation.

And that's really what we're targeting to do as a business.

Do I think there's going to be a little bit of pressure on margin?

I do think there's a little bit.

We had a little bit of higher cost of funds on our deposits this quarter because of the public funds, but that's that we were able to keep pace with our slightly asset-sensitive balance sheet.

So I think we can work through it.

We're focused on working through it.

We're seeing continued growth in our variable rate loans.

There might be a little bit of compression on margin next year, but I don't see, from our perspective, what other institutions are seeing.

Okay.

A couple more I'll actually sneak in here.

One, just on credit, the Share National Credit in the quarter, obviously, what we're -- it's been kind of a strange year, I guess, from a credit perspective because all of the metrics, and obviously, the outlook seems stable, but there's been a couple of episodic events in 2018.

And I guess, how are you feeling about the overall credit of the loan portfolio at this point as we move towards the end the year and into next year?

Mike, I think your depiction is accurate.

Overall, our metrics are strong, and we feel generally good about the credit quality of the portfolio.

We do have -- obviously, we have the charge-off in the second quarter and the snick that got downgraded in the third quarter here.

So you see a couple on, when they are larger credit size, obviously, they influence the provision in any given quarter.

And generally speaking, we believe that the credit quality of our portfolio is strong, and we see no trends that would take us away from that.

Right.

And then lastly, Jeff, on the capital deployment side, it's kind of a unique situations because, obviously, you guys raised the capital not too long ago at the end of last year with -- and the growth has been solid this year at 10%, again, second consecutive year, more or less, and obviously, there's 1 quarter left to go here.

But it does kind of feel like, especially with growth at 8%, that you're not really going to be able to make a dent in that capital ratio just through your organic growth and current dividend.

So I'm just curious how are you guys thinking about capital deployment as you start to budget for 2019.

I mean, does -- do you have to broaden maybe the toolbox a little bit here, especially with some of the recent weakness in the marketplace, and look at maybe share repurchases or go back to increasing the dividend?

I was just curious.

Any updated thoughts would be helpful.

Overall, on capital, we -- the reason we raised the capital was multifold.

We continue to do see good organic growth.

But as you said, it's not necessarily at a level that will eat into the capital that we raised.

We do continue to look at opportunities on insurance and wealth for acquisitions, and our work -- we work a pipeline of that on a continuous basis.

Not that we've closed anything this year, but it is something that we are actively doing as we continue to look to build out our diversified model.

We did buy back about 100,000 shares this quarter.

In the month of October.

In the month of October -- sorry, in the month of October to take advantage of what seems to us could be a ridiculous drop in share price.

It's a good investment for our organization to buy back some shares.

On the dividend front, we hold firm with what we've always said there that we need to get more back to peer level before we will start to increase that dividend, which should be a low 30% payout ratio type of numbers.

I do think there's still opportunities to continue to look at lift-outs and continue to look at nonbank acquisitions.

These all take time, but I do think that, that is a use of capital that could happen in 2019 as we continue to move forward and continue to work on things that we have in the pipelines.

And Jeff or Roger, can you just remind me of the buyback?

What's the size of the current authorization that you guys have outstanding so after the 100,000 in October?

It's slightly more than 900,000.

(Operator Instructions) Our next question comes from Matthew Breese with Piper Jaffray.

Just going back to the buyback a little bit.

At current levels, do you feel like you want to use the entire authorization?

No.

One of the things, quite frankly, is we're looking out to 2020 where we have some sub-debt that will convert from its current fixed rate to a LIBOR-based rate that's right around 8% or so.

So I do want to keep powder dry to pay down some of that sub-debt.

So it's a little bit of what do you do in a scenario where -- look, stocks have been hit hard, right?

And so I think we would all believe that buying our own stock would be a good investment at these levels.

But it's also the concept that I do want to be able to pay down a decent portion of that sub-debt in 2020.

So we're looking at it both ways.

Understood.

Okay.

And sorry, could you give us any -- a little bit of an outlook for the tax rate for 4Q in 2019?

I know Fox Chase had some locations in South Jersey, and the tax situation there has changed.

Is there any impact there?

Not really.

So we would say we're around 18.5% for the fourth quarter.

When we look out to 2019, we would guide to a range of 19% to 19.5%.

A little bit of it's just a function of the increased pretax income, less benefit from your term differences, and we do have less municipal loans that are tax free now than we did a year ago.

So that would bring it up just a little bit.

But we're looking at 19% to 19.5% for next year.

Okay.

And then maybe going back to the margin, I think you noted in your comments that you had some excess cash and liquidity for the quarter that impacted margin by 3 basis points.

And I was just curious if we could see that used.

And maybe for 4Q, should we get some of that back?

Should we see some margin expansion in 4Q?

One of the things that we're anticipating is that the loan growth is going to be back-ended this quarter.

So I do have -- today, I have some excess cash, but the goal is, over the next 2 months, to utilize that.

So by the end of the year, you'll see it utilized for the quarter, on averages, we'll still have a little bit excess liquidity like we did in the third quarter.

And we don't mind that.

I mean, that's just a function of developing really good relationships on the deposit front that are going to be of value for a long time to come.

And we know that in public funds arena that there is a seasonal decline in the fourth quarter.

It's just timing within the quarter on the loan growth versus the deposit runoff.

Okay.

Okay.

And then just staying on the margins, I mean, as we get deeper into the cycle, one thing I'm observing in the Northeast is that the number of banks able to defend the NIM and retain an asset-sensitive position, the population just gets smaller and smaller every quarter.

And so I was curious as you look at your current pricing metrics for deposits, do you feel like you're -- there's any sort of shortfall versus where you are versus competition and where we might see that tipping point of margin compression versus stability?

I think we feel good about our deposit pricing.

As we've communicated last quarter, we are operating a CD promotion that's 59-month at 3%, a 23-month at 2.50% and a 13-month at 2.25%.

We feel good about that pricing relative to if I had to go out and borrow term borrowings, like this pricing is 25 to 50 basis points lower.

So I think where there's a possibility of getting squeezed a little bit is on the lending side where we've been able to do 50% variable, 50% fixed.

And I think that's going to switch a little bit to where borrowers are starting to lock in and may not be able to swap that just depends on the individual borrower.

So you might see a decline in new originations of the variable nature and more fixed rate there.

So it would be a slower grind on margin, I would say, but I do think that's where you would see some pressure.

Right.

Okay.

And so your guide, if we're looking out over the next 5 or 6 quarters, is some slight market compression on a core basis.

Is that accurate?

Yes, that is correct.

Okay.

And then my last one is just on the muni deposits for fourth quarter and into the first quarter of next year, what is the estimated outflow?

So in the fourth quarter, I believe, it's about $70 million of outflow.

And then the next year just becomes cyclical within their respective cycles.

In Pennsylvania, the third quarter is big for school districts.

That's when the school districts raise their taxes for the next year.

So they get all the funds in basically August, early September.

There's a liquidation throughout the rest of the year on that where the low point is June 30, and then it recycles again.

And we will plan accordingly for that.

But I can tell you, the second quarter of every year will be our highest loan-to-deposit ratio.

Our next question comes from Chris Reynolds with Neuberger Berman.

I have 2 questions.

The first relates to just the general housing market and your operating footprint.

It's well documented that housing activity and prices in the Northeast, whether it's Connecticut or New Jersey, have been soft over the last couple of quarters.

I'm wondering what you're seeing in your operating footprint.

And then also, provide -- can you provide an update on just your expansion in and around the Philadelphia market, which is important for you for growth?

Yes.

So on the first -- Chris, it's Mike Keim.

With regard to the housing market, on the residential side, it's just simply the available supply that out there in the markets -- and our footprint is down.

Turnover is quick, and there wasn't a lot that was added quarter-over-quarter.

So actually, home appreciation is up a little bit, but the supply is down.

So that is hurting -- clearly hurts us on the mortgage side, and we go from there.

With regard to the next question with regard to Philadelphia expansion, we have -- we've laid out, we have 6 financial centers and an LPO that sits in Center City, Philadelphia.

We continue to add people and look to add talent as we go, but we have not added additional physical infrastructure.

And at this point in time, we're not looking to add additional physical infrastructure.

We're putting a lot of focus more on the digital side of the equation for our growth.

Our next question comes from Frank Schiraldi with Sandler O'Neill.

Most of my questions have been answered, but I just wanted to ask, Roger, just following up on the promotions you talked about.

Just wondering what sort of traction you're getting there.

And then given liquidity on the balance sheet, are you looking to shut off the taps there at all?

And then finally, just how that compares in pricing to brokered CDs these days?

Sure.

So the -- to answer your question, I'm not worried about having a little bit of excess liquidity.

And I don't -- so to me, I'm about a wash in the P&L on that, and so if it's a little bit of a ding to the margin, I don't really care because I really care about net interest income.

So I don't really have any intention of turning off the spigot on the CD programs, primarily because they've been successful, and I'm able -- I have borrowings that are maturing.

I'm just not -- longer term, I'm not going to replace.

I'm just going to continue to use the CD programs.

The only time you would change that, quite frankly, is if you thought rates were going to turn the other way.

And I think it's a little too early for us to really get a sense what's going on.

If the Fed does increase 3 to 4 more times in the next 5 quarters, then these decisions on the CDs, I think, are going to be the correct decisions.

As it relates to our comparative rates, for example, on a 5-year brokered CD, it's a 3.38%, 5-year overnight with the Fed, all-in cost is about a 3.40%.

So I'm 40 basis points better, and I'm doing it with customers' -- customer CDs, which are, obviously, much more attractive.

One thing I would say this quarter, for example, we track our CD programs by new dollars that come into the bank.

Last quarter, we had $51 million new deposit dollars, and that related to 298 new customers.

This quarter was 173 new customers with new dollars of $35 million.

So that's a nice way to make traction within our market area as well as attracting new customers and the opportunity to cross-sell.

So I'm really kind of winning two birds with one stone relative to just going out to the wholesale market.

This concludes our question-and-answer session.

I would like to turn the conference back over to Jeff Schweitzer for any closing remarks.

Thanks, Brandon, and thanks to everybody for joining us on the call today.

We appreciate you participating, and look forward to talking to everybody again in January after we report fourth quarter earnings.

Have a great day.

The conference has now concluded.

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