Univest Financial Corp (UVSP) 2019 Q2 法說會逐字稿

Good morning, and welcome to the Univest Financial Corporation Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note, today's event is being recorded.

At this time, I would like to turn the conference over to Jeffrey Schweitzer, President and CEO.

Please go ahead.

Thank you, Chris, 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 Brian Richardson, 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 $16.5 million during the second quarter or $0.56 per share.

We are pleased with our results for the quarter as loans grew $100 million or 9.8% annualized, and deposits grew $119 million or 11.9% annualized.

Year-to-date, loans have grown $161.3 million or 8.1% annualized and deposits have grown $236.2 million or 12.2% annualized.

This growth has led to a 10.4% increase in our net interest income compared to the 6 months ending June 30, 2018.

We continue to see solid loan demand due to market disruption and the strength of our local economy.

However, competition around rate and structure is increasing.

In our non-banking lines of business, wealth management revenues, which includes our trust business, rebounded in the second quarter as the market rebounded, as first quarter revenue was impacted by the market downturn in the fourth quarter.

Insurance revenues increased 5.6% year-over-year due to strong contingent commission income and growth in commercial lines and group health and life premiums.

I'll now throw it over to Brian 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 continued our positive trend of earnings growth and consistent financial performance.

As Jeff mentioned, we recorded earnings per share of $0.56 for the quarter, with no unusual or nonrecurring items.

Through the first 6 months of 2019, we achieved a return on average assets of 1.29%, return on average equity of 10.28% and return on tangible equity of 14.23%.

I would now like to touch on 2 items from the earnings release.

First, as Jeff highlighted, net interest income for the first 6 months of 2019 is up 10.4% compared to the same period in 2018 due to strong average loan growth and a relatively flat net interest margin.

Our core net interest margin for the second quarter of 3.66% decreased 8 basis points from 3.74% in the first quarter.

It is important to note that excess liquidity, which was driven by strong deposit growth during the quarter, negatively impacted core NIM by approximately 5 basis points.

Excluding the impact of excess liquidity, core net interest margin was 3.71%, a decrease of 3 basis points when compared to the first quarter.

We would anticipate that core net interest margin for the third quarter would compress approximately 6 to 8 basis points to a range of 3.63% to 3.65%.

This includes compression at a similar rate experienced in the second quarter, plus the negative impact of the current decrease in short-term LIBOR rates and the anticipated 25 basis point reduction in primary rate later this month.

Due to recent signs of deposit cost abatement, we do expect the core NIM to flatten out in the fourth quarter, absent any further primary decreases.

Second, as expected, our efficiency ratio continued to decline as compared to the prior year.

Excluding 2018 restructuring charges, total non-interest expense for the 6 months ended June 30, 2019, increased by 5.0% from the same period in 2018.

When combining significant revenue growth and continued expense discipline, our year-to-date efficiency ratio excluding restructuring charges declined to 61.0% from 63.2% in 2018.

It should also be noted that 2019 expense numbers include approximately $675,000 of year-to-date noninterest expense associated with hiring the 8-person team in Lancaster and York counties during the first quarter of the year.

As it relates to the full year of 2019, I would like to remind everybody that we expect noninterest expense growth, excluding restructuring charges of 7.0% to 7.5% for the year.

This translates to 2019 noninterest expense of $146 million to $147 million, which includes the incremental investments in lending teams that we have made during the year.

I believe the press release was straightforward for the remaining items, particularly related to noninterest income.

And accordingly, 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.

(Operator Instructions) Today's first question comes from Frank Schiraldi of Sandler O'Neill and Partners.

Just a couple of questions.

I just wanted to start with the NIM outlook.

Brian, you mentioned, down 6 to 8 bips on a core basis in the third quarter.

Just wondering if you can -- if we can extrapolate out 25 -- given 25 basis point rate cut, what does that mean for the NIM?

Is that 6 to 8 bips a good number?

Or I would imagine some of the 2Q included the reduction of LIBOR that sort of front ran into reduction or the expected reduction in Fed fund.

So just trying to get a sense for, just generically, given 25 basis point rate cut, where do you think that impacts the margin?

Yes, Frank, we -- on a normalized basis, we saw 3 basis points of compression in the current quarter -- in the second quarter.

We expect similar compression, absent the decrease.

So with the 6% to 8% guidance of compression, there will be incremental 3% to 4% as it relates to the primary decrease, Federal Reserve rate decrease.

Okay.

So a 25 bips -- I mean, I guess, the next 25 bips, are you thinking 3 to 4 basis points as well?

In that range.

Of course, there is the uncertainty around deposit cost and pricing on the commercial loan side.

So -- but with all things equal, our models today would suggest 3 to 4 basis points for a 25 basis point decrease.

Okay.

And then why the 6 to 8?

Is that -- that includes just, I guess, continued ramp-up in deposit costs from the rate hike, I guess, in December or...

Yes.

We're starting to see some abatement, but there still is, we have our public funds bill that occurs during the third quarter and the like.

So we do see a little bit of pressure on for that.

And then we expect it to normalize and flatten out in the fourth quarter, absent any further rate decreases.

Okay.

And then just finally, on the loan growth, continued strong loan growth.

Just wondering, you mentioned the 8-member team in Lancaster and York.

Is that -- are they contributing at all in a big way?

Or is that still sort of yet to come?

Frank, it's Mike.

Yes, they did some deals that came through in the second quarter.

It was a small percentage of what the overall growth.

They are building pipelines.

So we are expecting to see them to be a stronger contributor as we move forward here.

Our next question comes from Michael Perito of KBW.

I wanted to just quickly -- quick clarification question.

In the earnings release, the increase in other income with the noninterest income, there were a couple of things mentioned.

Fees on risk participation agreements and then some gain on sale of SBA.

I was wondering if you could, I guess, on the first part, just give us a little bit more color about what that business actually is, the fees on risk participation agreements?

And then second, just give us a sense of kind of how big the SBA platform is today and your expectations there moving forward, if that continue to be as positive a contributor as it was in the second quarter.

Sure, Mike, this is Brian.

As it relates to risk participation agreements, that's the vehicle we use to derive, so swaps and derivatives to our customer base.

It's really situations where customers are seeking longer-term fixed rate loans than what we would like to put on balance sheet.

So we achieved that via having them enter into a derivative, and we participate in the risk via risk participation agreement.

So that's the instruments there.

On the SBA side, it was a very strong quarter as it relates to SBA.

We would continue to add -- or we expect that to taper off a little bit as we look into the third quarter.

But we have been focusing on that over the last year to 18 months.

And so as you think about -- I mean the first half of the year here, you've done north of $16 million a quarter in noninterest income core.

I mean as you think about that run rate or as we move into the back half of the year, what's the thought process?

I mean do you think that, that is a sustainable level, just given the wealth insurance and investment momentum and some of the swap in SBA momentum as well and another seasonally strong quarter for mortgage, even though I know overall the environment is a little tough there locally?

But what are your thoughts, I guess, broadly on the fee income line in the back half of the year?

We had originally guided to 5% increase year-over-year compared to 2018 for the full year, and we are affirming that guidance at this point.

Okay.

Helpful.

And then just -- another clarification question on the margin guide.

I mean so does that 6 to 8 assume a constant level of the Q2 liquidity?

Or has that liquidity already run down?

Just maybe -- and then, I guess, more broadly, just how -- not margin related, just on absolute dollar basis, where do you expect the liquidity profile to kind of move forward?

As I imagine, there's quite a build in the deposit pipeline as well as the loan pipeline today?

Yes, Mike, this is Brian again.

The answer to that, the last part there, as it relates to normal liquidity levels, we operate around $40 million on a normalized basis.

And we're approximately $60 million to $65 million in excess of that throughout the second quarter.

That 6 to 8 basis points, that does anticipate a normalization of excess liquidity.

And so far through the quarter, we see that occurring.

Helpful.

And then just lastly, as we look out to next year and in the back half of this year, capital levels are pretty healthy here.

It sounds like growth is well positioned to at least kind of continue in this upper single-digit range, minimally with the new teams coming on.

I know that's part of kind of a long-term capital plan to continue to drive organic growth.

But can you give us any thoughts, just maybe beyond that?

I mean it would seem like even with the 8%, 9% growth rate, you're still going to be building capital towards 10% on a CCE.

I'm just curious what the updated thoughts on how to kind of manage that moving forward?

Yes.

Similar to what we've talked about in the past, our plan is to try to repay some of our sub debt, which starts to come due next year.

So right now, you're correct.

We will -- should be building capital and the intention would be to use that to repay our sub debt.

And can you remind us what comes due next year and what the rate on it is?

It's a $50 million piece is what comes due at the end of the year.

And the rate is approximately 5.1%.

After we'll pay all of it off, but we're going to try to eat into that and make a good dent on it at a minimum.

And that's the end of next year, correct?

No.

The end of this...

March.

It's March 31, 2020.

(Operator Instructions) The next question comes from Matthew Breese of Piper Jaffray.

Just wanted to talk about the other team, the new team hired in the second quarter, New Jersey and Philly.

Are they commercial real estate focused or C&I focused?

Where will they be additive?

And then just stepping back and considering further consolidation in your market with the WSFS-Beneficial deal, are there still good hiring opportunities or are there more or less?

Could you just characterize the environment on that front?

Matt, it's Mike.

In terms of the guys in South Jersey, they are primarily business bankers, so they're doing smaller deals, which would be more on the C&I side, but they also have a couple of larger deals.

So there will be some necessary, so I'm being a little cryptic, and I apologize for that but they got a good blend.

On average, their deal size is going to be smaller rather than what our average deal size is across the platform.

In terms of health or environment for recruiting, look, we still get opportunities, and we'll continue to do that.

And I think the biggest value that we always can point to is, we've done team lift-ups, where we've been successful, and we continue to invest in our process and get a way just to demonstrate the folks that we can get deals done, and we work well with our customers.

So I think we've created an environment that is attractive for people to come and join us, and we'll continue to foster that environment, and therefore, we'll continue to get opportunities to bring additional folks onboard.

Understood.

Just given they are in South Jersey, and legacy Fox Chase have some exposure to South Jersey as well, do you ever see yourselves building out more of a physical presence in that market?

So the former Fox Chase team was more down at the shore.

These guys are operating in the kind of the Jersey suburbs to Philadelphia.

We are going to look at putting an LPO in place.

But at this point, we have no additional plans to add a financial center or a branch.

That's what we call them.

Understood.

Okay.

And then I know you said that deposit competition is starting to abate.

Could you just give us a characterization of where you're seeing it abate?

Have you seen it yet on the money market and high cost savings kind of accounts?

Or you're still on the CD front, the longer duration front that's following the curve, so to speak?

Matt, this is Brian.

It certainly has occurred on the CD side.

And we are seeing signs that it's starting to occur on the money market side as well.

A lot of the promotional products that were out there, you start to see those being dialed back a little bit over the last couple of weeks to a month or so.

Okay.

And then just the last one.

We're getting very close to CECL implementation.

Just curious where you stand in that process?

And any early indications of where we could see that, first day true-up allowance?

And what the go-forward provision could look like?

The team that we assembled for the CECL implementation project has made great progress over the last 18 months.

We are very happy with where we are in that process.

But at this point, we are not ready to disclose the expected impact.

This concludes our question-and-answer session.

At this time, I would like to turn the call back over to Jeffrey Schweitzer for any closing remarks.

Thanks, Chris, and thanks, everybody, for joining us today.

And we're excited about the results we were able to publish for the second quarter and look forward to solid momentum as we head into the third quarter and the rest of the summer.

So we look forward to talking to you 3 months after we release earnings again.

So have a great day and enjoy the rest of your summer.

Thanks.

The conference has now concluded.

Thank you for attending today's presentation.

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