Univest Financial Corp (UVSP) 2022 Q3 法說會逐字稿

Good morning. Thank you for attending today's Univest Financial Corporation Third Quarter 2022 Earnings Conference Call. My name is Alexis, and I will be your moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to Jeff Schweitzer, President and CEO of Univest. You may proceed, Jeff.

Thank you, Alexis, and good morning, and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Keim, our Chief Operating Officer and President of Univest Bank and Trust; and Brian Richardson, our Chief Financial Officer.

Before we begin, I would like to 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 $20.8 million during the third quarter or $0.71 per share. Our net interest income increased 13.2% from the second quarter of the year as we continue to benefit from rising interest rates. Additionally, we continue to have very strong loan growth as loans grew $190.6 million or 13.5% annualized, excluding PPP loans during the quarter. Year-to-date loan growth has been $568.8 million or 14.4% annualized, excluding PPP loans.

We are very happy with our results for the quarter as our pretax pre-provision income continues to be solid and increased 27.9% from the second quarter. Additionally, while noninterest income has been negatively impacted by increasing rates and decreasing margins for mortgage banking along with the decline in financial markets impacting assets under management and supervision for wealth management, new business production across our lines of businesses continues to be solid, setting us up for continued future growth. Finally, while there is definitely recession risk as the Federal Reserve continues to raise rates, our credit quality continues to be solid as nonperforming assets to total assets declined 4 basis points during the quarter with minimal net charge-offs of 8 basis points.

Before I pass it over to Brian, I would like to thank the entire Univest family for the great work they do every day and for their continued efforts serving our customers, communities and each other.

I'll now turn it over to Brian for further discussion on our results.

Thank you, Jeff, and I would also like to thank everyone for joining us today. As Jeff indicated, we continue to be very pleased with our performance during the first 9 months of the year. I would like to touch on five items from the earnings release. First, our strong loan growth in recent years, coupled with the benefit of the rising rate environment, continued to provide momentum for our net interest income and net interest margin. Reported margin of 3.67% increased 48 basis points compared to last quarter. Core margin, which excludes the impact of excess liquidity and PPP, was 3.68%, an increase of 27 basis points when compared to last quarter. Net interest income increased $6.8 million or 13.2% compared to last quarter.

Second, during the quarter, we recorded a provision for credit losses of $3.6 million. Our coverage ratio was 1.28% on September 30 compared to 1.27% at June 30. For the first 9 months of the year, we've had net charge-offs of $3 million or 7 basis points annualized. Despite general economic concerns, we are not seeing signs of pervasive credit quality deterioration in our portfolio. During the first quarter, we actually saw a slight reduction in nonperforming assets and delinquencies and a $59 million or 35% reduction in criticized and classified loans.

Third, noninterest income decreased $2.6 million or 12.6% compared to the third quarter of 2021, which was primarily driven by a $2.4 million decrease in net gains on mortgage banking due to a decrease in saleable volume.

Fourth, noninterest expense increased $3.4 million or 7.9% compared to the third quarter of 2021. This include $1.2 million related to our digital transformation initiative, $504,000 resulting from the inclusion of the Paul I. Sheaffer Insurance Agency, which was acquired on December 1 of last year and $227,000 related to our expansion into Western Pennsylvania and Maryland. Excluding these items, noninterest expense increased to $1.5 million or 3.4%.

Fifth, on October 26, the Board of Directors authorized an additional 1 million shares for repurchase. Including this authorization, there are a total of 1.3 million shares -- 1.23 million shares authorized for repurchase. During the first 9 months of the year, we purchased 450,000 shares at an average price of $25.29. Going forward, we will opportunistically repurchase shares with no predefined quarterly volume targets. I believe the remainder of the earnings release was straightforward, and I would now like to provide two updates to our 2022 guidance.

First, on last quarter's call, I had guided to loan growth of 10% to 11% for 2022. Based on our continued strong growth during the quarter and our current pipelines, we are increasing this guidance to 13% to 15%. Second, we expect the increased loan growth coupled with the rising rate environment to result in net interest income growth of approximately 23% to 25% of the base of $173.4 million in 2021. This assumes a 75 basis point rate increase next week and another 75 basis points in December. I'd also like to note, the guidance provided last quarter for the provision for credit losses, noninterest income, noninterest expense and income taxes remains unchanged.

That concludes 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 comes from the line of Tim Switzer with KBW.

I'm on for Mike Perito. I wanted to ask about the upgraded loan guide. It's kind of an acceleration, I guess, from what you guys are expecting. Last quarter sort of implied like a high single-digit rate in the back half of the year, and now I'm looking at it real quick, but it looks like you're in the double digits, like low double digits now. So I want to hear kind of what are the trends you're seeing? Which markets are you seeing the growth? And then what are your expectations for at least the first half of next year?

Tim, so this is Mike Keim. When we talked in the last quarter's call, there was -- we still had strong pipelines and we are moving forward. We had an element of caution with regard to what would have to happen to activity as the Fed continue to move interest rates up. As we -- at this point in time, our pipelines are full for the fourth quarter, and we expect a very similar quarter to what we had this quarter and in the fourth quarter, therefore, Brian's guidance. As we move into next year, I still am cautionary, and we are still cautioned as an organization with regard to how loan demand will hold up as the Fed continues to raise rates. So that was really what -- why we're a little bit more cautious and conservative last quarter. We're kind of steering at in the face with regard to the fourth quarter right now, but we are still cautious to some degree as we move into 2023.

Okay. Yes, I understand the 2023 outlook. That's fair with the Fed rate. And then can you talk about which markets and categories you're seeing the strongest growth in demand from?

We're actually -- we have a very well-diversified book, and we are seeing growth across the footprint. At this point in time, our customers continue to see strong economic activity. There is some level of caution that's going on with regard to hiring new people. But other than that, everybody kind of thinks that at the very least, we're going to have a slowdown, if not some type of recession. But individually, each company is kind of thinking their business is doing fine. So it's kind of an odd kind of situation at this point in time from a perspective -- for perspective, but other than that, we're seeing that growth and strong activity across the board. So there's no specific market or no specific asset class that is stronger than the other or at least memorable.

Okay. That's good color. And the last question for me is on the margin. Really good core expansion this quarter. With another 150 basis points baked in your guide, could you talk about where you see the margin going from here and into like first half of '23?

Sure, Tim, this is Brian. So for Q4, we're expecting kind of in that 5 to 10 basis point expansion range on NIM. While we're not positioned to give full guidance for 2023 as we're in the middle of our budget process, I think as you kind of just think about our asset sensitivity and the reduced benefit of that asset sensitivity, the further we get into this raising rate cycle, I would think it would be fair to conclude that NIM would kind of peak out in the fourth quarter, maybe into the first quarter, and then you start to see it pull back into that 3.55% to 3.65% type range going forward as we -- on a more normalized basis.

Okay. That's understood. And could you guys take any more actions to limit the asset sensitivity, like the swap you guys did last quarter? Or is that more just you're expecting some rising deposit betas?

It's really the asset side continuing to behave as we originally modeled and as we've seen on the first handful of raises, the first 300 basis points of raises, where the change is coming in is on the liability side as [deposit] betas catch up. Up to this point, our cumulative beta on interest-bearing deposits is in that 12% range. Historically, in rising rate environment, we see that in the 45% range. So we expect that to catch up here as things continue to go in the upward rate environment.

The next question comes from the line of Matthew Breese with Stephens Inc.

Curious on the loan growth guidance. Is there anything else that's driving that beyond just good kind of core economic activity in your local markets? Maybe talk about the hiring efforts and whether or not it's bearing fruit. And the other thing I'm curious about is whether or not there's been any change in the competitive landscape? Like have you seen some of the insurance companies or non-banks pull back and become less competitive?

So Matt, it's Mike. In terms of hiring, we've consistently looked for and brought on strong producers. So that continued to benefit us over time. There's nobody specifically that we brought on that. All of a sudden, it has produced some outsized growth in the last quarter or so. It's really the cumulative efforts that we've had.

With regard to the expanded markets in Western Pennsylvania and Maryland, we're still building up pipelines there. That's contributed a little less than $10 million to the loan growth in the third quarter. So it's helping, but it's not a big driver at this point in time, but we will continue to make investments as we grow out those regions. Beyond that, from a competition perspective, we met with couple of people that seem to indicate perhaps, there is some back off on multifamily from an insurance company perspective, but we haven't seen anything that dramatic at this point in time.

Got it. Okay. And then maybe just talk a little bit about the funding strategy supporting, which seems to be at least in the near term, continued strong loan growth. What areas do you expect to rely on? Is it going to be CDs and kind of money market? And then maybe just touch on expectations for noninterest-bearing deposits, which have been down in the last couple of quarters?

Matt, this is Brian. So we've always historically managed in kind of that 100 to 105 range from a loan-to-deposit ratio. We're now targeting kind of in that 95 to 100 range. We're a little bit north of that as we ended here, but of course, growing deposits to continue to fund our growth will be a core initiative. It's kind of an across-the-board approach being -- CDs are certainly a place to be going. We have some promos that are out in the marketplace currently as well as money markets, where we've done some adjustments on our rack rates as well to both retain and drive some incremental deposits there.

On the noninterest-bearing side, we've had a pretty good track record in the last rising rate cycle. From 2016 to '19, we saw a 12% average increase per year in noninterest-bearing, really sits there in kind of that roughly 33% to 35% of our deposit base on a normalized basis. We'd expect that to continue to grow in conjunction with our C&I growth and our treasury management and commercial offerings.

Okay. So you expect that historical range to hold?

Correct.

Okay. And then I think you'd mentioned -- I don't know if I caught it correct, historically, a 45% deposit beta for interest-bearing. Is that what you're assuming kind of full cycle, this cycle as well? Or any kind of -- any change to that?

Correct, yes. Yes, we expect to resort back to it's historical norms. So 40% to 45% on interest-bearing in the low 30s when you look at it on a total deposit basis, assuming our mix stays the same, where it's 2/3, 1/3 between interest-bearing, noninterest-bearing.

Okay. And then last one for me. Just I love some commentary on the overall size of the securities portfolio and how we should be thinking of that as a percentage of the total balance sheet?

Yes. So where that is today is currently in line with where we'd expect roughly 7% of assets. Historically, we've averaged -- targeted 8% to 9% of total assets. Of course, with our strong loan growth, well, that's a balancing act, and kind of where we sit today, it seems like an appropriate level, and we'll continue to manage that moving forward.

(Operator Instructions)

The next question comes from the line of Frank Schiraldi with ABC.

It's actually Justin Crowley on for Frank from Piper Sandler. I have a quick question on expenses, and there wasn't necessarily anything change specific to the quarter, but you've had the digital initiative going for some time now, and that's been flown through the base. I was wondering if you could just spend some time just talking about what the benefits there are. And then specifically on that digital side, how that could potentially help on the funding side, if at all, just as you look out further into next year? And sort of what that does for the franchise?

Yes. So -- this is Mike Keim. So the investments that we have made on the digital side and what we expect out of them, you kind of tick through these. One, we think that the investments we're making are necessary to keep us from a competitive posture there. Two, we are looking at them and the tools that we have so that we can deepen existing relationships with customers. So we can sell all of our products and services. So that is a revenue side of the equation. The third component of it is, what you're getting at is, ultimately, we believe those digital investments will allow us to be, a, across the board, we'll be more efficient with regard to processing loans, processing deposits, et cetera, but also gives us an ability to enter into new markets without making heavy investments in fixed infrastructure, i.e., physical space.

So as we expand into Western Pennsylvania and into the Maryland markets, we can do that with a lot less -- more a couple of regional headquarters in each of the counties that we serve and go forward from that perspective. So ultimately, that's how it will benefit us from an expense posture. But we will also see benefits across the board with regard to just being more efficient as an organization from the front end to the back end of our operation as we more tightly integrate workflow and use systems to drive data through.

Beyond that, from a funding perspective, components of what we're doing on the digital side or mobile tools with regard to consumer deposit account opening as well as we subsequently will add a stronger small business depository tool. Remember, we are much more a commercial bank than a consumer bank. So new customer acquisition that would be driven by kind of a marketing spend would be the fourth pillar of our digital strategy, and we will not embark on that until we get the first three nailed.

Okay. Got it. I appreciate that. And then just on that -- on the initiative and sort of the related costs, is that something that is -- and forgive me if you guys have talked about this before, but just how that trends into next year? And kind of how spend has shaken out compared to what you originally budgeted for versus where you see that as we head into 2023?

Yes. For 2022 -- this is Brian Richardson. For 2022, we had guided towards $3.5 million to $4 million of spend. We expect to come in on the higher end of that range, but still in that $4 million range. Expected to be roughly half of that next year, and that's really a function of some costs we incurred this year that are deferrable due to the long-term nature of the solution that we're building. So it's really the amortization of that because it's largely coming through in future periods. A lot of our heavy consulting spend, and the upfront work that was needed to be expensed was expensed this year, and we had some items that are capitalized that will carry into next year.

Got it. And then sort of shifting gears. Just on uses of capital, I hear you on the buybacks being a little more opportunistic. I guess as far as other uses, you guys have traditionally leaned more on the team lift out strategy. Nothing that I've heard seems to suggest that, that might change going forward. But just on M&A, could you sort of frame what conversations you're having, if any granted? I know deals right now, it seems like they're a little tougher to get done just given some of these marks and some other industry headwinds. But just any updated thoughts on M&A would be appreciated.

Sure, Justin. This is Jeff. Bank M&A is really not a priority of ours at this point. So while we always want to be attuned to what's going on in the market and what's out there, it's not something that we're overly focused on. We've entered Pittsburgh in Baltimore by hiring market presidents. They're going to be building teams out organically. That's been our strategy now since we did the Fox Chase transaction. The Leicester lift out to over a $1 billion bank now out there, basically. So that's really our focus is the organic strategy as opposed to bank M&A. And given where pricing is right now. On stock prices, combined with if we are headed to a recession, buying somebody else's loan book just makes it even less attractive from our perspective right now. So we're going to continue with our organic strategy for the time being and really focused on that.

Understood. And then if I could just sneak one last one in just quickly on credit. Obviously, metrics look great, and I think that's sort of what you're seeing across the industry. No real issues despite some of the headlines and the macro backdrop. Are there any areas where you're getting a little more cautious, maybe not specific to this quarter, but just as you look over the past year or so or just any areas where you're maybe tightening up, asking for lower LTVs or just more stringent standards more broadly?

Yes. So Justin, it's Mike again. So what we've -- for the last year at the very least, we've looked at the office space with the level of caution. And while we may do a deal or two, it's really reflective of who the underlying tenant is and what business that they're in, that would drive that. Otherwise, we don't have a huge appetite for that space. Beyond that, when you look at retail, we'll still do certain retail deals, but it's again, who are the underlying tenants, where are the organizations. So we won't go into a strip mall with just local vendors or local companies that were once supporting a strip mall.

If there is a larger Home Depot/Lowe's type of underlying tenant, that is something we would look at and move forward with that. But we would also be a little bit more cautious with regard to the LTVs on that side of the equation as well. So those are the two that come to mind the most. We're very careful to be absolutist, saying we will or won't do anything because a lot of times, it is the facts and circumstances of the deal. But on a general basis, that's the color I could give you.

There are probably no further questions registered in queue. So I will now turn the conference back over to Jeff Schweitzer for any closing remarks.

Thank you, Alexis, and thank you, everyone, for participating on the call today. We had a very strong third quarter, and we look forward to finishing the year equally as strong. And I hope everybody has a great day, and go Phillies.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.