Univest Financial Corp (UVSP) 2021 Q4 法說會逐字稿

Hello, and welcome to the Univest Financial Corporation Fourth Quarter and Year-end 2021 Earnings Call. My name is Alex, and I will be coordinating the call today.

(Operator Instructions) I will now hand over to your host, Jeffrey Schweitzer, President and CEO of Univest Financial Corporation. Over to you, Jeff.

Thank you, Alex, 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 start by saying I hope everyone listening is staying safe and you and your families are healthy. I also need 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 could be found on our website at univest.net under the Investor Relations tab.

We reported net income of $17.4 million during the fourth quarter or $0.59 per share. For the year, we reported net income of $91.8 million or $3.11 per share. We are very pleased with our results for the quarter and the year as we continue to experience strong loan production, along with growth in our fee income businesses.

Even with the continued offset of payoffs due to the success of our customers, we experienced solid loan growth of $111.8 million or 8.7% annualized during the quarter, resulting in total growth for 2021 of $455.2 million or 9.4%, excluding PPP loans. Since the acquisition of Fox Chase Bank and the lift-out of the Lancaster team, which both occurred in mid-2016, we have averaged 10% loan growth per year, excluding PPP loans.

Additionally, to bolster our fee income business on December 1, we completed the acquisition of the Paul I. Sheaffer Insurance Agency, expanding our insurance team into the Lancaster market, where we have significant banking operations.

2021 was a strong year for Univest as we continue to grow our lines of businesses and make investments for the future in both people and technology. Before I throw it over to Brian, I once again want to thank the members of the Univest family. They continue to do a wonderful job living our core values each day in serving our customers, our communities and each other as we continue to work through the current environment and move Univest forward. I will now turn it over to Brian for further discussion on our results. Brian?

Thank you, Jeff. And I would also like to thank everyone for joining us today. As Jeff said, we are very pleased with our performance during 2021. We produced a pretax pre-provision ROAA of 1.57%. This was a direct reflection of the strength of our diversified business model and continued ability to grow loans.

I would like to touch on 4 items from the earnings release. First, reported margin of 2.86% was down 25 basis points compared to the third quarter. Reported NIM was negatively impacted by 43 basis points of excess liquidity, which averaged $874 million for the quarter compared to $490 million in the third quarter.

This increase in average excess liquidity was driven by a $226 million seasonal increase in average public fund deposits as well as a $149 million increase in commercial deposits.

During the fourth quarter, PPP loans increased NIM by 8 basis points and contributed $1.6 million to net interest income. Core margin, which excludes the impact of excess liquidity and PPP was 3.21%, an increase of 3 basis points when compared to the third quarter. As it relates to PPP, as of December 31, $817,000 of net deferred fees remained on the balance sheet. During 2021, we recognized net interest income of $15 million related to PPP loans.

Second, during the fourth quarter, we recorded a provision for credit losses of $1.4 million. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.36% on December 31, which was consistent with September 30. During the quarter, our COVID-related deferral declined to $6.2 million or 0.1% of the portfolio. We experienced net recoveries during the quarter of $243,000 and net charge-offs for the year totaled $213,000.

Third, noninterest income increased $4.9 million or 6.3% in 2021 compared to 2020, which reflects the continued benefit of our diversified business model. During 2021, noninterest income represented 31% of total revenue.

Fourth, noninterest expenses increased $12.4 million or 8% for the full year when compared to 2020. Salaries, benefits and commissions increased $11 million or 11.8% as we continue to be aggressive in hiring revenue producers when presented the opportunity. We have also experienced cost increases due to merit increases, the impact of wage inflation and variable incentive compensation cost, which increased $3.6 million year-over-year due to our strong performance in 2021.

Excluding the increase in variable incentive compensation, noninterest expense increased 5.7% over 2020. Professional fees increased $2.3 million or 44%, primarily attributable to increased consulting fees in support of our DE&I and training initiatives as well as our treasury management product and process enhancements. During 2021, we spent $1.4 million on these initiatives.

Data processing expenses increased $1.4 million or 12.4%, primarily due to continued investments in our end-to-end loan origination solution for loans below $1 million, customer relationship management software, internal infrastructure improvements and outsourced data processing solutions. I believe the remainder of the earnings release was straightforward, and I would now like to focus on 5 items as it relates to the 2022 guidance.

First, during 2021, net interest income totaled $173.4 million when excluding PPP income of $15 million. For 2022, we expect loan growth of approximately 8% to 9%, excluding PPP loans, and we expect this to result in net interest income growth of approximately 8% to 10% off the base of $173.4 million. This assumes one 25 basis point rate increase in March. Each additional 25 basis point increase is expected to result in annualized net interest income of approximately $3.5 million to $4 million.

Second, the provision for credit losses will continue to be driven by changes in economic forecasts, government stimulus and performance of the portfolio. At this time, we expect the provision for 2022 to be approximately $6 million to $8 million.

Third, 2021 noninterest income included $1.1 million of BOLI debt benefits. Excluding these BOLI debt benefits, noninterest income totaled $82.1 million in 2021. For 2022, we expect noninterest income growth of approximately 1% to 3% off the base of $82.1 million. This translates to a compound annual growth rate of approximately 8% to 9% from 2019 to 2022.

Fourth, we reported noninterest expense of $167.4 million in 2021 and expect growth of approximately 6% to 8% in 2022.

Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 19% to 20% assuming the current statutory rate 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) Our first question comes from [Michael Terito] who is a private investor.

Just a couple of questions. Brian, I appreciate the thorough guidance there. On the 6% to 8% expense growth, I guess, how should we think about kind of this for that? I mean you guys continue to invest in the business, but there seems to be some environmental pressures that a lot of your peers are citing when kind of guiding up to expenses next year. Can you maybe just give us a little bit of how much that is hiring that you budget in? How much of that is tech investments you're budgeting in? And how much of that is kind of general like environmental pressures that could be pushing that number higher in 2022?

Yes. All in, as we look at kind of adds to staff just as we continue to grow and hire producers as well as just kind of the pressures that you're describing. We're kind of in the high single-digit range assumption for salary, benefits and commission growth year-over-year.

And then the other kind of big area would be on the data processing side. That's kind of in that high single-digit, low double-digit growth range year-over-year. So those are the main drivers that get us to that 6% to 8%. And those numbers do include about $1 million of assumed investment as we continue to evolve our digital products. So that's reflected in that 6% to 8% guidance that I provided.

Helpful. And then maybe a question for Jeff or Mike. But just in terms of the competitive landscape from a loan growth perspective, I mean, obviously, you guys have really been able to sustain your growth through a variety of environments here. Just curious if, as you look to next year, obviously, the loan growth guidance is pretty strong. But I mean do you think the environment could perhaps become even a bit more accommodating than it was over the last year?

I mean it seems like a lot of your regional peers are getting more bullish on growth, and they weren't even growing loans for the prior 12 months. So I'm just trying to kind of level set, if you think there's some tailwinds maybe that could help you guys accelerate growth even further?

I think it's -- Mike, it's Mike. I think it's still going to be a competitive marketplace. I think at this point in time, I don't think everybody is fully thinking about the Fed increases and their pricing mechanisms. Larger competitors are, but that continues to be a competitive headwind for us.

The secret to our loan growth continues to come back to the strength of our team. So even with the larger players becoming more bullish on what the market could be, I'm very comfortable with the guidance that Brian put forth as we move forward. And we'll continue to grow the team as he also referenced in the operating expense detail.

Yes. The other thing you got to remember, a lot of our customers have been very successful in selling their projects, and we're seeing that continuing to happen. So the loan growth that we're forecasting, while strong, it's also net of some payoffs that we anticipate happening throughout the year that are sizable.

Got it. Very helpful. And then -- just lastly, on the NIM guide, Brian, because I'm curious what you guys are thinking on the deposit side of the equation.

What type of betas are you assuming? And I think you guys have brought in a lot of new core funding, particularly if you can expand it into new markets, just how are you generally thinking about some of the rate sensitivities of those fundings relative to kind of some of the legacy like north of Philly funding you guys have, which I know the beta is historically extremely low.

Yes. I mean we -- the first couple of increases, especially with the excess liquidity that we're sitting with, we think that the betas will be pretty low for the first couple of 25 basis point increases. Historically, in the last kind of increasing rate environment, we saw a beta of roughly 45%. Kind of thinking that will be in the 20% to 30% range here for the first couple of increases. Just again sitting with the excess liquidity that we currently have. We do have roughly $600 million of deposits that are variable rate and tied to Fed funds, so that will instantly adjust off. So that will bring some incremental expense across with that. But otherwise, we think we'll be able to hold pricing relatively flat on the rest of the book with small deviations.

And can you just remind us on the asset side? What were prices immediately?

Yes. So the book overall, our loan book is 40% fixed, 23% adjustable and 37% variable. So it's really that 37% that's variable adjust immediately.

(Operator Instructions) Our next question comes from Frank Schiraldi from Piper Sandler.

On the -- sorry if I missed it, Brian, but on the -- on your NII guide, does that assume additional deployment through security purchases as well? Or is loan growth robust enough that, that's really the driver? And then what are your thoughts on the -- obviously, you mentioned deposits. You got some room to let those run off if need be, but just kind of what is your base case there?

Yes. So we -- where we sit today, we kind of see excess liquidity. I mean we ended the year at $800 million from a spot perspective. We're currently down to the $700 million range. We see a path where, without meaningful incremental investment purchases or anything like that, we could be in the $0.5 billion range by kind of midway through the year, and then in the $100 million to $200 million range by the end of the year.

That said, in between the fourth quarter of last year, and here in the first quarter of this year, we have purchased approximately $125 million of incremental investments, really to get our investment book back up to the percentage of the balance sheet that we've seen historically. But we're doing that in a disciplined fashion, just kind of hard to get too excited about sub-2% yields on mortgage backed. So we're nibbling at it as we go through, but being disciplined, but opportunistic.

Okay. And then on the fee income side. I think the guide was for 1% to 3% of that normalized 2021. I wonder if you could just drill down a little bit there. I'm wondering what you guys are expecting on the mortgage banking front and then what the specific offsets for growth are.

Yes. On the mortgage banking side, I mean, from an all-in -- from a reported fee income perspective, we see that pulling back kind of in that 25% to 30% range versus what we experienced in 2021. Really, we expect volume to hold relatively steady, but margins are tightening up. We were kind of in the low to mid-3s for a good part of 2021. We'd expect that to kind of fall in that 2.50 to 2.75 margin type range. So that in and of itself drives about that 25%, 30% pullback. The areas kind of offsetting that and driving growth would be investment advisory, we continue to see nice kind of high single-digit, low double-digit growth there; and on the insurance side as well both organic, but then with the addition of the Paul I. Sheaffer Agency, we see that being a nice kind of mid- to high double-digit growth year-over-year.

We currently have no further questions. So I will hand back to Jeffrey Schweitzer for any closing remarks.

Thanks, Alex, and thanks to everybody for participating on our call today. We're excited about 2021 and the year we were able to produce and the momentum that we have as we head into '22, as we continue to make investments for the long-term success of Univest and to reward our shareholders. So with that, I hope everybody has a great day and stay healthy. Thanks a lot.

Thank you for joining today's call. You may now disconnect.