Univest Financial Corp (UVSP) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Univest Financial Corporation Second Quarter 2021 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 Financial Corporation. Please go ahead.

Thank you, Debbie, 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, 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 can be found on our website at univest.net under the Investor Relations tab.

We reported net income of $20.9 million during the second quarter or $0.71 per share. We are very pleased with our results for the quarter as we experienced strong loan growth of $187.9 million or 15.4% annualized during the quarter, resulting in total growth over the past 12 months of $621.6 million or 14%, excluding PPP loans.

Generating this level of growth during a pandemic demonstrates the strength of our team and the commitment we have made to our customers and communities. We also continue to see strong results in mortgage banking due to the investments we have made in production talent and process enhancements over the past 2 years.

Additionally, we had strong investment advisory income, which has increased 18.7% in the first 6 months of the year compared to the same period in the prior year due to favorable market conditions and new relationships.

In spite of concerns over the Delta variant, activity in our markets continues to be solid and improving as our local economies have opened up.

Before I throw it over to Brian, I just want to thank the members of the Univest family. They continue to do a wonderful job serving our customers, our communities and each other as we continue to work through the current environment and move Univest forward.

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. In addition to demonstrating our continued ability to grow loans, we continue to have strong performance in our core business. During the first 6 months of the year, we produced a pre-tax pre-provision ROAA of 1.72%.

I would like to touch on 4 items from the earnings release. First, reported margin of 3.15% was up 3 basis points compared to the first quarter. Reported NIM was negatively impacted by 10 basis points of excess liquidity, which averaged $175 million for the quarter. PPP loans increased NIM by 11 basis points and contributed $4.8 million to net interest income.

Core margin, excluding excess liquidity and the PPP impact, was 3.14%, a decrease of 5 basis points when compared to the first quarter. Core margin, excluding excess liquidity and the PPP impact, is expected to expand slightly in the third quarter. This reflects quarterly savings of approximately $850,000 from the $75 million subordinated debt redemption at the end of the second quarter.

As it relates to PPP, as of June 30, $6.4 million of net deferred fees remained on the balance sheet, which represents approximately 35% of the initial deferred fee amount. Second, during the second quarter, we recorded a reversal of provision for credit losses of $59,000, which was driven by a $2.8 million benefit due to favorable changes in economic-related assumptions within our CECL model, primarily offset by reserves attributable to our 15.4% annualized loan growth during the quarter.

The allowance for credit loss coverage ratio, excluding PPP loans, was 1.41% at June 30 compared to 1.46% at March 31 and 1.94% at June 30, 2020. During the quarter, our COVID-related deferral activity reduced to $54.2 million or 1.1% of the portfolio. Net charge-offs for the quarter and the first half of the year were 2 basis points on an annualized basis.

Third, noninterest income was up $2.2 million or 12.4% when compared to the second quarter of 2020. As Jeff mentioned, this growth was primarily fueled by our investment advisory line of business. Additionally, the second quarter included an $893,000 BOLI death benefit claim.

Fourth, noninterest expense increased $5.3 million or 14.8% for the quarter and $6.1 million or 8.1% for the first half of the year when compared to 2020.

These variances were partially driven by relatively low expenses in the comparable periods in 2020 due to COVID-19 and the related impacts. Specifically, capitalized compensation related to our PPP loans was $1.2 million lower in the second quarter of 2021 compared -- and $664,000 lower for the first half of 2021.

Additionally, variable compensation cost increased $1 million for the quarter and $1.7 million for the 6 months ended June 30, 2021, due to an overall increase in profitability and more specifically, in our mortgage banking and wealth management lines of business.

Professional fees increased $751,000 for the quarter and $1.2 million for the 6 months ended June 30, 2021, primarily attributable to increased consulting fees in support of our DE&I and training initiatives as well as our treasury management product enhancements.

During the first 6 months of 2021, we spent $781,000 on these initiatives, and we expect to incur approximately $650,000 of additional expenses in the second half of the year related to these initiatives. These expenses are not expected to reoccur in subsequent periods.

I believe the remainder of the earnings release was straightforward, and I would now like to provide a few updates to our full year 2021 guidance. First, we had previously guided to loan growth of 7% to 8% excluding PPP. Based on our strong year-to-date growth, we are increasing this guidance to 10%, which we expect to result in net interest income growth of 2% to 4%, again, excluding PPP.

Second, we have previously guided noninterest income contraction of 5% to 7% for the year. Based on the strong performance of our mortgage banking and investment advisory lines of business as well as our recently hired SBA team, we are now expecting noninterest income growth of 1% to 2% for the year.

Third, we had previously guided noninterest expense growth of 2% to 4%. Based on our continued investment in people and the previously discussed consulting initiatives and variable compensation cost, we are increasing our expense growth guidance to 4% to 6% for the year. It is important to note the net impact of these guidance updates is accretive to pre-tax pre-provision income.

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 Frank Schiraldi with Micro Sandler (sic) [Piper Sandler].

Wondering about the strong loan growth. Obviously, you increased the guide here. What would you say the primary driver there? Is it some of the teams you guys have added sort of ramping up fast than you expected? Is it better demand in your markets? Or maybe is it some of the M&A deals out there just providing a greater amount of opportunity?

Yes. Frank, it's Mike. The first and foremost is the -- just the quality of our teams and the fact that we never stopped lending during the pandemic. We kept momentum. Again, I think we talked about this in the last call as well. We did get more conservative in our underwriting guidance, but we kept the lending momentum going.

So customers and prospects knew that we were going to continue to lend and have done that. So that's helped us. The quality of our teams has been outstanding. And yes, we have seen pick up from some of the folks that we've hired. So it's all of the above, but the real secret sauce continues to be just the strength and quality of the overall team.

Okay. And then just trying to drill down to some of the fee income drivers of the guide, Brian. Just wondered if you could give your thoughts on a fair growth rate for the investment advisory business over the next 12 months or so, especially given some of the potential opportunity in the market, again, related to deals.

Yes. On the investment advisory side, of course, there's the market consideration there, assuming that things were to stay flat, we'd expect kind of double-digit to mid double-digit growth is what we're expecting from a full year perspective year-over-year from '20 to '21.

Okay. Great. And then driving that is just expanding the business?

Yes, improvement of AUM from a valuation perspective as well as new business and continuing to expand customer relationships.

Yes. I mean, Frank, we've been added to the Schwab referral network as one of the RIAs in that network and have I believe 50 branches that have been assigned to us in the Mid-Atlantic area and we haven't even started that yet. We are getting all the documents in order, so that will help also on top of what we're just doing normal organic growth.

Okay. And then the other piece of it on fee income for me is a bit more volatile and more difficult to model is the mortgage banking business. I know, last quarter, you talked about the pipeline remaining strong there, moving more to purchase activity as opposed to refi as that wave sort of wanes. Any expectation you can share on that side in terms of thoughts on -- given where margins are now, given where volumes are, what we could see in the back half of the year in terms of revenues in the mortgage business?

Yes. So overall, pipelines are still strong, Frank, to what you just said. What has happened, simply the margins which were on a gross basis nearing 4% last year have kind of pulled down to the 2.75%, 3% range. We expect that that will continue. And absent anything else, I would tell you that the third quarter will be fairly strong. And unless -- and I hope this doesn't happen, rates drop dramatically again and refi's resurface, the fourth quarter cyclicality should come into play. Our pipeline right now is more -- slightly more than 50% purchase, which reflects the new hires and the strength of their relationships with realtors and the like as we move forward.

Okay. So could we see that maybe -- I think it's usually stronger in the third quarter. Would that be the expectation versus the 2Q result?

I don't necessarily say -- I would say it was stronger than 2Q just because 2Q is elevated because margins at the beginning of 2Q were closer to that 3.5% to 3.75% range.

So we could see it pull back a little bit in the third quarter from where we were in the second quarter, would be a reasonable expectation.

Not yet.

If you looked at it on a historical basis, it would be a historic -- will be strong relative to historical third quarters. If you're looking at it through a refi, dominated 4% margin? No.

The next question comes from Tim Switzer with KBW.

This is Tim Switzer on for Mike Perito. So you guys have several expense items that you touched on, and it look like they're pretty temporary, such as the PPP origination count, the DE&I training. And you guys have some variable compensation going on as well. So I mean, can you help us kind of quantify how many of these expenses this quarter are kind of transitory? And just trying to help us figure out what's going to exit the expense run rate going into 2022?

From an expense run rate perspective, again, I think if we look at the full year, that updated guidance that I had provided of 4% to 6% is reflective of the onetimers in the quarter and the additional kind of onetimers that we expect related to those initiatives in the back half of the year. Certainly not in a position at this point to give guidance for full year 2022 expense growth. We'll be going through that budget process later this year, and we'll be communicating accordingly thereafter. But I do expect things to certainly be normalizing overall from an expense growth perspective as we get these handful of items behind us.

Okay. And as these 2 more temporary costs come out, will you maybe replace those with other growth investments or something else like that or will you allow that to fall to the bottom line?

Those are case-by-case decisions, depending on the environment, obviously on certain things, on digital and the like, everything continues to evolve and some incremental investments are required from time-to-time. However, we do understand the importance of operating leverage, and we'll be focusing on maximizing that to the extent possible.

Okay. Great. And if I can move on to capital really quick. You guys have really strong capital levels, generating good returns, but also growing a little bit pretty quickly here. So what are your capital priorities and do you have any plans on excess capital deployment and how you'd like to deal with that?

Yes. This is Jeff. On the capital front, as we've said in the past, kind of everything is on the table. Right now, we want to make sure we have strong capital to support the loan growth that we're continuing to see, which is really exciting and very positive for us for the long term.

Additionally, as we've talked in the past, we're actively trying to look for opportunities in wealth management, insurance from an M&A standpoint. And then once you peel that back even further, then we would look at -- if -- depending on how things go on those fronts, we would always look at dividend, buybacks, et cetera, that's all on the table. But right now, I would say it's a focus of organic growth, making sure we're supporting that and then also looking for any opportunities, keeping some dry powder in case opportunities arise on the M&A front.

The next question is from Matthew Breese. (Operator Instructions)

I was hoping to learn a little bit more about the loan pipeline. Maybe give us a sense for size and how that's changed over the last 6 months? And then perhaps just some insight as to what geographies are showing strength or what product sets?

Matt, it's Mike. Look, in terms of the pipeline, the second quarter and what projects to be the third quarter, the pipelines continue to look strong. The biggest issue with regard to loan growth going forward here is going to be whether we get payoff activity that was unanticipated. And the unanticipated payoff activity is largely coming because the market is pretty hot, and our customers are having opportunity to either sell their business and/or if it's a CRE deal, to sell perhaps in this area a warehouse facility, which is very hot and very strong at this point in time, and they sell it at sizable gain.

In terms of whether there are -- we continue to perform across all of our markets is the truth. The Lancaster market, Central PA market continues to be strong. We continue to perform well there. We continue to look for people to add to the team and -- as we look at York and as we look at Cumberland and Dauphin counties. And then in what we call East Penn and New Jersey area, again, same issue, very diversified loan book, very strong across the board. We're not doing office in the traditional sense.

But whether it's C&I, whether it's CRE, it's been very strong. Our markets performed well. The economy is strong. I think, everybody knows that this area is more vaccinated than other parts of the country. So hopefully, we continue to move forward without having any interruption as a result of Delta variant.

But things look good. And like I said, I just want to repeat, making sure because when you look at our loan growth and say, oh, can you do more? The reality is that we have to be looking out for what is the payoff activity that can net against that loan growth as we move forward.

Understood. Okay. And you mentioned competitive conditions. Just maybe give us a sense for what incremental blended new loan yields are and maybe where the competition is?

Matt, this is Brian. From a production for the quarter, our traditional kind of C&I and CRE loans averaged around 3.21% from a new production standpoint. That's up from around 3% in the first quarter. So of course, you got various loan types like SBLOCs and some other things like that, that have unique characteristics that can lower those yields or have lower yields from time-to-time. But if you look at our traditional C&I and CRE production for the quarter, we're around 3.21%.

From a competitive perspective, Matt, I'll tell you that you still have people doing some things that we just won't match and don't want to go there. So there's still some craziness out there. I wish everybody the best of luck, but there's levels on the fixed rate side, whether it's 5, 7 or 10 years that we just will not go to.

Got it. Okay. Can you provide me with the percentage of your loan portfolio that's floating rate and unencumbered by floors at this point? Just want to get a sense for if we do -- when and see if that hike, how responsive loan yields will be on your end?

Yes. So overall, our -- again, this is Brian. Our loan book is 43% fixed, 20% adjustable and the remainder being 37% is variable. From a loan floor perspective, as of the end of the second quarter, we had $346 million of loans that were at their floors and in the money. They're about -- they're in the money by about 70 basis points. So 2 to 3 moves there will be what it would take to get lift on those. The rest of the book would -- that is variable or adjustable, depending on the reset dates would have more of an immediate impact in a rate increase environment.

Okay. Just on the -- just a couple of others on my end. So just to clarify on expenses, you mentioned you expect an additional, I think, $680,000 of training fees in the back half of the year. I mean your professional fees are a bit higher already. Should we expect this level to kind of continue or ramp-up higher for that $680,000? Just wanted some clarification there.

Yes. And just to clarify, that $650,000 in the back half of the year, and that's related to DE&I, our treasury management product enhancements and training. So it wasn't simply just training. But I would not expect there to be an incremental lift solely related to that $650,000 from the second quarter to the third quarter. In all honestly, if you look at the kind of all-in guidance of 4% to 6%, you kind of expect expenses to be pretty level on a quarterly basis here on out.

Okay. Understood. Just last one for me. For the last couple of quarters, the tax rate has just been a touch higher than my projections. Curious if 19% is the kind of new normal or should we expect a reversion back to kind of the 18%, 18.5% level?

Yes. As we continue to have income coming from PPP forgiveness and the like that is providing upside in taxable income, which translates to an increased effective tax rate. So in the near term, I would think that current effective rate is a good indicator. To the extent PPP income starts to kind of wind down, then you'd expect the reversion back to historical norms.

At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Jeff Schweitzer for any closing remarks.

Thank you, Debbie, and thank you to everybody for participating today. We appreciate your participation and your good questions, and we look forward to talking to you again at the end of the third quarter. Have a great day, and stay safe.

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