Univest Financial Corp (UVSP) 2022 Q1 法說會逐字稿

Hello, and welcome to today's Univest Financial Corporation First Quarter 2022 Earnings Call. My name is Bailey, and I will be the moderator for today's call. (Operator Instructions). I would now like to pass the conference over to Jeff Schweitzer, President and CEO. Jeff, please go ahead.

Thank you, Bailey, 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 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 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 $20.3 million during the first quarter or $0.68 per share. During the quarter, we continued to experience solid loan growth as loans grew $112.2 million or 8.5% annualized, excluding PPP loans.

In addition to our solid results in the quarter, we are excited to announce our expansion into 2 new markets with the hiring of market presidents for Western Pennsylvania and Maryland as we continue our organic growth strategy. We are excited by the additions of Chris and Matt to the Univest family. While they are experienced commercial bankers, in addition to building their teams, they will be working with all our lines of business and growing and serving these new markets. Additionally, during the quarter, we began the development of a comprehensive digital platform, building off the investments we have been making in technology over the past few years.

This digital platform will allow us to be more efficient and less reliant on physical locations in the future as we expand and build out this initiative. While this will be a significant investment, we are confident it will position us very well for the future as customer expectations and preferences continue to evolve. Finally, due to our strong performance and strong capital position, the Board of Directors has declared a 5% increase in our quarterly cash dividend and the repurchase of shares targeted at 150,000 per quarter.

While we have been utilizing our internally generated capital to fund growth over the past few years, we are excited that our strong performance, along with our strong capital position is enabling us to increase the value we return to our shareholders. As detailed in our release and my comments, there's a lot to be excited about at Univest as we continue to grow. This could not be possible without the hard work of the over 900 members of the Univest family. I'd like to thank them for all their efforts serving our customers, communities and each other. I will 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 said, we are pleased with our performance during the quarter. While we incurred incremental expenses totaling $1.6 million associated with our digital transformation, onboarding of new mortgage lenders and costs associated with the customer who was defrauded, our core business performed well during the quarter. I would like to touch on 4 items from the earnings release. First, reported margin of 2.89%, down 3 basis points compared to the fourth quarter.

Reported NIM was negatively impacted by 33 basis points of excess liquidity, which averaged $693 million for the quarter compared to $874 million in the fourth quarter. During the first quarter, PPP loans increased NIM by 3 basis points and contributed $591,000 to net interest income. Core margin, which excludes the impact of excess liquidity and PPP was 3.19%, a decrease of 2 basis points when compared to the fourth quarter. This modest decrease is attributable to incremental investment purchases during the fourth quarter of 2021 and the first quarter of 2022, totaling $135 million at a weighted average yield of 1.9%.

Assuming the Federal Reserve raises rates by 50 basis points in May, we expect core NIM to expand by approximately 12 to 15 basis points in the second quarter. During the quarter, we recorded a reversal of provision for credit losses of $3.5 million. This was driven by a $5.7 million benefit from changes in economic-related assumptions, offset by provisioning for loan growth and specific reserves. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.27% on March 31 compared to 1.36% at December 31 and September 30.

During the quarter, we experienced net charge-offs of $76,000 and nonperforming loans and leases decreased 7.6% from year-end. Third, noninterest income decreased $2.8 million or 12% compared to the first quarter of 2021, which was driven by a $4 million decrease in net gains on mortgage banking activities offset by increases in our investment management and insurance lines of business and our other service fee income streams. Fourth, noninterest expense increased $5.9 million or 14.9% compared to the first quarter of 2021.

This includes $779,000 related to our digital transformation project, $488,000 resulting from the inclusion of the Paul I. Sheaffer Insurance Agency, which was acquired on December 1 of last year; $470,000 of guarantees paid to recently hired mortgage producers and $330,000 of expense related to the customer who was defrauded. Excluding these items, expenses in $3.8 million or 9.6% compared to the first quarter of 2021. I believe the remainder of the earnings release was straightforward, and I would now like to provide updates to our 2022 guidance.

First, as a reminder, during 2021, net interest income totaled $173.4 million when excluding PPP income of $15 million. We had originally guided loan growth of approximately 8% to 9% in 2022, excluding PPP loans, and net interest income growth of 8% to 10%. Our loan growth guidance is being increased to 9% to 10% to reflect the Western PA and Maryland expansion markets and the addition of the previously discussed mortgage producers. We expect this to result in net interest income growth of approximately 15% to 17% off the base of $173.4 million from 2021. This includes the impact of the 25 basis point increase in March and the anticipated 50 basis point increase in May. Each additional 25 basis point rate increase is expected to result in annualized net interest income of approximately $4 million to $4.5 million for the first several increase.

Second, 2021 noninterest income included $1.1 million of BOLI death benefits. Excluding these BOLI death benefits, noninterest income totaled $82.1 million for the year. We had previously expected noninterest income growth of approximately 1% to 3%. We now expect noninterest income for the full year of 2022 to be flat to slightly down. This is primarily driven by reduced margins and saleable volume in the mortgage line of business based on the current interest rate environment. Third, we reported noninterest expense of $167.4 million for 2021 and had previously guided to growth of approximately 6% to 8% for 2022.

We expect to incur roughly $3.5 million to $4 million of expense in 2022 in conjunction with our digital transformation initiative. Additionally, we expect to incur approximately $2 million to $2.5 million of incremental expenses related to our investment in the Western PA and Maryland expansion markets during the year. Including these 3 investments, we expect 2022 expenses to increase 10% to 11% off the base of $167.4 million from 2021. As it relates to our Western PA and Maryland expansion markets, we expect these investments to be accretive to pre-provision earnings in approximately 24 months and fully earned back in 3 to 3.5 years, again, on our pre provisions.

We continue to prefer this method of entering new markets as compared with doing whole bank acquisitions, which inherently include more integration risk, intangible recognition and tangible book value dilution. Lastly, as it relates to income taxes, based on our increased pretax earnings from these guidance updates, we expect our effective tax rate to be on the higher end of the 19% to 20% range that was provided during last quarter's call. That concludes my prepared remarks. We will be happy answer any questions. Bailly, would you please begin the question-and-answer session?

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

Wanted to start with -- Jeff, if you could maybe give us a little more detail on the digital platform, the digital initiative and how that -- if that differentiates you from others your size? Or does that get you to where you need to be in terms of in line with others of your size? If you could just kind of give us a little more color there, that would be great.

So Frank, it's Mike. I'm going to take this one. So the background on the digital initiative, both Jeff and Brian alluded to it. We've made significant investments in core platforms over the last several years. And what we're doing now is using the investments we made in Salesforce, expanded tools with Salesforce to wrap all those core platforms into the Salesforce ecostructure and deliver that hopefully, which would be a differentiator is ultimately delivering a human touch with the digital capability.

So -- but it goes beyond that. We need to look at making sure that the organization is available for customers when customers want to do business with us, not necessarily stated hours that we previously may have had. And we need to be much better at data. And that will personalize things from a digital perspective as well as make sure that we continue to deepen our relationships with existing customers. In terms of how this is used relative to our peers, I think peers our size, as we enact this initiative, we will move forward. We need to make sure that we are on par with our larger peers or larger competitors so that we continue to move forward, and we can thrive in the future.

And -- okay. So is this sort of like middleware investment? And how much of this is external in terms of going to consultant and external IT? And how much is it internal and just going to sort of continue to be in run rate beyond planned implementation?

So Brian -- the numbers that Brian alluded to are external.

Correct. And that's our 2022 expense associated with that. Whenever you do an initiative like this there's capitalization. So there will be a tail that results from that in future periods as a result of capitalizing those external costs. But what we actually expect to run through the P&L for this year is the guidance I provided.

And then so beyond and deeper to your questions, we are partnering with 2 consulting entities. One would be helping us kind of to step back, look at how we -- who we're serving, how we need to serve them and make sure we build the infrastructure to do that. And then we are also partnering with the content, branding and digital marketing firm. And those 2 entities, combined with our internal staff, will work together to deliver the product and deliver the solutions that we move forward. But just as importantly, like I said, this is about changing how we operate as a core company and how we are available for our customers and how we move forward.

So there will be an increased investment in our customer care center. So we are available for our customers, and we can be more of a concierge type of approach to serving them. And we also need to make sure that we get much better at data. We have tons of data. Every company has tons of data, but we need to make sure that we make a significant investment in data so that we can be predictive and personalized experiences as we move forward. So it will be a combination of internal and external resources.

Okay. Got you. And then just lastly, if I could sneak one in. In terms of -- Brian, sorry, I didn't get a chance to do the math. But in terms of the increase in expense from the 6% to 8% to the 10% to 11%, I know you noted the building out the expansion markets and also the digital initiative. Is there any increase as well for just general inflationary expense? And is that -- if not, is that a risk to that 10% to 11% growth?

Yes. No, that's our updated expectation, all things considered. There's a little bit in there for inflation in some of these. The mortgage investment that I spoke to as well as kind of the defrauded loss item as well. So that's kind of baked in there, but there is a little bit of an inflationary increase, but we had anticipated a fair bit of that when we set our original targets and guidance for 2022, and things seem to be tracking pretty close to that at this point.

The next question today comes from Tim Switzer from KBW.

I'm on for Mike Perito. If we could talk about the expansion markets real quick. You talked about in the press release about your success entering the Central PA region and you started with the lift out of 15 employees and now you have about $1.2 billion in loans outstanding. Are you going to have -- do you have a similar trajectory, you think, for these new markets? And I know you've just hired the presidents, but like if you give us any guidelines of maybe how many employees they're planning starting with or want to? And just exactly what's the trajectory after this year, really?

So Tim, it's Mike. No, we will not have the same level of trajectory as we had in Central Pennsylvania. I mean there was a couple of factors that played into that. One, we were able to get a team of that size. And also there was significant market disruption at that time, which allowed us to kind of expedite the process of growing the business and moving forward there. We think we have found 2 extremely talented individuals to lead our teams in both of the markets.

We will be actively looking to recruit and build out those teams on the commercial side. But as Jeff referenced in his opening remarks, we were going to bring all of our products and services to bear. So we will be hiring mortgage loan officers, adding to our wealth management capabilities, putting a treasury management person in each marketplace. So we are optimistic, but we are not prepared at this point in time to give future loan targets because that will be dependent upon how quickly and how many RMs we hire in that marketplace.

Okay. Great. And then could you talk about your general strategy when entering new markets and your go-to-market strategy. What's your plans on winning business? And maybe it's unique in each market, but if you could talk about that real quick, please?

Yes. I would say, first and foremost, it's fairly basic. It is -- find an extremely talented leader in each marketplace and then grow a team of talented individuals and then we will supplement that. We know that we need to make certain community investments. We know we have to spend marketing dollars, and we need to be -- most importantly, Jeff and myself need to be in market, meeting with prospects, people that can influence building business and over time, obviously, current customers.

So this is an investment of time and talent, and that's what we need to do, and that will make us successful. We feel very confident about that. We know who we are as a company. We know that the focus on taking care of the customer and making sure that we can build a team of people that are focused on taking care of the customer and doing the right thing day in, day out, and that will allow us to be successful in each market.

Tim, we've been very successful by leading with the commercial bank. I mean, that's who we are. Our bread and butter is commercial lending, small business, middle market lending. So bringing on these 2 market presidents to really build out commercial lending teams and then supplement it with mortgage bankers and wealth advisers and the like. And then layering on the digital initiative on top of it, we think we can have a very good impact on the market, grow successfully, but do it in an efficient way.

So with the digital initiative, the hub and spoke, the spoke being digital and the hub being more of a regional headquarters type of presence. So we're excited about bringing these 2 individuals. We're excited about what we think they can do, building out a team. But it's really going to be commercial focused at the beginning, and then we'll layer on consumer as we go along.

(Operator Instructions) The next question today comes from Brody Preston from Stephens.

I just wanted to follow up on the regional expansion with Chris and Matthew. Could you give us a sense for kind of what size businesses they've historically done business with? And if that's smaller or larger than kind of your core customer cohort?

I think that's consistent with what we've done. Revenue size is small $5 million and take it up to $50 million. Would there be something that could be bigger? Yes. But in terms of that wide of a broth. And that's where we play well, and we will continue to do that. Could we go to a larger size? Of course, we could. But that -- you're looking at loans, typical loan sizes of a couple of million dollars to $10 million on average, I would say.

Yes, that was what's exciting is what they prospect and target fit in very well with what we historically have been successful in growing the business.

Got it. And maybe on the capital management front, I just wanted to ask how long you anticipated repurchasing? I think it's about 150,000 shares a quarter.

Yes. So we have 600-some-odd thousand available. We're going -- as long as we can continue to generate capital at the pace we expect to especially with the rate increases that are coming and how we will benefit greatly from that, we would expect to continue purchasing those as long as economically is a good investment and makes sense. So I would think that right now, we have 600-and-some thousand available. And as we start to fill that up, we'll assess at that time if we need to get authorization for more to continue to repurchase shares.

Clearly, that gives us about a year's worth of current coverage. And kind of as we look at it, we're targeting an earn back of 3 years or less, quite honestly, at current levels, we're less than half of that. So it's certainly attractive at this point for us to be active on that front.

Got it. Okay. And just on the -- turning to the loan yields, could you give us a sense for what new blended loan yields are and whether or not you've started to see any compression and spread compression?

Yes. So we saw -- as we looked at kind of new yields in the first quarter, they were up slightly from the fourth quarter, but still kind of in that low to mid-3% range. However, that was really of closed deals, which would have been locked earlier on. And then as we know, the rate expectations increased pretty drastically throughout the quarter. So most recently, we've seen things kind of in that low to mid-4% range and trending higher over the last month or so.

Got it. And then just last one for me. Just on deposit prices on a spot basis, have you changed rates at all so far? Have you begun to make any exceptions as it relates to pricing for some of your customers?

No. We've held steady on -- really on all fronts with the level of excess liquidity that we have and continue to project to have. We think that gives us a little bit of room to operate quite honestly, on the deposit cost side for the foreseeable future.

The next question today comes from Chris Reynold from Neuberger Berman.

Yes. I wanted to follow up on the dividend increase. I thought that was quite positive. It's sort of my recollection, you haven't increased your dividend and -- maybe 10 years or more. And is this a change in long-term policy? Should we expect the dividend to continue to grow as your company grows? Or is this just a function of the excess liquidity that you discussed?

Yes, Chris, it's Jeff. Yes, it's true. We haven't increased it in quite a number of years. We didn't cut it during the 2008, '09 cycle like most of our peers would have done. We held steady back then. But in -- looking at our projections for earnings and our capital position, where we are and obviously, as I've said, we'll benefit greatly from the rate increases that are coming from the Fed, it felt prudent at this time to raise the dividend and return some value to our shareholders. through a dividend increase.

We will continue to assess that as time goes on. As far as where our earnings position is, where our growth and our -- overall capital position is, obviously, we would like nothing more than to continue to reward our shareholders going forward, and we'll continue to assess that as time goes on with the Board. But it had nothing to do with the excess liquidity. It really had to do with where we see earnings going combined with growth combined with our strong capital position.

(Operator Instructions) There are no additional questions waiting at this time. We have a follow-up question, excuse me, from Tim Switzer from KBW.

I just had a couple more. On the quarter, you guys ended like $775 million of cash balances. And last quarter, you talked about not being too excited about buying securities at the current yields. But with the recent increase in rates, has that changed your mind at all? And do you plan on stepping up investment purchases or just letting the excess liquidity be deployed through loan growth?

This is Brian. Just to kind of work through that one. We had purchased $100 million incremental in the fourth quarter and then another $35 million incremental in the first quarter, a little bit taking advantage of that increase in yield, as you described. That said, we ended the quarter at $675 million of excess liquidity. We expect roughly $350 million to $400 million based on our loan guidance of utilization of that kind of through the remainder of the year as well as rundown of seasonality in public funds.

So that said, don't plan to really bolster the investment portfolio much further than we have at this point But based on current facts and circumstances, we tend to target 8% to 9% of total assets. And when you adjust for the excess liquidity and the like, we're right around 8.4% right now. So we're kind of operating in that range that we like to be.

Nice. Okay. And then sort of related to that, but just on the securities portfolio, you guys had a pretty minimal impact AOCI and TCE from the higher interest rates and a lot of your peers are obviously getting hit pretty hard. Do you guys have any hedging on that? Is it just your smaller securities portfolio and the way you have it structured?

Yes. We don't have any hedging strategies really a function of the portfolio itself, mixed between (inaudible) and available for sale. We did have a $20 million unrealized (inaudible) increase that was recognized during the period, and our earnings for the quarter offset that. That's why you don't see -- largely offset that. That's why you didn't see as much of a deterioration in our reported ratios and book value, but we did see a hit consistent with what others have seen, just not maybe to the extent -- the same magnitude.

There are no additional questions waiting at this time. So I'd like to pass the conference back over to Jeff Schweitzer for closing remarks.

Thank you, Baily, and thank you, everybody, for joining us today. As I think you can see in our release, there's a lot of exciting stuff going on with respect to all of these initiatives that we're working on to continue to position us very strongly for the future. So we look forward to speaking with everybody after we release second quarter earnings. And I hope you all have a great day.

That concludes the Univest Financial Corporation First Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.