Univest Financial Corporation
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

Good morning and welcome to the Univest Corporation of Pennsylvania Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [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 Corporation of Pennsylvania. Please go ahead.

[Jeff Schweitzer:]

Thank you, Brian. 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 Roger Deacon, 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 $11.8 million during the first quarter or $0.44 per share, which included a BOLI death benefit of $889,000. Excluding this benefit, net income was $10.9 million or $0.41 per share. A couple of highlights for the quarter were strong 20.1% annualized loan growth, as we experienced strong commercial loan growth across all of our markets. As we discussed last quarter, our second and fourth quarters tend to be our strongest quarters for loan growth, when combined with the first quarter, our year-to-date annualized loan growth is 13.7%. And we remain comfortable with our previous guidance for the year of 10% to 12% as we anticipate slower growth in the third quarter, as seasonally the first and third quarters are typically lighter quarters for us. Additionally, our efficiency ratio was 60.74% during the quarter, 61.8% excluding the BOLI gain, as we continue to focus on driving down our efficiency ratio. I will now throw it over to Roger for some additional discussion on our results.

[Roger Deacon:]

Thank you, Jeff. And I would also like to thank everyone for joining us today. I'm going to discuss a couple items from the earnings release. First, our net interest margin, as disclosed core net interest income, which excludes the impact of purchase accounting adjustments was $34.5 million for the second quarter and represented a $1 million or 3.1% increase, as compared to core net interest income of $33.5 million for the first quarter. Our core margin, again excluding purchase accounting adjustments was a 3.68% compared to 3.72% for the first quarter, but up from 3.61% in the fourth quarter of 2016. The decrease in the current quarter of 4 basis points is primarily due to an increase of cost of funds due to increased competition on public funds and commercial deposit rates and increased borrowing cost. As during the first half of the year, we opportunistically termed out a $125 million in longer term borrowings at an average life of 3.5 years at a rate of 1.84%. I believe from a margin perspective it is - it's better to analyze where we are in the second quarter compared to the fourth quarter. This comparison includes the 50 basis point impact of the two 25 basis point increases in December and March. From the fourth quarter of 2016 to the second quarter of 2017, excluding purchase accounting adjustments, our margin increased 7 basis points from 361 to 368. This increase is due to an increase in yield on our interest earning assets of 14 basis points, offset by an increase in our cost of interest bearing liabilities of 8 basis points. Again, I believe this increase in net interest margin better demonstrates the asset sensitivity of our balance sheet. Second I'd like to discuss is the provision for loan losses. During the quarter we reported a provision of $2.8 million. As we know the provision is comprised of an increase in general reserves which relates to the growth of our loan portfolio and specific reserves and charge-offs is the other component. As the provision for this quarter are $1.4 million solely relates to the significant growth that Jeff previously explained and the other $1.4 million relates to specific reserves and charge-offs. I believe the press release was pretty straightforward as non-interest income and expense and accordingly that's it from my prepared remarks. We'll be happy to answer any questions. Operator, would you please begin the question-and-answer session.

[Operator:]

Sure. [Operator Instructions] The first question comes from Michael Perito with KBW. Please go ahead.

[Michael Perito:]

Good morning, guys.

[Roger Deacon:]

Morning, Mike.

[Jeff Schweitzer:]

Good morning, Mike.

[Michael Perito:]

Few questions from me, maybe starting on the deposits, I know this quarter you had some seasonal impact. It sounds like from the outsourced municipal deposits, but you know, the loan deposit ratio crept up a bit to 104, 105. Just curious you know, it sounds like it could rebound a bit next quarter when you know, with the seasonally slower growth quarter, but any outlook commentary around kind of where you expect that ratio to trend over the next year or so. And what range you guys are comfortable operate in the bank?

[Jeff Schweitzer:]

Sure, Mike. So you know, one of the things we like to look at is not spot, but average. And our average loan to deposit ratio for the quarter was 101.6 versus the higher 104 and change at the end of the quarter. With the loan growth what is primarily in the month of June and the seasonal run-off of our public funds, which is primarily you know, our county money runs off and before the school district money comes in, in Pennsylvania in the third quarter. So you know, we are most focused on the averages here rather than point. We think we're going to be around a 102 to 102.5 at the end of the third quarter and the averages will be somewhere around that as well for the quarter. As we operate the bank, we really would prefer to be in that 100 to 105 range. I'm comfortable being that 105. Particularly, if you know it's just timing [ph] with some future events, but we really would like to operate in that 100 to 105 range.

[Michael Perito:]

Okay. Thanks for the color. And you know, maybe on the [Technical Difficulty] out here, maybe just near term. You know, we had the raise in June. It sounds like you guys will have some funding rebound in the third quarter, at least on a relative basis. I mean, is there a room for some expansion or how do you think about those longer term kind of terms borrowings behind you or how you guys think about that?

[Michael Perito:]

You're breaking up a little bit Mike, is your question related to our thoughts on margin?

[Michael Perito:]

Yes.

[Michael Perito:]

Yes. So you know, the margin quite frankly is really going to be driven by what we're seeing on the deposit front. We did see an increasing competition in the second quarter, I think that was after that, if you think about it after the second rate increase in March, I think some folks woke up particularly in the public funds world where it had been relatively quiet. I think our customers are starting to think that the rate should be passed on to them, and also on larger commercial customers. So it will be interesting to see how the third quarter plays itself out. But the margin is really going to be driven by the beta on the deposits. You know, I'm really looking at it, what I would say a flat margin for the quarter, which means the benefit of the rate increase will be offset by incremental deposit costs. If I win a little bit, I'll take it. But you know, we are also trying to operate in that 100 to 105 range as well.

[Michael Perito:]

Okay. And then one last one maybe for Mike, loan growth is really strong in the quarter. Curious if you can give us any color about kind of the geographic breakdown and also looking kind of for an update, you know, I've heard from some of your peers at Lancaster [Technical Difficulty] areas has picked up quite a bit the last six months, just curious any thoughts around that?

[Mike Keim:]

So overall Mike, loan growth is really across all of over footprint. You know, all three of our divisions contributed solidly in the quarter. We continued to see significant growth coming from the Lancaster market. If you're comment and again you broke up a little bit was relative to increasing competition in the Lancaster market…

[Michael Perito:]

Yeah, it was, yes…

[Mike Keim:]

Yes, so competition continues to play there. I will tell you what we really see is in the niche market that the team that we brought on board, we can continue to grow and will. To the extent that we look to a larger size credit, some of the larger players in the marketplace are being very aggressive from a pricing perspective. So that is where we would see the most kind of competition and where we need to stay disciplined to protect our margin where others can step in and do what they need to do. But to the extent that we stay where we are very good at and our niche in that marketplace, we continue to see good growth at solid margins. Lehigh Valley, as we've talked about on other calls continues to be an area for growth there, so we saw a fairly significant up-tick in the Lehigh Valley and across our core market which we call the Delaware Valley Division, we also had solid performance.

[Michael Perito:]

Okay. Great. Thanks, guys. I appreciate all the color.

[Mike Keim:]

Thank you, Mike.

[Operator:]

The next question comes from Frank Schiraldi with Sandler O'Neill. Please go ahead.

[Frank Schiraldi:]

Hey, guys. Good morning.

[Jeff Schweitzer:]

Hi, Frank.

[Frank Schiraldi:]

Some few - just a couple of questions. Just following up on deposit cost, so Roger from your comments it sounded like it's primarily the institutional side, are you seeing anything on the retail side yet in terms of pressure to increase?

[Roger Deacon:]

Our core rack rate, we're not seeing it across the board, but we're seeing a lot more promotions in the marketplace on the money market and CD side, you're seeing a lot more of that than we were three months ago.

[Frank Schiraldi:]

Okay. And are you prepared to allow I mean, given it seems like the pressure is coming mostly on the institutional side, maybe not all of that is good relationship and you might let some of that roll off. I know given your loan to deposit ratio that makes it tougher. But would you - are you allowing any of this to roll off as opposed to increasing rates and you know, maybe looking at the wholesale market, which might even be a little cheaper or no?

[Roger Deacon:]

Quite frankly, no. We have rates that we're targeting internally as it relates to municipal - the public funds and larger commercial customers. And you know, from my perspective there is a value to the institution of these relationships, as opposed to being wholesale. So similar to you know, this 100 to 105 on the deposit ratio, I really don't want to significantly increase my wholesale borrowings and broker CD's to my total assets either. So quite frankly we'll defend our turf well, Jeff.

[Frank Schiraldi:]

Got you. Okay. And then just wondered if you could maybe give a little color on credit and just how you're feeling about the previous guidance on our credit costs?

[Jeff Schweitzer:]

Yeah, I'm still comfortable with the previous guidance. Quite frankly, this quarter was solely due to the sizable loan growth which was larger than I had quite frankly predicted on a quarterly basis. So if you had a slowdown in the third quarter you would see some decline in the provision of the third quarter. Overall in the book business Frank we see credit quality continuing to improve. So that goes hand-in-hand with what Roger just said. So to the extent that our provisions go down, it is really tied to our loan growth.

[Frank Schiraldi:]

Okay, great. And then I guess, just finally, I'm sorry if I missed it, but in terms of the expense base you know, kind of right in line with the guidance for the full year and I would guess that's - you're reiterating that and then where you should expect sort of flatness going forward, is that reasonable?

[Jeff Schweitzer:]

Well, I think if - I'm still at 130 for the year, which is roughly at 327 the next 2 quarters and that's how I'm thinking about it. We continue to invest, when we have the opportunity to invest in technology and in people. We're not going to say you know, with a pause. So for right now I'm going with that 327 per quarter of 130 for the year.

[Frank Schiraldi:]

Got you. All right. Thanks, guys.

[Jeff Schweitzer:]

Thank you.

[Roger Deacon:]

Thank you.

[Operator:]

Next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

[Matthew Breese:]

Good morning, everybody.

[Jeff Schweitzer:]

Morning, Matt.

[Matthew Breese:]

Just going back to the deposit growth strategy, I mean, just thinking about maintaining that loan to deposit ratio at 105 or even moving it a little bit lower, your loan growth projections are 10% applying, you've got to at least keep that on the deposits front. So $350 million more in deposits, where do you see the majority of that $350 million coming from, is it is it the muni and commercial side? And explain to me what the incremental cost there is today versus what it was six months ago?

[Jeff Schweitzer:]

I'll cover some of this Matt and then I'll let Roger chime in on some of the cost side of the equation. But if you look at where our growth will come from over time, we - it will continue to come from the public fund side, in the Lancaster market, in the Lehigh Valley. We really haven't penetrated those markets from a public fund market or a perspective like we can. Our commercial customers and really tie that to our management activities and continue to build out and focus on our cash management operation and run that like a standalone business that also complements the commercial lending business. And then we have some other opportunities and initiatives that we're working on as well. And the other part of this, and the last part of this I would say is, we have opened up several locations on the consumer side. We need to continue to work on those to reap the benefits of the investments that we've made. So we're very cognizant of the fact that loan growth at 10%. We can't keep doing that and grow in deposits at 5%. So we are working on those initiatives to narrow that gap and keep ourselves from a loan deposit ratio in the range that Roger referenced earlier.

[Roger Deacon:]

And so from a cost perspective, we've had three rate increases since December, March in June. On those folks I would say on average we're 50 to 75 basis points higher than where we were at December.

[Matthew Breese:]

Okay. And where were you in December. Just for reference sake?

[Roger Deacon:]

You know, I would say on average year you were at the 25 to 50 basis points.

[Matthew Breese:]

Okay. And then maybe turning to capital levels, common equities at 7.8% this quarter, you've been here before, but certainly on the lower end. Could you give us some color on your comfort level and where capital or capital needs to be?

[Roger Deacon:]

Sure. So, I've communicated this at different conferences and the like. But you know, we're down a little bit, just because of the loan growing. We really look at that 8% type number of managing too, but we're close to being a little bit below from point to point. But from a management perspective, we've communicated the intention is to not increase the dividend and to retain all the extra earnings that we have to support our loan growth going forward. Our projections indicate that that's adequate even though you know, it's not excessive, but it's adequate for us in terms of managing our capital ratios.

[Matthew Breese:]

Okay. And then last one for me is really you know, given where we are in the year, we're about a year after the Fox Chase closing, we're about a year after the bulk of the Lancaster team hires. Just give us a sense of where we are in terms of what's actually occurred versus expectations? And is it better or worse than what you guys originally outlined?

[Jeff Schweitzer:]

I would say that it's going according to plan. The loan growth numbers that we had anticipated are happening with the Lancaster lift out that really provided some extra juice to our loan growth, but across the board, you know from all the conversions, the consolidation of locations, integration of people and just the overall growth of the company. It's really gone according to plan. I mean, Lancaster is actually a little bit of ahead of schedule. As far as their loan growth, they're probably a good 40 million higher than we would have predicted at this time. And I'd say from the Fox Chase side that's gone pretty much as we designed it. So we're really pleased.

[Roger Deacon:]

Yeah. And I would add that from a financial perspective the same, I mean, our goal here is really to achieve operating leverage. And right now we're starting to show that. And as you look forward though, you know, going forward the third and fourth quarter as the revenues grow at a much greater rate than our expenses is the key. And from my perspective we're really executing rate along with our thought process on that.

[Matthew Breese:]

Right. And then you know, I know for - when this all happened you guys were all in the mindset of let's maintain culture and keep things cohesive and be out of the M&A game for a little while. Has that changed at all, now that everything is kind of on-track for M&A again…

[Jeff Schweitzer:]

No. We're still probably a year out from doing - looking at any bank M&A. there is some stuff that we're still working on, putting in sales force. We just put in a new mortgage system. There is some foundational things that we're doing on the tax side that we want to get in place before we would do another bank transactions. So we had talked about 18 to 24 months when we did the Fox Chase deal, when we closed it. And you know, we're 12 months into that. So I'd say we're still - we're pretty much - we're sticking to what we had provided guidance on back then. We want to make sure that you know, as we're prepared for the next level of growth whatever that may be, whether it's lift outs or M&A that we have some foundational things buttoned down.

[Matthew Breese:]

Very good. That's all answers my questions. Thanks guys.

[Jeff Schweitzer:]

Thank you.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Schweitzer for any closing remarks.

[Jeff Schweitzer:]

Thank you, Brian. And thank you everybody for joining us today. As we've noted, we're pleased with the quarter and we look forward to talking to everybody again after the third quarter. Have a great day.

[Operator:]

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