Univest Financial Corporation
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good morning, and welcome to the Univest Corporation of Pennsylvania Third Quarter 2017 Earnings Conference Call. All participants will be in a 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, Chad, and good morning, and thank you to all of our listeners for joining us this morning. Joining me on the call this morning is Mike Keim, President of Univest Bank and Trust; and Roger Deacon, our 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 $11.2 million during the third quarter or $0.42 per share. During the quarter, we recorded a $2.8 million charge-off related to $5 million of software leases under vendor referral program. The provision during the quarter related to this program was $1.9 million. As we had already established an allowance of $886,000 related to these leases as of June 30, 2017, we have written the receivables related to this program down to $2.3 million and do not anticipate any material write downs to this amount in the future. Additionally, we do not have any similar leases on our balance sheet at September 30, 2017. The impact of the provision related to these leases was $0.05 during the quarter. As we discussed on previous calls, the first and third quarters are historically lower loan growth quarters for us. Total loans declined $23 million during the quarter primarily due to significant line of credit pay downs and pay offs during the quarter. Loan production during the quarter was relatively solid as we booked 159 million of new loan commitments as we continue to see solid activity and expect a solid fourth quarter. However, as a result of the decline in loans during the quarter, we anticipate loan growth for the year coming in closer to 9% compared to our previously discussed range of 10 to 12%. I'll now throw it over to Roger for some additional discussion on our results.

[Roger Deacon:]

Thank you, Jeff. And I would like also to thank everyone for joining us today. I'm going to discuss a couple other items related to our earnings release. First, as it relates to earnings. As Jeff mentioned, we reported earnings of $0.42 per fully diluted share, which includes the negative impact of the incremental provision related to the leasing programs of 1.9 million or $0.05 for the quarter, which we do not view to be part of our normal provision run rate. Earnings also include purchase accounting benefit related to the disposition of a $4.8 million credit impaired loan and resulted in a $493,000 gain or $0.01 per share for the quarter, and that's included in our purchase accounting accretion. Second as relates to credit, our internal credit metrics have continued to improve as our total criticized and classified commercial loans have been reduced by 39% during the year to approximately 86 million from 142 million at the beginning of the year. Additionally, our purchased credit impaired loans have been reduced to only 1.6 million and our REO balance is 1.8 million. And then finally, our provision for loan losses, excluding the provision related to releasing program was only 781,000 and net credit losses was only 292,000 for the quarter. Given these improvements in our credit metrics, I am estimating a quarterly provision for losses will range between 2 million and 2.2 million per quarter on a go-forward basis. As always, that will be event driven by loan growth and charge-offs, but that is a reduction from prior guidance. Finally as it relates to the net interest margin, as disclosed in the earnings release, core net interest income which excludes the impact of purchase accounting adjustments was $35.8 million for the quarter and represents $1.2 million increase as compared to core net interest income of $34.6 million for the second quarter. This increase was primarily driven by an increase in average loans of $66 million during the quarter as our core net interest margin, again excluding purchase accounting adjustments, was relatively flat at 369 compared to a 368 for the second quarter of this year. The increase we received in the yield on the loan portfolio of five basis points was almost totally offset by an increase in the cost of funds on our deposits and borrowings. The impact of net interest margin of purchase accounting accretion has averaged 9 basis points for the nine months of 2017. We anticipate that this would decrease to four basis points in the fourth quarter of this year and will be only 1 to 2 basis points in 2018. I believe the press release is pretty straightforward as it relates to non-interest income and expense and accordingly. That's it for our prepared remarks. We will happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from Michael Perito with KBW. Please go ahead.

[Michael Perito:]

Hi, good morning, guys. Thanks for taking my questions.

[Roger Deacon:]

Good morning, Mike.

[Michael Perito:]

I have a couple of questions. I want to start on loan growth, I think the quarter-to-quarter seasonality here was well telegraphed by you guys, but as we move into next year, I am just curious how the pipeline are starting to look today. And maybe any high level thoughts you could provide on how you think the overall loan portfolio could grow? I mean I imagine there is probably going to be a little bit more turn in some of the newer stuff next year, but just curious if you have any initial thoughts as we are only a couple of months out from the start of 2018?

[Mike Keim:]

Mike, I would tell you -- it's Mike Keim, and good morning.

[Michael Perito:]

Hey, Mike.

[Mike Keim:]

I would tell we continue to be bullish in terms of what we are doing from a loan growth perspective. The Lancaster market continues to be strong for us and overall we are strong. As Jeff referenced early on the call, loan commitments have fell in the third quarter. We are strong and we see -- and we are projecting a pickup in loan commitments in the fourth quarter as well. We think that will continue to carry forward into next year. We don't think we'll have 10 to 12% loan growth next year, but we are looking at in that 8 to 10% range. So we are ratcheting it down an little bit. But, we feel very good. Teams continue to perform exceptionally well as well as the Lancaster market which is a new market for us.

[Michael Perito:]

Awesome, very helpful. Thanks, Mike. I also wanted to ask a couple of questions on non-interest income. Curious the mortgage activity seem like it's slowed a bit. Just curious if that pipeline has kind of stayed low into the fourth quarter here? And then any other thoughts you can drive on kind of the production there?

[Mike Keim:]

Yes, so production has stayed -- first off, the pipeline has stayed relatively consistent from the second quarter forward. So we didn't really get this typical seasonal pickup in the third quarter. That's really a function of housing supply in the key markets that we serve. We have been successful and recruiting additional loan officers. So we've actually maintained the pipeline going into the fourth quarter here which is actually very strong. And that's a good sign for us and we are going to continue to recruit. During the second quarter, we implemented a new production system in campus [ph]. And now we feel that we've kind of walk through any of the kind of impediments that any system conversion occurs with or has with it. So now adding and recruiting people and continuing to grow that book of business. The other thing that hurt us from it, if you just look at the core income statement and the gain on sale item is besides production being down about 23% year-over-year in the quarter, the mix of our business held for sale versus portfolio, we had an increase in our mix going toward portfolio. So while that is a short term trade off in terms of annuity stream versus gain on sale, it will benefit us as we move forward.

[Michael Perito:]

Got it. It's interesting, I have heard it from a couple of your peers on the housing supply issue, is that something you guys -- is there some pent up supply that could hit the market later this year that could maybe make some the typically slower quarters a little stronger? I mean, it's more of a short term phenomenon, but is that's something that's possible?

[Roger Deacon:]

Look, that's certainly possible. And I think what you are seeing is as that supply tightens obviously home price increase. And therefore, people that might not have otherwise been in the market to sell their home rotate into that. So, it's something we will watch carefully. But like I said, our focus is really getting after and hiring additional folks, loan officers that can bring business to us. And do not rely solely on a refinance environment. For us to be successful in the mortgage banking side, we need to continue to grow our business focused on purchase. And when refinance activity occurs, we need to take advantage of that and reap the additional benefits.

[Michael Perito:]

Helpful. And then just my second one on non-interest income which is related to the trust business, as I look at overall non-interest income you are seeing some nice growth this year. It looks like trust is tracking to be relatively to be flat. I am just curious if there are any kind of organic or inorganic growth opportunities on the horizon that you guys are looking at in that business at this point that we should be thinking about?

[Roger Deacon:]

Trust is we've always said that it would be our lowest growth area in the wealth management platform. It does kind of ebb and flow a little bit during the year depending on the state settlements and things of that nature. And typically the fourth quarter is a little stronger, but tell you the truth overall it's tracking right on budget for the year. For us on the trust income, we have gotten into some specialty niche trust areas which we see opportunities to grow, but even there a trust is a slower growth market. We'll see our growth in wealth really coming from the RIA type of wealth management functions versus trust. It's a nice complement to what we have. It's a differentiator as we go after customers. We are trying to win new business on the RIA side that have trust powers, but overall trust as a business by itself it's more of a 3% type of growth line of business.

[Michael Perito:]

Helpful. Thank you guys. I appreciate all the color.

[Roger Deacon:]

Yes.

[Operator:]

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

[Frank Schiraldi:]

Good morning. Just a couple of questions; first on, I understood to get your guys commentary just color on deposits pricing pressures, deposit betas and thoughts on the core NIM from here aside from the purchase accounting?

[Roger Deacon:]

Sure. Frank, it's Roger. We did see an uptick in deposit betas during the quarter and I think that's pretty consistent with what we're seeing across the industry. Our deposit beta pick up this quarter is a little bit magnified because of the growth in our public funds deposits and in that space for public funds the beta were about 50 basis points higher today than where we were a year ago on our public funds dollars which would tell you that beta is about 67% and so there is a little bit of that spike in the seasonal related to our overall interest rates but we are seeing an uptick in what will say exception pricing for our retail customers and more folks asking for the higher rates on commercial and public funds. I think when I go back and looked at our beta relative to where we were last, the fourth quarter of last year our beta is 16% but it's grown with each of the rate increase, that I think that's consistent with what we've seen across the industry. As it relates to core margin, we are seeing a little bit of an increase in our loan pricing this quarter, so what we don't really, we don't know what's going to happen is in the fourth quarter, if we get rate increase and this is consistent with what I said before whereas like slightly asset sensitive as we know we're going to get an uptick on yields on our loans, it's just how much do you have to re-price on the borrowing side in the deposit side. So this quarter, we are relatively flat, I think of where we might see a little bit of compression in the core margins but it's not that significant and if we get to 25 basis points rate increase, I think that's probably wash as well.

[Frank Schiraldi:]

Got it, okay and then just on loan growth, Mike you mentioned rashing down expectations a bit for next year, is that more so in the legacy or expansion markets and then if you could just talk to whether that's driven more so by greater competition or just maybe a little bit less market activity expectation? Thanks.

[Jeff Schweitzer:]

Frank, I would look at it and basically say as we grow the Lancaster book of business effectively just you become numbers game in terms of what is the accelerated pace, so if you grow Lancaster from zero and then you're getting ratchet up now we're well over $200 million, it's simply that as that book of business gets larger in the overall book, that is slowing our stance. So with legacy market is still continuing to grow in that 8% range and so the incremental impetus for lack of better term coming from Lancaster is slowing down on a percentage basis.

[Roger Deacon:]

Okay. So all along we're talking about year in the prior changed has been 8% type for businesses, that increase this year on the Lancaster side is going to be less of an impact on the year-over-year percentage basis, this brings you to 8% to 10%.

[Frank Schiraldi:]

Okay. So I guess not really a big change in thinking just a bigger balance sheet?

[Roger Deacon:]

Correct, correct.

[Frank Schiraldi:]

Okay, all right. Thank you.

[Operator:]

[Operator Instructions] Our next question will be from Matthew Breese with Piper Jaffray. Please go ahead.

[Matthew Breese:]

Good morning everybody.

[Jeff Schweitzer:]

Good morning, Matt.

[Roger Deacon:]

Good morning, Matt.

[Matthew Breese:]

Just a couple of quick follow-ups, on the loan growth side, I'm just curious to hear, what are the incremental new loan yields coming in that pushing on the C&I side and on the CRE side and how does that compare to your average rates right now.

[Jeff Schweitzer:]

Sure. So Matt, our average yields today are about 430 and 435 and it lot depends on the mix in the of the new production of fixed versus variable and the fix is were able to see in that 435 to 450 on average so, it's been that was fairly good this past quarter and a variable obviously were probably about 40 to 50 basis points below that. But all in all we're pretty close to where our yield is today.

[Matthew Breese:]

Okay. And then how would do you -- size up the same question on the deposit side, what is the incremental cost of funds relative to your current cost?

[Jeff Schweitzer:]

In terms of that, you tell that in terms of new production I mean.

[Matthew Breese:]

New deposits if the incremental retail or the incremental commercial customer comes in what's typically the deposit rate you have to give them get in the door.

[Jeff Schweitzer:]

Yes, that's a really wide range based on the type of customer. If you have a good commercial customer, that you have the C&I loan with you get the operating account and with zero rate so, it's really relationship drive from that perspective. If I'm just out looking from money and if somebody might come in on the 125 which is my overnight cost of funds and that's why it's so important that we continue to faster the relationships with the commercial lending team and those commercial customers to really keep our overall loan deposit rate low but is really a wide range and we have not changed our consumer pricing and I guess we had more exceptions on that basis. On the -- we like to target if it's a higher dollar customer. We would like to target between 75 and 100 basis points.

[Matthew Breese:]

Got it. Okay. And then on the expense side things look like they are coming right we thought at about $130 million for the year, how you would size up expense growth in 2018 and what we should be expecting there.

[Jeff Schweitzer:]

Sure, so I think in any normal business model you are looking at a let's say a 4% to 4.5% growth. I would guide a little bit higher that because we do intent to continued to invest in our IT/technology as well as e-commerce mobile banking next year so, I would say that we are looking at that 5, 5.5% next year type number. It just continues. We really want to continue reinvest in certain aspects of the business. To advantage to make that be has the whole platform for banking changes. We want to be right there with that.

[Matthew Breese:]

Okay, so like a 136, 138 million, something like that is probably good ballpark.

[Jeff Schweitzer:]

Yes, I think that's fine.

[Matthew Breese:]

Okay. And my last question is really on the tax rate. I think this quarter was that higher than what we have seen in the last couple of quarter and just wanted to get us sense for us that kind of come back down or is 2018 level?

[Jeff Schweitzer:]

No, we don't say. I think as we go into 18 we guess this whole dynamic around the discreet of then so, I'm going to try to go forward almost ignore that because that becomes part of your run rate it just lumpy by quarter. And next year we would guide to a 29% effective tax rate.

[Matthew Breese:]

Okay, that's all I had. Thank you very much.

[Jeff Schweitzer:]

Thanks, Matt.

[Operator:]

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

[Jeff Schweitzer:]

Just like to thank everybody for participating on the call today. We look forward to a good fourth quarter end of the year and look forward to talk to you everybody in January. Have a great day.

[Operator:]

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