Univest Financial Corporation
Q4 2017 Earnings Call Transcript

Published: 25 Jan 2018

[Operator:]

Good morning, and welcome to the Univest Corporation of Pennsylvania Fourth Quarter and Year End 2017 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 Corporation of Pennsylvania. Please go ahead, sir.

[Jeff Schweitzer:]

Thank you, Rachel, 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, 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 $10.3 million during the fourth quarter or $0.37 per share. This included a charge related to the revaluation of our net deferred tax asset of $1.1 million or $0.04 per share related to the passage of the tax cuts and Jobs Act of 2017. During the quarter we raised a net $70.5 million of capital to a follow-on common stock offering. This capital was used to bring our capital levels more in line with peers and will be used for general corporate purposes and take advantage of strategic opportunities in the future. The highlight for the quarter was loan growth of $132.9 million or 15.2% annualized, which resulted in loan growth for the year of $334.2 million or 10.2%. Much of this growth occurred in December as our ending loan balance of $3.62 billion was $114.8 million higher than the average loan balance for the quarter, which provides a solid momentum heading into 2018. During the fourth quarter, we opened two new financial centers one each of the Lehigh Valley and Lancaster, as we continue to expand our physical footprint. The opening of these new locations was offset by the announced closing of three of our legacy financial centers as we continue to optimize our financial center footprint by consolidating locations in historical core market that are in close proximity to other financial center locations and reinvesting the dollars associated with these locations in technology and our extended footprint. We announced the closing of these locations on January 17, 2018, and will record a charge of between $600,000 and $700,000 related to these closures during the first quarter of 2018. I will 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 one item related to the fourth quarter, but primarily focus my remarks on 2018 guidance. As it relates to the net interest margin in the fourth quarter, our core margin was 3.72% for the quarter compared to a 3.69% for the third quarter. This increase included a minor benefit of approximately $225,000 or two basis points related to nonrecurring fee income. So I would say, our core margin was relatively flat for the linked quarter basis. The impact to our reported net interest margin included purchase account accretion of four basis points for the quarter which is consistent with our expectations and seven basis points for the year. I'd like to remind everybody that we anticipate that this purchase accounting accretion will decrease and will be only one to two basis points throughout 2018. As it relates to guidance for 2018, as a result of the reduction in the federal tax rate of 35% to 21%, we anticipate that our effective tax rate for 2018 will be approximately 19%, which includes the anticipated benefit associated with ASU 2016-9 of stock-based compensation. This guidance is down from our prior guidance of 29%. The amount of this benefit is impacted by our sizable tax free road and municipal lease businesses as well as our municipal bond and building portfolios. The quarterly effective tax rate will fluctuate as a result of the timing of investing and exercise of equity awards. Jeff referred to the closing of three branches and a related one-time charge of approximately $600,000 to $700,000 for the first quarter of 2018. The annual fees related to this activity are estimated to be $1.3 million, the 2018 benefit of approximately $900,000 has already been incorporated in our prior guidance of 5.5% to 6% expense increase for 2018. We currently have no other change to our prior guidance for 2018, but just wanted to remind folks we are anticipating loan growth and guiding towards a range of growth between 8% and 10%. On the core margin perspective, excluding purchase accounting, we are anticipating margin to be relatively flat for the year. We are anticipating that any benefit we see related to federal rate increases could be offset by an increase on our deposit costs as a result of increased competition, which could result due to high loan to deposit ratios in our region and/or other financial institutions competing away some of the tax benefit from the rate cut with more aggressive pricing. That said, because we report net interest margin on a tax equivalent basis, our reported margin will decline 6 to 7 basis points for 2018 as compared to our reported margin in 2017. Accordingly when combining the decrease and the benefit of purchase account accretion, with the revised reporting related to the tax credit, year-over-year our reported comparative margin will be down 12 to 14 basis points. Finally as it relates to guidance, the loan loss provision we have no change. Obviously the provision is driven on a quarterly basis by loan growth and credit losses but we're still guiding to approximately $2 million to 2.2 million per quarter or approximately 17 to 18 basis points. Finally I'd like to remind the group that like many other financial institutions, our first quarter tends to be our lease profitable quarter with higher efficiency ratios and lower ROEs due to higher seasonal compensation and occupancy cost. This ratio should improve every quarter after the first quarter throughout the year. I believe the press release was straight forward for the remaining items and accordingly that's it from my prepared remarks. We will be happy to answer any questions. Operator, would you please begin the question-and-answer session.

[Operator:]

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

[Michael Perito:]

I apologize, I got on a couple of minutes late. So I'm sorry if I missed this, but any thoughts on kind of the mortgage business as we head into next year? I saw the comment in the release that the supply impacts the 4Q balances. But just curious how you guys are thinking about that business from a revenue perspective as we move into 2018.

[Mike Keim:]

With regard to the mortgage business when we charged in the third quarter earnings call, we talked about what we believe to do is go out and recruit additional people to draw a business in for us. And that’s exactly what we did. We hired two additional producing sales managers in the fourth quarter. They will also be growing teams underneath them. And really these are folks who are going to bring purchase business in not rely on referrals from the bank network. So that’s our - we're continuing on that strategy on the mortgage side. The market - and where we operate clearly January has been cold and we had snow on the ground but then as we move through the first quarter here and get into the spring purchase market, we believe that we will be able to continue to grow the mortgage business and regain past profitability levels that we had seen.

[Michael Perito:]

Has there been any pickup at all, I guess, in the first month or so here? Or has it been kind of similar levels of production at this point?

[Mike Keim:]

Two things here Mike. We ended the year and going into January slightly higher than we were at this time last year. The part of what goes and goes through our P&L and you can see that in the fourth quarter as well is, was the mix of our business between salable and portfolio. And in the fourth quarter our portfolio mix was higher than it had been previously. So that impacts down sale levels but it also does drive net interest income overtime. That’s basically carry-forward into the early part of January. From a purchase perspective, we really see the market start to pick up mid-February forward and is somewhat depended upon the weather.

[Michael Perito:]

And then just sticking in the noninterest income line for another question here, just any thoughts. You guys got off to a pretty strong start on the insurance side. I know typically, it kind of followed the trajectory that it always does. But just curious if maybe you have any insight yet onto contingency piece in the first quarter. And any overall thoughts about how that line could track, or any growth opportunities in 2018.

[Roger Deacon:]

We anticipate it to be slightly higher than what it was in the first quarter of last year. Last year was about - little bit more than $1 million and we’re within that range maybe a little bit better in the first quarter but not too significant.

[Michael Perito:]

And then finally, Roger, you mentioned -- actually, I'm going to pivot and ask a different question. Jeff, on capital. The loan growth was solid. It seems like pipelines were good and the 8% to 10% growth is a good number. It sounds like there's still some stuff you guys are doing on the expense side early part of this year. But any thoughts on bank M&A? And maybe you can give us some updated thoughts around timing of when you think it would be appropriate for you guys to get more -- maybe aggressive is the wrong word, but be more open to opportunities there and how you guys are thinking about that over the next, call it, 6 to 18 months

[Jeff Schweitzer:]

Sure. Consistent with what we said in the past, we're looking at still doing some stuff on the system side, which will take us through the middle of this year, which will then allow us to be more proactive at looking on the bank M&A side. But I will caution as I said in the past that there has been a lot of consolidation this market over the last few years that we've participated in as well as others and the opportunities that are out there aren’t as robust as they were in the past. So there is just isn't -- with the consolidation that's occurred, there just aren’t as many solid opportunities to acquire banks when we look out that would really fit what we're looking to try to do, but from a ability to do it and be more proactive and look at it, once we get into the second half of the year, we would be in that position. On the other M&A side with mortgage -- with wealth and insurance, we're always looking there and will always continue to look and build a pipeline of potential acquisitions. Not to say that there is anything eminent, but it is something that the heads of those lines of business are focused on as part of their growth strategy.

[Michael Perito:]

And those M&A -- bank M&A comments. I mean, is that broad in scope? Or is that really just like the greater Philadelphia region? I mean, as you guys kind of move north and west organically, I mean, is that -- is there a little bit more in those neck of the woods for you guys to look at? Or does that comment that really encompass all of those opportunities at this point?

[Jeff Schweitzer:]

I would say it pretty much encompasses the markets that we're looking at. We're Southeast from Pennsylvania. As you said, we're going a little north, we're going a little west, but overall what would meet our criteria, we're not looking to do a small bank deal. We're going to grow loans 8% to 10% this year and if you do the math, that is a small bank. So for us it's a supplier, a small bank is more disruptive and it necessarily is additive unless we're entering a new market. So overall I would say that we're looking more towards the $1 billion type of institutions which when you look at what's out there, that limits supply that we can go after. Now as we expand geographically, obviously that could bring players into the mix, but we're also looking to acquire stuff that enhances the franchise to the extent that we do acquisitions and not just making us bigger.

[Operator:]

[Operator instructions] The next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

[Matthew Breese:]

I just wanted to go to the growth outlook, when we talked about the capital raise, one of the potential outcomes was you're seeing opportunities to hire folks in your market and I want to get an update there if you actually have accomplishing and to what extent?

[Mike Keim:]

So we continue to be looking to recruit in all three of our primary markets as we run from a commercial perspective, which is the Lancaster market, where we call the Delaware Valley Division as well as the Lehigh Valley. We did pick up another addition in the Lehigh Valley during the fourth quarter and we're continuing to talk to people. There is nothing out there at the present time that would be a whole team lift out, but there's opportunities for us to cobble together a team and to potentially continue to move forward there. So we're looking at that. It is a tight market in terms of trying to recruit people and just talent especially at this time of the year, because people are close to getting their bonus payments at most institutions and would stay for that period of time, but we are in deep discussions with several people and we continue to move forward.

[Matthew Breese:]

So you picked up, one I totally understand that the timing, what do you think is the goal in terms of people that gets you where you want to be by this point next year?

[Jeff Schweitzer:]

Matt, typically I don't focus necessarily on the number of people that we pick up. I look at the quality of people that we can get. So I try not to limit ourselves. Do we budget to a number of people? Yes. But I am more focused on if there is a team or there is a group of people that make sense for us, I'd rather focus on the quality of the book of business that they can help us grow. So, I am not going to comment to a specific number that would tell you similar to what was discussed in the capital raise and what we discussed on other earnings call. We continue to look forward that we could find another Lancaster team, we would certainly do that. We’re looking to bolster Lancaster market as some of the people that we talk to can we go into your county a little bit and do some of other things there. We would certainly do that but we’re not going to pay to a specific number because in my past that's actually caused problems because you try to drive the higher specific number of people and it's not necessarily the quality people that you get and want.

[Matthew Breese:]

And then Roger just on the NIM outlook obviously a lot of moving parts as we headed to the New Year with the tax changes, maybe frame it in another way what are your expectations for net interest income growth year-over-year I will leave the question there?

[Roger Deacon:]

Sure. The report is roughly 6.5%, remember that includes the purchase accounting. When we exclude the purchase accounting then we’re looking for a net interest increase of approximately 8.5%.

[Matthew Breese:]

Right, okay. That's very helpful.

[Roger Deacon:]

So it’s kind of consistent with that growth kind of consistent with a flat margin.

[Matthew Breese:]

And then you spoke about some volatility on the tax rate throughout the year, where do you expect the high and the low points to be?

[Roger Deacon:]

The low will be in the first quarter and somewhat in the third quarter, most of our restricted stock invest in the first quarter, but we do have some that invest in the third quarter as well but that’s where the biggest benefit will be.

[Matthew Breese:]

Understood, okay.

[Roger Deacon:]

Yes, options are little tougher because you can’t really predict when they get exercised.

[Matthew Breese:]

My last one is really around the shape of yield curve obviously the five and 10 years backed up quite bit, and I just wanted to get a sense for way you’re seeing the higher yields pass-through and conversely where you’re seeing some of that spread compete it way?

[Roger Deacon:]

Yes, so as it relates to new commercial loan production, we see the modest uptick during the year maybe five to 10 basis points but that's about it. So we really haven't seen a significant increase in new origination loan pricing. The benefit we’ve seen over the course of the year related to increase in yields on our interest earning assets primarily relates to just our existing portfolio repricing. So, where we've actually done a great job this year is increasing our non-interest-bearing deposits and that's really been what’s helped us keep our margin, you know what I would say relatively flat for the last two to three quarters - the value of our what we call free flow is up six basis points from the fourth quarter of last year. So it’s competitive and that's why I have really guided towards a relatively flat number. In theory, we should get a little bit of a benefit of a rate increase, we just don't know what’s going to happen on that deposit pricing side. So I’m hoping on conservatively calling it by a flat margin for the year, but it’s competitive and what we don't know, we haven't seen it yet but we don't know if competitors are going to get more aggressive and compete away the benefit of the tax cut by coming up out with more aggressive pricing on loans or on deposits. And so it’s really a watch-and-see situation right now.

[Matthew Breese:]

And if I could I just one more. Obviously with the change in tax rate your bottom line should be a bit better and just wanted to get a sense for what the added capital generation power where were you first look to put that will be in cash or sack it way maybe for something like Cecil or higher dividend or cash acquisitions just curious what your thoughts are there?

[Roger Deacon:]

Well at the current time, we’ve kept the capital at the holding company and we’re just using that to reduce our short-term borrowings. I don't really have the intention to put it in investments and I don't have the intention of really changing my capital management strategy at the current time. I’d like to put it to use through additional growth maybe a folding on acquisition on the wealth or insurance side, and Jeff already discussed kind of the M&A, the bank M&A environment. But I think obviously the first place I'd like to spend it is organic growth and if you had an opportunity do the lift-outs or the like, I would spend it there via expense and capital usage.

[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:]

Well just like to thank everybody for participating today, and we are looking forward to a really solid 2018 and looking forward to talking to everybody at the end of the first quarter. And go Eagles. Have a good day.

[Operator:]

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