Univest Financial Corporation
Q3 2016 Earnings Call Transcript

Published: 30 Oct 2016

[Operator:]

Good morning and welcome to the Univest Corporation of Pennsylvania's Third Quarter 2016 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, Amy, and good morning and thank you to all of our listeners for joining us today. Joining me on this 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 Web site at univest.net under the Investor Relations tab. We reported net income of $58,000 during the third quarter. As anticipated, our reported income includes after-tax $9.2 million of acquisition and integration expenses, related to the acquisition of Fox Chase Bancorp. Excluding these costs, earnings would have been $0.35 per share. Additionally on a pro forma basis, we had solid loan growth during the quarter of $69 million, or 2.2% un-annualized along with deposit growth of $63 million or 2% un-annualized. During the quarter, we successfully completed the systems conversion of Fox Chase in the Univest and closed two of the legacy Fox Chase branch locations in New Jersey, consolidating these locations into the existing Ocean City location. Additionally, we are slated to close three more legacy Univest locations on November 1, consolidating these locations into existing locations, which are located nearby as we continue to optimize our financial center footprint. These closures were offset by the opening of our first financial center in Lancaster County in Willow Street to support the talent with that we executed on in the second quarter. Now I'd like to open it up for questions that anybody might have today. Amy, can you queue for questions please?

[Operator:]

Yes. [Operator Instructions] Our first question is from Michael Perito of KBW.

[Michael Perito:]

Hey, good morning guys.

[Jeff Schweitzer:]

Good morning, Mike.

[Michael Perito:]

Few questions, I guess starting on maybe kind of the loan growth outlook, you know, had another strong quarter of growth, double-digit growth on the organic basis, can you maybe talk about the pipeline and maybe more specifically the Lancaster kind of pipeline and maybe where balances are already?

[Mike Keim:]

Sure, Mike. It's Mike Keim, and good morning. Pipelines remain healthy as we've talked about in the last earnings call. We continue to believe that on a annual basis, we will have loan growth in the 10% to 12% range. That doesn't mean every single quarter will be at that perspective, but we continue to see the growth and pipeline supporting that going forward. With regard to Lancaster, we finished the third quarter with a little -- approximately $34 million and balances from that group, and as of yesterday, it grown to $43 million. So we see healthy production actually coming on the books and we continue to see a pipeline that justifies that pace of growth will continue.

[Michael Perito:]

Great, that was helpful. And then maybe a pivot question here, I mean I think about legacy Univest, you guys operated with kind of a loan deposit ratio in that 90% plus or minus range. I was really actually below that for quite a few years before last year. Obviously now, smacking a 100, it sounds like the 10% to 12% loan growth outlook is unchanged. What's the expectation in terms of funding that loan growth? And I don't guess where -- how comfortable are you with that ratio rising into that 105 range at this point?

[Roger Deacon:]

Hey, Michael, it's Roger. Yes, it's a very good question. We are comfortable operating in a 100% to a 110% type loan to deposit ratio. Obviously we'd like that to be added in the 100% range, but what we'd like to do is have -- if anything you grows the loan book and you fund there with deposits, it will be were as a trailer as opposed to reading [ph] with it. So if for time-to-time we go up to 102% or 103%, in my mind that is okay. And then we'll have separate initiatives along the way to continue to fund that both on the commercial and consumer side.

[Jeff Schweitzer:]

And I would add to that, Mike. We continue to have opportunities in the public fund market, and as Roger said, we'll have separate initiatives to continue growing on the commercial side as well as the consumer side. On the consumer side, as you will know, that's a marathon in terms of continue to grow those deposits. So, the more immediate impact would be on the public funds and commercial side.

[Michael Perito:]

Is that public fund commercial side and these are the biggest opportunity there the Lancaster market or other opportunities in the legacy market or Valley Green [ph] that are still meaningful?

[Jeff Schweitzer:]

The quick answer is yes, there is opportunity across the Board. We surely have opportunities in Lancaster. We also have opportunities in Lehigh Valley, which we need to continue to pursue as well.

[Roger Deacon:]

Yes, nice thing with the public fund side is that's where the local positioning actually does come into play somewhat, a lot of the school districts and such like to do business with banks in the market, not necessarily headquartered out of state, so we do see opportunities. In our core market, that was along with our expanded markets.

[Michael Perito:]

Okay. And then maybe just one more balance sheet question, the name came in just about where I was expecting and at least to be in -- it seems like the cash position though was maybe a little higher than what it needs to be at least on an average basis. I guess can you guys just remind us, I mean it sounds like obviously if you search of a public funds business, my guess is the securities portfolio will probably be relatively flat at least from here, but I guess can you just provide any updated thoughts on kind of the cash and securities portion of the balance sheet as the overall continues to grow?

[Jeff Schweitzer:]

Yes, you're exactly right. My plan would be to keep the investment portfolio at about the same size as it is now. It's going to obviously will be opportunistic in terms of timing of purchases and sales. But in over time then that becomes a slightly smaller percentage of the balance sheet, but that would be the plan right now. As you've raised your question about cash, I mean really we're in a borrowing position overnight. So the cash just on the balance is really cash in the branches and in process clearing items. It's not really cash that were sitting, and it is not funds that were sitting on.

[Michael Perito:]

Okay. So I mean taking at that face value, it would sound like then I guess my next question would be the core kind of margin expectation. I mean it sounds like it could be relatively steady from here. I guess is that fair or is there still in asset side compression that we should expect some large compression sequentially for the near future absent of higher rates?

[Mike Keim:]

Sure, I think that the bulk of our growth is still going to come to commercial and commercial pricing is still what I would say on average 50 basis points lower than our core portfolio right now. So our core portfolio commercials about a 430 yield, new business is coming in on average around 370, 375. So you will see -- what I've said in the past is I think this is still true. I think we're going to see a couple basis points of compression per quarter.

[Michael Perito:]

Okay.

[Jeff Schweitzer:]

And assuming no change in the yield curve, correct…

[Michael Perito:]

Right, if you remind us what the – always as you guys see all as equal, what the impact would be to the NII and the margin rather -- if we did see a 25 basis point hike in December?

[Jeff Schweitzer:]

Sure, it's not super material. It's probably about three basis points for the 25…

[Michael Perito:]

On the plus?

[Jeff Schweitzer:]

Yes, on the other plus correct.

[Michael Perito:]

Yes, okay.

[Jeff Schweitzer:]

I mean 50% of our commercial loan portfolio is variable.

[Michael Perito:]

Okay. All right, thank you guys. Appreciate it.

[Jeff Schweitzer:]

Thanks, Mike.

[Roger Deacon:]

Thanks Mike.

[Operator:]

The next question is from Matthew Breese of Piper Jaffray.

[Matthew Breese:]

Good morning everybody.

[Jeff Schweitzer:]

Hi, Matt.

[Roger Deacon:]

Hi, Matt.

[Mike Keim:]

Good morning, Matt.

[Matthew Breese:]

Just curious, what was the absolute dollar amount of total intangible assets at quarter end?

[Roger Deacon:]

We have the goodwill and the intangible. Okay, the goodwill is $172 million, intangibles are $17 million and that doesn't include MSRs were about -- which are $6 million. So the combination is $79 million -- $189 million.

[Matthew Breese:]

Okay, $189 million in total.

[Jeff Schweitzer:]

Yes.

[Matthew Breese:]

Okay, and then I know the message was third quarter, fourth quarter. We're going to be somewhat noisy. Can you just remind us of what remaining one-times will occur in the fourth quarter? I know we still on track to see clean results in first quarter 2017.

[Roger Deacon:]

Matt, it's Roger again. Yes, I mean that continues to be our plan is to – have start-off 2017 with a clean first quarter, and as it relates to one-time in the fourth quarter, there's not going to be much significant. We may have a few items that we're looking into that will help continue to position ourselves for 2017, but it shouldn't be too significant. We still had some Fox Chase related costs that were in the third quarter. Some of those bleed into the fourth quarter, but once you hit the first quarter will that be Queen [ph].

[Matthew Breese:]

The system convergent, have any impact on service charges this quarter, especially on the Fox Chase side?

[Jeff Schweitzer:]

No.

[Matthew Breese:]

Okay. Okay, and then I know there is some moving parts in terms of consolidating branches and opening some new ones. What would you expect is the operating expense run rate as we head into the first and second quarter 2017?

[Jeff Schweitzer:]

Sure, I think it's in the range of $30 million to $32.5 million.

[Matthew Breese:]

Okay, and then my last one is can you remind us of your overall profitability goals in 2017 and beyond and perhaps comment on your confidence and achieving those goals?

[Jeff Schweitzer:]

Yes I mean our overall profitability goals they haven't changed. We're looking at North of a 110 ROA. We're focused on -- we're very focused on efficiency ratio. I know it's not necessarily profitability goal, but it helps to drive it. It's continuing to drive that down into that 60 to 63 shorter term with the goal of long-term getting even further lower than that. ROTC north of 13.5 to 14, so the goals that we've outlined in the presentations in the past, they haven't changed, we still feel confident that we can hit those as we get through 2017 and 2018.

[Matthew Breese:]

Got it. That's all I had. Thank you very much.

[Jeff Schweitzer:]

Thank you, Matt.

[Roger Deacon:]

Thank you, Matt.

[Operator:]

[Operator Instructions] And the next question is from Chris Reynolds of Neuberger Berman.

[Chris Reynolds:]

Good morning, gentlemen.

[Jeff Schweitzer:]

Good morning, Chris.

[Roger Deacon:]

Good morning, Chris.

[Chris Reynolds:]

I have a question about new financial center, capital spending cost and breakeven, I would think that the economics vary quite a bit depending on whether it's the Valley Green bank division or operating in Lancaster County? Can you sort of outline what that looks like?

[Mike Keim:]

Yes, Chris, it's Mike Keim. And when you look at that breakeven, I mean traditionally would have looked at it as a level of deposits on loans with our diversified model. We also look at it in terms of what are we driving and with regard to the increases in the feed driven business. So what we do from a mortgage perspective? What we do from a wealth management perspective, as well as from an insurance perspective. The reality is the occupancy cost, and Lancaster market is dramatically lower than it would be in the Philadelphia market, which I think we'll make sense to everybody. So as we consolidate branches, we're trying to consolidate branches and get them to be in that $50 million deposit per se, per branch. Now as we open up new ones in new markets that's obviously going to take a ramp up period. But when you combine that deposit base per branch with what we can sell from our other feed driven businesses that's how we look to drive to a quick -- frankly beyond a breakeven analysis for our new branch structure. We are looking at and as we mentioned, we will have closed 11 branches in the last year and change with regard to the existing centers in those savings that we're getting from those shutdowns is what we're using to invest in the new locations, which expand the reach of our footprint and support all of our lines of businesses.

[Chris Reynolds:]

Okay, thank you, terrific.

[Jeff Schweitzer:]

Thanks, Chris.

[Operator:]

[Operator Instructions] The next question is from Michael Perito of KBW.

[Michael Perito:]

Thanks for taking the follow-up guys. Question kind of stemming from the response on the target profitability goals, obviously my hunch is that that the non-interest income platform growth is a big driver of achieving those. Can you maybe just give some comments on what you saw on the quarter? It seems like on the mortgage where you guys have hired some -- starting to pick up some momentum, I guess where we had that build out and maybe also some comments on the insurance and investment trusts platform as well, please?

[Jeff Schweitzer:]

Yes sure. The insurance investments, we obviously really like the diversified model. We want to continue to grow the diversified model. Our metrics have gotten a little skewed after buying two banks that were loan a deposit shop, so our long-term goals to continue to increase those percentages of income from non-interest income and continue to grow those. With that said, it can't happen just organically because obviously the bank is a big engine that will continue to grow, so for those lines of business -- to catch up, it's got to be a combination of organic growth plus acquisitions and there's always opportunities out there and while we're out of the acquisition market for banks. We continue to look at opportunities and those lines of business to fill out our footprint and fill out our capabilities. With that said, we had a nice rise in the stock market in the third quarter, which always helps us then as we get paid on assets under supervision and as those grow, we make more money. Insurance on the organic is a slower growth 5% to 7% type of growth engine and that continues that's been kind of our growth year-to-date from written premium and also on revenue basis and we feel comfortable with that. I would say well starting to see a change in the mix of our business more moving to the growth we're seeing isn't investment advisory, which is really nice. That's what we've been focused on growing that's been growing significantly during the year while we've seen some runoff in the trust business because it's just a slower growth engine on the trust side. So a change in that mix is a favorable thing long-term for us and we've been very focused on growing that investment advisory business. We've built out the mortgage banking side and we have a team in the Lehigh Valley now that is really starting to produce. We built that over the past year and they're starting to contribute to production now, which is really nice. We need to grow out of Chester County more and into Lancaster now that we've entered that market, so that we have a full diversified set of products and services in all of our markets.

[Michael Perito:]

Okay, thanks for that color. And then I guess taking those comments all together, I mean obviously your points taken on as a percentage of your operating revenues organically turned to be difficult is because you're growing loan to 10%, 12% percent a year.

[Jeff Schweitzer:]

Right.

[Michael Perito:]

But I guess what is a kind of realistic organic growth rate for your, fee income platform as you see the opportunities in front of you today?

[Jeff Schweitzer:]

Well, it kind of varies by line. As I said insurance organically is more of a 5% to 7% I'd say wealth is more of an 8% to 10%. And mortgage, I'll kick it over to Mike because they report up to him on what he sees.

[Mike Keim:]

We should see mid single-digits Mike to some degree on the mortgage side in terms of revenue growth that depends on where interest rates go and you're also going to have from quarter-to-quarter seasonality. So we're going to come into -- as in a rate decrease and replies picking up we're going to see the purchase market where we operate and slowed down a little bit until the February timeframe, February early March. But we continue as Jeff referenced, we have not stepped up like we can and should in the Lancaster market nor the Chester market. So we continue to see growth on the mortgage side. This is going to be realistically I think as it becomes more and more repurchase market with less refinance volume. We'll see margins is net up, gain on sale margin is come down a little bit, but we are also very focused on being more efficient as an organization and get our cost or loan down. So the mortgage business will continue to grow. To some degree, the revenue growth might be more in that 5% range, but we -- as we get more efficient like I know we can from an operating basis will -- the pretax contribution could actually grow faster than that.

[Michael Perito:]

Okay, and thanks for that and then just one last question for me on the credit side of things. I think last time we spoke, you guys have mentioned some, not concerned, but just kind of a closer watch on some areas in the Philly market and I guess how should we be thinking about incremental credit costs both I guess in terms of your view of credit overall in your markets plus taking into consideration that 10% to 12% growth expectation, as we head into 2017.

[Roger Deacon:]

Hey Mike, it's Roger again. So here is how we're seeing about the provision. I mean obviously the charge-offs are then driven and that's going to be a driver of it from a quarter-to-quarter basis. But kind of going forward, we're going to provide for new loan growth. We're going to provide for charge-offs. Loan growth in general is going to be at about 75 to 80 basis points of loan growth. And then I think in the charge-off front, if you look that this year we're at $3.3 million of charge-offs. I think really $1 million to $1.2 million per quarter on average is probably an appropriate run rate.

[Michael Perito:]

Okay, thanks guys. Appreciate it.

[Roger Deacon:]

Okay, thank you.

[Operator:]

[Operator Instructions] Since we have no further questions and I would like to turn the conference back over to Jeff Schweitzer for any closing remarks.

[Jeff Schweitzer:]

Thanks, Amy, and I just like to thank everybody for participating this morning. We appreciate your interest in Univest and your holdings in Univest, and we look forward to getting back and talking to you in January at the release of fourth quarter earnings. Have a great day.

[Operator:]

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