Univest Financial Corporation (UVSP) Q1 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Univest Corporation of Pennsylvania's First 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.

Thank you, Francesca. Good morning and thank you to all of our listeners for joining us today. 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 Web site at univest.net under the Investor Relations tab. We reported net income of $10.9 million during the first quarter or $0.41 per share. A couple of highlights for the quarter was solid 6.8% annualized loan growth and 13.3% annualized deposit growth. While our loan growth in the quarter was below our expectations for the year of 10% to 12%, we are still comfortable with these amounts for the year as the loan pipeline is strong. The first quarter is typically a lighter quarter for us and expect loan growth to accelerate in the second quarter. Additionally, our efficiency ratio was 62.7% during the quarter as we fully realized the cost saves and other strategic initiatives from the third and fourth quarters of last year. We opened two financial centers during the quarter in our expansion markets, one in the University City District of Philadelphia, and one in Strasburg in Lancaster, as we continue to reposition our branch footprint and fill out these markets. Before we get to questions, I would now like to ask Roger to spend a few minutes discussing some other financial highlights. Roger?

Thank you, Jeff, and I would also like to thank everyone for joining today's call. I am going to take a couple of minutes discussing a few items in our earnings release. First, I will discuss net interest margin. Core net interest income which excludes the impact of purchase accounting adjustments was $33.5 million for the first quarter of 2017, which represents a $1.2 million or 3.6% increase as compared to core net interest income of $32.3 million for the fourth quarter of 2016. Core net interest margin, again excluding purchase accounting adjustments, was 3.72% compared to 3.61% in the fourth quarter of last year. This increase in net interest margin was primarily driven by the increase in interest rates in December 2016, which increased loan yields at a greater pace than the rates on deposits. We also saw a benefit in our mortgage-backed securities portfolio yield due to a slowdown in payment rates and the related premium amortizations. One item I would note is the increase of mortgage-backed security yields acts as a natural hedge to lower mortgage banking revenue in a rising rate environment. As it relates to the provision for loan losses, we reported a provision of $2.4 million for the first quarter. The provision is primarily due to an increase in non-covered loans during the quarter as strong new loan production which requires a full reserve was offset by paydowns and reduced line utilization on existing covered loans which had no loan loss reserve. For the remainder of 2017, as always, the provision is event driven and will depend on loan growth, particularly that of non-covered loans which require the full reserve plus any specific credit issues. That said, we are increasing our quarterly estimate of the provision to a range between $2.2 million and $2.5 million per quarter. As it relates to noninterest income, consistent with prior years this quarter's noninterest income included $964,000 of insurance contingency income which compared to $1.3 million in the first quarter of 2016. Excluding the impact of this contingency income, insurance income would have increased $192,000 or 5.9% from the prior year. Also, wealth income increased 19.1% from the same quarter last year due to increased new customers and tailwinds from the fourth quarter market conditions. Mortgage banking decreased 8.6% from the same period due to lower mortgage volumes as a result of increased interest rates. Finally, as noted in the release, we did have $114,000 of gains on sale of REO during the quarter. As it relates to noninterest expense, as previously communicated our goal is to have no acquisition or integration expense in 2017 and the first quarter was clean from that perspective. We reported noninterest expense of $32.0 million for the quarter. We have previously communicated our goal of $32.5 million per quarter, or $130 million for the year. The quarter benefited from timing of certain activity-based expenses such as marketing and professional services that we anticipate will increase in future quarters. We continue to believe we are on track for $130 million of noninterest expense for the year. And then finally, as noted in the press release and consistent with other public companies, we did receive a discrete tax expense of $288,000 in the quarter related to the new accounting rules for equity-based compensation. Excluding these type of discrete events, we believe our effective tax rate will range between 28% and 28.5%. That's it for my prepared remarks. I'd be happy to answer any further questions. Operator, would you please begin the question-and-answer session?

[Operator Instructions] The first question comes from Frank Schiraldi of Sandler O’Neill. Please go ahead.

Just a couple of questions on -- I wonder if you could just talk a little bit more about loan growth expectations in terms of where the pipeline stands now. Are we already at a level 10% to 12% higher than where we stood next last year, or are you assuming that a pipeline is built here and into the back half of the year.

Good morning, Frank. It's Mike Keim. Our pipeline has built to that point and as Jeff referenced previously, our first quarter has been historically our lowest point. So we do see pipelines at a point and anticipate strong funding in the second quarter and beyond which will lead us back to that 10% to 12% annualized loan growth rate.

Okay. And then on the NIM, I wonder, Roger, maybe you could just talk a little bit about, in the past I think you have said off of 25 basis point move. Maybe it was just for December rate move but I think you talked about $1 million to $2 million in potential NII benefit. Is that still a number you would use for future rate hikes and at this point would you say that core margin pressures have subsided.

What I would say -- well, I will answer that in a couple of different ways. So from a core margin perspective, we do believe those numbers are still appropriate to $1 million to $2.5 million. From a core margin perspective of the 372, what I would say is we are starting to see some pressure on deposit pricing as a result of this last rate increase. We did not see much at all on the December rate increase. And so we are a little bit hesitant. We think we are at the lower end of that range right now. Maybe it's a little conservative but -- so if we think about this second rate increase, you are really probably at that 1 million-1.5 million range. I think we beat consensus during the quarter by about $1 million across the board because of that rate increase. I don’t really think we get much of a increase in margin from here on out. So the 372 core is probably a good number to use. But we do anticipate the nice loan growth of $80 million to $100 million per quarter. So that will drive your net interest income really more than the margin.

Okay. So just the 25 basis points we got in March, you are saying that you are seeing some offsetting deposit pressure to kind of keep that NIM where it is currently?

That’s correct.

Okay. And then just finally. I just wondered if you could just remind us on growth plans in your expansion markets in terms of any further -- is there any further build out you anticipate in terms for branch openings from here and maybe timing on that. Thanks.

Yes. We are going to continue to build out in the Lancaster market. We did open a new center, as Jeff referenced, in April in Strasburg. We have another center that will open in June, early June in Brownstown and then one that’s in Christiania on Georgetown Road that will open late summer, early fall. And that will round out what we are doing in Lancaster for 2017. We are also looking at opening another center in [indiscernible] in the Lehigh Valley but that will be late in the fourth quarter with negligible income statement impact to our results in 2017.

Okay. And then, I might have missed it, but in terms of the commentary on the expectation of still being in that 130 level on the expense base. Is that more because the staffing has been built out in a lot of these branches already or is it more, you just get cost saves elsewhere to offset these incremental costs.

Yes. We targeted the 130 for the year, Frank. There is obviously a lot of timing things that occur in marketing and professional services and the like. And the overall cost of building out a couple of branches really isn't going to drive that materially different. We also announced and will be closing one of our centers in Bucks County in the Solebury market and that will close May 31. So it's consistent with our branch optimization project that we have been working on the last couple of years, which is how do we continue to expand in the expansion markets yet be really thoughtful with regard to where we put centers in our existing markets and take the savings there to offset the increased expenses in the expansion markets.

The next question comes from Michael Perito of KBW. Please go ahead.

Thanks for the time and the updates on the outlook commentary. It was helpful. A couple of questions from me. On the non-interest income side, any updates on how the momentum there is looking. I mean ex the contingency income, it sounds like insurance was still kind of trucking higher. Trust was pretty flat quarter-over-quarter. Just what do you guys see in -- I mean has there been any pick up in some of the newer areas or just any comments there will be helpful.

Yes. I would say that insurance ex contingency still is in that 5% to 7% growth, which is what we saw. Taking out the contingency year-over-year with 5.9% -- we still continue to go at that growth rate. I would say wealth, we have seen some nice opportunities from the expansion markets. Especially in Lancaster we have got good new business. They are having a very good year and I think we will have a good year. Going in that higher single digit type of growth rate on the revenue side, which is what we have talked about in the past. So I would say each line of business is still pretty much operating into those levels that we have discussed previously.

Okay. And on the deposit growth in the quarter which is pretty solid. Can you talk may be a little bit about some of the -- where you saw some of that growth? Is it money that you expect to stick around or was it seasonal money? Just any more color there you guys can provide?

Sure, Mike. We really grew at a couple of key places I identified our commercial relationships and also municipal businesses. With the consolidating industry, we do have an opportunity on the municipality side. When I say that, I mean counties, school districts, authorities and we like to be bank local. So there is opportunities there and we have identified that as an opportunity and are aggressively pursuing those types of deposits. Obviously, with our loan growth as planned, we do need to be also aggressive on the deposit front, indentifying opportunities and working those.

Okay. So I mean is it fair to assume that when you think about those opportunities that the hope for the year is to match the 10% to 12% loan growth with similar dollar deposit growth and keep the loan to deposit ratio in this kind of current ranges you are in.

Sure. We would like to obviously keep it at around 100%. Mike, my sense would be that we are probably going to tweak up to 102%, 103%, 104% from time to time. There is some seasonality in those deposits. And that’s okay. We don’t mind managing the business that way but over the long haul, we would like to stay between 100% and 105%. That’s the way, quite honestly we used to do things at Fox, chasing that 100% to 105% range where you don’t prefund loan growth, you kind of fund it on the backend. And that would be the strategy here.

Okay. And then just one more follow up for me on the margin. Maybe I misheard, got a little confused, but there was a couple of contradictory comments. So from the March hike you expect a 1 million to 1.5 million pickup in NI related just to the hike but the core NIM is not going to -- there is not additional increase in the core NIM. Did I hear that correctly?

Well, we received -- what I said was we received the benefit in the first quarter of December. There might be over the course of the year $1 million. So call it $250,000 a quarter. What I am really guiding you guys to is that benefit we saw in the first quarter to keep it around that. As we are getting pressure on the rate side and there is some significant growth plan, so the combination of the two, I would just say, I would keep the margin flat for the year and incorporate the growth that we have planned.

Okay. So the flat core NIM for the year though, that assumes no additional rate hikes in 2017, correct?

That is correct.

Your next question comes from Matthew Breese of Piper Jaffray.

Jeff, I just wanted on to maybe touch on the wealth management business. I know you would give some good color on organically what that business is capable of. But in the past you have also talked about potential wealth acquisitions and I wanted to know how conversations were there and if there is any pipeline or anything you might call [indiscernible] occurring this year.

Yes. Right now, honestly the organic growth opportunity is pretty significant for us than wealth. Trust is still a low growth business but the RIA business actually is growing very strongly. We are always out looking for wealth opportunities but there is nothing imminent at this time. We are really focused internally on, frankly the organic side which is obviously the best bang for the buck for our shareholders in return. And we are going to continue focus on that but we always are out there talking to people. Seeing what opportunities might exist. Because as we expand our markets, if there is an opportunity in some of the expansion markets, it's something we need to look at.

Understood. Okay. And then going back to the balance sheet. The deposits out of the balance sheet in terms of strategy, Roger, I know you pointed out that there has been some increasing competition. Although quarter-over-quarter we haven't seen much of any deposit data. But if competition is heating up and the backend of the curve is coming down a little bit, are there alternative strategies, you might take including maybe putting on some lower cost borrowings for longer periods of time. Is that an option?

Actually, Matt, during the quarter we did extend out. We did $85 million worth of longer term borrowings in that three to five year type range. So, yes, we are been opportunistic in that regard. The cost of -- the difference between overnight and five year money is not that significant. So we pick our movements but we are doing some expansion.

Understood. And if you kind of had to characterize the competition and the deposit beta that we might we see in the quarters ahead. How would you size that up?

Yes. So as I said, we would like to stay at 100% loan to deposit ratio. So we will be more aggressive as well, say on the margin, where we have opportunities to attract new customers and new customers with significant dollars. Those customers were pricing aggressively to get the relationship. You get that relationship in the door, you have them really for a longer period of time. So that makes a lot of sense to us to be aggressive, get the relationship and lock in that funding for an extended period of time. We haven't really had to do much on the core base yet but quite frankly, it's going to come at some point as we can see it with some other competition including, quite frankly, credit unions.

Is that more on the retail side or the commercial side?

That would be retail.

Okay. And what are you seeing on the commercial front? Like how competitive is that, the deposit pricing there?

I would tell you it's competitive but those deposits are tied to lending relationship and cash management services that we provide. So it's all, to Roger's point, what he was alluding to is total relationship. So there is not as much, what I would call, headline rate pressure. But to the extent that we look to and can get on a larger block of deposits and somebody might have those parked somewhere else. Perhaps even in a mutual fund type of entity. We would pay up and we are looking at that strategically relative to what is the cost for us to borrow overnight vis-à-vis what we would pay on those.

Okay. And my last question is, I thought you guys had a nice quarter delivering on a number of different things you talked about in prior quarters. From here, I was just looking to get a sense for -- we talked about longer term profitability targets, ROA, ROTCE. Are all those targets still intact and can you remind us of what those are?

So, yes, they are intact. I know we were talking around in a range of the 110 plus on the ROA. It was the really the key item. We would like to be at 60% on the efficiency ratio. They are really the two key ones that we would look to in terms of how we would drive the business forward. We really haven't changed our thoughts on the long run. Quite frankly, you are right, from an efficiency perspective and a revenue driven perspective, it was a nice quarter and we feel comfortable that we have the capabilities to continue to achieve operating leverage and grow revenues at a pace faster than our expenses.

[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.

Thank you, Francesca, and thank you for everybody joining us this morning. We feel good that we were able to report a clean quarter which was what our goal was for the first quarter and we look forward to talking to everybody again in the second quarter. Have a great day.

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