Univest Financial Corporation (UVSP) Q3 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Univest Financial Corporation's Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Thank you, Eilie, 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 Brian Richardson, 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 universe.net under the investor relations tab.We reported net income of $17.7 million during the third quarter or $0.60 per share. Earnings for the quarter included a $988,000 or $781,000 after tax FDIC small bank assessment credit. Excluding this credit our earnings for the quarter we're $0.57 per share. We were pleased with our results for the quarter as loans grew $84 million or 8.1% annualized and deposits grew $215.9 million or 20.9% annualized. Year-to-date, loans have grown $245.4 million or 8.2% annualized and deposits have grown $452.1 million or 15.5% annualized.This growth has led to an 8.7% increase in our net interest income compared to the nine months ending September 30, 2018. We continue to see solid loan demand due to market disruption and the strength of our local economy. However, with the unfavorable change in the yield curve, combined with increased competition around rate and structure, we, like most banks, are experiencing pressure on our net interest margin, which Brian will discuss shortly.With the decreasing rate environment, our mortgage banking operation had a strong quarter with the net gain on mortgage banking activities increasing $875,000 for the quarter and $496,000 for the nine months ended September 30, 2019, compared to the comparable periods in the prior year.During the quarter, we did add an $11.3 million credit to nonaccrual. This relates to a relationship we have with an auto dealer that is still operating and current, and we do not anticipate any loss related to this relationship at this time.I will now throw it over to Brian for some additional discussion on our results.

Thank you, Jeff. And I would also like to thank everyone for joining us today. During the third quarter, we continued our positive trend of earnings growth and consistent financial performance. As Jeff mentioned, we reported earnings per share of $0.60 or $0.57 when excluding the FDIC small bank assessment credit. Through the first nine months of 2019, we have achieved a return on average assets of 1.30%, return on average equity of 10.40% and return on tangible equity of 14.33%.I would now like to touch on three items from the earnings release. First, as Jeff highlighted, net interest income for the first nine months of 2019 is up 8.7% compared to the same period in 2018. This is due to strong average loan growth of 9.8%, partially offset by net interest margin compression.Our core net interest margin for the third quarter of 3.52% decreased 14 basis points from 3.66% in the second quarter. During the third quarter, we continued to have excess liquidity due to strong deposit growth throughout 2019. Average excess liquidity of approximately $174 million negatively impacted core NIM by approximately 13 basis points compared to $63 million or 5 basis points in the second quarter.Excluding the impact of excess liquidity, core NIM was 3.65%, a decrease of 6 basis points when compared to 3.71% in the second quarter. Due to the decreasing rate environment and increased competition on the commercial lending side, we expect continued net interest margin compression in the fourth quarter.The anticipated pressure on net interest income highlights the importance of our diversified business model. For the first nine months of 2019, noninterest income represented 28% of total revenue. Second, the provision for loan losses was favorably impacted by one large substandard shared National Credit loan, which paid off during the third quarter.During the first quarter of 2019, this loan had been downgraded from pass to substandard in conjunction with the regulators Shared National Credit review cycle. The loan balance was $14.6 million and the pay-off favorably impacted the provision by $1.5 million. As we look forward, we would continue to guide the provision at approximately $2.2 million to $2.4 million per quarter. Third, as expected, our efficiency ratio continued to decline as compared to the prior year.Excluding 2018's restructuring charges and 2019's FDIC assessment credit, total noninterest expense for the nine months ended September 30, 2019, increased by 6.1% from the same period in 2018. Although we've continued to invest in the business through people and technology, with significant revenue growth and continued expense discipline, our year-to-date efficiency ratio, excluding restructuring charges and FDIC assessment credits, declined to 61.3% from 62.5% in 2018.It should be noted that 2019 expense numbers include approximately $1.1 million of year-to-date noninterest expense associated with the hiring of the 8 person team in Lancaster and York counties during the first quarter of the year.As it relates to the full year of 2019, I would like to remind everybody that we expect noninterest expense growth, excluding restructuring charges and FDIC assessment credits, of 7% to 7.5% for the year. This translates to 2019 noninterest expense of $146 million to $147 million or $145 million to $146 million when including the FDIC assessment credits.I believe the rest of the release was straightforward for the remaining items, particularly related to noninterest income and accordingly, that is it for my prepared remarks. We'll be happy to answer any questions.Operator, would you please begin the question-and-answer session?

[Operator Instructions] Our first question comes from Frank Schiraldi with Sandler O'Neill.

Good morning.

Good morning, Frank.

Good morning, Frank.

I missed, and Jeff I know you touched on it in your prepared remarks, but on the credit that went into NPA in the quarter, I know others have had some SNC downgrades from what you said it didn't sound like this was a SNC, and I did hear you say you didn't expect loss, but if you can just give a little more color on sort of what happened here? And it didn't sound like you've had much previous provisioning for this loan if you don't expect loss?

Hey Frank, it's Mike. No, we didn't have a provision for this previously, without going into a lot of details, the company is dealing with some liquidity issues. We're working with them. We thought it was prudent to put it on nonaccrual based on that. But based on the collateral that we have, we do not believe that at this time we would take a loss on the credit.

And I missed, what sort of credit. I mean did you give any more color on what that collateral is or is it real-estate-related?

It's an auto dealership and it's secured by the real estate, the building, the dealership itself, the service base, et cetera.

Okay. And just curious, how you are feeling about credit overall, still seeing any more broader issues whether it be geography or loan type or how do you feel about credit overall?

On a general basis, we feel good about credit. But you do see, as we deal with the instance that we're dealing with, onesie, twosie issues, but there's no overriding trend. And otherwise, our numbers would be very strong.

Okay. And then, just wondered if there was any more detail you could give in terms of the -- Brian, in terms of the NIM guide, the expectation that it will be lower into 4Q. I know, obviously, liquidity played a big part and then the 3Q contraction, just trying to think about magnitude of the NIM compression from here?

Sure, Frank. Assuming no additional fed rate decreases, we expect NIM to compress by approximately 6 to 7 basis points from the normalized Q3 NIM of 365. So that's assuming no further decreases that's where we would expect it to land in the fourth quarter.

Okay. And I assume a decrease -- a 25 bp decrease does add some compassion to that?

Yes. Again, a full quarter impact of a decrease is roughly in that 3 to 4 basis point range. If we have it late October, potentially 2 to 3 incremental basis point compression in the fourth quarter.

Okay. And so when you say 6 to 7 bps without a rate cut, I think, you mentioned that's on a normalized basis. So then liquidity does whatever it does linked quarter and that might be an offset.

Yes.

Okay. Thank you.

[Operator Instructions] Our next question comes from Michael Perito with KBW.

Hey, good morning guys.

Good morning, Mike.

I was wondering if you could give us an update, loan growth has been strong year-to-date, again, in the third quarter, just maybe some more color about what particular segments and geographies kind of drove the strength this quarter? And then, how the respective pipelines are building? And if there's still, presumably, I would imagine, quite a bit of demand from some of the newer hires that you guys made to sustain growth going forward?

So on a net basis Mike, we still see what we now label as the Central Pennsylvania market being a significant driver to our overall growth. We are seeing growth across all product lines and segments. The new teams that have come on board have funded loans, have building pipelines. We're very pleased with the progress that they have made to date. I would tell you, the only -- the environment overall is getting more competitive and difficult. We're happy with where we are.We feel that we will continue to grow. We haven't worked for our budget process for next year yet finally. So we're not ready to commit to what we would have as a growth number for next year. But we feel good about the fact that we can continue to grow. But we're not going to ever give up on structure, and we are seeing some people do that a little bit. And the pricing environment certainly is competitive and that is adding to the pressures that Brian alluded to on our net interest margin.

Helpful. And then could you remind us how the size of your Shared National Credit portfolio and how that's trended over the last several quarters?

Yes. Somewhere in that $30 million to $40 million would be our Shared National Credits, and it is going down.

So fairly small?

Yes.

Okay.

We -- the one that Brian talked about in the beginning of the third quarter that paid off, that was a big chunk of it. So we're down pretty sizably and we have not added to it.

Okay. And then on the expense side, it seems like you guys would -- based on the third quarter, the trend would be on pace may be a little below the guidance. Obviously, the FDIC credit helps, but just any updated thoughts on kind of the Q4 expense run rate? And I think you'll get a little carryover right from the FDIC credit although not quite as substantial. But -- and then just also, as we think to next year, it doesn't sound like you guys are ready to put numbers out. But just any conceptual items or investments we should be thinking about that could potentially impact your expense growth rate?

Mike, this is Brian. As you normalized the third quarter and project that forward, I would think the guidance provided is pretty much spot-on for the full year of 2019 from an expense perspective. As it relates to 2020, as Mike said, we are going through the budget process and at this point we're not in a position to kind of provide too much commentary on that. So we hope to do that consistent with our past practice. On the January call, is where we look to give the general guidance for 2020.

But you guys already -- in the investment process, I know, you guys have been kind of steadily upgrading just in terms of platforms on the commercial side, on the retail side. I mean is there anything notable that, that's on the docket for 2019 -- 2020 rather at this point that you guys can record or are you guys still sorting that stuff out as well?

Mike, we're still working through that. I will tell you that we've been -- we've had Salesforce installed for more than a year across the entire enterprise. So we continue to work on that. We continue to ramp up what we're dealing with Encino. So we will continue to make investments to keep pushing the business forward. But there is nothing notable in dollar terms that would be incremental from our current run rate at this time.

Okay. And then just one last quick one. Can you just maybe provide, Mike, the -- some pipeline commentary specifically to the mortgage business? I mean, obviously the rate environment helped, but I know your region has had some supply issues in the past couple of years. Just any updated thoughts around that business and what we could expect going forward?

Yes. So you're right. The third quarter activity was largely rate-driven, refinance activity certainly helped out. We carried through some of that into the October period. Rates have backed up a little bit, we continue to watch it. The tenure for mortgages is really the key. So pipeline was solid coming into the end of the third quarter. Really what is more of important for us longer term is we are out there, starting to -- we have been and we continue to recruit new loan officers to join us. We've worked through the process. We implemented our new system in the past year.Our new head of mortgage banking is doing a great job. So we feel good about the fact that we are kind of a source for good, solid loan producers to come through, they can get deals done. We can get them done in a relatively short period of time, good turnaround and good experience for the customer base. So we're confident, we can continue to push forward on the mortgage side. I would just kind of somewhat caution you that asset -- the rates further going down, you're going to get cyclicality and seasonality coming into play.

Yes.

All right. Great, thank you guys for taking my questions, I appreciate it.

Thanks, Mike.

Thanks, Mike.

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, everybody, for joining us today. We are pleased with our results for the third quarter, while the environment is still obviously very competitive out there. We continue to drive solid earnings and solid results and look forward to talking to everybody in January after our fourth quarter earnings are released. Have a great day.

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