Univest Financial Corporation (UVSP) Q2 2021 Earnings Report, Transcript and Summary

Good morning and welcome to the Univest Financial Corporation Second Quarter 2021 Earnings Conference Call. Please note this event is being recorded. I would like to turn the conference over to Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Thank you, Debby, 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, I'd like to start by saying I hope everyone listening is staying safe and you are your families are healthy. I also need to 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 to the forward-looking cautionary statements in our earnings release and in our SEC filings.

Thank you, Jeff. And I would also like to thank everyone for joining us today. In addition to demonstrating our continued ability to grow loans, we continue to have strong performance in our core business. During the first six months of the year, we produced a pretax pre-provision ROAA of 1.72%. I would like to touch on four items from the earnings release. First reported margin of 3.15% was up three basis points compared to the first quarter. Reported NIM was negatively impacted by 10 basis points of excess liquidity, which averaged $175 million for the quarter. PPP loans increased NIM by 11 basis points and contributed $4.8 million to net interest income. Core margin, excluding excess liquidity and the PPP impact was 3.14%, a decrease of five basis points when compared to the first quarter. Core margin excluding excess liquidity and the PPP impact is expected to expand slightly in the third quarter. This reflects quarterly savings of approximately $850,000 from the $75 million subordinated debt redemption at the end of the second quarter. As it relates to PPP, as of June 30th, $6.4 million of net deferred fees remained on the balance sheet, which represents approximately 35% of the initial deferred fee amount. Second, during the second quarter, we recorded a reversal of provision for credit losses of $59,000, which was driven by a $2.8 million benefit due to favorable changes in economic related assumptions within our CECL model, primarily offset by reserves attributable to our 15.4% annualized loan growth during the quarter. The allowance for credit loss coverage ratio excluding PPP loans was 1.41% at June 30, compared to 1.46% at March 31 and 1.94% at June 30, 2020.

The first question comes from Frank Schiraldi with Sandler.

Hey, guys, wondering about the strong loan growth obviously increased the guide here, what would you say the primary driver there? Is it some of the teams you guys have added sort of ramping up faster than you expected? Is it better demand in your market? Or maybe the some of the M&A deals out there it's just providing a greater amount of opportunity.

So, good morning, Frank. It's Mike. So the first and foremost would be just the quality of our teams and the fact that we never stopped lending during the pandemic. We kept momentum. Again, I think we talked about this last call as well. We did get more conservative in our underwriting guidance, but we kept the lending momentum going, so customers and prospects knew that we were going to continue to lend and have done that. So that's helped us, the quality of our teams has been outstanding. And yes, we have seen, picked up from some of the folks that we've hired. So it's all above -- all of the above. But the real secret sauce continues to be just the strength and quality of the overall team.

Okay, and then just trying to drill down into some of the fee income drivers of the guide, Brian, just wondered if you could give your thoughts on a fair growth rate for the investment advisory business, over the next 12 months or so, especially given some of the potential opportunity in the market, again, related to deals.

Yes, on the investment advisory side, of course, there's the -- the market consideration there. But assuming that things were stayed flat, we'd expect kind of double digit to mid double digit growth is what we're expecting from a full year perspective, year-over-year from '20 to '21.

Okay, great. And then driving that is just expanding the business.

Yes, improvement of AUM from a valuation perspective, as well as new business and continuing to expand customer relationships.

Yes, I mean, we've been added to the Schwab referral network, as one of the RIA's in that network and have I believe 50 branches that have been assigned to us in the Mid Atlantic area, and we haven't even started that yet, we are getting all the documents in order. So that'll help also on top of what we're just doing, normal organic growth.

Okay. And then the other piece of it on fee income for me is a bit more volatile and more difficult to model is the mortgage banking business. I know last quarter, you talked about the pipeline remaining strong there moving more to purchase activity as opposed to refi because that wave sort of wanes. Any expectation you can share on that side in terms of, thoughts, given where margins are now, given where volumes are, what we could see in the back half of the year in terms of revenues, and the mortgage business.

Ye, so overall, pipelines are still strong, Frank, to what you just said. What has happened to simply that margins, which were on a gross basis, nearing 4%, last year have kind of pulled down to the 2.75% 3% range, we expect that that will continue. And absent anything else, I would tell you that the third quarter will be fairly strong. And unless and I hope this doesn't happen, rates drop dramatically again and refis resurface. The fourth quarter cyclicality should come into play. Our pipeline right now is more little, slightly more than 50% purchase, which reflects the new hires and the strength of their relationships with realtors and alike as we move forward.

Okay, so can we see that maybe I think it's usually stronger in the third quarter. Would that be the expectation versus of the 2Q results?

I don't necessarily say I would say was stronger than 2Q just because 2Q is elevated because margins at the beginning of the 2Q were closer to that 3.5% to 3.75% range. So we could see a pullback a little bit in the third quarter from where we were in the second quarter would be a reasonable expectation not yet. If you looked at it on a historical basis, it would be a historic, will be strong relative to historical third quarters, if you're looking at it to a refi dominated 4% margin now.

The next question comes from Tim Switzer with KBW.

Good morning. This is Tim Switzer on for Mike Perito. So you guys had several expense items that you touched on and they look like they're pretty temporary such as the PPP origination comp, the DE&I training, and you guys have some variable compensation going on as well. So I mean can you help us kind of quantify, how many of these expenses this quarter kind of transitory and, just trying to help us figure out, what's going to exit the expense run rate going into 2022.

From an expense run rate perspective, again, I think if we look at the full year, that updated guidance that I had provided of 4% to 6% is reflective of the one timer in the quarter and the additional kind of one timer that we expect related to those initiatives in the back half of the year. Certainly not in a position at this point to give guidance for full year 2022 expense growth. We'll be going through that budget process later this year. And we'll be communicating accordingly thereafter. But I do expect things to certainly be normalizing overall, from an expense growth perspective as we get this handful of items behind us.

Okay, and as these two more temporary costs come out will you maybe replace those with other growth investments or something else like that or you allow that to follow the bottom line.

Those are case by case decisions, depending on the environment, obviously, uncertain things, and digital and like, everything continues to evolve. And some incremental investments are required from time to time; however, we do understand the importance of operating leverage. And we'll be focusing on maximizing that to the extent possible.

Okay, great. And if I can move on to capital really quick, you guys have really strong capital levels, generating good returns, but also grown your loan book pretty quickly here. So what are your capital priorities? And do you have any plans on excess capital deployment? And how you'd like to deal with that?

Yes, this is Jeff. On the capital front, as we said, in the past, kind of everything is on the table right now, we want to make sure we have strong capital support, the loan growth that we're continuing to see, which is really exciting and very positive for us for the long term. Additionally, as we've talked in the past, we're actively trying to look for opportunities and wealth management insurance from an M&A standpoint. And then once you peel that back even further than, we would look at if depending on how things go on those fronts, we would always look at, dividend buybacks, et cetera. That's all on the table. But right now, I would say it's a focus of organic growth, making sure we're supporting that and then also looking for any opportunities and keeping some dry powder in case opportunities arise on the M&A front.

The next question is from Matthew Breese from Piper Jaffray.

Thank you. Good morning. I was hoping to learn a little bit more about the loan pipeline, maybe give us a sense for your size and how that's changed over the last six months. And then perhaps, just some insight as to what geographies are showing strength or what product sets.

Good morning, Matt, it's Mike. Look, in terms of the pipeline, the second quarter and what projects to be the third quarter of the pipelines continue to look strong. The biggest issue with regard to loan growth going forward here is going to be whether we get pay off activities that were unanticipated. And the unanticipated pay off activity is largely coming because the market is pretty hot, and our customers are having an opportunity to either sell their business and/or if it's a CRE deal to sell, perhaps in this area, warehouse facility, which is very hot and very strong at this point in time. And they sell it as a sizable gain. In terms of whether there are, we continue to perform across all of our markets is the truth. The Lancaster markets, Central PA market continues to be strong. We continue to perform well there.

Understood, okay. And then you mentioned competitive conditions just maybe give us a sense for what incremental blended new loan yields are and maybe where the competition is.

Hi, Matt. This is Brian. From a production for the quarter, our traditional kind of C&I and CRE loans averaged around 3.21% from a from a new production standpoint, that's up from around 3% in the first quarter. So of course, you got various loan types like S blocks and some other things like that, that have unique characteristics that can lower those yields or have lower yields from time to time. But if you look at our traditional C&I and CRE production for the quarter, we were at around a 3.20% And from a competitive perspective, Matt, I'll tell you that you still have people doing some things that we just won't match, and don't want to go there. So there is still some craziness out there. I wish everybody the best of luck. But there's levels on the fixed rate side, whether it's five, seven or 10 years that we just will not go to.

Got it, okay. Could you provide me with the percentage of your loan portfolio that's floating rate and unencumbered by floors at this point, just want to get a sense for if we do when and see if that hike, how responsive loan yields will be on your end?

Yes, so overall, again, this is Brian, our loan book is 43% fixed 20% adjustable and the remainder 37% is variable. From a loan floor perspective, as of the end of the second quarter, we had $346 million of loans that were at their floors and in the money. They're out there -- in the money by about 70 basis points. So two to three moves there would be what it would take to get lift on those, the rest of the book on what would happen is variable or adjustable, depending on a reset dates would have more of an immediate impact in a rate increase environment.

Okay. Just on the -- just a couple others on my end, so just to clarifying expenses you mentioned, you expect in additional I think $680,000 of training fees in the back half of the year. Professional fees are a bit higher already, should we expect this level to kind of continue or ramp up higher for that $680,000, just wanted some clarification there.

Yes, and just to clarify $650,000 in the back half of the year, and that's related to DE&I, our treasury, our management product enhancements and training. So it wasn't simply just training. But I would not expect there to be an incremental lift solely related to that $650,000 from the second quarter to the third quarter. In all honesty, if you look at the kind of all in guidance of 4% to 6% you'd kind of expect expenses to be pretty level on a quarterly basis here on now.

Okay. Understood. Thank you. Just last one for me; the last couple quarters the tax rate is just been a touch higher than my projections. Curious if 19% is the kind of new normal or should we expect, a reversion back to kind of the 18%, 18.5% level.

Yes, now as we continue to have income coming from PPP forgiveness and the like that is providing upside and taxable income, which translates in increased effective tax rate. So in the near term, I would think that current effective rate is a good indicator, to the extent PPP income starts to kind of wind down then you'd expect a reversion back to historical norms.

At this time, there are no further questions. So 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, Debbie, and thank you to everybody for participating today. We appreciate your participation and your good questions. And we look forward to talking to you again at the end of the third quarter. Have a great day and stay safe.

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