Univest Financial Corporation (UVSP) Q1 2019 Earnings Call Transcript

Univest Corp of Pennsylvania (UVSP 3.31%)
Q1 2019 Earnings Call
April 25, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Univest Financial Corporation First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note this event is being recorded.

I would now like to turn the conference over to Jeffrey Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Jeffrey Schweitzer -- President and Chief Executive Officer

Thank you, Brandon, 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; Roger Deacon, our Chief Financial Officer, and Brian Richardson, Executive Vice President and Director of Finance.

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 $16.1 million during the first quarter, or $0.55 cents per share, which is a 19.6% increase over the first quarter of 2018 when you exclude restructuring costs recorded in the first quarter of 2018. We are pleased with our results for the quarter as loan grew $61.3 million, or 6.1% annualized, and deposits grew $117.2 million, or 12.1% annualized.

The first quarter is historically a slower quarter for us, so we were pleased with the growth we experienced and have strong pipelines as we head into the second quarter. We continue to see solid loan demand due to market disruption and the strength of our local economy.

In our non-banking lines of business, wealth management revenues, which includes our trust business, was essentially flat with the prior year as assets under management were impacted by the market downturn in the fourth quarter. We expect this line of business to rebound in the second quarter as the markets recover during the first quarter. Insurance revenues increased 5.2% year-over-year due to strong contingent commission income and growth in commercialized and group health and life premiums.

Another exciting development during the first quarter was out lift out of a commercial banking team of eight individuals, including five relationship managers and business developers in the Western Lancaster County market into York County. This complements our existing Lancaster team and we are excited about the continued growth opportunities the new team brings to us in the expanded market. Additionally, we hired a three-person team in the South Jersey/Philadelphia market in April as we continue to expand our presence in the growing Greater Philadelphia marketplace.

I will now throw it over to Roger for some additional discussion on our results.

Roger Deacon -- Chief Financial Officer

Thank you, Jeff, and I would also like to thank everyone for joining us today. I'm going to discuss a couple of items from the earnings release. I'd like to start off by saying I think we had our third consecutive quarter of very solid earnings and growth. We report a $0.55 per fully diluted share for the quarter with no reportable unusual or non-recurring items. This translates to a return on average assets of 1.30%, return on equity of 10.3%, and return on tangible equity of 14.4%.

Our tangible book value per share has increased $15.72 per share, representing an 8.1% increase from the prior year. Yesterday's closing price also represented 1.58 times tangible book value per share and we believe given our current business and capital plan that we could increase this by 8-10% per year. Additionally, we continue to pay a $0.20 per quarter dividend, which equates to an annualized yield of 3.2%. As it relates to net interest margin, our core margin was 3.74%, up three basis points compared to 3.71% in the fourth quarter of 2018.

As a reminder, last quarter included three basis point negative impact of excess liquidity and this quarter includes a two basis point benefit associated with reduced funding cost due to less days in the quarter. Accordingly, we believe our core net interest margin is relatively flat from the prior quarter.

Given the Federal Reserve's pause in rate increases this quarter, similar to other asset sensitive financial institutions, we would anticipate the net interest margin expansion that we have experienced over the past two and a half years will likely end this quarter as deposit costs are likely to rise slightly faster than those yields.

Second, the provision for loan losses was negatively impacted by one large shared national credit loan, which was downgraded from pass to substandard during the shared national credit review cycle, which was performed by regulators as of January 2019. The loan is performing and is not considered impaired. The loan balance was $14.6 million and we recorded an incremental provision of $1.5 million during the quarter on this downgrade. As we look forward for the rest of 2019, we will continue to guide to approximately $2.2-2.4 million of provision per quarter.

Third, as expected, our efficiency ratio continued to decline this quarter compared to the prior year. Excluding 2018 restructuring charges, our total non-interest expense increased by 2.9% from the same period in the prior year. We're combining significant revenue growth and expense discipline. Our efficiency ratio excluding restructuring charges declined to 60.5% for the quarter compared to 64.3% in the first quarter of 2018. It should also be noted that these expense numbers included approximately $225,000 of non-interest expense associated with our hires in Lancaster County that Jeff previously mentioned.

As it relates to the full-year 2019, we are going to increase our guidance by 150 basis points from our prior range of 5.5-6% to 7.0-7.5% to account for the incremental investments in lending teams that we made during the quarter. Please note that this increase is against 2018 expense restructuring charges.

I believe the rest of the press release is straightforward for the remaining items, particularly related to non-interest income, and quarterly, that's it for my prepared remarks. We'll be happy to answer any questions.

Operator, would you please begin the Q&A session?

Questions and Answers:

Operator

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Frank Schiraldi with Sandler O'Neill. Please go ahead.

Justin Crowley -- Sandler O'Neill & Partners -- Analyst

Hey, good morning. It's actually Justin Crowley on for Frank this morning.

Roger Deacon -- Chief Financial Officer

Hi, Justin.

Michael Keim -- President

Good morning, Justin.

Justin Crowley -- Sandler O'Neill & Partners -- Analyst

First, on the downgraded SNC in the quarter, are you able to give any color on geography and/or the industry. And then, secondly, in that same vein, what is the total size of the SNC portfolio? Where does that stand today?

Roger Deacon -- Chief Financial Officer

Yeah, so this is Roger. I'll answer that question. It is in the energy business and geographically, it's in our locale. It's within Pennsylvania.

Michael Keim -- President

Then, total, we have about $62 million in SNC credits outstanding.

Justin Crowley -- Sandler O'Neill & Partners -- Analyst

$60 million? Okay, and then I guess just more broadly, apart from the downgrade in the quarter, are you seeing any other deterioration in the broader book or what are you kind of seeing there?

Michael Keim -- President

Now, overall, we're very happy with credit performance. The previous quarter, we had this SNC downgrade and this quarter we did, as well. We believe those are isolated instances, and in both cases, we don't believe we'll actually take losses on those ones. We're very pleased with how we continue to move forward on the credit side.

Justin Crowley -- Sandler O'Neill & Partners -- Analyst

Okay, that's helpful. Then, secondly on expenses, so you increased your expense guidance for the year and then you had the two-team lift out. Are you guys anticipating continuing that strategy? Do you expect to lift out any other teams throughout the year, or what are your thoughts there?

Michael Keim -- President

Generally speaking, if we can bring on additional talent, we will continue to do that. As we mentioned on several calls before, it's not always that easy to get these teams, so when we have the opportunity to do it, we will do it, but it's a very difficult thing to forecast. Overall, do you want to speak on --

Roger Deacon -- Chief Financial Officer

Yeah, I was just going to go down the path more of -- I totally agree with what Mike said about how you have to be opportunistic, and for everyone to remember, we raised the capital back in the fourth quarter of 2017 with the intent of growing the business though hiring of lenders and that's really part of that strategy. You can't pick the moments. It just so happened that these opportunities happened this quarter and we took advantage of it.

Justin Crowley -- Sandler O'Neill & Partners -- Analyst

Okay, great. I appreciate the color. That's all I had. Thank you for taking my question.

Michael Keim -- President

Thank you.

Operator

Our next question comes from Michael Perito with KBW. Please go ahead.

Adela Dashian -- KBW -- Analyst

Hey, everyone. This is actually Adela Dashian on for Mike. Thanks for taking our question.

Roger Deacon -- Chief Financial Officer

Sure.

Adela Dashian -- KBW -- Analyst

My first question is, could you just provide a little more detail on the recent hire in Lancaster, like what type of production you expect and overall how big you think that market can be?

Michael Keim -- President

Well, we continue to grow that market. The hires that came on, Jeff referenced that there was five RM/BDs. There was not a lot of overlap to the existing Lancaster team that was in place. I mean, generally speaking, I would tell you that an RM in that market should be able to do $10-15 million a year, but there's a ramp up period of time that has to get taken into consideration and you go from there. In terms of the type of business they do, they're C&I and CRE. They do not do Ag like the existing group did, so it's a good compliment and they focus more on the western part of the Lancaster County marketplace, so we think it's a good add. The team in South Jersey, those folks are more of a business banking team, so a little bit smaller of loan size, but we think that's also a great addition to what we have in place.

Adela Dashian -- KBW -- Analyst

Okay, and then if I could also ask, what are the next steps in Lehigh Valley for growth?

Michael Keim -- President

Yeah, we continue to look at the Lehigh Valley. We're going to -- we've been there obviously for about 10 years now. We think that's a market that, from our perspective, we have an underutilized market share there, so like we do in all of our other markets, if we could lift out a team, we would certainly do that, but otherwise, we will continue to hire people on a one-off basis.

Adela Dashian -- KBW -- Analyst

Got it, and my last question, capital deployment, what are your plans there?

Roger Deacon -- Chief Financial Officer

Really, it's not much of a change from what we've talked about in the past in our overall plan. We don't really intend to increase our dividend until we get to peer level payout ratios. Longer term -- we intend to do buybacks. What our plan is, is to, come next March, redeem a portion of the sub debt that we have that converts from -- it hits its five-year mark and converts from a fixed to a floating rate. That's our number one goal as it relates to capital, is the redemption of the sub debt first.

Adela Dashian -- KBW -- Analyst

Okay, that's all I had. Thank you.

Michael Keim -- President

Thank you.

Operator

As a reminder, if you would like to ask a question, please press * then 1. Our next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

Hey, good morning.

Roger Deacon -- Chief Financial Officer

Good morning

Michael Keim -- President

Good morning, Matt.

Matthew Breese -- Piper Jaffray -- Analyst

I'm just kind of doing the rough, back-of-the-envelope math on the new hires, so the five RMs plus the three folks down in South Jersey. If we kind of split the difference and call it $12 million each, is that roughly $100 million annual benefit to loan growth? Is that a good way to think about it?

Jeffrey Schweitzer -- President and Chief Executive Officer

I'm just going to caution you a little bit, Matt, in terms of -- you're trying to apply that to the current year, but overall, yeah. Now, remember, we have some trade-offs in terms of the overall staffing level, but those folks, if they were to hit those levels, I would tell you, the Lancaster folks are what I said was traditional kind of CRE and C&I. The folks in South Jersey are more of a business banking team, so their loan sizes are going to be a little bit smaller, but at least for 2019, factor in the ramp up period.

Matthew Breese -- Piper Jaffray -- Analyst

Yeah, completely agree, but let's just call it by 2020 once they're fully ramped up, it's about a $100 million benefit.

Jeffrey Schweitzer -- President and Chief Executive Officer

$75-100 million, yeah.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, and then, Roger, you did note that with the Fed on pause, it might be the end of core NIM expansion. Could you quantify a little bit what you think the downside potential is on a quarterly basis or if it's more of a stability in the core NIM?

Roger Deacon -- Chief Financial Officer

Sure, so here's how I'm thinking about it, and again, I'm going back to say that if you take the two basis point benefit, just a shorter number of cost [inaudible] this quarter. We really rather 372. I think we could decline this quarter, on the max side, three to five basis points, and that assumes there is no reduction in price pressure on deposits. In our market, we have yet to see that. I know in other markets there has been, with the Fed pause, a little bit of pricing -- reduction of price pressure, so if we do get that reduction, maybe it's not that significant, but when I look at the next quarter, that's where it could land if I don't catch a break on the pricing.

Matthew Breese -- Piper Jaffray -- Analyst

Understood, OK.

Roger Deacon -- Chief Financial Officer

Then, after that, the markets are going to take over and I do think that that would slow after that, but it's still -- you have an inverted yield curve and that's gonna be a little bit of a challenge going forward.

Matthew Breese -- Piper Jaffray -- Analyst

Understood, OK. I hope you don't mind, I have a couple other questions on Cecil.

Roger Deacon -- Chief Financial Officer

We were anticipating that.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. Well, at this point, do you have an idea of where the [inaudible] reserve could go, what the impacts could be day one?

Roger Deacon -- Chief Financial Officer

We do not.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. Let me try it a couple of different ways here. As you've gone through the process of determining what the [inaudible] reserve could be, could you give us an idea of the change in methodology? How much of the allowance today is driven by qualitative factors and in a proforma Cecil world, what do you expect the quantitative portion to be?

Roger Deacon -- Chief Financial Officer

Today, quantitatively, 25-30% is quantitative, the rest is qualitative, and we don't have an answer on the second part of your question yet.

Matthew Breese -- Piper Jaffray -- Analyst

Do you expect --

[Crosstalk]

Matthew Breese -- Piper Jaffray -- Analyst

-- heavily quantitative?

Roger Deacon -- Chief Financial Officer

We don't honestly know, Matt. We're not there yet and we just haven't gotten that far down the path.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, and as you're going through the process of looking at historical losses, I'm just curious, how far back do you have to look to get a good data set of historical losses?

Roger Deacon -- Chief Financial Officer

Brian, you can answer that.

Brian Richardson -- Executive Vice President and Director of Finance

We're going back six years on our own data and looking at peer data for an extended period of time, including ourselves.

Matthew Breese -- Piper Jaffray -- Analyst

Six years on your own, and then is there an additional timeframe beyond that or is six years sufficient?

Brian Richardson -- Executive Vice President and Director of Finance

There's an additional time period beyond that.

Matthew Breese -- Piper Jaffray -- Analyst

What is that additional time period?

Brian Richardson -- Executive Vice President and Director of Finance

Three to four years.

Matthew Breese -- Piper Jaffray -- Analyst

I'm just curious thinking about this. At the time of implementation, we will have seen the worst years of the crisis basically rolling off the historical look back. Is that accurate?

Brian Richardson -- Executive Vice President and Director of Finance

Yeah, correct.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, and then just looking in your current reserve, just summing up, it looks like it's five, maybe six years of historical chart drops. As you think about whether or not that's going up or down, is it more likely than not that you could see reserves flat to down given how much of historical chart drops you already have in there?

Roger Deacon -- Chief Financial Officer

This is Roger. I would just say, Matt, to us that would not make any sense.

Matthew Breese -- Piper Jaffray -- Analyst

Okay.

Roger Deacon -- Chief Financial Officer

That's all I would say. I don't understand at all how -- and maybe we're missing it, and we're not there yet. I don't understand how you could go from an incurred loss model to a projected loss model and actually have a decline.

Matthew Breese -- Piper Jaffray -- Analyst

Right.

Roger Deacon -- Chief Financial Officer

It just doesn't make sense, but again, we'll work through it but I don't see that happening.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. I'll leave it there. Thanks for taking my questions.

Roger Deacon -- Chief Financial Officer

Sure.

Brian Richardson -- Executive Vice President and Director of Finance

Thanks, Matt.

Operator

Again, if you have a question, please press * then 1. At this time, there are no further questions. I would like to turn the conference back over to Jeffrey Schweitzer for any closing remarks.

Jeffrey Schweitzer -- President and Chief Executive Officer

Thanks, Brandon. Thank you to everybody for listening in today. For those of you who have followed us for the last three years, this is Roger's last conference call as he announced his retirement on June 30^th, and we're excited for him as he enters his next phase of life and I just want to personally thank him for everything he's done for us over the last three years since he joined us from Fox Chase. We wish him nothing but the best and I'm sure all of you do, too. Brian will be taking over the CFO duties come July 1st and we're very excited about him as he enters his next phase of his career, also.

Thank you again. We're excited about the quarter and we look forward to talking to everybody again at the end of the second quarter. Have a great day.

Operator

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

Duration: 20 minutes

Call participants:

Jeffrey Schweitzer -- President and Chief Executive Officer

Roger Deacon -- Chief Financial Officer

Michael Keim -- President

Brian Richardson -- Executive Vice President and Director of Finance

Justin Crowley -- Sandler O'Neill & Partners -- Analyst

Adela Dashian -- KBW -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

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