UNIVEST FINANCIAL Corp Q4 FY2022 Earnings Call

Hello everyone, and welcome to the Fourth Quarter 2022 Earnings Call for Univest Financial Corporation. I will now hand the conference over to Jeff Schweitzer, President and CEO. Please proceed.

Thank you, Drew, and good morning, and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Keim, our Chief Operating Officer and President of Univest Bank and Trust; and Brian Richardson, our Chief Financial Officer. Before we begin, I would like 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 those 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 $23.8 million during the fourth quarter or $0.81 per share. The highlight of the quarter was our continued strong organic loan growth. Loans grew $274 million or 18.8% annualized, excluding PPP loans during the quarter and $842.8 million or 16% for the year. This strong growth, along with the increasing interest rate environment during the year, resulted in net interest income increasing 25.5% in 2022 compared to 2021, excluding PPP activity. We are very happy with our results for the quarter and 2022 as a whole as we reported solid growth and financial results while also investing in long-term strategic initiatives in our digital strategy and expansion into Western Pennsylvania and Maryland. Before I pass it over to Brian, I would like to thank the entire Univest family for the great work they do every day and for their continued efforts serving our customers, communities and each other. I will now turn it over to Brian for further discussion on our results.

Thank you, Jeff, and I would also like to thank everyone for joining us today. As Jeff indicated, we are very pleased with our performance throughout 2022. I would like to touch on four items from the earnings release. First, we continue to see the benefit of our strong loan growth in recent years, coupled with our asset sensitivity in the rising rate environment. Reported margin of 3.76%, increased 9 basis points compared to last quarter. Net interest income increased $3.7 million or 6.3% on a linked-quarter basis. During the quarter, deposits grew $116.8 million or 8% annualized. This included growth of $69.1 million in noninterest-bearing deposits. Second, during the quarter we recorded a provision for credit losses of $5.4 million. Our coverage ratio was 1.29% at December 31 compared to 1.28% at September 30. Net charge-offs for the quarter totaled $908,000 or 6 basis points annualized. For the year, net charge-offs totaled $3.9 million or 7 basis points. Consistent with the prior quarter, despite general concerns regarding the economy, we are not seeing signs or indications of credit quality deterioration in our portfolio. During the quarter, we continued to see stability in nonperforming assets and criticized classified loans. Third, noninterest income increased $1.3 million or 6.6% compared to the fourth quarter of 2021. The fourth quarter of 2022 included $1.2 million adjustment related to investment advisory income, $1.2 million of swap fees related to the conversion of certain LIBOR-based loans to SOFR and $526,000 of BOLI death benefits. Offsetting these items was continued pressure on wealth management revenue, driven by reduced assets under management and supervision due to market volatility and reduced gain on sale income from our mortgage banking business due to the current interest rate environment. Fourth, noninterest expense increased $4 million or 9.2% compared to the fourth quarter of 2021. This includes $434,000 related to our digital transformation initiative, $370,000 of incremental expense resulting from the inclusion of the Paul I Sheaffer Insurance Agency, which was acquired in December of 2021; $430,000 of fraud losses; $318,000 related to our expansion into Western PA and Maryland; and $184,000 of restructuring charges related to the planned consolidation of two financial centers. Excluding these items, noninterest expense increased $2.3 million or 5.5% versus the fourth quarter of 2021. I believe the remainder of the earnings release was straightforward, and I would now like to focus on five items as it relates to 2023 guidance. First, for 2022, net interest income totaled $218.3 million. For 2023, we expect loan growth of approximately 12% to 14%, and we expect this to result in net interest income growth of approximately 13% to 15% from the base of $218.3 million. This assumes a 125 basis point increase in February. Each additional 25 basis point increase is expected to result in annualized net interest income of approximately $250,000 to $500,000. Second, the provision for credit losses will continue to be driven by changes in economic forecasts and credit performance of the portfolio. At this time, we expect the provision for 2023 to be approximately $18 million to $20 million. Third, for 2022, noninterest income included $977,000 of BOLI death benefits. Excluding these BOLI death benefits, noninterest income totaled $76.9 million in 2022. In 2023, we expect noninterest income growth of approximately 4% to 6% from the base of $76.9 million. Fourth, we reported noninterest expense of $186.8 million for 2022 and expect growth of approximately 7% to 9% in 2023. This includes core expense growth of approximately 5% to 6% plus 2% to 3% related to our expansion markets. Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 20% to 20.5% based on current statutory rates. That concludes my prepared remarks. We'd be happy to answer any questions.

Our first question today comes from Tim Switzer from KBW. Your line is now open.

Good morning. I'm on for Mike Perito. Thanks for taking my questions.

Good morning, Tim.

Can you provide your expectations for loan growth? I believe you slightly increased it, now in the range of 13% to 15%. Can you discuss the main drivers you are observing and what contributed to the acceleration to 19% annualized this quarter? Do you think there is still potential for upside if economic trends remain stable?

This is Mike Keim. Good morning, Tim. I think the range that Brian mentioned is appropriate for our expectations. We are continuing to expand our teams in our current markets, which helps us maintain volume. In our new markets in Western PA and Maryland, we expect this will provide us with growth advantages compared to our competitors. In our mortgage operations, we introduced hybrid ARMs in 2022, and we anticipate that will continue into 2023, depending on interest rates. Our preference is to return to our main focus, which is selling our mortgage production to benefit from the gain on sale while keeping the servicing rights. Overall, I want to reiterate that we are comfortable with the range Brian provided. I wouldn’t say there is significant upside to that, but we are confident in our strategy as we move forward.

Could you discuss the trajectory of net interest income and its relationship to net interest margin? I understand it might be challenging to provide a specific target for the net interest margin, but can you clarify how rising deposit costs will influence this? Last quarter, you indicated that it would likely peak this quarter and the next, then return to the range of 3.50% to 3.55%. Is that range higher now?

This is Brian Richardson. We're really holding in that same range. We expect the kind of NIM to behave exactly as we would have expected in the fourth quarter. We do expect this to be the peak and expect it to pull back in that mid-single-digit basis point range next quarter and in the subsequent quarters, settling probably right at mid-3.50% to 3.60% ranges, where I think we will end up. Really the function of the deposit beta, current cycle to date, looking on interest-bearing, we're at roughly 28%. If you look all in, on deposits, we're up closer to 15%. Historical norm on interest-bearing for us would be in that 40% to 45% range. So we still have some room to go there. And if we're looking at historical norm on total deposits, that would be closer to the 30% range. So again, about halfway there on the deposit side. So I do think contraction will continue to occur for the next several quarters.

I understand. So we can expect some Net Interest Margin contraction over the next few quarters before it hopefully stabilizes if the Federal Reserve pauses. Regarding your guidance of $18 million to $20 million on the provision, when we annualize the figure from this quarter, it appears to be slightly above that. Charge-offs and Non-Performing Assets remain fairly solid, so what factors influenced the provision this quarter?

Yes. We assess our coverage ratio and specific assets, which involve various factors. As I mentioned, this is event-driven, and there will be some aspects that continue to evolve as we move forward. Nevertheless, we believe that the range of $18 million to $20 million is appropriate.

Right. Yes. I mean the loan reserve percentage didn't really move up all that much. But I just wanted to ask. All right. Thank you.

Thank you.

We have no further questions at this time. I will now hand you back over to Jeff Schweitzer.

Thank you, Drew, and thank you, everyone, for listening in on our call today. As I said in my comments, we're very pleased with our results for 2022. A lot of strong financial performance, a lot of growth, and we're excited about the momentum we carry into '23 even with pending economic concerns out there. We're in great markets with great people and really strong customers. So we look forward to a successful 2023 and talking to you at the end of the first quarter. Have a great day.

That concludes today's Univest Financial Corporation held fourth quarter 2022 earnings call. You may now disconnect your line.