This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: 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'd like to start by saying I hope everyone listening is staying safe and you and 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 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 $17.4 million during the fourth quarter or 59 cents per share. For the year, we reported net income of $91.8 million or $3.11 per share. We are very pleased with our results for the quarter and the year. as we continue to experience strong loan production along with growth in our fee income businesses. Even with the continued offset of payoffs due to the success of our customers, we experienced solid loan growth of $111.8 million, or 8.7% annualized during the quarter, resulting in total growth for 2021 of $455.2 million, or 9.4% excluding PPP loans. Since the acquisition of Fox Chase Bank and the lift-out of the Lancaster team, which both occurred in mid-2016, we have averaged 10% loan growth per year, excluding PPP loans. Additionally, to bolster our fee income business, on December 1st, we completed the acquisition of the Paul I. Schaefer Insurance Agency, expanding our insurance team into the Lancaster market, where we have significant banking operations. 2021 was a strong year for Univest as we continue to grow our lines of businesses and make investments for the future in both people and technology. Before I throw it over to Brian, I once again want to thank the members of the Univest family. They continue to do a wonderful job living our core values each day and serving our customers, our communities, and each other as we continue to work through the current environment and move Univest forward. I will now turn it over to Brian for further discussion on our results.
spk03: Brian? Thank you, Jeff. And I would also like to thank everyone for joining us today. As Jeff said, we are very pleased with our performance during 2021. We produced a pre-tax, pre-provision ROAA of 1.57%. This was a direct reflection of the strength of our diversified business model and continued ability to grow loans. I would like to touch on four items from the earnings release. First, reported margin of 2.86% with down 25 basis points compared to the third quarter. Reported NIM was negatively impacted by 43 basis points of excess liquidity, which averaged $874 million for the quarter compared to $490 million in the third quarter. This increase in average excess liquidity was driven by a $226 million seasonal increase in average public fund deposits, as well as a $149 million increase in commercial deposits. During the fourth quarter, PPP loans increased NIM by eight basis points and contributed $1.6 million to net interest income. Core margin, which excludes the impact of excess liquidity and PPP, was 3.21%, an increase of three basis points when compared to the third quarter. As it relates to PPP, as of December 31st, 817,000 of net deferred fees remained on the balance sheet. During 2021, we recognized net interest income of $15 million related to PPP loans. Second, during the fourth quarter, we recorded a provision for credit losses of $1.4 million. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.36% on December 31st, which was consistent with September 30th. During the quarter, our COVID-related deferrals declined to 6.2 million, or 0.1% of the portfolio. We experienced net recoveries during the quarter of 243,000, and net charge-offs for the year totaled 213,000. Third, non-interest income increased 4.9 million or 6.3% in 2021 compared to 2020, which reflects the continued benefit of our diversified business model. During 2021, non-interest income represented 31% of total revenue. Fourth, non-interest expenses increased 12.4 million or 8% for the full year when compared to 2020. Salaries, benefits, and commissions increased $11 million, or 11.8%, as we continued to be aggressive in hiring revenue producers when presented the opportunity. We have also experienced cost increases due to merit increases, the impact of wage inflation, and variable incentive compensation costs, which increased $3.6 million year over year due to our strong performance in 2021. Excluding the increase in variable incentive compensation, non-interest expense increased 5.7% over 2020. Professional fees increased $2.3 million, or 44%, primarily attributable to increased consulting fees in support of our DE&I and training initiatives, as well as our treasury management product and process enhancements. During 2021, we spent $1.4 million on these initiatives. Data processing expenses increased $1.4 million, or 12.4%, primarily due to continued investments in our end-to-end loan origination solution for loans below $1 million, customer relationship management software, internal infrastructure improvements, and outsourced data processing solutions. I believe the remainder of the earnings release was straightforward, and I would now like to focus on five items as it relates to 2022 guidance. First, during 2021, net interest income totaled $173.4 million when excluding PPP income of $15 million. For 2022, we expect loan growth of approximately 8% to 9% excluding PPP loans, and we expect this to result in net interest income growth of approximately 8% to 10% off the base of $173.4 million. This assumes one 25 basis point rate increase in March. Each additional 25 basis point increase is expected to result in annualized net interest income of approximately $3.5 to $4 million. Second, the provision for credit losses will continue to be driven by changes in economic forecasts, government stimulus, and performance of the portfolio. At this time, we expect the provision for 2022 to be approximately $6 to $8 million. Third, 2021 non-interest income included $1.1 million of BOLI death benefits. Excluding these BOLI death benefits, non-interest income totaled $82.1 million in 2021. For 2022, we expect non-interest income growth of approximately 1% to 3% off the base of $82.1 million. This translates to a compound annual growth rate of approximately 8% to 9% from 2019 to 2022. Fourth, we reported non-interest expense of $167.4 million in 2021 and expect growth of approximately 6% to 8% in 2022. Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 19% to 20%, assuming the current statutory rate remains unchanged. That concludes my prepared remarks. We will be happy to answer any questions. Operator, would you please begin the question and answer session?
spk00: Thank you. We will now proceed with the Q&A. If you'd like to ask a question, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you can press star 2. Please ensure you're unmuted locally when asking your question. Our first question comes from Michael Terito, who is a private investor. Michael, over to you.
spk01: Hey, good morning, everybody. How are you? Good, Mike. How are you? Good. Thanks. Just a couple questions. Brian, I appreciate the thorough guidance there. Just on the 6% to 8% expense growth, how should we think about kind of the split of that? I mean, you guys continue to invest in the business, but there seems to be some environmental pressure that a lot of your peers are citing when kind of guiding up your expenses next year and Can you maybe just give us a little bit of, you know, how much of that is hiring that you budget in, how much of that is tech investments you're budgeting in, and how much of that is kind of general, like, environmental pressures that could be pushing that number higher in 2022?
spk03: Yeah, all in as we look at kind of as the staff, just as we continue to grow and hire producers, as well as just kind of the pressures that you're describing, we're kind of in a high single-digit range assumption for salary benefits and commission growth year over year. And then the other kind of big area would be on the data processing side. That's kind of in that high single digit, low double digit growth range year over year. So those are the main drivers that get us to that 6% to 8%. Those numbers do include about a million dollars of assumed investment as we continue to evolve our digital products. So that's reflective in that 6% to 8% guidance that I provided.
spk01: Helpful. Thanks. And then... Maybe a question for Jeff or Mike, but just in terms of the competitive landscape from a loan growth perspective, I mean, obviously you guys have really been able to sustain your growth through a variety of environments here. I'm just curious if, you know, as you look to next year, obviously the loan growth guidance is pretty strong, but, you know, I mean, do you think the environment could perhaps become even a bit more accommodating than it was over the last year? I mean, it seems like a lot of your regional peers are getting more bullish on growth, and they weren't even growing loans for the prior 12 months. So I'm just trying to kind of level set if you think there's some tailwinds maybe that could help you guys accelerate growth even further.
spk02: Good morning, Mike. It's Mike. I think it's still going to be a competitive marketplace. I think at this point in time, I don't think everybody's fully thinking about the Fed increases in their pricing mechanisms. Larger competitors are, but that continues to be a competitive headwind for us. The secret to our long growth continues to come back to the strength of our team. So even with the larger players becoming more bullish on what the market could be, I'm very comfortable with the guidance that Brian put forth as we move forward. And we'll continue to grow the team, as he also referenced in the operating expense detail.
spk05: Yeah, and the other thing, Mike, a lot of our customers have been very successful in selling their projects, and we're seeing that continue to happen. So, you know, the loan growth that we're forecasting while strong is also net of some payoffs that we anticipate happening throughout the year that are, you know, sizable.
spk01: Got it. Very helpful. Thanks. And then just lastly on the – On the NIM guide, Brian, just curious what you guys are thinking on the deposit side of the equation. What type of betas are you assuming? I think you guys have brought in a lot of new core funding, particularly as you've expanded into new markets. Just kind of how are you generally thinking about some of the rate sensitivities of those fundings relative to kind of some of the legacy like North of Philly funding you guys have, which I know the beta is historically extremely low.
spk03: Yeah, I mean, the first couple of increases, especially with the excess liquidity that we're sitting with, we think the betas will be pretty low for the first couple of 25 basis point increases. Historically, in the last kind of increasing rate environment, we saw a beta of roughly 45%, kind of thinking that will be in that 20% to 30% range here for the first couple of increases, just, again, sitting with the excess liquidity that we currently have. We do have roughly $600 million of deposits that are variable rate and tied to FED funds. So that will instantly adjust up. So that will bring some incremental expense across with that. But otherwise, we think we'll be able to hold pricing relatively flat on the rest of the book with small deviations.
spk01: And can you just remind us on the asset side what were prices immediately?
spk03: Yeah, so the book overall, our loan book is 40% fixed, 23% adjustable, and 37% variable. So it's really that 37% that's variable adjust immediately.
spk02: Perfect.
spk01: Great. Thank you, guys. Good quarter. Appreciate the color. Thanks, Mike.
spk00: Thank you, Michael. Thank you, Michael. As a reminder, if you would like to ask a question, that's star 1 on your telephone keypads. Our next question comes from Frank Chiraldi from Piper Sandler. Frank, your line is now open.
spk04: Good morning. Good morning, Frank. Jeff, on the – sorry if I missed it, Brian, but on the – on your NII guide, does that assume additional deployment through security purchases as well, or, you know, is Longrow robust enough that – that that's really the driver and then you know what are your thoughts on the obviously you mentioned deposits you got some room to let those run off if need be but just kind of what is your base case there?
spk03: Yeah, so where we sit today, we kind of see excess liquidity. I mean, we ended the year at $800 million from a spot perspective. We're currently down to the $700 million range. We see a path where without meaningful incremental investment purchases or anything like that, we could be in the half of a billion dollar range by kind of midway through the year and then in the $100 to $200 million range by the end of the year. That said, in between the fourth quarter of last year, And here in the first quarter of this year, we have purchased approximately $125 million of incremental investments, really to get our investment book back up to the percentage of the balance sheet that we've seen historically. But we're doing that in a disciplined fashion, just kind of hard to get too excited about sub-2% yields on mortgage-backed. So we're nibbling at it as we go through, but being disciplined but opportunistic.
spk04: Okay. And then... On the fee income side, I think the guy was for 1% to 3% off that normalized 2021. I wonder if you could just drill down a little bit there. I'm wondering what you guys are expecting on the mortgage banking front and then what the specific offsets for growth are.
spk03: Yeah, on the mortgage banking side, I mean, from a reported fee income perspective, we see that pulling back kind of in that 25% to 30% range versus what we experienced in 2021. Really, we expect volume to hold relatively steady, but margins are tightening up. We were kind of in the low to mid threes for a good part of 2021. We'd expect that to kind of fall in that 250 to 275 margin type range. So that in and of itself drives volume. about that 25%, 30% pullback. The areas kind of offsetting that and driving growth would be investment advisory. We continue to see nice kind of high single-digit, low double-digit growth there. And on the insurance side as well, both organic, but then with the addition of the Paul Isaac Shaper Agency, we see that being a nice kind of mid to high double-digit growth year over year. Okay.
spk04: All right, great. Thanks for all the color. Thanks, Rick.
spk00: Thank you, Frank. We currently have no further questions, so I will hand back to Jeff Schweizer for any closing remarks.
spk05: Thanks, Alex, and thanks to everybody for participating on our call today. We're excited about 2021 and the year we were able to produce and the momentum that we have as we head into 2022 as we continue to make investments for the long-term success of Univest and to reward our shareholders. So with that, I hope everybody has a great day. And stay healthy. Thanks a lot.
Disclaimer