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spk00: Good morning. Thank you for attending today's Unifest Financial Corporation third quarter 2022 earnings conference call. My name is Alexis and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Jeff Schweitzer, President and CEO of Unifest. You may proceed, sir.
spk02: Thank you, Alexis, 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 the 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 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 $20.8 million during the third quarter, or 71 cents per share. Our net interest income increased 13.2% from the second quarter of the year as we continue to benefit from rising interest rates. Additionally, we continue to have very strong loan growth as loans grew 190.6 million or 13.5% annualized excluding PPP loans during the quarter. Year-to-date loan growth has been $568.8 million or 14.4% annualized excluding PPP loans. We are very happy with our results for the quarter as our pre-tax pre-provision income continues to be solid and increased 27.9% from the second quarter. Additionally, while non-interest income has been negatively impacted by increasing rates and decreasing margins for mortgage banking, along with the decline in financial markets impacting assets under management and supervision for wealth management, new business production across our lines of businesses continues to be solid, setting us up for continued future growth. Finally, While there is definitely recession risk as the Federal Reserve continues to raise rates, our credit quality continues to be solid as non-performing assets to total assets declined four basis points during the quarter with minimal net charge-offs of eight basis points. Before I pass it over to Brian, I'd 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'll now turn it over to Brian for further discussion on our results.
spk05: Thank you, Jeff, and I would also like to thank everyone for joining us today. As Jeff indicated, we continue to be very pleased with our performance during the first nine months of the year. I would like to touch on five items from the earnings release. First, our strong loan growth in recent years, coupled with the benefit of the rising rate environment, continue to provide momentum for our net interest income and net interest margin. Reported margin of 3.67% increased 48 basis points compared to last quarter. Core margin, which excludes the impact of excess liquidity and PPP, was 3.68%, an increase of 27 basis points when compared to last quarter. Net interest income increased 6.8 million, or 13.2%, compared to last quarter. Second, during the quarter, we recorded a provision for credit losses of 3.6 million. Our coverage ratio was 1.28% on September 30th, compared to 1.27% at June 30th. For the first nine months of the year, we've had net charge-offs of $3 million or seven basis points annualized. Despite general economic concerns, we are not seeing signs of pervasive credit quality deterioration in our portfolio. During the first quarter, we actually saw a slight reduction in non-performing assets and delinquencies and a $59 million or 35% reduction in criticized and classified loans. Third, non-interest income decreased 2.6 million or 12.6% compared to the third quarter of 2021, which was primarily driven by a $2.4 million decrease in net gains on mortgage banking due to a decrease in saleable volume. Fourth, non-interest expense increased 3.4 million or 7.9% compared to the third quarter of 2021. This includes 1.2 million related to our digital transformation initiative, 504,000 resulting from the inclusion of the Paul I. Schaefer Insurance Agency, which was acquired on December 1st of last year, and $227,000 related to our expansion into western Pennsylvania and Maryland. Excluding these items, non-interest expense increased $1.5 million, or 3.4%. Fifth, on October 26th, the Board of Directors authorized an additional 1 million shares for repurchase. Including this authorization, there are a total of 1.23 million shares authorized for repurchase. During the first nine months of the year, we purchased 450,000 shares at an average price of $25.29. Going forward, we will opportunistically repurchase shares with no predefined quarterly volume targets. I believe the remainder of the earnings release was straightforward, and I would now like to provide two updates to our 2022 guidance. First, on last quarter's call, I had guided to loan growth of 10% to 11% for 2022. Based on our continued strong growth during the quarter and our current pipelines, we are increasing this guidance to 13 to 15%. Second, we expect the increased loan growth coupled with the rising rate environment to result in net interest income growth of approximately 23 to 25% off the base of 173.4 million in 2021. This assumes a 75 basis point rate increase next week and another 75 basis points in December. I'd also like to note the guidance provided last quarter For the provision for credit losses, non-interest income, non-interest expense, and income taxes remains unchanged. That concludes my prepared remarks. We would be happy to answer any questions. Operator, would you please begin the question and answer session?
spk00: Absolutely. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. The first question comes from the line of Tim Switzer with KDW. You may proceed.
spk03: Hey, good morning. I'm on for Mike Carito. Thanks for taking my question. Morning, Tim. Morning, Tim. I wanted to ask about the upgraded loan guy. It's kind of an acceleration, I guess, from what you guys are expecting last quarter, sort of implied like a high single-digit rate in the back half of the year. And now, you know, I'm looking at it real quick, but it looks like you're in the double digits, like low double digits now. So I want to hear kind of what are the trends you're seeing, which markets are you seeing the growth? And then, you know, what are your expectations for at least the first half of next year?
spk04: Yeah, Tim, so this is Mike Kime. When we talked in the last quarter's call, we still had strong pipelines and we were moving forward. We had an element of caution with regard to what would happen to activity as the Fed continued to move interest rates up. At this point in time, our pipelines are full for the fourth quarter, and we expect a very similar quarter to what we had this quarter and the fourth quarter, therefore Brian's guidance. As we move into next year, I still am cautionary, and we are still cautionary as an organization with regard to how loan demand will hold up as the Fed continues to raise rates. So that was really why we were a little bit more cautious and conservative last quarter. We're kind of staring it in the face with regard to the fourth quarter right now, but we are still cautious to some degree as we move into 2023. Okay.
spk03: Yeah, I understand the 2023 outlook. That's fair with the Fed rate. And then can you talk about which markets and, you know, categories are seeing the strongest growth in demand from?
spk04: We're actually, you know, we have a very well diversified book and we are seeing growth across the footprint. At this point in time, our customers continue to see strong economic activity. There is some level of caution that's going on with regard to hiring new people. But other than that, you know, everybody kind of thinks that, you know, at the very least, we're going to have a slowdown, if not some type of recession. But individually, each company is kind of thinking their business is doing fine. So it's kind of an odd kind of situation at this point in time from a perspective perspective, you know, for perspective, but Other than that, we're seeing that growth and strong activity across the board. So there's no specific market or no specific asset class that is stronger than another or at least memorable.
spk03: Okay, thanks. That's good color. And the last question for me is on the margin. Really good core expansion this quarter with another 150 basis points baked in in your guide. Could you talk about where you see the the margin going from here into like the first half of 23? Sure, Tim.
spk05: This is Brian. So for Q4, we expect kind of that 5 to 10 basis point expansion range on NIM. While we're not positioned to get full guidance for 2023 as we're in the middle of our budget process, I think as you kind of just think about our asset sensitivity and the reduced benefit of that asset sensitivity, the further we get into this raising rate cycle, I would think it would be fair to conclude that NIM would kind of peak out in the fourth quarter, maybe into the first quarter, and then you'd start to see it pull back into that 355 to 365 type range going forward on a more normalized basis.
spk03: Okay, that's understood. And did you guys take any more action to limit the asset sensitivity, like the swap you guys did last quarter? Or is it more just you're expecting some rising deposit betas?
spk05: It's really the asset size continuing to behave as we originally modeled and as we've seen on the first handful of raises, the first 300 basis points of raises, where the changes coming in is on the liability side as deposit basis catch up. Up through this point, our cumulative bait on interest-bearing deposits is in that 12% range. Historically, in a rising rate environment, we'd see that in the 45% range. So we expect that to catch up here as things – things continue to go in the upward rate environment.
spk03: Okay, great.
spk05: That's all for me.
spk03: Thank you.
spk00: Thank you, Mr. Switzer. The next question comes from the line of Matthew Brees with Stevens Inc. You may proceed.
spk06: Good morning. I'm curious on the loan growth guidance. Is there anything else that's driving that beyond just good kind of core economic activity in your local markets? Maybe talk about the hiring efforts and whether or not it's bearing fruit. And the other thing I'm curious about is whether or not there's been any change in the competitive landscape. Like have you seen some of the insurance companies or non-banks pull back and become less competitive?
spk04: So Matt, it's Mike. In terms of hiring, we've consistently looked for and brought on strong producers, so that continued to benefit us over time. There's nobody specifically that we brought on that all of a sudden has produced some outsized growth in the last quarter or so. It's really the cumulative efforts that we've had. With regard to the expanded markets in western Pennsylvania and Maryland, we're still building up pipelines there. that's contributed a little less than $10 million to the loan growth in the third quarter. So it's helping, but it's not a big driver at this point in time. But we will continue to make investments as we grow out those regions. Beyond that, from a competition perspective, we met with a couple of people that seemed to indicate perhaps there is some back off on multifamily. from an insurance company perspective, but we haven't seen anything that dramatic at this point in time.
spk06: Got it. Okay. And then maybe just talk a little bit about the funding strategy supporting what seems to be, at least in the near term, continued strong loan growth. What areas do you expect to rely on? Is it going to be CDs and kind of money market? And then maybe just touch on expectations for noninterest-bearing deposits, which have been down the last couple of quarters.
spk05: Matt, this is Brian. So, we've always historically managed in kind of that 100 to 105 range from a loan to deposit ratio. We're now targeting kind of that 95 to 100 range. We're a little bit north of that as we ended here. But, of course, growing deposits to continue to fund our growth would be a core initiative. It's kind of an across-the-board approach. CDs are certainly a place to be going. We have some promos that are out in the marketplaces. Currently, as well as money markets, we've done some adjustments on our rack rates as well to both retain and drive some incremental deposits there. On the non-interest bearing side, we've had a pretty good track record in the last rising rate cycle for 2016-19. We saw a 12% average increase per year in non-interest bearing, really sits there in kind of that roughly 33% to 35% of our deposit base on a normalized basis. We'd expect that to continue to grow. in conjunction with our CNI growth and our treasury management and commercial offerings.
spk06: Okay.
spk05: So you expect that historical range to hold?
spk06: Correct. Okay. And then I think you'd mentioned, I don't know if I caught it correct, historically a 45% deposit beta for interest-bearing. Is that what you're assuming, kind of full cycle, this cycle as well, or any change to that?
spk05: Correct. Yeah, we'd expect to resort back to those historical norms. So 40 to 45% on interest bearing in the low 30s when you look at it on a total deposit basis, assuming our mix stays the same where it's two-thirds, one-third between interest bearing, non-interest bearing. Okay.
spk06: And then last one for me, just I'd love some commentary on the overall size of the securities portfolio and how we should be thinking that as a percentage of the total balance sheet.
spk05: Yeah, so where that is today is currently in line with where we'd expect, roughly 7% of assets. Historically, we've averaged or targeted 8% to 9% of total assets. Of course, with our strong loan growth, that's a balancing act, and kind of where we sit today seems like an appropriate level, and we'll continue to manage that moving forward.
spk06: Okay. Perfect. That's all I had. Thanks for taking my questions. Thank you, Matt.
spk00: Thank you, Mr. Breeze. Again, if you would like to ask a question, please press star followed by one. The next question comes from the line of Frank Chirondi with ABC. You may proceed.
spk01: Hey, it's actually Justin Crowley on for Frank from Piper Sandler. Good morning, guys. I have a quick question on expenses, and it wasn't necessarily anything specific to the quarter, but you've had the digital initiative going for some time now, and that's been flowing through the base. I was wondering if you could just spend some time just talking about what the benefits there are, and then specifically on that digital side, how that could potentially help on the funding side, if at all, just as you look out further into next year and sort of what that does for the franchise.
spk04: This is Mike Kine. So the investments that we have made on the digital side and what we expect out of them, you kind of tick through these. One, we think that the investments we're making are necessary to keep us from a competitive posture there. Two, we are looking at them and the tools that we have so that we can deepen existing relationships with customers so we can sell all of our products and services. So that is a revenue side of the equation. The third component of it is what you're getting at is ultimately we believe those digital investments will allow us to be, A, across the board will be more efficient with regard to processing loans, processing deposits, et cetera, but also gives us an ability to enter into new markets without making heavy investments in fixed infrastructure, i.e. physical space. So as we expand into western Pennsylvania and into the Maryland markets, we can do that with a lot less A couple of regional headquarters in each of the counties that we serve and go forward from that perspective. So ultimately, that's how it will benefit us from an expense posture. But we will also see benefits across the board with regard to just being more efficient as an organization from the front end to the back end of our operation as we more tightly integrate workflow and use systems to drive data through. Beyond that, from a funding perspective, components of what we're doing on the digital side are mobile tools with regard to consumer deposit account opening, as well as we subsequently will add a stronger small business depository tool. Remember, we are much more a commercial bank than a consumer bank. So new customer acquisition that would be driven by kind of a marketing spend would be the fourth pillar of our digital strategy, and we will not embark on that until we get the first three nailed.
spk01: Okay. Got it. I appreciate that. And then just on that, on the initiative and sort of the related cost, is that something that is, and forgive me if you guys have talked about this before, but just how that trends into next year and kind of, you know, how, you know, how spend has shaken out compared to, you know, what you originally budgeted for versus where you see that, you know, as we head into 2023.
spk05: Yeah, for 2022, this is Brian Richardson. For 2022, we had guided towards $3.5 to $4 million of spend. We expect to come in on the higher end of that range, but still in that $4 million range. Expected to be roughly half of that next year. And that's really a function of some costs we incurred this year that are deferrable due to the long-term nature of the solution that we're building. So it's really the amortization of that largely coming through in future periods. A lot of our heavy consulting spend and the upfront work that needed to be expensed was expensed this year, and we have some items that are capitalized we'll carry into next year.
spk01: Got it. And then... sort of shifting gears just on uses of capital. I hear you on the buybacks being a little more opportunistic. I guess as far as other uses, you know, you guys have traditionally leaned more on the team lift-out strategy. You know, nothing that I've heard seems to suggest that that might change going forward. But just on M&A, could you sort of frame what conversations you're having, if any? You know, granted, I know deals right now It seems like they're a little tougher to get done just given some of these marks and some other industry headwinds. But just any updated thoughts on M&A would be appreciated.
spk02: Sure, Justin. This is Jeff. Bank M&A is really not a priority of ours at this point. So while we always want to be attuned to what's going on in the market and what's out there, it's not something that we're overly focused on. You know, we've entered Pittsburgh and Baltimore by hiring market presidents. They're going to be building teams out organically. That's been our strategy now since we did the Fox Chase transaction. You know, the Lancaster lift out to over a billion dollar bank now out there, basically. So, you know, that's really our focus is the organic strategy as opposed to bank M&A. And given where pricing is right now on stock prices combined with if we are headed to a recession, You know, buying somebody else's loan book just makes it even less attractive from our perspective right now. So we're going to continue with our organic strategy for the time being and really focus on that.
spk01: Understood. And then if I could just sneak one last one in just quickly on credit. You know, obviously metrics look great, and I think that's sort of what you've seen across the industry. No real issues despite some of some of the headlines and the macro backdrop. Are there any areas where, you know, you're getting a little more cautious, maybe not specific to this quarter, but just as you look over the past year or so, or just any areas where you're maybe tightening up, asking for lower LTVs or just more stringent standards more broadly?
spk04: Yeah. So, Justin, it's Mike again. So, for the last year at the very least, We've looked at the office space with a level of caution. And while we may do a deal or two, it's really reflective of who the underlying tenant is and what business that they're in that would drive that. Otherwise, we don't have a huge appetite for that space. Beyond that, when you look at retail, we'll still do certain retail deals, but it's, again, who are the underlying tenants? What are the organizations? We wouldn't go into a strip mall with just local vendors or local companies that were once supporting a strip mall. If there was a larger Home Depot slash Lowe's type of underlying tenant, that is something we would look at and move forward with that. But we would also be a little bit more cautious with regard to the LTVs on that side of the equation as well. So those are the two that come to mind the most. We're very careful to be absolutist, saying we will or won't do anything, because a lot of times it is the facts and circumstances of the deal, but on a general basis, that's the color I could give you.
spk01: Okay, awesome. That's super helpful. That is all I have. Thank you so much for taking my questions, guys. Thank you. Thank you.
spk00: Thank you for your question. There are currently no further questions registered in queue. So I will now turn the conference back over to Jeff Schweitzer for any closing remarks.
spk02: Thank you, Alexis, and thank you, everyone, for participating on the call today. We had a very strong third quarter, and we look forward to finishing the year equally as strong. And I hope everybody has a great day, and go Phillies.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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