Hello, and welcome to today's Univest Financial Corporation first quarter 2022 earnings call. My name is Bailey, and I will be the moderator for today's call. All lines will be muted during the presentation portion, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Jeff Schweitzer, President and CEO. Jeff, please go ahead.
Thank you, Bailey, 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 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 could be found on our website at univest.net under the Investor Relations tab.
We reported net income of $20.3 million during the first quarter or $0.68 per share. During the quarter, we continued to experience solid loan growth as loans grew $112.2 million or 8.5% annualized excluding PPP loans. In addition to our solid results in the quarter, we are excited to announce our expansion into two new markets with the hiring of market presidents for Western Pennsylvania and Maryland as we continue our organic growth strategy. We are excited by the additions of Chris and Matt to the Univest family. While they are experienced commercial bankers, in addition to building their teams, they will be working with all our lines of business in growing and serving these new markets.
Additionally, during the quarter, we began the development of a comprehensive digital platform, building off the investments we have been making in technology over the past few years. This digital platform will allow us to be more efficient and less reliant on physical locations in the future as we expand and build out this initiative. While this will be a significant investment, we are confident it will position us very well for the future as customer expectations and preferences continue to evolve. Finally, due to our strong performance and strong capital position, the board of directors has declared a 5% increase in our quarterly cash dividend and the repurchase of shares targeted at 150,000 per quarter.
While we have been utilizing our internally generated capital to fund growth over the past few years, we are excited that our strong performance, along with our strong capital position, is enabling us to increase the value we return to our shareholders. As detailed in our release and my comments, there's a lot to be excited about at Univest as we continue to grow. This could not be possible without the hard work of the over nine hundred members of the Univest family. I'd like to thank them for all their 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. I would also like to thank everyone for joining us today. As Jeff said, we are pleased with our performance during the quarter. While we incurred incremental expenses totaling $1.6 million associated with our digital transformation, onboarding of new mortgage lenders, and costs associated with a customer who was defrauded, our core business performed well during the quarter. I would like to touch on four items from the earnings release. First, reported margin of 2.89% was down 3 basis points compared to the fourth quarter. Reported NIM was negatively impacted by 33 basis points of excess liquidity, which averaged $693 million for the quarter, compared to $874 million in the fourth quarter.
During the first quarter, PPP loans increased NIM by 3 basis points and contributed $591 thousand to net interest income. Core margin, which excludes the impact of excess liquidity and PPP, was 3.19%, a decrease of 2 basis points when compared to the fourth quarter. This modest decrease is attributable to incremental investment purchases during the fourth quarter of 2021 and the first quarter of 2022, totaling $135 million at a weighted average yield of 1.9%. Assuming the Federal Reserve raises rates by 50 basis points in May, we expect core NIM to expand by approximately 12-15 basis points in the second quarter. Second, during the quarter, we recorded a reversal of provision for credit losses of $3.5 million.
This was driven by a $5.7 million benefit from changes in economic-related assumptions, offset by provisioning for loan growth and specific reserves. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.27% on March thirty-first, compared to 1.36% at December 31st and September 30th. During the quarter, we experienced net charge-offs of $76,000 and non-performing loans and leases decreased 7.6% from year-end. Third, non-interest income decreased $2.8 million or 12% compared to the first quarter of 2021, which was driven by a $4 million decrease in net gains on mortgage banking activities, offset by increases in our investment management and insurance lines of business and our other service fee income streams.
Fourth, non-interest expense increased $5.9 million or 14.9% compared to the first quarter of 2021. This includes $779 ,000 related to our digital transformation project, $488 ,000 resulting from the inclusion of the Paul I. Sheaffer Insurance Agency, which was acquired on December 1st of last year, $470 ,000 of guarantees paid to recently hired mortgage producers, and $330 ,000 of expense related to the customer who was defrauded. Excluding these items, expenses increased $3.8 million or 9.6% compared to the first quarter of 2021. I believe the remainder of the earnings release was straightforward, and I would now like to provide updates to our 2022 guidance.
First, as a reminder, during 2021, net interest income totaled $173.4 million when excluding PPP income of $15 million. We had originally guided loan growth of approximately 8%-9% in 2022, excluding PPP loans and net interest income growth of 8%-10%. Our loan growth guidance is being increased to 9%-10% to reflect the Western PA and Maryland expansion markets and the addition of the previously discussed mortgage producers. We expect this to result in net interest income growth of approximately 15%-17% off the base of $173.4 million from 2021. This includes the impact of the 25 basis point increase in March and the anticipated 50 basis point increase in May.
Each additional 25 basis point rate increase is expected to result in annualized net interest income of approximately $4 million-$4.5 million for the first several increases. Second, 2021 non-interest income included $1.1 million of BOLI death benefits. Excluding these BOLI death benefits, non-interest income totaled $82.1 million for the year. We had previously expected non-interest income growth of approximately 1%-3%. We now expect non-interest income for the full year of 2022 to be flat to slightly down. This is primarily driven by reduced margins and salable volume in the mortgage line of business based on the current interest rate environment.
Third, we reported non-interest expense of $167.4 million for 2021 and had previously guided the growth of approximately 6%-8% for 2022. We expect to incur roughly $3.5 million-$4 million of expense in 2022 in conjunction with our digital transformation initiative. Additionally, we expect to incur approximately $2 million-$2.5 million of incremental expenses related to our investment in the Western PA and Maryland expansion markets during the year. Including these three investments, we expect 2022 expenses to increase 10%-11% off the base of $167.4 million from 2021.
As it relates to our Western PA and Maryland expansion markets, we expect these investments to be accretive to pre-provision earnings in approximately 24 months and fully earned back in 3-3.5 years, again, on a pre-provision basis. We continue to prefer this method of entering new markets as compared with doing whole bank acquisitions, which inherently include more integration risk, intangible recognition, and tangible book value dilution. Lastly, as it relates to income taxes, based on our increased pre-tax earnings from these guidance updates, we expect our effective tax rate to be on the higher end of the 19%-20% range that was provided during last quarter's call. That concludes my prepared remarks. We will be happy to answer any questions. Bailey, would you please begin the question and answer session?
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from Frank Schiraldi from Piper Sandler. Frank, please go ahead. Your line is now open.
Good morning.
Morning, Frank.
Just wanted to start with Jeff, if you could maybe give us a little more detail on the digital platform, the digital initiative and how that, if that, you know, differentiates you from others your size, or does that get you to where you need to be, in terms of in line with others your size? If you could just kinda give us a little more color there, that would be great. Thanks.
Frank, it's Mike. I'm gonna take this one. The background on the digital initiative, you know, both Jeff and Brian alluded to it. We've made significant investments in core platforms over the last several years. What we're doing now is using the investments we made in Salesforce and expanded tools with Salesforce to wrap all those core platforms into the Salesforce ecosystem and deliver that hopefully, you know, which would be a differentiator, is ultimately delivering, you know, human touch with a digital capability. It goes beyond that. You know, we need to look at making sure that the organization is available for customers when customers want to do business with us, not necessarily stated hours that we previously may have had.
We need to be much better at data, and that'll allow us to personalize things from a digital perspective as well as make sure that we continue to deepen our relationships with existing customers. In terms of how this views us relative to our peers, I think peers our size, as we enact this initiative, we will move forward. We need to make sure that we are on par with our larger peers or larger competitors so that we continue to move forward and we can thrive in the future.
Okay, is this sort of like middleware investment? How much of this is external, in terms of, you know, going to consultant and external IT, and how much is it internal and just gonna, you know, sort of, continue to be in run rate beyond, you know, plan implement?
Brian, the numbers that Brian alluded to are external.
Correct. That's our 2022 expense associated with that. Whenever you do an initiative like this, there's capitalization. There will be a tail that results from that in future periods as a result of capitalizing those external costs. What we actually expect to run through the P&L for this year is the guidance I had provided.
Yeah. Beyond into deeper into your questions. We are partnering with two consulting entities. One would be helping us kind of just step back, look at who we're serving, how we need to serve them, and make sure we build the infrastructure to do that. We are also partnering with a content branding and digital marketing firm. Those two entities, combined with our internal staff, will work together to deliver the product and deliver the solutions that we move forward. Just as importantly, like I said, this is about changing how we operate as a core company, and how we are available for our customers and how we move forward.
There will be an increased investment in our customer care center, we are available for our customers, and we can be more of a concierge type of approach to serving them. We also need to make sure that we get much better at data. We have tons of data. Every company has tons of data. We need to make sure that we make a significant investment in data so that we can be predictive and personalize experiences as we move forward. It will be a combination of internal and external resources.
Okay. Got you. Just lastly, if I could sneak one in. In terms of Brian, sorry, I didn't get a chance to do the math, but in terms of the increase in expense from the 6%-8% to the 10%-11%, I know you noted the building out the expansion markets and also the digital initiative. Is there any increase as well for just general inflationary expense? Is that, you know, if not, is that a risk to that 10%-11% growth?
Yeah, no, that's our updated expectation, all things considered. There's a little bit in there for inflation, some of these, the mortgage producer investment that I spoke to, as well as kind of the fraud loss item as well. That's kind of baked in there. There is a little bit of an inflationary increase, but we had anticipated a fair bit of that when we set our original targets and guidance for 2022, and things seem to be tracking pretty close to that at this point.
Great. Okay. Thanks, guys.
Thank you.
Thanks, Brian.
Thank you. The next question today comes from Tim Switzer from KBW. Tim, please go ahead. Your line is now open.
Hey, good morning. I'm on for Mike Perito. Thanks for taking my question.
Morning, Tim.
Morning, Tim.
Pleasure. Good morning. If we could talk about the expansion markets real quick. You talked about in the press release about your success entering the Central PA region and how you started with a lift out of 15 employees, and now, you know, you have about $1.2 billion in loans outstanding. Do you have a similar trajectory you think for these new markets? I know you just hired the presidents, but you know, like, if you give us any guidelines of maybe how many employees you're planning starting with or want to, and, just what's the trajectory after this year, really?
Tim, it's Mike. No, we will not have the same level of trajectory as we had in Central Pennsylvania. I mean, there was a couple factors that played into that. One, we were able to get a team of that size, and also there was significant market disruption at that time, which allowed us to kind of expedite the process of growing the business and moving forward there. You know, we think we have found two extremely talented individuals to lead our teams in both of those markets. We will be actively looking to recruit and build out those teams on the commercial side. But as Jeff referenced in his opening remarks, we were gonna bring all of our products and services to bear. We will be hiring mortgage loan officers, adding to our wealth management capabilities, putting a treasury management person in each marketplace.
We are optimistic, but we are not prepared at this point in time to give future loan targets because that will be dependent upon how quickly and how many RMs we hire in that marketplace.
Okay. Great. Could you talk about your general strategy when entering new markets and your, you know, your go-to-market strategy? What's your plans on winning business? Maybe it's unique in each market, but if you could talk about that real quick, please.
Yeah. I would say, first and foremost, it's fairly basic. It is find an extremely talented leader in each marketplace and then grow a team of talented individuals. Then, you know, we will supplement that. We know that we need to make certain community investments. We know we have to spend marketing dollars, and we need to be most importantly, Jeff and myself need to be in market, meeting with prospects, people that can influence, building business, and over time, obviously current customers. This is an investment of time and talent, and that's what we need to do, and that will make us successful. We feel very confident about that. We know who we are as a company.
We know that the focus on taking care of the customer and making sure that we build a team of people that are focused on taking care of the customer and doing the right thing day in, day out, and that will allow us to be successful in each market.
Yeah. Tim, we've been very successful by leading with the commercial bank. I mean, that's who we are. You know, our bread and butter is commercial lending, small business, middle market lending. So
Bringing on, you know, these two market presidents to really build out commercial lending teams and then supplement it with mortgage bankers and wealth advisors and the like, you know, and then layering on the digital initiative on top of it. We think we can have a very good impact on the market, grow successfully, but do it in an efficient way. With the digital initiative, it's a hub and spoke, with the spoke being digital and the hub being more of a regional, you know, headquarters type of presence. We're excited about bringing these two individuals. We're excited about what we think they can do building out a team. It's really gonna be commercial-focused at the beginning and then, you know, we'll layer on consumer as we go along.
Gotcha. That makes a lot of sense. Thank you for taking my questions.
No problem.
Thank you.
Thank you, Tim. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from Brody Preston from Stephens. Brody, please go ahead. Your line is now open.
Hey, good morning, everyone.
Morning, Brody.
Morning, Brody.
Hey, I just wanted to follow up on the regional expansion. You know, with Chris and Matthew, could you give us a sense for, you know, kind of what size businesses, you know, they've historically done business with, and if that's, you know, smaller or larger than kind of your core customer cohort?
I think it's consistent with what we've done. You know, revenue size is as small as $5 million and take it up to $50 million, you know. Would there be something that could be bigger? Yes. In terms of that wide of a breadth, you know, and that's where we play well in, and we will continue to do that. Could we go to a larger size? Of course, we could. You know, you're looking at loans, typical loan sizes of a couple million dollars to $10 million on average, I would say.
Yeah. That was what's exciting is, you know, what their prospects and targets fit in very well with what we historically have been successful in growing the business.
Got it. Thank you for that. Maybe on the capital management front, just wanted to ask, you know, how long you anticipated repurchasing. I think it's been 150,000 shares a quarter.
Yeah. You know, we have 600 and some odd thousand available. You know, as long as we can continue to generate capital at the pace we expect to, especially with the rate increases that are coming and how we will benefit greatly from that, you know, we would expect to continue purchasing those as long as it economically is a good investment and makes sense. You know, I would think that right now we have 600 and some odd thousand available, and as we start to fill that up, you know, we'll assess at that time if we need to get authorization for more to continue to repurchase shares.
Yeah. Clearly, that gives us about a year's worth of current coverage. Kind of as we look at it, we're targeting an earn back of three years or less. Quite honestly, at current levels, we're less than half of that. It's certainly attractive at this point for us to be active on that front.
Got it. Okay. Just on the turning to the loan yields, could you give us a sense for what new blended loan yields are and, you know, whether or not you've started to see any compression, any spread compression?
Yeah. We saw as we looked at kind of new yields in the first quarter, they were up slightly from the fourth quarter, but still kind of in that low-to-mid 3% range. However, that was really from closed deals, which would have been locked earlier on. Then as we know, the rate expectations increased pretty drastically throughout the quarter. Most recently, we've seen things kind of in that low-to-mid 4% range and trending higher over the last month or so.
Got it. Just last one for me, just on deposit prices, you know, on spot basis, have you changed rates, at all so far? You know, have you begun to make any exceptions as it relates to pricing for some of your customers?
No. We've held steady on, really on all fronts. With the level of excess liquidity that we have and continue to project to have, we think that gives us a little bit of room to operate, quite honestly, on the deposit call side for the foreseeable future.
Got it. Thank you very much for taking my questions, everyone.
Yeah.
I appreciate it.
No problem. Thanks, Brody.
Thank you, Brody. The next question today comes from Chris Reynolds from Neuberger Berman. Chris, please go ahead. Your line is now open.
Good morning, gentlemen, and thank you for taking my question.
Morning, Chris.
Morning, Chris.
Yeah.
Yeah. I wanted to follow up on the dividend increase. I thought that was quite positive. It's sort of my recollection, you haven't increased your dividend in, you know, maybe 10 years or more. Is this a change in long-term policy? Should we expect the dividend to continue to grow as your company grows, or is this just a function of the excess liquidity that you discussed?
Yeah. Chris, this is Jeff. Yes, it's true. We haven't increased it in quite a number of years. We didn't cut it during the 2008-09 cycle like most of our peers would have done. We held steady back then. In looking at our
At our projections for earnings and our capital position where we are, and obviously, as I've said, we'll benefit greatly from the rate increases that are coming from the Fed. It felt prudent at this time to raise the dividend and return some value back to our shareholders through a dividend increase. We will continue to assess that, you know, as time goes on, as far as where our earnings position is, where our growth and our overall capital position is. Obviously, we would like nothing more than to continue to reward our shareholders going forward. We'll continue to assess that as time goes on with the board. It had nothing to do with the excess liquidity. It really had to do with where we see earnings going, combined with growth, combined with our strong capital position.
Thank you.
Yep.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time. We have a follow-up question, excuse me, from Tim Switzer from KBW. Tim, please go ahead. Your line is now open.
Hey, guys. Thanks for taking my extra question. I just had a couple more. On the quarter, you guys entered like $775 million in cash balances, and last quarter, you talked about not being too excited about buying securities at the current yields. With the recent increase in rates, has that changed your mind at all? And do you plan on stepping up investment purchases or just letting the excess liquidity be deployed through loan growth?
This is Brian. Just to kind of work through that one. We had purchased $100 million incremental in the fourth quarter and then another $35 million incremental in the first quarter, a little bit taking advantage of that increase in yield as you described. That said, we ended the quarter at $675 million of excess liquidity. We expect roughly $350 million-$400 million, based on our loan guidance of utilization of that kinda through the remainder of the year, as well as rundown of seasonal seasonality in public funds. That said, don't plan to really bolster the investment portfolio much further than we have at this point, based on current facts and circumstances. We tend to target 8%-9% of total assets. When you adjust for the excess liquidity and the like, we're right around 8.5, 8.4% right now. We're kind of operating in that range that we like to be.
Nice. Okay. Sort of related to that, but just on the securities portfolio, you guys had a pretty minimal impact to AOCI and TCE from the higher interest rates, and a lot of your peers are obviously getting hit pretty hard. Do you guys have any hedging on that? Is it just your smaller securities portfolio and the way you have it structured?
Yeah. We don't have any hedging strategies, really a function of the portfolio itself mixed between HTM and available for sale. We did have a $20 million unrealized loss increase that was recognized during the period, and our earnings for the quarter offset that. That's why you don't see. Largely offset that. That's why you didn't see as much of a deterioration in our reported ratios and book value. We did see a hit, consistent with what others have seen. Just not maybe to the extent same magnitude.
Okay, great. Well, thanks for taking my extra question.
No problem.
Thank you, Tim. There are no additional questions waiting at this time, so I'd like to pass the conference back over to Jeff Schweitzer for closing remarks.
Thank you, Bailey, and thank you everybody for joining us today. As I think you can see in our release, there's a lot of exciting stuff going on with respect to all of these initiatives that we're working on, to continue to position us very strongly for the future. We look forward to speaking with everybody after we release second quarter earnings, and I hope you all have a great day.
That concludes the Univest Financial Corporation first quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.