Univest Financial Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 24, 2024

There are 6 speakers on the call.

Operator

Good morning all and thank you for joining us for the Univest Financial Corporation Third Quarter 2024 Earnings Call. My name is Carly and I'll be the call coordinator for today. I'd now like to hand over to your host, Jeff Schweitzer, Chairman and CEO to begin. The floor is

Speaker 1

yours. Thank you, Carly. 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 Unifest 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.

Speaker 1

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.

Speaker 1

We reported net income of $18,600,000 during the Q3 or $0.63 per share. During the quarter, we saw a large increase in deposits of $358,800,000 due to our seasonal build of public funds deposits. Loan growth was slightly muted during the quarter at $45,900,000 or 2.8 percent annualized. While loan production was solid, we have been impacted by declining line usage by customers as they continue to utilize existing cash on hand as opposed to drawing down on their lines combined with elevated payoff activity. Our diversified business model continued to serve us well as our non interest income was up $1,500,000 or 7.8% compared to the prior year as we have seen growth in our non banking lines of business with wealth management and insurance up 9.8% and 8% respectively compared to the Q3 of the prior year.

Speaker 1

Additionally, we continue to prudently manage expenses as non interest expenses were down $436,000 or 0.9% compared to the prior year. With respect to capital, we continue to be active and plan on continuing to be active with stock buybacks as we repurchased 156,728 shares of stock during the quarter and 663,043 shares year to date, which represents 2.25 percent of shares outstanding as of December 31, 2023, while growing tangible book value per share 7.32% year to date. Finally, at our Board meeting yesterday, the Board approved an increase of 1,000,000 shares available for repurchase. 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.

Speaker 2

Thank you, Jeff. And I would also like to thank everyone for joining us today. I would like to start by highlighting a few items from the earnings release. 1st, during the quarter, reported NIM of 2.82% increased 2 basis points from 2.84% in the prior quarter due to the increase in excess liquidity from the seasonal public funds build. As expected, core NIM of 2.91%, which excludes the impact of excess liquidity, expanded 5 basis points compared to the 2nd quarter.

Speaker 2

We expect core NIM to be flat to slightly up in the 4th quarter, assuming a 25 basis point rate cut at each of the FOMC meetings in November December. 2nd, during the quarter, we recorded a provision for credit losses of $1,400,000 Our coverage ratio at September 30 was 1.28 percent, which was unchanged from June 30. Net charge offs for the quarter totaled $820,000 or 5 basis points annualized. During the Q3, we saw continued stability in non performing assets, loan delinquencies and criticized and classified loans. 3rd, non interest income increased $1,500,000 or 7 point percent compared to the Q3 of 2023.

Speaker 2

We saw increased contributions from our wealth management and insurance lines of business and increased gains on sale of SBA loans. Offsetting these increases was a reduction in service fee income, which was primarily driven by a $785,000 valuation allowance recorded on our mortgage servicing asset. This allowance was driven by an increase in assumed prepayment speeds due to the decrease in interest rates during the quarter. Overall, we continue to be very happy with the diversification and contributions from our fee income businesses. 4th, non interest expense decreased $436,000 or 0.9% compared to the Q3 of 2023.

Speaker 2

This reflects the continued benefit for the various expense reduction strategies we deployed during 2023 and our ongoing commitment to prudent expense management. I believe the remainder of the earnings release was straightforward and I would now like to provide an update to our 2024 guidance. First, for the full year of 2024, we expect loan growth of approximately 4% and we expect net interest income to contract 4% to 5% for the full year of 2024 compared to 2023. 2nd, our provision per credit loss guidance for the year is being reduced to $6,000,000 to 8,000,000 However, the provision will continue to be event driven, including loan growth, changes in economic related assumptions and the credit performance of the portfolio, including specific credits. 3rd, our non interest income growth guidance for the year remains at the 7% to 9% when excluding the $3,400,000 pre tax gain on the sale of MSRs in the Q1.

Speaker 2

Including the gain on the sale of MSRs, non interest expense growth guidance for the year remains at 11% to 13%. As a reminder, this is off the 2023 base of $76,800,000 4th, in 2023, our non interest expense totaled $195,800,000 when excluding the $1,500,000 of restructuring charges. For 2024, we expect growth of 1% to 2% off the base of $195,800,000 Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 20.5% based on current statutory rates. That concludes my prepared remarks. We'll be happy to answer any questions.

Speaker 2

Carly, would you please begin the question and answer session?

Operator

Thank you. We'd now like to open the lines for Q and A. Our first question comes from Frank Schiraldi of Piper Sandler. Frank, your line is now open.

Speaker 3

Good morning. Just on the expense front, Brian, you mentioned I think 1% to 2% growth and that would seem to imply a little bit over 50,000,000 dollars a little over $50,000,000 in the Q4. Can you just talk about linked quarter growth there? What might be driving that if I have that right? And then is that a decent kind of run rate for starting things off for next year?

Speaker 2

Yes, it would put you in that $50,000,000 range give or take for the Q4 and I do think that would be a reasonable starting point for next year. Of course, with some growth that occurs early in the year for merit increases and the like occur in the early part of the year, so you start to see that ramp up, but that'd be a good jumping point going into next year.

Speaker 3

Okay. And when you think about the 3Q result versus a bit of an uptick to get to that $50,000,000 is that mostly driven by kind of other expenses normalizing or any sort of color you can give there for modeling?

Speaker 2

Yes, I think it's just the normalization of a couple of small things that were benefits in the current quarter and you'd see that start to normalize, but we have run favorable throughout the year. So just looking forward to the Q4, you'd expect some things to normalize.

Operator

Okay.

Speaker 3

And then can you just remind us in terms of the muni, the seasonality there, how much of that $350,000,000 is seasonal muni and how does that kind of run off or run through the balance sheet again in terms of timing?

Speaker 2

Yes. So the overall build occurs in the Q3 every year and then we'll see $100,000,000 give or take a month potential outflows depending on specific cases in the Q4. So you start you see that build and then you start to see that wind back down in the 4th quarter into the Q1 and then again hitting the trough in at the end of the second quarter.

Speaker 3

Okay. And that the inflows this quarter were 350,000,000 that about that? Is that right?

Speaker 2

They were a little bit higher than that. It was closer to $400,000,000 and change

Speaker 1

on muni specifically.

Speaker 3

Okay, great. And then just great. And then just lastly, if I could sneak in one more on the buyback, saw the uptick in activity this quarter. Just curious, do you think that's a reasonable place to be in terms of quarterly level of activity? Could you ramp that up given the I think 1,000,000 shares, is that maybe ramp that up and that's a reasonable kind of annual expectation of 1,000,000 shares?

Speaker 3

Or just trying to get a sense of guardrails around buybacks going forward?

Speaker 1

Yes. So Frank, we're using basically we have capital levels we want to maintain and then excess capital that we're generating, we're using towards buybacks. So $1,000,000 is not a year, wouldn't be used up in a year, but 1,000,000 shares. 1,000,000 shares, sorry, wouldn't be used up in a year. But we're basically as we continue to grow capital, excess capital that we have generated will be using towards buybacks is our plan.

Speaker 3

Great. Okay. All right. Thanks for all the color.

Operator

Thank you. Thank you very much. Our next question comes from Emily Lee of KBW. Emily, your line is now open.

Speaker 4

Hi, good morning. I'm on for Tim Switzer today. So thank you for taking my question. I wanted to ask what factors you think good morning.

Speaker 3

I

Speaker 4

wanted to ask what factors could drive upside or downside to your guidance?

Speaker 2

Sorry, can you repeat that question? I didn't catch the end of

Speaker 4

Yes. I was just wondering what factors could potentially drive some upside or downside in either direction to the guidance, the updated guidance that you just gave?

Speaker 2

Sure. So as you kind of go through, if you look at the net interest income side, clearly what occurs on the competitive side and the overall environment on deposit pricing continues to be the wildcard there. As you go through the fee income line, of course, market valuations and the like has an impact on our wealth management business and some other areas. But one of the bigger wildcards right now is that valuation allowance on MSRs and how that would continue to play through or subside in the Q4 or subsequent quarter. And then on the expense side, really event driven.

Speaker 2

Again, we've maintained, proven management over that, but you have things that occur from time to time, both positive and negative that could potentially drive variances to the guidance that I provided.

Speaker 4

Great. And another question I had was just related to NII margin and the impact of Fed cuts. I was wondering if the Fed cuts moved more than expected, what do you estimate the potential impact to be to the margin?

Speaker 2

We really expect ourselves to be neutral for the foreseeable future in rate cuts. We have a variable rate loan book and when you look at our cash that's going to automatically reprice. We have largely offsetting deposit book that will also offset automatically and then there's a portion that's exception price that we adjust accordingly. So we have pretty good matching as it relates to the first several moves that are expected to be made, so it's to really be ourselves being neutral here. With of course upside to NII and NIM being the inherent repricing of loan book as you have maturities and churn that provides a potential tailwind to NIM and NII all other things equal.

Speaker 4

Great. Thank you. I just have a few more if that's all right. I was wondering how competition is trending in your market for loans and deposits particularly with rates coming down. So has deposit pricing been rational so far?

Speaker 4

And I guess what's your customers' reaction to lower rates?

Speaker 3

So I mean, if you look from a deposit perspective, yes, deposit pricing in general has come down with the Fed rate move. And as we talk to our customers, our customers are a lot more cognizant of the Fed moves perhaps than they might have been 3 to 5 years ago. So I think people are on top of that. The competition is still stiff for deposits. I don't think any call you're going to be on, people are not going to talk about the competition being more intense with regard to deposits and liquidity that it provides.

Speaker 3

From a loan perspective, we continue despite that we had some payoffs and line activity was down. We still had to Brian's point earlier in his remarks, a strong quarter from a new production perspective and we are able to get priced where we want to be. I would tell you that the pricing on larger credits seems to be actually we've seen several credits that people are offering tighter spreads, which is somewhat surprising to us. And therefore, we'll evaluate that as we move forward because in the world where deposit pricing is a little bit higher, we need to make sure that we are priced accordingly on the loan side to maintain our net.

Speaker 4

That's great. Thank you. And then the last question I had was, we spoke about how you plan to continue deploying excess capital into share repurchases, but I was wondering if you would like to reserve any capital for potential M and A in the future?

Speaker 1

So at this point, we feel still that the best investment we can make is in our own stock and buying that back. With a still challenging interest rate environment as the Fed cuts, it will get hopefully the yield curve will get more like historical norm. However, it was still challenging interest rate environment doubling down on the margin business. It's not something that we are is not really part of our short term strategic plan. So we anticipate that the excess capital will really be used more towards buybacks than building a war chest to do some type of deal in the future.

Speaker 4

Okay, great. Thank you so much for taking my questions.

Speaker 2

Thank you.

Operator

Thank you, Emily. Our next question comes from Matthew Breese of Stephens Inc.

Speaker 5

Brian, I was first hoping to start with cash and the excess cash position on the balance sheet today. Obviously, there's going to be some volatility due to munis. But I was hoping you could walk us through, 1, when you expect that to kind of normalize, is that over the next couple of quarters? And 2, how much will be used for muni swings and how much can be kind of reinvested potentially in securities loans?

Speaker 2

Yes. So as we look at average excess liquidity, we'd expect that to hold relatively stable Q3 to Q4. But of course, your point to point would inherently drop as we get towards the latter half of the fourth quarter or latter portion of the 4th quarter. But there'll be you kind of think about $150,000,000 to $250,000,000 running out and then the remaining amount of excess liquidity that was built would be available for deployment into other asset classes going forward. Great.

Speaker 5

Okay. And then maybe you could talk a little bit about the loan pipeline. What's in it? Where are you kind of spending your time? And what does the pipeline loan yield look like?

Speaker 5

Give us

Speaker 2

an overall sense for kind

Speaker 5

of near term loan growth.

Speaker 3

Yes. So overall, Matt, the pipeline is fairly healthy. It's primarily in C and I. We do have some CRE in there, but those are full relationship CRE customers. So we continue to move forward.

Speaker 3

The pricing, like I said before, we're in above 7s at the present time. We'll see what the Fed does in terms of where that drives fixed rates as we move forward here. But what we've alluded to throughout in our write up for the quarter as well as the discussion here is that we are maintaining our pricing discipline. There may be a time where we will that we participate in a credit today that we will not participate going forward because quite frankly those are variable price credits that suffer less 200 and that in the current environment and the go forward environment that we were seeing is just not something that we can play in. So at least not playing and maintain the NIM to where it needs to be.

Speaker 3

So healthy pipeline for the Q4. Brian gave overall guidance where we think loan growth will come in for the full year and maintaining our pricing discipline and making sure that our NIM continues to bounce off the bottom here.

Speaker 5

Got it. Okay. I was hoping you could talk a little bit about the Fed cut and deposit actions taken so far. Brian, I think you had mentioned you have some kind of higher cost deposit exception deposits. Maybe give us some sense for how much of your deposit base kind of fits into the higher cost categories and have already moved and by what amount?

Speaker 2

Sure Matt, I'd be happy to walk through that. So we have just about $2,000,000,000 that automatically on the deposit side that automatically reprice that are indexed. So that automatically occurs. Then we have a portfolio of call it $1,000,000,000 in chain $1,100,000,000 that is exception price for a kind of a wide range of exception pricing and where those fall there. But I will tell you, we had roughly $325,000,000 that were exception price that we had 100% data on from a ratcheting down as a result of the Fed move in September.

Speaker 2

So that's something we went out to actively kind of ratchet it down that $320,000,000 worth of deposits with 100% data, so full 50 basis point reduction on those. And the plan would be to kind of navigate that, you know, still work similar actions going forward as the Fed moves.

Speaker 5

All right. Are you kind of expecting similar loan and deposit betas on the way down as we saw during the last hiking cycle?

Speaker 2

I would say, yes, I mean, of course, on the way up, they've behaved differently, but we would expect on the way down, again, competition becomes the wildcard on the deposit side. We'd expect that to initially fall in that kind of 30% range on the deposit side, as we migrate down, and then some potential upside as you get a little bit further out in the process. But I would think looking at, absent anything else, looking at historical norms would be a reasonable thing to do here, depending on what happens from the competition side.

Speaker 5

Okay. Last one for me. I think the year over year fee income guide is 7% to 9% growth. Yes, excluding the MSR stuff. Is that a reasonable place to be for 2025?

Speaker 5

And I'm assuming that the primary business lines, trust wealth insurance will be kind of net that higher single digit range. Are those fair assumptions?

Speaker 2

Yes, I think we're in that general range give or take. Of course, we had a bump this year when you look at kind of mortgage year over year. So that's something there's there's the opportunity for that to be a bump as we go forward as well. But if you look at wealth and they're kind of high single digits, low double digits is what they would be putting up this year. You'd expect it to be somewhere in that similar neighborhood going forward.

Speaker 2

Insurance did have a big contingent income year. So as you kind of you look at that potentially normalizing next year, that's a little bit of an offset. But yes, I think in that general range with some potential upside is a reasonable thing to potential upside is

Speaker 5

a reasonable

Speaker 1

thing to conclude.

Operator

Thank you very much. We currently have no further questions. So I'd like to hand back to Jeff Switzer for any closing remarks.

Speaker 1

Thank you, Carly, and thank you everyone for listening today, and we look forward to speaking to you at the end of the year. Have a great day.

Operator

As we conclude today's call, we would like to thank everyone for joining. You may now disconnect your lines.

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Earnings Conference Call
Univest Financial Q3 2024
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