Univest Financial Corporation

Ladies and gentlemen, the Unifest Financial Corporation's third quarter 2024 earnings call will begin shortly with your host, Jeff Schweitzer. We appreciate your patience as we prepare your session for today. During the call, we do encourage participants to raise any questions they may have. You can raise a question by pressing star followed by one on your telephone keypad and to remove yourself from that line of questioning, it will be star followed by two. We will begin shortly. 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. If you'd like to register a question during the call, you can do so by pressing star followed by one on your telephone keypad and to remove yourself out of the questioning, it will be star followed by two. I'd now like to hand over to your host, Jeff Schweitzer, Chairman, CEO, to begin. The floor is 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 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. The best 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 $18.6 million during the third quarter, or 63 cents per share. During the quarter, we saw a large increase in deposits of $358.8 million due to our seasonal build of public funds deposits. Loan growth was slightly muted during the quarter at $45.9 million, or 2.8% 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 $1.5 million 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 of 9.8% and 8% respectively compared to the third quarter of the prior year. 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% 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 million 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.

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. First, during the quarter, reported NIM of 2.82% decreased two basis points from 2.84% in the prior quarter due to the increase in excess liquidity from the seasonal public funds bill. As expected, core NIM of 2.91%, which excludes the impact of excess liquidity, expanded five basis points compared to the second quarter. We expect core NIM to be flat to slightly up in the fourth quarter, assuming a 25 basis point rate cut at each of the FOMC meetings in November and December. Second, during the quarter, we recorded a provision for credit losses of $1.4 million. Our coverage ratio at September 30th was 1.28%, which was unchanged from June 30th. Net charge-offs for the quarter totaled $820,000, or five basis points annualized. During the third quarter, we saw continued stability in non-performing assets, loan delinquencies, and criticized and classified loans. Third, non-interest income increased 1.5 million, or 7.8%, compared to the third quarter of 2023. 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. Fourth, non-interest expense decreased $436,000 or 0.9% compared to the third quarter of 2023. This reflects the continued benefit of 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. Second, our provision for credit loss guidance for the year is being reduced to 6 to 8 million. 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. Third, our non-interest income growth guidance for the year remains at the sale of MSRs in the first quarter. Including the gain on the sale of MSRs, non-interest expense growth guidance for the year remains at 11 to 13 percent. As a reminder, this is off the 2023 base of $76.8 million. Fourth, in 2023, our non-interest expense totaled $195.8 million when excluding the $1.5 million of restructuring charges. For 2024, we expect 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 would be happy to answer any questions. Carly, would you please begin the question and answer session?

Thank you. We'd now like to open the lines for Q&A. If you would like to ask a question, please press star followed by 1 on your telephone keypad, and to remove yourself and learn the questioning, it will be star followed by 2. Our first question comes from Frank of Piper Sandler. Frank, your line's now open.

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 million in the fourth quarter. Can you just talk about link quarter growth there? What might be driving that if I have that right? And then is that a decent kind of run rate for, you know, starting things off for next year?

Yeah, it would put you in that $50 million range, give or take, for the fourth quarter. And I do think that'd 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 the jumping point going into next year.

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

Yeah, I think it's just a 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 fourth quarter, you'd expect some things to normalize.

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

Yeah, so the overall build occurs in the third quarter every year, and then we'll see $100 million, give or take, a month potential outflows depending on specific cases in the fourth quarter. So you see at the end of the second quarter.

Okay. And the inflows this quarter were $350 million. Is that about that? Is that right?

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

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

uh guard rails around uh buybacks going forward yeah so frank we're using basically you know we have we have capital levels we want to maintain and excess capital that we're generating we're using towards buybacks so A million dollars is not a year, wouldn't be used up in a year. A million shares. A million shares, sorry, wouldn't be used up in a year. But, you know, we're basically, as we continue to grow capital, excess capital that we have generated we'll be using towards buybacks is our plan. Great.

Okay. All right. Thanks for all the color.

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

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

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

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

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 wild card 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 wild cards right now is that valuation allowance on MSRs and how that would continue to play through or subside in the fourth quarter or subsequent quarter. and on the expense side really event driven again we've maintained um permanent management over that but you have things that occur from time to time both positive and negative that could potentially um drive variances to the guidance that i provided great um thank you and um another question i had was just related to nii and 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?

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 a largely offsetting deposit book that will also offset automatically, and then So, we have pretty good matching as it relates to the first several moves that are expected to be made to really view ourselves as being neutral here. With, of course, upside to NII and NIM being the inherent repricing of loan book as you have maturities in churn, that provides a potential tailwind to NIM and NII, all other things equal.

Great. Thank you. I 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? And I guess what's your customer's reaction to lower rates?

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 talked to our customers our customers are a lot more Cognizant of the Fed moves perhaps than they might have been three to five years ago So I think people are on top of that But price and 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 from a loan perspective and And we continue, you know, 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 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 NIP.

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&A in the future.

So at this point, we feel still that the best investment we can make is in our own stock and buying that back. You know, with a still challenging interest rate environment, as the Fed cuts, it'll 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 is not something that we are is not really part of our short term strategic plan. So, you know, we anticipate that the excess capital will really be used more towards buybacks than, you know, building a war chest to do some type of deal in the future.

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

Thank you. Thank you. Thank you, Emily. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. And to remove yourself, that line of questioning, it is star followed by two. Our next question comes from Matthew Breeze of Stevens, Inc. Matthew, your line is now open.

Good morning, everybody. 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, one, when you expect that to kind of normalize, is that over the next couple of quarters? And two, how much will be used for muni swings and how much can be kind of reinvested for potentially securities loans?

Yeah, 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 fourth quarter. But you kind of think about $150 to $250 million 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. 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? Just give us an overall sense for kind of near-term loan growth. Thank you.

Yeah. So overall, Matt, the pipeline's fairly healthy. It's primarily in CNI. We do have some CRE in there, but those are full relationship CRE customers. So, you know, we continue to move forward. The pricing, like I said before, you know, we're in above sevens at the present time. You know, we'll see what the Fed does in terms of where that drives fixed rates as we move forward here. 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, you know, quite frankly, those are variable price credits that show for less 200 and that in the current environment and the go-forward environment that we're seeing is just not something that we can play in it. at least not playing and maintain the NIM to where it needs to be. So healthy pipeline for the fourth quarter. Brian gave overall guidance where we think cologne 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.

Got it. Okay. I was hoping you could talk a little bit about You know, the Fed cut and deposit actions taken so far. Brian, I think you had mentioned you have some, you know, kind of higher cost deposit exception deposits. You know, 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.

Sure, Matt. I'd be happy to walk through that. So we have just about $2 billion that automatically, on the deposit side, that automatically reprice, that are indexed. So that automatically occurs. Then we have a portfolio of, call it a billion and change, billion one, that That is exception price, kind of a wide range of exception pricing where those fall there. But I will tell you, we had roughly $325 million that were exception price that we had 100% data on from a ratcheting down as a result of the Fed move in September. So that's something we went out to actively kind of ratcheted down at $320 million worth of deposits with 100% data. So full 50 basis point reduction on those. And the plan would be to kind of navigate that and do similar actions going forward as the Fed moves.

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

I would, yeah, I mean, of course, on the way up, they've behaved differently, but we would expect on the way down, again, competition becomes the wild card 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.

Okay, last one for me. I think the year-over-year fee income guide is 7% to 9% growth. Yep, excluding the MSR stuff. Is that a reasonable place to be for 2025? And I'm assuming, you know, the primary business lines, trust, wealth, insurance will be kind of in that higher single-digit range. Are those fair assumptions? Yes.

Yeah, 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 that 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. um 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 yeah i think in that general range with some potential upsides a reasonable thing to conclude that's all i had i appreciate you taking my questions thank you thanks thanks matt thank you very much we currently have no further questions so i'd like to hand back to jeff switzer for any closing remarks

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.

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