Univest Financial - Q3 2024
October 24, 2024
Transcript
Operator (participant)
Good morning, all, and thank you for joining us for the Univest Financial Corporation third quarter twenty twenty-four 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 from the line of 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.
Jeff Schweitzer (Chairman and CEO)
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. 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 $18.6 million during the third quarter, or $0.63 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 up 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 thirty-first, 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.
Brian Richardson (CFO)
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 build-up. 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 thirtieth was 1.28%, which was unchanged from June thirtieth. 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%-5% for the full year of 2024 compared to 2023. Second, our provision for credit losses guidance for the year is being reduced to $6 million-$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 7%-9% when excluding the $3.4 million pre-tax gain on 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%-13%. 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 growth of 1%-2% off the base of $195.8 million. 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. Carly, would you please begin the question and answer session?
Operator (participant)
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 one on your telephone keypad, and to remove yourself at line of questioning, it will be star followed by two. Our first question comes from Frank Schiraldi of Piper Sandler. Frank, your line's now open.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Good morning.
Brian Richardson (CFO)
Good morning.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Just on the expense front, Brian, you mentioned, I think, 1%-2% growth, and that would seem to imply-
Brian Richardson (CFO)
Correct.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
A little bit over $50 million 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 you know starting things off for next year?
Brian Richardson (CFO)
Yeah, it would put you in that $50 million range, give or take, for the Q4, 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 a good jumping point going into next year.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
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?
Brian Richardson (CFO)
Yeah, I think it's just a normalization of a couple of small things that were benefits in the current quarter, and you 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.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Okay. And then, can you just remind us, in terms of the muni, the 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?
Brian Richardson (CFO)
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 Q4. So you see that build, and then you start to see that wind back down in the Q4 into the first quarter, and then again, hitting the trough at the end of the Q2.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Okay.
Brian Richardson (CFO)
And that-
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
The inflows this quarter were $350 million. Is that about that? Is that right?
Brian Richardson (CFO)
They were a little bit higher than that. It was closer to 400 and change.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Okay.
Brian Richardson (CFO)
On muni specifically.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Okay, great. 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, 1 million shares, is 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 guardrails around buybacks going forward.
Jeff Schweitzer (Chairman and CEO)
Yeah. So, Frank, we're using basically, you know, we have capital levels we want to maintain, and then excess capital that we're generating, we're using towards buybacks. So, $1 million is not a year, wouldn't be used up in a year, but-
Brian Richardson (CFO)
1 million shares.
Jeff Schweitzer (Chairman and CEO)
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.
Frank Schiraldi (Managing Director and Senior Equity Research Analyst)
Great. Okay. All right, thanks for all the color.
Brian Richardson (CFO)
Thank you.
Operator (participant)
Thank you very much. Our next question comes from Emily Lee of KBW. Emily, your line is now open.
Emily Lee (Analyst)
Hi, good morning. I'm on for Tim Switzer today, so thank you for taking my question. I wanted to ask-
Brian Richardson (CFO)
Good morning, Emily.
Emily Lee (Analyst)
Good morning. I wanted to ask what factors could drive upside or downside to your guidance?
Brian Richardson (CFO)
So sorry, can you repeat that question? I didn't catch the end of it.
Jeff Schweitzer (Chairman and CEO)
Factors that will change our guidance.
Emily Lee (Analyst)
Yeah, I was just-
Jeff Schweitzer (Chairman and CEO)
Plus or minus.
Emily Lee (Analyst)
Yeah. 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?
Brian Richardson (CFO)
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, of course, market valuations and the like has an impact on our wealth management business and some other areas. 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 quarters. Then on the expense side, really event-driven. Again, we've maintained prudent 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.
Emily Lee (Analyst)
Great. Thank you. And 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?
Brian Richardson (CFO)
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 there's a portion that's exception priced 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 really view ourselves as being neutral here going forward. 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.
Emily Lee (Analyst)
Great. Thank you. I just have a few more, if that's all right. I was wondering how competition is trending in your markets for loans and deposits, particularly with rates coming down. So has deposit pricing been rational so far? And I guess, what's your customers' reaction to lower rates?
Mike Keim (COO and President)
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 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 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 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, you know, 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 NIM.
Emily Lee (Analyst)
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.
Mike Keim (COO and President)
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, hopefully the yield curve will get more like historical norm. However, with still challenging interest rate environment, doubling down on the margin business 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.
Emily Lee (Analyst)
Okay, great. Thank you so much for taking my questions.
Brian Richardson (CFO)
Thank you.
Mike Keim (COO and President)
Thank you.
Operator (participant)
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 from that line of questioning, it is star followed by two. Our next question comes from Matthew Breese at Stephens Inc. Matthew, your line is now open.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Good morning, everybody.
Brian Richardson (CFO)
Good morning, Matt.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
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 into securities loans?
Brian Richardson (CFO)
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 there'll be you kind of think about $150 million-$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.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
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.
Mike Keim (COO and President)
Yeah. So overall, Matt, the pipeline's fairly healthy. It's primarily in C&I. 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. 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, you know, quite frankly, those are variable rate credits that are so far less than 200, and that in the current environment and the go-forward environment that we're foreseeing, is just not something that we can play in. So, at least not play in and maintain the NIM to where it needs to be. So healthy pipeline for theQ4. You know, Brian gave overall guidance where we think loan growth will come in for the full year and, you know, maintaining our pricing discipline and making sure that our NIM continues to bounce off the bottom here.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
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 deposits, 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?
Brian Richardson (CFO)
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, $1 billion, that is exception priced, kind of a wide range of exception pricing of where those fall there. But I will tell you, we had roughly $325 million that were exception priced, that had 100% beta 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 that $320 million worth of deposits with 100% beta, so a full 50 basis point reduction on those.
And the plan would be-
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Got it. Okay.
Brian Richardson (CFO)
to kind of navigate that, do similar actions going forward as the Fed moves.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
All right. Are you kind of expecting similar loan and deposit betas on the way down, as we saw during the last hiking cycle?
Brian Richardson (CFO)
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 on from the competition side.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Okay. Last one for me. I think the year-over-year fee income guide is 7%-9% growth.
Brian Richardson (CFO)
Um, yep.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Excluding the MSR stuff. Is that a reasonable place to be for 2025? And I'm assuming, you know, that the primary business lines, trust, wealth, insurance, will be kind of in that higher single digit range. Are those fair assumptions?
Brian Richardson (CFO)
Yeah, I think they're, 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 you, there's the opportunity for that to be a bump as we go forward as well. But if you look at wealth and insurance, 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. Insurance did have a big contingent income year, so as 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 are a reasonable thing to conclude.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
That's all I had. I appreciate you taking my questions. Thank you.
Brian Richardson (CFO)
Thanks, Matt.
Mike Keim (COO and President)
Thanks, Matt.
Operator (participant)
Thank you very much. We currently have no further questions, so I'd like to hand back to Jeff Schweitzer for any closing remarks.
Jeff Schweitzer (Chairman and CEO)
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 (participant)
As we conclude today's call, we would like to thank everyone for joining. You may now disconnect your lines.