Univest Financial Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome. My name is Drew, and I'll be your operator today. At this time, I would like to welcome everyone to the Univest Financial Corporation 4th Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Investor Relations. I will now turn the call over to your host, Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Speaker 1

Thank you, Drew, and good morning and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Tyme, our Chief Operating Officer and President of Univest Bank and Trust and Brian Richardson, our Chief Financial Officer. Before we begin, I'd 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. Actual results may differ materially from those contemplated by these forward looking statements.

Speaker 1

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 $16,300,000 during the Q4 or $0.55 per share. During the quarter, we started to see stabilization in the shift in the mix of deposits along with the cost of deposits.

Speaker 1

While loans declined slightly during the quarter due to the higher rate environment, the payoff of some potential problem credits and the general slowdown in economic activity, We continue to have solid pipelines as we enter 2024. We continue to focus on full relationship customers and prospects. Brian will provide additional guidance for 2024 in his comments.

Speaker 2

Before I

Speaker 1

pass it over to Brian, I'd just like to thank entire Univest family for the great work that they do every day and their continued efforts serving our customers, our communities and each other. I'll now turn it over to Brian for further discussion on our results.

Speaker 3

Thank you, Jeff, and I would also like to thank everyone for joining us today. I would like to start by touching on 6 items from the earnings release. 1st, during the quarter, we saw signs of NIM stabilization. Reported NIM of 2.84 percent declined 12 basis points from 2.96% in the 3rd quarter. This compares to an 18 basis point decline during the Q3.

Speaker 3

Additionally, core NIM, which excludes excess liquidity of 2.94% declined 6 basis points compared to the 3rd quarter. This compares to a 14 basis point decline during the last quarter. 2nd, as it relates to our loan and deposit activity, loans contracted by $7,700,000 during the quarter and grew 444,000,000 or 7.3 percent during 2023. Deposits contracted by $63,400,000 in the quarter and grew by 462 $300,000 or 7.8 percent during 2023. The $63,400,000 decrease in the 4th quarter included a $57,500,000 reduction in brokered CDs.

Speaker 3

During the Q4, we saw signs of stabilization as it relates to non interest bearing deposits, which increased by $35,800,000 compared to a decrease of $150,000,000 last quarter. As of December 31, non interest bearing deposits represented 23% of total deposits compared to 22.2% at September 30. 3rd, during the quarter, we recorded a provision for credit losses of $1,900,000 Our coverage ratio was 1.3% at December 31, compared to 1.28% at September 30. Net charge offs for the quarter totaled $1,100,000 or 6 basis points annualized. 4th non interest income decreased $1,800,000 or 9% compared to the Q4 of 2022.

Speaker 3

This was primarily driven by decreases in wealth management revenue, BOLI income and swap related fees. These decreases were driven by a $1,200,000 adjustment for previously unrecorded wealth management revenue and $526,000 of BOLI death benefits, both of which were recognized during the Q4 of 2022. Interest rate swap income also decreased $1,500,000 compared to the Q4 of 2022. 5th. Non interest expense increased $1,700,000 or 3.6 percent compared to the Q4 of 2022.

Speaker 3

This includes $642,000 of incremental FDIC expense, which is primarily driven by the industry wide increased assessment rate. Lastly, during the Q4, we repurchased 26,485 shares of stock and plan to opportunistically repurchased shares in 2024. I believe the remainder of the earnings release was straightforward, and I would now like to focus on 5 items as it relates financial guidance. 1st, for 2023, net interest income totaled 220,000,000 For 2024, we expect loan growth of approximately 4% to 5%, and we expect net interest income to be flat to down 3%. This assumes a stable rate environment and NIM bottoming out in the first half of the year and in climbing thereafter.

Speaker 3

As we start to see stability on the viability side coupled with continued repricing of assets. 2nd, provision for credit losses will continue to be driven by changes in economic forecasts and the credit performance of the portfolio. At this time, we expect the provision for 2024 to be approximately $11,000,000 to $13,000,000 3rd, 2023 non interest income totaled $26,800,000 For 20 24, we expect non interest income growth of approximately 4% to 6% off the $76,800,000 base. 4th, we reported non interest expense of $197,400,000 for 2023. For 2024, We expect growth of approximately 3% to 5%.

Speaker 3

Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 20% to 20.5% based on current statutory rates. That concludes my prepared remarks. We will be happy to answer any questions. Drew, would you please begin the question and answer session?

Operator

Thank you. We will now start today's Q and A session. Our first question today comes from Tim Switzer from KBW. Please go ahead.

Speaker 4

Thank you for the guidance. Appreciate it. I think the first question I have is your NII guide Assuming stable rates, could you talk about maybe what the impact of A rate cut or 2 would be if we get some in the back half of the year. So after the NIM has bottomed, Assuming maybe deposit competition has moderated a little bit, what's the impact you expect from just a couple of rate cuts? And then does that impact change if we get deeper into the cut cycle, say, like 2025 and the Fed has cut, say, 4 to 5 times or more?

Speaker 2

Okay. This is Brian.

Speaker 3

I'll take that one. So a little bit of it, environment and forward rates has certainly got an impact on things, but it's really customer expectations and customer behavior coupled with that really a competition on the liability side. So that said, we would really expect the first couple based on kind of forward expectations right now on Fed actions and the like. We have seen some abatement on deposit cost pressures. I do think the first couple will have an impact, but be relatively minimal Because we do have variable rate loans that will automatically reprice as well as variable deposits and variable funding that will automatically reprice.

Speaker 3

We have about $1,100,000,000 of variable rate deposits, which is largely public funds driven, which will reprice Instantly, so that's a natural offset. And I think the first couple of moves will be pretty minimal impact on our financials.

Speaker 1

Yes. As Brian pointed out, competition, Tim, is going to have a huge impact on this. Everybody is looking for deposits. So I'm not so sure that the first 25 or 50 basis points is really going to cause a lot of movement on the competition side of things. There's Everybody is looking for deposits right now and any type of lower cost deposits.

Speaker 1

So it's still a very, very competitive market when it comes to the funding side of things.

Speaker 4

Yes, that makes a lot of sense. And that's kind of what I was expecting. So the second part of my question is, if we start to get 4 to 5 or more rate cuts. I know this is looking far down the line, but given The makeup of your balance sheet now, how would you then expect that to impact your NII?

Speaker 3

So coming into this rising rate cycle, we were asset sensitive as we had modeled it. Clearly, The behaviors across the industry that were a little bit different than that and we have slipped to liability sensitive. So if things would continue to hold, you'd expect there to be a benefit, as rates continue to decline, you start to see that flow through. But again, it really gets back to what customer behavior and competitive pressures are at that point in time.

Speaker 4

Okay. And you'd mentioned $1,100,000,000 of variable rate deposits. Can you talk about what you have on the asset side, that would be variable rate kind of instantly?

Speaker 3

Yes, effectively, it's about 29% of our loan book would reprice Effective immediately, it's slightly higher than that on a notional basis, but we do have a pay variable received fixed swap that we had done a couple of years ago, which brings that down ever so slightly, like I said, to the 29% range of our loan book instantly during prices. We have another 32% that's adjustable, that's a little bit more long dated, but the instant variables in that 29% range.

Speaker 4

Okay. I got you. Do you have maybe the adjustable well, That makes sense. The last question I have then is your CD maturity schedule, what does that look like?

Speaker 3

We have some tranches coming through in In total, probably $100,000,000 in the first half of the year. That would be anything that we would respond to non promotional rates. The promotional rates would backfill at a similar rate and quite honestly At a lower rate, because we were doing 7 month promotionals at 5 to 5.25, which will start to roll off. In the current environment, we'd those to come on at a lower level. So there'll be some pressure from CD maturities, but at this point, I don't expect that to be overly impactful.

Speaker 4

Okay, great. I'll get back in the queue. Thank you, guys.

Speaker 2

Thanks, Tim.

Operator

Our next question today comes from Frank Schiraldi from Piper Sandler. Your line is now open. Please go ahead.

Speaker 1

Good morning. Good morning, Frank.

Speaker 2

Good morning, Frank.

Speaker 1

You're curious on the

Speaker 5

Brian, on the fee income guide. So I think, yes, you said a flat rate environment as far as the NII guide. Just curious what the driver is of the fee income growth. If we do see rates does that imply some growth in mortgage banking or Is that sort of on the come if we do have lower rates in the rate cuts in the back half of the year?

Speaker 3

Yes. So there's a couple of components that play into that. Of course, in our insurance and wealth businesses, we expect kind of mid to high single digit to low double digit growth in those businesses in a stable environment. And on the mortgage banking side, we do expect Some level of increase while production is expected to be less year over year, we have a larger focus on salable production, Which will generate more gain on sale income and benefit the non interest income line.

Speaker 5

Okay. The driver is more outside of mortgage banking, I guess, in terms

Speaker 3

of the growth year over year, it sounds like? The mortgage is a component of it, but it's So kind of the diversified businesses that we have all will be contributors to the growth.

Speaker 5

Okay. And then Can you I'm sorry if I missed just in terms of it sounds like the core NIM is approaching stabilization. I don't know if you said do you expect to get there in early 2024, but also just curious about reported NIM, if you if Maybe that takes a little bit longer to inflect in terms of do you assume some continued build the liquidity here? Maybe is loan growth a little bit more measured in the near term?

Speaker 3

No, I think both the again, this is Brian, Frank, I think both of those will continue to move in line with each other as we kind of see some runoff of public funds and the like, I would actually Expect that excess liquidity to diminish in the near term and kind of reported and core will start to converge as well. But I do expect both of those to bottom out in the first half of the year and then see increases thereafter.

Speaker 5

Okay. And then just as you mentioned the variable rate piece of the loan book that We'll reprice immediately. If you can just maybe talk a little bit about the longer duration book, the CRE book. Is it fair to just basically assume 20% re prices a year? And just curious what the pickup And rates you're seeing currently in terms of that renewal.

Speaker 3

Yes, I mean, we've definitely seen a slowdown. I would say historically 20% to 25% would have been a reasonable kind of churn number. We see that slowing down a little bit in the current environment in the back half of 20 on 23%, but somewhere in that 15% to 20% range is what you could reasonably expect there. And as far as rates, our current commercial portfolio yield is just below 6%. It's at 5.93%.

Speaker 3

For the Q4, commercial production, kind of core production was at 770, and that was up 20 basis points, 25 basis points from last quarter. So again, there's an opportunity there as all those assets reprice and there is churn, you get lift there as well.

Speaker 1

Okay, great.

Speaker 6

And then if I could just sneak in

Speaker 5

one last one. Just on I'm not sure if I didn't see it, maybe somewhere in the release, but in terms of loan modifications that you are making or have made on the rate or term side. Do you guys disclose that? And just curious what sort of level of modifications you guys have made on the rate side in the CRE book. We

Speaker 3

Close it in our 10Q and 10 ks in our loan footnote. It will be ultimately disclosed there. But I will say there has not been substantial applications, rate or structure that would be included in that disclosure.

Speaker 1

Okay, great. I appreciate the color. Thanks.

Speaker 3

Thank you. Thank you,

Operator

Our next question today comes from Matthew Breese from Stephens Inc. Your line is now open. Please go ahead.

Speaker 6

Hey, good morning. I would like to just First start with where we are in the municipal deposit cycle and how much that played a role in the deposit dynamics this quarter.

Speaker 2

So Matt, I need to say where it's Mike, where we are on the cycle, if you're thinking for 4th quarter The end of the third quarter, very early part of the Q4 is the peak of the municipal deposits for us traditionally. And you start to see a small kind of ramp down in the Q4. That gradual ramp down continues in the Q1 and then you get more pronounced by the end of the second quarter and then it resets itself. What we've done is be able to work with some county and other municipalities to kind of fill in to reduce that peak and valley. But when you look at our financials, especially in the September, like Q3 end, That's really like peak, just over deposits we want to have on our balance sheet going forward.

Speaker 3

Got it. Yes, Matt, just put some numbers around that.

Speaker 2

Sorry, Matt,

Speaker 3

this is Brian. At 9:30, we were at $1,433,300,000 of public funds that would decrease by 165 $1,000,000 in the Q4 and we'd expect that to kind of continue to wind down through the Q2 then see that rebuild next year.

Speaker 6

Okay. It's very helpful. All right. And I appreciate all the guidance. One thing I was hoping for a little bit more color on was expectations around deposits for this year in terms of both growth and then composition as well.

Speaker 6

It sounds like we're starting to It's a stability point on the critical monetary bearing piece, but I wanted your thoughts.

Speaker 3

Yes, Mats, this is Brian. As it relates to deposits, we really look to match or we'll look to match the loan growth with deposit growth. That said, With public funds kind of being at an all time high in 2023, if you saw some normalization there and then normalized growth on the remaining deposit book. You might see a slight mismatch there. The overall goal as we progress forward is matching or exceeding loan growth with the deposit growth.

Speaker 3

As it relates to the composition, We saw again a slight increase in the quarter in non interest bearing. But that said, I think if that stabilizes in that low 20% range. We ended at 23% here at the 4th quarter. I think that that's a reasonable component to look at. As Mike said, we'll look for public funds to kind of be cap out at that level that we saw in 2023 and be backfilling with other components of deposits to help bolster the deposit base.

Speaker 6

Okay. And where do you expect The cost of total deposits to peak out this year, does it align with your NIM guidance? So first half of twenty twenty four, do you expect it to Peak out after that.

Speaker 3

No, we expect it to really peak in 'twenty That will kind of be a little bit more of a tail end. There will be slight ratcheting up that would occur throughout the year, but really kind of expect it to normalize by the end of 'twenty four.

Speaker 6

Okay. You mean peak at the end of 2024? Correct.

Speaker 3

Peak at the end of 2024.

Speaker 6

Got it. Okay. Last one for me was just on the securities portfolio. Just any color or guidance On expectations, whether it's growing or shrinking or staying flat.

Speaker 3

Yes. No, we really look portfolio to remain where it's at. We've kind of always targeted that to be in that 6% to 8% range, give or take of total assets. That's where it currently stands, right around 7% when you exclude the mark to market. And we look to keep that in a similar size and composition as we've had in the past.

Speaker 6

Okay, got it. Just sneaking in one more. It sounds like from a credit fund, the provision will kind of be determined by what comes your way. I'm curious what you're seeing boots on the ground customer by customer. Are you starting to see weakness on rate rolls?

Speaker 6

Are you starting to see concerns on debt to risk coverage ratios, things like that, and your general expectations for kind of credit trends, NPAs and charge offs

Speaker 2

24. I'll let Brian give you the specific on the guidance as we go forward, but And just the feel for the environment. Elevator rates obviously put more pressure on everybody, but we've been doing a very good job proactively We're working with our customer base, getting out ahead of things, making sure that we know what will happen when rates reset on given projects and working through that. For the most part, generally, everybody's doing still fairly good. About the only thing that we continue to look at that Has some level of slowness as luxury townhomes that exist in the Philadelphia market itself.

Speaker 2

And to be honest, our exposure there is $26,000,000 so it's not significant. But those projects seem to be struggling the most at this point in time, and that's a combination of just price point and interest rates If somebody was going to do the financing with it. This

Speaker 3

is Matt. This is Brian. As it relates to guidance, we Do not normally kind of give detailed guidance on expectations of non performing and criticized loans, but criticized and classified loans. But as Mike said, Nothing at this point suggests a fundamental change. That will continue to be event driven quarter by quarter.

Speaker 6

Perfect. Appreciate it. That's all I had. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

We have no further questions at this time. So I'll now hand you back over to Jeff Schritzer for any final remarks.

Speaker 1

Thank you, Drew, and thank you everybody for listening in today. While it was a challenging year in 2023 for the industry, I feel we've made a lot of good progress and pulled a lot of good levers to position us as we head into 'twenty four and beyond. As Brian noted, We feel that there will be some wind at our backs as we get into the second half of the year. And we're optimistic about what we have in place, team we have in place in the markets we're in. So we look forward to talking to everybody at the end of the Q1.

Speaker 1

Thanks a lot.

Operator

That concludes today's Univest Financial Corporation 4th Quarter 2023 Earnings Call. You may now disconnect your line.

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