Univest Financial Corp (UVSP) 2024 Q3 法說會逐字稿

Good morning, all.

And thank you for joining us for the Universe Financial Corporation's third quarter, 2024 earning school.

My name is Carly and I'll be the call coordinator for today.

(Operator Instructions) And I'd like to hand over to your host, Jeff Schweitzer, the 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 the 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.

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 universe.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 continues to serve us.

Well as our noninterest 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 noninterest 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 or 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 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 2 basis points from 2.84% in the prior quarter due to the increase in excess liquidity from the seasonal public funds bill as expected coam of 2.91% which excludes the impact of excess liquidity expanded five basis points compared to the second quarter.

We expect corn to be flat to slightly up in the fourth quarter assuming a 25 basis point rate cut at each of the FO MC 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 30 was 1.28% which was unchanged from June 30th net charge offs for the quarter total of 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 noninterest 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 SB A loans.

All setting these increases with 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 noninterest expense decreased $436,000 0.9% compared to the third quarter of 2023.

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.

Second, our provision for credit loss guidance for the year is being reduced to $6 million 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 noninterest income growth guidance for the year remains at the 7% to 9% when excluding the $3.4 million pretax gain on the sale of MS Rs in the first quarter including the gain on the sale of MS Rs noninterest expense growth guidance for the year remains at 11% to 13%.

As a reminder, this is off the 2023 base of $76.8 million four in 2023.

Our noninterest expense to $195.8 million when excluding the $1.5 million of restructuring charges for 2024.

We expect growth of 1% to 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 will be happy to answer any questions.

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

(Operator Instructions)

Frank Schiraldi, Piper Sandler.

Good morning.

(multiple speakers) So 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 , a little over $50 million in the fourth quarter.

Can you just talk about link quarter growth there?

What, what might be driving that if I 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 would be a reasonable starting point for next year.

Of course, with the growth that occurs early in the year for meriting merit increases and the like occur in the early part of the year.

So you start to see that ramp up, but that would be a good jumping point going into next year.

Okay.

When you think about the, three Q 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 the normalization of a couple of small things that, that were benefits in the, in the current quarter.

And you see that start to normalize, but we have run favorable throughout the year.

So, that 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, is seasonal Muni and, and, and how does that kind of run off or run through the balance sheet again in terms of timing?

Yes.

So, the overall bill occurs in the third quarter every year and then we'll see $100 million give or take a month potential outflow, depending on specific cases in the fourth quarter.

So, you start you see that bill and you start to see that wind back down in the fourth quarter into the first quarter.

And then again, hitting the trough in at the end of the second quarter.

Okay.

And that, 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 million change.

Okay.

On any specific?

Okay, great.

And then just 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 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 then, 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.

Yeah, so Frank, we're using basically, you know, we have, capital levels we want to maintain and then access capital that we're generating we're using towards buybacks.

So $1million is not a year wouldn't be used up in a year, but 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 will be used will be using towards buybacks is our plan.

Great.

Okay.

All Right.

Thanks for all the color.

Emily Lee, KBW.

Hi, good morning.

I'm on for Tim Switzer site.

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.

So sorry, can you repeat that question?

I didn't catch the end of it

Will change.

Yeah, I was just, 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?

Sure.

So as you kind of go through, you'll get 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 MS Rs and how that would continue to play through or subside in in the fourth quarter or subsequent quarter.

And then on the expense side, really event driven again, we've maintained improvement management over that, but you have things that occur from time to time, both positive and negative that that could potentially drive variances to the guidance that I provided.

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 the margin?

We really expect ourselves to be neutral for the foreseeable future in rate.

Plus we have a variable rate loan book and when you look at our cash, it's going to automatically repriced.

We have an largely offsetting on deposit book that will also offset automatically and then there's a portion that exception price that we adjust accordingly.

So we, have pretty good matching as it relates to the fir the first several moves that are expected to be made it to really be ourselves as being neutral here with of course, upside to NII and then 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.

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 customers reaction to lower rates?

So, I mean, if you look from a deposit perspective deposit pricing in general has come down with the fed rate move.

And as we talk to 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 price 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.

We're 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 long side to maintain our net.

That's great.

Thank you.

And then the last question I had was, we spoke about how you plan to continue deploying excess capital and share purchases.

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 deal curve will get more like historical norm.

However, 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 would really be used more towards buybacks than you know, building a war chest to do some type of deal in the future.

Okay, great.

Thank you so much for taking my questions.

Thank you too.

(Operator Instructions)

Matthew Breese, Stephens Inc

Good morning everybody.

Brian.

I was 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 that over the next couple of quarters and two, how much will be used for, for Muni swings and how much can be kind of reinvested for potentially securities loans?

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, the latter half of the fourth quarter, or ladder portion of the fourth quarter, but they'll be you kind of think about 150 million 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 you kind of spending your time and what is the pipeline loan yield look like?

Just, just give us a little sense of kind of near-term loan growth.

Yeah.

So overall that the pipeline is 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 seven 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 right up to the for the quarter, as well as the discussion here is that we're 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 so for less 200 that in the current environment and the go for an environment that we were seeing is just not something that we can play.

So at least not playing and maintain the end to where it needs to be so healthy pipeline for the fourth quarter.

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 n 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, but 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 the higher cost categories and have already moved.

And by what amount?

Sure man, I'd be happy to walk through that.

So we have just about $2 billion that automatically on the deposit side, that automatically repriced that are, that are indexed.

So that automatically occurs.

Then we have a portfolio of call it a billion and chain billion one.

That is that is exception price of a 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, 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 points] reduction on those and the plan would be to kind of navigate that, similar actions going forward as the fed as the fed moves.

Alright.

Are you, kind of expecting similar loan and deposit betas on the way down as we saw during the last techy?

I would, yeah, I mean of course, on the way up, they behaved differently, but we would expect on the way down again, competition becomes a wild part on the deposit side.

We expect that to initially fall in that kind of 30% range on the deposit side as we 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 a, anything else, looking at historical norms would be a reasonable thing to do here depending on what happens from the competition side.

Last one for me.

I think the year-to-year fee income guide is 7% to 9% growth.

Yes, excluding the MS R 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 that, higher single digit range for those fair assumptions.

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, as we go forward as well.

But if you get wealth and in wealth and they're kind of high single digits, low double digits is what they would be putting up 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 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 upside of 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 Schweitzer 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.