Univest Financial Corporation (NASDAQ:UVSP) Q3 2023 Earnings Call Transcript

Univest Financial Corporation (NASDAQ:UVSP) Q3 2023 Earnings Call Transcript October 26, 2023

Jeffrey Schweitzer: 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 $17 million during the third quarter or $0.58 per share. Like most in our industry, we continue to be impacted by the rising cost of funding, primarily driven by the mix shift in deposits, which negatively impacted our net interest margin during the quarter. We did see this shift slow during the third quarter compared to the second quarter. Given the rising cost of funding, we continue to increase loan pricing and focus our lending on full relationship customers. This has slowed lending by design as we focus on liquidity and maintaining capital for existing full-service customers.

We did experience significant deposit growth during the quarter due to the seasonal build of public fund deposits. Given the margin pressures, our diversified business model continues to serve us well throughout this cycle with combined wealth management insurance revenue up 5.2% year-to-date. Before I pass it over to Brian, I would like to thank the entire Univest family for the great work they do everyday. Our team continues to focus on making a positive impact by serving our customers, communities and each other. I will now turn it over to Brian for further discussion on our results.

Brian Richardson: Thank you, Jeff and I would also like to thank everyone for joining us today. I would like to start by touching on five items from the earnings release. First, as Jeff mentioned, we saw continued pressure on funding cost and net interest margin, primarily due to the ongoing mix shift of deposits as well as increased deposit betas. Reported NIM of 2.96% decreased 18 basis points compared to last quarter. Excess liquidity averaged $103 million for the quarter, which reduced reported NIM by 4 basis points. Core NIM, which excludes excess liquidity, was 3% compared to 3.14% in the second quarter. Our cycle-to-date interest-bearing deposit beta was 54% through the third quarter and 41% when including total deposits.

A banking executive, making a deposit into a night depository box.

Our cost of funds was 2.54%, up from 2.19% last quarter. Second, I would like to discuss our loan and deposit activity during the quarter. Loans grew by $112.7 million and deposits increased by $451.8 million. We experienced a $501.2 million seasonal increase in public fund deposits offset by decreases of $26.9 million in personal accounts, $16.4 million in business accounts and $6.2 million in broker deposits. Non-interest-bearing deposits decreased $150.2 million during the quarter. As of September 30, non-interest-bearing deposits represented 22.2% of total deposits compared to 26.4% at June 30. At September 30, unprotected deposits, which excludes insured, internal and collateralized deposit accounts totaled $1.3 billion and represented 20.8% of total deposits.

Third, during the quarter, we recorded a provision for credit losses of $2 million. Our coverage ratio was 1.28% at September 30, which was consistent with June 30. Net charge-offs for the quarter totaled $969,000 or 6 basis points annualized. During the quarter, non-performing assets increased by $5.6 million. Non-performing assets as of September 30 included a $5.8 million non-performing loan that was sold on October 16 at par. Fourth, non-interest income increased $732,000 or 4.1% compared to the third quarter of 2022. This was primarily driven by increased revenue from our wealth management, insurance and mortgage banking lines of business. As we have said before, our diversified business model continues to serve us well during the current interest rate cycle and a resulting pressure on our spread business.

Fifth, non-interest expense increased $2.3 million or 5% compared to the third quarter of 2022. This includes $596,000 of incremental FDIC expense, which is primarily driven by the industry-wide increased assessment rate and $527,000 of incremental retirement plan costs primarily driven by the current interest rate environment. Excluding these two items, expenses were up $1.2 million or 2.6% compared to the third quarter of 2022. I believe the remainder of the earnings release was straightforward and I would now like to provide an update for our 2023 guidance. First, on last quarter’s call, I communicated that we expected loan growth of approximately 9% and net interest income would be flat to up 2% for the year. This guidance remains unchanged.

Second, our provision for credit loss guidance for the year is being reduced to $12 million to $14 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 is being reduced from 2% to 4% to 0% to 1%. As a reminder, this is of the 2022 base of $76.9 million, which excludes $977,000 of BOLI death benefits. Fourth, our non-interest expense growth guidance is being reduced from 6% to 8% to 6% to 7%. Lastly, as it relates to income taxes, we continue to expect that our effective tax rate will be approximately 20% based on current statutory rates.

That concludes my prepared remarks. We will be happy to answer any questions. Lydia, would you please begin the question-and-answer session?

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Q&A Session

Operator: Absolutely. [Operator Instructions] Our first question today comes from Tim Switzer of KBW. Please go ahead. Your line is open.

Tim Switzer: Hey, good morning guys. I am on for Mike Perito. Thanks for taking my questions.

Brian Richardson: Good morning, Tim.

Jeffrey Schweitzer: Good morning.

Tim Switzer: So I think the first thing to start with you is probably the trajectory of the NIM from here. I think when we last talked to you guys, you mentioned that there is possibility of it stabilizing towards the end of ‘23 or beginning of ‘24. Can you guys update us on your thoughts on how that will trend and deposit costs and when you think the NIM could possibly stabilize and then – and select if we assume rates stay static from here?

Brian Richardson: Sure, Tim. This is Brian Richardson. Assuming that there is no further rate increases and kind of we continue to operate in the environment that we are in, we expect that trough to kind of be in early 2024. We expect a little bit more compression and contraction here in the fourth quarter and then the trough to occur. And then you see stabilization with the upside potential thereafter.

Tim Switzer: Okay. Looking at your loan growth expectations, I said it’s probably safe to assume at least mid to high-single digits next year, assuming the economy stays okay, once deposit costs settle out, what kind of expansion on the NIM could you see quarter-to-quarter just driven by the loan growth and you probably have some back book repricing as well. Can you help maybe quantify that trajectory for us?

Brian Richardson: Sure. Again, I think there could be some slight upside potential in growth that would occur in ‘24. But I do think just as you think about one of the benefits that you get in an uprate environment is churn that occurs in the portfolio. But in that operating environment and as we get later into it, that churn definitely starts to slow down with prepayments and the like. So while we expect deposit costs to normalize and you’ll have some incremental add on the asset side, I don’t expect that to be overly meaningful, I would say, over the next five quarters.

Mike Keim: And Tim, you should expect our loan growth to be in the mid-single digits in 2024.

Tim Switzer: Okay. Any reason for maybe the slowdown year-over-year, something you’ve seen in the market or it’s just that caution?

Jeffrey Schweitzer: Yes. Tim, this is Jeff. We – as we’ve forecasted in the last quarter and we continue to talk about, we are deliberately slowing loan growth down given liquidity pressures, the cost of liquidity and also our desire to continue to maintain. And actually, what we would like to do is to start to in turn not eat into capital with loan growth but start to grow capital so that we could be more opportunistic when it comes to capital utilization on buybacks and the like. So we are – trust me, we could have grown loans double digits this quarter if we wanted to. But given all of the other headwinds with liquidity, with making sure that we have strong capital, we have deliberately focused on full relationship customers that we have and making sure that we can support them.

There are still definitely opportunities out there on the loan side. The economy continues to stronger than I think everybody thought it would be at this point. So the opportunities do exist, but we’re being pretty focused and prudent and which relationships we go after and making sure that there are full relationships, bringing deposits and other services.

Tim Switzer: Okay, yes, that makes sense. And then the last question I have is kind of the flip side scenario with the NIM. If we start, say, once deposit costs settle down and we’re in maybe the back half of ‘24, if we saw some rate cuts, can you talk to us about your sensitivity to that and how you think the balance sheet in NIM would move with a rate cut?