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Univest Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 Fourth Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the call over to your host, Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Jeffrey Schweitzer: 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 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 $16.3 million during the fourth quarter 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. While loans declined slightly during the quarter due to the higher rate environment, the payoff of some potential problem credits and a 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. Before I pass it over to Brian, I’d just like to thank the 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.

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 six items from the earnings release. First, during the quarter, we saw signs of NIM stabilization. Reported NIM of 2.84% declined 12 basis points from 2.96% in the third quarter. This compares to an 18 basis point decline during the third quarter. Additionally, core NIM which excludes excess liquidity of 2.94% declined 6 basis points compared to the third quarter. This compares to a 14 basis point decline during the last quarter. Second, as it relates to our loan and deposit activity, loans contracted by $7.7 million during the quarter and grew $444 million or 7.3% during 2023. Deposits contracted by $63.4 million in the quarter and grew by $462.3 million, or 7.8% during 2023.

The $63.4 million decrease in the fourth quarter included a $57.5 million reduction in brokered CDs. During the fourth quarter, we saw signs of stabilization as it relates to non-interest-bearing deposits, which increased by $35.8 million compared to a decrease of $150 million last quarter. As of December 31st, non-interest-bearing deposits represented 23% of total deposits, compared to 22.2% at September 30th. Third, during the quarter, we recorded a provision for credit losses of $1.9 million. Our coverage ratio was 1.3% at December 31st, compared to 1.28% at September 30th. Net charge-offs for the quarter totaled $1.1 million or 6 basis points annualized. Fourth, non-interest income decreased $1.8 million, or 9% compared to the fourth quarter of 2022.

This was primarily driven by decreases in wealth management revenue, BOLI income and swap-related fees. These decreases were driven by a $1.2 million adjustment for previously unrecorded wealth management revenue and 526,000 of BOLI death benefits, both of which were recognized during the fourth quarter of 2022. Interest rate swap income also decreased $1.5 million, compared to the fourth quarter of 2022. Fifth, non-interest expense increased $1.7 million, or 3.6% compared to the fourth quarter of 2022. This includes 642,000 of incremental FDIC expense, which is primarily driven by the industry-wide increased assessment rate. Lastly, during the fourth quarter, we repurchased 26,485 shares of stock and plan to opportunistically repurchase shares in 2024.

I believe the remainder of the earnings release was straightforward and I would now like to focus on five items as it relates to 2024 guidance. First, for 2023, net interest income totaled $220 million. 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 inclining thereafter as we see – start to see stability on the liability side coupled with continued repricing of assets. Second, the 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 million to $13 million.

Third, 2023 non-interest income totaled $26.8 million. For 2024, we expect non-interest income growth of approximately 4% to 6% off the $76.8 million base. Fourth, we reported non-interest expense of $197.4 million for 2023. For 2024, we expect growth of approximately 3% to 5%. 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?

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Operator: [Operator Instructions] Our first question today comes from Tim Switzer from KBW. Please go ahead.

Tim Switzer: Hi, guys. Good morning. Thanks for taking my questions.

Brian Richardson: Good morning, Tim.

Jeffrey Schweitzer: Good morning, Tim.

Tim Switzer: 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 two 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, into like 2025, and the Fed has cut, say, 4 times to 5 times or more?

Brian Richardson: Okay. This is Brian. I’ll take that one. So a little bit of it, I mean, rate environment and forward rates has certainly got an impact on things, but it’s really customer expectations and customer behavior, coupled with that really of competition on the liability side. So that said, we would really expect the first couple on 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 of variable funding that will automatically reprice. We have about $1.1 billion 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.

Jeffrey Schweitzer: Yes. As Brian pointed out, competition, Tim, is going to have a huge impact on this. Everybody’s looking for deposits, so I’m not so sure that the first 25 basis points or 50 basis points is really going to cause a lot of movement when it – on the competition side of things. There is – everybody’s looking for deposits right now and any type of lower-cost deposits. So it’s still a very, very competitive market when it comes to the funding side of things.

Tim Switzer: 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 four to five 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?

Brian Richardson: So coming into this rising rate cycle, we were asset-sensitive as we had modeled it. Clearly, the behaviors across the industry were a little bit different than that. And we have flipped to liability sensitive. So if things would continue to hold, you’d expect there to be a benefit. As rates continue to decline, you’d 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.

Tim Switzer: Okay. And you’d mentioned $1.1 billion of variable rate deposits. Can you talk about what you have on the asset side that would be variable rate kind of instantly?

Brian Richardson: 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 receive 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 reprices, we have another 32% that’s adjustable. That’s a little bit more elongated, but the instant variables in that 29% range.

Tim Switzer: Okay. I got you. Do you have maybe the adjustable – well, yes, that makes sense. Yes, the last question I have then is your CD maturity schedule. What does that look like?

Brian Richardson: We have some tranches coming through in 2024. In total, probably $100 million in the first half of the year. That would be anything that was kind of non-promotional rates. The promotional rate stuff would backfill at a similar rate and quite honestly, at a lower rate because we were doing seven month promotionals at 5 to 5.25, which will start to roll off. And in the current environment, we’d expect 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.

Tim Switzer: Okay, great. I’ll get back in the queue. Thank you, guys.

Jeffrey Schweitzer: Thanks, Tim.

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

Frank Schiraldi: Good morning.

Jeffrey Schweitzer: Good morning, Frank.

Brian Richardson: Good morning, Frank.

Frank Schiraldi: Curious on the – 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 down, 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?

Brian Richardson: 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 saleable production, which will generate more gain on sale income and benefit the non-interest income line.

Frank Schiraldi: Okay. But the driver is more outside of the mortgage banking, I guess, in terms of the growth year-over-year, it sounds like.

Brian Richardson: The mortgage is a component of it, but it’s the kind of the diversified businesses that we have. All of them will be contributors to the growth.

Frank Schiraldi: 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 as long growth is a little bit more measured in the near term?

Brian Richardson: No I think both – again, this is Brian, Frank. I think both of those will continue to move in line with each other we – 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.

Frank Schiraldi: Okay. And then just – you mentioned the variable rate piece of the loan book that will reprice immediately. If you can just maybe talk a little bit about the longer duration book, the Cree book, is it fair to just basically assume 20% reprices a year? And just curious what the pickup in rates you’re seeing currently in terms of that renewal.

Brian Richardson: 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 2023, 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 593. For the fourth quarter, commercial production kind of core production was at 770, and that now 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.

Frank Schiraldi: Okay, great. And then if I could just sneak in one last one just on, I’m not sure if I didn’t see it, maybe it’s 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 Cree book?

Brian Richardson: We disclose it in our 10-Q and 10-K in our loan footnote. It will be ultimately disclosed there, but I will say there has not been substantial modifications, rate, or structure that would be included in that disclosure.

Frank Schiraldi: Okay, great. I appreciate the color. Thanks.

Jeffrey Schweitzer: Thank you.

Brian Richardson: Thank you, Frank.

Operator: [Operator Instructions] Our next question today comes from Matthew Breese from Stephens Inc. Your line is now open. Please go ahead.

Matthew Breese: Hi, good morning. I was hoping we could 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.

Mike Keim: So, Matt, when you say, where – it’s Mike, where we are on the cycle, if you’re thinking for fourth quarter that – the end of the third quarter, very early part of the fourth quarter is the peak of the municipal deposits for us traditionally. And you start to see a small kind of ramp down in the fourth quarter. That gradual ramp down continues in the first quarter, 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, the third quarter end, that’s really like peak municipal deposits we want to have on our balance sheet going forward.

Matthew Breese: Got you. Okay.

Brian Richardson: Matt, just put some numbers around that. Sorry, Matt, this is Brian. At 9/30, we were at $1.433 billion of public funds, that would decrease by $165 million in the fourth quarter. And we’d expect that to kind of continue to wind down through the second quarter, then see that rebuild next year in it.

Matthew Breese: Okay. 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. It sounds like we’re starting to hit the stability point on the critical non-interest-bearing piece, but I wanted your thoughts.

Brian Richardson: Yes, Matt. So this is Brian. As it relates to deposits, well, 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. As it relates to 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 fourth 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.

Matthew Breese: 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 ’24, do you expect it to peak out after that?

Brian Richardson: No, we expect it to really peak in ’24. That’ll kind of be a little bit more of the tail end. There’ll be slight ratcheting up that would occur throughout the year, but really kind of expect it to normalize by the end of ’24.

Matthew Breese: Okay, you mean peak at the end of ’24?

Brian Richardson: Correct. Peak at the end of ’24.

Matthew Breese: Got it. Okay. Last one for me was just on the securities portfolio. Just any color or guidance there on expectations? Whether it’s growing or shrinking or staying flat?

Brian Richardson: You know, we really look at a 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.

Matthew Breese: Okay, got it. Just sneaking in one more. It sounds like from a credit front, 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? Are you starting to see concerns on debt service coverage ratios, things like that, and your general expectations for kind of credit trends, NPAs, and charge-offs in ’24?

Mike Keim: Let Brian give you the specific on the guidance as we go forward, but just the – a feel for the environment. Elevated rates obviously put more pressure on everybody, but we’ve been doing a very good job proactively 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 is luxury townhomes that exist in the Philadelphia market itself. And to be honest, our exposure there is $26 million. So it’s not significant. But those projects seem to be struggling the most at that – 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.

Brian Richardson: This is Matt – this is Brian. As it relates to guidance, we do not normally kind of give detailed guidance on expectations of non-performing in criticized loans, but criticizing classified loans. But as Mike said, nothing at this point suggests a fundamental change that’ll continue to be event-driven quarter by quarter.

Matthew Breese: Perfect. I appreciate it. That’s all I had. Thanks for taking my questions.

Brian Richardson: Thank you.

Operator: We have no further questions at this time, so I will now hand you back over to Jeff Schweitzer for any final remarks.

Jeffrey Schweitzer: 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 ’24 and beyond. As Brian noted, we feel that there’ll 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, the team we have in place, and the markets we’re in. So we look forward to talking to everybody at the end of the first quarter. Thanks a lot.

Operator: That concludes today’s Univest Financial Corporation fourth quarter 2023 earnings call. You may now disconnect your line.