Univest Financial Q1 2023 Earnings Call Transcript

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April 27, 2023

There are 7 speakers on the call.

Operator

Hello, and a warm welcome to today's Univest Financial Corporation First Quarter 2023 Earnings Conference Call. My name is Candice, and I will be your coordinator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. I would now like to hand you over to our host, Geoff Swartzer, President and CEO. Please go ahead.

Speaker 1

Thank you, Candace, and good morning and thank you to all of our listeners for joining us today. 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'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. Univest's 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 site at univest.netundertheinvestorrelations tab. We reported net income of $21,000,000 during the Q1 or $0.71 While this past 1.5 months has been turbulent in the banking industry after the failures of Silicon Valley Bank and Signature Bank, Our diversified deposit sources and ample access to liquidity has served us well. While we do not see any significant unexpected shifts in our deposits, We are not immune to the accelerated rise in deposit and borrowing costs. As a result, we did experience an 18 basis point decline in our net interest margin during the quarter with continued pressure expected throughout the year. It is more important than ever that we stay disciplined in our loan pricing and expense management during what we anticipate will be an extended period of higher funding costs.

Speaker 1

Staying disciplined on loan pricing will slow down loan growth during the year. However, we are focused on ensuring we get an appropriate return on these future loan closings given the increased cost of funding.

Speaker 2

Before I pass it over

Speaker 1

to Brian for further and further detail on our financials, I would like to thank the entire Univest family for the great work they do every day. While it has been a volatile period in the industry, they continue to focus on serving our customers, communities and each other. I'll now turn it over to Brian for further discussion on our results.

Speaker 3

Thank you, Jeff. I would also like to thank everyone for joining us today. I would like to start by touching on 5 items from the earnings release. First, as Jeff mentioned, we experienced increased funding costs during the quarter due to a mix shift of deposits as well as increased deposit betas and borrowing costs. Reported margin of 3.58 percent decreased 18 basis points compared to last quarter.

Speaker 3

Asset yields increased by 31 basis points The 5.01% and the cost of interest bearing liabilities increased 71 basis points to 2.21%. Our cycle to date interest bearing deposit beta was 36% for the quarter. Our cost of funds including the benefit of non interest bearing deposits was 1.53%, up from 1% in the Q4 of 2022. 2nd, I would like to discuss our liquidity and funding position. During the quarter, deposits decreased by $78,900,000 While we saw certain expected outflows during the quarter, We saw net deposit inflows of $81,100,000 during the month of March.

Speaker 3

Non interest bearing deposits decreased $248,000,000 during the quarter, of which $47,300,000 occurred during the month of March. As of March 31, non interest bearing deposits represented 30.8% of deposits compared to 34.6% at December 31. During the quarter, broker deposits grew by $25,000,000 to $127,000,000 which represented 2.2% of total deposits as of the end of the quarter. At March 31, uninsured deposits adjusted to exclude internal accounts and Collateralized Trust and Public Fund Deposit Accounts Totaled $1,600,000,000 and Represented 27.2 Percent of Total Deposits. The corporation and its subsidiaries had committed borrowing capacity of $3,100,000,000 at March 31, of which $1,900,000,000 was available.

Speaker 3

We also maintained uncommitted funding sources from correspondent banks of $410,000,000 as of the end of the quarter, of which $320,000,000 was unused. 3rd, during the quarter, we recorded a provision for credit losses of $3,400,000 Our coverage ratio was 1.28% at March 31, compared to 1.29% at December 31. Net charge offs for the quarter totaled $2,800,000 of which $2,400,000 related to 1 relationship, which had a $2,100,000 specific reserve as of December 31. During the quarter, we saw stability in non performing assets and a reduction in delinquencies and criticizing classified loans. 4th, non interest income decreased $790,000 or 3.9% compared to the Q1 of 2022 As we saw continued pressure on wealth management revenue driven by reduced assets under management and supervision due to market volatility and reduced gain on sale income from our mortgage banking business due to increased interest rates and the corresponding decrease in refinance volume.

Speaker 3

Offsetting these decreases was a $917,000 increase in insurance commission and fee income, which was primarily driven by a 6 $51,000 increase in contingent income, which totaled $1,800,000 for the current quarter. As a reminder, contingent is largely recognized in the Q1 of the year. 5th, non interest expense increased $4,100,000 or 9.1 percent compared to the Q1 of 2022. This includes $1,900,000 related to 4 specific items, including our expansion into Western PA and Maryland, lower capitalized compensation due to reduced loan production, increased retirement plan costs and increased FDIC expense due to the new assessment rate that went into effect on January 1. Excluding these items, Non interest expense increased $2,300,000 or 4.9 percent.

Speaker 3

I believe the remainder of the earnings release was straightforward and I would now like to provide an update to our 1st, on last quarter's call, I had guided to loan growth of 12% to 14% for 2023. We expect that loan pricing discipline in contemplation of the rising funding costs will result in slower loan growth. Therefore, we are decreasing our loan growth expectation to 6% to 8%. We expect this to result Net interest income growth of approximately 5% to 8% for the year based on current information. This assumes a 25 basis point increase in May, A cycle to date interest bearing deposit beta of approximately 50% by the end of the year and maintaining a non interest bearing deposit mix in the 30% range.

Speaker 3

Deposit betas and mix are inherently volatile in the current environment and could have a material impact on our actual net interest income. 2nd, on last quarter's call, I had provided guidance of $18,000,000 to $20,000,000 for our provision for credit losses. While 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, We expect the provision of $12,000,000 to $16,000,000 for 2023 based on our reduced loan growth expectations. 3rd, our non interest income growth guidance of 4% to 6% remains unchanged. As a reminder, the 4% to 6% is off the twenty 20 2 base of $76,900,000 which excludes $977,000 of BOLI debt benefits.

Speaker 3

4th, our non interest expense growth guidance remains unchanged at 7% to 9%. While we have various The benefit of those initiatives compared to our original guidance is expected to be largely offset by reduced capitalized compensation due to our reduced loan production. Lastly, as it relates to income taxes, we expect our tax rate to be approximately 20% to 20.5% based off of current statutory rates. While it is certainly a tumultuous time for the industry, We believe our strong capital position and available liquidity coupled with the characteristics of our deposit base provide us with the foundation and stability to effectively navigate Andas, would you be able to begin the question and answer session, please? I apologize.

Speaker 3

It appears as though our provider is Experiencing technical difficulties and we apologize for that. If we can hold for a couple of minutes, we'll see if we're able to get things back online.

Speaker 4

Thank you. We are now ready to begin the Q and A session. Our next question comes from Frank Schiraldi from ABC. Frank, please go ahead.

Speaker 5

Good morning.

Speaker 6

Good morning, Frank.

Speaker 5

Wondering if You talked about obviously pulling back loan growth a bit, which seems prudent. And just curious about where You pulled back. Is it difficult just given that you're entering these new markets? Is there Significant change to your expectations in these expansion markets or is the change in your legacy markets or both?

Speaker 6

So Frank, it's Mike Keim. You're really going to see it across the whole footprint, which includes the new markets. And what we're really doing is we're making sure that we're priced for an acceptable return, given the current market conditions. Now in the new markets, it doesn't mean any less of a commitment to grow those new markets over time. We just need to be patient and prudent in how we do it.

Speaker 6

Our teams understand that and that's what we're going to focus on as we move forward.

Speaker 5

Great. Okay. And then just curious on the provisioning guide, what does that sort of entail in terms of The macro picture. Can you share with us any sort of detail on what that implies, what that Expectation would imply for things like unemployment, GDP, if there's some significant deterioration baked in or is that more steady state?

Speaker 3

Thanks. Sure, Frank. So as we build the CECL reserve, we utilize a weighting normally of Moody's scenarios were currently weighted with 75% towards the Moody's S2 downside scenario and 75% baseline 25% baseline. So there's inherently kind of more downside built into that based on that weighting. The provision guidance that was provided really assumes a static coverage ratio, give or take for the remainder of the year And then you factor in any potential credit events as well as loan growth, is how we end up with the provision guide that was provided.

Speaker 4

Thank you. Our next question comes from Matthew Breese from Stephens Inc. Matthew, please go ahead.

Speaker 2

Deposit mix. Just curious, So far this month, how has the mix held up? Are DDA still in kind of that 30% range? I'm just wanted to get a sense for As we've kind of put some separation between now and the events earlier this quarter, have things slowed down and stabilized?

Speaker 3

Sure, Matt. This is Brian. While it's a little early in the quarter to determine kind of any trends off of what we've seen so far when you consider things like cyclicality and seasonality of certain customers, Deposits have decreased approximately $60,000,000 since March 31 through the close of business yesterday, and non interest bearing was down a commensurate amount Over that same time period. So while we've seen some stabilization and there's seasonality and cyclicality in there, so it's a little bit hard to draw a full conclusion for the next 60 days, but that's what has occurred thus far.

Speaker 2

Got it. Okay. And then maybe flipping to the securities portfolio, we saw a little bit of growth this quarter. We haven't seen that for the prior three quarters. I just want to get a sense for the outlook there and whether or not you're reinvesting cash flows or is it a portfolio that we should largely think of as stable in kind of that $500,000,000 range?

Speaker 3

You should definitely think about it as stable. We've always targeted 7% to 9% of total assets. We're currently on the lower end of that range and in the middle of that range when you adjust for the mark to market. So really replacing cash flows, of course, we do anticipate On cash flows and purchase, that's why you might see a little bit of movement from time to time if prepay speeds ends up slowing down during the quarter. But all things equal, we look to keep that stable, as a percentage of assets going forward.

Speaker 2

Got it. Okay. Do you have on hand your office commercial real estate exposure? And then within that, some of the relevant metrics, Debt service coverage ratios, LTVs, cap rates, etcetera.

Speaker 6

Yes. So, Matt, Office and it's in the earnings release, is around 308,000,000 And that represents about 6.1% of the commercial portfolio, close to 5% of the overall portfolio. At the current time, LTVs are on the 60 mid to upper 60s and Debt service coverage ratio is a little bit north of 1.5.

Speaker 2

Okay. And as you've as some of this has come up for reset and renewed, either whether You're underwriting something that's in a transaction or you're reappraising something. What has been kind of the change in value, particularly from You know, pre COVID vintages.

Speaker 6

So just so you understand too, of that $308,000,000 or so, In 2023, a little less than $20,000,000 is coming up for renewal End of its term and even in 2024, it's slightly less than $25,000,000 So we haven't seen a lot of it, Matt, to be honest with you. And we have not added Significantly at all to our office portfolio. In fact, it's down quarter over quarter.

Speaker 2

Okay. All right. Maybe last one for me, just given the slowdown in loan growth guidance. You do have some excess capital as measured by tangible common equity. Could you just give me some color around appetite for buybacks here?

Speaker 1

Yes. Matt, this is Jeff. Right now, we aren't in the while we Totally believe our stock is undervalued. We are not in a buyback position, mainly because we want to see what any fallout is From regulatory guidelines on capital as a result of Silicon Valley Signature and what's going to come from that Combined with we want to make sure that we are able to continue to support our customers because we are still seeing loan demand. And while we're going to ratchet up pricing, There still is a lot of activity on the lending side in discussions with customers, and we want to make sure we can support them and also react to any Fall out on the regulatory side from expected capital or elevated capital ratios that might be coming down the pike.

Speaker 2

Understood. Okay. I'll leave it there. That's all I had. Thank you.

Speaker 2

Thanks, Matt.

Speaker 4

Thank you. We have no further questions. So I'll now hand back over to the management team for closing remarks.

Speaker 1

Thank you, Candace, and thank you, everybody. I apologize for the technical difficulties, but we appreciate you

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Earnings Conference Call
Univest Financial Q1 2023
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