Q2 2023 Univest Financial Corporation Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Universal Financial Corporation second quarter 2023 earnings calls.
I'd now like to turn the call over to Jeff Schweitzer.
I didn't and CEO of you in the Best Financial Corporation. Please go ahead.
Thank you Bob deep and good morning, and thank you to all of our listeners for joining US joining me on the call. This morning is Mike <unk>, Our Chief operating officer, and President of U S 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 you divest 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.
Everyone had a chance to review our earnings release from yesterday, if not it can be found on our website at <unk> dot net under the Investor Relations tab.
We reported net income of $16 $8 million during the second quarter or <unk> 57 per share. This was a 26, 7% increase in earnings per share over the second quarter of 2022 or.
Our results during the quarter included a $1 $1 million after tax restructuring charge related to the reduction of three financial centers, along with reduced head count primarily focused on our commercial real estate and residential mortgage lending teams.
These cost reduction initiatives.
Response to the macroeconomic headwinds, we are observing relating to rising funding costs.
We anticipate these expense reduction initiatives will result in $5 $4 million of annualized savings.
Like most in our industry, we continued to be impacted by the rising cost of funding, which negatively impacted our net interest margin, which contracted by 44 basis points during the quarter.
Given the rising cost of funding, we continue to increase loan pricing and focus our lending on full relationship customers.
While loan production was still strong during the second quarter. This is due to commitments. We had already made to customers, we'd anticipate lending to slow in the second half of the year and full year loan growth to approximate 9%.
Before I pass it over to Brian I would like to thank the entire universe family for the great work. They do every day our team continues to focus on making positive a positive impact on our communities.
By serving our customers communities and each other I will now turn it over to Brian for further discussion on our results.
Jeff and I would also like to thank everyone for joining us today I would like to start by touch on five items from the earnings release first as Jeff mentioned, we experienced continued pressure on 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, one, 4% decreased 44 basis points compared to last quarter.
Our NIM contraction did slow during the quarter NIM for the month of March was $3 four 1%.
This decreased by 14, and 19 basis points during April and May respectively named.
NIM contraction for the month of June was only one basis point, resulting in a monthly NIM of 3.07%.
Our cycle to date interest bearing deposit beta was 46, 6% for the quarter and 33, 7% when including total deposits.
Our cost of funds was two.
One 9% up from 1.53% last quarter.
Second I would like to provide an update on our liquidity and funding position during the quarter deposits increased by $152 $7 million.
We experienced decreases of $46 million in personal accounts $27 8 million in public funds and 77.9.
$9 million in business accounts, which includes outflows for two customers, which totaled $157 million offsetting these decreases was at $304 $4 million increase in broker deposits, which ended the quarter at $431 4 million or five 7% of total assets.
Noninterest bearing deposits decreased by $216 million during the quarter of which $151 6 million occurred in April and $25 5 million occurred in June .
As of June 30th noninterest bearing deposits represented 26, 4% of total deposits compared to 38% at March 31.
At June 30th unprotected deposits, which excludes insured in turtle and Collateralized Trust Trust and public fund deposit accounts totaled $1 4 billion and represented.
23, 3% of total deposits the corporation and its subsidiaries had committed borrowing capacity of $3 2 billion at June 30th.
<unk> 2 billion was available. We also maintained uncommitted funding sources from correspondent banks of $410 million at June 30th of which $285 million was unused.
Third during the quarter, we recorded a provision for credit losses of $3 $4 million, our coverage ratio of one point to 8% at June 30th which consistent with March 31.
Net charge offs for the quarter totaled 512000 or three basis points annualized.
During the quarter, we saw continued stability in non performing assets and a reduction in criticized and classified loans for the second consecutive quarter.
Fourth noninterest income increased 835000, or four 4% compared to the second quarter of 2022.
The value of our diversified business model continues to serve us well during the current interest rate cycle, and the resulting pressure on our spread business.
Fifth noninterest expense increased two 4 million or five 1% compared to the second quarter of 2022, excluding the $1 3 million of restructuring charges incurred during the quarter expenses increased $1 1 million or two 3%.
I believe the remainder of the earnings release was straightforward and I would now like to provide an update to our 2023 guidance.
First on last quarter's call I had guided to loan growth of 5% to 8% for 2023 as Jeff mentioned earlier, we anticipate landing to slow in the second half of the year and while our year to date loan growth was $339 million or 11% annualized we expect full year loan growth of approximately 9%.
We expect net interest income to be flat to up 2% for the year based on current information.
This reflects yesterday's 25 basis point rate increase and a cycle to date all in deposit beta of approximately 40% by the end of the year deposit betas continue to be volatile in the current environment and could have a material impact on our actual net interest income.
Second our provision for credit losses.
That guidance remains unchanged at $12 million to $16 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 is being reduced from 4% to 6% to 2% to 4% as a reminder, the 2% to 4% is after 2022 base of $76 9 million, which excludes 977000, a boldly death benefits.
Fourth our noninterest expense growth guidance is being reduced from 7% to 9% to 6% to 8%. This reflects the previously discussed cost savings initiatives as well as the one time restructuring charges incurred during the quarter.
Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 20% based on current statutory rates.
That concludes my prepared remarks, we will be happy to answer any questions. Monday would you. Please begin the question and answer session.
The floor is now open for your questions to ask good questions time. Please press star one on your telephone keypad at any point you'd like to withdraw from the queue. Please press star one again, we will now take a moment to compile a roster.
Our first question comes from the line of Frank <unk> from Piper Sandler. Please go ahead.
Good morning.
Morning, Greg.
Listen it sounds like based on the.
The guide or the outlook that you got a little bit more to go on the deposit betas.
But you also talked about.
It sounds like you're seeing some NIM stabilization here in.
In the month of June so.
Do you think the.
Just wondering if you could talk about where new business is going on here and if you do think.
That demand has stabilized at this point.
At that sort of.
June level.
Yes. Frank This is this is Brian overall, I think there still will be a little bit of downward pressure on NIM. Although it has slowed one data point in the month of June is a little bit tough to reach a conclusion based on but we are seeing on the asset side loans continue to kind of ratchet up now coming on in the mid 7%.
The wildcard continues to be really on the on the deposit side and what occurs there of course with the fed pausing in the back half of the quarter helped with yesterday's action that will bring a little bit of an element of uncertainty here as we progress forward, but again, the one basis point of NIM contraction in the month of June was.
Certainly a welcome datapoint.
Okay, and then I guess same question on the on the.
Just loan balance side in terms of the growth have you seen some stabilization in balances later in the quarter.
Just given your commentary about it sounded like this was stuff that was already sort of in the pipeline that led to the growth.
This quarter.
And just follow up on that when we think about this new update the 9% expected growth.
Is the bias that given the expansion markets and such that the bias is still to the upside there or how should we think about that.
Frank It's Mike <unk>.
Loan growth was solid throughout the quarter.
And.
As we look through and projects through the rest of the year.
And we are very focused on bringing in that 9% level, we think that that's consistent with regard to where our deposit levels.
Continue to grow to and also to maintain.
The current capital ratios that we have in place. So when you balance that out plus what Brian indicated in terms of where we're pricing our loans at all of those gives us the indication that we will be able to hit that 9%. We're not trying to go above that 9% at this point in time I will tell you demand would be there for us.
We could do more than that we just think it's a prudent target to hit at that point in time. The other thing that combines into this is that our mortgage production.
Is starting to be swing towards much more oriented towards the agency side of the business. So we expect less residential mortgage to go onto our balance sheet and stay on our balance sheet throughout the rest of the year.
Got it okay, great. Thank you guys.
Thank you Frank.
Our next question comes from the line of Michael Perito from <unk>. Please go ahead.
Hi, everyone. Good morning, Thanks for taking my questions.
Or am I remind you money.
I wanted to maybe follow up on a couple of <unk> questions around growth and NIM I mean, it's just as we think about like some of the.
Expansion markets quote unquote that you guys ran like Lancaster, maybe even the Jersey shore kind of outside your core market. I mean can you give US a reminder, or an update of how kind of self funded those markets are and end and when you think about loan growth and and putting stuff on I mean is there a kind of a change in approach or kind of do you have to sit down with the teams there and maybe like Rejig.
Around like focuses in terms of making sure that there's as much focus on bringing in loans as deposits as you know maybe a year year and a half ago. When when there was just more funding available kind of across your franchise to you.
Yes, so Mike it's Mike <unk> I'll answer the last part of that question first.
When we were sitting on excess liquidity of half a billion dollars of three quarters of $1 billion. Obviously, we were more focused on the allowance side of the equation.
And using up that excess liquidity position.
Given the current situation, we've actually further emphasize deposits as an equal weight relative to loans with our RM teams and we're also looking at SBA volume, where we can do some things with regard to the gain on sale line items. There. So we have refocused the teams.
We're still going to take good care of our customers, 9% loan growth is still very healthy.
But we do have an emphasis for our RM teams across our footprint.
Two.
Yes.
You need to raise and increase the level of deposits that we hold from the new markets perspective, the way to just look at this as we would have ramped up hiring faster. If you know what happened in early March did not happen.
So we're taking a more disciplined approach and a more patient approach with regard to the new markets. We're glad that the that we're in them. It gives us geographic distribution with regard to our loan portfolios and we see that as a great part of our future. Those teams are also focused on deposits just as much as they are on loans.
And like I said, we'll just have to be a little bit more patient in terms of the ramp up period. There we understand that we acknowledge that and we think that's appropriate.
Thanks, Mike that's that's helpful color.
A question for Brian just you know the 100 basis point 100 basis points reduction in the range on the Opex for this year you know just as we think to next year I mean is it fair.
I understand you're probably stop short of giving us a number but is it fair to think of that growth rate taking another step down next year, just with the full benefit of some of these cost actions coming in and just kind of the the more controlled.
You guys are having on the Opex line as we think about 'twenty 'twenty four.
Yes.
Certainly not going to be giving full year guidance for 2024, but I think your.
The way Youre thinking about it would be correct, where there would be continued to be controlled on the expense side of the house.
Got it thank you.
And then just one last one for me for for Jeff I'm trying to get everyone involved. This morning, I just know I know historically.
Jeff you you, maybe let's call. It the last couple of years, maybe a little longer you've been pretty negative on bank M&A and been adamant that you know the organic growth opportunity was significant in and and you guys. You know clearly executed on that as we think about the next phase of <unk> growth here in the next few years, you're obviously right now the bank M&A.
It's really tough, but as we think about 'twenty, four and 'twenty five and the current funding environment and rate environment.
Does bank M&A come back into the conversation more you know assuming some of the basics like around your own currency recovering and things like that or or do you not really foresee any change in your your stance on that.
Mike I don't really see any change in our stance. We've had a lot of success doing lift out approach I'm excited about although Mike said as he pointed out we're going to be a little more patient.
I am excited about the teams that we are building in Pittsburgh, and Baltimore and what we can do in those markets organically.
To go in and do an M&A transaction on the bank side with what we've done on the digital front with what we've done within C. Now and a lot of the things that we've put in place I am not sure it would be a seamless transition to acquire a smaller bank at this point as it might have been a few years ago.
I think we will continue to focus on the organic strategy lifting outgrowing those markets getting them up to.
A sizable amount and then continue to look for new places to to expand into as opposed to necessarily doing an M&A transaction.
Got it very good. Thank you guys for taking my questions and for the color. This morning appreciate it.
Thanks, Mike.
I would now like to turn the call over to Jeff Schweitzer for closing remarks.
Well, thank you <unk> and thank you everybody for listening in today. We appreciate your interest in our organization and while it is continuing to be a challenging environment. We're very very confident of our ability to manage through it and excited about the future of universe and look forward to talking to everybody again next quarter have a great day.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
Please wait the conference will begin.