Univest Financial Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Univest Financial Corporation second quarter 2023 earnings call. I would now like to turn the call over to Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Thank you, Mandeep, and good morning and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Kime, 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. The universe'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 $16.8 million during the second quarter, or $0.57 per share. This was a 26.7% increase in earnings per share over the second quarter of 2022. 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 headcount primarily focused on our commercial real estate and residential mortgage lending teams. These cost reduction initiatives were in 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 continue 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 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 Univest family for the great work they do every day. Our team continues to focus on making 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.

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 experienced continued pressure on funding costs during the quarter due to a mixed shift of deposits as well as increased deposit betas and borrowing costs. Reported margin of 3.14% decreased 44 basis points compared to last quarter. Our NIM contraction did slow during the quarter. NIM for the month of March was 3.41%. This decreased by 14 and 19 basis points during April and May, respectively. NIM contraction for the month of June was only one basis point, resulting in a monthly NIM of 3.07%. Our cycle-to-date interfering deposit beta was 46.6% for the quarter and 33.7% when including total deposits. Our cost of funds was 2.19% 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 million in business accounts, which includes outflows for two customers, which totaled $157 million. Offsetting these decreases was a $304.4 million increase in broker deposits, which ended the quarter at $431.4 million, or 5.7% of total assets. Non-interest-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, non-interest-bearing deposits represented 26.4% of total deposits compared to 30.8% at March 31st. At June 30th, unprotected deposits, which excludes insured, internal, and collateralized in 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, of which $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 1.28% at June 30th was consistent with March 31st. Net charge-offs for the quarter totaled $512,000, 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, non-interest income increased $835,000, or 4.4% 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, non-interest expense increased $2.4 million or 5.1% 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 2.3%. I believe the remainder of the earnings released was straightforward, and I would now like to provide an update to our 2023 guidance. First, on last quarter's call, I had guided the loan growth of 5% to 8% for 2023. As Jeff mentioned earlier, we anticipate lending 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 loss is This guidance remains unchanged at $12 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 non-interest 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 off 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 7% to 9% to 6% to 8%. This reflects the previously discussed cost-saving 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. Mandeep, would you please begin the question and answer session?