Univest Financial Corp
NASDAQ:UVSP
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Univest Financial Corp
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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. [Operator Instructions] I would now like to hand you over to our host, Jeff Schweitzer, President and CEO. Please go ahead.
Thank you, Candice, 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. 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 could be found on our website at univest.net under the Investor Relations tab. We reported net income of $21 million during the first quarter or $0.71 per share. While this past month and a half 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. 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.
Before I pass it over to Brian for 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.
Thank you, Jeff. And 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% decreased 18 basis points compared to last quarter. Asset yields increased by 31 basis points to 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 noninterest-bearing deposits, was 1.53%, up from 1% in the fourth quarter of 2022.
Second, I would like to discuss our liquidity and funding position. During the quarter, deposits decreased by $78.9 million. While we saw certain expected outflows during the quarter, we saw net deposit inflows of $81.1 million during the month of March. Noninterest-bearing deposits decreased $248 million during the quarter, of which $47.3 million occurred during the month of March. As of March 31, noninterest-bearing deposits represented 30.8% of deposits compared to 34.6% at December 31.
During the quarter, broker deposits grew by $25 million to $127 million, 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 $1.6 billion and represented 27.2% of total deposits. The corporation and its subsidiaries had committed borrowing capacity of $3.1 billion at March 31, of which $1.9 billion was available. We also maintained uncommitted funding sources from correspondent banks of $410 million as of the end of the quarter, of which $320 million was unused.
Third, during the quarter, we recorded a provision for credit losses of $3.4 million. Our coverage ratio was 1.28% at March 31 compared to 1.29% at December 31. Net charge-offs for the quarter totaled $2.8 million, of which $2.4 million related to one relationship, which had a $2.1 million specific reserve as of December 31. During the quarter, we saw a stability in nonperforming assets and a reduction in delinquencies and criticized and classified loans.
Fourth, noninterest income decreased $790,000 or 3.9% compared to the first quarter 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. Offsetting these decreases was a $917,000 increase in insurance commission and fee income, which was primarily driven by a $651,000 increase in contingent income, which totaled $1.8 million for the current quarter. As a reminder, contingent income is largely recognized in the first quarter of the year.
Fifth, noninterest expense increased $4.1 million or 9.1% compared to the first quarter of 2022. This includes $1.9 million 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, noninterest expense increased $2.3 million or 4.9%.
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 12% to 14% for 2023. We expect that loan pricing discipline and 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 in 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 noninterest-bearing deposit mix in the 30% range. Deposit betas and mix are inherently volatile in the current environment and could have a material impact on our actual net interest income.
Second, on last quarter's call, I had provided guidance of $18 million to $20 million 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 million to $16 million for 2023 based on our reduced loan growth expectations.
Third, our noninterest income growth guidance of 4% to 6% remains unchanged. As a reminder, the 4% to 6% is off the 2022 base of $76.9 million, which excludes $977,000 of BOLI death benefits.
Fourth, our noninterest expense growth guidance remains unchanged at 7% to 9%. While we have various expense reduction initiatives underway, 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 effective 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 the current environment. That concludes my prepared remarks. We will be happy to answer any questions. Candice, would you please begin the question-and-answer session?
[Technical Difficulty]
I apologize. It appears as though our providers are 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.
[Technical Difficulty]
Apologies. We have lost audio with the speaker team. Please standby whilst we reconnect them.
[Technical Difficulty]
Thank you. We are now ready to begin the Q&A session. [Operator Instructions] Our next question comes from Frank Schiraldi from ABC. Frank, please go ahead.
Wondering if -- you talked about obviously pulling back loan growth a bit, which seems prudent. And just curious about where you pull back. Is it difficult just given that you're entering these new markets, is there a significant change to your expectations in these expansion markets? Or is the change in your legacy markets or both?
Yes. 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. Our teams understand that, and that's what we're going to focus on as we move forward.
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 and GDP. Is there some significant deterioration baked in? Or is that more steady state?
Sure, Frank. So as we build the CECL reserve, we utilize a weighting normally of Moody's scenarios. We're currently weighted with 75% towards the Moody's S2 downside scenario and 75% baseline -- with 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.
Okay. Great. Appreciate the color.
[Operator Instructions] Our next question comes from Matthew Breese with Stephens Inc.
Deposit mix. Just curious, so far this month, how have -- how has the mix held up, your DDA still in kind of that 30% range? I 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.
Sure, Matt, this is Brian. Well, 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 million since March 31 through the close of business yesterday and noninterest-bearing was down as 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 occur -- has occurred thus far.
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 3 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 million range?
You should definitely think about they are stable. We have 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 cash flows and purchase and that's why you might see a little bit of movement from time to time. Our replace speed ends up slowing down during the quarter. But all things equal, we look to keep that relatively stable as a percentage of assets going forward.
Got it. Okay. Do you have on hand, your office commercial real estate exposure? And then within that, some of the relevant metrics that service coverage ratios, LTVs, cap rates, et cetera?
Yes. So Matt office, and it's in the earnings release is around $308 million. And that represents about 6.1% of the commercial portfolio closer to 5% of the overall portfolio. At the current time, LTVs are in the 60, mid- to upper 60s, and debt service coverage ratios are a little bit north of 1.5.
Okay. And as you -- 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 pre-COVID [ vintages ] ?
So just so you understand too, of that $300 million or so. And 2023, a little less than $20 million is coming up for renewal/end of its term. And even in 2024, it's slightly less than $25 million. 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.
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?
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 and 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 our 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 fallout on the regulatory side from expected capital or elevated capital ratios that might be coming down the pike.
Understood. Okay. I'll leave it there. That's all I had.
Thank you.
We have no further questions. I'll now hand back over to the management team for closing remarks.
Thank you, Candice, and thank you, everybody. I apologize for the technical difficulties, but we appreciate you participating on the call today, and we look forward to talking to you next quarter. Have a great day.
This concludes today's call. Thank you for joining. You may now disconnect your lines.