Univest Corporation of Pennsylvania Q2 2024 Earnings Call Transcript

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July 25, 2024

Key Takeaways

  • The bank reported core deposits grew $90 M (5.6% annualized) and loans increased $106 M (6.4% annualized) in Q2, demonstrating solid organic growth despite seasonal runoff and brokered deposit decreases.
  • Reported NIM declined by 4 bps sequentially to 2.84%, and full-year net interest income is guided to contract 3–5% YoY, although management expects NIM expansion in H2 2024.
  • The credit loss provision guidance was reduced to $8 M–$10 M for 2024 from $11 M–$13 M, reflecting improving asset quality and stable nonperforming assets and delinquencies.
  • Non-interest income growth guidance was raised to 7%–9% for 2024 (excluding MSR gains), driven by strong mortgage banking gains and investment advisory fees, up 5.8% in Q2.
  • Univest repurchased ~191,000 shares at an average cost of $21.17 in Q2 and boosted tangible book value per share by $0.47 (2.1%), with ~696,000 shares remaining under the buyback plan.
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Earnings Conference Call
Univest Corporation of Pennsylvania Q2 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, all, and thank you for joining us for the Univest Financial Corporation's 2nd Quarter 2024 Earnings Call. My name is Carly, and I'll be the call coordinator for today. I would like to hand over to our host, Jeff Schweitzer, CEO and President to begin.

Speaker 1

Thank you, Carly, 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.

Speaker 1

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 continue to see stabilization in the shift in the mix of deposits along with the cost of deposits. A highlight of the quarter was growth in deposits of $90,000,000 or 5.6 percent annualized during the quarter, which was net of our normal seasonal runoff of public funds deposits along with the decrease of brokered deposits as we experienced solid core deposit growth.

Speaker 1

Additionally, loan growth picked up in the 2nd quarter as we grew loans by approximately $106,000,000 or 6.4 percent annualized. Our diversified business model continued to serve us well as our non interest income was up $1,100,000 or 5.8% compared to the prior year. And finally, we continue to be active with stock buybacks during the quarter as we repurchased 190,808 shares of stock, while still growing our tangible book value. Before I pass it over to Brian, I would like to thank the entire Univest family for the great work they do every day and for their continued efforts serving our customers, communities and each other. I will now turn it over to Brian for further discussion on our results.

Speaker 2

Thank you, Jeff. And I would also like to thank everyone for joining us today. I would like to start by highlighting a few items from the earnings release. First, during the quarter, we continue to see signs of NIM stabilization and we expect core NIM to expand in the second half of the year. Reported NIM of 2.84 percent decreased 4 basis points from 2.88% in the first quarter.

Speaker 2

Core NIM of 2.86 percent, which excludes the impact of excess liquidity, declined 5 basis points compared to the Q1. During the quarter, loan yields decreased 5 basis points or increased 5 basis points to 5.73%. Interest earning asset yields increased by 6 basis points and the cost of interest bearing liabilities increased by 9 basis points. It is important to note the increase in our interest earning asset yields approximates the increase in our loan yields as we are not seeing a benefit from shrinking the investment book that some of our peers are seeing. We have consistently maintained the investment portfolio at 6% to 8% of total assets and plan to continue doing so.

Speaker 2

2nd, as it relates to the loan and deposit activity, loans grew $105,800,000 and deposits grew $90,000,000 during the 2nd quarter despite decreases in brokered and public fund deposits of $37,500,000 $24,100,000 respectively. 3rd, during the quarter, we recorded a provision for credit losses of $707,000 Our coverage ratio was 1.28% at June 30th compared to 1.3% at March 31. Our general reserve coverage ratio, which excludes individually annualized loans, was 1.28% at June 30 compared to 1.27% at March 31. Net charge offs for the quarter totaled 809,000 dollars or 5 basis points annualized. During the quarter, we saw a decrease in non performing assets and relative stability in loan delinquencies and criticizing classified assets.

Speaker 2

4th, non interest income increased $1,100,000 or 5.8% compared to the Q2 of 2023. This increase was primarily driven by a $671,000 or 64.6% increase in net gain on mortgage banking activities and a $530,000 or 11.3 percent increase in investment advisory commission and fee income. We continue to be happy with and proud of the contributions from our fee income business is and our diversified business model. 5th, non interest expense decreased $1,100,000 or 2.2 percent compared to the Q2 of 2023. When excluding the $1,300,000 of restructuring charges in the Q2 of 2023, expenses were up $239,000 or 0.5 percent year over year.

Speaker 2

This reflects the benefit of the various expense reduction strategies we deployed during 2023 and demonstrates our ongoing commitment to prudent expense management. Lastly, during the Q2, we repurchased approximately 191,000 shares of stock at an average all in cost of $21.17 while growing tangible book value per share by $0.47 or 2.1%. During the 1st 6 months of 2024, we repurchased approximately 506,000 shares at an average all in cost of $20.74 This represents 1.7 percent of the shares that were outstanding as of December 31, 2023. As of June 30, there were approximately 696,000 shares available for repurchase under our share repurchase plan, and we plan to remain active with regards to buybacks. I believe the remainder of the earnings release was straightforward, and I would now like to provide an update to our 2024 guidance.

Speaker 2

First, our previous loan growth guidance of 4% to 5% remains unchanged and we expect net interest income to contract 3% to 5% for the full year of 2024 compared to 2023. This assumes that NIM has bottomed out in the second quarter and will expand during the second half of the year. 2nd, our provision for credit loss guidance for the year is being reduced from $11,000,000 to $13,000,000 to $8,000,000 to $10,000,000 However, the provision will continue to be event driven, including loan growth, changes in economic related assumptions and credit performance of the portfolio, including specific credits. 3rd, our non interest income growth guidance for the year is being increased from 4% to 6% to 7% to 9% when excluding the $3,400,000 pre tax gain on the sale of MSRs in the Q1. Including the gain on sale of MSRs, non interest income growth guidance for the year is 11% to 13%.

Speaker 2

As a reminder, this is off the 2023 base of 76,800,000 dollars 4th, in 2023, our non interested expenses totaled $195,800,000 when excluding the $1,500,000 of restructuring charges. For 2024, we expect growth of 2% to 4% off the base of 195,800,000 dollars 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. The aggregate impact of these guidance updates when compared to our most recent guidance is accretive to EPS and relatively neutral to TPNR. While the revenue side of the equation is inherently being pressured, we have and will continue to strive to mitigate the impact on our bottom line by way of prudent expense management. That concludes my prepared remarks.

Speaker 2

We'll be happy to answer any questions. Carly, would you please begin the question and answer session?

Operator

Thank you very much. Our first question comes from Frank Schiardo of ABC. Frank, your line is now open.

Speaker 3

Good morning. Just in terms of the fee income guide, seems to me like it calls for total fees to kind of decline slightly from 2nd quarter level. So is that right? And kind of what is the driver of that?

Speaker 2

If you look at an average, it's relatively in line with the Q2. The Q1 was elevated when you think about the insurance contingent income and things like that, because that come through. But we look for it to be relatively stable in comparison to the 2nd quarter as you look at the 3rd Q4.

Speaker 3

Okay. And then just wondering if you could help a little bit just your thoughts on I know there's some seasonality there and otherwise had strong growth in core deposits. But what are your expectations for deposit growth in the back half of the year? And maybe if you could just talk about specifics driving that?

Speaker 2

Sure. We do have the seasonal public funds build, which occurs in the Q3. As we said, we saw growth in core deposits in the second quarter. We would look for that to continue in addition to the public funds growth in the Q3. That will be a couple of $100,000,000 on the public fund side and then you start to see that wind down in the Q4.

Speaker 2

Really what we're looking to do is continue to and we've done so far this year matching loan growth or exceeding loan growth with deposits and that will continue to be our goal and over time ratcheting down the loan to deposit ratio.

Operator

Okay.

Speaker 3

And then just lastly, you mentioned buybacks, sounds like you still have some appetite there. Obviously, bank stocks have moved a bit. So just wondering if you could provide any sort of guardrails around your thoughts for repurchase activity. Is the idea from here that you want to kind of hold capital level flattish and anything moving capital levels higher you maybe could be used in capital return. Just any thoughts around guardrails for how active you might be in the back half of the year?

Speaker 1

Yes, Frank, this is Jeff. Exactly what you said, we aren't looking to grow capital, and given loan pipelines are still solid right now. So when we forecast out, we do believe that we'll still be ability to generate some excess capital. We're not since we're not looking to grow capital levels, we would look to deploy that into the buyback area.

Operator

Thank you very much. Our next question comes from Emily Lee of KBW. Emily, your line is now open.

Speaker 4

This is Emily Lee. I'm stepping in for Tim Switzer today. To start off, I just wanted to ask about your loan growth pipeline and what it's looking like and how you expect to fund it? Also, what markets and loan categories are you seeing the most or least demand?

Speaker 5

Yes. So first, our pipelines continue to have they've expanded like they did from Q1 to Q2. We would anticipate the Q3 to be somewhat similar in terms of net loan growth than what we saw in Q2. In terms of how we're going to fund it, as Brian just referenced, we will see a seasonal increase in our public funds. So we do expect our deposits to grow in the 3rd and into the early part of Q4.

Speaker 5

And then in terms of types of loans, it's primarily C and I, a little CRE here or there, but our emphasis is on the C and I side, and that's where we see the most growth as we go forward.

Speaker 4

Great. Thank you. And if I could ask one more, how is competition trending in your markets for loans and deposits? And are there any certain growth opportunities that have become available from others pulling back?

Speaker 5

So the competition is still there, especially for strong credits, which is what we're all searching for. I would tell you that some of our competitors earlier on the Q2 anticipated or would appear that they anticipated the Fed to move with rate decreases at a little bit faster pace because they were a little bit sharper with the pencil with regard to pricing than we were. But that seems to have stabilized a little bit as well. Deposit pricing deposits in totality are just very competitive at this point in time. We're all trying to manage our balance sheets and make sure that we have ample liquidity.

Speaker 5

So I would say not that loans aren't competitive, they are, but deposits are even more competitive than loans at this point in time.

Operator

Our next question comes from David Marotnik of Stephens.

Speaker 6

This is David Maropnik from MAPFREASE.

Speaker 1

Good morning, David. Good morning, David.

Speaker 6

I was hoping we could just stick on deposits. You guys kind of mentioned that the mix shift was starting to look a little more stable and you talked about it still being competitive in the market. So just curious if you could touch on kind of what your outlook is for the cost of deposits going forward, saw a bit more of an increase in the last quarter in the cost. And with that competition still there, do you think it's maybe going to tick up a couple of honest points here and there? Or is it still got room to go?

Speaker 2

This is Brian. I'll take that one. As it relates to cost of funds, yes, you'd expect that, especially with public funds bills occurring in the Q3, you'd expect that to pick up in the Q3 and into the Q4. But at similar rates to what we've seen to slightly slower is what we'd expect.

Speaker 6

Great. And you think you have that cost kind of picking up by year end and hopefully with rate cuts coming down after that?

Speaker 2

Correct.

Speaker 6

Got it. Great. And switching to the loan side, I was just curious if you can give us an update for what percent of your loan book is purely floating rate as in will reprice sub 3 months?

Speaker 2

That's purely floating is right in the 32% range. When you take the $250,000,000 hedge that we have on the book that comes down effectively to 28% of the book is purely floating.

Speaker 6

Going. Great. And then do you is it safe to assume that probably the yield on that is around spread on it is around 200, 2 50 basis points attached to sulfur prime?

Speaker 2

Yes, just a little bit north of there.

Speaker 6

Great. And sticking there, do you by chance have the yield on the fixed rate book then? I assume it's probably somewhere in the high 4s or the 5?

Speaker 2

Yes, it's right in that 4.85 to 4.90 range.

Operator

Thank you very much. We currently have no further questions. So I would like to hand back to Jeff Switzer for any closing remarks.

Speaker 1

Thank you, Carly, and thank you everyone for participating today. We appreciate your interest in Univest and taking the time out with us today. And we look forward to talking to everybody at the end of the Q3 and enjoy the rest of your summer.

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