Univest Financial Corporation Reports Second Quarter Results

Univest Financial Corporation (“Univest” or the “Corporation”) (NASDAQ: UVSP), parent company of Univest Bank and Trust Co. (the “Bank”) and its insurance, investments and equipment financing subsidiaries, announced net income for the quarter ended June 30, 2023 was $16.8 million, or $0.57 diluted earnings per share, compared to net income of $13.2 million, or $0.45 diluted earnings per share, for the quarter ended June 30, 2022.

One-Time Items

The financial results for the quarter included a $1.3 million ($1.1 million after-tax), or $0.04 diluted earnings per share, restructuring charge associated with the Corporation’s financial service center optimization and expense management strategies deployed in response to macroeconomic headwinds. These strategies will result in a net reduction of three locations and a headcount rationalization, primarily concentrated within certain commercial real estate and residential mortgage lending teams. Estimated annualized cost savings from these initiatives is approximately $5.4 million. The financial results for the quarter also included a $250 thousand ($198 thousand after-tax) loss associated with the planned sale of a $19.7 million interest in a shared national credit.

Loans

Gross loans and leases increased $222.4 million, or 3.6% (14.4% annualized), from March 31, 2023 and $339.0 million, or 5.5% (11.0% annualized), from December 31, 2022. The increase in both periods was primarily due to increases in commercial real estate, construction, residential mortgage loans, and lease financings.

Deposits and Liquidity

Total deposits increased $152.7 million, or 2.6% (10.5% annualized), from March 31, 2023, primarily due to increases in brokered deposits partially offset by decreases in commercial and consumer deposits and public funds. Total deposits increased $73.9 million, or 1.2% (2.4% annualized), from December 31, 2022, primarily due to increases in public funds and brokered deposits partially offset by decreases in commercial and consumer deposits. Noninterest-bearing deposits represented 26.4% of total deposits at June 30, 2023, down from 30.8% at March 31, 2023. At June 30, 2023, unprotected deposits, which excludes insured accounts, internal accounts, and collateralized trust accounts, represented 23.3% of total deposits, down from 27.2% at March 31, 2023.

The Corporation and its subsidiaries had committed borrowing capacity of $3.2 billion at June 30, 2023, of which $2.0 billion was available. The Corporation and its subsidiaries also maintained uncommitted funding sources from correspondent banks of $410.0 million at June 30, 2023, of which $285.0 million was unused. Future availability under these uncommitted funding sources is subject to the prerogatives of the granting banks and may be withdrawn at will.

Net Interest Income and Margin

Net interest income of $54.3 million for the three months ended June 30, 2023 decreased   $5.0 million, or 8.4%, from the three months ended March 31, 2023, and increased $2.9 million, or 5.6%, from the three months ended June 30, 2022. The decrease in net interest income for the three months ended June 30, 2023 compared to the prior quarter was due to an increase in cost of funds, including long-term borrowings as well as the continued increase in deposit cost of funds, both of which outpaced the impact of higher asset yields and loan growth during the quarter. The increase in net interest income for the three months ended June 30, 2023 compared to the same period of 2022 was largely due to an increase in average loan balances and asset yields, offset by increases in the average balance of interest bearing liabilities and the cost of funds.

Net interest margin, on a tax-equivalent basis, was 3.14% for the second quarter of 2023, compared to 3.58% for the first quarter of 2023 and 3.19% for the second quarter of 2022. Excess liquidity reduced net interest margin by approximately 23 basis points for the quarter ended June 30, 2022.

Noninterest Income

Noninterest income for the quarter ended June 30, 2023 was $19.8 million, an increase of $835 thousand, or 4.4%, compared to the second quarter of 2022.

Insurance commission and fee income increased $479 thousand, or 10.3%, for the quarter ended June 30, 2023, primarily due to an increase in premiums for commercial lines. Other income increased $481 thousand, or 64.9%, for the quarter ended June 30, 2023, primarily due to $292 thousand of other real estate owned (“OREO”) income related to a commercial real estate loan transferred to OREO during the second quarter of 2022 and an increase of $232 thousand in fees on risk participation agreements for interest rate swaps. These increases were offset by a loss of $250 thousand on the planned sale of an interest in a shared national credit, as previously discussed.

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Noninterest Expense

Noninterest expense for the quarter ended June 30, 2023 was $49.8 million, an increase of $2.4 million, or 5.1%, compared to the second quarter of 2022. Excluding restructuring charges, expenses increased $1.1 million, or 2.3%.

Salaries, benefits and commissions increased $742 thousand, or 2.5%, for the quarter ended June 30, 2023. This increase reflects our expansion into Maryland and Western Pennsylvania and annual merit increases offset by a reduction in incentive compensation. Data processing expenses increased $429 thousand, or 11.6%, for the quarter ended June 30, 2023, primarily due to our investments in technology in recent years and general price increases incurred in the second half of 2022. Restructuring charges increased $1.3 million, as previously discussed. Other expense increased $757 thousand, or 11.8%, for the quarter ended June 30, 2023, primarily due to increases in retirement plan costs of $410 thousand, which is driven by the current interest rate environment. Professional fees decreased $1.2 million, or 41.3%, for the quarter ended June 30, 2023, primarily due to consultant fees incurred in the second quarter of 2022 related to our digital transformation initiative.

Tax Provision

The effective income tax rate was 19.8% for the quarters ended June 30, 2023 and 2022. The effective tax rates for the three months ended June 30, 2023 and 2022 reflected the benefits of tax-exempt income from investments in municipal securities and loans and leases.

Asset Quality and Provision for Credit Losses

Nonperforming assets were $34.5 million at June 30, 2023, compared to $32.4 million at March 31, 2023 and $34.7 million at June 30, 2022. During the quarter, a $5.8 million construction loan was placed on nonaccrual status and a $2.5 million nonaccrual commercial loan was paid off. Based on the value of the underlying collateral, an individual reserve was not recorded for the $5.8 million construction loan as of June 30, 2023.

Net loan and lease charge-offs were $512 thousand for the three months ended June 30, 2023 compared to $2.8 million and $1.7 million for the three months ended March 31, 2023 and June 30, 2022, respectively.

The provision for credit losses was $3.4 million for the three months ended June 30, 2023 compared to $3.4 million and $6.7 million for the three months ended March 31, 2023 and June 30, 2022, respectively. The allowance for credit losses on loans and leases as a percentage of loans and leases held for investment was 1.28% at June 30, 2023 and March 31, 2023, and 1.27% at June 30, 2022.

Dividend

On July 26, 2023, Univest declared a quarterly cash dividend of $0.21 per share to be paid on August 23, 2023 to shareholders of record as of August 9, 2023.

Conference Call

Univest will host a conference call to discuss second quarter 2023 results on Thursday, July 27, 2023 at 9:00 a.m. EST. Participants may preregister at https://conferencingportals.com/event/QPDnglhR. The general public can access the call by dialing 1-888-330-2398; using Conference ID 38917. A replay of the conference call will be available through August 26, 2023 by dialing 1-800-700-2030; using Conference ID 38917.