Univest Financial Corporation

Good day and welcome to the Unibest Financial Corporation third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded I would now like to turn the conference over to Jeff Schweitzer, President and CEO of Univest Financial Corporation. Please go ahead.

Thank you, Grant. And good morning and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Kime, President of Univest Bank and Trust, and Brian Richardson, our Chief Financial Officer. Before we begin, I would like to start by saying I hope everyone listening is staying safe and you and your families are healthy. I also need 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 can be found on our website at univest.net under the Investor Relations tab. We reported net income of $18.1 million during the third quarter, or 62 cents per share. As our local economy reopened during the end of the second quarter and into the third quarter, we have seen more activity and opportunities to grow our lines of business. We experienced strong loan and deposit growth during the quarter as loans increased $257.4 million and deposits increased $342.3 million. Our mortgage banking unit continues to set internal records with net gain on mortgage banking activities up $4.2 million, or 260%, compared to the same quarter in the prior year. Additionally, as detailed in our release, we continue to see improvement in our modified loans as the economy has reopened. with the percentage of modified loans as a result of COVID-19 decreasing to $191 million, or 4.1% of our loan portfolio. We continue to be pleased with the performance of our core diversified business model, as our pre-tax pre-provision income during the quarter increased $4.2 million, or 18.1%, compared to the third quarter of the prior year, with our pre-tax pre-provision return on average assets for the quarter being 1.73%. Additionally, on October 19th, we announced the consolidation or relocation of eight financial service centers, or 20% of our centers, as we continue to enhance our digital offerings, focus on efficiency, and adapt our business to changing customer preferences. Before I throw it over to Brian, I just want to thank the members of the Univest family. I continue to be very proud to be a part of this team. They have adapted to a new working environment while continuing to serve our customers, our communities, and each other while growing the business and moving the corporation forward. I'll now turn it over to Brian for further discussion on our results. Brian?

Thank you, Jeff, and I would also like to thank everyone for joining us today. As Jeff mentioned, we reported earnings of 62 cents per share for the quarter with a return on average assets of 1.15 percent, return on tangible common equity of 14.82 percent, and an efficiency ratio of 58 percent. I would now like to touch on four specific items related to the earnings release. First, our provision for credit losses was $3.9 million for the quarter, which was primarily driven by the $257.4 million increase in loans. During the third quarter, we saw stabilization in the economic assumptions used within our CECL model. As of September 30th, our allowance for credit losses was 1.95% of total loans and leases when excluding PPP loans. This represented an increase of one basis point compared to June 30th. Second, as expected, we experienced net interest margin compression during the third quarter. Reported NIM of 3.02% decreased 16 basis points when compared to the second quarter. Reported NIM was negatively impacted by 18 basis points of excess liquidity, which averaged $329 million for the quarter, and 10 basis points due to low-yielding PPP loans on the balance sheet. Core margin excluding excess liquidity and the PPP impact was 3.30%, a decrease of 13 basis points when compared to the second quarter. As a reminder, third quarter NIM was reduced by approximately six basis points due to the $100 million sub-debt issuance on August 5th. Third, as it relates to non-interest income, our mortgage banking business continues to have a great year. For the quarter, our net gain on mortgage banking totaled $5.9 million, which represented a year-over-year increase of $4.2 million. For the nine months ended September 30, 2020, our net gain on mortgage banking totaled $12.1 million, an increase of $9.2 million when compared to the same period in 2019. Additionally, non-interest income included swap fees of $2.3 million for the third quarter which was an increase of $2.2 million compared to the third quarter of 2019. For the nine months ended September 30th, 2020, swap fees totaled $4.1 million, representing an increase of $3.4 million when compared to 2019. Fourth, non-interest expense was slightly elevated due to compensation costs associated with strong performance of the mortgage banking business. Variable compensation costs for this business totaled $830,000 for the third quarter, This is an increase of $535,000 versus the third quarter of 2019. When you normalize expenses for these variable compensation costs and the FDIC assessment credit, which was recognized in the third quarter of 2019, expenses are up 1.98% year over year. As Jeff mentioned, on October 19th, we announced a plan to close or relocate 20% of our financial centers. Pre-tax one-time costs associated with this plan are estimated to be $1.7 million which will primarily be recognized during the fourth quarter of 2020. The estimated pre-tax annualized savings are approximately $2.4 million. It is important to note the plan includes two phases. As such, the expected pre-tax savings for 2021 is approximately $1.8 million. In closing, Our strong performance during the third quarter highlights the value of our diversified business model. This diversification enabled us to produce strong results despite the inherent headwinds from COVID-19 and the current interest rate environment. That is it for my prepared remarks. We will be happy to answer any questions. Operator, would you please begin the question and answer session?