Univest Financial Corporation

Good morning and welcome to the Univest Financial Corporation second quarter 2021 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 telephone keypad. 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, Debbie, 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 & 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. 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 $20.9 million during the second quarter, or 71 cents per share. We are very pleased with our results for the quarter as we experienced strong loan growth of $187.9 million or 15.4% annualized during the quarter, resulting in total growth over the past 12 months of $621.6 million or 14% excluding PPP loans. Generating this level of growth during a pandemic demonstrates the strength of our team and the commitment we have made to our customers and communities. We also continue to see strong results in mortgage banking due to the investments we have made in production talent and process enhancements over the past two years. Additionally, we had strong investment advisory income, which has increased 18.7% in the first six months of the year compared to the same period in the prior year due to favorable market conditions and new relationships. In spite of concerns over the Delta variant, activity in our markets continues to be solid and improving as our local economies have opened up. Before I throw it over to Brian, I just want to thank the members of the Univest family. They continue to do a wonderful job serving our customers, our communities, and each other as we continue to work through the current environment and move Univest forward. 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. In addition to demonstrating our continued ability to grow loans, we continue to have strong performance in our core business. During the first six months of the year, we produced a pre-tax, pre-provision ROAA of 1.72%. I would like to touch on four items from the earnings release. First, reported margin of 3.15% was up three basis points compared to the first quarter. Reported NIM was negatively impacted by 10 basis points of excess liquidity, which averaged $175 million for the quarter. PPP loans increased NIM by 11 basis points and contributed $4.8 million to net interest income. Core margin, excluding excess liquidity and the PPP impact, was 3.14%, a decrease of 5 basis points when compared to the first quarter. Core margin, excluding excess liquidity and the PPP impact, is expected to expand slightly in the third quarter. This reflects quarterly savings of approximately $850,000 from the $75 million subordinated debt redemption at the end of the second quarter. As it relates to PPP, as of June 30th, 6.4 million of net deferred fees remained on the balance sheet, which represents approximately 35% of the initial deferred fee amount. Second, during the second quarter, we recorded a reversal of provision for credit losses of $59,000, which was driven by a $2.8 million benefit due to favorable changes in economic-related assumptions within our CISO model, primarily offset by reserves attributable to our 15.4% annualized loan growth during the quarter. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.41% at June 30th compared to 1.46% at March 31st. and 1.94% at June 30th, 2020. During the quarter, our COVID-related deferral activity reduced to 54.2 million or 1.1% of the portfolio. Net charge-offs for the quarter and the first half of the year were two basis points on an annualized basis. Third, non-interest income was up 2.2 million or 12.4% when compared to the second quarter of 2020. As Jeff mentioned, this growth was primarily fueled by our investment advisory line of business. Additionally, the second quarter included an $893,000 BOLI death benefit claim. Fourth, non-interest expense increased $5.3 million or 14.8% for the quarter and $6.1 million or 8.1% for the first half of the year when compared to 2020. These variances include were partially driven by relatively low expenses in the comparable periods in 2020 due to COVID-19 and the related impacts. Specifically, capitalized compensation related to our PPP loans was $1.2 million lower in the second quarter of 2021 and $664,000 lower for the first half of 2021. Additionally, variable compensation costs increased $1 million for the quarter and $1.7 million for the six months ended June 30, 2021, due to an overall increase in profitability and, more specifically, in our mortgage banking and wealth management lines of business. Professional fees increased $751,000 for the quarter and $1.2 million for the six months ended June 30, 2021. primarily attributable to increased consulting fees in support of our DE&I and training initiatives, as well as our treasury management product enhancements. During the first six months of 2021, we spent $781,000 on these initiatives, and we expect to incur approximately $650,000 of additional expenses in the second half of the year related to these initiatives. These expenses are not expected to reoccur in subsequent periods. I believe the remainder of the earnings release was straightforward, and I would now like to provide a few updates to our full year 2021 guidance. First, we had previously guided to loan growth of 7% to 8% excluding PPP. Based on our strong year-to-date growth, we are increasing this guidance to 10%, which we expect to result in net interest income growth of 2% to 4%, again, excluding PPP. Second, we had previously guided non-interest income contraction of 5 to 7 percent for the year. Based on the strong performance of our mortgage banking and investment advisory lines of business, as well as our recently hired SBA team, we are now expecting non-interest income growth of 1 to 2 percent for the year. Third, we had previously guided non-interest expense growth of 2 to 4 percent. Based on our continued investment in people and the previously discussed consulting initiatives and variable compensation costs, we are increasing our expense growth guidance to 4% to 6% for the year. It is important to note the net impact of these guidance updates is accretive to pre-tax, pre-provision income. That concludes my prepared remarks. We will be happy to answer any questions. Operator, would you please begin the question and answer session?