Univest Financial Corporation

Good morning and welcome to the Univest Financial Corporation third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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. Please go ahead.

Thank you, Danielle. 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. 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 third quarter, or 71 cents per share. We were very pleased with our results for the quarter as we continued to experience strong loan production. Even with payoffs due to the success of our customers, we experienced solid net loan growth of $92 million, or 7.3% annualized during the quarter, resulting in total growth over the past 12 months of $456 million, or 9.7% excluding PPP loans. During the quarter, we recognized gains on the sale of SBA loans of $920,000 as the investments we made earlier in the year in our new SBA team have begun paying off. Additionally, we continue to have strong investment advisory income, which increased 19.8% during the quarter and 19.1% in the first nine months of the year, compared to the same period in the prior year due to favorable market conditions and new relationships. Before I throw it over to Brian, I once again 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 adapt and work through the current environment and move Univest forward. Brian?

Thank you, Jeff, and I would also like to thank everyone for joining us today. During the first nine months of the year, we produced a pre-tax, pre-provision ROAA of 1.66%. This is a direct reflection of the strength of our diversified business model and continued ability to grow loans. I would like to touch on three items from the earnings release. First, reported margin of 3.11% was down four basis points compared to the second quarter. Reported NIM was negatively impacted by 27 basis points of excess liquidity which averaged $490 million for the quarter compared to $175 million in the second quarter. The increase in excess liquidity was driven by a $490 million seasonal increase in public funds and the forgiveness of PPP loans totaling $167 million. During the third quarter, PPP loans increased NIM by 20 basis points and contributed $4.2 million to net interest income. Core margin, which excludes the impact of excess liquidity and PPP, was 3.18%, an increase of four basis points when compared to the second quarter. Core margin is expected to be relatively flat in the fourth quarter. As it relates to PPP, as of September 30th, 2.4 million of net deferred fees remained on the balance sheet, which represents approximately 13% of the initial deferred fee amount. Second, During the third quarter, we recorded a reversal of provision for credit losses of $182,000, which was driven by a $2.9 million benefit due to favorable changes in economic-related assumptions within our CECL model, offset by reserves on loans, securities, and unfunded commitments. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.36% at September 30th compared to 1.41% at June 30th and 1.95% at September 30, 2020. During the quarter, our COVID-related deferral activity declined to 18.1 million, or 0.3% of the portfolio. We experienced net recoveries during the quarter of 75,000, and net charge-offs for the first nine months of the year totaled 456,000, or one basis point on an annualized basis. Third, non-interest expense increased 4.7 million or 12.3% for the quarter and 10.8 million or 9.5% for the first nine months of the year when compared to 2020. In general, these variances were partially driven by relatively low expenses in the comparable periods in 2020 due to COVID-19 and the related impacts. More specifically, salaries, benefits, and commissions increased 2.6 million or 10.7% for the quarter and $7.2 million, or 10.4%, for the nine months ended September 30, 2021. We continue to be aggressive in hiring talented revenue producers when presented with the opportunity. We have also experienced cost increases due to merit increases, the impact of wage inflation, and certain other variable costs. Variable incentive compensation costs increased $829,000 for the quarter, and $2.6 million for the nine months ended September 30th, 2021, due to an overall increase in consolidated profitability and increased performance in certain lines of business like wealth management. Another example is medical costs, which increased $489,000 for the quarter and $629,000 for the nine months ended September 30th, 2021, as elective and preventative claims returned to pre-pandemic levels. Professional fees increased $853,000 for the quarter and $2 million for the nine months ended September 30, 2021, primarily attributable to increased consulting fees in support of our DE&I and training initiatives, as well as our treasury management product and process enhancements. During the first nine months of 2021, we have spent $1.4 million on these initiatives, and we expect to incur approximately $70,000 of additional expense related to these in the fourth quarter of 2021, but are not anticipating these costs to continue in 2022. 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, I have previously guided to net interest income growth of 2% to 4% excluding PPP. We expect to finish the year on the higher end of that range. Second, last quarter I had previous guided non-interest income growth of 1% to 2% for the year. Based on the strong performance of our mortgage banking and wealth management lines of business, as well as the contributions from our recently hired SBA team, we are now expecting non-interest income growth of 4% to 5% for the year. Third, last quarter I had guided non-interest expense growth of 4% to 6%. Based on the continued investment in people, and the previously discussed increase in variable cost and wage inflation, we are increasing our expense growth guidance to 6% to 8% 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?