Univest Financial Corporation

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 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 $20.3 million during the first quarter, or 68 cents per share. During the quarter, we continued to experience solid loan growth as loans grew $112.2 million, or 8.5% annualized, excluding PPP loans. In addition to our solid results in the quarter, we are excited to announce our expansion into two new markets with the hiring of market presidents for Western Pennsylvania and Maryland as we continue our organic growth strategy. We are excited by the additions of Chris and Matt to the Univest family. While they are experienced commercial bankers, in addition to building their teams, they will be working with all our lines of business in growing and serving these new markets. Additionally, during the quarter, we began the development of a comprehensive digital platform, building off the investments we have been making in technology over the past few years. This digital platform will allow us to be more efficient and less reliant on physical locations in the future as we expand and build out this initiative. While this will be a significant investment, we are confident it will position us very well for the future as customer expectations and preferences continue to evolve. Finally, due to our strong performance and strong capital position, the Board of Directors has declared a 5% increase in our quarterly cash dividend and the repurchase of shares targeted at $150,000 per quarter. While we have been utilizing our internally generated capital to fund growth over the past few years, We are excited that our strong performance, along with our strong capital position, is enabling us to increase the value we return to our shareholders. As detailed in our release and my comments, there's a lot to be excited about at Univest as we continue to grow. This could not be possible without the hard work of the over 900 members of the Univest family. I'd like to thank them for all their efforts serving our customers, communities, and each other. I will 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. As Jeff said, we are pleased with our performance during the quarter. While we incurred incremental expenses totaling $1.6 million associated with our digital transformation, onboarding of new mortgage lenders, and costs associated with a customer who was defrauded, our business performed well during the quarter. I would like to touch on four items from the earnings release. First, reported margin of 2.89%. was down three basis points compared to the fourth quarter. Reported NIM was negatively impacted by 33 basis points of excess liquidity, which averaged $693 million for the quarter compared to $874 million in the fourth quarter. During the first quarter, PPP loans increased NIM by three basis points and contributed $591,000 to net interest income. Core margin, which excludes the impact of excess liquidity and PPP, was 3.1%. 9%, a decrease of two basis points when compared to the fourth quarter. This modest decrease is attributable to incremental investment purchases during the fourth quarter of 2021 and the first quarter of 2022, totaling $135 million at a weighted average yield of 1.9%. Assuming the Federal Reserve raises rates by 50 basis points in May, we expect core NIM to expand by approximately 12 to 15 basis points in the second quarter. Second, during the quarter, we recorded a reversal of provision for credit losses of $3.5 million. This was driven by a $5.7 million benefit from changes in economic-related assumptions, offset by provisioning for loan growth and specific reserves. The allowance for credit loss coverage ratio, excluding PPP loans, was 1.27% on March 31, compared to 1.36% at December 31 and September 30. During the quarter, we experienced net charge-offs of $76,000, and non-performing loans and leases decreased 7.6% from year-end. Third, non-interest income decreased $2.8 million, or 12%, compared to the first quarter of 2021, which was driven by a $4 million decrease in net gains on mortgage banking activities, offset by increases in our investment management and insurance lines of business and our other service fee income streams. Fourth, non-interest expense increased $5.9 million, or 14.9%, compared to the first quarter of 2021. This includes $779,000 related to our digital transformation project, $488,000 resulting from the inclusion of the Paul I. Schaefer Insurance Agency, which was acquired on December 1st of last year, $470,000 of guarantees paid to recently hired mortgage producers, and $330,000 of expense related to the customer who was defrauded. Excluding these items, expenses increased $3.8 million, or 9.6%, compared to the first quarter of 2021. I believe the remainder of the earnings release was straightforward, and I would now like to provide updates to our 2022 guidance. First, as a reminder, during 2021, net interest income totaled $173.4 million when excluding PPP income of $15 million. We had originally guided loan growth of approximately 8% to 9% in 2022, excluding PPP loans, and net interest income growth of 8 to 10%. Our loan growth guidance is being increased to 9 to 10% to reflect the Western PA and Maryland expansion markets and the addition of the previously discussed mortgage producers. We expect this to result in net interest income growth of approximately 15 to 17% off the base of $173.4 million from 2021. This includes the impact of the 25 basis point increase in March and the anticipated 50 basis point increase in May. Each additional 25 basis point rate increase is expected to result in annualized net interest income of approximately $4 to $4.5 million for the first several increases. Second, 2021 non-interest income included $1.1 million of BOLI death benefits. Excluding these BOLI death benefits, non-interest income totaled $82.1 million for the year. We had previously expected non-interest income growth of approximately 1% to 3%. We now expect non-interest income for the full year of 2022 to be flat to slightly down. This is primarily driven by reduced margins and saleable volume in the mortgage line of business based on the current interest rates environment. Third, we reported non-interest expense of $167.4 million for 2021 and had previously guided to growth of approximately 6% to 8% for 2022. We expect to incur roughly $3.5 to $4 million of expense in 2022 in conjunction with our digital transformation initiative. Additionally, we expect to incur approximately $2 to $2.5 million of incremental expenses related to our investment in the Western PA and Maryland expansion markets during the year. Including these three investments, we expect 2022 expenses to increase 10% to 11% off the base of $167.4 million from 2021. As it relates to our Western PA and Maryland expansion markets, we expect these investments to be accretive to pre-provision earnings in approximately 24 months and fully earned back in three to three and a half years, again, on a pre-provision basis. We continue to prefer this method of entering new markets as compared with doing whole bank acquisitions, which inherently include more integration risk, intangible recognition, and tangible book value dilution. Lastly, as it relates to income taxes, Based on our increased pre-tax earnings from these guidance updates, we expect our effective tax rate to be on the higher end of the 19 to 20% range that was provided during last quarter's call. That concludes my prepared remarks. We will be happy to answer any questions. Bailey, would you please begin the question and answer session?

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from Frank Chiraldi from Piper Sandler. Frank, please go ahead. Your line is now open.