Univest Financial Corporation

Good morning and thank you for attending today's Univest Financial Corporation to hold second quarter 2022 earnings call. My name is Austin and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Jeff Schweitzer with Univest. Jeff, you may proceed.

Thank you, Austin, and good morning, and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Kime, our Chief Operating Officer and President of Univest Bank & 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 $13.2 million during the second quarter, or 45 cents per share. Our net interest income increased 10.3% from the first quarter of the year as we benefited from rising interest rates due to our asset sensitivity. Additionally, we continued to have very strong loan growth as loans grew $265.9 million, or 19.6% annualized, excluding PPP loans during the quarter. This strong loan growth resulted in an increased provision for loan and lease losses under CECL during the quarter, which Brian will go into more detail on in his comments. We are happy with our results for the quarter, and while there is volatility in the provision for loan and lease losses due to CECL as a result of our strong loan growth, our pre-tax pre-provision income continues to be solid and increased 6.4% from the first quarter. Additionally, while mortgage banking and wealth revenues have been negatively impacted by increasing rates, and decreasing margins for mortgage banking, along with the decline in financial markets impacting assets under management supervision for wealth management, the growth engine we have established across all of our lines of businesses continues to set us up for future and continued growth. Before I pass it over to Brian, I would like to thank the entire Univest family for the great work they do every day and for their continued 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. We are very pleased with our continued ability to generate strong loan growth during this rising rate environment. During the quarter, as Jeff said, loans increased $265.9 million, or 19.6% annualized, excluding PPP loans. For the first six months of the year, loans have increased $378.2 million, or 14.4% annualized. I would now like to touch on four items from the earnings release. First, reported margin of 3.19% increased 30 basis points compared to the first quarter. Reported NIM was negatively impacted by 23 basis points of excess liquidity, which averaged $434 million for the quarter compared to $693 million in the first quarter. However, during the quarter, our excess liquidity diminished, and we ended the quarter in a $93.6 million borrowing position. This was primarily driven by our strong loan growth seasonal public fund declines, and a large outflow in the second half of June for one commercial customer. During the quarter, PPP loans increased NIM by one basis point and contributed $154,000 to net interest income. Score margins, which excludes the impacts of excess liquidity and PPP, was 3.41%, an increase of 27 basis points when compared to the first quarter. Net interest income increased $4.8 million, or 10.3%, compared to last quarter. On May 4th, the company entered into a four-year $250 million interest rate swap, under which the bank receives a fixed rate of 5.99% and pays a variable rate equal to prime. The notional amount of $250 million equates to approximately 13% of our variable loans. We view this as an opportunity to lock in a portion of the benefit implied by the forward curve. Second, during the quarter, we recorded a provision for credit losses of $6.7 million. This was primarily driven by a $5.5 million provision resulting from our strong loan growth during the quarter and a provision totaling $1.8 million associated with two non-accrual loans. Our coverage ratio, excluding PPP loans, was 1.27% on June 30th, which was consistent with March 31st. During the quarter, we experienced net charge-offs of 1.7 million or 12 basis points annualized. This was primarily driven by a charge-off related to one non-accrual commercial loan. For the first six months of the year, we had net charge-offs of 1.8 million or seven basis points annualized. Despite the event-driven provision and charge-off related to non-accrual loans, we are not seeing signs of pervasive credit quality deterioration in the portfolio. Third, Non-insured income decreased $1.2 million, or 6.1%, compared to the second quarter of 2021, which was driven by a $2.1 million decrease in net gains on mortgage banking and a $915,000 decrease in BOLE income, primarily due to an $893,000 death benefit claim in the second quarter of last year. Offsetting these decreases were increases in our insurance and investment management lines of business, and our other service fee income streams. Fourth, non-interest expense increased $6.1 million or 14.7% compared to the second quarter of 2021. This includes $1.4 million related to the digital transformation project, $511,000 resulting from the inclusion of the Paul I. Schaefer Insurance Agency, which was acquired on December 1st of last year, $322,000 of guarantees paid to recently hired mortgage producers, and $291,000 related to our expansion into Western PA and Maryland. Excluding these items, non-interest expense increased $3.6 million, or 8.7%, compared to the second quarter of 2021. I believe the remainder of the earnings release was straightforward, and I would now like to provide an update to our 2022 guidance. First, as a reminder, during 2021, net interest income totaled $173.4 million when excluding PPP income of $15 million. On last quarter's call, I had guided the loan growth of 9% to 10% for 2022. Based on our strong growth during the quarter, we are increasing this guidance to 10% to 11%. We expect this to result in net interest income growth of approximately 21% to 23%, off the base of $173.4 million in 2021. This includes the impact of yesterday's 75 basis point rate increase and an assumed increase of 50 basis points in September. Second, our provision for credit losses will continue to be driven by loan growth, changes in economic related assumptions, and the credit performance of the portfolio, including that of specific credits. Third, Excluding $1.1 million of OLE death benefits, 2021's non-interest income totaled $82.1 million. Last quarter, I guided that non-interest income would be flat to slightly down in 2022. We expect additional pressure on non-interest income due to the reduced saleable volume in our mortgage banking line of business and equity market volatility impacting our wealth management AUM. As a result, we expect non-interest income for the full year of 2022 to be down 5 to 8% off the base of 82.1 million. Fourth, our non-interest expense growth guidance of 10 to 11% off the base, the 2021 base of 167.4 million remains unchanged. This includes our investments in the Maryland and Western PA expansion markets and our digital transformation. Excluding these investments, expenses are expected to be up approximately 7% for the year. Lastly, as it relates to income taxes, based on our increased pre-tax earnings from the guidance updates, we expect our effective tax rate to be approximately 20% for the full year of 2022. The cumulative impact of the above guidance for 2022 results in a core pre-tax pre-provision increase of 15 to 17% compared to 2021. We often highlight the strength of our diversified business model with approximately 29% of our year-to-date revenue being non-interest income. This diversification served us very well during the pandemic and during the last declining rate cycle. While certain fee income lines of business are now under pressure, it is more than offset by the benefit we are seeing in net interest income from our asset sensitivity. This concludes my prepared remarks. We will be happy to answer any questions. Austin, would you please begin the question and answer session?