Good morning and welcome to the Univest Financial Corporation First Quarter 2021 Earnings Call. All participants will be in listen-only mode. . Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Schweitzer. Please go ahead, sir.

Thank you, Chris, and good morning and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Keim, 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.

Thank you, Jeff. And I would also like to thank everyone for joining us today. During the quarter, we displayed our continued ability to generate organic loan growth. In 2020, we achieved loan growth of 9.9%, excluding PPP loans, despite the inherent headwinds presented by the pandemic.

Our first question is from Andrew DeFranco of KBW. Please go ahead.

Hi, guys, good morning. This is Andrew. I'm stepping in for Mike today. Thanks for take our questions.

Good morning, Andrew.

So you guys mentioned the improving economic conditions, but loan growth opportunities also seem to be pretty active. So how do you guys think about the balance and the provision expense going forward and the overall reserve ratio level?

That's going to continue to be a function of economic conditions as we see those improving. And we do are tied to Moody's. So as Moody's forecast improve, we would see that come through. That's what we experienced in the fourth quarter and again here in the first quarter being at that 146% coverage ratio. If we think back to where our coverage was at the implementation of CECL, we were at a 110% coverage ratio. So I would expect kind of us to operate in that range of 146% where we are trending down slightly as things would continue to improve should they continue to improve. But I think you can conceptually think about that initial implementation level of a 1.1% coverage as a longer-term play for where things would land.

Great, thanks. And you guys had strong fee contribution as well in the first quarter. Just a couple of questions on that. Wondering if you had any updates on the mortgage pipeline and the dynamics in the market right now. And secondly, I think Q1 benefits seasonally on the insurance and wealth side. But any update on the growth pipelines in those businesses as well?

So I'll take the first part of this, Andrew. It's Mike Keim. On the mortgage side, our pipeline remains strong, but the mix clearly is changing from refi to more purchase oriented. And as Jeff alluded to in his opening comments, the biggest problem on the purchase side in our area is a lack of inventory. But we continue to hire loan officers when we continue to drive the business to be purchase-oriented and then live off or refis when we get them.

And on the fee income side, you're correct. With respect to insurance, the first quarter, we get contingent income, which is really profit sharing from the carriers that we do business with that Brian alluded as around $1.1 million this quarter. That doesn't repeat itself in the following quarters during the year. That's a first quarter dynamic. With respect to wealth, there isn't necessarily any first quarter unusual items that would drive the increases that we've seen. The real driver there is what's happened with the market. Our assets under management and supervision are up over $900 million from last year at this time when the market pulled back. So we've seen a lot of appreciation as a result of the market, which increased revenue, but also, I would say, on the wealth side, things have opened up a lot more. We started a private banking office where we're getting good traction working with our wealth group. And just overall, with the market conditions, we're seeing a lot of opportunities on the well side and the pipelines are solid. The insurance side, pipelines are a little lighter than they historically are. Predominantly with people working remotely, it's still a little harder to get appointments and the like with HR directors when it comes to employee benefits. So while they are starting to improve as things are opening up and people are getting vaccinated, that's been a little bit more of a lag compared to wealth, which is pretty much back to historical levels with respect to pipelines.

Great. Thank you for that. And lastly, capital is building nicely. Any update on capital deployment priorities, including share repurchases and bank and nonbank M&A?

So with respect to capital, as we've alluded to in the past, our first goal is to pay off our subordinated debt that will be losing its capital treatment and we have about $75 million of that, which will be happening in June, the end of June. With respect to share buybacks, that's not something we're necessarily entertaining right now. Once we pay back the subordinated debt, everything will be on the table. But we still continue to see solid loan growth opportunities and organic growth as we've been continuing to expand our markets. And we do want to keep some dry powder as we've challenged our heads of wealth and insurance to start to build more robust pipelines when it comes to M&A. So we do want to keep some dry powder for potential M&A on the wealth and insurance side. And combined with our - what we see as really solid loan growth for the rest of the year as the economy continues to operate in our markets fairly well. We want - we think we have adequate capital for all those opportunities.

Thank you so much, for taking my questions.

Thank you.

The next question is from Matthew Breese of Stephens, Inc. Please go ahead.

Hey, good morning. I think the cadence and extent of charge-offs over the last - now this quarter and over the last 12 months has certainly taken us all by surprise given where we were. From your current advantage and looking at the nonperforming assets on the books, do you feel like charge-offs this year will more closely resemble what we've seen over the last two years? Or could you give us some color on how you think charge-offs might play out now that we have a little bit more of a firmer ground underneath us?

Yes. I think for the foreseeable future, the kind of experience that we've had the last couple of quarters is what we expect to occur. Again, there is just the inherent uncertainty as we come out of the pandemic. And as long as everything continues to head in the right direction, I think holding charge-offs relatively flat to where that we've seen in the last couple of quarters would be a reasonable expectation.

Okay. And then just on the margin, stripping away PPP and liquidity. Just wanted to get a sense for where you think we are in the process of finding a bottom on the margin? And have we hit that inflection point where you think kind of core net interest income can go from here?

Yes. I think we're certainly starting to hit that trough. There could be slight pressure going forward. You're going to have noise like you said on a reported basis due to PPP and excess liquidity. But I think on a normalized basis, we're certainly hitting that trough at this point in time.

And what's the impact? Could you just remind us of the terms of the sub debt that you could repay and what the impact on the NIM could be from that?

Yes. So the interest expense savings will be roughly $3 million annualized. There is a piece of those that's fixed today that will be flipping either around the 5% level that will be flipping to - would be flipping to 4% once it goes variable and our other one is just below 4%. So when you look at that, you're right around $3 million of annualized interest expense savings.

Okay. Great. And the last question from me is there's continued to be a lot of disruption in Pennsylvania, Eastern Pennsylvania. Historically, you all have done a great job kind of on the hiring front, particularly in commercial lending - on the lending side. How does that pipeline look? And then the more recent deals, there's actually been some insurance verticals also - I'm sorry, fee income verticals also disrupted. Just curious if there's hiring opportunity on the wealth and insurance front as well.

Well, I'll kick off on the wealth and insurance front. Unfortunately, the same challenge that we always have in wealth and insurance is non-compete to non-solicits. And just because somebody gets acquired doesn't mean that those go away. So the hiring part of it will still be a challenge. It's not like in - with the commercial bank where you can lift out a team or take talent away from somebody when they're being acquired on the wealth insurance side. They still have the non-competes and non-solicits which carry over. With that said, obviously disruption is still always a good thing in our eyes for us because it does provide opportunity on the customer side of things where they're going to be changing in one way or the other, so maybe they might be open to a conversation.

And on the banking side, Matt, we're continuing to - we've added people in the first quarter on the commercial side of the equation. We'd look to continue to grow on our expanded markets in Central Pennsylvania, the capital region. And on the mortgage side of the equation, we had a very active pipeline of recruits, and our benefit and value prop to them as we can get deals closed for them. So we continue to be active in getting after it.

Got it. Okay. I'm sorry, just one more to sneak in. Could you just give us a sense for what you think core ex-PPP loan growth could look for the year? I think you had mentioned previously maybe like a mid to high single-digit growth, but just curious if there's any updates there.

Yes, Matt. We had previously guided to 7% to 8% excluding PPP for the year and we think that continues to hold true at this point in time.

Appreciated. That's all I had. Thank you.

. The next question is from Frank Schiraldi of Piper Sandler. Please go ahead.

Good morning. Most of my questions have been answered, just a follow-up on the question of hiring lender. I would imagine that there's a lot of competition or more, even more so than usual for good commercial lenders in the footprint. So just wondering if that's been the case, if it's been tougher to bring over teams, bring over individuals. And is that - how does that impact your expectations for the loan growth? Are your expectations such that you anticipate hiring another certain amount of individuals per quarter? Or what are your thoughts on loan growth if you're able to continue to hire people or if you - if that doesn't come to fruition, I guess, through the rest of the year?

Yes. So the first part of it, Frank, the competition for good quality people is always strong. And I would tell you the bigger impact on us is that because we're successful, people would like to come after and grab our folks. So we're strongly defending our position and making sure that we keep our good folks because that is really the secret sauce to our loan growth success is the quality of our folks. We continue to get after it. I feel that we can deliver that 7% to 8% that Brian referenced with our existing staff. Remember, there's always a ramp-up period as we add people anyway. But there is no magic number for who we're trying to recruit. I don't like to put a number on that. What I'd like to do is say, anytime that we can find a quality person that will add strength to our teams, then we'll add them. But on the broader scale, we can deliver the 7% to 8% with the team that we have today.

Okay, great. Thank you.

Thank you very much. So we have no further questions in the queue. And I'd like to hand the conference back to Mr. Schweitzer for any closing remarks.

Thank you, Chris, and thank you, everyone, for joining us this morning. We appreciate the attention and participation on our call and the questions. We look forward to what looks to be a strong 2021 as the economy continues to open up and activity looks pretty robust in our markets, and we look to definitely participate in that and look forward to talking to everybody again after we release earnings in the second quarter. Have a great day.

Thank you very much, sir. Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation and you may now disconnect.