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. 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 taking our questions.

Good morning, Andrew.

So you mentioned improving economic conditions, and loan growth opportunities also seem to be pretty active. How do you think about the balance between loan growth and 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. We are tied to Moody's, so as Moody's forecasts improve, we would expect that to come through. That's what we experienced in the fourth quarter and again here in the first quarter, with a 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 us to operate around the 146% range, trending down slightly as conditions continue to improve. Conceptually, you can think about that initial implementation level of a 1.1% coverage as a longer-term target for where things would land.

Great, thanks. You had strong fee contribution as well in the first quarter. A couple of questions on that: 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. Any update on the growth pipelines in those businesses as well?

I'll take the first part of this, Andrew. On the mortgage side, our pipeline remains strong, but the mix is clearly shifting from refinances to more purchase-oriented business. And as Jeff alluded to in his opening comments, the biggest constraint on the purchase side in our area is a lack of inventory. We continue to hire loan officers and drive the business to be purchase-oriented, and we will do refinancings when they occur.

On the fee income side, you're correct. With respect to insurance, in the first quarter we receive contingent income, which is profit sharing from the carriers that we do business with; Brian alluded to around $1.1 million this quarter. That doesn't repeat in the following quarters during the year—it's a first-quarter dynamic. With respect to wealth, there aren't necessarily any first-quarter unusual items that would drive the increases we've seen; the real driver is what 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. 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. Overall, with the market conditions, we're seeing a lot of opportunities on the wealth 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. While they are starting to improve as things open up and people get vaccinated, that's been a 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. Lastly, capital is building nicely. Any update on capital deployment priorities, including share repurchases and bank and nonbank M&A?

With respect to capital, as we've mentioned in the past, our first goal is to repay subordinated debt that will be losing its capital treatment; we have about $75 million of that, which will be repaid at the end of June. With respect to share buybacks, that's not something we're entertaining right now. Once we pay back the subordinated debt, everything will be on the table. We continue to see solid loan growth opportunities and organic growth as we expand our markets, and we want to keep some dry powder. We've challenged our heads of wealth and insurance to build more robust pipelines for M&A, so we want to retain capacity for potential M&A on the wealth and insurance side. Combined with what we see as solid loan growth for the rest of the year as the economy continues to operate fairly well in our markets, 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 vantage 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 firmer ground underneath us?

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

Okay. And then on the margin, stripping away PPP and excess liquidity, where do you think we are in the process of finding a bottom on margin? Have we hit an inflection point where core net interest income can move from here?

I think we're certainly starting to hit that trough. There could be slight pressure going forward. You'll see noise on a reported basis due to PPP and excess liquidity, but on a normalized basis, we are hitting that trough at this point in time.

What's the impact? Could you remind us of the terms of the subordinated debt you'll repay and what the impact on NIM could be from that?

The interest expense savings will be roughly $3 million annualized. A piece of that is fixed today that will be flipping—around the 5% level—would be flipping to variable, and our other piece is just below 4%. So you're right around $3 million of annualized interest expense savings.

Okay, great. And there's continued disruption in Eastern Pennsylvania. Historically, you've done well on hiring, particularly on the commercial lending side. How does that pipeline look? And with recent deals and disruption in fee income verticals, is there hiring opportunity on the wealth and insurance front as well?

On the wealth and insurance front, the same challenge persists: non-competes and non-solicits. Just because a firm is acquired doesn't mean those go away, so hiring on the wealth and insurance side will still be a challenge. It's not like the commercial bank where you can lift out a team or take talent away when someone is acquired; non-competes and non-solicits generally carry over. That said, disruption is a good thing for us because it provides customer-side opportunities—clients may be open to conversations when their providers change.

On the banking side, we've added people in the first quarter on the commercial side and we plan to continue to grow in our expanded markets in Central Pennsylvania and the capital region. On the mortgage side, we have a very active pipeline of recruits. Our benefit and value proposition to them is that we can get deals closed for them, so we continue to be active in recruiting.

Got it. Could you give a sense for what you think core ex-PPP loan growth could look like for the year? I think you had previously guided to mid- to high-single-digit growth; any updates?

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 hiring lenders. I would imagine there's a lot of competition for good commercial lenders in the footprint. Is it tougher to bring over teams or individuals, and how does that impact your expectations for loan growth? Do you anticipate hiring a certain number of individuals per quarter? What are your thoughts on loan growth if you're able to continue hiring people or if that doesn't come to fruition through the rest of the year?

Competition for good quality people is always strong. The bigger impact for us is that because we're successful, others try to recruit our people. We are strongly defending our position and making sure we keep our good folks, because that is really the secret sauce to our loan growth success—the quality of our people. We continue to pursue new hires, and I believe we can deliver the 7% to 8% guidance Brian referenced with our existing staff. There is always a ramp-up period when we add people, and I don't like to put a specific number on hires; anytime we can find a quality person who will add strength to our teams, we'll add them. On the broader scale, we can deliver the 7% to 8% with the team we have today.

Okay, great. Thank you.

We have no further questions in the queue. 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 thoughtful questions. We look forward to what appears to be a strong 2021 as the economy continues to open up and activity looks robust in our markets. We plan to participate in that and look forward to speaking with everyone 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.