Welcome to the Univest Corporation of Pennsylvania Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jeff Schweitzer, President and CEO of Univest Corporation of Pennsylvania. Please go ahead.

Thank you, Bianca and good morning and thank you to all of our listeners for joining us this morning. Joining me on the call today is Mike Keim, President of Univest Bank and Trust and Roger Deacon, our Chief Financial Officer. Before we begin, we 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 $5.2 million during the second quarter. While expenses were elevated during the quarter, these are predominantly related to investments being made in the business to drive future growth. During the quarter we incurred $1.2 million of after-tax acquisition costs related to our acquisition of Fox Chase which we closed on July 1. Additionally, we incurred $186,000 of after-tax charges and interest expense related to the bridge loan we entered into in connection with closing the acquisition which was repaid on July 1. And finally, we incurred $405,000 of after-tax charges related to our lift-out of 15 individuals in the Lancaster market which includes nine lenders, support staff and a retail team. We added in another four individuals in July, in anticipation of opening our first retail branch location in Lancaster in mid-August. Highlights during the quarter, in addition to our closing the acquisition of Fox Chase and the lift-out of the Lancaster team, was organic loan growth of $162 million or 7.4% during the quarter. This growth included only minimal growth of around $1 million related to the Lancaster lift-out, as the lift-out occurred toward the end of May. Additionally, we bolstered our capital levels in anticipation of future growth with the closing of our $45 million subordinated debt offering which also occurred on July 1. Our credit quality continues to improve as net charge-offs during the quarter were only $129,000. Finally, the integration with Fox Chase continues to move smoothly with systems conversion due to occur the weekend of September 9. In connection with the systems conversion, we will also be closing two Fox Chase locations in New Jersey and consolidate these locations into the existing Ocean City, New Jersey location. Now we would just like to open it up to questions that anybody on the call might have.

[Operator Instructions]. Our first question will come from the line of Michael Perito from KBW.

A few questions, maybe starting on the expenses. Jeff, appreciate the color. So can there were a few moving pieces there. So I mean it sounds like the core run rate to build off of was kind of in the high $27 million range. Am I interpreting that correctly?

Yes, Mike, it's Roger. Yes, that's exactly what I'm thinking is $27.8 million to $28 million.

Okay. And as you guys look, obviously there's been quite a few additions you guys have made over the past six months. How does the pipeline for that look, I guess, as we're trying to judge -- obviously, this is excluding Fox Chase, but just judge a core expense growth rate for you guys. Do you foresee a lot of those hires that you guys have targeted have taken place or is there still a pretty active pipeline that could push the expense growth up over the back half of the year?

I would say that on the lending side, a lot of that has taken place. There are still opportunities in the wealth management world that we see over the next six months where we can bring on additional sales talent. But I would say as far as the lending piece, that that has more or less played itself out, with maybe one or two additional adds over the next few months.

And then maybe switch it over to the growth; it was a pretty strong quarter. It sounds like the Lancaster office really hasn't even contributed that materially yet. As you guys kind of look forward, maybe not on a percentage basis because I know you guys will be quite a bit bigger now with Fox Chase on board. But as you look at the production you put on in the quarter, a little over $150 million and then you look at the pipeline that you guys have currently; what kind of production do you guys expect to do over the next year or so as you see it all today?

Mike, it's Mike Keim. We will speak to it from a percentage perspective. What we continue to sit and think about is the Fox Chase team plus what the Univest legacy team would have done is somewhere around the 8% loan growth going forward. And then Lancaster on top of that would get us somewhere in the 10% to 12% growth rate on a consistent basis.

And has the seasonality of the portfolio changed at all with all the -- with the value degree in Fox Chase and now this Lancaster office? Are there any ebbs and flows worth noting kind of on a quarterly basis from a seasonality perspective?

Well, historically, Mike, the first and the third quarter had been our weaker quarters. At this point, the third quarter continues to look -- it won't be like the second quarter, but it'll be in the ranges I just talked about. And it looks like based upon discussions with Roger and the team, the Fox Chase team had historically had a fairly decent third quarter. So overall, we think that we will blend across the board and we're obviously seeing the pickup in Lancaster. So I would look for more consistency. We'll see when the first quarter comes to here. I would imagine we will still have a little bit slower out-of-the-gate first quarter, but the rest of the year should get us back to that overall trend.

Okay. And then maybe just one last question from me on capital. You guys raised the debt intra quarter. It sounds like the growth outlook is a bit stronger than maybe this time at the 1Q 2016 earnings call. How comfortable -- can you guys just remind us how comfortable you are in terms of leveraging the balance sheet and where those capital ratios could go before you consider raising additional funds?

Well, historically, Mike, from a regulatory capital perspective, we've always wanted to be at least 100% in basis points notional over the well-capitalized level. And we feel very comfortable with our organic growth capabilities that we can maintain those levels going forward.

Yes and once we get through the earnings charges, obviously the third quarter will have a lot of merger charges that will impact earnings. But once we get through those, we feel we will be generating a significant amount of organic capital going forward.

[Operator Instructions]. Our next question will come from the line of Matthew Breese from Piper Jaffray.

I just wanted to touch on the expenses one more time. I think I missed one or two numbers in there. The lift-out costs, I think you mentioned it was in the $400,000 range. Was that after-tax?

Yes, that's after-tax.

Okay. And then did you attach a cost to the Lancaster team that you hired?

That is what we're talking about, Matt.

That's the team, that's entering into a lease, you know. There's some upfront signing bonuses, things of that nature. So that $405,000 after tax is related to the Lancaster team.

Okay, so that's the annualized cost for them.

No, that was during this quarter. That's not the annualized cost.

It'll be probably on a cost perspective a couple hundred thousand dollars higher than this quarter. This quarter was roughly $650,000 gross.

$400,000 net.

Yes, because you remember they didn't come on until almost the end of May.

It will somewhat balance it out that there was also some signing bonuses. So there's a little bit of noise into that, but we will we will be generally up in the range that both Roger and Jeff referenced.

Okay. So the core expenses are $28 million to -- the hi $28s million to $29 million.

The one thing, Matt, if you are reconciling, we also had a couple hundred thousand dollar higher intangible amortization this quarter than what our are run rate would be. So that's bringing me back down to the $28 million number. That related to a couple of insurance acquisitions.

Yes, that performed better than originally model. So we had to incur some additional expenses on the earnout side.

Okay. And then with Fox Chase and with the conversion, either by year end or by first quarter of 2017, where do you want that core expense line to be?

You know, I think where we want it to be is somewhere around $31.5 million to $32 million. You know, where I'm at today, real simply, is $31.3 million which is a $28 million type number plus Fox Chase at $5.6 million, $5.7 million, minus the cost saves gets me like to a $31.3 million. And then we're going to have normal increases for merit compensation and the like for next year. So it depends on the time frame you're looking at, Matt, but that is the kind of bridge I'm looking at is a $31.2 million, $31.3 million number, plus consistent growth going into next year just related to the cost of living increases and other business expenses.

And does that include the branch closures that we just spoke about?

It does. There's a lot of ins and outs there, Matt, but the $32 million is a number that I am pretty comfortable with.

Okay. And then with Fox Chase, at this point can you give us some idea of what the added goodwill and intangibles will be?

You know, we have publicly disclosed before approximately $60 million in goodwill. We're pretty close to that in the preliminary work we've done around the quarter. And the intangibles, we're looking at another $5 million to $6 million there. So we're looking in that $65 million plus range. It's pretty consistent with what was previously disclosed.

Okay. And then just thinking about the overall profitability metrics, I know there's ongoing investment and Fox Chase. But profitability this quarter excluding the securities gains was a bit lower than what we've seen consistently from Univest. And I just wanted to get some commentary on when we can see a rebound and see those investments flow through to the bottom line return on asset ratio.

Our plan is really to get everything behind us this year so that 2017, it's a clean income statement. Now, it will take halfway through 2016 for the Lancaster team to really start to be accretive and start to break even and making money from all the investments we have to make as they start to bring on customers and bring on loans, etc. But overall, we would expect as we start into 2017, we want to have a clean income statement.

Okay and then just one more. The pro forma margin with Fox Chase, where do you expect that to shake out and what kind of pressure are you seeing given the flatter yield curve?

I will take this one, Matt. So Univest is a 3.92%; Fox Chase, we did about a 3.18% this quarter. So if you blend it, you are at 3.73%. And then we have the impact of the sub debt which would be about 5 basis points. There's a slight offset on that bridge loan fee. And then there is continued pressure. This is the same speech I've given at Fox Chase for the last four years, I think. With this yield curve we're operating in, the spread on every new loan we're booking is south of that 3.70%, right? So there will be, given this current yield curve, there will be continued pressure on the margin. Kind of quarter over quarter, you're just going to see some bleed-off of the margin related to the new production.

Matt, can I add one more thing? I want to just for everybody, in case I lose the call. The one thing I want to just communicate is the merger-related charges of $1.2 million, almost all of that was not deductible for taxes. So when we're looking at our core earnings, when you take out the impact of the non-deductibility, that really gets us a couple cents more in core earnings than we have really communicated in the press release. So I just wanted to put that out for everybody.

Our next question will come from the line of Michael Perito from KBW.

Just a quick technical follow-up, when you announced the Fox Chase merger, I think the targeted cost saves were $10.2 million, plus or minus. I know you kind of spoke to the overall expense level that you are expecting, but has that number changed at all materially? Were those two branch closures incorporated into that number originally or were those add-ons afterwards?

The overall 45% has not changed materially. We're feeling very good about those numbers, is what I would say.

[Operator Instructions]. We have no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Schweitzer for any closing remarks.

Thank you, Bianca and thank you to everybody for spending time with us this morning. We appreciate the questions and the communication and we look forward to touching base with everybody next quarter. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.