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spk04: Good day and welcome to the Univest Financial Corporation fourth quarter and year end 2020 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing star and then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch tone phone. To withdraw your question, please press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Jeffrey Schweitzer. Please go ahead.
spk01: Thanks, Tom. Good morning, and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Kime, President of Univest Bank & 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. I also 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 $25.9 million during the fourth quarter, or 88 cents per share. We were very pleased with our results for the quarter as we experienced another quarter of strong loan growth with loans growing $112.8 million, excluding PPP loans forgiven, or 9.6% annualized, resulting in growth for the year of $436.2 million, or 9.9%. Additionally, our mortgage banking team continues to perform very well, setting internal highs as net gain on mortgage banking activities increased $3.3 million, or 316.5% for the quarter and 316.7% for the year, compared to the prior year's comparable quarter and prior year as refinance activity continued combined with a robust local housing market, which is only muted due to limited supply of homes. As we have gotten more clarity on the impact of the pandemic on our loan portfolio, and with the reduction in deferrals and modifications to 1.4% of our loan portfolio, we were able to release $8.7 million of our allowance for credit losses during the quarter, bringing our coverage ratio down to 1.72% of loans and leases, excluding PPP loans. We continue to be pleased with the performance of our core business, as our pre-tax pre-provision income for the year was up $9.1 million, or 10.3%, compared to the prior year with an increase of 8.6% from the fourth quarter of the prior year. Before I throw it over to Brian, I just want to thank the members of the Univest family. They continue to do a wonderful job serving our customers, our communities, and each other as we continue to work through the current environment and move Univest forward. I'll now turn it over to Brian for further discussion on our results. Brian?
spk03: Thank you, Jeff. I would also like to thank everyone for joining us today. I would like to start by touching on four specific items from the earnings release. First, our reversal of provision for credit losses was $8.7 million for the quarter, which was driven by an $11.6 million benefit due to changes in economic-related assumptions within our CESA model offset by reserves attributable to the 9.6% annualized loan growth we achieved during the quarter. For the full year of 2020, we recorded a total provision for credit losses of $40.8 million, of which 27.4 million was driven by changes in economic factors. As of December 31st, our allowance for credit losses was 1.27% of total loans, excluding PPP. Additionally, during the fourth quarter, we continued to see reductions in COVID-related deferral activity and stable levels of non-performing assets and net charge-offs. We ended the year with $68 million of deferrals, which represented 1.4% of the portfolio. Second, Reported margin of 3.02% was flat with the third quarter. Reported NIM was negatively impacted by 13 basis points of excess liquidity, which averaged $256 million for the quarter compared to $329 million in the third quarter. Additionally, NIM was reduced by 7 basis points due to carrying low-yielding PPP loans on the balance sheet. Poor margin, excluding excess liquidity and PPP impact, was 3.22%, a decrease of eight basis points when compared to the third quarter. During the fourth quarter, PPP loans contributed $3.1 million to net interest income, of which $369,000 related to forgiveness activity. For 2020, PPP loans contributed a total of $7.9 million to net interest income. As of December 31st, $7.7 million of net deferred fees remained on the balance sheet, which represents approximately 63% of the initial deferred fee amount. Third, as it relates to non-interest income, our mortgage banking business finished the year with another very strong quarter as Jeff previously discussed. Additionally, other non-interest income included swap fees of $1.6 million for the fourth quarter, which was an increase of $1 million when compared to the fourth quarter of 2019. For the year, swap fees totaled $5.7 million, representing an increase of $4.4 million when compared to 2019. Fourth, non-interest expense included the following non-recurring items. A $1.4 million restructuring charge related to the Financial Center Optimization Plan, which was announced in the fourth quarter. This plan is expected to result in expense savings of $1.8 million in 2021 and $2.4 million on an annualized basis. A $1.1 million charge related to the termination of $80 million of long-term borrowings with a weighted average rate of 1.46%. This is expected to result in an interest expense benefit of approximately $800,000 in 2021. A $928,000 benefit related to the modification of performance-based equity awards during the fourth quarter. These modifications replaced the original peer-based ROAA metric with a peer-based pre-tax, pre-provision, less net charge-off ROAA metric. This was done to address the inherent lack of comparability in peer ROAA metrics due to the variation in CECL implementation timing and approach. The Compensation Committee of the Board of Directors concluded this replacement metric was a more comparable measure of performance and we plan to include this metric in future performance-based grants. We reported a pre-tax, pre-provision ROAA of 1.44% for the quarter and 1.62% for the year. Adjusting for the previously mentioned one-time items, our pre-tax, pre-provision ROAA was 1.55% for the quarter and 1.65% for the year, which shows that we were able to produce solid core results despite the inherent challenges faced while operating during a pandemic. I believe the remainder of the earnings release was straightforward, and I would now like to focus on five items as it relates to 2021 guidance. First, PPP inherently introduces a lot of volatility as it relates to NII and NIM. As previously mentioned, at December 31st, we had $7.7 million of net deferred fees from the first round of PPP that will be accreted to income over the remaining life or accelerated upon forgiveness. It is challenging to determine the exact timing and extent of forgiveness, which is further complicated by the second round of PPP, so I think it is most appropriate to exclude PPP when giving 2021 guidance. Accordingly, NII excluding PPP was $166.5 million for 2020. For 2021, we expect loan growth of approximately 7% to 8% excluding PPP loans and we expect this to result in net interest income growth of 2% to 4%, again, excluding PPP. This is reflective of the current interest rate environment. Second, the provision for credit losses will continue to be driven by changes in economic forecast, potential government stimulus, and the expected timeframe to fully exit the pandemic environment. Third, We have historically seen non-interest income growth of approximately 5% per year, but we experienced outside growth of 19.7% in 2020 due to mortgage banking, activities, and swap fees. Accordingly, we expect contraction of 5% to 7% in non-interest income for 2021. This translates to a compound annual growth rate of approximately 6% from 2019 to 2021, which is slightly above historical norm. Fourth, we reported non-interest expense of $155 million for 2020 and expect non-interest expense growth of approximately 2% to 4% in 2021, which reflects the expected savings from the previously mentioned financial center optimization plan offset by our continued investments in digital offerings and expansion markets, specifically York, Berks, and Cumberland counties. These regional centers will serve both business and consumer customers and provide Univest integrated financial solutions. Lastly, as it relates to income taxes, we expect our effective tax rate to be approximately 18 to 18.5%, assuming the current statutory rate remains unchanged. That concludes my prepared remarks. We will be happy to answer any questions. Operator, would you please begin the question and answer session?
spk04: We will now begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Perito with KBW. Please go ahead.
spk05: Good morning, guys. Happy New Year. Morning, Mike. Morning, Mike. A couple questions for me. Appreciate the Outlook commentary. I guess first, on the Lone World side, 7% to 8% for next year. Obviously, you guys have been tracking, it seems, XPPP a little stronger than that in the back half of 2020. just curious if, um, you know, what some of the drivers are, you know, how the pipeline looks today, maybe relative to six months ago. And, and, and, you know, can you talk about the, um, the marketplace for additional talent ads right now? It seems like, you know, there's, there's quite a bit of, you know, talent moving around, especially from Wells Fargo in your, in your neck of the woods. Just curious how that pipeline looks as well.
spk02: Yeah, Mike says, good morning. It's my time with regard to how the pipeline looks. It looks strong. Um, You know, as we've talked about in the last couple quarters, it was important for us to continue to be a lender during the pandemic. We did pull back on our underwriting criteria to make sure we were more conservative given the economic outlook at that point in time and as it continues today. But we stayed in the game when we continued to build momentum. And really, I think it's a testament to the strength of our teams and that consistent contact that we have with our customer base. So we are seeing growth. basically across the board. Obviously we're not growing in the hospitality or accommodation industries at this point in time, but we see strong growth continuing in central Pennsylvania, and we see our diversified loan portfolio continuing to grow in what we call the East Penn and New Jersey marketplace. As we move forward, from a talent perspective, we have picked up a couple people. We would agree with you that there seems to be some movement around We haven't necessarily gotten talent from the institution that you referenced, but there are other people out there, and we are always actively recruiting and trying to add talent to our teams.
spk05: Understood. Thanks for that. And then just, Brian, on kind of the efficiency ratio here, or maybe Brian and Jeff, just You guys have driven about 100 basis points of positive operating leverage for the last handful of years now. You know, if I think about the core efficiency ratio, 63% in 2017 and down to 60 now. I wonder, can you talk, you know, how much of that is kind of branch optimization and, you know, other cost reduction efforts versus kind of, technology investments that are kind of reducing costs around, you know, back office processes and whatnot. And I was wondering if you could maybe just talk about that dynamic. And, you know, it seems like you think it's sustainable into 2021 based on the guidance you provided, Brian. Is that a fair assessment?
spk03: Yeah, so I guess as we look forward to 2021, I mean, there's a lot of noise there in 2020. There was, as we all know, 2020 was abnormal in a lot of ways. And it's seen in several expense lines. If you look at certain activity-based things, they were down year over year. For example, we're self-insured on medical, and when you're self-insured, it's activity-based, and we saw about a million-dollar decrease year over year in medical. So that's despite seeing mid-single-digit increases in underlying medical costs, again, really just a function of the pandemic and folks electing deferral procedures and the like. Okay. You don't want to expect something like that to start to return back to a normal level. T&E is another example. That was down $1.2 million year over year. And I hope for everybody's sake that that returns back to a normal level, not just personally but also from the health of the overall economy, that those activities return back to normal. So with those two items alone and incorporated in my guidance there is $2.2 million worth of benefit in 2020 that you'd expect to start to give some of that back in 2021. So lots of noise in the expense items. Again, achieving some operating leverage here in 2020, despite the pressures that we've seen on the revenue side.
spk05: And then just to comment, anything in terms of technology efficiency? Is that something you think can start to pull through the numbers, or continue to pull through the numbers going forward? Or any thoughts there?
spk02: From a technology perspective, Mike, You know, the way we look at it and the way we continue to drive forward is what happens is we're not necessarily reducing headcount as a result of these technology expenditures, but as we grow as an organization, we are not adding headcount. So we're getting operating leverage, but it's going, I would say, almost the more positive way. Growth without having to add versus having to reduce.
spk05: All right, great. Well, thank you guys for taking my question. Appreciate it. Thank you, Mike.
spk04: Thanks, Mike. The next question comes from Frank Chiraldi with Piper Sandler. Please go ahead.
spk00: Good morning, guys. Morning, Frank. Just wanted to ask on the changes in the model leading to the reduction or the negative provision in the quarter. Is that more universe-centric? Is that changes to macroeconomic expectations? And if so, if the latter, I just wondered if you could share kind of, you know, some of those changes in the model?
spk03: Sure, Frank. This is Brian. We use a third-party forecast, economic forecast, Moody's, to just put it out there. We've consistently, earlier in the year, we used the baseline scenario. We looked at some downside scenarios that we utilized at the third quarter and continued to utilize that downside scenario in the fourth quarter. But there was improvement of that downside scenario from September 30th to December 31st. And that's what kind of bled itself through the numbers there as we released the $8.7 million as previously discussed.
spk00: Okay. And in terms of the expense guide, Brian, you mentioned the savings involved with the reduction in branches. And does SOAP sound like that ladders in over 2020? Is that right, or did you get that all up front?
spk03: No, that ladders in because we have closures that are occurring at the end of this month, and then we have closures that are occurring in June, at the end of June. So it does ladder in. That's why we expect $1.8 million in savings for 2021, and then full annualized savings going forward as we look into 2022 from your kind of original start point would be $2.4 million all in on the initiative.
spk00: Okay. And then just finally, I wonder if you could talk about thoughts on capital return in 2021 in terms of a buyback.
spk01: Frank, this is Jeff. As we've discussed, when it comes to capital, our first goal is to pay back our subordinated debt, which we started that process. and we'll pay back if everything goes according to plan. We'll pay the rest of the original $95 million in mid-year. And then once that happens and we kind of get a little more clarity as we get through the first six months, you know, vaccines and the like, and the economy hopefully reopens again fully, then everything's on the table when it comes to capital deployment, whether it be buybacks, you know, looking at the dividend, things of that nature. Obviously, the board will be integrally involved in all of those discussions. But our first goal is to pay back that subordinated debt and then get a little more clarity on the year and how everything's going with the pandemic and assuming everything goes according to plan and what we're all hopeful it will be and everything is on the table.
spk00: Okay. All right. Great. Thanks, guys. Thank you. Thank you.
spk04: As a reminder, if you have a question, please press star and then one to be joined into the queue. Our next question comes from Matthew Brees with Stevens Incorporated. Please go ahead.
spk06: Good morning. Good morning, Matt. Hey, just going back to loan growth, Mike, as you kind of outlined the pipeline strength, I thought you were describing it from a geographic standpoint being, you know, across the board fairly strong. Could you describe for us what segments, whether it's CNI or CRE or REGI, that are strongest and you expect to grow more so than others in 2021?
spk02: Sure, Matt. It is across our footprint. Where you see the most growth for us at the moment, we continue to grow our ag business. I would then say CRE certainly is a component of that. CNI And I'm ranking them. I would go CRE, AG, CNI, which is a mix there. And also we had ramped up an ABL component. So we're going to see some growth from what we're doing on the ABL side in the first quarter as well. So it's kind of across the board.
spk06: And how are new yields, as you look at those categories, what are the blended incremental yields now versus, call it, six months ago?
spk03: Hi, Matt. This is Brian. If you look at it quarter over quarter, we've seen improvement there. We were right below 3% for new commercial production back at the third quarter. That's up 20 basis points to 315 here in the fourth quarter. And it's really a 50-50 split there between fixed and variable. Our fixed book, we saw production levels around 368, which was flat quarter over quarter. And our variable book was around 263 for the fourth quarter in production.
spk06: Got it. Okay. And then, you know, just tying this into the core NIM outlook, you know, I appreciate the NII guys. I think about loan growth, you know, very robust, but, you know, NII up single digits. I'm assuming that the core NIM outlook is, you know, there's continued pressure there. Could you just give us an idea of where you think the stabilization point is and, you know, when you think you'll be able to fully deploy the excess liquidity?
spk03: Yeah, I mean, the excess liquidity part, that's why I really tried to focus on, and I am in my guidance there, was simply excess liquidity is a moving target just with first round of PPP and the forgiveness that'll come along with that, which is now the timeframe for that's extended just because of round two and the tail that'll come along with that. So I would think core NIM overall, though, should relatively, I mean, that is starting to stabilize. We're seeing the core There will be some deterioration, but I really think that started to slow, and we're in a point of more stabilization than we've been over the last couple of quarters. Okay, great.
spk06: And then the last one, just on fee income, I recognize the strength this year, and you're calling for a little bit of a decline next year. I'm assuming a lot of that's mortgage banking. Could you just walk through the other lines of business, wealth, trust, insurance, and how you think the individual lines will perform?
spk03: Sure. So, yeah, I mean, a big component of that is the decrease in the outsized mortgage banking or increased mortgage banking for the year and the swap fees. But if we look on kind of the wealth and investment management side, we see that in kind of the 10% to 15% growth type range for the year. On the insurance side of things, we're in the mid-single digit. Growth is what we're expecting there on that side of the business. Great.
spk06: Well, I appreciate it. Thank you for taking my questions.
spk03: Thank you, Matt. Thanks, Matt.
spk04: This concludes our question and answer session. I would now like to turn the conference back over to Jeffrey Schweitzer for any closing remarks.
spk01: Thanks, Tom, and thanks to everyone for joining us today. I think we ended the year on a really strong note with a lot of momentum as we head into 2021. We're excited about what we've been able to continue to accomplish to serve our customers and our communities throughout this pandemic. And I look forward to continuing to do that as we hopefully work towards more of a normalized environment as we get through this year. So I just want to thank everybody for participating again, and please stay safe. Have a great day.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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