Univest Financial Corporation

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.

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?

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?