Q4 2020 Univest Financial Corp Earnings Call
Good day and welcome to the Universal Financial Corporation fourth quarter and year end of 'twenty and 'twenty earnings Conference call.
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I'd 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 <unk> President of interest 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.
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.
<unk> actual results may differ materially from those contemplated by these forward looking statements.
I will refer you to the forward looking cautionary statements and 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 <unk> dot net under the Investor Relations tab.
We reported net income of $25 $9 million during the fourth quarter or <unk> 88 per share. We are 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 nine 6% annualized.
Resulting in growth for the year of $436 2 million or nine 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 years comparable quarter and prior year as refinance activity continue.
Combined with a robust local housing market, which is only muted due to limited supply of homes.
As we've gotten more clarity on the impact of the pandemic on our loan portfolio and with the reduction and deferrals and modifications to one 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 172% of loans and leases excluding.
P P loves.
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 eight 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 universe family and continue to do a wonderful job serving our customers our communities and each other as we continue to work through the current environment and moving and divest forward ill now turn it over to Brian for further discussion on our results. Thank you, Jeff and I would also like to thank everyone for joining us today.
Hey.
I would like to start by touching on four specific items and 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 and economic related assumptions within our CSO model offset by reserves attributable to the nine 6% annualized loan growth we achieved during the quarter.
For the full year of 2020, we recorded a total provision for credit losses of $48 million of which $27 4 million was driven by changes in economic factors as of December 31, our allowance for credit losses was 127% of total loans excluding PPP.
Additionally, during the fourth quarter, we continued to see reductions and COVID-19 related deferral of activity and stable levels of nonperforming assets and net charge offs. We ended the year with $68 million of deferrals, which represented one 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 and the third quarter.
Additionally, NIM was reduced by seven basis points due to carrying low yielding PPP loans on the balance sheet.
Core margin, excluding excess liquidity and PPP impact was three 2% of decrease of eight basis points when compared to the third quarter.
During the fourth quarter of PPP loans contributed $3 $1 million to net interest income of <unk>.
369000 related to forgiveness activity.
For 2020, PPP loans contributed a total of $7 $9 million to net interest income.
As of December 30, <unk> $7 7 million of net deferred fees remains on the balance sheet, which represents approximately 63% of the initial deferred fee amount.
Third as it relates to non interest income on mortgage banking business finished the year with another very strong quarter as Jeff previously discussed. Additionally, other noninterest 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 noninterest.
Noninterest expense included the following nonrecurring items, a $1 $4 million restructuring charge related to the financial center optimization plan, which was announced and the fourth quarter. This.
This plan is expected to result, and expense savings of one 8.002 million 21, and $2 4 million on an annualized basis.
A $1 $1 million charge related to determination of $80 million of long term borrowings with a weighted average rate of 146%.
This is expected to result, and in and interest expense benefit of approximately 800000 and 2021.
A $928000 benefit related to the modification of performance based equity awards during the fourth quarter.
These modifications replace the original peer based ROA, a metric with a peer based pre tax pre provision less net charge off ROE AA metric. This was done to address the inherent lack of comparability and Pierre ROA metrics due to the variation and seasonal implementation timing and approach.
The compensation Committee of the board of Directors concluded. This replacement metric was of more comparable measure of performance and we plan to include this metric and future performance based grants.
We reported a pretax pre provision ROA of 144% for the quarter and 162% for the year and.
Adjusting for the previously mentioned one time items, our pre tax pre provision ROA was 155% for the quarter and $1 six 5% 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 2000 and 'twenty one guidance.
First PPP inherently introduces a lot of volatility as it relates to NII and NIM as previously mentioned at December 31, 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, where accelerated upon forgiveness. It is challenging to determine the <unk>.
<unk> 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 of <unk>.
And 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 noninterest income growth of approximately 5% per year, but we experienced outside growth of 19, 7% and 2020 due to mortgage banking activities and swap fees. Accordingly, we expect contraction of 5% to 7% and noninterest income for 2021.
This translates to a compound annual growth rate of approximately 6% from 2019 to 2021, which is slightly above historical norms.
Fourth we reported noninterest expense of $155 million for 2020, and expect noninterest expense growth of approximately 2% to 4% and 2021, which reflects the expected savings from the previously mentioned financial center optimization plan offset by our continued investments and digital offerings and.
And markets, Specifically York Berkes, and Cumberland County.
These regional centers will serve both business and consumer customers and provide universal 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.
And.
We will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone and sound.
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At this time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from Michael Perito with K B W. Please go ahead.
Good morning, guys happy new year.
Good morning, Good morning, Mike.
Couple of questions from me appreciate the outlook commentary.
And I guess first on on the loan growth side, and you know of 7% to 8% for next year. Obviously, you guys of the tracking it seems you know ex PPP, a little stronger than that and the back half of 2020, just curious if.
You know what some of the drivers are.
Pipeline looks today, and maybe relative to six months ago, and and and can you talk about the.
The marketplace for additional talent adds right now it seems like there's quite a bit of cash.
And moving around and especially from Wells Fargo and your and your neck of the Woods, just curious how that pipeline looks as well.
And Mike Good morning, It's Mike time.
With regard to how the pipeline looks it looks strong.
No as we've talked about on the last couple of 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 and time and as it continues today, but.
But we stayed in the game when we continue 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're seeing growth basically across the board, obviously, we're not growing and the hospitality of our combination of industries at this point in time, but we see a strong growth continuing and central Pennsylvania, and we see our diversified loan portfolio of continuing to grow and what we call the east pennant and New Jersey.
Marketplace.
And as we move forward.
From a talent perspective, we have picked up a couple of people.
Would agree with you that.
And it seems to be some moving around.
We haven't necessarily.
Scott and 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.
Understood.
Thanks, and then just on.
And I E.
And part of the efficiency ratio here on that.
And block and you guys had.
Growth of about 100 basis points of positive operating leverage for all of that.
And if I think about the core efficiency ratio.
And 62% of 2017 with one of 16.
And I was wondering can you talk.
How much of that is just kind of.
Branch optimization and and and other.
Other cost reduction efforts versus kind of technology investments that on kind of reducing costs around back office processes and whatnot and.
And I'm wondering if you can maybe just talk about that dynamic.
Seems like you think of sustainable into 2021 based on the guide right Brian is that of ferrous ackman.
Yeah, So I guess as we look forward to 2021.
There's a lot of noise there in 2020 on and there is as we all know 2020 was abnormal and a lot of ways and it's seen and several expense lines.
If you look at certain activity based and they were down year over year. For example, we're self insured on medical and when Youre self insured it's activity based and we saw about a $1 million decrease year over year and medical.
So that's despite seeing mid single digit increases and underlying medical cost and again really just a function of the pandemic and folks are electing deferral of procedures and the like.
Would almost expect that something like that and start to return back to a normal level of TNF is another example of that was down a 1 million two year over year.
And I hope for everybody's sake, the debt returns back to our normal level not just from her personally but also from the health of the overall economy that those activities and to return back to normal so with those two items alone and and incorporating and 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 and the expense items.
Again <unk>.
Keeping some of our operating leverage here in 2020, despite the pressures that we've seen on the revenue side.
Alright, and then just to comment anything on in terms of kind of technology.
Technology efficiency and I mean is there.
And at something you think can you start to pull through of the numbers.
Or continue to comb through the numbers going forward or any thoughts there.
And from a technology perspective, Mike.
We look at it and the way we continue to drive forward is.
What happens is we're not necessarily reducing head count as a result of these technology expenditures, but as we grow as an organization we are not adding head count so we're getting operating leverage but it's going.
I would say almost of the more positive way.
Without having to add versus having to.
Reduce.
Hi.
Alright, great well. Thank you guys for taking my questions appreciate it thank.
Thanks, Mike.
The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.
Good morning, guys.
Good morning, Brian.
So just wanted to ask on the changes in the model.
Leading to the.
The reduction or the negative provision in the quarter or is that.
More of universe centric.
That changed.
Changes to macroeconomic expectations and if so its the latter I just wondered if you could share kind of.
Some of those changes and the model.
Sure Frank This is Brian.
We use of third party off of forecast economic forecast Moody's.
And just put it out there and we've.
And Lee earlier in the year, we use the baseline scenario, we looked at some downside scenarios that we utilize at the third quarter and continue to utilize that downside scenario in the fourth quarter.
But there was improvement of that all of downside scenario for September 30 to December 31, and Thats, what kind of blood itself through the numbers there as we released the $8 7 million as previously discussed.
Okay.
And in terms of.
In terms of the expense guide.
Brian you mentioned the savings.
Of all with the reduction and branches and.
It sounded like that ladders and over 'twenty 'twenty, one is that right or do you get that all upfront and noted that ladders in because we have closures that are occurring at the end of this month and then we have this.
<unk> that are occurring in June at the end of June so it does ladder and that's why we expect $1 $8 million and savings for 2021, and then full annualized savings going forward as we look into 2022 from your kind of.
Original Star point would be $2 4 million and on the initiative okay.
Yeah.
And then just finally I wonder if you could talk about.
Thoughts on capital return.
And 2021.
In terms of.
On a buyback.
Thanks.
Frank This is Jeff as we've discussed on cat when it comes to capital.
Our first goal is to payback, our our subordinated debt, which we started to do started that process and well payback. If everything goes according to plan, we will pay the debt.
The rest of the original and $95 million.
And mid year, and then once that happens and we kind of get a little more clarity as we get through the first six months vaccines and the like and the economy hopefully.
Opens again fully debt.
Everything's on the table when it comes to capital deployment, whether it be buybacks looking at the dividend and things of that nature. Obviously, the board will be integrally involved and all of those discussions but our first.
Goal is to payback debt 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.
Okay, Alright, great. Thanks, Scott. Thank you. Thank you.
And.
Yes.
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 Breese with Stephens incorporated please go ahead.
Good morning, and.
Good morning, Matt.
Hey, just going back to loan growth, Mike as you've kind of outlined.
Pipeline strength I thought you were describing and from a geographic standpoint being across the board fairly strong could.
Could you describe for us and what what segments, whether it's C&I are here already that are strongest and you expect to grow.
More so than others in 2021.
Sure, Matt So and it is.
Across our footprint and where you see the most growth.
And at the moment, we continue to grow our AG business.
And then say CRE and certainly as a component of that.
C&I and.
And I am ranking CRE AG.
NII, which is a mix there and also we had ramped up and ABL.
And on it so we're going to see some growth from from what we're doing on the ABL side and the first quarter as well.
So.
And that's kind of across the board.
And.
And and how our new yields.
Look at those categories what are the what are the the blended incremental yield now versus call. It six months ago.
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 on back of the third quarter, that's up 20 basis points to $3 15 here in the fourth quarter.
And it was really a 50 50 split there between fixed and variable or fixed book and where we saw production levels around $3, 68, which was flat quarter over quarter.
And our variable book was around $2 63 for the fourth quarter and production.
Got it okay.
And then just tying this into the core NIM outlook I appreciate the NII guide and to think about loan growth.
Yes.
Very robust, but NII up single digits.
I'm, assuming that the core NIM outlook as you know Theres continued pressure there could you just give us an idea of where you think the stabilization point is and when you think you'll be able to fully deploy the excess liquidity.
Yeah, the excess liquidity of four and that's why I really tried to focus on NII and my guidance. There was simply the excess liquidity is a moving target just with the first round of PPP and and forgiveness that will come along with that and which is now the timeframe for that is extended.
And just because of round two and the tail that will come along with that so I would think core NIM overall, though should relatively I mean that is starting to stabilize and we're seeing the core.
And there'll be some deterioration, but but I really think that started to slow and we're in a point of more stabilization that we've been over the last couple of quarters.
Okay, Great and then last one just on fee income I recognize the strength this year and youre, calling for a little bit of of decline next year I'm, assuming a lot of that is mortgage banking could you just walk through the other lines of business wealth Trust insurance and how you think the individual line tool will perform.
Sure.
Yeah, I mean of big component of that is the decrease and the outside of mortgage banking or increased mortgage banking for the year and the swap fees, but if we look on kind of the the wealth and investment.
Management side, we see that and then kind of of the 10% to 15% growth type range for the year on the insurance side of things, where and the mid single digit growth is what we're expecting there on on that side of the business.
Great well I appreciate it thank you for taking my questions.
And thank you Matt Thank you Matt.
This concludes our question and answer session.
I would now like to turn the conference back over to Jeffrey Schweitzer for any closing remarks.
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'll look forward to continuing to do that as we hopefully hopeful.
Look 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 and have a great day.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.
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