UNIVEST FINANCIAL Corp Q4 FY2020 Earnings Call

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. After today's presentation, there will be an opportunity to ask questions. 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 Keim, President of Univest Bank and Trust; and Brian Richardson, our Chief Financial Officer.

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 CECL 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.

The first question comes from Michael Perito with KBW. Please go ahead.

Good morning, guys. Happy New Year.

Good morning Mike.

I have a couple of questions and appreciate the commentary on the outlook. First, regarding loan growth projected at 7% to 8% for next year, it seems you've been experiencing stronger growth than that in the latter half of 2020, excluding PPP loans. I'm curious about the drivers behind this growth, how the current pipeline looks compared to six months ago, and could you discuss the current marketplace for attracting additional talent? It appears there is significant talent movement, particularly from Wells Fargo, so I would like to know how that pipeline appears as well.

Yeah Mike, good morning. It is Mike Keim. With regard to how the pipeline looks, it looks strong. As we've talked about in 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 in time and as it continues today. But we stayed in the game and 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 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 of 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.

Understood. Thanks for that. And then just Brian on the kind of efficiency ratio here, or maybe just what you guys are talking about 100 basis points positive operating leverage for less than four years. Now, if I think about the core efficiency ratio it is 63% in 2017 down to 60% now. I am wondering, can you talk how much of that is kind of branch optimization and other cost reduction efforts versus kind of technology investments that are kind of reducing costs around back office processes and whatnot. I was wondering if you guys can talk about that dynamic and it seems like you think it's sustainable into 2021 based on the guidance provided Brian, is that a fair assessment?

Yes, so I guess as we go forward to 2021, I mean, there's a lot of noise there in 2020. 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 $1 million decrease year-over-year in medical. So that's displacing mid-single-digit increases in underlying medical costs, again really just a function of the pandemic and folks electing deferral procedures and the like. You'd almost expect that something like that to start to return back to the normal level. To use 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 it 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 in the ways of expense items, again, achieving semi-operating leverage here in 2020 despite the pressures that we've seen on the revenue side.

And then just to comment anything in terms of kind of technology efficiency and I mean, is that something you think you can start to pull through the numbers or continue to pull through the numbers going forward or any thoughts there?

From a technology perspective Mike, 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.

Alright, great. Well, thank you guys for taking my questions. Appreciate it.

Thanks, Mike.

The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning, guys. 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 some of those changes in the model?

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 continue 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 led itself through the numbers there as we released the 8.7 million as previously discussed.

Okay, and in terms of the expense guide, Brian, you mentioned the savings involved with the reduction in branches and so it sounds like that ladders in over 2021 is that right or did you get that all up front?

No, that ladder is in because we have closures that are occurring at the end of this month and then we have closures that are coming 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 in 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.

Okay. And then just finally, I wonder if you could talk about thoughts on capital return in 2021 in terms of a buyback? Thanks.

Frank, this is Jeff. As we've discussed, our top priority regarding capital is to repay our subordinated debt, which we've begun. If everything goes as planned, we'll pay back the remaining 95 million by midyear. Once we achieve that and gain more clarity over the first six months, along with vaccinations and the hope of a full economic reopening, we will consider all options for capital deployment, including buybacks and dividends. The Board will be closely involved in these discussions, but our primary focus remains on repaying that subordinated debt and assessing the situation for the rest of the year, particularly in light of the pandemic, with optimism that plans will proceed as expected.

Okay, alright, great. Thanks, guys.

Thank you.

Our next question comes from Matthew Breese with Stephens, Incorporated. Please go ahead.

Good morning. 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, across the board fairly strong. Could you describe for us what segments, whether it's CNI or CRE or REG that are stronger than you expected to grow, more so than others in 2021?

Hello Matt. So it is across our footprint. And where you see the most growth at the moment we continue to grow our Ag business. I would then say, CRE certainly is a component of that. CNI, and I am 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.

And how are new yields, as you look at those categories, what are 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 back at the third quarter. That's up 20 basis points to 3.15 here in the fourth quarter. And it's really a 50:50 split there between fixed and variable. Our fixed look 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 in production.

Got it, okay. And then just tying this into the core NIM outlook, I appreciate the NII guide as I think about loan growth, it has been very robust but NII up single-digits. I am assuming that the core NIM outlook is there's continued pressure there. Could you just give us an idea where you think the stabilization point is and when you think you'll be able to fully deploy the excess liquidity?

The issue of excess liquidity is why I focused on net interest income in my guidance. Excess liquidity is constantly changing, especially with the first round of PPP loans and the associated forgiveness, which has extended due to the second round and its lingering effects. However, I believe the core net interest margin should start to stabilize. We are noticing some deterioration, but it seems to be slowing down, and we are reaching a point of greater stability compared to the last few quarters.

Okay, great. And then 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?

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 the 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. I appreciate it. Thank you for taking my questions.

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 look forward to continuing to do that as we hopefully will 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.

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