Univest Financial Corporation: FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K, not a standalone fourth-quarter filing. Univest is a Pennsylvania-based bank holding company with banking, wealth management and insurance businesses serving Pennsylvania, New Jersey, Maryland and adjacent markets.
Business Context and Financial Position
- At year-end, total assets were $7.22 billion, net loans and leases were $6.04 billion, deposits were $5.91 billion and shareholders’ equity was $776.5 million.
- The company operated 52 properties and employed 973 people. Its banking portfolio was concentrated in commercial, commercial real estate and construction lending.
- Commercial, financial and agricultural, commercial real estate, construction and lease-financing exposures represented a substantial portion of lending; approximately 81.3% of loans excluding PPP loans consisted of commercial-related categories.
Financial Performance and Key Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net interest income | $218.3 million | $188.4 million | +15.9% |
| Provision for credit losses | $12.2 million | $(10.1) million reversal | Unfavorable swing |
| Noninterest income | $77.9 million | $83.2 million | $(5.3) million |
| Noninterest expense | $186.8 million | $167.4 million | +11.6% |
| Net income | $78.1 million | $91.8 million | $(13.7) million, or -14.9% |
| Diluted EPS | $2.64 | $3.11 | -15.1% |
| Return on average assets | 1.12% | 1.38% | Down 26 basis points |
| Return on average equity | 10.13% | 12.50% | Down 237 basis points |
| Tax-equivalent net interest margin | 3.38% | 3.06% | Up 32 basis points |
| Efficiency ratio | 62.4% | 60.9% | Higher, less efficient |
Net interest income benefited from rising asset yields, loan growth and an asset-sensitive balance sheet. The benefit was partly offset by higher deposit funding costs and the decline in PPP-related income. Noninterest income declined primarily because mortgage banking gains fell 70.9% to $4.4 million as higher rates reduced loan sales and compressed gain-on-sale margins.
Cash Flow, Liquidity, Debt and Capital
- Operating activities provided $109.5 million of cash; investing activities used $897.6 million, primarily from an $836.6 million net increase in loans and leases; financing activities provided $50.8 million.
- Cash and cash equivalents declined 82.8% to $152.8 million, as liquidity funded loan growth and deposit outflows.
- Deposits declined 2.3% to $5.91 billion. Approximately $3.3 billion of deposits exceeded the FDIC insurance limit at year-end.
- Total borrowings increased to $440.4 million from $214.0 million, including $125.0 million of short-term FHLB borrowings, $60.0 million of federal funds purchased and $50.0 million of newly issued subordinated notes.
- Available committed borrowing capacity was approximately $2.1 billion, including approximately $1.9 billion of available FHLB capacity. Uncommitted correspondent-bank funding of $350.0 million was also available but could be withdrawn at the lenders’ discretion.
- The company remained well capitalized. The Corporation’s year-end total risk-based capital ratio was 13.67%, Tier 1 risk-based capital ratio was 10.37% and Tier 1 leverage ratio was 9.81%.
- Dividends declared were $0.83 per share, and the company repurchased 450,000 shares for $11.4 million during 2022. No shares were repurchased during the fourth quarter.
Material Changes Versus FY2021
- Loans and leases held for investment increased 15.3% to $6.12 billion, led by commercial, commercial real estate, construction, residential mortgage and lease-financing growth. PPP loans declined to $2.1 million from $31.7 million.
- Net interest margin expanded from 3.06% to 3.38%, but the provision for credit losses changed from a $10.1 million reversal to a $12.2 million expense.
- Net charge-offs increased to $3.9 million from $213 thousand, including $3.3 million related to two commercial real estate loans.
- Nonaccrual loans and leases declined to $13.4 million from $33.2 million, but other real estate owned increased sharply to $19.3 million from $279 thousand following the transfer of an $18.3 million commercial real estate loan.
- The allowance for credit losses increased to $79.0 million, although the allowance ratio declined to 1.29% from 1.35% because of loan growth.
- Noninterest expense increased 11.6%, including higher salaries, data processing and professional fees. The company incurred $3.8 million of digital-platform development expense, including $653 thousand in data-processing costs and approximately $3.0 million in consulting fees.
- Accumulated other comprehensive loss increased by $45.8 million, primarily from after-tax unrealized losses on available-for-sale securities and the company’s interest-rate swap.
- Wealth management assets under management and supervision declined to $4.2 billion from $4.9 billion, reflecting unfavorable market conditions. Insurance commission income increased 16.6%, largely due to the 2021 acquisition of the Paul I. Sheaffer Insurance Agency.
Outlook, Management Commentary, Risks and Unusual Items
- Management did not provide quantitative earnings or revenue guidance in the filing. The company expects to continue investing in digital capabilities and expanding into Western Pennsylvania and Maryland, but the timing and benefits of these initiatives are uncertain.
- The balance sheet was described as slightly asset-sensitive in modeled interest-rate scenarios. A parallel 200-basis-point increase was estimated to increase next-12-month net interest income by 3.16%; a 200-basis-point decrease was estimated to reduce it by 9.70%. Actual results may differ materially.
- Key risks include deposit attrition and funding costs, rapid or prolonged interest-rate changes, recession and inflation, commercial real estate and construction credit deterioration, declining collateral values, higher credit-loss provisions, securities fair-value losses, competition for deposits and loans, cybersecurity and technology failures, regulatory changes and geographic concentration in Pennsylvania and New Jersey.
- The company entered into a $250.0 million cash-flow hedge in May 2022. Its year-end fair value was an $8.6 million liability, and approximately $4.0 million after tax was expected to be reclassified into earnings during the following 12 months.
- Off-balance-sheet exposure included $1.78 billion of commitments to extend credit and $58.5 million of potential payments under letters of credit. The reserve for sold-mortgage repurchase exposure was $330 thousand.
- The company issued $50.0 million of 7.25% fixed-to-floating subordinated notes due 2032 in November 2022. Existing $100.0 million subordinated notes bear a fixed 5.00% rate through August 2025 before converting to a floating rate.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The filing identifies allowance-for-credit-loss valuation for pooled loans as the critical audit matter.
Most Important Facts for Investors to Verify
- Whether deposit balances and funding costs stabilize, particularly given the 35% noninterest-bearing deposit mix and approximately $3.3 billion of uninsured deposits.
- Whether the 2022 loan growth rate is sustainable without a material increase in delinquencies, charge-offs, commercial real estate losses or the allowance for credit losses.
- The resolution and carrying-value risk of the $19.3 million of other real estate owned and the related commercial real estate exposure.
- The effect of interest-rate movements on net interest margin, deposit pricing, securities valuations and the $250.0 million interest-rate hedge.
- Whether mortgage banking weakness, lower wealth management assets and higher operating expenses continue to pressure fee income and the efficiency ratio.
- The execution, cost and expected returns of the digital-platform initiative and geographic expansion.
- Available borrowing capacity, collateral requirements and the liquidity impact of further deposit outflows or loan growth.
- Future dividend and repurchase capacity in light of regulatory capital requirements, subsidiary dividend restrictions and the company’s funding needs.