Univest Financial Corporation 10-Q Summary
Reporting period: Three months ended March 31, 2021; filed May 3, 2021. Univest is a Pennsylvania bank holding company with Banking, Wealth Management, and Insurance segments. The financial statements are unaudited and should be read with the 2020 Form 10-K.
Financial Performance and Condition
| Metric | Q1 2021 | Q1 2020 / Dec. 31, 2020 | Change |
|---|---|---|---|
| Net income | $32.6 million | $0.8 million | +$31.8 million |
| Diluted EPS | $1.11 | $0.03 | +$1.08 |
| Net interest income | $45.4 million | $42.5 million | +6.9% |
| Net interest margin, tax-equivalent | 3.12% | 3.48% | -36 basis points |
| Noninterest income | $23.3 million | $18.4 million | +26.5% |
| Noninterest expense | $39.5 million | $38.8 million | +2.0% |
| Net cash from operating activities | $29.9 million | $11.1 million | +$18.8 million |
| Total assets | $6.42 billion | $6.34 billion at Dec. 31, 2020 | +1.3% |
| Loans and leases held for investment | $5.42 billion | $5.31 billion at Dec. 31, 2020 | +2.0% |
| Total deposits | $5.31 billion | $5.24 billion at Dec. 31, 2020 | +1.3% |
| Shareholders’ equity | $722.5 million | $692.5 million at Dec. 31, 2020 | +4.3% |
Profitability: Return on average assets was 2.07%, compared with 0.06% in Q1 2020. Return on average equity was 18.90%, compared with 0.50%. The Q1 2021 effective tax rate was 19.3%; the prior-year rate was negative 261.2% because of the unusually low pre-tax income and COVID-19-related estimation effects.
Credit and asset quality: The company recorded an $11.3 million reversal of credit-loss provisions, compared with a $21.8 million provision in Q1 2020. The allowance for credit losses on loans declined to $71.5 million, or 1.32% of loans, from $83.0 million, or 1.56%, at year-end. Net charge-offs were $0.3 million, compared with $0.5 million in the prior-year quarter. Nonperforming loans and leases were $30.7 million, or 0.57% of loans, and nonperforming assets were $38.2 million, or 0.60% of total assets.
Liquidity and debt: Cash and cash equivalents were $187.3 million. The company reported $26.7 million of short-term borrowings, $95.0 million of long-term debt, and $173.6 million of subordinated notes. Available committed borrowing capacity was approximately $1.7 billion, including $1.6 billion available from the Federal Home Loan Bank. No Federal Reserve Discount Window or correspondent-bank line borrowings were outstanding.
Capital: At March 31, 2021, the Corporation reported total capital to risk-weighted assets of 15.13%, Tier 1 capital to risk-weighted assets of 11.08%, and Tier 1 capital to average assets of 9.45%. The Bank was categorized as well capitalized.
Material Changes Versus the Prior Comparable Period
- Net income increased substantially, primarily because Q1 2021 included a credit-loss reversal instead of the significant provision recorded in Q1 2020.
- Tax-equivalent net interest income increased 6.6% to approximately $46.0 million, supported by $4.5 million of PPP-related income, loan growth, and lower funding costs. The benefit was partly offset by lower asset yields and excess liquidity.
- Mortgage banking gains increased 116.4% to $5.9 million due to higher volume and wider margins.
- Loan growth was concentrated in commercial real estate, which increased $72.8 million, and PPP loans, which increased $44.7 million to $528.5 million.
- Deposits increased $68.9 million, while long-term debt declined $15.0 million and subordinated notes declined $9.9 million, including a $10.0 million redemption.
- Net cash used in investing activities increased to $109.8 million, primarily because of $108.3 million of net loan growth. Financing activities provided $47.4 million, resulting in a $32.5 million decrease in cash and cash equivalents during the quarter.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal quantitative earnings guidance. Management stated that Q1 results are not necessarily indicative of full-year results and emphasized continued uncertainty related to COVID-19, economic conditions, interest rates, real estate values, credit quality, funding costs, and competition.
- Approximately $73.0 million of loans and leases remained subject to COVID-19-related payment modifications at March 31, 2021, representing approximately 1.5% of the loan portfolio excluding PPP loans. These modifications were not classified as troubled debt restructurings under applicable relief provisions.
- PPP exposure totaled $528.5 million at quarter-end. Management identified risks involving SBA forgiveness and funding, litigation, regulatory enforcement, and reputational exposure.
- The $11.3 million credit-loss reversal included approximately $12.9 million attributable to favorable economic assumptions in the CECL model, partially offset by reserve increases from loan growth. This reversal materially benefited earnings and may not recur.
- Goodwill was $172.6 million, with no impairment recorded. Future impairment testing could result in an earnings charge if conditions deteriorate.
- Customer interest-rate swap credit derivatives had a $707.3 million notional amount. The filing states that potential payments under these arrangements are not estimable because they depend on future interest rates and are not capped.
- Legal proceedings are periodically pending, but management does not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- The company declared and paid a quarterly cash dividend of $0.20 per share and made no repurchases under its publicly announced program during the quarter.
Investor Verification Items
- Assess the sustainability of earnings excluding the $11.3 million credit-loss reversal and the $4.5 million of PPP-related income.
- Monitor the decline in net interest margin, the effect of excess liquidity, and sensitivity to changes in interest rates.
- Review commercial real estate concentrations and the $73.0 million of COVID-related loan modifications, particularly exposures to hotels, retail, office, and other stressed industries.
- Verify future PPP forgiveness, SBA reimbursement, deferred-fee recognition, and related legal or regulatory developments.
- Track nonperforming assets, charge-offs, CECL assumptions, and whether the allowance remains adequate as pandemic support programs expire.
- Confirm continued access to committed funding sources and compliance with capital requirements.
- Evaluate the recurring contribution of mortgage banking, wealth management, insurance, and other fee-based revenue to offset margin pressure.