Business Context and Reporting Period
Univest Financial Corporation, a Pennsylvania bank holding company, reported unaudited consolidated results for the three and nine months ended September 30, 2020. Its principal businesses are Banking, Wealth Management, and Insurance. The period was materially affected by the COVID-19 pandemic, low interest rates, the Paycheck Protection Program (PPP), and adoption of the current expected credit loss (CECL) model effective January 1, 2020.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net income | $18.1 million | $17.7 million | 2.6% increase |
| Diluted EPS | $0.62 | $0.60 | 3.3% increase |
| Net interest income | $43.9 million | $42.6 million | 2.8% increase |
| Provision for credit losses | $3.9 million | $1.5 million | Increase |
| Noninterest income | $21.8 million | $16.6 million | 31.4% increase |
| Noninterest expense | $38.5 million | $36.3 million | 6.2% increase |
| Return on average assets | 1.15% | 1.32% | Down 17 basis points |
| Return on average equity | 10.89% | 10.62% | Up 27 basis points |
| Tax-equivalent net interest margin | 3.02% | 3.52% | Down 50 basis points |
For the nine months ended September 30, 2020, net income was $21.0 million, or $0.72 diluted EPS, compared with $50.2 million, or $1.71 diluted EPS, in the prior-year period. Net interest income increased to $129.8 million from $126.8 million, while the provision for credit losses increased to $49.5 million from $6.3 million. Noninterest income increased to $58.2 million from $49.3 million, and noninterest expense increased to $113.3 million from $108.6 million.
Balance Sheet, Cash Flow, Debt, and Liquidity
- Total assets increased 18.6% from December 31, 2019 to $6.38 billion at September 30, 2020.
- Cash and cash equivalents increased to $387.7 million from $125.1 million, primarily due to a $247.5 million increase in interest-earning deposits at the Federal Reserve.
- Loans and leases held for investment increased 18.8% to $5.21 billion, including $501.6 million of PPP loans.
- Total deposits increased 19.5% to $5.21 billion, primarily from commercial and consumer deposit growth.
- Long-term debt was $205.0 million and subordinated notes were $193.4 million, compared with $150.1 million and $94.8 million, respectively, at December 31, 2019.
- The company issued $100.0 million of 5.00% fixed-to-floating subordinated notes due 2030 on August 5, 2020, generating approximately $98.4 million of net proceeds.
- Committed borrowing capacity totaled $2.2 billion, of which $1.3 billion was available at September 30, 2020. An additional $460.0 million of uncommitted correspondent funding was available, subject to withdrawal by the counterparties.
- Net cash provided by operating activities was $46.1 million. Investing activities used $767.3 million, principally because of an $851.4 million net increase in loans and leases. Financing activities provided $983.7 million, primarily from deposit growth and debt issuance.
- Shareholders’ equity was $669.1 million, down 0.9% from year-end 2019. Regulatory capital ratios exceeded minimum requirements, and management stated that the company and Bank remained compliant; the Bank was categorized as well capitalized.
Material Changes Versus the Prior Comparable Period
- Quarterly earnings increased modestly despite materially higher credit-loss provisioning. The nine-month earnings decline was primarily attributable to COVID-19-related CECL charges.
- The nine-month provision for credit losses included $40.5 million attributable to changes in economic assumptions in the CECL model, principally driven by COVID-19. The after-tax impact was approximately $32.0 million, or $1.10 diluted EPS.
- CECL adoption increased the allowance for loan and lease losses by $12.9 million, the investment securities allowance by $300 thousand, and the unfunded commitment reserve by $1.1 million. The aggregate after-tax reduction to retained earnings was $11.3 million.
- Mortgage banking gains increased to $5.9 million in the quarter and $12.1 million year to date, compared with $1.6 million and $2.9 million, respectively, primarily due to higher volume and wider margins.
- Service charges on deposits and other service fee income declined, reflecting waived customer fees, lower activity, higher mortgage servicing-right amortization, and lower interchange income.
- Average loan and lease balances grew substantially, but lower market interest rates reduced asset yields. Excess liquidity and PPP loans also reduced the net interest margin.
- Nonperforming loans and leases declined to $33.6 million, or 0.65% of loans and leases, from $38.8 million, or 0.88%, at December 31, 2019. The allowance for credit losses increased to $91.9 million, or 1.76% of loans, from $35.3 million, or 0.81%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that the continuing effects of COVID-19 are difficult to predict and may affect demand, unemployment, delinquencies, foreclosures, collateral values, credit-loss provisions, wealth-management revenue, interest margins, cybersecurity exposure, FDIC premiums, and PPP-related litigation or regulatory risk.
- As of October 16, 2020, approximately 165 COVID-19-related loan and lease modifications remained outstanding, totaling $191.0 million, down from approximately 1,420 modifications totaling $720.1 million at June 30, 2020.
- The company participated in PPP lending and originated approximately 2,570 PPP loans totaling approximately $511 million. It recognized $4.7 million of related interest income and had $9.5 million of net deferred PPP fees remaining on the balance sheet.
- Other real estate owned increased to $8.3 million from $516 thousand at year-end, primarily due to a commercial real estate loan transferred to OREO. The property was under agreement of sale and expected to be sold in the fourth quarter of 2020.
- The company disclosed a $300 thousand OREO valuation write-down and a $206 thousand mortgage-servicing-right valuation allowance during the nine months.
- On October 19, 2020, the company announced consolidation or relocation of eight financial service centers. Estimated pretax costs were $1.7 million, primarily expected in the fourth quarter of 2020.
- Management identified fair-value measurements and the CECL allowance as critical accounting estimates. Legal proceedings were not expected to have a material adverse effect based on currently available information.
Most Important Facts for Investors to Verify
- Whether COVID-19-related credit deterioration produces additional provisioning, charge-offs, nonperforming assets, or collateral losses after September 30, 2020.
- The pace of PPP loan forgiveness, recognition of deferred fees, and any SBA guarantee or funding disputes.
- The sustainability of mortgage-banking gains, which materially supported 2020 noninterest income.
- The effect of prolonged near-zero interest rates and excess liquidity on net interest margin and earnings.
- The adequacy of the $91.9 million loan and lease allowance under changing economic forecasts and CECL assumptions.
- Execution and costs of the eight-location footprint optimization plan.
- Capital and liquidity levels after loan growth, subordinated debt issuance, dividends, and any future credit deterioration.