Univest Financial Corporation — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Univest Financial Corporation is a Pennsylvania bank holding company operating through Univest Bank and Trust Co. Its reportable segments are Banking, Wealth Management, and Insurance. The filing covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Results were significantly affected by the COVID-19 pandemic, the Paycheck Protection Program (PPP), near-zero interest rates, and adoption of the current expected credit loss (CECL) standard.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net income | $2.1 million | $16.5 million | $2.9 million | $32.5 million |
| Diluted EPS | $0.07 | $0.56 | $0.10 | $1.11 |
| Net interest income | $43.5 million | $42.6 million | $86.0 million | $84.2 million |
| Provision for credit losses | $23.7 million | $2.1 million | $45.6 million | $4.8 million |
| Noninterest income | $18.0 million | $16.4 million | $36.4 million | $32.7 million |
| Noninterest expense | $36.0 million | $36.8 million | $74.7 million | $72.3 million |
| Tax-equivalent net interest margin | 3.18% | 3.67% | 3.32% | 3.71% |
| Return on average assets | 0.14% | 1.28% | 0.10% | 1.29% |
| Return on average equity | 1.27% | 10.23% | 0.88% | 10.28% |
Financial condition, liquidity, and capital
- Total assets were $6.13 billion at June 30, 2020, up 13.8% from December 31, 2019.
- Loans and leases held for investment increased 12.9% to $4.95 billion, primarily from $499.0 million of PPP loans.
- Deposits increased 11.7% to $4.87 billion. Cash and interest-earning deposits rose to $348.5 million from $125.1 million at year-end.
- Short-term borrowings increased to $210.8 million, including $182.5 million borrowed through the Federal Reserve’s PPP Lending Facility. Long-term debt was $210.0 million and subordinated notes were $94.9 million.
- Shareholders’ equity declined 3.0% to $654.9 million, reflecting the $11.3 million after-tax CECL adoption adjustment, $11.7 million of dividends, and $2.9 million of year-to-date net income.
- Six-month operating cash flow was $25.6 million, compared with $31.6 million in 2019. Investing activities used $548.6 million, primarily because of a $591.5 million net increase in loans. Financing activities provided $746.4 million.
- The Federal Home Loan Bank provided approximately $1.5 billion of available borrowing capacity at June 30, 2020, and correspondent-bank uncommitted credit lines totaled $504.0 million.
- The Corporation and Bank remained above regulatory capital requirements. The Bank’s total risk-based capital ratio was 12.04%, Tier 1 capital ratio was 10.79%, common equity Tier 1 ratio was 10.79%, and leverage ratio was 9.20%; the Bank was categorized as well capitalized.
Material changes versus the prior comparable period
- Net income declined 87.3% in the quarter and 91.0% year to date, mainly because of substantially higher credit-loss provisions.
- Q2 provision expense included $19.9 million attributable to changes in CECL economic assumptions, predominantly driven by COVID-19. The six-month amount attributable to economic assumptions was $40.2 million.
- Net interest income increased modestly despite a lower margin, as loan growth and materially lower deposit and borrowing costs offset lower asset yields.
- Noninterest income increased 10.1% in Q2 and 11.4% year to date, led by mortgage banking gains of $3.5 million in Q2 and $6.3 million year to date. Mortgage volume and margins expanded.
- Interest expense declined 43.4% in Q2 and 28.1% year to date, reflecting Federal Reserve rate cuts and lower funding costs.
- Nonperforming loans and leases declined to $27.4 million from $38.8 million at year-end, while the allowance for credit losses increased to $86.2 million from $35.3 million. The allowance-to-loans ratio rose to 1.74% from 0.81%.
- Approximately 1,420 loans and leases totaling $720.1 million received principal or interest deferrals under COVID-19 relief provisions and were not classified as troubled debt restructurings.
- Other real estate owned increased to $8.6 million from $0.5 million after a $8.1 million commercial real estate loan was transferred to OREO.
- Mortgage servicing rights declined to $6.1 million and included a $338 thousand valuation allowance, compared with no allowance at year-end.
Outlook, management commentary, risks, and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management states that interim results are not necessarily indicative of full-year results.
- Management identified COVID-19 as the principal uncertainty. Prolonged unemployment, weaker demand, declining real estate collateral values, higher delinquencies, additional CECL provisions, and reduced wealth-management revenue could materially affect results.
- Near-zero interest rates may reduce asset yields faster than funding costs, placing further pressure on net interest margin and earnings.
- PPP participation created potential litigation, regulatory, reputational, and credit risks. The SBA could deny or reduce guaranty coverage if it determines that loans were improperly originated, funded, or serviced.
- PPP activity generated approximately $2.0 million of Q2 interest income and $1.3 million of capitalized compensation; $11.0 million of net deferred PPP fees remained on the balance sheet at June 30, 2020.
- CECL adoption reduced retained earnings by $11.3 million after tax on January 1, 2020. The company elected available regulatory capital transition relief.
- A $656 thousand first-quarter charge related to extinguishment of long-term debt increased year-to-date noninterest expense.
- Management reported effective disclosure controls as of June 30, 2020 and stated that pending legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether COVID-19 loan deferrals convert into higher delinquencies, nonaccrual loans, charge-offs, or additional CECL provisions.
- The ultimate forgiveness and SBA guaranty status of the $499.0 million PPP portfolio and any related litigation or regulatory developments.
- Whether the 1.74% allowance-to-loans ratio remains adequate under changing economic forecasts, particularly for commercial real estate, hospitality, retail, and other exposed sectors.
- The sustainability of elevated mortgage banking gains and whether lower rates continue to pressure mortgage servicing rights and fee income.
- Future net interest margin performance amid excess liquidity, PPP loans, deposit growth, and near-zero short-term rates.
- Capital and dividend capacity if earnings remain depressed or goodwill and intangible-asset impairment indicators emerge.