Univest Financial Corporation — Form 10-Q Summary
Business context and reporting period
Univest Financial Corporation is a Pennsylvania bank holding company with Banking, Wealth Management and Insurance segments. The filing covers the unaudited three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019 and December 31, 2019 balance-sheet amounts. The quarter was materially affected by the COVID-19 pandemic, market volatility and the January 1, 2020 adoption of the current expected credit loss (CECL) standard.
Key financial metrics
| Metric | Q1 2020 | Comparable period or change |
|---|---|---|
| Net interest income | $42.5 million | Up $0.9 million, or 2.3%, from Q1 2019 |
| Tax-equivalent net interest margin | 3.48% | 3.75% in Q1 2019 |
| Provision for credit losses | $21.0 million | $2.7 million in Q1 2019 |
| Noninterest income | $18.4 million | Up 12.8% from Q1 2019 |
| Noninterest expense | $39.6 million | Up 11.3% from Q1 2019 |
| Income before taxes | $0.2 million | $19.6 million in Q1 2019 |
| Net income | $0.8 million | Down 94.8% from $16.1 million |
| Diluted earnings per share | $0.03 | $0.55 in Q1 2019 |
| Return on average assets | 0.06% | 1.30% in Q1 2019 |
| Return on average equity | 0.50% | 10.32% in Q1 2019 |
| Total assets | $5.46 billion | Up 1.6% from December 31, 2019 |
| Loans and leases held for investment | $4.45 billion | Up 1.4% from December 31, 2019 |
| Deposits | $4.41 billion | Up 1.1% from December 31, 2019 |
| Shareholders’ equity | $651.6 million | Down 3.5% from December 31, 2019 |
Cash and cash equivalents increased to $182.9 million from $125.1 million at year-end. Operating activities provided $11.1 million of cash, investing activities used $50.6 million, and financing activities provided $97.3 million. The company issued $125.0 million of long-term debt and repaid $65.0 million during the quarter.
The allowance for credit losses on loans and leases was $68.2 million, or 1.53% of loans and leases, compared with $35.3 million, or 0.81%, at December 31, 2019. Nonperforming loans and leases were $38.5 million, or 0.86% of loans and leases, and nonperforming assets were $39.0 million, or 0.71% of total assets.
Liquidity remained substantial. The company reported approximately $1.4 billion of available committed borrowing capacity, $1.3 billion of available FHLB borrowing capacity and $504.0 million of uncommitted correspondent-bank credit lines. The Bank remained well capitalized, with a total risk-based capital ratio of 11.87% and a Tier 1 common capital ratio of 10.76% at March 31, 2020.
Material changes versus prior comparable periods
- Net income fell $15.2 million, primarily because of the substantial increase in credit-loss expense associated with CECL and COVID-19 economic assumptions.
- Q1 2020 included $20.3 million of COVID-19-related provision and reserve expense, or approximately $16.1 million after tax and $0.55 per diluted share.
- CECL adoption increased the loan and lease allowance by $12.9 million, the investment-securities allowance by $0.3 million and the unfunded-commitment reserve by $1.1 million. The aggregate after-tax reduction to retained earnings was $11.3 million.
- Net interest income increased despite a decline in net interest margin, reflecting loan growth and lower deposit and borrowing costs. Average gross loans and leases increased $371.2 million year over year.
- Noninterest income benefited from mortgage banking activity and investment advisory fees. Mortgage banking income increased to $2.7 million from $0.5 million, while investment advisory fees increased 12.3%.
- Noninterest expense increased $4.0 million, including higher compensation and data-processing costs, a $0.7 million gain on the sale of investment securities in the income statement, and a $0.7 million charge for extinguishment of long-term debt.
- Wealth Management pretax income increased to $1.9 million, but assets under management and supervision declined to $3.3 billion from $3.8 billion at December 31, 2019 because of the equity-market downturn.
Outlook, commentary, risks and unusual items
The filing provides no formal earnings or revenue guidance. Management states that the full impact of COVID-19 cannot yet be predicted. Key identified risks include lower demand for financial products, higher delinquencies and foreclosures, declining real-estate collateral values, additional credit-loss provisions, lower asset yields and net interest margins, weaker wealth-management revenue, higher FDIC premiums, cybersecurity threats from remote work and disruptions at third-party service providers.
As of March 31, 2020, 46 loans with principal balances totaling $10.7 million had received principal or interest deferrals under the CARES Act and related interagency guidance. These modifications were not classified as troubled debt restructurings under the applicable relief provisions. The filing also discusses the Paycheck Protection Program and related Federal Reserve lending facility, but does not provide a clear amount of PPP loans originated as of the reporting date.
The company declared a quarterly cash dividend of $0.20 per share and repurchased 185,072 shares under its publicly announced repurchase program during the quarter. Management cautions that a sustained decline in earnings or a net loss could reduce the future dividend rate. Legal proceedings are not expected to have a material adverse effect based on information currently available.
Important facts for investors to verify
- Whether COVID-19-related loan deferrals, unemployment and commercial real-estate stress lead to additional provisions or charge-offs in subsequent quarters.
- The adequacy of the $68.2 million loan and lease allowance under CECL forecasts and the effect of regulatory CECL transition relief on capital ratios.
- The sustainability of the 3.48% net interest margin following Federal Reserve rate cuts and continued excess liquidity.
- The level, mix and cost of deposits and the company’s reliance on FHLB and other wholesale funding.
- Future performance of mortgage banking income, investment advisory fees and assets under management after the March 2020 market decline.
- The status and economics of PPP lending, loan-forgiveness processing and any related liquidity or operational impacts; the filing text does not provide a clear reported PPP balance.
- Potential changes in dividends or share repurchases if earnings, capital or credit quality deteriorate.