Univest Financial Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; filed August 2, 2019. The interim financial statements are unaudited. Univest is a Pennsylvania bank holding company with Banking, Wealth Management and Insurance segments. Effective January 1, 2019, the company changed its name from Univest Corporation of Pennsylvania and rebranded its wealth management business under the Girard name.
Financial Highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net income | $16.5 million | $4.4 million | $32.5 million | $17.2 million |
| Diluted EPS | $0.56 | $0.15 | $1.11 | $0.58 |
| Net interest income | $42.6 million | $39.0 million | $84.2 million | $76.3 million |
| Provision for loan and lease losses | $2.1 million | $15.4 million | $4.8 million | $17.5 million |
| Noninterest income | $16.4 million | $15.3 million | $32.7 million | $30.9 million |
| Noninterest expense | $36.8 million | $34.3 million | $72.3 million | $69.5 million |
| Tax-equivalent net interest margin | 3.67% | 3.73% | 3.71% | 3.72% |
| Return on average assets | 1.28% | 0.37% | 1.29% | 0.75% |
| Return on average equity | 10.23% | 2.86% | 10.28% | 5.70% |
Balance Sheet, Liquidity and Capital
- Total assets were $5.15 billion at June 30, 2019, up 3.4% from December 31, 2018.
- Loans and leases held for investment were $4.17 billion, up 4.0% from year-end, with growth concentrated in commercial real estate and residential real estate lending.
- Total deposits increased 6.1% to $4.12 billion. Short-term borrowings declined 79.3% to $39.4 million, while long-term debt increased 17.1% to $170.2 million.
- Cash and cash equivalents were $84.6 million, compared with $109.4 million at December 31, 2018. The company reported $31.6 million of operating cash flow and used $156.1 million in investing activities during the first six months.
- The FHLB borrowing facility provided approximately $1.7 billion of maximum capacity. Uncommitted correspondent federal-funds lines totaled $504.0 million, but availability may be withdrawn at the lenders’ discretion. No Federal Reserve Discount Window or committed correspondent-line borrowings were outstanding at June 30, 2019.
- Shareholders’ equity was $651.7 million, up 4.4% from year-end. The company declared cash dividends of $0.40 per share during the first six months.
- The Corporation and Bank exceeded regulatory minimums. At June 30, 2019, the Corporation reported total capital and Tier 1 capital ratios of 13.79% and 10.99%, respectively; the Bank reported 11.65% and 10.92%. The Bank was categorized as well capitalized.
Material Changes Versus Prior Period
- Six-month net income increased 89.1%, primarily reflecting significantly lower credit-loss provisions and continued loan growth. The 2018 comparison included a $12.7 million commercial-loan charge-off related to borrower employee fraud.
- Net interest income increased 10.1% for the six months, supported by 10.3% average loan growth. The margin declined modestly because higher deposit costs and excess liquidity offset asset-yield improvement.
- Interest expense increased 62.1% for the six months, driven by higher deposit costs and 16.4% average deposit growth.
- Noninterest income increased 5.7%, supported by investment advisory, insurance, deposit service and other service-fee growth. Mortgage banking income declined 22.9% for the six months due primarily to narrower margins.
- Noninterest expense increased 4.1%, principally from additional revenue-generating personnel and higher data-processing costs. The prior-year period included $571 thousand of restructuring charges; none were recorded in 2019.
- Nonperforming loans and leases decreased slightly to $26.6 million from $26.9 million at year-end, while the allowance for loan and lease losses increased to $32.6 million from $29.4 million. The allowance was 0.78% of loans and leases and 122.64% of nonperforming loans.
- The company adopted lease accounting guidance on January 1, 2019, recording $35.5 million of operating lease right-of-use assets, $38.6 million of lease liabilities and a $1.5 million after-tax reduction to retained earnings. Management stated that the adoption negatively affected regulatory capital ratios.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management’s stated strategy emphasizes business growth, expansion of commercial lending, fee-based businesses, technology investment and maintaining capital and liquidity while limiting credit and interest-rate risk.
- Management expects adoption of the current expected credit loss standard, effective January 1, 2020, to increase the loan-loss reserve and reduce shareholders’ equity and regulatory capital, although the filing does not provide a quantified estimate.
- Key risks include interest-rate volatility, deposit pricing and funding competition, loan and investment credit quality, access to cost-effective funding, economic and competitive conditions, regulatory and accounting changes, operational and cybersecurity failures, and retention of key personnel.
- Credit derivatives created contingent exposure to third-party financial institutions. The company’s maximum potential payments were not estimable because they depend on future interest rates and the contracts did not cap the potential amount.
- Unrealized losses on available-for-sale securities totaled $7.2 million for securities held in loss positions for at least twelve months. Management concluded the securities were not other-than-temporarily impaired and did not record impairment charges.
- Pending and threatened legal proceedings were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- There were no shares repurchased under the publicly announced repurchase program during the second quarter; 864,246 shares remained available under the program at June 30, 2019.
Investor Verification Items
- Verify the sustainability of earnings improvement after normalizing for the $12.7 million fraud-related charge-off and other 2018 unusual items.
- Monitor deposit-cost trends, net interest margin compression and the effect of any changes in interest rates.
- Assess commercial real estate concentration, nonperforming loans, troubled debt restructurings and reserve adequacy.
- Quantify the retained-earnings and regulatory-capital impact of CECL adoption when disclosed.
- Review liquidity availability, including collateral requirements, FHLB capacity and the withdrawal risk associated with uncommitted funding lines.
- Evaluate the effect of operating-expense investments and commercial-lending expansion on future efficiency and credit performance.