Business Context and Reporting Period
Univest Financial Corporation, a Pennsylvania bank holding company, owns Univest Bank and Trust Co. and operates Banking, Wealth Management, and Insurance segments. The filing is an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. Unless otherwise noted, dollar amounts are in thousands.
Key Financial Metrics
- Second-quarter net income: $16.8 million, up 27.6% from $13.2 million; diluted EPS was $0.57 versus $0.45.
- Six-month net income: $37.8 million, up 13.0% from $33.5 million; diluted EPS was $1.28 versus $1.13.
- Net interest income: Second-quarter reported net interest income was $54.3 million, up 5.6%; six-month net interest income was $113.6 million, up 15.8%. Tax-equivalent net interest margin was 3.14% for the quarter and 3.35% for the six-month period, compared with 3.19% and 3.04%, respectively.
- Profitability: Second-quarter return on average assets was 0.91% and return on average equity was 8.35%; six-month measures were 1.04% and 9.56%.
- Noninterest income: $19.8 million in the quarter, up 4.4%; $39.5 million for six months, essentially unchanged from the prior year. Insurance fee income increased, while mortgage banking and investment advisory income declined.
- Noninterest expense: $49.8 million in the quarter, up 5.1%; $99.3 million for six months, up 7.1%. Second-quarter results included $1.3 million of restructuring charges.
- Credit provisions: Provision expense was $3.4 million in the quarter versus $6.7 million; six-month provision expense was $6.8 million versus $3.2 million.
- Loans: Loans and leases held for investment increased 5.5% from year-end 2022 to $6.46 billion, driven primarily by commercial real estate, residential mortgage loans, and lease financings.
- Asset quality: Nonaccrual loans and leases were $15.1 million, or 0.23% of loans, versus $13.4 million and 0.22% at year-end. The allowance for credit losses was $82.7 million, or 1.28% of loans, compared with 1.29% at year-end. Total nonperforming assets were $34.5 million, including $19.3 million of other real estate owned.
- Liquidity: Cash and cash equivalents were $140.4 million. Available-for-sale securities totaled $356.2 million. The Corporation and subsidiaries had $3.2 billion of committed borrowing capacity, of which $2.0 billion was available, plus $410.0 million of uncommitted correspondent funding, of which $285.0 million was unused.
- Deposits and funding: Deposits increased 1.2% from year-end to $5.99 billion. Brokered deposits rose to 7.2% of deposits from 1.7%; unprotected deposits declined to 23.3% from 31.0%. Short-term borrowings were $244.7 million, long-term debt was $320.0 million, and subordinated notes were $148.5 million.
- Capital: At June 30, 2023, the Corporation reported total capital to risk-weighted assets of 13.54%, Tier 1 capital of 10.26%, and Tier 1 capital to average assets of 9.59%. The Bank was categorized as well capitalized.
- Cash flow: Six-month operating cash flow was $40.1 million, compared with $59.7 million in the prior year. Investing activities used $385.7 million, principally reflecting $361.7 million of net loan growth. Financing activities provided $333.3 million, including $225.0 million net proceeds from long-term debt issuance and repayment.
Material Changes Versus the Prior Comparable Period
- Interest income increased substantially as loan balances and yields rose; interest expense increased sharply because of higher deposit costs and increased borrowings.
- Average loans and leases increased to $6.27 billion for the six-month period from $5.43 billion, while the average cost of time and interest-bearing deposits increased to 2.28% from 0.34%.
- Mortgage banking income declined 47.3% for six months because of lower loan sales and narrower gain-on-sale margins in the higher-rate environment.
- Insurance commission and fee income increased 13.7% for six months, primarily due to commercial lines, group life and health, and contingent commission income.
- Noninterest expense increased due to salaries, technology and data processing costs, deposit insurance premiums, retirement plan costs, and $1.3 million of restructuring charges related to financial service center optimization and expense management.
- Loans held for sale increased to $29.5 million from $5.0 million, including a $19.7 million shared national credit expected to be sold in the third quarter of 2023.
- Nonaccrual loans increased during the quarter after a $5.8 million construction loan was placed on nonaccrual status, partly offset by repayment of a $2.5 million nonaccrual commercial loan.
- Six-month net charge-offs increased to $3.4 million from $1.8 million, primarily due to $2.4 million of charge-offs on two existing nonaccrual commercial loans to one borrower.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal earnings, revenue, margin, or balance-sheet guidance. Management stated that operating results for the interim periods are not necessarily indicative of full-year results. Management expects to meet contractual cash obligations through on-balance-sheet liquidity, deposit generation, borrowings, and brokered deposits.
- Management cited macroeconomic headwinds, higher interest rates, deposit competition, inflation, possible recession, and slower economic growth as factors affecting margins, funding costs, loan demand, credit quality, and mortgage activity.
- Key risks include deposit outflows or changes in the mix of uninsured deposits, access to cost-effective funding, commercial real estate exposure, changes in real estate values, criticized and classified loans, charge-offs, allowance estimates, interest-rate volatility, liquidity, regulatory changes, higher FDIC assessments, cybersecurity, technology failures, and competition.
- The investment portfolio included significant unrealized losses: held-to-maturity securities had $19.7 million of unrealized losses and available-for-sale securities had $40.7 million of unrealized losses at June 30, 2023. Management stated that it did not intend, and was unlikely to be required, to sell these securities before recovery.
- A $250.0 million interest-rate swap used as a cash-flow hedge had a $10.4 million liability fair value. The Corporation also had $870.4 million of customer credit-derivative notional exposure, with reported credit exposure of $570 thousand; maximum potential payments were not estimable.
- Legal proceedings were described as routine, and management did not expect them to have a material adverse effect. Disclosure controls were determined to be effective, with no material changes in internal control over financial reporting.
- The Corporation adopted ASU 2022-02 on January 1, 2023; the adoption primarily updated disclosures and did not materially affect the financial statements. The Corporation does not expect ASU 2023-02, effective January 1, 2024, to have a material impact.
Important Facts for Investors to Verify
- Whether deposit pricing and the increased use of brokered deposits and wholesale borrowings continue to pressure net interest margin and liquidity.
- Whether the $5.8 million construction loan and other commercial real estate exposures generate additional nonaccruals, reserves, or charge-offs.
- Whether the $19.7 million shared national credit is sold as expected in the third quarter and at what gain or loss.
- Whether unrealized investment-security losses affect tangible capital, liquidity, or future earnings if securities must be sold.
- Whether restructuring actions produce sustainable expense savings after the $1.3 million second-quarter charge.
- Future trends in mortgage banking volume, investment advisory assets, insurance commissions, loan growth, deposit retention, and funding costs.
- The adequacy of the $82.7 million allowance for credit losses relative to commercial real estate concentration, economic conditions, and changes in criticized or nonperforming loans.