Univest Financial Corporation 2019 Q1 Form 10-Q Summary
Business context and reporting period
Univest Financial Corporation is a Pennsylvania bank holding company whose subsidiaries provide commercial and consumer banking, mortgage banking, equipment leasing, wealth management and insurance services. The filing covers the unaudited three months ended March 31, 2019, compared primarily with the three months ended March 31, 2018 and December 31, 2018 balance-sheet amounts. Effective January 1, 2019, the company changed its name from Univest Corporation of Pennsylvania, and its wealth management business was rebranded under the Girard name.
Key financial metrics
| Metric | Q1 2019 | Comparable period or change |
|---|---|---|
| Total assets | $5.036 billion | Up 1.0% from December 31, 2018 |
| Loans and leases held for investment | $4.068 billion | Up 1.5% from December 31, 2018; average loans and leases up 10.5% year over year |
| Total deposits | $4.003 billion | Up $117.2 million, or 3.0%, from December 31, 2018 |
| Net interest income | $41.5 million | Up 11.4% from $37.3 million |
| Tax-equivalent net interest margin | 3.75% | Up from 3.72% |
| Total noninterest income | $16.3 million | Up 4.6% from $15.6 million |
| Total noninterest expense | $35.6 million | Up 1.2% from $35.1 million |
| Provision for loan and lease losses | $2.7 million | Up from $2.1 million |
| Net income | $16.1 million | Up 25.1% from $12.9 million |
| Diluted earnings per share | $0.55 | Up from $0.44 |
| Return on average assets | 1.30% | Up from 1.14% |
| Return on average equity | 10.32% | Up from 8.60% |
| Net cash provided by operating activities | $17.1 million | Compared with $17.9 million in Q1 2018 |
| Cash and cash equivalents | $66.1 million | Down from $109.4 million at December 31, 2018 |
Material changes versus the prior comparable period
- Net interest income increased primarily because of 10.5% average loan growth and modest margin expansion. Tax-equivalent interest income rose 19.9%, while interest expense rose 73.1%, principally from higher deposit costs and 15.6% average deposit growth.
- Noninterest income increased $715 thousand. Insurance commissions, bank-owned life insurance income, deposit service charges and risk-participation fees increased, while mortgage banking gains and trust fee income declined.
- Noninterest expense increased only $432 thousand despite additional revenue-generating staff and technology investments. Q1 2018 included $571 thousand of restructuring charges related to financial-center closures and staffing rationalization; Q1 2019 had none.
- The loan-loss provision increased by $632 thousand. Management stated that the 2019 provision included $1.5 million of incremental provision and general reserve related to downgrading a $14.6 million shared national credit loan from pass to substandard.
- Gross loans and leases increased $61.3 million during the quarter, primarily in commercial real estate and residential real estate. Nonperforming loans and leases were $26.9 million, or 0.66% of loans and leases, versus 0.67% at year-end 2018.
- The allowance for loan and lease losses increased to $31.6 million, or 0.78% of loans and leases, from $29.4 million, or 0.73%, at year-end. Net charge-offs were $447 thousand compared with $198 thousand in Q1 2018.
- Deposits funded loan growth and reduced short-term borrowings, which declined $116.6 million, or 61.4%, to $73.2 million. Long-term debt was $145.3 million and subordinated notes were $94.6 million at March 31, 2019.
- Shareholders’ equity increased $13.5 million to $637.6 million, primarily from net income, partially offset by the $5.9 million quarterly dividend and the $1.5 million lease-accounting adoption adjustment.
Guidance, outlook, management commentary, risks and unusual items
- The filing provides no specific earnings, revenue or balance-sheet guidance. Management’s stated strategy is to grow banking, wealth management and insurance activities while maintaining capital and liquidity and controlling credit and interest-rate risk.
- Management highlighted commercial lending expansion, including the hiring of eight commercial lenders and support staff focused on Western Lancaster and York Counties. It also cited continued investment in customer relationship management software, infrastructure and outsourced data processing.
- The company adopted lease accounting guidance on January 1, 2019, recognizing $39.6 million of operating lease liabilities and $36.6 million of right-of-use assets, with a $1.5 million after-tax reduction to retained earnings. Management stated that the adoption negatively affected regulatory capital ratios.
- The company expects adoption of the current expected credit loss standard, or CECL, on January 1, 2020 to increase the loan-loss reserve, reduce shareholders’ equity and affect regulatory capital and ratios. The filing does not provide a quantified CECL impact.
- Liquidity sources included core deposits, a Federal Home Loan Bank facility with approximately $1.7 billion of capacity, $367.0 million of uncommitted correspondent-bank federal-funds lines, Federal Reserve Discount Window collateral of $104.9 million and a $10.0 million committed line of credit. Availability under some facilities may be withdrawn or may vary with collateral and credit conditions.
- Both the Corporation and the Bank exceeded applicable capital requirements at March 31, 2019. The Bank’s total risk-based capital ratio was 11.61%, Tier 1 risk-based capital ratio was 10.89%, common equity Tier 1 ratio was 10.89% and leverage ratio was 10.05%; the Bank was categorized as well capitalized.
- Principal risks include credit quality and loan concentrations, deposit pricing and funding access, interest-rate volatility, competition, regulatory and accounting changes, operational and cybersecurity failures, dependence on key employees and broader economic conditions.
- Management stated that pending or threatened legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported, and disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether the increase in deposit costs continues to offset loan growth and limit future net interest margin expansion.
- The performance and collateral support of the $14.6 million shared national credit loan downgraded during the quarter, along with broader commercial real estate exposure.
- The adequacy of the $31.6 million allowance and the effect of CECL adoption on reserves, retained earnings and regulatory capital.
- The sustainability of deposit growth and the availability and cost of wholesale liquidity if deposits weaken.
- The effect of mortgage banking margin compression, lower trust fees and market conditions on fee income.
- The company’s ability to maintain capital buffers while paying dividends, repurchasing shares and funding continued loan growth.