Univest Financial Corporation — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. This is an annual Form 10-K rather than a quarterly filing, although fourth-quarter share repurchase activity is disclosed. Univest is a Pennsylvania bank holding company with banking, wealth management and insurance operations serving Pennsylvania and New Jersey markets.
Business Context
- At year-end, the Corporation reported $7.1 billion of assets, $5.2 billion of net loans and leases, $6.1 billion of deposits and $773.8 million of shareholders’ equity.
- The company operated through Banking, Wealth Management and Insurance segments. Wealth management assets under management and supervision increased to $4.9 billion from $4.1 billion.
- In December 2021, Univest Insurance acquired certain assets of Paul I. Sheaffer Insurance Agency for $3.8 million in cash, with contingent consideration of up to $1.9 million. The transaction added $3.0 million of goodwill and $2.5 million of customer-related intangibles.
Financial Performance and Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net interest income | $188.4 million | $174.4 million | +8.0% |
| Reversal of provision for credit losses | $10.1 million | Provision of $40.8 million | Favorable swing |
| Noninterest income | $83.2 million | $78.3 million | +6.3% |
| Noninterest expense | $167.4 million | $155.0 million | +8.0% |
| Net income | $91.8 million | $46.9 million | +95.7% |
| Diluted EPS | $3.11 | $1.60 | +94.4% |
| Return on average assets | 1.38% | 0.78% | +60 bps |
| Return on average equity | 12.50% | 7.02% | +548 bps |
| Efficiency ratio | 60.9% | 60.6% | +30 bps |
- Tax-equivalent net interest margin declined to 3.06% from 3.16%, primarily because excess liquidity increased substantially and was invested at low yields. PPP loan forgiveness generated $15.0 million of net interest income, including $10.4 million of recognized deferred fees.
- Noninterest income benefited from higher investment advisory fees, other service fees and bank-owned life insurance income. Mortgage banking income declined modestly to $15.1 million from $16.4 million.
- Noninterest expense increased primarily due to salaries, incentive compensation, professional fees and technology investments. The 2020 restructuring charge did not recur in 2021.
- The effective tax rate was 19.7%, compared with 17.5% in 2020.
Balance Sheet, Credit, Debt and Liquidity
- Cash and cash equivalents increased 304.9% to $890.2 million, including $840.9 million of interest-earning deposits with other banks, as deposit growth substantially exceeded loan growth.
- Total deposits increased 15.5% to $6.055 billion. Noninterest-bearing deposits were $2.065 billion, or approximately 34% of total deposits.
- Gross loans and leases held for investment were essentially flat at $5.310 billion; excluding PPP loans, balances increased 9.4%. PPP loans declined by $452.0 million to $31.7 million.
- The allowance for credit losses declined to $71.9 million from $83.0 million, or 1.35% of loans compared with 1.56%. Net charge-offs were $213 thousand, versus $4.6 million in 2020.
- Nonperforming assets declined to $34.0 million from $40.5 million, and other real estate owned fell to $279 thousand from $7.4 million. Nonaccrual loans and leases increased modestly to $33.2 million from $31.7 million.
- Total borrowings declined to $214.0 million from $311.4 million, including $95.0 million of FHLB advances and $98.9 million of subordinated notes. Available committed borrowing capacity was approximately $1.6 billion, supplemented by $400 million of uncommitted correspondent lines.
- The Corporation remained well capitalized. Its total risk-based capital ratio was 13.77%, Tier 1 risk-based capital ratio was 11.08% and Tier 1 capital-to-average-assets ratio was 9.13% at year-end.
- Operating cash flow was $102.3 million. Investing activities used $126.8 million, while financing activities provided $694.7 million, primarily from the $812.4 million increase in deposits. Cash increased by $670.3 million during the year.
Material Changes Versus 2020
- Net income nearly doubled, largely because the 2021 CECL reversal replaced the $40.8 million provision recorded in 2020.
- Loan growth excluding PPP balances was strong, but total loans were flat because PPP forgiveness and paydowns reduced balances.
- Deposits and excess liquidity expanded materially, lowering the net interest margin and creating greater asset sensitivity to interest rates.
- Credit metrics generally improved: lower charge-offs, lower nonperforming assets and lower allowance balances, although nonaccrual loans increased slightly.
- Wealth management pretax income increased to $8.5 million from $7.5 million, while Insurance pretax income declined to $3.4 million from $4.1 million.
- The quarterly share repurchase program had no purchases during the fourth quarter. At year-end, 679,174 shares remained available for repurchase.
Outlook, Risks and Unusual Items
- Management expects excess liquidity to decline as customers spend pandemic-related funds and the company funds future loan growth, but prolonged excess liquidity could depress earnings and valuation.
- The balance sheet is modeled as asset sensitive: a 100-basis-point increase in rates was estimated to increase next-12-month net interest income by $20.5 million, while a 100-basis-point decrease was estimated to reduce it by $4.3 million. Actual results may differ materially.
- Approximately 82.8% of loans excluding PPP loans consisted of commercial, commercial real estate, construction and related commercial exposures, increasing sensitivity to economic downturns, real estate values and borrower cash flow.
- CECL results remain sensitive to economic assumptions. Management used an 80% Moody’s S2 and 20% S3 downside-weighted forecast. The filing indicates that alternative forecast scenarios could change the allowance materially, but the exact impact depends on the scenario used.
- Key risks include COVID-19 effects, interest-rate and margin volatility, credit deterioration, deposit competition, uninsured deposits, cybersecurity, regulatory changes, LIBOR transition, competition from fintech and nonbank institutions, and the ability to integrate acquisitions.
- At December 31, 2021, the company had $3.4 billion of uninsured deposits exceeding the FDIC limit. Off-balance-sheet commitments to extend credit were $1.639 billion, and letters of credit totaled approximately $48.4 million.
- Potential contingent consideration related to the Sheaffer acquisition was recorded at $1.6 million and could reach $1.9 million through November 2024.
- Management and KPMG reported effective internal control over financial reporting, and KPMG issued unqualified audit opinions. The critical audit matter involved valuation of the allowance for credit losses on pooled loans.
Important Facts for Investors to Verify
- Whether excess cash is converted into higher-yielding loans or investments without materially increasing credit risk.
- Whether deposit growth persists and whether the 34% noninterest-bearing deposit mix remains stable as interest rates rise.
- Whether commercial real estate and other commercial exposures produce higher delinquencies, charge-offs or CECL provisions as pandemic support fades.
- Whether the decline in the allowance reflects sustainable credit improvement or optimistic economic assumptions.
- The effect of rising rates on deposit pricing, securities’ unrealized losses, loan demand and the modeled net interest income benefit.
- The sustainability of 2021 earnings after excluding the CECL reversal, PPP fee recognition and the $1.1 million BOLI death benefit.
- Progress and financial contribution from the Sheaffer acquisition and any additional contingent payments.
- Exposure to uninsured deposits, off-balance-sheet commitments, credit derivatives and LIBOR-linked instruments.