Business Context and Reporting Period
Univest Financial Corporation, a Pennsylvania bank holding company, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Its principal subsidiary, Univest Bank and Trust Co., provides banking, wealth management, insurance, mortgage banking and equipment-financing services. Reportable segments are Banking, Wealth Management and Insurance.
Financial Results and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $58.3 million | $48.7 million | $156.4 million | $140.9 million |
| Provision for credit losses | $3.6 million | $(0.2) million reversal | $6.8 million | $(11.5) million reversal |
| Noninterest income | $18.0 million | $20.6 million | $57.4 million | $64.0 million |
| Noninterest expense | $46.7 million | $43.2 million | $139.4 million | $124.1 million |
| Net income | $20.8 million | $20.9 million | $54.3 million | $74.4 million |
| Diluted EPS | $0.71 | $0.71 | $1.84 | $2.52 |
| Return on average assets | 1.21% | 1.24% | 1.05% | 1.53% |
| Return on average equity | 10.67% | 11.12% | 9.39% | 13.72% |
- Tax-equivalent net interest margin was 3.67% in Q3 and 3.25% for the first nine months, compared with 3.11% and 3.13%, respectively, in the prior-year periods. Management attributed the improvement to loan growth, higher interest rates and the Corporation’s asset-sensitive balance sheet.
- Total assets were $6.91 billion at September 30, 2022, down 3.0% from December 31, 2021. Loans and leases held for investment increased 10.2% to $5.85 billion, while net loans and leases were $5.77 billion after the allowance for credit losses.
- Allowance for credit losses on loans and leases was $74.9 million, or 1.28% of loans, compared with 1.35% at year-end 2021.
- Noninterest income declined primarily because mortgage banking activity weakened. Mortgage banking income fell 74.7% in Q3 and 68.5% for the nine-month period.
- Noninterest expense increased 7.9% in Q3 and 12.4% for the nine-month period. The filing includes approximately $1.2 million of digital-transformation expenses in Q3 and $3.4 million for the first nine months.
- Net cash provided by operating activities was $83.5 million for the first nine months. Investing activities used $624.5 million, principally from a $562.2 million increase in loans and $122.0 million of net investment-securities purchases. Financing activities used $235.8 million, principally reflecting a $268.2 million decrease in deposits.
Liquidity, Funding, Debt and Capital
- Cash and cash equivalents declined to $113.3 million from $890.2 million at December 31, 2021, as excess liquidity funded loan growth and securities purchases.
- Total deposits were $5.79 billion, down 4.4% from year-end. The weighted-average deposit cost increased to 0.65% from 0.16% at December 31, 2021.
- Short-term borrowings increased to $80.7 million from $20.1 million. Long-term debt was $95.0 million and subordinated notes were $99.1 million.
- The Corporation and Bank had $2.8 billion of committed borrowing capacity, of which $2.0 billion was available at September 30, 2022. The Bank had approximately $1.9 billion of available FHLB borrowing capacity and no Discount Window borrowings.
- Shareholders’ equity was $754.2 million, down 2.5% from year-end, primarily because of a $48.6 million increase in accumulated other comprehensive loss related to lower securities and derivative fair values and $11.4 million of share repurchases.
- The Corporation’s total capital ratio was 13.10%, Tier 1 risk-based capital ratio was 10.51% and Tier 1 leverage ratio was 9.87%. The Bank remained well capitalized.
Material Changes Versus the Prior Comparable Period
- Q3 net income decreased $0.1 million, or 0.5%, while nine-month net income decreased $20.1 million, or 27.0%.
- Net interest income increased $9.6 million, or 19.7%, in Q3 and $15.5 million, or 11.0%, for the first nine months.
- The shift from credit-loss reversals in 2021 to provisions in 2022 reduced earnings by approximately $3.7 million in Q3 and $18.3 million for the first nine months.
- Loan growth and improved loan yields benefited interest income, but funding costs increased as deposit rates and short-term borrowing costs rose.
- Noninterest income fell $2.6 million in Q3 and $6.6 million for the first nine months, principally due to lower mortgage banking revenue and weaker wealth-management fee trends.
- Nonperforming loans and leases declined to $14.1 million from $33.8 million at year-end, although other real estate owned increased to $19.0 million from $0.3 million after a $18.3 million commercial real estate loan transfer.
- Available-for-sale and held-to-maturity securities had significant unrealized losses at September 30, 2022, primarily because of higher interest rates. The filing states that management did not intend, and was not likely required, to sell the securities before recovery or maturity.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal earnings or revenue guidance. Management expects to maintain adequate capital and liquidity, support loan growth and use a diversified funding strategy. Management also described continued investment in a digital-transformation initiative and expansion into Maryland and Western Pennsylvania.
- Key forward-looking risks include inflation, recession or slower growth, labor shortages, supply-chain disruption, interest-rate volatility, reduced loan demand, deposit competition and higher funding costs.
- Credit risks include changes in delinquencies, criticized and classified loans, charge-offs, commercial real estate exposure, real estate values and the assumptions used in the allowance for credit losses.
- Market-rate increases may support net interest income but reduce the fair value of fixed-rate securities, increase deposit costs and affect mortgage originations, prepayments and wealth-management assets.
- Assets under wealth-management supervision declined to $4.0 billion from $4.6 billion a year earlier, pressuring advisory-fee revenue.
- The Corporation disclosed legal proceedings that management does not expect to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- A $250 million interest-rate swap entered in May 2022 had a $9.0 million liability fair value at September 30, 2022. Customer-related credit derivatives had $795.0 million of notional exposure; the maximum potential payments were not estimable.
- Potential contingent consideration related to the Sheaffer acquisition ranged from zero to a maximum of $1.9 million through November 30, 2024; the recorded liability was $1.7 million.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether loan growth can continue without a material deterioration in commercial real estate, construction or other credit exposures.
- Whether the allowance for credit losses remains adequate as economic conditions, interest rates and borrower performance change.
- The effect of deposit outflows and rising deposit costs on liquidity and future net interest margin.
- The extent to which unrealized securities losses affect tangible capital, liquidity flexibility or future earnings if securities must be sold.
- Whether mortgage banking and wealth-management revenue remain below prior-year levels.
- The future cost and execution risk of the digital-transformation initiative and geographic expansion.
- The potential cash impact of contingent consideration, customer swap exposures, legal matters and other off-balance-sheet commitments.