Univest Financial Corporation: Q2 2022 Form 10-Q Summary
Business context and reporting period
Univest Financial Corporation is a Pennsylvania bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides banking, wealth management, insurance, mortgage banking and equipment financing services. The filing covers the three and six months ended June 30, 2022; financial statements are unaudited and presented in accordance with U.S. GAAP. Reportable segments are Banking, Wealth Management and Insurance.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $51.5 million | $98.1 million |
| Provision for credit losses | $6.7 million | $3.2 million |
| Noninterest income | $19.0 million | $39.5 million |
| Noninterest expense | $47.4 million | $92.8 million |
| Net income | $13.2 million | $33.5 million |
| Diluted EPS | $0.45 | $1.13 |
| Return on average assets | 0.76% | 0.96% |
| Return on average equity | 6.85% | 8.74% |
| Tax-equivalent net interest margin | 3.19% | 3.04% |
At June 30, 2022, total assets were $6.70 billion, including $5.66 billion of loans and leases held for investment, net loans of $5.59 billion, and $94.8 million of cash and cash equivalents. Total deposits were $5.56 billion, total liabilities were $5.94 billion, and shareholders’ equity was $763.9 million.
Six-month operating cash flow was $59.7 million. Investing activities used $421.6 million, primarily reflecting a $371.5 million increase in loans and purchases of investment securities. Financing activities used $433.5 million, primarily because deposits declined by $492.1 million. Cash and cash equivalents decreased from $890.2 million at year-end 2021 to $94.8 million at June 30, 2022.
Total borrowings were $291.6 million, consisting of $97.6 million of short-term borrowings, $95.0 million of long-term debt and $99.0 million of subordinated notes. The Bank had approximately $2.0 billion of available FHLB borrowing capacity and $2.1 billion of total committed borrowing capacity available at quarter-end, excluding fully available uncommitted correspondent funding of $410.0 million.
Material changes versus the prior comparable period
- Second-quarter net income declined 36.9% to $13.2 million, while six-month net income declined 37.4% to $33.5 million. Diluted EPS decreased from $0.71 to $0.45 for the quarter and from $1.81 to $1.13 for the six-month period.
- Net interest income increased 10.1% in the quarter and 6.5% year to date, supported by loan and investment growth, higher asset yields and lower borrowing costs. The six-month net interest margin declined to 3.04% from 3.14%.
- Noninterest income declined 6.1% for the quarter and 9.2% year to date. Mortgage banking gains fell 64.5% and 66.4%, respectively, because of lower loan sales and narrower margins.
- Noninterest expense increased 14.7% for the quarter and 14.8% year to date, including costs associated with the digital transformation initiative, higher personnel investment, data processing and professional fees.
- Loans and leases held for investment increased 6.6% from December 31, 2021, or 7.2% excluding PPP loans. Deposits decreased 8.1%, primarily due to lower public funds, commercial and consumer deposits.
- Accumulated other comprehensive loss increased to $42.8 million from $16.4 million, principally because of after-tax unrealized losses on available-for-sale securities.
- The allowance for credit losses on loans and leases was $72.0 million, or 1.27% of loans and leases, compared with 1.35% at year-end 2021. Net charge-offs increased to $1.8 million for the six-month period from $531 thousand in the prior year.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or financial guidance. Management stated that excess liquidity diminished during the quarter, returning to a pre-pandemic liquidity level, and that loan growth was funded partly through the use of excess cash and increased short-term FHLB borrowings.
The second-quarter provision for credit losses primarily reflected loan growth, a $1.1 million specific reserve on a commercial real estate loan placed on nonaccrual status, and a $736 thousand provision related to an existing nonaccrual commercial real estate loan. For the six-month period, favorable changes in CECL economic assumptions partially offset reserve increases related to loan growth and two nonaccrual commercial real estate properties.
Nonperforming assets were $34.8 million at June 30, 2022, including $16.2 million of nonperforming loans and leases and $18.6 million of other real estate owned. The increase in other real estate owned primarily resulted from the transfer of an $18.3 million commercial real estate loan during the quarter. Management reported that nonaccrual loans and leases declined to $13.4 million from $33.2 million at year-end.
The Bank entered into a four-year, $250 million interest-rate swap during the quarter, receiving a fixed 5.99% rate and paying a rate based on Prime. The swap represented approximately 13% of variable-rate loans and contributed approximately $707 thousand to second-quarter net interest income.
Key risks identified include credit deterioration, commercial and residential real estate values, interest-rate and market volatility, deposit competition and funding access, economic and geopolitical conditions, regulatory and accounting changes, cybersecurity and system failures, competition for employees and customers, and execution of growth and technology initiatives. The filing states that there were no material changes to previously disclosed risk factors, no material changes in market risk, and no legal proceedings expected to have a material adverse effect.
The company incurred approximately $1.4 million of digital transformation expenses in the quarter and $2.1 million year to date. A six-month customer fraud incident resulted in $330 thousand of expense. The company repurchased 300,000 shares for $7.6 million during the quarter. Regulatory capital ratios remained above minimum requirements, and the Bank remained categorized as well capitalized.
Important facts for investors to verify
- Whether commercial real estate credit quality, specific reserves, charge-offs and other real estate owned remain elevated in subsequent periods.
- Whether loan growth can continue without materially increasing credit-loss provisions or requiring higher-cost funding.
- Trends in deposits, liquidity, FHLB borrowings and available borrowing capacity following the substantial cash and deposit declines.
- The effect of rising interest rates on net interest margin, deposit pricing, securities valuations and interest-rate swap performance.
- Whether mortgage banking revenue remains below prior-year levels as loan sales and margins contract.
- The continued cost, timing and expected benefits of the digital transformation initiative and expansion-market investments.
- The potential impact of unrealized securities losses on accumulated other comprehensive loss, regulatory capital and liquidity if securities must be sold.
- The maximum potential exposure under credit derivative arrangements, which the filing states cannot be estimated because payments depend on future interest rates and contract conditions.