Univest Financial Corporation — FY2020 Form 10-K 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, mortgage, equipment-financing, wealth-management and insurance services primarily in Pennsylvania and New Jersey. The filing covers the fiscal year ended December 31, 2020; quarterly data includes the fourth quarter of 2020. The company reported approximately 40 banking offices, 896 employees, $6.3 billion of assets and $692.5 million of shareholders’ equity at year-end.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $6.34 billion | $5.38 billion | 17.8% increase |
| Net loans and leases held for investment | $5.22 billion | $4.35 billion | 20.0% increase |
| Deposits | $5.24 billion | $4.36 billion | 20.2% increase |
| Net interest income | $174.4 million | $169.2 million | 3.0% increase |
| Provision for credit losses | $40.8 million | $8.5 million | Material increase |
| Noninterest income | $78.3 million | $65.4 million | 19.7% increase |
| Noninterest expense | $155.0 million | $146.1 million | 6.1% increase |
| Net income | $46.9 million | $65.7 million | 28.6% decrease |
| Diluted EPS | $1.60 | $2.24 | 28.6% decrease |
| Return on average assets | 0.78% | 1.26% | Down 48 basis points |
| Return on average equity | 7.02% | 10.07% | Down 305 basis points |
| Tax-equivalent net interest margin | 3.16% | 3.59% | Down 43 basis points |
| Net cash provided by operating activities | $51.2 million | $73.1 million | Decrease |
Liquidity and capital: Cash and interest-earning deposits were $219.9 million, up 75.7%. Total borrowings were $311.4 million, including $183.5 million of subordinated notes. The company and bank remained well capitalized; the Corporation’s total risk-based capital ratio was 15.31% and its Tier 1 risk-based capital ratio was 10.76%. The company reported approximately $1.5 billion of available committed borrowing capacity at year-end.
Credit quality: The allowance for credit losses on loans and leases increased to $83.0 million from $35.3 million, or 1.56% of loans versus 0.81% in 2019. Net charge-offs were $4.6 million, or 0.10% of average loans. Nonperforming loans and leases were $33.1 million, or 0.62% of loans, while nonperforming assets were $40.5 million, or 0.64% of total assets.
Material Changes Versus the Prior Comparable Period
- Net income declined primarily because of the substantially higher credit-loss provision associated with COVID-19 economic assumptions and adoption of the CECL accounting standard.
- CECL adoption on January 1, 2020 increased the allowance for credit losses on loans and leases by $12.9 million, increased the allowance on investments by $300 thousand and increased the unfunded-commitment reserve by $1.1 million, resulting in an after-tax retained-earnings reduction of $11.3 million.
- Loans and leases grew 21.0%, including $483.8 million of PPP loans at year-end. Excluding PPP loans, loans and leases increased 9.9%.
- Deposits increased 20.2%, with noninterest-bearing deposits reaching $1.69 billion, or approximately 32% of total deposits.
- Net interest income increased despite a decline in the net interest margin, reflecting lower deposit costs and loan growth. The margin was pressured by near-zero short-term interest rates, excess liquidity and lower-yielding PPP loans.
- Noninterest income benefited from mortgage banking activity: the net gain on mortgage banking activities rose to $16.4 million from $3.9 million. Service charges and other service-fee income declined because of reduced customer activity and COVID-19 fee waivers.
- Noninterest expense increased, including $1.4 million of restructuring charges for the financial-center optimization plan and $1.8 million related to extinguishment of long-term debt. A $928 thousand pre-tax benefit resulted from modifying performance-based restricted-stock vesting criteria.
- The company issued $100 million of fixed-to-floating subordinated notes in August 2020 and redeemed $10 million of previously issued subordinated notes.
- The quarterly pattern improved materially by the fourth quarter: fourth-quarter net income was $25.9 million, compared with $2.1 million in the second quarter and $18.1 million in the third quarter. The fourth quarter included an $8.7 million reversal of provision for credit losses.
- The quarterly cash dividend was reduced to $0.20 per share, or $0.60 for the year, compared with $0.80 per share in 2019.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management’s outlook is subject to significant uncertainty from the COVID-19 pandemic, employment and economic conditions, interest rates, real-estate values, borrower performance and the timing of PPP forgiveness.
- The Bank originated approximately 2,550 PPP loans totaling approximately $510 million through December 31, 2020. Management believed the loans were originated in accordance with SBA guidelines and were fully guaranteed, but disclosed risks of litigation, regulatory enforcement, reputational damage and possible SBA denial or reduction of guarantees.
- Approximately $68.0 million of loans and leases were modified through principal or interest deferrals under COVID-19 relief provisions and were not classified as troubled debt restructurings.
- Commercial, commercial-real-estate, construction and agricultural lending represented approximately 78% of the loan portfolio excluding PPP loans, creating sensitivity to regional economic weakness, real-estate values and business cash flows.
- Other real estate owned increased to $7.4 million from $516 thousand after a commercial real-estate loan was transferred to OREO. The related property, carried at $7.1 million, was under an agreement of sale and expected to be sold in the first quarter of 2021.
- Interest-rate sensitivity modeling indicated the balance sheet was slightly asset-sensitive. Management estimated that a 100-basis-point increase in rates would increase next-12-month net interest income by approximately 9.34%, while a 100-basis-point decrease would reduce it by approximately 2.21%; actual results may differ materially.
- Key continuing risks include credit losses, interest-rate and margin compression, deposit competition, liquidity access, cybersecurity and technology failures, regulatory changes, LIBOR replacement, concentrated regional lending and competition from banks and nonbank financial providers.
- The company announced consolidation or relocation of eight financial centers. The first phase was completed in January 2021, with the second phase planned for completion by June 30, 2021.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The valuation of the collective allowance for credit losses was identified as the critical audit matter.
Most Important Facts for Investors to Verify
- Whether PPP loans are forgiven and fully reimbursed by the SBA, and whether any related litigation, regulatory actions or guarantee disputes arise.
- Whether the $83.0 million CECL allowance adequately covers future losses, particularly in commercial real estate, construction, hospitality and other economically sensitive portfolios.
- Trends in nonperforming loans, criticized and classified assets, loan modifications, charge-offs and OREO following the expiration of pandemic relief programs.
- The sustainability of the unusually strong mortgage-banking contribution to 2020 noninterest income.
- The effect of prolonged low interest rates on the 3.16% net interest margin, deposit pricing and earnings.
- Liquidity availability and collateral requirements for FHLB, Federal Reserve and correspondent-bank funding sources.
- Future dividend capacity given reduced earnings, capital-distribution restrictions and reliance on dividends from the Bank.
- Execution and cost savings from the branch optimization plan and the effect of ongoing technology, staffing and regulatory-compliance investments.