Business Context and Reporting Period
Univest Financial Corporation, formerly Univest Corporation of Pennsylvania, filed its Form 10-K for the fiscal year ended December 31, 2018. The corporate name change and wealth-management rebranding under the Girard name became effective January 1, 2019. The company is a Pennsylvania bank holding company operating through Banking, Wealth Management, and Insurance segments, primarily in southeastern Pennsylvania and southern New Jersey.
At year-end, the company reported approximately $5.0 billion of assets, $4.0 billion of net loans and leases, $3.9 billion of deposits, $624.1 million of shareholders’ equity, 39 banking offices, and approximately 841 employees.
Financial Performance and Condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net interest income | $158.1 million | $143.2 million | +10.4% |
| Provision for loan and lease losses | $20.3 million | $9.9 million | +105.4% |
| Noninterest income | $60.2 million | $59.2 million | +1.6% |
| Noninterest expense | $137.2 million | $130.7 million | +5.0% |
| Net income | $50.5 million | $44.1 million | +14.6% |
| Diluted EPS | $1.72 | $1.64 | +4.9% |
| Return on average assets | 1.07% | 1.01% | +6 bps |
| Return on average equity | 8.26% | 8.37% | -11 bps |
- Margins and revenue: Tax-equivalent net interest margin was 3.72%, down from 3.78%, as higher loan yields and loan growth were offset by sharply higher deposit and borrowing costs. Tax-equivalent net interest income was $160.7 million. Purchase-accounting accretion contributed approximately $1.0 million, versus $3.0 million in 2017.
- Loan growth and credit: Gross loans and leases held for investment increased 10.7% to $4.0 billion, led by commercial real estate, commercial business, and residential real estate lending. Commercial, financial, agricultural, commercial real estate, and construction loans represented approximately 84.8% of the portfolio.
- Asset quality: Net charge-offs increased to $12.5 million from $5.8 million, primarily due to a $10.9 million net charge-off associated with borrower employee fraud. Nonaccrual loans increased to $26.2 million, or 0.65% of loans, from $14.5 million, or 0.40%. Nonperforming loans were $26.9 million, or 0.67% of loans, compared with 0.74%. The allowance increased to $29.4 million, or 0.73% of loans, from $21.6 million, or 0.60%.
- Noninterest income: Growth in investment advisory fees, insurance commissions, and other service fees largely offset lower mortgage banking income, BOLI income, and trust fees. Wealth-management assets under management and supervision declined to $3.3 billion from $3.5 billion, primarily due to fourth-quarter equity-market weakness.
- Cash flow: Operating activities provided $86.0 million, compared with $68.7 million in 2017. Investing activities used $431.3 million, principally reflecting a $398.2 million net increase in loans and leases. Financing activities provided $379.3 million, including $331.2 million of deposit growth and $84.3 million of additional short-term borrowings. Cash and cash equivalents increased to $109.4 million from $75.4 million.
- Liquidity and funding: Deposits grew 9.3% to $3.9 billion, including $1.1 billion of noninterest-bearing deposits. Total borrowings were $429.7 million, consisting of $189.8 million of short-term borrowings, $145.3 million of long-term debt, and $94.6 million of subordinated notes. The Bank had an approximately $1.6 billion FHLB borrowing capacity and $367.0 million of uncommitted correspondent-bank federal funds lines, which may be withdrawn at the lenders’ discretion.
- Capital: The Corporation remained well capitalized. At December 31, 2018, its total risk-based capital ratio was 13.70%, Tier 1 risk-based capital ratio was 10.88%, and Tier 1 leverage ratio was 10.13%. The Bank’s total risk-based capital ratio was 11.54%.
- Shareholder returns: The annual dividend remained $0.80 per share. The company repurchased 150,000 shares for $3.6 million during 2018, leaving 864,246 shares authorized for future repurchase.
Material Changes Versus the Prior Comparable Period
- Net income increased despite materially higher credit costs, supported by loan growth, higher interest income, and the lower federal statutory tax rate.
- Interest expense increased 63.4% to $32.4 million as deposit and borrowing costs rose with Federal Reserve rate increases. The average cost of interest-bearing liabilities increased to 1.08% from 0.70%.
- The provision for loan and lease losses more than doubled, driven primarily by the $10.9 million net loss from a fraudulent commercial borrower relationship. The company recovered $1.8 million in the fourth quarter on the previously charged-off loan.
- Assets increased 9.4% to $5.0 billion, while shareholders’ equity increased 3.4% to $624.1 million. Accumulated other comprehensive loss widened by $10.6 million, mainly due to lower available-for-sale securities values as interest rates increased.
- The company closed two owned financial centers and one leased financial center and recorded $571,000 of restructuring charges.
- The 2017 comparison included a $1.1 million deferred-tax-asset remeasurement charge related to the Tax Cuts and Jobs Act; 2018 benefited from a $300,000 completion adjustment and a lower 21% federal tax rate.
- The 2017 cash-flow statement was revised for classification errors involving mortgage-loan originations and sales. Management stated that the corrections did not change total operating, investing, or financing cash flow, cash balances, assets, liabilities, equity, or net income.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management described the balance sheet as slightly asset sensitive, projecting that net interest income would increase in a rising-rate environment. The filing’s simulation estimated a 2.27% increase in next-twelve-month net interest income under a 100-basis-point rate increase and a 4.23% decrease under a 100-basis-point decline, assuming a static balance sheet.
- Management expects continued growth through customer relationships, new offices, and potential strategic acquisitions while maintaining capital, liquidity, credit-risk, and interest-rate-risk limits.
- CECL adoption is required January 1, 2020. Management anticipates a higher allowance and related reductions in shareholders’ equity and regulatory capital ratios, although the amount was not yet clear.
- Lease accounting adoption on January 1, 2019 was expected to add approximately $40.0 million of operating lease liabilities and $37.0 million of right-of-use assets, with an estimated $1.5 million after-tax reduction to retained earnings.
- Key risks include interest-rate and margin compression, commercial real estate and commercial-loan concentration, credit losses, competition for low-cost deposits, access to wholesale funding, regulatory changes, cybersecurity and system failures, litigation, acquisition execution, and declines in wealth-management assets.
- The company reported no material adverse legal proceedings, no goodwill or identifiable-intangible impairment, and no other-than-temporary impairment charges on debt securities. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the elevated provision and nonaccrual-loan levels in 2018 represent an isolated borrower event or broader deterioration in commercial credit quality.
- The effect of deposit repricing and further interest-rate movements on net interest margin and funding costs.
- The quantified balance-sheet, capital, and earnings impact of CECL adoption in 2020.
- Actual 2019 effects from lease accounting, including the expected reduction in retained earnings and regulatory capital ratios.
- The sustainability of loan growth, especially in commercial real estate, commercial business, construction, and Lancaster County markets.
- Trends in wealth-management assets under management, mortgage banking revenue, and other fee-based income.
- Availability and cost of FHLB, correspondent-bank, brokered-deposit, and other wholesale funding sources.
- Whether nonperforming assets, specific reserves, and commercial borrower concentrations remain consistent with reported capital levels and dividend plans.