UNIVEST FINANCIAL Corp quarterly report, Q1 FY2022

Business Context and Reporting Period

Univest Financial Corporation is a Pennsylvania bank holding company operating through Univest Bank and Trust Co. Its three reportable segments are Banking, Wealth Management and Insurance. The filing reports unaudited consolidated results for the three months ended March 31, 2022, compared with the three months ended March 31, 2021, and financial position at March 31, 2022 compared with December 31, 2021.

Key Financial Metrics

Metric	Q1 2022	Q1 2021	Change
Net interest income	$46.7 million	$45.4 million	Up 2.7%
Tax-equivalent net interest income	$47.2 million	$46.0 million	Up 2.6%
Tax-equivalent net interest margin	2.89%	3.12%	Down 23 basis points
Reversal of provision for credit losses	$3.5 million	$11.3 million	Smaller reversal
Noninterest income	$20.5 million	$23.3 million	Down 12.0%
Noninterest expense	$45.4 million	$39.5 million	Up 14.9%
Income before income taxes	$25.2 million	$40.4 million	Down 37.7%
Net income	$20.3 million	$32.6 million	Down 37.7%
Diluted earnings per share	$0.68	$1.11	Down $0.43
Return on average assets	1.17%	2.07%	Down 90 basis points
Return on average equity	10.64%	18.90%	Down 826 basis points

Balance Sheet, Liquidity and Capital

Total assets were $7.11 billion, down 0.2% from December 31, 2021.
Loans and leases held for investment were $5.40 billion, up $90.8 million, or 1.7%; excluding PPP loans, growth was 2.1%, primarily from commercial real estate and residential mortgage lending.
Total deposits were $6.05 billion, essentially unchanged from year-end. Noninterest-bearing deposits increased to $2.14 billion, while interest-bearing deposits declined.
Cash and cash equivalents were $773.8 million, down $116.4 million, as excess liquidity funded securities and loan growth.
Total borrowings were approximately $213.0 million, consisting of $19.0 million of short-term borrowings, $95.0 million of long-term debt and $99.0 million of subordinated notes.
Available borrowing capacity was approximately $1.9 billion within total committed borrowing capacity of $2.6 billion. The FHLB provided approximately $1.8 billion of available borrowing capacity.
Shareholders’ equity was $773.9 million. Accumulated other comprehensive loss increased by $15.6 million, primarily from declines in the fair value of available-for-sale securities.
The Bank remained well capitalized. At March 31, 2022, its total risk-based capital ratio was 11.72%, Tier 1 risk-based capital ratio was 10.76%, and Tier 1 leverage ratio was 9.09%.

Cash Flow and Credit Quality

Operating activities provided $23.9 million of cash, compared with $29.9 million in Q1 2021.
Investing activities used $126.2 million, principally due to a $90.8 million net increase in loans and $69.6 million of investment-security purchases.
Financing activities used $14.1 million, including $6.1 million of dividends and a $7.2 million net decrease in deposits.
Net cash and cash equivalents decreased $116.4 million during the quarter.
The allowance for credit losses on loans and leases declined to $68.3 million from $71.9 million. The allowance ratio declined to 1.26% from 1.35%.
Total nonperforming loans and leases were $31.2 million, down from $33.8 million at year-end. Nonaccrual loans and leases were $30.9 million, or 0.57% of loans and leases.
Net loan and lease charge-offs were $76 thousand, compared with $288 thousand in Q1 2021.

Material Changes Versus the Prior Comparable Period

Net income fell $12.3 million, or 37.7%, primarily because the prior-year period benefited from a substantially larger credit-loss provision reversal and higher mortgage banking revenue.
Net interest income increased despite a lower margin. Loan and investment balances grew and funding costs declined, but excess liquidity reduced the margin by approximately 33 basis points.
Noninterest income declined $2.8 million. Mortgage banking gains fell $4.0 million, or 67.5%, due to lower loan sales and narrower margins.
Fee-based businesses performed better: investment advisory fees rose 9.7%, insurance commissions rose 12.4%, and other service fees rose 25.7%, partly reflecting the 2021 insurance agency acquisition and higher customer activity.
Noninterest expense increased $5.9 million, driven by higher salaries, benefits and commissions; data processing and professional fees related to technology and digital transformation investments; recruiting; and higher FDIC insurance premiums.
The CECL provision reversal was $3.5 million versus $11.3 million in Q1 2021. Management attributed $5.7 million of the 2022 reversal to favorable economic assumptions, partially offset by increases in reserves for loans, unfunded commitments and securities.
PPP loans outstanding declined to $10.3 million from $31.7 million at year-end. PPP-related net interest income was $591 thousand, including $552 thousand from recognition of deferred fees as loans were forgiven or paid down.

Outlook, Management Commentary, Risks and Unusual Items

The filing does not provide specific quantitative earnings or revenue guidance. Management states that quarterly results are not necessarily indicative of full-year results.
Management expects to continue investing in revenue-producing personnel, digital transformation, loan-origination capabilities, customer relationship management and internal technology infrastructure.
Available-for-sale securities had $21.7 million of gross unrealized losses and a $1.3 million credit-loss allowance at March 31, 2022. Management concluded that the unrealized losses were primarily interest-rate-related and did not represent credit losses; it did not intend, and was not expected, to be required, to sell the securities before recovery.
Interest-rate risk is material because changes in rates affect net interest income, fixed-rate asset values, deposit pricing, mortgage banking activity and securities valuations. The filing reported no material change in market risk during the quarter.
Principal risks include economic deterioration, inflation and interest-rate volatility, declining real estate values, deterioration in loan quality, higher credit-loss provisions, funding competition, liquidity access, cybersecurity and system failures, regulatory changes, geopolitical events and the continuing effects of COVID-19.
Customer fraud resulted in $330 thousand of other expense during the quarter. The filing also disclosed $387 thousand of short-term incremental guarantees related to new mortgage banking producers.
Outstanding credit derivatives had a notional amount of $769.3 million and a liability fair value of $457 thousand. Potential payments under these arrangements are contingent on future interest rates and are not estimable.
A contingent consideration liability related to the Sheaffer acquisition was $1.7 million, with potential payments ranging from zero to $1.9 million through November 30, 2024.
Management stated that pending or threatened legal actions are not expected to have a material adverse effect. No material changes were reported to the risk factors in the 2021 Form 10-K.
The company declared cash dividends of $0.20 per share. No shares were repurchased under the publicly announced repurchase program during the quarter.

Important Facts for Investors to Verify

Whether loan growth and the planned deployment of excess liquidity offset the pressure from rising interest rates and the 2.89% net interest margin.
The sustainability of lower credit-loss reserves and whether favorable CECL economic assumptions remain appropriate.
Commercial real estate concentration, including $2.82 billion of commercial real estate loans, and trends in criticized, classified and nonaccrual credits.
The trajectory of mortgage banking revenue after the 67.5% year-over-year decline in Q1.
Whether increased personnel, technology, digital transformation and FDIC costs produce sufficient revenue growth to offset the 14.9% increase in noninterest expense.
The effect of further interest-rate increases on accumulated other comprehensive loss, securities fair values, deposit costs and net interest margin.
Liquidity and funding capacity, including reliance on core deposits, FHLB availability and the $620.0 million of FHLB letters of credit supporting public and other secured deposits.
Future credit losses, collateral values and potential payments associated with the credit-derivative and contingent-consideration arrangements.