Univest Financial Corporation — Q1 2023 Form 10-Q Summary
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 covers the three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2022. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / prior period | Change |
|---|---|---|---|
| Net income | $21.0 million | $20.3 million | Up 3.5% |
| Diluted EPS | $0.71 | $0.68 | Up $0.03 |
| Return on average assets | 1.18% | 1.17% | Up 1 bp |
| Return on average equity | 10.81% | 10.64% | Up 17 bps |
| Net interest income | $59.3 million | $46.7 million | Up 27.1% |
| Tax-equivalent net interest margin | 3.58% | 2.89% | Up 69 bps |
| Provision for credit losses | $3.4 million | $(3.5) million reversal | Higher expense |
| Noninterest income | $19.7 million | $20.5 million | Down 3.9% |
| Noninterest expense | $49.5 million | $45.4 million | Up 9.1% |
| Income before taxes | $26.1 million | $25.2 million | Up 3.6% |
Interest income increased to $83.3 million from $51.2 million, driven by loan growth and higher asset yields. Interest expense increased sharply to $23.9 million from $4.5 million as deposit and borrowing costs rose. The efficiency ratio, calculated from reported noninterest expense divided by the sum of net interest income and noninterest income, was approximately 62.7% in Q1 2023 versus 67.6% in Q1 2022.
Total assets were $7.36 billion at March 31, 2023, up 1.9% from December 31, 2022. Loans and leases held for investment increased 1.9% to $6.24 billion, led by commercial real estate, residential mortgage loans, and lease financings. The allowance for credit losses was $80.0 million, or 1.28% of loans and leases, compared with 1.29% at year-end 2022.
Total deposits declined 1.3% to $5.83 billion. Noninterest-bearing deposits fell to $1.80 billion from $2.05 billion, while interest-bearing deposits increased to $4.04 billion. Short-term borrowings rose to $271.9 million from $197.1 million, and long-term debt increased to $220.0 million from $95.0 million. Subordinated notes were $148.4 million. Shareholders’ equity increased 2.8% to $798.5 million.
Operating cash flow was $20.7 million. Investing activities used $148.8 million, primarily reflecting a $119.3 million increase in loans and leases. Financing activities provided $113.6 million, including $150.0 million of long-term debt proceeds, partially offset by deposit outflows and dividends. Cash and cash equivalents declined to $138.3 million from $152.8 million.
Liquidity included $367.7 million of available-for-sale securities and approximately $3.1 billion of committed borrowing capacity, of which $1.9 billion was available at quarter-end. Uncommitted correspondent funding totaled $410.0 million, of which $320.0 million was unused but subject to withdrawal at the lenders’ discretion.
Material changes versus prior comparable period
- Net interest income rose 26.5% on a tax-equivalent basis, primarily from loan growth and higher asset yields, partly offset by higher funding costs.
- Loan and lease balances averaged $6.16 billion, up from $5.34 billion, while the average yield increased to 5.20% from 3.69%.
- Interest-bearing deposit costs increased to 1.91% from 0.30%; average borrowing costs increased to 4.53% from 3.16%.
- Noninterest income declined because mortgage banking gains fell 67.6% and investment advisory income fell 7.8%, partly offset by a 16.5% increase in insurance commission income.
- Noninterest expense increased 9.1%, including higher salaries, technology costs, deposit insurance premiums, retirement-plan costs, and other operating expenses.
- Nonperforming loans and leases declined to $13.4 million from $14.2 million, while nonaccrual loans declined to $11.4 million from $13.4 million. Q1 included $2.4 million of charge-offs related to two existing commercial loans to one borrower.
- Accumulated other comprehensive loss improved to $55.6 million from $62.1 million, primarily because of higher available-for-sale securities and interest-rate swap values.
- The Corporation adopted ASU 2022-02 on January 1, 2023. The adoption changed disclosures for borrowers experiencing financial difficulty and vintage charge-offs but did not materially affect the financial statements.
Outlook, management commentary, risks, and unusual items
Management stated that Q1 results benefited from loan growth and improved asset yields, but noted pressure from rising deposit and wholesale funding costs. The higher-rate environment reduced mortgage banking activity and margins and contributed to lower investment advisory income through market-related declines in assets under management. No specific quantitative earnings guidance was provided.
Management identified liquidity, deposit composition, uninsured deposits, capital, interest-rate risk, credit quality, funding costs, inflation, recession risk, real estate values, competition, cybersecurity, regulatory changes, and broader financial-system volatility as significant risks. The filing specifically added risk disclosure regarding the potential effects of unrelated bank failures and negative depositor confidence following the failures of Silvergate Bank, Silicon Valley Bank, Signature Bank, and First Republic Bank.
The held-to-maturity portfolio had a fair value of $133.1 million versus an amortized cost of $151.3 million, including $18.2 million of unrealized losses. Available-for-sale securities had $37.6 million of unrealized losses for which management concluded that no additional credit-loss allowance was required, primarily because the securities were government agency or investment-grade instruments and the Corporation did not intend or expect to be required to sell them before recovery.
The Corporation remained compliant with regulatory capital requirements. At March 31, 2023, the Corporation reported total capital to risk-weighted assets of 13.78%, Tier 1 capital of 10.43%, and Tier 1 capital to average assets of 9.71%. The Bank was categorized as well capitalized.
One accruing and one nonaccrual loan to borrowers experiencing financial difficulty were modified during the quarter. The filing states that neither experienced payment defaults after modification during Q1. The Corporation also disclosed a contingent consideration liability related to the Sheaffer acquisition, with potential payments ranging from zero to a maximum of $1.9 million through November 30, 2024.
Management stated that pending and threatened legal proceedings are not expected to have a material adverse effect. Disclosure controls and procedures were deemed effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether deposit outflows and the shift from noninterest-bearing to interest-bearing deposits continue, and the resulting effect on funding costs and net interest margin.
- The sustainability of loan growth, particularly the concentration in commercial real estate and other commercial industries.
- Future credit performance, charge-offs, criticized loans, nonperforming assets, and changes in the $80.0 million allowance for credit losses.
- The amount and stability of uninsured deposits and the Corporation’s reliance on FHLB, federal funds, brokered deposits, and other wholesale funding.
- The impact of interest-rate movements on securities’ accumulated other comprehensive loss, deposit pricing, borrowing costs, and earnings.
- Whether mortgage banking and wealth-management revenue remain under pressure from high rates and market volatility.
- The availability and collateral requirements of committed and uncommitted liquidity sources during periods of market stress.
- Potential changes to regulatory capital, FDIC insurance assessments, liquidity requirements, or other banking regulations.