Univest Financial Corporation: Q3 2021 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, mortgage, equipment financing, wealth management and insurance services. The filing covers the three and nine months ended September 30, 2021; financial statements are unaudited.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net income | $20.9 million | $18.1 million | $74.4 million | $21.0 million |
| Diluted EPS | $0.71 | $0.62 | $2.52 | $0.72 |
| Net interest income | $48.7 million | $43.9 million | $140.9 million | $129.8 million |
| Provision for credit losses | $(0.2) million reversal | $3.9 million provision | $(11.5) million reversal | $49.5 million provision |
| Noninterest income | $20.6 million | $21.8 million | $64.0 million | $58.2 million |
| Noninterest expense | $43.2 million | $38.5 million | $124.1 million | $113.3 million |
| Tax-equivalent net interest margin | 3.11% | 3.02% | 3.13% | 3.21% |
| Return on average assets | 1.24% | 1.15% | 1.53% | 0.48% |
| Return on average equity | 11.12% | 10.89% | 13.72% | 4.22% |
At September 30, 2021, total assets were $7.0 billion, up 10.2% from December 31, 2020. Cash and cash equivalents were $902.4 million, compared with $219.9 million at year-end 2020, reflecting substantial deposit growth and excess liquidity. Total deposits increased 13.3% to $5.94 billion. Gross loans and leases held for investment declined 1.0% to $5.25 billion, but excluding PPP loans increased 7.1%.
Net loans and leases were $5.18 billion after a $70.1 million allowance for credit losses, down from $83.0 million at December 31, 2020. Nonperforming assets were $37.1 million, or 0.53% of total assets, compared with $40.5 million, or 0.64%, at year-end. The allowance represented 1.34% of loans and leases and 203.16% of nonaccrual loans.
Total borrowings were approximately $208 million, consisting of $14.1 million of short-term borrowings, $95.0 million of long-term debt and $98.8 million of subordinated notes. Available FHLB borrowing capacity was $1.4 billion, and total committed borrowing capacity was $2.4 billion. The Bank remained well capitalized; its total risk-based capital ratio was 11.75% and Tier 1 leverage ratio was 9.22%.
Net cash provided by operating activities was $65.5 million for the nine months ended September 30, 2021. Investing activities provided $40.9 million, primarily because loan balances declined, while financing activities provided $576.1 million, principally from the $695.4 million increase in deposits. Cash and cash equivalents increased $682.5 million to $902.4 million.
Material changes versus the prior comparable period
- Third-quarter net income increased 15.4%; nine-month net income increased 253.5%, primarily reflecting substantially lower credit-loss expense and higher net interest income.
- Net interest income increased 10.7% in Q3 and 8.1% for the nine-month period. PPP loan income contributed $4.2 million in Q3 and $13.5 million year to date, including accelerated recognition of deferred fees as loans were forgiven or paid down.
- The nine-month credit-loss provision shifted from a $49.5 million expense in 2020 to an $11.5 million reversal in 2021. Management attributed the reversal primarily to favorable economic assumptions associated with recovery from the COVID-19 pandemic.
- Q3 noninterest income declined 5.7%, largely because mortgage banking income fell 45.0% as volume and margins contracted. Nine-month noninterest income increased 10.0%, supported by wealth-management fees, service fees and bank-owned life insurance income.
- Noninterest expense increased 12.3% in Q3 and 9.5% year to date, driven by higher salaries, incentive compensation, professional fees and data-processing costs.
- Subordinated notes declined $84.7 million, primarily following redemption of $85.0 million of previously issued notes. Shareholders’ equity increased 9.2% to $756.0 million.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management states that results for the interim periods are not necessarily indicative of full-year results. The company continues to focus on business growth while maintaining capital and liquidity and managing credit and interest-rate risk.
- COVID-19 remains a significant uncertainty. As of September 30, 2021, approximately $18.1 million of loans and leases had pandemic-related modifications outstanding, down from approximately $68.0 million at year-end 2020.
- PPP loans outstanding were $85.6 million, with $2.4 million of related net deferred fees remaining. The company identifies potential SBA funding, litigation, regulatory-enforcement and reputation risks associated with PPP participation.
- Credit risks include deterioration in borrower performance, commercial real estate exposure, changing real estate values, higher delinquencies and the possibility that the allowance for credit losses may need to increase if economic conditions worsen.
- Interest-rate, funding, liquidity, competition, cybersecurity, information-technology, regulatory, legal and disaster risks could materially affect future results.
- Credit derivatives supporting customer interest-rate swaps had a $762.4 million notional amount. The filing states that the maximum potential payments under these arrangements are not estimable because they depend on future interest rates and are not contractually capped.
- The company recorded $893 thousand of tax-free BOLI death-benefit proceeds in the second quarter and $196 thousand in the third quarter of 2021. Management also noted favorable discrete tax benefits in the nine-month period.
- Management reported no material changes in market risk, no material changes in internal control over financial reporting, no material change in disclosed risk factors and no legal proceedings expected to materially affect results.
Important facts for investors to verify
- Whether future earnings can be sustained after the unusually favorable credit-loss reversals and PPP fee recognition subside.
- The trajectory of non-PPP loan growth, commercial real estate concentrations and the increase in nonaccrual commercial real estate loans.
- The effect of elevated excess liquidity and low interest rates on future net interest margin.
- Mortgage banking volumes and margins following the Q3 decline.
- The adequacy of the $70.1 million loan-loss allowance under changing economic and real estate conditions.
- The durability of deposit growth and the availability and cost of wholesale funding.
- Capital ratios after subordinated-debt redemptions, dividends and any future balance-sheet growth.