Business Context and Reporting Period
Univest Financial Corporation is a Pennsylvania bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides banking, wealth management, insurance, mortgage banking and equipment-financing services. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared primarily with the same periods in 2020; balance-sheet comparisons are to December 31, 2020.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net income | $20.9 million | $2.1 million | $53.5 million | $2.9 million |
| Diluted EPS | $0.71 | $0.07 | $1.81 | $0.10 |
| Net interest income | $46.8 million | $43.5 million | $92.2 million | $86.0 million |
| Tax-equivalent net interest margin | 3.15% | 3.18% | 3.14% | 3.32% |
| Noninterest income | $20.2 million | $18.0 million | $43.5 million | $36.4 million |
| Noninterest expense | $41.3 million | $36.0 million | $80.8 million | $74.7 million |
| Provision for credit losses | $(0.1) million reversal | $23.7 million provision | $(11.3) million reversal | $45.6 million provision |
Return on average assets was 1.30% in the quarter and 1.68% year to date, compared with 0.14% and 0.10%, respectively, in the prior-year periods. Return on average equity was 11.49% in the quarter and 15.10% year to date, compared with 1.27% and 0.88%.
Total assets were $6.36 billion at June 30, 2021, up 0.3% from year-end 2020. Loans and leases held for investment were $5.33 billion, up 0.4%; net loans and leases were $5.26 billion. Deposits were $5.32 billion, up 1.4%, including $1.87 billion of noninterest-bearing deposits. Shareholders’ equity was $740.0 million, up 6.9%.
Cash and cash equivalents were $203.4 million at June 30, 2021, compared with $219.9 million at December 31, 2020. Six-month operating cash flow was $48.4 million, investing cash flow was $(37.8) million and financing cash flow was $(27.0) million, producing a net cash decrease of $16.4 million.
Total borrowings were approximately $219.0 million, consisting of $25.3 million of short-term borrowings, $95.0 million of long-term debt and $98.7 million of subordinated notes. Total borrowings declined by $92.5 million from year-end, primarily because of an $85.0 million subordinated-debt redemption and $15.0 million of long-term-debt maturities. The company reported approximately $1.7 billion of available FHLB borrowing capacity and $460.0 million of uncommitted correspondent funding.
Material Changes Versus Prior Comparable Period
- Net income increased $18.8 million in the second quarter and $50.6 million for the first six months, driven principally by the swing from substantial credit-loss provisions in 2020 to modest reversals in 2021.
- Net interest income increased 7.4% in the quarter and 7.2% year to date. PPP-related income, loan growth and lower deposit costs more than offset lower yields and excess-liquidity pressure. The tax-equivalent net interest margin declined from 3.18% to 3.15% in the quarter and from 3.32% to 3.14% year to date.
- Noninterest income increased 12.4% in the quarter and 19.5% year to date. Year-to-date gains included stronger mortgage banking activity, investment advisory fees, other service fees and favorable bank-owned life insurance income, including $893 thousand of tax-free death-benefit proceeds.
- Noninterest expense increased 14.8% in the quarter and 8.1% year to date, reflecting higher salaries, variable compensation, data-processing costs and professional fees.
- Gross loans grew $20.5 million from year-end as commercial and residential real estate lending increased $246.5 million, largely offset by a $230.9 million decline in PPP loans. PPP loans outstanding were $252.8 million at June 30, 2021.
- The allowance for credit losses on loans declined to $71.4 million from $83.0 million, and the allowance ratio declined to 1.34% from 1.56%, primarily because of favorable economic assumptions related to the COVID-19 recovery.
- Nonperforming assets declined to $38.5 million from $40.5 million, mainly because other real estate owned fell to $279 thousand from $7.4 million following the sale of a commercial real estate property. Nonaccrual loans and leases increased to $37.5 million from $31.7 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that results remain subject to economic recovery, interest-rate movements, loan and deposit demand, credit quality and the continuing effects of COVID-19.
Under the PPP, the company originated 1,226 second-draw loans and secured approximately $169.5 million of customer funding through June 30, 2021. During the second quarter, forgiveness and paydowns of $282.3 million generated $3.7 million of PPP-related net-interest income; $6.4 million of net deferred PPP fees remained on the balance sheet.
Approximately 34 COVID-related loan and lease modifications totaling $54.2 million remained outstanding at June 30, 2021, or approximately 1.1% of the loan portfolio excluding PPP loans. Hotels and motels represented a notable concentration of modified commercial loans, with $26.0 million modified.
Principal risks identified include COVID-19-related deterioration, higher delinquencies and charge-offs, declining real-estate values, changes in allowance-for-credit-loss assumptions, interest-rate volatility, funding access, competition, cybersecurity and third-party service disruptions, regulatory or legal exposure related to PPP participation, and potential goodwill or intangible-asset impairment. Management stated that pending legal matters are not expected to have a material adverse effect.
The Corporation and Bank exceeded applicable capital requirements at June 30, 2021. The Bank remained well capitalized; the Corporation's total capital ratio was 13.82% and the Bank's was 11.74%. Management reported no material change in market risk and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether the improvement in earnings is sustainable after the unusually favorable credit-loss reversals and PPP fee recognition subside.
- Trends in nonaccrual commercial real estate loans, COVID-related modifications and concentrations in hotels, retail and other affected sectors.
- The adequacy of the $71.4 million loan-loss allowance as economic assumptions and pandemic relief programs change.
- The future effect of declining PPP balances and deferred-fee amortization on net interest income and margin.
- Whether higher salaries, technology spending and professional fees produce corresponding revenue growth.
- Liquidity and funding capacity, including the availability and collateral requirements of FHLB and correspondent-bank lines.
- Exposure from customer interest-rate-swap credit derivatives, for which maximum potential payments were not estimable.
- Potential volatility in wealth-management revenue and mortgage-banking activity if market conditions or refinancing volumes weaken.