Univest Financial Corporation — 2019 Form 10-K Summary
Business context and reporting period
Univest Financial Corporation is a Pennsylvania bank holding company headquartered in Souderton, Pennsylvania. Through Univest Bank and Trust Co. and subsidiaries, it provides banking, equipment financing, wealth management and insurance services primarily in Pennsylvania and New Jersey. The filing covers the fiscal year ended December 31, 2019; quarterly data includes the fourth quarter of 2019.
- Approximately 873 employees and 39 banking offices at year-end.
- Year-end assets were $5.38 billion, net loans and leases were $4.35 billion, deposits were $4.36 billion and shareholders’ equity was $675.1 million.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $65.7 million | $50.5 million | +30.0% |
| Diluted EPS | $2.24 | $1.72 | +30.2% |
| Net interest income | $169.2 million | $158.1 million | +7.1% |
| Noninterest income | $65.4 million | $60.2 million | +8.7% |
| Noninterest expense | $146.1 million | $137.2 million | +6.4% |
| Provision for loan and lease losses | $8.5 million | $20.3 million | -58.1% |
| Return on average assets | 1.26% | 1.07% | +19 basis points |
| Return on average equity | 10.07% | 8.26% | +181 basis points |
| Net interest margin, tax-equivalent | 3.59% | 3.72% | -13 basis points |
| Efficiency ratio | 61.4% | 61.9% | Improved |
- Operating cash flow was $73.1 million, compared with $86.0 million in 2018. Investing cash flow was negative $343.4 million, primarily reflecting a $381.3 million net increase in loans and leases. Financing cash flow was positive $285.9 million, mainly from a $474.2 million increase in deposits, partly offset by a $171.1 million reduction in short-term borrowings.
- Gross loans and leases held for investment increased 9.5% to $4.39 billion, led by commercial real estate and residential real estate growth. Deposits increased 12.2% to $4.36 billion.
- Total borrowings declined $166.1 million to $263.6 million, including a $171.1 million decrease in short-term borrowings. Year-end cash and interest-earning deposits increased to $125.1 million.
- The allowance for loan and lease losses increased to $35.3 million, or 0.81% of loans and leases, from $29.4 million, or 0.73%, in 2018. Net charge-offs declined to $2.6 million from $12.5 million.
- Nonperforming loans and leases increased to $38.8 million, or 0.88% of loans and leases, from $26.9 million, or 0.67%. Nonperforming assets increased to $39.3 million, or 0.73% of assets.
- The common dividend remained $0.80 per share for the year, paid quarterly at $0.20 per share. No shares were repurchased under the public repurchase program during 2019.
- At December 31, 2019, the Corporation’s Tier 1 risk-based capital ratio was 11.03% and total risk-based capital ratio was 13.78%; management reported the Corporation and Bank as well capitalized.
Material changes versus the prior comparable period
- Net income benefited from loan growth, higher interest income and lower credit-loss expense. Results also included a $1.1 million FDIC small-bank assessment credit, producing an after-tax benefit of $871 thousand.
- 2019 included an $869 thousand pre-tax legal settlement expense related to a former Fox Chase Bank customer, producing an after-tax charge of $687 thousand.
- 2018 results were adversely affected by a $10.9 million net charge-off related to fraudulent activities by employees of a commercial borrower. The absence of a comparable loss was a major contributor to the 2019 earnings increase.
- Tax-equivalent net interest margin declined from 3.72% to 3.59%, as higher funding costs and excess liquidity more than offset loan growth and higher asset yields.
- Noninterest income growth reflected higher mortgage banking, investment advisory, insurance and other fee income. Wealth management assets under management and supervision increased to $3.8 billion from $3.3 billion.
- Noninterest expense increased primarily because of additional personnel supporting commercial lending and revenue growth, higher data-processing costs and the legal settlement. The 2018 restructuring charge did not recur.
- The company adopted lease accounting guidance in 2019, recording $39.6 million of operating lease liabilities, $36.6 million of right-of-use assets and a $1.5 million after-tax reduction to retained earnings.
Guidance, outlook, management commentary and risks
- No formal earnings or revenue guidance is provided in the filing. Management emphasized continued business growth while maintaining capital, liquidity and controls over credit and interest-rate risk.
- Management expected adoption of CECL on January 1, 2020 to increase the reserve for credit losses by approximately $13.0 million to $16.0 million and reduce shareholders’ equity by approximately $10.2 million to $12.6 million. The Corporation expected to remain well capitalized and planned to elect available regulatory capital phase-in relief.
- The loan portfolio is concentrated in commercial, commercial real estate and construction lending; approximately 85.3% of loans and leases consisted of commercial, financial and agricultural, commercial real estate, construction loans and leases.
- Key risks include interest-rate and net-interest-margin pressure, deterioration in commercial real estate or regional economies, higher credit losses, competition for low-cost deposits, dependence on Pennsylvania and New Jersey markets, regulatory changes, the transition from LIBOR, cybersecurity and technology failures, and risks associated with acquisitions.
- Management’s interest-rate simulation indicated that the balance sheet was slightly asset sensitive: modeled next-12-month net interest income would increase 5.03% under a 100-basis-point rate increase and decline 6.84% under a 100-basis-point decrease. Actual results may differ materially from these models.
- Pending and threatened legal proceedings were not expected by management to have a material adverse effect. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether the projected CECL reserve and equity reductions were consistent with the actual January 1, 2020 adoption entries and subsequent credit performance.
- Whether the increase in nonperforming loans, particularly commercial real estate exposures and the $11.9 million commercial relationship placed on nonaccrual in 2019, results in additional provisions or charge-offs.
- Whether deposit growth and the 29% noninterest-bearing deposit mix can be maintained without materially increasing funding costs.
- Whether loan growth remains profitable as the net interest margin contracts and interest-rate conditions change.
- Whether the FDIC assessment credit and absence of the 2018 fraud-related loss make reported earnings growth appear stronger than underlying recurring performance.
- Exposure to LIBOR-linked assets, liabilities, derivatives and subordinated debt, and the company’s transition arrangements to replacement benchmarks.
- Available liquidity, collateral capacity and reliance on FHLB, Federal Reserve and correspondent funding sources, including $1.34 billion of commitments to extend credit and $44.4 million of letters of credit.