Univest Financial Corporation — Q3 2019 Form 10-Q Summary
Business context and reporting period
Univest Financial Corporation is a Pennsylvania bank holding company operating through Banking, Wealth Management and Insurance segments. The filing covers the three and nine months ended September 30, 2019; financial statements are unaudited. The company changed its name from Univest Corporation of Pennsylvania effective January 1, 2019, and rebranded its wealth management operations under the Girard name.
Key financial metrics
| Metric | Three months ended Sept. 30, 2019 | Three months ended Sept. 30, 2018 | Nine months ended Sept. 30, 2019 | Nine months ended Sept. 30, 2018 |
|---|---|---|---|---|
| Net interest income | $42.6 million | $40.4 million | $126.8 million | $116.7 million |
| Provision for loan and lease losses | $1.5 million | $2.7 million | $6.3 million | $20.2 million |
| Noninterest income | $16.6 million | $14.9 million | $49.3 million | $45.8 million |
| Noninterest expense | $36.3 million | $34.4 million | $108.6 million | $103.8 million |
| Net income | $17.7 million | $15.0 million | $50.2 million | $32.2 million |
| Diluted EPS | $0.60 | $0.51 | $1.71 | $1.09 |
| Return on average assets | 1.32% | 1.23% | 1.30% | 0.92% |
| Return on average equity | 10.62% | 9.70% | 10.40% | 7.05% |
| Tax-equivalent net interest margin | 3.52% | 3.71% | 3.64% | 3.72% |
At September 30, 2019, total assets were $5.35 billion, up 7.4% from December 31, 2018. Loans and leases held for investment were $4.25 billion, up 6.1%, while total deposits reached $4.34 billion, up 11.6%. Shareholders’ equity was $664.3 million, up 6.4%.
Cash and cash equivalents were $225.3 million, compared with $109.4 million at year-end 2018. The allowance for loan and lease losses was $33.7 million, or 0.79% of loans and leases held for investment. Nonperforming loans and leases were $39.9 million, or 0.94% of loans and leases, compared with $26.9 million, or 0.67%, at December 31, 2018.
Net cash provided by operating activities was $53.9 million for the nine months, compared with $61.3 million in the prior-year period. Investing activities used $217.5 million, primarily reflecting a $246.5 million net increase in loans and leases. Financing activities provided $279.5 million, primarily from a $452.1 million increase in deposits, partly offset by a $170.8 million reduction in short-term borrowings. Cash dividends paid were $17.6 million.
At September 30, 2019, borrowings included $19.0 million of short-term borrowings, $160.1 million of long-term debt and $94.8 million of subordinated notes. The Bank had approximately $1.8 billion of FHLB borrowing capacity, $504.0 million of uncommitted federal funds lines and no borrowings under its Federal Reserve Discount Window or $10.0 million committed correspondent line.
Material changes versus the prior comparable period
- Net income increased 18.0% in the third quarter and 56.1% for the first nine months. Diluted EPS increased 17.6% and 56.9%, respectively.
- Net interest income increased 5.4% in the quarter and 8.5% year to date, primarily from average loan growth of 8.8% and 9.8%. The net interest margin declined because deposit costs rose and excess liquidity increased.
- Interest expense rose 32.0% in the quarter and 50.3% year to date, primarily due to higher deposit balances and deposit pricing.
- The provision for loan and lease losses declined substantially from 2018, which included a $12.7 million charge-off related to fraudulent activity by employees of a commercial borrower.
- Noninterest income increased 11.7% in the quarter and 7.6% year to date, supported by mortgage banking, investment advisory, insurance and service-fee activity.
- Noninterest expense increased 5.5% in the quarter and 4.6% year to date, principally from personnel additions, commercial lending expansion, technology investments and data-processing costs.
- The third quarter included a $988 thousand FDIC small-bank assessment credit, producing an after-tax benefit of approximately $781 thousand, or $0.03 per diluted share. An additional $114 thousand credit was expected in the fourth quarter.
- Compared with 2018, the company no longer recorded the prior-year restructuring charge related to financial-center closures, and 2018 included a $446 thousand tax-free BOLI death benefit.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management emphasized continued growth through lending, deposits, wealth management, insurance, mortgage banking, acquisitions, customer service and technology investments.
Management reported that the Corporation and Bank were in compliance with regulatory capital requirements and that the Bank remained well capitalized. At September 30, 2019, the Corporation’s total capital ratio was 13.81%, Tier 1 capital ratio was 11.03% and leverage ratio was 9.97%; the Bank’s corresponding ratios were 11.70%, 10.95% and 9.89%.
Asset quality deteriorated from year-end: nonaccrual loans and leases increased to $37.4 million from $26.2 million, and one commercial banking relationship totaling $11.6 million was placed on nonaccrual status during the third quarter. Commercial real estate represented the largest component of nonaccrual exposure.
The company adopted lease accounting in 2019, recording $35.0 million of operating lease right-of-use assets and $38.1 million of lease liabilities at September 30, 2019. Management expects the January 1, 2020 adoption of CECL to increase the loan-loss reserve, reduce shareholders’ equity and affect regulatory capital ratios, although it expects the Corporation and Bank to remain well capitalized. The filing does not provide a quantified CECL impact.
Other principal risks include interest-rate volatility, funding costs and liquidity, credit quality and real estate values, competitive pressures, regulatory and accounting changes, cyber-security and operational failures, technology dependence, retention of key personnel and the ability to execute growth strategies. Management stated that no material market-risk changes occurred during the quarter, no material legal-adverse outcome was expected, and no material changes occurred in previously disclosed risk factors.
Important facts for investors to verify
- Whether the increase in nonperforming assets, particularly commercial real estate exposure, results in higher charge-offs or provisions.
- The final CECL transition adjustment and its effect on the allowance, retained earnings, capital ratios and future earnings.
- Whether deposit growth and pricing pressure continue to reduce the net interest margin.
- The sustainability of mortgage banking gains, insurance contingent commissions and other noninterest income.
- The remaining impact of the FDIC assessment credit, which was partly nonrecurring.
- Future funding needs, FHLB collateral and borrowing availability as loans continue to grow.
- Potential fair-value changes in investment securities, mortgage servicing rights, derivatives and other Level 3 assets.