Univest Financial Corporation — Q3 2023 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, wealth management, insurance, mortgage banking and equipment financing services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the respective 2022 periods. The common stock trades on Nasdaq under “UVSP.”
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $53.6 million | $58.3 million | $167.2 million | $156.4 million |
| Provision for credit losses | $2.0 million | $3.6 million | $8.8 million | $6.8 million |
| Noninterest income | $18.7 million | $18.0 million | $58.2 million | $57.4 million |
| Noninterest expense | $49.0 million | $46.7 million | $148.3 million | $139.4 million |
| Net income | $17.0 million | $20.8 million | $54.9 million | $54.3 million |
| Diluted EPS | $0.58 | $0.71 | $1.86 | $1.84 |
| Tax-equivalent net interest margin | 2.96% | 3.67% | 3.22% | 3.25% |
| Return on average assets | 0.88% | 1.21% | 0.98% | 1.05% |
| Return on average equity | 8.32% | 10.67% | 9.14% | 9.39% |
At September 30, 2023, total assets were $7.83 billion, up 8.4% from December 31, 2022. Loans and leases held for investment were $6.57 billion, up 7.4%, while deposits were $6.44 billion, up 8.9%. Shareholders’ equity was $807.2 million, up 4.0% from year-end 2022.
Cash and cash equivalents were $290.3 million, compared with $152.8 million at December 31, 2022. Available-for-sale securities totaled $334.5 million. Nine-month operating cash flow was $61.9 million, investing cash outflow was $473.9 million, and financing cash inflow was $549.5 million, producing a $137.5 million increase in cash and cash equivalents.
Total borrowings consisted of $14.7 million of short-term borrowings, $320.0 million of long-term debt and $148.6 million of subordinated notes. The company reported $3.3 billion of committed borrowing capacity, of which $1.7 billion was available, plus $369.0 million of unused uncommitted correspondent funding sources. The Bank’s regulatory capital ratios exceeded minimum requirements, and the Bank remained categorized as well capitalized.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income declined 18.2%, primarily because higher deposit and borrowing costs reduced net interest income. Nine-month net income increased 1.0%.
- Third-quarter net interest income decreased 8.3% on a tax-equivalent basis, while nine-month net interest income increased 6.5%. The third-quarter margin fell to 2.96% from 3.67% as funding costs rose faster than asset yields.
- Interest expense increased substantially, particularly on deposits, reflecting higher market rates and a greater mix of certificates of deposit and money market accounts.
- Loan growth was concentrated in commercial real estate, construction, residential mortgage lending and lease financings. Loans held for investment increased $451.7 million from year-end 2022.
- Noninterest income increased 4.1% in the quarter and 1.4% year to date. Insurance commission income and investment advisory fees improved, while year-to-date mortgage banking income declined 27.6% because of lower loan sales and narrower margins.
- Noninterest expense increased 5.0% in the quarter and 6.4% year to date. Drivers included salaries, data processing, deposit insurance premiums, retirement costs, loan workout fees and other expenses. Year-to-date results included $1.3 million of restructuring charges related to financial service center optimization and expense management.
- Noninterest-bearing deposits fell to 22.2% of total deposits from 34.6% at year-end 2022. Unprotected deposits declined to 20.8% of total deposits from 31.0%.
- Accumulated other comprehensive loss increased to $71.6 million, largely due to after-tax unrealized losses on available-for-sale securities and interest-rate hedges.
Credit Quality, Outlook, Risks and Unusual Items
The allowance for credit losses on loans and leases was $83.8 million, or 1.28% of loans and leases, compared with 1.29% at December 31, 2022. Nine-month net charge-offs were $4.3 million, including $2.4 million related to two existing nonaccrual commercial loans to one borrower.
Total nonperforming assets were $40.1 million, including $20.2 million of nonperforming loans and leases and $19.9 million of other real estate owned, compared with $33.5 million at year-end 2022. Nonaccrual loans and leases held for investment were $12.3 million, or 0.28% of loans. A $5.8 million nonperforming construction loan was transferred to held for sale during the third quarter and sold on October 16, 2023.
At September 30, 2023, held-to-maturity securities had $25.7 million of unrealized losses and available-for-sale securities had $52.9 million of unrealized losses in positions without a related credit-loss allowance. Management stated that it did not intend, and was unlikely, to be required to sell these securities before recovery or maturity. The filing attributes the declines primarily to interest-rate movements rather than credit deterioration.
Management did not provide specific earnings, margin, loan-growth or expense guidance in the filing. Management expects to meet contractual obligations through on-balance-sheet liquidity, deposit generation, borrowings and brokered deposits. The filing highlights risks from interest-rate volatility, deposit competition and funding costs, credit quality and real estate values, economic conditions, liquidity, regulatory changes and FDIC assessments, cybersecurity, technology, competition and employee retention.
The company reported no material changes in market risk, no material legal contingencies based on information currently available, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2023. The FASB’s ASU 2022-02 was adopted in 2023 without a material financial statement impact.
Important Facts for Investors to Verify
- Whether deposit pricing and funding mix cause further pressure on net interest margin and earnings.
- Trends in commercial real estate, construction and residential loan performance, criticized assets, nonaccrual balances and charge-offs.
- The adequacy of the $83.8 million allowance for credit losses under changing economic and real estate assumptions.
- Liquidity resilience, including deposit retention, uninsured or unprotected deposits, available borrowing capacity and collateral requirements.
- Potential effects of unrealized investment-security losses and interest-rate hedge valuations on tangible capital and shareholders’ equity.
- Future restructuring, deposit insurance, retirement, loan workout and technology-related expenses.
- Completion and proceeds of the October 16, 2023 sale of the $5.8 million nonperforming construction loan.
- Regulatory capital ratios and the Bank’s continued “well capitalized” status.