Univest(UVSP) - 2021 Q1 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for Q1 2021 show net income significantly increased to $32.6 million, driven by a reversal of the provision for credit losses, with total assets growing to $6.42 billion Condensed Consolidated Balance Sheets As of March 31, 2021, total assets increased to $6.42 billion, primarily due to a $119.7 million rise in net loans and leases, while total liabilities grew to $5.69 billion from deposit growth Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | At March 31, 2021 | At December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $6,416,665 | $6,336,496 | | Net loans and leases held for investment | $5,343,509 | $5,223,797 | | Cash and cash equivalents | $187,317 | $219,858 | | Total Liabilities | $5,694,210 | $5,644,024 | | Total deposits | $5,311,592 | $5,242,715 | | Total Shareholders' Equity | $722,455 | $692,472 | Condensed Consolidated Statements of Income For Q1 2021, net income reached $32.6 million, a substantial increase from $838 thousand in Q1 2020, primarily due to an $11.3 million reversal of provision for credit losses and growth in net interest and noninterest income Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $45,414 | $42,468 | | (Reversal of provision) provision for credit losses | $(11,283) | $21,843 | | Total Noninterest Income | $23,250 | $18,384 | | Total Noninterest Expense | $39,540 | $38,777 | | Net Income | $32,603 | $838 | | Diluted EPS | $1.11 | $0.03 | - The significant improvement in net income was largely due to a reversal of provision for credit losses of $11.3 million in Q1 2021, versus a provision of $21.8 million in Q1 2020[12] - Net gain on mortgage banking activities more than doubled, increasing to $5.9 million in Q1 2021 from $2.7 million in Q1 2020[12] Condensed Consolidated Statements of Cash Flows For Q1 2021, net cash provided by operating activities was $29.9 million, while net cash used in investing activities was $109.8 million, resulting in a net decrease in cash and cash equivalents of $32.5 million Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $29,873 | $11,052 | | Net cash used in investing activities | $(109,822) | $(50,560) | | Net cash provided by financing activities | $47,408 | $97,282 | | Net (decrease) increase in cash | $(32,541) | $57,774 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, financial instruments, and segment performance, including investment and loan portfolios, credit quality, derivatives, fair value measurements, and the adoption of new accounting standards - The Corporation adopted ASU No. 2018-14 for retirement benefits and ASU No. 2019-12 for income taxes, effective January 1, 2021, with neither adoption having a material impact on the financial statements[22][23] - Material estimates susceptible to significant changes include the fair value measurement of available-for-sale securities and the determination of the allowance for credit losses[21] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the strong Q1 2021 performance, with net income of $32.6 million, to a significant reversal of the provision for credit losses driven by improved economic forecasts, alongside growth in noninterest income and improved asset quality Executive Overview Net income for Q1 2021 was $32.6 million, a significant increase from $838 thousand in Q1 2020, primarily driven by an $11.3 million reversal of provision for credit losses due to favorable economic assumptions Q1 2021 Performance Highlights | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income | $32,603 thousand | $838 thousand | | Diluted EPS | $1.11 | $0.03 | | Return on average assets | 2.07% | 0.06% | | Return on average equity | 18.90% | 0.50% | - A reversal of provision for credit losses of $11.3 million was recorded in Q1 2021, of which $12.9 million was due to favorable economic assumptions, partially offset by reserves for loan growth[146] - The Paycheck Protection Program (PPP) contributed $4.5 million to net interest income in Q1 2021, with $2.3 million from forgiveness and pay downs of loans[147] Net Interest Income Tax-equivalent net interest income increased by 6.6% to $46.0 million in Q1 2021, driven by PPP income and lower funding costs, despite net interest margin compression to 3.12% - Tax-equivalent net interest income rose $2.8 million (6.6%) year-over-year, primarily due to $4.5 million in PPP income and a $3.5 million decrease in interest-bearing liability costs[150] - The tax-equivalent net interest margin was 3.12% for Q1 2021, down from 3.48% in Q1 2020, with excess liquidity negatively impacting by 11 bps and PPP loans positively impacting by 4 bps[151] Provision for Credit Losses A reversal of the provision for credit losses of $11.3 million was recorded for Q1 2021, primarily due to improved economic assumptions, contrasting with a $21.8 million provision in Q1 2020, while net charge-offs decreased - A reversal of provision for credit losses of $11.3 million was recorded for Q1 2021, mainly due to improved economic forecasts under the CECL model[156] - Net loan and lease charge-offs were $288 thousand for Q1 2021, compared to $489 thousand for Q1 2020[156] Noninterest Income Noninterest income for Q1 2021 increased by 26.5% to $23.3 million, primarily driven by a 116.4% increase in net gain on mortgage banking activities and growth in investment advisory fees Noninterest Income Breakdown (in thousands) | Category | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net gain on mortgage banking activities | $5,938 | $2,744 | 116.4% | | Investment advisory commission and fee income | $4,697 | $4,255 | 10.4% | | Insurance commission and fee income | $4,955 | $4,732 | 4.7% | | Other income | $1,370 | $67 | NM | | Total Noninterest Income | $23,250 | $18,384 | 26.5% | Noninterest Expense Total noninterest expense for Q1 2021 modestly increased by 2.0% to $39.5 million, mainly due to higher salaries, benefits, and professional fees, partially offset by lower other expenses - Salaries, benefits and commissions increased by $944 thousand (4.0%) due to new hires, merit increases, and higher variable compensation, partially offset by capitalized compensation from PPP loan originations[163] - Other expense decreased by $947 thousand (15.6%), primarily because Q1 2020 included a $656 thousand charge for debt extinguishment and Q1 2021 had lower travel expenses due to COVID-19[164] Financial Condition The Corporation's financial condition remained strong as of March 31, 2021, with total assets growing by 1.3% to $6.4 billion, driven by increased gross loans and deposits, and shareholders' equity rising to $722.5 million Asset Quality Asset quality improved in Q1 2021, with total nonperforming assets decreasing to $38.2 million (0.60% of total assets) and nonaccrual loans declining, while the allowance for credit losses to total loans stood at 1.32% Nonperforming Assets (in thousands) | Metric | At March 31, 2021 | At December 31, 2020 | | :--- | :--- | :--- | | Total nonperforming loans and leases | $30,712 | $33,137 | | Other real estate owned | $7,481 | $7,355 | | Total nonperforming assets | $38,193 | $40,492 | | Nonperforming assets / total assets | 0.60% | 0.64% | - As of March 31, 2021, the Corporation had approximately 54 loan and lease modifications outstanding with principal balances totaling $73.0 million, made in accordance with CARES Act relief provisions[177] Capital Adequacy The Corporation and its subsidiary Bank remained well-capitalized at March 31, 2021, with all regulatory capital ratios exceeding minimums, and the company elected to use transition relief for CECL adoption's impact on regulatory capital Corporation Regulatory Capital Ratios (at March 31, 2021) | Ratio | Actual | To Be Well-Capitalized | | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | 15.13% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 11.08% | 8.00% | | Tier 1 Capital (to Average Assets) | 9.45% | 5.00% | - The Corporation and the Bank maintain capital levels in excess of the capital conservation buffer and were in compliance with these requirements at March 31, 2021[192] - The Corporation adopted the transition guidance and the 2020 CECL interim final rule (IFR) relief, which defers the full regulatory capital impact of CECL adoption[199] Quantitative and Qualitative Disclosures About Market Risk No material changes in the Corporation's market risk occurred during the first quarter of 2021, with further details available in the Annual Report on Form 10-K for 2020 - No material changes in the Corporation's market risk occurred during the quarter ended March 31, 2021[208] Controls and Procedures Management concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2021[209] - No material changes to the Corporation's internal control over financial reporting occurred during the quarter[210] Part II. Other Information Legal Proceedings Management believes that any financial responsibility from pending or threatened legal actions will not materially adversely affect the Corporation's operations, financial position, or cash flows - Management opines that any legal and financial responsibility from pending legal actions will not have a material adverse effect on the Corporation[211] Risk Factors No material changes in the Corporation's risk factors were reported from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes in risk factors were reported from those disclosed in the 2020 Form 10-K[212] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2021, the Corporation did not repurchase shares under its publicly announced program but did repurchase 10,493 shares at $28.07 per share to cover income taxes for stock-based incentive plans - No shares were repurchased under the publicly announced stock repurchase plan during the quarter, with 679,174 shares remaining available for purchase under the plan[215] - A total of 10,493 shares were repurchased during the quarter, not under the main program, but to cover income taxes for employees upon the vesting of restricted stock awards[216] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements in Inline XBRL format - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and financial data in Inline XBRL format[221]