Univest Financial Corporation Reports Second Quarter Results

Univest Financial Corporation

SOUDERTON, PA — Univest Financial Corporation (NASDAQ: UVSP), the parent company of Univest Bank and Trust Co. and its insurance, investments and equipment financing subsidiaries, recently announced net income for the quarter ended June 30, 2021 was $20.9 million, or $0.71 diluted earnings per share, compared to net income of $2.1 million, or $0.07 diluted earnings per share, for the quarter ended June 30, 2020. Net income for the six months ended June 30, 2021 was $53.5 million, or $1.81 diluted earnings per share, compared to net income of $2.9 million, or $0.10 diluted earnings per share, for the six months ended June 30, 2020.

Pre-tax pre-provision income1 for the quarter ended June 30, 2021 was $25.7 million, an increase of $143 thousand, or 0.6%, from the second quarter of 2020. Pre-tax pre-provision income1 for the six months ended June 30, 2021 was $54.8 million, an increase of $7.2 million, or 15.1%, from the comparable period in the prior year.

One-Time Items
The financial results for the three and six months ended June 30, 2021 included a tax-free bank-owned life insurance (“BOLI”) death benefit claim of $893 thousand, which represents $0.03 diluted earnings per share.

Paycheck Protection Program
On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, which provides new COVID-19 relief funds, additional funding under the Paycheck Protection Program (the “PPP”) and the establishment of PPP Second Draw Loans. The Small Business Administration (the “SBA”) announced it was taking certain steps under the PPP to further promote equitable relief for smaller businesses. Under this program, we successfully originated 1,226 PPP loans and secured funding of approximately $169.5 million for our customers.

As of June 30, 2021, $252.8 million in PPP loan originations remain outstanding. During the quarter, we recorded income of $4.8 million within net interest income related to these loans, of which $3.7 million was the result of forgiveness and pay downs of PPP loans totaling $282.3 million. During the six months ended June 30, 2021, we recorded income of $9.3 million within net interest income related to these loans, of which $7.1 million was the result of forgiveness and pay downs of PPP loans totaling $402.0 million. As of June 30, 2021, we have $6.4 million of net deferred fees on our balance sheet, which represents approximately 35.2% of the initial deferred fee amount.

Loans
Gross loans and leases, excluding PPP loans1, increased $187.9 million, or 15.4% (annualized), from March 31, 2021, $251.4 million or 10.4% (annualized) from December 31, 2020 and $621.6 million, or 14.0%, from June 30, 2020 due to increases in commercial, construction, residential mortgage loans and lease financings.

Deposits
Total deposits increased $7.1 million, or 0.5% (annualized), from March 31, 2021 and $76.0 million, or 2.9% (annualized), from December 31, 2020 primarily due to increases in commercial and consumer deposits offset by a decrease in brokered deposits and a seasonal decrease in public funds deposits. Total deposits increased $449.4 million, or 9.2%, from June 30, 2020, primarily due to increases in commercial, consumer and public funds deposits.

Net Interest Income and Margin
Net interest income of $46.8 million for the three months ended June 30, 2021 increased $1.3 million, or 3.0%, from the three months ended March 31, 2021, and $3.2 million, or 7.4%, from the three months ended June 30, 2020. Net interest income of $92.2 million for the six months ended June 30, 2021 increased $6.2 million, or 7.2%, from the six months ended June 30, 2020. The increase in net interest income for the six months ended June 30, 2021 compared to the same period of 2020 was primarily due to an increase in PPP loan income of $7.2 million and lower deposit costs offset by a decrease in yield on loans and investment securities.

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Net interest margin, on a tax-equivalent basis, was 3.15% for the second quarter of 2021, compared to 3.12% for the first quarter of 2021 and 3.18% for the second quarter of 2020. Excess liquidity reduced net interest margin by approximately ten basis points for the quarter ended June 30, 2021 compared to eleven basis points for the quarter ended March 31, 2021 and sixteen basis points for the quarter ended June 30, 2020. This excess liquidity was primarily driven by strong deposit balance growth during the last fifteen months, which was partially attributable to the various stimulus initiatives associated with the COVID-19 pandemic. As PPP loans are forgiven, the associated deferred fees are recognized in earnings, thus attaining yields in excess of 2020 run rates. PPP loans had a favorable impact on net interest margin of eleven basis points for the quarter ended June 30, 2021 compared to four basis points for the quarter ended March 31, 2021 and an unfavorable impact of nine basis points for the quarter ended June 30, 2020. Excluding the impact of excess liquidity and PPP loans, the net interest margin, on a tax-equivalent basis, was 3.14% for the quarter ended June 30, 2021 compared to 3.19% for the quarter ended March 31, 2021 and 3.43% for the quarter ended June 30, 2020.

Noninterest Income
Noninterest income for the quarter ended June 30, 2021 was $20.2 million, an increase of $2.2 million, or 12.4%, compared to the second quarter of 2020. Noninterest income for the six months ended June 30, 2021 was $43.5 million, an increase of $7.1 million, or 19.5%, from the comparable period in the prior year.

Net gain on mortgage banking activities decreased $54 thousand, or 1.5%, for the quarter and increased $3.1 million, or 50.2% for the six months ended June 30, 2021 compared to the comparable periods in the prior year. The increase for the six months ended June 30, 2021 was primarily due to an increase in volume and expansion of margins. Investment advisory commission and fee income increased $1.0 million, or 28.8%, for the quarter and $1.5 million, or 18.7%, for the six months ended June 30, 2021 compared to the comparable periods in the prior year, due to increased assets under management driven by favorable market conditions and new customer relationships. BOLI income increased $888 thousand, or 121.3%, for the quarter and $871 thousand, or 59.4%, for the six months ended June 30, 2021 primarily due to proceeds from BOLI death benefits of $893 thousand as previously discussed.

Other service fee income increased $1.3 million, or 84.7%, for the quarter and $1.6 million, or 47.1%, for the six months ended June 30, 2021 compared to the comparable periods in the prior year. Mortgage servicing fees increased $599 thousand for the quarter and $692 thousand for the six months ended June 30, 2021 driven by an increase in retained servicing associated with elevated mortgage volume over the past fifteen months. Interchange fee income increased $494 thousand for the quarter and $672 thousand for the six months ended June 30, 2021 due to increased customer activity as the markets we operate in continue to re-open.

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Other income decreased $1.3 million, or 73.1%, for the quarter due to a decrease of $1.4 million in fees on risk participation agreements for interest rate swaps driven by a decrease in customer demand.

Noninterest Expense
Noninterest expense for the quarter ended June 30, 2021 was $41.3 million, an increase of $5.3 million, or 14.8%, compared to the second quarter of 2020. Noninterest expense for the six months ended June 30, 2021 was $80.8 million, an increase of $6.1 million, or 8.1%, from the comparable period in the prior year.

Salaries, benefits and commissions increased $3.7 million, or 17.0%, for the quarter and $4.6 million, or 10.2%, for the six months ended June 30, 2021 from the comparable periods in the prior year. These increases reflect our continued investment in staff to support revenue generation across all business lines and annual merit increases. Variable compensation expenses increased $1.0 million and $1.7 million for the three and six months ended June 30, 2021, respectively, from the comparable periods in the prior year, due to increased profitability, specifically in our mortgage banking and wealth management lines of business. Additionally, capitalized compensation related to PPP origination activity was $1.2 million and $664 thousand lower in the three and six months ended June 30, 2021, respectively, from the comparable periods in the prior year.

Data processing expenses increased $314 thousand, or 11.4%, for the quarter and $604 thousand, or 11.0%, for the six months ended June 30, 2021 primarily due to continued investments in our end-to-end loan origination solution for loans below $1.0 million, customer relationship management software, internal infrastructure improvements and outsourced data processing solutions. Professional fees increased $751 thousand, or 59.4%, for the quarter and $1.2 million, or 45.8%, for the six months ended June 30, 2021, primarily attributable to increased consultant fees in support of our Diversity, Equity and Inclusion, training initiatives and treasury management product enhancements. During the first six months of 2021, we have spent $781 thousand on these initiatives and we expect to incur approximately $650 thousand of additional expenses related to these initiatives in the second half of the year. These expenses are not expected to re-occur in subsequent periods.

Other expense increased $390 thousand, or 7.3%, for the quarter primarily attributable to an increase in interchange fee expense and travel and entertainment expenses, which are beginning to normalize as the markets we operate in continue to re-open. Other expense decreased $557 thousand, or 4.9%, for the six months ended June 30, 2021 primarily due to a $656 thousand charge related to the extinguishment of long-term debt that occurred in the first quarter of 2020.

Asset Quality and Provision for Credit Losses
Nonperforming assets were $38.5 million at June 30, 2021, compared to $38.2 million at March 31, 2021 and $36.0 million at June 30, 2020.

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Net loan and lease charge-offs were $243 thousand during the second quarter of 2021 compared to $3.6 million for the three months ended June 30, 2020. The reversal of provision for credit losses was $59 thousand for the second quarter of 2021, of which $2.8 million (after-tax benefit of $2.2 million), or $0.08 diluted earnings per share, was attributable to favorable changes in economic-related assumptions within the Corporation’s CECL model, partially offset by a reserve increase attributable to loan growth. The provision for credit losses was $23.7 million for the comparable period in the prior year, of which $19.9 million (after-tax charge of $15.7 million), or $0.54 diluted earnings per share, was attributable to adverse changes in economic-related assumptions, which were predominately driven by COVID-19.

Net loan and lease charge-offs were $531 thousand for the six months ended June 30, 2021 compared to $4.1 million for the same period in the prior year. The reversal of provision for credit losses was $11.3 million for the six months ended June 30, 2021, of which $15.8 million (after-tax benefit of $12.5 million), or $0.42 diluted earnings per share, was attributable to favorable changes in economic-related assumptions within the Corporation’s CECL model partially offset by a reserve increase attributable to loan growth. The provision for credit losses was $45.6 million for the comparable period in the prior year, of which $40.2 million (after-tax charge of $31.8 million), or $1.09 diluted earnings per share, was attributable to adverse changes in economic-related assumptions.

The allowance for credit losses on loans and leases as a percentage of loans and leases held for investment was 1.34% at June 30, 2021, compared to 1.32% at March 31, 2021, and 1.74% at June 30, 2020. The allowance for credit losses on loans and leases as a percentage of loans and leases held for investment, excluding PPP loans1, was 1.41% at June 30, 2021 compared to 1.46% at March 31, 2021 and 1.94% at June 30, 2020.

Tax Provision
The effective income tax rate was 19.0% for the quarter ended June 30, 2021, compared to an effective income tax rate of (14.5%) for the quarter ended June 30, 2020. The effective income tax rate was 19.2% for the six months ended June 30, 2021 compared to an effective income tax rate of (42.4%) for the six months ended June 30, 2020. The effective tax rate for the three and six months ended June 30, 2021 and 2020 reflects the level of pre-tax income and the benefits of tax-exempt income from investments in municipal securities and loans and leases.

Dividend
On July 28, 2021, Univest declared a quarterly cash dividend of $0.20 per share. The dividend will be paid on August 25, 2021 to shareholders of record as of August 11, 2021.

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