Business Context and Reporting Period
Univest Corporation of Pennsylvania, a bank holding company with Banking, Wealth Management, and Insurance segments, filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The filing reports the first full quarter including Fox Chase Bancorp, acquired July 1, 2016.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net interest income | $32.9 million | $23.5 million | $80.1 million | $70.4 million |
| Noninterest income | $14.1 million | $12.7 million | $42.0 million | $39.2 million |
| Provision for loan losses | $1.4 million | $0.7 million | $2.6 million | $2.9 million |
| Noninterest expense | $47.1 million | $25.2 million | $103.6 million | $79.5 million |
| Net income | $58 thousand | $7.5 million | $12.6 million | $20.1 million |
| Diluted EPS | Less than $0.01 | $0.39 | $0.57 | $1.02 |
| Tax-equivalent net interest margin | 3.68% | 3.89% | 3.82% | 4.02% |
| Return on average assets | 0.01% | 1.06% | 0.51% | 0.98% |
| Return on average equity | 0.05% | 8.36% | 4.07% | 7.48% |
- Total assets were $4.14 billion at September 30, 2016, up 44% from December 31, 2015.
- Loans and leases held for investment were $3.19 billion, up $1.01 billion, or 46%, including $776.3 million acquired from Fox Chase.
- Total deposits were $3.18 billion, up $784.1 million, or 33%, including $738.3 million of Fox Chase deposits.
- Shareholders’ equity was $509.2 million, up 41%, primarily from stock issued in the Fox Chase transaction.
- Cash flow from operating activities was $23.9 million for the first nine months, while investing activities used $197.9 million and financing activities provided $185.0 million. Cash and due from banks ended at $43.4 million.
- Total borrowings included $211.4 million of short-term borrowings, $92.9 million of long-term debt, and $94.0 million of subordinated notes.
- The Corporation’s total risk-based capital ratio was 12.64%; the Bank’s was 11.80%. Management stated that both remained well-capitalized.
Material Changes Versus Prior Comparable Period
- Net income declined 99% in the quarter and 37% year to date, primarily because of Fox Chase acquisition and integration costs.
- Q3 noninterest expense increased 86%, including $8.8 million of acquisition-related costs and $5.4 million of integration costs. Nine-month acquisition and integration costs totaled $15.6 million.
- Management reported acquisition and integration costs of $9.2 million after tax for the quarter and $10.6 million after tax for the nine-month period, reducing diluted EPS by approximately $0.35 and $0.48, respectively.
- Net interest income increased 40% in Q3 and 14% year to date, driven largely by the Fox Chase acquisition and loan growth, while the net interest margin declined 21 basis points in Q3 and 20 basis points year to date.
- Noninterest income rose 11% in Q3 and 7% year to date, helped by mortgage banking, bank-owned life insurance, deposit service charges, and insurance activity.
- Organic loan growth, excluding Fox Chase loans, was $235.1 million, or 8.0%, from December 31, 2015; organic deposit growth was $45.9 million, or 1.5%.
- Nonperforming loans and leases were $19.5 million, compared with $19.8 million at December 31, 2015. Other real estate owned increased to $6.0 million from $1.3 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management described the Fox Chase transaction as expanding its market presence and expects continued opportunities from loan growth, new lending personnel, and broader customer and financial-center coverage.
- Fox Chase added approximately $1.1 billion of assets, $776.3 million of loans, and $738.3 million of deposits. The transaction was valued at approximately $242.2 million and generated $59.4 million of goodwill.
- System conversion was completed September 12, 2016. Management noted that acquisition-related costs and staffing, premises, data-processing, and integration expenses materially affected current-period earnings.
- Management believes the allowance for loan and lease losses of $16.9 million was appropriate. The allowance equaled 0.53% of loans and leases held for investment and 112.29% of nonaccrual loans.
- Key risks include interest-rate volatility, pressure on net interest margins, borrower and collateral performance, commercial real estate and construction exposure, integration execution, competition for deposits, regulatory and legal risks, and broader economic conditions.
- The Corporation expects the Pennsylvania Bank Shares Tax rate increase scheduled for 2017 to reduce net income by approximately $260 thousand annually, based on September 30, 2016 balances.
- The adoption of the future current expected credit loss standard was expected to increase the allowance and reduce regulatory capital and capital ratios, although the filing did not provide a quantified estimate.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2016.
Investor Verification Checklist
- Verify the recurring earnings contribution from Fox Chase after excluding the $10.6 million after-tax year-to-date acquisition and integration impact.
- Monitor whether organic loan and deposit growth continues without a disproportionate increase in funding costs or credit losses.
- Assess the sustainability of the 3.68% quarterly net interest margin amid declining asset yields and higher borrowing costs.
- Review commercial real estate, construction, acquired-credit-impaired loans, nonperforming assets, and the adequacy of the $16.9 million allowance.
- Evaluate integration progress, operating cost synergies, and the effect of added personnel, locations, and data-processing expenses.
- Confirm capital ratios after acquisition growth, subordinated debt issuance, and eventual adoption of the expected-credit-loss accounting standard.
- Consider liquidity concentration in deposits, Federal Home Loan Bank facilities, federal funds lines, and other short-term funding sources.