Business Context and Reporting Period
Univest Corporation of Pennsylvania is a Pennsylvania bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides commercial and consumer banking, trust, wealth management, insurance, mortgage banking and equipment financing services. Reportable segments are Banking, Wealth Management and Insurance. This Form 10-K covers the fiscal year ended December 31, 2015; fourth-quarter data are presented in the filing but the report is annual rather than a quarterly filing.
At year-end, the Corporation reported $2.9 billion of assets, $2.2 billion of net loans and leases, $2.4 billion of deposits, $361.6 million of shareholders’ equity and 717 employees. Operations are concentrated in Southeastern Pennsylvania and nearby markets.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net income | $27.3 million | $22.2 million | Up 23% |
| Diluted EPS | $1.39 | $1.37 | Up $0.02 |
| Net interest income | $93.4 million | $71.9 million | Up 30% |
| Tax-equivalent net interest margin | 3.96% | 3.87% | Up 9 basis points |
| Provision for loan and lease losses | $3.8 million | $3.6 million | Up $0.2 million |
| Noninterest income | $52.9 million | $48.7 million | Up 9% |
| Noninterest expense | $105.5 million | $87.3 million | Up 21% |
| Return on average assets | 0.98% | 1.01% | Down 3 basis points |
| Return on average equity | 7.58% | 7.74% | Down 16 basis points |
Operating cash flow was $35.6 million, compared with $31.9 million in 2014. Investing activities used $186.3 million, primarily because of net loan growth and investment-security purchases. Financing activities provided $151.1 million, including $49.3 million of net proceeds from subordinated notes and a $147.6 million increase in deposits, partially offset by share repurchases and dividends. Cash and due from banks ended at $32.4 million; cash and interest-earning deposits totaled $60.8 million.
Gross loans and leases held for investment increased 34% to $2.179 billion, while deposits increased 29% to $2.394 billion. Borrowings totaled $73.6 million, including $49.4 million of subordinated notes and $24.2 million of customer repurchase agreements. The Corporation had approximately $792.2 million of maximum FHLB borrowing capacity, $122.0 million of federal funds lines and no outstanding borrowings under its correspondent, federal funds or Federal Reserve lines at year-end.
Asset quality improved: nonaccrual loans and leases declined to $14.2 million from $17.3 million, nonperforming loans and leases declined to $19.8 million from $23.3 million, and net charge-offs declined to $6.8 million from $7.4 million. The allowance for loan and lease losses was $17.6 million, or 0.81% of loans and leases, compared with 1.27% in 2014. Approximately 84% of the loan portfolio consisted of commercial, commercial real estate, construction, agricultural and lease-financing exposures.
The Corporation and Bank remained well capitalized under Basel III. At December 31, 2015, the Corporation’s total risk-based capital ratio was 13.35%, Tier 1 capital ratio was 10.65% and Tier 1 leverage ratio was 9.69%; the Bank’s corresponding ratios were 12.09%, 11.36% and 10.31%.
Material Changes Versus the Prior Comparable Period
- The January 1, 2015 acquisition of Valley Green Bank added approximately $425.2 million of assets, $380.9 million of loans and $385.9 million of deposits, and resulted in $43.5 million of goodwill. The transaction issued 3,787,866 Univest shares.
- Excluding the Valley Green contribution, management reported organic loan growth of 11% and organic deposit growth of 8%.
- Net interest income benefited principally from the acquisition and related fair-value accretion. Interest expense increased to $8.1 million from $4.0 million, partly because of the new subordinated debt.
- Noninterest income benefited from insurance growth and higher mortgage banking activity, including a 55% increase in funded first-mortgage volume. Investment advisory fees declined $1.1 million following the divestiture of approximately $375 million of marginally profitable assets under supervision in late 2014.
- Noninterest expense included $2.0 million of Valley Green integration and acquisition costs, $540 thousand of Fox Chase merger costs and $1.6 million of restructuring charges related to the consolidation of six financial centers. The consolidations were projected to produce $1.9 million of annualized savings.
- The Corporation repurchased 608,757 shares for $12.0 million in 2015 and had 1,080,246 shares remaining under the authorization at year-end. Dividends remained $0.20 per share each quarter, or $0.80 for the year.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide formal earnings guidance in the filing. It stated that rising-rate scenarios are expected to increase net interest income over time because asset repricing is expected to exceed liability repricing, although the Corporation was liability-sensitive in the near term. The filing’s simulation indicated that a 100-basis-point rate increase could reduce next-twelve-month net interest income by approximately $604 thousand, while a 100-basis-point decrease could reduce it by approximately $3.8 million.
On December 8, 2015, Univest entered into a definitive agreement to acquire Fox Chase Bancorp in a cash-and-stock transaction valued at approximately $239.3 million. Closing was expected in the third quarter of 2016, subject to shareholder and regulatory approvals. Fox Chase had approximately $1.1 billion of assets, $767.7 million of loans and $765.0 million of deposits at December 31, 2015. Management expected the transaction to be accretive to EPS in the first combined year, but the filing notes integration, execution, dilution, regulatory and liquidity risks.
Other significant considerations include concentrated exposure to Southeastern Pennsylvania, intense competition for loans and deposits, interest-rate risk, reliance on low-cost deposits, commercial and commercial-real-estate credit risk, potential loan-loss provision increases, regulatory and compliance costs, cybersecurity and operational risks, and possible impairment of goodwill or investment securities. The filing reports no material pending litigation and no goodwill or material identifiable-intangible impairment through 2015.
Contractual and off-balance-sheet exposures included $701.0 million of commitments to extend credit, $57.6 million of letters of credit, $47.5 million of operating-lease commitments and $965 thousand of possible future commitments under risk-participation agreements. Management stated that no litigation was probable or expected to have a material adverse effect.
The 2015 results included several unusual items: $2.0 million of Valley Green integration and acquisition costs, $540 thousand of Fox Chase acquisition costs, $1.6 million of restructuring charges and $1.3 million of net acquisition-accounting accretion recognized in cash-flow reconciliation. The filing also reports a $5 thousand other-than-temporary impairment charge on equity securities.
Most Important Facts for Investors to Verify
- Confirm the final terms, approval status, closing date, financing mix and post-closing dilution of the Fox Chase transaction.
- Reconcile reported earnings growth with acquisition-related costs, restructuring charges, fair-value accretion and other nonrecurring items.
- Monitor commercial and commercial-real-estate concentration, criticized loans, nonaccrual trends, charge-offs and the reduced allowance ratio after substantial loan growth.
- Assess deposit retention and pricing pressure, particularly the $277.3 million of time deposits of $100 thousand or more and the 23% noninterest-bearing deposit mix.
- Evaluate near-term interest-rate sensitivity, including the liability-sensitive repricing profile and modeled downside in declining-rate scenarios.
- Review capital-buffer requirements under Basel III, dividend capacity at the Bank subsidiary and the effect of future acquisitions or share repurchases on capital.
- Assess the carrying value and future amortization or impairment risk of $112.7 million of goodwill and $12.6 million of amortized intangible assets.