Univest Corporation of Pennsylvania — Form 10-Q Summary
Business Context and Reporting Period
Univest Corporation of Pennsylvania is a bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides commercial banking, trust, insurance, investment advisory, brokerage, equipment financing and related services primarily in Southeastern Pennsylvania. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods and December 31, 2012 balance-sheet data.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net income | $6.0 million | $5.8 million | $16.3 million | $15.8 million |
| Diluted EPS | $0.36 | $0.34 | $0.97 | $0.94 |
| Net interest income | $18.3 million | $18.0 million | $54.4 million | $54.3 million |
| Tax-equivalent net interest margin | 3.84% | 3.84% | 3.84% | 3.92% |
| Provision for loan and lease losses | $4.1 million | $2.2 million | $9.6 million | $7.7 million |
| Noninterest income | $13.2 million | $10.9 million | $35.7 million | $29.9 million |
| Noninterest expense | $20.0 million | $19.1 million | $59.5 million | $56.6 million |
| Return on average assets | 1.07% | 1.04% | 0.97% | 0.96% |
| Return on average equity | 8.55% | 8.19% | 7.67% | 7.60% |
At September 30, 2013, total assets were $2.253 billion, down 2% from December 31, 2012. Gross loans and leases held for investment were $1.526 billion, up $44.4 million, or 3%. Net loans and leases were $1.501 billion after a $24.8 million allowance. Total deposits were $1.889 billion, up $23.7 million, or 1%.
Cash and interest-earning deposits totaled $79.5 million, down $66.7 million from year-end. Cash flow from operating activities was $29.3 million for the first nine months, compared with $19.7 million in 2012. Investing activities used $18.5 million, while financing activities used $62.8 million, principally because of debt redemption, reduced short-term borrowings, share repurchases and dividends. Cash and due from banks ended at $46.5 million.
Borrowings included $46.7 million of customer repurchase agreements; subordinated notes and junior subordinated debt were zero at September 30, 2013. The Corporation had no outstanding FHLB borrowings and reported approximately $468.2 million of maximum FHLB borrowing capacity. Regulatory capital remained strong: the Bank's total risk-based capital ratio was 12.91%, Tier 1 risk-based ratio was 11.66% and Tier 1 leverage ratio was 9.88%; the Bank remained classified as well capitalized.
Material Changes Versus Comparable Periods
- Third-quarter net income increased 5% and nine-month net income increased 3%; diluted EPS increased 6% and 3%, respectively.
- Net interest income was broadly stable. Lower asset yields and reinvestment of securities at lower rates were offset by lower deposit and borrowing costs, including savings from redeeming trust preferred securities.
- The tax-equivalent net interest margin was unchanged in the quarter but declined 8 basis points year to date to 3.84%.
- Noninterest income increased 22% in the quarter and 19% year to date, supported by insurance, investment advisory, mortgage servicing, bank-owned life insurance proceeds and gains on investment securities.
- Mortgage banking income declined to $935 thousand in the quarter from $2.2 million, as higher interest rates reduced refinancing activity, purchase demand and gain-on-sale margins.
- The loan-loss provision increased 85% in the quarter and 26% year to date. Management attributed the increase primarily to updated collateral assessments and concentration-related credit analysis.
- Noninterest expense increased 5% in both comparison periods. The nine-month period included $539 thousand of restructuring charges related to a 3.4% staffing reduction and closure of the Silverdale financial service center.
- Nonaccrual loans and leases declined to $24.0 million from $32.1 million at December 31, 2012; total nonperforming loans and leases declined to $40.0 million from $46.0 million. However, impaired loans increased to $66.8 million from $45.2 million, with related reserves increasing to $3.1 million from $208 thousand.
- The Corporation redeemed $20.0 million of trust preferred securities and related common securities in July 2013, funded with existing cash. It recognized a $1.9 million loss on termination of the related interest-rate swap but expects annual interest savings of approximately $1.1 million after 2013.
- The Corporation acquired John T. Fretz Insurance Agency on May 1, 2013 for $2.2 million in cash, recording $1.3 million of goodwill and $1.3 million of customer-related intangibles. Future contingent consideration may range from zero to $930 thousand.
- The Corporation repurchased 395,000 shares for $7.4 million during the third quarter. On October 23, 2013, the Board authorized a new program to repurchase up to 800,000 shares, approximately 5% of shares outstanding.
Outlook, Commentary, Risks and Unusual Items
Management described the Corporation as asset sensitive and expects longer-term increases in interest rates to benefit net interest income. Its interest-rate simulation estimated a 15.4% increase in next-twelve-month net interest income under a parallel 300-basis-point increase, versus a 5.7% decline under the modeled 100-basis-point decrease. These estimates assume no growth in interest-earning assets or interest-bearing liabilities and are subject to model assumptions.
Management reported short-term uncertainty affecting business and consumer credit demand. Principal risks include credit deterioration, commercial real estate and construction exposures, collateral-value changes, interest-rate volatility, deposit competition, economic and regulatory conditions, competition across banking and fee businesses, and changes in estimates for loan-loss reserves, securities valuations, goodwill, mortgage servicing rights, taxes and benefit plans.
The July 2013 Basel III rules will increase capital requirements beginning January 1, 2015, with capital conservation buffer requirements phasing in beginning January 1, 2016. Management stated that the Corporation and Bank continued to meet applicable requirements. The filing reports no material litigation, no material changes in risk factors from the 2012 Form 10-K, effective disclosure controls and no material market-risk changes.
Important Facts for Investors to Verify
- Whether the elevated loan-loss provision and increased impaired-loan balance represent a temporary concentration issue or a broader deterioration in commercial real estate and construction credit.
- Whether loan growth can continue without materially increasing credit costs or reducing underwriting quality.
- The sustainability of noninterest-income gains from securities sales, bank-owned life insurance proceeds, mortgage servicing and insurance acquisitions.
- The effect of higher or lower interest rates on net interest margin, securities accumulated other comprehensive loss and mortgage banking activity.
- Liquidity after the trust-preferred redemption and share repurchases, including the availability and terms of FHLB, Federal Reserve and correspondent-bank facilities.
- The impact of Basel III implementation on capital ratios, dividend capacity and the treatment of accumulated other comprehensive income.
- Future contingent consideration payments and operating performance for the Fretz acquisition, as well as the absence of further Javers earn-out liability at September 30, 2013.
- The filing's caution that nine-month results are not necessarily indicative of full-year 2013 results.