Univest Corporation of Pennsylvania — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; quarterly data includes the fourth quarter ended December 31, 2013. The filing was signed March 4, 2014. Univest is a Pennsylvania bank holding company operating primarily through Univest Bank and Trust Co. Its reportable segment is Community Banking, with banking, trust, insurance, investment advisory, brokerage, and equipment-financing activities concentrated in Southeastern Pennsylvania.
Business Context and Financial Position
- At year-end, total assets were $2.192 billion, net loans and leases were $1.517 billion, deposits were $1.844 billion, and shareholders’ equity was $280.5 million.
- The company had 31 banking offices, 612 employees, and its largest market concentrations were Montgomery and Bucks counties, Pennsylvania.
- Univest completed the acquisition of John T. Fretz Insurance Agency in May 2013. The acquisition of Girard Partners, an investment advisory firm with more than $500 million of assets under management, closed January 27, 2014 and therefore was a subsequent event for the 2013 financial statements.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Interest income | $77.6 million | $80.7 million | Down 4% |
| Interest expense | $5.1 million | $8.2 million | Down 37% |
| Net interest income | $72.5 million | $72.5 million | Essentially flat |
| Net interest margin, tax-equivalent | 3.81% | 3.89% | Down 8 basis points |
| Provision for loan and lease losses | $11.2 million | $10.0 million | Up 12% |
| Noninterest income | $46.8 million | $40.3 million | Up 16% |
| Noninterest expense | $81.1 million | $76.3 million | Up 6% |
| Net income | $21.2 million | $20.9 million | Up 2% |
| Diluted earnings per share | $1.27 | $1.24 | Up 2% |
| Return on average assets | 0.95% | 0.95% | Flat |
| Return on average equity | 7.53% | 7.39% | Up 14 basis points |
Fourth Quarter 2013
- Net income was $4.9 million, or $0.30 diluted earnings per share, compared with $5.1 million and $0.30 per diluted share in the fourth quarter of 2012.
- Net interest income was $18.1 million, compared with $18.2 million in the prior-year quarter.
- The provision for loan and lease losses was $1.6 million, compared with $2.4 million in the fourth quarter of 2012.
- Noninterest income was $11.1 million, compared with $10.4 million, while noninterest expense was $21.6 million, compared with $19.7 million.
Cash Flow, Debt, Liquidity, and Capital
- Net cash provided by operating activities was $32.8 million. Investing activities provided $21.6 million, principally reflecting securities maturities, calls, and sales, while financing activities used $120.2 million.
- Cash and due from banks declined to $32.6 million from $98.4 million. Management attributed the decline primarily to loan growth and the redemption of trust preferred securities.
- Investment securities declined to $402.3 million from $499.6 million, while loans and leases held for investment increased 4% to $1.541 billion.
- Total deposits declined 1% to $1.844 billion. Noninterest-bearing demand deposits increased, while time deposits and certain trust-related interest-bearing funds declined.
- Customer repurchase agreements were $37.3 million, down from $96.3 million. The company had no outstanding FHLB borrowings, federal-funds-line borrowings, or Federal Reserve borrowings at year-end. FHLB borrowing capacity was approximately $484.1 million, subject to collateral and other conditions.
- Univest redeemed approximately $20.6 million of trust preferred securities in July 2013 using existing cash. It recognized a $1.9 million loss on terminating the related interest-rate swap but expects annual interest savings of approximately $1.1 million thereafter.
- The Corporation’s Tier 1 capital ratio was 12.63% and total risk-based capital ratio was 13.90%; the Bank’s corresponding ratios were 11.81% and 13.06%. The company and Bank remained well capitalized.
- Contractual obligations and commitments totaled $922.0 million, including $533.4 million of commitments to extend credit, $42.3 million of letters of credit, $37.3 million of customer repurchase agreements, and $29.6 million of operating leases.
Material Changes Versus the Prior Comparable Period
- Profitability improved modestly: net income increased $317 thousand, or 2%, despite higher credit-loss provision and operating expenses.
- Net interest income was stable because a 37% decline in funding costs largely offset lower asset yields. The net interest margin contracted as commercial and residential real estate loan rates repriced lower and securities were reinvested at lower yields.
- Noninterest income increased $6.5 million, driven by insurance and investment advisory growth, higher securities gains, increased mortgage servicing income, and a favorable change in other real estate owned results. Mortgage banking gains declined due to higher rates, weaker refinancing activity, and lower funded loan volume.
- Loan growth was concentrated in commercial real estate and lease financings, partially offset by lower commercial business loans. Gross loans and leases increased $59.6 million, or 4%.
- Asset quality improved overall. Nonaccrual loans declined to $23.2 million from $32.1 million; total nonperforming loans declined to $31.6 million from $46.0 million; and net charge-offs declined to $11.5 million from $15.2 million.
- The allowance for loan and lease losses declined slightly to $24.5 million, or 1.59% of loans, from $24.7 million, or 1.67%. However, individually impaired loans increased to $58.3 million from $45.2 million, and the related specific allowance increased to $3.0 million from $208 thousand.
- Total assets declined 5% to $2.192 billion, investment securities declined 19%, and shareholders’ equity declined 1% to $280.5 million. Accumulated other comprehensive loss increased primarily because rising rates reduced the fair value of available-for-sale securities.
- The company repurchased 540,285 shares for $9.9 million during the first nine months of 2013. A new authorization for up to 800,000 shares was approved in October 2013, but no shares were repurchased under that plan during the fourth quarter.
Outlook, Management Commentary, Risks, and Unusual Items
- Management described the company as asset sensitive and expects higher interest rates over the longer term to benefit net interest margin. Its simulation estimated a 4.6% increase in next-twelve-month net interest income under a 100-basis-point rate increase, versus a 6.4% decrease under the modeled downward-rate scenario.
- Management stated that the longer-term economic outlook was positive, but stagnant household income and spending were expected to restrain near-term credit demand and credit-line utilization.
- The filing identifies significant exposure to interest-rate risk, commercial real estate and construction lending, regional economic conditions in Pennsylvania, deposit competition, regulatory changes, technology and cybersecurity, liquidity access, and potential future loan-loss or securities-impairment charges.
- A company-wide restructuring plan reduced staffing by 3.4% and closed or consolidated the Silverdale financial service center. Restructuring charges were approximately $539 thousand, primarily severance and fixed-asset retirement costs.
- The company recorded a $959 thousand reduction in the Javers acquisition contingent consideration liability because required revenue targets were not met and future earn-out payments became remote. The remaining Fretz contingent consideration liability was $501 thousand at year-end, with potential future payments up to $930 thousand.
- The Girard Partners acquisition added $5.6 million of cash consideration and estimated contingent consideration of $5.6 million, with potential cumulative contingent payments ranging from zero to $14.4 million over five years. These amounts relate to the 2014 acquisition and are not included in 2013 operating results.
- Basel III capital requirements were scheduled to begin taking effect January 1, 2015, with the capital conservation buffer phasing in beginning in 2016. The filing does not provide a 2014 earnings or revenue forecast.
- Management reported no material pending litigation, no material unresolved SEC staff comments, effective disclosure controls and internal control over financial reporting, and an unqualified audit opinion from KPMG LLP.
Most Important Facts for Investors to Verify
- Whether loan growth remains concentrated in commercial real estate, construction, and other higher-risk commercial categories, and whether impaired loans and specific reserves continue to rise.
- Whether deposit balances and deposit mix remain stable as competition increases, particularly for low-cost and noninterest-bearing deposits.
- The effect of interest-rate movements on net interest margin, securities accumulated other comprehensive income, mortgage banking activity, and funding costs.
- Post-closing financial results, integration progress, goodwill, intangible assets, and contingent consideration associated with the Girard Partners acquisition.
- Compliance with Basel III requirements and the effect of capital distributions, share repurchases, and future acquisitions on regulatory capital.
- Liquidity availability under FHLB, Federal Reserve, and correspondent-bank facilities, including collateral requirements and the $533.4 million of unfunded credit commitments.
- The sustainability of noninterest income growth, particularly insurance, investment advisory, mortgage servicing, securities gains, and other potentially market-sensitive sources.