Univest Corporation of Pennsylvania — Q1 2013 Form 10-Q Summary
Business context and reporting period
Univest Corporation of Pennsylvania is a bank holding company whose subsidiaries provide commercial banking, trust, insurance, investment advisory, broker-dealer, equipment financing and related financial services, primarily in eastern Pennsylvania. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012, and balance-sheet data compared with December 31, 2012. Dollar amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net income | $5,398 | $5,263 | +$135, or 3% |
| Basic and diluted EPS | $0.32 | $0.31 | +$0.01, or 3% |
| Net interest income | $17,943 | $18,164 | -$221, or 1% |
| Tax-equivalent net interest margin | 3.83% | 3.95% | -12 basis points |
| Provision for loan and lease losses | $2,074 | $4,100 | -$2,026, or 49% |
| Noninterest income | $11,475 | $11,021 | +$454, or 4% |
| Noninterest expense | $20,236 | $18,876 | +$1,360, or 7% |
| Income before taxes | $7,108 | $6,209 | +$899 |
| Effective tax rate | 24% | 15% | Higher in 2013 |
| Return on average assets | 0.98% | 0.97% | +1 basis point |
| Return on average equity | 7.67% | 7.70% | -3 basis points |
Revenue growth was supported by investment advisory fees, insurance commissions, other service fees and mortgage banking gains. Insurance income benefited from the May 2012 acquisition of Javers Group, while mortgage banking gains benefited from strong refinancing volume. Bank-owned life insurance income declined by $1,002, partly because Q1 2012 included $989 of death-benefit proceeds.
Balance sheet, liquidity and capital
- Total assets were $2.263 billion at March 31, 2013, down $41.8 million, or 2%, from year-end 2012.
- Gross loans and leases held for investment were $1.487 billion, up $5.5 million from December 31, 2012. Net loans and leases were $1.462 billion after a $25.2 million allowance.
- Total deposits were $1.815 billion, down $50.7 million, or 3%, primarily because public-fund deposits declined $38.9 million. Customer repurchase agreements increased $8.0 million to $104.3 million.
- Cash and interest-earning deposits declined to $84.6 million from $146.1 million at year-end. The decline was primarily attributable to lower deposits.
- Long-term borrowings were $20.6 million, consisting primarily of junior subordinated debt related to trust preferred securities. There were no outstanding FHLB borrowings or Federal Reserve borrowings at March 31, 2013.
- Available borrowing capacity through the FHLB was approximately $403.6 million, and correspondent-bank federal-funds lines totaled $82.0 million, subject to lender availability and collateral requirements.
- Shareholders’ equity was $284.8 million, essentially unchanged from $284.3 million at year-end 2012. A $3.4 million dividend was declared, equal to $0.20 per share.
- Both the Corporation and the Bank exceeded regulatory capital minimums. At March 31, 2013, the Bank’s total risk-based capital ratio was 14.09%, Tier 1 risk-based capital ratio was 12.84%, and Tier 1 leverage ratio was 10.60%; management stated that the Bank remained well capitalized.
Cash flow and credit quality
- Net cash provided by operating activities was $2.4 million, compared with $5.8 million in Q1 2012.
- Investing activities used $15.6 million, primarily reflecting net purchases of investment securities and a net increase in loans and leases.
- Financing activities used $43.9 million, mainly because of a $50.7 million decrease in deposits, partially offset by increased short-term borrowings.
- Cash and due from banks declined $57.1 million during the quarter to $41.3 million.
- Nonaccrual loans and leases declined to $28.9 million from $32.1 million at year-end 2012 and $36.3 million at March 31, 2012. Nonaccrual loans were 1.94% of loans and leases held for investment.
- Total nonperforming loans and leases were $42.3 million, or 2.84% of loans and leases, down from $46.0 million at year-end 2012.
- Total nonperforming assets were $45.9 million, or 2.03% of total assets. Other real estate owned increased to $3.6 million from $1.6 million at year-end, primarily because of $1.7 million of commercial properties transferred to OREO.
- Net charge-offs were approximately $1.6 million, compared with $3.4 million in Q1 2012. The allowance for loan and lease losses was $25.2 million, or 1.70% of loans and leases held for investment.
Material changes versus prior comparable periods
- Net income increased modestly despite lower net interest income and a lower net interest margin, primarily because the loan-loss provision declined substantially and fee income increased.
- Interest income fell because investment securities were reinvested at lower yields and commercial and residential real estate loan rates declined. Deposit repricing and a shift from time deposits to lower-cost checking and savings deposits reduced interest expense by 32%.
- Noninterest expense increased 7%, including $539 of restructuring charges. Excluding those charges, noninterest expense increased 4%.
- Commercial real estate loans increased, while construction and personal real estate loans declined. Management described overall loan demand and utilization as light because of the sluggish economy.
- Accumulated other comprehensive loss increased to $7.7 million, primarily because of declines in the fair value of available-for-sale securities.
- The company repurchased 61,044 shares for $1.0 million during the quarter. Approximately 480,885 shares remained available under the repurchase authorization at March 31, 2013.
Guidance, outlook, management commentary and unusual items
- No formal earnings or financial guidance was provided. Management stated that results for the quarter are not necessarily indicative of full-year 2013 results.
- Management considers the company asset sensitive and expects rising interest rates over the longer term to benefit net interest income. Its simulation estimated that a 100-basis-point rate increase would increase the next-12-month net interest income by approximately 4.2%, while a modeled 100-basis-point decrease would reduce it by approximately 5.5%; these are estimates based on stated assumptions, not guidance.
- A company-wide restructuring reduced staffing levels by 3.4% and included consolidation of the Silverdale financial service center into Hilltown and Perkasie. The company recorded $539 of charges, comprising $437 of severance and $102 of fixed-asset retirement costs.
- On May 1, 2013, after quarter-end, the company acquired John T. Fretz Insurance Agency for $2.2 million in cash, with additional contingent consideration ranging from zero to a maximum of $930 over three years based on revenue performance.
- Management identified credit quality, commercial real estate and construction exposure, economic conditions, interest-rate volatility, liquidity, regulatory and competitive pressures as significant risks. The filing states that no material changes occurred in previously disclosed risk factors or market-risk strategy.
- Management reported no material litigation and concluded that disclosure controls and procedures were effective as of March 31, 2013.
Most important facts for investors to verify
- Whether deposit outflows, particularly public-fund deposits, continue and how they affect cash balances, funding costs and liquidity.
- Whether the lower net interest margin persists in the low-rate and competitive lending environment.
- Trends in commercial real estate, construction and other impaired loans, including the $13.9 million local developer/home-builder exposure and the $6.0 million theatre credit.
- Whether the increase in other real estate owned produces additional carrying costs, write-downs or realized losses.
- The sustainability of mortgage banking, insurance and investment-advisory fee income, including the effects of refinancing activity and acquisitions.
- The recurring savings and implementation costs from the restructuring plan, and the effect of the Fretz Insurance Agency acquisition and contingent consideration.
- The adequacy of the $25.2 million loan-loss allowance under changing collateral values, borrower cash flows and economic conditions.
- The assumptions underlying the interest-rate sensitivity estimates and the company’s ability to maintain strong regulatory capital while paying dividends and repurchasing shares.