Univest Corporation of Pennsylvania — Form 10-Q Summary
Business context and reporting period
Univest is a bank holding company operating through banking, wealth management, insurance, mortgage banking, trust, investment advisory and equipment-financing businesses. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the 2017 periods.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net interest income | $40.4 million | $36.9 million | $116.7 million | $106.5 million |
| Provision for loan losses | $2.7 million | $2.7 million | $20.2 million | $7.9 million |
| Noninterest income | $14.9 million | $14.1 million | $45.8 million | $45.1 million |
| Noninterest expense | $34.4 million | $32.7 million | $103.8 million | $97.3 million |
| Net income | $15.0 million | $11.2 million | $32.2 million | $33.8 million |
| Diluted EPS | $0.51 | $0.42 | $1.09 | $1.27 |
| Tax-equivalent net interest margin | 3.71% | 3.80% | 3.72% | 3.78% |
| Return on average assets | 1.23% | 1.01% | 0.92% | 1.05% |
| Return on average equity | 9.70% | 8.43% | 7.05% | 8.73% |
At September 30, 2018, total assets were $4.802 billion, up 5.4% from December 31, 2017. Loans and leases held for investment were $3.866 billion, up 6.8%, while deposits were $3.820 billion, up 7.5%. Shareholders’ equity was $614.2 million, up 1.8%.
Cash and interest-earning deposits totaled $84.1 million. Nine-month operating cash flow was $61.3 million, compared with $44.8 million in 2017. Investing activities used $275.2 million, primarily because of a $260.0 million net increase in loans. Financing activities provided $219.4 million, principally from a $265.3 million increase in deposits.
Borrowings included $86.8 million of short-term borrowings, $145.4 million of long-term debt and $94.5 million of subordinated notes. The Bank had approximately $1.6 billion of FHLB borrowing capacity, $367.0 million of uncommitted correspondent federal-funds lines and no borrowings from the Federal Reserve Discount Window or the $10.0 million correspondent line. The filing does not provide a single consolidated liquidity ratio.
Material changes versus the prior comparable period
- Third-quarter net income increased 33.7% and diluted EPS increased 21.4%, primarily reflecting higher net interest income and a lower effective tax rate.
- Nine-month net income declined 4.9% and diluted EPS declined 14.2%, primarily because of a $12.7 million commercial-loan charge-off related to alleged fraudulent activities by one or more employees of a borrower. The charge reduced after-tax earnings by approximately $10.1 million, or $0.34 per diluted share.
- Net interest income increased 9.6% in both the quarter and nine-month period, supported by loan growth and higher asset yields. However, deposit and borrowing costs rose substantially, and the net interest margin declined by 9 basis points in the quarter and 6 basis points for the nine months.
- Loan-loss provision increased $12.3 million for the nine months. Net charge-offs were $14.4 million versus $4.9 million in the prior-year period; the allowance increased to $27.4 million from $21.6 million.
- Noninterest income increased only 1.5% for the nine months. Growth in advisory, insurance and service-fee income was largely offset by a 32.2% decline in mortgage-banking gains and lower BOLI income.
- Noninterest expense increased 6.8% for the nine months, including $571 thousand of restructuring charges related to the closure of two owned financial centers and one leased center. Excluding restructuring charges, expense increased 6.2%.
- Accumulated other comprehensive loss increased to $28.7 million from $17.8 million, mainly because of declines in the fair value of available-for-sale securities.
Guidance, outlook, commentary, risks and unusual items
The filing provides no formal earnings or revenue guidance. Management describes continued growth initiatives across lending, deposits, wealth management and insurance, while emphasizing capital, liquidity, credit-risk and interest-rate-risk management.
- Credit quality weakened in selected areas: nonaccrual loans and leases rose to $27.6 million from $14.5 million, and total nonperforming loans and leases rose to $29.5 million from $26.7 million. Commercial real estate represented the largest nonaccrual exposure.
- Management identified the $12.7 million fraudulent-borrower charge-off as an unusual item. The filing states that the Bank held a participating interest originally totaling $13.0 million in an approximately $80.0 million commercial lending facility.
- Nonperforming assets were $31.0 million, or 0.65% of total assets. Other real estate owned declined to $1.4 million from $1.8 million.
- Management expects adoption of the current expected credit loss standard on January 1, 2020 to increase the loan-loss reserve and reduce shareholders’ equity, regulatory capital and capital ratios.
- For lease accounting adoption on January 1, 2019, management estimated operating lease liabilities and related right-of-use assets of approximately $30 million to $40 million. The filing states that this transition may negatively affect capital ratios.
- Management expects a small January 1, 2019 reduction in retained earnings, estimated at approximately $40 thousand net of tax, from the callable-debt-security premium-amortization standard.
- Regulatory capital remained strong. At September 30, 2018, the Bank reported total risk-based capital of 11.59%, Tier 1 risk-based capital of 10.92%, Tier 1 common capital of 10.92% and a leverage ratio of 10.01%; management stated that the Bank was well capitalized.
- Pending and threatened legal actions were not expected by management to have a material adverse effect, although outcomes remain subject to uncertainty. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the elevated nonaccrual and nonperforming commercial real estate exposures require additional reserves or charge-offs.
- Whether the unusual borrower-fraud loss was isolated and whether related recovery, insurance or legal developments could affect future results.
- Deposit pricing, funding costs and the effect of further interest-rate changes on the 3.72% nine-month net interest margin.
- The magnitude of the reserve and capital impact when CECL is adopted in 2020.
- The final balance-sheet and regulatory-capital effects of the $30 million to $40 million lease-accounting estimate.
- The sustainability of loan growth and whether credit expansion continues to outpace core deposit growth or increases reliance on wholesale funding.
- The decline in mortgage-banking revenue and the contribution of advisory, insurance and other fee businesses to earnings stability.