Univest Corporation of Pennsylvania — Q1 2014 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014. Univest is a bank holding company whose subsidiaries provide commercial banking, trust, insurance, investment advisory, brokerage, equipment financing and mortgage services, primarily in Pennsylvania markets. The filing was signed May 9, 2014; 16,242,580 common shares were outstanding at April 30, 2014.
Key financial metrics
| Metric | Q1 2014 | Comparable period or date | Change |
|---|---|---|---|
| Net income | $5.7 million | $5.4 million in Q1 2013 | Up 6% |
| Diluted EPS | $0.35 | $0.32 | Up $0.03 |
| Net interest income | $17.9 million | $17.9 million | Approximately flat |
| Tax-equivalent net interest margin | 3.96% | 3.82% | Up 14 basis points |
| Noninterest income | $12.1 million | $11.5 million | Up 6% |
| Noninterest expense | $20.9 million | $20.2 million | Up 3% |
| Net interest income after provision | $16.5 million | $15.9 million | Up 4% |
| Provision for loan and lease losses | $1.5 million | $2.1 million | Down 29% |
| Return on average assets | 1.07% | 0.98% | Up 9 basis points |
| Return on average equity | 8.22% | 7.67% | Up 55 basis points |
| Cash flow from operating activities | $12.7 million | $2.4 million | Improved by $10.2 million |
All dollar amounts are in thousands unless otherwise noted. Income before taxes was $7.7 million and income tax expense was $2.0 million, producing an effective tax rate of approximately 26%, versus 24% in Q1 2013. The company declared a $0.20 per-share dividend.
Financial condition, liquidity and capital
- Total assets were $2.20 billion at March 31, 2014, compared with $2.19 billion at December 31, 2013.
- Gross loans and leases held for investment increased 1% to $1.56 billion; net loans were $1.54 billion after a $24.6 million allowance.
- Total deposits were $1.84 billion, down $4.7 million from year-end. Noninterest-bearing deposits increased while public funds and certain demand deposits declined.
- Short-term borrowings were $41.5 million, consisting of overnight customer repurchase agreements. The company had no outstanding FHLB borrowings or Federal Reserve credit-line borrowings at quarter-end.
- Cash and interest-earning deposits totaled $72.1 million. The Bank had approximately $474.1 million of maximum FHLB borrowing capacity, $82.0 million of federal funds lines, and additional Federal Reserve borrowing capacity subject to collateral.
- Shareholders’ equity was $283.3 million, up $2.8 million from December 31, 2013. The Bank remained classified as well capitalized, with total capital of 12.49%, Tier 1 risk-based capital of 11.24%, and Tier 1 leverage capital of 9.92%.
- Net cash provided by investing activities was $5.3 million, while financing activities used $6.1 million, including $2.7 million of treasury-stock purchases and $3.3 million of dividends paid.
Material changes versus prior comparable periods
- Net income benefited from lower credit-loss provisions, lower funding costs and higher fee income. Interest expense fell 35% to $1.0 million, primarily because trust preferred securities and the related interest-rate swap were redeemed in Q2 2013, and higher-cost time deposits matured.
- Noninterest income increased despite a $1.3 million decline in mortgage-banking gains. Investment advisory income rose 61%, primarily reflecting the Girard Partners acquisition, and insurance commission income rose 32%, partly reflecting the John T. Fretz Insurance Agency acquisition.
- Mortgage activity weakened materially: funded loan volume declined 79%, attributed to higher interest rates, reduced refinancing activity and severe winter weather.
- Noninterest expense increased 3%, driven by higher salaries, occupancy, equipment and amortization costs associated with acquisitions. Q1 2013 included $539 thousand of restructuring charges; Q1 2014 included none.
- Loan quality improved overall. Nonaccrual loans declined to $19.3 million from $23.2 million at December 31, 2013 and $28.9 million at March 31, 2013. Total nonperforming loans and leases declined to $26.9 million from $31.6 million at year-end and $42.3 million a year earlier.
- Available-for-sale securities declined to $315.9 million from $336.3 million at year-end, while their net unrealized gain improved to $343 thousand from a $2.3 million net unrealized loss.
Acquisition, outlook, risks and unusual items
- On January 27, 2014, Univest completed the acquisition of Girard Partners, an investment advisory firm with more than $500 million of assets under management. Assets under management increased to more than $3.0 billion at acquisition.
- The acquisition required $5.4 million of cash at closing and created $6.8 million of goodwill and $4.3 million of customer-related intangible assets. Girard-related contingent consideration has a potential cumulative payout ranging from zero to $14.5 million through 2018; the recorded contingent consideration liability was $5.7 million at March 31, 2014.
- Management describes the company as more asset sensitive and expects longer-term increases in interest rates to benefit net interest margin, although rates remained historically low at the reporting date. The filing provides no formal earnings or revenue guidance.
- Management expects stagnant household income and spending to restrain near-term credit demand and credit-line utilization. Competitive pressure, interest-rate volatility, economic conditions, regulatory developments and borrower performance remain significant risks.
- Commercial, commercial real estate and construction lending represent important credit exposures and may be more sensitive to economic and real estate downturns. Management states that the allowance is appropriate, but its adequacy depends on estimates, collateral values, cash flows and future economic conditions.
- Investment securities had $3.4 million of unrealized losses at March 31, 2014, which management considered temporary and not other-than-temporary impairment. No impairment charges were recorded.
- The company repurchased 110,671 shares for approximately $2.0 million during the quarter, leaving 689,329 shares available under the repurchase program.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material litigation and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether Girard Partners produces the expected recurring advisory-fee growth and whether contingent consideration ultimately approaches the stated $14.5 million maximum.
- Future trends in net interest margin as rates, loan yields, deposit costs and the asset-sensitive balance sheet change.
- Whether mortgage-banking activity recovers after the 79% decline in funded volume.
- Credit performance in commercial real estate, construction and commercial lending, including the $26.9 million of nonperforming loans and the $24.6 million allowance.
- The effect of acquisition-related salaries, occupancy and intangible amortization on operating leverage.
- Deposit stability, available borrowing capacity and the company’s ability to fund continued loan growth without materially higher funding costs.
- Future capital effects from Basel III implementation beginning January 1, 2015 and the associated capital-conservation buffer requirements.