Business Context and Reporting Period
Univest Corporation of Pennsylvania, a bank holding company headquartered in Souderton, Pennsylvania, provides commercial and consumer banking, trust, insurance, investment advisory, mortgage banking, and equipment financing services through Univest Bank and Trust Co. and other subsidiaries. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with balance-sheet comparisons to December 31, 2013 and income and cash-flow comparisons to the corresponding 2013 periods. Dollar amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | Comparable Change |
|---|---|---|---|
| Net income | $5,080 | $10,806 | +5% and +6%, respectively |
| Diluted earnings per share | $0.31 | $0.66 | +7% and +8%, respectively |
| Net interest income | $17,744 | $35,692 | Down 2% and 1%, respectively, on a reported basis |
| Tax-equivalent net interest margin | 3.86% | 3.91% | Up 8 and 11 basis points, respectively |
| Provision for loan and lease losses | $1,251 | $2,726 | Down 64% and 51%, respectively |
| Noninterest income | $11,924 | $24,065 | +8% and +7%, respectively |
| Noninterest expense | $21,790 | $42,673 | +13% and +8%, respectively |
| Return on average assets | 0.94% | 1.00% | Up 8 basis points in each comparison |
| Return on average equity | 7.14% | 7.67% | Up 33 and 43 basis points, respectively |
Total assets were $2.197 billion at June 30, 2014, versus $2.192 billion at December 31, 2013. Gross loans and leases held for investment increased 3% to $1.587 billion, while the allowance for loan and lease losses was $24.1 million, or 1.52% of loans. Deposits declined 1% to $1.832 billion. Shareholders’ equity increased 2% to $286.8 million.
Six-month net cash provided by operating activities was $17.6 million, compared with $13.2 million in the prior-year period. Investing activities provided $12.0 million, versus using $17.2 million in 2013, primarily reflecting securities maturities and reduced securities purchases. Financing activities used $13.3 million, compared with $49.1 million in 2013. Cash and due from banks increased $16.2 million to $48.9 million.
Short-term borrowings totaled $45.1 million, consisting primarily of $41.1 million in customer repurchase agreements and $4.0 million in federal funds purchased. The Bank had no FHLB or Federal Reserve borrowings and had approximately $486.7 million of maximum FHLB borrowing capacity, subject to collateral and other requirements. Federal funds lines totaled $82.0 million.
Material Changes Versus Prior Comparable Period
- Net income increased $250 thousand in the second quarter and $578 thousand for the first six months, despite lower reported net interest income.
- Net interest margin improved because of lower funding costs, the 2013 redemption of trust preferred securities and related swap termination, and loan growth; this was partly offset by lower investment securities balances and loan yields.
- Noninterest income benefited from the Girard Partners acquisition, completed January 27, 2014, which added more than $500 million of assets under management and increased advisory-fee income by $2.1 million for the six-month period.
- Mortgage banking income declined $897 thousand for the quarter and $2.2 million for the six months. Funded first-mortgage volume fell 72% and 75%, respectively, as higher interest rates reduced refinancing and purchase activity.
- Noninterest expense rose primarily from the Girard acquisition, higher salaries and benefits, intangible amortization, occupancy and equipment costs, and acquisition-related expenses. The prior-year period included a $959 thousand reduction in expense from a Javers contingent-consideration adjustment and $539 thousand of restructuring charges.
- Asset quality improved. Nonaccrual loans and leases, including nonaccrual troubled debt restructurings, declined to $17.7 million from $23.2 million at December 31, 2013 and $25.2 million at June 30, 2013. Total nonperforming assets declined to $26.3 million from $33.2 million and $41.1 million, respectively.
- Net loan and lease charge-offs declined to $1.7 million for the quarter and $3.1 million for the six months, down from $3.9 million and $5.5 million, respectively, in the prior-year comparisons.
- Accumulated other comprehensive loss improved to $6.6 million from $10.0 million at year-end, mainly because of higher available-for-sale securities values.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management stated that the Corporation is asset sensitive and expects longer-term increases in interest rates to benefit net interest margin, although rate movements may reduce fixed-rate asset values and affect earnings.
- Management expects the pending Valley Green Bank merger to close in the first quarter of 2015, subject to shareholder and regulatory approvals. The proposed all-stock transaction has an approximate value of $76 million and is expected to be accretive to earnings per share in the first combined year, with greater than 10% earnings accretion projected in year two.
- Valley Green had approximately $370 million of assets, $329 million of loans and $335 million of deposits at March 31, 2014. The transaction would add three branches and two loan production offices in the Philadelphia market.
- On July 1, 2014, the Corporation completed the acquisition of Sterner Insurance Associates for $3.9 million in cash and assumed liabilities of $940 thousand. Contingent consideration has an estimated fair value of $635 thousand and potential payments ranging from zero to $5.7 million.
- Girard Partners contingent consideration had a June 30, 2014 fair value of $5.9 million, with potential cumulative cash payments ranging from zero to $14.5 million through 2018. Total contingent consideration liabilities were $6.2 million.
- Key risks include commercial real estate and construction credit exposure, borrower cash-flow weakness, collateral-value declines, interest-rate volatility, deposit competition, mortgage-market weakness, economic and competitive conditions, regulatory and legal risks, and execution risk associated with acquisitions.
- Management identified loan-loss reserves, securities impairment, goodwill and intangible valuation, mortgage servicing rights, deferred taxes, benefit plans and stock compensation as critical accounting estimates. Actual results may differ materially from those estimates.
- The filing reports no material litigation, no material change in previously disclosed risk factors, no material change in market risk, and effective disclosure controls as of June 30, 2014.
Investor Verification Checklist
- Verify the regulatory and shareholder approvals, closing date, exchange ratio and realized accretion from the Valley Green merger.
- Monitor post-acquisition performance of Girard Partners and Sterner Insurance, including contingent-consideration remeasurement and integration costs.
- Assess whether loan growth is sustained without deterioration in commercial real estate, construction and business-loan credit quality.
- Track nonaccrual loans, impaired loans, charge-offs and the adequacy of the $24.1 million allowance as economic and collateral conditions change.
- Evaluate the sensitivity of net interest margin to rising rates, deposit repricing, loan yields and securities portfolio changes.
- Determine whether mortgage banking weakness and higher operating expenses offset growth in advisory, insurance and other fee income.
- Confirm the effect of Basel III capital requirements beginning January 1, 2015 and the Corporation’s ability to maintain dividends and repurchases while funding growth.