UNIVEST FINANCIAL Corp annual report, FY2011

Business context and reporting period

The filing is Univest Corporation of Pennsylvania’s Form 10-K for the fiscal year ended December 31, 2011, including fourth-quarter results. The company operates as a Pennsylvania bank holding company with one reportable segment, Community Banking, serving individuals, businesses, municipalities and nonprofit organizations primarily in southeastern Pennsylvania. Its subsidiaries provide commercial banking, trust, insurance, investment advisory, brokerage and leasing services.

During 2011, the Bank converted from a national charter to a Pennsylvania state-chartered bank and trust company; management reported no significant financial, regulatory or customer impact. The Corporation also terminated its Financial Holding Company status in February 2011 without material impact.

Key financial metrics

Metric	2011	2010	Change
Net income	$18.9 million	$15.8 million	20% increase
Diluted EPS	$1.13	$0.95	19% increase
Net interest income	$74.7 million	$73.5 million	2% increase
Tax-equivalent net interest margin	4.15%	4.11%	4 basis-point increase
Provision for loan and lease losses	$17.5 million	$21.6 million	$4.1 million decrease
Noninterest income	$34.4 million	$34.4 million	Essentially unchanged
Noninterest expense	$68.0 million	$67.3 million	1% increase
Return on average assets	0.89%	0.75%	Improved
Return on average equity	6.91%	5.82%	Improved

Fourth-quarter 2011 net income was $5.3 million, or $0.32 diluted EPS, compared with $4.9 million, or $0.30 diluted EPS, in fourth-quarter 2010. Fourth-quarter net interest income was $18.3 million, the provision for loan and lease losses was $3.1 million, noninterest income was $9.0 million and noninterest expense was $17.6 million.

Total assets were $2.21 billion, up 3.4% from 2010.
Net loans and leases were $1.42 billion, down 1.6% from 2010; gross loans and leases declined 1.7% to $1.45 billion.
Total deposits were $1.75 billion, up 3.7%, driven by growth in noninterest-bearing demand, interest-bearing demand and savings deposits.
Total borrowings were $137.2 million at year-end, compared with $143.9 million in 2010. Long-term borrowings were $27.5 million, including $20.6 million of trust preferred securities.
Shareholders’ equity was $273.0 million, up 2.5%; year-end book value was $16.34 per share.
The Corporation remained well capitalized, with a 14.29% Tier 1 risk-based capital ratio and a 15.56% total risk-based capital ratio.
Cash and interest-earning deposits totaled $107.4 million, compared with $29.2 million at December 31, 2010.
Net cash provided by operating activities was $42.7 million; investing activities used $57.8 million and financing activities provided $43.3 million. Cash and due from banks ended at $39.9 million.
The quarterly cash dividend remained $0.20 per share, or $0.80 for the year. The Corporation repurchased 77,037 shares during the third and fourth quarters and had authorization to repurchase 566,745 additional shares at year-end.

Material changes versus the prior comparable period

Profitability improved as lower funding costs and a reduced loan-loss provision more than offset lower asset yields and modestly higher operating expenses.
Tax-equivalent net interest income increased $1.6 million, primarily because the decline in interest-bearing liability costs exceeded the decline in asset yields. Average Federal Home Loan Bank advances fell from $45.8 million to $5.0 million.
Interest expense decreased 38.6% to $10.7 million, reflecting lower deposit pricing, lower time-deposit balances and reduced borrowings.
Loan-loss provision declined 19.0%, but net charge-offs increased to $18.5 million from $15.5 million. The allowance declined to $29.9 million, or 2.07% of loans and leases, from $30.9 million, or 2.10%.
Noninterest income was stable despite a $1.6 million decline in deposit service charges and a $1.1 million decline in mortgage-banking gains. These items were offset by higher trust fees, investment advisory fees, bank-owned life insurance income and securities gains, as well as the absence of a $1.1 million 2010 loss on an interest-rate swap.
Nonperforming loans and leases declined to $42.5 million from $46.5 million, but other real estate owned increased to $6.6 million from $2.4 million. Total nonperforming assets were $49.1 million, or 2.22% of total assets.
Core deposits increased $72.2 million, while time deposits declined $9.3 million, improving the funding mix.
Accumulated other comprehensive loss improved to $6.1 million from $6.8 million, primarily due to gains on available-for-sale securities, partly offset by pension and interest-rate swap losses.

Guidance, outlook, risks and unusual items

The filing does not provide formal earnings or revenue guidance. Management described the Corporation as asset-sensitive and expects that higher interest rates over the longer term could benefit net interest margin, while acknowledging that rates were expected to remain low for the foreseeable future.

Management cited light credit demand and continued economic pressure in its Pennsylvania markets. Approximately 82.7% of the loan and lease portfolio consisted of commercial, commercial real estate, construction and related business-oriented lending, which carries elevated sensitivity to economic and real estate conditions.
Key risks include interest-rate changes, regional economic weakness, commercial real estate and construction credit losses, deposit competition, funding availability, regulatory and compliance costs, cybersecurity and information-system disruptions, litigation, and possible impairment of investment securities or goodwill.
The Dodd-Frank Act and changes to FDIC assessment rules could increase operating and compliance costs. The repeal of restrictions on interest paid on business demand deposits could increase deposit costs and compress net interest margin.
Management recorded a $798 thousand net loss on sales and write-downs of other real estate owned, compared with a $377 thousand loss in 2010.
Mortgage servicing rights were subject to a $592 thousand valuation reduction in 2011 as lower rates increased projected prepayments.
The Corporation early adopted qualitative goodwill impairment testing during the fourth quarter. No goodwill impairment was recorded.
Contractual obligations totaled $1.13 billion, including $421.9 million of time deposits, $109.7 million of repurchase agreements and $473.8 million of commitments to extend credit. The Corporation also had $47.8 million of letters of credit and $2.3 million of potential exposure under risk participation agreements.
Management reported no material pending legal proceedings, and both management and KPMG LLP concluded that internal control over financial reporting was effective as of December 31, 2011.

Most important facts for investors to verify

Whether the decline in nonperforming loans is sustained and whether commercial real estate, construction and commercial loan concentrations generate additional charge-offs.
Whether the $29.9 million allowance for loan and lease losses remains adequate relative to net charge-offs, impaired loans and regional economic conditions.
Whether low interest rates, deposit repricing and increased competition for business deposits pressure the 4.15% net interest margin.
Whether loan growth resumes after the 2011 decline and whether excess liquidity can be deployed at acceptable yields.
The carrying value and future performance of other real estate owned, mortgage servicing rights, investment securities and goodwill.
The maturity and cost of time deposits, repurchase agreements, trust preferred securities and other borrowings, including the availability of FHLB and correspondent funding.
The sustainability of the $0.80 annual dividend and continued share repurchases relative to earnings, capital requirements and subsidiary dividend capacity.
The filing identifies the registrant as Univest Corporation of Pennsylvania; investors should verify whether this corresponds to the requested “UNIVEST FINANCIAL Corp.”