Univest Corporation of Pennsylvania — Q2 2018 Form 10-Q Summary
Business context and reporting period
Univest Corporation of Pennsylvania is a bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides commercial and consumer banking, mortgage banking, equipment financing, wealth management, trust, investment advisory and insurance services. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net income | $4.4 million | $11.8 million | $17.2 million | $22.6 million |
| Diluted EPS | $0.15 | $0.44 | $0.58 | $0.85 |
| Net interest income | $39.0 million | $35.3 million | $76.3 million | $69.6 million |
| Provision for loan and lease losses | $15.4 million | $2.8 million | $17.5 million | $5.2 million |
| Noninterest income | $15.3 million | $16.0 million | $30.9 million | $31.0 million |
| Noninterest expense | $34.3 million | $32.5 million | $69.5 million | $64.6 million |
| Return on average assets | 0.37% | 1.09% | 0.75% | 1.07% |
| Return on average equity | 2.86% | 9.13% | 5.70% | 8.89% |
| Tax-equivalent net interest margin | 3.73% | 3.76% | 3.72% | 3.78% |
At June 30, 2018, total assets were $4.75 billion, up 4.3% from December 31, 2017. Loans and leases held for investment were $3.82 billion, up 5.5%, while deposits were $3.62 billion, up 1.9%. Shareholders’ equity was $605.3 million, compared with $603.4 million at year-end 2017.
Net cash provided by operating activities for the first six months was $36.5 million. Investing activities used $210.0 million, principally reflecting a $211.5 million net increase in loans and leases. Financing activities provided $181.2 million, including $126.4 million of additional short-term borrowings and $66.0 million of deposit growth. Cash and due from banks ended at $54.4 million.
Borrowings at June 30, 2018 included $231.9 million of short-term borrowings, $155.6 million of long-term debt and $94.5 million of subordinated notes. The Bank had approximately $1.5 billion of FHLB borrowing capacity, $367.0 million of uncommitted federal funds lines and no outstanding Federal Reserve Discount Window or $10.0 million correspondent-bank line borrowings.
Regulatory capital remained strong. The Bank reported total capital to risk-weighted assets of 11.36%, Tier 1 capital of 10.73%, Tier 1 common capital of 10.73% and Tier 1 capital to average assets of 10.03%. Management stated that the Corporation and Bank met applicable capital requirements, and the Bank remained categorized as well capitalized.
Material changes versus the prior comparable period
- Q2 net income decreased 63.0% and six-month net income decreased 24.0%, primarily because of a $12.7 million charge-off tied to alleged fraudulent activities by one or more employees of a commercial borrower.
- Net interest income increased 10.5% in Q2 and 9.6% for the six months, supported by loan growth and higher earning-asset yields. Higher deposit and borrowing costs partly offset this benefit, and the net interest margin narrowed by 3 basis points in Q2 and 6 basis points for the six months.
- Gross loans and leases grew $198.3 million from year-end 2017, primarily in commercial real estate, commercial business and residential real estate lending.
- Noninterest income was broadly stable for the six months, as growth in investment advisory, insurance and service fees offset lower mortgage banking income, BOLI income and other income.
- Mortgage banking gains declined 38.7% in Q2 and 37.4% for the six months, reflecting lower refinance volume, housing supply constraints and a greater proportion of mortgage originations retained on balance sheet.
- Noninterest expense increased 5.5% in Q2 and 7.6% for the six months, led by higher salaries, benefits and commissions. The first six months included $571,000 of restructuring charges related to the closure of two owned and one leased financial center and related staffing reductions.
- The federal statutory tax rate declined from 35% to 21% under the Tax Cuts and Jobs Act. The six-month effective tax rate was 14.9%, including discrete tax benefits and tax-free BOLI death-benefit proceeds; management stated that the rate excluding discrete items was 18.2%.
- Accumulated other comprehensive loss increased to $28.0 million, primarily due to after-tax declines in the fair value of available-for-sale investment securities and pension-related amounts.
Outlook, risks, contingencies and unusual items
The filing provides no formal earnings or revenue guidance. Management’s stated priorities are business growth, adequate capital and liquidity, and control of credit and interest-rate risk. Management expects the six-month results are not necessarily indicative of full-year results.
- Credit quality deteriorated from year-end: nonperforming loans and leases rose to $31.1 million from $26.7 million, nonaccrual loans and leases rose to $30.1 million from $14.5 million, and nonperforming assets increased to $32.8 million from $28.6 million.
- The allowance for loan and lease losses increased to $25.7 million, or 0.67% of loans and leases, from $21.6 million, or 0.60%. A $12.0 million commercial real estate loan placed on nonaccrual status during Q1 had a $650,000 specific reserve at June 30.
- Management identified interest-rate volatility, competition for deposits, economic and regulatory conditions, loan and investment portfolio quality, and execution of strategic initiatives as material risks.
- The Corporation is evaluating the future impact of CECL, effective January 1, 2020. Management anticipates that adoption will increase the loan-loss reserve and reduce shareholders’ equity and regulatory capital ratios. Lease accounting adoption in 2019 is also expected to add operating lease liabilities and right-of-use assets and may negatively affect capital ratios.
- Unrealized losses on available-for-sale securities increased with higher interest rates. Management concluded that the securities were not other-than-temporarily impaired and did not record impairment charges on debt securities.
- Pending and threatened legal actions were disclosed, but management does not expect them to have a material adverse effect based on currently available information.
- The Corporation adopted accounting guidance for equity securities, certain tax effects in accumulated other comprehensive income and revenue recognition in 2018. The filing states that the revenue adoption required no retained-earnings adjustment.
Important facts for investors to verify
- Whether the commercial borrower fraud incident was fully contained and whether additional losses, recoveries or litigation could arise beyond the $12.7 million charge-off.
- Whether the increase in nonaccrual commercial real estate loans persists and whether additional provisions or charge-offs are required.
- Loan growth, funding mix and the effect of rising deposit and wholesale borrowing costs on net interest margin.
- The sustainability of mortgage banking income, investment advisory growth, insurance commissions and BOLI-related income.
- The expected effect of CECL and lease accounting on reserves, retained earnings, regulatory capital and capital distributions.
- Future unrealized investment-security losses and their potential effect on tangible equity, liquidity or capital if securities must be sold.
- Whether restructuring savings offset the higher staffing, technology and professional-fee expenses.