Univest Corporation of Pennsylvania — Q1 2017 Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. The filing is for Univest Corporation of Pennsylvania and subsidiaries, a bank holding company with Banking, Wealth Management, and Insurance segments. Results include the July 1, 2016 acquisition of Fox Chase Bancorp. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 or Dec. 31, 2016 | Change |
|---|---|---|---|
| Net income | $10.9 million | $7.3 million | +48.9% |
| Diluted EPS | $0.41 | $0.37 | +$0.04 |
| Net interest income | $34.3 million | $23.5 million | +45.7% |
| Tax-equivalent net interest income | $35.7 million | $24.8 million | +43.8% |
| Tax-equivalent net interest margin | 3.80% | 3.91% | -11 basis points |
| Provision for loan and lease losses | $2.4 million | $0.3 million | Higher by $2.1 million |
| Noninterest income | $15.0 million | $13.8 million | +8.2% |
| Noninterest expense | $32.0 million | $26.9 million | +18.9% |
| Return on average assets | 1.04% | 1.03% | +1 basis point |
| Return on average equity | 8.65% | 8.05% | +60 basis points |
| Assets | $4.274 billion | $4.231 billion at Dec. 31, 2016 | +1.0% |
| Loans and leases held for investment | $3.342 billion | $3.286 billion at Dec. 31, 2016 | +1.7% |
| Total deposits | $3.366 billion | $3.258 billion at Dec. 31, 2016 | +3.3% |
| Shareholders’ equity | $511.9 million | $505.2 million at Dec. 31, 2016 | +1.3% |
Interest income increased primarily from the Fox Chase acquisition and organic growth in commercial real estate, commercial business, and residential real estate loans. Interest expense increased because of the acquisition and higher borrowings. Noninterest income benefited from investment advisory fees, service charges, bank-owned life insurance income, and other service fees, partly offset by lower insurance commissions and mortgage banking income.
Noninterest expense rose mainly because of additional Fox Chase staffing and locations, expansion into new markets, higher data-processing costs, and a higher bank-shares tax. The 2016 comparison included $220 thousand of acquisition and integration costs; no such costs were recorded in Q1 2017.
Cash flow, liquidity, debt, and capital
- Operating activities provided $17.7 million of cash, compared with $6.7 million in Q1 2016.
- Investing activities used $57.7 million, primarily because loan growth used $56.6 million of cash. Q1 2016 investing activities provided $54.9 million, largely reflecting higher securities sales.
- Financing activities provided $36.0 million, including a $108.5 million increase in deposits and $55.0 million of long-term debt issuance, partly offset by a $116.8 million reduction in short-term borrowings.
- Cash and due from banks ended at $44.7 million, down from $48.8 million at December 31, 2016.
- Short-term borrowings were $79.4 million, down from $196.2 million. Long-term debt was $182.1 million, up from $127.5 million. Subordinated notes were $94.1 million.
- The Bank had approximately $1.3 billion of FHLB borrowing capacity, $327.0 million of uncommitted correspondent-bank federal-funds lines, and no borrowings under its Federal Reserve Bank or $10.0 million correspondent-bank credit lines.
- At March 31, 2017, the Bank remained “well capitalized.” Its total capital ratio was 11.77%, Tier 1 risk-based capital ratio was 11.23%, Tier 1 common capital ratio was 11.23%, and Tier 1 leverage ratio was 10.44%.
- The quarterly dividend was $0.20 per share. No shares were repurchased under the announced repurchase program during the quarter.
Material changes versus comparable periods
- Net income rose $3.6 million year over year, driven primarily by the Fox Chase acquisition, loan growth, and higher fee income, despite increased expenses and credit-loss provisioning.
- Gross loans and leases increased $56.0 million from year-end 2016, led by commercial real estate, commercial business, and residential real estate lending.
- The allowance for loan and lease losses increased to $19.5 million from $17.5 million, and the allowance ratio increased to 0.58% from 0.53% of loans and leases held for investment.
- Nonperforming loans and leases increased to $23.6 million from $22.2 million; nonperforming assets were $27.3 million, or 0.64% of total assets, essentially unchanged as a percentage of assets.
- Nonaccrual loans and leases increased to $19.9 million from $17.9 million, primarily because of $5.0 million of software leases affected by a vendor dispute.
- Other real estate owned declined to $3.7 million from $5.0 million after property sales, partly offset by a $653 thousand transfer into OREO.
- Accumulated other comprehensive loss improved to $19.0 million from $19.5 million, principally because of higher available-for-sale securities values.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management’s principal forward-looking risks include operating, legal and regulatory risks; economic, political, and competitive conditions; interest-rate volatility; and conditions affecting the U.S. and global financial systems.
- Univest Capital filed collection complaints after certain software lessees stopped making payments. One lessee filed a federal complaint in Texas seeking, among other relief, class-action certification and a declaration that the contracts and guarantees are void. The company had not been served as of the filing date, and management stated that the outcome was neither probable nor estimable.
- Management stated that other pending or threatened legal matters are not expected to have a material adverse effect, based on information currently available.
- The company expects adoption of the current expected credit loss standard, effective in 2020, to increase its allowance and reduce regulatory capital and capital ratios, although the amount is not yet quantified.
- Adoption of new lease, financial-instrument, goodwill, business-combination, pension-cost, and revenue-recognition standards could affect presentation, balance-sheet amounts, timing, or regulatory ratios. Management generally did not expect material impacts except for potential balance-sheet and capital effects from lease and credit-loss guidance.
- KBRA reaffirmed the Corporation’s senior unsecured rating of BBB+, subordinated rating of BBB, and short-term rating of K2 on April 25, 2017, with a stable outlook. KBRA assigned the Bank a senior unsecured rating of A- and initiated a Bank subordinated rating of BBB+.
- A remaining restructuring accrual of $740 thousand related to prior financial-center exits, office closures, and staff reductions was reported at March 31, 2017.
Most important facts for investors to verify
- Whether the higher loan-loss provision and rising nonaccrual lease balances represent a temporary issue or a broader deterioration in credit quality.
- The ultimate outcome and potential financial exposure from the Texas software-lease litigation and related collection actions.
- Whether loan growth and deposit growth can continue without materially increasing funding costs or compressing the 3.80% net interest margin.
- The sustainability of Fox Chase acquisition-related revenue synergies relative to the higher staffing, occupancy, data-processing, and other operating costs.
- The expected capital impact of CECL adoption and whether the company’s capital ratios will remain comfortably above regulatory and capital-conservation-buffer requirements.
- The availability and terms of wholesale liquidity, including callable FHLB borrowings and uncommitted correspondent-bank lines.