Univest Corporation of Pennsylvania: FY2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016, with comparative years 2015 and 2014. Univest is a Pennsylvania bank holding company operating through Univest Bank and Trust Co. and subsidiaries across Banking, Wealth Management and Insurance. Its primary markets are in southeastern Pennsylvania and Cape May County, New Jersey. The July 1, 2016 acquisition of Fox Chase Bancorp materially expanded the company’s scale and market presence.
- Year-end assets: $4.23 billion; net loans and leases: $3.27 billion; deposits: $3.26 billion; shareholders’ equity: $505.2 million.
- The company had 840 employees and 37 banking offices at year-end.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Interest income | $126.6 million | $102.0 million | 24.1% |
| Net interest income | $114.2 million | $93.9 million | 21.6% |
| Tax-equivalent net interest income | $119.7 million | $99.2 million | 20.6% |
| Tax-equivalent net interest margin | 3.82% | 3.96% | Down 14 bps |
| Provision for loan and lease losses | $4.8 million | $3.8 million | Up $1.0 million |
| Noninterest income | $56.0 million | $52.4 million | 6.7% |
| Noninterest expense | $142.0 million | $105.5 million | 34.6% |
| Net income | $19.5 million | $27.3 million | Down 28.5% |
| Diluted EPS | $0.84 | $1.39 | Down 39.6% |
| Return on average assets | 0.56% | 0.98% | Down 42 bps |
| Return on average equity | 4.46% | 7.58% | Down 312 bps |
Revenue growth reflected the Fox Chase acquisition, loan growth, higher mortgage banking activity, and increased insurance and advisory fees. Noninterest income included $6.0 million of mortgage banking gains, $14.6 million of insurance commissions and fees, and $11.4 million of investment advisory fees.
Profitability was reduced by substantially higher operating expenses, including acquisition and integration costs, restructuring charges, increased staffing and technology costs, and a settlement related to future Girard Partners obligations. The reported effective tax rate declined to 16.6% from 26.4%, primarily because of tax-exempt income and the lower taxable income base.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $33.3 million, compared with $39.3 million in 2015.
- Investing activities used $294.6 million, primarily reflecting $338.0 million of net loan growth, $94.8 million of net cash paid for acquisitions and capital expenditures.
- Financing activities provided $277.7 million, including deposit growth, increased short-term borrowings and $44.5 million of net subordinated-note proceeds.
- Cash and due from banks ended at $48.8 million, compared with $32.4 million at year-end 2015.
- Short-term borrowings were $196.2 million, long-term debt was $127.5 million and subordinated notes were $94.1 million, for total borrowings of approximately $417.8 million.
- The company reported FHLB borrowing capacity of approximately $1.2 billion and correspondent-bank federal funds lines totaling $302.0 million, although these facilities may be modified or withdrawn.
- Noninterest-bearing deposits were $918.3 million, or approximately 28% of total deposits, providing a relatively low-cost funding source.
Material changes versus the prior comparable period
- Fox Chase acquisition: The transaction closed July 1, 2016 for approximately $242.2 million and added $1.1 billion of assets, $776.2 million of loans and $738.3 million of deposits. Univest issued 6.86 million shares and paid $98.9 million in cash. Goodwill of $59.9 million was recorded.
- Scale expansion: Total assets increased 46.9%, loans and leases held for investment increased 50.8%, and deposits increased 36.1% from year-end 2015. Organic loan growth was 11.2% and organic deposit growth was 4.0%.
- Higher funding and leverage: Borrowings increased by $344.2 million, including $105.0 million of acquired debt, $45.0 million of new subordinated notes and $172.0 million of additional short-term borrowings.
- Credit quality: Nonaccrual loans increased to $17.9 million from $14.2 million, but the nonaccrual ratio improved to 0.55% from 0.65% because of substantial portfolio growth. Net charge-offs declined to $5.0 million from $6.8 million, and the net charge-off ratio declined to 0.18% from 0.33%.
- Capital: The Corporation’s total risk-based capital ratio declined to 12.44% from 13.35%, while remaining above the 10.00% well-capitalized threshold. The Bank’s ratio was 11.85%.
- Shareholder returns: Quarterly dividends remained $0.20 per share, or $0.80 for the year. The company repurchased 66,000 shares for $1.4 million in 2016.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management described the balance sheet as slightly asset-sensitive and projected that a parallel 100-basis-point increase in rates could increase next-12-month net interest income by approximately 2.31%, while a 100-basis-point decline could reduce it by approximately 3.60%, based on the company’s assumptions and a static balance sheet.
- Reported 2016 results included approximately $17.7 million of acquisition, integration and restructuring costs before tax, or $11.8 million after tax and $0.51 of diluted EPS.
- An additional $1.2 million after tax, or $0.05 per diluted share, related to the settlement of future Girard Partners obligations was recorded in the fourth quarter.
- A fourth-quarter pension settlement cost of $1.4 million was partly offset by a $1.3 million non-cash reduction from a paid-time-off policy change.
- Goodwill and identifiable intangible assets were not impaired in 2016, but future impairment charges remain possible.
- The company expects adoption of the current expected credit loss standard in 2020 to increase its allowance and reduce shareholders’ equity and regulatory capital ratios; the filing does not provide a quantified impact.
- Key risks include interest-rate and margin compression, concentration in commercial and real estate lending, regional economic conditions, deposit competition, reliance on FHLB and other wholesale funding, regulatory and compliance costs, cybersecurity, acquisition integration, goodwill impairment, liquidity access and future credit losses.
- Off-balance-sheet exposures included $980.6 million of commitments to extend credit and $46.6 million of letters of credit. The reserve for unfunded off-balance-sheet credit exposures was $385 thousand.
- Management reported no material pending litigation and no unresolved SEC staff comments. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Fox Chase produces the anticipated revenue growth, cost savings and efficiency improvements after the substantial 2016 integration costs.
- Whether loan growth remains strong without a deterioration in commercial real estate, construction and business-purpose residential credit quality.
- Whether the decline in net interest margin stabilizes as interest rates change and acquired-loan accretion declines.
- The sustainability of earnings excluding acquisition, restructuring, pension and Girard-related unusual items.
- The effect of higher borrowings and subordinated debt on funding costs, liquidity and future capital ratios.
- The eventual capital and allowance impact of CECL adoption in 2020.
- The company’s ability to maintain dividends while the 2016 dividend payout ratio was approximately 94.5% of net income.