Univest Corporation of Pennsylvania — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; filed November 6, 2015. The filing identifies the registrant as Univest Corporation of Pennsylvania. Financial statements are unaudited and dollars are in thousands except per-share data.
Business Context
Univest is a bank holding company whose primary subsidiary provides commercial and consumer banking, mortgage banking, equipment financing, wealth management, trust, investment advisory and insurance services. Reportable segments are Banking, Wealth Management and Insurance.
On January 1, 2015, Univest completed the all-stock acquisition of Valley Green Bank, issuing 3,787,866 shares in a transaction valued at approximately $77 million. The acquisition added approximately $380.9 million of loans, $385.9 million of deposits and $43.5 million of goodwill, and expanded the company’s presence in the greater Philadelphia market.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net interest income | $23.4 million | $18.2 million | $70.0 million | $53.9 million |
| Tax-equivalent net interest income | $24.7 million | $19.5 million | $74.0 million | $57.7 million |
| Tax-equivalent net interest margin | 3.89% | 3.88% | 4.01% | 3.90% |
| Provision for loan losses | $0.7 million | $0.2 million | $2.9 million | $3.0 million |
| Noninterest income | $12.9 million | $12.5 million | $39.6 million | $36.6 million |
| Noninterest expense | $25.2 million | $22.0 million | $79.5 million | $64.7 million |
| Net income | $7.5 million | $6.2 million | $20.1 million | $17.0 million |
| Diluted EPS | $0.39 | $0.38 | $1.02 | $1.05 |
| Return on average assets | 1.06% | 1.12% | 0.98% | 1.04% |
| Return on average equity | 8.36% | 8.58% | 7.48% | 7.98% |
- Revenue and profitability: Q3 net income increased 21% and nine-month net income increased 18%, primarily reflecting the Valley Green acquisition and higher net interest income. Nine-month EPS declined 3% because of the substantial increase in shares issued for the acquisition.
- Fee income: Nine-month noninterest income increased 8%, driven mainly by Sterner Insurance, higher mortgage banking income and investment-security gains. Investment advisory fees declined 10% year to date following the divestiture of approximately $375 million of marginally profitable assets in late 2014.
- Expenses and margins: Nine-month noninterest expense increased 23%, reflecting acquisition and integration costs, additional staffing and operating costs, higher pension expense, and restructuring charges. The nine-month efficiency burden reduced reported returns despite stable-to-improved net interest margins.
- Balance sheet: Total assets were $2.85 billion at September 30, up 28% from December 31, 2014. Gross loans and leases held for investment were $2.10 billion, up 29%; management reported 6% organic growth, or 8% annualized. Deposits were $2.37 billion, up 27%.
- Liquidity and cash flow: Cash and due from banks were $32.1 million, while cash and short-term interest-earning assets totaled $108.5 million. Nine-month operating cash flow was $25.2 million; investing activities used $154.9 million, largely from loan growth, securities purchases and higher interest-earning deposits; financing activities provided $129.8 million.
- Capital and debt: The company issued $50 million of fixed-to-floating subordinated notes on March 30, 2015, bearing 5.10% through 2020 and three-month LIBOR plus 3.544% thereafter through 2025. Total risk-based capital was 13.68% at the corporation and 12.70% at the bank; both remained well-capitalized.
Material Changes Versus Prior Comparable Period
- Valley Green Bank materially increased loans, deposits, assets, goodwill, shares outstanding and operating expenses.
- Q3 net interest income rose 27% on a tax-equivalent basis; nine-month net interest income rose 28%. The nine-month margin expanded 11 basis points to 4.01%.
- Mortgage banking gains rose to $3.7 million for the first nine months from $1.5 million, while insurance commission income increased to $10.8 million from $8.6 million.
- Six financial centers were consolidated in September 2015 under an optimization plan. The company recorded $1.6 million of restructuring charges and projected annualized gross savings of $1.9 million.
- The company repurchased 86,650 shares during the quarter for $1.8 million; 1,080,246 shares remained available under the repurchase program at September 30.
- Asset quality improved on several ratios despite higher absolute nonaccrual balances. Nonaccrual loans and leases were $20.8 million, or 0.99% of applicable loans, versus 1.07% at year-end 2014 and 1.18% at September 2014.
Outlook, Commentary, Risks and Unusual Items
- Management expects the financial-center consolidations to produce approximately $1.9 million of annualized gross savings, but the filing provides no formal earnings or revenue guidance.
- Management projects increased net interest income in rising-rate scenarios because asset repricing is expected to exceed liability repricing, although the company describes itself as liability-sensitive.
- Key risks include interest-rate volatility, competitive pressures, economic and political conditions, credit losses, commercial real estate and construction exposure, liquidity and regulatory risks, and the execution of acquisitions and integration activities.
- Commercial real estate, construction and business-purpose residential lending involve heightened exposure to borrower cash flow, collateral values, development delays, tenant conditions and broader economic cycles.
- Nonperforming assets totaled $27.0 million, or 0.95% of assets. Two construction loans totaling $4.0 million were transferred to loans held for sale after a $1.3 million charge-off and were expected to be sold before year-end 2015.
- Goodwill and other intangible assets totaled $125.7 million, including $112.7 million of goodwill. Management reported no impairment during the first nine months, but future impairment testing could affect earnings.
- Management stated that no material litigation, risk-factor changes, market-risk changes or internal-control deficiencies were identified during the period. Disclosure controls were deemed effective.
Investor Verification Checklist
- Verify the sustainability of loan and deposit growth after removing Valley Green acquisition balances and seasonal public-funds deposits.
- Assess whether higher noninterest expenses, pension costs and acquisition-related costs normalize and whether projected branch-consolidation savings are realized.
- Monitor net interest margin sensitivity to deposit repricing, rising rates and the 5.10% subordinated-note funding cost.
- Review commercial real estate, construction and acquired-loan credit quality, including the $4.0 million loans held for sale and the $20.8 million nonaccrual balance.
- Evaluate the effect of acquisition-related share issuance on per-share earnings, capital ratios and future dilution.
- Track goodwill, contingent consideration and other intangible valuations, as these depend on acquisition assumptions and future operating performance.
- Confirm liquidity availability, including the approximately $768.1 million FHLB borrowing capacity, $122 million of federal-funds lines and collateral requirements.
- Reconcile reported GAAP net interest income with tax-equivalent measures and distinguish recurring earnings from securities gains, mortgage banking gains and restructuring items.