Univest Corporation of Pennsylvania — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The filing covers Univest Corporation of Pennsylvania and subsidiaries, including Univest Bank and Trust Co. Financial statements are unaudited and presented in accordance with U.S. GAAP. Results include the Valley Green Bank acquisition completed January 1, 2015.
Financial performance and condition
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net interest income | $23.4 million | $17.7 million | $46.7 million | $35.7 million |
| Net interest margin, tax-equivalent | 4.03% | 3.86% | 4.07% | 3.91% |
| Noninterest income | $13.4 million | $11.9 million | $26.8 million | $24.1 million |
| Noninterest expense | $26.8 million | $21.8 million | $54.2 million | $42.7 million |
| Provision for loan and lease losses | $1.1 million | $1.3 million | $2.2 million | $2.7 million |
| Net income | $6.5 million | $5.1 million | $12.6 million | $10.8 million |
| Diluted earnings per share | $0.33 | $0.31 | $0.63 | $0.66 |
| Return on average assets | 0.95% | 0.94% | 0.93% | 1.00% |
| Return on average equity | 7.22% | 7.14% | 7.04% | 7.67% |
Quarterly net income increased 27%, while six-month net income increased 16%. Six-month diluted EPS declined 5% because the acquisition materially increased the share count. Quarterly and six-month dividends declared were $0.20 and $0.40 per share, respectively.
- Balance sheet: Total assets were $2.78 billion at June 30, 2015, up 24% from December 31, 2014. Loans and leases held for investment increased 30% to $2.11 billion, including $381.1 million acquired from Valley Green; organic loan growth was 6%, or 12% annualized.
- Deposits and funding: Deposits increased 22% to $2.26 billion, primarily from $385.9 million of Valley Green deposits. Short-term borrowings were $61.2 million. The company issued $50 million of subordinated notes, with net proceeds of approximately $49.3 million, at a fixed 5.10% rate through March 2020 and thereafter at three-month LIBOR plus 3.544% through 2025.
- Liquidity: Cash and due from banks were $32.3 million at quarter-end. The Bank had approximately $752.6 million of maximum FHLB borrowing capacity, $82.0 million of correspondent-bank federal funds lines, and an available Federal Reserve Bank line secured by pledged loans and securities. The filing states that no Federal Reserve line borrowings were outstanding.
- Cash flow: Six-month operating cash flow was $14.6 million, compared with $17.9 million in the prior-year period. Investing activities used $80.9 million, primarily reflecting a $106.4 million net increase in loans and leases. Financing activities provided $66.6 million, including subordinated-note proceeds, and ending cash increased $0.3 million.
- Capital: Total shareholders’ equity was $356.2 million, up 25% from year-end. Under Basel III, total risk-based capital was 13.65% for the Corporation and 12.65% for the Bank, above the 10.00% well-capitalized threshold. The Bank was categorized as well capitalized.
Material changes versus prior comparable periods
- Net interest income grew 30% in the quarter and 29% year to date, primarily from Valley Green’s acquired earning assets and purchase-accounting accretion. The acquisition accounting adjustments added approximately 14 basis points to quarterly NIM and 11 basis points to year-to-date NIM.
- Noninterest income rose 12% in the quarter and 11% year to date. Insurance commission income benefited from the Sterner Insurance acquisition, while mortgage banking income increased substantially with higher mortgage purchase volume. Investment advisory income declined following the divestiture of approximately $375 million of marginally profitable assets in late 2014.
- Noninterest expense increased 23% in the quarter and 27% year to date, driven by acquired operations, staffing, branch and technology costs, integration expenses, and a $1.6 million restructuring charge.
- Loan asset quality ratios improved despite portfolio growth. Nonaccrual loans and leases were $17.7 million, or 0.84% of loans and leases held for investment and nonaccrual loans held for sale, versus 1.07% at December 31, 2014 and 1.12% at June 30, 2014.
- The allowance for loan and lease losses declined to $19.6 million from $20.7 million at year-end, primarily because acquired loans are recorded at fair value and had no related allowance at June 30, 2015.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management expects increased net interest income in rising-rate scenarios despite the Corporation’s liability-sensitive position, because it expects asset repricing to exceed liability repricing.
- The Bank planned to consolidate six financial centers in the third quarter of 2015 under its optimization plan. The filing reports $1.6 million of restructuring charges and projected annualized savings of approximately $1.9 million.
- Valley Green Bank was acquired in an all-stock transaction valued at approximately $77 million. The acquisition added $43.4 million of goodwill and $1.5 million of core deposit intangible assets. Purchase accounting remains subject to measurement-period adjustments.
- Two nonaccrual construction loans totaling $4.0 million were transferred to loans held for sale following an agreement to sell them before December 31, 2015. The related credit incurred $1.3 million of charge-offs in the second quarter.
- Total nonperforming assets were $25.0 million, or 0.90% of total assets. Nonperforming loans and leases were $24.1 million, and other real estate owned was $1.0 million.
- Key risks include commercial real estate, construction, business-purpose residential lending, borrower repayment capacity, collateral values, interest-rate changes, deposit competition, acquisition integration, goodwill and intangible-asset impairment, and changes in economic, regulatory or competitive conditions.
- The filing states that there were no material litigation matters, no material changes in previously disclosed risk factors, no material changes in market risk strategy, and effective disclosure controls as of June 30, 2015.
Important facts for investors to verify
- Whether the Valley Green acquisition generates the expected revenue growth, cost savings and credit performance after purchase-accounting effects and integration costs subside.
- Whether the planned six financial-center consolidations achieve the projected $1.9 million annualized savings and whether additional restructuring costs arise.
- The sustainability of the 4.03% quarterly and 4.07% year-to-date net interest margins as deposit costs and market interest rates change.
- Trends in commercial real estate, construction and business-purpose residential loans, including the disposition and ultimate loss on the $4.0 million construction-loan exposure.
- The adequacy of the $19.6 million allowance, particularly because acquired loans carry purchase-accounting discounts rather than a conventional allowance.
- The impact of the 5.10% subordinated debt issuance on funding costs, capital ratios and future earnings.
- Future performance of mortgage banking and insurance income, which contributed materially to the increase in noninterest income.
- Potential goodwill, intangible-asset and contingent-consideration adjustments related to acquisitions.