Business Context and Reporting Period
Univest Corporation of Pennsylvania, a bank holding company, filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Its businesses include commercial and consumer banking, trust services, insurance, investment advisory services, mortgage banking and equipment financing, primarily in southeastern Pennsylvania.
Financial Performance and Condition
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net income | $6.2 million, up 3% | $17.0 million, up 5% |
| Diluted EPS | $0.38, up 6% | $1.04, up 7% |
| Net interest income | $18.2 million | $53.9 million |
| Tax-equivalent net interest margin | 3.88%, up 5 basis points | 3.90%, up 9 basis points |
| Provision for loan losses | $0.2 million | $3.0 million |
| Noninterest income | $12.5 million, down 5% | $36.6 million, up 3% |
| Noninterest expense | $22.0 million, up 10% | $64.7 million, up 9% |
| Return on average assets | 1.12% | 1.04% |
| Return on average equity | 8.58% | 7.98% |
Total assets were $2.22 billion at September 30, 2014, up 1% from December 31, 2013. Loans and leases held for investment increased 4% to $1.60 billion, while investment securities declined 10% to $360.8 million. Deposits increased 1% to $1.86 billion. Shareholders’ equity rose 3% to $289.8 million.
Cash and interest-earning deposits totaled $68.4 million. Short-term borrowings were $38.0 million, consisting of customer repurchase agreements; there were no outstanding FHLB borrowings or federal funds purchased. The Corporation had approximately $510.8 million of FHLB borrowing capacity, $82.0 million of federal funds lines and an available Federal Reserve Bank line, subject to collateral and lender conditions.
Operating cash flow for the first nine months was $22.6 million, compared with $29.3 million in the prior-year period. Investing activities used $29.9 million, primarily reflecting a $70.3 million net increase in loans and $9.3 million of acquisition payments. Financing activities provided $4.3 million. Cash and due from banks ended at $29.7 million.
The quarterly dividend remained $0.20 per share, or $0.60 per share for the nine-month period. The Corporation repurchased $3.9 million of treasury stock during the first nine months.
Material Changes Versus Prior Comparable Period
- Net income increased despite higher operating costs, principally because loan-loss provisions declined by $3.9 million for the quarter and $6.7 million year to date.
- Net interest income was broadly stable. Loan growth and lower funding costs offset reduced investment securities and lower loan yields.
- Investment advisory income increased 77% in the quarter and 62% year to date, primarily because of the Girard Partners acquisition.
- Insurance commission income increased 25% in the quarter and 20% year to date, primarily reflecting the Sterner Insurance acquisition and other insurance growth.
- Mortgage banking income declined 34% in the quarter and 63% year to date as higher interest rates reduced refinancing and funded mortgage volume.
- Noninterest expense increased mainly from salaries, occupancy, equipment, amortization and acquisition-related costs.
- Nonaccrual loans declined to $18.8 million from $23.2 million at December 31, 2013 and $24.0 million at September 30, 2013. Nonperforming assets declined to $25.6 million from $33.2 million and $41.7 million, respectively.
Guidance, Outlook, Risks and Unusual Items
Management described the Corporation as asset sensitive and expects longer-term increases in interest rates could benefit net interest margin. No formal earnings guidance was provided. Management expects the Valley Green Bank merger to be accretive to earnings per share in the first combined year, with earnings accretion greater than 10% in the second year, subject to required approvals.
On July 1, 2014, Univest acquired Sterner Insurance Associates for $3.9 million in cash, assumed $0.9 million of liabilities and recorded potential contingent consideration of up to $5.7 million. In January 2014, it acquired Girard Partners; related contingent consideration could total up to $14.5 million. The proposed all-stock acquisition of Valley Green Bank has an approximate value of $76 million and was expected to close in the first quarter of 2015, subject to shareholder and regulatory approval.
The Corporation sold its credit card portfolio during the quarter for a $479 thousand pretax gain, citing insufficient scale and increasing risk-management and compliance costs. A commercial real estate property was sold for a $195 thousand gain. The filing also identifies a large impaired commercial real estate developer credit with a September 30 balance of approximately $6.3 million and significant 2014 charge-offs.
Key risks include commercial real estate, construction and business-loan credit exposure; changing collateral values; economic conditions; interest-rate volatility; competition for deposits and financial-services customers; acquisition integration and contingent consideration; regulatory and legal risks; and possible changes in goodwill, intangible-asset, mortgage-servicing-rights and loan-loss estimates. Management reported no material litigation, no material changes in risk factors, effective disclosure controls and no material changes in market risk.
The allowance for loan and lease losses was $21.8 million, or 1.36% of loans and leases, compared with 1.59% at December 31, 2013. Management stated that the allowance was appropriate, but its adequacy depends on subjective estimates and future credit conditions. The Bank remained categorized as well capitalized, with a total capital ratio of 12.39% and Tier 1 leverage ratio of 9.76% at September 30, 2014.
Investor Verification Priorities
- Verify completion, accounting treatment and actual earnings impact of the Valley Green Bank merger, including the final exchange ratio and regulatory approvals.
- Assess whether the lower loan-loss provision and improving nonperforming-asset ratios are sustainable, particularly in commercial real estate and construction lending.
- Monitor acquisition-related expenses, intangible amortization and contingent consideration obligations of up to $20.2 million across the Girard and Sterner acquisitions.
- Evaluate the effect of mortgage banking volume declines and the Corporation’s sensitivity to future interest-rate changes.
- Reconcile liquidity sources, pledged securities, FHLB availability and customer repurchase agreements with projected deposit and lending needs.
- Review regulatory capital effects of Basel III implementation beginning January 1, 2015, including the capital conservation buffer.
- Confirm the sustainability of dividend payments and share repurchases relative to earnings, capital requirements and merger funding needs.