Business Context and Reporting Period
Univest Corporation of Pennsylvania is a Pennsylvania bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides commercial and consumer banking, trust, wealth management, insurance, investment advisory, brokerage, equipment financing and related services. Reportable segments are Banking, Wealth Management and Insurance. This Form 10-K covers the fiscal year ended December 31, 2014; fourth-quarter data are presented where relevant.
At year-end, the Corporation had 638 employees, 31 bank financial service centers, $2.235 billion of assets, $1.606 billion of net loans and leases held for investment, $1.861 billion of deposits and $284.6 million of shareholders’ equity.
Financial Results and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $71.9 million | $72.5 million | Down 1% |
| Tax-equivalent net interest margin | 3.87% | 3.81% | Up 6 bp |
| Provision for loan and lease losses | $3.6 million | $11.2 million | Down $7.6 million |
| Noninterest income | $48.7 million | $46.8 million | Up 4% |
| Noninterest expense | $87.3 million | $81.1 million | Up 8% |
| Net income | $22.2 million | $21.2 million | Up 5% |
| Diluted earnings per share | $1.36 | $1.27 | Up 7% |
| Return on average assets | 1.01% | 0.95% | Up 6 bp |
| Return on average equity | 7.74% | 7.53% | Up 21 bp |
| Dividends per share | $0.80 | $0.80 | Unchanged |
Interest income declined 2% to $75.9 million, but interest expense declined 22% to $4.0 million as higher-cost time deposits matured and trust preferred securities had been redeemed in 2013. Fee income benefited from the Girard Partners and Sterner Insurance acquisitions, while mortgage banking income fell 52% to $2.2 million as refinancing activity weakened. The efficiency impact of higher salaries, occupancy, equipment, intangible and acquisition-related costs contributed to the increase in noninterest expense.
Fourth-quarter 2014 net income was $5.2 million, or $0.32 diluted earnings per share, compared with $4.9 million, or $0.30 per diluted share, in the fourth quarter of 2013. Fourth-quarter provision expense was $648 thousand versus $1.6 million in the prior-year quarter.
Financial Condition, Cash Flow, Debt and Liquidity
- Total assets increased 2% to $2.235 billion. Gross loans and leases held for investment increased 6% to $1.627 billion, led by commercial business, commercial real estate and residential real estate lending.
- Deposits increased 1% to $1.861 billion. Noninterest-bearing deposits were $449.3 million, or approximately 24% of total deposits.
- Investment securities declined 8% to $368.6 million and cash and interest-earning deposits declined 44% to $38.6 million, principally reflecting loan growth.
- Year-end borrowings consisted primarily of $42.0 million of customer repurchase agreements. There were no outstanding FHLB advances or Federal Reserve borrowings; available FHLB borrowing capacity was approximately $518.7 million and correspondent federal funds lines totaled $82.0 million.
- Operating activities provided $31.9 million of cash. Investing activities used $38.4 million, primarily because of the $101.0 million net increase in loans and leases and acquisition spending. Financing activities provided $5.9 million, including $16.8 million of deposit growth, partly offset by $13.0 million of dividends and $4.6 million of treasury-stock purchases. Cash and due from banks ended at $32.0 million.
- Regulatory capital remained strong. The Corporation reported a Tier 1 risk-based capital ratio of 11.79% and total risk-based capital ratio of 12.91%; the Bank reported 11.04% and 12.15%, respectively. The Bank remained well capitalized.
Asset Quality and Material Changes
- Nonaccrual loans and leases declined to $17.3 million, or 1.07% of loans, from $23.2 million, or 1.51%, at December 31, 2013.
- Total nonperforming loans and leases declined to $23.3 million from $31.6 million; nonperforming assets declined to $24.2 million from $33.2 million.
- Net charge-offs declined to $7.4 million from $11.5 million, and the allowance for loan and lease losses declined to $20.7 million, or 1.27% of loans, from $24.5 million, or 1.59%.
- Commercial, financial and agricultural, commercial real estate and construction loans represented approximately 72% of loans; including business-purpose residential real estate and leases, approximately 81% of the portfolio was in categories management identifies as carrying greater lending risk.
- Accumulated other comprehensive loss increased to $14.5 million, primarily because of a $7.5 million increase in the pension-related loss. The pension obligation rose following a lower discount rate and adoption of the RP-2014 mortality table.
Acquisitions, Outlook, Risks and Unusual Items
- Girard Partners was acquired effective January 1, 2014, adding more than $500 million of assets under management. Sterner Insurance Associates was acquired July 1, 2014 for $3.9 million in cash plus contingent consideration.
- Valley Green Bank was acquired on January 1, 2015 in an all-stock transaction valued at approximately $78.9 million. Univest issued approximately 3.8 million shares and recorded approximately $41.9 million of preliminary goodwill. Valley Green contributed approximately $425 million of assets, $386 million of loans and $385 million of deposits at December 31, 2014. Management expected the transaction to be accretive to earnings per share in the first combined year.
- Potential contingent consideration from the Girard and Sterner acquisitions could total up to $14.5 million and $5.7 million, respectively, subject to performance conditions. The year-end contingent consideration liability was $6.5 million.
- Management stated that long-term increases in interest rates could benefit net interest margin. The filing’s interest-rate simulation estimated a 0.92% increase in next-twelve-month net interest income under a 100-basis-point rate increase and a 6.31% decline under the modeled downward shock.
- Basel III capital requirements became effective January 1, 2015. Management expected the Corporation and Bank to remain well capitalized, but capital conservation buffer requirements begin phasing in in 2016.
- Key risks include interest-rate and margin compression, concentrated exposure to Southeastern Pennsylvania, commercial real estate and construction credit risk, competition for low-cost deposits, possible higher loan-loss provisions, regulatory and compliance costs, cybersecurity and systems disruption, acquisition integration, goodwill impairment, pension funding requirements and volatility in wealth-management assets and insurance commissions.
- No material litigation or government proceedings were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether loan growth remains sustainable after the 2015 Valley Green acquisition and whether acquired loans generate expected accretion.
- The integration costs, dilution and actual earnings contribution of Valley Green, Girard Partners and Sterner Insurance.
- Trends in commercial real estate, construction and business-loan delinquencies, charge-offs and allowance coverage.
- The effect of interest-rate changes on net interest margin, deposit pricing and securities valuations.
- Future pension contributions and the impact of actuarial assumptions on accumulated other comprehensive loss and capital.
- Availability and cost of wholesale liquidity, including FHLB, Federal Reserve and correspondent-bank facilities.
- Potential contingent consideration payments and future goodwill or intangible-asset impairment charges.
- Continuation of the $0.20 quarterly dividend and the effect of dividends and share repurchases on regulatory capital and tangible book value.