Univest Corporation of Pennsylvania — Q2 2013 Form 10-Q Summary
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 banking, trust, insurance, investment advisory, brokerage, equipment financing and mortgage banking services. The unaudited filing covers the quarter and six months ended June 30, 2013, compared primarily with the same periods of 2012 and with December 31, 2012 balance-sheet amounts.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net income | $4.8 million | $4.8 million | $10.2 million | $10.0 million |
| Diluted EPS | $0.29 | $0.28 | $0.61 | $0.60 |
| Net interest income | $18.1 million | $18.1 million | $36.1 million | $36.3 million |
| Tax-equivalent net interest margin | 3.84% | 3.97% | 3.83% | 3.96% |
| Noninterest income | $11.0 million | $8.0 million | $22.5 million | $19.0 million |
| Noninterest expense | $19.3 million | $18.6 million | $39.5 million | $37.5 million |
| Provision for loan and lease losses | $3.4 million | $1.3 million | $5.5 million | $5.4 million |
| Return on average assets | 0.86% | 0.88% | 0.92% | 0.93% |
| Return on average equity | 6.81% | 6.90% | 7.24% | 7.30% |
At June 30, 2013, total assets were $2.256 billion, gross loans and leases held for investment were $1.500 billion, deposits were $1.873 billion, total liabilities were $1.976 billion and shareholders’ equity was $279.6 million. Cash and interest-earning deposits totaled $86.6 million. The allowance for loan and lease losses was $24.7 million, or 1.65% of loans and leases held for investment.
Six-month operating cash flow was $13.2 million, compared with $18.8 million in the prior-year period. Investing activities used $17.2 million, principally reflecting net loan growth and investment-security purchases. Financing activities used $49.1 million, primarily from reduced short-term borrowings, treasury-stock purchases and dividends. Cash and due from banks declined to $45.4 million from $98.4 million at year-end 2012.
The quarterly and year-to-date dividend declared was $0.20 and $0.40 per share, respectively. Regulatory capital remained strong: at June 30, the Corporation reported total capital to risk-weighted assets of 13.95% and Tier 1 capital to average assets of 10.61%; the Bank reported 13.09% and 9.85%, respectively. Management stated that the Bank remained “well capitalized.”
Material changes versus comparable periods
- Second-quarter net income increased $67 thousand, or 1%, and six-month net income increased $202 thousand, or 2%. Diluted EPS rose by $0.01 in both comparisons.
- Net interest income was approximately flat in the quarter and declined 1% year to date. The tax-equivalent net interest margin contracted 13 basis points in both periods because of lower reinvestment yields and repricing pressure on commercial and residential real estate loans.
- Noninterest income increased 37% in the quarter and 18% year to date. Growth came from insurance, investment advisory, other service fees, securities gains, mortgage banking and improved results from other real estate owned.
- Noninterest expense increased 3% in the quarter and 5% year to date, with higher commissions, equipment costs and acquisition-related staffing costs. Year-to-date expense also included $539 thousand of restructuring charges.
- The provision for loan and lease losses increased $2.1 million in the second quarter, primarily because of a decline in collateral value for one commercial real estate borrower. Net charge-offs were $4.0 million in the quarter and $5.5 million year to date.
- Gross loans and leases increased $18.1 million from year-end, led by $40.2 million of commercial real estate growth and $7.8 million of lease-financing growth, partly offset by a $28.5 million decline in commercial business loans.
- Nonaccrual loans and leases declined to $25.2 million, or 1.68% of loans, from $32.1 million, or 2.17%, at December 31, 2012. Total nonperforming assets declined to $41.1 million from $47.6 million.
- Total assets declined $49.2 million from year-end, primarily from lower cash, interest-earning deposits and investment securities. Deposits increased $7.7 million, while short-term borrowings declined $50.9 million, partly reflecting the transfer of approximately $68.1 million of customer repurchase agreements into interest-bearing deposits.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quantitative earnings guidance. Management expects that longer-term increases in interest rates could benefit net interest margin because the Corporation is asset sensitive. Its interest-rate simulation estimated that a parallel increase of 100 basis points would increase next-twelve-month net interest income by approximately 4.6%, while a 100-basis-point decrease would reduce it by approximately 6.3% under the stated assumptions.
On May 1, 2013, the Corporation acquired John T. Fretz Insurance Agency for $2.2 million in cash. It recorded $1.3 million of goodwill, $1.3 million of customer-related intangibles and $454 thousand of estimated contingent consideration. Future contingent payments may range from zero to $930 thousand through April 30, 2016.
The Corporation gave notice to redeem its $20.0 million of Trust Preferred Securities effective July 7, 2013, with settlement on July 8, 2013. It recognized a $1.9 million loss on termination of the related interest-rate swap, but expects to save approximately $600 thousand in interest expense during the remainder of 2013 and approximately $1.1 million annually thereafter.
The first-quarter restructuring plan reduced staffing by 3.4% and consolidated the Silverdale financial service center. The filing also reports a $959 thousand reduction of expense from remeasurement of the Javers acquisition contingent consideration liability; the liability was reduced to zero because earn-out performance thresholds were not met or were unlikely to be met.
Principal risks include credit deterioration, commercial real estate and construction exposure, collateral-value declines, changing interest rates, deposit competition, economic and competitive conditions, regulatory requirements, fair-value estimates, mortgage servicing-right valuations and potential goodwill or intangible-asset impairment. Management expects the Corporation and Bank to meet Basel III requirements effective January 1, 2015, but the filing notes that the impact remains under review.
Management expects to contribute $2.0 million to its qualified retirement plan during the third quarter of 2013 and may make additional contributions. The filing reports no material litigation, no material change in previously disclosed risk factors and effective disclosure controls as of June 30, 2013.
Most important facts for investors to verify
- Whether the higher commercial real estate provision and second-quarter charge-offs represent an isolated borrower issue or a broader deterioration in credit quality.
- The sustainability of noninterest-income growth, particularly insurance, investment advisory, mortgage banking and securities-sale gains.
- Future net interest margin performance as rates change, including the effect of asset sensitivity and deposit repricing.
- The liquidity impact of lower cash balances and the redemption of the Trust Preferred Securities, including the expected interest savings.
- The performance and contingent-payment exposure of the John T. Fretz Insurance Agency acquisition and the effects of the Javers contingent-consideration adjustment.
- The adequacy of the $24.7 million loan-loss allowance relative to commercial real estate, construction and other impaired loans.
- The effect of unrealized available-for-sale securities losses on accumulated other comprehensive income and regulatory capital.
- The Corporation’s ability to maintain strong capital ratios after the Trust Preferred Securities redemption and under Basel III requirements.