Business Context and Reporting Period
Univest Corporation of Pennsylvania, a bank holding company headquartered in Souderton, Pennsylvania, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. Its businesses include commercial banking, trust services, insurance, investment advisory, broker-dealer, commercial finance and related financial services, primarily in Pennsylvania.
Financial Performance and Condition
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $18.0 million, down 3% | $54.3 million, down 4% |
| Net interest margin, tax-equivalent | 3.84%, down 31 basis points | 3.92%, down 29 basis points |
| Provision for loan and lease losses | $2.2 million, down $1.4 million | $7.7 million, down $6.7 million |
| Noninterest income | $10.9 million, up 21% | $29.9 million, up 18% |
| Noninterest expense | $19.1 million, up 10% | $56.6 million, up 12% |
| Net income | $5.8 million, up 10% | $15.8 million, up 16% |
| Diluted earnings per share | $0.34, versus $0.31 | $0.94, versus $0.81 |
| Return on average assets | 1.04% | 0.96% |
| Return on average equity | 8.19% | 7.60% |
All dollar amounts are as reported by the company; financial statement amounts are in thousands unless otherwise indicated. The filing does not present a consolidated revenue line comparable to a nonfinancial company; principal revenue sources are net interest income and noninterest income.
- Total assets were $2.232 billion at September 30, 2012, up $25.2 million, or 1%, from December 31, 2011.
- Gross loans and leases held for investment were $1.470 billion, up $23.1 million, or 2%. Net loans were $1.442 billion after a $27.1 million allowance.
- Total deposits were $1.778 billion, up $28.7 million, or 2%; growth was concentrated in noninterest-bearing demand, interest-bearing demand and savings deposits, while time deposits declined $66.6 million.
- Shareholders’ equity was $281.6 million, up $8.6 million, or 3%. Dividends declared were $0.20 per share for the quarter and $0.60 per share year to date.
- Cash and due from banks were $39.0 million, and cash plus interest-earning deposits totaled $63.3 million at quarter-end, down from $107.4 million at year-end 2011.
- Net cash provided by operating activities was $19.7 million; investing activities used $35.1 million; financing activities provided $14.4 million. Cash and due from banks decreased $0.9 million during the nine months.
- Long-term debt was eliminated from the balance sheet, compared with $5.0 million at December 31, 2011. Remaining long-term borrowings included $0.8 million of subordinated notes and $20.6 million of trust preferred securities; securities sold under repurchase agreements totaled $111.6 million.
- The allowance for loan and lease losses was 1.84% of loans held for investment, compared with 2.07% at year-end 2011. Net charge-offs were $10.4 million for the nine months, versus $14.2 million in the prior-year period.
- Nonperforming loans and leases were $44.6 million, or 3.03% of relevant loans, versus $42.5 million, or 2.94%, at December 31, 2011. Total nonperforming assets were $47.9 million, including $3.3 million of other real estate owned.
- Regulatory capital remained strong. At September 30, 2012, the Bank’s total risk-based capital ratio was 14.21%, Tier 1 risk-based capital ratio was 12.95%, and Tier 1 leverage ratio was 10.50%; the Bank was categorized as well capitalized.
Material Changes Versus Prior Comparable Period
- Profitability improved despite lower net interest income, primarily because of lower credit-loss provisioning and higher fee income.
- The tax-equivalent net interest margin declined because maturing securities were reinvested at lower yields and commercial loan pricing declined amid repricing and competitive pressure. Lower deposit costs partially offset the pressure.
- Noninterest income benefited from stronger mortgage refinancing activity, the Javers Group acquisition, bank-owned life insurance death benefits and a $1.3 million gain on the sale of a former operations building. These benefits were partly offset by higher other-real-estate-owned losses and lower securities-sale gains.
- Noninterest expense increased largely because of higher mortgage-related commissions, employee incentives, annual compensation increases, additional staff and higher loan workout, legal, employment services and equipment costs.
- Asset quality was mixed: nonaccrual loans declined from $38.2 million to $30.5 million, but accruing troubled debt restructurings increased from $3.9 million to $13.4 million, resulting in higher total nonperforming loans and leases.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance is provided. Management expects interest rates to remain low for the foreseeable future and anticipates that a longer-term increase in rates could benefit the net interest margin because the company is in a more asset-sensitive position.
- Management cited continued competition, weak loan demand and low line utilization, interest-rate volatility, economic conditions, regulatory and legal risks, and risks in commercial real estate, construction and commercial lending.
- The May 31, 2012 acquisition of the Javers Group expanded employee-benefits, human-resource consulting and technology services. Univest paid $3.2 million in cash, recorded $3.1 million of goodwill and $989 thousand of customer-related intangibles, and recorded contingent consideration of $876 thousand at September 30, 2012. Potential additional cash payments range from zero to $1.7 million through June 2015.
- Other unusual items included the $1.3 million building-sale gain, $1.9 million of year-to-date other-real-estate-owned write-downs, $989 thousand of bank-owned life insurance death-benefit proceeds, and a $621 thousand third-quarter other-real-estate-owned impairment charge.
- The company contributed $8.0 million to its qualified retirement plan during the nine months and may make additional contributions during the remainder of 2012.
- Management reported effective disclosure controls as of September 30, 2012, no material changes in internal control, no material litigation, and no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether the decline in net interest margin persists and how quickly deposit repricing and future interest-rate movements offset lower asset yields.
- The composition, collateral coverage and resolution timelines of the $44.6 million of nonperforming loans and leases, particularly commercial real estate, construction and commercial credits.
- Whether the $27.1 million allowance remains adequate if economic conditions or collateral values deteriorate.
- The sustainability of mortgage banking gains and other noninterest income that benefited from refinancing activity and one-time items.
- The effect of Javers Group revenue performance on contingent consideration, goodwill and future operating expenses.
- Liquidity capacity and collateral availability, including the approximately $403.5 million maximum FHLB borrowing capacity, $82.0 million of federal funds lines and commitments to extend credit.
- Future pension contributions, other postretirement obligations and potential valuation changes affecting mortgage servicing rights, securities, goodwill and other intangible assets.