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 six months ended June 30, 2012. Its businesses include commercial banking, trust, insurance, investment advisory, brokerage, and commercial finance services. Unless otherwise noted, amounts are in thousands.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Net income | $4,763 | $10,026 |
| Basic and diluted EPS | $0.28 | $0.60 |
| Net interest income | $18,147 | $36,311 |
| Provision for loan and lease losses | $1,343 | $5,443 |
| Noninterest income | $8,000 | $19,021 |
| Noninterest expense | $18,636 | $37,512 |
| Net interest margin, tax-equivalent | 3.97% | 3.96% |
| Return on average assets | 0.88% | 0.93% |
| Return on average equity | 6.90% | 7.30% |
At June 30, 2012, total assets were $2.189 billion, gross loans and leases were $1.465 billion, net loans and leases were $1.435 billion, deposits were $1.744 billion, and shareholders’ equity was $277.3 million. Cash and interest-earning deposits totaled $105.9 million.
Debt and other borrowings included $100.1 million of securities sold under repurchase agreements, $1.1 million of subordinated notes, and $20.6 million of trust preferred securities. Long-term debt shown on the balance sheet was zero; total borrowing fair value was approximately $119.6 million. The Bank had no outstanding Federal Home Loan Bank borrowings and maintained approximately $414.3 million of maximum FHLB borrowing capacity, subject to collateral and other conditions.
Six-month cash flow from operating activities was $18.8 million, cash flow from investing activities was $15.3 million, and cash flow used in financing activities was $27.4 million. Cash and due from banks increased by $6.7 million to $46.6 million.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased 6% to $4.8 million from $4.5 million; six-month net income increased 20% to $10.0 million from $8.4 million.
- Net interest income declined 4% in both the quarter and six-month period on a tax-equivalent basis. The net interest margin declined 27 basis points in the quarter and 28 basis points for the six months, primarily because lower rates reduced investment and commercial loan yields.
- The provision for loan and lease losses declined to $1.3 million from $5.6 million in the quarter and to $5.4 million from $10.7 million for the six months. Net charge-offs declined to $1.4 million for the quarter and $4.8 million for the six months.
- Noninterest income decreased 8% in the quarter but increased 16% for the six months. Mortgage banking gains increased to $1.1 million for the quarter and $2.3 million for the six months, supported by refinancing activity. Six-month results also included $989 thousand of bank-owned life insurance death-benefit proceeds.
- Noninterest expense increased 14% in the quarter and 13% for the six months, primarily from higher salaries, mortgage-related commissions, incentives, loan workout costs, and equipment expense.
- Gross loans and leases increased $19.0 million, or 1%, from December 31, 2011. Deposits declined $5.3 million, primarily because time deposits declined $51.6 million, partly offset by higher noninterest-bearing demand and savings deposits.
- Investment securities declined $32.1 million, or 7%, from year-end as maturities, calls, and $57.2 million of sales exceeded purchases.
- Nonperforming loans and leases increased to $44.7 million, or 3.05% of loans, from $42.5 million, or 2.94%, at December 31, 2011, but remained below $49.2 million at June 30, 2011. Nonperforming assets were $48.7 million, or 2.22% of total assets.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that interest rates were expected to remain low for the foreseeable future and that the company was positioned to benefit from higher rates over the longer term because it was more asset sensitive. Credit demand and line utilization remained light.
- On May 31, 2012, the company acquired the Javers Group, an employee benefits and human-resource services agency, for $3.2 million in cash. It recorded $3.1 million of goodwill, $989 thousand of customer-related intangibles, and $842 thousand of estimated contingent consideration. Potential contingent payments range from zero to $1.7 million through June 30, 2015.
- Other real estate owned declined to $3.9 million from $6.6 million at year-end. Two properties were written down by a total of $1.3 million during the six months, including a $1.1 million second-quarter charge.
- At June 30, 2012, the allowance for loan and lease losses was $30.5 million, or 2.08% of loans and leases, and covered 68.18% of nonperforming loans. Management stated that the allowance was adequate, but noted that reserve estimates and specific credit valuations are subjective and could change.
- Credit risks are concentrated in commercial, commercial real estate, and construction lending, which are sensitive to economic conditions, borrower cash flow, property values, tenant demand, and construction costs.
- The company had a $20.0 million interest-rate swap converting the variable rate on trust preferred securities to a fixed 2.65% payment rate through January 2019. The swap liability was $1.8 million at June 30, 2012.
- Management expected to contribute $8.0 million to its qualified retirement plan during the third quarter of 2012 and could make additional contributions during 2012.
- On July 20, 2012, the company sold a former operations building for $2.0 million, generating a subsequent-event gain of approximately $1.3 million.
- The company repurchased 24,816 shares during the second quarter for $386 thousand and had 541,929 shares remaining under its repurchase authorization at June 30, 2012.
- The filing reports no material litigation, no defaults upon senior securities, no material changes in previously disclosed risk factors, and effective disclosure controls as of June 30, 2012.
Important Facts for Investors to Verify
- Whether the lower provision for loan losses is sustainable given the increase in nonperforming loans and the concentration in commercial real estate and construction credits.
- The level and trend of net interest margin as low rates and loan repricing continue to pressure asset yields.
- The recurring contribution from mortgage banking gains and the nonrecurring impact of bank-owned life insurance proceeds.
- The performance and contingent-payment exposure of the Javers Group acquisition, including the $842 thousand Level 3 liability.
- Future impairment risk for other real estate owned, impaired loans, mortgage servicing rights, goodwill, and investment securities.
- Liquidity availability and collateral requirements under the FHLB, Federal Reserve, correspondent-bank, and repurchase-agreement funding arrangements.
- The company’s capital strength: the Bank was classified as well capitalized, with a 14.99% total risk-based capital ratio, 13.74% Tier 1 risk-based capital ratio, and 10.99% Tier 1 leverage ratio at June 30, 2012.