Business Context and Reporting Period
Univest Corporation of Pennsylvania, a bank holding company whose principal subsidiary is Univest Bank and Trust Co., filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company provides commercial banking, trust, insurance, investment advisory, mortgage banking, and commercial finance services, primarily in Eastern Pennsylvania. On June 29, 2011, its principal bank converted from a national charter to a Pennsylvania state charter; management stated that the conversion was not expected to have a significant financial or regulatory impact.
Financial Performance and Condition
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Net interest income | $19.0 million | $37.8 million |
| Provision for loan and lease losses | $5.6 million | $10.7 million |
| Noninterest income | $8.7 million | $16.5 million |
| Noninterest expense | $16.4 million | $33.2 million |
| Net income | $4.5 million | $8.4 million |
| Diluted earnings per share | $0.27 | $0.50 |
| Net interest margin, tax-equivalent | 4.24% | 4.24% |
| Return on average assets | 0.86% | 0.80% |
| Return on average equity | 6.64% | 6.24% |
All dollar amounts are in thousands unless otherwise noted. Net interest income benefited from lower deposit and borrowing costs, despite lower yields on earning assets. The provision for credit losses increased year over year, reflecting deterioration in collateral values and economic conditions.
| Balance-sheet metric | June 30, 2011 | December 31, 2010 |
|---|---|---|
| Total assets | $2.058 billion | $2.134 billion |
| Gross loans and leases | $1.439 billion | $1.471 billion |
| Allowance for loan and lease losses | $32.6 million | $30.9 million |
| Investment securities | $418.0 million | $467.0 million |
| Total deposits | $1.621 billion | $1.686 billion |
| Total borrowings | $127.7 million | $143.2 million |
| Shareholders’ equity | $273.0 million | $266.2 million |
| Cash and due from banks | $32.4 million | $11.6 million |
Six-month operating cash flow was $21.9 million, compared with $15.8 million in the prior-year period. Investing activities provided $85.5 million, primarily from securities maturities and calls and a decrease in loans. Financing activities used $86.6 million, mainly due to a $65.0 million decrease in deposits and dividend payments of $6.7 million. Cash increased to $32.4 million at June 30, 2011.
Long-term debt consisted of $5.0 million of FHLB borrowings, $3.0 million of subordinated notes, and $20.6 million of trust preferred securities. The company reported approximately $361.6 million of FHLB borrowing capacity, $82.0 million of federal funds lines, and no borrowings under its Federal Reserve Bank credit line. The Bank was categorized as well capitalized, with a total risk-based capital ratio of 15.45% and a Tier 1 leverage ratio of 11.19%.
Material Changes Versus Prior Comparable Period
- Net income increased 21.1% to $4.5 million in the second quarter and 25.0% to $8.4 million for the first six months.
- Tax-equivalent net interest income increased 4.1% in the quarter and 7.1% year to date. The net interest margin improved from 4.11% to 4.24% in the quarter and from 4.05% to 4.24% year to date.
- Interest expense declined substantially as deposit costs fell and average borrowings declined, including the reduction of FHLB advances from $54.0 million at June 30, 2010 to $5.0 million at June 30, 2011.
- Noninterest income increased 7.9% in the quarter but only 1.2% year to date. The quarter benefited from a $569 thousand securities-sale gain and the absence of a $516 thousand interest-rate-swap loss recorded in the prior-year quarter.
- Mortgage banking income declined to $303 thousand year to date from $935 thousand, while deposit service-charge income decreased $902 thousand year to date, principally following Regulation E changes affecting overdraft fees.
- Noninterest expense decreased 3.0% in the quarter and 2.5% year to date, largely because of lower advertising and deposit-insurance costs.
- Loans and leases declined 2.2% from year-end, reflecting weak credit demand. Construction loans declined $34.9 million, partially offset by growth in commercial business loans and personal-purpose residential loans.
Outlook, Commentary, Risks, and Unusual Items
Management described the company as more asset-sensitive and expects interest rates to remain low in the foreseeable future, while believing that longer-term rate increases could benefit the net interest margin. No quantitative earnings or revenue guidance was provided. Management emphasized growth in core deposits, expense control, capital and liquidity maintenance, and continued monitoring of credit and interest-rate risk.
- Nonperforming loans and leases increased to $49.2 million, or 3.42% of total loans and leases, from $46.5 million, or 3.16%, at December 31, 2010, and $32.3 million, or 2.23%, at June 30, 2010.
- The increase included an $11.3 million commercial real estate relationship involving a theatre; $2.6 million was charged off and $8.7 million was placed on nonaccrual status. Management stated that the remaining credit had sufficient estimated collateral.
- Net charge-offs increased to $5.8 million for the quarter and $9.0 million year to date, compared with $2.8 million and $5.4 million, respectively, in the prior-year periods.
- Other real estate owned increased to $5.0 million from $2.4 million at year-end. The company recorded $612 thousand of valuation adjustments on three commercial properties during the first half.
- The allowance for loan and lease losses increased to 2.27% of loans from 2.10% at year-end. Management considered the allowance adequate but noted that future reserves could be affected by changes in collateral values, borrower performance, economic conditions, and judgments regarding impaired credits.
- Commercial real estate, construction, commercial business lending, real estate values, weak economic conditions, deposit competition, interest-rate volatility, regulatory changes, and liquidity demands remain principal risks.
- The filing identified no material litigation, no material changes to previously reported risk factors, and no material changes in market risk strategy. Disclosure controls were deemed effective.
Investor Verification Checklist
- Verify trends in nonperforming loans, charge-offs, other real estate owned, and the adequacy of the $32.6 million loan-loss allowance.
- Assess whether the $8.7 million theatre-related nonaccrual balance and other impaired commercial real estate credits create additional reserve or charge-off exposure.
- Monitor the sustainability of the 4.24% net interest margin as deposit repricing benefits diminish and interest rates change.
- Review deposit runoff, public-fund seasonality, borrowing capacity, and the company’s contingency liquidity sources.
- Separate recurring earnings from securities-sale gains, mortgage banking valuation changes, other real estate write-downs, and the absence of prior-year swap losses.
- Confirm the impact of the Pennsylvania bank charter conversion and the implementation of new troubled-debt-restructuring and fair-value disclosure requirements.