Business Context and Reporting Period
Univest Corporation of Pennsylvania, a bank holding company, reported unaudited results for the three and six months ended June 30, 2016. Its businesses include commercial and consumer banking, wealth management, insurance, mortgage banking and equipment financing. The filing was dated August 8, 2016.
The period preceded the July 1, 2016 completion of the Fox Chase Bancorp acquisition; therefore, Fox Chase operating results are not included in second-quarter or year-to-date 2016 results.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $23.5 million, compared with $23.4 million | $46.9 million, compared with $46.7 million |
| Noninterest income | $14.1 million, up 5.8% | $28.1 million, up 4.8% |
| Provision for loan and lease losses | $0.8 million, compared with $1.1 million | $1.2 million, compared with $2.2 million |
| Noninterest expense | $29.5 million, up 10.1% | $56.5 million, up 4.1% |
| Net income | $5.2 million, down 19.0% | $12.5 million, essentially flat |
| Diluted EPS | $0.27, compared with $0.33 | $0.64, unchanged |
| Return on average assets | 0.74%, compared with 0.95% | 0.89%, compared with 0.93% |
| Return on average equity | 5.72%, compared with 7.22% | 6.88%, compared with 7.04% |
- Tax-equivalent net interest margin was 3.92% for the quarter and 3.91% year to date, down from 4.03% and 4.07%, respectively.
- Gross loans and leases held for investment were $2.345 billion at June 30, 2016, up $166.0 million, or 7.6%, from December 31, 2015.
- Total assets were $3.108 billion, up 7.9% from year-end 2015. Total deposits were $2.377 billion, down 0.7%.
- The allowance for loan and lease losses was $17.2 million, or 0.73% of loans and leases held for investment.
- Nonaccrual loans and leases were $13.3 million, or 0.57% of loans and leases; total nonperforming assets were $21.6 million, or 0.69% of total assets.
- Net cash provided by operating activities was $8.2 million; investing activities used $213.3 million, principally reflecting $98.9 million advanced for the Fox Chase merger settlement and $169.4 million of net loan growth; financing activities provided $209.2 million.
- At June 30, 2016, cash, interest-earning deposits and federal funds sold totaled $93.2 million. Short-term borrowings were $260.2 million, including $156.0 million from the Federal Home Loan Bank and an $80.0 million Fox Chase bridge loan.
- Shareholders’ equity was $369.2 million. The quarterly and year-to-date dividend was $0.20 and $0.40 per share, respectively.
- Total risk-based capital ratios were 12.77% for the Corporation and 11.45% for the Bank. Management stated that both remained well-capitalized.
Material Changes Versus Comparable Periods
- Second-quarter net income declined primarily because noninterest expense increased faster than revenue. Salaries and benefits rose 17%, and acquisition-related costs increased to $1.2 million from $41 thousand.
- Year-to-date net income was broadly unchanged despite higher noninterest income and lower credit-loss provision, as expenses increased and merger-related costs continued.
- Net interest income was supported by loan growth but offset by lower loan yields, a lower benefit from acquisition-accounting accretion and higher borrowing costs. Second-quarter interest expense included $289 thousand of Fox Chase bridge-loan fees and interest.
- Credit trends improved: nonaccrual loans declined from $14.2 million at December 31, 2015 and $17.7 million at June 30, 2015; second-quarter net charge-offs were $129 thousand versus $2.5 million in the prior-year quarter.
- Short-term borrowings increased by $236.0 million from year-end, primarily to fund loan growth and the merger. Approximately $92.4 million of interest-bearing consumer demand deposits were reclassified as noninterest-bearing deposits during the quarter.
- Other real estate owned increased to $3.1 million from $1.3 million at year-end.
Guidance, Outlook, Risks and Unusual Items
- The Fox Chase transaction closed July 1, 2016. Fox Chase contributed approximately $1.1 billion of assets, $785 million of loans and $739 million of deposits as of June 30, 2016. Consideration included $98.9 million in cash and 6,857,529 Univest shares, approximately 35% of outstanding shares at closing.
- Management expected the Fox Chase transaction to be accretive to earnings per share in the first combined year of operations in 2017. Preliminary acquisition accounting estimates were still subject to adjustment during the measurement period.
- On July 1, 2016, Univest issued $45.0 million of fixed-to-floating subordinated notes, with net proceeds of approximately $44.5 million, to support general corporate purposes, growth and potential acquisitions.
- Management described the company as liability-sensitive in the short term but projected higher net interest income in rising-rate scenarios because asset repricing was expected to exceed liability repricing.
- The principal risks identified include credit losses, commercial and real estate concentration risk, interest-rate volatility, liquidity and deposit competition, integration and execution risk from Fox Chase, legal and regulatory risks, and economic and competitive conditions.
- Management anticipated a $2.0 million qualified retirement-plan contribution in the third quarter of 2016. The filing also indicated that future adoption of the current expected credit loss standard was expected to increase the allowance and reduce regulatory capital and ratios.
- A Fox Chase shareholder lawsuit was dismissed with prejudice in July 2016. Management reported no material pending litigation and no material changes to previously disclosed risk factors.
Investor Verification Points
- Verify the post-acquisition financial impact of Fox Chase, including purchase accounting marks, goodwill, integration costs, loan and deposit retention, and expected EPS accretion.
- Monitor whether rapid loan growth is sustained without deterioration in commercial real estate, commercial business, construction and lease-finance credit quality.
- Assess the effect of the higher short-term borrowing balance, the bridge-loan repayment and the new subordinated notes on funding costs and capital ratios.
- Reconcile reported earnings with merger-related, acquisition-related, integration and other unusual items when evaluating underlying profitability.
- Track net interest margin sensitivity to interest-rate changes, deposit pricing and the reduction in acquisition-accounting accretion.
- Evaluate the future impact of the CECL allowance increase and other regulatory or accounting changes on capital and earnings.