Business Context and Reporting Period
Univest Corporation of Pennsylvania is a bank holding company whose principal subsidiary, Univest Bank and Trust Co., provides commercial and consumer banking, lending, equipment financing, mortgage banking, wealth management, trust, investment advisory and insurance services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Results include the July 1, 2016 acquisition of Fox Chase Bancorp; prior-period comparisons therefore reflect a materially smaller acquired-asset base.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net income | $11.8 million, up 124.8% | $22.6 million, up 80.7% |
| Diluted EPS | $0.44, versus $0.27 | $0.85, versus $0.64 |
| Net interest income | $35.3 million, up 49.2% | $69.6 million, up 47.5% |
| Tax-equivalent net interest margin | 3.76%, versus 3.93% | 3.78%, versus 3.92% |
| Provision for loan and lease losses | $2.8 million, versus $0.8 million | $5.2 million, versus $1.2 million |
| Noninterest income | $16.0 million, up 14.3% | $31.0 million, up 11.3% |
| Noninterest expense | $32.5 million, up 10.2% | $64.6 million, up 14.3% |
| Return on average assets | 1.09%, versus 0.74% | 1.07%, versus 0.89% |
| Return on average equity | 9.13%, versus 5.72% | 8.89%, versus 6.88% |
At June 30, 2017, total assets were $4.45 billion, up 5.3% from December 31, 2016. Loans and leases held for investment were $3.51 billion, up 6.8%, driven primarily by commercial real estate, commercial business and residential real estate lending. Deposits were $3.35 billion, up 2.8%. Shareholders’ equity was $521.3 million, up 3.2%.
Net cash provided by operating activities was $32.6 million for the six months, while investing activities used $233.1 million, principally because net loans and leases increased by $225.7 million. Financing activities provided $200.5 million, including $90.0 million of additional long-term debt and $90.8 million of deposit growth. Cash and due from banks ended at $48.8 million, essentially unchanged from year-end.
Total borrowings were $542.5 million at June 30, 2017, consisting of $231.7 million of short-term borrowings, $216.6 million of long-term debt and $94.2 million of subordinated notes. The Bank had approximately $1.3 billion of FHLB borrowing capacity, $367.0 million of uncommitted correspondent federal-fund lines and an available Federal Reserve line collateralized by $55.5 million of securities. The filing states that the Corporation and Bank met capital requirements; the Bank was categorized as well capitalized. The Bank’s total capital ratio was 11.50%, Tier 1 risk-based ratio was 10.95% and leverage ratio was 10.39%.
Material Changes Versus the Prior Comparable Period
- Net income growth was primarily attributable to the Fox Chase acquisition, higher loan balances, increased net interest income and higher fee income.
- Interest income increased substantially with the larger loan portfolio, but the tax-equivalent net interest margin declined to 3.76% in the second quarter from 3.93%, reflecting acquisition-related funding and balance-sheet mix.
- Noninterest income benefited from higher investment advisory fees, deposit service charges, other service fees and a $889 thousand tax-free bank-owned life insurance death benefit. Mortgage banking income declined due to lower volume.
- Noninterest expense increased because of higher staffing, occupancy, data processing and other costs associated with Fox Chase, business expansion and technology investment. Fox Chase acquisition and integration costs of $1.2 million in the second quarter and $1.4 million year-to-date were not incurred in 2017.
- The loan-loss provision increased to $5.2 million year-to-date from $1.2 million, reflecting loan growth, net charge-offs and an $844 thousand reserve related to impaired leases.
- Nonperforming loans and leases increased to $32.2 million from $22.2 million at year-end, and nonperforming assets increased to $34.4 million from $27.1 million. The nonperforming-loan ratio rose to 0.92% from 0.67%.
- Long-term debt increased $89.1 million as management used longer-term FHLB advances to support balance-sheet growth and take advantage of the flattening yield curve.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management describes continued growth through lending, deposits, acquisitions, fee-based businesses, technology and market expansion, while emphasizing capital, liquidity, credit-risk and interest-rate-risk management.
- A $889 thousand BOLI death benefit increased second-quarter and year-to-date earnings by approximately $0.03 per diluted share in each period. The filing also reports discrete tax benefits from equity compensation of $90 thousand for the quarter and $378 thousand year-to-date.
- A $303 thousand reversal of a prior Sterner Insurance Associates earn-out accrual reduced second-quarter noninterest expense.
- Approximately $5.0 million of software leases became nonaccrual after lessees stopped paying because of disputes with a vendor. Univest Capital pursued collection, while a Texas federal complaint sought class certification and to invalidate the contracts and guarantees. The outcome was neither probable nor estimable at the filing date.
- Credit risk increased in several measures, including nonaccrual leases, nonperforming loans, impaired leases and the allowance for loan and lease losses, which rose to $20.9 million from $17.5 million.
- The Corporation expects adoption of the current expected credit loss standard in 2020 to increase the allowance and reduce shareholders’ equity, regulatory capital and capital ratios. The filing also identifies potential balance-sheet and capital impacts from lease accounting.
- Key forward-looking risks include interest-rate volatility, economic and competitive conditions, legal and regulatory developments, credit losses, liquidity and funding competition, acquisition integration and the possibility that management’s assumptions or strategies may prove inaccurate.
- KBRA reaffirmed the Corporation’s senior unsecured rating of BBB+, subordinated rating of BBB and short-term rating of K2, with a stable outlook. The Bank’s deposit rating was A- and its short-term ratings were K2.
Most Important Facts for Investors to Verify
- Whether loan growth and Fox Chase integration can sustain earnings while the net interest margin remains below the prior-year level.
- Whether the rise in nonperforming loans, particularly the software lease exposure, leads to additional charge-offs or provisions.
- The adequacy of the $20.9 million allowance relative to the expanded $3.51 billion loan portfolio and $32.2 million of nonperforming loans.
- The effect of higher borrowings and deposit pricing on future funding costs, liquidity and net interest income.
- The eventual capital impact of CECL adoption and lease accounting, including any effect on dividend capacity.
- The resolution and potential exposure from the Texas litigation involving Univest Capital and the disputed lease contracts.
- The sustainability of unusual earnings benefits, including the BOLI death benefit, earn-out reversal and discrete tax benefits.
- Future credit-quality trends in commercial real estate, commercial lending and lease financing, as well as the timing and impact of any acquisition-related costs.