Univest Corporation of Pennsylvania — Q3 2011 Form 10-Q Summary
Business context and reporting period
The filing covers Univest Corporation of Pennsylvania and subsidiaries, including Univest Bank and Trust Co., for the three and nine months ended September 30, 2011. The company operates as a bank holding company providing commercial banking, trust, insurance, investment advisory, brokerage, leasing and other financial services primarily in Eastern Pennsylvania. The bank converted from a national charter to a Pennsylvania state charter effective June 30, 2011; management stated that the conversion was not expected to have a significant financial or regulatory impact.
Amounts are in thousands, except per-share data. The interim financial statements are unaudited.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net income | $5.2 million, versus $4.1 million | $13.6 million, versus $10.8 million |
| Diluted earnings per share | $0.31, versus $0.25 | $0.81, versus $0.65 |
| Net interest income | $18.6 million, versus $19.0 million | $56.4 million, versus $54.3 million |
| Net interest margin, tax-equivalent | 4.15%, unchanged | 4.21%, versus 4.08% |
| Noninterest income | $9.0 million, versus $8.9 million | $25.4 million, versus $25.2 million |
| Noninterest expense | $17.3 million, versus $17.2 million | $50.4 million, versus $51.2 million |
| Provision for loan and lease losses | $3.6 million, versus $5.5 million | $14.3 million, versus $15.3 million |
| Return on average assets | 0.98%, versus 0.78% | 0.87%, versus 0.70% |
| Return on average equity | 7.55%, versus 6.07% | 6.69%, versus 5.37% |
Net income increased 26.5% in the quarter and 25.6% for the nine-month period. Results benefited from lower funding costs, reduced provisions, lower expenses for the year-to-date period, securities gains and the absence of the 2010 interest-rate-swap loss. These benefits were partly offset by lower asset yields, weaker loan demand and lower mortgage banking income.
At September 30, 2011, total assets were $2.174 billion, up 1.9% from December 31, 2010. Total loans and leases were $1.436 billion, down 2.4%, while investment securities were $412.3 million, down 11.7%. Cash and interest-earning deposits increased to $147.0 million from $29.2 million, primarily because of public-funds inflows and higher balances held at the Federal Reserve.
Total deposits increased 2.3% to $1.725 billion. Securities sold under repurchase agreements were $107.6 million. Long-term debt was $5.0 million, subordinated notes were $2.3 million and trust preferred securities were $20.6 million. Total shareholders’ equity increased 3.3% to $275.1 million.
Cash flow from operating activities was $31.2 million for the first nine months, compared with $22.7 million in the prior-year period. Investing activities used $13.6 million, while financing activities provided $21.0 million. Cash and due from banks increased to $50.1 million from $11.6 million at year-end 2010.
The loan-loss reserve was $31.0 million, or 2.16% of loans and leases, compared with 2.10% at December 31, 2010. Net charge-offs were $5.2 million in the quarter and $14.2 million year to date, compared with $5.8 million and $11.2 million, respectively, in the prior-year periods.
Regulatory capital remained strong. At September 30, 2011, the bank reported total risk-based capital of 15.32%, Tier 1 risk-based capital of 14.06% and Tier 1 leverage capital of 11.24%. Management stated that the bank was “well capitalized.”
Material changes versus comparable periods
- Quarterly net income rose $1.1 million, or 26.5%; nine-month net income rose $2.8 million, or 25.6%.
- Quarterly net interest income declined 1.2% on a tax-equivalent basis, but nine-month net interest income increased 4.2%.
- The nine-month net interest margin improved 13 basis points to 4.21%, mainly because deposit and borrowing costs declined faster than asset yields.
- Average year-to-date FHLB advances declined to $5.0 million from $58.1 million in the prior-year period.
- Noninterest income increased modestly, helped by trust fees, bank-owned life insurance income and securities gains, but service-charge and mortgage-banking income declined.
- Nine-month noninterest expense decreased 1.4%, although third-quarter expense increased slightly because of higher loan-workout and legal costs.
- Nonperforming loans and leases declined to $42.6 million, or 2.96% of total loans and leases, from $46.5 million, or 3.16%, at December 31, 2010. However, nonperforming assets increased to $50.3 million from $48.9 million because other real estate owned increased to $7.7 million from $2.4 million.
- Construction loans declined $36.7 million from year-end, while commercial business loans increased $10.0 million and commercial real estate loans increased $2.4 million.
- The company repurchased 56,408 shares during the quarter for $742 thousand and had 587,374 shares remaining under its repurchase authorization at September 30, 2011.
Outlook, risks, contingencies and unusual items
Management described the company as asset sensitive and expected interest rates to remain low in the near term, while anticipating that higher rates over the longer term could benefit net interest margin. No specific earnings or financial guidance was provided.
- Credit risk remains concentrated in commercial, commercial real estate and construction lending. Management identified borrower cash flow, collateral values, real estate conditions, construction delays and economic weakness as important loss drivers.
- Impaired loans and leases totaled $42.1 million. Management stated that additional reserves could be required if conditions or judgments regarding several large commercial credits deteriorate.
- During the third quarter, a foreclosed commercial real estate loan resulted in a $1.0 million charge-off and a $1.8 million transfer to other real estate owned.
- Other real estate owned increased to $7.7 million and generated $758 thousand of net losses and write-downs during the first nine months.
- Mortgage servicing rights were impaired by $672 thousand in the third quarter and $734 thousand year to date, primarily because lower interest rates increased expected prepayments.
- Available-for-sale securities had a fair value of $381.8 million and unrealized losses of approximately $1.1 million. Management considered the debt-security losses temporary and reported no other-than-temporary impairment charges on debt securities.
- The company held $289.0 million of securities pledged for public deposits and other legal requirements.
- Standard & Poor’s downgrade of U.S. government and Federal Home Loan Bank debt ratings could affect securities values, collateral availability, borrowing costs and access to capital markets.
- The company had approximately $362.9 million of maximum FHLB borrowing capacity, $82.0 million of federal-funds lines and no outstanding Federal Reserve discount-window borrowings at September 30, 2011. FHLB letters of credit totaling $115.5 million supported seasonal public-funds deposits.
- Management stated that disclosure controls were effective and that no material litigation was pending. The filing identifies no material market-risk changes from the 2010 Form 10-K.
Important facts for investors to verify
- Whether the decline in loan balances and continued weak credit demand persists, particularly in construction, commercial real estate and leasing.
- Future trends in nonperforming assets, other real estate owned, charge-offs and the adequacy of the $31.0 million loan-loss reserve.
- Whether low interest rates continue to pressure asset yields, mortgage servicing rights and mortgage banking income.
- The sustainability of earnings gains driven by lower funding costs, securities sales, bank-owned life insurance income and the absence of prior-year swap losses.
- The effect of U.S. government and FHLB credit-rating changes on securities valuations, liquidity and borrowing capacity.
- The company’s ability to maintain strong regulatory capital while funding dividends, share repurchases and future growth.