Business Context and Reporting Period
Univest Corporation of Pennsylvania is a bank holding company whose subsidiaries provide commercial and consumer banking, wealth management, insurance, mortgage banking, trust, investment advisory, and equipment financing services. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Comparable / Prior Period | Change |
|---|---|---|---|
| Net interest income | $37.3 million | $34.3 million | +8.7% |
| Noninterest income | $15.6 million | $15.0 million | +4.1% |
| Total operating revenue | $52.9 million | $49.3 million | +7.3% |
| Provision for loan and lease losses | $2.1 million | $2.4 million | Down $0.4 million |
| Noninterest expense | $35.1 million | $32.0 million | +9.7% |
| Income before taxes | $15.7 million | $14.8 million | +6.1% |
| Net income | $12.9 million | $10.9 million | +18.4% |
| Diluted EPS | $0.44 | $0.41 | +7.3% |
| Return on average assets | 1.14% | 1.04% | +10 basis points |
| Return on average equity | 8.60% | 8.65% | Down 5 basis points |
| Tax-equivalent net interest margin | 3.72% | 3.80% | Down 8 basis points |
| Cash dividends declared per share | $0.20 | $0.20 | Unchanged |
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $4.614 billion at March 31, 2018, up 1.3% from year-end 2017. Gross loans and leases held for investment were $3.690 billion, up 1.9%.
- Deposits were $3.497 billion, down 1.6% from December 31, 2017, primarily due to lower commercial noninterest-bearing deposits and seasonal public-funds declines.
- Short-term borrowings increased to $216.4 million from $105.4 million as the Corporation funded loan growth and replaced reduced deposits. Long-term debt was $155.7 million and subordinated notes were $94.4 million.
- Cash and interest-earning deposits were $48.6 million at quarter-end, down from $75.4 million. Operating activities provided $17.9 million, investing activities used $77.6 million, and financing activities provided $47.7 million, resulting in an $12.0 million decrease in cash and due from banks.
- The Bank had approximately $1.5 billion of FHLB borrowing capacity, $367.0 million of uncommitted correspondent federal-funds lines, and no borrowings under its Federal Reserve Discount Window or $10.0 million correspondent line at quarter-end.
- Shareholders’ equity was $606.7 million, up 0.6% from year-end. Corporation and Bank total risk-based capital ratios were 14.04% and 11.60%, respectively; the Bank remained well capitalized.
Material Changes Versus the Prior Comparable Period
- Loan growth and higher loan yields increased interest income, but deposit and borrowing costs rose materially as interest rates increased. Interest expense grew 52.2% to $6.3 million, contributing to the lower net interest margin.
- Average loans increased 9.9%, while average noninterest-bearing deposits increased 9.9% and average equity increased 19.0% year over year.
- Investment advisory fees rose 15.8% and insurance commissions rose 10.8%, supported by new customer relationships, favorable market performance, and higher contingent commissions.
- Mortgage banking gains declined 35.7% to $0.7 million, attributed to lower mortgage volume, limited housing supply, and extended winter weather. Bank-owned life insurance income declined 14.6%.
- Noninterest expense increased primarily from higher staffing, technology, professional fees, and other operating costs. The quarter included $571 thousand of restructuring charges related to closing three financial centers and reducing related staff; the after-tax impact was approximately $451 thousand, or $0.01 per diluted share.
- The effective tax rate fell to 18.0% from 26.5%, reflecting the Tax Cuts and Jobs Act reduction in the federal statutory rate from 35% to 21%, tax-exempt income, and $118 thousand of discrete tax benefits.
- The allowance for loan and lease losses increased to $23.4 million from $21.6 million. Net charge-offs were $198 thousand versus $416 thousand in the prior-year quarter.
Outlook, Commentary, Risks and Unusual Items
- Management emphasized continued business growth while maintaining capital and liquidity and limiting credit and interest-rate risk. No specific earnings or revenue guidance was provided.
- Credit quality weakened during the quarter. Nonaccrual loans and leases increased to $27.7 million from $14.5 million, nonperforming loans and leases increased to $31.0 million from $26.7 million, and nonperforming assets rose to $32.9 million from $28.6 million.
- A $12.3 million commercial real estate loan was placed on nonaccrual status during the quarter, with a specific reserve of $656 thousand. Management noted that specific reserves may change as facts and judgments evolve.
- Accumulated other comprehensive loss increased to $26.8 million, primarily from declines in available-for-sale securities caused by higher interest rates. The Corporation reported no other-than-temporary impairment charges on debt securities.
- The Corporation early adopted ASU 2018-02 and reclassified $3.9 million of stranded tax effects from accumulated other comprehensive income to retained earnings. It also adopted ASU 2016-01, resulting in a $433 thousand reclassification and a $4 thousand net loss on equity securities during the quarter.
- Management expects future adoption of the current expected credit loss standard, effective in 2020, to increase the allowance and reduce shareholders’ equity and regulatory capital ratios. Lease accounting adoption is expected to add operating lease assets and liabilities and may negatively affect capital ratios.
- Forward-looking results are exposed to interest-rate volatility, economic and competitive conditions, loan and investment portfolio quality, regulatory and accounting changes, liquidity and funding competition, legal and operational risks, and the timing of revenues and expenditures.
- Management stated that pending and threatened legal actions are not expected to have a material adverse effect. Disclosure controls were effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether the increase in nonaccrual commercial real estate loans is isolated or signals broader deterioration in credit quality.
- Future deposit trends and the sustainability and cost of the increased short-term borrowing used to fund loan growth.
- The effect of further interest-rate increases on net interest margin, deposit pricing, securities values, and accumulated other comprehensive loss.
- Whether wealth management and insurance fee growth can offset weaker mortgage banking activity and higher operating expenses.
- The eventual capital and allowance impact of CECL and lease-accounting adoption.
- The remaining costs and operating benefits from the financial-center closures and staffing reductions.
- Regulatory capital ratios, the 2018 capital conservation buffer, and the Bank’s continued well-capitalized status.