Univest Corporation of Pennsylvania — Q3 2017 Form 10-Q Summary
Business context and reporting period
Univest is a bank holding company whose principal subsidiary provides commercial and consumer banking, trust, wealth management, insurance, mortgage banking and equipment-financing services. The filing covers the three and nine months ended September 30, 2017. Results include the impact of the July 1, 2016 Fox Chase Bancorp acquisition, making year-over-year comparisons less comparable.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net income | $11.2 million | $58 thousand | $33.8 million | $12.6 million |
| Diluted EPS | $0.42 | Less than $0.01 | $1.27 | $0.57 |
| Net interest income | $36.9 million | $32.9 million | $106.5 million | $80.1 million |
| Tax-equivalent net interest margin | 3.80% | 3.68% | 3.78% | 3.82% |
| Noninterest income | $14.1 million | $14.1 million | $45.1 million | $42.0 million |
| Noninterest expense | $32.7 million | $47.1 million | $97.3 million | $103.6 million |
| Provision for loan and lease losses | $2.7 million | $1.4 million | $7.9 million | $2.6 million |
Total assets were $4.42 billion at September 30, 2017, up 4.4% from December 31, 2016. Loans and leases held for investment increased 6.1% to $3.49 billion, while deposits increased 8.0% to $3.52 billion. Shareholders' equity rose 4.7% to $528.8 million.
Cash and interest-earning deposits totaled $79.5 million. Net cash provided by operating activities was $44.8 million, compared with $23.9 million in the prior-year period. Investing activities used $201.7 million, principally because of $204.9 million of net loan growth. Financing activities provided $156.1 million, primarily from deposit growth and $95.0 million of long-term debt issuance. Cash and due from banks ended at $47.9 million.
Borrowings included $32.1 million of short-term borrowings, $206.2 million of long-term debt and $94.3 million of subordinated notes. The Bank reported approximately $1.4 billion of FHLB borrowing capacity, $367.0 million of uncommitted correspondent-bank federal-funds lines and no borrowings from the Federal Reserve discount window or the $10.0 million correspondent line.
At September 30, 2017, the Bank's regulatory capital ratios were 11.78% total capital to risk-weighted assets, 11.23% Tier 1 capital to risk-weighted assets, 11.23% Tier 1 common capital to risk-weighted assets and 10.32% Tier 1 capital to average assets. Management stated that the Bank remained well capitalized.
Material changes versus comparable periods
- Q3 net income increased by $11.1 million, largely because Q3 2016 included $14.1 million of Fox Chase acquisition and integration costs. No acquisition or integration costs were recorded in 2017.
- Nine-month net income increased by $21.2 million. The 2017 period included an $889 thousand tax-free BOLI death benefit; the 2016 period included $15.6 million of acquisition, integration and restructuring costs.
- Tax-equivalent net interest income increased 11.7% in Q3 and 31.6% for nine months, supported by loan growth, higher loan yields and Fox Chase-related balances. Q3 margin improved, although the nine-month margin declined modestly.
- Noninterest income was flat in Q3 and increased 7.4% for nine months. Investment advisory fees, deposit service charges, insurance fees, BOLI income and other service fees increased, while mortgage banking income declined 54.7% in Q3 and 27.9% for nine months because of lower refinancing volume and limited housing supply.
- Loan-loss provision increased substantially. Nine-month net charge-offs were $4.9 million versus $3.3 million in 2016, including a Q3 charge-off of $2.8 million related to $5.0 million of software leases under a vendor referral program.
- Noninterest expense declined because 2016 included Fox Chase acquisition and integration costs, partly offset by higher staffing, premises, data-processing and other operating costs associated with growth and expansion.
- Nonperforming loans and leases increased to $29.0 million from $22.2 million at year-end 2016, and nonperforming assets increased to $30.8 million from $27.1 million. The allowance for loan and lease losses rose to $20.5 million from $17.5 million.
Outlook, risks, contingencies and unusual items
The filing does not provide formal earnings or financial guidance. Management describes continued growth initiatives through commercial lending, market expansion, technology investment and cross-selling across banking, wealth management and insurance. Management also notes exposure to competition, economic and political conditions, interest-rate volatility, credit quality, regulatory and accounting changes, and the success of growth strategies.
- Vendor referral lease matter: Univest Capital recorded a $2.8 million Q3 charge-off and held a $2.3 million receivable at September 30, 2017, including $1.3 million of nonaccruing lease receivables and $1.0 million in other assets. A settlement provided for $1.0 million subject to court approval and up to an additional $1.3 million depending on guarantor elections. The $1.0 million was held in escrow and expected in Q4 2017; the election process was expected to conclude by March 31, 2018.
- Credit concentration and quality: The portfolio is weighted toward commercial and commercial real estate lending. Management reported $11.5 million of accruing troubled debt restructurings, including $9.2 million relating to one borrower whose loans received amortization-period extensions.
- Accounting changes: Management expected CECL adoption in 2020 to increase the allowance and potentially reduce shareholders' equity and regulatory capital. Lease accounting and financial-instrument accounting changes were also under evaluation; no material impacts were expected for several other issued standards.
- Interest-rate risk: The company uses interest-rate swaps and asset-liability management modeling. Changes in interest rates could affect net interest income, deposit costs, loan yields and securities valuations.
- Management stated that no material changes occurred in market risk, no material adverse effect was expected from other legal proceedings, and disclosure controls were effective as of September 30, 2017.
Investor verification checklist
- Verify the sustainability of earnings after excluding Fox Chase acquisition-cost comparisons and the $889 thousand BOLI death benefit.
- Monitor loan growth, commercial real estate exposure, nonperforming assets, troubled debt restructurings and future provisions or charge-offs.
- Track the resolution and cash collections associated with the vendor referral software-lease litigation and settlement.
- Assess whether deposit growth and the shift from short-term to long-term borrowings continue to support liquidity at acceptable funding costs.
- Evaluate the effect of mortgage banking weakness, rising deposit costs and changing interest rates on the net interest margin.
- Review the eventual CECL and lease-accounting impacts on the allowance, equity and regulatory capital ratios.