Business Context and Reporting Period
Univest Corporation of Pennsylvania, through Univest Bank and Trust Co. and other subsidiaries, provides commercial and consumer banking, equipment financing, wealth management, investment advisory, trust, mortgage banking, and insurance services. Reportable segments are Banking, Wealth Management, and Insurance. The filing covers the fiscal year ended December 31, 2017; fourth-quarter data is also presented. The filing was audited by KPMG LLP, which issued unqualified opinions on the financial statements and internal control over financial reporting.
At year-end, the Corporation operated 41 banking offices, primarily in southeastern Pennsylvania and southern New Jersey, and employed 855 people.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Interest income | $163.0 million | $126.6 million | 28.8% |
| Net interest income | $143.2 million | $114.2 million | 25.4% |
| Provision for loan and lease losses | $9.9 million | $4.8 million | 105.2% |
| Noninterest income | $59.2 million | $56.0 million | 5.9% |
| Noninterest expense | $130.7 million | $142.0 million | (7.9%) |
| Net income | $44.1 million | $19.5 million | 126.1% |
| Diluted EPS | $1.64 | $0.84 | 95.2% |
| Net interest margin | 3.78% | 3.82% | (4) bps |
| Return on average assets | 1.01% | 0.56% | +45 bps |
| Return on average equity | 8.37% | 4.46% | +391 bps |
- Balance sheet: Total assets were $4.55 billion, net loans and leases held for investment were $3.60 billion, deposits were $3.55 billion, and shareholders’ equity was $603.4 million.
- Loan growth: Gross loans and leases held for investment increased 10.2% to $3.62 billion, led by commercial business, commercial real estate, and residential real estate lending.
- Asset quality: Nonperforming loans and leases were $26.7 million, or 0.74% of loans and leases, versus 0.67% in 2016. The allowance for loan and lease losses was $21.6 million, or 0.60% of loans and leases.
- Cash flow: Operating activities provided $68.7 million; investing activities used $352.1 million, primarily because of $338.5 million of net loan growth; financing activities provided $281.4 million. Cash and due from banks ended at $46.7 million, while cash and interest-earning deposits totaled $75.4 million.
- Debt and liquidity: Borrowings totaled $355.6 million, consisting of $105.4 million of short-term borrowings, $155.8 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 federal-funds lines, and no outstanding Federal Reserve Discount Window or $10 million correspondent-line borrowings at year-end.
- Capital: The Corporation’s Tier 1 capital ratio was 11.11% and total risk-based capital ratio was 14.00%, compared with 9.42% and 12.44%, respectively, in 2016. The Corporation and Bank remained well capitalized.
- Shareholder returns: Dividends were $0.80 per share for the year. No shares were repurchased under the public repurchase program during 2017. Book value per share was $20.57.
Fourth-Quarter 2017 Results
| Metric | Q4 2017 |
|---|---|
| Net interest income | $36.7 million |
| Provision for loan and lease losses | $2.0 million |
| Noninterest income | $14.2 million |
| Noninterest expense | $33.4 million |
| Net income | $10.3 million |
| Diluted EPS | $0.37 |
Material Changes Versus the Prior Comparable Period
- Net income more than doubled, principally because 2017 had a full year of Fox Chase Bancorp operations, stronger loan growth, higher loan yields, and no Fox Chase acquisition, integration, or restructuring expenses.
- Net interest income increased $29.0 million, while the tax-equivalent net interest margin declined slightly from 3.82% to 3.78% because higher deposit and borrowing costs partly offset loan growth and improved loan yields.
- Noninterest income increased $3.3 million. Investment advisory fees, service charges, other service fees, and bank-owned life insurance income increased, while mortgage banking income declined $2.0 million because of lower refinance volume and limited housing supply.
- Noninterest expense fell $11.3 million because 2016 included $17.7 million of acquisition, integration, and restructuring costs. This benefit was partly offset by higher salaries, occupancy, data processing, and bank shares tax expenses.
- Loans increased $334.2 million, or 10.2%, and deposits increased $297.4 million, or 9.1%. Short-term borrowings declined $90.7 million, partly offset by a $28.3 million increase in long-term debt.
- Shareholders’ equity increased $98.2 million, including $70.5 million of net proceeds from a December public offering of 2.645 million common shares.
- Credit metrics were mixed: nonaccrual loans declined to $14.5 million from $17.9 million, but total nonperforming loans and leases increased to $26.7 million from $22.2 million. The 2017 provision also included $2.8 million related to software leases under a vendor referral program.
Outlook, Management Commentary, Risks, and Unusual Items
- Interest rates: Management describes the balance sheet as slightly asset sensitive. Its simulation estimated that a 100-basis-point rate increase would increase next-12-month net interest income by approximately $6.4 million, or 4.20%, while a 100-basis-point decline would reduce it by approximately $8.3 million, or 5.44%. These are model estimates, not guidance.
- No formal earnings guidance: The filing does not provide a clear numerical earnings, revenue, or growth forecast. Management emphasizes organic growth, expansion in Lancaster County and other markets, fee-based businesses, and maintaining capital and liquidity.
- Tax reform: The Tax Cuts and Jobs Act reduced the federal tax rate to 21% beginning in 2018. Univest recorded $1.1 million of additional 2017 tax expense to remeasure deferred tax assets and liabilities. Certain tax effects remained provisional under SEC Staff Accounting Bulletin 118.
- Accounting changes: Management expected CECL adoption in 2020 to increase the allowance for credit losses and reduce shareholders’ equity and regulatory capital. Lease accounting adoption was expected to add operating lease assets and liabilities and could negatively affect capital ratios. The filing states that the impact of CECL had not yet been quantified.
- Settlement and litigation: Univest Capital received $1.0 million under a September 2017 settlement involving disputed software leases and was eligible for up to an additional $1.3 million. At year-end, the $1.3 million receivable was recorded as a nonaccruing lease receivable. The filing states that other pending or threatened litigation was not expected to have a material adverse effect.
- Principal risks: Key risks include local economic and commercial real estate exposure, interest-rate and deposit-cost pressure, competition, reliance on FHLB and other wholesale funding, regulatory and compliance costs, cybersecurity and technology disruptions, credit losses, possible goodwill impairment, acquisitions, and volatility in wealth management and insurance revenues.
- Concentration: Approximately 85.2% of the loan and lease portfolio consisted of commercial, commercial real estate, construction, financial and agricultural loans, and leases, which generally carry greater credit risk than residential and consumer lending.
Important Facts for Investors to Verify
- Reconcile the improvement in earnings excluding the $1.1 million tax-remeasurement charge, the $889 thousand bank-owned life insurance death benefit, and the absence of 2016 acquisition and restructuring costs.
- Assess whether loan growth, particularly commercial real estate and construction exposure, can continue without deterioration in nonperforming assets or higher provisions.
- Monitor deposit pricing, noninterest-bearing deposit retention, funding mix, FHLB availability, and the effect of rising rates on the net interest margin.
- Review the software-lease settlement, the $1.3 million nonaccruing receivable, and any subsequent collections or litigation developments.
- Quantify the eventual effects of CECL, lease accounting, tax reform measurement adjustments, and related regulatory-capital changes.
- Evaluate the effect of the December 2017 equity offering on per-share earnings, capital deployment, and dilution.