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UVSP > SEC Filings for UVSP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for UNIVEST CORP OF PENNSYLVANIA

Form 10-Q for UNIVEST CORP OF PENNSYLVANIA


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(All dollar amounts presented within tables are in thousands, except per share data. "BP" means "basis points"; "N/M" equates to "not meaningful"; "-" equates to "zero" or "doesn't round to a reportable number"; and "N/A" equates to "not applicable." Certain amounts have been reclassified to conform to the current-year presentation.)

Forward-Looking Statements

The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words "believe," "anticipate," "estimate," "expect," "project," "target," "goal" and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below:

Operating, legal and regulatory risks

Economic, political and competitive forces impacting various lines of business

The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

Volatility in interest rates

Other risks and uncertainties, including those occurring in the U.S. and world financial systems

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation's expectations with regard to any change in events, conditions or circumstances on which any such statement is based.

Critical Accounting Policies

Management, in order to prepare the Corporation's financial statements in conformity with U.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation's financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available for sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation's 2011 Annual Report on Form 10-K.

General

Univest Corporation of Pennsylvania, (the Corporation), is a Bank Holding Company. It owns all of the capital stock of Univest Bank and Trust Co. (the Bank) and Univest Delaware, Inc. The Corporation's former subsidiary, Univest Reinsurance Corporation, was liquidated during the third quarter of 2012 and the net assets were transferred to the Corporation.

The Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, and Univest Investments, Inc., a full-service broker-dealer and investment advisory firm. The Bank is also the parent company of Univest Capital, Inc., a small ticket commercial finance business, and TCG Investment Advisory, a registered investment advisor which provides discretionary investment consulting and management services. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals, municipalities and businesses throughout its markets of operation.


Table of Contents

Executive Overview

The Corporation's consolidated net income, earnings per share and returns on
average assets and average equity were as follows:



                                       Three Months Ended                                      Nine Months Ended
                                          September 30,                  Change                  September 30,                  Change
                                       2012           2011        Amount       Percent         2012          2011        Amount       Percent
(Dollars in thousands, except per
share data)
Net income                           $   5,770       $ 5,244      $   526            10 %    $ 15,796      $ 13,622      $ 2,174            16 %
Net income per share:
Basic                                $    0.34       $  0.31      $  0.03            10      $   0.94      $   0.81      $  0.13            16
Diluted                                   0.34          0.31         0.03            10          0.94          0.81         0.13            16
Return on average assets                  1.04 %        0.98 %       6 BP             6          0.96 %        0.87 %       9 BP            10
Return on average equity                  8.19 %        7.55 %      64 BP             8          7.60 %        6.69 %      91 BP            14

Net interest income on a tax-equivalent basis for the three months ended September 30, 2012 was down $654 thousand, or 3% compared to the same period in 2011. The third quarter 2012 net interest margin on a tax-equivalent basis was 3.84%, a decrease of 31 basis points from 4.15% for the third quarter of 2011. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2012 was down $2.1 million or 3% compared to the same period in 2011. The tax equivalent net interest margin for the nine months ended September 30, 2012 was 3.92% compared to 4.21% for the same period in the prior year.

The provision for loan and lease losses decreased by $1.4 million and $6.7 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.

Non-interest income increased $1.9 million or 21% and $4.5 million or 18% during the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Non-interest expense increased $1.8 million or 10% and $6.1 million or 12% for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.

Gross loans and leases grew $23.1 million from December 31, 2011 and deposits grew $28.7 million from December 31, 2011.

Nonperforming loans and leases increased to $44.6 million at September 30, 2012 compared to $42.5 million at December 31, 2011. Nonperforming loans and leases were $42.6 million at September 30, 2011. Nonperforming loans and leases as a percentage of total loans and leases (held for investment and nonaccrual loans held for sale) were 3.03% at September 30, 2012 compared to 2.94% at December 31, 2011 and 2.96% at September 30, 2011. Net loan and lease charge-offs were $5.6 million for the three months ended September 30, 2012 compared to $5.2 million for the same period in the prior year. Net charge-offs for the nine months ended September 30, 2012 declined to $10.4 million compared to $14.2 million for the same period in the prior year. Charge-offs occurred primarily in the commercial, financial and agricultural and commercial real estate categories.

On May 31, 2012, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of the Javers Group, a full-service employee benefits agency that specializes in comprehensive human resource management, payroll and administrative services to businesses with 50 to 1,000 employees. The acquisition expands the Corporation's insurance and employee benefits business and further diversifies its solutions to include human resource consulting services and technology. The Corporation paid $3.2 million in cash at closing with additional contingent consideration to be paid in annual installments over the three-year period ended June 30, 2015 based on the achievement of certain levels of revenue. As of the acquisition date, the Corporation recorded the estimated fair value of the contingent payments of $842 thousand as additional goodwill and the liability is included in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 thousand to a maximum of $1.7 million over the next three years. As a result of the Javers Group acquisition, the Corporation recorded goodwill of $3.1 million (inclusive of contingent consideration) and customer related intangibles of $989 thousand.

Details of the changes in the various components of net income and the balance sheet are further discussed in the sections that follow.


Table of Contents

The Corporation earns its revenues primarily from the margins and fees it generates from loans and leases and depository services it provides as well as from trust fees and insurance and investment commissions. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board of Directors approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation is in a more asset sensitive position; although interest rates are expected to remain low for the foreseeable future, it anticipates increasing interest rates over the longer term, which it expects would benefit its net interest margin.

The Corporation seeks to establish itself as the financial provider of choice in the markets it serves. It plans to achieve this goal by offering a broad range of high quality financial products and services and by increasing market awareness of its brand and the benefits that can be derived from its products. The Corporation operates in an attractive market for financial services but also is in intense competition with domestic and international banking organizations and other insurance and investment providers for the financial services business. The Corporation has taken initiatives to achieve its business objectives by acquiring banks and other financial service providers in strategic markets, through marketing, public relations and advertising, by establishing standards of service excellence for its customers, and by using technology to ensure that the needs of its customers are understood and satisfied.

Results of Operations

Net Interest Income

Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation's revenue. Table 1 presents a summary of the Corporation's average balances, the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders' equity on a tax-equivalent basis for the three and nine months ended September 30, 2012 and 2011. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of net interest free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders' equity. Table 2 analyzes the changes in the tax-equivalent net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Investment Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.

Net interest income on a tax-equivalent basis for the three months ended September 30, 2012 decreased $654 thousand, or 3% compared to the same period in 2011. The tax-equivalent net interest margin for the three months ended September 30, 2012 decreased 31 basis points to 3.84% from 4.15% for the three months ended September 30, 2011. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2012 decreased $2.1 million, or 3% compared to the same period in 2011. The tax-equivalent net interest margin for the nine months ended September 30, 2012 decreased 29 basis points to 3.92% from 4.21% for the nine months ended September 30, 2011. The declines in net interest income and the net interest margin were primarily due to the re-investment of maturing and called investment securities with lower yielding investments, as a result of the lower interest rate environment and lower rates on commercial loans (including real estate loans) due to re-pricing and competitive pressures. The decline in net interest income and net interest margin was partially offset by re-pricing of certificates of deposits and savings account products. During the three months ended September 30, 2012, the Corporation increased its investments in government agencies, treasuries and corporate bonds with longer duration maturities as interest rate protection in the prolonged low rate interest environment.


Table of Contents

Table 1-Average Balances and Interest Rates-Tax-Equivalent Basis



                                                                Three Months Ended September 30,
                                                       2012                                         2011
                                        Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                  Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with
other banks                           $    52,214      $     45          0.34 %    $    46,109      $     25          0.22 %
U.S. Government obligations               156,885           508          1.29          129,263           509          1.56
Obligations of states and political
subdivisions                              121,612         1,696          5.55          112,935         1,720          6.04
Other debt and equity securities          196,026           846          1.72          167,178         1,347          3.20

Total interest-earning deposits and
investments                               526,737         3,095          2.34          455,485         3,601          3.14

Commercial, financial and
agricultural loans                        452,531         4,895          4.30          435,805         4,930          4.49
Real estate-commercial and
construction loans                        525,143         6,804          5.15          528,936         7,308          5.48
Real estate-residential loans             256,297         2,616          4.06          247,332         2,684          4.31
Loans to individuals                       42,991           602          5.57           42,358           594          5.56
Municipal loans and leases                129,651         1,748          5.36          132,494         1,919          5.74
Lease financings                           59,284         1,415          9.50           58,419         1,456          9.89

Gross loans and leases                  1,465,897        18,080          4.91        1,445,344        18,891          5.19

Total interest-earning assets           1,992,634        21,175          4.23        1,900,829        22,492          4.69

Cash and due from banks                    50,875                                       57,572
Reserve for loan and lease losses         (31,365 )                                    (34,104 )
Premises and equipment, net                34,002                                       34,257
Other assets                              168,137                                      154,892

Total assets                          $ 2,214,283                                  $ 2,113,446

Liabilities:
Interest-bearing checking deposits    $   230,462            40          0.07      $   210,499            57          0.11
Money market savings                      331,425           121          0.15          291,830           167          0.23
Regular savings                           514,205           187          0.14          483,341           349          0.29
Time deposits                             348,675         1,276          1.46          394,509         1,597          1.61

Total time and interest-bearing
deposits                                1,424,767         1,624          0.45        1,380,179         2,170          0.62

Short-term borrowings                     104,110            33          0.13          104,469            96          0.36
Long-term debt                                 -             -             -             5,000            48          3.81
Subordinated notes and capital
securities                                 21,732           301          5.51           23,240           307          5.24

Total borrowings                          125,842           334          1.06          132,709           451          1.35

Total interest-bearing liabilities      1,550,609         1,958          0.50        1,512,888         2,621          0.69

Demand deposits, non-interest
bearing                                   346,687                                      292,273
Accrued expenses and other
liabilities                                36,815                                       32,783

Total liabilities                       1,934,111                                    1,837,944

Shareholders' Equity:
Common stock                               91,332                                       91,332
Additional paid-in capital                 61,327                                       61,473
Retained earnings and other equity        127,513                                      122,697

Total shareholders' equity                280,172                                      275,502

Total liabilities and shareholders'
equity                                $ 2,214,283                                  $ 2,113,446

Net interest income                                    $ 19,217                                     $ 19,871

Net interest spread                                                      3.73                                         4.00
Effect of net interest-free funding
sources                                                                  0.11                                         0.15

Net interest margin                                                      3.84 %                                       4.15 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                128.51 %                                     125.64 %


Table of Contents
                                                                Nine Months Ended September 30,
                                                       2012                                         2011
                                        Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                  Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with
other banks                           $    55,358      $    121          0.29 %    $    24,076      $     40          0.22 %
U.S. Government obligations               148,422         1,519          1.37          150,902         1,865          1.65
Obligations of states and political
subdivisions                              119,634         5,092          5.69          110,730         5,153          6.22
Other debt and equity securities          192,833         3,069          2.13          169,453         4,403          3.47

Total interest-earning deposits and
investments                               516,247         9,801          2.54          455,161        11,461          3.37

Commercial, financial and
agricultural loans                        445,301        14,423          4.33          431,983        15,048          4.66
Real estate-commercial and
construction loans                        529,778        20,741          5.23          542,926        21,958          5.41
Real estate-residential loans             251,035         7,818          4.16          245,889         8,082          4.39
Loans to individuals                       43,803         1,856          5.66           42,428         1,817          5.73
Municipal loans and leases                133,557         5,450          5.45          128,202         5,529          5.77
Lease financings                           57,708         4,244          9.82           61,000         4,442          9.74

Gross loans and leases                  1,461,182        54,532          4.99        1,452,428        56,876          5.24

Total interest-earning assets           1,977,429        64,333          4.35        1,907,589        68,337          4.79

Cash and due from banks                    41,152                                       41,205
Reserve for loan and lease losses         (31,706 )                                    (33,506 )
Premises and equipment, net                34,231                                       34,393
Other assets                              168,485                                      155,561

Total assets                          $ 2,189,591                                  $ 2,105,242

Liabilities:
Interest-bearing checking deposits    $   227,775           138          0.08      $   204,619           180          0.12
Money market savings                      317,390           391          0.16          292,620           542          0.25
Regular savings                           505,451           634          0.17          482,026         1,186          0.33
Time deposits                             371,056         3,968          1.43          403,729         5,018          1.66

Total time and interest-bearing
deposits                                1,421,672         5,131          0.48        1,382,994         6,926          0.67

Short-term borrowings                     110,177           295          0.36          105,250           256          0.33
Long-term debt                                146             4          3.66            5,000           142          3.80
Subordinated notes and capital
securities                                 22,108           906          5.47           23,615           917          5.19

Total borrowings                          132,431         1,205          1.22          133,865         1,315          1.31

Total interest-bearing liabilities      1,554,103         6,336          0.54        1,516,859         8,241          0.73

Demand deposits, non-interest
bearing                                   319,176                                      283,124
Accrued expenses and other
liabilities                                38,682                                       32,966

Total liabilities                       1,911,961                                    1,832,949

Shareholders' Equity:
Common stock                               91,332                                       91,332
Additional paid-in capital                 61,352                                       61,452
Retained earnings and other equity        124,946                                      119,509

Total shareholders' equity                277,630                                      272,293

Total liabilities and shareholders'
equity                                $ 2,189,591                                  $ 2,105,242

Net interest income                                    $ 57,997                                     $ 60,096

Net interest spread                                                      3.81                                         4.06
Effect of net interest-free funding
sources                                                                  0.11                                         0.15

Net interest margin                                                      3.92 %                                       4.21 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                127.24 %                                     125.76 %

Notes: For rate calculation purposes, average loan and lease categories include unearned discount.
Nonaccrual loans and leases have been included in the average loan and lease balances.
Loans held for sale have been included in the average loan balances. Tax-equivalent amounts for the three and nine months ended September 30, 2012 and 2011 have been calculated using the Corporation's federal applicable rate of 35%.


Table of Contents

Table 2-Analysis of Changes in Net Interest Income

The rate-volume variance analysis set forth in the table below compares changes
in tax-equivalent net interest income for the periods indicated by their rate
and volume components. The change in interest income/expense due to both volume
and rate has been allocated proportionately.



                                               Three Months Ended September 30,               Nine Months Ended September 30,
                                                       2012 Versus 2011                               2012 Versus 2011
                                           Volume             Rate                         Volume            Rate
(Dollars in thousands)                     Change            Change          Total         Change           Change         Total
Interest income:
Interest-earning deposits with other
banks                                     $       4        $        16      $     20      $      65        $      16      $     81
U.S. Government obligations                      97                (98 )          (1 )          (31 )           (315 )        (346 )
Obligations of states and political
subdivisions                                    124               (148 )         (24 )          397             (458 )         (61 )
Other debt and equity securities                203               (704 )        (501 )          543           (1,877 )      (1,334 )

Interest on deposits, investments and
federal funds sold                              428               (934 )        (506 )          974           (2,634 )      (1,660 )

Commercial, financial and agricultural
loans and leases                                182               (217 )         (35 )          458           (1,083 )        (625 )
Real estate-commercial and construction
loans                                           (53 )             (451 )        (504 )         (513 )           (704 )      (1,217 )
Real estate-residential loans                    94               (162 )         (68 )          166             (430 )        (264 )
. . .
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