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UVSP > SEC Filings for UVSP > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for UNIVEST CORP OF PENNSYLVANIA | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNIVEST CORP OF PENNSYLVANIA


9-May-2013

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" equates to "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 at 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 2012 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 Bank is engaged in the general commercial banking business and provides a full range of banking 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., an equipment financing 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
                                                       March 31,                     Change
                                                  2013           2012         Amount       Percent
(Dollars in thousands, except per share data)
Net income                                      $   5,398       $ 5,263      $    135             3 %
Net income per share:
Basic                                           $    0.32       $  0.31      $   0.01             3
Diluted                                              0.32          0.31          0.01             3
Return on average assets                             0.98 %        0.97 %        1 BP             1
Return on average equity                             7.67 %        7.70 %      (3) BP            -

Net interest income on a tax-equivalent basis for the three months ended March 31, 2013 decreased $292 thousand, or 2% compared to the same period in 2012. The first quarter 2013 net interest margin on a tax-equivalent basis was 3.83%, a decrease of 12 basis points from 3.95% for the first quarter of 2012.

The provision for loan and lease losses was down $2.0 million, or 49% for the three months ended March 31, 2013 compared to the same period in 2012.

Non-interest income increased $454 thousand, or 4% during the three months ended March 31, 2013 compared to the same period in 2012. Non-interest expense increased $1.4 million, or 7% for the three months ended March 31, 2013 compared to the same period in 2012.

Gross loans and leases grew $5.5 million from December 31, 2012 and deposits decreased $50.7 million from December 31, 2012.

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications decreased to $28.9 million at March 31, 2013 compared to $32.1 million at December 31, 2012 and $36.3 million at March 31, 2012. Nonaccrual loans and leases as a percentage of total loans and leases held for investment were 1.94% at March 31, 2013 compared to 2.17% at December 31, 2012 and 2.48% at March 31, 2012. Net loan and lease charge-offs declined to $1.6 million for the three months ended March 31, 2013 compared to $3.4 million for the same period in the prior year. Charge-offs occurred primarily in the commercial, financial and agricultural and commercial real estate categories.

During the first quarter of 2013, the Corporation implemented a company-wide restructuring plan which reduced staffing levels by 3.4% and included the announced closure and consolidation of its Silverdale financial service center, effective May 3, 2013, into the Hilltown and Perkasie locations,. As a result, the Corporation recorded $539 thousand in restructuring charges during the three months ended March 31, 2013, which consisted of $437 thousand in severance and $102 thousand in fixed asset retirement expenses.

During the first quarter of 2013, the Corporation repurchased 61 thousand shares of common stock at a cost of $1.0 million under the board approved stock repurchase program. Shares available for future repurchases under the plan totaled 481 thousand at March 31, 2013. Total shares outstanding at March 31, 2013 were 16,762,695.

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

The Corporation earns its revenues primarily from the margins and fees it generates from the lending and depository services it provides as well as fee-based income from trust, insurance, mortgage banking and investment services to customers. 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.


Table of Contents

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 months ended March 31, 2013 and 2012. 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 March 31, 2013 decreased $292 thousand, or 2% compared to the same period in 2012. The tax-equivalent net interest margin for the three months ended March 31, 2013 decreased 12 basis points to 3.83% from 3.95% for the three months ended March 31, 2012. The declines in net interest income and net interest margin were primarily due to the re-investment of maturing and called investment securities into lower yielding investments as a result of the lower interest rate environment and lower rates on commercial and residential real estate loans due to re-pricing and competitive pressures. The decline in net interest income and net interest margin were partially offset by favorable re-pricing of savings accounts and certificates of deposit.


Table of Contents

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



                                                                     Three Months Ended March 31,
                                                          2013                                         2012
                                           Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                     Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with other
banks                                    $    40,552      $     35          0.35 %    $    59,453      $     38          0.26 %
U.S. Government obligations                  174,408           477          1.11          147,146           519          1.42
Obligations of states and political
subdivisions                                 121,686         1,579          5.26          116,918         1,708          5.88
Other debt and equity securities             200,938           895          1.81          193,447         1,234          2.57

Total interest-earning deposits and
investments                                  537,584         2,986          2.25          516,964         3,499          2.72

Commercial, financial and agricultural
loans                                        438,434         4,676          4.33          440,906         4,742          4.33
Real estate-commercial and
construction loans                           544,865         6,658          4.96          534,079         6,988          5.26
Real estate-residential loans                257,435         2,455          3.87          247,295         2,605          4.24
Loans to individuals                          42,781           596          5.65           44,497           630          5.69
Municipal loans and leases                   134,450         1,716          5.18          133,896         1,821          5.47
Lease financings                              66,078         1,557          9.56           56,647         1,372          9.74

Gross loans and leases                     1,484,043        17,658          4.83        1,457,320        18,158          5.01

Total interest-earning assets              2,021,627        20,644          4.14        1,974,284        21,657          4.41

Cash and due from banks                       40,070                                       34,956
Reserve for loan and lease losses            (25,245 )                                    (31,908 )
Premises and equipment, net                   33,046                                       34,299
Other assets                                 163,649                                      168,820

Total assets                             $ 2,233,147                                  $ 2,180,451

Liabilities:
Interest-bearing checking deposits       $   244,089            36          0.06      $   220,360            57          0.10
Money market savings                         325,677            80          0.10          310,878           148          0.19
Regular savings                              534,701            76          0.06          498,572           264          0.21
Time deposits                                323,982         1,048          1.31          400,433         1,384          1.39

Total time and interest-bearing
deposits                                   1,428,449         1,240          0.35        1,430,243         1,853          0.52

Short-term borrowings                        102,444            17          0.07          118,255           106          0.36
Long-term debt                                    -             -             -               440             4          3.66
Subordinated notes and capital
securities                                    20,982           289          5.59           22,486           304          5.44

Total borrowings                             123,426           306          1.01          141,181           414          1.18

Total interest-bearing liabilities         1,551,875         1,546          0.40        1,571,424         2,267          0.58

Demand deposits, non-interest bearing        361,659                                      294,067
Accrued expenses and other liabilities        34,055                                       39,889

Total liabilities                          1,947,589                                    1,905,380

Shareholders' Equity:
Common stock                                  91,332                                       91,332
Additional paid-in capital                    64,721                                       61,402
Retained earnings and other equity           129,505                                      122,337

Total shareholders' equity                   285,558                                      275,071

Total liabilities and shareholders'
equity                                   $ 2,223,147                                  $ 2,180,451

Net interest income                                       $ 19,098                                     $ 19,390

Net interest spread                                                         3.74                                         3.83
Effect of net interest-free funding
sources                                                                     0.09                                         0.12

Net interest margin                                                         3.83 %                                       3.95 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                   130.27 %                                     125.64 %

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 months ended March 31, 2013 and 2012 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 March 31,
                                                             2013 Versus 2012
                                                    Volume          Rate
(Dollars in thousands)                              Change         Change        Total
Interest income:
Interest-earning deposits with other banks         $    (14 )     $     11      $     (3 )
U.S. Government obligations                              84           (126 )         (42 )
Obligations of states and political subdivisions         64           (193 )        (129 )
Other debt and equity securities                         45           (384 )        (339 )

Interest on deposits and investments                    179           (692 )        (513 )

Commercial, financial and agricultural loans            (66 )           -            (66 )
Real estate-commercial and construction loans           121           (451 )        (330 )
Real estate-residential loans                            97           (247 )        (150 )
Loans to individuals                                    (29 )           (5 )         (34 )
Municipal loans and leases                                6           (111 )        (105 )
Lease financings                                        212            (27 )         185

Interest and fees on loans and leases                   341           (841 )        (500 )

Total interest income                                   520         (1,533 )      (1,013 )

Interest expense:
Interest-bearing checking deposits                        5            (26 )         (21 )
Money market savings                                      7            (75 )         (68 )
Regular savings                                          17           (205 )        (188 )
Time deposits                                          (257 )          (79 )        (336 )

Interest on time and interest-bearing deposits         (228 )         (385 )        (613 )

Short-term borrowings                                   (13 )          (76 )         (89 )
Long-term debt                                           (4 )           -             (4 )
Subordinated notes and capital securities               (22 )            7           (15 )

Interest on borrowings                                  (39 )          (69 )        (108 )

Total interest expense                                 (267 )         (454 )        (721 )

Net interest income                                $    787       $ (1,079 )    $   (292 )

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 months ended March 31, 2013 and 2012 have been calculated using the Corporation's federal applicable rate of 35%.

Interest Income

Three months ended March 31, 2013 versus 2012

Interest income on a tax-equivalent basis for the three months ended March 31, 2013 decreased $1.0 million, or 5% from the same period in 2012. This decrease was mainly due to a 47 basis point decrease in the average rate earned on investment securities and deposits at other banks and an 18 basis point decrease in the average rate earned on loans. The decline in interest income on investment securities and deposits at other banks of $513 thousand for the three months ended March 31, 2013 compared to the same period in 2012 was mostly due to maturities, pay-downs and calls of investment securities and their replacement with lower yielding investments due to the lower interest rate environment. Interest and fees on loans and leases declined by $500 thousand during the three months ended March 31, 2013 compared to the same period in 2012. The Corporation experienced decreases in the average rates on commercial and residential real estate loans due to re-pricing and competitive pressures. These unfavorable variances were partially offset by growth in lease financings and commercial and residential real estate loans.


Table of Contents

Interest Expense

Three months ended March 31, 2013 versus 2012

Interest expense for the three months ended March 31, 2013 decreased $721 thousand, or 32% from the comparable period in 2012. This decrease was mainly due to a 17 basis point decrease in the Corporation's average cost of deposits largely attributable to re-pricing of savings accounts and time deposits and a $76.5 million decrease in average time deposits. For the three months ended March 31, 2013, interest expense on savings accounts decreased $256 thousand and time deposits decreased by $336 thousand. For the three months ended March 31, 2013, average time deposits decreased by $76.5 million partially offset by increases in average interest-bearing checking of $23.7 million, money market savings of $14.8 million and regular savings of $36.1 million. The Corporation's focus on growing low cost core deposits by attaining new customers and the lower interest rate environment has resulted in a shift in customer deposits from time deposits to savings and interest-bearing checking accounts.

Provision for Loan and Lease Losses

The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Loans are also reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans' initial effective interest rates. Any of the above criteria may cause the reserve to fluctuate. The provision for the three months ended March 31, 2013 and 2012 was $2.1 million and $4.1 million, respectively. The year-to-date decline in the provision was primarily the result of the migration and resolution of loans through the loan workout process and a decrease in loss factors for commercial real estate loans.

Noninterest Income

Noninterest income consists of trust department fee income, service charges on deposit accounts, commission income, net gains (losses) on sales of securities, net gains (losses) on mortgage banking activities, net gains (losses) on sales and write-downs of other real estate owned and other miscellaneous types of income. Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank's customer debit card usage (Mastermoney fees), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Bank owned life insurance income represents changes in the cash surrender value of bank-owned life insurance policies, which is affected by the market value of the underlying assets, and also includes any excess proceeds from death benefit claims. The net gain (loss) on mortgage banking activities consists of gains (losses) on sales of mortgages held for sale and fair value adjustments on interest-rate locks and forward loan sale commitments. Other non-interest income includes other miscellaneous income.

The following table presents noninterest income for the periods indicated:

                                                 Three Months Ended
                                                     March  31,                       Change
(Dollars in thousands)                           2013           2012          Amount         Percent
Trust fee income                              $    1,734      $  1,625       $    109               7 %
Service charges on deposit accounts                1,086         1,100            (14 )            (1 )
Investment advisory commission and fee
income                                             1,701         1,256            445              35
Insurance commission and fee income                2,718         2,267            451              20
Other service fee income                           1,698         1,522            176              12
Bank owned life insurance income                     504         1,506         (1,002 )           (67 )
Other-than-temporary impairment on equity
securities                                            -             (3 )            3             N/M
Net gain on sales of investment securities           185           258            (73 )           (28 )
Net gain on mortgage banking activities            1,696         1,272            424              33
Net loss on sales and write-downs of other
real estate owned                                     -            (31 )           31             N/M
Other                                                153           249            (96 )           (39 )

Total noninterest income                      $   11,475      $ 11,021       $    454               4


Table of Contents

Three months ended March 31, 2013 versus 2012

Noninterest income for the three months ended March 31, 2013 was $11.5 million, . . .

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