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UVSP > SEC Filings for UVSP > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for UNIVEST CORP OF PENNSYLVANIA

Form 10-Q for UNIVEST CORP OF PENNSYLVANIA


8-Nov-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). The Corporation's former subsidiary, Univest Delaware, Inc., was dissolved in the second quarter of 2013.

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.


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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
                                     2013         2012        Amount       Percent         2013          2012        Amount       Percent
(Dollars in thousands, except per
share data)
Net income                          $ 6,039      $ 5,770      $   269             5 %    $ 16,267      $ 15,796      $   471             3 %
Net income per share:
Basic                               $  0.36      $  0.34      $  0.02             6      $   0.97      $   0.94      $  0.03             3
Diluted                                0.36         0.34         0.02             6          0.97          0.94         0.03             3
Return on average assets               1.07 %       1.04 %        3BP             3          0.97 %        0.96 %       1 BP             1
Return on average equity               8.55 %       8.19 %       36BP             4          7.67 %        7.60 %       7 BP             1

Net interest income on a tax-equivalent basis for the three months ended September 30, 2013 increased $318 thousand, or 2% compared to the same period in 2012. The third quarter 2013 net interest margin on a tax-equivalent basis was 3.84%, consistent with the third quarter of 2012. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2013 was consistent compared to the same period in 2012. The tax equivalent net interest margin for the nine months ended September 2013 was 3.84% compared to 3.92% for the same period in the prior year.

The provision for loan and lease losses increased by $1.9 million and $2.0 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012.

Non-interest income increased $2.3 million, or 22% and $5.8 million, or 19% during the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. Non-interest expense increased $930 thousand, or 5% and $2.9 million, or 5% for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012.

Gross loans and leases grew $44.4 million or 3% from December 31, 2012 and deposits increased $23.7 million from December 31, 2012.

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications decreased to $24.0 million at September 30, 2013 from $32.1 million at December 31, 2012 and $30.5 million at September 30, 2012. Nonaccrual loans and leases as a percentage of total loans and leases (held for investment and non-accrual loans held for sale) was 1.57% at September 30, 2013 compared to 2.17% at December 31, 2012 and 2.07% at September 30, 2012. Net loan and lease charge-offs declined by $1.6 million and $902 thousand for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012.

On May 1, 2013, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of John T. Fretz Insurance Agency, Inc., a full-service property and casualty insurance agency providing solutions to both personal and commercial clients. The Corporation paid $2.2 million in cash at closing with additional contingent consideration to be paid in annual installments over the three-year period ending April 30, 2016 based on the achievement of certain levels of revenue. At the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $454 thousand in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $930 thousand cumulative over the next three years. As a result of the John T. Fretz Insurance Agency, Inc. acquisition, the Corporation recorded goodwill of $1.3 million (inclusive of contingent consideration) and customer related intangibles of $1.3 million.

During the third quarter of 2013, the Corporation repurchased 395,000 shares of common stock at a cost of $7.4 million under its 2007 Board approved share repurchase program. At September 30, 2013, this share repurchase plan was substantially completed. Total shares outstanding at September 30, 2013 were 16,288,597. On October 23, 2013, the Corporation's Board of Directors approved a new share repurchase program for the repurchase of up to 800,000 shares, or approximately 5% of the shares outstanding.


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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; despite increases in the first nine months of 2013, interest rates remain at historically low levels, however, the Corporation anticipates further increases in 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, 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.

Three months ended September 30, 2013 versus 2012

Net interest income on a tax-equivalent basis for the three months ended September 30, 2013 increased $318 thousand, or 2% compared to the same period in 2012. The tax-equivalent net interest margin for the three months ended September 30, 2013 was 3.84%, consistent with the same period in 2012. While the tax-equivalent yield on average interest-earning assets declined 16 basis points for the three months ended September 30, 2013 compared to the same period in the prior year, the rate on interest-bearing liabilities was down 20 basis points compared to the same period. The decline in rate on interest-bearing liabilities was attributable to the Corporation's decision to redeem its trust preferred securities and terminate the related interest rate swap and an overall decline in rates paid on time and interest bearing deposits.

Nine months ended September 30, 2013 versus 2012

Net interest income on a tax-equivalent basis for the nine months ended September 30, 2013 was consistent with the same period in 2012. The tax-equivalent net interest margin for the nine months ended September 30, 2013 decreased 8 basis points to 3.84% from 3.92% for the nine months ended September 30, 2012. The decline in the year-to-date net interest margin from the comparable period in the prior year was primarily due to the re-investment


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of maturing and called investment securities into lower yielding investments. In addition, lower rates on commercial and residential real estate loans due to re-pricing and the competitive environment contributed to the decline. Favorable re-pricing of savings accounts, customer repurchase agreements and certificates of deposit, along with maturities of higher yielding certificates of deposit, partially offset the decline in the year-to-date net interest margin.

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



                                                                   Three Months Ended September 30,
                                                          2013                                         2012
                                           Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                     Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with other
banks                                    $    30,842      $     25          0.32 %    $    52,214      $     45          0.34 %
U.S. government obligations                  175,753           484          1.09          156,885           508          1.29
Obligations of states and political
subdivisions                                 117,166         1,589          5.38          121,612         1,696          5.55
Other debt and equity securities             186,523           907          1.93          196,026           846          1.72

Total interest-earning deposits and
investments                                  510,284         3,005          2.34          526,737         3,095          2.34

Commercial, financial and agricultural
loans                                        395,251         4,062          4.08          452,531         4,895          4.30
Real estate-commercial and
construction loans                           590,967         7,071          4.75          525,143         6,804          5.15
Real estate-residential loans                261,586         2,463          3.74          256,297         2,616          4.06
Loans to individuals                          42,483           587          5.48           42,991           602          5.57
Municipal loans and leases                   147,505         1,875          5.04          129,651         1,748          5.36
Lease financings                              69,058         1,610          9.25           59,284         1,415          9.50

Gross loans and leases                     1,506,850        17,668          4.65        1,465,897        18,080          4.91

Total interest-earning assets              2,017,134        20,673          4.07        1,992,634        21,175          4.23

Cash and due from banks                       39,988                                       50,875
Reserve for loan and lease losses            (25,404 )                                    (31,365 )
Premises and equipment, net                   33,157                                       34,002
Other assets                                 168,249                                      168,137

Total assets                             $ 2,233,124                                  $ 2,214,283

Liabilities:
Interest-bearing checking deposits       $   323,165            46          0.06      $   230,462            40          0.07
Money market savings                         306,937            73          0.09          331,425           121          0.15
Regular savings                              545,134            80          0.06          514,205           187          0.14
Time deposits                                294,844           920          1.24          348,675         1,276          1.46

Total time and interest-bearing
deposits                                   1,470,080         1,119          0.30        1,424,767         1,624          0.45

Short-term borrowings                         44,516             8          0.07          104,110            33          0.13
Subordinated notes and capital
securities                                     1,569            11          2.78           21,732           301          5.51

Total borrowings                              46,085            19          0.16          125,842           334          1.06

Total interest-bearing liabilities         1,516,165         1,138          0.30        1,550,609         1,958          0.50

Demand deposits, non-interest bearing        405,498                                      346,687
Accrued expenses and other liabilities        31,216                                       36,815

Total liabilities                          1,952,879                                    1,934,111

Shareholders' Equity:
Common stock                                  91,332                                       91,332
Additional paid-in capital                    64,866                                       61,327
Retained earnings and other equity           124,047                                      127,513

Total shareholders' equity                   280,245                                      280,172

Total liabilities and shareholders'
equity                                   $ 2,233,124                                  $ 2,214,283

Net interest income                                       $ 19,535                                     $ 19,217

Net interest spread                                                         3.77                                         3.73
Effect of net interest-free funding
sources                                                                     0.07                                         0.11

Net interest margin                                                         3.84 %                                       3.84 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                   133.04 %                                     128.51 %


Table of Contents
                                                                   Nine Months Ended September 30,
                                                          2013                                         2012
                                           Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                     Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with other
banks                                    $    37,730      $    106          0.38 %    $    55,358      $    121          0.29 %
U.S. government obligations                  176,095         1,449          1.10          148,422         1,519          1.37
Obligations of states and political
subdivisions                                 120,435         4,774          5.30          119,634         5,092          5.69
Other debt and equity securities             193,949         2,746          1.89          192,833         3,069          2.13

Total interest-earning deposits and
investments                                  528,209         9,075          2.30          516,247         9,801          2.54

Commercial, financial and agricultural
loans                                        412,233        13,093          4.25          445,301        14,423          4.33
Real estate-commercial and
construction loans                           570,209        20,575          4.82          529,778        20,741          5.23
Real estate-residential loans                257,170         7,354          3.82          251,035         7,818          4.16
Loans to individuals                          42,519         1,784          5.61           43,803         1,856          5.66
Municipal loans and leases                   139,827         5,334          5.10          133,557         5,450          5.45
Lease financings                              67,860         4,738          9.33           57,708         4,244          9.82

Gross loans and leases                     1,489,818        52,878          4.75        1,461,182        54,532          4.99

Total interest-earning assets              2,018,027        61,953          4.10        1,977,429        64,333          4.35

Cash and due from banks                       47,242                                       41,152
Reserve for loan and lease losses            (25,627 )                                    (31,706 )
Premises and equipment, net                   32,938                                       34,231
Other assets                                 166,334                                      168,485

Total assets                             $ 2,238,914                                  $ 2,189,591

Liabilities:
Interest-bearing checking deposits       $   277,673           119          0.06      $   227,775           138          0.08
Money market savings                         318,406           231          0.10          317,390           391          0.16
Regular savings                              538,764           234          0.06          505,451           634          0.17
Time deposits                                307,134         2,930          1.28          371,056         3,968          1.43

Total time and interest-bearing
deposits                                   1,441,977         3,514          0.33        1,421,672         5,131          0.48

Short-term borrowings                         82,318            40          0.06          110,177           295          0.36
Long-term debt                                    -             -             -               146             4          3.66
Subordinated notes and capital
securities                                    14,319           483          4.51           22,108           906          5.47

Total borrowings                              96,637           523          0.72          132,431         1,205          1.22

Total interest-bearing liabilities         1,538,614         4,037          0.35        1,554,103         6,336          0.54

Demand deposits, non-interest bearing        383,514                                      319,176
Accrued expenses and other liabilities        33,374                                       38,682

Total liabilities                          1,955,502                                    1,911,961

Shareholders' Equity:
Common stock                                  91,332                                       91,332
Additional paid-in capital                    64,756                                       61,352
Retained earnings and other equity           127,324                                      124,946

Total shareholders' equity                   283,412                                      277,630

Total liabilities and shareholders'
equity                                   $ 2,238,914                                  $ 2,189,591

Net interest income                                       $ 57,916                                     $ 57,997

Net interest spread                                                         3.75                                         3.81
Effect of net interest-free funding
sources                                                                     0.09                                         0.11

Net interest margin                                                         3.84 %                                       3.92 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                   131.16 %                                     127.24 %

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


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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,
                                                         2013 Versus 2012                               2013 Versus 2012
                                               Volume             Rate                        Volume            Rate
(Dollars in thousands)                         Change            Change         Total         Change           Change        Total
Interest income:
Interest-earning deposits with other banks   $      (17 )      $        (3 )    $  (20 )    $      (45 )      $     30      $    (15 )
U.S. government obligations                          58                (82 )       (24 )           258            (328 )         (70 )
Obligations of states and political
subdivisions                                        (58 )              (49 )      (107 )            34            (352 )        (318 )
Other debt and equity securities                    (41 )              102          61              18            (341 )        (323 )

Interest on deposits and investments                (58 )              (32 )       (90 )           265            (991 )        (726 )

Commercial, financial and agricultural
loans                                              (594 )             (239 )      (833 )        (1,065 )          (265 )      (1,330 )
. . .
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