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UVSP > SEC Filings for UVSP > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for UNIVEST CORP OF PENNSYLVANIA

Form 10-Q for UNIVEST CORP OF PENNSYLVANIA


9-May-2014

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 2013 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 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. In January 2014, Delview completed the acquisition of Girard Partners, a registered investment advisory firm, headquartered in King of Prussia, Pennsylvania with two satellite offices in Virginia and Florida. 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
(Dollars in thousands, except per share data)       2014             2013          Amount         Percent
Net income                                        $   5,726         $ 5,398        $   328               6 %
Net income per share:
Basic                                             $    0.35         $  0.32        $  0.03               9
Diluted                                                0.35            0.32           0.03               9
Return on average assets                               1.07 %          0.98 %         9 BP               9
Return on average equity                               8.22            7.67          55 BP               7

Net interest income on a tax-equivalent basis of $19.2 million for the three months ended March 31, 2014 increased $106 thousand, or 1% compared to the same period in 2013. The net interest margin on a tax-equivalent basis for the first quarter of 2014 was 3.96%, an increase of 14 basis points compared to 3.82% for the first quarter of 2013.

The provision for loan and lease losses for the three months ended March 31, 2014 was $1.5 million, a decrease of $599 thousand, or 29% compared to the same period in 2013.

Noninterest income for the three months ended March 31, 2014 was $12.1 million, an increase of $666 thousand, or 6% from the comparable period in the prior year. Noninterest expense for the three months ended March 31, 2014 was $20.9 million, an increase of $647 thousand, or 3% compared to the same period in the prior year.

Gross loans and leases held for investment increased $19.0 million, or 1% from December 31, 2013. Deposits declined $4.7 million from December 31, 2013.

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications, decreased to $19.3 million at March 31, 2014 from $23.2 million at December 31, 2013 and $28.9 million at March 31, 2013. Nonaccrual loans and leases as a percentage of total loans and leases held for investment was 1.24% at March 31, 2014 compared to 1.51% at December 31, 2013 and 1.94% at March 31, 2013. Net loan and lease charge-offs were $1.4 million during the three months ended March 31, 2014, compared to $1.6 million for the same period in 2013.

On January 27, 2014, the Corporation completed the acquisition of Girard Partners, a registered investment advisory firm with more than $500 million in assets under management. The Corporation increased its assets under management to over $3.0 billion at the acquisition date and expanded its advisory capabilities. The Corporation paid $5.4 million in cash at closing with additional contingent consideration to be paid in annual installments over the five-year period ending December 31, 2018 based on the achievement of certain levels of EBITDA (earnings before interest, taxes, depreciation and amortization). As of the effective date of the acquisition, January 1, 2014, the Corporation recorded the estimated fair value of the contingent consideration of $5.5 million in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the next five years. As a result of the Girard Partners acquisition, the Corporation recorded goodwill of $6.8 million (inclusive of the contingent consideration) and customer related intangibles of $4.3 million.

During the first quarter of 2014, the Corporation repurchased 110,671 shares of common stock at a cost of $2.0 million under its 2013 Board approved share repurchase program. Shares available for future repurchases under the plan totaled 689,329 at March 31, 2014. Total shares outstanding at March 31, 2014 were 16,249,152.

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 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 a general increase in interest rates over the last several quarters, 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 months ended March 31, 2014 and 2013. 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 March 31, 2014 versus 2013

Net interest income on a tax-equivalent basis for the three months ended March 31, 2014 was $19.2 million, an increase of $106 thousand, or 1% compared to the same period in 2013. The tax-equivalent net interest margin for the three months ended March 31, 2014 increased 14 basis points to 3.96% from 3.82% for the three months ended March 31, 2013. The increase in the first quarter net interest margin from the prior year was primarily attributable to the redemption of the Corporation's trust preferred securities and termination of the related interest rate swap during the second quarter of 2013, maturities of higher yielding time deposits, a decline in the rate paid on time deposits and a reduction in lower yielding investment securities.


Table of Contents

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



                                                                   Three Months Ended March 31,
                                                        2014                                         2013
                                         Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                   Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with other
banks                                  $    25,403      $     14          0.22 %    $    48,347      $     35          0.29 %
U.S. government obligations                131,302           331          1.02          174,408           477          1.11
Obligations of states and political
subdivisions                               107,756         1,456          5.48          121,686         1,579          5.26
Other debt and equity securities           151,572           720          1.93          200,938           895          1.81

Total interest-earning deposits and
investments                                416,033         2,521          2.46          545,379         2,986          2.22

Commercial, financial and
agricultural loans                         392,173         3,898          4.03          438,434         4,676          4.33
Real estate-commercial and
construction loans                         591,064         6,888          4.73          544,865         6,658          4.96
Real estate-residential loans              282,002         2,558          3.68          257,435         2,455          3.87
Loans to individuals                        38,646           584          6.13           42,781           596          5.65
Municipal loans and leases                 175,149         2,121          4.91          134,450         1,716          5.18
Lease financings                            71,312         1,632          9.28           66,078         1,557          9.56

Gross loans and leases                   1,550,346        17,681          4.63        1,484,043        17,658          4.83

Total interest-earning assets            1,966,379        20,202          4.17        2,029,422        20,644          4.13

Cash and due from banks                     29,949                                       32,275
Reserve for loan and lease losses          (25,326 )                                    (25,245 )
Premises and equipment, net                 34,250                                       33,046
Other assets                               167,299                                      163,649

Total assets                           $ 2,172,551                                  $ 2,233,147

Liabilities:
Interest-bearing checking deposits     $   313,666            43          0.06      $   244,089            36          0.06
Money market savings                       289,101            67          0.09          325,677            80          0.10
Regular savings                            543,107            79          0.06          534,701            76          0.06
Time deposits                              268,952           803          1.21          323,982         1,048          1.31

Total time and interest-bearing
deposits                                 1,414,826           992          0.28        1,428,449         1,240          0.35

Short-term borrowings                       39,631             6          0.06          102,444            17          0.07
Subordinated notes and capital
securities                                      -             -             -            20,982           289          5.59

Total borrowings                            39,631             6          0.06          123,426           306          1.01

Total interest-bearing liabilities       1,454,457           998          0.28        1,551,875         1,546          0.40

Noninterest-bearing deposits               408,763                                      361,659
Accrued expenses and other
liabilities                                 26,757                                       34,055

Total liabilities                        1,889,977                                    1,947,589

Shareholders' Equity:
Common stock                                91,332                                       91,332
Additional paid-in capital                  65,270                                       64,721
Retained earnings and other equity         125,972                                      129,505

Total shareholders' equity                 282,574                                      285,558

Total liabilities and shareholders'
equity                                 $ 2,172,551                                  $ 2,233,147

Net interest income                                     $ 19,204                                     $ 19,098

Net interest spread                                                       3.89                                         3.73
Effect of net interest-free funding
sources                                                                   0.07                                         0.09

Net interest margin                                                       3.96 %                                       3.82 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                 135.20 %                                     130.27 %

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, 2014 and 2013 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,
                                                                  2014 Versus 2013
                                                       Volume             Rate
(Dollars in thousands)                                 Change            Change          Total
Interest income:
Interest-earning deposits with other banks            $     (14 )       $      (7 )      $  (21 )
U.S. government obligations                                (110 )             (36 )        (146 )
Obligations of states and political subdivisions           (187 )              64          (123 )
Other debt and equity securities                           (231 )              56          (175 )

Interest on deposits and investments                       (542 )              77          (465 )

Commercial, financial and agricultural loans               (470 )            (308 )        (778 )
Real estate-commercial and construction loans               548              (318 )         230
Real estate-residential loans                               227              (124 )         103
Loans to individuals                                        (61 )              49           (12 )
Municipal loans and leases                                  499               (94 )         405
Lease financings                                            122               (47 )          75

Interest and fees on loans and leases                       865              (842 )          23

Total interest income                                       323              (765 )        (442 )

Interest expense:
Interest-bearing checking deposits                            7                -              7
Money market savings                                         (7 )              (6 )         (13 )
Regular savings                                               3                -              3
Time deposits                                              (169 )             (76 )        (245 )

Interest on time and interest-bearing deposits             (166 )             (82 )        (248 )

Short-term borrowings                                        (9 )              (2 )         (11 )
Subordinated notes and capital securities                  (289 )              -           (289 )

Interest on borrowings                                     (298 )              (2 )        (300 )

Total interest expense                                     (464 )             (84 )        (548 )

Net interest income                                   $     787         $    (681 )      $  106

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, 2014 and 2013 have been calculated using the Corporation's federal applicable rate of 35%.

Interest Income

Three months ended March 31, 2014 versus 2013

Interest income on a tax-equivalent basis for the three months ended March 31, 2014 was $20.2 million, a decrease of $442 thousand, or 2% from the same period in 2013. The decrease was primarily due to lower rates on loans and a reduction in lower yielding investment securities partially offset by loan growth. The lower rates on loans were primarily in the commercial business, commercial real estate and residential real estate loan categories due to re-pricing and the competitive environment. Growth in commercial real estate loans, residential real estate loans and municipal loans and leases was partially offset by lower commercial business loan outstandings.


Table of Contents

Interest Expense

Three months ended March 31, 2014 versus 2013

Interest expense for the three months ended March 31, 2014 was $1.0 million, a decrease of $548 thousand, or 35% from the comparable period in 2013. The decrease was mainly attributable to the redemption of the Corporation's trust preferred securities and termination of the related interest rate swap during the second quarter of 2013, maturities of higher yielding time deposits and a decline in rates paid on time deposits. The average rate paid on borrowings declined by 95 basis points and the average cost of deposits declined by 7 basis points. For the three months ended March 31, 2014, the Corporation experienced decreases in average time deposits of $55.0 million and money market savings of $36.6 million partially offset by increases in average interest-bearing checking of $69.6 million and regular savings of $8.4 million. The lower interest rate environment continued to result in a shift in consumer deposits from time deposits to noninterest-bearing and regular savings deposits. The increase in interest-bearing checking deposits was primarily due to a product change for existing business and municipal customers which resulted in $68.1 million of customer repurchase agreements, classified as borrowings, being transferred to interest-bearing demand deposits during the second quarter of 2013.

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, 2014 and 2013 was $1.5 million and $2.1 million, respectively.

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, loss on termination of interest rate swap 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 noninterest income includes other miscellaneous income.

The following table presents noninterest income for the periods indicated:

                                                     Three Months Ended
                                                          March 31,                        Change
(Dollars in thousands)                               2014            2013          Amount          Percent
Trust fee income                                  $    1,899       $  1,734       $    165               10 %
Service charges on deposit accounts                    1,014          1,086            (72 )             (7 )
Investment advisory commission and fee income          3,049          1,896          1,153               61
Insurance commission and fee income                    3,332          2,523            809               32
Other service fee income                               1,807          1,698            109                6
Bank owned life insurance income                         378            504           (126 )            (25 )
Net gain on sales of securities                          142            185            (43 )            (23 )
Net gain on mortgage banking activities                  349          1,696         (1,347 )            (79 )
Other                                                    171            153             18               12

Total noninterest income                          $   12,141       $ 11,475       $    666                6

. . .

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