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UVSP > SEC Filings for UVSP > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for UNIVEST CORP OF PENNSYLVANIA

Form 10-Q for UNIVEST CORP OF PENNSYLVANIA


8-Aug-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 and consumer 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, Univest Investments, Inc., a full-service broker-dealer and investment advisory firm and Girard Partners (Girard), a registered investment advisory firm acquired in January 2014. 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                                        Six Months Ended
                                          June 30,                      Change                     June 30,                    Change
(Dollars in thousands, except
per share data)                    2014             2013         Amount       Percent         2014          2013        Amount       Percent
Net income                       $   5,080       $    4,830      $   250             5 %    $ 10,806      $ 10,228      $   578             6 %
Net income per share:
Basic                            $    0.31       $     0.29      $  0.02             7      $   0.67      $   0.61      $  0.06            10
Diluted                               0.31             0.29         0.02             7          0.66          0.61         0.05             8
Return on average assets              0.94 %           0.86 %       8 BP             9          1.00 %        0.92 %       8 BP             9
Return on average equity              7.14 %           6.81 %      33 BP             5          7.67 %        7.24 %      43 BP             6

Net interest income on a tax-equivalent basis of $19.0 million for the three months ended June 30, 2014 decreased $316 thousand, or 2% compared to the same period in 2013. The net interest margin on a tax-equivalent basis for the second quarter of 2014 was 3.86%, an increase of 8 basis points compared to 3.78% for the second quarter of 2013. Net interest income on a tax-equivalent basis of $38.2 million for the six months ended June 30, 2014 decreased $210 thousand, or 1% compared to the same period in 2013. The tax-equivalent net interest margin for the six months ended June 30, 2014 was 3.91% compared to 3.80% for the same period in the prior year.

The provision for loan and lease losses for the three months ended June 30, 2014 was $1.3 million, a decrease of $2.2 million, or 64% compared to the same period in 2013. The provision for loan and lease losses was $2.7 million for the six months ended June 30, 2014, a decrease of $2.8 million, or 51% compared to the same period in 2013.

Noninterest income for the three months ended June 30, 2014 was $11.9 million, an increase of $933 thousand, or 8% from the comparable period in the prior year. Non-interest income for the six months ended June 30, 2014 was $24.1 million, an increase of $1.6 million, or 7% from the comparable period in the prior year.

Non-interest expense for the three months ended June 30, 2014 was $21.8 million, an increase of $2.5 million, or 13% from the comparable period in the prior year. Non-interest expense for the six months ended June 30, 2014 was $42.7 million, an increase of $3.2 million, or 8% from the comparable period in the prior year.

Gross loans and leases held for investment grew $45.5 million, or 3% from December 31, 2013. Deposits declined $12.3 million, or 1% from December 31, 2013.

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications, decreased to $17.7 million at June 30, 2014, from $23.2 million at December 31, 2013 and $25.2 million at June 30, 2013. Nonaccrual loans and leases as a percentage of total loans and leases (held for investment and nonaccrual loans held for sale) was 1.12% at June 30, 2014 compared to 1.51% at December 31, 2013 and 1.68% at June 30, 2013. Net loan and lease charge-offs were $1.7 million and $3.1 million for the three and six months ended June 30, 2014, respectively, down $2.2 million and $2.4 million, respectively, from the same periods in 2013.

Valley Green Bank

On June 17, 2014, the Corporation, the Bank and Valley Green Bank (Valley Green) entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to which Valley Green will be merged with and into the Bank in an all-stock transaction with an aggregate value of approximately $76 million. Headquartered in the Mt. Airy neighborhood of Philadelphia, Valley Green had approximately $370 million in assets, $329 million in loans, and $335 million in deposits at March 31, 2014 and operates three full-service banking offices and two loan production offices in the greater Philadelphia marketplace.

Under the terms of the Merger Agreement, Valley Green shareholders will receive shares of the Corporation's common stock equal to $27.00 for each share of Valley Green stock outstanding, subject to certain adjustments depending upon the changes in the price of the Corporation's common stock. The final exchange ratio will be based upon an average closing price of the Corporation's common stock over the 20 consecutive trading day period ending on the day prior to the closing date.


Table of Contents

With the assumption of Valley Green's three branches and two loan production offices in the Philadelphia marketplace, the Corporation enters a new and highly attractive small business and consumer market and expands its existing lending network within southeastern Pennsylvania. Upon the closing, Valley Green will operate as a separate division of the Bank, under the Valley Green brand. The transaction is anticipated to be accretive to the Corporation's earnings per share in the first combined year of operations, with earnings accretion greater than 10% in year two.

The Merger Agreement has been approved by the Boards of Directors of the Corporation, the Bank and Valley Green and remains subject to approval by the shareholders of both companies, as well as their regulatory authorities. The transaction is expected to close in the first quarter of 2015.

Girard Partners

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 acquisition, the Corporation recorded goodwill of $6.8 million (inclusive of the contingent consideration) and customer related intangibles of $4.3 million.

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 an asset sensitive position, as 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.


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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 six months ended June 30, 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 and six months ended June 30, 2014 versus 2013

Net interest income on a tax-equivalent basis for the three months ended June 30, 2014 was $19.0 million, a decrease of $316 thousand, or 2% compared to the same period in 2013. Net interest income on a tax-equivalent basis for the six months ended June 30, 2014 was $38.2 million, a decrease of $210 thousand, or 1% compared to the same period in 2013. The decline in net interest income from the prior year was primarily attributable to a reduction in lower yielding investment securities. This decline was partially offset by the redemption of the Corporation's trust preferred securities and the termination of the related interest rate swap during the second quarter of 2013, maturities of higher yielding time deposits and a decline in the rate paid on time deposits. The tax-equivalent net interest margin for the three months ended June 30, 2014 increased 8 basis points to 3.86% from 3.78% for the three months ended June 30, 2013. The tax-equivalent net interest margin for the six months ended June 30, 2014 increased 11 basis points to 3.91% from 3.80% for the six months ended June 30, 2013.


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



                                                                   Three Months Ended June 30,
                                                        2014                                         2013
                                         Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                   Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with other
banks                                  $    25,164      $     17          0.27 %    $    71,290      $     46          0.26 %
U.S. government obligations                127,631           316          0.99          178,110           488          1.10
Obligations of states and political
subdivisions                               107,021         1,373          5.15          122,503         1,606          5.26
Other debt and equity securities           142,318           695          1.96          194,541           944          1.95

Total interest-earning deposits and
investments                                402,134         2,401          2.39          566,444         3,084          2.18

Commercial, financial and
agricultural loans                         404,252         3,973          3.94          403,490         4,355          4.33
Real estate-commercial and
construction loans                         594,929         6,798          4.58          574,288         6,846          4.78
Real estate-residential loans              284,931         2,524          3.55          252,443         2,436          3.87
Loans to individuals                        35,770           551          6.18           42,295           601          5.70
Municipal loans and leases                 175,952         2,112          4.81          137,382         1,743          5.09
Lease financings                            70,459         1,589          9.05           68,411         1,571          9.21

Gross loans and leases                   1,566,293        17,547          4.49        1,478,309        17,552          4.76

Total interest-earning assets            1,968,427        19,948          4.06        2,044,753        20,636          4.05

Cash and due from banks                     31,071                                       32,282
Reserve for loan and lease losses          (25,086 )                                    (26,229 )
Premises and equipment, net                 34,355                                       32,611
Other assets                               170,290                                      167,881

Total assets                           $ 2,179,057                                  $ 2,251,298

Liabilities:
Interest-bearing checking deposits     $   311,660            42          0.05      $   264,897            37          0.06
Money market savings                       280,693            68          0.10          322,808            78          0.10
Regular savings                            537,526            79          0.06          537,410            78          0.06
Time deposits                              267,610           780          1.17          302,896           962          1.27

Total time and interest-bearing
deposits                                 1,397,489           969          0.28        1,428,011         1,155          0.32

Short-term borrowings                       45,429            12          0.11          100,632            15          0.06
Subordinated notes and capital
securities                                      -             -             -            20,619           183          3.56

Total borrowings                            45,429            12          0.11          121,251           198          0.65

Total interest-bearing liabilities       1,442,918           981          0.27        1,549,262         1,353          0.35

Noninterest-bearing deposits               422,057                                      384,089
Accrued expenses and other
liabilities                                 28,593                                       33,456

Total liabilities                        1,893,568                                    1,966,807

Shareholders' Equity:
Common stock                                91,332                                       91,332
Additional paid-in capital                  65,367                                       64,680
Retained earnings and other equity         128,790                                      128,479

Total shareholders' equity                 285,489                                      284,491

Total liabilities and shareholders'
equity                                 $ 2,179,057                                  $ 2,251,298

Net interest income                                     $ 18,967                                     $ 19,283

Net interest spread                                                       3.79                                         3.70
Effect of net interest-free funding
sources                                                                   0.07                                         0.08

Net interest margin                                                       3.86 %                                       3.78 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                 136.42 %                                     131.98 %


Table of Contents
                                                                    Six Months Ended June 30,
                                                        2014                                         2013
                                         Average        Income/       Average         Average        Income/       Average
(Dollars in thousands)                   Balance        Expense        Rate           Balance        Expense        Rate
Assets:
Interest-earning deposits with other
banks                                  $    25,283      $     31          0.25 %    $    59,882      $     81          0.27 %
U.S. government obligations                129,457           647          1.01          176,269           965          1.10
Obligations of states and political
subdivisions                               107,386         2,829          5.31          122,097         3,185          5.26
Other debt and equity securities           146,919         1,415          1.94          197,722         1,839          1.88

Total interest-earning deposits and
investments                                409,045         4,922          2.43          555,970         6,070          2.20

Commercial, financial and
agricultural loans                         398,246         7,871          3.99          420,865         9,031          4.33
Real estate-commercial and
construction loans                         593,007        13,686          4.65          559,657        13,504          4.87
Real estate-residential loans              283,475         5,082          3.62          254,926         4,891          3.87
Loans to individuals                        37,200         1,135          6.15           42,537         1,197          5.67
Municipal loans and leases                 175,553         4,233          4.86          135,924         3,459          5.13
Lease financings                            70,883         3,221          9.16           67,251         3,128          9.38

Gross loans and leases                   1,558,364        35,228          4.56        1,481,160        35,210          4.79

Total interest-earning assets            1,967,409        40,150          4.12        2,037,130        41,280          4.09

Cash and due from banks                     30,513                                       32,278
Reserve for loan and lease losses          (25,206 )                                    (25,740 )
Premises and equipment, net                 34,303                                       32,827
Other assets                               168,803                                      165,777

Total assets                           $ 2,175,822                                  $ 2,242,272

Liabilities:
Interest-bearing checking deposits     $   312,658            85          0.05      $   254,550            73          0.06
Money market savings                       284,874           135          0.10          324,235           158          0.10
Regular savings                            540,301           158          0.06          536,063           154          0.06
Time deposits                              268,277         1,583          1.19          313,381         2,010          1.29

Total time and interest-bearing
deposits                                 1,406,110         1,961          0.28        1,428,229         2,395          0.34

Short-term borrowings                       42,546            18          0.09          101,533            32          0.06
Subordinated notes and capital
securities                                      -             -             -            20,799           472          4.58

Total borrowings                            42,546            18          0.09          122,332           504          0.83

Total interest-bearing liabilities       1,448,656         1,979          0.28        1,550,561         2,899          0.38

Noninterest-bearing deposits               415,446                                      372,936
Accrued expenses and other
liabilities                                 27,681                                       33,754

Total liabilities                        1,891,783                                    1,957,251

Shareholders' Equity:
Common stock                                91,332                                       91,332
Additional paid-in capital                  65,319                                       64,700
Retained earnings and other equity         127,388                                      128,989

Total shareholders' equity                 284,039                                      285,021

Total liabilities and shareholders'
equity                                 $ 2,175,822                                  $ 2,242,272

Net interest income                                     $ 38,171                                     $ 38,381

Net interest spread                                                       3.84                                         3.71
Effect of net interest-free funding
sources                                                                   0.07                                         0.09

Net interest margin                                                       3.91 %                                       3.80 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                 135.81 %                                     131.38 %

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 six months ended June 30, 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.



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