United
States
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the quarterly period ended September
30, 2006.
|
or
o
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the transition period from ___
to ___.
|
Commission
File Number: 0-7617
UNIVEST
CORPORATION OF PENNSYLVANIA
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
|
23-1886144
|
(State
or other jurisdiction of incorporation of organization)
|
|
(IRS
Employer Identification No.)
|
14
North Main Street, Souderton, Pennsylvania 18964
(Address
of principal executive offices)(Zip Code)
Registrant’s
telephone number, including area code: (215)
721-2400
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. RYes
£No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). £Yes
RNo
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common
Stock, $5 par value
|
|
12,984,041
|
(Title
of Class)
|
|
(Number
of shares outstanding at 9/30/06)
|
UNIVEST
CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
|
|
Page
Number |
Part
I.
|
Financial
Information:
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at
|
|
|
|
September
30, 2006 and December 31, 2005
|
1
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Three and Nine
|
|
|
|
Months
Ended September 30, 2006 and 2005
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
|
Nine
Months Ended September 30, 2006 and 2005
|
3
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
|
|
|
|
Results
of Operations
|
12
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
31
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
31
|
|
|
|
|
Part
II.
|
Other
Information:
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
32
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
32
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
33
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Securities Holders
|
33
|
|
|
|
|
|
Item
5.
|
Other
Information
|
33
|
|
|
|
|
|
Item
6.
|
Exhibits
|
33
|
PART
I. FINANCIAL
INFORMATION
Item
1. Financial
Statements
UNIVEST
CORPORATION OF PENNSYLVANIA
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
30, 2006
|
|
December
31, 2005
|
|
ASSETS
|
|
($
in thousands)
|
Cash
and due from banks
|
|
$
|
44,871
|
|
$
|
46,226
|
|
Interest-bearing
deposits with other banks
|
|
|
655
|
|
|
563
|
|
Federal
funds sold
|
|
|
924
|
|
|
12,650
|
|
Investment
securities held-to-maturity (market value $12,820 and $14,686 at
September 30, 2006 and December 31, 2005,
respectively)
|
|
|
12,831
|
|
|
14,808
|
|
Investment
securities available-for-sale
|
|
|
382,421
|
|
|
328,451
|
|
Loans
and leases
|
|
|
1,370,620
|
|
|
1,249,652
|
|
Less:
Reserve for loan and lease losses
|
|
|
(12,997
|
)
|
|
(13,363
|
)
|
Net
loans and leases
|
|
|
1,357,623
|
|
|
1,236,289
|
|
Premises
and equipment, net
|
|
|
22,326
|
|
|
21,635
|
|
Goodwill,
net of accumulated amortization of $2,845 at September 30, 2006 and
December 31, 2005
|
|
|
41,150
|
|
|
40,998
|
|
Other
intangibles, net of accumulated amortization of $4,869 and $4,424
at
September 30, 2006 and December 31, 2005,
respectively
|
|
|
6,691
|
|
|
2,389
|
|
Cash
surrender value of insurance policies
|
|
|
36,265
|
|
|
35,211
|
|
Accrued
interest and other assets
|
|
|
31,640
|
|
|
30,089
|
|
Total
assets
|
|
$
|
1,937,397
|
|
$
|
1,769,309
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Demand
deposits, noninterest-bearing
|
|
$
|
228,646
|
|
$
|
246,736
|
|
Demand
deposits, interest-bearing
|
|
|
446,213
|
|
|
445,395
|
|
Savings
deposits
|
|
|
189,970
|
|
|
192,154
|
|
Time
deposits
|
|
|
598,887
|
|
|
482,430
|
|
Total
deposits
|
|
|
1,463,716
|
|
|
1,366,715
|
|
Securities
sold under agreements to repurchase
|
|
|
92,997
|
|
|
108,312
|
|
Other
short-term borrowings
|
|
|
70,800
|
|
|
─
|
|
Accrued
expenses and other liabilities
|
|
|
26,493
|
|
|
32,753
|
|
Long-term
debt
|
|
|
67,154
|
|
|
56,580
|
|
Subordinated
notes
|
|
|
10,125
|
|
|
11,250
|
|
Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts
holding
junior subordinated debentures of Univest ("Trust Preferred
Securities")
|
|
|
20,619
|
|
|
20,619
|
|
Total
liabilities
|
|
|
1,751,904
|
|
|
1,596,229
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $5 par value: 24,000,000 shares authorized at September 30,
2006
and December 31, 2005; 14,873,904 shares and 14,873,904 shares issued
and
12,984,041 and 12,947,001 shares outstanding at September 30, 2006
and
December 31, 2005, respectively
|
|
|
74,370
|
|
|
74,370
|
|
Additional
paid-in capital
|
|
|
22,376
|
|
|
22,051
|
|
Retained
earnings
|
|
|
124,541
|
|
|
114,346
|
|
Accumulated
other comprehensive loss, net of tax benefit
|
|
|
(60
|
)
|
|
(1,050
|
)
|
Treasury
stock, at cost; 1,889,863 and 1,926,903 shares at September 30, 2006
and
December 31, 2005, respectively
|
|
|
(35,734
|
)
|
|
(36,637
|
)
|
Total
shareholders’ equity
|
|
|
185,493
|
|
|
173,080
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,937,397
|
|
$
|
1,769,309
|
|
Note:
See
accompanying notes to the unaudited condensed consolidated financial
statements.
UNIVEST
CORPORATION OF PENNSYLVANIA
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
For
the Three Months Ended September 30,
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Interest
income
|
|
($
in thousands, except per share data)
|
Interest
and fees on loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
22,542
|
|
$
|
17,866
|
|
$
|
62,598
|
|
$
|
49,861
|
|
Exempt
from federal income taxes
|
|
|
1,003
|
|
|
807
|
|
|
2,860
|
|
|
2,403
|
|
Total
interest and fees on loans and leases
|
|
|
23,545
|
|
|
18,673
|
|
|
65,458
|
|
|
52,264
|
|
Interest
and dividends on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,178
|
|
|
2,559
|
|
|
8,424
|
|
|
7,306
|
|
Exempt
from federal income taxes
|
|
|
959
|
|
|
882
|
|
|
2,907
|
|
|
2,652
|
|
Other
interest income
|
|
|
42
|
|
|
51
|
|
|
216
|
|
|
158
|
|
Total
interest income
|
|
|
27,724
|
|
|
22,165
|
|
|
77,005
|
|
|
62,380
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
9,722
|
|
|
5,361
|
|
|
24,829
|
|
|
14,089
|
|
Interest
on long-term debt and capital securities
|
|
|
1,264
|
|
|
1,123
|
|
|
3,607
|
|
|
3,214
|
|
Interest
on short-term debt
|
|
|
1,091
|
|
|
480
|
|
|
2,375
|
|
|
1,029
|
|
Total
interest expense
|
|
|
12,077
|
|
|
6,964
|
|
|
30,811
|
|
|
18,332
|
|
Net
interest income
|
|
|
15,647
|
|
|
15,201
|
|
|
46,194
|
|
|
44,048
|
|
Provision
for loan and lease losses
|
|
|
568
|
|
|
509
|
|
|
1,594
|
|
|
1,409
|
|
Net
interest income after provision for loan and lease losses
|
|
|
15,079
|
|
|
14,692
|
|
|
44,600
|
|
|
42,639
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
fee income
|
|
|
1,363
|
|
|
1,301
|
|
|
4,362
|
|
|
3,964
|
|
Service
charges on deposit accounts
|
|
|
1,748
|
|
|
1,803
|
|
|
5,091
|
|
|
5,147
|
|
Investment
advisory commission and fee income
|
|
|
545
|
|
|
517
|
|
|
1,701
|
|
|
1,438
|
|
Insurance
commission and fee income
|
|
|
1,233
|
|
|
846
|
|
|
3,534
|
|
|
2,779
|
|
Life
insurance income
|
|
|
433
|
|
|
373
|
|
|
1,054
|
|
|
977
|
|
Other
service fee income
|
|
|
893
|
|
|
790
|
|
|
2,437
|
|
|
2,335
|
|
Net
gain on sales of securities
|
|
|
3
|
|
|
63
|
|
|
50
|
|
|
150
|
|
Net
loss on disposition of fixed assets
|
|
|
─
|
|
|
(3
|
)
|
|
(67
|
)
|
|
(218
|
)
|
Other
|
|
|
16
|
|
|
(134
|
)
|
|
192
|
|
|
83
|
|
Total
noninterest income
|
|
|
6,234
|
|
|
5,556
|
|
|
18,354
|
|
|
16,655
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
7,051
|
|
|
6,766
|
|
|
21,554
|
|
|
20,039
|
|
Net
occupancy
|
|
|
1,078
|
|
|
1,006
|
|
|
3,205
|
|
|
3,211
|
|
Equipment
|
|
|
829
|
|
|
741
|
|
|
2,406
|
|
|
2,212
|
|
Other
|
|
|
3,374
|
|
|
2,558
|
|
|
10,162
|
|
|
8,711
|
|
Total
noninterest expense
|
|
|
12,332
|
|
|
11,071
|
|
|
37,327
|
|
|
34,173
|
|
Income
before income taxes
|
|
|
8,981
|
|
|
9,177
|
|
|
25,627
|
|
|
25,121
|
|
Applicable
income taxes
|
|
|
2,444
|
|
|
2,475
|
|
|
6,861
|
|
|
6,648
|
|
Net
income
|
|
$
|
6,537
|
|
$
|
6,702
|
|
$
|
18,766
|
|
$
|
18,473
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
$
|
0.52
|
|
$
|
1.45
|
|
$
|
1.43
|
|
Diluted
|
|
|
0.50
|
|
|
0.51
|
|
|
1.44
|
|
|
1.42
|
|
Dividends
declared
|
|
|
0.20
|
|
|
0.19
|
|
|
0.58
|
|
|
0.53
|
|
Note:
See
accompanying notes to the unaudited condensed consolidated financial
statements.
UNIVEST
CORPORATION OF PENNSYLVANIA
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
($
in thousands)
|
|
Net
income
|
|
$
|
18,766
|
|
$
|
18,473
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
Provision
for loan and lease losses
|
|
|
1,594
|
|
|
1,409
|
|
Depreciation
of premises and equipment
|
|
|
1,627
|
|
|
1,470
|
|
Realized
gains on investment securities
|
|
|
(50
|
)
|
|
(150
|
)
|
Realized
losses on dispositions of fixed assets
|
|
|
67
|
|
|
218
|
|
Increase
in cash surrender value of insurance policies
|
|
|
(1,054
|
)
|
|
(977
|
)
|
Other
adjustments to reconcile net income to cash provided by operating
activities
|
|
|
(446
|
)
|
|
(997
|
)
|
Increase
in interest receivable and other assets
|
|
|
(1,475
|
)
|
|
(1,036
|
)
|
(Decrease)
increase in accrued expenses and other liabilities
|
|
|
(7,672
|
)
|
|
3,899
|
|
Net
cash provided by operating activities
|
|
|
11,357
|
|
|
22,309
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Net
cash paid due to acquisitions
|
|
|
(4,330
|
)
|
|
(200
|
)
|
Net
capital expenditures
|
|
|
(2,327
|
)
|
|
(3,274
|
)
|
Proceeds
from maturing securities held-to-maturity
|
|
|
827
|
|
|
68,755
|
|
Proceeds
from maturing securities available-for-sale
|
|
|
121,265
|
|
|
35,732
|
|
Proceeds
from sales and calls of securities available-for-sale
|
|
|
22,298
|
|
|
10,514
|
|
Purchases
of investment securities held-to-maturity
|
|
|
─
|
|
|
(49,885
|
)
|
Purchases
of investment securities available-for-sale
|
|
|
(194,655
|
)
|
|
(83,259
|
)
|
Proceeds
from sales of mortgages
|
|
|
1,156
|
|
|
5,750
|
|
Purchases
of lease financings
|
|
|
(10,412
|
)
|
|
─
|
|
Net
increase in loans and leases
|
|
|
(113,420
|
)
|
|
(60,677
|
)
|
Net
(increase) decrease in interest-bearing deposits
|
|
|
(92
|
)
|
|
114
|
|
Net
decrease (increase) in federal funds sold
|
|
|
11,726
|
|
|
(2,494
|
)
|
Net
cash used in investing activities
|
|
|
(167,964
|
)
|
|
(78,924
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
97,182
|
|
|
71,571
|
|
Net
increase (decrease) in short-term borrowings
|
|
|
55,485
|
|
|
(3,304
|
)
|
Issuance
of long-term debt
|
|
|
20,000
|
|
|
─
|
|
Repayment
of long-term debt
|
|
|
(9,075
|
)
|
|
─
|
|
Repayment
of subordinated debt
|
|
|
(1,125
|
)
|
|
(1,125
|
)
|
Purchases
of treasury stock
|
|
|
(3,397
|
)
|
|
(3,323
|
)
|
Stock
issued under dividend reinvestment and employee stock purchase
plans
|
|
|
1,539
|
|
|
1,491
|
|
Proceeds
from exercise of stock options, including tax benefits
|
|
|
2,026
|
|
|
2,201
|
|
Cash
dividends paid
|
|
|
(7,383
|
)
|
|
(6,491
|
)
|
Net
cash provided by financing activities
|
|
|
155,252
|
|
|
61,020
|
|
Net
(decrease) increase in cash and due from banks
|
|
|
(1,355
|
)
|
|
4,405
|
|
Cash
and due from banks at beginning of year
|
|
|
46,226
|
|
|
35,876
|
|
Cash
and due from banks at end of period
|
|
$
|
44,871
|
|
$
|
40,281
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
29,046
|
|
$
|
17,758
|
|
Income
taxes, net of refunds received
|
|
|
6,999
|
|
|
6,091
|
|
Note:
See
accompanying notes to the unaudited condensed consolidated financial
statements.
UNIVEST
CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes
to the Unaudited Condensed Consolidated Financial
Statements
Note
1. Financial Information
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Univest Corporation of Pennsylvania (the “Corporation”) and its
wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest
National Bank and Trust Co. (the “Bank”). The unaudited condensed consolidated
financial statements included herein have been prepared without audit pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States have been condensed or omitted pursuant to such rules
and
regulations. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments which are of a normal recurring nature and
are, in the opinion of management, necessary to present a fair statement of
the
results and condition for the interim periods presented. Operating results
for
the nine-month period ended September 30, 2006 are not necessarily indicative
of
the results that may be expected for the year ending December 31, 2006. It
is
suggested that these unaudited condensed consolidated financial statements
be
read in conjunction with the financial statements and the notes thereto included
in the registrant’s Annual Report on Form 10-K for the year ended December
31, 2005, which has been filed with the SEC.
Effective
January 1, 2006 the Corporation adopted the fair value method of accounting
for
stock-based compensation arrangements in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123R”),
using the modified prospective method of transition. Under the provisions of
SFAS 123R, the estimated fair value of share based awards is recognized as
compensation expense over the vesting period. Using the modified prospective
method, compensation expense is recognized beginning with the effective date
of
adoption of SFAS 123R for all shares granted after the effective date of
adoption and granted prior to the effective date of adoption and that remain
unvested on the date of adoption.
During
the second quarter of 2006, the Bank entered into the small ticket commercial
leasing business through its newly formed subsidiary Vanguard Leasing, Inc.
(“Vanguard”). Vanguard is incorporated under Pennsylvania law and is located in
Bensalem, Pennsylvania.
On
July
27, 2006, the Corporation completed the acquisition of B. G. Balmer &
Company, Inc. (“Balmer”), a full-service insurance agency, located in West
Chester, Pennsylvania. The acquisition expands the Corporation’s growing
insurance business and provides a prominent, competitive presence in Chester
County. The Corporation has recorded additional intangible assets of $4.7
million for the Balmer acquisition based on a preliminary analysis of the
purchase price and is subject to adjustment.
Note
2. Loans
The
following is a summary of the major loan and lease categories:
($
in thousands)
|
|
At
September 30,
2006
|
|
At
December 31,
2005
|
|
Commercial,
financial and agricultural
|
|
$
|
454,176
|
|
$
|
383,792
|
|
Real
estate-commercial
|
|
|
359,299
|
|
|
349,384
|
|
Real
estate-construction
|
|
|
135,326
|
|
|
110,032
|
|
Real
estate-residential
|
|
|
304,313
|
|
|
303,994
|
|
Loans
to individuals
|
|
|
106,945
|
|
|
102,095
|
|
Lease
financings
|
|
|
11,628
|
|
|
415
|
|
Total
gross loans and leases
|
|
|
1,371,687
|
|
|
1,249,712
|
|
Less:
Unearned income
|
|
|
(1,067
|
)
|
|
(60
|
)
|
Total
loans and leases
|
|
$
|
1,370,620
|
|
$
|
1,249,652
|
|
Net
unamortized deferred loan and lease origination fees at September 30, 2006
and
December 31, 2005 were $1.0 million and $1.5 million,
respectively.
Note
3. Reserve for Loan and Lease Losses
A
summary
of the activity in the reserve for loan and lease losses is as
follows:
($
in thousands)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Reserve
for loan and lease losses at beginning of period
|
|
$
|
14,280
|
|
$
|
13,252
|
|
$
|
13,363
|
|
$
|
13,099
|
|
Provision
for loan and lease losses
|
|
|
568
|
|
|
509
|
|
|
1,594
|
|
|
1,409
|
|
Recoveries
|
|
|
110
|
|
|
139
|
|
|
512
|
|
|
916
|
|
Loans
charged off
|
|
|
(1,961
|
)
|
|
(1,190
|
)
|
|
(2,472
|
)
|
|
(2,714
|
)
|
Reserve
for loan and lease losses at period end
|
|
$
|
12,997
|
|
$
|
12,710
|
|
$
|
12,997
|
|
$
|
12,710
|
|
Information
with respect to loans and leases that are considered to be impaired under SFAS
114 at September 30, 2006 and December 31, 2005 is as
follows:
|
|
At
September 30, 2006
|
|
At
December 31, 2005
|
|
($
in thousands)
|
|
Balance
|
|
Specific
Reserve
|
|
Balance
|
|
Specific
Reserve
|
|
Recorded
investment in impaired loans and leases at period-end subject to
a
specific reserve for loan and lease losses and corresponding specific
reserve
|
|
$
|
4,918
|
|
$
|
1,093
|
|
$
|
3,263
|
|
$
|
1,076
|
|
Recorded
investment in impaired loans and leases at period-end requiring
no
specific reserve for loan and lease losses
|
|
|
─
|
|
|
|
|
|
─
|
|
|
|
|
Recorded
investment in impaired loans and leases at period-end
|
|
$
|
4,918
|
|
|
|
|
$
|
3,263
|
|
|
|
|
Recorded
investment in nonaccrual and restructured loans and leases
|
|
$
|
4,918
|
|
|
|
|
$
|
3,263
|
|
|
|
|
The
following is an analysis of interest on nonaccrual and restructured loans and
leases:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
($
in thousands)
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Nonaccrual
and restructured loans and leases at period end
|
|
$
|
4,918
|
|
$
|
6,024
|
|
$
|
4,918
|
|
$
|
6,024
|
|
Average
recorded investment in impaired loans and leases
|
|
|
7,915
|
|
|
7,384
|
|
|
5,658
|
|
|
9,047
|
|
Interest
income that would have been recognized under original
terms
|
|
|
86
|
|
|
61
|
|
|
319
|
|
|
444
|
|
No
interest income was recognized on these loans for the three- and nine-month
periods ended September 30, 2006 and 2005.
Note
4. Earnings Per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
(in
thousands, except per share data)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings per share -
Net
income
|
|
$
|
6,537
|
|
$
|
6,702
|
|
$
|
18,766
|
|
$
|
18,473
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share -
weighted-average
shares outstanding
|
|
|
12,963
|
|
|
12,917
|
|
|
12,949
|
|
|
12,892
|
|
Effect
of dilutive securities:
Employee
stock options
|
|
|
69
|
|
|
131
|
|
|
57
|
|
|
153
|
|
Denominator
for diluted earnings per share - adjusted
weighted-average
shares outstanding
|
|
|
13,032
|
|
|
13,048
|
|
|
13,006
|
|
|
13,045
|
|
Basic
earnings per share
|
|
$
|
0.50
|
|
$
|
0.52
|
|
$
|
1.45
|
|
$
|
1.43
|
|
Diluted
earnings per share
|
|
$
|
0.50
|
|
$
|
0.51
|
|
$
|
1.44
|
|
$
|
1.42
|
|
As
permitted under SFAS No. 123 (before revision), “Accounting for
Stock-Based-Compensation” (“SFAS 123”), the Corporation applied the
intrinsic value method of accounting for stock options and other awards granted
to employees. Under that method, the Corporation did not recognize any
compensation cost during 2005. Under
the
modified prospective method of transition under SFAS 123R, the Corporation
is
not required to restate its prior period financial statements to reflect
expensing of share-based compensation under SFAS 123R. Therefore, the results
for the three- and nine-month periods ended September 30, 2006 are not directly
comparable to the same periods in the prior year.
The
following pro forma information is presented for comparative purposes and
illustrates the effect on net income, basic earnings per share and fully-diluted
earnings per share, assuming the estimated fair value based method of the
options granted prior to January 1, 2006 were amortized to expense over the
option-vesting period:
($
in thousands, except per share data)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Income as reported
|
|
$
|
6,537
|
|
$
|
6,702
|
|
$
|
18,766
|
|
$
|
18,473
|
|
Add:
Stock-based compensation expense included in reported net income,
net of
tax
|
|
|
138
|
|
|
─
|
|
|
375
|
|
|
─
|
|
Deduct:
Stock-based compensation expense determined under the fair value
based
method for all awards, net of tax
|
|
|
138
|
|
|
118
|
|
|
375
|
|
|
270
|
|
Pro
forma net income
|
|
$
|
6,537
|
|
$
|
6,584
|
|
$
|
18,766
|
|
$
|
18,203
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.50
|
|
$
|
0.52
|
|
$
|
1.45
|
|
$
|
1.43
|
|
Pro
forma
|
|
$
|
0.50
|
|
$
|
0.51
|
|
$
|
1.45
|
|
$
|
1.41
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.50
|
|
$
|
0.51
|
|
$
|
1.44
|
|
$
|
1.42
|
|
Pro
forma
|
|
$
|
0.50
|
|
$
|
0.50
|
|
$
|
1.44
|
|
$
|
1.40
|
|
Note
5. Share-Based Compensation
The
1996
Employee Stock Purchase Plan (the “Purchase Plan”) provided 984,375 shares of
common stock available for issuance, of which 882,226 shares were available
for
issuance at September
30,
2006.
Employees may elect to make contributions to the Purchase Plan in an aggregate
amount not less than 2% nor more than 10% of such employee’s total compensation.
These contributions are then used to purchase stock during an offering period
determined by the Corporation’s Administrative Committee. The purchase price of
the stock is established by the Administrative Committee provided, however,
that
the purchase price will not be less than 85% of the lesser of the market price
on the first day or last day of the offering period. Under SFAS 123R
compensation expense must be recognized if the discount is greater than 5%.
The
Corporation adopted the shareholders’ approved 2003 Long-Term Incentive Plan to
replace the 1993 Long-Term Incentive Plan at its expiration. The 385,546
unissued common shares remaining under the 1993 plan expired and are no longer
available for future options. There were 246,737 options to purchase common
shares outstanding at September
30,
2006
under the 1993 plan. The Corporation may grant options to employees to purchase
up to 1,500,000 shares of common stock under the 2003 plan. The plan provides
for the issuance of options to purchase common shares at prices not less than
100 percent of the fair market value at the date of option grant. For the
majority of options issued, after two years, 33 percent of the optioned shares
are exercisable each year for a period not exceeding ten years. There were
1,232,701 common shares available for future grants and 267,254 options to
purchase common shares outstanding at September
30,
2006
under the 2003 plan.
Activity
under the 1993 and 2003 Long-term Incentive Plans was as follows:
($
in thousand except per share data)
|
|
Shares
Under Option
|
|
Weighted
Average Exercise Price Per Share
|
|
Weighted
Average Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
at September
30,
2006
|
|
Outstanding
at December 31, 2005
|
|
|
589,223
|
|
$
|
21.57
|
|
|
|
|
|
|
|
Granted
|
|
|
37,500
|
|
|
25.01
|
|
|
|
|
|
|
|
Expired
|
|
|
(850
|
)
|
|
28.27
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,700
|
)
|
|
25.46
|
|
|
|
|
|
|
|
Exercised
|
|
|
(106,182
|
)
|
|
16.02
|
|
|
|
|
|
|
|
Outstanding
at September
30,
2006
|
|
|
513,991
|
|
|
22.91
|
|
|
4.9
|
|
$
|
11,777
|
|
Exercisable
at September
30,
2006
|
|
|
259,548
|
|
|
20.82
|
|
|
2.2
|
|
|
5,404
|
|
During
the first nine months of 2006 and 2005, proceeds from the exercise of stock
options were $1.7 million and $1.9 million, respectively; the tax benefit
recognized and recorded to additional paid in capital was $325 thousand and
$314
thousand, respectively; and the intrinsic value of the options exercised was
$1.3 million and $1.8 million, respectively.
The
Corporation uses the Black-Scholes Model to estimate the fair value of each
option on the date of grant. The Black-Scholes Model estimates the fair value
of
employee stock options using a pricing model which takes into consideration
the
exercise price of the option, the expected life of the options, the current
market price and its expected volatility, the expected dividends on the stock
and the current risk-free interest rate for the expected life of the option.
The
Corporation’s estimate of the fair value of a stock option is based on
expectations derived from historical experience and may not necessarily equate
to its market value when fully vested. The Corporation uses a straight-line
accrual method to recognize stock-based compensation expense over the
time-period it expects the options to vest.
Using
the
modified prospective method, compensation expense is recognized beginning with
the effective date of adoption of SFAS 123R for all shares granted after the
effective date of adoption and for those shares granted prior to the effective
date of adoption and that remain unvested on the date of adoption. There were
no
options granted in 2004. Options granted during Fiscal Years 2002, 2003 and
2005
which remained unvested on the date of adoption and options granted during
2006
will be expensed in 2006 and in future periods under the following
assumptions:
|
|
For
the Three Months Ended
September
30,
|
|
For
the Nine
Months
Ended
September
30,
|
|
For
Fiscal Years
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Expected
option life in years
|
|
|
─
|
|
|
─
|
|
|
8.9
|
|
|
8.6
|
|
|
8.7
|
|
|
─
|
|
|
8.0
|
|
|
5.0
|
|
Risk
free interest rate
|
|
|
─
|
|
|
─
|
|
|
5.15
|
%
|
|
4.00
|
%
|
|
4.35
|
%
|
|
─
|
|
|
3.04
|
%
|
|
2.75
|
%
|
Expected
dividend yield
|
|
|
─
|
|
|
─
|
|
|
3.04
|
%
|
|
2.38
|
%
|
|
3.11
|
%
|
|
─
|
|
|
2.11
|
%
|
|
2.26
|
%
|
Expected
volatility
|
|
|
─
|
|
|
─
|
|
|
.309
|
|
|
.358
|
|
|
.335
|
|
|
─
|
|
|
.142
|
|
|
.219
|
|
Fair
value of options
|
|
|
─
|
|
|
─
|
|
$
|
7.96
|
|
$
|
10.13
|
|
$
|
7.69
|
|
|
─
|
|
$
|
4.57
|
|
$
|
3.93
|
|
During
the third quarter of 2006, the Corporation recognized stock-based compensation
expense of $144 thousand on stock options and $7 thousand on the Employee
Stock Purchase Plan and recognized a tax benefit on nonqualified stock option
expense of $13 thousand. During the nine months ended September 30, 2006, the
Corporation recognized stock-based compensation expense of $389 thousand on
stock options and $20 thousand on the Employee Stock Purchase Plan and
recognized a tax benefit on nonqualified stock option expense of $34 thousand.
At September
30,
2006,
accrued stock-based compensation expense amounted to $386 thousand for
stock options that the Corporation anticipates to vest over a weighted average
period of 1.4 years. At September
30,
2006,
there was $1.2 million of unrecognized expense related to stock options
which is expected to be recognized over a weighted-average period of 3.0
years.
During
the nine months ended September 30, 2006, the Corporation accelerated the
vesting of 4,437 grants for employees as permitted under the 1993 and 2003
Long-Term Incentive Plans upon retirement. As a result of these modifications,
additional compensation expense of $15 thousand was recognized.
The
following table provides information about the change in nonvested options
over
the first nine months of 2006:
|
|
Nonvested
Shares
|
|
Weighted
Average Grant Date Fair Value
|
|
Nonvested
options at December 31, 2005
|
|
|
227,080
|
|
$
|
6.01
|
|
Granted
|
|
|
37,500
|
|
|
7.96
|
|
Vested
|
|
|
(4,437
|
)
|
|
4.92
|
|
Forfeited
|
|
|
(5,700
|
)
|
|
6.71
|
|
Nonvested
options at September
30,
2006
|
|
|
254,443
|
|
|
6.30
|
|
Note
6. Accumulated Comprehensive Income
The
following shows the accumulated comprehensive income, net of income taxes,
for
the periods presented:
($
in thousands)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Income
|
|
$
|
6,537
|
|
$
|
6,702
|
|
$
|
18,766
|
|
$
|
18,473
|
|
Unrealized
gain (loss) on cash flow hedges, net of tax
|
|
|
41
|
|
|
(29
|
)
|
|
45
|
|
|
(29
|
)
|
Unrealized
gain (loss) on available-for-sale investment securities, net of
tax
|
|
|
2,823
|
|
|
(1,750
|
)
|
|
977
|
|
|
(2,436
|
)
|
Less:
reclassification adjustment for gains realized, net of tax, in net
income
|
|
|
1
|
|
|
41
|
|
|
32
|
|
|
98
|
|
Total
comprehensive income, net of tax
|
|
$
|
9,400
|
|
$
|
4,882
|
|
$
|
19,756
|
|
$
|
15,910
|
|
Note
7. Pensions and Other Postretirement Benefits
Components
of net periodic benefit cost:
($
in thousands)
|
|
Three
Months Ended September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
Retirement
Plans
|
|
Other
Postretirement
|
|
Service
cost
|
|
$
|
326
|
|
$
|
300
|
|
$
|
14
|
|
$
|
13
|
|
Interest
cost
|
|
|
406
|
|
|
389
|
|
|
20
|
|
|
18
|
|
Expected
return on plan assets
|
|
|
(395
|
)
|
|
(372
|
)
|
|
─
|
|
|
─
|
|
Amortization
of net loss
|
|
|
95
|
|
|
59
|
|
|
3
|
|
|
2
|
|
Amortization
of prior service cost
|
|
|
(19
|
)
|
|
(18
|
)
|
|
(5
|
)
|
|
(5
|
)
|
Net
periodic benefit cost
|
|
$
|
413
|
|
$
|
358
|
|
$
|
32
|
|
$
|
28
|
|
($
in thousands)
|
|
Nine
Months Ended September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
Retirement
Plans
|
|
Other
Postretirement
|
|
Service
cost
|
|
$
|
1,013
|
|
$
|
918
|
|
$
|
43
|
|
$
|
40
|
|
Interest
cost
|
|
|
1,226
|
|
|
1,180
|
|
|
59
|
|
|
55
|
|
Expected
return on plan assets
|
|
|
(1,171
|
)
|
|
(1,132
|
)
|
|
─
|
|
|
─
|
|
Amortization
of net (gain) loss
|
|
|
261
|
|
|
166
|
|
|
3
|
|
|
6
|
|
Amortization
of prior service cost
|
|
|
(55
|
)
|
|
(55
|
)
|
|
(15
|
)
|
|
(15
|
)
|
Net
periodic benefit cost
|
|
$
|
1,274
|
|
$
|
1,077
|
|
$
|
96
|
|
$
|
86
|
|
The
Corporation previously disclosed in its financial statements for the year ended
December 31, 2005, that it expected to make payments of $1.5 million for its
qualified and non-qualified retirement plans and $94 thousand for its other
postretirement benefit plans in 2006. As of September
30,
2006,
$1.2 million and $65 thousand have been paid to participants from its
qualified and non-qualified retirement plans and other postretirement plans,
respectively. During the nine months ended September
30,
2006,
the Corporation contributed $383 thousand and $65 thousand to its
non-qualified retirement plans and other postretirement plans, respectively.
The
Corporation presently anticipates making essentially equal payments for the
remaining quarter in 2006 to fund the non-qualified retirement plan and other
postretirement plans.
Note
8. SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities.”
At
September
30,
2006,
the total notional amount of the “Pay Floating, Receive Fixed” swap outstanding
was $20.0 million. The net payable or receivable from the interest-rate
swap agreement is accrued as an adjustment to interest income. The $20.0 million
in notional amount of interest-rate swap outstanding expires on November 2,
2006. The Corporation’s credit exposure on swaps is limited to the value of
interest-rate swaps that have become favorable to the Corporation. At
September
30,
2006,
the market value of the interest-rate swaps in an unfavorable position was
$25 thousand and there were no interest-rate swaps with a market value in a
favorable position.
Note
9. Recent Accounting Pronouncements
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”). SFAS 156 amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
with respect to the accounting for separately recognized servicing assets and
servicing liabilities.” SFAS 156: 1) requires an entity to recognize a servicing
asset or servicing liability each time it undertakes an obligation to service
a
financial asset by entering into a servicing contract in any of the following
situations: a) a transfer of the servicer’s financial assets that meets the
requirements for sale accounting; b) a transfer of the servicer’s financial
assets to a qualifying special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities in accordance with SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”); or, c) an acquisition or assumption
of an obligation to service a financial asset that does not relate to financial
assets of the servicer or its consolidated affiliates; 2) requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable; 3) permits an entity to choose either
of
the following subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities: a) amortization
method—amortize servicing assets or servicing liabilities in proportion to and
over the period of estimated net servicing income or net servicing loss and
assess servicing assets or servicing liabilities for impairment or increased
obligation based on fair value at each reporting date; or, b) fair value
measurement method—measure servicing assets or servicing liabilities at fair
value at each reporting date and report changes in fair value in earnings in
the
period in which the changes occur; 4) at its initial adoption, permits a
one-time reclassification of available-for-sale securities to trading securities
by entities with recognized servicing rights, without calling into question
the
treatment of other available-for-sale securities under SFAS 115, provided that
the available-for-sale securities are identified in some manner as offsetting
the entity’s exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and,
5) requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position
and
additional disclosures for all separately recognized servicing assets and
servicing liabilities. An entity should adopt SFAS 156 as of the beginning
of
its first fiscal year that begins after September 15, 2006. Earlier adoption
is
permitted as of the beginning of an entity’s fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. The effective date of SFAS 156 is the date
an entity adopts the requirements of this Statement. The Corporation has not
completed its assessment of SFAS 156 and the impact, if any, on the financial
statements.
In
June
2006, FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
provides guidance on financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. According to FIN 48,
a
tax position is recognized if it is more-likely-than-not that the tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. If
the
tax position meets the more-likely-than-not recognition threshold, the position
is measured to determine the amount of benefit to recognize and should be
measured at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Corporation has not completed its
assessment of FIN 48 and the impact, if any, on the financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 establishes
a framework for measuring fair value in GAAP, and enhances disclosures about
fair value measurements. SFAS 157 applies when other accounting pronouncement
require fair value measurements; it does not require new fair value
measurements.
SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and for interim periods within those years. The
Corporation has not completed its assessment of SFAS 157 and the impact, if
any,
on the financial statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plan” (“SFAS 158”). SFAS 158 requires
an employer to recognize on their balance sheet the funded status of its defined
pension plans and other post-retirement plans as of December 31, 2006. An
under-funded position would create a liability and an over-funded position
would
create an asset, with a correlating deferred tax asset or liability. The net
impact would be an adjustment to equity as accumulated other comprehensive
income (loss.) Employers must also recognize as a component of other
comprehensive income (loss), net of tax, the actuarial gains and losses and
the
prior service costs and credits that arise during the period. The Corporation
has not completed its assessment of SFAS 158, but anticipates recording a
reduction to Shareholders’ Equity in Net Other Comprehensive Loss during the
fourth quarter of 2006.
On
September 13, 2006 the Securities and Exchange Commission (“SEC”) Staff issued
Statement of Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,” (“SAB
108”). SAB 108 addresses how errors, built up over time in the balance sheet,
should be considered from a materiality perspective and corrected. SAB 108
provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC Staff believes that companies should quantify errors
using
both a balance sheet and an income statement approach and evaluate whether
either of these approaches results in quantifying a misstatement that, when
all
relevant quantitative and qualitative factors are considered, is material.
SAB
108 also describes the circumstances where it would be appropriate for a
registrant to record a one-time cumulative effect adjustment to correct errors
existing in prior years that previously had been considered immaterial as well
as the required disclosures to investors. Implementation of SAB 108 is
encouraged in any report for an interim period of the first fiscal year ending
after November 15, 2006. The
Corporation did not early adopt SAB No. 108. The Corporation has not yet
determined whether this interpretation will have a material impact on its
consolidated financial statements upon adoption.
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
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
|
Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. These forward-looking statements
speak only as of the date of the report. The Corporation expressly disclaims
any
obligation to publicly release any updates or revisions to reflect any change
in
the Corporation's expectations with regard to any change in events, conditions
or circumstances on which any such statement is based.
General
Univest
Corporation of Pennsylvania, (the “Corporation”), is a Financial Holding
Company. It owns all of the capital stock of Univest National Bank and Trust
Co.
(the “Bank”), Univest Realty Corporation, Univest Delaware, Inc., and Univest
Reinsurance Corporation.
The
Bank
is engaged in the general commercial banking business and provides a full range
of banking services and trust services to its customers. Delview, Inc., a wholly
owned subsidiary of the Bank, provides various financial services including
financial planning, investment management, insurance products and brokerage
services to individuals and businesses through its subsidiaries Univest
Investments, Inc. and Univest Insurance, Inc. During the second quarter of
2006,
the Bank entered into the small ticket commercial leasing business through
its
newly formed subsidiary Vanguard Leasing, Inc. (“Vanguard”). Vanguard is
incorporated under Pennsylvania law and is located in Bensalem,
Pennsylvania.
On
July
27, 2006, the Corporation completed the acquisition of B. G. Balmer &
Company, Inc. (“Balmer”), a full-service insurance agency, located in West
Chester, Pennsylvania. The acquisition expands the Corporation’s growing
insurance business and provides a prominent, competitive presence in Chester
County. The Corporation recorded additional intangible assets of $4.7 million
related to this acquisition based on a preliminary analysis of the purchase
price and is subject to adjustment.
Executive
Overview
The
Corporation recorded net income for the nine months ended September
30,
2006 of
$18.8 million, a 1.6% increase over the September
30,
2005
period. Both basic and diluted net income per share increased 1.4%.
Average
earning assets increased $131.1 million and average interest-bearing liabilities
increased $118.1 million when comparing the nine-month periods ended
September
30,
2006
and 2005. Increased rates on commercial business loans and commercial and
construction real estate loans, partially offset by increased rates on money
market savings and certificates of deposits, contributed to a $2.1 million
increase in net interest income. The tax-equivalent net interest margin declined
slightly to 3.9% for the nine-month period ended September 30, 2006 compared
to
4.0% for the same period in 2005.
Non-interest
income grew 10.2%, when comparing the nine-month periods ended September
30,
2006 to
2005, primarily due to increases in insurance commissions and fee income,
investment advisory commissions and fee income, and trust fee income.
Non-interest expense grew 9.2% primarily due to an increase in salary and
employee benefit expense as well as an increase in the capital shares
tax.
The
Corporation earns its revenues primarily from the margins and fees it generates
from the loan and depository services it provides as well as from trust,
insurance and investment commissions and fees. 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 approved levels. As interest rates increase,
fixed-rate assets that banks hold will tend to decrease in value while the
margin impact will vary from bank to bank based upon the structure of its
balance sheet. The Corporation maintains a relatively low interest rate risk
profile and does not anticipate that an increase in interest rates would be
adverse to 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 objective by
acquiring banks and other financial service providers in strategic markets,
by
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 - Three Months Ended September 30, 2006 Versus
2005
The
Corporation’s consolidated net income and earnings per share for the three
months ended September 30, 2006 and 2005 were as follows:
($
in thousands, except per share data)
|
|
Three
Months Ended
September
30,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Net
income
|
|
$
|
6,537
|
|
$
|
6,702
|
|
|
($165
|
)
|
|
(2.46
|
%)
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
$
|
0.52
|
|
|
($
0.02
|
)
|
|
(3.8
|
%)
|
Diluted
|
|
|
0.50
|
|
|
0.51
|
|
|
(0.01
|
)
|
|
(2.0
|
%)
|
Return
on
average shareholders' equity was 14.36% and return on average assets was 1.39%
for the three months ended September 30, 2006 compared to 15.81% and 1.56%,
respectively, for the same period in 2005.
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. The following table presents a summary of the
Corporation's average balances; the tax-equivalent yields earned on average
assets, and the cost of average liabilities for the three months ended September
30, 2006 and 2005. Sensitivities associated with the mix of assets and
liabilities are numerous and complex. The Asset/Liability Management and
Investment committees work to maintain an adequate and reliable net interest
margin for the Corporation.
Net
interest income increased $446 thousand for the three months ended September
30,
2006 compared to 2005 primarily due to increased rates on commercial loans
and
commercial real estate and construction loans, partially offset by increased
rates on money market savings deposits and certificates of deposit. The
tax-equivalent net interest margin, which is tax-equivalent net interest income
as a percentage of average interest-earning assets, was 3.8% and 4.1% for the
three-month periods ended September 30, 2006 and 2005, respectively. The
tax-equivalent net interest spread, which represents the difference between
the
weighted average tax-equivalent yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities, was 3.3% for the three
months ended September 30, 2006 compared to 3.7% for the same period in 2005.
The effect of net interest free funding sources increased to 0.5% for the three
months ended September 30, 2006 compared to 0.4% for the same period in 2005;
this represents the effect on the net interest margin of net funding provided
by
noninterest-earning assets, noninterest-bearing liabilities and shareholders’
equity.
Table
1 — Distribution of Assets, Liabilities and Stockholders’
Equity; Interest
Rates and Interest Differential
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
Income/
|
|
Avg.
|
|
Average
|
|
Income/
|
|
Avg.
|
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
deposits with other banks
|
|
$
|
663
|
|
$
|
7
|
|
|
4.2
|
%
|
$
|
651
|
|
$
|
4
|
|
|
2.5
|
%
|
U.S.
Government obligations
|
|
|
159,125
|
|
|
1,456
|
|
|
3.7
|
|
|
169,346
|
|
|
1,418
|
|
|
3.3
|
|
Obligations
of states & political subdivisions
|
|
|
83,566
|
|
|
1,474
|
|
|
7.1
|
|
|
77,695
|
|
|
1,355
|
|
|
7.0
|
|
Other
securities
|
|
|
131,419
|
|
|
1,697
|
|
|
5.2
|
|
|
104,167
|
|
|
1,116
|
|
|
4.3
|
|
Federal
Reserve bank stock
|
|
|
1,687
|
|
|
25
|
|
|
5.9
|
|
|
1,687
|
|
|
25
|
|
|
5.9
|
|
Federal
funds sold
|
|
|
2,815
|
|
|
35
|
|
|
5.0
|
|
|
4,759
|
|
|
47
|
|
|
4.0
|
|
Total
interest-earning deposits, investments and federal funds
sold
|
|
|
379,275
|
|
|
4,694
|
|
|
5.0
|
|
|
358,305
|
|
|
3,965
|
|
|
4.4
|
|
Commercial,
financial and agricultural loans and leases
|
|
|
415,686
|
|
|
7,950
|
|
|
7.7
|
|
|
347,785
|
|
|
5,746
|
|
|
6.6
|
|
Real
estate─commercial and construction loans
|
|
|
430,982
|
|
|
8,564
|
|
|
7.9
|
|
|
390,686
|
|
|
6,812
|
|
|
7.0
|
|
Real
estate─residential loans
|
|
|
301,296
|
|
|
4,156
|
|
|
5.5
|
|
|
298,901
|
|
|
3,864
|
|
|
5.2
|
|
Loans
to individuals
|
|
|
107,359
|
|
|
1,872
|
|
|
7.0
|
|
|
90,664
|
|
|
1,444
|
|
|
6.4
|
|
Municipal
loans
|
|
|
90,710
|
|
|
1,357
|
|
|
6.0
|
|
|
83,023
|
|
|
1,134
|
|
|
5.5
|
|
Gross
loans and leases
|
|
|
1,346,033
|
|
|
23,899
|
|
|
7.1
|
|
|
1,211,059
|
|
|
19,000
|
|
|
6.3
|
|
Total
interest-earning assets
|
|
|
1,725,308
|
|
|
28,593
|
|
|
6.6
|
|
|
1,569,364
|
|
|
22,965
|
|
|
5.8
|
|
Cash
and due from banks
|
|
|
42,330
|
|
|
|
|
|
|
|
|
42,551
|
|
|
|
|
|
|
|
Reserve
for loan losses
|
|
|
(14,278
|
)
|
|
|
|
|
|
|
|
(13,272
|
)
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
22,142
|
|
|
|
|
|
|
|
|
21,030
|
|
|
|
|
|
|
|
Other
assets
|
|
|
109,924
|
|
|
|
|
|
|
|
|
104,298
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,885,426
|
|
|
|
|
|
|
|
$
|
1,723,971
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking deposits
|
|
$
|
132,672
|
|
|
69
|
|
|
0.2
|
|
$
|
146,861
|
|
|
40
|
|
|
0.1
|
|
Money
market savings
|
|
|
330,013
|
|
|
3,187
|
|
|
3.9
|
|
|
278,466
|
|
|
1,600
|
|
|
2.3
|
|
Regular
savings
|
|
|
194,999
|
|
|
499
|
|
|
1.0
|
|
|
208,696
|
|
|
146
|
|
|
0.3
|
|
Certificates
of deposit
|
|
|
537,524
|
|
|
5,592
|
|
|
4.2
|
|
|
450,868
|
|
|
3,407
|
|
|
3.0
|
|
Time
open & club accounts
|
|
|
31,495
|
|
|
375
|
|
|
4.8
|
|
|
21,667
|
|
|
168
|
|
|
3.1
|
|
Total
time and interest-bearing deposits
|
|
|
1,226,703
|
|
|
9,722
|
|
|
3.2
|
|
|
1,106,558
|
|
|
5,361
|
|
|
1.9
|
|
Federal
funds purchased
|
|
|
12,853
|
|
|
172
|
|
|
5.4
|
|
|
5,940
|
|
|
56
|
|
|
3.8
|
|
Securities
sold under agreements to repurchase
|
|
|
92,623
|
|
|
516
|
|
|
2.2
|
|
|
96,547
|
|
|
400
|
|
|
1.7
|
|
Other
short-term borrowings
|
|
|
33,545
|
|
|
403
|
|
|
4.8
|
|
|
2,623
|
|
|
24
|
|
|
3.7
|
|
Long-term
debt
|
|
|
57,201
|
|
|
649
|
|
|
4.5
|
|
|
56,761
|
|
|
622
|
|
|
4.4
|
|
Subordinated
notes and capital securities
|
|
|
30,752
|
|
|
615
|
|
|
8.0
|
|
|
32,244
|
|
|
501
|
|
|
6.2
|
|
Total
borrowings
|
|
|
226,974
|
|
|
2,355
|
|
|
4.2
|
|
|
194,115
|
|
|
1,603
|
|
|
3.3
|
|
Total
interest-bearing liabilities
|
|
|
1,453,677
|
|
|
12,077
|
|
|
3.3
|
|
|
1,300,673
|
|
|
6,964
|
|
|
2.1
|
|
Demand
deposits, non-interest bearing
|
|
|
227,389
|
|
|
|
|
|
|
|
|
233,247
|
|
|
|
|
|
|
|
Accrued
expenses & other liabilities
|
|
|
22,239
|
|
|
|
|
|
|
|
|
20,538
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,703,305
|
|
|
|
|
|
|
|
|
1,554,458
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
74,370
|
|
|
|
|
|
|
|
|
74,370
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
22,178
|
|
|
|
|
|
|
|
|
21,787
|
|
|
|
|
|
|
|
Retained
earnings and other equity
|
|
|
85,573
|
|
|
|
|
|
|
|
|
73,356
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
182,121
|
|
|
|
|
|
|
|
|
169,513
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,885,426
|
|
|
|
|
|
|
|
$
|
1,723,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
16,516
|
|
|
|
|
|
|
|
$
|
16,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
3.3
|
|
|
|
|
|
|
|
|
3.7
|
|
Effect
of net interest-free funding sources
|
|
0.5
|
|
|
|
|
|
|
|
|
0.4
|
|
Net
interest margin
|
|
3.8
|
%
|
|
|
|
|
|
|
|
4.1
|
%
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
|
|
118.7
|
%
|
|
|
|
|
|
|
|
120.7
|
%
|
|
|
|
|
|
|
Notes:
Tax-equivalent
amounts have been calculated using the Corporation’s federal applicable rate of
35 percent.
For
rate
calculation purposes, average loan categories include unearned
discount.
Nonaccrual
loans have been included in the average loan balances.
Certain
amounts have been reclassified to conform to the current-year
presentation.
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 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 to change in volume.
|
|
The
Three Months Ended September 30,
2006
Versus 2005
|
|
|
|
Volume
Change
|
|
Rate
Change
|
|
Total
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
deposits with other banks
|
|
$
|
—
|
|
$
|
3
|
|
$
|
3
|
|
U.S.
Government obligations
|
|
|
(131
|
)
|
|
169
|
|
|
38
|
|
Obligations
of states & political subdivisions
|
|
|
100
|
|
|
19
|
|
|
119
|
|
Other
securities
|
|
|
347
|
|
|
234
|
|
|
581
|
|
Federal
Reserve bank stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Federal
funds sold
|
|
|
(24
|
)
|
|
12
|
|
|
(12
|
)
|
Interest
on deposits, investments and federal funds sold
|
|
|
292
|
|
|
437
|
|
|
729
|
|
Commercial
, financial and agricultural loans and leases
|
|
|
1,248
|
|
|
956
|
|
|
2,204
|
|
Real
estate─commercial and construction loans
|
|
|
873
|
|
|
879
|
|
|
1,752
|
|
Real
estate─residential loans
|
|
|
68
|
|
|
224
|
|
|
292
|
|
Loans
to individuals
|
|
|
292
|
|
|
136
|
|
|
428
|
|
Municipal
loans
|
|
|
119
|
|
|
104
|
|
|
223
|
|
Interest
and fees on loans and leases
|
|
|
2,600
|
|
|
2,299
|
|
|
4,899
|
|
Total
interest income
|
|
|
2,892
|
|
|
2,736
|
|
|
5,628
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Interest
checking deposits
|
|
|
(8
|
)
|
|
37
|
|
|
29
|
|
Money
market savings
|
|
|
473
|
|
|
1,114
|
|
|
1,587
|
|
Regular
savings
|
|
|
(12
|
)
|
|
365
|
|
|
353
|
|
Certificates
of deposit
|
|
|
832
|
|
|
1,353
|
|
|
2,185
|
|
Time
open & club accounts
|
|
|
115
|
|
|
92
|
|
|
207
|
|
Interest
on deposits
|
|
|
1,400
|
|
|
2,961
|
|
|
4,361
|
|
Federal
funds purchased
|
|
|
92
|
|
|
24
|
|
|
116
|
|
Securities
sold under agreement to repurchase
|
|
|
(5
|
)
|
|
121
|
|
|
116
|
|
Other
short-term borrowings
|
|
|
372
|
|
|
7
|
|
|
379
|
|
Long-term
debt
|
|
|
13
|
|
|
14
|
|
|
27
|
|
Subordinated
notes and capital securities
|
|
|
(31
|
)
|
|
145
|
|
|
114
|
|
Interest
on borrowings
|
|
|
441
|
|
|
311
|
|
|
752
|
|
Total
interest expense
|
|
|
1,841
|
|
|
3,272
|
|
|
5,113
|
|
Net
interest income
|
|
$
|
1,051
|
|
$
|
(536
|
)
|
$
|
515
|
|
Notes:
Tax-equivalent
amounts have been calculated using the Corporation’s federal applicable rate of
35 percent.
Nonaccrual
loans and unearned discounts have been included in the average loan balances.
Interest
Income
Interest
on deposits, investments and federal funds sold increased primarily due to
a
rate and volume increases on mortgage-backed securities and U.S. Government
agency obligations and average volume increases in obligations of state and
political subdivisions.
The
growth in interest and fees on loans and leases is due primarily to volume
and
rate increases on commercial business loans and commercial and construction
real
estate loans. The average interest yield on the commercial loan portfolio
increased 104 basis points, primarily due to a 183 basis point increase in
the
average prime rate, for the three months ended September 30, 2006 compared
to
the same period in 2005; which, along with average volume increases of
$67.9 million, contributed to a $2.2 million increase in interest
income. The average yield on commercial and construction real estate loans
increased by 98 basis points; this along with average volume increases of
$40.3 million contributed to a $1.8 million increase in interest income.
The average volume of loans to individuals increased $16.7 million, primarily
contributing to an increase in interest income of $428 thousand.
Interest
Expense
The
Corporation’s average rate on deposits increased 123 basis points for the three
months ended September 30, 2006 compared to the same period in 2005. The average
rate paid on money market savings increased 156 basis points due to new
products and promotions offered to grow deposits in the Bank’s competitive
marketplace; which contributed to a $1.6 million increase in interest expense.
Interest on certificates of deposit increased $2.2 million, due to a
114 basis-point increase in average rate and average volume increases of
$86.7 million. Since August 2004, the Bank obtained deposits from the
Pennsylvania Local Government Investment Trust (“PLGIT”) to augment its fixed
funding sources. The PLGIT deposits are public funds collateralized with a
letter of credit that PLGIT maintains with the Federal Home Loan Bank of
Pittsburgh (“FHLB”); therefore, the Univest National Bank is not required to
provide collateral on these deposits. The average balance of PLGIT deposits
increased $49.6 million comparing the three months ended September 30, 2006
over
the same period in 2005.
Interest
expense on short-term borrowings includes interest paid on federal funds
purchased and short-term FHLB borrowings. In addition, the Bank offers an
automated cash management checking account that sweeps funds daily into a
repurchase agreement account (“sweep accounts”). Interest expense on short-term
borrowings increased $611 thousand during the three months ended September
30,
2006 compared to 2005 primarily due to an increase in short-term FHLB
borrowings.
Interest
on long-term borrowings increased primarily due to a 178 basis point increase
in
the rate paid on subordinated notes and trust preferred securities. This
increase in rate was due to Three Month London Interbank Offer Rate (“LIBOR”)
increases which affect the variable rate paid on the trust preferred
securities.
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, 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
discounted cash flows using the loans' initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans as provided
for under SFAS No. 114. Any of the above criteria may cause the provision to
fluctuate. The bank’s primary regulators, as an integral part of their
examination process, may require adjustments to the allowance. Continued growth
in loan and lease volumes and current economic conditions indicated the need
for
an increase to the reserve in 2006. The provision for the three months ended
September 30, 2006 and 2005 was $568 thousand and $509 thousand,
respectively.
Non-interest
Income
Non-interest
income consists of trust department fee income, service charges on deposits
income, commission income, net gains on sales of securities, and other
miscellaneous types of income. It also includes various types of service fees,
such as ATM fees, and life insurance income which primarily represents changes
in the cash surrender value of bank-owned life insurance policies. Total
non-interest income increased during the three months ended September 30, 2006
compared to 2005 primarily due to higher insurance commission and fee income
resulting from the acquisition of B. G. Balmer & Company, Inc. (“Balmer”)
during the third quarter of 2006.
|
|
For
the Three Months Ended September 30,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Trust
fee income
|
|
$
|
1,363
|
|
$
|
1,301
|
|
$
|
62
|
|
|
4.8
|
%
|
Service
charges on deposit accounts
|
|
|
1,748
|
|
|
1,803
|
|
|
(55
|
)
|
|
(3.1
|
)
|
Investment
advisory commission and fee income
|
|
|
545
|
|
|
517
|
|
|
28
|
|
|
5.4
|
|
Insurance
commission and fee income
|
|
|
1,233
|
|
|
846
|
|
|
387
|
|
|
45.7
|
|
Life
insurance income
|
|
|
433
|
|
|
373
|
|
|
60
|
|
|
16.1
|
|
Other
service fee income
|
|
|
893
|
|
|
790
|
|
|
103
|
|
|
13.0
|
|
Net
gain on sales of securities
|
|
|
3
|
|
|
63
|
|
|
(60
|
)
|
|
(95.2
|
)
|
Net
loss on dispositions of fixed assets
|
|
|
-
|
|
|
(3
|
)
|
|
3
|
|
|
100.0
|
|
Other
|
|
|
16
|
|
|
(134
|
)
|
|
150
|
|
|
111.9
|
|
Total
non-interest income
|
|
$
|
6,234
|
|
$
|
5,556
|
|
$
|
678
|
|
|
12.2
|
|
Trust
fee
income increased in 2006 over 2005 primarily due to an increase in the number
and market value of managed accounts. Service charges on deposit accounts
decreased for the third quarter in 2006 compared to 2005 primarily due to a
reduction in checking account service charges.
Investment
advisory commissions and fee income, the primary source of income for Univest
Investments, Inc., increased in 2006 over 2005 due to market activity and
volume. Life insurance income is primarily the change in the cash surrender
values of bank owned life insurance policies, which is primarily affected by
the
market value of the underlying assets. The increase recognized on these policies
was greater in the third quarter of 2006 compared to 2005.
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.
Other service fee income increased for the second quarter of 2006 over 2005
primarily due to increases in Mastermoney fees and mortgage placement income.
Other
non-interest income includes loss on investments in partnerships, gains on
sales
of mortgages, gains on sales of other real estate owned, reinsurance income
and
other miscellaneous income. The Corporation recognized smaller losses on
investments in partnerships when comparing September 30, 2006 to the same period
in 2005.
Gains
on Sale of Assets
Sales
of
$390 thousand in mortgage loans during the three months ended September 30,
2006
resulted in gains of $12 thousand compared to sales of $1.1 million for
gains of $2 thousand for the three months ended September 30, 2005.
During
the three months ended September 30, 2006, approximately $31 thousand of
securities were sold recognizing gains of $3 thousand. During the three months
ended September 30, 2005, $7.7 million of securities were sold recognizing
gains
of $63 thousand.
Non-interest
Expense
The
operating costs of the Corporation are known as non-interest expense, and
include, but are not limited to, salaries and benefits, equipment expense,
and
occupancy costs. Expense control is very important to the management of the
Corporation, and every effort is made to contain and minimize the growth of
operating expenses.
The
following table presents noninterest expense for the periods
indicated:
|
|
For
the Three Months Ended September 30,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Salaries
and benefits
|
|
$
|
7,051
|
|
$
|
6,766
|
|
$
|
285
|
|
|
4.2
|
%
|
Net
occupancy
|
|
|
1,078
|
|
|
1,006
|
|
|
72
|
|
|
7.2
|
|
Equipment
|
|
|
829
|
|
|
741
|
|
|
88
|
|
|
11.9
|
|
Other
|
|
|
3,374
|
|
|
2,558
|
|
|
816
|
|
|
31.9
|
|
Total
non-interest expense
|
|
$
|
12,332
|
|
$
|
11,071
|
|
$
|
1,261
|
|
|
11.4
|
|
Salary
and benefits increased due to the normal annual increases, the recognition
of
stock-based compensation expense of $151 thousand, and increased pension costs
of $80 when compared to the same period in 2005. Occupancy expense increased
primarily due to the increase of rental expense as the result of the acquisition
Balmer. Equipment expense increased due to depreciation on assets purchased
for
new branches opened in 2005. Other expenses increased primarily due to bank
shares tax overpayments and credits utilized in 2005 which were no longer
available in 2006 and reductions taken in 2005 in loss contingency reserves.
Tax
Provision
The
provision for income taxes was $2.4 million for the three months ended September
30, 2006 compared to $2.5 million in 2005, at effective rates of 27.21% and
26.97%, respectively. The effective tax rates reflect the benefits of tax
credits generated from investments in low-income housing projects and tax-exempt
income from investments in municipal securities, loans and bank-owned life
insurance. The increase in the effective tax rate between the three-month
periods is primarily due to a decrease in low-income housing credits and
non-deductible stock option compensation expense, partially offset by an
increase in tax-exempt income and a decrease in pre-tax income.
Results
of Operations - Nine Months Ended September 30, 2006 Versus 2005
The
Corporation’s consolidated net income and earnings per share for the nine months
ended September 30, 2006 and 2005 were as follows:
($
in thousands, except per share data)
|
|
For
the Nine Months Ended
September
30,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Net
income
|
|
$
|
18,766
|
|
$
|
18,473
|
|
$
|
293
|
|
|
1.59
|
%
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.45
|
|
$
|
1.43
|
|
$
|
0.02
|
|
|
1.40
|
%
|
Diluted
|
|
|
1.44
|
|
|
1.42
|
|
|
0.02
|
|
|
1.41
|
|
Return
on
average shareholders' equity was 14.04% and return on average assets was 1.37%
for the nine months ended September 30, 2006 compared to 14.86% and 1.46%,
respectively, for the same period in 2005.
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. The following table presents a summary of the
Corporation's average balances; the tax-equivalent yields earned on average
assets, and the cost of average liabilities for the nine months ended September
30, 2006 and 2005. Sensitivities associated with the mix of assets and
liabilities are numerous and complex. The Asset/Liability Management and
Investment committees work to maintain an adequate and reliable net interest
margin for the Corporation.
Net
interest income increased $2.1 million for the nine months ended September
30,
2006 compared to 2005 primarily due to increased rates on commercial loans
and
commercial real estate and construction loans, partially offset by increased
rates on money market savings deposits and certificates of deposit. The
tax-equivalent net interest margin, which is tax-equivalent net interest income
as a percentage of average interest-earning assets, was 3.9% for the nine-month
period ended September 30, 2006 and 4.0% for the same period in 2005. The
tax-equivalent net interest spread, which represents the difference between
the
weighted average tax-equivalent yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities, was 3.4% for the nine
months ended September 30, 2006 compared to 3.7% for the same period in 2005.
The effect of net interest free funding sources increased to 0.5% for the nine
months ended September 30, 2006 compared to 0.3% for the same period in 2005;
this represents the effect on the net interest margin of net funding provided
by
noninterest-earning assets, noninterest-bearing liabilities and shareholders’
equity.
Table
1 — Distribution of Assets, Liabilities and Stockholders’
Equity; Interest
Rates and Interest Differential
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
Income/
|
|
Avg.
|
|
Average
|
|
Income/
|
|
Avg.
|
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
deposits with other banks
|
|
$
|
647
|
|
$
|
19
|
|
|
3.9
|
%
|
$
|
693
|
|
$
|
12
|
|
|
2.3
|
%
|
U.S.
Government obligations
|
|
|
154,183
|
|
|
4,067
|
|
|
3.5
|
|
|
157,805
|
|
|
3,864
|
|
|
3.3
|
|
Obligations
of states & political subdivisions
|
|
|
84,210
|
|
|
4,467
|
|
|
7.1
|
|
|
78,016
|
|
|
4,076
|
|
|
7.0
|
|
Other
securities
|
|
|
115,106
|
|
|
4,281
|
|
|
5.0
|
|
|
104,492
|
|
|
3,366
|
|
|
4.3
|
|
Federal
Reserve bank stock
|
|
|
1,687
|
|
|
76
|
|
|
6.0
|
|
|
1,687
|
|
|
76
|
|
|
6.0
|
|
Federal
funds sold
|
|
|
5,525
|
|
|
197
|
|
|
4.8
|
|
|
6,413
|
|
|
146
|
|
|
3.0
|
|
Total
interest-earning deposits, investments and federal funds
sold
|
|
|
361,358
|
|
|
13,107
|
|
|
4.8
|
|
|
349,106
|
|
|
11,540
|
|
|
4.4
|
|
Commercial,
financial and agricultural loans and leases
|
|
|
388,272
|
|
|
21,462
|
|
|
7.4
|
|
|
339,250
|
|
|
15,603
|
|
|
6.1
|
|
Real
estate─commercial and construction loans
|
|
|
418,428
|
|
|
23,585
|
|
|
7.5
|
|
|
388,263
|
|
|
19,465
|
|
|
6.7
|
|
Real
estate─residential loans
|
|
|
302,955
|
|
|
12,285
|
|
|
5.4
|
|
|
296,918
|
|
|
11,284
|
|
|
5.1
|
|
Loans
to individuals
|
|
|
106,821
|
|
|
5,266
|
|
|
6.6
|
|
|
78,408
|
|
|
3,509
|
|
|
6.0
|
|
Municipal
loans
|
|
|
88,285
|
|
|
3,926
|
|
|
5.9
|
|
|
83,121
|
|
|
3,408
|
|
|
5.5
|
|
Gross
loans and leases
|
|
|
1,304,761
|
|
|
66,524
|
|
|
6.8
|
|
|
1,185,960
|
|
|
53,269
|
|
|
6.0
|
|
Total
interest-earning assets
|
|
|
1,666,119
|
|
|
79,631
|
|
|
6.4
|
|
|
1,535,066
|
|
|
64,809
|
|
|
5.6
|
|
Cash
and due from banks
|
|
|
40,707
|
|
|
|
|
|
|
|
|
39,809
|
|
|
|
|
|
|
|
Reserve
for loan losses
|
|
|
(13,964
|
)
|
|
|
|
|
|
|
|
(13,100
|
)
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
21,946
|
|
|
|
|
|
|
|
|
20,569
|
|
|
|
|
|
|
|
Other
assets
|
|
|
107,081
|
|
|
|
|
|
|
|
|
103,301
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,821,889
|
|
|
|
|
|
|
|
$
|
1,685,645
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking deposits
|
|
$
|
137,422
|
|
|
143
|
|
|
0.1
|
|
$
|
152,104
|
|
|
126
|
|
|
0.1
|
|
Money
market savings
|
|
|
310,291
|
|
|
8,099
|
|
|
3.5
|
|
|
268,230
|
|
|
3,896
|
|
|
1.9
|
|
Regular
savings
|
|
|
196,125
|
|
|
1,011
|
|
|
0.7
|
|
|
212,004
|
|
|
444
|
|
|
0.3
|
|
Certificates
of deposit
|
|
|
517,630
|
|
|
14,768
|
|
|
3.8
|
|
|
433,266
|
|
|
9,301
|
|
|
2.9
|
|
Time
open & club accounts
|
|
|
24,970
|
|
|
808
|
|
|
4.3
|
|
|
17,066
|
|
|
322
|
|
|
2.5
|
|
Total
time and interest-bearing deposits
|
|
|
1,186,438
|
|
|
24,829
|
|
|
2.8
|
|
|
1,082,670
|
|
|
14,089
|
|
|
1.7
|
|
Federal
funds purchased
|
|
|
5,947
|
|
|
234
|
|
|
5.3
|
|
|
6,326
|
|
|
149
|
|
|
3.1
|
|
Securities
sold under agreements to repurchase
|
|
|
94,996
|
|
|
1,517
|
|
|
2.1
|
|
|
95,297
|
|
|
856
|
|
|
1.2
|
|
Other
short-term borrowings
|
|
|
17,748
|
|
|
624
|
|
|
4.7
|
|
|
884
|
|
|
24
|
|
|
3.6
|
|
Long-term
debt
|
|
|
56,532
|
|
|
1,861
|
|
|
4.4
|
|
|
56,877
|
|
|
1,815
|
|
|
4.3
|
|
Subordinated
notes and capital securities
|
|
|
31,125
|
|
|
1,746
|
|
|
7.5
|
|
|
32,618
|
|
|
1,399
|
|
|
5.7
|
|
Total
borrowings
|
|
|
206,348
|
|
|
5,982
|
|
|
3.9
|
|
|
192,002
|
|
|
4,243
|
|
|
2.9
|
|
Total
interest-bearing liabilities
|
|
|
1,392,786
|
|
|
30,811
|
|
|
3.0
|
|
|
1,274,672
|
|
|
18,332
|
|
|
1.9
|
|
Demand
deposits, non-interest bearing
|
|
|
227,835
|
|
|
|
|
|
|
|
|
223,952
|
|
|
|
|
|
|
|
Accrued
expenses & other liabilities
|
|
|
23,078
|
|
|
|
|
|
|
|
|
21,260
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,643,699
|
|
|
|
|
|
|
|
|
1,519,884
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
74,370
|
|
|
|
|
|
|
|
|
66,470
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
22,097
|
|
|
|
|
|
|
|
|
21,691
|
|
|
|
|
|
|
|
Retained
earnings and other equity
|
|
|
81,723
|
|
|
|
|
|
|
|
|
77,600
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
178,190
|
|
|
|
|
|
|
|
|
165,761
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,821,889
|
|
|
|
|
|
|
|
$
|
1,685,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
48,820
|
|
|
|
|
|
|
|
$
|
46,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
3.4
|
|
|
|
|
|
|
|
|
3.7
|
|
Effect
of net interest-free funding sources
|
|
0.5
|
|
|
|
|
|
|
|
|
0.3
|
|
Net
interest margin
|
|
3.9
|
%
|
|
|
|
|
|
|
|
4.0
|
%
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
|
|
120.1
|
%
|
|
|
|
|
|
|
|
120.4
|
%
|
|
|
|
|
|
|
Notes:
Tax-equivalent
amounts have been calculated using the Corporation’s federal applicable rate of
35 percent.
For
rate
calculation purposes, average loan categories include unearned
discount.
Nonaccrual
loans have been included in the average loan balances.
Certain
amounts have been reclassified to conform to the current-year
presentation.
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 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 to change in volume.
|
|
The
Nine Months Ended September 30,
2006
Versus 2005
|
|
|
|
Volume
Change
|
|
Rate
Change
|
|
Total
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
deposits with other banks
|
|
$
|
(1
|
)
|
$
|
8
|
|
$
|
7
|
|
U.S.
Government obligations
|
|
|
(34
|
)
|
|
237
|
|
|
203
|
|
Obligations
of states & political subdivisions
|
|
|
332
|
|
|
59
|
|
|
391
|
|
Other
securities
|
|
|
366
|
|
|
549
|
|
|
915
|
|
Federal
Reserve bank stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Federal
funds sold
|
|
|
(36
|
)
|
|
87
|
|
|
51
|
|
Interest
on deposits, investments and federal funds sold
|
|
|
627
|
|
|
940
|
|
|
1,567
|
|
Commercial,
financial and agricultural loans and leases
|
|
|
2,551
|
|
|
3,308
|
|
|
5,859
|
|
Real
estate─commercial and construction loans
|
|
|
1,790
|
|
|
2,330
|
|
|
4,120
|
|
Real
estate─residential loans
|
|
|
333
|
|
|
668
|
|
|
1,001
|
|
Loans
to individuals
|
|
|
1,404
|
|
|
353
|
|
|
1,757
|
|
Municipal
loans
|
|
|
269
|
|
|
249
|
|
|
518
|
|
Interest
and fees on loans and leases
|
|
|
6,347
|
|
|
6,908
|
|
|
13,255
|
|
Total
interest income
|
|
|
6,974
|
|
|
7,848
|
|
|
14,822
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Interest
checking deposits
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Money
market savings
|
|
|
984
|
|
|
3,219
|
|
|
4,203
|
|
Regular
savings
|
|
|
(69
|
)
|
|
636
|
|
|
567
|
|
Certificates
of deposit
|
|
|
2,542
|
|
|
2,925
|
|
|
5,467
|
|
Time
open & club accounts
|
|
|
256
|
|
|
230
|
|
|
486
|
|
Interest
on deposits
|
|
|
3,730
|
|
|
7,010
|
|
|
10,740
|
|
Federal
funds purchased
|
|
|
(19
|
)
|
|
104
|
|
|
85
|
|
Securities
sold under agreement to repurchase
|
|
|
18
|
|
|
643
|
|
|
661
|
|
Other
short-term borrowings
|
|
|
593
|
|
|
7
|
|
|
600
|
|
Long-term
debt
|
|
|
3
|
|
|
43
|
|
|
46
|
|
Subordinated
notes and capital securities
|
|
|
(93
|
)
|
|
440
|
|
|
347
|
|
Interest
on borrowings
|
|
|
502
|
|
|
1,237
|
|
|
1,739
|
|
Total
interest expense
|
|
|
4,232
|
|
|
8,247
|
|
|
12,479
|
|
Net
interest income
|
|
$
|
2,742
|
|
$
|
(399
|
)
|
$
|
2,343
|
|
Notes:
Tax-equivalent
amounts have been calculated using the Corporation’s federal applicable rate of
35 percent.
Nonaccrual
loans and unearned discounts have been included in the average loan balances.
Interest
Income
Interest
on deposits, investments and federal funds sold increased primarily due to
rate
increases on mortgage-backed securities and U.S. Government obligations and
volume increases in mortgage-backed securities and obligations of state and
political subdivisions.
The
growth in interest and fees on loans and leases is due primarily to increased
rates on commercial business loans and commercial and construction real estate
loans. The average interest yield on the commercial loan portfolio increased
124
basis points, primarily due to a 194 basis point increase in the average prime
rate, for the nine months ended September 30, 2006 compared to the same period
in 2005; which, along with average volume increases of $49.0 million,
contributed to a $5.9 million increase in interest income. The average
yield on commercial and construction real estate loans increased by
84 basis points; this along with average volume increases of $30.2 million
contributed to a $4.1 million increase in interest income. The average volume
of
loans to individuals increased $28.4 million, primarily contributing to an
increase in interest income of $1.8 million.
Interest
Expense
The
Corporation’s average rate on deposits increased 105 basis points for the nine
months ended September 30, 2006 compared to the same period in 2005. The
average rate paid on money market savings increased 154 basis points due to
new products and promotions offered to grow deposits in the Bank’s competitive
marketplace; which contributed to a $4.2 million increase in interest expense.
Interest on certificates of deposit increased $5.5 million, due to a 94
basis-point increase in average rate and average volume increases of $84.4
million. The average balance of PLGIT deposits increased $48.3 million comparing
the nine months ended September 30, 2006 over the same period in 2005.
Interest
expense on short-term borrowings includes interest paid on federal funds
purchased and short-term FHLB borrowings. In addition, the Bank offers an
automated cash management checking account that sweeps funds daily into a
repurchase agreement account (“sweep accounts”). Interest expense on short-term
borrowings increased $1.3 million during the nine months ended September
30, 2006 compared to 2005 primarily due to rate increases on sweep accounts
and
volume increases in short-term FHLB borrowings.
Interest
on long-term borrowings increased primarily due to a 176 basis point increase
in
the rate paid on subordinated notes and trust preferred securities. This
increase in rate was due to LIBOR increases which affect the variable rate
paid
on the trust preferred securities.
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, 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
discounted cash flows using the loans' initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans as provided
for under SFAS No. 114. Any of the above criteria may cause the provision to
fluctuate. The bank’s primary regulators, as an integral part of their
examination process, may require adjustments to the allowance. Continued growth
in loan and lease volumes and current economic conditions indicated the need
for
an increase to the reserve in 2006. The provision for the nine months ended
September 30, 2006 and 2005 was $1.6 million and $1.4 million,
respectively.
Non-interest
Income
Non-interest
income consists of trust department fee income, service charges on deposits
income, commission income, net gains on sales of securities, and other
miscellaneous types of income. It also includes various types of service fees,
such as ATM fees, and life insurance income which primarily represents changes
in the cash surrender value of bank-owned life insurance. Total non-interest
income increased during the nine months ended September 30, 2006 compared to
2005 primarily due to higher insurance commissions and fees, investment advisory
commission as well as trust commissions.
|
|
For
the Nine Months Ended September 30,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Trust
fee income
|
|
$
|
4,362
|
|
$
|
3,964
|
|
$
|
398
|
|
|
10.0
|
%
|
Service
charges on deposit accounts
|
|
|
5,091
|
|
|
5,147
|
|
|
(56
|
)
|
|
(1.1
|
)
|
Investment
advisory commission and fee income
|
|
|
1,701
|
|
|
1,438
|
|
|
263
|
|
|
18.3
|
|
Insurance
commission and fee income
|
|
|
3,534
|
|
|
2,779
|
|
|
755
|
|
|
27.2
|
|
Life
insurance income
|
|
|
1,054
|
|
|
977
|
|
|
77
|
|
|
7.9
|
|
Other
service fee income
|
|
|
2,437
|
|
|
2,335
|
|
|
102
|
|
|
4.4
|
|
Net
gain on sales of securities
|
|
|
50
|
|
|
150
|
|
|
(100
|
)
|
|
(66.7
|
)
|
Net
loss on dispositions of fixed assets
|
|
|
(67
|
)
|
|
(218
|
)
|
|
151
|
|
|
69.3
|
|
Other
|
|
|
192
|
|
|
83
|
|
|
109
|
|
|
131.3
|
|
Total
non-interest income
|
|
$
|
18,354
|
|
$
|
16,655
|
|
$
|
1,699
|
|
|
10.2
|
|
Trust
fee
income increased in 2006 over 2005 primarily due to an increase in the number
and market value of managed accounts. Investment advisory commissions and fee
income, the primary source of income for Univest Investments, Inc., increased
in
2006 over 2005 due to market activity and volume. Insurance commission and
fee
income increased due to an increase in contingent commissions received during
the first quarter 2006 as well as the acquisition of Balmer in the third quarter
of 2006. Life insurance income is primarily the change in the cash surrender
values of bank owned life insurance policies, which is primarily affected by
the
market value of the underlying assets. The increase recognized on these policies
was slightly more in the 2006 compared to 2005.
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.
Other service fee income increased slightly in 2006 over 2005 primarily due
to
increases in Mastermoney fees and miscellaneous fee income that was offset
by a
reduction of mortgage servicing income.
Other
non-interest income includes loss on investments in partnerships, gains on
sales
of mortgages, gains on sales of other real estate owned, reinsurance income
and
other miscellaneous income. The Corporation recognized $139 thousand in
gains on sales of other real estate owned during the nine months of 2006 as
discussed below. Additionally, larger losses were recognized on investments
in
partnerships when comparing September 30, 2006 to the same period in
2005.
Gains
on Sale of Assets
Sales
of
$1.1 million in mortgage loans during the first nine months ended September
30,
2006 resulted in gains of $30 thousand compared to sales of $5.7 million
for gains of $56 thousand for the nine months ended September 30, 2005.
During
the nine months ended September 30, 2006 and 2005, approximately $1.6 million
and $10.0 million of securities were sold recognizing gains $4 thousand and
$150
thousand, respectively. During the nine months ended September 30, 2006, the
Corporation also received $46 thousand resulting from the mandatory sale of
shares created through conversion of one of its vendor relationships from a
membership association to a private share corporation.
During
the nine months ended September 30, 2006, the Corporation relocated a banking
office within one of its supermarket locations and recognized a loss of $65
thousand. During the nine months ended September 30, 2005 the Corporation closed
two of its supermarket banking offices and retired additional long-term assets
replaced by the new Kulpsville branch resulting in net losses of the disposition
of fixed assets of $215 thousand.
During
the nine months ended September 30, 2006, the Corporation sold two other real
estate owned properties resulting in a gain of $139 thousand. There were no
sales of other real estate owned during the nine months ended September 30,
2005.
Non-interest
Expense
The
operating costs of the Corporation are known as non-interest expense, and
include, but are not limited to, salaries and benefits, equipment expense, and
occupancy costs. Expense control is very important to the management of the
Corporation, and every effort is made to contain and minimize the growth of
operating expenses.
The
following table presents noninterest expense for the periods
indicated:
|
|
For
the Nine Months
Ended
September 30,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Salaries
and benefits
|
|
$
|
21,554
|
|
$
|
20,039
|
|
$
|
1,515
|
|
|
7.6
|
%
|
Net
occupancy
|
|
|
3,205
|
|
|
3,211
|
|
|
(6
|
)
|
|
(0.2
|
)
|
Equipment
|
|
|
2,406
|
|
|
2,212
|
|
|
194
|
|
|
8.8
|
|
Other
|
|
|
10,162
|
|
|
8,711
|
|
|
1,451
|
|
|
16.7
|
|
Total
non-interest expense
|
|
$
|
37,327
|
|
$
|
34,173
|
|
$
|
3,154
|
|
|
9.2
|
|
Salary
and benefits increased due to the normal annual increases, the recognition
of
stock-based compensation expense of $409 thousand, increased hospital and
medical expenses of $90 thousand, increased payroll taxes of $191 thousand
and increased pension cost of $185 thousand when compared to the same period
in
2005. Equipment expense increased due to depreciation on assets purchased for
new branches opened in 2005. Other expenses increased primarily due to bank
shares tax overpayments and credits utilized in 2005 which were no longer
available in 2006 and reductions taken in 2005 in loss contingency reserves.
These increases were partially offset by decreases in legal fees associated
with
loan work-outs.
Tax
Provision
The
provision for income taxes was $6.9 million for the nine months ended September
30, 2006 compared to $6.6 million in 2005, at effective rates of 26.77% and
26.46%, respectively. The effective tax rates reflect the benefits of tax
credits generated from investments in low-income housing projects and tax-exempt
income from investments in municipal securities, loans and bank-owned life
insurance. The increase in the effective tax rate between the nine-month periods
is primarily due to an increase in pre-tax income, non-deductible stock-based
compensation expense and a decrease in low-income housing credits, partially
offset by an increase in tax-exempt income.
Financial
Condition
Assets
Total
assets increased $168.1 million since December 31, 2005. The increase was
primarily due to net growth in loans.
The
following table presents the assets for the periods indicated:
|
|
At
September 30,
|
|
At
December 31,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Cash,
deposits and federal funds sold
|
|
$
|
46,450
|
|
$
|
59,439
|
|
$
|
(12,989
|
)
|
|
(21.9
|
)%
|
Investment
securities
|
|
|
395,252
|
|
|
343,259
|
|
|
51,993
|
|
|
15.1
|
|
Total
loans and leases
|
|
|
1,370,620
|
|
|
1,249,652
|
|
|
120,968
|
|
|
9.7
|
|
Reserve
for loan and lease losses
|
|
|
(12,997
|
)
|
|
(13,363
|
)
|
|
366
|
|
|
2.7
|
|
Premises
and equipment, net
|
|
|
22,326
|
|
|
21,635
|
|
|
691
|
|
|
3.2
|
|
Goodwill
and other intangibles, net
|
|
|
47,841
|
|
|
43,387
|
|
|
4,454
|
|
|
10.3
|
|
Cash
surrender value of insurance policies
|
|
|
36,265
|
|
|
35,211
|
|
|
1,054
|
|
|
3.0
|
|
Other
assets
|
|
|
31,640
|
|
|
30,089
|
|
|
1,551
|
|
|
5.2
|
|
Total
assets
|
|
$
|
1,937,397
|
|
$
|
1,769,309
|
|
$
|
168,088
|
|
|
9.5
|
|
Investment
Securities
The
investment portfolio is managed as part of the overall asset and liability
management process to optimize income and market performance over an entire
interest rate cycle while mitigating risk. Activity in this portfolio is
undertaken primarily to manage liquidity and interest rate risk and to take
advantage of market conditions that create more economically attractive returns
on these investments. The securities portfolio consists primarily of U.S.
Government agency, mortgage-backed and municipal securities.
Total
investments increased primarily due to security purchases of $194.7 million
that
were partially offset by maturities of $122.1 million and sales and calls of
$22.2 million.
Loans
and Leases
Total
loans and leases increased in the nine months ended September 30, 2006 due
to
increases in commercial business loans of $70.4 million, commercial real estate
loans of $9.9 million, real estate construction loans of $25.3 million,
lease financings of $10.2 million and non-real estate related loans to
individuals of $4.9 million.
Asset
Quality
Performance
of the entire loan and lease portfolio is reviewed on a regular basis by bank
management and loan officers. A number of factors regarding the borrower, such
as overall financial strength, collateral values, and repayment ability, are
considered in deciding what actions should be taken when determining the
collectibility of interest for accrual purposes.
When
a
loan or lease, including a loan or lease impaired under SFAS No. 114, is
classified as nonaccrual, the accrual of interest on such a loan or lease is
discontinued. A loan or lease is classified as nonaccrual when the contractual
payment of principal or interest has become 90 days past due or management
has
serious doubts about the further collectibility of principal or interest, even
though the loan is currently performing. A loan or lease may remain on accrual
status if it is in the process of collection and is either guaranteed or well
secured. When a loan or lease is placed on nonaccrual status, unpaid interest
credited to income is reversed. Interest received on nonaccrual loans and leases
is either applied against principal or reported as interest income, according
to
management's judgment as to the collectibility of principal.
Loans
and
leases are usually restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time, and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Cash
basis, restructured and nonaccrual loans and leases totaled $4.9 million at
September 30, 2006, $3.3 million at December 31, 2005 and $6.0 million
at September 30, 2005 and consist mainly of commercial loans and real estate
related commercial loans. For the nine months ended September 30, 2006 and
2005,
nonaccrual loans and leases resulted in lost interest income of $319 thousand
and $444 thousand, respectively. Loans and leases 90 days or more past due
totaled $1.7 million at September 30, 2006, $610 thousand at December 31, 2005
and $786 thousand at September 30, 2005. Other real estate owned totaled $344
thousand at December 31, 2005 and $732 thousand at September 30, 2005. There
was
no other real estate owned at September 30, 2006. The Corporation's ratio of
nonperforming assets to total loans and leases and other real estate owned
was
0.48% at September 30, 2006, 0.34% at December 31, 2005 and .61% at September
30, 2005.
At
September 30, 2006, the recorded investment in loans and leases that are
considered to be impaired under SFAS No. 114 was $4.9 million, all of which
were on a nonaccrual basis; the related reserve for loan and lease losses for
those credits was $1.1 million. At December 31, 2005, the recorded
investment in loans and leases that are considered to be impaired under SFAS
No.
114 was $3.3 million, all of which were on a nonaccrual basis. The related
reserve for loan and lease losses for those credits was $1.1 million. At
September 30, 2005, the recorded investment in loans and leases that are
considered to be impaired under SFAS No. 114 was $6.0 million and the
related reserve for loan and lease losses for those credits was
$815 thousand. The amount of the specific reserve needed for these credits
could change in future periods subject to changes in facts and judgments related
to these credits. Specific reserves have been established based on current
facts
and management’s judgments about the ultimate outcome of these
credits.
Reserve
for Loan and Lease Losses
Management
believes the reserve for loan and lease losses is maintained at a level that
is
adequate to absorb losses in the loan and lease portfolio. Management's
methodology to determine the adequacy of and the provisions to the reserve
considers specific credit reviews, past credit loss experience, current economic
conditions and trends, and the volume, growth, and composition of the loan
and
lease portfolio.
The
reserve for loan and lease losses is determined through a monthly evaluation
of
reserve adequacy. Quarterly, this analysis takes into consideration the growth
of the loan and lease portfolio, the status of past-due credits, current
economic conditions, various types of lending activity, policies, real estate
and other loan commitments, and significant changes in charge-off activity.
Non-accrual loans and leases are evaluated individually. All other loans are
evaluated as pools. Based on historical loss experience, loss factors are
determined giving consideration to the areas noted in the first paragraph and
applied to the pooled loan or lease categories to develop the general or
allocated portion of the reserve. Loans are also reviewed for impairment based
on discounted cash flows using the loans' initial effective interest rate or
the
fair value of the collateral for certain collateral-dependent loans as provided
under SFAS No. 114. Management also reviews the activity within the reserve
to
determine what actions, if any, should be taken to address differences between
estimated and actual losses. Any of the above factors may cause the provision
to
fluctuate.
The
reserve for loan and lease losses is based on management's evaluation of the
loan and lease portfolio under current economic conditions and such other
factors, which deserve recognition in estimating credit losses. This evaluation
is inherently subjective, as it requires estimates including the amounts and
timing of future cash flows expected to be received on impaired credits that
may
be susceptible to significant change. Additions to the reserve arise from the
provision for loan and lease losses charged to operations or from the recovery
of amounts previously charged off. Loan and lease charge-offs reduce the
reserve. Loans and leases are charged off when there has been permanent
impairment or when in the opinion of management the full amount of the loan
or
lease, in the case of non-collateral dependent borrowings, will not be realized.
Certain impaired credits are reported at the present value of expected future
cash flows using the loan's initial effective interest rate, or at the credit's
observable market price or the fair value of the collateral if the credit is
collateral dependent.
The
specific reserve element is based on a regular analysis of impaired commercial
and real estate credits. For these credits, the specific reserve established
is
based on an analysis of related collateral value, cash flow considerations
and,
if applicable, guarantor capacity.
The
class
reserve element is determined by an internal credit grading process in
conjunction with associated allowance factors. The Corporation revises the
class
reserve factors whenever necessary in order to address improving or
deteriorating credit quality trends or specific risks associated with a given
loan or lease pool classification.
The
Corporation maintains a reserve in other liabilities for off-balance sheet
credit exposures that currently are unfunded.
The
reserve for loan and lease losses decreased $366 thousand from December 31,
2005
to September 30, 2006 due to two large charge-offs for a commercial customer
of
$1.4 million that occurred in the third quarter partially offset by a decrease
in reserve resulting from payoffs of nonaccrual loans. Management believes
that
the reserve is maintained at a level that is adequate to absorb losses in the
loan and lease portfolio. The ratio of the reserve for loan and lease losses
to
total loans and leases was 0.95% at September 30, 2006 and 1.07% at December
31,
2005.
Goodwill
and Other Intangible Assets
On
January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" (“SFAS 142”). In accordance with the provisions of SFAS
142, the Corporation completes annual impairment tests during the fourth
quarter. There can be no assurance that future goodwill impairment tests will
not result in a charge to earnings.
The
Corporation has covenants not to compete, intangible assets due to bank and
branch acquisitions, core deposit intangibles, and mortgage servicing rights,
which are not deemed to have an indefinite life and therefore will continue
to
be amortized over their useful life. The Corporation also has goodwill of $41.2
million, which is deemed to be an indefinite intangible asset and will not
be
amortized but is tested for impairment annually. During the third quarter 2006,
the Corporation recorded $4.7 of intangible assets as a result of the Balmer
acquisition.
Liabilities
Total
liabilities increased since December 31, 2005 primarily due to an increase
in
deposits. Borrowings also increased which were partially offset by a decrease
in
other liabilities. The following table presents the liabilities for the periods
indicated:
|
|
At
September 30,
|
|
At
December 31,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Deposits
|
|
$
|
1,463,716
|
|
$
|
1,366,715
|
|
$
|
97,001
|
|
|
7.1
|
%
|
Borrowings
|
|
|
261,695
|
|
|
196,761
|
|
|
64,934
|
|
|
33.0
|
|
Accrued
expenses and other liabilities
|
|
|
26,493
|
|
|
32,753
|
|
|
(6,260
|
)
|
|
(19.1
|
)
|
Total
liabilities
|
|
$
|
1,751,904
|
|
$
|
1,596,229
|
|
$
|
155,675
|
|
|
9.8
|
|
Deposits
Total
deposits grew at the Bank primarily due to increases in PLGIT deposits of $43.0
million and $40.0 million in brokered CD's. Growth in money market savings
accounts of $23.5 million was offset by decreases in interest-bearing checking
accounts of $22.7 million and decreases in non-interest-bearing demand accounts
of $17.7 million.
Borrowings
Long-term
borrowings at September 30, 2006, included $10.1 million in Subordinated Capital
Notes, $20.6 million of Trust Preferred Securities, and $65.5 million in
long-term borrowings from the FHLB. The consolidated balance sheet also includes
a $1.7 million fair market value adjustment relating to FHLB long-term
borrowings acquired in the First County Bank and Suburban Community Bank
acquisitions. In April 2003, the Corporation secured $15.0 million in
subordinated capital notes that qualify for Tier 2 capital status. In August
2003, the Corporation issued $20.0 million of trust preferred securities that
qualify for Tier 1 capital status. Principal payments of $375 thousand are
made quarterly and reduce the Subordinated Capital Notes balance. The
Corporation deconsolidated its Capital Trust in the first quarter of 2004,
as a
result of the adoption of FIN 46. The result was an increase in the junior
debt
of $619 thousand. Short-term borrowings typically include federal funds
purchased and short-term FHLB borrowings. In addition, the Bank offers an
automated cash management checking account that sweeps funds daily into a
repurchase agreement account (“sweep accounts”). Short-term borrowings increased
due to an increase of short-term FHLB borrowings of $44.2 million as well as
an
increase of federal funds purchased of $26.6 million which were offset by
decreases in the sweep accounts of $15.3 million.
Other
Liabilities
Other
liabilities decreased primarily due to payments made to private investors for
participated loans and taxes paid.
Shareholders'
Equity
Total
shareholders’ equity increased since December 31, 2005 primarily due to current
earnings, partially offset by cash dividends paid. The following table presents
the shareholders’ equity for the periods indicated:
|
|
At
September 30,
|
|
At
December 31,
|
|
Change
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Common
stock
|
|
$
|
74,370
|
|
$
|
74,370
|
|
$
|
─
|
|
|
─
|
%
|
Additional
paid-in capital
|
|
|
22,376
|
|
|
22,051
|
|
|
325
|
|
|
1.5
|
|
Retained
earnings
|
|
|
124,541
|
|
|
114,346
|
|
|
10,195
|
|
|
8.9
|
|
Accumulated
other comprehensive loss
|
|
|
(60
|
)
|
|
(1,050
|
)
|
|
990
|
|
|
94.3
|
|
Treasury
stock
|
|
|
(35,734
|
)
|
|
(36,637
|
)
|
|
903
|
|
|
2.5
|
|
Total
shareholders’ equity
|
|
$
|
185,493
|
|
$
|
173,080
|
|
$
|
12,413
|
|
|
7.2
|
|
Retained
earnings were favorably impacted by nine months of net income of $18.8 million
partially offset by cash dividends of $7.5 million declared during the nine
months of 2006. Treasury stock decreased slightly primarily due to the exercise
of stock options. There is a buyback program in place that as of September
30,
2006 allows the Corporation to purchase an additional 489,439 shares of its
outstanding common stock in the open market or in negotiated transactions.
Accumulated
other comprehensive loss related to securities of $44 thousand, net of taxes,
is
included in shareholders' equity as of September 30, 2006. Accumulated other
comprehensive loss related to securities of $989 thousand, net of taxes,
has been included in shareholders' equity as of December 31, 2005. Accumulated
other comprehensive income (loss) related to debt securities is the unrealized
gain (loss), or difference between the book value and market value, on the
available-for-sale investment portfolio, net of taxes. The period-to-period
increase in accumulated other comprehensive income (loss) was a result of
increases in the market values of fixed rate mortgage-backed and
non-mortgage-backed government agency debt securities, partially offset by
a
decline in the market value of municipal securities. The market value increases
are attributable to increases, from December 31, 2005 to September 30,
2006, in the 2-, 3-, 5- and 10-year treasury yields, which ranged from
27 basis points to 30 basis points.
In
the
third quarter of 2005, the Corporation entered into an interest-rate swap
agreement that converts a portion of its floating rate commercial loans to
a
fixed rate basis. The accumulated other comprehensive loss related to
interest-rate swaps, net of taxes, included in shareholders’ equity at September
30, 2006 and December 31, 2005 was $16 thousand and $61 thousand,
respectively. Accumulated other comprehensive income (loss) related to
interest-rate swaps reflects the current market value of the swap, net of taxes.
Capital
Adequacy
Capital
guidelines which banking regulators have adopted assign minimum capital
requirements for categories of assets depending on their assigned risks. The
components of risk-based capital are Tier 1 and Tier 2. Minimum required total
risk-based capital is 8.0%. The Corporation and the Bank continue to be in
the
"well-capitalized" category under regulatory standards.
Critical
Accounting Policies
Management,
in order to prepare the Corporation's financial statements in conformity with
generally accepted accounting principles, is required to make estimates and
assumptions that effect 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 reserve for loan
and lease losses, intangible assets, investment securities, mortgage servicing
rights, income taxes and benefit plans as its critical accounting policies.
For
more information on these critical accounting policies, please refer to our
2005
Annual Report on Form 10-K.
During
the first quarter of 2006, the Corporation adopted SFAS 123R, “Accounting for
Stock-based Compensation,” and added stock-based compensation to its list of
critical accounting policies. The Corporation uses the Black-Scholes Model
to
estimate the fair value of each option on the date of grant. The Black-Scholes
Model estimates the fair value of employee stock options using a pricing model
which takes into consideration the exercise price of the option, the expected
life of the options, the current market price and its expected volatility,
the
expected dividends on the stock and the current risk-free interest rate for
the
expected life of the option. The Corporation’s estimate of the fair value of a
stock option is based on expectations derived from historical experience and
may
not necessarily equate to its market value when fully vested. During the nine
months ended September 30, 2006, the Corporation recognized stock-based
compensation expense of $409 thousand.
Asset/Liability
Management
The
primary functions of Asset/Liability Management are to assure adequate earnings,
capital and liquidity while maintaining an appropriate balance between
interest-earning assets and interest-bearing liabilities. Liquidity management
involves the ability to meet cash flow requirements of customers and corporate
needs. Interest-rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing rates.
The
Corporation uses both static gap analysis and simulation techniques to quantify
its exposure to interest rate risk. The Corporation uses static gap analysis
techniques to identify and monitor long-term rate exposure and uses a simulation
model to measure the short-term rate exposures. The Corporation runs various
earnings simulation scenarios to quantify the effect of declining or rising
interest rates on the net interest margin over a one-year horizon. The
simulation uses existing portfolio rate and repricing information, combined
with
assumptions regarding future loan and deposit growth, future spreads,
prepayments on residential mortgages, and the discretionary pricing of
non-maturity assets and liabilities.
During
the third quarter of 2005, the Corporation entered into an interest-rate swap
agreement that converts a portion of its floating rate commercial loans to
a
fixed rate basis. Under this swap agreement, the Corporation agrees to exchange,
at specified intervals, the difference between fixed and floating-interest
rates
calculated on an agreed upon notional principal amount. Interest-rate swaps
in
which the Corporation pays a floating rate and receives a fixed rate are used
to
reduce the impact of changes in interest rates on the Corporation’s net interest
income.
At
September 30, 2006, the total notional amount of the “Pay Floating, Receive
Fixed” swap outstanding was $20.0 million. The net payable or receivable
from the interest-rate swap agreement is accrued as an adjustment to interest
income. The $20.0 million in notional amount of interest-rate swap outstanding
expires on November 2, 2006.
The
impact of the interest-rate swap on net interest income for the nine months
ended September 30, 2006 was a negative $125 thousand. The Corporation’s credit
exposure on swaps is limited to the value of interest-rate swaps that have
become favorable to the Corporation. Credit risk would exist because the
counterparty to a derivative contract with an unrealized gain might fail to
perform according to the terms of the agreement. As of September 30, 2006,
the
market value of the interest-rate swap was in an unfavorable position of $25
thousand and there were no interest-rate swaps with a market value in a
favorable position.
Liquidity
The
Corporation, in its role as a financial intermediary, is exposed to certain
liquidity risks. Liquidity refers to the Corporation's ability to ensure that
sufficient cash flow and liquid assets are available to satisfy demand for
loans
and deposit withdrawals. The Corporation manages its liquidity risk by measuring
and monitoring its liquidity sources and estimated funding needs. The
Corporation has a contingency funding plan in place to address liquidity needs
in the event of an institution-specific or a systemic financial
crisis.
Sources
of Funds
Core
deposits and cash management repurchase agreements (“Repos”) have historically
been the most significant funding sources for the Corporation. These deposits
and Repos are generated from a base of consumer, business and public customers
primarily located in Bucks and Montgomery counties, Pennsylvania. The
Corporation faces increased competition for these deposits from a large array
of
financial market participants, including banks, thrifts, mutual funds, security
dealers and others.
The
Corporation supplements its core funding with money market funds it holds for
the benefit of various trust accounts. These funds are fully collateralized
by
the Bank’s investment portfolio and are at current money market mutual fund
rates. This funding source is subject to changes in the asset allocations of
the
trust accounts. Since August 2004, the Bank obtained deposits from PLGIT to
augment its fixed funding sources. The PLGIT deposits are public funds
collateralized with a letter of credit that PLGIT maintains with the FHLB;
therefore, the Bank is not required to provide collateral on these deposits.
These standby letters of credit are issued by the FHLB on behalf of the
Corporation, which is the account party on the letters of credit and therefore
is obligated to reimburse the FHLB for all payments made under the standby
letter of credit. At September 30, 2006, the Bank had $93.0 million in PLGIT
deposits.
The
Corporation, through its Bank, has short-term and long-term credit facilities
with the FHLB with a maximum borrowing capacity of approximately
$350.0 million. At September 30, 2006, under the FHLB credit facilities,
the Corporation's outstanding short-term and long-term borrowings totaled $109.7
million and PLGIT letters of credit totaled $96.0 million. The maximum borrowing
capacity changes as a function of the Bank’s qualifying collateral assets and
the amount of funds received may be reduced by additional required purchases
of
FHLB stock.
The
Corporation maintains federal fund lines with several correspondent banks
totaling $70 million. At September 30, 2006, there were $26.6 million in
outstanding borrowings under these lines. Future availability under these lines
is subject to the policies of the granting banks and may be
withdrawn.
The
Corporation, through the Bank, has an available line of credit at the Federal
Reserve Bank of Philadelphia, the amount of which is dependent upon the balance
of loans and securities pledged as collateral. At September 30, 2006, the
Corporation had no outstanding borrowings under this line.
Cash
Requirements
The
Corporation has cash requirements for various financial obligations, including
contractual obligations and commitments that require cash payments. The
contractual obligations and commitments table that follows presents, as of
September 30, 2006, significant fixed and determinable contractual obligations
and commitments to third parties. The most significant contractual obligation,
in both the under and over one year time period, is for the Bank to repay its
certificates of deposit. Securities sold under agreement to repurchase
constitute the next largest payment obligation which is short term in nature.
The Bank anticipates meeting these obligations by continuing to provide
convenient depository and cash management services through its branch network,
thereby replacing these contractual obligations with similar fund sources at
rates that are competitive in our market.
Commitments
to extend credit are the Bank’s most significant commitment in both the under
and over one year time periods. These commitments do not necessarily represent
future cash requirements in that these commitments often expire without being
drawn upon.
Contractual
Obligations and Commitments
The
Corporation enters into contractual obligations in the normal course of business
as a source of funds for its asset growth and its asset/liability management,
to
fund acquisitions and to meet required capital needs. These obligations require
the Corporation to make cash payments over time as detailed in the table below.
The
Corporation is a party to financial instruments with off-balance sheet risk
in
the normal course of business to manage the Corporation’s exposure to
fluctuation in interest rates. These financial instruments include commitments
to extend credit, standby and commercial letters of credit and forward
contracts. These financial instruments involve, to varying degrees, elements
of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of these financial
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The
Corporation’s exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby and commercial letters of credit is represented by the contractual
amount of those instruments. The Corporation uses the same credit policies
in
making commitments and conditional obligations as it does for on-balance sheet
instruments. Unless noted otherwise, the Corporation does not require and is
not
required to pledge collateral or other security to support financial instruments
with credit risk. These commitments expire over time as detailed in the
following table.
The
PLGIT
deposits are public funds collateralized with a letter of credit that PLGIT
maintains with the FHLB; therefore, the Corporation is not required to provide
collateral on these deposits. These standby letters of credit are issued by
the
FHLB on behalf of the Corporation, which is the account party on the letters
of
credit and therefore is obligated to reimburse the FHLB for all payments made
under the standby letter of credit. The Corporation’s exposure is represented by
the contractual amount of these instruments.
Forward
contracts represent agreements for delayed delivery of financial instruments
or
commodities in which the buyer agrees to purchase and the seller agrees to
deliver, at a specified future date, a specified instrument or commodity at
a
specified price or yield. Forward contracts are not traded on organized
exchanges and their contractual terms are not standardized. The Corporation’s
forward contracts are commitments to sell loans secured by 1-to-4 family
residential properties whose predominant risk characteristic is interest rate
risk.
The
following table sets forth contractual obligations and other commitments
representing required and potential cash outflows, including interest payable,
as of September 30, 2006:
|
|
|
Payments
Due by Period
|
|
|
|
|
Total
|
|
|
|
|
|
Due
in One to Three Years
|
|
|
Due
in Four
to
Five Years
|
|
|
|
|
Long-term
debt
|
|
$
|
77,401
|
|
$
|
4,494
|
|
$
|
23,471
|
|
$
|
44,196
|
|
$
|
5,240
|
|
Subordinated
capital notes
|
|
|
12,646
|
|
|
2,137
|
|
|
4,019
|
|
|
3,639
|
|
|
2,851
|
|
Trust
preferred securities
|
|
|
67,288
|
|
|
1,727
|
|
|
3,455
|
|
|
3,454
|
|
|
58,652
|
|
Securities
sold under agreement to repurchase
|
|
|
93,002
|
|
|
93,002
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Other
short-term borrowings
|
|
|
70,803
|
|
|
70,803
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Time
deposits
|
|
|
621,516
|
|
|
513,365
|
|
|
69,739
|
|
|
34,704
|
|
|
3,708
|
|
Operating
leases
|
|
|
8,715
|
|
|
1,497
|
|
|
2,345
|
|
|
1,574
|
|
|
3,299
|
|
Standby
and commercial letters of credit
|
|
|
57,980
|
|
|
49,998
|
|
|
7,982
|
|
|
─
|
|
|
─
|
|
Forward
contracts
|
|
|
225
|
|
|
225
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Commitments
to extend credit
|
|
|
458,405
|
|
|
115,808
|
|
|
69,356
|
|
|
24,386
|
|
|
248,855
|
|
PLGIT
letters of credit
|
|
|
96,010
|
|
|
96,010
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Total
contractual obligations
|
|
$
|
1,563,991
|
|
$
|
949,066
|
|
$
|
180,367
|
|
$
|
111,953
|
|
$
|
322,605
|
|
Recent
Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS
155 amends SFAS Nos. 133 and 140. SFAS 155 resolves issues addressed in
Statement 133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets." SFAS 155: a) permits
fair
value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation; b) clarifies
which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives; and, e) amends
SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS
155
is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006.
The fair value election provided for in paragraph 4(c) of this Statement may
also be applied upon adoption of this Statement for hybrid financial instruments
that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the
adoption of SFAS 155. Earlier adoption is permitted as of the beginning of
an
entity's fiscal year, provided the entity has not yet issued financial
statements, including financial statements for any interim period for that
fiscal year. Provisions of SFAS 155 may be applied to instruments that an entity
holds at the date of adoption on an instrument-by-instrument basis. The Company
does not anticipate that SFAS 155 will have a material impact on their
consolidated financial statements upon adoption. The Corporation has not
completed its assessment of SFAS 155 and the impact, if any, on the financial
statements.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”). SFAS 156 amends SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities.” SFAS 156: 1) requires an entity to recognize a servicing
asset or servicing liability each time it undertakes an obligation to service
a
financial asset by entering into a servicing contract in any of the following
situations: a) a transfer of the servicer’s financial assets that meets the
requirements for sale accounting; b) a transfer of the servicer’s financial
assets to a qualifying special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities in accordance with SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”); or, c) an acquisition or assumption
of an obligation to service a financial asset that does not relate to financial
assets of the servicer or its consolidated affiliates; 2) requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable; 3) permits an entity to choose either
of
the following subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities: a) amortization
method—amortize servicing assets or servicing liabilities in proportion to and
over the period of estimated net servicing income or net servicing loss and
assess servicing assets or servicing liabilities for impairment or increased
obligation based on fair value at each reporting date; or, b) fair value
measurement method—measure servicing assets or servicing liabilities at fair
value at each reporting date and report changes in fair value in earnings in
the
period in which the changes occur; 4) at its initial adoption, permits a
one-time reclassification of available-for-sale securities to trading securities
by entities with recognized servicing rights, without calling into question
the
treatment of other available-for-sale securities under SFAS 115, provided that
the available-for-sale securities are identified in some manner as offsetting
the entity’s exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and,
5) requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position
and
additional disclosures for all separately recognized servicing assets and
servicing liabilities. An entity should adopt SFAS 156 as of the beginning
of
its first fiscal year that begins after September 15, 2006. Earlier adoption
is
permitted as of the beginning of an entity’s fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. The effective date of SFAS 156 is the date
an entity adopts the requirements of this Statement. The Corporation has not
completed its assessment of SFAS 156 and the impact, if any, on the financial
statements.
In
June
2006, FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
provides guidance on financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. According to FIN 48,
a
tax position is recognized if it is more-likely-than-not that the tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. If
the
tax position meets the more-likely-than-not recognition threshold, the position
is measured to determine the amount of benefit to recognize and should be
measured at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Corporation has not completed its
assessment of FIN 48 and the impact, if any, on the financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS No. 157 establishes a framework for measuring fair value in
GAAP, and enhances disclosures about fair value measurements. SFAS 157 applies
when other accounting pronouncement require fair value measurements; it does
not
require new fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those years. The Corporation has not completed its
assessment of SFAS 157 and the impact, if any, on the financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plan” (“SFAS 158”). SFAS 158 requires
an employer to recognize on their balance sheet the funded status of its defined
pension plans and other post-retirement plans as of December 31, 2006. An
under-funded position would create a liability and an over-funded position
would
create an asset, with a correlating deferred tax asset or liability. The net
impact would be an adjustment to equity as accumulated other comprehensive
income (loss.) Employers must also recognize as a component of other
comprehensive income (loss), net of tax, the actuarial gains and losses and
the
prior service costs and credits that arise during the period. The Corporation
has not completed its assessment of SFAS 158, but anticipated recording a
reduction to Shareholders’ Equity in Net Other Comprehensive Loss during the
fourth quarter of 2006.
On
September 13, 2006 the Securities and Exchange Commission (“SEC”) Staff issued
Statement of Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,” (“SAB
108”). SAB 108 addresses how errors, built up over time in the balance sheet,
should be considered from a materiality perspective and corrected. SAB 108
provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC Staff believes that companies should quantify errors
using
both a balance sheet and an income statement approach and evaluate whether
either of these approaches results in quantifying a misstatement that, when
all
relevant quantitative and qualitative factors are considered, is material.
SAB
108 also describes the circumstances where it would be appropriate for a
registrant to record a one-time cumulative effect adjustment to correct errors
existing in prior years that previously had been considered immaterial as well
as the required disclosures to investors. Implementation of SAB 108 is
encouraged in any report for an interim period of the first fiscal year ending
after November 15, 2006. The
Corporation did not early adopt SAB No. 108. The Corporation has not yet
determined whether this interpretation will have a material impact on its
consolidated financial statements upon adoption.
Item
3. Quantitative
and Qualitative Disclosure About Market Risk
No
material changes in the Corporation’s market risk or market strategy occurred
during the current period. A detailed discussion of market risk is provided
in
the Registrant’s Annual Report on Form 10-K for the period ended December 31,
2005.
Item
4.
Controls
and Procedures
Management
is responsible for the disclosure controls and procedures of Univest Corporation
of Pennsylvania (“Univest”). Disclosure controls and procedures are in place to
assure that all material information is collected and disclosed in accordance
with Rule 13a - 15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
Based on their evaluation Management believes that the financial information
required to be disclosed in accordance with the Securities Exchange Act of
1934
is presented fairly, recorded, summarized and reported within the required
time
periods.
As
of
September 30, 2006 an evaluation was performed under the supervision and with
the participation of the Corporation's management, including the CEO and CFO,
of
the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures. Based on that evaluation, the Corporation's management,
including the CEO and CFO, concluded that the Corporation's disclosure controls
and procedures were effective and there have been no changes in the
Corporation's internal controls or in other factors that have materially
affected or are reasonably likely to materially affect internal controls
subsequent to December 31, 2005.
PART
II. OTHER
INFORMATION
Item
1. Legal
Proceedings
Management
is not aware of any litigation that would have a material adverse effect on
the
consolidated financial position of the Corporation. There are no proceedings
pending other than the ordinary routine litigation incident to the business
of
the Corporation. In addition, there are no material proceedings pending or
known
to be threatened or contemplated against the Corporation or the Bank by
government authorities.
Item
1A. Risk
Factors
There
were no material changes from the risk factors previously disclosed in the
Registrant’s Form 10-K, Part 1, Item 1A,
for the
Year Ended December 31, 2005 as filed with the Securities and Exchange
Commission on March 6, 2006.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The
following table provides information on repurchases by the Corporation of its
common stock during the three months ended September 30, 2006.
ISSUER
PURCHASES OF EQUITY
SECURITIES
|
|
|
|
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
July
1 - 31, 2006
|
|
|
34,671
|
|
$
|
27.97
|
|
|
34,671
|
|
|
464,463
|
|
August
1 - 31, 2006
|
|
|
5,189
|
|
|
29.53
|
|
|
5,189
|
|
|
473,254
|
|
September
1 - 30, 2006
|
|
|
2,754
|
|
|
29.83
|
|
|
2,754
|
|
|
489,439
|
|
Total
|
|
|
42,614
|
|
|
|
|
|
42,614
|
|
|
|
|
1. |
Transactions
are reported as of settlement
dates.
|
2. |
The
Corporation’s current stock repurchase program was approved by its Board
of Directors and announced on 12/31/2001. The repurchased shares
limit is
net of normal Treasury activity such as purchases to fund the Dividend
Reinvestment Program, Employee Stock Purchase Program and the equity
compensation plan.
|
3. |
The
number of shares originally approved for repurchase under the
Corporation’s current stock repurchase program is
526,571.
|
4. |
The
Corporation’s current stock repurchase program does not have an expiration
date.
|
5. |
No
stock repurchase plan or program of the Corporation expired during
the
period covered by the table.
|
6. |
The
Corporation has no stock repurchase plan or program that it has determined
to terminate prior to expiration or under which it does not intend
to make
further purchases. The plans are restricted during certain blackout
periods in conformance with the Corporation’s Insider Trading Policy.
|
Item
3. Defaults
Upon Senior Securities
None.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None.
Item
6. Exhibits
a. Exhibits
|
Exhibit
31.1
|
Certification
of William S. Aichele, Chairman, President and Chief Executive Officer
of
the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act,
as
enacted by Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
Exhibit
31.2
|
Certification
of Wallace H. Bieler, Senior Executive Vice President, Chief Financial
Officer, Chief Operation Officer and Corporate Secretary of the
Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted
by
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
Exhibit
32.1
|
Certification
of William S. Aichele, Chief Executive Officer of the Corporation,
pursuant to 18 United States Code Section 1350, as enacted by Section
906
of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit
32.2
|
Certification
of Wallace H. Bieler, Chief Financial Officer of the Corporation,
pursuant
to 18 United States Code Section 1350, as enacted by Section 906
of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
Univest
Corporation of Pennsylvania
(Registrant)
|
|
|
|
Date:
November 3, 2006 |
|
/s/ William
S. Aichele |
|
William
S. Aichele, Chairman, President |
|
and Chief Executive
Officer |
|
|
|
|
|
|
|
|
Date:
November 3, 2006 |
|
/s/ Wallace
H. Bieler |
|
Wallace
H. Bieler, Senior Executive Vice President,
|
|
Chief
Operation Officer and Chief Financial
Officer |