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 March
31, 2007.
|
or
|
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
|
|
12,978,481
|
(Title
of Class)
|
|
(Number
of shares outstanding at 3/31/07)
|
UNIVEST
CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
|
|
|
|
Page
Number
|
Part
I.
|
Financial
Information:
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at March 31, 2007 and December 31,
2006
|
1
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Three Months Ended March
31,
2007 and 2006
|
2
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended
March 31,
2007 and 2006
|
3
|
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosure About Market Risk
|
21
|
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
21
|
|
|
|
|
|
Part
II.
|
Other
Information:
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
22
|
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
22
|
|
|
|
|
|
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
|
|
|
|
|
Item
3.
|
|
Defaults
Upon Senior Securities
|
23
|
|
|
|
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Securities Holders
|
23
|
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
23
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
24
|
PART
I. FINANCIAL
INFORMATION
Item 1. |
Financial
Statements
|
UNIVEST
CORPORATION OF PENNSYLVANIA
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(UNAUDITED)
March
31, 2007
|
|
(SEE
NOTE)
December
31, 2006
|
|
ASSETS
|
|
(In
thousands, except share data)
|
|
Cash
and due from banks
|
|
$
|
46,291
|
|
$
|
46,956
|
|
Interest-earning
deposits with other banks
|
|
|
478
|
|
|
582
|
|
Federal
funds sold
|
|
|
15,420
|
|
|
22,817
|
|
Investment
securities held-to-maturity (market value $2,463 and $2,685 at
March 31, 2007 and December 31, 2006, respectively)
|
|
|
2,394
|
|
|
2,619
|
|
Investment
securities available-for-sale
|
|
|
377,093
|
|
|
379,781
|
|
Loans
and leases
|
|
|
1,372,523
|
|
|
1,353,681
|
|
Less:
Reserve for loan and lease losses
|
|
|
(13,414
|
)
|
|
(13,283
|
)
|
Net
loans and leases
|
|
|
1,359,109
|
|
|
1,340,398
|
|
Premises
and equipment, net
|
|
|
21,833
|
|
|
21,878
|
|
Goodwill,
net of accumulated amortization of $2,942 at March 31, 2007 and
December 31, 2006
|
|
|
44,425
|
|
|
44,273
|
|
Other
intangibles, net of accumulated amortization and fair value adjustments
of
$5,134 and $5,113 at March 31, 2007 and December 31, 2006,
respectively
|
|
|
3,194
|
|
|
3,335
|
|
Cash
surrender value of insurance policies
|
|
|
37,008
|
|
|
36,686
|
|
Accrued
interest and other assets
|
|
|
28,685
|
|
|
30,176
|
|
Total
assets
|
|
$
|
1,935,930
|
|
$
|
1,929,501
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Demand
deposits, noninterest-bearing
|
|
$
|
244,410
|
|
$
|
263,417
|
|
Demand
deposits, interest-bearing
|
|
|
519,102
|
|
|
508,140
|
|
Savings
deposits
|
|
|
204,815
|
|
|
195,126
|
|
Time
deposits
|
|
|
553,013
|
|
|
521,862
|
|
Total
deposits
|
|
|
1,521,340
|
|
|
1,488,545
|
|
Securities
sold under agreements to repurchase
|
|
|
83,826
|
|
|
99,761
|
|
Other
short-term borrowings
|
|
|
-
|
|
|
17,900
|
|
Accrued
expenses and other liabilities
|
|
|
35,962
|
|
|
30,505
|
|
Long-term
debt
|
|
|
75,919
|
|
|
77,036
|
|
Subordinated
notes
|
|
|
9,375
|
|
|
9,750
|
|
Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts
holding
junior subordinated debentures of Univest ("Trust Preferred
Securities")
|
|
|
20,619
|
|
|
20,619
|
|
Total
liabilities
|
|
|
1,747,041
|
|
|
1,744,116
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $5 par value: 24,000,000 shares authorized at March 31, 2007
and December 31, 2006; 14,873,904 shares issued at March 31, 2007
and
December 31, 2006; 12,978,481 and 13,005,329 shares outstanding at
March
31, 2007 and December 31, 2006, respectively
|
|
|
74,370
|
|
|
74,370
|
|
Additional
paid-in capital
|
|
|
22,493
|
|
|
22,459
|
|
Retained
earnings
|
|
|
131,884
|
|
|
128,242
|
|
Accumulated
other comprehensive loss, net of tax benefit
|
|
|
(3,974
|
)
|
|
(4,463
|
)
|
Treasury
stock, at cost; 1,895,423 and 1,868,575 shares at March 31, 2007
and
December 31, 2006, respectively
|
|
|
(35,884
|
)
|
|
(35,223
|
)
|
Total
shareholders’ equity
|
|
|
188,889
|
|
|
185,385
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,935,930
|
|
$
|
1,929,501
|
|
Note:
The
condensed consolidated balance sheet at December 31, 2006 has been derived
from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statement. 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 March 31,
|
|
|
|
2007
|
|
2006
|
|
Interest
income
|
|
($
in thousands, except per share data)
|
|
Interest
and fees on loans and leases:
|
|
|
|
|
|
Taxable
|
|
$
|
22,585
|
|
$
|
19,160
|
|
Exempt
from federal income taxes
|
|
|
1,019
|
|
|
916
|
|
Total
interest and fees on loans and leases
|
|
|
23,604
|
|
|
20,076
|
|
Interest
and dividends on investment securities:
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,684
|
|
|
2,446
|
|
Exempt
from federal income taxes
|
|
|
948
|
|
|
967
|
|
Other
interest income
|
|
|
64
|
|
|
63
|
|
Total
interest income
|
|
|
28,300
|
|
|
23,552
|
|
Interest
expense
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
10,395
|
|
|
6,697
|
|
Interest
on long-term borrowings
|
|
|
1,466
|
|
|
1,156
|
|
Interest
on short-term debt
|
|
|
994
|
|
|
707
|
|
Total
interest expense
|
|
|
12,855
|
|
|
8,560
|
|
Net
interest income
|
|
|
15,445
|
|
|
14,992
|
|
Provision
for loan and lease losses
|
|
|
624
|
|
|
511
|
|
Net
interest income after provision for loan and lease losses
|
|
|
14,821
|
|
|
14,481
|
|
Noninterest
income
|
|
|
|
|
|
|
|
Trust
fee income
|
|
|
1,487
|
|
|
1,551
|
|
Service
charges on deposit accounts
|
|
|
1,650
|
|
|
1,672
|
|
Investment
advisory commission and fee income
|
|
|
679
|
|
|
549
|
|
Insurance
commission and fee income
|
|
|
1,875
|
|
|
1,377
|
|
Life
insurance income
|
|
|
322
|
|
|
386
|
|
Other
service fee income
|
|
|
866
|
|
|
754
|
|
Net
gain (loss) on sales of securities
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
37
|
|
|
156
|
|
Total
noninterest income
|
|
|
6,916
|
|
|
6,445
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
7,794
|
|
|
7,305
|
|
Net
occupancy
|
|
|
1,251
|
|
|
1,068
|
|
Equipment
|
|
|
775
|
|
|
772
|
|
Marketing
and advertising
|
|
|
165
|
|
|
535
|
|
Other
|
|
|
3,177
|
|
|
2,809
|
|
Total
noninterest expense
|
|
|
13,162
|
|
|
12,489
|
|
Income
before income taxes
|
|
|
8,575
|
|
|
8,437
|
|
Applicable
income taxes
|
|
|
2,328
|
|
|
2,223
|
|
Net
income
|
|
$
|
6,247
|
|
$
|
6,214
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
$
|
0.48
|
|
Diluted
|
|
|
0.48
|
|
|
0.48
|
|
Dividends
declared
|
|
|
0.20
|
|
|
0.19
|
|
Note:
See
accompanying notes to the unaudited condensed consolidated financial
statements.
UNIVEST
CORPORATION OF PENNSYLVANIA
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Three Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
($
in thousands)
|
|
Net
income
|
|
$
|
6,247
|
|
$
|
6,214
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
Provision
for loan and lease losses
|
|
|
624
|
|
|
511
|
|
Depreciation
of premises and equipment
|
|
|
513
|
|
|
536
|
|
Increase
in cash surrender value of insurance policies
|
|
|
(322
|
)
|
|
(386
|
)
|
Other
adjustments to reconcile net income to cash provided by operating
activities
|
|
|
(59
|
)
|
|
(8
|
)
|
Decrease
(increase) in accrued interest receivable and other assets
|
|
|
1,257
|
|
|
(3,082
|
)
|
Increase
(decrease) in accrued expenses and other liabilities
|
|
|
5,441
|
|
|
(2,686
|
)
|
Net
cash provided by operating activities
|
|
|
13,701
|
|
|
1,099
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Net
cash paid due to acquisitions, net of cash acquired
|
|
|
(198
|
)
|
|
(152
|
)
|
Net
capital expenditures
|
|
|
(467
|
)
|
|
(991
|
)
|
Proceeds
from maturing securities held-to-maturity
|
|
|
226
|
|
|
308
|
|
Proceeds
from maturing securities available-for-sale
|
|
|
16,267
|
|
|
11,975
|
|
Proceeds
from sales of securities available-for-sale
|
|
|
8,380
|
|
|
7,470
|
|
Purchases
of investment securities available-for-sale
|
|
|
(21,115
|
)
|
|
(7,827
|
)
|
Proceeds
from sales of loans and leases
|
|
|
246
|
|
|
449
|
|
Purchases
of financing leases
|
|
|
(6,478
|
)
|
|
─
|
|
Net
increase in loans and leases
|
|
|
(13,034
|
)
|
|
(38,252
|
)
|
Net
decrease (increase) in interest-bearing deposits
|
|
|
104
|
|
|
(58
|
)
|
Net
decrease in federal funds sold
|
|
|
7,397
|
|
|
5,528
|
|
Net
cash used in investing activities
|
|
|
(8,672
|
)
|
|
(21,550
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
32,741
|
|
|
38,391
|
|
Net
decrease in short-term borrowings
|
|
|
(33,835
|
)
|
|
(17,463
|
)
|
Repayment
of long-term debt
|
|
|
(1,000
|
)
|
|
─
|
|
Repayment
of subordinated debt
|
|
|
(375
|
)
|
|
(375
|
)
|
Purchases
of treasury stock
|
|
|
(1,273
|
)
|
|
(1,029
|
)
|
Stock
issued under dividend reinvestment and employee stock purchase
plans
|
|
|
492
|
|
|
552
|
|
Proceeds
from exercise of stock options
|
|
|
151
|
|
|
158
|
|
Cash
dividends paid
|
|
|
(2,595
|
)
|
|
(2,462
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(5,694
|
)
|
|
17,772
|
|
Net
decrease in cash and due from banks
|
|
|
(665
|
)
|
|
(2,679
|
)
|
Cash
and due from banks at beginning of year
|
|
|
46,956
|
|
|
46,226
|
|
Cash
and due from banks at end of period
|
|
$
|
46,291
|
|
$
|
43,547
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
Cash
paid (received) during the year for:
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
13,623
|
|
$
|
8,275
|
|
Income
taxes, net of refunds received
|
|
|
(2
|
)
|
|
23
|
|
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 three-month period ended March 31, 2007 are not necessarily indicative
of
the results that may be expected for the year ending December 31, 2007. 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, 2006, which has been filed with the SEC on March 8, 2007.
Note
2. Loan and Leases
The
following is a summary of the major loan and lease categories:
($
in thousands)
|
|
At
March 31,
2007
|
|
At
December 31,
2006
|
|
Commercial,
financial and agricultural
|
|
$
|
445,422
|
|
$
|
442,182
|
|
Real
estate-commercial
|
|
|
355,627
|
|
|
352,596
|
|
Real
estate-construction
|
|
|
144,143
|
|
|
136,331
|
|
Real
estate-residential
|
|
|
305,767
|
|
|
305,306
|
|
Loans
to individuals
|
|
|
84,866
|
|
|
89,217
|
|
Lease
financings
|
|
|
39,810
|
|
|
30,186
|
|
Total
gross loans and leases
|
|
|
1,375,635
|
|
|
1,355,818
|
|
Less:
Unearned income
|
|
|
(3,112
|
)
|
|
(2,137
|
)
|
Total
loans and leases
|
|
$
|
1,372,523
|
|
$
|
1,353,681
|
|
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 March 31,
|
|
|
|
2007
|
|
2006
|
|
Reserve
for loan and lease losses at beginning of period
|
|
$
|
13,283
|
|
$
|
13,363
|
|
Provision
for loan and lease losses
|
|
|
624
|
|
|
511
|
|
Recoveries
|
|
|
159
|
|
|
274
|
|
Loans
and leases charged off
|
|
|
(652
|
)
|
|
(292
|
)
|
Reserve
for loan and lease losses at period end
|
|
$
|
13,414
|
|
$
|
13,856
|
|
Information
with respect to loans and leases that are considered to be impaired under SFAS
114 at March 31, 2007 and December 31, 2006 is as
follows:
|
|
At
March 31, 2007
|
|
At
December 31, 2006
|
|
($
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
|
|
$
|
4,451
|
|
$
|
1,498
|
|
$
|
5,606
|
|
$
|
1,576
|
|
Recorded
investment in impaired loans and leases at period-end requiring
no
specific reserve for loan and lease losses
|
|
|
3,301
|
|
|
|
|
|
2,837
|
|
|
|
|
Recorded
investment in impaired loans and leases at period-end
|
|
$
|
7,752
|
|
|
|
|
$
|
8,443
|
|
|
|
|
Recorded
investment in nonaccrual and restructured loans and leases
|
|
$
|
7,752
|
|
|
|
|
$
|
8,443
|
|
|
|
|
The
following is an analysis of interest on nonaccrual and restructured loans and
leases:
|
|
Three
Months Ended
|
|
($
in thousands)
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Nonaccrual
and restructured loans and leases at period end
|
|
$
|
7,752
|
|
$
|
5,343
|
|
Average
recorded investment in impaired loans and leases
|
|
|
8,186
|
|
|
4,321
|
|
Interest
income that would have been recognized under original
terms
|
|
|
198
|
|
|
118
|
|
No
interest income was recognized on these loans for the three-month periods ended
March 31, 2007 and 2006.
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
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings per share - Net income
|
|
$
|
6,247
|
|
$
|
6,214
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share -
weighted-average
shares outstanding
|
|
|
13,004
|
|
|
12,945
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
49
|
|
|
74
|
|
Denominator
for diluted earnings per share - adjusted weighted-average shares
outstanding
|
|
|
13,053
|
|
|
13,019
|
|
Basic
earnings per share
|
|
$
|
0.48
|
|
$
|
0.48
|
|
Diluted
earnings per share
|
|
$
|
0.48
|
|
$
|
0.48
|
|
Note
5. Accumulated Comprehensive Income
The
following shows the accumulated comprehensive income, net of income taxes,
for
the periods presented:
($
in thousands)
|
|
For
the Three Months
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
Net
Income
|
|
$
|
6,247
|
|
$
|
6,214
|
|
Unrealized
loss on cash flow hedges:
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during the period
|
|
|
─
|
|
|
(11
|
)
|
Unrealized
gain (loss) on available-for-sale investment securities:
|
|
|
|
|
|
|
|
Unrealized
gains (losses) arising during the period
|
|
|
509
|
|
|
(869
|
)
|
Defined
benefit pension plans:
|
|
|
|
|
|
|
|
Unrealized
losses arising during the period
|
|
|
(52
|
)
|
|
─
|
|
Less:
amortization of net gain included in net periodic pension
costs
|
|
|
(47
|
)
|
|
─
|
|
Less:
accretion of prior service cost included in net periodic pension
costs
|
|
|
15
|
|
|
─
|
|
Total
comprehensive income
|
|
$
|
6,736
|
|
$
|
5,334
|
|
Note
6. Pensions and Other Postretirement Benefits
Components
of net periodic benefit cost:
($
in thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
Retirement
Plans
|
|
Other
Postretirement
|
|
Service
cost
|
|
$
|
362
|
|
$
|
340
|
|
$
|
16
|
|
$
|
14
|
|
Interest
cost
|
|
|
419
|
|
|
414
|
|
|
19
|
|
|
19
|
|
Expected
return on plan assets
|
|
|
(415
|
)
|
|
(382
|
)
|
|
─
|
|
|
─
|
|
Amortization
of net gain
|
|
|
70
|
|
|
70
|
|
|
3
|
|
|
3
|
|
Accretion
of prior service cost
|
|
|
(18
|
)
|
|
(18
|
)
|
|
(5
|
)
|
|
(5
|
)
|
Net
periodic benefit cost
|
|
$
|
418
|
|
$
|
424
|
|
$
|
33
|
|
$
|
31
|
|
The
Corporation previously disclosed in its financial statements for the year ended
December 31, 2006, that it expected to make payments of $1.7 million for its
qualified and non-qualified retirement plans and $92 thousand for its other
postretirement benefit plans in 2007. As of March 31, 2007, $401 thousand and
$25 thousand have been paid from its retirement plans and other
postretirement plans, respectively. During the three months ended March 31,
2007, the Corporation contributed $126 thousand and $25 thousand to its
non-qualified retirement plans and other postretirement plans, respectively.
The
Corporation presently anticipates making essentially equal payments for the
remaining quarters in 2007 to fund the non-qualified retirement plan and other
postretirement plans.
Note
7. SFAS
No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”
At
March
31, 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 was accrued as an adjustment to interest income.
The $20.0 million notional amount of interest-rate swap outstanding expired
on
November 2, 2006. There were no swaps outstanding at March 31, 2007 or December
31, 2006.
Note
8. Income Taxes
Effective January
1, 2007 the Corporation adopted 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.
As
of
January 1, 2007, the Coporation had no material unrecognized tax benefits,
accrued interest or penalties. Penalties are recorded in non-interest
expense in the year they are assessed and are treated as a non-deductible
expense for tax purposes. Interest is recorded in non-interest expense in the
year it is assessed and is treated as a deductible expense for tax purposes.
As
of January 1, 2007, Tax Years 2003 through 2006 remain subject to Federal
examination as well as examination by state taxing jurisdictions.
Note
9. Recent Accounting Pronouncements
In
September 2006, the Emerging Issues Task Force (“EITF”) reached a conclusion on
EITF No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF 06-4.”)
EITF 06-4 is effective for fiscal years beginning after December 15, 2007.
Under EITF 06-4, if an
agreement is to provide the employee with a death benefit in a
postretirement/termination period, the employer should recognize a liability
for
the future death benefit in accordance with either Statement of Financial
Accounting Standard (“SFAS”) No. 106 or Accounting Principles Board Opinion No.
12. EITF
06-4
requires that recognition of the effects of adoption should be either by
(a) a change in accounting principle through a cumulative-effect adjustment
to retained earnings as of the beginning of the year of adoption or (b) a
change in accounting principle through retrospective application to all prior
periods.
The
potential impact to the Corporation will be negative cumulative-effect
adjustment to retained earnings of approximately $1.6 million and would not
be tax affected.
In
September 2006, the Financial Accounting Standards Board (“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 chose not to adopt SFAS 157 early.
The
Corporation does not anticipate the adoption of SFAS 157 in the Fiscal Year
2008
to have a material impact on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities (Including an amendment of FASB
Statement No. 115)” (“SFAS 159.”) SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective of SFAS 159 is to improve financial reporting by allowing entities
to
minimize volatility in reported earnings caused by related assets and
liabilities being measured differently. Most of the provisions of SFAS 159
apply
only to entities that elect the fair value option. However, SFAS 159 includes
an
amendment to SFAS 115 which applies
to all entities with available-for-sale and trading securities. Entities
electing the fair value option will report unrealized gains and losses in
earnings and recognize upfront costs and fees related to those items in earnings
as they are incurred, not deferred. The following items are eligible for the
fair value measurement option established by SFAS 159: 1) Recognized financial
assets and financial liabilities, except (a) an investment in a subsidiary
that
is required to be consolidated, (b) an interest in a variable interest entity
that is required to be consolidated, (c) obligations (or assets representing
net
over funded positions) for pension plans, other postretirement benefits, post
employment benefits, employee stock option and stock purchase plans, and other
forms of deferred compensation arrangements, (d) financial assets and
liabilities recognized under leases, (e) demand deposit liabilities of financial
institutions, and (f) financial instruments classified by the issuer as a
component of shareholder’s equity; 2) firm commitments that would otherwise not
be recognized at inception and that involve only financial instruments; 3)
nonfinancial insurance contracts and warranties that the insurer can settle
by
paying a third party to provide those goods or services; and, 4) host financial
instruments resulting from separation of an embedded nonfinancial derivative
instrument from a nonfinancial hybrid instrument. The fair value option may
be
applied on an instrument-by-instrument basis, with a few exceptions, such as
investments otherwise accounted for by the equity method or multiple advanced
made to one borrower under a single contract. The fair value option is
irrevocable unless a new election date occurs and applies only to entire
instruments and not to portions of instruments. Entities are permitted to elect
fair value option for any eligible item within the scope of SFAS 159 at the
date they initially adopt the SFAS 159. The adjustment to reflect the difference
between the fair value and the current carrying amount of the assets and
liabilities for which an entity elects fair value option is reported as a
cumulative-effect adjustment to the opening balance of retained earnings upon
adoption. SFAS 159 is effective as of the beginning of an entity’s first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS 157. The
Corporation chose not to adopt SFAS 159 early. The Corporation does not
anticipate the adoption of SFAS 159 in the Fiscal Year 2008 to have a material
impact on its financial statements.
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. Vanguard Leasing,
Inc.,
a wholly owned subsidiary of the Bank, provides lease financing. 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.
Executive
Overview
The
Corporation recorded net income of $6.2 million for both three-month periods
ended March 31, 2007 and 2006.
Average
earning assets increased $140.6 million and average interest-bearing liabilities
increased $136.0 million when comparing the three-month periods ended March
31, 2007 and 2006. Increased volume and rates on commercial business loans
and
commercial and construction real estate loans, partially offset by increased
volume and rates on money market savings and certificates of deposits,
contributed to a $453 thousand increase in net interest income. The
tax-equivalent net interest margin declined slightly to 3.81% for the
three-month period ended March 31, 2007 compared to 4.01% for the same period
in
2006.
Non-interest
income grew 7.30%, when comparing the three-month periods ended March 31, 2007
to 2006, primarily due to increases in insurance commission and fee
income.
Non-interest
expense grew 5.38% primarily due to salary and employee benefit expense.
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 March 31, 2007 Versus 2006
The
Corporation’s consolidated net income and earnings per share for the three
months ended March 31, 2007 and 2006 were as follows:
($
in thousands, except per share data)
|
|
For
the Three Months Ended
March
31,
|
|
Change
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Net
income
|
|
$
|
6,247
|
|
$
|
6,214
|
|
$
|
33
|
|
|
0.53
|
%
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
$
|
0.48
|
|
|
—
|
|
|
—
|
|
Diluted
|
|
|
0.48
|
|
|
0.48
|
|
|
—
|
|
|
—
|
|
Return
on
average shareholders' equity was 13.33% and return on average assets was 1.31%
for the three months ended March 31, 2007 compared to 14.24% and 1.41%,
respectively, for the same period in 2006.
Net
Interest Income
Net
interest income is the difference between interest earned on loans, 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 March
31,
2007 and 2006. 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 $453 thousand for the three months ended March 31,
2007 compared to the same period in 2006 primarily due to increased volume
and
rates on commercial loans and commercial real estate and construction loans,
partially offset by increased volume and 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 3.81% and 4.01% for the three-month period ended March 31, 2007
and
2006, 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 3.24%
for the three months ended March 31, 2007 compared to 3.56% for the same period
in 2006. The effect of net interest free funding sources increased to 0.57%
for
the three months ended March 31, 2007 compared to 0.45% for the same period
in
2006; 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 March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
|
|
Income/
|
|
Avg.
|
|
Average
|
|
Income/
|
|
Avg.
|
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
deposits with other banks
|
|
$
|
594
|
|
$
|
7
|
|
|
4.78
|
%
|
$
|
610
|
|
$
|
6
|
|
|
3.99
|
%
|
U.S.
Government obligations
|
|
|
123,249
|
|
|
1,351
|
|
|
4.45
|
|
|
152,557
|
|
|
1,297
|
|
|
3.45
|
|
Obligations
of states & political subdivisions
|
|
|
82,983
|
|
|
1,458
|
|
|
7.13
|
|
|
84,612
|
|
|
1,486
|
|
|
7.12
|
|
Other
securities
|
|
|
175,961
|
|
|
2,308
|
|
|
5.32
|
|
|
97,494
|
|
|
1,124
|
|
|
4.68
|
|
Federal
Reserve bank stock
|
|
|
1,687
|
|
|
25
|
|
|
6.01
|
|
|
1,687
|
|
|
25
|
|
|
6.01
|
|
Federal
funds sold
|
|
|
5,197
|
|
|
57
|
|
|
4.45
|
|
|
5,439
|
|
|
57
|
|
|
4.25
|
|
Total
interest-earning deposits, investments and federal funds
sold
|
|
|
389,671
|
|
|
5,206
|
|
|
5.42
|
|
|
342,399
|
|
|
3,995
|
|
|
4.73
|
|
Commercial,
financial and agricultural loans
|
|
|
407,934
|
|
|
7,967
|
|
|
7.92
|
|
|
365,210
|
|
|
6,402
|
|
|
7.11
|
|
Real
estate─commercial and construction loans
|
|
|
432,734
|
|
|
8,334
|
|
|
7.81
|
|
|
401,242
|
|
|
7,102
|
|
|
7.18
|
|
Real
estate─residential loans
|
|
|
305,199
|
|
|
4,112
|
|
|
5.46
|
|
|
303,119
|
|
|
4,007
|
|
|
5.36
|
|
Loans
to individuals
|
|
|
85,702
|
|
|
1,485
|
|
|
7.03
|
|
|
105,786
|
|
|
1,638
|
|
|
6.28
|
|
Municipal
loans
|
|
|
92,839
|
|
|
1,469
|
|
|
6.42
|
|
|
86,748
|
|
|
1,275
|
|
|
5.96
|
|
Lease
financings
|
|
|
31,386
|
|
|
687
|
|
|
8.88
|
|
|
323
|
|
|
11
|
|
|
13.81
|
|
Gross
loans and leases
|
|
|
1,355,794
|
|
|
24,054
|
|
|
7.20
|
|
|
1,262,428
|
|
|
20,435
|
|
|
6.56
|
|
Total
interest-earning assets
|
|
|
1,745,465
|
|
|
29,260
|
|
|
6.80
|
|
|
1,604,827
|
|
|
24,430
|
|
|
6.17
|
|
Cash
and due from banks
|
|
|
39,075
|
|
|
|
|
|
|
|
|
39,173
|
|
|
|
|
|
|
|
Reserve
for loan losses
|
|
|
(13,315
|
)
|
|
|
|
|
|
|
|
(13,572
|
)
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
21,888
|
|
|
|
|
|
|
|
|
21,571
|
|
|
|
|
|
|
|
Other
assets
|
|
|
108,845
|
|
|
|
|
|
|
|
|
104,650
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,901,958
|
|
|
|
|
|
|
|
$
|
1,756,649
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking deposits
|
|
$
|
136,634
|
|
$
|
91
|
|
|
0.27
|
%
|
$
|
140,787
|
|
$
|
37
|
|
|
0.11
|
%
|
Money
market savings
|
|
|
365,947
|
|
|
3,685
|
|
|
4.08
|
|
|
284,009
|
|
|
2,110
|
|
|
3.01
|
|
Regular
savings
|
|
|
198,145
|
|
|
717
|
|
|
1.47
|
|
|
196,136
|
|
|
202
|
|
|
0.42
|
|
Certificates
of deposit
|
|
|
515,957
|
|
|
5,705
|
|
|
4.48
|
|
|
485,671
|
|
|
4,181
|
|
|
3.49
|
|
Time
open & club accounts
|
|
|
17,164
|
|
|
197
|
|
|
4.65
|
|
|
19,272
|
|
|
167
|
|
|
3.51
|
|
Total
time and interest-bearing deposits
|
|
|
1,233,847
|
|
|
10,395
|
|
|
3.42
|
|
|
1,125,875
|
|
|
6,697
|
|
|
2.41
|
|
Federal
funds purchased
|
|
|
16,297
|
|
|
218
|
|
|
5.42
|
|
|
559
|
|
|
6
|
|
|
4.35
|
|
Securities
sold under agreements to repurchase
|
|
|
91,450
|
|
|
537
|
|
|
2.38
|
|
|
98,624
|
|
|
506
|
|
|
2.08
|
|
Short-term
borrowings
|
|
|
17,794
|
|
|
239
|
|
|
5.45
|
|
|
17,176
|
|
|
195
|
|
|
4.60
|
|
Long-term
debt
|
|
|
76,883
|
|
|
884
|
|
|
4.66
|
|
|
56,525
|
|
|
606
|
|
|
4.35
|
|
Subordinated
notes and capital securities
|
|
|
29,998
|
|
|
582
|
|
|
7.87
|
|
|
31,502
|
|
|
550
|
|
|
7.08
|
|
Total
borrowings
|
|
|
232,422
|
|
|
2,460
|
|
|
4.29
|
|
|
204,386
|
|
|
1,863
|
|
|
3.70
|
|
Total
interest-bearing liabilities
|
|
|
1,466,269
|
|
|
12,855
|
|
|
3.56
|
|
|
1,330,261
|
|
|
8,560
|
|
|
2.61
|
|
Demand
deposits, non-interest bearing
|
|
|
218,933
|
|
|
|
|
|
|
|
|
228,003
|
|
|
|
|
|
|
|
Accrued
expenses & other liabilities
|
|
|
29,306
|
|
|
|
|
|
|
|
|
23,841
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,714,508
|
|
|
|
|
|
|
|
|
1,582,105
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
74,370
|
|
|
|
|
|
|
|
|
74,370
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
22,485
|
|
|
|
|
|
|
|
|
22,053
|
|
|
|
|
|
|
|
Retained
earnings and other equity
|
|
|
90,595
|
|
|
|
|
|
|
|
|
78,121
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
187,450
|
|
|
|
|
|
|
|
|
174,544
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,901,958
|
|
|
|
|
|
|
|
$
|
1,756,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
16,405
|
|
|
|
|
|
|
|
$
|
15,870
|
|
|
|
|
Net
interest spread
|
|
3.24
|
|
|
|
|
|
|
|
|
3.56
|
|
Effect
of net interest-free funding sources
|
|
0.57
|
|
|
|
|
|
|
|
|
0.45
|
|
Net
interest margin
|
|
3.81
|
%
|
|
|
|
|
|
|
|
4.01
|
%
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
|
|
119.04
|
%
|
|
|
|
|
|
|
|
120.64
|
%
|
|
|
|
|
|
|
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 March 31,
2007
Versus 2006
|
|
|
|
Volume
Change
|
|
Rate
Change
|
|
Total
|
|
Interest
income:
|
|
|
|
|
|
|
|
Interest-bearing
deposits with other banks
|
|
$
|
─
|
|
$
|
1
|
|
$
|
1
|
|
U.S.
Government obligations
|
|
|
(322
|
)
|
|
376
|
|
|
54
|
|
Obligations
of states & political subdivisions
|
|
|
(30
|
)
|
|
2
|
|
|
(28
|
)
|
Other
securities
|
|
|
1,030
|
|
|
154
|
|
|
1,184
|
|
Federal
Reserve bank stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Federal
funds sold
|
|
|
(3
|
)
|
|
3
|
|
|
─
|
|
Interest
on deposits, investments and federal funds sold
|
|
|
675
|
|
|
536
|
|
|
1,211
|
|
Commercial
, financial and agricultural loans
|
|
|
836
|
|
|
729
|
|
|
1,565
|
|
Real
estate─commercial and construction loans
|
|
|
609
|
|
|
623
|
|
|
1,232
|
|
Real
estate─residential loans
|
|
|
30
|
|
|
75
|
|
|
105
|
|
Loans
to individuals
|
|
|
(349
|
)
|
|
196
|
|
|
(153
|
)
|
Municipal
loans
|
|
|
96
|
|
|
98
|
|
|
194
|
|
Lease
financings
|
|
|
680
|
|
|
(4
|
)
|
|
676
|
|
Interest
and fees on loans and leases
|
|
|
1,902
|
|
|
1,717
|
|
|
3,619
|
|
Total
interest income
|
|
|
2,577
|
|
|
2,253
|
|
|
4,830
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Interest
checking deposits
|
|
|
(2
|
)
|
|
56
|
|
|
54
|
|
Money
market savings
|
|
|
826
|
|
|
749
|
|
|
1,575
|
|
Regular
savings
|
|
|
7
|
|
|
508
|
|
|
515
|
|
Certificates
of deposit
|
|
|
338
|
|
|
1,186
|
|
|
1,524
|
|
Time
open & club accounts
|
|
|
(24
|
)
|
|
54
|
|
|
30
|
|
Interest
on deposits
|
|
|
1,145
|
|
|
2,553
|
|
|
3,698
|
|
Federal
funds purchased
|
|
|
211
|
|
|
1
|
|
|
212
|
|
Securities
sold under agreement to repurchase
|
|
|
(42
|
)
|
|
73
|
|
|
31
|
|
Other
short-term borrowings
|
|
|
8
|
|
|
36
|
|
|
44
|
|
Long-term
debt
|
|
|
235
|
|
|
43
|
|
|
278
|
|
Subordinated
notes and capital securities
|
|
|
(29
|
)
|
|
61
|
|
|
32
|
|
Interest
on borrowings
|
|
|
383
|
|
|
214
|
|
|
597
|
|
Total
interest expense
|
|
|
1,528
|
|
|
2,767
|
|
|
4,295
|
|
Net
interest income
|
|
$
|
1,049
|
|
$
|
(514
|
)
|
$
|
535
|
|
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
The
growth in interest and fees on loans and leases is due primarily to increased
volume and rates on commercial business loans and commercial and construction
real estate loans. The average interest yield on the commercial loan portfolio
increased 81 basis points, primarily due to an 83 basis point increase in the
average prime rate, for the three months ended March 31, 2007 compared to the
same period in 2006; which, along with average volume increases of
$42.7 million, contributed to a $1.6 million increase in interest
income. The average yield on commercial and construction real estate loans
increased by 63 basis points; this along with average volume increases of
$31.5 million contributed to a $1.2 million increase in interest income. The
average yield on loans to individuals increased 75 basis points; this
increase was offset by a decrease in average volume by $20.1 million, primarily
due to the sale of $13.9 million of student loans in the fourth quarter of
2006.
Interest
on investments, interest-bearing deposits and federal funds sold increased
primarily due to a rate increases on U.S. Government agency obligations and
average volume and rate increases in other securities.
Interest
Expense
The
Corporation’s average rate on deposits increased 101 basis points for the three
months ended March 31, 2007 compared to the same period in 2006. The
average rate paid on money market savings increased 107 basis points due to
new products and promotions offered to grow deposits in the Bank’s competitive
marketplace; average rate increases combined with the average volume increases
of $81.9 million, contributed to a $1.6 million increase in interest expense
on
such deposits. Interest on certificates of deposit increased $1.5 million,
due
to a 99 basis-point increase in average rate and average volume increases of
$30.3 million. Average wholesale certificates of deposit increased $10.0 million
and average customer certificates of deposits increased $20.3 million.
Interest
expense on federal funds purchased increased $212 thousand due to average volume
increase of $15.7 million and a 107 basis point increase in the average rate
paid.
Interest
expense on long-term debt increased $278 thousand due to an average volume
increase of $20.4 million and a 31 basis-point increase in the
rate.
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 reserve. Continued growth
in
loan and lease volumes and current economic conditions indicated the need for
an
increase to the reserve in 2007. The provision for the three months ended
March 31, 2007 and 2006 was $624 thousand and $511 thousand,
respectively.
Noninterest
Income
Noninterest
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 insurance. Total noninterest income
increased during the three months ended March 31, 2007 compared to 2006
primarily due to higher insurance commission and fee income.
The
following table presents noninterest income for the periods
indicated:
|
|
For
the Three Months Ended
March
31,
|
|
Change
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Trust
fee income
|
|
$
|
1,487
|
|
$
|
1,551
|
|
$
|
(64
|
)
|
|
(4.1)
|
%
|
Service
charges on deposit accounts
|
|
|
1,650
|
|
|
1,672
|
|
|
(22
|
)
|
|
(1.3
|
)
|
Investment
advisory commission and fee income
|
|
|
679
|
|
|
549
|
|
|
130
|
|
|
23.7
|
|
Insurance
commission and fee income
|
|
|
1,875
|
|
|
1,377
|
|
|
498
|
|
|
36.2
|
|
Life
insurance income
|
|
|
322
|
|
|
386
|
|
|
(64
|
)
|
|
(16.6
|
)
|
Other
service fee income
|
|
|
866
|
|
|
754
|
|
|
112
|
|
|
14.9
|
|
Other
|
|
|
37
|
|
|
156
|
|
|
(119
|
)
|
|
(76.3
|
)
|
Total
noninterest income
|
|
$
|
6,916
|
|
$
|
6,445
|
|
$
|
471
|
|
|
7.3
|
%
|
Trust
fee
income decreased in 2007 over 2006 as market value increases on managed accounts
were less in 2007 than in 2006. Service fee charges on deposit accounts declined
slightly in 2007 compared to 2006 primarily due to reductions in regular
checking service fee charges resulting from free-checking products introduced
during 2006. Nonsufficient-funds fee income increased slightly, as the average
balance of overdrafts increased.
Investment
advisory commissions and fee income, the primary source of income for Univest
Investments, Inc., increased in 2007 over 2006 due to market activity and
volume. Insurance commissions and fee income, the primary source of income
for
Univest Insurance, Inc., grew approximately $498 thousand primarily due to
the
acquisition of B.G. Balmer and Co. 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. There was less of an increase recognized on these
policies in 2007 compared to 2006 due to current market conditions.
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 first quarter of 2007 over 2006
primarily due to increases in Mastermoney fees, merchant 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. Other non-interest income declined over prior year
due to the $139 thousand in gains on sales of other real estate owned recorded
during the first quarter of 2006, as discussed below.
Gains
on Sale of Assets
Sales
of
$244 thousand in mortgage loans during the first quarter of 2007 resulted in
gains of $5 thousand compared to sales of $390 thousand for gains of $11
thousand for the first quarter of 2006.
During
the three months ended March 31, 2007 and 2006, approximately $4.2 million
and
$1.6 million, respectively, in securities available-for-sale were sold,
resulting in no material gains or losses recognized in either period.
There
were no sales of other real estate owned during the three months ended March
31,
2007. During the three months ended March 31, 2006 the Corporation sold two
other real estate owned properties resulting in a gain of $139 thousand.
Noninterest
Expense
The
operating costs of the Corporation are known as noninterest 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
March
31,
|
|
Change
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Salaries
and benefits
|
|
$
|
7,794
|
|
$
|
7,305
|
|
$
|
489
|
|
|
6.7
|
%
|
Net
occupancy
|
|
|
1,251
|
|
|
1,068
|
|
|
183
|
|
|
17.1
|
|
Equipment
|
|
|
775
|
|
|
772
|
|
|
3
|
|
|
0.4
|
|
Marketing
and advertising
|
|
|
165
|
|
|
535
|
|
|
(370
|
)
|
|
(69.2
|
)
|
Other
|
|
|
3,177
|
|
|
2,809
|
|
|
368
|
|
|
13.1
|
|
Total
noninterest expense
|
|
$
|
13,162
|
|
$
|
12,489
|
|
$
|
673
|
|
|
5.4
|
%
|
Salary
and benefits increased due to normal annual increases, the acquisition of B.G.
Balmer and Co. in the third quarter of 2006, and increased benefit costs during
the first quarter of 2007. Net occupancy expense increased primarily due to
increased rental obligations associated with the new West Chester insurance
office and the new Doylestown corporate banking office. Marketing and
advertising expenses decreased primarily due to a reduction in radio advertising
costs. Other expenses increased primarily due an increase in the bank shares
tax, audit and examination fees, legal fees and amortization costs associated
with customer lists. These increases were partially offset by decreases in
consultant fees as well as reductions in travel and entertainment expenses.
Tax
Provision
The
provision for income taxes was $2.3 million for the three months ended March
31,
2007 compared to $2.2 million in 2006, at effective rates of 27.1% and 26.3%,
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 an increase in pre-tax income, a decrease in tax credits
generated from investments in low-income housing projects, and a reduction
in
the amount the cash surrender value of bank-owned life insurance policies
increased.
Financial
Condition
Assets
Total
assets increased $6.4 million since December 31, 2006. The increase was
primarily due to net growth in loans. The following table presents the assets
for the periods indicated:
|
|
At
March 31,
|
|
At
December 31,
|
|
Change
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Cash,
deposits and federal funds sold
|
|
$
|
62,189
|
|
$
|
70,355
|
|
$
|
(8,166
|
)
|
|
(11.6
|
)%
|
Investment
securities
|
|
|
379,487
|
|
|
382,400
|
|
|
(2,913
|
)
|
|
(0.8
|
)
|
Total
loans and leases
|
|
|
1,372,523
|
|
|
1,353,681
|
|
|
18,842
|
|
|
1.4
|
|
Reserve
for loan and lease losses
|
|
|
(13,414
|
)
|
|
(13,283
|
)
|
|
(131
|
)
|
|
(0.1
|
)
|
Premises
and equipment
|
|
|
21,833
|
|
|
21,878
|
|
|
(45
|
)
|
|
(0.2
|
)
|
Goodwill
and other intangibles
|
|
|
47,619
|
|
|
47,608
|
|
|
11
|
|
|
─
|
|
Cash
surrender value of insurance policies
|
|
|
37,008
|
|
|
36,686
|
|
|
322
|
|
|
0.9
|
|
Other
assets
|
|
|
28,685
|
|
|
30,176
|
|
|
(1,491
|
)
|
|
(4.9
|
)
|
Total
assets
|
|
$
|
1,935,930
|
|
$
|
1,929,501
|
|
$
|
6,429
|
|
|
0.3
|
%
|
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 decreased primarily due to maturities, calls and sales of $24.9
million partially offset by purchases of $21.1 million in the available-for-sale
portfolio.
Loans
Total
loans increased in the first three months of 2007 due to increases in lease
financings of $9.6 million, commercial real estate loans of $3.0 million, real
estate construction loans of $7.8 million
and
commercial business loans of $3.2 million. These increases were offset slightly
by a decrease in non-real estate related loans to individuals of
$4.4 million.
Asset
Quality
Performance
of the entire loan 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, including a loan impaired under SFAS No. 114, is classified as nonaccrual,
the accrual of interest on such a loan is discontinued. A loan 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
may remain on accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against other expense. Interest received
on
nonaccrual loans is either applied against principal or reported as interest
income, according to management's judgment as to the collectibility of
principal.
Loans
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 totaled $7.8 million at March 31,
2007,
$8.4 million at December 31, 2006 and $5.3 million at March 31, 2006 and
consisted mainly of commercial loans and real estate related commercial loans.
For the three months ended March 31, 2007 and 2006, nonaccrual loans resulted
in
lost interest income of $198 thousand and $118 thousand, respectively. Loans
90
days or more past due totaled $1.2 million at March 31, 2007, $760 thousand
at December 31, 2006 and $663 thousand at March 31, 2006. Other real estate
owned totaled $338 thousand at March 31, 2007. There was no other real estate
owned at December 31, 2006 and March 31, 2006. The Corporation's ratio of
nonperforming assets to total loans and other real estate owned was 0.67% at
March 31, 2007, 0.68% at December 31, 2006 and 0.47% at March 31,
2006.
At
March
31, 2007, the recorded investment in loans that are considered to be impaired
under SFAS No. 114 was $7.8 million, all of which were on a nonaccrual
basis; the related reserve for loan losses for those loans was $1.5 million.
At
December 31, 2006, the recorded investment in loans that are considered to
be
impaired under SFAS No. 114 was $8.4 million, all of which were on a nonaccrual
basis; the related reserve for loan losses for those loans was $1.6 million.
At
March 31, 2006, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $5.3 million; the related reserve for loan
losses for those loans was $1.3 million. 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. In the first quarter of 2007, one commercial real
estate credit secured by a mortgage totaling $406 thousand and several
commercial business loans totaling $730 thousand were added to impaired
loans. For the three months ended March 31, 2007, payments of $839 thousand
were received on impaired loans, $298 thousand were charged-off, $350 thousand
was returned to accruing, and $327 thousand was transferred to other real estate
owned.
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 loan 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 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 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, including input from the Bank’s primary
regulators, 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 loan and lease 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 loans are reported at the present value of expected
future cash flows using the loan's initial effective interest rate, or at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent.
The
specific reserve element is based on a regular analysis of impaired commercial
and real estate loans. For these loans, 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 loan 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 pool
classification.
The
reserve for loan and lease losses increased $131 thousand from December 31,
2006
to March 31, 2007 due to the need to increase the reserve for loan and lease
growth. Management believes that the reserve is maintained at a level that
is
adequate to absorb losses in the loan portfolio. The ratio of the reserve for
loan losses to total loans was 0.98% at both March 31, 2007 and December 31,
2006.
The
Corporation maintains a reserve in other liabilities for off-balance sheet
credit exposures that currently are unfunded. The balance of this reserve was
$105 thousand as of March 31, 2007 and December 31, 2006.
Goodwill
and Other Intangible Assets
The
Corporation has goodwill of $44.4 million, which is deemed to be an indefinite
intangible asset and in accordance to SFAS 142, is no longer amortized. The
Corporation also has covenants not to compete, intangible assets due to bank
and
branch acquisitions, core deposit intangibles, customer related intangibles
and
mortgage servicing rights, which are not deemed to have an indefinite life
and
therefore continue to be amortized over their useful life. In accordance to
SFAS
142, the Corporation conducts annual impairment analysis on all intangible
assets to determine if impairment of the asset exists. At March 31, 2007, there
was no impairment detected.
Liabilities
Total
liabilities increased since December 31, 2006 primarily due to an increase
in
deposits and other liabilities, partially offset by a decrease in borrowings.
The following table presents the liabilities for the periods
indicated:
|
|
At
March 31,
|
|
At
December 31,
|
|
Change
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Deposits
|
|
$
|
1,521,340
|
|
$
|
1,488,545
|
|
$
|
32,795
|
|
|
2.2
|
%
|
Borrowings
|
|
|
189,739
|
|
|
225,066
|
|
|
(35,327
|
)
|
|
(15.7
|
)
|
Other
liabilities
|
|
|
35,962
|
|
|
30,505
|
|
|
5,457
|
|
|
17.9
|
|
Total
liabilities
|
|
$
|
1,747,041
|
|
$
|
1,744,116
|
|
$
|
2,925
|
|
|
0.2
|
%
|
Deposits
Total
deposits grew at the Bank primarily due to increases in wholesale certificates
of deposit of $24.9 million. Growth in regular and money market savings
accounts of $18.7 million were offset by a decrease in non-interest-bearing
demand accounts of $19.0 million.
Borrowings
Long-term
debt at March 31, 2007, includes $9.4 million in Subordinated Capital Notes,
$20.6 million of Trust Preferred Securities, and $74.5 million in long-term
borrowings from the FHLB. The consolidated balance sheet also includes a
$1.4 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 decreased
due to net fluctuations in the sweep accounts of negative $15.9 million and
a
reduction in federal funds purchased of $17.9 million.
Other
Liabilities
Other
liabilities increased primarily due to an increase in accrued income taxes
and
an increase in the liability for payments made to private investors for
participated loans.
Shareholders'
Equity
Total
shareholders’ equity increased since December 31, 2006 primarily due to current
earnings, partially offset by cash dividends paid. The following table presents
the shareholders’ equity for the periods indicated:
|
|
At
March 31,
|
|
At
December 31,
|
|
Change
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Common
stock
|
|
$
|
74,370
|
|
$
|
74,370
|
|
$
|
─
|
|
|
─
|
%
|
Additional
paid-in capital
|
|
|
22,493
|
|
|
22,459
|
|
|
34
|
|
|
0.2
|
|
Retained
earnings
|
|
|
131,884
|
|
|
128,242
|
|
|
3,642
|
|
|
2.8
|
|
Accumulated
other comprehensive loss
|
|
|
(3,974
|
)
|
|
(4,463
|
)
|
|
489
|
|
|
11.0
|
|
Treasury
stock
|
|
|
(35,884
|
)
|
|
(35,223
|
)
|
|
(661
|
)
|
|
(1.9
|
)
|
Total
shareholders’ equity
|
|
$
|
188,889
|
|
$
|
185,385
|
|
$
|
3,504
|
|
|
1.9
|
%
|
Retained
earnings was favorably impacted by three months of net income of $6.2 million
partially offset by cash dividends of $2.6 million declared during the first
three months of 2007. Treasury stock increased slightly primarily due to
purchases. There is a buyback program in place that as of March 31, 2007 allows
the Corporation to purchase an additional 526,571 shares of its outstanding
common stock in the open market or in negotiated transactions.
Accumulated
other comprehensive gains related to debt securities of $334 thousand, net
of
taxes, is included in shareholders' equity as of March 31, 2007. Accumulated
other comprehensive loss related to debt securities of $175 thousand, net of
taxes, has been included in shareholders' equity as of December 31, 2006.
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 improved market values of fixed rate mortgage-backed and
non-mortgage-backed government agency debt securities. The market value
increased are attributable to decreases, from December 31, 2006 to March 31,
2007, in the 2-, 3- and 5-year treasury yields, which ranged from 16 basis
points to 24 basis points.
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, benefit plans and stock-based compensation as its critical
accounting policies. For more information on these critical accounting policies,
please refer to our 2006 Annual Report on Form 10-K.
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.
The
Corporation had used an interest-rate swap agreement that converts a portion
of
its floating rate commercial loans to a fixed rate basis. In this swap, the
Corporation agreed to exchange, at specified intervals, the difference between
the fixed and floating interest rates calculated on a 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 income. The impact of the interest-rate
swap on interest income for the three months ended March 31, 2006 was a negative
$20 thousand. At March 31, 2007 and December 31, 2006 the Corporation had
no swaps outstanding as the swap expired on November 2, 2006.
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 wholesale certificates of deposit.
At March 31, 2007 the Bank had $108.7 million in wholesale certificates of
deposits. The Corporation also 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.
The
Corporation, through its Bank, has short-term and long-term credit facilities
with the FHLB with a maximum borrowing capacity of approximately
$343.4 million. At March 31, 2007, the Corporation's outstanding borrowings
under the FHLB credit facilities totaled $74.5 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 $112.0 million. At March 31, 2007, there were no 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 March 31, 2007, 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
March
31, 2007, 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.
Pennsylvania
Local Government Investment Trust (“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 March 31, 2007:
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Due
in One
Year
or Less
|
|
Due
in One to Three Years
|
|
Due
in Four
to
Five Years
|
|
Due
in Over
Five
Years
|
|
Long-term
debt
|
|
$
|
85,946
|
|
$
|
13,860
|
|
$
|
36,755
|
|
$
|
30,185
|
|
$
|
5,146
|
|
Subordinated
capital notes
|
|
|
11,566
|
|
|
2,088
|
|
|
3,936
|
|
|
3,536
|
|
|
2,006
|
|
Trust
preferred securities
|
|
|
66,552
|
|
|
1,732
|
|
|
3,464
|
|
|
3,464
|
|
|
57,892
|
|
Securities
sold under agreement to repurchase
|
|
|
83,836
|
|
|
83,836
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Time
deposits
|
|
|
586,575
|
|
|
490,214
|
|
|
78,908
|
|
|
17,203
|
|
|
250
|
|
Operating
leases
|
|
|
7,742
|
|
|
1,495
|
|
|
2,176
|
|
|
1,562
|
|
|
2,509
|
|
Standby
and commercial letters of credit
|
|
|
69,163
|
|
|
58,312
|
|
|
10,851
|
|
|
─
|
|
|
─
|
|
Standby
letters of credit issued by FHLB on behalf of the
Corporation
|
|
|
47,469
|
|
|
47,469
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Commitments
to extend credit
|
|
|
508,111
|
|
|
184,590
|
|
|
53,124
|
|
|
13,929
|
|
|
256,468
|
|
Forward
contracts
|
|
|
190
|
|
|
190
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Total
contractual obligations
|
|
$
|
1,467,108
|
|
$
|
883,786
|
|
$
|
189,214
|
|
$
|
69,879
|
|
$
|
324,271
|
|
Recent
Accounting Pronouncements
In
September 2006, the Emerging Issues Task Force (“EITF”) reached a conclusion on
EITF No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF 06-4.”)
EITF 06-4 is effective for fiscal years beginning after December 15, 2007.
Under EITF 06-4, if an
agreement is to provide the employee with a death benefit in a
postretirement/termination period, the employer should recognize a liability
for
the future death benefit in accordance with either Statement of Financial
Accounting Standard (“SFAS”) No. 106 or Accounting Principles Board Opinion No.
12. EITF
06-4
requires that recognition of the effects of adoption should be either by
(a) a change in accounting principle through a cumulative-effect adjustment
to retained earnings as of the beginning of the year of adoption or (b) a
change in accounting principle through retrospective application to all prior
periods.
The
potential impact to the Corporation will be negative cumulative-effect
adjustment to retained earnings of approximately $1.6 million and would not
be tax affected.
In
September 2006, the Financial Accounting Standards Board (“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 chose not to adopt SFAS 157 early. The
Corporation does not anticipate the adoption of SFAS 157 in the Fiscal Year
2008
to have a material impact on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities (Including an amendment of FASB
Statement No. 115)” (“SFAS 159.”) SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective of SFAS 159 is to improve financial reporting by allowing entities
to
minimize volatility in reported earnings caused by related assets and
liabilities being measured differently. Most of the provisions of SFAS 159
apply
only to entities that elect the fair value option. However, SFAS 159 includes
an
amendment to SFAS 115 which applies
to all entities with available-for-sale and trading securities. Entities
electing the fair value option will report unrealized gains and losses in
earnings and recognize upfront costs and fees related to those items in earnings
as they are incurred, not deferred. The following items are eligible for the
fair value measurement option established by SFAS 159: 1) Recognized financial
assets and financial liabilities, except (a) an investment in a subsidiary
that
is required to be consolidated, (b) an interest in a variable interest entity
that is required to be consolidated, (c) obligations (or assets representing
net
over funded positions) for pension plans, other postretirement benefits, post
employment benefits, employee stock option and stock purchase plans, and other
forms of deferred compensation arrangements, (d) financial assets and
liabilities recognized under leases, (e) demand deposit liabilities of financial
institutions, and (f) financial instruments classified by the issuer as a
component of shareholder’s equity; 2) firm commitments that would otherwise not
be recognized at inception and that involve only financial instruments; 3)
nonfinancial insurance contracts and warranties that the insurer can settle
by
paying a third party to provide those goods or services; and, 4) host financial
instruments resulting from separation of an embedded nonfinancial derivative
instrument from a nonfinancial hybrid instrument. The fair value option may
be
applied on an instrument-by-instrument basis, with a few exceptions, such as
investments otherwise accounted for by the equity method or multiple advanced
made to one borrower under a single contract. The fair value option is
irrevocable unless a new election date occurs and applies only to entire
instruments and not to portions of instruments. Entities are permitted to elect
fair value option for any eligible item within the scope of SFAS 159 at the
date they initially adopt the SFAS 159. The adjustment to reflect the difference
between the fair value and the current carrying amount of the assets and
liabilities for which an entity elects fair value option is reported as a
cumulative-effect adjustment to the opening balance of retained earnings upon
adoption. SFAS 159 is effective as of the beginning of an entity’s first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS 157. The
Corporation chose not to adopt SFAS 159 early. The Corporation does not
anticipate the adoption of SFAS 159 in the Fiscal Year 2008 to have a material
impact on its financial statements.
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,
2006.
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
March 31, 2007 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, 2006.
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.
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, 2006 as filed with the Securities and Exchange
Commission on March 8, 2007.
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 March 31, 2007.
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
|
January
1 - 31, 2007
|
|
|
15,721
|
|
$
|
30.27
|
|
|
15,721
|
|
|
515,404
|
|
February
1 - 28, 2007
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
515,404
|
|
March
1 - 31, 2007
|
|
|
32,575
|
|
|
24.47
|
|
|
32,575
|
|
|
483,879
|
|
Total
|
|
|
48,296
|
|
|
|
|
|
48,296
|
|
|
|
|
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
|
At
the
Corporation’s Annual Meeting of Shareholders held on April 10, 2007, the
Corporation’s shareholders approved the following matters:
1. |
ELECTION
OF THREE CLASS II DIRECTORS TO SERVE FOR A
THREE-YEAR
TERM EXPIRING IN 2010:
|
James
L. Bergey
|
|
|
9,594,341.74
|
|
|
598,489.40
|
|
Charles
H. Hoeflich
|
|
|
9,926,088.13
|
|
|
266,743.01
|
|
John
U. Young
|
|
|
10,021,655.88
|
|
|
171,175.26
|
|
2. |
ELECTION
OF THREE ALTERNATE DIRECTORS FOR A
ONE-YEAR
TERM EXPIRING IN 2008:
|
Margaret
K. Zook
|
|
|
9,511,312.93
|
|
|
681,518.21
|
|
William
G. Morral, CPA
|
|
|
9,467,046.54
|
|
|
725,784.60
|
|
Mark
A. Schlosser
|
|
|
9,514,862.93
|
|
|
677,968.21
|
|
|
|
|
|
|
|
|
|
The
other
directors of the Corporation whose terms in office continued after the 2007
Annual Meeting of Shareholders are as follows: terms expiring at the 2008 Annual
Meeting are Marvin A. Anders, R. Lee Delp, H. Ray Mininger and P. Gregory
Shelly; and terms expiring at the 2009 Annual Meeting are William S. Aichele,
Norman L. Keller, Thomas K. Leidy and Merrill S. Moyer.
Item
5.
|
Other
Information
|
None.
|
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, Chief Operation Officer and Chief Financial
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
32.1
|
Certification
of William S. Aichele, Chairman, President and 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 Operation Officer and 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: May
8,
2007 |
By: |
/s/ William
S. Aichele |
|
William S. Aichele, Chairman, President
and Chief Executive
Officer
|
|
|
|
|
|
|
Date: May
8, 2007 |
By: |
/s/ Wallace
H. Bieler |
|
Wallace
H. Bieler, Senior Executive Vice President,
|
|
Chief
Operation Officer and Chief Financial
Officer |