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UNIVEST FINANCIAL Corp - Quarter Report: 2012 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2012.

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 all 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Common Stock, $5 par value

 

16,765,148

(Title of Class)   (Number of shares outstanding at October 31, 2012)

 

 

 


Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX

 

             Page Number  
Part I.   Financial Information:   
  Item 1.   Financial Statements (Unaudited)   
    Consolidated Balance Sheets at September 30, 2012 and December 31, 2011      2   
    Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011      3   
    Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011      4   
    Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011      5   
    Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 2012 and 2011      6   
    Notes to Consolidated Financial Statements      7   
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk      46   
  Item 4.   Controls and Procedures      46   
Part II.   Other Information   
  Item 1.   Legal Proceedings      47   
  Item 1A.   Risk Factors      47   
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      47   
  Item 3.   Defaults Upon Senior Securities      47   
  Item 4.  

Mine Safety Disclosures

     47   
  Item 5.   Other Information      47   
  Item 6.   Exhibits      48   
Signatures      49   

 

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Table of Contents
PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)    (UNAUDITED)
At September 30, 2012
    (SEE NOTE)
At December 31, 2011
 

ASSETS

    

Cash and due from banks

   $ 38,977      $ 39,857   

Interest-earning deposits with other banks

     24,329        67,520   

Investment securities held-to-maturity (fair value $71,741 and $45,639 at September 30, 2012 and December 31, 2011, respectively)

     70,054        45,804   

Investment securities available-for-sale

     445,202        425,361   

Loans held for sale

     6,146        3,157   

Loans and leases held for investment

     1,469,511        1,446,406   

Less: Reserve for loan and lease losses

     (27,096     (29,870
  

 

 

   

 

 

 

Net loans and leases held for investment

     1,442,415        1,416,536   
  

 

 

   

 

 

 

Premises and equipment, net

     33,700        34,303   

Goodwill

     56,238        53,169   

Other intangibles, net of accumulated amortization and fair value adjustments of $13,566 and $11,646 at September 30, 2012 and December 31, 2011, respectively

     5,717        4,870   

Bank owned life insurance

     61,044        61,387   

Accrued interest receivable and other assets

     48,259        54,875   
  

 

 

   

 

 

 

Total assets

   $ 2,232,081      $ 2,206,839   
  

 

 

   

 

 

 

LIABILITIES

    

Demand deposits, noninterest-bearing

   $ 334,856      $ 304,006   

Demand deposits, interest-bearing

     581,547        547,034   

Savings deposits

     519,600        489,692   

Time deposits

     341,927        408,500   
  

 

 

   

 

 

 

Total deposits

     1,777,930        1,749,232   
  

 

 

   

 

 

 

Securities sold under agreements to repurchase

     111,551        109,740   

Accrued interest payable and other liabilities

     39,642        47,394   

Long-term debt

     —          5,000   

Subordinated notes

     750        1,875   

Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Company (Trust Preferred Securities)

     20,619        20,619   
  

 

 

   

 

 

 

Total liabilities

     1,950,492        1,933,860   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $5 par value: 48,000,000 shares authorized at September 30, 2012 and December 31, 2011; 18,266,404 shares issued at September 30, 2012 and December 31, 2011; 16,765,126 and 16,702,376 shares outstanding at September 30, 2012 and December 31, 2011, respectively

     91,332        91,332   

Additional paid-in capital

     58,404        58,495   

Retained earnings

     163,052        157,566   

Accumulated other comprehensive loss, net of taxes

     (4,135     (6,101

Treasury stock, at cost; 1,501,278 shares and 1,564,028 shares at September 30, 2012 and December 31, 2011, respectively

     (27,064     (28,313
  

 

 

   

 

 

 

Total shareholders’ equity

     281,589        272,979   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,232,081      $ 2,206,839   
  

 

 

   

 

 

 

 

Note: The consolidated balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share data)  

Interest income

        

Interest and fees on loans and leases:

        

Taxable

   $ 16,332      $ 16,972      $ 49,082      $ 51,347   

Exempt from federal income taxes

     1,143        1,265        3,565        3,642   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and fees on loans and leases

     17,475        18,237        52,647        54,989   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and dividends on investment securities:

        

Taxable

     1,354        1,856        4,588        6,268   

Exempt from federal income taxes

     1,103        1,119        3,310        3,350   

Other interest income

     45        25        121        40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     19,977        21,237        60,666        64,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Interest on deposits

     1,624        2,170        5,131        6,926   

Interest on short-term borrowings

     33        96        295        256   

Interest on long-term borrowings

     301        355        910        1,059   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,958        2,621        6,336        8,241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     18,019        18,616        54,330        56,406   

Provision for loan and lease losses

     2,210        3,649        7,653        14,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     15,809        14,967        46,677        42,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Trust fee income

     1,625        1,625        4,875        4,875   

Service charges on deposit accounts

     1,122        1,218        3,301        3,910   

Investment advisory commission and fee income

     1,350        1,239        3,956        3,595   

Insurance commission and fee income

     2,129        1,787        6,453        6,059   

Other service fee income

     1,053        814        3,943        3,606   

Bank owned life insurance income

     463        554        2,305        1,166   

Other-than-temporary impairment on equity securities

     (4     (1     (13     (11

Net gain on sales of securities

     9        848        291        1,417   

Net gain on mortgage banking activities

     2,171        913        4,517        1,216   

Net gain (loss) on sales and dispositions of fixed assets

     1,321        (3     1,312        (12

Net loss on sales and write-downs of other real estate owned

     (621     (141     (1,723     (758

Other

     243        121        665        366   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     10,861        8,974        29,882        25,429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and benefits

     10,828        9,888        33,124        28,505   

Net occupancy

     1,445        1,361        4,241        4,272   

Equipment

     1,152        1,026        3,297        2,968   

Marketing and advertising

     340        305        1,243        1,287   

Deposit insurance premiums

     406        442        1,279        1,582   

Other

     4,887        4,273        13,386        11,833   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     19,058        17,295        56,570        50,447   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,612        6,646        19,989        17,049   

Applicable income taxes

     1,842        1,402        4,193        3,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,770      $ 5,244      $ 15,796      $ 13,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ .34      $ .31      $ .94      $ .81   

Diluted

     .34        .31        .94        .81   

Dividends declared

     .20        .20        .60        .60   

 

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended September 30,  
     2012     2011  
(Dollars in thousands)    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
 

Net income

   $ 7,612      $ 1,842      $ 5,770      $ 6,646      $ 1,402      $ 5,244   

Other comprehensive income:

            

Net unrealized gains on available-for-sale investment securities:

            

Net unrealized holding gains arising during the period

     2,698        944        1,754        3,504        1,227        2,277   

Less: reclassification adjustment for net gains on sales realized in net income

     (9     (3     (6     (848     (297     (551

Less: reclassification adjustment for other-than-temporary impairment on equity securities realized in net income

     4        2        2        1        1        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized gains on available-for-sale investment securities

     2,693        943        1,750        2,657        931        1,726   

Net change in fair value of derivatives used for cash flow hedges

     (213     (75     (138     (1,466     (513     (953

Defined benefit pension plans:

            

Less: amortization of net loss included in net periodic pension costs

     293        103        190        180        63        117   

Less: accretion of prior service cost included in net periodic pension costs

     (64     (22     (42     (65     (23     (42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit pension plans

     229        81        148        115        40        75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     2,709        949        1,760        1,306        458        848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 10,321      $ 2,791      $ 7,530      $ 7,952      $ 1,860      $ 6,092   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30,  
(Dollars in thousands)    2012     2011  
     Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
 

Net income

   $ 19,989      $ 4,193      $ 15,796      $ 17,049      $ 3,427      $ 13,622   

Other comprehensive income:

            

Net unrealized gains on available-for-sale investment securities:

            

Net unrealized holding gains arising during the period

     3,215        1,125        2,090        9,822        3,438        6,384   

Less: reclassification adjustment for net gains on sales realized in net income

     (291     (102     (189     (1,417     (496     (921

Less: reclassification adjustment for other-than-temporary impairment on equity securities realized in net income

     13        5        8        11        4        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized gains on available-for-sale investment securities

     2,937        1,028        1,909        8,416        2,946        5,470   

Net change in fair value of derivatives used for cash flow hedges

     (602     (211     (391     (1,838     (643     (1,195

Defined benefit pension plans:

            

Less: amortization of net loss included in net periodic pension costs

     882        309        573        561        196        365   

Less: accretion of prior service cost included in net periodic pension costs

     (192     (67     (125     (192     (67     (125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit pension plans

     690        242        448        369        129        240   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     3,025        1,059        1,966        6,947        2,432        4,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 23,014      $ 5,252      $ 17,762      $ 23,996      $ 5,859      $ 18,137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share data)    Common
Shares
Outstanding
    Accumulated
Other
Comprehensive
(Loss) Income
    Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Total  

For the Nine Months Ended September 30, 2012

               

Balance at December 31, 2011

     16,702,376      $ (6,101   $ 91,332       $ 58,495      $ 157,566      $ (28,313   $ 272,979   

Net income

     —          —          —           —          15,796        —          15,796   

Other comprehensive income, net of taxes

     —          1,966        —           —          —          —          1,966   

Cash dividends declared ($0.60 per share)

     —          —          —           —          (10,058     —          (10,058

Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs

     121,012        —          —           —          (64     2,051        1,987   

Cancelled stock options and awards

     (13,125     —          —           300        (54     (213     33   

Tax expense on stock based compensation

     —          —          —           (84     —          —          (84

Purchases of treasury stock

     (116,294     —          —           —          —          (1,877     (1,877

Restricted stock awards granted

     71,157        —          —           (1,154     (134     1,288        —     

Vesting of restricted stock awards

     —          —          —           847        —          —          847   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     16,765,126      $ (4,135   $ 91,332       $ 58,404      $ 163,052      $ (27,064   $ 281,589   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in thousands, except per share data)    Common
Shares
Outstanding
    Accumulated
Other
Comprehensive
(Loss) Income
    Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Total  

For the Nine Months Ended September 30, 2011

               

Balance at December 31, 2010

     16,648,303      $ (6,766   $ 91,332       $ 59,080      $ 151,978      $ (29,400   $ 266,224   

Net income

     —          —          —           —          13,622        —          13,622   

Other comprehensive income, net of taxes

     —          4,515        —           —          —          —          4,515   

Cash dividends declared ($0.60 per share)

     —          —          —           —          (10,043     —          (10,043

Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs

     105,345        —          —           62        13        1,712        1,787   

Purchases of treasury stock

     (85,285     —          —           —          —          (1,209     (1,209

Restricted stock awards granted

     58,736        —          —           (1,019     47        972        —     

Vesting of restricted stock awards

     —          —          —           203        —          —          203   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     16,727,099      $ (2,251   $ 91,332       $ 58,326      $ 155,617      $ (27,925   $ 275,099   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  
(Dollars in thousands)            2012                     2011          

Cash flows from operating activities:

    

Net income

   $ 15,796      $ 13,622   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan and lease losses

     7,653        14,339   

Depreciation of premises and equipment

     2,160        1,942   

Other-than-temporary impairment on equity securities

     13        11   

Net gain on sales of investment securities

     (291     (1,417

Net gain on mortgage banking activities

     (4,517     (1,216

Net (gain) loss on sales and dispositions of fixed assets

     (1,312     12   

Net loss on sales and write-downs of other real estate owned

     1,723        758   

Bank owned life insurance income

     (2,305     (1,166

Other adjustments to reconcile net income to cash provided by operating activities

     5,638        2,509   

Originations of loans held for sale

     (215,767     (105,389

Proceeds from the sale of loans held for sale

     218,280        108,836   

Contributions to pension and other postretirement benefit plans

     (8,089     (90

Decrease (increase) in accrued interest receivable and other assets

     801        (1,467

Decrease in accrued interest payable and other liabilities

     (39     (110
  

 

 

   

 

 

 

Net cash provided by operating activities

     19,744        31,174   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net cash paid due to acquisitions

     (3,225     —     

Net capital expenditures

     (236     (1,481

Proceeds from maturities of securities held-to-maturity

     —          33   

Proceeds from maturities and calls of securities available-for-sale

     107,920        153,033   

Proceeds from sales of securities available-for-sale

     57,162        40,481   

Purchases of investment securities held-to-maturity

     (24,697     (30,561

Purchases of investment securities available-for-sale

     (182,949     (98,833

Net (increase) decrease in loans and leases

     (36,131     13,114   

Net decrease (increase) in interest-bearing deposits

     43,191        (79,321

Purchases of bank owned life insurance

     —          (12,500

Proceeds from bank owned life insurance

     2,415        791   

Proceeds from sales of other real estate owned

     1,482        1,607   
  

 

 

   

 

 

 

Net cash used in investing activities

     (35,068     (13,637
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     28,698        38,793   

Net decrease in short-term borrowings

     (3,189     (7,250

Repayment of subordinated debt

     (1,125     (1,125

Purchases of treasury stock

     (1,877     (1,209

Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs

     1,987        1,787   

Cash dividends paid

     (10,050     (10,011
  

 

 

   

 

 

 

Net cash provided by financing activities

     14,444        20,985   
  

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (880     38,522   

Cash and due from banks at beginning of year

     39,857        11,624   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 38,977      $ 50,146   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid during the year for:

    

Interest

   $ 6,694      $ 8,374   

Income taxes, net of refunds received

     1,437        4,357   

Non cash transactions:

    

Noncash transfer of loans to other real estate owned

   $ —        $ 7,426   

Noncash transfer of loans held for investment to loans held for sale

     2,599        —     

Contingency consideration recorded as goodwill

     842        —     

 

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

Notes to the Unaudited Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying unaudited 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 Bank and Trust Co. (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations for interim financial information. The accompanying unaudited consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary for a fair presentation of the financial statements for the interim periods presented. Certain prior period amounts have been reclassified to conform to the current-year presentation. Operating results for the nine-month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on March 2, 2012.

Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include fair value measurement of investment securities available for sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation expense.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to simplify testing indefinite-lived intangible assets for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative indefinite-lived intangible asset impairment test. An entity no longer will be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not, that its fair value is less than its carrying amount. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 or January 1, 2013 for the Corporation. Early adoption is permitted. The Corporation does not anticipate the guidance will have any impact on its financial statements.

In June 2011, the FASB issued an ASU regarding the presentation of comprehensive income and to increase the prominence of items reported in other comprehensive income and facilitate the convergence of U.S. GAAP and International Financial Reporting Standards (IFRS). The guidance requires entities to report the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. This update is effective for fiscal years and interim periods within those years, beginning after December 15, 2011, or March 31, 2012 for the Corporation, and is to be applied retrospectively. In December 2011, the FASB issued an ASU deferring the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. The Corporation adopted the two separate but consecutive financial statements approach for the three months ended March 31, 2012 and retrospectively for the three months ended March 31, 2011 by including consolidated statements of comprehensive income after the consolidated statements of income in this report. The standard did not have a material impact on the Corporation’s financial statements.

 

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Table of Contents

In May 2011, the FASB issued an ASU regarding fair value measurements which establishes a global standard in U.S. GAAP and IFRS for applying fair value measurements and disclosures. Consequently, the amendments in this update change the wording to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments do not require additional fair value measurements and most of the amendments are not intended to result in a change of the application of fair value measurement requirements. Additional disclosures required include: 1) for fair value measurements categorized within Level 3 of the fair value hierarchy: a) the valuation processes used by the reporting entity; and b) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any; and 2) the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. This amendment is effective for fiscal years and interim periods within those years, beginning after December 15, 2011, or March 31, 2012 for the Corporation, and is to be applied prospectively. The application of the provisions of this standard did not have a material impact on the Corporation’s financial statements although it resulted in expanded disclosures effective March 31, 2012, which are included in Note 11, “Fair Value Disclosures.”

Note 2. Acquisition

On May 31, 2012, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of the Javers Group, a full-service employee benefits agency that specializes in comprehensive human resource management, payroll and administrative services to businesses with 50 to 1,000 employees. The acquisition expands the Corporation’s insurance and employee benefits business and further diversifies its solutions to include human resource consulting services and technology.

The Corporation paid $3.2 million in cash at closing with additional contingent consideration to be paid in annual installments over the three-year period ended June 30, 2015 based on the achievement of certain levels of revenue. As of the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $842 thousand in other liabilities. The estimated fair value of the contingent consideration liability was calculated using a discounted cash flow model of future contingent payments based on projected revenue related to the acquired business. The potential cash payments that could result from the contingent consideration arrangement range from $0 thousand to a maximum of $1.7 million over the next three years. The fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change in the discount rate or change in projected revenue of the acquired business affecting the contingent consideration liability is recorded through non-interest expense.

As a result of the Javers Group acquisition, the Corporation recorded goodwill of $3.1 million (inclusive of contingent consideration) and customer related intangibles of $989 thousand. The goodwill is expected to be deductible for tax purposes. The customer related intangibles are being amortized over nine years using the sum-of-the-years-digits amortization method. The allocation of the purchase price to goodwill, customer related intangibles and the contingent consideration liability, as of September 30, 2012, are preliminary estimates and are subject to adjustment within the measurement period. The acquisition was accounted for in accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations.”

Note 3. Investment Securities

The following table shows the amortized cost and the estimated fair value of the held-to-maturity securities and available-for-sale securities at September 30, 2012 and December 31, 2011 by contractual maturity within each type.

 

     At September 30, 2012      At December 31, 2011  
(Dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Held-to-Maturity

                     

Corporate bonds:

                     

After 1 year to 5 years

   $ 70,054       $ 1,725       $ (38   $ 71,741       $ 45,804       $ 154       $ (319   $ 45,639   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     70,054         1,725         (38     71,741         45,804         154         (319     45,639   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 70,054       $ 1,725       $ (38   $ 71,741       $ 45,804       $ 154       $ (319   $ 45,639   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

8


Table of Contents
     At September 30, 2012      At December 31, 2011  
(Dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available-for-Sale

                     

U.S. treasuries:

                     

Within 1 year

   $ —         $ —         $ —        $ —         $ 2,525       $ —         $ —        $ 2,525   

After 5 years to 10 years

     4,959         —           (7     4,952         —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     4,959         —           (7     4,952         2,525         —           —          2,525   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

U.S. government corporations and agencies:

                     

Within 1 year

     6,528         27         —          6,555         10,009         77         —          10,086   

After 1 year to 5 years

     151,267         1,615         —          152,882         143,189         1,022         (33     144,178   

After 5 years to 10 years

     20,986         107         (7     21,086         —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     178,781         1,749         (7     180,523         153,198         1,099         (33     154,264   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

State and political subdivisions:

                     

Within 1 year

     1,557         41         —          1,598         752         5         —          757   

After 1 year to 5 years

     7,596         169         (16     7,749         10,082         308         (16     10,374   

After 5 years to 10 years

     28,471         1,128         (6     29,593         11,846         664         (3     12,507   

Over 10 years

     79,567         5,704         (15     85,256         87,896         5,472         (1     93,367   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     117,191         7,042         (37     124,196         110,576         6,449         (20     117,005   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Residential mortgage-backed securities:

                     

After 5 years to 10 years

     21,645         867         —          22,512         20,745         743         —          21,488   

Over 10 years

     72,911         3,370         —          76,281         55,328         2,665         (680     57,313   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     94,556         4,237         —          98,793         76,073         3,408         (680     78,801   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Commercial mortgage obligations:

                     

After 1 year to 5 years

     118         1         —          119         —           —           —          —     

After 5 years to 10 years

     1,190         16         —          1,206         5,547         124         —          5,671   

Over 10 years

     22,448         598         —          23,046         54,994         799         —          55,793   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     23,756         615         —          24,371         60,541         923         —          61,464   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Corporate bonds:

                     

After 1 year to 5 years

     4,993         13         —          5,006         4,991         —           (224     4,767   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     4,993         13         —          5,006         4,991         —           (224     4,767   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Money market mutual funds:

                     

Within 1 year

     4,500         —           —          4,500         3,851         —           —          3,851   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     4,500         —           —          4,500         3,851         —           —          3,851   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities:

                     

No stated maturity

     2,289         737         (165     2,861         2,364         544         (224     2,684   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     2,289         737         (165     2,861         2,364         544         (224     2,684   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 431,025       $ 14,393       $ (216   $ 445,202       $ 414,119       $ 12,423       $ (1,181   $ 425,361   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Expected maturities may differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties.

Securities with a fair value of $383.9 million and $338.5 million at September 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes as required by law.

The following table presents information related to sales of securities available for sale during the nine months ended September 30, 2012 and 2011.

 

     Nine Months Ended September 30,  
(Dollars in thousands)        2012              2011      

Securities available for sale:

     

Proceeds from sales

   $ 57,162       $ 40,481   

Gross realized gains on sales

     1,187         1,428   

Gross realized losses on sales

     896         11   

Tax expense related to net realized gains on sales

     102         496   

 

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Table of Contents

Accumulated other comprehensive income related to securities of $9.2 million and $7.3 million, net of taxes, has been included in shareholders' equity at September 30, 2012 and December 31, 2011, respectively. Unrealized losses in investment securities at September 30, 2012 and December 31, 2011 do not represent other-than-temporary impairments.

The Corporation realized other-than-temporary impairment charges to noninterest income of $13 thousand and $11 thousand, respectively, on its equity portfolio during the nine months ended September 30, 2012 and 2011. The Corporation determined that it was probable that the fair value of certain equity securities would not recover to the Corporation’s cost basis within a reasonable period of time due to a decline in the financial stability of the underlying companies. The Corporation carefully monitors all of its equity securities and has not taken impairment losses on certain other equity securities in an unrealized loss position, at this time, as the financial performance of the underlying companies is not indicative of the market deterioration of their stock and it is probable that the market value of the equity securities will recover to the Corporation’s cost basis in the individual securities in a reasonable amount of time. The equity securities within the following table consist of common stocks of other financial institutions, which have experienced declines in value consistent with the industry as a whole. Management evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Corporation has the positive intent to hold these securities and believes it is more likely than not that it will not have to sell these securities until recovery to the Corporation’s cost basis occurs. The Corporation does not consider these investments to be other-than-temporarily impaired at September 30, 2012 and December 31, 2011.

Management evaluates debt securities, which are comprised of U. S. government, government sponsored agencies, municipalities, corporate bonds and other issuers, for other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. All of the debt securities are rated as investment grade and management believes that it will not incur any losses. The unrealized losses on the Corporation’s investments in debt securities are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers within our investment portfolio. The Corporation does not have the intent to sell the debt securities and believes it is more likely than not, that it will not have to sell the securities before recovery of their cost basis. The Corporation has not recognized any other-than-temporary impairment charges on debt securities for the nine months ended September 30, 2012 and 2011.

At September 30, 2012 and December 31, 2011, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.

The following table shows the amount of securities that were in an unrealized loss position at September 30, 2012 and December 31, 2011:

 

     At September 30, 2012  
     Less than Twelve Months     Twelve Months or Longer     Total  
(Dollars in thousands)    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

U.S. treasuries

   $ 4,952       $ (7   $ —         $ —        $ 4,952       $ (7

U.S. government corporations and agencies

     4,993         (7     —           —          4,993         (7

State and political subdivisions

     5,057         (24     587         (13     5,644         (37

Corporate bonds

     4,986         (38     —           —          4,986         (38

Equity securities

     24         (1     917         (164     941         (165
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 20,012       $ (77   $ 1,504       $ (177   $ 21,516       $ (254
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     At December 31, 2011  
     Less than Twelve Months     Twelve Months or Longer     Total  
(Dollars in thousands)    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

U.S. government corporations and agencies

   $ 24,967       $ (33   $ —         $ —        $ 24,967       $ (33

State and political subdivisions

     —           —          1,997         (20     1,997         (20

Residential mortgage-backed securities

     5,184         (20     3,311         (660     8,495         (680

Corporate bonds

     34,851         (543     —           —          34,851         (543

Equity securities

     920         (224     —           —          920         (224
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 65,922       $ (820   $ 5,308       $ (680   $ 71,230       $ (1,500
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Note 4. Loans and Leases

Summary of Major Loan and Lease Categories

 

(Dollars in thousands)    At September 30, 2012     At December 31, 2011  

Commercial, financial and agricultural

   $ 476,125      $ 477,662   

Real estate-commercial

     515,743        514,953   

Real estate-construction

     95,245        90,397   

Real estate-residential secured for business purpose

     32,820        32,481   

Real estate-residential secured for personal purpose

     148,053        132,245   

Real estate-home equity secured for personal purpose

     82,337        80,478   

Loans to individuals

     42,626        44,965   

Lease financings

     76,562        73,225   
  

 

 

   

 

 

 

Total loans and leases held for investment, net of deferred income

   $ 1,469,511      $ 1,446,406   
  

 

 

   

 

 

 

Unearned lease income, included in the above table

   $ (11,040   $ (9,965

Net deferred costs, included in the above table

   $ 1,057      $ 876   

Overdraft deposits included in the above table

   $ 122      $ 123   

Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.

Age Analysis of Past Due Loans and Leases

The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases greater than 90 days past due which are accruing interest at September 30, 2012 and December 31, 2011:

 

(Dollars in thousands)    30-59 Days
Past Due*
     60-89 Days
Past Due*
     Greater
Than
90 Days
Past Due*
     Total
Past Due*
     Current*      Total
Loans and
Leases
Held for
Investment
     Recorded
Investment
Greater than
90 Days
Past Due
and Accruing
Interest*
 

At September 30, 2012

                    

Commercial, financial and agricultural

   $ 392       $ 342       $ 321       $ 1,055       $ 470,838       $ 476,125       $ 321   

Real estate—commercial real estate and construction:

                    

Commercial real estate

     507         —           —           507         495,330         515,743         —     

Construction

     —           —           —           —           79,175         95,245         —     

Real estate—residential and home equity:

                    

Residential secured for business purpose

     192         —           —           192         32,453         32,820         —     

Residential secured for personal purpose

     —           205         —           205         147,525         148,053         —     

Home equity secured for personal purpose

     224         80         58         362         81,975         82,337         58   

Loans to individuals

     252         250         289         791         41,787         42,626         289   

Lease financings

     813         843         22         1,678         74,329         76,562         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,380       $ 1,720       $ 690       $ 4,790       $ 1,423,412       $ 1,469,511       $ 690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Excludes impaired loans and leases.

 

11


Table of Contents
(Dollars in thousands)    30-59 Days
Past Due*
     60-89 Days
Past Due*
     Greater
Than
90 Days
Past Due*
     Total
Past Due*
     Current*      Total
Loans and
Leases
Held for
Investment
     Recorded
Investment
Greater than
90 Days
Past Due
and Accruing
Interest*
 

At December 31, 2011

                    

Commercial, financial and agricultural

   $ 3,741       $ 33       $ —         $ 3,774       $ 469,197       $ 477,662       $ —     

Real estate—commercial real estate and construction:

                    

Commercial real estate

     2,212         723         —           2,935         491,498         514,953         —     

Construction

     —           —           —           —           74,656         90,397         —     

Real estate—residential and home equity:

                    

Residential secured for business purpose

     340         —           —           340         32,026         32,481         —     

Residential secured for personal purpose

     1,783         —           —           1,783         130,405         132,245         —     

Home equity secured for personal purpose

     298         68         117         483         79,968         80,478         117   

Loans to individuals

     386         236         204         826         44,089         44,965         204   

Lease financings

     1,203         544         44         1,791         70,535         73,225         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,963       $ 1,604       $ 365       $ 11,932       $ 1,392,374       $ 1,446,406       $ 365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Excludes impaired loans and leases.

Nonaccrual and Troubled Debt Restructured Loans and Lease Modifications

The following presents, by class of loans and leases, nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) and accruing troubled debt restructured loans and lease modifications at September 30, 2012 and December 31, 2011.

 

     At September 30, 2012      At December 31, 2011  
(Dollars in thousands)    Nonaccrual
Loans and
Leases*
     Accruing
Troubled Debt
Restructured
Loans and
Lease
Modifications
     Total
Impaired
Loans and
Leases
     Nonaccrual
Loans and
Leases*
     Accruing
Troubled Debt
Restructured
Loans and
Lease
Modifications
     Total
Impaired
Loans and
Leases
 

Loans held for sale**

   $ 2,599       $ —         $ 2,599       $ —         $ —         $ —     

Loans and leases held for investment:

                 

Commercial, financial and agricultural

     3,966         266         4,232         4,614         77         4,691   

Real estate—commercial real estate and construction:

                 

Commercial real estate

     9,318         10,588         19,906         18,085         2,435         20,520   

Construction

     13,614         2,456         16,070         14,479         1,262         15,741   

Real estate—residential and home equity:

                 

Residential secured for business purpose

     175         —           175         107         8         115   

Residential secured for personal purpose

     323         —           323         57         —           57   

Home equity secured for personal purpose

     —           —           —           27         —           27   

Loans to individuals

     —           48         48         —           50         50   

Lease financings

     530         25         555         838         61         899   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,525       $ 13,383       $ 43,908       $ 38,207       $ 3,893       $ 42,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes non-accrual troubled debt restructured loans and lease modifications of $228 thousand and $8.6 million at September 30, 2012 and December 31, 2011, respectively.

 

** Includes commercial, financial and agricultural loans of $447 thousand and commercial real estate loans of $2.2 million at September 30, 2012.

 

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Table of Contents

Credit Quality Indicators

The following tables present by class, the recorded investment in loans and leases held for investment by credit quality indicator at September 30, 2012 and December 31, 2011.

The Corporation employs a ten (10) grade risk rating system related to the credit quality of commercial loans and residential real estate loans secured for a business purpose of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating. Loans with risk ratings of one through five are reviewed based on the relationship dollar amount with the borrower: loans with a relationship total of $2.5 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.5 million but greater than $500 thousand are reviewed annually based on the borrower’s fiscal year; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with risk ratings of six are also reviewed based on the relationship dollar amount with the borrower: loans with a relationship balance of $2.0 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.0 million but greater than $500 thousand are reviewed annually; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with risk ratings of seven are reviewed at least quarterly, and as often as monthly, at management’s discretion. Loans with risk ratings of eight through ten are reviewed monthly.

 

  1. Cash Secured—No credit risk
  2. Fully Secured—Negligible credit risk
  3. Strong—Minimal credit risk
  4. Satisfactory—Nominal credit risk
  5. Acceptable—Moderate credit risk
  6. Pre-Watch—Marginal, but stable credit risk
  7. Special Mention—Potential weakness
  8. Substandard—Well-defined weakness
  9. Doubtful—Collection in-full improbable
  10. Loss—Considered uncollectible

Commercial Credit Exposure Credit Risk by Internally Assigned Grades

 

    Commercial, Financial
and Agricultural
    Real Estate—Commercial     Real Estate—Construction     Real Estate—Residential
Secured for Business
Purpose
 
(Dollars in thousands)   At
September  30,
2012
    At
December 31,
2011
    At
September  30,
2012
    At
December 31,
2011
    At
September  30,
2012
    At
December 31,
2011
    At
September  30,
2012
    At
December 31,
2011
 

Grade:

               

1. Cash secured/
2. Fully secured

  $ 2,125      $ 2,426      $ —        $ —        $ —        $ —        $ —        $ —     

3. Strong

    4,387        4,441        9,347        9,365        485        1,124        —          —     

4. Satisfactory

    41,583        32,730        22,595        28,517        3,121        89        342        1,309   

5. Acceptable

    272,942        289,835        285,506        296,499        31,994        35,207        19,411        18,990   

6. Pre-watch

    92,646        79,402        126,515        100,581        42,429        33,993        10,146        8,853   

7. Special Mention

    33,580        26,162        28,161        29,055        477        1,715        288        663   

8. Substandard

    27,289        40,634        42,626        49,943        16,739        18,269        2,633        2,666   

9. Doubtful

    1,573        2,032        993        993        —          —          —          —     

10. Loss

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 476,125      $ 477,662      $ 515,743      $ 514,953      $ 95,245      $ 90,397      $ 32,820      $ 32,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation monitors the credit risk profile by payment activity for the following classifications of loans and leases: residential real estate loans secured for a personal purpose, home equity loans secured for a personal purpose, loans to individuals and lease financings by payment activity. Nonperforming loans and leases are loans past due 90 days or more, loans and leases on non-accrual of interest and troubled debt restructured loans and lease modifications. Performing loans and leases are reviewed only if the loan becomes 60 days or more past due. Nonperforming loans and leases are reviewed monthly. Performing loans and leases have a nominal to moderate risk of loss. Nonperforming loans and leases are loans or leases with a well-defined weakness and where collection in-full is improbable.

 

13


Table of Contents

Credit Exposure—Real Estate—Residential Secured for Personal Purpose, Real Estate—Home Equity Secured for Personal Purpose, Loans to individuals, Lease Financing Credit Risk Profile by Payment Activity

 

     Real Estate—Residential
Secured for Personal Purpose
     Real Estate—Home Equity
Secured for Personal Purpose
     Loans to individuals      Lease Financing  
(Dollars in thousands)    At
September  30,
2012
     At
December 31,
2011
     At
September  30,
2012
     At
December 31,
2011
     At
September  30,
2012
     At
December 31,
2011
     At
September  30,
2012
     At
December 31,
2011
 

Performing

   $ 147,730       $ 132,188       $ 82,279       $ 80,334       $ 42,289       $ 44,711       $ 75,985       $ 72,282   

Nonperforming

     323         57         58         144         337         254         577         943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 148,053       $ 132,245       $ 82,337       $ 80,478       $ 42,626       $ 44,965       $ 76,562       $ 73,225   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Risks associated with lending activities include, among other things, the impact of changes in interest rates and economic conditions, which may adversely impact the ability of borrowers to repay outstanding loans, and impact the value of the associated collateral.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties and factors affecting residential real estate borrowers.

Commercial, financial and agricultural business loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans often depreciates over time, is difficult to appraise and liquidate and fluctuates in value based on the success of the business.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest). During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. Included in real estate-construction is track development financing. Risk factors related to track development financing include the demand for residential housing and the real estate valuation market. When projects move slower than anticipated, the properties may have significantly lower values than when the original underwriting was completed, resulting in lower collateral values to support the loan. Extended time frames also cause the interest carrying cost for a project to be higher than the builder projected, negatively impacting the builder’s profit and cash flow and, therefore, their ability to make principal and interest payments.

Commercial real estate loans and residential real estate loans with a business purpose secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans secured for a business purpose are more susceptible to a risk of loss during a downturn in the business cycle. The Corporation has strict underwriting, review, and monitoring procedures in place, however, these procedures cannot eliminate all of the risks related to these loans.

The Corporation focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial, financial and agricultural loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the Eastern Pennsylvania market area at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that any credit concentrations by borrower or industry are closely monitored.

 

14


Table of Contents

The Corporation originates fixed-rate and adjustable-rate real estate-residential mortgage loans that are secured by the underlying 1- to 4-family residential properties for personal purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

In the real estate-home equity loan portfolio secured for a personal purpose, combined loan-to-value ratios at origination are generally limited to 80%. Other credit considerations may warrant higher combined loan-to-value ratios and are generally insured by private mortgage insurance.

Credit risk in the loans to individuals portfolio, which includes, direct consumer loans and credit cards, is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

The primary risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations. The Corporation has strict underwriting, review, and monitoring procedures in place to mitigate this risk. Risk also lies in the residual value of the underlying equipment. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors and insurers. To the extent not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the residual value. The Corporation greatly reduces this risk primarily by using $1.00 buyout leases, in which the entire cost of the leased equipment is included in the contractual payments, leaving no residual payment at the end of the lease terms.

Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases

The following presents, by portfolio segment, a summary of the activity in the reserve for loan and lease losses, the balance in the reserve for loan and lease losses disaggregated on the basis of impairment method and the recorded investment in loans and leases disaggregated on the basis of impairment method for the three and nine months ended September 30, 2012 and 2011:

 

(Dollars in thousands)   Commercial,
Financial
and
Agricultural
    Real Estate—
Commercial

and
Construction
    Real Estate—
Residential
Secured for
Business
Purpose
    Real Estate—
Residential

and Home
Equity
Secured for
Personal

Purpose
    Loans to
Individuals
    Lease
Financings
    Unallocated     Total  

For the Three Months Ended September 30, 2012

               

Reserve for loan and lease losses:

               

Beginning balance

  $ 12,021      $ 12,316      $ 834      $ 884      $ 719      $ 1,161      $ 2,567      $ 30,502   

Charge-offs*

    (4,143     (1,318     —          —          (168     (203     N/A        (5,832

Recoveries

    33        4        4        —          43        132        N/A        216   

Provision (recovery of provision)

    3,344        (763     (154     62        12        94        (385     2,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,255      $ 10,239      $ 684      $ 946      $ 606      $ 1,184      $ 2,182      $ 27,096   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Three Months Ended September 30, 2011

               

Reserve for loan and lease losses:

               

Beginning balance

  $ 10,877      $ 16,092      $ 1,019      $ 696      $ 695      $ 1,912      $ 1,310      $ 32,601   

Charge-offs

    (160     (4,661     (120     —          (209     (310     N/A        (5,460

Recoveries

    28        35        4        4        65        76        N/A        212   

Provision (recovery of provision)

    (1,021     4,259        (47     (4     79        (66     449        3,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 9,724      $ 15,725      $ 856      $ 696      $ 630      $ 1,612      $ 1,759      $ 31,002   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents
(Dollars in thousands)   Commercial,
Financial
and
Agricultural
    Real  Estate—
Commercial
and
Construction
    Real Estate—
Residential
Secured for
Business

Purpose
    Real Estate—
Residential

and Home
Equity
Secured for
Personal

Purpose
    Loans to
Individuals
    Lease
Financings
    Unallocated     Total  

For the Nine Months Ended September 30, 2012

               

Reserve for loan and lease losses:

               

Beginning balance

  $ 11,262      $ 13,317      $ 823      $ 735      $ 730      $ 1,344      $ 1,659      $ 29,870   

Charge-offs*

    (7,308     (2,993     —          (2     (408     (849     N/A        (11,560

Recoveries

    448        144        59        3        100        379        N/A        1,133   

Provision (recovery of provision)

    6,853        (229     (198     210        184        310        523        7,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 11,255      $ 10,239      $ 684      $ 946      $ 606      $ 1,184      $ 2,182      $ 27,096   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Nine Months Ended September 30, 2011

               

Reserve for loan and lease losses:

               

Beginning balance

  $ 9,630      $ 15,288      $ 1,333      $ 544      $ 734      $ 1,950      $ 1,419      $ 30,898   

Charge-offs

    (2,934     (9,724     (314     (38     (806     (1,169     N/A        (14,985

Recoveries

    209        115        10        7        143        266        N/A        750   

Provision (recovery of provision)

    2,819        10,046        (173     183        559        565        340        14,339   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 9,724      $ 15,725      $ 856      $ 696      $ 630      $ 1,612      $ 1,759      $ 31,002   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes charge-offs of $1.3 million on commercial real estate loans which were subsequently transferred to loans held for sale at September 2012.

 

(Dollars in thousands)   Commercial,
Financial
and
Agricultural
    Real Estate—
Commercial

and
Construction
    Real Estate—
Residential
Secured for
Business

Purpose
    Real Estate—
Residential

and Home
Equity
Secured for
Personal

Purpose
    Loans to
Individuals
    Lease
Financings
    Unallocated     Total  

At September 30, 2012

               

Reserve for loan and lease losses:

               

Ending balance: individually evaluated for impairment

  $ 428      $ 262      $ —        $ —        $ —        $ —        $ N/A      $ 690   

Ending balance: collectively evaluated for impairment

    10,827        9,977        684        946        606        1,184        2,182        26,406   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending balance

  $ 11,255      $ 10,239      $ 684      $ 946      $ 606      $ 1,184      $ 2,182      $ 27,096   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases held for investment:

               

Ending balance: individually evaluated for impairment

  $ 4,232      $ 35,976      $ 175      $ 323      $ 48      $ —          $ 40,754   

Ending balance: collectively evaluated for impairment

    471,893        575,012        32,645        230,067        42,578        76,562          1,428,757   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total ending balance

  $ 476,125      $ 610,988      $ 32,820      $ 230,390      $ 42,626      $ 76,562        $ 1,469,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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Table of Contents
(Dollars in thousands)    Commercial,
Financial
and
Agricultural
     Real Estate—
Commercial
and
Construction
     Real Estate—
Residential
Secured for
Business
Purpose
     Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
     Loans to
Individuals
     Lease
Financings
     Unallocated      Total  

At September 30, 2011

                       

Reserve for loan and lease losses:

                       

Ending balance: individually evaluated for impairment

   $ 374       $ 1,784       $ —         $ —         $ —         $ —         $ N/A       $ 2,158   

Ending balance: collectively evaluated for impairment

     9,350         13,941         856         696         630         1,612         1,759         28,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending balance

   $ 9,724       $ 15,725       $ 856       $ 696       $ 630       $ 1,612       $ 1,759       $ 31,002   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases held for investment:

                       

Ending balance: individually evaluated for impairment

   $ 5,861       $ 34,886       $ 215       $ 250       $ 50       $ —            $ 41,262   

Ending balance: collectively evaluated for impairment

     461,389         567,209         32,442         218,329         42,240         83,402            1,405,011   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending balance

   $ 467,250       $ 602,095       $ 32,657       $ 218,579       $ 42,290       $ 83,402          $ 1,446,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Impaired Loans

The following presents, by class of loans, the recorded investment and unpaid principal balance of impaired loans, the amounts of the impaired loans for which there is not an allowance for credit losses and the amounts for which there is an allowance for credit losses at September 30, 2012 and December 31, 2011:

 

     At September 30, 2012      At December 31, 2011  
(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Impaired loans with no related allowance recorded:

                 

Loans held for sale

   $ 2,599       $ 6,621          $ —         $ —        

Loans held for investment:

                 

Commercial, financial and agricultural

     3,262         7,815            3,384         4,422      

Real estate—commercial real estate

     17,767         23,476            19,453         27,146      

Real estate—construction

     16,070         18,044            15,741         17,268      

Real estate—residential secured for business purpose

     175         186            115         631      

Real estate—residential secured for personal purpose

     323         323            57         57      

Real estate—home equity secured for personal purpose

     —           —              27         27      

Loans to individuals

     48         57            50         58      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total impaired loans with no related allowance recorded:

   $ 40,244       $ 56,522          $ 38,827       $ 49,609      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with an allowance recorded:

                 

Commercial, financial and agricultural

   $ 970       $ 1,347       $ 428       $ 1,307       $ 1,700       $ 510   

Real estate—commercial real estate

     2,139         2,331         262         1,067         1,067         743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loan with an allowance recorded

   $ 3,109       $ 3,678       $ 690       $ 2,374       $ 2,767       $ 1,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     At September 30, 2012      At December 31, 2011  
(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Total impaired loans:

                 

Loans held for sale

   $ 2,599       $ 6,621       $ —         $ —         $ —         $ —     

Loans held for investment:

                 

Commercial, financial and agricultural

     4,232         9,162         428         4,691         6,122         510   

Real estate—commercial real estate

     19,906         25,807         262         20,520         28,213         743   

Real estate—construction

     16,070         18,044         —           15,741         17,268         —     

Real estate—residential secured for business purpose

     175         186         —           115         631         —     

Real estate—residential secured for personal purpose

     323         323         —           57         57         —     

Real estate—home equity secured for personal purpose

     —           —           —           27         27         —     

Loans to individuals

     48         57         —           50         58         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans:

   $ 43,353       $ 60,200       $ 690       $ 41,201       $ 52,376       $ 1,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans:

 

     Three Months Ended September 30, 2012      Three Months Ended September 30, 2011  
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized*
     Interest Income
That Would
Have Been
Recognized
Under Original
Terms
     Average
Recorded
Investment
     Interest
Income
Recognized*
     Interest Income
That Would
Have Been
Recognized
Under Original
Terms
 

Loans held for sale

   $ 650       $ —         $ —         $ —         $ —         $ —     

Loans held for investment:

                 

Commercial, financial and agricultural

     5,474         23         71         5,924         —           77   

Real estate—commercial real estate

     20,525         69         257         21,497         39         463   

Real estate—construction

     16,324         33         190         17,746         20         223   

Real estate—residential secured for business purpose

     176         —           2         247         2         4   

Real estate—residential secured for personal purpose

     320         —           5         219         —           3   

Real estate—home equity secured for personal purpose

     —           —           —           31         —           —     

Loans to individuals

     48         1         —           51         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 43,517       $ 126       $ 525       $ 45,715       $ 62       $ 770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest income recognized on accruing troubled debt restructured loans of $126 thousand and $60 thousand for the three months ended September 30, 2012 and 2011, respectively.

 

     Nine Months Ended September 30, 2012      Nine Months Ended September 30, 2011  
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized*
     Interest Income
That Would
Have Been
Recognized
Under Original
Terms
     Average
Recorded
Investment
     Interest
Income
Recognized*
     Interest Income
That Would
Have Been
Recognized
Under Original
Terms
 

Loans held for sale

   $ 260       $ —         $ —         $ —         $ —         $ —     

Loans held for investment:

                 

Commercial, financial and agricultural

     5,542         56         223         6,498         14         270   

Real estate—commercial real estate

     20,417         156         783         18,535         91         1,024   

Real estate—construction

     16,238         85         575         17,104         48         681   

Real estate—residential secured for business purpose

     150         —           5         343         5         13   

Real estate—residential secured for personal purpose

     188         —           9         590         19         23   

Real estate—home equity secured for personal purpose

     3         —           —           18         —           —     

Loans to individuals

     49         4         —           59         4         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,847       $ 301       $ 1,595       $ 43,147       $ 181       $ 2,012   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest income recognized on accruing troubled debt restructured loans of $293 thousand and $139 thousand for the nine months ended September 30, 2012 and 2011, respectively.

 

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Table of Contents

Troubled Debt Restructured Loans

The following presents, by class of loans, information regarding accruing and non-accrual loans that were restructured during the three and nine months ended September 30, 2012 and 2011.

 

     Three Months Ended September 30, 2012      Three Months Ended September 30, 2011  

(Dollars in thousands)

   Number
Of
Loans
     Pre-
Restructuring
Outstanding
Recorded
Investment
     Post-
Restructuring
Outstanding
Recorded
Investment
     Related
Allowance
     Number
Of
Loans
     Pre-
Restructuring
Outstanding
Recorded
Investment
     Post-
Restructuring
Outstanding
Recorded
Investment
     Related
Allowance
 

Accruing Troubled Debt Restructured Loans

                       

Commercial, financial and agricultural

     2       $ 1,731       $ 1,731       $ —           —         $ —         $ —         $ —     

Real estate—commercial real estate

     1         1,621         1,621         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 3,352       $ 3,352       $ —           —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans

                       

Real estate—commercial real estate

     —         $ —         $ —         $ —           1       $ 6,667       $ 6,667       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —         $ —           1       $ 6,667       $ 6,667       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2012      Nine Months Ended September 30, 2011  

(Dollars in thousands)

   Number
Of
Loans
     Pre-
Restructuring
Outstanding
Recorded
Investment
     Post-
Restructuring
Outstanding
Recorded
Investment
     Related
Allowance
     Number
Of
Loans
     Pre-
Restructuring
Outstanding
Recorded
Investment
     Post-
Restructuring
Outstanding
Recorded
Investment
     Related
Allowance
 

Accruing Troubled Debt Restructured Loans

                       

Commercial, financial and agricultural

     10       $ 3,404       $ 3,404       $ —           —         $ —         $ —         $ —     

Real estate—commercial real estate

     5         2,630         2,630         —           5         2,438         2,435         —     

Real estate—construction

     2         1,330         1,330         —           5         2,182         2,182         —     

Real estate—residential secured for business purpose

     —           —           —           —           1         98         98         —     

Real estate—residential secured for personal purpose

     —           —           —           —           1         156         156         —     

Real estate—home equity secured for personal purpose

     —           —           —           —           1         31         31         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     17       $ 7,364       $ 7,364       $ —           13       $ 4,905       $ 4,902       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans

                       

Commercial, financial and agricultural

     2       $ 448       $ 448       $ —           —         $ —         $ —         $ —     

Real estate—commercial real estate

     1         124         124         —           2         9,432         9,432         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 572       $ 572       $ —           2       $ 9,432       $ 9,432       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation grants concessions primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are on a short-term basis up to one year. Our goal when restructuring a credit is to afford the customer a reasonable period of time to provide cash flow relief to customers experiencing cash flow difficulties.

Accruing loans totaling $7.4 million were restructured during the first nine months of 2012. Accruing troubled debt restructured loans were primarily comprised of three categories of loans on which interest is being accrued under the restructured terms, and the loans were current or less than ninety days past due. The first category primarily consisted of four commercial business loans for one borrower totaling $1.3 million, which had their interest only payment terms extended due to reduced cash flows. During the third quarter of 2012 these loans were paid off. This category also consisted of one commercial business loan totaling $1.7 million, which had its term extended by 90 days. During the third quarter of 2012, this loan was paid off. The second category primarily consisted of one commercial real estate loan totaling $1.6 million, which had its interest only payment terms extended six months due to reduced cash flows. The third category primarily consisted of one commercial construction loan totaling $1.2 million, which had interest only payment terms extended until projected cash flows

 

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from rental property income are received. Accruing troubled debt restructured loans charged-off during the nine months ended September 30, 2012 subsequent to the restructuring totaled approximately $372 thousand, primarily due to declines in collateral values for two commercial real estate loans for one borrower.

Nonaccrual loans totaling $572 thousand were restructured during the first nine months of 2012. Nonaccrual troubled debt restructured loans were comprised of two commercial business loans and one commercial real estate loan for one borrower, which were granted principal and interest deferrals for a six month period.

The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there was a payment default during the three and nine month periods ending September 30, 2012 and 2011 and within twelve months of the restructuring date.

 

     Three Months Ended
September 30, 2012
     Three Months Ended
September 30, 2011
 
(Dollars in thousands)    Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Investment
 

Accruing Troubled Debt Restructured Loans:

           

Real estate—residential secured for personal purpose

     —         $ —           1       $ 158   

Real estate—home equity secured for personal purpose

     —           —           1         31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           2       $ 189   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

           

Real estate—commercial real estate

     —         $ —           1       $ 2,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           1       $ 2,761   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2011
 
(Dollars in thousands)    Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Investment
 

Accruing Troubled Debt Restructured Loans:

           

Real estate—residential secured for personal purpose

     —         $ —           1       $ 158   

Real estate—home equity secured for personal purpose

     —           —           1         31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           2       $ 189   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

           

Real estate—commercial real estate

     —         $ —           1       $ 2,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           1       $ 2,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Mortgage Servicing Rights

The Corporation has originated mortgage servicing rights which are included in other intangible assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method using an accelerated amortization method and are subject to periodic impairment testing. The aggregate fair value of these rights was $3.2 million and $2.8 million at September 30, 2012 and December 31, 2011, respectively. The fair value of mortgage servicing rights was determined using discount rates ranging from 3.5% to 7.5% at September 30, 2012 and 3.5% to 7.3% at December 31, 2011.

Changes in the mortgage servicing rights balance are summarized as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands)    2012     2011     2012     2011  

Beginning of period

   $ 3,276      $ 2,878      $ 2,739      $ 2,441   

Servicing rights capitalized

     741        277        1,777        965   

Amortization of servicing rights

     (463     (123     (1,147     (312

Changes in valuation

     (372     (672     (187     (734
  

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 3,182      $ 2,360      $ 3,182      $ 2,360   
  

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage loans serviced for others

   $ 540,735      $ 377,060      $ 540,735      $ 377,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Activity in the valuation allowance for mortgage servicing rights was as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands)        2012             2011             2012             2011      

Valuation allowance, beginning of period

   $ (608   $ (263   $ (793   $ (201

Additions

     (372     (672     (187     (734

Reductions

     —          —          —          —     

Direct write-downs

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Valuation allowance, end of period

   $ (980   $ (935   $ (980   $ (935
  

 

 

   

 

 

   

 

 

   

 

 

 

The estimated amortization expense of mortgage servicing rights for the remainder of 2012 and the succeeding fiscal years is as follows:

 

Year

 

(Dollars in thousands)

   Amount  

Remainder of 2012

     $ 225   

2013

       777   

2014

       588   

2015

       427   

2016

       302   

Thereafter

       863   

Note 6. Income Taxes

As of September 30, 2012 and December 31, 2011, the Corporation 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 September 30, 2012, the Corporation’s tax years 2009 through 2011 remain subject to federal examination as well as examination by state taxing jurisdictions.

Note 7. Retirement Plans and Other Postretirement Benefits

Substantially all employees who were hired before December 8, 2009 are covered by a noncontributory retirement plan. Employees hired on or after December 8, 2009 are not eligible to participate in the noncontributory retirement plan. The Corporation also provides supplemental executive retirement benefits, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are non-qualified benefit plans. Information on these plans are aggregated and reported under “Retirement Plans” within this footnote.

The Corporation also provides certain postretirement healthcare and life insurance benefits for retired employees. Information on these benefits is reported under “Other Postretirement Benefits” within this footnote.

The Corporation sponsors a Supplemental Non-Qualified Pension Plan which was established in 1981 prior to the existence of a 401(k) Deferred Savings Plan, the Employee Stock Purchase Plan and the Long-Term Incentive Plans and therefore is not actively offered to new participants.

Information with respect to the Retirement and Supplemental Retirement Plans and Other Postretirement Benefits follows:

Components of net periodic benefit cost were as follows:

 

     Three Months Ended September 30,  
         2012             2011             2012             2011      
(Dollars in thousands)    Retirement Plans     Other Post Retirement
Benefits
 

Service cost

   $ 156      $ 138      $ 21      $ 16   

Interest cost

     431        431        29        29   

Expected return on plan assets

     (564     (474     —          —     

Amortization (accretion) of net loss/gain

     287        185        6        (5

Accretion of prior service cost

     (58     (59     (6     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic cost

   $ 252      $ 221      $ 50      $ 34   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents
     Nine Months Ended September 30,  
     2012     2011     2012     2011  
(Dollars in thousands)    Retirement Plans     Other Post Retirement
Benefits
 

Service cost

   $ 469      $ 416      $ 62      $ 49   

Interest cost

     1,294        1,294        88        88   

Expected return on plan assets

     (1,692     (1,422     —          —     

Amortization of net loss

     865        549        17        12   

Accretion of prior service cost

     (176     (176     (16     (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic cost

   $ 760      $ 661      $ 151      $ 133   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation contributed $8.0 million to its qualified retirement plan during the three and nine months ended September 30, 2012 and may make additional contributions during the remainder of 2012 to maximize tax benefits. The Corporation expects to make contributions of $40 thousand to its non-qualified retirement plans and $87 thousand to its other postretirement benefit plans in 2012. During the nine months ended September 30, 2012, the Corporation contributed $30 thousand to its non-qualified retirement plans and $59 thousand to its other postretirement plans. During the nine months ended September 30, 2012, $1.2 million has been paid to participants from the qualified and non-qualified retirement plans and $59 thousand has been paid to participants from the other postretirement plans.

Note 8. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars and shares in thousands, except per share data)    2012      2011      2012      2011  

Numerator for basic and diluted earnings per share—income available to common shareholders

   $ 5,770       $ 5,244       $ 15,796       $ 13,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for basic earnings per share—weighted-average shares outstanding

     16,760         16,771         16,760         16,752   

Effect of dilutive securities—employee stock options and awards

     60         —           49         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share—adjusted weighted-average shares outstanding

     16,820         16,771         16,809         16,752   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.34       $ 0.31       $ 0.94       $ 0.81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.34       $ 0.31       $ 0.94       $ 0.81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average anti-dilutive options and awards excluded from computation of diluted earnings per share

     588         508         579         498   

Note 9. Accumulated Other Comprehensive (Loss) Income

The following table shows the components of accumulated other comprehensive (loss) income, net of taxes, for the periods presented:

 

(Dollars in thousands)    Net Unrealized
Gains on
Available for Sale
Investment
Securities
     Net Change in
Fair Value of
Derivative Used
for Cash Flow
Hedges
    Net Change
Related to
Defined Benefit
Pension Plan
    Accumulated
Other
Comprehensive
(Loss) Income
 

Balance, December 31, 2011

   $ 7,306       $ (932   $ (12,475   $ (6,101

Net Change

     1,909         (391     448        1,966   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ 9,215       $ (1,323   $ (12,027   $ (4,135
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

   $ 884       $ 320      $ (7,970   $ (6,766

Net Change

     5,470         (1,195     240        4,515   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 6,354       $ (875   $ (7,730   $ (2,251
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Note 10. Derivative Instruments and Hedging Activities

The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed or fixed to floating in order to reduce the impact of interest rate changes on future net interest income. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The Corporation’s credit exposure on interest rate swaps includes fair value and any collateral that is held by a third party. Changes in the fair value of derivative instruments designated as hedges of future cash flows are recognized in accumulated other comprehensive income until the underlying forecasted transactions occur, at which time the deferred gains and losses are recognized in earnings. For a qualifying fair value hedge, the gain or loss on the hedging instrument is recognized in earnings, and the change in fair value on the hedge item to the extent attributable to the hedged risk adjusts the carrying amount of the hedge item and is recognized in earnings.

Derivative loan commitments represent agreements for delayed delivery of financial instruments in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument at a specified price or yield. The Corporation’s derivative loan commitments are commitments to sell loans secured by 1-to-4 family residential properties whose predominant risk characteristic is interest rate risk. The fair values of these derivative loan commitments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Loans held for sale are included as forward loan commitments.

On December 23, 2008, the Corporation entered into a cash flow hedge with a notional amount of $20.0 million that had the effect of converting the variable rates on trust preferred securities to a fixed rate. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.65% and receives a floating rate based on the three month LIBOR with a maturity date of January 7, 2019. The Corporation expects that there will be no ineffectiveness in the next twelve months, and therefore anticipates no portion of the net loss in accumulated other comprehensive loss will be reclassified to interest expense within the next twelve months.

The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at September 30, 2012 and December 31, 2011:

 

            Derivative Assets      Derivative Liabilities  
(Dollars in thousands)    Notional
Amount
     Balance Sheet
Classification
   Fair
Value
     Balance Sheet
Classification
   Fair
Value
 

At September 30, 2012

              

Interest rate locks with customers

   $ 77,633       Other Assets    $ 3,420          $ —     

Forward loan commitments

     81,155       —        —         Other Liabilities      1,029   
  

 

 

       

 

 

       

 

 

 

Total

   $ 158,788          $ 3,420          $ 1,029   
  

 

 

       

 

 

       

 

 

 

At December 31, 2011

              

Interest rate locks with customers

   $ 35,934       Other Assets    $ 1,079          $ —     

Forward loan commitments

     39,080       —        —         Other Liabilities      302   
  

 

 

       

 

 

       

 

 

 

Total

   $ 75,014          $ 1,079          $ 302   
  

 

 

       

 

 

       

 

 

 

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at September 30, 2012 and December 31, 2011:

 

   

            Derivative Assets      Derivative Liabilities  
(Dollars in thousands)    Notional
Amount
     Balance Sheet
Classification
   Fair
Value
     Balance Sheet
Classification
   Fair
Value
 

At September 30, 2012

              

Interest rate swap—cash flow hedge

   $ 20,000       —      $ —         Other Liabilities    $ 2,036   
  

 

 

       

 

 

       

 

 

 

Total

   $ 20,000          $ —            $ 2,036   
  

 

 

       

 

 

       

 

 

 

At December 31, 2011

              

Interest rate swap—cash flow hedge

   $ 20,000       —      $ —         Other Liabilities    $ 1,435   
  

 

 

       

 

 

       

 

 

 

Total

   $ 20,000          $ —            $ 1,435   
  

 

 

       

 

 

       

 

 

 

 

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For the three and nine months ended September 30, 2012 and 2011, the amounts included in the consolidated statements of income for derivatives not designated as hedging instruments are shown in the table below:

 

          Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in thousands)

  

Statement of Income
Classification

       2012             2011             2012             2011      

Interest rate locks with customers

  

Net gain (loss) on mortgage
banking activities

   $ 1,394      $ 1,060      $ 2,341      $ 829   

Forward loan commitments

  

Net gain (loss) on mortgage
banking activities

     (617     (369     (727     (606
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 777      $ 691      $ 1,614      $ 223   
     

 

 

   

 

 

   

 

 

   

 

 

 

For the three and nine months ended September 30, 2012 and 2011, the amounts included in the consolidated statements of income for derivatives designated as hedging instruments are shown in the table below:

 

   

          Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in thousands)

  

Statement of Income
Classification

       2012             2011             2012             2011      

Interest rate swap—cash flow hedge—interest payments

   Interest expense    $ 112      $ 123      $ 331      $ 360   

Interest rate swap—cash flow hedge—ineffectiveness

   Interest expense      —          —          —          —     
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 112      $ 123      $ 331      $ 360   
     

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2012 and December 31, 2011, the amounts included in accumulated other comprehensive loss for derivatives designated as hedging instruments are shown in the table below:

 

(Dollars in thousands)

  

Accumulated other
comprehensive (loss)
income

   At September 30, 2012     At December 31, 2011  

Interest rate swap—cash flow hedge

   Fair value, net of taxes    $ (1,323   $ (932
     

 

 

   

 

 

 

Total

      $ (1,323   $ (932
     

 

 

   

 

 

 

Note 11. Fair Value Disclosures

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Corporation determines the fair value of its financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that the market participants would use in pricing the asset or liability based on the best information available in the circumstances, including assumptions about risk. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. Transfers between levels are recognized at the end of the reporting period.

Level 1:    Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation can access at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2:    Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

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Level 3:    Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities

Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid U.S. Treasury securities, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange as of the close of business at period end. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government sponsored enterprises, certain MBS, CMOs, and corporate and municipal bonds and certain equity securities. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.

Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does have not sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.

On a quarterly basis, the Corporation reviews changes, as submitted by the pricing service, in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. Additionally, on an annual basis, the Corporation has its security portfolio priced by a second pricing service to determine consistency with another market evaluator, except for municipal bonds which are priced by another service provider on a sample basis. If, on the Corporation’s review or in comparing with another servicer, a material difference between pricing evaluations were to exists, the Corporation may submit an inquiry to its current pricing service regarding the data used to make the valuation of a particular security. If the Corporation determines it has market information that would support a different valuation than its current pricing service’s evaluation it can submit a challenge for a change to that security’s valuation. There were no material differences in valuations noted at September 30, 2012.

Derivative Financial Instruments

The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Derivative financial instruments are classified within Level 2 of the valuation hierarchy.

Contingent Consideration Liability

The Corporation estimated the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on projected revenue related to the acquired business. The fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change in the discount rate or change in projected revenue of the acquired business which affect the contingent consideration liability will be recorded through non-interest expense. Due to the significant unobservable input related to the projected revenue, the contingent consideration liability is classified within Level 3 of the valuation hierarchy. An increase in the projected revenue may result in a significantly higher fair value of the contingent consideration liability. Alternatively, a decrease in the projected revenue may result in a significantly lower estimated fair value of the contingent consideration liability.

 

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Table of Contents

The following table presents the assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, classified using the fair value hierarchy:

 

     At September 30, 2012  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/
Liabilities at

Fair  Value
 

Assets:

           

Available-for-sale securities:

           

U.S. government treasuries

   $ 4,952       $ —         $ —         $ 4,952   

U.S. government corporations and agencies

     —           180,523         —           180,523   

State and political subdivisions

     —           124,196         —           124,196   

Residential mortgage-backed securities

     —           98,793         —           98,793   

Commercial mortgage obligations

     —           24,371         —           24,371   

Corporate bonds

     —           5,006         —           5,006   

Money market mutual funds

     4,500         —           —           4,500   

Equity securities

     2,861         —           —           2,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     12,313         432,889         —           445,202   

Interest rate locks with customers

     —           3,420         —           3,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,313       $ 436,309       $ —         $ 448,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate swap

   $ —         $ 2,036       $ —         $ 2,036   

Forward loan commitments

     —           1,029         —           1,029   

Contingent consideration liability

     —           —           876         876   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 3,065       $ 876       $ 3,941   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/
Liabilities at

Fair  Value
 

Assets:

           

Available-for-sale securities:

           

U.S. government treasuries

   $ 2,525       $ —         $ —         $ 2,525   

U.S. government corporations and agencies

     —           154,264         —           154,264   

State and political subdivisions

     —           117,005         —           117,005   

Residential mortgage-backed securities

     —           78,801         —           78,801   

Commercial mortgage obligations

     —           61,464         —           61,464   

Corporate bonds

     —           4,767         —           4,767   

Money market mutual funds

     3,851         —           —           3,851   

Equity securities

     2,684         —           —           2,684   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     9,060         416,301         —           425,361   

Interest rate locks with customers

     —           1,079         —           1,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 9,060       $ 417,380       $ —         $ 426,440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate swap

   $ —         $ 1,435       $ —         $ 1,435   

Forward loan commitments

     —           302         —           302   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 1,737       $ —         $ 1,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a reconciliation for all assets measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value for the nine months ended September 30, 2011. There was no activity to report for the three and nine months ended September 30, 2012, or the three months ended September 30, 2011.

 

     Nine Months Ended September 30, 2011  
(Dollars in thousands)    Balance at
December 31,
2010
     Total
Unrealized
Gains or
(Losses)
    Total
Realized
Gains or
(Losses)
     Paydowns     Transfers
to Level 2
    Balance at
September 30,
2011
 

Available-for-sale securities:

              

Commercial mortgage obligations

   $ 4,331       $ (26   $ —         $ (135   $ (4,170   $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Level 3 assets

   $ 4,331       $ (26   $ —         $ (135   $ (4,170   $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Realized gains or losses are recognized in the consolidated statements of income. There were no realized gains or losses recognized on Level 3 assets during the three or nine month periods ended September 30, 2012 or 2011.

On May 31, 2012 and as disclosed in Note 2, as a result of the purchase of Javers Group, the Corporation recorded a contingent consideration liability. The following table presents the change in the balance of the contingent consideration liability for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the nine months ended September 30, 2012:

 

(Dollars in thousands)       

Balance as of December 31, 2011

   $ —     

Contingent consideration from new acquisition

     842   

Adjustment of contingent consideration liability

     34   
  

 

 

 

Balance as of September 30, 2012

   $ 876   
  

 

 

 

The following table represents assets measured at fair value on a non-recurring basis as of September 30, 2012 and December 31, 2011.

 

     At September 30, 2012  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/Liabilities at
Fair Value
 

Impaired loans held for investment

   $ —         $ —         $ 40,065       $ 40,065   

Mortgage servicing rights

     —           3,182         —           3,182   

Other real estate owned

     —           3,301         —           3,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 6,483       $ 40,065       $ 46,548   
  

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2011  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/Liabilities at
Fair Value
 

Impaired loans held for investment

   $ —         $ —         $ 39,948       $ 39,948   

Mortgage servicing rights

     —           2,739         —           2,739   

Other real estate owned

     —           6,600         —           6,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 9,339       $ 39,948       $ 49,287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans held for investment include those collateral-dependent loans for which the practical expedient was applied, resulting in a fair-value adjustment to the loan. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans less cost to sell and is classified at a Level 3 in the fair value hierarchy. The fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Corporation. At September 30, 2012, impaired loans held for investment had a carrying amount of $40.8 million with a valuation allowance of $690 thousand. At December 31, 2011, impaired loans held for investment had a carrying amount of $41.2 million with a valuation allowance of $1.3 million.

The Corporation estimates the fair value of mortgage servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the current interest rates of the portfolios serviced. Mortgage servicing rights are classified within Level 2 of the valuation hierarchy. The Corporation reviews the mortgage servicing rights portfolio on a quarterly basis for impairment and the mortgage servicing rights are carried at the lower of amortized cost or estimated fair value. At September 30, 2012, mortgage servicing rights had a carrying amount of $4.2 million with a negative valuation allowance of $980 thousand. At December 31, 2011, mortgage servicing rights had a carrying amount of $3.5 million with a negative valuation allowance of $793 thousand.

The fair value of other real estate owned is estimated based upon its appraised value less costs to sell. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property but no more than the fair value of the property, less estimated costs to sell. New appraisals are generally obtained on an annual basis. Other real estate owned is classified within Level 2 of the valuation hierarchy. During the third quarter of 2012, two commercial other real estate owned properties with a total carrying amount of $2.3 million were written down to their updated fair value of $1.7 million, resulting in an impairment charge of $621 thousand, which was included in earnings. During the nine months ended September 30, 2012, three commercial other real estate owned properties with a total carrying amount of $5.2 million, were written down to their updated fair values totaling $3.3 million, resulting in impairment charges of $1.9 million, which were included in earnings.

 

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Table of Contents

Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other intangible assets. During the nine months ended September 30, 2012, there were no triggering events that required valuation of goodwill and other intangible assets.

The following table presents assets and liabilities and off-balance sheet items not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed as of September 30, 2012 and December 31, 2011. The disclosed fair values are classified using the fair value hierarchy.

 

     At September 30, 2012  
(Dollars in thousands)    Level 1      Level 2     Level 3      Fair Value     Carrying
Amount
 

Assets:

            

Cash and short-term interest-earning assets

   $ 63,306       $ —        $ —         $ 63,306      $ 63,306   

Held-to-maturity securities

     —           71,741        —           71,741        70,054   

Loans held for sale

     —           3,670        2,599         6,269        6,146   

Net loans and leases held for investment

     —           —          1,464,468         1,464,468        1,442,415   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 63,306       $ 75,411      $ 1,467,067       $ 1,605,784      $ 1,581,921   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Deposits:

            

Demand and savings deposits, non-maturity

   $ 1,436,003       $ —        $ —         $ 1,436,003      $ 1,436,003   

Time deposits

     —           345,517        —           345,517        341,927   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     1,436,003         345,517        —           1,781,520        1,777,930   

Short-term borrowings

     —           109,315        —           109,315        111,551   

Long-term borrowings

     —           21,339        —           21,339        21,369   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 1,436,003       $ 476,171      $ —         $ 1,912,174      $ 1,910,850   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Off-Balance-Sheet:

            

Commitments to extend credit

   $ —         $ (1,276   $ —         $ (1,276   $ —     
     At December 31, 2011  
(Dollars in thousands)    Level 1      Level 2     Level 3      Fair Value     Carrying
Amount
 

Assets:

            

Cash and short-term interest-earning assets

   $ 107,377       $ —        $ —         $ 107,377      $ 107,377   

Held-to-maturity securities

     —           45,639        —           45,639        45,804   

Loans held for sale

     —           3,255        —           3,255        3,157   

Net loans and leases held for investment

     —           —          1,453,129         1,453,129        1,416,536   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 107,377       $ 48,894      $ 1,453,129       $ 1,609,400      $ 1,572,874   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Deposits:

            

Demand and savings deposits, non-maturity

   $ 1,340,732       $ —        $ —         $ 1,340,732      $ 1,340,732   

Time deposits

     —           411,818        —           411,818        408,500   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     1,340,732         411,818        —           1,752,550        1,749,232   

Short-term borrowings

     —           106,677        —           106,677        109,740   

Long-term borrowings

     —           27,654        —           27,654        27,494   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 1,340,732       $ 546,149      $ —         $ 1,886,881      $ 1,886,466   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Off-Balance-Sheet:

            

Commitments to extend credit

   $ —         $ (1,227   $ —         $ (1,227   $ —     

 

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Table of Contents

The following valuation methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheets for cash and due from banks, interest-earning deposits with other banks, and other short-term investments approximates those assets’ fair values. Cash and short-term interest-earning assets are classified within Level 1 in the fair value hierarchy.

Held-to-maturity securities: Fair values for the held-to-maturity investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics and are classified in Level 2 in the fair value hierarchy.

Loans held for sale: The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including interest rates, bids or indications provided by market participants on specific loans that are actively marketed for sale. The Corporation’s loans held for sale are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2012, nonaccrual commercial loans totaling $2.6 million were transferred to loans held for sale. There were no valuation adjustments for loans held for sale at September 30, 2012 and December 31, 2011.

Loans and leases held for investment: The fair values for loans are estimated using discounted cash flow analyses, using a discount rate based on current interest rates at which similar loans with similar terms would be made to borrowers and include components for credit risk, operating expense and embedded prepayment options. An overall valuation adjustment is made for specific credit risks in addition to general portfolio risk and is significant to the valuation. As permitted, the fair value of the loans and leases are not based on the exit price concept as discussed in the first paragraph of this note. Loans and leases are classified within Level 3 in the fair value hierarchy.

Deposit liabilities: The fair values for demand and savings accounts, with no stated maturities, is the amount payable on demand at the reporting date (carrying value) and are classified within Level 1 in the fair value hierarchy. The carrying amount for demand and savings accounts previously reported at December 31, 2011 included the estimated fair value of the non-financial intangible of $43.1 million which has been excluded for September 30, 2012 and December 31, 2011 presentation purposes. The fair values for time deposits with fixed maturities are estimated by discounting the final maturity using interest rates currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 in the fair value hierarchy.

Short-term borrowings: The fair value of securities sold under repurchase agreements are estimated using current market rates for similar borrowings and are classified within Level 2 in the fair value hierarchy. Short-term FHLB advances are estimated using a discounted cash flow analysis based on current market rates for similar borrowings, and include components for operating expense and embedded prepayment options that are observable. Short-term FHLB advances are classified within Level 2 in the fair value hierarchy.

Long-term borrowings: The fair values of the Corporation’s long-term borrowings are estimated using a discounted cash flow analysis based on current market rates for similar borrowings, and include components for credit risk, operating expense, and embedded prepayment options that are observable. Long-term borrowings are classified within Level 2 in the fair value hierarchy.

Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing and are classified within Level 2 in the fair value hierarchy.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(All dollar amounts presented within tables are in thousands, except per share data. “BP” means “basis points” “N/M” equates to “not meaningful” “—” equates to “zero” or “doesn’t round to a reportable number” and “N/A” equates to “not applicable.” Certain amounts have been reclassified to conform to the current-year presentation.)

Forward-Looking Statements

The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words “believe,” “anticipate,” “estimate,” “expect,” “project,” “target,” “goal” and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below:

 

   

Operating, legal and regulatory risks

 

   

Economic, political and competitive forces impacting various lines of business

 

   

The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

 

   

Volatility in interest rates

 

   

Other risks and uncertainties, including those occurring in the U.S. and world financial systems

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only 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.

Critical Accounting Policies

Management, in order to prepare the Corporation's financial statements in conformity with U.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation's financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available for sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation’s 2011 Annual Report on Form 10-K.

General

Univest Corporation of Pennsylvania, (the Corporation), is a Bank Holding Company. It owns all of the capital stock of Univest Bank and Trust Co. (the Bank) and Univest Delaware, Inc. The Corporation’s former subsidiary, Univest Reinsurance Corporation, was liquidated during the third quarter of 2012 and the net assets were transferred to the 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. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, and Univest Investments, Inc., a full-service broker-dealer and investment advisory firm. The Bank is also the parent company of Univest Capital, Inc., a small ticket commercial finance business, and TCG Investment Advisory, a registered investment advisor which provides discretionary investment consulting and management services. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals, municipalities and businesses throughout its markets of operation.

 

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Table of Contents

Executive Overview

The Corporation’s consolidated net income, earnings per share and returns on average assets and average equity were as follows:

 

     Three Months Ended
September 30,
    Change     Nine Months Ended
September 30,
    Change  
     2012     2011     Amount      Percent     2012     2011     Amount      Percent  
(Dollars in thousands, except per share data)                                                   

Net income

   $ 5,770      $ 5,244      $ 526         10   $ 15,796      $ 13,622      $ 2,174         16

Net income per share:

                  

Basic

   $ 0.34      $ 0.31      $ 0.03         10      $ 0.94      $ 0.81      $ 0.13         16   

Diluted

     0.34        0.31        0.03         10        0.94        0.81        0.13         16   

Return on average assets

     1.04     0.98     6 BP         6        0.96     0.87     9 BP         10   

Return on average equity

     8.19     7.55     64 BP         8        7.60     6.69     91 BP         14   

Net interest income on a tax-equivalent basis for the three months ended September 30, 2012 was down $654 thousand, or 3% compared to the same period in 2011. The third quarter 2012 net interest margin on a tax-equivalent basis was 3.84%, a decrease of 31 basis points from 4.15% for the third quarter of 2011. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2012 was down $2.1 million or 3% compared to the same period in 2011. The tax equivalent net interest margin for the nine months ended September 30, 2012 was 3.92% compared to 4.21% for the same period in the prior year.

The provision for loan and lease losses decreased by $1.4 million and $6.7 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.

Non-interest income increased $1.9 million or 21% and $4.5 million or 18% during the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Non-interest expense increased $1.8 million or 10% and $6.1 million or 12% for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.

Gross loans and leases grew $23.1 million from December 31, 2011 and deposits grew $28.7 million from December 31, 2011.

Nonperforming loans and leases increased to $44.6 million at September 30, 2012 compared to $42.5 million at December 31, 2011. Nonperforming loans and leases were $42.6 million at September 30, 2011. Nonperforming loans and leases as a percentage of total loans and leases (held for investment and nonaccrual loans held for sale) were 3.03% at September 30, 2012 compared to 2.94% at December 31, 2011 and 2.96% at September 30, 2011. Net loan and lease charge-offs were $5.6 million for the three months ended September 30, 2012 compared to $5.2 million for the same period in the prior year. Net charge-offs for the nine months ended September 30, 2012 declined to $10.4 million compared to $14.2 million for the same period in the prior year. Charge-offs occurred primarily in the commercial, financial and agricultural and commercial real estate categories.

On May 31, 2012, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of the Javers Group, a full-service employee benefits agency that specializes in comprehensive human resource management, payroll and administrative services to businesses with 50 to 1,000 employees. The acquisition expands the Corporation’s insurance and employee benefits business and further diversifies its solutions to include human resource consulting services and technology. The Corporation paid $3.2 million in cash at closing with additional contingent consideration to be paid in annual installments over the three-year period ended June 30, 2015 based on the achievement of certain levels of revenue. As of the acquisition date, the Corporation recorded the estimated fair value of the contingent payments of $842 thousand as additional goodwill and the liability is included in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 thousand to a maximum of $1.7 million over the next three years. As a result of the Javers Group acquisition, the Corporation recorded goodwill of $3.1 million (inclusive of contingent consideration) and customer related intangibles of $989 thousand.

Details of the changes in the various components of net income and the balance sheet are further discussed in the sections that follow.

 

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Table of Contents

The Corporation earns its revenues primarily from the margins and fees it generates from loans and leases and depository services it provides as well as from trust fees and insurance and investment commissions. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board of Directors approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation is in a more asset sensitive position; although interest rates are expected to remain low for the foreseeable future, it anticipates increasing interest rates over the longer term, which it expects would benefit its net interest margin.

The Corporation seeks to establish itself as the financial provider of choice in the markets it serves. It plans to achieve this goal by offering a broad range of high quality financial products and services and by increasing market awareness of its brand and the benefits that can be derived from its products. The Corporation operates in an attractive market for financial services but also is in intense competition with domestic and international banking organizations and other insurance and investment providers for the financial services business. The Corporation has taken initiatives to achieve its business objectives by acquiring banks and other financial service providers in strategic markets, through marketing, public relations and advertising, by establishing standards of service excellence for its customers, and by using technology to ensure that the needs of its customers are understood and satisfied.

Results of Operations

Net Interest Income

Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation's revenue. Table 1 presents a summary of the Corporation's average balances, the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three and nine months ended September 30, 2012 and 2011. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of net interest free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity. Table 2 analyzes the changes in the tax-equivalent net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Investment Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.

Net interest income on a tax-equivalent basis for the three months ended September 30, 2012 decreased $654 thousand, or 3% compared to the same period in 2011. The tax-equivalent net interest margin for the three months ended September 30, 2012 decreased 31 basis points to 3.84% from 4.15% for the three months ended September 30, 2011. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2012 decreased $2.1 million, or 3% compared to the same period in 2011. The tax-equivalent net interest margin for the nine months ended September 30, 2012 decreased 29 basis points to 3.92% from 4.21% for the nine months ended September 30, 2011. The declines in net interest income and the net interest margin were primarily due to the re-investment of maturing and called investment securities with lower yielding investments, as a result of the lower interest rate environment and lower rates on commercial loans (including real estate loans) due to re-pricing and competitive pressures. The decline in net interest income and net interest margin was partially offset by re-pricing of certificates of deposits and savings account products. During the three months ended September 30, 2012, the Corporation increased its investments in government agencies, treasuries and corporate bonds with longer duration maturities as interest rate protection in the prolonged low rate interest environment.

 

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Table of Contents

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

 

     Three Months Ended September 30,  
     2012     2011  
(Dollars in thousands)    Average
Balance
    Income/
Expense
     Average
Rate
    Average
Balance
    Income/
Expense
     Average
Rate
 

Assets:

              

Interest-earning deposits with other banks

   $ 52,214      $ 45         0.34   $ 46,109      $ 25         0.22

U.S. Government obligations

     156,885        508         1.29        129,263        509         1.56   

Obligations of states and political subdivisions

     121,612        1,696         5.55        112,935        1,720         6.04   

Other debt and equity securities

     196,026        846         1.72        167,178        1,347         3.20   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning deposits and investments

     526,737        3,095         2.34        455,485        3,601         3.14   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Commercial, financial and agricultural loans

     452,531        4,895         4.30        435,805        4,930         4.49   

Real estate—commercial and construction loans

     525,143        6,804         5.15        528,936        7,308         5.48   

Real estate—residential loans

     256,297        2,616         4.06        247,332        2,684         4.31   

Loans to individuals

     42,991        602         5.57        42,358        594         5.56   

Municipal loans and leases

     129,651        1,748         5.36        132,494        1,919         5.74   

Lease financings

     59,284        1,415         9.50        58,419        1,456         9.89   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Gross loans and leases

     1,465,897        18,080         4.91        1,445,344        18,891         5.19   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,992,634        21,175         4.23        1,900,829        22,492         4.69   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and due from banks

     50,875             57,572        

Reserve for loan and lease losses

     (31,365          (34,104     

Premises and equipment, net

     34,002             34,257        

Other assets

     168,137             154,892        
  

 

 

        

 

 

      

Total assets

   $ 2,214,283           $ 2,113,446        
  

 

 

        

 

 

      

Liabilities:

              

Interest-bearing checking deposits

   $ 230,462        40         0.07      $ 210,499        57         0.11   

Money market savings

     331,425        121         0.15        291,830        167         0.23   

Regular savings

     514,205        187         0.14        483,341        349         0.29   

Time deposits

     348,675        1,276         1.46        394,509        1,597         1.61   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total time and interest-bearing deposits

     1,424,767        1,624         0.45        1,380,179        2,170         0.62   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Short-term borrowings

     104,110        33         0.13        104,469        96         0.36   

Long-term debt

     —          —           —          5,000        48         3.81   

Subordinated notes and capital securities

     21,732        301         5.51        23,240        307         5.24   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total borrowings

     125,842        334         1.06        132,709        451         1.35   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,550,609        1,958         0.50        1,512,888        2,621         0.69   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand deposits, non-interest bearing

     346,687             292,273        

Accrued expenses and other liabilities

     36,815             32,783        
  

 

 

        

 

 

      

Total liabilities

     1,934,111             1,837,944        
  

 

 

        

 

 

      

Shareholders’ Equity:

              

Common stock

     91,332             91,332        

Additional paid-in capital

     61,327             61,473        

Retained earnings and other equity

     127,513             122,697        
  

 

 

        

 

 

      

Total shareholders’ equity

     280,172             275,502        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 2,214,283           $ 2,113,446        
  

 

 

        

 

 

      

Net interest income

     $ 19,217           $ 19,871      
    

 

 

        

 

 

    

Net interest spread

          3.73             4.00   

Effect of net interest-free funding sources

          0.11             0.15   
       

 

 

        

 

 

 

Net interest margin

          3.84          4.15
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

     128.51          125.64     
  

 

 

        

 

 

      

 

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Table of Contents
     Nine Months Ended September 30,  
     2012     2011  
(Dollars in thousands)    Average
Balance
    Income/
Expense
     Average
Rate
    Average
Balance
    Income/
Expense
     Average
Rate
 

Assets:

              

Interest-earning deposits with other banks

   $ 55,358      $ 121         0.29   $ 24,076      $ 40         0.22

U.S. Government obligations

     148,422        1,519         1.37        150,902        1,865         1.65   

Obligations of states and political subdivisions

     119,634        5,092         5.69        110,730        5,153         6.22   

Other debt and equity securities

     192,833        3,069         2.13        169,453        4,403         3.47   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning deposits and investments

     516,247        9,801         2.54        455,161        11,461         3.37   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Commercial, financial and agricultural loans

     445,301        14,423         4.33        431,983        15,048         4.66   

Real estate—commercial and construction loans

     529,778        20,741         5.23        542,926        21,958         5.41   

Real estate—residential loans

     251,035        7,818         4.16        245,889        8,082         4.39   

Loans to individuals

     43,803        1,856         5.66        42,428        1,817         5.73   

Municipal loans and leases

     133,557        5,450         5.45        128,202        5,529         5.77   

Lease financings

     57,708        4,244         9.82        61,000        4,442         9.74   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Gross loans and leases

     1,461,182        54,532         4.99        1,452,428        56,876         5.24   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,977,429        64,333         4.35        1,907,589        68,337         4.79   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and due from banks

     41,152             41,205        

Reserve for loan and lease losses

     (31,706          (33,506     

Premises and equipment, net

     34,231             34,393        

Other assets

     168,485             155,561        
  

 

 

        

 

 

      

Total assets

   $ 2,189,591           $ 2,105,242        
  

 

 

        

 

 

      

Liabilities:

              

Interest-bearing checking deposits

   $ 227,775        138         0.08      $ 204,619        180         0.12   

Money market savings

     317,390        391         0.16        292,620        542         0.25   

Regular savings

     505,451        634         0.17        482,026        1,186         0.33   

Time deposits

     371,056        3,968         1.43        403,729        5,018         1.66   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total time and interest-bearing deposits

     1,421,672        5,131         0.48        1,382,994        6,926         0.67   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Short-term borrowings

     110,177        295         0.36        105,250        256         0.33   

Long-term debt

     146        4         3.66        5,000        142         3.80   

Subordinated notes and capital securities

     22,108        906         5.47        23,615        917         5.19   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total borrowings

     132,431        1,205         1.22        133,865        1,315         1.31   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,554,103        6,336         0.54        1,516,859        8,241         0.73   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand deposits, non-interest bearing

     319,176             283,124        

Accrued expenses and other liabilities

     38,682             32,966        
  

 

 

        

 

 

      

Total liabilities

     1,911,961             1,832,949        
  

 

 

        

 

 

      

Shareholders’ Equity:

              

Common stock

     91,332             91,332        

Additional paid-in capital

     61,352             61,452        

Retained earnings and other equity

     124,946             119,509        
  

 

 

        

 

 

      

Total shareholders’ equity

     277,630             272,293        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 2,189,591           $ 2,105,242        
  

 

 

        

 

 

      

Net interest income

     $ 57,997           $ 60,096      
    

 

 

        

 

 

    

Net interest spread

          3.81             4.06   

Effect of net interest-free funding sources

          0.11             0.15   
       

 

 

        

 

 

 

Net interest margin

          3.92          4.21
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

     127.24          125.76     
  

 

 

        

 

 

      

 

Notes:    For rate calculation purposes, average loan and lease categories include unearned discount.
   Nonaccrual loans and leases have been included in the average loan and lease balances.
   Loans held for sale have been included in the average loan balances.
   Tax-equivalent amounts for the three and nine months ended September 30, 2012 and 2011 have been calculated using the Corporation’s federal applicable rate of 35%.

 

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Table of Contents

Table 2—Analysis of Changes in Net Interest Income

The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated proportionately.

 

     Three Months Ended September 30,
2012 Versus 2011
    Nine Months Ended September 30,
2012 Versus 2011
 
(Dollars in thousands)    Volume
Change
    Rate
Change
    Total     Volume
Change
    Rate
Change
    Total  

Interest income:

            

Interest-earning deposits with other banks

   $ 4      $ 16      $ 20      $ 65      $ 16      $ 81   

U.S. Government obligations

     97        (98     (1     (31     (315     (346

Obligations of states and political subdivisions

     124        (148     (24     397        (458     (61

Other debt and equity securities

     203        (704     (501     543        (1,877     (1,334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on deposits, investments and federal funds sold

     428        (934     (506     974        (2,634     (1,660
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial, financial and agricultural loans and leases

     182        (217     (35     458        (1,083     (625

Real estate—commercial and construction loans

     (53     (451     (504     (513     (704     (1,217

Real estate—residential loans

     94        (162     (68     166        (430     (264

Loans to individuals

     7        1        8        60        (21     39   

Municipal loans and leases

     (41     (130     (171     230        (309     (79

Lease financings

     20        (61     (41     (235     37        (198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest and fees on loans and leases

     209        (1,020     (811     166        (2,510     (2,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     637        (1,954     (1,317     1,140        (5,144     (4,004
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Interest-bearing checking deposits

     6        (23     (17     20        (62     (42

Money market savings

     20        (66     (46     46        (197     (151

Regular savings

     23        (185     (162     55        (607     (552

Time deposits

     (178     (143     (321     (387     (663     (1,050
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on time and interest-bearing deposits

     (129     (417     (546     (266     (1,529     (1,795
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities sold under agreement to repurchase and other short-term borrowings

     —          (63     (63     13        26        39   

Long-term debt

     (48     —          (48     (133     (5     (138

Subordinated notes and capital securities

     (21     15        (6     (60     49        (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on borrowings

     (69     (48     (117     (180     70        (110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (198     (465     (663     (446     (1,459     (1,905
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 835      $ (1,489   $ (654   $ 1,586      $ (3,685   $ (2,099
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:    For rate calculation purposes, average loan and lease categories include unearned discount.
   Nonaccrual loans and leases have been included in the average loan and lease balances.
   Loans held for sale have been included in the average loan balances.
   Tax-equivalent amounts for the three and nine months ended September 30, 2012 and 2011 have been calculated using the Corporation’s federal applicable rate of 35%.

Interest Income

Three months ended September 30, 2012 versus 2011

Interest income on a tax-equivalent basis for the three months ended September 30, 2012 decreased $1.3 million, or 6% from the same period in 2011. This decrease was mainly due to an 80 basis point decrease in the average rate earned on investment securities and deposits at other banks and a 28 basis point decrease in the average rate earned on loans. The decline in interest income on investment securities and deposits at other banks of $506 thousand for the three months ended September 30, 2012 compared to the same period in 2011 was mostly due to maturities, pay-downs and calls of investment securities and replacement with lower yielding investments, as a result of the lower interest rate environment. During the three months ended September 30, 2012, the Corporation increased its investments in government agencies, treasuries and corporate bonds with longer duration maturities as interest rate protection in the prolonged low rate interest environment. Interest and fees on loans and leases declined by $811 thousand during the three months ended September 30, 2012 compared to the same period in 2011 mostly due to a decrease in the average rate on commercial loans resulting from re-pricing and competitive pressures. The Corporation experienced increases in average volume for commercial business loans and residential real estate loans which were partially offset by decreases in average volume for commercial real estate and construction loans.

 

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Nine months ended September 30, 2012 versus 2011

Interest income on a tax-equivalent basis for the nine months ended September 30, 2012 decreased $4.0 million, or 6% from the same period in 2011. This decrease was mainly due to an 83 basis point decrease in the average rate earned on investment securities and deposits at other banks and a 25 basis point decrease in the average rate earned on loans. The decline in interest income on investment securities and deposits at other banks of $1.7 million for the nine months ended September 30, 2012 compared to the same period in 2011 was mostly due to maturities, pay-downs and calls of investment securities and replacement with lower yielding investments due to the lower interest rate environment. Interest and fees on loans and leases declined by $2.3 million during the nine months ended September 30, 2012 compared to the same period in 2011 mostly due to a decrease in the average rate on commercial loans resulting from re-pricing and competitive pressures. The Corporation experienced increases in average volume for commercial business loans, residential real estate loans and municipal loans and leases which were mostly offset by decreases in average volume for commercial real estate and construction loans.

Interest Expense

Three months ended September 30, 2012 versus 2011

Interest expense for the three months ended September 30, 2012 decreased $663 thousand, or 25% from the comparable period in 2011. This decrease was mainly due to a 17 basis point decrease in the Corporation’s average cost of deposits largely attributable to re-pricing of time deposit accounts and regular savings accounts. For the three months ended September 30, 2012, interest expense on time deposits decreased $321 thousand and interest expense on regular savings accounts decreased by $162 thousand. For the three months ended September 30, 2012, average interest-bearing deposits increased by $44.6 million with increases in average interest-bearing checking of $20.0 million, money market savings of $39.6 million and regular savings of $30.9 million partially offset by a decrease in average time deposits of $45.8 million. The Corporation’s focus on growing low cost core deposits by attaining new customers and the lower interest rate environment has resulted in a shift in customer deposits from time deposits to savings accounts and interest-bearing checking accounts.

Nine months ended September 30, 2012 versus 2011

Interest expense for the nine months ended September 30, 2012 decreased $1.9 million, or 23% from the comparable period in 2011. This decrease was mainly due to a 19 basis point decrease in the Corporation’s average cost of deposits largely attributable to re-pricing of time deposit accounts and regular savings accounts. For the nine months ended September 30, 2012, interest expense on time deposits decreased $1.1 million and interest expense on regular savings accounts decreased by $552 thousand. For the nine months ended September 30, 2012, average interest-bearing deposits increased by $38.7 million with increases in average interest-bearing checking of $23.2 million, money market savings of $24.8 million and regular savings of $23.4 million partially offset by a decrease in average time deposits of $32.7 million. The Corporation’s focus on growing low cost core deposits by attaining new customers and the lower interest rate environment has resulted in a shift in customer deposits from time deposits to savings and interest-bearing checking accounts.

Provision for Loan and Lease Losses

The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charged-off activity. Loans are also reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans' initial effective interest rates. Any of the above criteria may cause the reserve to fluctuate. The provision for the three months ended September 30, 2012 and 2011 was $2.2 million and $3.6 million, respectively. The provision for the nine months ended September 30, 2012 and 2011 was $7.7 million and $14.3 million, respectively. The year-to-date decline in the provision was primarily the result of the migration and resolution of loans through the loan workout process and a decrease in historical loss factors for commercial real estate loans.

 

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Noninterest Income

Noninterest income consists of trust department fee income, service charges on deposit accounts, commission income, net gains (losses) on sales of securities, net gains (losses) on mortgage banking activities, net gain (loss) on sales and dispositions of fixed assets, net gains (losses) on sales and write-downs of other real estate owned and other miscellaneous types of income. Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (Mastermoney fees), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Bank owned life insurance income represents changes in the cash surrender value of bank-owned life insurance policies, which is affected by the market value of the underlying assets, and also includes any excess proceeds from death benefit claims. The net gain (loss) on mortgage banking activities consists of gains (losses) on sales of mortgages held for sale and fair value adjustments on interest-rate locks and forward loan commitments. Other non-interest income includes gains (losses) on investments in partnerships and other miscellaneous income.

The following table presents noninterest income for the periods indicated:

 

     Three Months Ended
September 30,
    Change     Nine Months Ended
September 30,
    Change  
(Dollars in thousands)    2012     2011     Amount     Percent     2012     2011     Amount     Percent  

Trust fee income

   $ 1,625      $ 1,625      $ —          —     $ 4,875      $ 4,875      $ —          —  

Service charges on deposit accounts

     1,122        1,218        (96     (8     3,301        3,910        (609     (16

Investment advisory commission and fee income

     1,350        1,239        111        9        3,956        3,595        361        10   

Insurance commission and fee income

     2,129        1,787        342        19        6,453        6,059        394        7   

Other service fee income

     1,053        814        239        29        3,943        3,606        337        9   

Bank owned life insurance income

     463        554        (91     (16     2,305        1,166        1,139        98   

Other-than-temporary impairment on equity securities

     (4     (1     (3     N/M        (13     (11     (2     (18

Net gain on sales of securities

     9        848        (839     (99     291        1,417        (1,126     (79

Net gain on mortgage banking activities

     2,171        913        1,258        N/M        4,517        1,216        3,301        N/M   

Net gain (loss) on sales and dispositions of fixed assets

     1,321        (3     1,324        N/M        1,312        (12     1,324        N/M   

Net loss on sales and write-downs of other real estate owned

     (621     (141     (480     N/M        (1,723     (758     (965     N/M   

Other

     243        121        122        N/M        665        366        299        82   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total noninterest income

   $ 10,861      $ 8,974      $ 1,887        21      $ 29,882      $ 25,429      $ 4,453        18   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Three months ended September 30, 2012 versus 2011

Noninterest income for the three months ended September 30, 2012 was $10.9 million, an increase of $1.9 million or 21% from the comparable period in the prior year. During the three months ended September 30, 2012, the Corporation sold a former operations building located in Hilltown, Pennsylvania with a book value of $702 thousand for $2.0 million, resulting in a gain on sale of fixed assets of $1.3 million. The net gain on mortgage banking activities increased $1.3 million during the three months ended September 30, 2012 over the same period in 2011 as re-finance activity continues to be strong. In addition, insurance commission and fee income was up $342 thousand mainly due to the Javers Group acquisition on May 31, 2012. Partially offsetting these favorable variances was an increase in the net loss on sales and write-downs of other real estate owned of $480 thousand. The net gain on sales of securities was $9 thousand for the three months ended September 30, 2012 compared to $848 thousand during the three months ended September 30, 2011.

Nine months ended September 30, 2012 versus 2011

Noninterest income for the nine months ended September 30, 2012 was $29.9 million, an increase of $4.5 million or 18% compared to the nine months ended September 30, 2011. The increase was primarily attributable to an increase in the net gain on mortgage banking activities of $3.3 million due to stronger mortgage demand from increased re-finance activity, a $1.3 million gain on sale of a former operations building during the three months ended September 30, 2012 and proceeds from bank owned life insurance death benefits of $989 thousand recognized during the first three months of 2012. These favorable variances were partially offset by an increase in the net loss on sales and write-downs of other real estate owned of $965 thousand. In addition, the net gain on sales of securities was $291 thousand for the nine months ended September 30, 2012 compared to $1.4 million for the same period in 2011. The decline in service charges on deposits was primarily due to changes in industry practices to benefit consumers.

 

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During the nine months ended September 30, 2012 and 2011, the Corporation sold available for sale securities totaling $57.2 million and $40.5 million, respectively, primarily from the U.S. government agency bond portfolio. The Corporation did not realize any significant other-than-temporary impairment charges on its equity portfolio during the nine months ended September 30, 2012 and 2011. The Corporation carefully monitors all of its equity securities and has not taken impairment losses on certain other securities in an unrealized loss position, at this time, as the financial performance and near-term prospects of the underlying companies are not indicative of the market deterioration of their stock. The Corporation has the positive intent and ability to hold these securities and believes it is more likely than not that it will not have to sell these securities until recovery to the Corporation’s cost basis occurs.

Noninterest 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, and to provide technological innovation whenever practical, as operations change or expand.

The following table presents noninterest expense for the periods indicated:

 

     Three Months Ended
September 30,
     Change     Nine Months Ended
September 30,
     Change  
(Dollars in thousands)    2012      2011      Amount     Percent     2012      2011      Amount     Percent  

Salaries and benefits

   $ 10,828       $ 9,888       $ 940        10   $ 33,124       $ 28,505       $ 4,619        16

Net occupancy

     1,445         1,361         84        6        4,241         4,272         (31     (1

Equipment

     1,152         1,026         126        12        3,297         2,968         329        11   

Marketing and advertising

     340         305         35        11        1,243         1,287         (44     (3

Deposit insurance premiums

     406         442         (36     (8     1,279         1,582         (303     (19

Other

     4,887         4,273         614        14        13,386         11,833         1,553        13   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total noninterest expense

   $ 19,058       $ 17,295       $ 1,763        10      $ 56,570       $ 50,447       $ 6,123        12   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Three months ended September 30, 2012 versus 2011

Noninterest expense for the three months ended September 30, 2012 was $19.1 million, an increase of $1.8 million or 10% compared to the same period in 2011. Salaries and benefits expense increased $940 thousand primarily due to higher commissions related to increased mortgage banking activities, annual performance increases and additional staff including the Javers Group acquisition. Additionally, noninterest expense increased due to higher loan workout, legal, employment services and equipment expenses.

Nine months ended September 30, 2012 versus 2011

Noninterest expense for the nine months ended September 30, 2012 was $56.6 million, an increase of $6.1 million or 12% compared to the nine months ended September 30, 2011. Salaries and benefits expense increased $4.6 million primarily due to higher commissions related to increased mortgage banking activities, increased employee incentives and annual performance increases. Additionally, noninterest expense increased due to higher loan workout, legal, employment services and equipment expenses. The increases for the year-to-date were partially offset by a decline in deposit insurance premiums of $303 thousand mainly due to the amended assessment calculation requirement through the FDIC rule implemented April 1, 2011. The payment was formerly based on deposits whereas the rule change now bases the payment on the average consolidated total assets less average tangible equity.

Tax Provision

The provision for income taxes for the three months ended September 30, 2012 and 2011 was $1.8 million and $1.4 million, at effective rates of 24% and 21%, respectively. The provision for income taxes for the nine months ended September 30, 2012 and 2011 was $4.2 million and $3.4 million, at effective rates of 21% and 20%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities and loans and bank-owned life insurance. The ratio of tax-free income to income before income taxes was slightly less in 2012 than in 2011; causing a slight increase in the effective tax rate.

 

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Table of Contents

Financial Condition

Assets

Total assets increased $25.2 million since December 31, 2011 primarily due to an increase in investment securities and loans and leases, partially offset by a decrease in cash and interest-earning deposits. The following table presents the assets for the periods indicated:

 

     At September 30,
2012
    At December 31,
2011
    Change  
(Dollars in thousands)        Amount     Percent  

Cash and interest-earning deposits

   $ 63,306      $ 107,377      $ (44,071     (41 )% 

Investment securities

     515,256        471,165        44,091        9   

Loans held for sale

     6,146        3,157        2,989        95   

Loans and leases held for investment

     1,469,511        1,446,406        23,105        2   

Reserve for loan and lease losses

     (27,096     (29,870     2,774        9   

Premises and equipment, net

     33,700        34,303        (603     (2

Goodwill and other intangibles, net

     61,955        58,039        3,916        7   

Bank owned life insurance

     61,044        61,387        (343     (1

Accrued interest receivable and other assets

     48,259        54,875        (6,616     (12
  

 

 

   

 

 

   

 

 

   

Total assets

   $ 2,232,081      $ 2,206,839      $ 25,242        1   
  

 

 

   

 

 

   

 

 

   

Cash and Interest-earning Deposits

Interest-earning deposits at the Federal Reserve Bank decreased $43.4 million at September 30, 2012 from December 31, 2011. The Corporation increased its investments in government agencies, treasuries and corporate bonds with longer duration maturities (primarily five to seven years) as interest rate protection in the prolonged low rate interest environment.

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, to take advantage of market conditions that create more economically beneficial returns on these investments, and to collateralize public funds deposits. The securities portfolio consists primarily of U.S. Government agencies, municipals, residential mortgage-backed securities and corporate bonds.

Total investments increased by $44.1 million at September 30, 2012 compared to December 31, 2011. Purchases of $207.6 million were partially offset by maturities and pay-downs of $57.0 million, calls of $50.9 million, and sales of $57.2 million.

Loans and Leases

Gross loans and leases held for investment grew by $23.1 million at September 30, 2012 as compared to December 31, 2011. Commercial customer loans increased $4.4 million and personal residential mortgage and home equity loans increased $17.7 million. While the Corporation continued to see increased loan activity in the first nine months of 2012, overall credit demand and utilization of lines by businesses and consumers remained light as a result of the prolonged challenging economic environment.

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 collectability of interest for accrual purposes.

When a loan or lease, including a loan or lease that is impaired, is classified as nonaccrual, the accrual of interest on such a loan or lease is discontinued. A loan or lease is typically classified as nonaccrual when the

 

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Table of Contents

contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest, even though the loan or lease 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 collectability of principal and is recognized on a cash basis.

Loans or 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 collectability of the total contractual principal and interest is no longer in doubt.

Total cash basis, troubled debt restructured loans, lease modifications and nonaccrual loans and leases (including held for investment and held for sale) totaled $43.9 million at September 30, 2012, $42.1 million at December 31, 2011, and $42.1 million at September 30, 2011; the balance at September 30, 2012 primarily consisted of commercial real estate, construction and commercial, financial and agricultural loans. The Corporation’s ratio of nonperforming assets to total loans and leases, nonaccrual loans held for sale and other real estate owned was 3.25% as of September 30, 2012, compared to 3.38% as of December 31, 2011 and 3.48% as of September 30, 2011.

At September 30, 2012, loans held for investment that were considered to be impaired was $40.8 million, all of which were on a nonaccrual basis or accruing trouble debt restructured. The related reserve for loan losses was $690 thousand. At December 31, 2011, the recorded investment in loans that were considered to be impaired was $41.2 million, all of which were on a nonaccrual basis or accruing trouble debt restructured. The related reserve for loan losses 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. Impaired loans at September 30, 2012 included one large Shared National Credit to a theatre with an outstanding balance of $6.1 million. During the third quarter of 2012, this credit was returned to accruing troubled debt restructured status as the borrower made six consecutive principal and interest payments. At September 30, 2012, the credit was secured with sufficient estimated collateral and therefore, there was no specific reserve on this credit. The theatre continues to be open and operating. In addition, impaired loans at September 30, 2012 included one large credit which went on non-accrual during the third quarter of 2009 and is for four separate facilities to a local commercial real estate developer/home builder, aggregating to $13.9 million at September 30, 2012. There is no specific allowance on this credit as the credit was secured with sufficient estimated collateral. The borrower does not have the resources to develop these properties; therefore, the properties must be sold. At September 30, 2011, the recorded investment in loans that were considered to be impaired was $41.3 million, all of which were on a nonaccrual basis or accruing trouble debt restructured. The related reserve for loan losses was $2.2 million. For the nine months ended September 30, 2012 and 2011, interest income that would have been recognized under the original terms for impaired loans was $1.6 million and $2.0 million, respectively. Interest income recognized in the nine months ended September 30, 2012 and 2011 was $301 thousand and $181 thousand, respectively.

Other real estate owned decreased to $3.3 million, consisting of three properties, at September 30, 2012, down from $6.6 million at December 31, 2011. During the nine months ended September 30, 2012, one property with a carrying value of $1.3 million was sold for $1.5 million resulting in a gain on sale of $210 thousand. In addition, three properties were written down to their updated fair values, resulting in impairment charges totaling $1.9 million, which were included in earnings for the nine months ended September 30, 2012.

 

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Table of Contents

Table 3—Nonaccrual and Past Due Loans and Leases; Troubled Debt Restructured Loans and Lease Modifications; Other Real Estate Owned; and Related Ratios

The following table details information pertaining to the Corporation’s non-performing assets as of the dates indicated:

 

(Dollars in thousands)    At September 30,
2012
    At December 31,
2011
    At September 30,
2011
 

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*:

      

Loans held for sale

   $ 2,599      $ —        $ —     

Loans held for investment:

      

Commercial, financial and agricultural

     3,966        4,614        5,861   

Real estate—commercial

     9,318        18,085        16,835   

Real estate—construction

     13,614        14,479        14,406   

Real estate—residential

     498        191        358   

Lease financings

     530        838        720   
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*

     30,525        38,207        38,180   

Accruing troubled debt restructured loans and lease modifications, not included above

     13,383        3,893        3,925   
  

 

 

   

 

 

   

 

 

 

Total impaired loans and leases

     43,908        42,100      $ 42,105   

Accruing loans and leases 90 days or more past due:

      

Commercial, financial and agricultural

     321        —          —     

Real estate—residential

     58        117        111   

Loans to individuals

     289        204        332   

Lease financings

     22        44        6   
  

 

 

   

 

 

   

 

 

 

Total accruing loans and leases, 90 days or more past due

     690        365        449   
  

 

 

   

 

 

   

 

 

 

Total non-performing loans and leases

     44,598        42,465        42,554   

Other real estate owned

     3,301        6,600        7,711   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 47,899      $ 49,065      $ 50,265   
  

 

 

   

 

 

   

 

 

 

Nonperforming loans and leases / loans and leases held for investment and nonaccrual loans held for sale

     3.03     2.94     2.96

Nonperforming assets / total assets

     2.15     2.22     2.31

Allowance for loan and lease losses / loans and leases held for investment

     1.84     2.07     2.16

Allowance for loan and lease losses / nonaccrual loans and leases held for investment

     97.03     78.18     81.20

Allowance for loan and lease losses

   $ 27,096      $ 29,870      $ 31,002   

* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table

   $ 228      $ 8,551      $ 6,797   

The following table provides additional information on the Corporation’s nonaccrual loans and leases held for investment:

 

     At September 30,     At December 31,     At September 30,  
(Dollars in thousands)    2012     2011     2011  

Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications

   $ 27,926      $ 38,207      $ 38,180   

Nonaccrual loans and leases with partial charge-offs

     8,508        9,399        8,804   

Life-to-date partial charge-offs on nonaccrual loans and leases

     11,765        10,040        9,329   

Charge-off rate of nonaccrual loans and leases with partial charge-offs

     58.0     51.6     51.4

Specific reserves on impaired loans

   $ 690      $ 1,253      $ 2,158   

Reserve for Loan and Lease Losses

Management believes the reserve for loan and lease losses is maintained at a level that is adequate as of September 30, 2012 to absorb probable 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 and lease loss experience, current economic conditions and trends, and the volume, growth, and composition of the portfolio.

 

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The reserve for loan and lease losses is determined through a monthly evaluation of reserve adequacy. This analysis takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Non-accrual loans and leases, and those which are troubled debt restructured, are evaluated individually. All other loans and leases are evaluated as pools. Based on historical loss experience, loss factors are determined giving consideration to the areas noted in the preceding paragraph and applied to the pooled loan and lease categories to develop the general or allocated portion of the reserve. Loans are also reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans' initial effective interest rates. 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 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 loans 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 loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, or for certain loans, at the present value of expected future cash flows using the loan’s initial effective interest rate.

The reserve for loan and lease losses consists of an allocated reserve and unallocated reserve categories. The allocated reserve is comprised of reserves established on specific loans and leases, and class reserves based on historical loan and lease loss experience, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios.

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 and lease grading process in conjunction with associated allowance factors. The Corporation revises the class allowance factors whenever necessary, but no less than quarterly, 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 in categories with historical loss experience.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets have been recorded on the books of the Corporation in connection with acquisitions. The Corporation has covenants not to compete, intangible assets due to branch acquisitions, core deposit intangibles, customer-related 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 using the present value of projected cash flows. The amortization of intangible assets was $652 thousand and $344 thousand for the three months ended September 30, 2012 and 2011, respectively and $1.7 million and $989 thousand for the nine months ended September 30, 2012 and 2011, respectively. The Corporation also has goodwill with a net carrying amount of $56.2 million at September 30, 2012 and $53.2 million at December 31, 2011, which is deemed to be an indefinite intangible asset and is not amortized.

The Corporation completes a goodwill impairment analysis at least on an annual basis or more often if events and circumstances indicate that there may be impairment. Identifiable intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. There were no impairments recorded to goodwill or identifiable intangibles during the nine months ended September 30, 2012 and 2011. Since the last annual impairment analysis during 2011, there have been no circumstances to indicate impairment. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.

 

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Other Assets

At September 30, 2012 and December 31, 2011, the Bank held $3.3 million in Federal Reserve Bank stock as required by the Federal Reserve Bank. The Bank is required to hold stock in the FHLB in relation to the level of outstanding borrowings. The Bank held FHLB stock of $4.7 million and $5.8 million as of September 30, 2012 and December 31, 2011, respectively. Additionally, the FHLB might require its members to increase its capital stock requirement. Effective February 28, 2011, the FHLB entered into a Joint Capital Enhancement Agreement with the other 11 Federal Home Loan Banks (collectively, the FHLBanks). The agreement calls for a plan for each FHLBank to build additional retained earnings and enhance capital. On August 5, and August 8, 2011, the Standard & Poor’s Rating Services downgraded the credit ratings of the U.S government and federal agencies, including the FHLB, respectively, from AAA to AA+, with a negative outlook. These recent downgrades, and any future downgrades in the credit ratings of the U.S. government and the FHLB could increase the borrowing costs of the FHLB and possibly have a negative impact on its operations and long-term performance. It is possible this could have an adverse effect on the value of the Corporation’s investment in the FHLB stock. However, based on current information from the FHLB, management believes that if there is any impairment in the FHLB stock it is temporary. Therefore, as of September 30, 2012, the FHLB stock is recorded at cost.

Liabilities

Total liabilities increased $16.6 million since December 31, 2011 primarily due to an increase in deposits, partially offset by a decrease in long-term borrowings and accrued expenses and other liabilities. The following table presents the liabilities for the periods indicated:

 

                   Change  
(Dollars in thousands)    At September 30, 2012      At December 31, 2011      Amount     Percent  

Deposits

   $ 1,777,930       $ 1,749,232       $ 28,698        2

Short-term borrowings

     111,551         109,740         1,811        2   

Long-term borrowings

     21,369         27,494         (6,125     (22

Accrued expenses and other liabilities

     39,642         47,394         (7,752     (16
  

 

 

    

 

 

    

 

 

   

Total liabilities

   $ 1,950,492       $ 1,933,860       $ 16,632        1   
  

 

 

    

 

 

    

 

 

   

Deposits

Total deposits increased by $28.7 million from December 31, 2011 primarily due to increases in non-interest bearing demand deposits of $30.9 million, interest bearing demand deposits of $34.5 million and savings deposits of $29.9 million, partially offset by a decrease in time deposits of $66.6 million. Deposits, excluding public funds, grew $33.2 million from December 31, 2011 primarily due to new customers choosing Univest.

Borrowings

Long-term borrowings at September 30, 2012, included $750 thousand in Subordinated Capital Notes, and $20.6 million of Trust Preferred Securities. Short-term borrowings typically include securities sold under agreement to repurchase, federal funds purchased, Federal Reserve Bank discount window borrowings and short-term FHLB borrowings. At September 30, 2012, the Bank also had outstanding short-term letters of credit with the FHLB totaling $5.0 million, which were utilized to collateralize seasonal public funds deposits. Short-term borrowings increased due to an increase in securities sold under agreements to repurchase of $1.8 million.

Shareholders’ Equity

Total shareholders’ equity at September 30, 2012 increased $8.6 million since December 31, 2011. This increase was primarily due to net income exceeding dividends declared.

 

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The following table presents the shareholders’ equity for the periods indicated:

 

                 Change  
(Dollars in thousands)    At September 30, 2012     At December 31, 2011     Amount     Percent  

Common stock

   $ 91,332      $ 91,332      $ —          —  

Additional paid-in capital

     58,404        58,495        (91     —     

Retained earnings

     163,052        157,566        5,486        3   

Accumulated other comprehensive loss

     (4,135     (6,101     1,966        32   

Treasury stock

     (27,064     (28,313     1,249        4   
  

 

 

   

 

 

   

 

 

   

Total shareholders’ equity

   $ 281,589      $ 272,979      $ 8,610        3   
  

 

 

   

 

 

   

 

 

   

Retained earnings at September 30, 2012 were impacted by the nine months of net income of $15.8 million partially offset by cash dividends declared of $10.1 million during the first nine months of 2012. Treasury stock decreased primarily due to shares issued for restricted stock awards and other comprehensive loss decreased primarily due to increases in security valuation adjustments.

Capital Adequacy

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

Table 4—Regulatory Capital

 

     Actual     For Capital Adequacy
Purposes
    To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
 
(Dollars in thousands)    Amount      Ratio         Amount              Ratio             Amount              Ratio      

As of September 30, 2012:

               

Total Capital (to Risk-Weighted Assets):

               

Corporation

   $ 268,865         15.34   $ 140,213         8.00   $ 175,266         10.00

Bank

     245,517         14.21        138,261         8.00        172,827         10.00   

Tier 1 Capital (to Risk-Weighted Assets):

               

Corporation

     246,632         14.07        70,106         4.00        105,159         6.00   

Bank

     223,843         12.95        69,131         4.00        103,696         6.00   

Tier 1 Capital (to Average Assets):

               

Corporation

     246,632         11.48        85,949         4.00        107,436         5.00   

Bank

     223,843         10.50        85,271         4.00        106,589         5.00   

As of December 31, 2011:

               

Total Capital (to Risk-Weighted Assets):

               

Corporation

   $ 265,105         15.56   $ 136,343         8.00   $ 170,429         10.00

Bank

     249,694         14.89        134,158         8.00        167,697         10.00   

Tier 1 Capital (to Risk-Weighted Assets):

               

Corporation

     243,474         14.29        68,172         4.00        102,257         6.00   

Bank

     228,619         13.63        67,079         4.00        100,618         6.00   

Tier 1 Capital (to Average Assets):

               

Corporation

     243,474         11.53        84,501         4.00        105,627         5.00   

Bank

     228,619         10.91        83,840         4.00        104,800         5.00   

 

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As of September 30, 2012 and December 31, 2011, management believes that the Corporation and the Bank met all capital adequacy requirements to which they are subject. The Corporation, like other bank holding companies, currently is required to maintain Tier 1 Capital and Total Capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. As of September 30, 2012, the Bank is categorized as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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 interest-sensitivity gap analysis and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses the gap analysis 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 re-pricing 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.

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.

The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $403.5 million. At September 30, 2012 there were no outstanding borrowings with the FHLB. At December 31, 2011, total outstanding short-term and long-term borrowings with the FHLB totaled $5.0 million. At September 30, 2012 and December 31, 2011, the Bank also had outstanding short-term letters of credit with the FHLB totaling $5.0 million and $55.0 million, respectively, which were utilized to collateralize seasonal public funds deposits. The maximum borrowing capacity with the FHLB changes as a function of qualifying collateral assets as well as the FHLB’s internal credit rating of the Bank, 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 $82.0 million at September 30, 2012 and December 31, 2011. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.

 

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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, 2012 and December 31, 2011, 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 most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay its certificates of deposit. Short-term borrowings consisting of securities sold under agreement to repurchase constitute the next largest payment obligation. 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.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Footnote 1, “Summary of Significant Accounting Policies” of this Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures 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, 2011.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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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 balance sheet or statement of income 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 have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors.” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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, 2012.

 

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, 2012

     —         $ —           —           541,929   

August 1 – 31, 2012

     —           —           —           541,929   

September 1 – 30, 2012

     —           —           —           541,929   
  

 

 

       

 

 

    

Total

     —         $ —           —        
  

 

 

       

 

 

    

 

1. Transactions are reported as of trade dates.
2. The Corporation’s current stock repurchase program was approved by its Board of Directors and announced on August 22, 2007. 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 approved for repurchase under the Corporation’s stock repurchase program is 643,782.
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. Mine Safety Disclosures

Not Applicable.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

a.       Exhibits   
  Exhibit 3.1    Amended and Restated Articles of Incorporation are incorporated by reference to Appendix A of Form DEF14A, filed with the Securities and Exchange Commission (the SEC) on March 9, 2006.
  Exhibit 3.2    Amended By-Laws dated September 26, 2007 are incorporated by reference to Exhibit 3.2 of Form 8-K, filed with the SEC on September 27, 2007.
  Exhibit 4.1    Shareholder Rights Agreement dated September 30, 2011 is incorporated by reference to Exhibit 4.1 of Form 8-K, filed with the SEC on October 6, 2011.
  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 Jeffrey M. Schweitzer, Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer, 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 Jeffrey M. Schweitzer, 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.
  Exhibit 101.INS    XBRL Instance Document
  Exhibit 101.SCH    XBRL Taxonomy Extension Schema Document
  Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
  Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase Document
  Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
  Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

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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 8, 2012  

/s/ William S. Aichele

 

William S. Aichele, Chairman, President and

Chief Executive Officer (Principal Executive Officer)

Date: November 8, 2012  

/s/ Jeffrey M. Schweitzer

  Jeffrey M. Schweitzer, Senior Executive Vice President,
Chief Operating Officer and Chief Financial Officer
(Principal Operating, Financial and Accounting Officer)

 

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