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UNIVEST FINANCIAL Corp - Quarter Report: 2013 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, 2013.

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 or 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

 

16,283,354

(Title of Class)   (Number of shares outstanding at October 31, 2013)

 

 

 


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, 2013 and December 31, 2012

   2
     

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012

   3
     

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012

   4
     

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2013 and 2012

   5
     

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

   6
     

Notes to Consolidated Financial Statements

   7
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   33
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   50
   Item 4.   

Controls and Procedures

   50
Part II.    Other Information   
   Item 1.   

Legal Proceedings

   51
   Item 1A.   

Risk Factors

   51
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   51
   Item 3.   

Defaults Upon Senior Securities

   51
   Item 4.   

Mine Safety Disclosures

   52
   Item 5.   

Other Information

   52
   Item 6.   

Exhibits

   52
Signatures    53

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED BALANCE SHEETS

 

     (UNAUDITED)     (SEE NOTE)  
(Dollars in thousands, except per share data)    At September 30, 2013     At December 31, 2012  

ASSETS

  

Cash and due from banks

   $ 46,484      $ 98,399   

Interest-earning deposits with other banks

     32,974        47,713   

Investment securities held-to-maturity (fair value $70,079 and $71,327 at September 30, 2013 and December 31, 2012, respectively)

     69,214        69,845   

Investment securities available-for-sale

     393,359        429,734   

Loans held for sale

     3,489        4,530   

Loans and leases held for investment

     1,526,241        1,481,862   

Less: Reserve for loan and lease losses

     (24,835     (24,746
  

 

 

   

 

 

 

Net loans and leases held for investment

     1,501,406        1,457,116   
  

 

 

   

 

 

 

Premises and equipment, net

     33,797        33,222   

Goodwill

     57,517        56,238   

Other intangibles, net of accumulated amortization and fair value adjustments of $9,783 and $10,475 at September 30, 2013 and December 31, 2012, respectively

     8,475        6,456   

Bank owned life insurance

     60,144        61,409   

Accrued interest receivable and other assets

     46,137        40,179   
  

 

 

   

 

 

 

Total assets

   $ 2,252,996      $ 2,304,841   
  

 

 

   

 

 

 

LIABILITIES

    

Demand deposits, noninterest-bearing

   $ 394,983      $ 368,948   

Demand deposits, interest-bearing

     658,417        638,483   

Savings deposits

     545,864        526,391   

Time deposits

     289,782        331,511   
  

 

 

   

 

 

 

Total deposits

     1,889,046        1,865,333   
  

 

 

   

 

 

 

Customer repurchase agreements

     46,733        96,282   

Accrued interest payable and other liabilities

     42,463        37,955   

Subordinated notes

     —          375   

Junior subordinated debt owed to unconsolidated subsidiary trust

     —          20,619   
  

 

 

   

 

 

 

Total liabilities

     1,978,242        2,020,564   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $5 par value: 48,000,000 shares authorized at September 30, 2013 and December 31, 2012; 18,266,404 shares issued at September 30, 2013 and December 31, 2012; 16,288,597 and 16,770,232 shares outstanding at September 30, 2013 and December 31, 2012, respectively

     91,332        91,332   

Additional paid-in capital

     62,060        62,101   

Retained earnings

     170,937        164,823   

Accumulated other comprehensive loss, net of taxes

     (13,703     (6,920

Treasury stock, at cost; 1,977,807 and 1,496,172 shares at September 30, 2013 and December 31, 2012, respectively

     (35,872     (27,059
  

 

 

   

 

 

 

Total shareholders’ equity

     274,754        284,277   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,252,996      $ 2,304,841   
  

 

 

   

 

 

 

 

Note: The consolidated balance sheet at December 31, 2012 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. 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,
 
(Dollars in thousands, except per share data)    2013     2012     2013     2012  

Interest income

  

Interest and fees on loans and leases:

        

Taxable

   $ 15,793      $ 16,332      $ 47,544      $ 49,082   

Exempt from federal income taxes

     1,215        1,143        3,459        3,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and fees on loans and leases

     17,008        17,475        51,003        52,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and dividends on investment securities:

        

Taxable

     1,391        1,354        4,195        4,588   

Exempt from federal income taxes

     1,033        1,103        3,103        3,310   

Other interest income

     25        45        106        121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     19,457        19,977        58,407        60,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Interest on deposits

     1,119        1,624        3,514        5,131   

Interest on short-term borrowings

     8        33        40        295   

Interest on long-term borrowings

     11        301        483        910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,138        1,958        4,037        6,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     18,319        18,019        54,370        54,330   

Provision for loan and lease losses

     4,094        2,210        9,614        7,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     14,225        15,809        44,756        46,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Trust fee income

     1,736        1,625        5,249        4,875   

Service charges on deposit accounts

     1,149        1,122        3,333        3,301   

Investment advisory commission and fee income

     1,536        1,350        5,048        3,956   

Insurance commission and fee income

     2,513        2,129        7,829        6,453   

Other service fee income

     1,929        1,053        5,454        3,943   

Bank owned life insurance income

     1,555        463        2,472        2,305   

Other-than-temporary impairment on equity securities

     —          (4     —          (13

Net gain on sales of investment securities

     1,426        9        2,950        291   

Net gain on mortgage banking activities

     935        2,171        4,047        4,517   

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

     —          1,321        (6     1,312   

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

     198        (621     450        (1,723

Loss on termination of interest rate swap

     —          —          (1,866     —     

Other

     225        243        708        665   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     13,202        10,861        35,668        29,882   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and benefits

     9,761        8,944        28,980        28,185   

Commissions

     2,026        1,884        6,529        4,939   

Net occupancy

     1,472        1,445        4,279        4,241   

Equipment

     1,225        1,152        3,619        3,297   

Marketing and advertising

     570        340        1,432        1,243   

Deposit insurance premiums

     381        406        1,173        1,279   

Restructuring charges

     (5     —          534        —     

Other

     4,558        4,887        12,964        13,386   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     19,988        19,058        59,510        56,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,439        7,612        20,914        19,989   

Income taxes

     1,400        1,842        4,647        4,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,039      $ 5,770      $ 16,267      $ 15,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ .36      $ .34      $ .97      $ .94   

Diluted

     .36        .34        .97        .94   

Dividends declared

     .20        .20        .60        .60   

Note: 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,  
     2013     2012  
(Dollars in thousands)    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
 

Income

   $ 7,439      $ 1,400      $ 6,039      $ 7,612      $ 1,842      $ 5,770   

Other comprehensive income:

            

Net unrealized (losses) gains on available-for-sale investment securities:

            

Net unrealized holding gains arising during the period

     442        155        287        2,698        944        1,754   

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

     (1,426     (499     (927     (9     (3     (6

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

     —          —          —          4        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (losses) gains on available-for-sale investment securities

     (984     (344     (640     2,693        943        1,750   

Cash flow hedge derivative:

            

Net change in fair value of interest rate swap

     —          —          —          (213     (75     (138
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow hedge derivative

     —          —          —          (213     (75     (138

Defined benefit pension plans:

            

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

     320        112        208        293        103        190   

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

     (64     (22     (42     (64     (22     (42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit pension plans

     256        90        166        229        81        148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (728     (254     (474     2,709        949        1,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 6,711      $ 1,146      $ 5,565      $ 10,321      $ 2,791      $ 7,530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
     2013     2012  
(Dollars in thousands)    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
    Before
Tax
Amount
    Tax
Expense
(Benefit)
    Net of
Tax
Amount
 

Income

   $ 20,914      $ 4,647      $ 16,267      $ 19,989      $ 4,193      $ 15,796   

Other comprehensive income:

            

Net unrealized (losses) gains on available-for-sale investment securities:

            

Net unrealized holding (losses) gains arising during the period

     (10,163     (3,557     (6,606     3,215        1,125        2,090   

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

     (2,950     (1,032     (1,918     (291     (102     (189

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

     —          —          —          13        5        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (losses) gains on available-for-sale investment securities

     (13,113     (4,589     (8,524     2,937        1,028        1,909   

Cash flow hedge derivative:

            

Net change in fair value of interest rate swap

     43        15        28        (602     (211     (391

Less: reclassification adjustment for loss on termination of interest rate swap realized in net income

     1,866        653        1,213        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow hedge derivative

     1,909        668        1,241        (602     (211     (391

Defined benefit pension plans:

            

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

     961        336        625        882        309        573   

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

     (191     (66     (125     (192     (67     (125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit pension plans

     770        270        500        690        242        448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (10,434     (3,651     (6,783     3,025        1,059        1,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 10,480      $ 996      $ 9,484      $ 23,014      $ 5,252      $ 17,762   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note: 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  

Nine Months Ended September 30, 2013

               

Balance at December 31, 2012

     16,770,232      $ (6,920   $ 91,332       $ 62,101      $ 164,823      $ (27,059   $ 284,277   

Net income

              16,267          16,267   

Other comprehensive loss, net of income tax benefit

       (6,783              (6,783

Cash dividends declared ($0.60 per share)

              (10,029       (10,029

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

     105,263             9        (32     1,915        1,892   

Repurchase of cancelled restricted stock awards

     (29,533          519          (519     —     

Stock-based compensation

            616            616   

Net tax deficiency on stock-based compensation

            (11         (11

Purchases of treasury stock

     (627,406              (11,475     (11,475

Restricted stock awards granted

     70,041             (1,174     (92     1,266        —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     16,288,597      $ (13,703   $ 91,332       $ 62,060      $ 170,937      $ (35,872   $ 274,754   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(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  

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 income tax

       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   

Repurchase of cancelled restricted stock awards

     (13,125          300        (87     (213     —     

Stock-based compensation

            847        33          880   

Net tax deficiency 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        —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Note: 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)    2013     2012  

Cash flows from operating activities:

    

Net income

   $ 16,267      $ 15,796   

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

    

Provision for loan and lease losses

     9,614        7,653   

Depreciation of premises and equipment

     2,196        2,160   

Other-than-temporary impairment on equity securities

     —          13   

Net gain on sales of investment securities

     (2,950     (291

Net gain on mortgage banking activities

     (4,047     (4,517

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

     6        (1,312

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

     (450     1,723   

Loss on termination of interest rate swap

     1,866        —     

Bank owned life insurance income

     (2,472     (2,305

Stock-based compensation

     616        923   

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

     944        5,638   

Originations of loans held for sale

     (233,408     (215,767

Proceeds from the sale of loans held for sale

     239,501        218,280   

Contributions to pension and other postretirement benefit plans

     (2,090     (8,089

(Increase) decrease in accrued interest receivable and other assets

     (974     801   

Increase (decrease) in accrued interest payable and other liabilities

     4,722        (962
  

 

 

   

 

 

 

Net cash provided by operating activities

     29,341        19,744   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net cash paid due to acquisitions

     (2,170     (3,225

Net capital expenditures

     (2,777     (236

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

     33,503        107,920   

Proceeds from sales of securities available-for-sale

     58,148        57,162   

Purchases of investment securities held-to-maturity

     —          (24,697

Purchases of investment securities available-for-sale

     (66,959     (182,949

Net increase in loans and leases

     (57,137     (36,131

Net decrease in interest-earning deposits

     14,739        43,191   

Proceeds from sales of other real estate owned

     4,183        1,482   

Proceeds from bank owned life insurance

     —          2,415   
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,470     (35,068
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     24,033        28,698   

Net decrease in short-term borrowings

     (49,549     (3,189

Repayment of subordinated debt

     (375     (1,125

Payment for repurchase of trust preferred securities

     (20,619     —     

Purchases of treasury stock

     (11,475     (1,877

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

     1,892        1,987   

Cash dividends paid

     (6,693     (10,050
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (62,786     14,444   
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (51,915     (880

Cash and due from banks at beginning of year

     98,399        39,857   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 46,484      $ 38,977   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 4,801      $ 6,694   

Cash paid for income taxes, net of refunds received

     4,336        1,437   

Non cash transactions:

    

Noncash transfer of loans to other real estate owned

   $ 3,526      $ —     

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

     —          2,599   

Contingent consideration recorded as goodwill

   $ 454      $ 842   

Note: See accompanying notes to the unaudited consolidated financial statements.

 

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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, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. 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, 2012, which was filed with the SEC on March 4, 2013.

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 2013, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which requires entities to present an unrecognized tax benefit or a portion of an unrecognized tax benefit for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, in the financial statements as a reduction to a deferred tax asset with some specified exceptions. The ASU was issued to eliminate diversity in practice on this topic. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2013, or January 1, 2014 for the Corporation. The adoption of this ASU will not have any impact on the Corporation’s financial statements.

In February 2013, the FASB issued an ASU to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The guidance requires entities to present, either on the face of the statement where net income is presented or in a single footnote, significant amounts that are required under U.S. GAAP to be reclassified to net income in their entirety. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to provide a cross-reference to other required U.S. GAAP disclosures. The amendment is effective for reporting periods beginning after December 15, 2012, or January 1, 2013 for the Corporation. The application of the provisions of this standard did not have a material impact on the Corporation’s financial statements although it resulted in additional disclosures which are included in Note 10, “Accumulated Other Comprehensive (Loss) Income.”

In December 2011, the FASB issued an ASU regarding disclosures about offsetting assets and liabilities. The scope of this accounting guidance was further clarified by an ASU issued by the FASB in January 2013. This guidance affects entities that have financial instruments and derivative instruments that are either (1) offset in accordance with U.S. GAAP or (2) subject to an enforceable master netting arrangement or similar agreement. This

 

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information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments within the scope of this guidance. The guidance is effective for annual reporting periods beginning on or after January 1, 2013. The provisions of this guidance did not have any impact on the Corporation’s financial statements.

Note 2. Acquisition

On May 1, 2013, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of John T. Fretz Insurance Agency, Inc., a full-service property and casualty insurance agency providing solutions to both personal and commercial clients. The acquisition expands the Corporation’s insurance business and increases its market share in its core market.

The Corporation paid $2.2 million in cash at closing with additional contingent consideration to be paid in annual installments over the three-year period ended April 30, 2016 based on the achievement of certain levels of revenue. At the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $454 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 $930 thousand cumulative over the next three years. The fair value of the contingent consideration liability will be reviewed on a quarterly basis and any valuation adjustments resulting from a change in the discount rate or estimated future contingent payments based on projected revenue of the acquired business affecting the contingent consideration liability will be recorded through noninterest expense.

As a result of the John T. Fretz Insurance Agency, Inc. acquisition, the Corporation recorded goodwill of $1.3 million (inclusive of the contingent consideration) and customer related intangibles of $1.3 million. The goodwill is expected to be deductible for tax purposes. The customer related intangibles will be amortized over seven years using the sum-of-the-years-digits amortization method. The acquisition was accounted for in accordance with accounting standards for 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, 2013 and December 31, 2012 by contractual maturity within each type:

 

     At September 30, 2013      At December 31, 2012  
(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:

                     

Within 1 year

   $ 12,228       $ 86       $ —        $ 12,314       $ 3,026       $ 7       $ —        $ 3,033   

After 1 year to 5 years

     56,986         1,040         (261     57,765         66,819         1,526         (51     68,294   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     69,214         1,126         (261     70,079         69,845         1,533         (51     71,327   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 69,214       $ 1,126       $ (261   $ 70,079       $ 69,845       $ 1,533       $ (51   $ 71,327   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Securities Available-for-Sale

                     

U.S. treasuries:

                     

After 5 years to 10 years

   $ 4,965       $ —         $ (192   $ 4,773       $ 4,960       $ —         $ (22   $ 4,938   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     4,965         —           (192     4,773         4,960         —           (22     4,938   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

U.S. government corporations and agencies:

                     

Within 1 year

     5,999         36         —          6,035         1,517         9         —          1,526   

After 1 year to 5 years

     148,123         169         (1,157     147,135         148,120         1,509         (70     149,559   

After 5 years to 10 years

     10,850         —           (471     10,379         20,953         109         (5     21,057   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     164,972         205         (1,628     163,549         170,590         1,627         (75     172,142   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

State and political subdivisions:

                     

Within 1 year

     3,825         14         —          3,839         4,607         75         —          4,682   

After 1 year to 5 years

     4,603         29         (35     4,597         4,130         88         (19     4,199   

After 5 years to 10 years

     41,545         720         (530     41,735         36,499         1,245         (7     37,737   

Over 10 years

     65,746         1,788         (311     67,223         70,495         5,055         —          75,550   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     115,719         2,551         (876     117,394         115,731         6,463         (26     122,168   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     At September 30, 2013      At December 31, 2012  
(Dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Residential mortgage-backed securities:

                     

After 5 years to 10 years

     18,365         307         (55     18,617         20,140         777         —          20,917   

Over 10 years

     35,075         375         —          35,450         66,962         2,861         —          69,823   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     53,440         682         (55     54,067         87,102         3,638         —          90,740   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Collateralized mortgage obligations:

                     

After 1 year to 5 years

     109         1         —          110         41         —           —          41   

After 5 years to 10 years

     —           —           —          —           626         7         —          633   

Over 10 years

     9,462         111         (163     9,410         25,698         645         (5     26,338   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     9,571         112         (163     9,520         26,365         652         (5     27,012   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Corporate bonds:

                     

After 1 year to 5 years

     10,819         35         (131     10,723         4,993         21         —          5,014   

After 5 years to 10 years

     22,833         8         (1,156     21,685         —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     33,652         43         (1,287     32,408         4,993         21         —          5,014   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Money market mutual funds:

                     

Within 1 year

     9,639         —           —          9,639         4,878         —           —          4,878   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     9,639         —           —          9,639         4,878         —           —          4,878   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities:

                     

No stated maturity

     1,678         357         (26     2,009         2,279         696         (133     2,842   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     1,678         357         (26     2,009         2,279         696         (133     2,842   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 393,636       $ 3,950       $ (4,227   $ 393,359       $ 416,898       $ 13,097       $ (261   $ 429,734   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Expected maturities may differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties. Unrealized losses in investment securities at September 30, 2013 and December 31, 2012 do not represent other-than-temporary impairments.

Securities with a carrying value of $330.8 million and $368.2 million at September 30, 2013 and December 31, 2012, 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, 2013 and 2012:

 

     Nine Months Ended September 30,  
(Dollars in thousands)    2013      2012  

Securities available-for-sale:

     

Proceeds from sales

   $ 58,148       $ 57,162   

Gross realized gains on sales

     2,957         1,187   

Gross realized losses on sales

     7         896   

Tax expense related to net realized gains on sales

     1,033         102   

The Corporation realized other-than-temporary impairment charges to noninterest income of $0 thousand and $13 thousand, respectively, on its equity portfolio during the nine months ended September 30, 2013 and 2012. As such, in 2012, 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 intent and ability to hold 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, 2013 and December 31, 2012.

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,

 

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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 did not recognize any other-than-temporary impairment charges on debt securities for the nine months ended September 30, 2013 and 2012.

At September 30, 2013 and December 31, 2012, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.

The following table shows the fair value of securities that were in an unrealized loss position at September 30, 2013 and December 31, 2012 by the length of time those securities were in a continuous loss position:

 

     At September 30, 2013  
     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

   $ 4,773       $ (192   $ —         $ —         $ 4,773       $ (192

U.S. government corporations and agencies

     107,154         (1,628     —           —           107,154         (1,628

State and political subdivisions

     26,790         (876     —           —           26,790         (876

Residential mortgage-backed securities

     5,093         (55     —           —           5,093         (55

Collateralized mortgage obligations

     4,334         (163     —           —           4,334         (163

Corporate bonds

     45,866         (1,548     —           —           45,866         (1,548

Equity securities

     1,054         (26     —           —           1,054         (26
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 195,064       $ (4,488   $ —         $ —         $ 195,064       $ (4,488
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 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

   $ 4,938       $ (22   $ —         $ —        $ 4,938       $ (22

U.S. government corporations and agencies

     36,793         (75     —           —          36,793         (75

State and political subdivisions

     4,574         (14     480         (12     5,054         (26

Collateralized mortgage obligations

     5,006         (5     —           —          5,006         (5

Corporate bonds

     10,410         (51     —           —          10,410         (51

Equity securities

     976         (133     —           —          976         (133
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 62,697       $ (300   $ 480       $ (12   $ 63,177       $ (312
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Note 4. Loans and Leases

Summary of Major Loan and Lease Categories

 

(Dollars in thousands)    At September 30, 2013     At December 31, 2012  

Commercial, financial and agricultural

   $ 430,818      $ 468,421   

Real estate-commercial

     606,030        530,122   

Real estate-construction

     74,847        91,250   

Real estate-residential secured for business purpose

     35,673        35,179   

Real estate-residential secured for personal purpose

     143,374        146,526   

Real estate-home equity secured for personal purpose

     90,527        82,727   

Loans to individuals

     42,211        43,780   

Lease financings

     102,761        83,857   
  

 

 

   

 

 

 

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

   $ 1,526,241      $ 1,481,862   
  

 

 

   

 

 

 

Unearned lease income, included in the above table

   $ (14,192   $ (12,355

Net deferred costs (fees), included in the above table

   $ 2,523      $ 1,432   

Overdraft deposits included in the above table

   $ 156      $ 128   

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

 

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Table of Contents

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, 2013 and December 31, 2012:

 

(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, 2013

                    

Commercial, financial and agricultural

   $ 4,169       $ 972       $ 1,047       $ 6,188       $ 424,630       $ 430,818       $ 300   

Real estate—commercial real estate and construction:

                    

Commercial real estate

     651         1,364         6,405         8,420         597,610         606,030         641   

Construction

     —           —           8,742         8,742         66,105         74,847         —     

Real estate—residential and home equity:

                    

Residential secured for business purpose

     411         180         226         817         34,856         35,673         —     

Residential secured for personal purpose

     1,122         197         619         1,938         141,436         143,374         619   

Home equity secured for personal purpose

     341         76         51         468         90,059         90,527         51   

Loans to individuals

     496         255         299         1,050         41,161         42,211         299   

Lease financings

     1,592         1,372         271         3,235         99,526         102,761         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,782       $ 4,416       $ 17,660       $ 30,858       $ 1,495,383       $ 1,526,241       $ 1,954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2012

                    

Commercial, financial and agricultural

   $ 586       $ 313       $ 754       $ 1,653       $ 466,768       $ 468,421       $ —     

Real estate—commercial real estate and construction:

                    

Commercial real estate

     8,266         —           5,894         14,160         515,962         530,122         —     

Construction

     306         —           13,150         13,456         77,794         91,250         —     

Real estate—residential and home equity:

                    

Residential secured for business purpose

     1,663         69         103         1,835         33,344         35,179         —     

Residential secured for personal purpose

     1,617         152         —           1,769         144,757         146,526         —     

Home equity secured for personal purpose

     276         64         54         394         82,333         82,727         54   

Loans to individuals

     551         153         347         1,051         42,729         43,780         347   

Lease financings

     1,001         273         426         1,700         82,157         83,857         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,266       $ 1,024       $ 20,728       $ 36,018       $ 1,445,844       $ 1,481,862       $ 441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

Non-Performing Loans and Leases

The following presents, by class of loans and leases, non-performing loans and leases at September 30, 2013 and December 31, 2012:

 

     At September 30, 2013      At December 31, 2012  
(Dollars in thousands)    Nonaccrual
Loans and
Leases*
     Accruing
Troubled
Debt
Restructured
Loans and
Lease
Modifications
     Loans and
Leases
Greater

than 90 Days
Past Due
and
Accruing
Interest
     Total Non-
Performing
Loans and
Leases
     Nonaccrual
Loans and
Leases*
     Accruing
Troubled

Debt
Restructured
Loans and

Lease
Modifications
     Loans and
Leases
Greater

than 90 Days
Past Due

and
Accruing
Interest
     Total Non-
Performing
Loans and
Leases
 

Commercial, financial and agricultural

   $ 3,778       $ 1,406       $ 300       $ 5,484       $ 2,842       $ 480       $ —         $ 3,322   

Real estate—commercial real estate and construction:

                       

Commercial real estate

     9,858         10,499         641         20,998         14,340         10,523         —           24,863   

Construction

     9,165         2,164         —           11,329         13,588         2,397         —           15,985   

Real estate—residential and home equity:

                       

Residential secured for business purpose

     226         —           —           226         172         —           —           172   

Residential secured for personal purpose

     720         —           619         1,339         804         —           —           804   

Home equity secured for personal purpose

     —           —           51         51         —           —           54         54   

Loans to individuals

     —           37         299         336         —           38         347         385   

Lease financings

     227         —           44         271         386         19         40         445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,974       $ 14,106       $ 1,954       $ 40,034       $ 32,132       $ 13,457       $ 441       $ 46,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes nonaccrual troubled debt restructured loans and lease modifications of $1.6 million and $579 thousand at September 30, 2013 and December 31, 2012, respectively.

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, 2013 and December 31, 2012.

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

 

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Table of Contents

Commercial Credit Exposure Credit Risk by Internally Assigned Grades

 

     At September 30, 2013  
(Dollars in thousands)    Commercial,
Financial and
Agricultural
     Real Estate —
Commercial
     Real Estate —
Construction
     Real Estate —
Residential Secured
for Business Purpose
     Total  

Grade:

              

1. Cash secured/ 2. Fully secured

   $ 4,498       $ 2,031       $ 1,550       $ —         $ 8,079   

3. Strong

     5,534         9,119         4,288         —           18,941   

4. Satisfactory

     33,136         17,579         1,602         107         52,424   

5. Acceptable

     246,455         376,724         33,898         25,721         682,798   

6. Pre-watch

     98,524         121,054         21,282         5,351         246,211   

7. Special Mention

     15,897         22,169         —           1,919         39,985   

8. Substandard

     26,410         57,305         12,227         2,575         98,517   

9. Doubtful

     364         49         —           —           413   

10. Loss

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 430,818       $ 606,030       $ 74,847       $ 35,673       $ 1,147,368   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Grade:

              

1. Cash secured/ 2. Fully secured

   $ 2,263       $ —         $ —         $ —         $ 2,263   

3. Strong

     5,227         9,591         3,907         —           18,725   

4. Satisfactory

     40,747         25,837         1,783         335         68,702   

5. Acceptable

     260,042         321,194         26,331         22,764         630,331   

6. Pre-watch

     106,436         110,476         42,190         8,458         267,560   

7. Special Mention

     31,825         16,187         548         288         48,848   

8. Substandard

     21,881         45,844         16,491         3,334         87,550   

9. Doubtful

     —           993         —           —           993   

10. Loss

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 468,421       $ 530,122       $ 91,250       $ 35,179       $ 1,124,972   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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. Nonperforming loans and leases are loans past due 90 days or more, loans and leases on nonaccrual 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.

 

     At September 30, 2013  
(Dollars in thousands)    Real Estate —
Residential
Secured for
Personal Purpose
     Real Estate —
Home Equity
Secured for
Personal Purpose
     Loans to
Individuals
     Lease
Financing
     Total  

Performing

   $ 142,035       $ 90,476       $ 41,875       $ 102,490       $ 376,876   

Nonperforming

     1,339         51         336         271         1,997   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 143,374       $ 90,527       $ 42,211       $ 102,761       $ 378,873   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Performing

   $ 145,722       $ 82,673       $ 43,395       $ 83,412       $ 355,202   

Nonperforming

     804         54         385         445         1,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 146,526       $ 82,727       $ 43,780       $ 83,857       $ 356,890   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

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 Southeastern 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.

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, credit exposure is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to the Corporation’s underwriting policies. Combined loan-to-value ratios are generally limited to 80%, but increased to 85% for the Corporation’s strongest profile borrower. Other credit considerations and compensating factors may warrant higher combined loan-to-value ratios.

 

14


Table of Contents

Credit risk for direct consumer loans 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. These loans are included within the portfolio of loans to individuals.

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, 2013 and 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  

Three Months Ended September 30, 2013

                

Reserve for loan and lease losses:

                

Beginning balance

   $ 11,395      $ 8,662      $ 586      $ 1,084      $ 693      $ 1,212      $ 1,086      $ 24,718   

Charge-offs

     (812     (2,784     (38     (133     (216     (211     N/A        (4,194

Recoveries

     85        —          1        2        60        69        N/A        217   

(Recovery of provision) provision

     (152     2,542        682        249        169        198        406        4,094   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,516      $ 8,420      $ 1,231      $ 1,202      $ 706      $ 1,268      $ 1,492      $ 24,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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  

Nine Months Ended September 30, 2013

                

Reserve for loan and lease losses:

                

Beginning balance

   $ 11,594      $ 7,507      $ 639      $ 980      $ 679      $ 1,326      $ 2,021      $ 24,746   

Charge-offs

     (1,973     (6,857     (112     (160     (620     (637     N/A        (10,359

Recoveries

     172        48        9        5        172        428        N/A        834   

Provision (recovery of provision)

     723        7,722        695        377        475        151        (529     9,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,516      $ 8,420      $ 1,231      $ 1,202      $ 706      $ 1,268      $ 1,492      $ 24,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

N/A – Not applicable

 

* 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, 2013

                       

Reserve for loan and lease losses:

                       

Ending balance: individually evaluated for impairment

   $ 2,210       $ 111       $ 775       $ —         $ —         $ —         $ N/A       $ 3,096   

Ending balance: collectively evaluated for impairment

     8,306         8,309         456         1,202         706         1,268         1,492         21,739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending balance

   $ 10,516       $ 8,420       $ 1,231       $ 1,202       $ 706       $ 1,268       $ 1,492       $ 24,835   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases held for investment:

                       

Ending balance: individually evaluated for impairment

   $ 14,029       $ 50,242       $ 1,776       $ 720       $ 37       $ —            $ 66,804   

Ending balance: collectively evaluated for impairment

     416,789         630,635         33,897         233,181         42,174         102,761            1,459,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending balance

   $ 430,818       $ 680,877       $ 35,673       $ 233,901       $ 42,211       $ 102,761          $ 1,526,241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

16


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, 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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

N/A – Not applicable

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, 2013 and December 31, 2012:

 

     At September 30, 2013      At December 31, 2012  
(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Impaired loans with no related allowance recorded:

           

Commercial, financial and agricultural

   $ 8,037       $ 9,961          $ 2,646       $ 4,504      

Real estate—commercial real estate

     36,500         46,604            24,863         30,991      

Real estate—construction

     12,227         14,410            15,985         17,959      

Real estate—residential secured for business purpose

     226         238            172         184      

Real estate—residential secured for personal purpose

     720         739            804         804      

Loans to individuals

     37         55            38         55      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total impaired loans with no allowance recorded

   $ 57,747       $ 72,007          $ 44,508       $ 54,497      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with an allowance recorded:

                 

Commercial, financial and agricultural

   $ 5,992       $ 6,075       $ 2,210       $ 676       $ 717       $ 208   

Real estate—commercial real estate

     1,515         1,515         111         —           —           —     

Real estate—residential secured for business purpose

     1,550         1,550         775         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 9,057       $ 9,140       $ 3,096       $ 676       $ 717       $ 208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans:

                 

Commercial, financial and agricultural

   $ 14,029       $ 16,036       $ 2,210       $ 3,322       $ 5,221       $ 208   

Real estate—commercial real estate

     38,015         48,119         111         24,863         30,991         —     

Real estate—construction

     12,227         14,410         —           15,985         17,959         —     

Real estate—residential secured for business purpose

     1,776         1,788         775         172         184         —     

Real estate—residential secured for personal purpose

     720         739         —           804         804         —     

Loans to individuals

     37         55         —           38         55         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 66,804       $ 81,147       $ 3,096       $ 45,184       $ 55,214       $ 208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans includes nonaccrual loans and leases, accruing troubled debt restructured loans and lease modifications and other accruing impaired loans for which it is probable that not all principal and interest payments due will be collectible in accordance with the contractual terms. These loans are individually measured to determine the amount of potential impairment. The loans are 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. At September 30, 2013, impaired loans included other accruing impaired loans of $29.0 million. At September 30, 2013, specific reserves of $1.9 million were established for four borrower relationships with principal balances totaling $7.9 million on other accruing impaired loans.

 

17


Table of Contents

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Therefore, interest income on accruing impaired loans is recognized using the accrual method.

 

     Three Months Ended September 30, 2013      Three Months Ended September 30, 2012  
(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

     5,971         29         70         5,474         23         71   

Real estate—commercial real estate

     22,789         171         150         20,525         69         257   

Real estate—construction

     14,544         25         184         16,324         33         190   

Real estate—residential secured for business purpose

     585         2         2         176         —           2   

Real estate—residential secured for personal purpose

     725         —           11         320         —           5   

Real estate—home equity secured for personal purpose

     —           —           —           —           —           —     

Loans to individuals

     37         1         —           48         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,651       $ 228       $ 417       $ 43,517       $ 126       $ 525   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest income recognized on a cash basis for nonaccrual loans of $0 thousand for both the three months ended September 30, 2013 and 2012 and interest income recognized on accrual method for accruing impaired loans of $228 thousand and $126 thousand for the three months ended September 30, 2013 and 2012, respectively.

 

     Nine Months Ended September 30, 2013      Nine Months Ended September 30, 2012  
(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

     3,985         45         132         5,542         56         223   

Real estate—commercial real estate

     23,138         473         566         20,417         156         783   

Real estate—construction

     15,291         81         553         16,238         85         575   

Real estate—residential secured for business purpose

     341         2         7         150         —           5   

Real estate—residential secured for personal purpose

     758         —           35         188         —           9   

Real estate—home equity secured for personal purpose

     2         —           —           3         —           —     

Loans to individuals

     41         3         —           49         4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 43,556       $ 604       $ 1,293       $ 42,847       $ 301       $ 1,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest income recognized on a cash basis for nonaccrual loans of $6 thousand and $8 thousand for the nine months ended September 30, 2013 and 2012, respectively and interest income recognized on accrual method for accruing impaired loans of $598 thousand and $293 thousand for the nine months ended September 30, 2013 and 2012, respectively.

 

18


Table of Contents

Troubled Debt Restructured Loans

The following presents, by class of loans, information regarding accruing and nonaccrual loans that were restructured:

 

     Three Months Ended September 30, 2013      Three Months Ended September 30, 2012  
(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

     3         1,569         1,569         —           1         1,621         1,621         —     

Real estate—construction

     1         459         459         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 2,028       $ 2,028       $ —           3       $ 3,352       $ 3,352       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —         $ —           —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2013      Nine Months Ended September 30, 2012  
(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

     1       $ 1,000       $ 1,000       $ —           10       $ 3,404       $ 3,404       $ —     

Real estate—commercial real estate

     3         1,569         1,569         —           5         2,630         2,630         —     

Real estate—construction

     1         459         459         —           2         1,330         1,330         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 3,028       $ 3,028       $ —           17       $ 7,364       $ 7,364       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                       

Commercial, financial and agricultural

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

Real estate—commercial real estate

     —           —           —           —           1         124         124         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —         $ —           3       $ 572       $ 572       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 troubled debt restructured loans are primarily comprised of loans on which interest is being accrued under the restructured terms, and the loans are current or less than ninety days past due.

 

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Table of Contents

The following presents, by class of loans, information regarding the types of concessions granted on accruing and nonaccrual loans that were restructured during the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended September 30, 2013  
     Interest Only Term
Extension
     Temporary Payment
Reduction
     Temporary Payment
Suspension
     Maturity Date
Extension
     Total Concessions
Granted
 
(Dollars in thousands)    No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount  

Accruing Troubled Debt Restructured Loans:

                             

Real estate—commercial real estate

     —         $ —           1       $ 756         —         $ —           2       $ 813         3       $ 1,569   

Real estate—construction

     —           —           —           —           —           —           1         459         1         459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           1       $ 756         —         $ —           3       $ 1,272         4       $ 2,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                             
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2012  
     Interest Only Term
Extension
     Temporary Payment
Reduction
     Temporary Payment
Suspension
     Maturity Date
Extension
     Total Concessions
Granted
 
(Dollars in thousands)    No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount  

Accruing Troubled Debt Restructured Loans:

                             

Commercial, financial and agricultural

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

Real estate—commercial real estate

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 1,621         —         $ —           —         $ —           2       $ 1,731         3       $ 3,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                             
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2013  
     Interest Only Term
Extension
     Temporary Payment
Reduction
     Temporary Payment
Suspension
     Maturity Date
Extension
     Total Concessions
Granted
 
(Dollars in thousands)    No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount  

Accruing Troubled Debt Restructured Loans:

                             

Commercial, financial and agricultural

     1       $ 1,000         —         $ —           —         $ —           —         $ —           1       $ 1,000   

Real estate—commercial real estate

     —           —           1         756         —           —           2         813         3         1,569   

Real estate—construction

     —           —           —           —           —           —           1         459         1         459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 1,000         1       $ 756         —         $ —           3       $ 1,272         5       $ 3,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                             
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2012  
     Interest Only Term
Extension
     Temporary Payment
Reduction
     Temporary Payment
Suspension
     Maturity Date
Extension
     Total Concessions
Granted
 
(Dollars in thousands)    No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount      No. of
Loans
     Amount  

Accruing Troubled Debt Restructured Loans:

                             

Commercial, financial and agricultural

     4       $ 1,316         3       $ 221         —         $ —           3       $ 1,867         10       $ 3,404   

Real estate—commercial real estate

     3         2,267         1         188         —           —           1         175         5         2,630   

Real estate—construction

     2         1,330         —           —           —           —           —           —           2         1,330   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9       $ 4,913         4       $ 409         —         $ —           4       $ 2,042         17       $ 7,364   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                             

Commercial, financial and agricultural

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

Real estate—commercial real estate

     —           —           —           —           1         124         —           —           1         124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           3       $ 572         —         $ —           3       $ 572   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there was a payment default within twelve months of the restructuring date:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
(Dollars in thousands)    Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
 

Accruing Troubled Debt Restructured Loans:

                       

Commercial, financial and agricultural

     1       $ 1,000         —         $ —           4       $ 1,230         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 1,000         —         $ —           4       $ 1,230         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual Troubled Debt Restructured Loans:

                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 and an accelerated amortization method for loan payoffs. Mortgage servicing rights are subject to impairment testing on a quarterly basis. The aggregate fair value of these rights was $7.0 million and $4.2 million at September 30, 2013 and December 31, 2012, respectively. The fair value of mortgage servicing rights was determined using discount rates ranging from 5.1% to 10.0% at September 30, 2013 and 5.0% to 10.0% at December 31, 2012.

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Beginning of period

   $ 5,227      $ 3,276      $ 4,152      $ 2,739   

Servicing rights capitalized

     544        741        2,183        1,777   

Amortization of servicing rights

     (287     (463     (1,099     (1,147

Changes in valuation allowance

     —          (372     248        (187
  

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 5,484      $ 3,182      $ 5,484      $ 3,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage loans serviced for others

   $ 736,017      $ 540,735      $ 736,017      $ 540,735   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Valuation allowance, beginning of period

   $ (249   $ (608   $ (497   $ (793

Additions

     —          (372     —          (187

Reductions

     —          —          248        —     

Direct write-downs

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Valuation allowance, end of period

   $ (249   $ (980   $ (249   $ (980
  

 

 

   

 

 

   

 

 

   

 

 

 

The estimated amortization expense of mortgage servicing rights for the remainder of 2013 and the succeeding fiscal years is as follows:

 

Year (Dollars in thousands)

   Amount  

Remainder of 2013

   $ 218   

2014

     801   

2015

     700   

2016

     602   

2017

     510   

Thereafter

     2,653   

 

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Note 6. Income Taxes

At September 30, 2013 and December 31, 2012, 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. At September 30, 2013, the Corporation’s tax years 2010 through 2012 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 salary savings plan, employee stock purchase plan and long-term incentive plans and therefore is not actively offered to new participants.

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

Components of net periodic benefit cost were as follows:

 

     Three Months Ended September 30,  
         2013             2012         2013     2012  
(Dollars in thousands)    Retirement Plans     Other Post Retirement
Benefits
 

Service cost

   $    155      $    156      $ 23      $ 21   

Interest cost

     427        431        30        29   

Expected return on plan assets

     (630     (564     —          —     

Amortization of net loss

     314        287        6        6   

Accretion of prior service cost

     (58     (58     (6     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 208      $ 252      $   53      $   50   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
         2013             2012         2013     2012  
(Dollars in thousands)    Retirement Plans     Other Post Retirement
Benefits
 

Service cost

   $ 466      $ 469      $ 69      $ 62   

Interest cost

     1,284        1,294        86        88   

Expected return on plan assets

     (1,894     (1,692     —          —     

Amortization of net loss

     943        865        18        17   

Accretion of prior service cost

     (176     (176     (15     (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 623      $ 760      $ 158      $ 151   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation contributed $2.0 million to its qualified retirement plan during the three and nine months ended September 30, 2013 and may make additional contributions during the remainder of 2013 to maximize tax benefits. The Corporation previously disclosed in its financial statements for the year ended December 31, 2012, that it expected to make contributions of $40 thousand to its non-qualified retirement plans and $82 thousand to its other postretirement benefit plans in 2013. During the nine months ended September 30, 2013, the Corporation contributed $30 thousand to its non-qualified retirement plans and $60 thousand to its other postretirement plans. During the nine months ended September 30, 2013, $1.3 million has been paid to participants from the retirement plans and $60 thousand has been paid to participants from the other postretirement plans. For 2013, the weighted average expected long-term rate of return on plan assets used to determine the net benefit cost was changed to 7.5% from 8.0%. The rate was changed during 2013 based on historical returns and future expectations of long-term asset returns.

 

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Note 8. Trust Preferred Securities

On May 14, 2013, the Corporation submitted a redemption notice to the trustee to redeem all of the outstanding capital securities issued by Univest Capital Trust I (Trust Preferred Securities), pursuant to the optional redemption provisions provided in the documents governing the Trust Preferred Securities. The Trust Preferred Securities had an aggregate principal balance of $20.0 million with an interest rate of three-month U.S. London Interbank Borrowing Rate (LIBOR) plus 3.05% per annum and a maturity date of October 7, 2033. The Trust Preferred Securities had a liquidation amount of $1,000 per trust preferred security plus accrued and unpaid distributions to the redemption date of July 7, 2013 and a settlement date Monday, July 8, 2013. The redemption also included $619 thousand in common securities issued by Univest Capital Trust I and related to the Trust Preferred Securities. Following the redemption, the Corporation’s capital levels remained well in excess of the regulatory minimum for well capitalized status.

This redemption is consistent with the capital plan the Corporation submitted to the Federal Reserve and was funded from the Corporation’s existing cash. The Trust Preferred Securities were hedged and the Corporation recognized a loss in May 2013 on the termination of the associated interest rate swap of $1.9 million. The interest rate swap had a maturity date of January 7, 2019. The Corporation expects to save approximately $600 thousand in interest expense during 2013 and approximately $1.1 million annually thereafter over what would have been the remaining term of the Trust Preferred Securities and related interest rate swap.

Note 9. 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)    2013      2012      2013      2012  

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

   $ 6,039       $ 5,770       $ 16,267       $ 15,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     16,658         16,760         16,714         16,760   

Effect of dilutive securities – employee stock options and awards

     84         60         61         49   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     16,742         16,820         16,775         16,809   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.36       $ 0.34       $ 0.97       $ 0.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.36       $ 0.34       $ 0.97       $ 0.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     470         588         567         579   

Note 10. 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
Related to
Derivative Used
for Cash Flow
Hedge
    Net Change
Related to
Defined Benefit
Pension Plan
    Accumulated
Other
Comprehensive
(Loss) Income
 

Balance, December 31, 2012

   $ 8,344      $ (1,241   $ (14,023   $ (6,920

Net Change

     (8,524     1,241        500        (6,783
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

   $ (180   $ —        $ (13,523   $ (13,703
  

 

 

   

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table illustrates the amounts reclassified out of each component of accumulated comprehensive (loss) income for the three and nine months ended September 30, 2013 and 2012:

 

Details about Accumulated Other

Comprehensive (Loss) Income Components

   Amount Reclassified from Accumulated Other
Comprehensive (Loss) Income
   

Affected Line Item in the

Statement of Income

     Three Months Ended     Nine Months Ended      
     September 30,     September 30,      
(Dollars in thousands)    2013     2012     2013     2012      

Net unrealized holding gains (losses) on available-for-sale investment securities

   $ 1,426      $ 9      $ 2,950      $ 291     

Net gain on sales of investment securities

     —          (4     —          (13  

Other-than-temporary impairment on equity securities

  

 

 

   

 

 

   

 

 

   

 

 

   
     1,426        5        2,950        278     

Total before tax

     (499     (1     (1,032     (97  

Tax expense

  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 927      $ 4      $ 1,918      $ 181     

Net of tax

  

 

 

   

 

 

   

 

 

   

 

 

   

Cash flow hedge derivative:

          
   $ —        $ —        $ (1,866   $ —       

Net loss on interest rate swap

  

 

 

   

 

 

   

 

 

   

 

 

   
     —          —          (1,866     —       

Total before tax

     —          —          653        —       

Tax benefit

  

 

 

   

 

 

   

 

 

   

 

 

   
   $ —        $ —        $ (1,213   $ —       

Net of tax

  

 

 

   

 

 

   

 

 

   

 

 

   

Defined benefit pension plans:

          

Amortization of net loss included in net periodic pension costs*

   $ (320   $ (293   $ (961   $ (882  

Accretion of prior service cost included in net periodic pension costs*

     64        64        191        192     
  

 

 

   

 

 

   

 

 

   

 

 

   
     (256     (229     (770     (690  

Total before tax

     90        81        270        242     

Tax benefit

  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (166   $ (148   $ (500   $ (448  

Net of tax

  

 

 

   

 

 

   

 

 

   

 

 

   

 

* These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. (See Note 7—Retirement Plans and Other Postretirement Benefits for additional details.)

Note 11. Derivative Instruments and Hedging Activities

The Corporation may use interest-rate swap agreements to modify interest rate characteristics from variable to fixed or fixed to variable 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 of 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.

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 paid a fixed rate of 2.65% and received a floating rate based on the three-month LIBOR with a maturity date of January 7, 2019. During May 2013, the Corporation terminated the swap in conjunction with the submission of a redemption notice to the trustee to redeem the Trust Preferred Securities on July 7, 2013, pursuant to the optional redemption provisions provided in the documents governing the Trust Preferred Securities. See Note 8 – Trust Preferred Securities for additional information.

 

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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, 2013 and December 31, 2012:

 

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

At September 30, 2013

              

Interest rate locks with customers

   $ 22,340       Other Assets    $ 849          $ —     

Forward loan sale commitments

     25,809            —         Other Liabilities      361   
  

 

 

       

 

 

       

 

 

 

Total

   $ 48,149          $ 849          $   361   
  

 

 

       

 

 

       

 

 

 

At December 31, 2012

              

Interest rate locks with customers

   $ 51,768       Other Assets    $ 1,547          $ —     

Forward loan sale commitments

     56,263            —         Other Liabilities      54   
  

 

 

       

 

 

       

 

 

 

Total

   $ 108,031          $ 1,547          $ 54   
  

 

 

       

 

 

       

 

 

 

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, 2013 and December 31, 2012:

 

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

At September 30, 2013

          

Interest rate swap – cash flow hedge

   $ —          $    —        —     $ —     
  

 

 

     

 

 

     

 

 

 

Total

   $ —          $ —          $ —     
  

 

 

     

 

 

     

 

 

 

At December 31, 2012

          

Interest rate swap – cash flow hedge

   $ 20,000        $ —        Other Liabilities   $ 1,909   
  

 

 

     

 

 

     

 

 

 

Total

   $   20,000        $ —          $ 1,909   
  

 

 

     

 

 

     

 

 

 

For the three and nine months ended September 30, 2013 and 2012, 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     Nine Months Ended  
          September 30,     September 30,  
(Dollars in thousands)   

Statement of Income Classification

   2013     2012     2013     2012  

Interest rate locks with customers

  

Net gain (loss) on mortgage banking activities

   $ 913      $ 1,394      $ (698   $ 2,341   

Forward loan sale commitments

  

Net loss on mortgage banking activities

     (1,133     (617     (307     (727
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (220   $ 777      $ (1,005   $ 1,614   
     

 

 

   

 

 

   

 

 

   

 

 

 

For the three and nine months ended September 30, 2013 and 2012, the amounts included in the consolidated statements of income for derivatives designated as hedging instruments are shown in the table below:

 

          Three Months Ended     Nine Months Ended  
     Statement of Income    September 30,     September 30,  
(Dollars in thousands)   

Classification

   2013      2012     2013     2012  

Interest rate swap – cash flow hedge – loss on termination

  

Net loss on termination of interest rate swap

   $ —         $ —        $ (1,866   $ —     

Interest rate swap – cash flow hedge – interest payments

  

Interest expense

     —           112        124        331   

Interest rate swap – cash flow hedge—ineffectiveness

  

Interest expense

     —           —          —          —     
     

 

 

    

 

 

   

 

 

   

 

 

 

Net loss

      $ —         $ (112   $ (1,990   $ (331
     

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

At September 30, 2013 and December 31, 2012, the amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments are shown in the table below:

 

(Dollars in thousands)

  

Accumulated other

comprehensive (loss) income

   At September 30, 2013      At December 31, 2012  

Interest rate swap – cash flow hedge

  

Fair value, net of taxes

   $ —         $ (1,241
     

 

 

    

 

 

 

Total

      $ —         $ (1,241
     

 

 

    

 

 

 

Note 12. 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.

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 at 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, mortgage-backed securities, collateralized mortgage obligations, 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.

 

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Table of Contents

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 exist, 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, 2013.

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 estimates 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 estimated 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 of estimated future contingent payments based on projected revenue of the acquired business affecting 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 higher fair value of the contingent consideration liability. Alternatively, a decrease in the projected revenue may result in a lower estimated fair value of the contingent consideration liability.

For the Javers Group acquisition, the Corporation recorded a reduction to the contingent liability during the second quarter of 2013 which resulted in a reduction of other noninterest expense of $959 thousand. While the acquisition remains accretive, the adjustment reflects that revenue levels necessary for an earn-out payment in the first year post-acquisition were not met and that revenue growth levels necessary to qualify for subsequent years’ earn-out payments to be made are less than remote. Therefore, as of September 30, 2013, the fair value of this contingent consideration liability is $0. The Javers’ original contingent consideration arrangement ranged from $0 to a maximum of $1.7 million cumulative over the three-year period ending June 30, 2015.

For the John T. Fretz Insurance Agency, Inc. acquisition, the potential future cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $930 thousand cumulative over the three-year period ending April 30, 2016.

 

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Table of Contents

The following table presents the assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012, classified using the fair value hierarchy:

 

     At September 30, 2013  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/
Liabilities at
Fair Value
 

Assets:

  

Available-for-sale securities:

           

U.S. treasuries

   $ 4,773       $ —         $ —         $ 4,773   

U.S. government corporations and agencies

     —           163,549         —           163,549   

State and political subdivisions

     —           117,394         —           117,394   

Residential mortgage-backed securities

     —           54,067         —           54,067   

Collateralized mortgage obligations

     —           9,520         —           9,520   

Corporate bonds

     —           32,408         —           32,408   

Money market mutual funds

     9,639         —           —           9,639   

Equity securities

     2,009         —           —           2,009   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     16,421         376,938         —           393,359   

Interest rate locks with customers

     —           849         —           849   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 16,421       $ 377,787       $ —         $ 394,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Forward loan sale commitments

   $ —         $ 361       $ —         $ 361   

Contingent consideration liability

     —           —           483         483   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 361       $ 483       $ 844   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2012  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/
Liabilities at
Fair Value
 

Assets:

  

Available-for-sale securities:

           

U.S. treasuries

   $ 4,938       $ —         $ —         $ 4,938   

U.S. government corporations and agencies

     —           172,142         —           172,142   

State and political subdivisions

     —           122,168         —           122,168   

Residential mortgage-backed securities

     —           90,740         —           90,740   

Collateralized mortgage obligations

     —           27,012         —           27,012   

Corporate bonds

     —           5,014         —           5,014   

Money market mutual funds

     4,878         —           —           4,878   

Equity securities

     2.842         —           —           2,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     12,658         417,076         —           429,734   

Interest rate locks with customers

     —           1,547         —           1,547   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,658       $ 418,623       $ —         $ 431,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate swap

   $ —         $ 1,909       $ —         $ 1,909   

Forward loan sale commitments

     —           54         —           54   

Contingent consideration liability

     —           —           903         903   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 1,963       $ 903       $ 2,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013 and December 31, 2012, the Corporation had no assets measured at fair value on a recurring basis utilizing Level 3 inputs.

The following table presents the change in the balance of the contingent consideration liability related to acquisitions for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30, 2013  
(Dollars in thousands)    Balance at
December 31,
2012
     Contingent
Consideration
from New
Acquisition
     Payment of
Contingent
Consideration
     Adjustment
of Contingent
Consideration
    Balance at
September 30,
2013
 

Javers Group

   $ 903       $ —         $ —         $ (903   $ —     

John T. Fretz Insurance Agency, Inc.

     —           454         —           29        483   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total contingent consideration liability

   $ 903       $ 454       $ —         $ (874   $ 483   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Nine Months Ended September 30, 2012  
(Dollars in thousands)    Balance at
December 31,
2011
     Contingent
Consideration
from New
Acquisition
     Payment of
Contingent
Consideration
     Adjustment of
Contingent
Consideration
     Balance at
September 30,
2012
 

Javers Group

   $ —         $ 842       $ —         $ 34       $ 876   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contingent consideration liability

   $ —         $ 842       $ —         $ 34       $ 876   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table represents assets measured at fair value on a non-recurring basis at September 30, 2013 and December 31, 2012:

 

     At September 30, 2013  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/Liabilities at
Fair Value
 

Impaired loans held for investment

   $ —         $ —         $ 63,708       $ 63,708   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 63,708       $ 63,708   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2012  
(Dollars in thousands)    Level 1      Level 2      Level 3      Assets/Liabilities at
Fair Value
 

Impaired loans held for investment

   $ —         $ —         $ 44,976       $ 44,976   

Mortgage servicing rights*

     —           4,152         —           4,152   

Other real estate owned*

     —           1,607         —           1,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 5,759       $ 44,976       $ 50,735   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The fair value was lower than cost, therefore written down to fair value at December 31, 2012. At September 30, 2013, fair value was greater than cost.

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 at September 30, 2013 and December 31, 2012. The disclosed fair values are classified using the fair value hierarchy.

 

     At September 30, 2013  
(Dollars in thousands)    Level 1      Level 2     Level 3      Fair
Value
    Carrying
Amount
 

Assets:

            

Cash and short-term interest-earning assets

   $ 79,458       $ —        $ —         $ 79,458      $ 79,458   

Held-to-maturity securities

     —           70,079        —           70,079        69,214   

Loans held for sale

     —           3,574        —           3,574        3,489   

Net loans and leases held for investment

     —           —          1,457,592         1,457,592        1,437,698   

Mortgage servicing rights

     —           7,029        —           7,029        5,484   

Other real estate owned

     —           1,650        —           1,650        1,650   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 79,458       $ 82,332      $ 1,457,592       $ 1,619,382      $ 1,596,993   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Deposits:

            

Demand and savings deposits, non-maturity

   $ 1,599,264       $ —        $ —         $ 1,599,264      $ 1,599,264   

Time deposits

     —           288,271        —           288,271        289,782   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     1,599,264         288,271        —           1,887,535        1,889,046   

Short-term borrowings

     —           44,841        —           44,841        46,733   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 1,599,264       $ 333,112      $ —         $ 1,932,376      $ 1,935,779   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Off-Balance-Sheet:

            

Commitments to extend credit

   $ —         $ (1,342   $ —         $ (1,342   $ —     

 

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Table of Contents
     At December 31, 2012  
(Dollars in thousands)    Level 1      Level 2     Level 3      Fair
Value
    Carrying
Amount
 

Assets:

            

Cash and short-term interest-earning assets

   $ 146,112       $ —        $ —         $ 146,112      $ 146,112   

Held-to-maturity securities

     —           71,327        —           71,327        69,845   

Loans held for sale

     —           4,653        —           4,653        4,530   

Net loans and leases held for investment

     —           —          1,433,990         1,433,990        1,412,140   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 146,112       $ 75,980      $ 1,433,990       $ 1,656,082      $ 1,632,627   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Deposits:

            

Demand and savings deposits, non-maturity

   $ 1,533,822       $ —        $ —         $ 1,533,822      $ 1,533,822   

Time deposits

     —           334,164        —           334,164        331,511   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     1,533,822         334,164        —           1,867,986        1,865,333   

Short-term borrowings

     —           94,066        —           94,066        96,282   

Long-term borrowings

     —           20,965        —           20,965        20,994   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 1,533,822       $ 449,195      $ —         $ 1,983,017      $ 1,982,609   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Off-Balance-Sheet:

            

Commitments to extend credit

   $ —         $ (1,286   $ —         $ (1,286   $ —     

The following valuation methods and assumptions were used by the Corporation in estimating its fair value for financial instruments measured at fair value on a non-recurring basis and financial instruments 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:

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. There were no valuation adjustments for loans held for sale at September 30, 2013 and December 31, 2012.

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.

Impaired loans held for investment: 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, 2013, impaired loans held for investment had a carrying amount of $66.8 million with a valuation allowance of $3.1 million. At December 31, 2012, impaired loans held for investment had a carrying amount of $45.2 million with a valuation allowance of $208 thousand.

 

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Mortgage servicing rights: 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, 2013, mortgage servicing rights had a carrying amount of $5.7 million with a valuation allowance of $249 thousand. At December 31, 2012, mortgage servicing rights had a carrying amount of $4.6 million with a valuation allowance of $497 thousand.

Goodwill and other identifiable intangible assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. In conjunction with the reduction in the contingent consideration liability for Javers during the nine months ended September 30, 2013, an evaluation of goodwill and other identifiable intangible assets was performed with no indicated impairment.

Other real estate owned: 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.

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 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 customer 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.

Note 13. Restructuring Charges

During the first quarter of 2013, the Corporation implemented a company-wide restructuring plan which reduced staffing levels by 3.4% and included the announced closure and consolidation of its Silverdale financial service center, effective May 3, 2013, into the Hilltown and Perkasie locations. As a result, the Corporation recorded $539 thousand in restructuring charges during the first quarter of 2013, which consisted of $437 thousand in severance and $102 thousand in fixed asset retirement expenses. These charges are included in restructuring charges, a component of non-interest expense, within the consolidated statement of income. The restructuring involved strategic changes to ensure the Corporation is effectively managing costs, improving efficiencies and evolving the business to meet the need of all its stakeholders.

 

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A roll-forward of the accrued restructuring expense is as follows:

 

(Dollars in thousands)    Severance  

Accrued at January 1, 2013

   $ —     

Restructuring charge

     437   

Payments

     (432

Adjustment of restructuring charge

     (5
  

 

 

 

Accrued at September 30, 2013

   $ —     
  

 

 

 

Note 14. Share Repurchase Plans

During 2007, the Corporation’s Board of Directors approved a share repurchase program for the repurchase of up to 643,782 shares of common stock. During the three and nine months ended September 30, 2013, the Corporation repurchased 395,000 shares at a cost of $7.4 million and 540,285 shares at a cost of $9.9 million, respectively. At September 30, 2013, this share repurchase plan was substantially completed and is closed. Total shares outstanding at September 30, 2013 were 16,288,597.

On October 23, 2013, the Corporation’s Board of Directors approved a new stock repurchase plan for the repurchase of up to 800,000 shares, or approximately 5% of the shares outstanding.

Under the new plan:

 

    the aggregate number of shares purchased will not exceed 800,000 shares of the Corporation’s common stock;

 

    the Corporation will repurchase shares of its common stock from time to time through open market purchases, tender offers, privately negotiated purchases or other means;

 

    the share repurchase program does not obligate the Corporation to acquire any particular amount of common stock; and

 

    the program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.

 

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

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

Forward-Looking Statements

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

 

    Operating, legal and regulatory risks

 

    Economic, political and competitive forces impacting various lines of business

 

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

 

    Volatility in interest rates

 

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

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only at the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation’s expectations with regard to any change in events, conditions or circumstances on which any such statement is based.

Critical Accounting Policies

Management, in order to prepare the Corporation’s financial statements in conformity with U.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation’s financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation’s 2012 Annual Report on Form 10-K.

General

Univest Corporation of Pennsylvania, (the Corporation), is a Bank Holding Company. It owns all of the capital stock of Univest Bank and Trust Co. (the Bank). The Corporation’s former subsidiary, Univest Delaware, Inc., was dissolved in the second quarter of 2013.

The Bank is engaged in the general commercial banking business and provides a full range of banking and trust services to its customers. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, and Univest Investments, Inc., a full-service broker-dealer and investment advisory firm. The Bank is also the parent company of Univest Capital, Inc., an equipment financing business, and TCG Investment Advisory, a registered investment advisor which provides discretionary investment consulting and management services. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals, municipalities and businesses throughout its markets of operation.

 

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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  
     2013     2012     Amount      Percent     2013     2012     Amount      Percent  
(Dollars in thousands, except per share data)                                                   

Net income

   $ 6,039      $ 5,770      $ 269         5   $ 16,267      $ 15,796      $ 471         3

Net income per share:

                  

Basic

   $ 0.36      $ 0.34      $ 0.02         6      $ 0.97      $ 0.94      $ 0.03         3   

Diluted

     0.36        0.34        0.02         6        0.97        0.94        0.03         3   

Return on average assets

     1.07     1.04     3BP         3        0.97     0.96     1 BP         1   

Return on average equity

     8.55     8.19     36BP         4        7.67     7.60     7 BP         1   

Net interest income on a tax-equivalent basis for the three months ended September 30, 2013 increased $318 thousand, or 2% compared to the same period in 2012. The third quarter 2013 net interest margin on a tax-equivalent basis was 3.84%, consistent with the third quarter of 2012. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2013 was consistent compared to the same period in 2012. The tax equivalent net interest margin for the nine months ended September 2013 was 3.84% compared to 3.92% for the same period in the prior year.

The provision for loan and lease losses increased by $1.9 million and $2.0 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012.

Non-interest income increased $2.3 million, or 22% and $5.8 million, or 19% during the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. Non-interest expense increased $930 thousand, or 5% and $2.9 million, or 5% for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012.

Gross loans and leases grew $44.4 million or 3% from December 31, 2012 and deposits increased $23.7 million from December 31, 2012.

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications decreased to $24.0 million at September 30, 2013 from $32.1 million at December 31, 2012 and $30.5 million at September 30, 2012. Nonaccrual loans and leases as a percentage of total loans and leases (held for investment and non-accrual loans held for sale) was 1.57% at September 30, 2013 compared to 2.17% at December 31, 2012 and 2.07% at September 30, 2012. Net loan and lease charge-offs declined by $1.6 million and $902 thousand for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012.

On May 1, 2013, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of John T. Fretz Insurance Agency, Inc., a full-service property and casualty insurance agency providing solutions to both personal and commercial clients. The Corporation paid $2.2 million in cash at closing with additional contingent consideration to be paid in annual installments over the three-year period ending April 30, 2016 based on the achievement of certain levels of revenue. At the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $454 thousand in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $930 thousand cumulative over the next three years. As a result of the John T. Fretz Insurance Agency, Inc. acquisition, the Corporation recorded goodwill of $1.3 million (inclusive of contingent consideration) and customer related intangibles of $1.3 million.

During the third quarter of 2013, the Corporation repurchased 395,000 shares of common stock at a cost of $7.4 million under its 2007 Board approved share repurchase program. At September 30, 2013, this share repurchase plan was substantially completed. Total shares outstanding at September 30, 2013 were 16,288,597. On October 23, 2013, the Corporation’s Board of Directors approved a new share repurchase program for the repurchase of up to 800,000 shares, or approximately 5% of the shares outstanding.

 

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Table of Contents

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

The Corporation earns its revenues primarily from the margins and fees it generates from the lending and depository services it provides as well as fee-based income from trust, insurance, mortgage banking and investment services to customers. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board of Directors approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation is in a more asset sensitive position; despite increases in the first nine months of 2013, interest rates remain at historically low levels, however, the Corporation anticipates further increases in interest rates over the longer term, which it expects would benefit its net interest margin.

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

Results of Operations

Net Interest Income

Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation’s revenue. Table 1 presents a summary of the Corporation’s average balances, the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three and nine months ended September 30, 2013 and 2012. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of net interest free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity. Table 2 analyzes the changes in the tax-equivalent net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Investment Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.

Three months ended September 30, 2013 versus 2012

Net interest income on a tax-equivalent basis for the three months ended September 30, 2013 increased $318 thousand, or 2% compared to the same period in 2012. The tax-equivalent net interest margin for the three months ended September 30, 2013 was 3.84%, consistent with the same period in 2012. While the tax-equivalent yield on average interest-earning assets declined 16 basis points for the three months ended September 30, 2013 compared to the same period in the prior year, the rate on interest-bearing liabilities was down 20 basis points compared to the same period. The decline in rate on interest-bearing liabilities was attributable to the Corporation’s decision to redeem its trust preferred securities and terminate the related interest rate swap and an overall decline in rates paid on time and interest bearing deposits.

Nine months ended September 30, 2013 versus 2012

Net interest income on a tax-equivalent basis for the nine months ended September 30, 2013 was consistent with the same period in 2012. The tax-equivalent net interest margin for the nine months ended September 30, 2013 decreased 8 basis points to 3.84% from 3.92% for the nine months ended September 30, 2012. The decline in the year-to-date net interest margin from the comparable period in the prior year was primarily due to the re-investment

 

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of maturing and called investment securities into lower yielding investments. In addition, lower rates on commercial and residential real estate loans due to re-pricing and the competitive environment contributed to the decline. Favorable re-pricing of savings accounts, customer repurchase agreements and certificates of deposit, along with maturities of higher yielding certificates of deposit, partially offset the decline in the year-to-date net interest margin.

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

 

     Three Months Ended September 30,  
     2013     2012  
(Dollars in thousands)    Average
Balance
    Income/
Expense
     Average
Rate
    Average
Balance
    Income/
Expense
     Average
Rate
 

Assets:

              

Interest-earning deposits with other banks

   $ 30,842      $ 25         0.32   $ 52,214      $ 45         0.34

U.S. government obligations

     175,753        484         1.09        156,885        508         1.29   

Obligations of states and political subdivisions

     117,166        1,589         5.38        121,612        1,696         5.55   

Other debt and equity securities

     186,523        907         1.93        196,026        846         1.72   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning deposits and investments

     510,284        3,005         2.34        526,737        3,095         2.34   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Commercial, financial and agricultural loans

     395,251        4,062         4.08        452,531        4,895         4.30   

Real estate—commercial and construction loans

     590,967        7,071         4.75        525,143        6,804         5.15   

Real estate—residential loans

     261,586        2,463         3.74        256,297        2,616         4.06   

Loans to individuals

     42,483        587         5.48        42,991        602         5.57   

Municipal loans and leases

     147,505        1,875         5.04        129,651        1,748         5.36   

Lease financings

     69,058        1,610         9.25        59,284        1,415         9.50   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Gross loans and leases

     1,506,850        17,668         4.65        1,465,897        18,080         4.91   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     2,017,134        20,673         4.07        1,992,634        21,175         4.23   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and due from banks

     39,988             50,875        

Reserve for loan and lease losses

     (25,404          (31,365     

Premises and equipment, net

     33,157             34,002        

Other assets

     168,249             168,137        
  

 

 

        

 

 

      

Total assets

   $ 2,233,124           $ 2,214,283        
  

 

 

        

 

 

      

Liabilities:

              

Interest-bearing checking deposits

   $ 323,165        46         0.06      $ 230,462        40         0.07   

Money market savings

     306,937        73         0.09        331,425        121         0.15   

Regular savings

     545,134        80         0.06        514,205        187         0.14   

Time deposits

     294,844        920         1.24        348,675        1,276         1.46   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total time and interest-bearing deposits

     1,470,080        1,119         0.30        1,424,767        1,624         0.45   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Short-term borrowings

     44,516        8         0.07        104,110        33         0.13   

Subordinated notes and capital securities

     1,569        11         2.78        21,732        301         5.51   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total borrowings

     46,085        19         0.16        125,842        334         1.06   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,516,165        1,138         0.30        1,550,609        1,958         0.50   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand deposits, non-interest bearing

     405,498             346,687        

Accrued expenses and other liabilities

     31,216             36,815        
  

 

 

        

 

 

      

Total liabilities

     1,952,879             1,934,111        
  

 

 

        

 

 

      

Shareholders’ Equity:

              

Common stock

     91,332             91,332        

Additional paid-in capital

     64,866             61,327        

Retained earnings and other equity

     124,047             127,513        
  

 

 

        

 

 

      

Total shareholders’ equity

     280,245             280,172        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 2,233,124           $ 2,214,283        
  

 

 

        

 

 

      

Net interest income

     $ 19,535           $ 19,217      
    

 

 

        

 

 

    

Net interest spread

          3.77             3.73   

Effect of net interest-free funding sources

          0.07             0.11   
       

 

 

        

 

 

 

Net interest margin

          3.84          3.84
       

 

 

        

 

 

 

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

     133.04          128.51     
  

 

 

        

 

 

      

 

36


Table of Contents
     Nine Months Ended September 30,  
     2013     2012  
(Dollars in thousands)    Average
Balance
    Income/
Expense
     Average
Rate
    Average
Balance
    Income/
Expense
     Average
Rate
 

Assets:

              

Interest-earning deposits with other banks

   $ 37,730      $ 106         0.38   $ 55,358      $ 121         0.29

U.S. government obligations

     176,095        1,449         1.10        148,422        1,519         1.37   

Obligations of states and political subdivisions

     120,435        4,774         5.30        119,634        5,092         5.69   

Other debt and equity securities

     193,949        2,746         1.89        192,833        3,069         2.13   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning deposits and investments

     528,209        9,075         2.30        516,247        9,801         2.54   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Commercial, financial and agricultural loans

     412,233        13,093         4.25        445,301        14,423         4.33   

Real estate—commercial and construction loans

     570,209        20,575         4.82        529,778        20,741         5.23   

Real estate—residential loans

     257,170        7,354         3.82        251,035        7,818         4.16   

Loans to individuals

     42,519        1,784         5.61        43,803        1,856         5.66   

Municipal loans and leases

     139,827        5,334         5.10        133,557        5,450         5.45   

Lease financings

     67,860        4,738         9.33        57,708        4,244         9.82   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Gross loans and leases

     1,489,818        52,878         4.75        1,461,182        54,532         4.99   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     2,018,027        61,953         4.10        1,977,429        64,333         4.35   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and due from banks

     47,242             41,152        

Reserve for loan and lease losses

     (25,627          (31,706     

Premises and equipment, net

     32,938             34,231        

Other assets

     166,334             168,485        
  

 

 

        

 

 

      

Total assets

   $ 2,238,914           $ 2,189,591        
  

 

 

        

 

 

      

Liabilities:

              

Interest-bearing checking deposits

   $ 277,673        119         0.06      $ 227,775        138         0.08   

Money market savings

     318,406        231         0.10        317,390        391         0.16   

Regular savings

     538,764        234         0.06        505,451        634         0.17   

Time deposits

     307,134        2,930         1.28        371,056        3,968         1.43   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total time and interest-bearing deposits

     1,441,977        3,514         0.33        1,421,672        5,131         0.48   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Short-term borrowings

     82,318        40         0.06        110,177        295         0.36   

Long-term debt

     —          —           —          146        4         3.66   

Subordinated notes and capital securities

     14,319        483         4.51        22,108        906         5.47   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total borrowings

     96,637        523         0.72        132,431        1,205         1.22   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,538,614        4,037         0.35        1,554,103        6,336         0.54   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand deposits, non-interest bearing

     383,514             319,176        

Accrued expenses and other liabilities

     33,374             38,682        
  

 

 

        

 

 

      

Total liabilities

     1,955,502             1,911,961        
  

 

 

        

 

 

      

Shareholders’ Equity:

              

Common stock

     91,332             91,332        

Additional paid-in capital

     64,756             61,352        

Retained earnings and other equity

     127,324             124,946        
  

 

 

        

 

 

      

Total shareholders’ equity

     283,412             277,630        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 2,238,914           $ 2,189,591        
  

 

 

        

 

 

      

Net interest income

     $ 57,916           $ 57,997      
    

 

 

        

 

 

    

Net interest spread

          3.75             3.81   

Effect of net interest-free funding sources

          0.09             0.11   
       

 

 

        

 

 

 

Net interest margin

          3.84          3.92
       

 

 

        

 

 

 

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

     131.16          127.24     
  

 

 

        

 

 

      

 

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, 2013 and 2012 have been calculated using the Corporation’s federal applicable rate of 35%.

 

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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,
2013 Versus 2012
    Nine Months Ended September 30,
2013 Versus 2012
 
(Dollars in thousands)    Volume
Change
    Rate
Change
    Total     Volume
Change
    Rate
Change
    Total  

Interest income:

        

Interest-earning deposits with other banks

   $ (17   $ (3   $ (20   $ (45   $ 30      $ (15

U.S. government obligations

     58        (82     (24     258        (328     (70

Obligations of states and political subdivisions

     (58     (49     (107     34        (352     (318

Other debt and equity securities

     (41     102        61        18        (341     (323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on deposits and investments

     (58     (32     (90     265        (991     (726
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial, financial and agricultural loans

     (594     (239     (833     (1,065     (265     (1,330

Real estate—commercial and construction loans

     818        (551     267        1,522        (1,688     (166

Real estate—residential loans

     54        (207     (153     187        (651     (464

Loans to individuals

     (6     (9     (15     (56     (16     (72

Municipal loans and leases

     234        (107     127        247        (363     (116

Lease financings

     232        (37     195        715        (221     494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest and fees on loans and leases

     738        (1,150     (412     1,550        (3,204     (1,654
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     680        (1,182     (502     1,815        (4,195     (2,380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Interest-bearing checking deposits

     13        (7     6        23        (42     (19

Money market savings

     (7     (41     (48     1        (161     (160

Regular savings

     10        (117     (107     40        (440     (400

Time deposits

     (180     (176     (356     (645     (393     (1,038
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on time and interest-bearing deposits

     (164     (341     (505     (581     (1,036     (1,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Short-term borrowings

     (14     (11     (25     (59     (196     (255

Long-term debt

     —          —          —          (4     —          (4

Subordinated notes and capital securities

     (189     (101     (290     (282     (141     (423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on borrowings

     (203     (112     (315     (345     (337     (682
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (367     (453     (820     (926     (1,373     (2,299
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 1,047      $ (729   $ 318      $ 2,741      $ (2,822   $ (81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2013 and 2012 have been calculated using the Corporation’s federal applicable rate of 35%.

Interest Income

Three and nine months ended September 30, 2013 versus 2012

Interest income on a tax-equivalent basis for the three months ended September 30, 2013 decreased $502 thousand, or 2% from the same period in 2012. Interest income on a tax-equivalent basis for the nine months ended September 30, 2013 decreased $2.4 million, or 4% from the same period in 2012. These decreases were primarily due to lower rates on commercial and residential real estate loans due to re-pricing and the competitive environment, along with lower commercial business loan volume. The average rate earned on loans decreased 26 basis points and 24 basis points for the three and nine months ended September 30, 2013, respectively, from the comparable periods in 2012. In addition, the re-investment of maturing and called investment securities into lower yielding investments contributed to the year-to-date decline in interest income. The average rate earned on investment securities and deposits at other banks decreased 24 basis points for the nine months ended September 30, 2013 from the comparable period in 2012. These unfavorable variances were partially offset by growth in lease financings and commercial real estate loans.

 

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Table of Contents

Interest Expense

Three and nine months ended September 30, 2013 versus 2012

Interest expense for the three months ended September 30, 2013 decreased $820 thousand, or 42% from the comparable period in 2012. Interest expense for the nine months ended September 30, 2013 decreased $2.3 million, or 36% from the comparable period in 2012. These decreases were mainly due to a decrease in the Corporation’s average cost of deposits of 15 basis points for both the three months and nine months ended September 30, 2013. This was largely attributable to an overall decline in rates paid on time and interest bearing deposits along with maturities of higher yielding certificates of deposits. In addition, the average rate paid on borrowings declined by 90 basis points and 50 basis points for the three and nine months ended September 30, 2013, respectively. This decline primarily resulted from the Corporation’s decision to redeem its trust preferred securities and terminate the related interest rate swap. For the nine months ended September 30, 2013, the Corporation experienced increases in average interest-bearing checking of $49.9 million and regular savings of $33.3 million partially offset by a decrease in average time deposits of $63.9 million. 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 charge-off activity. Loans are also reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans’ initial effective interest rates. Any of the above criteria may cause the reserve to fluctuate. The provision for the three months ended September 30, 2013 and 2012 was $4.1 million and $2.2 million, respectively. The provision for the nine months ended September 30, 2013 and 2012 was $9.6 million and $7.7 million, respectively. The increase in the provision for both the three and nine months ended September 30, 2013 was primarily attributable to the intra-dependency of collateral and updated assessments of residential building lots securing loans to a common borrower.

Noninterest Income

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

 

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Table of Contents

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)    2013      2012     Amount     Percent     2013     2012     Amount     Percent  

Trust fee income

   $ 1,736       $ 1,625      $ 111        7   $ 5,249      $ 4,875      $ 374        8

Service charges on deposit accounts

     1,149         1,122        27        2        3,333        3,301        32        1   

Investment advisory commission and fee income

     1,536         1,350        186        14        5,048        3,956        1,092        28   

Insurance commission and fee income

     2,513         2,129        384        18        7,829        6,453        1,376        21   

Other service fee income

     1,929         1,053        876        83        5,454        3,943        1,511        38   

Bank owned life insurance income

     1,555         463        1,092        N/M        2,472        2,305        167        7   

Other-than-temporary impairment on equity securities

     —           (4     4        N/M        —          (13     13        N/M   

Net gain on sales of securities

     1,426         9        1,417        N/M        2,950        291        2,659        N/M   

Net gain on mortgage banking activities

     935         2,171        (1,236     (57     4,047        4,517        (470     (10

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

     —           1,321        (1,321     N/M        (6     1,312        (1,318     N/M   

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

     198         (621     819        N/M        450        (1,723     2,173        N/M   

Loss on termination of interest rate swap

     —           —          —          —          (1,866     —          (1,866     N/M   

Other

     225         243        (18     (7     708        665        43        6   
  

 

 

    

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total noninterest income

   $ 13,202       $ 10,861      $ 2,341        22      $ 35,668      $ 29,882      $ 5,786        19   
  

 

 

    

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Three and nine months ended September 30, 2013 versus 2012

Non-interest income for the three months ended September 30, 2013 was $13.2 million, an increase of $2.3 million, or 22% from the comparable period in the prior year. Non-interest income for the nine months ended September 30, 2013 was $35.7 million, an increase of $5.8 million or 19% from the comparable period in the prior year. Insurance commission and fee income increased $384 thousand for the three months and $1.4 million for the nine months ended September 30, 2013, primarily a result of the acquisitions of the John T. Fretz Insurance Agency, Inc. on May 1, 2013 and Javers Group on May 31, 2012. Investment advisory commission and fee income increased $186 thousand for the three months and $1.1 million for the nine months ended September 30, 2013 as assets under supervision increased 16% from September 30, 2012. Mortgage servicing income (included in other service fee income) increased $696 thousand for the three months and $868 thousand for the nine months ended September 30, 2013 mainly due to a 36% increase in loans serviced for others from September 2012, along with favorable changes in fair value adjustments on servicing rights. The net gain on sales of securities increased $1.4 million for the three months and $2.7 million for the nine months ended September, 30 2013. The net gain on sales of other real estate owned was $198 thousand for the three months and $450 thousand for the nine months ended September 30, 2013. This compares favorably to a net loss on sales and write-downs of $621 thousand and $1.7 million, respectively, for the comparable periods in the prior year. Excess proceeds from bank owned life insurance death benefits of $1.1 million were recognized during the three months ended September 30, 2013. On a year-to-date basis, $1.1 million in excess proceeds from bank owned life insurance death benefits were recognized in 2013 compared to $989 thousand for the same period in the prior year.

These favorable increases were partially offset by a $1.9 million loss on the termination of an interest rate swap during the second quarter of 2013, which was used as a hedge of trust preferred securities. In addition, the net gain on mortgage banking activities decreased $1.2 million and $470 thousand for the three and nine months ended September 30, 2013 respectively. The increase in interest rates during the second quarter of 2013 contributed to a significant decline in refinance activity, reduced demand for new home purchases and lowered gain on sale margins. Mortgage banking originations declined 39% in the third quarter of 2013 from the second quarter of 2013 and the third quarter of 2012.

Noninterest Expense

The operating costs of the Corporation are known as non-interest expense, and include, but are not limited to, salaries and benefits, commissions, equipment and occupancy expenses. 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.

 

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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)    2013     2012      Amount     Percent     2013      2012      Amount     Percent  

Salaries and benefits

   $ 9,761      $ 8,944       $ 817        9   $ 28,980       $ 28,185       $ 795        3

Commissions

     2,026        1,884         142        8        6,529         4,939         1,590        32   

Net occupancy

     1,472        1,445         27        2        4,279         4,241         38        1   

Equipment

     1,225        1,152         73        6        3,619         3,297         322        10   

Marketing and advertising

     570        340         230        68        1,432         1,243         189        15   

Deposit insurance premiums

     381        406         (25     (6     1,173         1,279         (106     (8

Restructuring charges

     (5     —           (5     N/M        534         —           534        N/M   

Other

     4,558        4,887         (329     (7     12,964         13,386         (422     (3
  

 

 

   

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total noninterest expense

   $ 19,988      $ 19,058       $ 930        5      $ 59,510       $ 56,570       $ 2,940        5   
  

 

 

   

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Three months ended September 30, 2013 versus 2012

Non-interest expense for the three months ended September 30, 2013 was $20.0 million, an increase of $930 thousand or 5% from the comparable period in the prior year. Salaries and benefits expenses increased $817 thousand primarily attributable to the Fretz acquisition and performance-based salary and incentive increases. Commission expense increased $142 thousand mainly due to increased production activity and revenues generated in the Corporation’s equipment finance, investment and insurance businesses partially offset by a decline in mortgage banking commissions.

Nine months ended September 30, 2013 versus 2012

Non-interest expense for the nine months ended September 30, 2013 was $59.5 million, an increase of $2.9 million or 5% from the comparable period in the prior year. Salaries and benefits expense increased $795 thousand primarily attributable to the Fretz and Javers acquisitions and performance-based salary and incentive increases. Commission expense increased $1.6 million mainly due to increased production activity and revenues generated in the Corporation’s equipment finance, investment and insurance businesses. Additionally, non-interest expense increased due to restructuring charges of $539 thousand recognized during the first three months of 2013.

Tax Provision

The provision for income taxes for the three months ended September 30, 2013 and 2012 was $1.4 million and $1.8 million, at effective rates of 19% and 24%, respectively. The provision for income taxes for the nine months ended September 30, 2013 and 2012 was $4.6 million and $4.2 million, at effective rates of 22% and 21%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities, loans and bank-owned life insurance. The lower effective rate for the three months ended September 30, 2013 is due to a higher amount of tax exempt income in 2013 primarily due to excess proceeds from bank-owned life insurance death benefits.

 

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Financial Condition

Assets

Total assets decreased $51.8 million from December 31, 2012 primarily due to a decrease in cash and interest-earning deposits, and a decrease in investment securities, partially offset by an increase in loans and leases. The following table presents the assets at the dates indicated:

 

     At September 30,     At December 31,     Change  
(Dollars in thousands)    2013     2012     Amount     Percent  

Cash and interest-earning deposits

   $ 79,458      $ 146,112      $ (66,654     (46 )% 

Investment securities

     462,573        499,579        (37,006     (7

Loans held for sale

     3,489        4,530        (1,041     (23

Loans and leases held for investment

     1,526,241        1,481,862        44,379        3   

Reserve for loan and lease losses

     (24,835     (24,746     (89     —     

Premises and equipment, net

     33,797        33,222        575        2   

Goodwill and other intangibles, net

     65,992        62,694        3,298        5   

Bank owned life insurance

     60,144        61,409        (1,265     (2

Accrued interest receivable and other assets

     46,137        40,179        5,958        15   
  

 

 

   

 

 

   

 

 

   

Total assets

   $ 2,252,996      $ 2,304,841      $ (51,845     (2
  

 

 

   

 

 

   

 

 

   

Cash and Interest-earning Deposits

Cash and interest-earning deposits at September 30, 2013 decreased $66.7 million from December 31, 2012 primarily due to the growth in loans and leases and the decline in long-term borrowings resulting from the Corporation’s redemption of trust preferred securities.

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 at September 30, 2013 decreased $37.0 million from December 31, 2012. Sales of $58.1 million, maturities and pay-downs of $31.4 million, calls of $2.1 million and a decline in the net unrealized gain on available-for-sale investment securities of $13.1 million, were partially offset by purchases of $67.0 million. The decline in net unrealized gain on available-for-sale investment securities was primarily due to declines in fair value resulting from the increase in interest rates during the second quarter of 2013.

Loans and Leases

Gross loans and leases held for investment at September 30, 2013 grew by $44.4 million or 3% from December 31, 2012. Commercial-related real estate loans increased $60.0 million and lease financings increased $18.9 million partially offset by a decrease in commercial business loans of $37.6 million. While the longer-term economic outlook remains positive, short-term uncertainty over the direction of fiscal and monetary policy is restraining overall credit demand and the utilization of available credit lines by both businesses and consumers.

Asset Quality

Performance of the entire loan and lease portfolio is reviewed on a regular basis by Bank management and lending 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.

 

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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 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 payments received on nonaccrual loans and leases are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.

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.

At September 30, 2013, the recorded investment in loans that were considered to be impaired was $66.8 million. The related reserve for loan losses was $3.1 million. At December 31, 2012, the recorded investment in loans that were considered to be impaired was $45.2 million. The related reserve for loan losses was $208 thousand. Impaired loans includes nonaccrual loans and leases, accruing troubled debt restructured loans and lease modifications and other accruing impaired loans for which it is probable that not all principal and interest payments due will be collectible in accordance with the contractual terms. 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. For the nine months ended September 30, 2013 and 2012, interest income that would have been recognized under the original terms for impaired loans was $1.3 million and $1.6 million, respectively. Interest income recognized for the nine months ended September 30, 2013 and 2012 was $604 thousand and $301 thousand, respectively.

The impaired loan balances consisted mainly of commercial real estate, construction and commercial business loans. At September 30, 2013, impaired loans included other accruing impaired loans of $29.0 million. At September 30, 2013, specific reserves of $1.9 million were established for four borrower relationships with principal balances totaling $7.9 million on other accruing impaired loans. In addition, year-to-date impaired loan activity included $10.2 million of loans which were restructured or placed on nonaccrual status, partially offset by the foreclosure of commercial loans totaling $3.5 million, net loan charge-offs on nonaccrual loans of $8.4 million and payments of $5.4 million. Impaired loans at September 30, 2013 included one large shared national credit to a theatre with an outstanding balance of $5.8 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, 2013, 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, 2013 included one large credit which went on nonaccrual during the third quarter of 2009 and is comprised of four separate facilities to a local commercial real estate developer/home builder, aggregating to $9.6 million. During the third quarter of 2013, one of the facilities was sold and proceeds of $2.3 million were applied to the loan. This credit incurred $2.0 million in charge-offs during the third quarter of 2013 primarily attributable to the intra-dependency of collateral and updated assessments of residential building lots securing the loans. There is no specific allowance on this credit, after the noted charge-offs, 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.

Other real estate owned increased slightly to $1.7 million at September 30, 2013, compared to $1.6 million at December 31, 2012. The year-to-date increase was primarily due to the addition of commercial properties for $3.8 million, offset by the sale of three locations with an associated carrying balance of $3.7 million for a gain of $450 thousand.

 

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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 at the dates indicated:

 

(Dollars in thousands)    At September 30,
2013
    At December 31,
2012
    At September 30,
2012
 

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

     3,778        2,842        3,966   

Real estate — commercial

     9,858        14,340        9,318   

Real estate — construction

     9,165        13,588        13,614   

Real estate — residential

     946        976        498   

Lease financings

     227        386        530   
  

 

 

   

 

 

   

 

 

 

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

     23,974        32,132        30,525   

Accruing troubled debt restructured loans and lease modifications

     14,106        13,457        13,383   

Accruing loans and leases 90 days or more past due:

      

Commercial, financial and agricultural

     300        —          321   

Real estate — commercial

     641        —          —     

Real estate — residential

     670        54        58   

Loans to individuals

     299        347        289   

Lease financings

     44        40        22   
  

 

 

   

 

 

   

 

 

 

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

     1,954        441        690   
  

 

 

   

 

 

   

 

 

 

Total non-performing loans and leases

     40,034        46,030        44,598   

Other real estate owned

     1,650        1,607        3,301   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 41,684      $ 47,637      $ 47,899   
  

 

 

   

 

 

   

 

 

 

Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment and nonaccrual loans held for sale

     1.57     2.17     2.07

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

     2.62     3.11     3.03

Nonperforming assets / total assets

     1.85     2.07     2.15

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

     1.63     1.67     1.84

Allowance for loan and lease losses / nonaccrual loans and leases

     103.59     77.01     97.03

Allowance for loan and lease losses / nonperforming loans and leases

     62.03     53.76     64.52

Allowance for loan and lease losses

   $ 24,835      $ 24,746      $ 27,096   

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

   $ 1,618      $ 579      $ 228   

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)    2013     2012     2012  

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

   $ 23,974      $ 32,132      $ 27,926   

Nonaccrual loans and leases with partial charge-offs

     10,232        8,834        8,508   

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

     8,475        4,361        7,142   

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

     45.3     33.1     45.6

Specific reserves on impaired loans

   $ 3,096      $ 208      $ 690   

 

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Reserve for Loan and Lease Losses

Management believes the reserve for loan and lease losses is maintained at a level that is appropriate at September 30, 2013 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.

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. Impaired loans, including nonaccrual loans and leases, troubled debt restructured loans and other accruing impaired loans 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. Loss factors are updated quarterly and are comprised of losses aggregated over eight quarters. 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. The reserve for these off-balance sheet credits was $321 thousand and $119 thousand at September 30, 2013 and December 31, 2012, respectively.

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 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 $539 thousand and $652 thousand for the three months ended September 30, 2013 and 2012, respectively and $1.8 million and $1.7 million for the nine months ended September 30, 2013 and 2012, respectively. The Corporation also has goodwill with a net carrying amount of $57.5 million at September 30, 2013 and $56.2 million at December 31, 2012, which is deemed to be an indefinite intangible asset and is not amortized.

 

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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. The Corporation also completes an impairment test for other identifiable intangible assets on an annual basis or more often if events and circumstances indicate there may be impairment. The Corporation completes an annual impairment test for other intangible assets, or more often, if events and circumstances indicate a possible impairment. There was no goodwill impairment and no material impairment to identifiable intangibles during the nine months ended September 30, 2013 and 2012. In conjunction with the reduction in the contingent consideration liability for Javers during the six months ended June 30, 2013, an evaluation of goodwill and other identifiable intangible assets was performed with no indicated impairment. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.

Other Assets

At September 30, 2013 and December 31, 2012, 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 $2.8 million and $4.1 million at September 30, 2013 and December 31, 2012, 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. On June 10, 2013, Standard & Poor’s upgraded its credit outlook for the United States government from “negative” to “stable”. These changes 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, at September 30, 2013, the FHLB stock is recorded at cost.

Liabilities

Total liabilities decreased $42.3 million since December 31, 2012 primarily due to a decrease in short-term and long-term borrowings, partially offset by an increase in deposits. The following table presents the liabilities at the dates indicated:

 

            Change  
(Dollars in thousands)    At September 30, 2013      At December 31, 2012      Amount     Percent  

Deposits

   $ 1,889,046       $ 1,865,333       $ 23,713        1

Short-term borrowings

     46,733         96,282         (49,549     (51

Subordinated notes and capital securities

     —           20,994         (20,994     N/M   

Accrued expenses and other liabilities

     42,463         37,955         4,508        12   
  

 

 

    

 

 

    

 

 

   

Total liabilities

   $ 1,978,242       $ 2,020,564       $ (42,322     (2
  

 

 

    

 

 

    

 

 

   

Deposits

Total deposits increased $23.7 million from December 31, 2012, mainly due to a product change for existing business and municipal customers which resulted in approximately $68.1 million of customer repurchase agreements, classified as borrowings, being transferred to interest-bearing demand deposits during the second quarter of 2013. This transfer was partially offset by a decrease in time deposits of $41.7 million.

Borrowings

Short-term borrowings at September 30, 2013, consisted of customer repurchase agreements on an overnight basis; the decrease of $49.5 million from December 31, 2012 was due to the migration of customer accounts to interest bearing deposits as previously discussed. During the second quarter of 2013, the Corporation submitted a redemption notice to the trustee resulting in the redemption of all of the trust preferred securities, with an aggregate principal balance of $20.0 million, issued by Univest Capital Trust I. The Corporation redeemed the trust preferred securities effective July 7, 2013 with settlement on July 8, 2013. The redemption also included $619 thousand in common securities issued by Univest Capital Trust I and related to the Trust Preferred Securities.

 

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Shareholders’ Equity

Total shareholders’ equity at September 30, 2013 decreased $9.5 million since December 31, 2012, primarily due to an increase in treasury stock and an increase in accumulated other comprehensive loss partially offset by an increase in retained earnings.

The following table presents total shareholders’ equity at the dates indicated:

 

           Change  
(Dollars in thousands)    At September 30, 2013     At December 31, 2012     Amount     Percent  

Common stock

   $ 91,332      $ 91,332      $ —          —  

Additional paid-in capital

     62,060        62,101        (41     —     

Retained earnings

     170,937        164,823        6,114        4   

Accumulated other comprehensive loss

     (13,703     (6,920     (6,783     (98

Treasury stock

     (35,872     (27,059     (8,813     (33
  

 

 

   

 

 

   

 

 

   

Total shareholders’ equity

   $ 274,754      $ 284,277      $ (9,523     (3
  

 

 

   

 

 

   

 

 

   

Retained earnings at September 30, 2013 were impacted by the nine months of net income of $16.3 million partially offset by cash dividends declared of $10.0 million. Accumulated other comprehensive loss increased primarily due to declines in the fair value of available-for-sale investment securities, resulting from the increase in interest rates during the second quarter of 2013. Treasury stock increased primarily due to the purchase of 540,285 treasury shares, totaling $9.9 million under its 2007 Board approved share repurchase program partially offset by the issuance of restricted stock.

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).

 

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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  

At September 30, 2013:

               

Total Capital (to Risk-Weighted Assets):

               

Corporation

   $ 253,783         13.73   $ 147,918         8.00   $ 184,898         10.00

Bank

     235,648         12.91        146,012         8.00        182,515         10.00   

Tier 1 Capital (to Risk-Weighted Assets):

               

Corporation

     230,494         12.47        73,959         4.00        110,939         6.00   

Bank

     212,802         11.66        73,006         4.00        109,509         6.00   

Tier 1 Capital (to Average Assets):

               

Corporation

     230,494         10.63        86,715         4.00        108,394         5.00   

Bank

     212,802         9.88        86,121         4.00        107,651         5.00   

At December 31, 2012:

               

Total Capital (to Risk-Weighted Assets):

               

Corporation

   $ 274,504         15.62   $ 140,631         8.00   $ 175,788         10.00

Bank

     246,861         14.22        138,841         8.00        173,552         10.00   

Tier 1 Capital (to Risk-Weighted Assets):

               

Corporation

     252,240         14.35        70,315         4.00        105,473         6.00   

Bank

     225,126         12.97        69,421         4.00        104,131         6.00   

Tier 1 Capital (to Average Assets):

               

Corporation

     252,240         11.47        87,934         4.00        109,918         5.00   

Bank

     225,126         10.31        87,310         4.00        109,137         5.00   

On May 14, 2013, the Corporation submitted a redemption notice to the trustee to redeem all of the outstanding capital securities issued by Univest Capital Trust I, with a redemption date of July 7, 2013. This is the primary reason that the Corporation’s regulatory capital ratios declined when comparing September 30, 2013 to December 31, 2012. Additionally, during the second quarter of 2013, the Bank’s subsidiary, Delview, Inc., called its preferred stock of $15.0 million, which qualified as Tier 1 Capital at the Bank as “Qualifying Noncontrolling (Minority) Interests in Consolidated Subsidiaries.” This is the primary reason that the Bank’s regulatory capital ratios declined when comparing September 30, 2013 to December 31, 2012.

At September 30, 2013 and December 31, 2012, management believes that the Corporation and the Bank continued to meet 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. At September 30, 2013, 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.

In July 2013, the federal bank regulatory agencies adopted final rules revising the agencies’ capital adequacy guidelines and prompt corrective action rules, designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity Tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a Tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The final rules permit institutions, other than certain large institutions, to elect to continue to treat certain components of accumulated other comprehensive income as permitted under the current general risk-based

 

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capital rules, and not reflect unrealized gains and losses on available-for-sale securities in common equity Tier 1 calculations. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016. The Corporation and the Bank will continue to analyze these new rules and their effects on the business, operations and capital levels of the Corporation and the Bank.

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 modeling 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.

The following table demonstrates the expected effect that a parallel interest rate shift would have on the Corporation’s net interest income over the next twelve months. This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. The changes to net interest income are shown in the below table at September 30, 2013.

Table 5 — Summary of Interest Rate Simulation

 

     Estimated Change in Net
Interest Income Over Next 12
Months
 
(Dollars in thousands)    Amount     Percent  

Rate shock—Change in interest rates

    

+300 basis points

   $ 11,083        15.4

+200 basis points

     7,042        9.8   

+100 basis points

     3,193        4.4   

-100 basis points*

     (4,139     (5.7

 

* Because certain current short-term interest rates are at or below 1.0%, the 100 basis point downward shock assumes that corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis points downward shock.

The interest rate simulation demonstrates that the Corporation is asset sensitive; indicating that an increase in interest rates will have a positive impact on net interest income over the next 12 months while a decrease in interest rates will negatively impact net interest income.

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 customer repurchase agreements have historically been the most significant funding sources for the Corporation. These deposits and repurchase agreements 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, savings institutions, mutual funds, security dealers and others.

 

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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 bear interest 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 $468.2 million. At September 30, 2013 and December 31, 2012, there were no outstanding borrowings with the FHLB. At September 30, 2013 and December 31, 2012, the Bank had outstanding short-term letters of credit with the FHLB totaling $5.0 million and $32.0 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 Bank, maintains federal fund lines with several correspondent banks totaling $82.0 million at September 30, 2013 and December 31, 2012. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.

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, 2013 and December 31, 2012, 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 customer repurchase agreements 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, 2012.

 

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

 

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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, 2013.

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, 2013 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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, 2012.

 

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, 2013 under its 2007 Board approved program.

 

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, 2013

     —         $ —           —           396,644   

August 1 – 31, 2013

     —           —           —           396,644   

September 1 – 30, 2013

     395,000         18.79         395,000         1,644   
  

 

 

       

 

 

    

Total

     395,000       $ 18.79         395,000      
  

 

 

       

 

 

    

 

1. Transactions are reported as of trade dates.

 

2. The number of shares approved for repurchase under the Corporation’s 2007 Board approved share repurchase program was 643,782. The repurchased shares limit was net of normal treasury activity such as purchases to fund the dividend reinvestment, employee stock purchase and equity compensation plans. The 2007 Board approved program is deemed to be satisfied and closed.

 

3. On October 23, 2013, the Corporation’s Board of Directors approved a new stock repurchase plan for the repurchase of up to 800,000 shares, or approximately 5% of the shares outstanding. The repurchased shares limit is net of normal treasury activity such as purchases to fund the dividend reinvestment, employee stock purchase and equity compensation plans. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.

 

Item 3. Defaults Upon Senior Securities

None.

 

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Item 4. Mine Safety Disclosures

Not Applicable.

 

Item 5. Other Information

None.

 

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    Univest Corporation of Pennsylvania 2013 Long-Term Incentive Plan is incorporated by reference to Appendix A of Form DEF14A, filed with the SEC on March 15, 2013.
    Exhibit 4.2    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 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 Michael S. Keim, Executive Vice President 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 Michael S. Keim, 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, 2013      

/s/ William S. Aichele

     

William S. Aichele, Chairman and

Chief Executive Officer (Principal Executive Officer)

Date: November 8, 2013      

/s/ Michael S. Keim

     

Michael S. Keim, Executive Vice President

and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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