UNIVEST FINANCIAL Corp - Annual Report: 2014 (Form 10-K)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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 | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of class | Name of each exchange on which registered | |
Common Stock, $5 par value | The NASDAQ Stock Market | |
Securities registered pursuant to Section 12(g) of the Act: Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 twelve 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 ninety days. Yes x 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). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
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. (Check one):
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 ¨ No x
The approximate aggregate market value of voting stock held by non-affiliates of the registrant is $323,018,636 as of June 30, 2014 based on the June 30, 2014 closing price of the Registrant's Common Stock of $20.70 per share.
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 | 20,060,088 | |
(Title of Class) | (Number of shares outstanding at January 31, 2015) | |
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part III incorporate information by reference from the proxy statement for the annual meeting of shareholders on April 21, 2015.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE OF CONTENTS
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
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PART I
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 but not limited to those set forth below as well as the risk factors described in Item 1A, “Risk Factors”:
• | Operating, legal and regulatory risks |
• | Economic, political and competitive forces impacting various lines of business |
• | The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful |
• | Volatility in interest rates |
• | Other risks and uncertainties, including those occurring in the U.S. and world financial systems |
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation’s expectations with regard to any change in events, conditions or circumstances on which any such statement is based.
Item 1. | Business |
General
Univest Corporation of Pennsylvania (the Corporation) is a Pennsylvania corporation organized in 1973 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956. The Corporation owns all of the capital stock of Univest Bank and Trust Co. (the Bank). The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. The Corporation’s and the Bank’s legal headquarters are located at 14 North Main Street, Souderton, PA 18964. The Corporation’s former subsidiary, Univest Delaware, Inc., was dissolved during 2013.
The Bank is a Pennsylvania state-chartered bank and trust company. As a state-chartered member bank of the Federal Reserve System, the Bank is regulated primarily by the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia.
The Bank is engaged in the general commercial and consumer banking business and provides a full range of banking and trust services to its customers. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, Univest Investments, Inc., a full-service broker-dealer and investment advisory firm and Girard Partners (Girard), a registered investment advisory firm acquired in January 2014. Univest Insurance has three offices in Pennsylvania and one in Maryland. Univest Investments has two offices in Pennsylvania. Girard is headquartered in King of Prussia, Pennsylvania with two satellite offices in Virginia and Florida. 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. Univest Investments, Inc., Univest Insurance, Inc. and Univest Capital, Inc. were formed to enhance the traditional banking and trust services provided by the Bank, as was the acquisition of Girard Partners.
At December 31, 2014, the Corporation has three reportable business segments: Banking, Wealth Management and Insurance. The Corporation determines its segments based primarily upon product and service offerings, through the types of income generated and the regulatory environment. This is strategically how the Corporation operates and has positioned itself in the marketplace. Accordingly, significant operating decisions are based upon analysis of each of these segments. At December 31, 2014, these segments meet the quantitative thresholds for separate disclosure as a business segment. For more detailed discussion and financial information on the business segments, see Note 23 “Segment Reporting” included in the Notes to the Consolidated Financial Statements included herein under Item 8.
At December 31, 2014, the Corporation had total assets of $2.2 billion, net loans and leases of $1.6 billion, total deposits of $1.9 billion and total shareholders’ equity of $284.6 million.
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Employees
At December 31, 2014, the Corporation and its subsidiaries employed six hundred and thirty-eight (638) persons. None of these employees are covered by collective bargaining agreements, and the Corporation believes it enjoys good relations with its personnel.
Market Area
The Corporation is headquartered in Souderton, Pennsylvania, which is located in Southeastern Pennsylvania, approximately thirty-five miles north of Philadelphia. The highest concentration of our deposits and loans are in Montgomery and Bucks counties where all of our thirty-one Bank retail financial service centers are located. These are two of the wealthiest counties in Pennsylvania. Significant types of employment industries include pharmaceuticals, health care, electronics, computer services, insurance, industrial machinery, retailing and meat processing. Major companies throughout the two counties include Merck and Company, Abington Memorial Hospital, GlaxoSmithKline, Hatfield Quality Meats, Aetna/U.S. Healthcare, St. Mary Medical Center, Healthcare Services, Giant Food Stores LLC, Doylestown Hospital, Grand View Hospital and Northtec LLC. Unemployment rates at December 2014 were 4% in both Montgomery and Bucks counties, slightly lower than Pennsylvania’s state unemployment rate of 5% and the federal unemployment rate of 6%, according to the Bureau of Labor Statistics. In addition to our hub in Montgomery and Bucks counties, we have commercial lending and insurance offices in the Lehigh Valley and Chester County. These areas currently represent a smaller segment of the Corporation’s market area.
The Corporation ranks sixth in market share in Montgomery County with fifteen financial service centers, tenth in Bucks County with sixteen financial service centers; with 5% of total combined market share in the two counties according to data provided by SNL Financial. Montgomery County’s population has grown 2% to 800,000 from the year 2010 to 2014, and is expected to grow another 2% through 2019, while Bucks County’s population has grown .3% to 630,000 during the same period, and is expected to grow .5% through 2019, according to SNL Financial. The median age is 41 years and 42 years in Montgomery and Bucks counties, respectively, consistent with the median age of 40 years in Pennsylvania and slightly higher than the median age in the United States of 37 years. County estimates project the median age to increase over the next two decades. The median yearly household income was $78,000 for Montgomery County and $73,000 for Bucks County during 2014 and is expected to increase 7% for Montgomery County and 4% for Bucks County through 2019, according to SNL Financial. The yearly median income for both counties is well above that of the Commonwealth of Pennsylvania and the United States with both at $53,000 during 2014.
Upon the acquisition of Valley Green Bank effective January 1, 2015, the Corporation began operating its three full-service branches and two administrative offices for loan production in the Philadelphia marketplace as Valley Green Bank - a Division of Univest Bank and Trust Co. This acquisition brings the Corporation its first physical presence in the Philadelphia marketplace. Philadelphia is a rapidly growing market which makes it very desirable for the Corporation to deliver its comprehensive financial solutions.
Competition
The Corporation’s service areas are characterized by intense competition for banking business among commercial banks, savings institutions and other financial institutions. The Corporation’s subsidiary bank actively competes with such banks and financial institutions for local retail and commercial accounts in Bucks, Montgomery and Chester counties and the Lehigh Valley, as well as other financial institutions outside its primary service area.
In competing with other banks, savings institutions, and other financial institutions, the Bank seeks to provide personalized services through management’s knowledge and awareness of its service area, customers and borrowers.
Other competitors, including credit unions, consumer finance companies, insurance companies, leasing companies and mutual funds, compete with certain lending and deposit gathering services and insurance and wealth management services offered by the Bank and its operating segments.
Supervision and Regulation
The financial services industry in the United States, particularly entities that are chartered as banks, is highly regulated by federal and state laws that limit the types of businesses in which banks and their holding companies may engage, and which impose significant operating requirements and limitations on banking entities. The discussion below is only a brief summary of some of the significant laws and regulations that affect the Bank and the Corporation, and is not intended to be a complete description of all such laws.
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The Bank is subject to supervision and is regularly examined by the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia. The Bank is also subject to examination by the Federal Deposit Insurance Corporation.
The Corporation is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. The Corporation is subject to the reporting requirements of the Board of Governors of the Federal Reserve System (the Board); and the Corporation, together with its subsidiaries, is subject to examination by the Board. The Federal Reserve Act limits the amount of credit that a member bank may extend to its affiliates, and the amount of its funds that it may invest in or lend on the collateral of the securities of its affiliates. Under the Federal Deposit Insurance Act, insured banks are subject to the same limitations.
The Corporation is subject to the Sarbanes-Oxley Act of 2002 (SOX). SOX adopted new standards of corporate governance and imposed additional requirements on the board of directors and management of public companies. SOX also requires that the chief executive officer and chief financial officer certify the accuracy of periodic reports filed with the Securities and Exchange Commission (SEC). Pursuant to Section 404 of SOX (SOX 404), the Corporation is required to furnish a report by its management on internal control over financial reporting, identify any material weaknesses in its internal control over financial reporting and assert that such internal controls are effective. The Corporation has continued to be in compliance with SOX 404 during 2014. The Corporation must maintain effective internal controls, which requires an on-going commitment by management and the Corporation’s Audit Committee. The process has and will continue to require substantial resources in both financial costs and human capital.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).
The Dodd-Frank Act was signed into law on July 21, 2010. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services industry as a whole, or on the Corporation’s business, results of operations and financial condition. The Dodd-Frank Act, among other things:
• | Centralized responsibility for consumer financial protection by the creation of a new agency, the Consumer Financial Protection Bureau, that has rulemaking authority for a wide range of consumer protection laws that apply to all banks and has broad powers to supervise and enforce consumer protection laws; |
• | Increased the FDIC assessment for depository institutions with assets of $10 billion or more, changed the basis for determining FDIC premiums from insured deposits to consolidated assets less tangible capital; and increased the minimum reserve ratio for the deposit insurance fund to 1.35% by September 30, 2020; |
• | Permanently increased the federal deposit insurance coverage to $250 thousand and increased the Securities Investor Protection Corporation protection from $100 thousand to $250 thousand; |
• | Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; |
• | Amended the Electronic Funds Transfer Act, “Regulation E” to give the Federal Reserve authority to establish rules to limit debit-card interchange fees and rules regarding overdraft fees; |
• | Provided for new disclosures and other requirements relating to executive compensation, proxy access by shareholders and corporate governance; |
• | Provided for mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; and |
• | Created a financial stability oversight council responsible for recommending to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity. |
Basel III
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
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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 include 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 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 became effective on January 1, 2015. The capital conservation buffer requirements phase in over a three-year period beginning January 1, 2016. Management believes that, as of December 31, 2014, the Corporation and the Bank would have met the capital adequacy requirements under Basel III if such requirements had been in effect. The Corporation and the Bank expect to be well capitalized upon the adoption of BASEL III in 2015. The Corporation will continue to analyze the impact of the new rules as it grows and as the capital conservation buffer requirements are phased in.
Wealth Management and Insurance Businesses
The Corporation's wealth management and insurance businesses are subject to additional regulatory requirements. The securities brokerage activities of Univest Investments, Inc. are subject to regulation by the SEC, the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. Girard Partners and TCG Investment Advisory are registered investment advisory firms which are subject to regulation by the SEC. Univest Insurance, Inc. is subject to Pennsylvania insurance laws and the regulations of the Pennsylvania Department of Insurance.
Credit and Monetary Policies
The Bank is affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve Board of Governors. An important function of these policies is to curb inflation and control recessions through control of the supply of money and credit. The Board uses its powers to regulate reserve requirements of member banks, the discount rate on member-bank borrowings, interest rates on time and savings deposits of member banks, and to conduct open-market operations in United States Government securities to exercise control over the supply of money and credit. The policies have a direct effect on the amount of bank loans and deposits and on the interest rates charged on loans and paid on deposits, with the result that the policies have a material effect on bank earnings. Future policies of the Board and other authorities cannot be predicted, nor can their effect on future bank earnings.
The Bank is a member of the Federal Home Loan Bank System (FHLBanks), which consists of 12 regional Federal Home Loan Banks, and is subject to supervision and regulation by the Federal Housing Finance Agency. The FHLBanks provide a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank of Pittsburgh (FHLB), is required to acquire and hold shares of capital stock in the FHLB as regulated by the FHLB. At December 31, 2014, the Bank owned $1.1 million in FHLB capital stock.
The deposits of the Bank are insured under the Federal Deposit Insurance Corporation (FDIC) up to applicable limits. Effective April 1, 2011, in accordance with the provisions of the Dodd-Frank Act, the FDIC implemented a final rule regarding deposit insurance assessments. The rule changed the assessment base from domestic deposits to average consolidated total assets minus average tangible equity, adopted a new large-bank pricing assessment scheme, and set a target size for the Deposit Insurance Fund (DIF) at 2% of insured deposits. The rule adopted a new assessment rate schedule and, in lieu of dividends, other rate schedules when the reserve ratio reaches certain levels. The rule lowered overall assessment rates in order to generate the same approximate amount of revenue under the new larger base as was raised under the old base. Nearly all institutions with assets less than $10 billion pay smaller assessments as a result of this rule. The rule eliminated the adjustment to the rate paid for secured liabilities, including Federal Home Loan Bank advances, since these are part of the new assessment base. It also created a new depository institution debt adjustment that increases the assessment rate of an institution that holds long-term debt issued by another insured depository institution. The final rule also created a scorecard-based assessment system for banks with more than $10 billion in assets. The scorecards include financial measures that the FDIC believes are predictive of long-term performance.
Acquisitions
Univest Corporation of Pennsylvania and its operating segments provide financial solutions to individuals, businesses, municipalities and nonprofit organizations. The Corporation prides itself on being a financial organization that continues to increase
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its scope of services while maintaining traditional beliefs and a determined commitment to the communities it serves. Over the past five years, the Corporation and its subsidiaries have experienced stable growth, both organically and through various acquisitions to be the best integrated financial solutions provider in the market.
The acquisitions included:
• | Valley Green Bank on January 1, 2015 |
• | Sterner Insurance Associates on July 1, 2014 |
• | Girard Partners on January 1, 2014 |
• | John T. Fretz Insurance Agency, Inc. on May 1, 2013 |
• | Javers Group on May 31, 2012 |
Securities and Exchange Commission Reports
The Corporation makes available free-of-charge its reports that are electronically filed with the Securities and Exchange Commission (SEC) including its Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports on its website as a hyperlink to EDGAR. These reports are available as soon as reasonably practicable after the material is electronically filed. The Corporation’s website address is www.univest.net. Information included on the Corporation’s website is not part of this Annual Report on Form 10-K. The Corporation will provide at no charge a copy of the SEC Form 10-K annual report for the year 2014 to each shareholder who requests one in writing after March 31, 2015. Requests should be directed to: Karen E. Tejkl, Corporate Secretary, Univest Corporation of Pennsylvania, P.O. Box 197, Souderton, PA 18964.
The Corporation’s filings are also available at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the hours of operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains the Corporation’s SEC filings electronically at www.sec.gov.
Item 1A. Risk Factors
An investment in the Corporation’s common stock is subject to risks inherent to the Corporation’s business. Before making an investment, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report. This report is qualified in its entirety by these risk factors.
Risks Relating to Recent Economic Conditions and Governmental Response Efforts
The Corporation’s earnings are impacted by general business and economic conditions.
The Corporation’s operations and profitability are impacted by general business and economic conditions; these conditions include long-term and short-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control.
Uncertainty in the financial markets and concerns regarding general economic conditions have persisted over the past few years, including the higher level of unemployment and lower labor force participation rate, lower home prices and foreclosures in the housing market, financial difficulties experienced by consumers and businesses and the level of national debt. Although general economic trends and market conditions have shown some improvement, the continued economic pressures on consumers and businesses and continued higher unemployment rate and lower labor force participation rate may adversely affect our business, financial condition, and results of operations.
We cannot predict the effect of recent legislative and regulatory initiatives, and they could increase our costs of doing business and adversely affect our results of operations and financial condition.
The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations. Other changes to statutes, regulations or regulatory policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer, limit the fees we may charge, increase the ability of non-banks to offer competing financial services and products and limit our ability to attract and maintain our executive officers, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties
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and/or reputation damage, which could have a material adverse effect on the Corporation's business, financial condition and results of operations.
We borrow from the Federal Home Loan Bank and the Federal Reserve, and these lenders could modify or terminate their current programs which could have an adverse effect on our liquidity and profitability.
We at times utilize the FHLB for overnight borrowings and term advances; we also borrow from the Federal Reserve and from correspondent banks under our federal funds lines of credit. The amount loaned to us is generally dependent on the value of the collateral pledged as well as the FHLB’s internal credit rating of the Bank. These lenders could reduce the percentages loaned against various collateral categories, could eliminate certain types of collateral and could otherwise modify or even terminate their loan programs, particularly to the extent they are required to do so, because of capital adequacy or other balance sheet concerns. Any change or termination of our borrowings from the FHLB, the Federal Reserve or correspondent banks would have an adverse effect on our liquidity and profitability.
Our results of operations may be adversely affected by other-than-temporary impairment charges relating to our investment portfolio.
We may be required to record future impairment charges on our investment securities, including our investment in the FHLB, if they suffer declines in value that we consider other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the ability of the Bank to pay dividends to us, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders. Significant impairment charges could also negatively impact our regulatory capital ratios and result in the Bank not being classified as “well-capitalized” for regulatory purposes.
We may need to raise additional capital in the future and such capital may not be available when needed or at all.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.
Our customary sources of liquidity are, including, but not limited to, inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. Such sources of liquidity may not be available to us on acceptable terms or not available at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our bank or counterparties participating in the capital markets may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Market and Business
The Corporation’s profitability is affected by economic conditions in the Commonwealth of Pennsylvania.
Unlike larger regional banks that operate in large geographies, the Corporation provides banking and financial services to customers primarily in Bucks, Montgomery and Chester counties and the Lehigh Valley area of Pennsylvania. Because of our geographic concentration, continuation of a slow economic recovery in our region could make it more difficult to attract deposits and could cause higher rates of loss and delinquency on our loans than if the loans were more geographically diversified. Adverse economic conditions in the region, including, without limitation, declining real estate values, could cause our levels of non-performing assets and loan losses to increase. If the slow economic recovery is prolonged, borrowers may be less likely to repay their loans as scheduled. A continued sluggish economy could, therefore, result in losses that materially and adversely affect our financial condition and results of operations.
The Corporation operates in a highly competitive industry and market area which could adversely impact its business and results of operations.
We face substantial competition in all phases of our operations from a variety of different competitors. Our competitors, including commercial banks, community banks, savings institutions, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds and other financial institutions,
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compete with lending and deposit-gathering services and insurance and wealth management services offered by us. Increased competition in our markets may result in reduced loans and deposits.
Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than we can. If we are unable to offer competitive products and services, our business may be negatively affected.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured financial institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.
The Corporation’s controls and procedures may fail or be circumvented.
Our management diligently reviews and updates the Corporation’s internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any failure or undetected circumvention of these controls could have a material adverse impact on our financial condition and results of operations.
Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value.
We regularly evaluate opportunities to acquire and invest in banks and in other complementary businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a purchase transaction, which could dilute current shareholders’ ownership interest. These activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not impact cash flow, tangible capital or liquidity.
Our acquisition activities could involve a number of additional risks, including the risks of:
• | incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions; |
• | using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets; |
• | the time and expense required to integrate the operations and personnel of the combined businesses; |
• | creating an adverse short-term effect on our results of operations; and |
• | losing key employees and customers as a result of an acquisition that is poorly received. |
We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value.
The Corporation may not be able to attract and retain skilled people.
We are dependent on the ability and experience of a number of key management personnel who have substantial experience with our operations, the financial services industry, and the markets in which we offer products and services. The loss of one or more senior executives or key managers may have an adverse effect on our operations. The Corporation does not currently have employment agreements or non-competition agreements with any of our named executive officers. Also, as we continue to grow operations, our success depends on our ability to continue to attract, manage, and retain other qualified management personnel.
If we lost a significant portion of our low-cost deposits, it would negatively impact our liquidity and profitability.
Our profitability depends in part on our success in attracting and retaining a stable base of low-cost deposits. At December 31, 2014, 24% of our deposit base was comprised of noninterest-bearing deposits, of which 19% consisted of business deposits, which are primarily operating accounts for businesses, and 5% consisted of consumer deposits. While we generally do not believe these core deposits are sensitive to interest rate fluctuations, the competition for these deposits in our markets is strong and customers
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are increasingly seeking investments that are safe, including the purchase of U.S. Treasury securities and other government-guaranteed obligations, as well as the establishment of accounts at the largest, most-well capitalized banks. If we were to lose a significant portion of our low-cost deposits, it would negatively impact our liquidity and profitability.
The Corporation’s information systems may experience an interruption or breach in security.
The Corporation relies heavily on information systems to conduct its business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in the Corporation’s customer relationship management and general ledger, deposit, loan, and other systems. The Corporation has policies and procedures designed with the intention to prevent or limit the effect of any failure, interruption, or breach in our security systems. The occurrence of any such failures, interruptions, or breaches in security could expose the Corporation to reputation risk, civil litigation, regulatory scrutiny and possible financial liability that could have a material adverse effect on our financial condition.
The Corporation continually encounters technological change.
Our future success depends, in part, on our ability to effectively embrace technology efficiencies to better serve customers and reduce costs. Failure to keep pace with technological change could potentially have an adverse effect on our business operations and financial condition.
The Corporation is subject to claims and litigation.
Customer claims and other legal actions, whether founded or unfounded, could result in financial or reputation damage and have a material adverse effect on our financial condition and results of operations if such claims are not resolved in a manner favorable to the Corporation.
Natural disasters, acts of war or terrorism and other external events could negatively impact the Corporation.
Natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Corporation’s ability to conduct business. In addition, such events could affect the stability of the Corporation’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Corporation to incur additional expenses. Our management has established disaster recovery policies and procedures that are expected to mitigate events related to natural or man-made disasters; however, the occurrence of any such event and the impact of an overall economic decline resulting from such a disaster could have a material adverse effect on the Corporation’s financial condition.
The Corporation depends on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform to U.S. generally accepted accounting principles (GAAP) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition and results of operations could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to deterioration in asset quality in a timely manner, or rely on financial statements that do not comply with GAAP or are materially misleading.
Risks Related to the Banking Industry
The Corporation is subject to interest rate risk.
Our profitability is dependent to a large extent on our net interest income. Like most financial institutions, we are affected by changes in general interest rate levels and by other economic factors beyond our control. Although we believe we have implemented strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial and prolonged change in market interest rates could adversely affect our operating results.
9 |
Net interest income may decline in a particular period if:
• | In a declining interest rate environment, more interest-earning assets than interest-bearing liabilities re-price or mature, or |
• | In a rising interest rate environment, more interest-bearing liabilities than interest-earning assets re-price or mature. |
Our net interest income may decline based on our exposure to a difference in short-term and long-term interest rates. If the difference between the interest rates shrinks or disappears, the difference between rates paid on deposits and received on loans could narrow significantly resulting in a decrease in net interest income. In addition to these factors, if market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thus reducing our net interest income. Also, certain adjustable rate loans re-price based on lagging interest rate indices. This lagging effect may also negatively impact our net interest income when general interest rates continue to rise periodically. Increasing interest rates may also reduce the fair value of our fixed rate investment securities.
The Corporation is subject to lending risk.
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 the value of the associated collateral. Various laws and regulations also affect our lending activities, and failure to comply with such applicable laws and regulations could subject the Corporation to enforcement actions and civil monetary penalties.
At December 31, 2014, approximately 81% of our loan and lease portfolio consisted of commercial, financial and agricultural, commercial real estate and construction loans and leases which are generally perceived as having more risk of default than residential real estate 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, as well as the factors affecting residential real estate borrowers. An increase in non-performing loans and leases could result in a net loss of earnings from these loans and leases, an increase in the provision for possible loan and lease losses, and an increase in loan and lease charge-offs. The risk of loan and lease losses increases if the economy worsens.
Commercial 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 projects 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 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 business, commercial real estate, and construction loans are more susceptible to a risk of loss during a downturn in the business cycle. Our underwriting, review, and monitoring cannot eliminate all of the risks related to these loans.
10 |
The Corporation’s allowance for possible loan and lease losses may be insufficient, and an increase in the allowance would reduce earnings.
We maintain an allowance for loan and lease losses. The allowance is established through a provision for loan and lease losses based on management’s evaluation of the risks inherent in our loan portfolio and the general economy. The allowance is based upon a number of factors, including the size of the loan and lease portfolio, asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management’s assessment of the credit risk inherent in the portfolio, historical loan and lease loss experience and loan underwriting policies. In addition, we evaluate all loans and leases identified as problem loans and augment the allowance based upon our estimation of the potential loss associated with those problem loans and leases. Additions to our allowance for loan and lease losses decrease our net income.
If the evaluation we perform in connection with establishing loan and lease loss reserves is wrong, our allowance for loan and lease losses may not be sufficient to cover our losses, which would have an adverse effect on our operating results. Due to the volatile economy, we could experience an increase in delinquencies and losses as these loans continue to mature.
The federal regulators, in reviewing our loan and lease portfolio as part of a regulatory examination, may from time to time require us to increase our allowance for loan and lease losses, thereby negatively affecting our financial condition and earnings at that time. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans and leases, identification of additional problem loans and leases and other factors, both within and outside of our control.
Changes in economic conditions and the composition of our loan portfolio could lead to higher loan charge-offs or an increase in our provision for loan losses and may reduce our net income.
Changes in national and regional economic conditions could impact our loan portfolios. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities we serve. Weakness in the market areas we serve could depress our earnings and consequently our financial condition because customers may not demand our products or services; borrowers may not be able to repay their loans; the value of the collateral securing our loans to borrowers may decline and the quality of our loan portfolio may decline. Any of the latter three scenarios could require us to charge off a higher percentage of our loans and/or increase our provision for loan and lease losses, which would reduce our net income and could require us to raise capital.
The Corporation is subject to environmental liability risk associated with lending activities.
In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Corporation may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. Our policies and procedures require environmental factors to be considered during the loan application process. An environmental review is performed before initiating any commercial foreclosure action; however, these reviews may not be sufficient to detect all potential environmental hazards. Possible remediation costs and liabilities could have a material adverse effect on our financial condition.
The Corporation is subject to extensive government regulation and supervision.
We are subject to Federal Reserve Board regulation. The Bank is subject to extensive regulation, supervision, and examination by our primary federal regulators, the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank of Philadelphia, and by the FDIC, the regulating authority that insures customer deposits. Also, as a member of the FHLB, the Bank must comply with applicable regulations of the Federal Housing Finance Agency and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A large claim against the Bank under these laws could have a material adverse effect on our results of operations.
Proposals for further regulation of the financial services industry are continually being introduced in the Congress of the United States of America and the General Assembly of the Commonwealth of Pennsylvania. New financial reform legislation has been enacted by Congress changing the bank regulatory framework, creating an independent consumer protection bureau and establishing more stringent capital standards for financial institutions and their holding companies. The legislation has, and will likely continue to result, in new regulations including those that affect lending, funding, trading and investment activities of financial institutions and their holding companies. Such additional regulation and oversight could have a material and adverse impact on us.
11 |
Consumers may decide not to use banks to complete their financial transactions.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams could have an adverse effect on our financial condition and results of operations.
Risks Related to the Wealth Management and Insurance Industries
Revenues and profitability from our wealth management business may be adversely affected by any reduction in assets under management and supervision as a result of either a decline in market value of such assets or net outflows, which could reduce trust, investment advisory and brokerage and other servicing fees earned.
The wealth management business derives the majority of its revenue from noninterest income which consists of trust, investment advisory and brokerage and other servicing fees. Substantial revenues are generated from investment management contracts with clients. Under these contracts, the investment advisory fees paid to us are typically based on the market value of assets under management. Assets under management and supervision may decline for various reasons including declines in the market value of the assets in the funds and accounts managed or supervised, which could be caused by price declines in the securities markets generally or by price declines in specific market segments. Assets under management may also decrease due to redemptions and other withdrawals by clients or termination of contracts. This could be in response to adverse market conditions or in pursuit of other investment opportunities.
The wealth management industry is subject to extensive regulation, supervision and examination by regulators, and any enforcement action or adverse changes in the laws or regulations governing our business could decrease our revenues and profitability.
The wealth management business is subject to regulation by a number of regulatory agencies that are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. In the event of non-compliance with an applicable regulation, governmental regulators, including the SEC, and FINRA, may institute administrative or judicial proceedings that may result in censure, fines, civil penalties, the issuance of cease-and-desist orders or the deregistration or suspension of the non-compliant broker-dealer or investment adviser or other adverse consequences. The imposition of any such penalties or orders could have a material adverse effect on the wealth management segment's operating results and financial condition. We may be adversely affected as a result of new or revised legislation or regulations. Regulatory changes have imposed and may continue to impose additional costs, which could adversely impact our profitability.
Revenues and profitability from our insurance business may be adversely affected by market conditions, which could reduce insurance commissions and fees earned.
The revenues of our fee based insurance business are derived primarily from commissions from the sale of insurance policies, which commissions are generally calculated as a percentage of the policy premium. These insurance policy commissions can fluctuate as insurance carriers from time to time increase or decrease the premiums on the insurance products we sell. Due to the cyclical nature of the insurance market and the impact of other market and macro economic conditions on insurance premiums, commission levels may vary. The reduction of these commission rates, along with general volatility and/or declines in premiums, may adversely impact our profitability.
Risks Related to Our Common Stock
An investment in the Corporation’s common stock is not an insured deposit.
The Corporation’s common stock is not a bank deposit, is not insured by the FDIC or any other deposit insurance fund, and is subject to investment risk, including the loss of some or all of your investment. Our common stock is subject to the same market forces that affect the price of common stock in any company.
12 |
The Corporation’s stock price can be volatile.
The Corporation’s stock price can fluctuate in response to a variety of factors, some of which are not under our control. These factors could cause the Corporation’s stock price to decrease regardless of our operating results. These factors include:
• | our past and future dividend practice; |
• | our financial condition, performance, creditworthiness and prospects; |
• | quarterly variations in our operating results or the quality of our assets; |
• | operating results that vary from the expectations of management, securities analysts and investors; |
• | changes in expectations as to our future financial performance; |
• | the operating and securities price performance of other companies that investors believe are comparable to us; |
• | future sales of our equity or equity-related securities; |
• | the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; and |
• | changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility and other geopolitical, regulatory or judicial events. |
The Corporation’s common stock is listed for trading on the NASDAQ Global Select Market under the symbol “UVSP” the trading volume has historically been less than that of larger financial services companies. Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive.
A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
Anti-takeover provisions could negatively impact our shareholders.
The provisions of the Corporation’s shareholder rights plan, together with certain provisions in the Corporation’s Articles of Incorporation and Bylaws, as well as federal banking laws, regulatory approval requirements, and Pennsylvania law could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial to the Corporation’s shareholders.
There may be future sales or other dilution of the Corporation’s equity, which may adversely affect the market price of our common stock.
The Corporation is generally not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The issuance of any additional shares of common stock or preferred stock or securities convertible into, exchangeable for or that represent the right to receive common stock or the exercise of such securities could be substantially dilutive to shareholders of our common stock. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series. The market price of our common stock could decline as a result of offerings or because of sales of shares of our common stock made after offerings or the perception that such sales could occur. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.
The Corporation relies on dividends from our subsidiaries for most of our revenue.
The Corporation is a bank holding company and our operations are conducted by our subsidiaries from which we receive dividends. The ability of our subsidiaries to pay dividends is subject to legal and regulatory limitations, profitability, financial condition, capital expenditures and other cash flow requirements. The ability of the Bank to pay cash dividends to the Corporation is limited by its obligation to maintain sufficient capital and by other restrictions on its cash dividends that are applicable to state member banks in the Federal Reserve System. If the Bank is not permitted to pay cash dividends to the Corporation, it is unlikely that we would be able to pay cash dividends on our common stock.
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Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
The Corporation and its subsidiaries occupy forty-seven properties in Montgomery, Bucks, Chester, Berks and Lehigh counties in Pennsylvania, Calvert County in Maryland, Burlington County in New Jersey, Hennepin County in Minnesota and Lee County in Florida, most of which are used principally as banking offices. Business locations and hours are available on the Corporation’s website at www.univest.net.
The Corporation owns its corporate headquarters buildings, which are shared with the Bank, Univest Investments, Inc., and Univest Insurance, Inc. in Souderton, Montgomery County. The Bank has a leased office used by Univest Investments, Inc., Univest Capital, Inc. and for loan production located in Allentown, Lehigh County. The Bank owns an office used by Univest Capital, Inc. and Univest Insurance, Inc. located in West Chester, Chester County. Univest Insurance, Inc. occupies five additional locations, of which one is owned by Univest Insurance, Inc. in Coopersburg, Lehigh County and one is owned by the Bank, in Lansdale, Montgomery County; and three are leased, one in North Beach, Calvert County in Maryland, one in Delran, Burlington County in New Jersey, and one in Wyomissing, Berks County. Univest Capital, Inc. occupies two additional leased locations, one in Bensalem, Bucks County, and one in Bloomington, Hennepin County in Minnesota. Girard occupies two leased offices, one located in King of Prussia, Montgomery County, and one located in Fort Meyers, Lee County in Florida. The Bank serves the area through its twenty-nine traditional offices and two supermarket branches that offer traditional community banking and trust services. Fifteen banking offices are located in Montgomery County, of which ten are owned, two are leased and three are buildings owned on leased land; sixteen banking offices are located in Bucks County, of which four are owned, ten are leased and two are buildings owned on leased land. The Bank has two additional regional leased offices, one primarily used for corporate banking and mortgage banking located in Doylestown, Bucks County and one used for corporate banking and wealth management located in West Chester, Chester County.
Additionally, the Bank provides banking and trust services for the residents and employees of twelve retirement home communities. The Bank has nine off-premise automated teller machines, four of which are located in Montgomery County, three in Bucks County, one in Lehigh County and one in Chester County. The Bank provides banking services nationwide through the internet via its website www.univest.net.
Item 3. | Legal Proceedings |
Management is not aware of any litigation that would be probable of occurring or probable of having 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 4. | Mine Safety Disclosures |
Not Applicable.
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PART II
Item 5. | Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity |
Securities
The Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “UVSP.” At December 31, 2014, the Corporation had 4,078 stockholders.
Broadridge Corporate Issuer Solutions, Inc. (Broadridge), serves as the Corporation’s transfer agent. Broadridge is located at 1155 Long Island Avenue, Edgewood, NY 11717. Shareholders can contact a representative by calling 866-321-8021.
Range of Market Prices of Common Stock and Cash Dividends
The following table shows the high and low closing sale prices of the Corporation’s common stock. The table also presents the cash dividends declared per share for each quarter.
Market Price | Cash Dividends Declared per Share | |||||||||||
2014 | High | Low | ||||||||||
January–March | $ | 21.04 | $ | 17.67 | $ | 0.20 | ||||||
April–June | 21.37 | 18.95 | 0.20 | |||||||||
July–September | 21.54 | 18.28 | 0.20 | |||||||||
October–December | 20.70 | 18.50 | 0.20 | |||||||||
2013 | ||||||||||||
January–March | $ | 18.00 | $ | 16.26 | $ | 0.20 | ||||||
April–June | 19.18 | 16.10 | 0.20 | |||||||||
July–September | 20.98 | 18.50 | 0.20 | |||||||||
October–December | 21.48 | 18.41 | 0.20 | |||||||||
For a description of regulatory restrictions on the ability of the Corporation and the Bank to pay dividends, see Note 21 “Regulatory Matters” included in the Notes to the Consolidated Financial Statements included herein under Item 8.
15 |
Stock Performance Graph
The following chart compares the yearly percentage change in the cumulative shareholder return on the Corporation’s common stock during the five years ended December 31, 2014, with (1) the Total Return Index for the NASDAQ Stock Market (U.S. Companies) and (2) the Total Return Index for NASDAQ Bank Stocks. This comparison assumes $100.00 was invested on December 31, 2009, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.
Five Year Cumulative Total Return Summary
2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||
Univest Corporation of Pennsylvania | 100.00 | 114.26 | 91.96 | 112.53 | 141.92 | 144.54 | ||||||
NASDAQ Stock Market (US) | 100.00 | 118.11 | 117.20 | 137.94 | 193.29 | 221.89 | ||||||
NASDAQ Banks | 100.00 | 114.13 | 102.19 | 121.20 | 171.67 | 180.04 | ||||||
16 |
Equity Compensation Plan Information
The Corporation adopted the shareholder approved 2013 Long-Term Incentive Plan to replace the 2003 Long-Term Incentive Plan which expired during April 2013. Under the 2013 Long-Term Incentive Plan, the Corporation may grant options and share awards to employees and non-employee directors up to 2,000,000 shares of common stock. The number of shares of common stock available for issuance under the plan is subject to adjustment, as described in the plan. This includes, in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the stock, substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the plan, in the number and option price of shares subject to outstanding options granted under the plan and in the number and price of shares subject to other awards, as described in the plan. As a result of the completion of the acquisition of Valley Green Bank on January 1, 2015, 473,483 additional shares are available for distribution under the 2013 Long-Term Incentive Plan. The following table sets forth information regarding outstanding options and shares under equity compensation plans at December 31, 2014:
(a) | (b) | (c) | |||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||||||
Equity compensation plan approved by security holders | 673,216 | $ | 19.46 | 1,831,545 | |||||
Equity compensation plan not approved by security holders | — | — | — | ||||||
Total | 673,216 | $ | 19.46 | 1,831,545 | |||||
ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information on repurchases by the Corporation of its common stock during the fourth quarter of 2014, under its 2013 Board approved program.
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 | ||||||||
October 1 - 31, 2014 | — | $ | — | — | 689,003 | |||||||
November 1 - 30, 2014 | — | — | — | 689,003 | ||||||||
December 1 – 31, 2014 | — | — | — | 689,003 | ||||||||
Total | — | $ | — | — | ||||||||
1. | Transactions are reported as of trade dates. |
2. | 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. |
17 |
Item 6. | Selected Financial Data |
For the Years Ended December 31, | |||||||||||||||||||
(Dollars in thousands, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Earnings | |||||||||||||||||||
Interest income | $ | 75,885 | $ | 77,579 | $ | 80,654 | $ | 85,468 | $ | 91,003 | |||||||||
Interest expense | 3,996 | 5,117 | 8,174 | 10,728 | 17,469 | ||||||||||||||
Net interest income | 71,889 | 72,462 | 72,480 | 74,740 | 73,534 | ||||||||||||||
Provision for loan and lease losses | 3,607 | 11,228 | 10,035 | 17,479 | 21,565 | ||||||||||||||
Net interest income after provision for loan and lease losses | 68,282 | 61,234 | 62,445 | 57,261 | 51,969 | ||||||||||||||
Noninterest income | 48,651 | 46,784 | 40,260 | 34,407 | 34,418 | ||||||||||||||
Noninterest expense | 87,254 | 81,133 | 76,282 | 68,010 | 67,349 | ||||||||||||||
Net income before income taxes | 29,679 | 26,885 | 26,423 | 23,658 | 19,038 | ||||||||||||||
Income taxes | 7,448 | 5,696 | 5,551 | 4,776 | 3,282 | ||||||||||||||
Net income | $ | 22,231 | $ | 21,189 | $ | 20,872 | $ | 18,882 | $ | 15,756 | |||||||||
Financial Condition at Year End | |||||||||||||||||||
Cash and interest-earning deposits | $ | 38,565 | $ | 69,169 | $ | 146,112 | $ | 107,377 | $ | 29,187 | |||||||||
Investment securities | 368,630 | 402,284 | 499,579 | 471,165 | 467,024 | ||||||||||||||
Net loans and leases held for investment | 1,605,963 | 1,516,990 | 1,457,116 | 1,416,536 | 1,440,288 | ||||||||||||||
Assets | 2,235,321 | 2,191,559 | 2,304,841 | 2,206,839 | 2,133,893 | ||||||||||||||
Deposits | 1,861,341 | 1,844,498 | 1,865,333 | 1,749,232 | 1,686,270 | ||||||||||||||
Borrowings | 41,974 | 37,256 | 117,276 | 137,234 | 143,865 | ||||||||||||||
Shareholders' equity | 284,554 | 280,506 | 284,277 | 272,979 | 266,224 | ||||||||||||||
Per Common Share Data | |||||||||||||||||||
Average shares outstanding (in thousands) | 16,235 | 16,605 | 16,761 | 16,743 | 16,598 | ||||||||||||||
Earnings per share – basic | $ | 1.37 | $ | 1.28 | $ | 1.25 | $ | 1.13 | $ | 0.95 | |||||||||
Earnings per share – diluted | 1.36 | 1.27 | 1.24 | 1.13 | 0.95 | ||||||||||||||
Dividends declared per share | 0.80 | 0.80 | 0.80 | 0.80 | 0.80 | ||||||||||||||
Book value (at year-end) | 17.54 | 17.22 | 16.95 | 16.34 | 15.99 | ||||||||||||||
Dividends declared to net income | 58.40 | % | 62.70 | % | 64.25 | % | 70.87 | % | 84.31 | % | |||||||||
Profitability Ratios | |||||||||||||||||||
Return on average assets | 1.01 | % | 0.95 | % | 0.95 | % | 0.89 | % | 0.75 | % | |||||||||
Return on average equity | 7.74 | 7.53 | 7.39 | 6.91 | 5.82 | ||||||||||||||
Average equity to average assets | 13.03 | 12.62 | 12.78 | 12.87 | 12.92 | ||||||||||||||
Asset Quality Ratios | |||||||||||||||||||
Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) to loans and leases held for investment | 1.07 | % | 1.51 | % | 2.17 | % | 2.64 | % | 3.07 | % | |||||||||
Nonperforming loans and leases to loans and leases held for investment | 1.43 | 2.05 | 3.11 | 2.94 | 3.16 | ||||||||||||||
Net charge-offs to average loans and leases outstanding | 0.47 | 0.77 | 1.03 | 1.28 | 1.07 | ||||||||||||||
Allowance for loan and leases losses to total loans and leases held for investment | 1.27 | 1.59 | 1.67 | 2.07 | 2.10 | ||||||||||||||
Allowance for loan and lease losses to nonaccrual loans and leases | 119.18 | 105.42 | 77.01 | 78.18 | 68.31 | ||||||||||||||
Allowance for loan and leases losses to nonperforming loans and leases | 88.84 | 77.53 | 53.76 | 70.34 | 66.48 | ||||||||||||||
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Item 7. 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.)
The information contained in this report may contain forward-looking statements, including statements relating to Univest Corporation of Pennsylvania (the Corporation) and its financial condition and results of operations that involve certain risks, uncertainties and assumptions. The Corporation’s actual results may differ materially from those anticipated, expected or projected as discussed in forward-looking statements. A discussion of forward-looking statements and factors that might cause such a difference includes those discussed in Item 1. “Business,” Item 1A. “Risk Factors,” as well as those within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report.
Critical Accounting Policies
The discussion below outlines the Corporation’s critical accounting policies. For further information regarding accounting policies, refer to Note 1, “Summary of Significant Accounting Policies” included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K.
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.
Fair Value Measurement of Investment Securities Available-for-Sale and Assessment for Impairment of Certain Investment Securities: The Corporation designates its investment securities as held-to-maturity, available-for-sale or trading. Each of these designations affords different treatment in the balance sheet and statement of income for market value changes affecting securities that are otherwise identical. Should evidence emerge that indicates that management’s intent or ability to manage the securities as originally asserted is not supportable, securities in the held-to-maturity or available-for-sale designations may be re-categorized so that adjustments to either the balance sheet or statement of condition may be required.
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.
Management evaluates debt securities for other-than-temporary impairment by considering the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The Corporation evaluates its equity securities for other-than-temporary impairment and recognizes other-than-temporary impairment charges when it has determined that it is probable that the fair value of certain equity securities will 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. Management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment and the Corporation’s positive intent and ability to hold these securities until recovery to the Corporation’s cost basis occurs.
Reserve for Loan and Lease Losses: Reserves for loan and lease losses are provided using techniques that specifically identify losses on impaired loans and leases, estimate losses on pools of homogeneous loans and leases, and estimate the amount of unallocated reserve necessary to account for losses that are present in the loan and lease portfolio but not yet currently identifiable. The adequacies
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of these reserves are sensitive to changes in current economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral committed to secure such payments. Rapid or sustained downturns in the economy may require increases in reserves that may negatively impact the Corporation’s results of operations and statements of financial condition in the periods requiring additional reserves.
Valuation of Goodwill and Other Intangible Assets: The Corporation completed an impairment test for goodwill and other intangible assets during the fourth quarter of 2014. The Corporation employs general industry practices in evaluating the fair value of its goodwill and other intangible assets. Goodwill and other assets and liabilities have been allocated to defined reporting units, which are Banking, Wealth Management and Insurance. The Corporation’s two-step impairment testing of goodwill is described as follows. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill.
For Banking, in Step 1, fair value is determined by using a weighted average of the market and income approaches. Under the market approach, fair value is measured based on trading multiples of independent publicly traded entities of comparable sizes. Under the income approach, fair value is measured utilizing a net present value of cash flows of projected net income based on the compound annual growth rate of equity and a discount rate. The discount rate is calculated by utilizing the cost of equity method. A heavier weighting is placed on the market approach as data is readily available for comparable banks. The fair value of Banking that was calculated was compared to its carrying amount. The fair value exceeded its carrying amount, therefore, no impairment existed. If the fair value of Banking is less than its carrying amount, a Step 2 test is required to calculate and compare the fair value of its goodwill with the carrying amount of that goodwill. The valuation procedures applied in Step 2 are similar to those that would be performed upon an acquisition, with the Step 1 fair value representing a hypothetical reporting unit purchase price. If the implied fair value of goodwill is less than its carrying amount, impairment exists which requires an impairment charge to noninterest expense.
For Wealth Management and Insurance, in Step 1, the fair value of each reporting unit is determined by using a weighted average of the income and market approaches. Under the income approach, fair value is measured utilizing a net present value of cash flows of projected net income based on the compound annual growth rate of equity and a discount rate. The discount rate is calculated by utilizing the cost of equity and the cost of debt methods. Under the market approach, fair value is measured based on trading multiples of independent publicly traded entities of comparable sizes. Wealth Management and Insurance, being fee-based revenue dependent, warrant a heavier weighting on the income approach; and not being publicly traded, warrant less weighting on the market approach. The fair value that was calculated for each reporting unit was compared to the carrying amount of the reporting unit. The fair value of each reporting unit exceeded its carrying amount, therefore, no impairment existed. If the fair value of any reporting unit is less than its carrying amount, a Step 2 test is required to calculate and compare the fair value of reporting unit goodwill with the carrying amount of that goodwill. The valuation procedures applied in Step 2 are similar to those that would be performed upon an acquisition, with the Step 1 fair value representing a hypothetical reporting unit purchase price. If the implied fair value of goodwill is less than its carrying amount, impairment exists which requires an impairment charge to noninterest expense.
There was no goodwill impairment and no material impairment of identifiable intangibles recorded during 2014 or 2013. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
For other identifiable intangible assets, changes in the useful life or economic value of acquired assets may require a reduction in the asset value carried on the financial statements of the Corporation and a related charge in the statement of income. Such changes in asset value could result from a change in market demand for the products or services offered by an acquired business or by reductions in the expected profit margins that can be obtained through the future delivery of the acquired product or service line.
Mortgage Servicing Rights: The Corporation has mortgage servicing rights for mortgages it originated, subsequently sold and retained servicing. The value of the rights is booked as income when the corresponding mortgages are sold. The income booked at sale is the estimated net present value of the cash flows that will be received from servicing the loans over their entire future term. The term of a servicing right can be reasonably estimated using prepayment assumptions of comparable assets priced in the secondary market. As mortgage rates being offered to the public decrease, the life of mortgage servicing rights tends to shorten, as borrowers have increased incentive to refinance. Shortened mortgage servicing lives may require changes in the value of the servicing rights that have already been recorded to be marked down. This may cause a material change in reported results of operations for the Corporation depending on the size of the servicing portfolio and the degree of change in the prepayment speed of the type and coupon of loans being serviced.
Deferred Tax Assets and Liabilities: The Corporation recognizes deferred tax assets and liabilities for the future effects of temporary differences, net operating loss carryforwards, and tax credits. Enacted tax rates are applied to cumulative temporary differences based on expected taxable income in the periods in which the deferred tax asset or liability is anticipated to be realized.
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Future tax rate changes could occur that would require the recognition of income or expense in the statement of income in the period in which they are enacted. Deferred tax assets must be reduced by a valuation allowance if in management’s judgment it is “more likely than not” that some portion of the asset will not be realized. Management may need to modify their judgments in this regard from one period to another should a material change occur in the business environment, tax legislation, or in any other business factor that could impair the Corporation’s ability to benefit from the asset in the future.
Benefit Plans: The Corporation has a retirement plan that it provides as a benefit to employees hired before December 8, 2009 and former employees who were also hired before December 8, 2009 and met the plan’s vesting requirements. The Corporation also provides supplemental retirement plans that it provides as a benefit to certain former executives. Determining the adequacy of the funding of these plans requires estimates of future salary rate increases, of long-term rates of investment return, mortality assumptions, and the use of an appropriate discount rate for the obligation. Changes in these estimates and assumptions due to changes in the economic environment or financial markets may result in material changes in the Corporation’s balance sheet or statement of income.
Stock-Based Compensation: The fair value of share based awards is recognized as compensation expense over the vesting period based on the grant-date fair value of the awards. The Corporation uses the Black-Scholes Model to estimate the fair value of each option on the date of grant. The Black-Scholes model estimates the fair value of employee stock options using a pricing model which takes into consideration the exercise price of the option, the expected life of the option, the current market price and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Corporation’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. The Corporation grants stock options to employees with an exercise price equal to the fair value of the shares at the date of grant. The Corporation grants both fixed and variable (performance-based) restricted stock to employees and non-employee directors. The performance-based restricted stock awards vest based upon the Corporation’s performance against selected peers with respect to certain financial measures over a three-year period. The fair value of fixed restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period. The fair value of the performance-based restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period adjusted for a probability factor of achieving the performance goals.
Readers of the Corporation’s financial statements should be aware that the estimates and assumptions used in the Corporation’s current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Corporation at that time.
General
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. Growth is pursued through expansion of current customer relationships and development of additional relationships with new offices and strategic acquisitions.The Corporation has also taken steps in recent years to reduce its dependence on net interest income by intensifying its focus on fee-based income from trust, insurance, mortgage banking and investment services to customers.
The principal component of earnings for the Corporation is net interest income, which is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The net interest margin, which is the ratio of net interest income to average earning assets, is affected by several factors including market interest rates, economic conditions, loan and lease demand, and deposit activity. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation is in an asset sensitive position from a maturity perspective and in a liability sensitive position from a repricing perspective as interest rates remain at historically low levels; however, the Corporation anticipates interest rates to increase over the longer term, which it expects would benefit its net interest margin.
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Executive Overview
The Corporation’s consolidated net income, earnings per share and returns on average assets and average equity were as follows:
For the Years Ended December 31, | Amount of Change | Percent Change | |||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2014 | 2013 | 2012 | 2014 to 2013 | 2013 to 2012 | 2014 to 2013 | 2013 to 2012 | ||||||||||||||||||
Net income | $ | 22,231 | $ | 21,189 | $ | 20,872 | $ | 1,042 | $ | 317 | 5 | % | 2 | % | |||||||||||
Net income per share: | |||||||||||||||||||||||||
Basic | $ | 1.37 | $ | 1.28 | $ | 1.25 | $ | 0.09 | $ | 0.03 | 7 | 2 | |||||||||||||
Diluted | 1.36 | 1.27 | 1.24 | 0.09 | 0.03 | 7 | 2 | ||||||||||||||||||
Return on average assets | 1.01 | % | 0.95 | % | 0.95 | % | 6 BP | 0 BP | 6 | — | |||||||||||||||
Return on average equity | 7.74 | % | 7.53 | % | 7.39 | % | 21 BP | 14 BP | 3 | 2 | |||||||||||||||
2014 versus 2013
The 2014 results compared to 2013 include the following significant components:
• | Net interest income on a tax-equivalent basis for 2014 was $76.9 million, a decrease of $321 thousand, or less than 1%, compared to 2013. The net interest margin on a tax-equivalent basis for 2014 was 3.87%, an increase of 6 basis points compared to 3.81% for 2013. |
• | The provision for loan and lease losses for 2014 was $3.6 million, a decrease of $7.6 million compared to 2013. |
• | Noninterest income for 2014 was $48.7 million, an increase of $1.9 million, or 4%, compared to 2013. Noninterest expense for 2014 was $87.3 million, an increase of $6.1 million, or 8% compared to 2013. |
• | Gross loans and leases held for investment grew $85.1 million, or 6% from December 31, 2013. Deposits increased $16.8 million, or 1% from December 31, 2013. |
• | Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications, decreased$5.9 million to $17.3 million at December 31, 2014 from $23.2 million at December 31, 2013. Nonaccrual loans and leases as a percentage of total loans and leases held for investment was 1.07% at December 31, 2014 compared to 1.51% at December 31, 2013. Net loan and lease charge-offs of $7.4 million for 2014 were down $4.1 million compared to $11.5 million for 2013. |
During 2014, the Corporation repurchased 110,997 shares of common stock at a cost of $2.0 million under its 2013 Board approved share repurchase program. At December 31, 2014, total shares outstanding were 16,221,607.
2013 versus 2012
The 2013 results compared to 2012 include the following significant components:
• | Net interest income on a tax-equivalent basis of $77.2 million for 2013 was consistent with 2012. The net interest margin on a tax-equivalent basis decreased 8 basis points to 3.81% for 2013 from 3.89% for 2012. |
• | The provision for loan and lease losses for 2013 was $11.2 million, an increase of $1.2 million, or 12% compared to 2012. |
• | Noninterest income for 2013 was $46.8 million, an increase of $6.5 million, or 16% compared to 2012. Noninterest expense for 2013 was $81.1 million, an increase of $4.9 million, or 6% compared to 2012. |
• | Gross loans and leases held for investment grew $59.6 million, or 4% from December 31, 2012. Deposits declined $20.8 million, or 1% from December 31, 2012. |
• | Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications, decreased $8.9 million to $23.2 million at December 31, 2013 from $32.1 million at December 31, 2012. Nonaccrual loans and leases as a percentage of total loans and leases held for investment was 1.51% at December 31, 2013 compared to 2.17% at December 31, 2012. Net loan and lease charge-offs of $11.5 million for 2013 were down $3.7 million compared to $15.2 million for 2012. |
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During 2013, the Corporation repurchased 540,285 shares of common stock at a cost of $9.9 million under its 2007 Board approved share repurchase program. At September 30, 2013, this share repurchase plan was substantially completed. 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.
Details of the changes in the various components of net income and the balance sheet are further discussed in the sections that follow.
Acquisitions
Valley Green Bank
On June 17, 2014, the Corporation, the Bank and Valley Green Bank entered into an Agreement and Plan of Merger which provided for the merger of Valley Green Bank with and into the Bank in an all-stock transaction with an aggregate value of approximately $78.9 million. On January 1, 2015, the Corporation completed its acquisition of Valley Green Bank. See Note 26, "Subsequent Event" included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K for additional information. The transaction qualifies as a tax-free reorganization for federal income tax purposes. The transaction is anticipated to be accretive to the Corporation’s earnings per share in the first combined year of operations, with earnings accretion expected to be greater than 10% in year two.
Headquartered in the Mt. Airy neighborhood of Philadelphia, Pennsylvania, Valley Green Bank had approximately $425 million in assets, $386 million in loans, and $385 million in deposits at December 31, 2014 and operated three full-service banking offices and two administrative offices for loan production in the greater Philadelphia marketplace. With the assumption of Valley Green Bank's three branches and two administrative offices for loan production in the Philadelphia marketplace, the Corporation entered a new small business and consumer market and expanded its existing lending network within southeastern Pennsylvania.
Sterner Insurance Associates
On July 1, 2014, the Corporation and its insurance subsidiary, Univest Insurance, completed the acquisition of Sterner Insurance Associates (Sterner), a full service firm providing insurance and consultative risk management solutions to individuals and businesses throughout the Lehigh Valley, Berks, Bucks and Montgomery counties. The Corporation paid $3.9 million in cash and assumed liabilities of $940 thousand at closing with additional contingent consideration to be paid in annual installments over the three-year period ending June 30, 2017, based on the achievement of certain levels of revenue growth and EBITDA (earnings before interest, taxes, depreciation and amortization). At the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $635 thousand in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $5.7 million cumulative over the next three years. As a result of the Sterner acquisition, the Corporation recorded goodwill of $3.4 million (inclusive of the contingent consideration) and customer related intangibles of $1.6 million.
Girard Partners
On January 27, 2014, the Corporation completed the acquisition of Girard Partners (Girard), a registered investment advisory firm with more than $500 million in assets under management. The Corporation increased its assets under management to over $3.0 billion at the acquisition date and expanded its advisory capabilities. The Corporation paid $5.4 million in cash at closing with additional contingent consideration to be paid in annual installments over the five-year period ending December 31, 2018, based on the achievement of certain levels of EBITDA. As of the effective date of the acquisition, January 1, 2014, the Corporation recorded the estimated fair value of the contingent consideration of $5.5 million in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the next five years. As a result of the Girard acquisition, the Corporation recorded goodwill of $6.8 million (inclusive of the contingent consideration) and customer related intangibles of $4.3 million.
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Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation’s revenue. Table 1 presents a summary of the Corporation’s average balances, the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the year ended December 31, 2014 compared to 2013 and for the year ended December 31, 2013 compared to 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.
2014 versus 2013
Net interest income on a tax-equivalent basis for the year ended December 31, 2014 was $76.9 million, a decrease of $321 thousand, or less than 1%, compared to the same period in 2013. The decline in year-to-date net interest income from the prior year was primarily attributable to a reduction in investment securities. This decline was partially offset by loan and lease growth which more than compensated for the reduction in loan rates. It was also offset by maturities of time deposits, reductions in time deposit rates and redemption of the Corporation's trust preferred securities in 2013. The tax-equivalent net interest margin for the year ended December 31, 2014 increased 6 basis points to 3.87% from 3.81% for 2013
2013 versus 2012
Net interest income on a tax-equivalent basis of $77.2 million for the year ended December 31, 2013 was consistent with 2012. The tax-equivalent net interest margin for the year ended December 31, 2013 decreased 8 basis points to 3.81% from 3.89% for 2012. The decline in net interest margin from the comparable period in the prior year was primarily due to lower rates on commercial and residential real estate loans due to re-pricing and the competitive environment. Additionally, the re-investment of maturing and called investment securities into lower yielding investments contributed to the decline. Favorable re-pricing of savings accounts and certificates of deposit, along with maturities of higher yielding certificates of deposit and the redemption of the trust preferred securities and termination of the related interest rate swap partially offset the decline in the net interest margin.
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Table 1—Average Balances and Interest Rates—Tax-Equivalent Basis
For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Income/ Expense | Average Rate | Average Balance | Income/ Expense | Average Rate | Average Balance | Income/ Expense | Average Rate | |||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Interest-earning deposits with other banks | $ | 33,482 | $ | 81 | 0.24 | % | $ | 46,469 | $ | 126 | 0.27 | % | $ | 52,387 | $ | 164 | 0.31 | % | ||||||||||||||
U.S. government obligations | 128,487 | 1,287 | 1.00 | 172,414 | 1,870 | 1.08 | 154,715 | 2,038 | 1.32 | |||||||||||||||||||||||
Obligations of states and political subdivisions | 106,365 | 5,554 | 5.22 | 118,235 | 6,263 | 5.30 | 119,993 | 6,669 | 5.56 | |||||||||||||||||||||||
Other debt and equity securities | 137,900 | 2,702 | 1.96 | 189,040 | 3,562 | 1.88 | 195,765 | 3,913 | 2.00 | |||||||||||||||||||||||
Total interest-earning deposits and investments | 406,234 | 9,624 | 2.37 | 526,158 | 11,821 | 2.25 | 522,860 | 12,784 | 2.45 | |||||||||||||||||||||||
Commercial, financial and agricultural loans | 392,747 | 15,636 | 3.98 | 403,993 | 16,958 | 4.20 | 445,883 | 19,367 | 4.34 | |||||||||||||||||||||||
Real estate—commercial and construction loans | 608,602 | 27,918 | 4.59 | 577,230 | 27,546 | 4.77 | 530,633 | 27,550 | 5.19 | |||||||||||||||||||||||
Real estate—residential loans | 293,610 | 10,523 | 3.58 | 261,704 | 9,896 | 3.78 | 253,486 | 10,373 | 4.09 | |||||||||||||||||||||||
Loans to individuals | 33,675 | 2,040 | 6.06 | 42,339 | 2,392 | 5.65 | 43,562 | 2,480 | 5.69 | |||||||||||||||||||||||
Municipal loans and leases | 180,914 | 8,767 | 4.85 | 145,463 | 7,360 | 5.06 | 133,212 | 7,231 | 5.43 | |||||||||||||||||||||||
Lease financings | 71,287 | 6,404 | 8.98 | 68,622 | 6,381 | 9.30 | 58,672 | 5,709 | 9.73 | |||||||||||||||||||||||
Gross loans and leases | 1,580,835 | 71,288 | 4.51 | 1,499,351 | 70,533 | 4.70 | 1,465,448 | 72,710 | 4.96 | |||||||||||||||||||||||
Total interest-earning assets | 1,987,069 | 80,912 | 4.07 | 2,025,509 | 82,354 | 4.07 | 1,988,308 | 85,494 | 4.30 | |||||||||||||||||||||||
Cash and due from banks | 32,710 | 32,854 | 49,362 | |||||||||||||||||||||||||||||
Reserve for loan and lease losses | (24,287 | ) | (25,519 | ) | (30,771 | ) | ||||||||||||||||||||||||||
Premises and equipment, net | 35,099 | 33,197 | 34,079 | |||||||||||||||||||||||||||||
Other assets | 171,656 | 165,292 | 167,515 | |||||||||||||||||||||||||||||
Total assets | $ | 2,202,247 | $ | 2,231,333 | $ | 2,208,493 | ||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Interest-bearing checking deposits | $ | 314,784 | 172 | 0.05 | $ | 286,487 | 164 | 0.06 | $ | 230,031 | 177 | 0.08 | ||||||||||||||||||||
Money market savings | 295,209 | 373 | 0.13 | 319,958 | 314 | 0.10 | 330,839 | 509 | 0.15 | |||||||||||||||||||||||
Regular savings | 535,346 | 317 | 0.06 | 536,701 | 313 | 0.06 | 510,005 | 790 | 0.15 | |||||||||||||||||||||||
Time deposits | 264,591 | 3,102 | 1.17 | 299,792 | 3,795 | 1.27 | 363,225 | 5,162 | 1.42 | |||||||||||||||||||||||
Total time and interest-bearing deposits | 1,409,930 | 3,964 | 0.28 | 1,442,938 | 4,586 | 0.32 | 1,434,100 | 6,638 | 0.46 | |||||||||||||||||||||||
Short-term borrowings | 41,215 | 32 | 0.08 | 72,211 | 48 | 0.07 | 108,023 | 326 | 0.30 | |||||||||||||||||||||||
Long-term debt | — | — | — | — | — | — | 109 | 4 | 3.67 | |||||||||||||||||||||||
Subordinated notes and capital securities | — | — | — | 10,710 | 483 | 4.51 | 21,921 | 1,206 | 5.50 | |||||||||||||||||||||||
Total borrowings | 41,215 | 32 | 0.08 | 82,921 | 531 | 0.64 | 130,053 | 1,536 | 1.18 | |||||||||||||||||||||||
Total interest-bearing liabilities | 1,451,145 | 3,996 | 0.28 | 1,525,859 | 5,117 | 0.34 | 1,564,153 | 8,174 | 0.52 | |||||||||||||||||||||||
Noninterest-bearing deposits | 435,058 | 390,420 | 327,576 | |||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 29,006 | 33,515 | 34,478 | |||||||||||||||||||||||||||||
Total liabilities | 1,915,209 | 1,949,794 | 1,926,207 | |||||||||||||||||||||||||||||
Shareholders’ Equity: | ||||||||||||||||||||||||||||||||
Common stock | 91,332 | 91,332 | 91,332 | |||||||||||||||||||||||||||||
Additional paid-in capital | 65,464 | 64,874 | 64,517 | |||||||||||||||||||||||||||||
Retained earnings and other equity | 130,242 | 125,333 | 126,437 | |||||||||||||||||||||||||||||
Total shareholders’ equity | 287,038 | 281,539 | 282,286 | |||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,202,247 | $ | 2,231,333 | $ | 2,208,493 | ||||||||||||||||||||||||||
Net interest income | $ | 76,916 | $ | 77,237 | $ | 77,320 | ||||||||||||||||||||||||||
Net interest spread | 3.79 | 3.73 | 3.78 | |||||||||||||||||||||||||||||
Effect of net interest-free funding sources | 0.08 | 0.08 | 0.11 | |||||||||||||||||||||||||||||
Net interest margin | 3.87 | % | 3.81 | % | 3.89 | % | ||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 136.93 | % | 132.75 | % | 127.12 | % | ||||||||||||||||||||||||||
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 years ended December 31, 2014, 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 year ended December 31, 2014 compared to 2013 and for the year ended December 31, 2013 compared to 2012, indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated proportionately.
For the Years Ended December 31, 2014 Versus 2013 | For the Years Ended December 31, 2013 Versus 2012 | ||||||||||||||||||||||
(Dollars in thousands) | Volume Change | Rate Change | Total | Volume Change | Rate Change | Total | |||||||||||||||||
Interest income: | |||||||||||||||||||||||
Interest-earning deposits with other banks | $ | (32 | ) | $ | (13 | ) | $ | (45 | ) | $ | (18 | ) | $ | (20 | ) | $ | (38 | ) | |||||
U.S. government obligations | (452 | ) | (131 | ) | (583 | ) | 222 | (390 | ) | (168 | ) | ||||||||||||
Obligations of states and political subdivisions | (616 | ) | (93 | ) | (709 | ) | (97 | ) | (309 | ) | (406 | ) | |||||||||||
Other debt and equity securities | (1,004 | ) | 144 | (860 | ) | (128 | ) | (223 | ) | (351 | ) | ||||||||||||
Interest on deposits and investments | (2,104 | ) | (93 | ) | (2,197 | ) | (21 | ) | (942 | ) | (963 | ) | |||||||||||
Commercial, financial and agricultural loans | (458 | ) | (864 | ) | (1,322 | ) | (1,793 | ) | (616 | ) | (2,409 | ) | |||||||||||
Real estate—commercial and construction loans | 1,446 | (1,074 | ) | 372 | 2,318 | (2,322 | ) | (4 | ) | ||||||||||||||
Real estate—residential loans | 1,167 | (540 | ) | 627 | 328 | (805 | ) | (477 | ) | ||||||||||||||
Loans to individuals | (517 | ) | 165 | (352 | ) | (71 | ) | (17 | ) | (88 | ) | ||||||||||||
Municipal loans and leases | 1,724 | (317 | ) | 1,407 | 640 | (511 | ) | 129 | |||||||||||||||
Lease financings | 245 | (222 | ) | 23 | 933 | (261 | ) | 672 | |||||||||||||||
Interest and fees on loans and leases | 3,607 | (2,852 | ) | 755 | 2,355 | (4,532 | ) | (2,177 | ) | ||||||||||||||
Total interest income | 1,503 | (2,945 | ) | (1,442 | ) | 2,334 | (5,474 | ) | (3,140 | ) | |||||||||||||
Interest expense: | |||||||||||||||||||||||
Interest-bearing checking deposits | 24 | (16 | ) | 8 | 39 | (52 | ) | (13 | ) | ||||||||||||||
Money market savings | (27 | ) | 86 | 59 | (17 | ) | (178 | ) | (195 | ) | |||||||||||||
Regular savings | 4 | — | 4 | 35 | (512 | ) | (477 | ) | |||||||||||||||
Time deposits | (415 | ) | (278 | ) | (693 | ) | (852 | ) | (515 | ) | (1,367 | ) | |||||||||||
Interest on time and interest-bearing deposits | (414 | ) | (208 | ) | (622 | ) | (795 | ) | (1,257 | ) | (2,052 | ) | |||||||||||
Short-term borrowings | (23 | ) | 7 | (16 | ) | (84 | ) | (194 | ) | (278 | ) | ||||||||||||
Long-term debt | — | — | — | (4 | ) | — | (4 | ) | |||||||||||||||
Subordinated notes and capital securities | (483 | ) | — | (483 | ) | (535 | ) | (188 | ) | (723 | ) | ||||||||||||
Interest on borrowings | (506 | ) | 7 | (499 | ) | (623 | ) | (382 | ) | (1,005 | ) | ||||||||||||
Total interest expense | (920 | ) | (201 | ) | (1,121 | ) | (1,418 | ) | (1,639 | ) | (3,057 | ) | |||||||||||
Net interest income | $ | 2,423 | $ | (2,744 | ) | $ | (321 | ) | $ | 3,752 | $ | (3,835 | ) | $ | (83 | ) | |||||||
2014 versus 2013
Net interest income on a tax-equivalent basis was $76.9 million for the year ended December 31, 2014, a decrease of $321 thousand from 2013. The tax-equivalent net interest margin for the year ended December 31, 2014 increased 6 basis points to 3.87% from 3.81% for 2013. The decline in year-to-date net interest income from the prior year was primarily attributable to a reduction in investment securities. This decline was partially offset by loan and lease growth which more than compensated for the reduction in loan rates. It was also offset by maturities of time deposits, reductions in time deposit rates and redemption of the Corporation's trust preferred securities in 2013.
2013 versus 2012
Net interest income on a tax-equivalent basis of $77.2 million for the year ended December 31, 2013 was consistent with 2012. The tax-equivalent net interest margin for the year ended December 31, 2013 decreased 8 basis points to 3.81% from 3.89% for 2012. The decline in net interest margin from the comparable period in the prior year was primarily due to lower rates on commercial and residential real estate loans due to re-pricing and the competitive environment. Additionally, the re-investment of maturing and called investment securities into lower yielding investments contributed to the decline. Favorable re-pricing of savings accounts and certificates of deposit, along with maturities of higher yielding certificates of deposit and the redemption of the trust preferred securities and termination of the related interest rate swap partially offset the decline in the net interest margin.
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Interest Income
2014 versus 2013
Interest income on a tax-equivalent basis for the year ended December 31, 2014 was $80.9 million, a decrease of $1.4 million, or 2% from 2013. The decrease was primarily due to a reduction in investment securities. This decline was partially offset as loan and lease growth more than compensated for the reduction in loan rates. The growth in loans for the year ended December 31, 2014, occurred mainly in commercial real estate, residential real estate and municipal loans and leases. The lower rates on loans were primarily in the business, commercial real estate and residential real estate loan categories due to re-pricing and the competitive environment. The average rate earned on loans decreased 19 basis points for the year ended December 31, 2014 from 2013.
2013 versus 2012
Interest income on a tax-equivalent basis for the year ended December 31, 2013 was $82.4 million, a decrease of $3.1 million, or 4% from 2012. The decrease was primarily due to lower rates on business, commercial real estate and residential real estate loans due to re-pricing and the competitive environment, along with lower commercial business loan outstandings. The average rate earned on loans decreased 26 basis points for the year ended December 31, 2013 from 2012. In addition, the re-investment of maturing and called investment securities into lower yielding investments contributed to the decline in interest income. The average rate earned on investment securities and deposits at other banks decreased 20 basis points for the year ended December 31, 2013 compared to 2012. These unfavorable variances were partially offset by growth in lease financings and commercial real estate loans.
Interest Expense
2014 versus 2013
Interest expense for the year ended December 31, 2014 was $4.0 million, a decrease of $1.1 million, or 22% from 2013. The decrease was mainly attributable to maturities of time deposits, reduction in time deposit rates and redemption of the Corporation’s trust preferred securities during 2013. For the year ended December 31, 2014, the average rate paid on time deposits declined by 10 basis points and the average rate paid on borrowings declined by 56 basis points. For the year ended December 31, 2014, the Corporation experienced decreases in average time deposits of $35.2 million and money market savings of $24.7 million partially offset by increases in average interest-bearing checking of $28.3 million. The increase in interest-bearing checking deposits was primarily due to a product change for existing business and municipal customers which resulted in customer repurchase agreements, classified as borrowings, being transferred to interest-bearing demand deposits during the the second quarter of 2013.
2013 versus 2012
Interest expense for the year ended December 31, 2013 was $5.1 million, a decrease of $3.1 million, or 37% from 2012. This decrease was mainly due to a decrease in the Corporation’s average cost of deposits of 14 basis points for the year ended December 31, 2013 from the same period in 2012. 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 54 basis points for the year ended December 31, 2013. This decline primarily resulted from the Corporation’s decision in the second quarter of 2013 to redeem its trust preferred securities and terminate the related interest rate swap. For the year ended December 31, 2013, the Corporation experienced increases in average interest-bearing checking of $56.5 million and regular savings of $26.7 million partially offset by decreases in average time deposits of $63.4 million and money market savings of $10.9 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 years ended December 31, 2014, 2013, and 2012 was $3.6 million, $11.2 million, and $10.0 million, respectively. The decrease in the provision during 2014 was mainly due to improvements in historical loss factors utilized to calculate the allowance for loan and lease loss requirement and improved asset quality compared to a decline in collateral value for a commercial real estate borrower in 2013 and updated assessments of residential building lots for a commercial real estate developer in 2013.
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Noninterest Income
Noninterest income consists of trust department fee income, service charges on deposit accounts, commission income, net gains (losses) on sales of securities, net gains (losses) on mortgage banking activities, net gains (losses) on sales and write-downs of other real estate owned, loss on termination of an 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 noninterest income includes other miscellaneous income.
The following table presents noninterest income for the periods indicated:
For the Years Ended December 31, | $ Change | % Change | |||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2014 to 2013 | 2013 to 2012 | 2014 to 2013 | 2013 to 2012 | ||||||||||||||||||
Trust fee income | $ | 7,835 | $ | 7,303 | $ | 6,777 | $ | 532 | $ | 526 | 7 | % | 8 | % | |||||||||||
Service charges on deposit accounts | 4,230 | 4,451 | 4,429 | (221 | ) | 22 | (5 | ) | — | ||||||||||||||||
Investment advisory commission and fee income | 11,904 | 7,642 | 6,128 | 4,262 | 1,514 | 56 | 25 | ||||||||||||||||||
Insurance commission and fee income | 11,543 | 9,395 | 7,766 | 2,148 | 1,629 | 23 | 21 | ||||||||||||||||||
Other service fee income | 7,189 | 7,390 | 5,855 | (201 | ) | 1,535 | (3 | ) | 26 | ||||||||||||||||
Bank owned life insurance income | 1,628 | 2,968 | 2,670 | (1,340 | ) | 298 | (45 | ) | 11 | ||||||||||||||||
Other-than-temporary impairment on equity securities | — | — | (13 | ) | — | 13 | — | N/M | |||||||||||||||||
Net gain on sales of investment securities | 635 | 3,389 | 305 | (2,754 | ) | 3,084 | (81 | ) | N/M | ||||||||||||||||
Net gain on mortgage banking activities | 2,182 | 4,523 | 6,088 | (2,341 | ) | (1,565 | ) | (52 | ) | (26 | ) | ||||||||||||||
Net gain (loss) on sales and dispositions of fixed assets | 40 | (6 | ) | 1,257 | 46 | (1,263 | ) | N/M | N/M | ||||||||||||||||
Net gain (loss) on sales and write-downs of other real estate owned | 195 | 626 | (1,904 | ) | (431 | ) | 2,530 | (69 | ) | N/M | |||||||||||||||
Loss on termination of interest rate swap | — | (1,866 | ) | — | 1,866 | (1,866 | ) | N/M | N/M | ||||||||||||||||
Other | 1,270 | 969 | 902 | 301 | 67 | 31 | 7 | ||||||||||||||||||
Total noninterest income | $ | 48,651 | $ | 46,784 | $ | 40,260 | $ | 1,867 | $ | 6,524 | 4 | % | 16 | % | |||||||||||
2014 versus 2013
Noninterest income for the year ended December 31, 2014 was $48.7 million, an increase of $1.9 million or 4% compared to 2013. Investment advisory commission and fee income increased $4.3 million for the year ended December 31, 2014, primarily due to the acquisition of Girard effective January 1, 2014. Insurance commission and fee income increased $2.1 million for the year ended December 31, 2014, primarily due to the Sterner acquisition on July 1, 2014, an increase in contingent commission income and the Fretz acquisition on May 1, 2013.
These favorable increases were partially offset for the year ended December 31, 2014 by a $2.3 million decline in net gain on mortgage banking activities. In 2014, higher interest rates led to a decline in refinance activity while new home purchase activity remained below historical norms. These factors led to a 51% decline in funded first mortgage volume for the year ended December 31, 2014 compared to 2013. However, funded first mortgage volume during the fourth quarter of 2014 was up 39% from the fourth quarter of 2013 due to an increase in purchase volume. In addition, there was a $2.8 million decline in net gain on sales of securities for the year ended December 31, 2014 from the prior year. The sale of available-for-sale investment securities during 2014 amounted to $33.0 million and consisted primarily of residential mortgage-backed securities. The sale of available-for-sale investment securities during 2013 amounted to $76.4 million and consisted primarily of U.S. government agency bonds.
Excess proceeds from bank owned life insurance death benefits of $1.1 million were recognized in 2013. Lastly, the year ended December 31, 2013 included a $1.9 million loss on the termination of an interest rate swap which was used as a hedge of trust preferred securities.
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2013 versus 2012
Noninterest income for the year ended December 31, 2013 was $46.8 million, an increase of $6.5 million, or 16% compared to 2012. Insurance commission and fee income increased $1.6 million for the year ended December 31, 2013, 2013, primarily a result of the Fretz acquisition on May 1, 2013 and the Javers acquisition on May 31, 2012. Investment advisory commission and fee income increased $1.5 million as assets under supervision increased 22%, predominately market driven, over December 31, 2012. Mortgage servicing income (included in other service fee income) increased $1.5 million mainly due to a 24% increase in loans serviced for others from December 31, 2012. The increase in loans serviced for others resulted from mortgage banking funded loans exceeding paydowns. The net gain on sales of other real estate owned was $626 thousand for the year ended December 31, 2013. This compares favorably to a net loss on sales and write-downs of other real estate owned of $1.9 million for the year ended December 31, 2012. The net gain on sales of securities increased $3.1 million for the year ended December, 31 2013. The increase in the gain was primarily due to favorable market conditions which led to higher treasury rates in 2013. The sale of available-for-sale investment securities during the year ended December 31, 2013 and 2012 amounted to $76.4 million and $57.2 million, respectively, and consisted primarily of U.S. government agency bonds.
These favorable increases were partially offset by a $1.9 million loss on the termination of an interest rate swap during 2013, which was used as a hedge of trust preferred securities. In addition, the net gain on mortgage banking activities decreased $1.6 million for the year ended December 31, 2013. The increase in interest rates beginning in the second quarter of 2013 contributed to a significant decline in refinance activity and lowered gain on sale margins. Mortgage banking funded loan volume declined 18% for the year ended December 31, 2013, from 2012.
Noninterest Expense
The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, commissions, occupancy, equipment, professional services and intangible 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.
The following table presents noninterest expense for the periods indicated:
For the Years Ended December 31, | $ Change | % Change | |||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2014 to 2013 | 2013 to 2012 | 2014 to 2013 | 2013 to 2012 | ||||||||||||||||||
Salaries and benefits | $ | 42,245 | $ | 39,522 | $ | 37,306 | $ | 2,723 | $ | 2,216 | 7 | % | 6 | % | |||||||||||
Commissions | 7,637 | 8,512 | 6,981 | (875 | ) | 1,531 | (10 | ) | 22 | ||||||||||||||||
Net occupancy | 7,023 | 5,869 | 5,716 | 1,154 | 153 | 20 | 3 | ||||||||||||||||||
Equipment | 5,645 | 4,865 | 4,486 | 780 | 379 | 16 | 8 | ||||||||||||||||||
Professional fees | 3,164 | 3,471 | 2,702 | (307 | ) | 769 | (9 | ) | 28 | ||||||||||||||||
Marketing and advertising | 1,880 | 1,948 | 1,725 | (68 | ) | 223 | (3 | ) | 13 | ||||||||||||||||
Deposit insurance premiums | 1,561 | 1,553 | 1,689 | 8 | (136 | ) | 1 | (8 | ) | ||||||||||||||||
Intangible expenses | 2,167 | 157 | 899 | 2,010 | (742 | ) | N/M | (83 | ) | ||||||||||||||||
Acquisition-related costs | 1,270 | 87 | 36 | 1,183 | 51 | N/M | N/M | ||||||||||||||||||
Restructuring and integration charges | 8 | 534 | — | (526 | ) | 534 | (99 | ) | N/M | ||||||||||||||||
Other | 14,654 | 14,615 | 14,742 | 39 | (127 | ) | — | (1 | ) | ||||||||||||||||
Total noninterest expense | $ | 87,254 | $ | 81,133 | $ | 76,282 | $ | 6,121 | $ | 4,851 | 8 | % | 6 | % | |||||||||||
2014 versus 2013
Noninterest expense for the year ended December 31, 2014 was $87.3 million, an increase of $6.1 million or 8% compared to 2013. Salaries and benefit expense increased $2.7 million for the year ended December 31, 2014, primarily attributable to the Girard and Sterner acquisitions and lower deferred loan origination costs which were partially offset by reduced pension plan expense. Intangible expenses increased by $2.0 million for the year ended December 31, 2014, mainly due to the Girard acquisition and the reduction to the contingent consideration liability related to the Javers acquisition which resulted in a reduction of expense of $959 thousand during 2013. Premises and equipment expenses increased $1.9 million for the year ended December 31, 2014, mainly due to increased costs related to computer equipment and software, our new leased office location in the Lehigh Valley which opened in December 2013 and the Girard and Sterner acquisitions. Acquisition-related costs for the year ended December 31, 2014 were $1.3 million, mainly attributable to the completed acquisition of Valley Green Bank. These unfavorable variances were partially
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offset by a decrease in commission expense of $875 thousand for the year ended December 31, 2014, mainly due to the decline in mortgage banking activity. In addition, non-interest expense in 2013 included restructuring charges of $534 thousand.
2013 versus 2012
Noninterest expense for the year ended December 31, 2013 was $81.1 million, an increase of $4.9 million or 6% compared to 2012. Salaries and benefits expense increased $2.2 million primarily attributable to the Fretz and Javers acquisitions, higher health insurance costs and performance-based salary and incentive increases. Commission expense increased $1.5 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 $534 thousand recognized during 2013 consisting of severance and fixed asset retirement expenses.
Tax Provision
The provision for income taxes was $7.4 million, $5.7 million and $5.6 million for the years ended December 31, 2014, 2013, and 2012, respectively, at effective rates of 25%, 21%, 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 higher effective rate for the year ended December 31, 2014 is primarily due to the absence of tax-exempt proceeds from bank-owned life insurance death benefits which were received in 2013 and 2012.
Financial Condition
ASSETS
The following table presents assets at the dates indicated:
At December 31, | ||||||||||||||
(Dollars in thousands) | 2014 | 2013 | $ Change | % Change | ||||||||||
Cash and interest-earning deposits | $ | 38,565 | $ | 69,169 | $ | (30,604 | ) | (44 | )% | |||||
Investment securities | 368,630 | 402,284 | (33,654 | ) | (8 | ) | ||||||||
Loans held for sale | 3,302 | 2,267 | 1,035 | 46 | ||||||||||
Loans and leases held for investment | 1,626,625 | 1,541,484 | 85,141 | 6 | ||||||||||
Reserve for loan and lease losses | (20,662 | ) | (24,494 | ) | 3,832 | 16 | ||||||||
Premises and equipment, net | 37,009 | 34,129 | 2,880 | 8 | ||||||||||
Goodwill and other intangibles, net | 79,897 | 65,695 | 14,202 | 22 | ||||||||||
Bank owned life insurance | 62,265 | 60,637 | 1,628 | 3 | ||||||||||
Accrued interest receivable and other assets | 39,690 | 40,388 | (698 | ) | (2 | ) | ||||||||
Total assets | $ | 2,235,321 | $ | 2,191,559 | $ | 43,762 | 2 | % | ||||||
Cash and Interest-earning Deposits
Cash and interest-earning deposits at December 31, 2014 decreased $30.6 million from December 31, 2013 and investment securities decreased $33.7 million from December 31, 2013 primarily due to the growth in loans and leases of $85.1 million.
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 fund deposits. The securities portfolio consists primarily of U.S. government agencies, municipals, residential mortgage-backed securities and corporate bonds.
Total investments at December 31, 2014 decreased $33.7 million from December 31, 2013. Sales of $33.0 million, maturities and pay-downs of $52.1 million and calls of $17.7 million were partially offset by purchases of $65.2 million and increases in the fair value of available-for-sale investment securities of $4.9 million. The increases in fair value of available-for-sale investment securities were primarily due to the decrease in long-term interest rates during the first quarter of 2014.
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Table 3—Investment Securities
The following table shows the carrying amount of investment securities at the dates indicated. Held-to-maturity and available-for-sale portfolios are combined.
At December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
U.S. treasuries | $ | 4,845 | $ | 4,708 | $ | 4,938 | |||||
U.S. government corporations and agencies | 121,844 | 128,148 | 172,142 | ||||||||
State and political subdivisions | 102,774 | 107,657 | 122,168 | ||||||||
Residential mortgage-backed securities | 13,643 | 35,480 | 90,740 | ||||||||
Collateralized mortgage obligations | 3,725 | 7,201 | 27,012 | ||||||||
Corporate bonds | 108,787 | 99,843 | 74,859 | ||||||||
Money market mutual funds | 11,675 | 16,900 | 4,878 | ||||||||
Equity securities | 1,337 | 2,347 | 2,842 | ||||||||
Total investment securities | $ | 368,630 | $ | 402,284 | $ | 499,579 | |||||
Table 4—Investment Securities (Yields)
The following table shows the maturity distribution and weighted average yields of the investment securities at the dates indicated. Expected maturities will differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties; therefore, the stated yield may not be recognized in future periods. Equity securities and money market mutual funds have no stated maturity and the current dividend yields may not be recognized in future periods. The weighted average yield is calculated by dividing income, which has not been tax equated on tax-exempt obligations, within each contractual maturity range by the outstanding amount of the related investment. Held-to-maturity and available-for-sale portfolios are combined.
At December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2014 Amount | 2014 Yield | 2013 Amount | 2013 Yield | 2012 Amount | 2012 Yield | ||||||||||||||
1 Year or less | $ | 18,710 | 2.45 | % | $ | 18,740 | 2.04 | % | $ | 9,234 | 2.00 | % | ||||||||
After 1 Year to 5 Years | 214,664 | 1.33 | 190,574 | 1.32 | 225,632 | 1.40 | ||||||||||||||
After 5 Years to 10 Years | 75,988 | 3.13 | 82,271 | 2.61 | 85,282 | 2.36 | ||||||||||||||
After 10 Years | 46,256 | 3.77 | 91,452 | 3.42 | 171,711 | 3.27 | ||||||||||||||
No stated maturity | 13,012 | 0.25 | 19,247 | 0.18 | 7,720 | 0.76 | ||||||||||||||
Total | $ | 368,630 | 2.03 | % | $ | 402,284 | 2.04 | % | $ | 499,579 | 2.21 | % | ||||||||
Loans and Leases
Gross loans and leases held for investment at December 31, 2014 grew $85.1 million, or 6% from December 31, 2013. Commercial-related real estate loans increased $28.1 million, commercial business loans increased $35.0 million and residential real estate loans increased $30.2 million as economic conditions continued to improve. During the third quarter of 2014, the Corporation sold its credit card loan portfolio with a principal balance of $8.5 million for a pre-tax gain of $479 thousand. The sale of the credit card loan portfolio was completed due to our lack of scale necessary to justify the increased expense and focus associated with the increasing complexity of the risk management and compliance environment related to credit cards.
At December 31, 2014, there were no concentrations of loans or leases exceeding 10% of total loans and leases other than as disclosed in Table 5.
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Table 5—Loan and Lease Portfolio
The following table presents the composition of the loan and lease portfolio at the dates indicated:
At December 31, | |||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Commercial, financial and agricultural | $ | 457,827 | $ | 422,816 | $ | 468,421 | $ | 477,662 | $ | 457,671 | |||||||||
Real estate-commercial | 628,478 | 600,353 | 530,122 | 514,953 | 496,357 | ||||||||||||||
Real estate-construction | 79,887 | 90,493 | 91,250 | 90,397 | 139,958 | ||||||||||||||
Real estate-residential | 312,032 | 281,828 | 264,432 | 245,204 | 251,057 | ||||||||||||||
Loans to individuals | 29,941 | 40,000 | 43,780 | 44,965 | 44,087 | ||||||||||||||
Lease financings | 118,460 | 105,994 | 83,857 | 73,225 | 82,056 | ||||||||||||||
Total loans and leases held for investment, net of deferred income | $ | 1,626,625 | $ | 1,541,484 | $ | 1,481,862 | $ | 1,446,406 | $ | 1,471,186 | |||||||||
Table 6—Loan and Lease Maturities and Sensitivity to Changes in Interest Rates
The following table presents the maturity and interest rate sensitivity of the loan and lease portfolio at December 31, 2014:
(Dollars in thousands) | Total | Due in One Year or Less | Due after One Year to Five Years | Due After Five Years | |||||||||||
Commercial, financial and agricultural | $ | 457,827 | $ | 266,126 | $ | 121,629 | $ | 70,072 | |||||||
Real estate-commercial | 628,478 | 170,599 | 333,651 | 124,228 | |||||||||||
Real estate-construction | 79,887 | 41,033 | 10,444 | 28,410 | |||||||||||
Real estate-residential | 312,032 | 141,300 | 38,062 | 132,670 | |||||||||||
Loans to individuals | 29,941 | 12,220 | 9,824 | 7,897 | |||||||||||
Lease financings | 118,460 | 43,123 | 75,042 | 295 | |||||||||||
Total gross loans and leases held for investment | $ | 1,626,625 | $ | 674,401 | $ | 588,652 | $ | 363,572 | |||||||
Loans and leases with fixed predetermined interest rates | $ | 815,334 | $ | 132,367 | $ | 447,414 | $ | 235,553 | |||||||
Loans and leases with variable or floating interest rates | 811,291 | 542,034 | 141,238 | 128,019 | |||||||||||
Total gross loans and leases held for investment | $ | 1,626,625 | $ | 674,401 | $ | 588,652 | $ | 363,572 | |||||||
The commercial mortgages and tax-exempt loans that are presently being written at both fixed and floating rates of interest primarily include loans typically written for five-year terms with a monthly payment based on up to a twenty-year amortization schedule. At each five-year anniversary date of the mortgage, the Bank usually has the right to require payment in full. If the loan is extended, the interest rate is renegotiated and the term of the loan is extended for an additional five years. These mortgages are included in the “Due in One to Five Years” category in the table above.
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.
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 December 31, 2014, the recorded investment in loans held for investment that were considered to be impaired was $56.2 million. The related reserve for loan losses was $998 thousand. At December 31, 2013, the recorded investment in loans that were considered to be impaired was $58.3 million. The related reserve for loan losses was $3.0 million. Impaired loans include nonaccrual
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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 years ended December 31, 2014, 2013, and 2012, additional interest income that would have been recognized under the original terms for impaired loans was $1.2 million, $1.7 million and $2.2 million. Interest income recognized on impaired loans for the years ended December 31, 2014, 2013 and 2012 was $1.9 million, $1.2 million and $552 thousand respectively.
The impaired loan balances consisted mainly of commercial real estate, construction and business loans. Impaired loans at December 31, 2014 included one large credit which went on nonaccrual during the third quarter of 2009 and was comprised of three separate facilities to a local commercial real estate developer/home builder, aggregating to a December 31, 2014 balance of $5.3 million. During the second quarter of 2014, one of the facilities was transferred to loans held for sale for $532 thousand and was sold during the third quarter of 2014 for a pre-tax loss of $7 thousand. This credit incurred charge-offs of $3.8 million during 2014 primarily attributable to updated assessments of residential building lots securing the loans. There is no specific allowance on the remaining credit as the credit was secured with sufficient estimated collateral. The borrower does not have the resources to develop these properties; therefore, the properties must be sold.
Other real estate owned was $955 thousand at December 31, 2014, down from $1.7 million at December 31, 2013. During the third quarter of 2014, a commercial real estate owned property with a carrying amount $696 thousand was sold for a gain of $195 thousand. On December 23, 2014, an agreement of sale was entered into for the remaining real estate owned property.
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Table 7—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:
At December 31, | |||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*: | |||||||||||||||||||
Commercial, financial and agricultural | $ | 5,002 | $ | 4,253 | $ | 2,842 | $ | 4,614 | $ | 7,627 | |||||||||
Real estate—commercial | 4,413 | 8,091 | 14,340 | 18,085 | 17,750 | ||||||||||||||
Real estate—construction | 5,931 | 9,159 | 13,588 | 14,479 | 17,307 | ||||||||||||||
Real estate—residential | 1,611 | 1,402 | 976 | 191 | 1,625 | ||||||||||||||
Loans to individuals | — | — | — | — | 21 | ||||||||||||||
Lease financings | 380 | 330 | 386 | 838 | 902 | ||||||||||||||
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications* | 17,337 | 23,235 | 32,132 | 38,207 | 45,232 | ||||||||||||||
Accruing troubled debt restructured loans and lease modifications not included in the above | 5,469 | 7,943 | 13,457 | 3,893 | 550 | ||||||||||||||
Accruing loans and leases 90 days or more past due: | |||||||||||||||||||
Commercial, financial and agricultural | — | 12 | — | — | — | ||||||||||||||
Real estate—residential | 31 | 23 | 54 | 117 | 314 | ||||||||||||||
Loans to individuals | 365 | 319 | 347 | 204 | 382 | ||||||||||||||
Lease financings | 55 | 59 | 40 | 44 | — | ||||||||||||||
Total accruing loans and leases, 90 days or more past due | 451 | 413 | 441 | 365 | 696 | ||||||||||||||
Total non-performing loans and leases | 23,257 | 31,591 | 46,030 | 42,465 | 46,478 | ||||||||||||||
Other real estate owned | 955 | 1,650 | 1,607 | 6,600 | 2,438 | ||||||||||||||
Total nonperforming assets | $ | 24,212 | $ | 33,241 | $ | 47,637 | $ | 49,065 | $ | 48,916 | |||||||||
Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment | 1.07 | % | 1.51 | % | 2.17 | % | 2.64 | % | 3.07 | % | |||||||||
Nonperforming loans and leases / loans and leases held for investment | 1.43 | 2.05 | 3.11 | 2.94 | 3.16 | ||||||||||||||
Nonperforming assets / total assets | 1.09 | 1.52 | 2.07 | 2.22 | 2.29 | ||||||||||||||
Allowance for loan and lease losses / loans and leases held for investment | 1.27 | 1.59 | 1.67 | 2.07 | 2.10 | ||||||||||||||
Allowance for loan and lease losses / nonaccrual loans and leases | 119.18 | 105.42 | 77.01 | 78.18 | 68.31 | ||||||||||||||
Allowance for loan and lease losses / nonperforming loans and leases | 88.84 | 77.53 | 53.76 | 70.34 | 66.48 | ||||||||||||||
Allowance for loan and lease losses | $ | 20,662 | $ | 24,494 | $ | 24,746 | $ | 29,870 | $ | 30,898 | |||||||||
* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table | $ | 3,104 | $ | 1,583 | $ | 579 | $ | 8,551 | $ | 1,155 | |||||||||
The following table provides additional information on the Corporation’s nonaccrual loans held for investment:
At December 31, | |||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | |||||||||||
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications | $ | 17,337 | $ | 23,235 | $ | 32,132 | $ | 38,207 | |||||||
Nonaccrual loans and leases with partial charge-offs | 6,465 | 8,958 | 8,834 | 9,399 | |||||||||||
Life-to-date partial charge-offs on nonaccrual loans and leases | 1,831 | 9,120 | 8,999 | 10,040 | |||||||||||
Charge-off rate of nonaccrual loans and leases with partial charge-offs | 22.1 | % | 50.4 | % | 50.5 | % | 51.6 | % | |||||||
Specific reserves on impaired loans | $ | 998 | $ | 2,963 | $ | 208 | $ | 1,253 | |||||||
Reserve for Loan and Lease Losses
Management believes the reserve for loan and lease losses is maintained at a level that is appropriate at December 31, 2014 to absorb probable losses in the loan and lease portfolio. Management’s methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan and lease loss experience, current economic conditions and trends, and the volume, growth, and composition of the portfolio.
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The reserve for loan and lease loss 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 and qualitative factors, 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.
The reserve for loan and lease losses is determined at the end of each quarter, and more frequently for management review purposes. Calculating the Corporation's reserve for loan and lease losses considers the Bank's loan portfolio utilizing historical loss data as a starting point, while evaluating the impact of environmental factors in a quantitative manner as they relate to the collectability of outstanding loan obligations. The Corporation utilizes a rolling eight-quarter migration analysis and loss emergence period analysis to determine the annualized net expected loan loss experience.
Each quarter, the conditions that exist within the look-back period are compared to current conditions to support a conclusion as to which qualitative adjustments are (or are not) deemed necessary for each loan portfolio segment. These factors are evaluated subjectively based on management's experience and supported by the Corporation's defined analytical metrics/drivers relative to the historical look-back period. Factors include, but are not limited to, asset quality trends, portfolio growth trends, changes in lending policies and management, economic trends, concentrations of credit risk and the impact of collateral dependent lending.
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 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 and qualitative factors, current trends, and management assessments. The unallocated reserve supports other risk considerations not readily quantifiable through the allocated reserve metrics outlined above, as well as the inherent imprecision of the reserve for loan and lease losses model complexity. These considerations include, but are not limited to, fair value instability within the non-performing category, and the improving credit risk profile of performing loans individually measured for impairment.
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 $338 thousand and $319 thousand at December 31, 2014 and 2013, respectively.
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Table 8—Summary of Loan and Lease Loss Experience
The following table presents average loans and leases and summarizes loan and lease loss experience for the periods indicated.
For the Years Ended December 31, | |||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Average amount of loans and leases outstanding | $ | 1,580,835 | $ | 1,499,351 | $ | 1,465,448 | $ | 1,448,079 | $ | 1,442,085 | |||||||||
Loan and lease loss reserve at beginning of period | $ | 24,494 | $ | 24,746 | $ | 29,870 | $ | 30,898 | $ | 24,798 | |||||||||
Charge-offs: | |||||||||||||||||||
Commercial, financial and agricultural loans | 2,834 | 3,213 | 9,974 | 6,784 | 3,436 | ||||||||||||||
Real estate loans | 4,644 | 8,974 | 4,959 | 10,435 | 10,573 | ||||||||||||||
Loans to individuals | 796 | 641 | 578 | 968 | 883 | ||||||||||||||
Lease financings | 576 | 791 | 1,224 | 1,516 | 2,213 | ||||||||||||||
Total charge-offs | 8,850 | 13,619 | 16,735 | 19,703 | 17,105 | ||||||||||||||
Recoveries: | |||||||||||||||||||
Commercial, financial and agricultural loans | 247 | 320 | 484 | 318 | 129 | ||||||||||||||
Real estate loans | 618 | 1,130 | 401 | 213 | 772 | ||||||||||||||
Loans to individuals | 265 | 174 | 130 | 174 | 227 | ||||||||||||||
Lease financings | 281 | 515 | 561 | 491 | 512 | ||||||||||||||
Total recoveries | 1,411 | 2,139 | 1,576 | 1,196 | 1,640 | ||||||||||||||
Net charge-offs | 7,439 | 11,480 | 15,159 | 18,507 | 15,465 | ||||||||||||||
Provision to loan and lease loss reserve | 3,607 | 11,228 | 10,035 | 17,479 | 21,565 | ||||||||||||||
Loan and lease loss reserve at end of period | $ | 20,662 | $ | 24,494 | $ | 24,746 | $ | 29,870 | $ | 30,898 | |||||||||
Ratio of net charge-offs to average loans and leases | 0.47 | % | 0.77 | % | 1.03 | % | 1.28 | % | 1.07 | % | |||||||||
The decrease in charge-offs during 2014 compared to 2013 was mainly due to improvements in asset quality resulting in decreased charge-off activity for commercial real estate loans. The decrease in charge-offs during 2013 compared to 2012 was mainly due to decreased charge-offs for commercial, financial and agricultural loans partially offset by increased charge-off activity for commercial real estate loans.
Table 9—Allocated, Other Loan and Lease Loss Reserves
The following table summarizes the allocation of the allowance for loan and lease losses and the percentage of loans and leases in each major loan category to total loans and leases held for investment at the dates indicated.
At December 31, | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||
Commercial, financial and agricultural loans | $ | 6,920 | 28 | % | $ | 9,789 | 27 | % | $ | 11,594 | 31 | % | $ | 11,262 | 33 | % | $ | 9,630 | 31 | % | ||||||||||||||
Real estate loans | 10,830 | 63 | 11,126 | 63 | 9,126 | 60 | 14,875 | 59 | 17,165 | 60 | ||||||||||||||||||||||||
Loans to individuals | 360 | 2 | 694 | 3 | 679 | 3 | 730 | 3 | 734 | 3 | ||||||||||||||||||||||||
Lease financings | 985 | 7 | 1,285 | 7 | 1,326 | 6 | 1,344 | 5 | 1,950 | 6 | ||||||||||||||||||||||||
Unallocated | 1,567 | N/A | 1,600 | N/A | 2,021 | N/A | 1,659 | N/A | 1,419 | N/A | ||||||||||||||||||||||||
Total | $ | 20,662 | 100 | % | $ | 24,494 | 100 | % | $ | 24,746 | 100 | % | $ | 29,870 | 100 | % | $ | 30,898 | 100 | % | ||||||||||||||
The allowance for loan and lease losses to nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications, was 119.18% at December 31, 2014, 105.42% at December 31, 2013 and 77.01% at December 31, 2012. At December 31, 2014, the specific allowance on impaired loans was $998 thousand, or 1.8% of the balance of impaired loans of $56.2 million. At December 31, 2013, the specific allowance on impaired loans was $3.0 million, or 5.1% of the balance of impaired loans of $58.3 million. At December 31, 2012, the specific allowance on impaired loans was $208 thousand, or 0.5% of the balance of impaired loans of $45.2 million.
The ratio of the reserve for loan and lease losses to total loans and leases was 1.27% at December 31, 2014 compared to 1.59% at December 31, 2013. Allocated reserves at December 31, 2014 decreased by $3.8 million compared to December 31, 2013. The allocated reserves for commercial, financial and agricultural loans decreased by $2.9 million at December 31, 2014 compared to December 31, 2013 mainly due to improvements in historical loss factors for non-criticized and criticized loans in this loan category and a decrease in the specific allowance on impaired loans.
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The ratio of the reserve for loan and lease losses to total loans and leases was 1.59% at December 31, 2013 compared to 1.67% at December 31, 2012. Allocated reserves at December 31, 2013 increased by $169 thousand compared to December 31, 2012. The allocated reserves for commercial, financial and agricultural loans decreased by $1.8 million at December 31, 2013 compared to December 31, 2012 mainly due to lower loan volume and a decrease in the level of criticized loans, partially offset by an increase in the specific allowance on impaired loans. The allocation of the allowance for real estate loans increased by $2.0 million at December 31, 2013 compared to December 31, 2012 mainly due to higher loan volume and an increase in the level of criticized loans.
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 these intangible assets for the years ended December 31, 2014, 2013 and 2012 was $3.3 million, $2.3 million and $2.4 million, respectively. The Corporation also has goodwill with a net carrying value of $67.7 million at December 31, 2014 and $57.5 million at December 31, 2013, which is deemed to be an indefinite intangible asset and is not amortized. The increase in goodwill of $10.2 million was related to the Girard and Sterner acquisitions.
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 completed an annual impairment test for goodwill and other intangibles during the fourth quarter of 2014. There was no impairment of goodwill and no material impairment of identifiable intangibles recorded during 2012 through 2014. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Other Assets
At December 31, 2014 and 2013, the Bank held $3.3 million in Federal Reserve Bank stock as required by the Federal Reserve Bank. The Bank is a member of the FHLB, and as such, is required to hold FHLB stock as a condition of membership as determined by the FHLB. The Bank is required to hold additional stock in the FHLB in relation to the level of outstanding borrowings. The Bank held FHLB stock of $1.1 million and $3.3 million at December 31, 2014 and 2013, respectively. Additionally, the FHLB might require its members to increase its capital stock requirement. Changes in the credit ratings of the U.S. government and federal agencies, including 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 FHLB stock. The Corporation determined there was no other-than-temporary impairment of its investment in FHLB stock. Therefore, at December 31, 2014, the FHLB stock is recorded at cost.
LIABILITIES
The following table presents liabilities at the dates indicated:
At December 31, | ||||||||||||||
(Dollars in thousands) | 2014 | 2013 | $ Change | % Change | ||||||||||
Deposits | $ | 1,861,341 | $ | 1,844,498 | $ | 16,843 | 1 | % | ||||||
Short-term borrowings | 41,974 | 37,256 | 4,718 | 13 | ||||||||||
Accrued interest payable and other liabilities | 47,452 | 29,299 | 18,153 | 62 | ||||||||||
Total liabilities | $ | 1,950,767 | $ | 1,911,053 | $ | 39,714 | 2 | % | ||||||
Deposits
Total deposits increased $16.8 million or 1% from December 31, 2013. Deposits, excluding public funds, grew $31.2 million from December 31, 2013, primary due to increases in non-interest bearing and interest bearing demand deposits partially offset by decreases in savings and time deposits.
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Table 10—Deposits
The following table summarizes the average amount of deposits for the periods indicated:
(Dollars in thousands) | For the Years Ended December 31, | ||||||||||
2014 | 2013 | 2012 | |||||||||
Noninteresting-bearing deposits | $ | 435,058 | $ | 390,420 | $ | 327,576 | |||||
Interest-bearing checking deposits | 314,784 | 286,487 | 230,031 | ||||||||
Money market savings | 295,209 | 319,958 | 330,839 | ||||||||
Regular savings | 535,346 | 536,701 | 510,005 | ||||||||
Time deposits | 264,591 | 299,792 | 363,225 | ||||||||
Total average deposits | $ | 1,844,988 | $ | 1,833,358 | $ | 1,761,676 | |||||
The following table summarizes the maturities of time deposits with balances of $100 thousand or more:
(Dollars in thousands) | At December 31, 2014 | ||
Due Three Months or Less | $ | 20,367 | |
Due Over Three Months to Six Months | 9,969 | ||
Due Over Six Months to Twelve Months | 11,508 | ||
Due Over Twelve Months | 34,982 | ||
Total | $ | 76,826 | |
Borrowings
Short-term borrowings at December 31, 2014, consisted of customer repurchase agreements on an overnight basis totaling $42.0 million. During 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. At December 31, 2014 and 2013, the Bank had outstanding short-term letters of credit with the FHLB totaling $55.0 million and $35.0 million, respectively, which were utilized to collateralize public funds deposits.
Table 11—Short Term Borrowings
The following table details key information pertaining to customer repurchase agreements on an overnight basis at the dates indicated:
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Balance at December 31 | $ | 41,974 | $ | 37,256 | $ | 96,282 | |||||
Weighted average interest rate at year end | 0.06 | % | 0.07 | % | 0.07 | % | |||||
Maximum amount outstanding at any month's end | $ | 43,266 | $ | 110,228 | $ | 117,291 | |||||
Average amount outstanding during the year | 41,048 | 72,211 | 106,206 | ||||||||
Weighted average interest rate during the year | 0.06 | % | 0.06 | % | 0.13 | % | |||||
Other Liabilities
Total accrued interest payable and other liabilities increased $18.2 million at December 31, 2014 from December 31, 2013. The increase was primarily due to an increase in the pension plan liability resulting from an increase in the unrecognized actuarial loss of $12.0 million. The increase in the actuarial loss was mostly due to a decrease in the discount rate of 97 basis points and the adoption of a new mortality assumption based on the most recent study by the Society of Actuaries (RP-2014 mortality table) which increased the average life expectancy of plan participants by 2 years.
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SHAREHOLDERS' EQUITY
The following table presents total shareholders’ equity at the dates indicated:
(Dollars in thousands) | At December 31, | |||||||||||||
2014 | 2013 | $ Change | % Change | |||||||||||
Common stock | $ | 91,332 | $ | 91,332 | $ | — | — | % | ||||||
Additional paid-in capital | 62,980 | 62,417 | 563 | 1 | ||||||||||
Retained earnings | 181,851 | 172,602 | 9,249 | 5 | ||||||||||
Accumulated other comprehensive loss | (14,462 | ) | (9,955 | ) | (4,507 | ) | (45 | ) | ||||||
Treasury stock | (37,147 | ) | (35,890 | ) | (1,257 | ) | (4 | ) | ||||||
Total shareholders’ equity | $ | 284,554 | $ | 280,506 | $ | 4,048 | 1 | % | ||||||
Retained earnings at December 31, 2014, were impacted by net income of $22.2 million, partially offset by cash dividends declared of $13.0 million. Accumulated other comprehensive income, net of tax benefit, related to available-for-sale investment securities was $1.7 million at December 31, 2014 compared to accumulated other comprehensive loss, net of tax, of $1.5 million at December 31, 2013. The increase of $3.2 million was primarily due to increases in the fair value of available-for-sale securities. Accumulated other comprehensive loss, net of tax benefit, related to pension and other post-retirement benefits was $16.0 million and $8.5 million at December 31, 2014 and 2013, respectively. The increase of $7.5 million was mainly due to an increase in the actuarial pension loss resulting from a decrease in the discount rate of 97 basis points and the adoption of a new mortality assumption based on the most recent study by the Society of Actuaries (RP-2014 mortality table) which increased the average life expectancy of plan participants by 2 years. Treasury stock increased primarily due to the purchase of 110,997 treasury shares, totaling $2.0 million, during 2014 under the 2013 Board approved share repurchase program partially offset by the issuance of restricted stock.
Capital Adequacy
Capital guidelines which banking regulators have adopted assign minimum capital requirements for categories of assets depending on their assigned risks. The components of risk-based capital for the Corporation are Tier 1 and Tier 2. Minimum required total risk-based capital is 8.00%. At December 31, 2014, the Corporation had a Tier 1 capital ratio of 11.79% and total risked-based capital ratio of 12.91%. At December 31, 2013, the Corporation had a Tier 1 capital ratio of 12.63% and total risked-based capital ratio of 13.90%. The Corporation continues to be in the “well-capitalized” category under regulatory standards. Details on the capital ratios can be found in Note 21 “Regulatory Matters,” included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K along with a discussion on dividend and other restrictions.
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 rules are discussed in Note 21 “Regulatory Matters,” included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K.
Asset/Liability Management
The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates.
The Corporation uses both 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 and two-year horizon. The simulation uses existing portfolio rate and re-pricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayment speeds on loans, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is in an asset sensitive position from a maturity perspective and in a liability sensitive position from a repricing perspective, as interest rates remain at historically low levels; however, the Corporation anticipates increases in interest rates over the longer term, which it expects would benefit its net interest margin.
Credit Risk
Extending credit exposes the Corporation to credit risk, which is the risk that the principal balance of a loan and any related interest will not be collected due to the inability of the borrower to repay the loan. The Corporation manages credit risk in the loan
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portfolio through adherence to consistent standards, guidelines and limitations established by the Board of Directors. Written loan policies establish underwriting standards, lending limits and other standards or limits as deemed necessary and prudent.
The loan review department conducts ongoing, independent reviews of the lending process to ensure adherence to established policies and procedures, monitors compliance with applicable laws and regulations, provides objective measurement of the risk inherent in the loan portfolio, and ensures that proper documentation exists.
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 loans are originated primarily within the Southeastern Pennsylvania market area at conservative loan-to-value ratios and are often supported 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.
Credit risk in the direct consumer loan portfolio 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. In the home equity loan portfolio, 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.
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.
The Corporation closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts begin after a loan payment is missed, by attempting to contact all borrowers. If collection attempts fail, the Corporation will proceed to gain control of any and all collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all monies owed to the Corporation. The Corporation monitors delinquency trends and past due reports which are submitted to the Board of Directors.
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.
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.
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The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $518.7 million. At December 31, 2014 and 2013, there were no outstanding borrowings with the FHLB. At December 31, 2014 and 2013, the Bank had outstanding short-term letters of credit with the FHLB totaling $55.0 million and $35.0 million, respectively, which were utilized to collateralize 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 December 31, 2014 and 2013. At December 31, 2014, the Corporation had no outstanding federal funds purchased. 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 December 31, 2014 and 2013, 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 following contractual obligations and commitments table presents, at December 31, 2014, significant fixed and determinable contractual obligations and commitments to third parties. The most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay its certificates of deposit. 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.
The table also shows the amounts and expected maturities of significant commitments at December 31, 2014. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods.
Contractual Obligations and Commitments
The Corporation enters into contractual obligations in the normal course of business as a source of funds for its asset growth and its asset/liability management, to fund acquisitions and to meet required capital needs. These obligations require the Corporation to make cash payments over time as detailed in the table below.
The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to manage the Corporation’s exposure to fluctuation in interest rates. These financial instruments include commitments to extend credit, standby and commercial letters of credit and forward loan sale contracts. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these financial instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Corporation does not require and is not required to pledge collateral or other security to support financial instruments with credit risk. These commitments expire over time as detailed in Table 12.
The Corporation also had possible future commitments on risk participation agreements, totaling $1.2 million at December 31, 2014. For further information regarding the Corporation’s commitments, refer to Note 16, “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K.
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Table 12—Contractual Obligations and Commitments
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows, including interest payable, at December 31, 2014. The contractual amounts to be paid on variable rate obligations are affected by changes in the market interest rates. Future changes in the market interest rates could materially affect the contractual amounts to be paid.
Payments Due by Period | |||||||||||||||||||
(Dollars in thousands) | Total | Due in One Year or Less | Due after One Year to Three Years | Due after Three Years to Five Years | Due in Over Five Years | ||||||||||||||
Customer repurchase agreements (a) | $ | 41,974 | $ | 41,974 | — | — | — | ||||||||||||
Time deposits (b) | 259,203 | 121,069 | 113,157 | 20,276 | 4,701 | ||||||||||||||
Operating leases | 33,539 | 2,297 | 4,349 | 3,801 | 23,092 | ||||||||||||||
Standby and commercial letters of credit | 46,867 | 26,415 | 20,318 | 134 | — | ||||||||||||||
Commitments to extend credit (c) | 538,488 | 158,162 | 40,536 | 11,485 | 328,305 | ||||||||||||||
Net asset/liability derivative loan commitments (d) | 676 | 676 | — | — | — | ||||||||||||||
Total contractual obligations | $ | 920,747 | $ | 350,593 | $ | 178,360 | $ | 35,696 | $ | 356,098 | |||||||||
Notes: | (a) Includes interest on variable rate obligations. The interest expense is based upon the fourth quarter average interest rate. |
(b) | Includes interest on both fixed and variable rate obligations. The interest expense is based upon the fourth quarter average interest rate. |
(c) | Includes both revolving and straight lines of credit. Revolving lines, including unused credit card lines, are reported in the “Due in One Year or Less” category. |
(d) | Includes the fair value of these contractual arrangements at December 31, 2014. |
Interest Rate Sensitivity
The Corporation uses both interest-rate sensitivity gap analysis and simulation modeling to measure and manage interest rate risk.
The interest sensitivity gap analysis identifies interest rate risk by showing re-pricing gaps in the Corporation’s balance sheet. The model is based on expected cash flows and re-pricing characteristics for all financial instruments at a point in time and incorporates Corporation developed, market influenced assumptions regarding the impact of changing interest rates on these financial instruments. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of either: re-pricing, maturity, contractual amortization, prepayments or likely call dates. Interest-bearing non-maturity deposits are spread over various time periods based on the expected sensitivity of these rates and based on historical behavior.
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The following table presents the Corporation’s gap analysis at December 31, 2014:
Table 13—Interest Rate Sensitivity Gap Analysis
(Dollars in thousands) | Within Three Months | After Three Months to Twelve Months | After One Year to Five Years | Over Five Years | Non-Rate Sensitive | Total | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash and due from banks | $ | — | $ | — | $ | — | $ | — | $ | 31,995 | $ | 31,995 | |||||||||||
Interest-earning deposits with other banks | 6,570 | — | — | — | — | 6,570 | |||||||||||||||||
Investment securities | 24,279 | 55,141 | 156,354 | 132,856 | — | 368,630 | |||||||||||||||||
Loans held for sale | 3,302 | — | — | — | — | 3,302 | |||||||||||||||||
Loans and leases, net of reserve for loan and lease losses | 606,374 | 277,549 | 625,041 | 117,661 | (20,662 | ) | 1,605,963 | ||||||||||||||||
Other assets | — | — | — | — | 218,861 | 218,861 | |||||||||||||||||
Total assets | $ | 640,525 | $ | 332,690 | $781,395 | $250,517 | $ | 230,194 | $ | 2,235,321 | |||||||||||||
Liabilities and shareholders' equity: | |||||||||||||||||||||||
Noninterest-bearing deposits | $ | — | $ | — | $ | — | $ | — | $ | 449,339 | $ | 449,339 | |||||||||||
Interest-bearing demand deposits | 276,103 | 23,045 | 96,290 | 244,657 | — | 640,095 | |||||||||||||||||
Savings deposits | 71,463 | 25,839 | 110,367 | 311,645 | — | 519,314 | |||||||||||||||||
Time deposits | 37,271 | 67,047 | 140,749 | 7,526 | — | 252,593 | |||||||||||||||||
Borrowings | 41,974 | — | — | — | — | 41,974 | |||||||||||||||||
Other liabilities | — | — | — | — | 47,452 | 47,452 | |||||||||||||||||
Shareholders' equity | — | — | — | — | 284,554 | 284,554 | |||||||||||||||||
Total liabilities and shareholders' equity | $ | 426,811 | $ | 115,931 | $ | 347,406 | $ | 563,828 | $ | 781,345 | $ | 2,235,321 | |||||||||||
Incremental gap | $ | 213,714 | $ | 216,759 | $ | 433,989 | $ | (313,311 | ) | $ | (551,151 | ) | |||||||||||
Cumulative gap | $ | 213,714 | $ | 430,473 | $ | 864,462 | $ | 551,151 | |||||||||||||||
Cumulative gap as a percentage of interest-earning assets | 10.66 | % | 21.47 | % | 43.11 | % | 27.49 | % | |||||||||||||||
The table above indicates that the Corporation is asset sensitive and should experience an increase in net interest income in the near term, if interest rates rise. Accordingly, if rates decline, net interest income should decline. Actual results may differ from expected results for many reasons including market reactions, competitor responses, customer behavior and/or regulatory actions.
Management also performs a simulation of net interest income to measure short-term rate exposures. 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 December 31, 2014.
Table 14—Net Interest Income - 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 | $ | 4,417 | 6.08 | % | ||
+200 basis points | 2,643 | 3.64 | ||||
+100 basis points | 669 | 0.92 | ||||
-100 basis points* | (4,583 | ) | (6.31 | ) | ||
*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.
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Management also performs a simulation of the economic value of equity to evaluate longer-term repricing risks. Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows plus the current market value of any off-balance- sheet positions. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. Economic value of equity values only the current balance sheet positions and therefore does not incorporate growth assumptions. The positive economic value of equity in a rising rate scenario demonstrates that liability duration exceeds asset duration and future asset re-pricing and reinvestment may have a beneficial impact on net interest income while a decrease in interest rates will negatively impact net interest income.
The changes in economic value of equity are shown in the below table at December 31, 2014.
Table 15—Economic Value of Equity - Summary of Interest Rate Simulation
Estimated Change in Economic Value of Equity Over Next 12 Months | ||||||
(Dollars in thousands) | Amount | Percent | ||||
Rate shock - Change in interest rates | ||||||
+300 basis points | $ | 12,105 | 2.36 | % | ||
+200 basis points | 11,567 | 2.26 | ||||
+100 basis points | 5,649 | 1.1 | ||||
-100 basis points* | (37,675 | ) | (7.35 | ) | ||
*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.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1, “Summary of Significant Accounting Policies” of this Form 10-K.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of loss from adverse changes in market prices and rates. In the normal course of its business activities including lending, investing, receiving deposits and borrowing funds, the Corporation is subject to changes in the economic value and/or earnings potential of the assets and liabilities due to changes in interest rates. The Corporation’s Investment Asset/Liability Management Committee, is responsible for managing interest rate risk in a manner so as to provide adequate and reliable earnings. This is accomplished through the establishment of policy limits on maximum risk exposures, as well as the regular and timely monitoring of reports designed to quantify risk and return levels. The Corporation’s Board of Directors establishes policies that govern interest rate risk management.
Information with respect to quantitative and qualitative disclosures about market risk can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” including Liquidity and Interest Rate Sensitivity.
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Item 8. | Financial Statements and Supplementary Data |
The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages:
Page | |
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Univest Corporation of Pennsylvania:
We have audited the accompanying consolidated balance sheets of Univest Corporation of Pennsylvania and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 |
Philadelphia, Pennsylvania
March 9, 2015
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UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED BALANCE SHEETS
At December 31, | |||||||
(Dollars in thousands, except share data) | 2014 | 2013 | |||||
ASSETS | |||||||
Cash and due from banks | $ | 31,995 | $ | 32,646 | |||
Interest-earning deposits with other banks | 6,570 | 36,523 | |||||
Investment securities held-to-maturity (fair value $54,765 and $66,853 at December 31, 2014 and 2013, respectively) | 54,347 | 66,003 | |||||
Investment securities available-for-sale | 314,283 | 336,281 | |||||
Loans held for sale | 3,302 | 2,267 | |||||
Loans and leases held for investment | 1,626,625 | 1,541,484 | |||||
Less: Reserve for loan and lease losses | (20,662 | ) | (24,494 | ) | |||
Net loans and leases held for investment | 1,605,963 | 1,516,990 | |||||
Premises and equipment, net | 37,009 | 34,129 | |||||
Goodwill | 67,717 | 57,517 | |||||
Other intangibles, net of accumulated amortization and fair value adjustments of $11,776 and $10,300 at December 31, 2014 and 2013, respectively | 12,180 | 8,178 | |||||
Bank owned life insurance | 62,265 | 60,637 | |||||
Accrued interest receivable and other assets | 39,690 | 40,388 | |||||
Total assets | $ | 2,235,321 | $ | 2,191,559 | |||
LIABILITIES | |||||||
Noninterest-bearing deposits | $ | 449,339 | $ | 411,714 | |||
Interest-bearing deposits: | |||||||
Demand deposits | 640,095 | 625,845 | |||||
Savings deposits | 519,314 | 536,150 | |||||
Time deposits | 252,593 | 270,789 | |||||
Total deposits | 1,861,341 | 1,844,498 | |||||
Customer repurchase agreements | 41,974 | 37,256 | |||||
Accrued interest payable and other liabilities | 47,452 | 29,299 | |||||
Total liabilities | 1,950,767 | 1,911,053 | |||||
SHAREHOLDERS’ EQUITY | |||||||
Common stock, $5 par value: 48,000,000 shares authorized at December 31, 2014 and 2013; 18,266,404 shares issued at December 31, 2014 and 2013; 16,221,607 and 16,287,812 shares outstanding at December 30, 2014 and 2013, respectively | 91,332 | 91,332 | |||||
Additional paid-in capital | 62,980 | 62,417 | |||||
Retained earnings | 181,851 | 172,602 | |||||
Accumulated other comprehensive loss, net of tax benefit | (14,462 | ) | (9,955 | ) | |||
Treasury stock, at cost; 2,044,797 and 1,978,592 shares at December 31, 2014 and 2013, respectively | (37,147 | ) | (35,890 | ) | |||
Total shareholders’ equity | 284,554 | 280,506 | |||||
Total liabilities and shareholders’ equity | $ | 2,235,321 | $ | 2,191,559 | |||
See accompanying notes to consolidated financial statements.
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UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, | |||||||||||
(Dollars in thousands, except per share data) | 2014 | 2013 | 2012 | ||||||||
Interest income | |||||||||||
Interest and fees on loans and leases: | |||||||||||
Taxable | $ | 62,521 | $ | 63,173 | $ | 65,479 | |||||
Exempt from federal income taxes | 5,684 | 4,777 | 4,725 | ||||||||
Total interest and fees on loans and leases | 68,205 | 67,950 | 70,204 | ||||||||
Interest and dividends on investment securities: | |||||||||||
Taxable | 3,989 | 5,432 | 5,951 | ||||||||
Exempt from federal income taxes | 3,610 | 4,071 | 4,335 | ||||||||
Other interest income | 81 | 126 | 164 | ||||||||
Total interest income | 75,885 | 77,579 | 80,654 | ||||||||
Interest expense | |||||||||||
Interest on demand deposits | 545 | 478 | 686 | ||||||||
Interest on savings deposits | 317 | 313 | 790 | ||||||||
Interest on time deposits | 3,102 | 3,795 | 5,162 | ||||||||
Interest on short-term borrowings | 32 | 48 | 326 | ||||||||
Interest on long-term borrowings | — | 483 | 1,210 | ||||||||
Total interest expense | 3,996 | 5,117 | 8,174 | ||||||||
Net interest income | 71,889 | 72,462 | 72,480 | ||||||||
Provision for loan and lease losses | 3,607 | 11,228 | 10,035 | ||||||||
Net interest income after provision for loan and lease losses | 68,282 | 61,234 | 62,445 | ||||||||
Noninterest income | |||||||||||
Trust fee income | 7,835 | 7,303 | 6,777 | ||||||||
Service charges on deposit accounts | 4,230 | 4,451 | 4,429 | ||||||||
Investment advisory commission and fee income | 11,904 | 7,642 | 6,128 | ||||||||
Insurance commission and fee income | 11,543 | 9,395 | 7,766 | ||||||||
Other service fee income | 7,189 | 7,390 | 5,855 | ||||||||
Bank owned life insurance income | 1,628 | 2,968 | 2,670 | ||||||||
Other-than-temporary impairment on equity securities | — | — | (13 | ) | |||||||
Net gain on sales of investment securities | 635 | 3,389 | 305 | ||||||||
Net gain on mortgage banking activities | 2,182 | 4,523 | 6,088 | ||||||||
Net gain (loss) on sales and dispositions of fixed assets | 40 | (6 | ) | 1,257 | |||||||
Net gain (loss) on sales and write-downs of other real estate owned | 195 | 626 | (1,904 | ) | |||||||
Loss on termination of interest rate swap | — | (1,866 | ) | — | |||||||
Other | 1,270 | 969 | 902 | ||||||||
Total noninterest income | 48,651 | 46,784 | 40,260 | ||||||||
Noninterest expense | |||||||||||
Salaries and benefits | 42,245 | 39,522 | 37,306 | ||||||||
Commissions | 7,637 | 8,512 | 6,981 | ||||||||
Net occupancy | 7,023 | 5,869 | 5,716 | ||||||||
Equipment | 5,645 | 4,865 | 4,486 | ||||||||
Professional fees | 3,164 | 3,471 | 2,702 | ||||||||
Marketing and advertising | 1,880 | 1,948 | 1,725 | ||||||||
Deposit insurance premiums | 1,561 | 1,553 | 1,689 | ||||||||
Intangible expenses | 2,167 | 157 | 899 | ||||||||
Acquisition-related costs | 1,270 | 87 | 36 | ||||||||
Restructuring and integration charges | 8 | 534 | — | ||||||||
Other | 14,654 | 14,615 | 14,742 | ||||||||
Total noninterest expense | 87,254 | 81,133 | 76,282 | ||||||||
Income before income taxes | 29,679 | 26,885 | 26,423 | ||||||||
Income taxes | 7,448 | 5,696 | 5,551 | ||||||||
Net income | $ | 22,231 | $ | 21,189 | $ | 20,872 | |||||
Net income per share: | |||||||||||
Basic | $ | 1.37 | $ | 1.28 | $ | 1.25 | |||||
Diluted | 1.36 | 1.27 | 1.24 | ||||||||
Dividends declared | 0.80 | 0.80 | 0.80 | ||||||||
See accompanying notes to consolidated financial statements.
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UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||
Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | |||||||||||||||||||||||||||
Income | $ | 29,679 | $ | 7,448 | $ | 22,231 | $ | 26,885 | $ | 5,696 | $ | 21,189 | $ | 26,423 | $ | 5,551 | $ | 20,872 | |||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on available-for-sale investment securities: | |||||||||||||||||||||||||||||||||||
Net unrealized holding gains (losses) arising during the period | 5,532 | 1,936 | 3,596 | (11,712 | ) | (4,099 | ) | (7,613 | ) | 1,888 | 660 | 1,228 | |||||||||||||||||||||||
Less: reclassification adjustment for net gains on sales realized in net income | (635 | ) | (222 | ) | (413 | ) | (3,389 | ) | (1,186 | ) | (2,203 | ) | (305 | ) | (107 | ) | (198 | ) | |||||||||||||||||
Less: reclassification adjustment for other-than-temporary impairment on equity securities realized in net income | — | — | — | — | — | — | 13 | 5 | 8 | ||||||||||||||||||||||||||
Total net unrealized gains (losses) on available-for-sale investment securities | 4,897 | 1,714 | 3,183 | (15,101 | ) | (5,285 | ) | (9,816 | ) | 1,596 | 558 | 1,038 | |||||||||||||||||||||||
Cash flow hedge derivatives: | |||||||||||||||||||||||||||||||||||
Net change in fair value of interest rate swaps | (241 | ) | (84 | ) | (157 | ) | 43 | 15 | 28 | (474 | ) | (165 | ) | (309 | ) | ||||||||||||||||||||
Less: reclassification adjustment for loss on termination of interest rate swap realized in net income | — | — | — | 1,866 | 653 | 1,213 | — | — | — | ||||||||||||||||||||||||||
Total cash flow hedge derivatives | (241 | ) | (84 | ) | (157 | ) | 1,909 | 668 | 1,241 | (474 | ) | (165 | ) | (309 | ) | ||||||||||||||||||||
Defined benefit pension plans: | |||||||||||||||||||||||||||||||||||
Net unrealized (losses) gains arising during the period | (11,968 | ) | (4,189 | ) | (7,779 | ) | 7,496 | 2,623 | 4,873 | (3,297 | ) | (1,154 | ) | (2,143 | ) | ||||||||||||||||||||
Less: amortization of net actuarial loss included in net periodic pension costs | 666 | 233 | 433 | 1,282 | 449 | 833 | 1,170 | 409 | 761 | ||||||||||||||||||||||||||
Less: accretion of prior service cost included in net periodic pension costs | (288 | ) | (101 | ) | (187 | ) | (255 | ) | (89 | ) | (166 | ) | (255 | ) | (89 | ) | (166 | ) | |||||||||||||||||
Total defined benefit pension plans | (11,590 | ) | (4,057 | ) | (7,533 | ) | 8,523 | 2,983 | 5,540 | (2,382 | ) | (834 | ) | (1,548 | ) | ||||||||||||||||||||
Other comprehensive loss | (6,934 | ) | (2,427 | ) | (4,507 | ) | (4,669 | ) | (1,634 | ) | (3,035 | ) | (1,260 | ) | (441 | ) | (819 | ) | |||||||||||||||||
Total comprehensive income | $ | 22,745 | $ | 5,021 | $ | 17,724 | $ | 22,216 | $ | 4,062 | $ | 18,154 | $ | 25,163 | $ | 5,110 | $ | 20,053 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share and per share data) | Common Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Total | |||||||||||||||||||
Balance at December 31, 2011 | 16,702,376 | $ | 91,332 | $ | 58,495 | $ | 157,566 | $ | (6,101 | ) | $ | (28,313 | ) | $ | 272,979 | |||||||||||
Net income | — | — | — | 20,872 | — | — | 20,872 | |||||||||||||||||||
Other comprehensive loss, net of income tax benefit | — | — | — | — | (819 | ) | — | (819 | ) | |||||||||||||||||
Cash dividends declared ($0.80 per share) | — | — | — | (13,411 | ) | — | — | (13,411 | ) | |||||||||||||||||
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs | 150,579 | — | — | (70 | ) | — | 2,585 | 2,515 | ||||||||||||||||||
Repurchase of cancelled restricted stock awards | (13,125 | ) | — | 300 | — | — | (300 | ) | — | |||||||||||||||||
Stock-based compensation | — | — | 4,544 | — | — | — | 4,544 | |||||||||||||||||||
Net tax deficiency on stock-based compensation | — | — | (84 | ) | — | — | — | (84 | ) | |||||||||||||||||
Purchases of treasury stock | (140,755 | ) | — | — | — | — | (2,319 | ) | (2,319 | ) | ||||||||||||||||
Restricted stock awards granted | 71,157 | — | (1,154 | ) | (134 | ) | — | 1,288 | — | |||||||||||||||||
Balance at December 31, 2012 | 16,770,232 | $ | 91,332 | $ | 62,101 | $ | 164,823 | $ | (6,920 | ) | $ | (27,059 | ) | $ | 284,277 | |||||||||||
Net income | — | — | — | 21,189 | — | — | 21,189 | |||||||||||||||||||
Other comprehensive loss, net of income tax benefit | — | — | — | — | (3,035 | ) | — | (3,035 | ) | |||||||||||||||||
Cash dividends declared ($0.80 per share) | — | — | — | (13,286 | ) | — | — | (13,286 | ) | |||||||||||||||||
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs | 132,681 | — | 20 | (32 | ) | — | 2,434 | 2,422 | ||||||||||||||||||
Repurchase of cancelled restricted stock awards | (29,533 | ) | — | 519 | — | — | (519 | ) | — | |||||||||||||||||
Stock-based compensation | — | — | 978 | — | — | — | 978 | |||||||||||||||||||
Net tax deficiency on stock-based compensation | — | — | (27 | ) | — | — | — | (27 | ) | |||||||||||||||||
Purchases of treasury stock | (655,609 | ) | — | — | — | — | (12,012 | ) | (12,012 | ) | ||||||||||||||||
Restricted stock awards granted | 70,041 | — | (1,174 | ) | (92 | ) | — | 1,266 | — | |||||||||||||||||
Balance at December 31, 2013 | 16,287,812 | $ | 91,332 | $ | 62,417 | $ | 172,602 | $ | (9,955 | ) | $ | (35,890 | ) | $ | 280,506 | |||||||||||
Net income | — | — | — | 22,231 | — | — | 22,231 | |||||||||||||||||||
Other comprehensive loss, net of income tax benefit | — | — | — | — | (4,507 | ) | — | (4,507 | ) | |||||||||||||||||
Cash dividends declared ($0.80 per share) | — | — | — | (12,982 | ) | — | — | (12,982 | ) | |||||||||||||||||
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs | 124,151 | — | 43 | — | — | 2,419 | 2,462 | |||||||||||||||||||
Exercise of stock options | 17,334 | — | (5 | ) | — | — | 315 | 310 | ||||||||||||||||||
Repurchase of cancelled restricted stock awards | (43,452 | ) | — | 735 | — | — | (735 | ) | — | |||||||||||||||||
Stock-based compensation | — | — | 1,141 | — | — | — | 1,141 | |||||||||||||||||||
Net tax deficiency on stock-based compensation | — | — | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||
Purchases of treasury stock | (238,542 | ) | — | — | — | — | (4,605 | ) | (4,605 | ) | ||||||||||||||||
Restricted stock awards granted | 74,304 | — | (1,349 | ) | — | — | 1,349 | — | ||||||||||||||||||
Balance at December 31, 2014 | 16,221,607 | $ | 91,332 | $ | 62,980 | $ | 181,851 | $ | (14,462 | ) | $ | (37,147 | ) | $ | 284,554 | |||||||||||
See accompanying notes to consolidated financial statements.
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UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 22,231 | $ | 21,189 | $ | 20,872 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Provision for loan and lease losses | 3,607 | 11,228 | 10,035 | ||||||||
Depreciation of premises and equipment | 3,243 | 2,927 | 2,903 | ||||||||
Other-than-temporary impairment of equity securities | — | — | 13 | ||||||||
Net gain on sales of investment securities | (635 | ) | (3,389 | ) | (305 | ) | |||||
Net gain on mortgage banking activities | (2,182 | ) | (4,523 | ) | (6,088 | ) | |||||
Net (gain) loss on sales and dispositions of fixed assets | (40 | ) | 6 | (1,257 | ) | ||||||
Net (gain) loss on sales and write-down of other real estate owned | (195 | ) | (626 | ) | 1,904 | ||||||
Loss on termination of interest rate swap | — | 1,866 | — | ||||||||
Bank owned life insurance income | (1,628 | ) | (2,968 | ) | (2,670 | ) | |||||
Net amortization on investment securities | 1,690 | 2,729 | 2,470 | ||||||||
Amortization, fair market value adjustments and capitalization of mortgage servicing rights | 10 | (1,367 | ) | (1,413 | ) | ||||||
Stock-based compensation | 1,141 | 978 | 1,267 | ||||||||
Intangible expenses | 2,167 | 157 | 899 | ||||||||
Other adjustments to reconcile net income to cash provided by operating activities | (587 | ) | (252 | ) | — | ||||||
Deferred tax expense | 4,162 | 933 | 2,540 | ||||||||
Originations of loans held for sale | (131,461 | ) | (265,732 | ) | (325,569 | ) | |||||
Proceeds from the sale of loans held for sale | 132,278 | 273,665 | 329,569 | ||||||||
Contributions to pension and other postretirement benefit plans | (254 | ) | (2,243 | ) | (8,215 | ) | |||||
(Increase) decrease in accrued interest receivable and other assets | (1,093 | ) | (2,873 | ) | 8,065 | ||||||
(Decrease) increase in accrued interest payable and other liabilities | (587 | ) | 1,101 | 2,119 | |||||||
Net cash provided by operating activities | 31,867 | 32,806 | 37,139 | ||||||||
Cash flows from investing activities: | |||||||||||
Net cash paid due to acquisitions | (9,260 | ) | (2,170 | ) | (3,225 | ) | |||||
Net capital expenditures | (5,595 | ) | (3,840 | ) | (578 | ) | |||||
Proceeds from maturities and calls of securities held-to-maturity | 11,000 | 3,000 | — | ||||||||
Proceeds from maturities and calls of securities available-for-sale | 58,744 | 85,205 | 164,943 | ||||||||
Proceeds from sales of securities available-for-sale | 32,967 | 76,361 | 57,186 | ||||||||
Purchases of investment securities held-to-maturity | — | — | (24,697 | ) | |||||||
Purchases of investment securities available-for-sale | (65,215 | ) | (81,712 | ) | (226,429 | ) | |||||
Proceeds from sale of credit card portfolio | 8,940 | — | — | ||||||||
Net increase in loans and leases | (100,981 | ) | (74,338 | ) | (50,615 | ) | |||||
Net decrease in interest-earning deposits | 30,070 | 11,190 | 19,807 | ||||||||
Proceeds from sales of other real estate owned | 891 | 4,359 | 3,012 | ||||||||
Proceeds from bank owned life insurance | — | 3,540 | 2,415 | ||||||||
Net cash (used in) provided by investing activities | (38,439 | ) | 21,595 | (58,181 | ) | ||||||
Cash flows from financing activities: | |||||||||||
Net increase (decrease) in deposits | 16,843 | (20,515 | ) | 116,101 | |||||||
Net increase (decrease) in short-term borrowings | 4,217 | (59,026 | ) | (18,458 | ) | ||||||
Repayment of subordinated debt | — | (375 | ) | (1,500 | ) | ||||||
Payment for repurchase of trust preferred securities | — | (20,619 | ) | — | |||||||
Payment of contingent consideration on acquisitions | (310 | ) | — | — | |||||||
Purchases of treasury stock | (4,605 | ) | (12,012 | ) | (2,319 | ) | |||||
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs | 2,462 | 2,422 | 2,515 | ||||||||
Proceeds from exercise of stock options | 310 | — | — | ||||||||
Cash dividends paid | (12,996 | ) | (10,029 | ) | (16,755 | ) | |||||
Net cash provided by (used in) financing activities | 5,921 | (120,154 | ) | 79,584 | |||||||
Net (decrease) increase in cash and due from banks | (651 | ) | (65,753 | ) | 58,542 | ||||||
Cash and due from banks at beginning of year | 32,646 | 98,399 | 39,857 | ||||||||
Cash and due from banks at end of period | $ | 31,995 | $ | 32,646 | $ | 98,399 | |||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid for interest | $ | 4,118 | $ | 5,997 | $ | 8,701 | |||||
Cash paid for income taxes, net of refunds received | 5,899 | 5,352 | 1,819 | ||||||||
Non cash transactions: | |||||||||||
Transfer of loans to other real estate owned | $ | — | $ | 3,485 | $ | — | |||||
Transfer of loans to loans held for sale | 8,926 | — | 2,599 | ||||||||
Contingent consideration recorded as goodwill | 6,105 | 454 | 842 | ||||||||
See accompanying notes to consolidated financial statements.
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UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in tables are in thousands, except per share data. “N/M” equates to “not meaningful” “-“ equates to “zero” or “doesn’t round to a reportable number” and “N/A” equates to “not applicable”.)
Note 1. Summary of Significant Accounting Policies
Organization
Univest Corporation of Pennsylvania (the Corporation) through its wholly owned subsidiary, Univest Bank and Trust Co. (the Bank), is engaged in domestic commercial and retail banking services and provides a full range of community banking and trust services to its customers. The Bank wholly owns Univest Capital, Inc., which provides lease financing, and Delview, Inc., who through its subsidiaries, Univest Investments, Inc., Univest Insurance, Inc. and Girard Partners provides financial planning, investment management, investment advisory, insurance products and brokerage services. Univest Investments, Inc., Univest Insurance, Inc. and Univest Capital, Inc. were formed to enhance the traditional banking and trust services provided by the Bank, along with the acquisition of Girard Partners.
At December 31, 2014, the Corporation has three reportable business segments: Banking, Wealth Management and Insurance. The Corporation determines its segments based primarily upon product and service offerings, through the types of income generated and the regulatory environment. This is strategically how the Corporation operates and has positioned itself in the marketplace. Accordingly, significant operating decisions are based upon analysis of each of these segments. At December 31, 2014, these segments meet the quantitative thresholds for separate disclosure as a business segment. For more detailed discussion and financial information on the business segments, see Note 23 “Segment Reporting”.
The Bank serves Montgomery, Bucks and Chester Counties and the Lehigh Valley of Pennsylvania through thirty-one banking offices and provides banking and trust services to the residents and employees of twelve retirement communities. With the acquisition of Valley Green Bank effective January 1, 2015, the Bank operates three full-service banking offices in the greater Philadelphia marketplace. Banking services are also available on-line at the Corporation’s website at www.univest.net.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries; the Corporation’s primary subsidiary is the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current-year presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (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.
Interest-earning Deposits with Other Banks
Interest-earning deposits with other banks consist of deposit accounts with other financial institutions generally having maturities of three months or less.
Investment Securities
Securities are classified as investment securities held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and are carried at fair value. The Corporation did not have any trading account securities at December 31, 2014 or 2013. Securities not classified as held-to-maturity or trading are designated securities available-for-sale and carried at fair value with unrealized gains and losses reflected in other comprehensive income, net of estimated income taxes. Realized gains and losses on the sale of investment securities are recognized using the specific identification method and are included in the consolidated statements of income. The amortization of premiums and accretion of discounts are included in interest income and calculated using the level yield method.
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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 by considering the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. All of the debt securities are rated as investment grade and management believes that it will not incur any losses. The unrealized losses on the Corporation’s investments in debt securities are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers within our investment portfolio. The Corporation does not have the intent to sell the debt securities and believes it is more likely than not, that it will not have to sell the securities before recovery of their cost basis. The credit portion of any loss on debt securities is recognized through earnings and the noncredit portion of any loss related to debt securities that the Corporation does not intend to sell, and it is more likely than not that the Corporation will not be required to sell the securities prior to recovery, is recognized in other comprehensive income, net of tax.
The Corporation evaluates its equity securities for other-than-temporary impairment and recognizes other-than-temporary impairment charges when it has determined that it is probable that the fair value of certain equity securities will not recover to the Corporation’s cost basis in the individual securities within a reasonable period of time due to a decline in the financial stability of the underlying companies. Management evaluates 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 of the Corporation’s cost basis occurs.
Loans and Leases
Loans and leases are stated at the principal amount less net deferred fees and unearned discount. Interest income on commercial, consumer, and mortgage loans is recorded on the outstanding balance method, using actual interest rates applied to daily principal balances. Loan commitments are made to accommodate the financial needs of the customers. These commitments represent off-balance sheet items that are unfunded. Accrual of interest income on loans and leases ceases when collectability of interest and/or principal is questionable. If it is determined that the collection of interest previously accrued is uncertain, such accrual is reversed and charged to current earnings. Loans and leases are considered past due based upon failure to comply with contractual terms.
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. 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 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 and leases are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. A loan or lease is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis.
Loan and Lease Fees
Fees collected upon loan or lease origination and certain direct costs of originating loans and leases are deferred and recognized over the contractual lives of the related loans and leases as yield adjustments using the interest method. Upon prepayment or other disposition of the underlying loans and leases before their contractual maturities, any associated unearned fees or unamortized costs are recognized.
Reserve for Loan and Lease Losses
The reserve for loan and lease losses is maintained at a level that management believes is appropriate to absorb known and inherent losses in the loan and lease portfolio. Management’s methodology to determine the adequacy of and the additions 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 loan portfolio.
The reserve for loan and lease loss 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 and qualitative factors, loss factors are determined giving consideration to the areas noted in
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the first paragraph and applied to the pooled loan and lease categories to develop the general or allocated portion of the reserve.
The reserve for loan and lease losses is determined at the end of each quarter, and more frequently for management review purposes. Calculating the Corporation's reserve for loan and lease losses considers the Bank's loan portfolio utilizing historical loss data as a starting point, while evaluating the impact of environmental factors in a quantitative manner as they relate to the collectability of outstanding loan obligations. The Corporation utilizes a rolling eight-quarter migration analysis and loss emergence period analysis to determine the annualized net expected loan loss experience.
Each quarter, the conditions that exist within the look-back period are compared to current conditions to support a conclusion as to which qualitative adjustments are (or are not) deemed necessary for each loan portfolio segment. These factors are evaluated subjectively based on management's experience and supported by the Corporation's defined analytical metrics/drivers relative to the historical look-back period. Factors include, but are not limited to, asset quality trends, portfolio growth trends, changes in lending policies and management, economic trends, concentrations of credit risk and the impact of collateral dependent lending.
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 and leases 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 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 impaired loans, at the present value of expected future cash flows using the loan’s initial effective interest rate. For commercial impaired loans which are collateral dependent, the fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Corporation less management’s estimated costs to sell. Appraisals are updated annually and obtained more frequently if changes in the property or market conditions warrant. Once an updated appraisal is received, if the fair value less estimated costs to sell is less than the carrying amount of the collateral dependent loan, a charge-off to the reserve for loan and lease losses is recorded for the difference.
The reserve for loan and lease losses consists of an allocated reserve and an unallocated reserve. The allocated reserve is comprised of reserves established on specific loans and leases, and class reserves based on historical loan and lease loss experience and qualitative factors, current trends, and management assessments. The unallocated reserve supports other risk considerations not readily quantifiable through the allocated reserve metrics outlined above, as well as the inherent imprecision of the reserve for loan and lease losses model complexity. These considerations include, but are not limited to, fair value instability within the non-performing category, and the improving credit risk profile of performing loans individually measured for impairment.
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. In addition, the Bank's primary examiner, as a regular part of their examination process, may require the Bank to increase the level of reserves.
Premises and Equipment
Land is stated at cost, and premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method and charged to operating expenses over the estimated useful lives of the assets. The estimated useful life for new buildings constructed on land owned is forty years, and for new buildings constructed on leased land, is the lesser of forty years or the lease term including anticipated renewable terms. The useful life of purchased existing buildings is the estimated remaining useful life at the time of the purchase. Land improvements are considered to have estimated useful lives of fifteen years or the lease term including anticipated renewable terms. Furniture, fixtures and equipment have estimated useful lives ranging from three to ten years.
Goodwill and Other Intangible Assets
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The Corporation accounts for its acquisitions using the purchase accounting method. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the sum of the year’s digits over their estimated useful lives of up to fifteen years. Customer related intangibles are amortized over their estimated useful lives of five to twelve years. Covenants not to compete are amortized over their three to five-year contractual lives. The Corporation completes a goodwill 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 intangible assets on an annual basis or more often if events and circumstances indicate a possible impairment. There can be no assurance that future impairment analyses will not result in a charge to earnings.
Mortgage servicing rights are recognized as separate assets when mortgage loans are sold and the servicing rights are retained. Capitalized mortgage servicing rights are reported in other intangible assets on the consolidated balance sheets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing period of the underlying mortgage loans. Mortgage servicing rights are evaluated for impairment, on a quarterly basis, based upon the fair value of the servicing rights as compared to amortized cost. 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 carried at the lower of amortized cost or estimated fair value. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the unamortized capitalized amount.
Bank Owned Life Insurance
The Corporation carries bank owned life insurance at the net cash surrender value of the policies. Changes in the net cash surrender value of these policies are reflected in noninterest income. Proceeds from and purchases of bank owned life insurance are reflected in the consolidated statements of cash flows under investing activities. The Corporation recognizes a liability for the future death benefit for certain endorsement split-dollar life insurance arrangements that provide an employee with a death benefit in a postretirement/termination period.
Other Real Estate Owned
Other real estate owned represents properties acquired through customers’ loan defaults and is included in other assets. 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. Any write-down, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent write‑downs and any gain or loss upon the sale of real estate owned is recorded in other noninterest income. Expenses incurred in connection with holding such assets are recorded in other noninterest expense.
Derivative Financial Instruments
The Corporation recognizes all derivative financial instruments on its balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the underlying forecasted transaction is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings immediately. To determine fair value, the Corporation uses third party pricing models that incorporate assumptions about market conditions and risks that are current at the reporting date.
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. The Corporation accounts for its interest-rate swap contracts in cash flow hedging relationships by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of assets or liabilities that are being hedged. To determine effectiveness, the Corporation performs an analysis to identify if changes in fair value or cash flow of the derivative correlate to the equivalent changes in the forecasted interest receipts related to a specified hedged item. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The change in fair value of the ineffective part of the instrument would need to be charged to earnings, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods. In a fair value hedge, the fair values of the interest rate swap agreements and changes in the fair values of the hedged items are recorded in the Corporation’s consolidated balance sheet with the corresponding gain or loss being recognized in the consolidated statement of income. The
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difference between changes in the fair values of interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in net interest income in the consolidated statement of income. The Corporation performs an assessment, both at the inception of the hedge and quarterly thereafter, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items.
In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sale or purchase of mortgage loans to or from third-party investors to hedge the effect of changes in interest rates on the value of the interest rate locks. Forward loan sale commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. Both the interest rate locks and the forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle each derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded within other assets and other liabilities on the consolidated balance sheets, with changes in fair value during the period recorded within the net gain on mortgage banking activities on the consolidated statements of income.
Federal Home Loan Bank Stock, Federal Reserve Bank Stock and Certain Other Investments without Readily Determinable Fair Values
Federal Home Loan Bank stock, Federal Reserve Bank stock and certain other investments without readily determinable fair values are classified as other assets on the consolidated balance sheets. These investments are carried at cost and evaluated for impairment periodically or if events or circumstances indicate that there may be impairment.
Income Taxes
There are two components of income tax expense: current and deferred. Current income tax expense approximates cash to be paid or refunded for taxes for the applicable period. Deferred income taxes are provided for temporary differences between amounts reported for financial statement and tax purposes. Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Deferred tax assets are subject to management’s judgment based upon available evidence that future realizations are “more likely than not.” If management determines that the Corporation is not more likely than not, to realize some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to reduce the value of the net deferred tax asset to the expected realizable value. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Penalties are recorded in noninterest expense in the year they are assessed and paid and are treated as a non-deductible expense for tax purposes. Interest is recorded in noninterest expense in the year it is assessed and paid and is treated as a deductible expense for tax purposes.
Retirement Plans and Other Postretirement Benefits
Substantially all employees who were hired before December 8, 2009 are covered by a noncontributory retirement plan. Effective December 31, 2009, the benefits previously accrued under the noncontributory retirement plan were frozen and the plan was amended and converted to a cash balance plan, with participants not losing any pension benefits already earned in the plan. Prior to the cash balance plan conversion effective December 31, 2009, the plan provided benefits based on a formula of each participant’s final average pay. Future benefits under the cash balance plan accrue by crediting participants annually with an amount equal to a percentage of earnings in that year based on years of credited service as defined in the 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. The Corporation provides certain postretirement healthcare and life insurance benefits for retired employees. The Corporation’s measurement date for plan assets and obligation is fiscal year-end. The Corporation recognizes on its consolidated balance sheet the funded status of its defined pension plans and changes in the funded status of the plan in the year in which the changes occur. An under-funded position would create a liability and an over-funded position would create an asset, with a correlating deferred tax asset or liability. The net impact would be an adjustment to equity as accumulated other comprehensive income (loss). The Corporation recognizes as a component of other comprehensive income (loss), net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period.
The Corporation sponsors a 401(k) deferred salary savings plan, which is a qualified defined contribution plan, and which covers all employees of the Corporation and its subsidiaries, and provides that the Corporation make matching contributions as defined by the plan.
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The Corporation sponsors a Supplemental Non-Qualified Pension Plan (SNQPP) which was established in 1981 for employees who have served for several years, with ability and distinction, in one of the primary policy-making senior level positions, with the understanding that the future growth and continued success of the Corporation’s business may well reflect the continued services to be rendered by these employees and the Corporation’s desire to be reasonably assured that these employees would continue to serve. The SNQPP was established prior to the existence of a 401(k) deferred salary savings, employee stock purchase and long-term incentive plans and therefore is not actively offered to new participants. These non-qualified plans are accounted for under guidance for deferred compensation arrangements.
Stock-Based Compensation
The fair value of share based awards is recognized as compensation expense over the vesting period based on the grant-date fair value of the awards. The Corporation uses the Black-Scholes Model to estimate the fair value of each option on the date of grant. The Black-Scholes Model estimates the fair value of employee stock options using a pricing model which takes into consideration the exercise price of the option, the expected life of the option, the current market price and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Corporation grants stock options to employees with an exercise price equal to the fair value of the shares at the date of grant. The Corporation grants both fixed and variable (performance-based) restricted stock. The performance-based restricted stock awards vest based upon the Corporation’s performance against selected peers with respect to certain financial measures over a three-year period. The fair value of fixed restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period. The fair value of the performance-based restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period adjusted for a probability factor of achieving the performance goals.
Dividend Reinvestment and Employee Stock Purchase Plans
The Univest Dividend Reinvestment Plan allows for the issuance of 1,968,750 shares of common stock. During 2014 and 2013, 82,922 and 95,639 shares, respectively, were issued under the dividend reinvestment plan, with 552,181 shares available for future purchase at December 31, 2014.
The 1996 Employee Stock Purchase Plan allows for the issuance of 984,375 shares of common stock. Employees may elect to make contributions to the plan in an aggregate amount not less than 2% or more than 10% of such employee’s total compensation. These contributions are then used to purchase stock during an offering period determined by the Corporation’s Employee Stock Purchase Plan Committee. The purchase price of the stock is 90% of the closing sale price on the last trading day of each quarter. Compensation expense is recognized as the discount is greater than 5% of the fair value. During 2014 and 2013, 23,271 and 20,195 shares, respectively, were issued under the employee stock purchase plan, with 732,624 shares available for future purchase at December 31, 2014.
Marketing and Advertising Costs
The Corporation’s accounting policy is to expense marketing and advertising costs as incurred, when the advertisement first takes place, or over the expected useful life of the related asset, as would be the case with billboards.
Statement of Cash Flows
The Corporation has defined those items included in the caption “Cash and due from banks” as cash and cash equivalents.
Trust Assets
Assets held by the Corporation in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Corporation.
Earnings per Share
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if options on common shares had been exercised, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method. The effects of options to issue common stock are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.
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Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) regarding revenue from contracts with customers which clarifies the principles for recognizing revenue and develops a common standard for U.S. GAAP and International Financial Reporting Standards. The ASU establishes a core principle that would require an entity to identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The ASU provides for improved disclosure requirements that require entities to disclose sufficient information that enables users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, or January 1, 2017 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on its financial statements; however, it is anticipated the impact will be only related to timing.
In January 2014, the FASB issued an ASU regarding reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The ASU clarifies that when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. 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, 2014, or January 1, 2015 for the Corporation. The Corporation does not anticipate the adoption of this guidance will have a material impact on its financial statements but will result in expanded disclosures effective March 31, 2015.
Note 2. Restrictions on Cash and Due from Banks and Interest-earning Deposit Accounts
The Bank maintains reserve balances under Federal Reserve Bank requirements. The reserve requirement at December 31, 2014 and 2013 was $2.5 million and $8.3 million, respectively, and was satisfied by vault cash held at the Bank’s branches. The average balances at the Federal Reserve Bank of Philadelphia were $31.5 million and $44.5 million for the years ended December 31, 2014 and 2013, respectively.
The Corporation also maintains interest-earning deposit accounts at other financial institutions as collateral for Risk Participation Agreements. The pledging requirement at December 31, 2014 and 2013 was $370 thousand and $690 thousand, respectively. See Note 16, “Commitments and Contingencies” for additional information.
Note 3. Acquisitions
Sterner Insurance Associates
On July 1, 2014, the Corporation and its insurance subsidiary, Univest Insurance, completed the acquisition of Sterner Insurance Associates, a full service firm providing insurance and consultative risk management solutions to individuals and businesses throughout the Lehigh Valley, Berks, Bucks and Montgomery counties.
The Corporation paid $3.9 million in cash and assumed liabilities of $940 thousand at closing with additional contingent consideration to be paid in annual installments over the three-year period ending June 30, 2017, based on the achievement of certain levels of revenue growth and EBITDA (earnings before interest, taxes, depreciation and amortization). At the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $635 thousand in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $5.7 million cumulative over the next three years. As a result of the Sterner Insurance acquisition, the Corporation recorded goodwill of $3.4 million (inclusive of the contingent consideration) and customer related intangibles of $1.6 million. The goodwill is expected to be deductible for tax purposes. The customer related intangibles are being amortized over nine years using the sum-of-the-years-digits amortization method.
Valley Green Bank
On June 17, 2014, the Corporation, the Bank and Valley Green Bank entered into an Agreement and Plan of Merger which provided for the merger of Valley Green Bank with and into the Bank in an all-stock transaction with an aggregate value of
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approximately $78.9 million . On January 1, 2015, the Corporation completed its acquisition of Valley Green Bank. See Note 26, "Subsequent Event" for additional information. The transaction qualifies as a tax-free reorganization for federal income tax purposes. The transaction is anticipated to be accretive to the Corporation’s earnings per share in the first combined year of operations.
Headquartered in the Mt. Airy neighborhood of Philadelphia, Pennsylvania, Valley Green Bank had approximately $425 million in assets, $386 million in loans, and $385 million in deposits at December 31, 2014 and operated three full-service banking offices and two administrative offices for loan production in the greater Philadelphia marketplace. With the assumption of Valley Green Bank's three branches and two administrative offices for loan production in the Philadelphia marketplace, the Corporation entered a new small business and consumer market and expanded its existing lending network within southeastern Pennsylvania.
Girard Partners
On January 27, 2014, the Corporation completed the acquisition of Girard Partners, a registered investment advisory firm with more than $500 million in assets under management. The Corporation increased its assets under management to over $3.0 billion at the acquisition date and expanded its advisory capabilities.
The Corporation paid $5.4 million in cash at closing with additional contingent consideration to be paid in annual installments over the five-year period ending December 31, 2018, based on the achievement of certain levels of EBITDA. As of the effective date of the acquisition, January 1, 2014, the Corporation recorded the estimated fair value of the contingent consideration of $5.5 million in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the next 5 years. As a result of the Girard Partners acquisition, the Corporation recorded goodwill of $6.8 million (inclusive of the contingent consideration) and customer related intangibles of $4.3 million. The goodwill is expected to be deductible for tax purposes. The customer related intangibles are being amortized over 9 years using the sum-of-the-years-digits amortization method.
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Note 4. 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 December 31, 2014 and 2013, by contractual maturity within each type:
At December 31, 2014 | At December 31, 2013 | ||||||||||||||||||||||||||||||
(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 | $ | 13,088 | $ | 82 | $ | — | $ | 13,170 | $ | 11,148 | $ | 122 | $ | — | $ | 11,270 | |||||||||||||||
After 1 year to 5 years | 41,259 | 388 | (52 | ) | 41,595 | 54,855 | 992 | (264 | ) | 55,583 | |||||||||||||||||||||
54,347 | 470 | (52 | ) | 54,765 | 66,003 | 1,114 | (264 | ) | 66,853 | ||||||||||||||||||||||
Total | $ | 54,347 | $ | 470 | $ | (52 | ) | $ | 54,765 | $ | 66,003 | $ | 1,114 | $ | (264 | ) | $ | 66,853 | |||||||||||||
Securities Available-for-Sale | |||||||||||||||||||||||||||||||
U.S. treasuries: | |||||||||||||||||||||||||||||||
After 1 year to 5 years | $ | 4,972 | $ | — | $ | (127 | ) | $ | 4,845 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
After 5 years to 10 years | — | — | — | — | 4,966 | — | (258 | ) | 4,708 | ||||||||||||||||||||||
4,972 | — | (127 | ) | 4,845 | 4,966 | — | (258 | ) | 4,708 | ||||||||||||||||||||||
U.S. government corporations and agencies: | |||||||||||||||||||||||||||||||
Within 1 year | — | — | — | — | 5,999 | 16 | — | 6,015 | |||||||||||||||||||||||
After 1 year to 5 years | 122,328 | 48 | (532 | ) | 121,844 | 112,989 | 114 | (1,226 | ) | 111,877 | |||||||||||||||||||||
After 5 years to 10 years | — | — | — | — | 10,816 | — | (560 | ) | 10,256 | ||||||||||||||||||||||
122,328 | 48 | (532 | ) | 121,844 | 129,804 | 130 | (1,786 | ) | 128,148 | ||||||||||||||||||||||
State and political subdivisions: | |||||||||||||||||||||||||||||||
Within 1 year | 600 | 2 | — | 602 | 1,564 | 13 | — | 1,577 | |||||||||||||||||||||||
After 1 year to 5 years | 12,326 | 17 | (59 | ) | 12,284 | 5,305 | 14 | (29 | ) | 5,290 | |||||||||||||||||||||
After 5 years to 10 years | 49,554 | 1,616 | (77 | ) | 51,093 | 41,974 | 710 | (698 | ) | 41,986 | |||||||||||||||||||||
Over 10 years | 37,004 | 1,792 | (1 | ) | 38,795 | 57,899 | 1,227 | (322 | ) | 58,804 | |||||||||||||||||||||
99,484 | 3,427 | (137 | ) | 102,774 | 106,742 | 1,964 | (1,049 | ) | 107,657 | ||||||||||||||||||||||
Residential mortgage-backed securities: | |||||||||||||||||||||||||||||||
After 1 year to 5 years | 5,066 | 17 | — | 5,083 | — | — | — | — | |||||||||||||||||||||||
After 5 years to 10 years | 4,856 | — | (32 | ) | 4,824 | 10,008 | 5 | (53 | ) | 9,960 | |||||||||||||||||||||
Over 10 years | 3,661 | 75 | — | 3,736 | 25,721 | 20 | (221 | ) | 25,520 | ||||||||||||||||||||||
13,583 | 92 | (32 | ) | 13,643 | 35,729 | 25 | (274 | ) | 35,480 | ||||||||||||||||||||||
Collateralized mortgage obligations: | |||||||||||||||||||||||||||||||
After 1 year to 5 years | — | — | — | — | 73 | — | — | 73 | |||||||||||||||||||||||
Over 10 years | 3,810 | — | (85 | ) | 3,725 | 7,341 | 40 | (253 | ) | 7,128 | |||||||||||||||||||||
3,810 | — | (85 | ) | 3,725 | 7,414 | 40 | (253 | ) | 7,201 | ||||||||||||||||||||||
Corporate bonds: | |||||||||||||||||||||||||||||||
Within 1 year | 4,998 | 22 | — | 5,020 | — | — | — | — | |||||||||||||||||||||||
After 1 year to 5 years | 29,505 | 88 | (244 | ) | 29,349 | 18,838 | 52 | (411 | ) | 18,479 | |||||||||||||||||||||
After 5 years to 10 years | 20,442 | — | (371 | ) | 20,071 | 16,474 | 4 | (1,117 | ) | 15,361 | |||||||||||||||||||||
54,945 | 110 | (615 | ) | 54,440 | 35,312 | 56 | (1,528 | ) | 33,840 | ||||||||||||||||||||||
Money market mutual funds: | |||||||||||||||||||||||||||||||
No stated maturity | 11,675 | — | — | 11,675 | 16,900 | — | — | 16,900 | |||||||||||||||||||||||
11,675 | — | — | 11,675 | 16,900 | — | — | 16,900 | ||||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||
No stated maturity | 854 | 483 | — | 1,337 | 1,679 | 668 | — | 2,347 | |||||||||||||||||||||||
854 | 483 | — | 1,337 | 1,679 | 668 | — | 2,347 | ||||||||||||||||||||||||
Total | $ | 311,651 | $ | 4,160 | $ | (1,528 | ) | $ | 314,283 | $ | 338,546 | $ | 2,883 | $ | (5,148 | ) | $ | 336,281 | |||||||||||||
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 December 31, 2014 and 2013 do not represent other-than-temporary impairments.
Securities with a carrying value of $230.9 million and $271.1 million at December 31, 2014 and 2013, respectively, were pledged to secure public deposits and for other purposes as required by law.
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The following table presents information related to sales of securities available-for-sale during the years ended December 31, 2014, 2013 and 2012:
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Securities available-for-sale: | |||||||||||
Proceeds from sales | $ | 32,967 | $ | 76,361 | $ | 57,186 | |||||
Gross realized gains on sales | 635 | 3,396 | 1,201 | ||||||||
Gross realized losses on sales | — | 7 | 896 | ||||||||
Tax expense related to net realized gains on sales | 222 | 1,186 | 107 | ||||||||
At December 31, 2014 and 2013, 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 December 31, 2014 and 2013 by the length of time those securities were in a continuous loss position:
Less than Twelve Months | Twelve Months or Longer | Total | |||||||||||||||||||||
(Dollars in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||
At December 31, 2014 | |||||||||||||||||||||||
Securities Held-to-Maturity | |||||||||||||||||||||||
Corporate bonds | $ | 15,036 | $ | (27 | ) | $ | 4,987 | $ | (25 | ) | $ | 20,023 | $ | (52 | ) | ||||||||
Total | $ | 15,036 | $ | (27 | ) | $ | 4,987 | $ | (25 | ) | $ | 20,023 | $ | (52 | ) | ||||||||
Securities Available-for-Sale | |||||||||||||||||||||||
U.S. treasuries | $ | — | $ | — | $ | 4,845 | $ | (127 | ) | $ | 4,845 | $ | (127 | ) | |||||||||
U.S. government corporations and agencies | 39,607 | (80 | ) | 62,140 | (452 | ) | 101,747 | (532 | ) | ||||||||||||||
State and political subdivisions | 10,246 | (31 | ) | 9,303 | (106 | ) | 19,549 | (137 | ) | ||||||||||||||
Residential mortgage-backed securities | 4,824 | (32 | ) | — | — | 4,824 | (32 | ) | |||||||||||||||
Collateralized mortgage obligations | — | — | 3,725 | (85 | ) | 3,725 | (85 | ) | |||||||||||||||
Corporate bonds | 21,949 | (328 | ) | 15,805 | (287 | ) | 37,754 | (615 | ) | ||||||||||||||
Total | $ | 76,626 | $ | (471 | ) | $ | 95,818 | $ | (1,057 | ) | $ | 172,444 | $ | (1,528 | ) | ||||||||
At December 31, 2013 | |||||||||||||||||||||||
Securities Held-to-Maturity | |||||||||||||||||||||||
Corporate bonds | $ | 19,942 | $ | (264 | ) | $ | — | $ | — | $ | 19,942 | $ | (264 | ) | |||||||||
Total | $ | 19,942 | $ | (264 | ) | $ | — | $ | — | $ | 19,942 | $ | (264 | ) | |||||||||
Securities Available-for-Sale | |||||||||||||||||||||||
U.S. treasuries | $ | 4,708 | $ | (258 | ) | $ | — | $ | — | $ | 4,708 | $ | (258 | ) | |||||||||
U.S. government corporations and agencies | 101,813 | (1,786 | ) | — | — | 101,813 | (1,786 | ) | |||||||||||||||
State and political subdivisions | 30,233 | (1,049 | ) | — | — | 30,233 | (1,049 | ) | |||||||||||||||
Residential mortgage-backed securities | 29,444 | (274 | ) | — | — | 29,444 | (274 | ) | |||||||||||||||
Collateralized mortgage obligations | 4,091 | (253 | ) | — | — | 4,091 | (253 | ) | |||||||||||||||
Corporate bonds | 26,557 | (1,528 | ) | — | — | 26,557 | (1,528 | ) | |||||||||||||||
Total | $ | 196,846 | $ | (5,148 | ) | $ | — | $ | — | $ | 196,846 | $ | (5,148 | ) | |||||||||
Note 5. Loans and Leases
Summary of Major Loan and Lease Categories
At December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Commercial, financial and agricultural | $ | 457,827 | $ | 422,816 | |||
Real estate-commercial | 628,478 | 600,353 | |||||
Real estate-construction | 79,887 | 90,493 | |||||
Real estate-residential secured for business purpose | 36,932 | 37,319 | |||||
Real estate-residential secured for personal purpose | 166,850 | 149,164 | |||||
Real estate-home equity secured for personal purpose | 108,250 | 95,345 | |||||
Loans to individuals | 29,941 | 40,000 | |||||
Lease financings | 118,460 | 105,994 | |||||
Total loans and leases held for investment, net of deferred income | $ | 1,626,625 | $ | 1,541,484 | |||
Unearned lease income, included in the above table | $ | (14,131 | ) | $ | (14,439 | ) | |
Net deferred costs, included in the above table | 3,218 | 2,744 | |||||
Overdraft deposits included in the above table | 50 | 62 | |||||
Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.
The Corporation is a lessor of primarily equipment under agreements expiring at various dates through the year 2021. At December 31, 2014 and 2013, the schedule of minimum lease payments receivable is as follows:
At December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Within 1 year | $ | 50,340 | $ | 43,911 | |||
After 1 year through 2 years | 38,084 | 33,302 | |||||
After 2 years through 3 years | 25,888 | 23,723 | |||||
After 3 years through 4 years | 13,667 | 14,335 | |||||
After 4 years through 5 years | 4,312 | 4,983 | |||||
Thereafter | 300 | 179 | |||||
Total future minimum lease payments receivable | 132,591 | 120,433 | |||||
Less: Unearned income | (14,131 | ) | (14,439 | ) | |||
Total lease financing receivables, net of unearned income | $ | 118,460 | $ | 105,994 | |||
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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 90 days or more past due which are accruing interest at December 31, 2014 and 2013:
(Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or more Past Due | Total Past Due | Current | Total Loans and Leases Held for Investment | Recorded Investment 90 Days or more Past Due and Accruing Interest | ||||||||||||||||||||
At December 31, 2014 | |||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 145 | $ | 747 | $ | 2,567 | $ | 3,459 | $ | 454,368 | $ | 457,827 | $ | — | |||||||||||||
Real estate—commercial real estate and construction: | |||||||||||||||||||||||||||
Commercial real estate | 361 | 913 | 1,163 | 2,437 | 626,041 | 628,478 | — | ||||||||||||||||||||
Construction | — | 405 | 5,525 | 5,930 | 73,957 | 79,887 | — | ||||||||||||||||||||
Real estate—residential and home equity: | |||||||||||||||||||||||||||
Residential secured for business purpose | 167 | 56 | 713 | 936 | 35,996 | 36,932 | — | ||||||||||||||||||||
Residential secured for personal purpose | 409 | 604 | 60 | 1,073 | 165,777 | 166,850 | — | ||||||||||||||||||||
Home equity secured for personal purpose | 348 | — | 215 | 563 | 107,687 | 108,250 | 31 | ||||||||||||||||||||
Loans to individuals | 365 | 65 | 365 | 795 | 29,146 | 29,941 | 365 | ||||||||||||||||||||
Lease financings | 1,610 | 406 | 435 | 2,451 | 116,009 | 118,460 | 55 | ||||||||||||||||||||
Total | $ | 3,405 | $ | 3,196 | $ | 11,043 | $ | 17,644 | $ | 1,608,981 | $ | 1,626,625 | $ | 451 | |||||||||||||
At December 31, 2013 | |||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 386 | $ | 922 | $ | 2,904 | $ | 4,212 | $ | 418,604 | $ | 422,816 | $ | 12 | |||||||||||||
Real estate—commercial real estate and construction: | |||||||||||||||||||||||||||
Commercial real estate | 148 | 262 | 4,932 | 5,342 | 595,011 | 600,353 | — | ||||||||||||||||||||
Construction | — | — | 8,742 | 8,742 | 81,751 | 90,493 | — | ||||||||||||||||||||
Real estate—residential and home equity: | |||||||||||||||||||||||||||
Residential secured for business purpose | 87 | 276 | 161 | 524 | 36,795 | 37,319 | — | ||||||||||||||||||||
Residential secured for personal purpose | 1,370 | — | 617 | 1,987 | 147,177 | 149,164 | — | ||||||||||||||||||||
Home equity secured for personal purpose | 278 | 97 | 100 | 475 | 94,870 | 95,345 | 23 | ||||||||||||||||||||
Loans to individuals | 445 | 193 | 319 | 957 | 39,043 | 40,000 | 319 | ||||||||||||||||||||
Lease financings | 2,182 | 455 | 389 | 3,026 | 102,968 | 105,994 | 59 | ||||||||||||||||||||
Total | $ | 4,896 | $ | 2,205 | $ | 18,164 | $ | 25,265 | $ | 1,516,219 | $ | 1,541,484 | $ | 413 | |||||||||||||
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Non-Performing Loans and Leases
The following presents, by class of loans and leases, non-performing loans and leases at December 31, 2014 and 2013:
At December 31, | |||||||||||||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Nonaccrual Loans and Leases* | Accruing Troubled Debt Restructured Loans and Lease Modifications | Loans and Leases 90 Days or more 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 90 Days or more Past Due and Accruing Interest | Total Non- Performing Loans and Leases | |||||||||||||||||||||||
Commercial, financial and agricultural | $ | 5,002 | $ | 2,851 | $ | — | $ | 7,853 | $ | 4,253 | $ | 1,329 | $ | 12 | $ | 5,594 | |||||||||||||||
Real estate—commercial real estate and construction: | |||||||||||||||||||||||||||||||
Commercial real estate | 4,413 | 2,618 | — | 7,031 | 8,091 | 4,271 | — | 12,362 | |||||||||||||||||||||||
Construction | 5,931 | — | — | 5,931 | 9,159 | 2,307 | — | 11,466 | |||||||||||||||||||||||
Real estate—residential and home equity: | |||||||||||||||||||||||||||||||
Residential secured for business purpose | 915 | — | — | 915 | 224 | — | — | 224 | |||||||||||||||||||||||
Residential secured for personal purpose | 512 | — | — | 512 | 1,101 | — | — | 1,101 | |||||||||||||||||||||||
Home equity secured for personal purpose | 184 | — | 31 | 215 | 77 | — | 23 | 100 | |||||||||||||||||||||||
Loans to individuals | — | — | 365 | 365 | — | 36 | 319 | 355 | |||||||||||||||||||||||
Lease financings | 380 | — | 55 | 435 | 330 | — | 59 | 389 | |||||||||||||||||||||||
Total | $ | 17,337 | $ | 5,469 | $ | 451 | $ | 23,257 | $ | 23,235 | $ | 7,943 | $ | 413 | $ | 31,591 | |||||||||||||||
* Includes nonaccrual troubled debt restructured loans and lease modifications of $3.1 million and $1.6 million at December 31, 2014 and December 31, 2013, 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 December 31, 2014 and 2013.
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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Commercial Credit Exposure Credit Risk by Internally Assigned Grades
(Dollars in thousands) | Commercial, Financial and Agricultural | Real Estate— Commercial | Real Estate— Construction | Real Estate— Residential Secured for Business Purpose | Total | ||||||||||||||
At December 31, 2014 | |||||||||||||||||||
Grade: | |||||||||||||||||||
1. Cash secured/ 2. Fully secured | $ | 4,248 | $ | — | $ | 1,262 | $ | — | $ | 5,510 | |||||||||
3. Strong | 14,013 | 8,504 | 3,897 | — | 26,414 | ||||||||||||||
4. Satisfactory | 23,931 | 30,587 | 8,731 | 339 | 63,588 | ||||||||||||||
5. Acceptable | 301,425 | 402,719 | 55,111 | 24,535 | 783,790 | ||||||||||||||
6. Pre-watch | 65,993 | 123,129 | 4,956 | 5,384 | 199,462 | ||||||||||||||
7. Special Mention | 7,166 | 17,505 | — | 1,304 | 25,975 | ||||||||||||||
8. Substandard | 41,051 | 46,034 | 5,930 | 5,370 | 98,385 | ||||||||||||||
9. Doubtful | — | — | — | — | — | ||||||||||||||
10.Loss | — | — | — | — | — | ||||||||||||||
Total | $ | 457,827 | $ | 628,478 | $ | 79,887 | $ | 36,932 | $ | 1,203,124 | |||||||||
At December 31, 2013 | |||||||||||||||||||
Grade: | |||||||||||||||||||
1. Cash secured/ 2. Fully secured | 4,763 | 2,014 | 1,682 | — | 8,459 | ||||||||||||||
3. Strong | 6,051 | 8,515 | 4,300 | — | 18,866 | ||||||||||||||
4. Satisfactory | 34,650 | 17,758 | 1,500 | 261 | 54,169 | ||||||||||||||
5. Acceptable | 251,203 | 384,061 | 54,464 | 26,694 | 716,422 | ||||||||||||||
6. Pre-watch | 84,201 | 113,181 | 16,084 | 5,884 | 219,350 | ||||||||||||||
7. Special Mention | 10,095 | 19,445 | — | 1,841 | 31,381 | ||||||||||||||
8. Substandard | 31,508 | 55,331 | 12,463 | 2,639 | 101,941 | ||||||||||||||
9. Doubtful | 345 | 48 | — | — | 393 | ||||||||||||||
10.Loss | — | — | — | — | — | ||||||||||||||
Total | $ | 422,816 | $ | 600,353 | $ | 90,493 | $ | 37,319 | $ | 1,150,981 | |||||||||
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.
(Dollars in thousands) | Real Estate— Residential Secured for Personal Purpose | Real Estate— Home Equity Secured for Personal Purpose | Loans to Individuals | Lease Financing | Total | ||||||||||||||
At December 31, 2014 | |||||||||||||||||||
Performing | $ | 166,338 | $ | 108,035 | $ | 29,576 | $ | 118,025 | $ | 421,974 | |||||||||
Nonperforming | 512 | 215 | 365 | 435 | 1,527 | ||||||||||||||
Total | $ | 166,850 | $ | 108,250 | $ | 29,941 | $ | 118,460 | $ | 423,501 | |||||||||
At December 31, 2013 | |||||||||||||||||||
Performing | $ | 148,063 | $ | 95,245 | $ | 39,645 | $ | 105,605 | $ | 388,558 | |||||||||
Nonperforming | 1,101 | 100 | 355 | 389 | 1,945 | ||||||||||||||
Total | $ | 149,164 | $ | 95,345 | $ | 40,000 | $ | 105,994 | $ | 390,503 | |||||||||
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
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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 with 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.
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
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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 for the years ended December 31, 2014, 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 | |||||||||||||||||||||||
For the Year Ended December 31, 2014 | |||||||||||||||||||||||||||||||
Reserve for loan and lease losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 9,789 | $ | 8,780 | $ | 1,062 | $ | 1,284 | $ | 694 | $ | 1,285 | $ | 1,600 | $ | 24,494 | |||||||||||||||
Charge-offs | (2,834 | ) | (4,363 | ) | (140 | ) | (141 | ) | (796 | ) | (576 | ) | N/A | (8,850 | ) | ||||||||||||||||
Recoveries | 247 | 524 | 60 | 34 | 265 | 281 | N/A | 1,411 | |||||||||||||||||||||||
Provision (recovery of provision) | (282 | ) | 4,002 | (219 | ) | (53 | ) | 197 | (5 | ) | (33 | ) | 3,607 | ||||||||||||||||||
Ending balance | $ | 6,920 | $ | 8,943 | $ | 763 | $ | 1,124 | $ | 360 | $ | 985 | $ | 1,567 | $ | 20,662 | |||||||||||||||
For the Year Ended December 31, 2013 | |||||||||||||||||||||||||||||||
Reserve for loan and lease losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 11,594 | $ | 7,507 | $ | 639 | $ | 980 | $ | 679 | $ | 1,326 | $ | 2,021 | $ | 24,746 | |||||||||||||||
Charge-offs | (3,213 | ) | (8,667 | ) | (112 | ) | (195 | ) | (641 | ) | (791 | ) | N/A | (13,619 | ) | ||||||||||||||||
Recoveries | 320 | 1,104 | 13 | 13 | 174 | 515 | N/A | 2,139 | |||||||||||||||||||||||
Provision (recovery of provision) | 1,088 | 8,836 | 522 | 486 | 482 | 235 | (421 | ) | 11,228 | ||||||||||||||||||||||
Ending balance | $ | 9,789 | $ | 8,780 | $ | 1,062 | $ | 1,284 | $ | 694 | $ | 1,285 | $ | 1,600 | $ | 24,494 | |||||||||||||||
For the Year Ended December 31, 2012 | |||||||||||||||||||||||||||||||
Reserve for loan and lease losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 11,262 | $ | 13,317 | $ | 823 | $ | 735 | $ | 730 | $ | 1,344 | $ | 1,659 | $ | 29,870 | |||||||||||||||
Charge-offs * | (9,974 | ) | (4,803 | ) | — | (156 | ) | (578 | ) | (1,224 | ) | N/A | (16,735 | ) | |||||||||||||||||
Recoveries | 484 | 334 | 60 | 7 | 130 | 561 | N/A | 1,576 | |||||||||||||||||||||||
Provision (recovery of provision) | 9,822 | (1,341 | ) | (244 | ) | 394 | 397 | 645 | 362 | 10,035 | |||||||||||||||||||||
Ending balance | $ | 11,594 | $ | 7,507 | $ | 639 | $ | 980 | $ | 679 | $ | 1,326 | $ | 2,021 | $ | 24,746 | |||||||||||||||
* Includes charge-offs of $1.3 million on commercial real estate loans which were subsequently transferred to loans held for sale in 2012 and sold during 2012.
N/A – Not applicable
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The following presents, by portfolio segment, 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 at December 31, 2014 and 2013:
(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 December 31, 2014 | |||||||||||||||||||||||||||||||
Reserve for loan and lease losses: | |||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 920 | $ | 78 | $ | — | $ | — | $ | — | $ | — | N/A | $ | 998 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | 6,000 | 8,865 | 763 | 1,124 | 360 | 985 | 1,567 | 19,664 | |||||||||||||||||||||||
Total ending balance | $ | 6,920 | $ | 8,943 | $ | 763 | $ | 1,124 | $ | 360 | $ | 985 | $ | 1,567 | $ | 20,662 | |||||||||||||||
Loans and leases held for investment: | |||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 16,561 | $ | 35,926 | $ | 3,008 | $ | 696 | $ | — | $ | — | $ | 56,191 | |||||||||||||||||
Ending balance: collectively evaluated for impairment | 441,266 | 672,439 | 33,924 | 274,404 | 29,941 | 118,460 | 1,570,434 | ||||||||||||||||||||||||
Total ending balance | $ | 457,827 | $ | 708,365 | $ | 36,932 | $ | 275,100 | $ | 29,941 | $ | 118,460 | $ | 1,626,625 | |||||||||||||||||
At December 31, 2013 | |||||||||||||||||||||||||||||||
Reserve for loan and lease losses: | |||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,398 | $ | — | $ | 501 | $ | 64 | $ | — | $ | — | N/A | $ | 2,963 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | 7,391 | 8,780 | 561 | 1,220 | 694 | 1,285 | 1,600 | 21,531 | |||||||||||||||||||||||
Total ending balance | $ | 9,789 | $ | 8,780 | $ | 1,062 | $ | 1,284 | $ | 694 | $ | 1,285 | $ | 1,600 | $ | 24,494 | |||||||||||||||
Loans and leases held for investment: | |||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 14,105 | $ | 41,240 | $ | 1,774 | $ | 1,178 | $ | 36 | $ | — | $ | 58,333 | |||||||||||||||||
Ending balance: collectively evaluated for impairment | 408,711 | 649,606 | 35,545 | 243,331 | 39,964 | 105,994 | 1,483,151 | ||||||||||||||||||||||||
Total ending balance | $ | 422,816 | $ | 690,846 | $ | 37,319 | $ | 244,509 | $ | 40,000 | $ | 105,994 | $ | 1,541,484 | |||||||||||||||||
N/A – Not applicable
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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 December 31, 2014 and 2013:
At December 31, | |||||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||||
(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 | $ | 12,628 | $ | 13,050 | $ | 10,890 | $ | 11,749 | |||||||||||||||
Real estate—commercial real estate | 29,779 | 30,810 | 28,883 | 35,700 | |||||||||||||||||||
Real estate—construction | 5,931 | 6,474 | 12,357 | 14,540 | |||||||||||||||||||
Real estate—residential secured for business purpose | 3,008 | 3,044 | 224 | 235 | |||||||||||||||||||
Real estate—residential secured for personal purpose | 512 | 547 | 131 | 131 | |||||||||||||||||||
Real estate—home equity secured for personal purpose | 184 | 184 | 77 | 77 | |||||||||||||||||||
Loans to individuals | — | — | 36 | 54 | |||||||||||||||||||
Total impaired loans with no related allowance recorded | $ | 52,042 | $ | 54,109 | $ | 52,598 | $ | 62,486 | |||||||||||||||
Impaired loans with an allowance recorded: | |||||||||||||||||||||||
Commercial, financial and agricultural | $ | 3,933 | $ | 3,935 | $ | 920 | $ | 3,215 | $ | 3,272 | $ | 2,398 | |||||||||||
Real estate—commercial real estate | 216 | 216 | 78 | — | — | — | |||||||||||||||||
Real estate—residential secured for business purpose | — | — | — | 1,550 | 1,550 | 501 | |||||||||||||||||
Real estate—residential secured for personal purpose | — | — | — | 970 | 976 | 64 | |||||||||||||||||
Total impaired loans with an allowance recorded | $ | 4,149 | $ | 4,151 | $ | 998 | $ | 5,735 | $ | 5,798 | $ | 2,963 | |||||||||||
Total impaired loans: | |||||||||||||||||||||||
Commercial, financial and agricultural | $ | 16,561 | $ | 16,985 | $ | 920 | $ | 14,105 | $ | 15,021 | $ | 2,398 | |||||||||||
Real estate—commercial real estate | 29,995 | 31,026 | 78 | 28,883 | 35,700 | — | |||||||||||||||||
Real estate—construction | 5,931 | 6,474 | — | 12,357 | 14,540 | — | |||||||||||||||||
Real estate—residential secured for business purpose | 3,008 | 3,044 | — | 1,774 | 1,785 | 501 | |||||||||||||||||
Real estate—residential secured for personal purpose | 512 | 547 | — | 1,101 | 1,107 | 64 | |||||||||||||||||
Real estate—home equity secured for personal purpose | 184 | 184 | — | 77 | 77 | — | |||||||||||||||||
Loans to individuals | — | — | — | 36 | 54 | — | |||||||||||||||||
Total impaired loans | $ | 56,191 | $ | 58,260 | $ | 998 | $ | 58,333 | $ | 68,284 | $ | 2,963 | |||||||||||
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. Impaired loans included other accruing impaired loans of $33.8 million and $27.5 million at December 31, 2014 and 2013, respectively. Specific reserves on other accruing impaired loans were $476 thousand and $1.6 million at December 31, 2014 and 2013, respectively.
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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.
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Recorded Investment | Interest Income Recognized* | Additional Interest Income That Would Have Been Recognized Under Original Terms | Average Recorded Investment | Interest Income Recognized* | Additional Interest Income That Would Have Been Recognized Under Original Terms | Average Recorded Investment | Interest Income Recognized* | Additional Interest Income That Would Have Been Recognized Under Original Terms | ||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 15,334 | $ | 540 | $ | 258 | $ | 6,412 | $ | 172 | $ | 200 | $ | 5,189 | $ | 82 | $ | 288 | |||||||||||||||||
Real estate—commercial real estate | 26,662 | 1,143 | 323 | 25,728 | 837 | 717 | 20,756 | 348 | 1,086 | ||||||||||||||||||||||||||
Real estate—construction | 10,412 | 103 | 463 | 14,621 | 124 | 680 | 16,207 | 117 | 763 | ||||||||||||||||||||||||||
Real estate—residential secured for business purpose | 2,524 | 77 | 61 | 672 | 19 | 10 | 156 | — | 7 | ||||||||||||||||||||||||||
Real estate—residential secured for personal purpose | 719 | — | 49 | 760 | — | 45 | 293 | — | 17 | ||||||||||||||||||||||||||
Real estate—home equity secured for personal purpose | 106 | — | 10 | 8 | — | — | 2 | — | — | ||||||||||||||||||||||||||
Loans to individuals | 4 | — | — | 40 | 4 | — | 47 | 5 | — | ||||||||||||||||||||||||||
Total | $ | 55,761 | $ | 1,863 | $ | 1,164 | $ | 48,241 | $ | 1,156 | $ | 1,652 | $ | 43,242 | $ | 552 | $ | 2,161 | |||||||||||||||||
* | Includes interest income recognized on a cash basis for nonaccrual loans of $23 thousand, $6 thousand and $67 thousand for the years ended December 31, 2014, 2013 and 2012, respectively and interest income recognized on the accrual method for accruing impaired loans of $1.8 million, $1.2 million and $485 thousand for the years ended December 31, 2014, 2013 and 2012, respectively. |
Any income accrued on one-to-four family residential properties after the loan becomes 90 days past due, which is not placed on non-accrual, is held in a reserve for uncollected interest. The reserve for uncollected interest was $1 thousand and $21 thousand at December 31, 2014 and 2013, respectively.
The Bank maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded. The reserve for these off-balance sheet credits was $338 thousand and $319 thousand at December 31, 2014 and 2013, respectively.
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Troubled Debt Restructured Loans
The following presents, by class of loans, information regarding accruing and nonaccrual loans that were restructured during the years ended December 31, 2014 and 2013:
For the Years Ended December 31, | |||||||||||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||||||||||
(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 | 6 | $ | 1,824 | $ | 1,824 | $ | 507 | 2 | $ | 1,025 | $ | 1,025 | $ | — | |||||||||||||||
Real estate—commercial real estate | 1 | 1,000 | 1,000 | — | 3 | 1,569 | 1,569 | — | |||||||||||||||||||||
Real estate—construction | — | — | — | — | 1 | 459 | 459 | — | |||||||||||||||||||||
Total | 7 | $ | 2,824 | $ | 2,824 | $ | 507 | 6 | $ | 3,053 | $ | 3,053 | $ | — | |||||||||||||||
Nonaccrual Troubled Debt Restructured Loans: | |||||||||||||||||||||||||||||
Real estate—commercial real estate | 1 | $ | 50 | $ | 50 | $ | — | — | $ | — | $ | — | $ | — | |||||||||||||||
Real estate—residential secured for business purpose | 2 | 688 | 688 | — | — | — | — | — | |||||||||||||||||||||
Total | 3 | $ | 738 | $ | 738 | $ | — | — | $ | — | $ | — | $ | — | |||||||||||||||
The Corporation grants concessions primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are for a short-term basis up to one year. Our goal when restructuring a credit is to establish 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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The following presents, by class of loans, information regarding the types of concessions granted on accruing and nonaccrual loans that were restructured during the years ended December 31, 2014 and 2013:
Interest Only Term Extension | Temporary Payment Reduction | Interest Rate Reduction | Maturity Date Extension | Payments Suspended | 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 | No. of Loans | Amount | |||||||||||||||||||||||||||||
For the Year Ended December 31, 2014 | |||||||||||||||||||||||||||||||||||||||||
Accruing Troubled Debt Restructured Loans: | |||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | — | $ | — | — | $ | — | — | $ | — | 5 | $ | 1,699 | 1 | $ | 125 | 6 | $ | 1,824 | |||||||||||||||||||||||
Real estate—commercial real estate | — | — | — | — | — | — | 1 | 1,000 | — | — | 1 | 1,000 | |||||||||||||||||||||||||||||
Total | — | $ | — | — | $ | — | — | $ | — | 6 | $ | 2,699 | 1 | $ | 125 | 7 | $ | 2,824 | |||||||||||||||||||||||
Nonaccrual Troubled Debt Restructured Loans: | |||||||||||||||||||||||||||||||||||||||||
Real estate—commercial real estate | — | $ | — | — | $ | — | 1 | $ | 50 | — | $ | — | — | $ | — | 1 | $ | 50 | |||||||||||||||||||||||
Real estate—residential secured for business purpose | — | — | — | — | 1 | 55 | 1 | 633 | — | — | 2 | 688 | |||||||||||||||||||||||||||||
Total | — | $ | — | — | $ | — | 2 | $ | 105 | 1 | $ | 633 | — | $ | — | 3 | $ | 738 | |||||||||||||||||||||||
For the Year Ended December 31, 2013 | |||||||||||||||||||||||||||||||||||||||||
Accruing Troubled Debt Restructured Loans: | |||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | 1 | $ | 1,000 | — | $ | — | — | $ | — | 1 | $ | 25 | — | $ | — | 2 | $ | 1,025 | |||||||||||||||||||||||
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 | — | $ | — | 4 | $ | 1,297 | — | $ | — | 6 | $ | 3,053 | |||||||||||||||||||||||
Nonaccrual Troubled Debt Restructured Loans: | |||||||||||||||||||||||||||||||||||||||||
Total | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | |||||||||||||||||||||||
The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there were payment defaults within twelve months of the restructuring date:
For the Years Ended December 31, | |||||||||||||
2014 | 2013 | ||||||||||||
(Dollars in thousands) | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||
Accruing Troubled Debt Restructured Loans: | |||||||||||||
Commercial, financial and agricultural | — | $ | — | 1 | $ | 1,000 | |||||||
Total | — | $ | — | 1 | $ | 1,000 | |||||||
Nonaccrual Troubled Debt Restructured Loans: | |||||||||||||
Total | — | $ | — | — | $ | — | |||||||
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Note 6. Premises and Equipment
The following table reflects the components of premises and equipment:
At December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Land and land improvements | $ | 10,576 | $ | 9,987 | |||
Premises and improvements | 37,348 | 35,225 | |||||
Furniture and equipment | 24,303 | 22,295 | |||||
Total cost | 72,227 | 67,507 | |||||
Less: accumulated depreciation | (35,218 | ) | (33,378 | ) | |||
Net book value | $ | 37,009 | $ | 34,129 | |||
Note 7. Goodwill and Other Intangible Assets
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 for the years ended December 31, 2014, 2013 and 2012 was $3.3 million, $2.3 million and $2.4 million, respectively. In 2014, 2013 and 2012, impairment on customer-related intangibles was recognized in other noninterest expense in the amount of $31 thousand, $83 thousand and $31 thousand, respectively. The Corporation also has goodwill with a net carrying amount of $67.7 million at December 31, 2014, which is deemed to be an indefinite intangible asset and is not amortized. The Corporation recorded goodwill of $6.8 million and customer related intangibles of $4.3 million related to the Girard Partners acquisition on January 27, 2014. The Corporation recorded goodwill of $3.4 million and customer related intangibles of $1.6 million related to the Sterner Insurance Associates acquisition on July 1, 2014.
The Corporation completed an annual impairment test for goodwill and other intangibles during the fourth quarter of 2014. There was no goodwill impairment or material impairment of identifiable intangibles recorded during the period 2012 through 2014. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Changes in the carrying amount of the Corporation's goodwill by business segment for the years ended December 31, 2014 and 2013 were as follows:
(Dollars in thousands) | Banking | Wealth Management | Insurance | Consolidated | |||||||||||
Balance at December 31, 2012 | $ | 35,058 | $ | 8,625 | $ | 12,555 | $ | 56,238 | |||||||
Addition to goodwill from acquisitions | — | — | 1,279 | 1,279 | |||||||||||
Balance at December 31, 2013 | 35,058 | 8,625 | 13,834 | 57,517 | |||||||||||
Addition to goodwill from acquisitions | — | 6,809 | 3,391 | 10,200 | |||||||||||
Balance at December 31, 2014 | $ | 35,058 | $ | 15,434 | $ | 17,225 | $ | 67,717 | |||||||
The following table reflects the components of intangible assets at the dates indicated:
At December 31, 2014 | At December 31, 2013 | ||||||||||||||||||||||
(Dollars in thousands) | Gross Carrying Amount | Accumulated Amortization and Fair Value Adjustments | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization and Fair Value Adjustments | Net Carrying Amount | |||||||||||||||||
Amortized intangible assets: | |||||||||||||||||||||||
Customer related intangibles | $ | 13,397 | $ | 6,726 | $ | 6,671 | $ | 7,513 | $ | 4,854 | $ | 2,659 | |||||||||||
Mortgage servicing rights | 10,559 | 5,050 | 5,509 | 10,965 | 5,446 | 5,519 | |||||||||||||||||
Total amortized intangible assets | $ | 23,956 | $ | 11,776 | $ | 12,180 | $ | 18,478 | $ | 10,300 | $ | 8,178 | |||||||||||
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The estimated aggregate amortization expense for customer related intangibles for each of the five succeeding fiscal years follows:
Year | (Dollars in thousands) | Amount | ||
2015 | $ | 1,730 | ||
2016 | 1,411 | |||
2017 | 1,162 | |||
2018 | 868 | |||
2019 | 622 | |||
Thereafter | 878 | |||
The Corporation has originated mortgage servicing rights which are included in other intangible assets on the consolidated balance sheet. 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 $6.9 million and $7.2 million at December 31, 2014 and 2013, respectively. The fair value of mortgage servicing rights was determined using a discount rate of 10.0% at December 31, 2014, and discount rates ranging from 5.0% to 10.0% at December 31, 2013.
Changes in the mortgage servicing rights balance are summarized as follows:
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Beginning of period | $ | 5,519 | $ | 4,152 | $ | 2,739 | |||||
Servicing rights capitalized | 1,118 | 2,485 | 2,727 | ||||||||
Amortization of servicing rights | (1,378 | ) | (1,365 | ) | (1,610 | ) | |||||
Changes in valuation allowance | 250 | 247 | 296 | ||||||||
End of period | $ | 5,509 | $ | 5,519 | $ | 4,152 | |||||
Mortgage loans serviced for others | $ | 796,835 | $ | 751,891 | $ | 604,801 | |||||
Activity in the valuation allowance for mortgage servicing rights was as follows:
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Valuation allowance, beginning of period | $ | (250 | ) | $ | (497 | ) | $ | (793 | ) | ||
Additions | — | — | — | ||||||||
Reductions | 250 | 247 | 296 | ||||||||
Direct write-downs | — | — | — | ||||||||
Valuation allowance, end of period | $ | — | $ | (250 | ) | $ | (497 | ) | |||
The estimated amortization expense of mortgage servicing rights for each of the five succeeding fiscal years is as follows:
Year | (Dollars in thousands) | Amount | ||
2015 | $ | 923 | ||
2016 | 787 | |||
2017 | 662 | |||
2018 | 556 | |||
2019 | 466 | |||
Thereafter | 2,115 | |||
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Note 8. Accrued Interest Receivable and Other Assets
The following table provides the details of accrued interest receivable and other assets:
At December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Other real estate owned | $ | 955 | $ | 1,650 | |||
Accrued interest receivable | 6,086 | 6,262 | |||||
Accrued income and other receivables | 2,655 | 3,539 | |||||
Fair market value of derivative financial instruments | 788 | 346 | |||||
Other prepaid expenses | 13,963 | 9,624 | |||||
Federal Reserve Bank stock, Federal Home Loan Bank stock and other not readily marketable equity securities | 4,487 | 6,632 | |||||
Net federal deferred tax assets | 10,756 | 12,335 | |||||
Total accrued interest and other assets | $ | 39,690 | $ | 40,388 | |||
At December 31, 2014 and 2013, the Bank held $3.3 million in Federal Reserve Bank stock as required by the Federal Reserve Bank. The Bank is a member of the FHLB, and as such, is required to hold FHLB stock as a condition of membership as determined by the FHLB. The Bank is required to hold additional stock in the FHLB in relation to the level of outstanding borrowings. The Bank held FHLB stock of $1.1 million and $3.3 million at December 31, 2014 and 2013, respectively. Additionally, the FHLB might require its members to increase its capital stock requirement. Changes in the credit ratings of the U.S. government and federal agencies, including 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. The Corporation determined there was no other-than-temporary impairment of its investment in FHLB stock at December 31, 2014. Therefore, at December 31, 2014, the FHLB stock is recorded at cost.
Note 9. Income Taxes
The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following:
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Current: | |||||||||||
Federal | $ | 2,509 | $ | 4,172 | $ | 2,753 | |||||
State | 777 | 591 | 258 | ||||||||
Deferred: | |||||||||||
Federal | 4,027 | 922 | 2,397 | ||||||||
State | 135 | 11 | 143 | ||||||||
$ | 7,448 | $ | 5,696 | $ | 5,551 | ||||||
The provision for income taxes differs from the expected statutory provision as follows:
For the Years Ended December 31, | ||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | |||||
Expected provision at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
Difference resulting from: | ||||||||
Tax exempt interest income | (11.2 | ) | (11.7 | ) | (12.1 | ) | ||
Increase in value of bank owned life insurance assets | (1.9 | ) | (3.9 | ) | (3.5 | ) | ||
Other, including state income taxes, valuation allowances and rate differentials | 3.2 | 1.8 | 1.6 | |||||
25.1 | % | 21.2 | % | 21 | % | |||
During the years ended December 31, 2014 and 2013, the Corporation recorded excess tax benefits resulting from the exercise of employee stock options and restricted stock of $0 thousand and $1 thousand respectively, to additional paid-in capital.
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At December 31, 2014, the Corporation had no material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in noninterest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in noninterest expense in the year it is assessed and is treated as a deductible expense for tax purposes. At December 31, 2014, the Corporation’s tax years 2011 through 2013 remain subject to federal examination as well as examination by state taxing jurisdictions.
Deferred income taxes reflect the the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred state taxes are combined with federal deferred taxes (net of the impact of deferred state tax on the deferred federal tax) and are shown in the table below by major category of deferred income or expense. The Corporation has a state net operating loss carry-forward of $25.0 million which will begin to expire after December 31, 2018 if not utilized. A valuation allowance at December 31, 2014 and 2013 was attributable to deferred tax assets generated in certain state jurisdictions for which management believes it is more likely than not that such deferred tax assets will not be realized. Additionally, deferred tax assets of $2 thousand and $28 thousand were reversed and recorded to additional paid-in capital during the years ended December 31, 2014 and 2013, respectively, as a result of unrecognized restricted stock and non-qualified stock option expense.
The assets and liabilities giving rise to the Corporation’s deferred tax assets and liabilities are as follows:
At December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Deferred tax assets: | |||||||
Loan and lease loss | $ | 7,358 | $ | 8,785 | |||
Deferred compensation | 2,492 | 2,675 | |||||
Actuarial adjustments on retirement benefits* | 8,625 | 4,568 | |||||
Interest on nonaccrual loans | — | 2,268 | |||||
State net operating losses | 1,621 | 1,743 | |||||
Other-than-temporary impairments on equity securities | 577 | 759 | |||||
Alternative minimum tax credits** | 1,067 | 1,367 | |||||
Net unrealized holding losses on securities available-for-sale* | — | 792 | |||||
Other | 1,125 | 280 | |||||
Gross deferred tax assets | 22,865 | 23,237 | |||||
Valuation allowance | (1,461 | ) | (1,630 | ) | |||
Total deferred tax assets, net of valuation allowance | 21,404 | 21,607 | |||||
Deferred tax liabilities: | |||||||
Market discount | 2,224 | 1,722 | |||||
Retirement plans | 5,700 | 5,602 | |||||
Intangible assets | 2,308 | 2,212 | |||||
Net unrealized holding gains on securities available-for-sale and swaps* | 837 | — | |||||
Total deferred tax liabilities | 11,069 | 9,536 | |||||
Net deferred tax assets | $ | 10,335 | $ | 12,071 | |||
*Represents the amount of deferred taxes recorded in accumulated other comprehensive loss.
** The alternative minimum tax credits have an indefinite life.
Note 10. 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 retirement benefits to certain former executives, 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 401(k) deferred salary savings plan, which is a qualified defined contribution plan, and which covers all employees of the Corporation and its subsidiaries, and provides that the Corporation makes matching contributions as
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defined by the plan. Expense recorded by the Corporation for the 401(k) deferred salary savings plan for the years ended December 31, 2014, 2013 and 2012 was $836 thousand, $765 thousand, and $667 thousand, respectively.
The Corporation sponsors a Supplemental Non-Qualified Pension Plan (SNQPP) 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 offered to new participants. Expense recorded by the Corporation for the SNQPP for the years ended December 31, 2013 and 2012 was $661 thousand and $531 thousand, respectively. The Corporation recognized income in 2014 of $44 thousand primarily due to an increase in the weighted average discount rate from 4.0% for 2013 to 4.9% for 2014.
Information with respect to the Retirement Plans and Other Postretirement Benefits follows:
Retirement Plans | Other Postretirement Benefits | ||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Change in benefit obligation: | |||||||||||||||
Benefit obligation at beginning of year | $ | 39,593 | $ | 42,879 | $ | 2,330 | $ | 2,518 | |||||||
Service cost | 528 | 621 | 75 | 86 | |||||||||||
Interest cost | 1,900 | 1,712 | 128 | 118 | |||||||||||
Actuarial loss (gain) | 11,462 | (3,818 | ) | 455 | (313 | ) | |||||||||
Benefits paid | (2,093 | ) | (1,801 | ) | (92 | ) | (79 | ) | |||||||
Benefit obligation at end of year | $ | 51,390 | $ | 39,593 | $ | 2,896 | $ | 2,330 | |||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets at beginning of year | $ | 40,547 | $ | 34,420 | $ | — | $ | — | |||||||
Actual return on plan assets | 2,821 | 5,764 | — | — | |||||||||||
Benefits paid | (2,093 | ) | (1,801 | ) | (92 | ) | (79 | ) | |||||||
Employer contribution and non-qualified benefit payments | 162 | 2,164 | 92 | 79 | |||||||||||
Fair value of plan assets at end of year | $ | 41,437 | $ | 40,547 | $ | — | $ | — | |||||||
Funded status | (9,953 | ) | 954 | (2,896 | ) | (2,330 | ) | ||||||||
Unrecognized net actuarial loss | 25,010 | 14,138 | 950 | 510 | |||||||||||
Unrecognized prior service costs | (1,309 | ) | (1,590 | ) | — | (7 | ) | ||||||||
Net amount recognized | $ | 13,748 | $ | 13,502 | $ | (1,946 | ) | $ | (1,827 | ) | |||||
Information for the pension plans with an accumulated benefit obligation in excess of the fair value of plan assets is shown below. The accumulated benefit obligation did not exceed the fair value of plan assets at December 31, 2013 but is shown for comparative purposes.
At December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Projected benefit obligation | $ | 48,928 | $ | 37,912 | |||
Accumulated benefit obligation | 45,003 | 36,683 | |||||
Fair value of plan assets | 41,437 | 40,547 | |||||
Components of net periodic benefit cost (income) were as follows:
Retirement Plans | Other Post Retirement Benefits | ||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||
Service cost | $ | 528 | $ | 621 | $ | 622 | $ | 75 | $ | 86 | $ | 82 | |||||||||||
Interest cost | 1,900 | 1,712 | 1,726 | 128 | 118 | 116 | |||||||||||||||||
Expected return on plan assets | (2,929 | ) | (2,527 | ) | (2,254 | ) | — | — | — | ||||||||||||||
Amortization of net actuarial loss | 649 | 1,259 | 1,147 | 17 | 23 | 23 | |||||||||||||||||
Accretion of prior service cost | (281 | ) | (235 | ) | (235 | ) | (7 | ) | (20 | ) | (20 | ) | |||||||||||
Net periodic benefit (income) cost | $ | (133 | ) | $ | 830 | $ | 1,006 | $ | 213 | $ | 207 | $ | 201 | ||||||||||
(Dollars in thousands) | Retirement Plans | Other Postretirement Benefits | |||||
Expected amortization expense for 2015: | |||||||
Amortization of net actuarial loss | $ | 1,308 | $ | 54 | |||
Accretion of prior service cost | (280 | ) | — | ||||
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During 2015, the Corporation expects to contribute approximately $166 thousand to the Retirement Plans and approximately $113 thousand to Other Postretirement Benefits.
The following benefits payments, which reflect expected future service, as appropriate, are expected to be paid:
(Dollars in thousands) | Retirement Plans | Other Postretirement Benefits | ||||||
For the fiscal year ending: | ||||||||
2015 | $ | 2,390 | $ | 113 | ||||
2016 | 2,429 | 116 | ||||||
2017 | 2,463 | 121 | ||||||
2018 | 2,514 | 126 | ||||||
2019 | 2,572 | 130 | ||||||
Years 2020-2024 | 13,533 | 700 | ||||||
Weighted-average assumptions used to determine benefit obligations at December 31, 2014 and 2013 were as follows:
Retirement Plans | Other Postretirement Benefits | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Assumed discount rate | 3.9 | % | 4.9 | % | 3.9 | % | 4.9 | % | |||
Assumed salary increase rate | 3.0 | 3.0 | — | — | |||||||
The benefit obligation for all plans at December 31, 2014 included the application of a new mortality assumption based on the most recent study by the Society of Actuaries. The adoption of the new RP-2014 mortality table increased the average life expectancy of plan participants by 2 years. The decrease in the discount rate and the adoption of the new mortality assumption increased the benefit obligation for all plans at December 31, 2014.
Weighted-average assumptions used to determine net periodic costs for the years ended December 31, 2014 and 2013 were as follows:
Retirement Plans | Other Postretirement Benefits | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Assumed discount rate | 4.9 | % | 4.0 | % | 4.9 | % | 4.0 | % | |||
Assumed long-term rate of investment return | 7.5 | 7.5 | — | — | |||||||
Assumed salary increase rate | 3.0 | 3.0 | — | — | |||||||
The discount rate was determined utilizing the Citigroup Pension Discount Curve. Historical investment returns is the basis used to determine the overall expected long-term rate of return on assets.
Assumed Health Care Cost Trend Rates | 2014 | 2013 | 2012 | ||||||
Health care cost trend rate assumed for next year | 6.0 | % | 6.5 | % | 6.5 | % | |||
Rate to which the cost trend rate is assumed to decline | 5.0 | 5.0 | 5.0 | ||||||
Year that the rate reaches the ultimate rate | 2016 | 2015 | 2014 | ||||||
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
One Percentage Point | |||||||
(Dollars in thousands) | Increase | Decrease | |||||
Effect on total of service and interest cost components | $ | 10 | $ | (10 | ) | ||
Effect on postretirement benefit obligation | 114 | (101 | ) | ||||
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The Corporation's pension plan asset allocation at December 31, 2014 and 2013, by asset category was as follows:
Percentage of Plan Assets at December 31, | |||||
2014 | 2013 | ||||
Asset Category: | |||||
Equity securities | 65 | % | 64 | % | |
Debt securities | 34 | 35 | |||
Other | 1 | 1 | |||
Total | 100 | % | 100 | % | |
Plan assets include marketable equity securities, corporate and government debt securities, and certificates of deposit. The investment strategy is to keep a 60%-equity-to-40%-fixed-income mix to achieve the overall expected long-term rate of return of 7.5%. Equity securities do not include any common stock of the Corporation.
The major categories of assets in the Corporation’s pension plan at year-end are presented in the following table. Assets are segregated by the level of the valuation inputs within the fair value hierarchy described in Note 18, “Fair Value Disclosures.”
Fair Value Measurements at December 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | |||||
Level 1: | |||||||
Mutual funds: | |||||||
U.S. Large Cap | 17,482 | 16,710 | |||||
U.S. Mid Cap | 2,218 | 2,169 | |||||
U.S. Small Cap | 2,290 | 2,341 | |||||
International | 4,961 | 4,634 | |||||
Income | 972 | 686 | |||||
Short-term investments | 585 | 650 | |||||
Level 2: | |||||||
U.S. governement obligations | 3,273 | 3,790 | |||||
Corporate bonds | 5,621 | 5,228 | |||||
Level 3: | |||||||
Certificates of deposit | 4,035 | 4,339 | |||||
Total fair value of plan assets | $ | 41,437 | $ | 40,547 | |||
Mutual fund investments in U.S. large cap funds are comprised primarily of common stock funds which are diversified amongst various industries including basic materials (oil, gas, and other), financial services, healthcare, technology and other industries with some foreign exposure in the companies’ markets. The primary objective is long-term capital appreciation with a secondary objective of current income. Mutual fund investments in U.S. mid cap and small cap funds are comprised mainly of growth and value equity funds with some foreign exposure in the companies’ markets. Mutual fund investments in international funds consist mainly of equity funds that invest in diverse companies mostly based in Europe and the Pacific Basin with the primary objective to provide long-term growth of capital with a secondary objective of current income. Mutual fund investments in income funds are comprised of short-term and intermediate-term bond funds. Corporate bonds are fixed income investment grade bonds of primarily U.S. issuers from diverse industries. Other fixed-income investments include U.S. government agency securities and bank certificates of deposits. The fixed income investments have varying maturities ranging from one to ten years with the objective to maximize investment return while preserving investment principal. Short-term investments are comprised of an interest-bearing money market deposit account with the Bank.
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The following table provides a reconciliation of the beginning and ending balances for measurements in hierarchy Level 3 at December 31, 2014 and 2013:
(Dollars in thousands) | Balance at December 31, 2013 | Total Unrealized (Losses) or Gains | Total Realized Gains or (Losses) | Purchases | Maturities/ Redemptions | Balance at December 31, 2014 | |||||||||||||||||
Certificates of deposit | $ | 4,339 | $ | — | $ | — | $ | 595 | $ | (899 | ) | $ | 4,035 | ||||||||||
Total Level 3 assets | $ | 4,339 | $ | — | $ | — | $ | 595 | $ | (899 | ) | $ | 4,035 | ||||||||||
(Dollars in thousands) | Balance at December 31, 2012 | Total Unrealized (Losses) or Gains | Total Realized Gains or (Losses) | Purchases | Maturities/ Redemptions | Balance at December 31, 2013 | |||||||||||||||||
Certificates of deposit | $ | 4,503 | $ | — | $ | — | $ | 280 | $ | (444 | ) | $ | 4,339 | ||||||||||
Total Level 3 assets | $ | 4,503 | $ | — | $ | — | $ | 280 | $ | (444 | ) | $ | 4,339 | ||||||||||
Note 11. Stock-Based Incentive Plan
The Corporation adopted the shareholder approved 2013 Long-Term Incentive Plan to replace the 2003 Long-Term Incentive Plan which expired during 2013. Under the 2013 Long-Term Incentive Plan, the Corporation may grant options and share awards to employees and non-employee directors up to 2,000,000 shares of common stock. The number of shares of common stock available for issuance under the plan is subject to adjustment, as described in the plan. This includes, in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the stock, substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the plan, in the number and option price of shares subject to outstanding options granted under the plan and in the number and price of shares subject to other awards, as described in the plan. As a result of the completion of the acquisition of Valley Green Bank on January 1, 2015, 473,483 additional shares are available for distribution under the 2013 Long-Term Incentive Plan. The plan provides for the issuance of options to purchase common shares at prices not less than 100 percent of the fair market value on the date of option grant and have a contractual term of ten years; and for restricted stock awards valued at not less than 100 percent of the fair market value at the date of award grant. For the majority of options issued, after two years, 33.3 percent of the optioned shares become exercisable in each of the following three years and remain exercisable for a period not exceeding ten years from the date of grant. For the majority of the restricted stock awards, the shares vest based upon the Corporation’s performance against selected peers with respect to certain financial measures over a three-year period. There were 1,831,545 share awards available for future grants at December 31, 2014 under the plan. At December 31, 2014, there were 673,216 options to purchase common stock and 176,978 unvested restricted stock awards outstanding under the plan.
The following table is a summary of the status of options under the Corporation’s long-term incentive plans:
(Dollars in thousands, except per share data) | Shares Under Option | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value at December 31, 2014 | ||||||||
Outstanding at December 31, 2013 | 612,050 | $ | 19.41 | |||||||||
Granted | 114,000 | 18.78 | ||||||||||
Expired | — | — | ||||||||||
Forfeited | (35,500 | ) | 17.06 | |||||||||
Exercised | (17,334 | ) | 17.92 | |||||||||
Outstanding at December 31, 2014 | 673,216 | 19.46 | 5.2 | $ | 1,201 | |||||||
Exercisable at December 31, 2014 | 393,662 | 21.07 | 3.1 | 351 | ||||||||
The total intrinsic value of options exercised during 2014 was $47 thousand. There were no stock options exercised during 2013 and 2012. The Corporation has a stock-for-stock-option exchange (or cashless exercise) program in place, whereby optionees can exchange the value of the spread of in-the-money vested options for Corporation stock having an equivalent value. This broker-assisted exchange allows the optionees to exercise their vested options on a net basis without having to pay the exercise price or related expenses in cash. However, it will result in the optionees acquiring fewer shares than the number of options exercised.
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The Corporation's estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee turnover. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury strip rate in effect at the time of grant. Expected volatility is based on the historical volatility of the Corporation’s stock over the expected life of the grant. The Corporation uses a straight-line accrual method to recognize stock-based compensation expense over the time-period it expects the options to vest.
The Corporation recognizes compensation expense for stock options over the requisite service period based on the grant-date fair value of those awards expected to ultimately vest. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates. The following aggregated assumptions were used to estimate the fair value of options granted for the periods indicated:
For the Years Ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Expected option life in years | 8.2 | 8.9 | 8.2 | ||||||||
Risk free interest rate | 2.51 | % | 1.99 | % | 1.63 | % | |||||
Expected dividend yield | 4.26 | % | 4.74 | % | 5.40 | % | |||||
Expected volatility | 50.16 | % | 49.30 | % | 50.74 | % | |||||
Fair value of options | $ | 6.53 | $ | 5.32 | $ | 4.37 | |||||
Following is a summary of nonvested restricted stock awards at December 31, 2014 including changes during the year:
(Dollars in thousands, except per share data) | Nonvested Share Awards | Weighted Average Grant Date Fair Value | ||||
Nonvested share awards at December 31, 2013 | 185,423 | $ | 16.40 | |||
Granted | 74,304 | 18.63 | ||||
Vested | (39,297 | ) | 17.24 | |||
Forfeited | (43,452 | ) | 16.91 | |||
Nonvested share awards at December 31, 2014 | 176,978 | 17.02 | ||||
The fair value of restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period. Certain information regarding restricted stock is summarized below for the periods indicated:
(Dollars in thousands, except per share data) | For the Years Ended December 31, | ||||||||||
2014 | 2013 | 2012 | |||||||||
Shares granted | 74,304 | 70,041 | 71,157 | ||||||||
Weighted average grant date fair value | $ | 18.63 | $ | 16.76 | $ | 15.29 | |||||
Intrinsic value of awards vested | $ | 735 | $ | 505 | $ | 625 | |||||
At December 31, 2014, there was $1.5 million in total unrecognized compensation expense related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted average period of 2.2 years.
The following table presents information related to the Corporation’s compensation expense related to stock incentive plans recognized for the periods indicated:
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Stock-based compensation expense: | |||||||||||
Stock options | $ | 463 | $ | 517 | $ | 408 | |||||
Restricted stock awards | 679 | 461 | 859 | ||||||||
Employee stock purchase plan | 46 | 38 | 36 | ||||||||
Total | $ | 1,188 | $ | 1,016 | $ | 1,303 | |||||
Tax benefit on nonqualified stock option expense, restricted stock awards and disqualifying dispositions of incentive stock options | $ | 244 | $ | 162 | $ | 296 | |||||
There were no modifications or accelerations to options or restricted stock awards during the period 2012 through 2014.
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The Corporation typically issues shares for stock option exercises and grants of restricted stock awards from its treasury stock.
Note 12. Time Deposits
The aggregate amount of time deposits in denominations of $100 thousand or more was $76.8 million at December 31, 2014 and $75.9 million at December 31, 2013, with interest expense of $891 thousand for 2014 and $1.0 million for 2013.
At December 31, 2014, the scheduled maturities of time deposits in denominations of $100 thousand or more are as follows:
(Dollars in thousands) | |||
Due in 2015 | $ | 41,844 | |
Due in 2016 | 20,140 | ||
Due in 2017 | 9,232 | ||
Due in 2018 | 2,251 | ||
Due in 2019 | 1,967 | ||
Thereafter | 1,392 | ||
Total | $ | 76,826 | |
Note 13. Borrowings
The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $518.7 million. Advances from the FHLB are collateralized by a blanket floating lien on all first mortgage loans of the Bank, FHLB capital stock owned by the Bank and any funds on deposit with the FHLB. At December 31, 2014 and 2013, there were no outstanding borrowings with the FHLB. At December 31, 2014 and 2013, the Bank had outstanding short-term letters of credit with the FHLB totaling $55.0 million and $35.0 million, respectively, which were utilized to collateralize public funds deposits. The maximum borrowing capacity changes as a function of the Bank’s 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.
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 was 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 Bank maintains federal fund credit lines with several correspondent banks totaling $82.0 million at December 31, 2014 and 2013. There was no outstanding balance at December 31, 2014 and 2013. 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 December 31, 2014 and 2013, the Corporation had no outstanding borrowings from this line.
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The following table details key information pertaining to customer repurchase agreements on an overnight basis for the periods indicated:
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Balance at December 31 | $ | 41,974 | $ | 37,256 | $ | 96,282 | |||||
Weighted average interest rate at year end | 0.06 | % | 0.07 | % | 0.07 | % | |||||
Maximum amount outstanding at any month's end | $ | 43,266 | $ | 110,228 | $ | 117,291 | |||||
Average amount outstanding during the year | 41,048 | 72,211 | 106,206 | ||||||||
Weighted average interest rate during the year | 0.06 | % | 0.06 | % | 0.13 | % | |||||
Note 14. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
For the Years Ended December 31, | |||||||||||
(Dollars and shares in thousands) | 2014 | 2013 | 2012 | ||||||||
Numerator for basic and diluted earnings per share—income available to common shareholders | $ | 22,231 | $ | 21,189 | $ | 20,872 | |||||
Denominator for basic earnings per share—weighted-average shares outstanding | 16,235 | 16,605 | 16,761 | ||||||||
Effect of dilutive securities—employee stock options and awards | 90 | 70 | 55 | ||||||||
Denominator for diluted earnings per share—adjusted weighted-average shares outstanding | 16,325 | 16,675 | 16,816 | ||||||||
Basic earnings per share | $ | 1.37 | $ | 1.28 | $ | 1.25 | |||||
Diluted earnings per share | $ | 1.36 | $ | 1.27 | $ | 1.24 | |||||
Average anti-dilutive options and awards excluded from computation of diluted earnings per share | 499 | 546 | 581 | ||||||||
Note 15. Accumulated Other Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss, net of tax benefit, for the periods presented:
(Dollars in thousands) | Net Unrealized Gains (Losses) on Available-for-Sale Investment Securities | Net Change Related to Derivatives Used for Cash Flow Hedges | Net Change Related to Defined Benefit Pension Plans | Accumulated Other Comprehensive Loss | |||||||||||
Balance, December 31, 2011 | $ | 7,306 | $ | (932 | ) | $ | (12,475 | ) | $ | (6,101 | ) | ||||
Net Change | 1,038 | (309 | ) | (1,548 | ) | (819 | ) | ||||||||
Balance, December 31, 2012 | 8,344 | (1,241 | ) | (14,023 | ) | (6,920 | ) | ||||||||
Net Change | (9,816 | ) | 1,241 | 5,540 | (3,035 | ) | |||||||||
Balance, December 31, 2013 | (1,472 | ) | — | (8,483 | ) | (9,955 | ) | ||||||||
Net Change | 3,183 | (157 | ) | (7,533 | ) | (4,507 | ) | ||||||||
Balance, December 31, 2014 | $ | 1,711 | $ | (157 | ) | $ | (16,016 | ) | $ | (14,462 | ) | ||||
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The following table illustrates the amounts reclassified out of each component of accumulated comprehensive loss for the periods presented:
Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive Loss | Affected Line Item in the Statement of Income | ||||||||||||
For the years ended December 31, | ||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | |||||||||||
Net unrealized holding gains on available-for-sale investment securities: | ||||||||||||||
$ | 635 | $ | 3,389 | $ | 305 | Net gain on sales of investment securities | ||||||||
— | — | (13 | ) | Other-than-temporary impairment on equity securities | ||||||||||
635 | 3,389 | 292 | Total before tax | |||||||||||
(222 | ) | (1,186 | ) | (102 | ) | Tax expense | ||||||||
$ | 413 | $ | 2,203 | $ | 190 | 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* | $ | (666 | ) | $ | (1,282 | ) | $ | (1,170 | ) | |||||
Accretion of prior service cost included in net periodic pension costs* | 288 | 255 | 255 | |||||||||||
(378 | ) | (1,027 | ) | (915 | ) | Total before tax | ||||||||
132 | 360 | 320 | Tax benefit | |||||||||||
$ | (246 | ) | $ | (667 | ) | $ | (595 | ) | Net of tax | |||||
* | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. (See Note 10—Retirement Plans and Other Postretirement Benefits for additional details.) |
Note 16. Commitments and Contingencies
Loan commitments are made to accommodate the financial needs of the Bank’s customers. The Bank offers commercial, mortgage, and consumer credit products to its customers in the normal course of business, which are detailed in Note 5. These products represent a diversified credit portfolio and are generally issued to borrowers within the Bank’s locations in Southeastern Pennsylvania. The ability of the customers to repay their credit is, to some extent, dependent upon the economy in the Bank’s market areas. Collateral is obtained based on management’s credit assessment of the customer.
Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. They are primarily issued to support commercial paper, medium and long-term notes and debentures, including industrial revenue obligations. The approximate term is usually one year but some can be up to five years. Historically, substantially all standby letters of credit expire unfunded. If funded, the majority of the letters of credit carry current market interest rates if converted to loans. Because letters of credit are generally un-assignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The carrying amount is recorded as unamortized deferred fees and the exposure is considered in the reserve for credit risk. At December 31, 2014, the maximum potential amount of future payments under letters of credit is $46.9 million. The current carrying amount of the contingent obligation is $441 thousand. This arrangement has credit risk essentially the same as that involved in extending loans to customers and is subject to the Bank’s normal credit policies. Collateral is obtained based on management’s credit assessment of the customer.
The Bank maintains a reserve in other liabilities for estimated losses associated with sold mortgages that may be repurchased. At December 31, 2014, the reserve for sold mortgages was $264 thousand.
The Corporation entered into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Corporation will reimburse a portion of the loss borne by the financial institution. The third parties usually have other borrowing relationships with the Corporation. The Corporation monitors overall borrower collateral and performance, and at the end of December 31, 2014, believes sufficient collateral is available to cover potential swap losses. The Corporation pledges cash or securities to cover a portion of the negative fair value of the RPAs, as
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measured by the participant financial institution. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 10 to 13 years. At December 31, 2014, the notional amount of the RPAs was $19.4 million, with a negative fair value of $1.2 million, of which $370 thousand was pledged to the participant financial institutions as collateral. The maximum potential future payment guaranteed by the Corporation cannot be readily estimated, but is dependent upon the fair value of the interest rate swaps at the time of default. If an event of default on all contracts had occurred at December 31, 2014, the Corporation would have been required to make payments of approximately $1.2 million. The RPA requires the Corporation to reimburse the institution in proportion to the pro rata share of the third party transactions, in the event the third party fails to make a payment to the institution. In exchange, the Corporation receives an agreed-upon fee from the institution for taking this risk. The fee is paid upfront to the Corporation and the Corporation recognizes the fee over the term of the loan(s). The fair value of the guarantee was $74 thousand at December 31, 2014.
Based on consultation with the Corporation’s legal counsel, management is not aware of any litigation that would be probable of occurring or probable of having a material adverse effect on the Corporation’s consolidated balance sheet or statement of income. 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.
The following schedule summarizes the Corporation’s off-balance sheet financial instruments at December 31, 2014:
(Dollars in thousands) | Contract/Notional Amount | ||
Financial instruments representing credit risk: | |||
Commitments to extend credit | $ | 538,488 | |
Performance letters of credit | 19,240 | ||
Financial standby letters of credit | 27,526 | ||
Other letters of credit | 101 | ||
At December 31, 2014, the Corporation and its subsidiaries were obligated under non-cancelable leases for various premises and equipment. Portions of certain properties are subleased. A summary of the future minimum rental commitments under non-cancelable operating leases with original or remaining terms greater than one year is as follows:
(Dollars in thousands) | |||
Year | Amount | ||
2015 | $ | 2,297 | |
2016 | 2,269 | ||
2017 | 2,080 | ||
2018 | 2,096 | ||
2019 | 1,705 | ||
Thereafter | 23,092 | ||
Total | $ | 33,539 | |
The following table summarizes rental expense charged to operations for the periods indicated:
For the Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||
Rental expense | $ | 2,732 | $ | 2,304 | $ | 2,250 | |||||
Sublease rental income | (238 | ) | (278 | ) | (396 | ) | |||||
Net rental expense | $ | 2,494 | $ | 2,026 | $ | 1,854 | |||||
Minimum future rental income receivable under subleases from non-cancelable operating leases was $183 thousand at December 31, 2014.
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Note 17. 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 October 24, 2014, the Corporation entered into an amortizing cash flow hedge with a notional amount of $20.0 million to hedge a portion of the debt financing of a pool of 10-year maturity fixed rate loans with balances totaling $29.1 million, at time of the hedge, that were originated in 2013. A brokered money market demand account totaling $25.0 million is being used for the cash flow hedge. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.10% and receives a floating rate based on the one-month LIBOR with a maturity date of November 1, 2022. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and on a recurring basis to determine that the derivative has been and is expected to continue to be highly effective in offsetting changes in cash flows of the hedged item. The Corporation expects that there will be no ineffectiveness in 2015, and therefore anticipates no portion of the net loss in accumulated other comprehensive loss will be reclassified to interest expense within the next twelve months.
The Corporation pledges cash or securities to cover a portion of the negative fair value of the interest rate swap, as measured by the counterparty. At December 31. 2014, the notional amount of the cash flow hedge was $19.9 million, with a negative fair value of $241 thousand. The Corporation has pledged $300 thousand to the counteryparty as collateral for the negative fair value.
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 13, “Borrowings” for additional information.
The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at December 31, 2014 and 2013:
Derivative Assets | Derivative Liabilities | ||||||||||||||
(Dollars in thousands) | Notional Amount | Balance Sheet Classification | Fair Value | Balance Sheet Classification | Fair Value | ||||||||||
At December 31, 2014 | |||||||||||||||
Interest rate locks with customers | $ | 27,007 | Other assets | $ | 788 | $ | — | ||||||||
Forward loan sale commitments | 30,537 | — | Other liabilities | 112 | |||||||||||
Total | $ | 57,544 | $ | 788 | $ | 112 | |||||||||
At December 31, 2013 | |||||||||||||||
Interest rate locks with customers | $ | 15,176 | Other assets | $ | 321 | $ | — | ||||||||
Forward loan sale commitments | 17,425 | Other assets | 25 | — | |||||||||||
Total | $ | 32,601 | $ | 346 | $ | — | |||||||||
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The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at December 31, 2014 and 2013:
Derivative Assets | Derivative Liabilities | ||||||||||||||
(Dollars in thousands) | Notional Amount | Balance Sheet Classification | Fair Value | Balance Sheet Classification | Fair Value | ||||||||||
At December 31, 2014 | |||||||||||||||
Interest rate swap - cash flow hedge | $ | 19,945 | $ | — | Other liabilities | $ | 241 | ||||||||
Total | $ | 19,945 | $ | — | $ | 241 | |||||||||
At December 31, 2013 | |||||||||||||||
Interest rate swap - cash flow hedge | $ | — | $ | — | $ | — | |||||||||
Total | $ | — | $ | — | $ | — | |||||||||
The following table presents amounts included in the consolidated statements of income for derivatives not designated as hedging instruments for the periods indicated:
Statement of Income Classification | For the Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||||
Interest rate locks with customers | Net gain (loss) on mortgage banking activities | $ | 467 | $ | (1,226 | ) | $ | 467 | |||||
Forward loan sale commitments | Net (loss) gain on mortgage banking activities | (137 | ) | 79 | 248 | ||||||||
Total | $ | 330 | $ | (1,147 | ) | $ | 715 | ||||||
The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:
Statement of Income Classification | For the Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2014 | 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 | 66 | 124 | 448 | |||||||||
Interest rate swap—cash flow hedge—ineffectiveness | Interest expense | — | — | — | |||||||||
Net loss | $ | (66 | ) | $ | (1,990 | ) | $ | (448 | ) | ||||
The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments for the periods indicated:
Accumulated Other Comprehensive (Loss) Income | For the Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||||||
Interest rate swap—cash flow hedge | Fair value, net of taxes | $ | (157 | ) | $ | — | $ | (1,241 | ) | ||||
Total | $ | (157 | ) | $ | — | $ | (1,241 | ) | |||||
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Note 18. 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 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 end of each trading day. 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 securities issued by 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.
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, upon the Corporation’s review or in comparing with another service, 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 December 31, 2014.
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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 noninterest 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 Sterner Insurance Associates acquisition, the potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $5.7 million over the three-year period ending June 30, 2017.
For the Girard Partners acquisition, the potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the five-year period ending December 31, 2018.
For the John T. Fretz Insurance Agency acquisition, the remaining potential future cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $620 thousand cumulative over the two-year period ending April 30, 2016.
For the Javers Group acquisition, the Corporation recorded a reduction to the contingent liability during 2013 which resulted in a reduction of other noninterest expense of $959 thousand. The adjustment reflected 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 remote. Therefore, as of December 31, 2014, 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.
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The following table presents the assets and liabilities measured at fair value on a recurring basis at December 31, 2014 and 2013, classified using the fair value hierarchy:
At December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Assets/ Liabilities at Fair Value | |||||||||||
Assets: | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
U.S. treasuries | $ | 4,845 | $ | — | $ | — | $ | 4,845 | |||||||
U.S. government corporations and agencies | — | 121,844 | — | 121,844 | |||||||||||
State and political subdivisions | — | 102,774 | — | 102,774 | |||||||||||
Residential mortgage-backed securities | — | 13,643 | — | 13,643 | |||||||||||
Collateralized mortgage obligations | — | 3,725 | — | 3,725 | |||||||||||
Corporate bonds | — | 54,440 | — | 54,440 | |||||||||||
Money market mutual funds | 11,675 | — | — | 11,675 | |||||||||||
Equity securities | 1,337 | — | — | 1,337 | |||||||||||
Total available-for-sale securities | 17,857 | 296,426 | — | 314,283 | |||||||||||
Interest rate locks with customers | — | 788 | — | 788 | |||||||||||
Total assets | $ | 17,857 | $ | 297,214 | $ | — | $ | 315,071 | |||||||
Liabilities: | |||||||||||||||
Interest rate swap | $ | — | $ | 241 | $ | — | $ | 241 | |||||||
Forward loan sale commitments | — | 112 | — | 112 | |||||||||||
Contingent consideration liability | — | — | 6,541 | 6,541 | |||||||||||
Total liabilities | $ | — | $ | 353 | $ | 6,541 | $ | 6,894 | |||||||
At December 31, 2013 | |||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Assets/ Liabilities at Fair Value | |||||||||||
Assets: | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
U.S. treasuries | $ | 4,708 | $ | — | $ | — | $ | 4,708 | |||||||
U.S. government corporations and agencies | — | 128,148 | — | 128,148 | |||||||||||
State and political subdivisions | — | 107,657 | — | 107,657 | |||||||||||
Residential mortgage-backed securities | — | 35,480 | — | 35,480 | |||||||||||
Collateralized mortgage obligations | — | 7,201 | — | 7,201 | |||||||||||
Corporate bonds | — | 33,840 | — | 33,840 | |||||||||||
Money market mutual funds | 16,900 | — | — | 16,900 | |||||||||||
Equity securities | 2,347 | — | — | 2,347 | |||||||||||
Total available-for-sale securities | 23,955 | 312,326 | — | 336,281 | |||||||||||
Interest rate locks with customers | — | 321 | — | 321 | |||||||||||
Forward loan sale commitments | — | 25 | — | 25 | |||||||||||
Total assets | $ | 23,955 | $ | 312,672 | $ | — | $ | 336,627 | |||||||
Liabilities: | |||||||||||||||
Contingent consideration liability | $ | — | $ | — | $ | 501 | $ | 501 | |||||||
Total liabilities | $ | — | $ | — | $ | 501 | $ | 501 | |||||||
At December 31, 2014 and December 31, 2013, the Corporation had no assets measured at fair value on a recurring basis utilizing Level 3 inputs.
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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 years ended December 31, 2014 and 2013:
For the Year Ended December 31, 2014 | |||||||||||||||||||
(Dollars in thousands) | Balance at December 31, 2013 | Contingent Consideration from New Acquisition | Payment of Contingent Consideration | Adjustment of Contingent Consideration | Balance at December 31, 2014 | ||||||||||||||
Sterner Insurance Associates | $ | — | $ | 635 | $ | — | $ | 45 | $ | 680 | |||||||||
Girard Partners | — | 5,470 | — | 33 | 5,503 | ||||||||||||||
John T. Fretz Insurance Agency | 501 | — | (310 | ) | 167 | 358 | |||||||||||||
Total contingent consideration liability | $ | 501 | $ | 6,105 | $ | (310 | ) | $ | 245 | $ | 6,541 | ||||||||
For the Year Ended December 31, 2013 | |||||||||||||||||||
(Dollars in thousands) | Balance at December 31, 2012 | Contingent Consideration from New Acquisition | Payment of Contingent Consideration | Adjustment of Contingent Consideration | Balance at December 31, 2013 | ||||||||||||||
John T. Fretz Insurance Agency | $ | — | $ | 454 | $ | — | $ | 47 | $ | 501 | |||||||||
Javers Group | 903 | — | — | (903 | ) | — | |||||||||||||
Total contingent consideration liability | $ | 903 | $ | 454 | $ | — | $ | (856 | ) | $ | 501 | ||||||||
The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table represents assets measured at fair value on a non-recurring basis at December 31, 2014 and 2013:
At December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Assets/Liabilities at Fair Value | |||||||||||
Impaired loans held for investment | $ | — | $ | — | $ | 55,193 | $ | 55,193 | |||||||
Total | $ | — | $ | — | $ | 55,193 | $ | 55,193 | |||||||
At December 31, 2013 | |||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Assets/Liabilities at Fair Value | |||||||||||
Impaired loans held for investment | $ | — | $ | — | $ | 55,370 | $ | 55,370 | |||||||
Total | $ | — | $ | — | $ | 55,370 | $ | 55,370 | |||||||
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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 December 31, 2014 and 2013. The disclosed fair values are classified using the fair value hierarchy.
At December 31, 2014 | |||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | Carrying Amount | ||||||||||||||
Assets: | |||||||||||||||||||
Cash and short-term interest-earning assets | $ | 38,565 | $ | — | $ | — | $ | 38,565 | $ | 38,565 | |||||||||
Held-to-maturity securities | — | 54,765 | — | 54,765 | 54,347 | ||||||||||||||
Loans held for sale | — | 3,374 | — | 3,374 | 3,302 | ||||||||||||||
Net loans and leases held for investment | — | — | 1,555,033 | 1,555,033 | 1,550,770 | ||||||||||||||
Mortgage servicing rights | — | — | 6,941 | 6,941 | 5,509 | ||||||||||||||
Other real estate owned | — | 955 | — | 955 | 955 | ||||||||||||||
Total assets | $ | 38,565 | $ | 59,094 | $ | 1,561,974 | $ | 1,659,633 | $ | 1,653,448 | |||||||||
Liabilities: | |||||||||||||||||||
Deposits: | |||||||||||||||||||
Demand and savings deposits, non-maturity | $ | 1,608,748 | $ | — | $ | — | $ | 1,608,748 | $ | 1,608,748 | |||||||||
Time deposits | — | 254,224 | — | 254,224 | 252,593 | ||||||||||||||
Total deposits | 1,608,748 | 254,224 | — | 1,862,972 | 1,861,341 | ||||||||||||||
Short-term borrowings | — | 38,631 | — | 38,631 | 41,974 | ||||||||||||||
Total liabilities | $ | 1,608,748 | $ | 292,855 | $ | — | $ | 1,901,603 | $ | 1,903,315 | |||||||||
Off-Balance-Sheet: | |||||||||||||||||||
Commitments to extend credit | $ | — | $ | (1,420 | ) | $ | — | $ | (1,420 | ) | $ | — | |||||||
At December 31, 2013 | |||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | Carrying Amount | ||||||||||||||
Assets: | |||||||||||||||||||
Cash and short-term interest-earning assets | $ | 69,169 | $ | — | $ | — | $ | 69,169 | $ | 69,169 | |||||||||
Held-to-maturity securities | — | 66,853 | — | 66,853 | 66,003 | ||||||||||||||
Loans held for sale | — | 2,267 | — | 2,267 | 2,267 | ||||||||||||||
Net loans and leases held for investment | — | — | 1,477,945 | 1,477,945 | 1,461,620 | ||||||||||||||
Mortgage servicing rights | — | 7,188 | — | 7,188 | 5,519 | ||||||||||||||
Other real estate owned | — | 1,650 | — | 1,650 | 1,650 | ||||||||||||||
Total assets | $ | 69,169 | $ | 77,958 | $ | 1,477,945 | $ | 1,625,072 | $ | 1,606,228 | |||||||||
Liabilities: | |||||||||||||||||||
Deposits: | |||||||||||||||||||
Demand and savings deposits, non-maturity | $ | 1,573,709 | $ | — | $ | — | $ | 1,573,709 | $ | 1,573,709 | |||||||||
Time deposits | — | 268,909 | — | 268,909 | 270,789 | ||||||||||||||
Total deposits | 1,573,709 | 268,909 | — | 1,842,618 | 1,844,498 | ||||||||||||||
Short-term borrowings | — | 35,687 | — | 35,687 | 37,256 | ||||||||||||||
Total liabilities | $ | 1,573,709 | $ | 304,596 | $ | — | $ | 1,878,305 | $ | 1,881,754 | |||||||||
Off-Balance-Sheet: | |||||||||||||||||||
Commitments to extend credit | $ | — | $ | (1,357 | ) | $ | — | $ | (1,357 | ) | $ | — | |||||||
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 sheet 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.
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Loans held for sale: The fair value of the Corporation’s mortgage 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. These loans 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 December 31, 2014 and 2013.
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 costs 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 December 31, 2014, impaired loans held for investment had a carrying amount of $56.2 million with a valuation allowance of $998 thousand. At December 31, 2013, impaired loans held for investment had a carrying amount of $58.3 million with a valuation allowance of $3.0 million.
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 interest rates of the portfolios serviced. Mortgage servicing rights were classified within Level 2 of the valuation hierarchy at December 31, 2013. The Corporation’s valuation model has not changed from December 31, 2013; however, management’s assessment of the inputs has resulted in mortgage servicing rights being classified within Level 3 of the valuation hierarchy at December 31, 2014. 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 December 31, 2014, mortgage servicing rights had a carrying amount of $5.5 million with no valuation allowance. At December 31, 2013, mortgage servicing rights had a carrying amount of $5.8 million with a valuation allowance of $250 thousand.
Goodwill and other identifiable assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. The Corporation completed an annual impairment test for goodwill and other intangibles during the fourth quarter of 2014. There was no goodwill impairment and no material impairment of identifiable intangibles recorded.
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 and federal funds purchased are estimated using current market rates for similar borrowings and are classified within Level 2 in the fair value hierarchy.
Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing and are classified within Level 2 in the fair value hierarchy.
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Note 19. 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.
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 December 31, 2013 | $ | — | |
Note 20. Share Repurchase Plan
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 nine months ended September 30, 2013, the Corporation repurchased 540,285 shares at a cost of $9.9 million under the 2007 plan. At September 30, 2013, this share repurchase plan was substantially completed.
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 this plan, 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. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.
The Corporation repurchased 110,997 shares under the 2013 plan during the year ended December 31, 2014, at a cost of $2.0 million. At December 31, 2014, total shares outstanding were 16,221,607.
Note 21. Regulatory Matters
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.
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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).
(Dollars in thousands) | Actual | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
At December 31, 2014 | ||||||||||||||||||||
Total Capital (to Risk-Weighted Assets): | ||||||||||||||||||||
Corporation | $ | 249,388 | 12.91 | % | $ | 154,589 | 8.00 | % | $ | 193,237 | 10.00 | % | ||||||||
Bank | 232,080 | 12.15 | 152,796 | 8.00 | % | 190,995 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets): | ||||||||||||||||||||
Corporation | 227,907 | 11.79 | 77,295 | 4.00 | % | 115,942 | 6.00 | % | ||||||||||||
Bank | 210,816 | 11.04 | 76,398 | 4.00 | % | 114,597 | 6.00 | % | ||||||||||||
Tier 1 Capital (to Average Assets): | ||||||||||||||||||||
Corporation | 227,907 | 10.55 | 86,371 | 4.00 | % | 107,964 | 5.00 | % | ||||||||||||
Bank | 210,816 | 9.80 | 86,005 | 4.00 | % | 107,506 | 5.00 | % | ||||||||||||
At December 31, 2013 | ||||||||||||||||||||
Total Capital (to Risk-Weighted Assets): | ||||||||||||||||||||
Corporation | $ | 256,329 | 13.90 | % | $ | 147,568 | 8.00 | % | $ | 184,460 | 10.00 | % | ||||||||
Bank | 238,336 | 13.06 | 145,991 | 8.00 | % | 182,489 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets): | ||||||||||||||||||||
Corporation | 232,946 | 12.63 | 73,784 | 4.00 | % | 110,676 | 6.00 | % | ||||||||||||
Bank | 215,497 | 11.81 | 72,995 | 4.00 | % | 109,493 | 6.00 | % | ||||||||||||
Tier 1 Capital (to Average Assets): | ||||||||||||||||||||
Corporation | 232,946 | 10.85 | 85,876 | 4.00 | % | 107,346 | 5.00 | % | ||||||||||||
Bank | 215,497 | 10.11 | 85,277 | 4.00 | % | 106,597 | 5.00 | % | ||||||||||||
At December 31, 2014 and December 31, 2013, 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 December 31, 2014, 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 include 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 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 became effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016. Management believes that, as of December 31, 2014, the Corporation and the Bank would have met the capital adequacy requirements under Basel III if such requirements had been in effect. The Corporation and the Bank expect to be well capitalized upon the adoption of BASEL III in 2015. The Corporation will continue to analyze the impact of the new rules as it grows and as the capital conservation buffer requirements are phased in.
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Dividends and Other Restrictions
The primary source of the Corporation’s dividends paid to its shareholders is from the earnings of its subsidiaries paid to the Corporation in the form of dividends.
The approval of the Federal Reserve Board of Governors is required for a state bank member in the Federal Reserve system to pay dividends if the total of all dividends declared in any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2015 without approval of the Federal Reserve Board of Governors of approximately $12.8 million plus an additional amount equal to the Bank’s net profits for 2015 up to the date of any such dividend declaration.
Federal Reserve Board policy applicable to the holding company also provides that, as a general matter, a bank holding company should inform the Federal Reserve and should eliminate, defer or significantly reduce the holding company’s dividends if the holding company’s net income for the preceding four quarters, net of dividends paid during the period, is not sufficient to fully fund the dividends, the holding company’s prospective rate of earnings retention is inconsistent with capital needs and overall current and prospective financial condition, or the holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Federal Reserve Board policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period or that could result in a material adverse change to the organization’s capital structure.
The Federal Reserve Act requires that extension of credit by the Bank to certain affiliates, including the Corporation (parent), be secured by readily marketable securities, that extension of credit to any one affiliate be limited to 10% of the Bank’s capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of the Bank’s capital and surplus.
Note 22. Related Party Transactions
In the ordinary course of business, the Corporation has made loans and commitments to extend credit to certain directors and executive officers of the Corporation and companies in which directors have an interest (Related Parties). These loans and commitments have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with customers not related to the lender and did not involve more than the normal risk of collectability or present other unfavorable terms.
The following table provides a summary of activity for loans to Related Parties during the year ended December 31, 2014:
(Dollars in thousands) | |||
Balance at January 1, 2014 | $ | 27,802 | |
Additions | 10,551 | ||
Amounts collected and other reductions | (7,668 | ) | |
Balance at December 31, 2014 | $ | 30,685 | |
The Corporation paid $19 thousand during 2014 to Penn Foundation Inc. for the Employee Assistance Program, in the normal course of business on substantially the same terms as available for others. Margaret Zook, a director of the Corporation, is on the Board of Directors of Penn Foundation Inc.
The following table provides additional information regarding transactions with Related Parties:
(Dollars in thousands) | At December 31, 2014 | ||
Commitments to extend credit | $ | 16,453 | |
Standby and commercial letters of credits | 223 | ||
Deposits received | 10,342 | ||
95 |
Note 23. Segment Reporting
At December 31, 2014, the Corporation has three reportable business segments: Banking, Wealth Management and Insurance. The Corporation determines its segments based primarily upon product and service offerings, through the types of income generated and the regulatory environment. This is strategically how the Corporation operates and has positioned itself in the marketplace. Accordingly, significant operating decisions are based upon analysis of each of these segments. At December 31, 2014, these segments meet the quantitative thresholds for separate disclosure as a business segment. Non-reportable segments include Univest Delaware, the parent holding company and intercompany eliminations, and are included in the "Other" segment. Prior to 2014, the Corporation had only one reportable segment, Community Banking. During 2014, the Corporation acquired Girard Partners and Sterner Insurance and realigned its investment and trust operations into its Wealth Management Reporting unit; this resulted in the three reportable segments of Banking, Wealth Management and Insurance.
The Corporation's Banking segment consists of commercial and retail banking. The Wealth Management segment consists of investment advisory services, retirement plan services, trust, municipal pension services and broker/dealer services. The Insurance segment consists of commercial lines, personal lines, benefits and human resources consulting.
Each segment generates revenue from a variety of products and services it provides. Examples of products and services provided for each reportable segment are indicated below.
Ÿ | The Banking segment provides financial services to consumers, businesses and governmental units. These services include a full range of banking services such as deposit taking, loan origination and servicing, mortgage banking, other general banking services and equipment lease financing. |
Ÿ | The Wealth Management segment offers trust and investment advisory services, guardian and custodian of employee benefits and other trust and brokerage services, as well as a registered investment advisory managing private investment accounts for both individuals and institutions. |
Ÿ | The Insurance segment includes a full-service insurance brokerage agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines. |
The accounting policies, used in the disclosure of the operating segments, are the same as those described in Note 1, “Summary of Significant Accounting Policies".
96 |
The following tables provide reportable segment-specific information and reconciliations to consolidated financial information for the years ended December 31, 2014, 2013 and 2012. Prior period information is shown for comparative purposes as if the realignment of Wealth Management occurred at the beginning of each period.
(Dollars in thousands) | Banking | Wealth Management | Insurance | Other | Consolidated | ||||||||||||||
For the Year Ended December 31, 2014 | |||||||||||||||||||
Interest income | $ | 75,850 | $ | 1 | $ | — | $ | 34 | $ | 75,885 | |||||||||
Interest expense | 3,998 | — | — | (2 | ) | 3,996 | |||||||||||||
Net interest income | 71,852 | 1 | — | 36 | 71,889 | ||||||||||||||
Provision for loan and lease losses | 3,607 | — | — | — | 3,607 | ||||||||||||||
Noninterest income | 16,170 | 19,918 | 12,038 | 525 | 48,651 | ||||||||||||||
Noninterest expense* | 63,120 | 13,855 | 11,435 | (1,156 | ) | 87,254 | |||||||||||||
Income before income taxes | 21,295 | 6,064 | 603 | 1,717 | 29,679 | ||||||||||||||
Income taxes | 4,043 | 2,269 | 256 | 880 | 7,448 | ||||||||||||||
Net income | $ | 17,252 | $ | 3,795 | $ | 347 | $ | 837 | $ | 22,231 | |||||||||
Total assets | $ | 2,154,485 | $ | 34,195 | $ | 22,930 | $ | 23,711 | $ | 2,235,321 | |||||||||
Capital expenditures | $ | 2,824 | $ | 100 | $ | 593 | $ | 169 | $ | 3,686 | |||||||||
For the Year Ended December 31, 2013 | |||||||||||||||||||
Interest income | $ | 77,517 | $ | 1 | $ | — | $ | 61 | $ | 77,579 | |||||||||
Interest expense | 4,641 | — | — | 476 | 5,117 | ||||||||||||||
Net interest income | 72,876 | 1 | — | (415 | ) | 72,462 | |||||||||||||
Provision for loan and lease losses | 11,228 | — | — | — | 11,228 | ||||||||||||||
Noninterest income | 22,053 | 14,938 | 9,959 | (166 | ) | 46,784 | |||||||||||||
Noninterest expense* | 60,759 | 10,079 | 8,749 | 1,546 | 81,133 | ||||||||||||||
Income (expense) before income taxes | 22,942 | 4,860 | 1,210 | (2,127 | ) | 26,885 | |||||||||||||
Income tax expense (benefit) | 4,255 | 1,850 | 497 | (906 | ) | 5,696 | |||||||||||||
Net income | $ | 18,687 | $ | 3,010 | $ | 713 | $ | (1,221 | ) | $ | 21,189 | ||||||||
Total assets | $ | 2,129,314 | $ | 22,737 | $ | 19,524 | $ | 19,984 | $ | 2,191,559 | |||||||||
Capital expenditures | $ | 2,679 | $ | 13 | $ | 46 | $ | 692 | $ | 3,430 | |||||||||
For the Year Ended December 31, 2012 | |||||||||||||||||||
Interest income | $ | 80,568 | $ | 3 | $ | 3 | $ | 80 | $ | 80,654 | |||||||||
Interest expense | 6,983 | — | — | 1,191 | 8,174 | ||||||||||||||
Net interest income | 73,585 | 3 | 3 | (1,111 | ) | 72,480 | |||||||||||||
Provision for loan and lease losses | 10,035 | — | — | — | 10,035 | ||||||||||||||
Noninterest income | 18,018 | 12,906 | 8,079 | 1,257 | 40,260 | ||||||||||||||
Noninterest expense* | 57,917 | 9,626 | 7,782 | 957 | 76,282 | ||||||||||||||
Income (expense) before income taxes | 23,651 | 3,283 | 300 | (811 | ) | 26,423 | |||||||||||||
Income tax expense (benefit) | 4,318 | 1,266 | 113 | (146 | ) | 5,551 | |||||||||||||
Net income | $ | 19,333 | $ | 2,017 | $ | 187 | $ | (665 | ) | $ | 20,872 | ||||||||
Capital expenditures | $ | 2,950 | $ | 53 | $ | 37 | $ | 190 | $ | 3,230 | |||||||||
*Includes an allocation of general and administrative expenses from both the parent holding company and the Bank. Generally speaking, these expenses are allocated based upon number of employees and square footage usage.
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Note 24. Condensed Financial Information - Parent Company Only
Condensed financial statements of the Corporation, parent company only, follow:
(Dollars in thousands) | At December 31, | ||||||
Balance Sheets | 2014 | 2013 | |||||
Assets: | |||||||
Cash and due from banks | $ | 3,120 | $ | 2,999 | |||
Investments in securities | 1,336 | 2,347 | |||||
Investments in subsidiaries, at equity in net assets: | |||||||
Bank | 283,166 | 271,147 | |||||
Non-banks | — | — | |||||
Other assets | 21,115 | 17,658 | |||||
Total assets | $ | 308,737 | $ | 294,151 | |||
Liabilities: | |||||||
Dividends payable | $ | 3,243 | $ | 3,257 | |||
Other liabilities | 20,940 | 10,388 | |||||
Total liabilities | 24,183 | 13,645 | |||||
Shareholders' equity: | 284,554 | 280,506 | |||||
Total liabilities and shareholders' equity | $ | 308,737 | $ | 294,151 | |||
(Dollars in thousands) | For the Years Ended December 31, | ||||||||||
Statements of Income | 2014 | 2013 | 2012 | ||||||||
Dividends from bank | $ | 12,482 | $ | 18,482 | $ | 20,482 | |||||
Dividends from non-bank | — | — | 1,200 | ||||||||
Other-than-temporary impairment on equity securities | — | — | (13 | ) | |||||||
Net gain on sales of securities | 306 | 644 | 70 | ||||||||
Loss on termination of interest rate swap | — | (1,866 | ) | — | |||||||
Other income | 18,334 | 18,306 | 17,463 | ||||||||
Total operating income | 31,122 | 35,566 | 39,202 | ||||||||
Operating expenses | 16,924 | 19,203 | 18,323 | ||||||||
Income before income tax expense (benefit) and equity in undistributed income (loss) of subsidiaries | 14,198 | 16,363 | 20,879 | ||||||||
Income tax expense (benefit) | 880 | (903 | ) | (143 | ) | ||||||
Income before equity in undistributed income (loss) of subsidiaries | 13,318 | 17,266 | 21,022 | ||||||||
Equity in undistributed income (loss) of subsidiaries: | |||||||||||
Bank | 8,913 | 3,929 | (140 | ) | |||||||
Non-banks | — | (6 | ) | (10 | ) | ||||||
Net income | $ | 22,231 | $ | 21,189 | $ | 20,872 | |||||
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(Dollars in thousands) | For the Years Ended December 31, | ||||||||||
Statements of Cash Flows | 2014 | 2013 | 2012 | ||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 22,231 | $ | 21,189 | $ | 20,872 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Equity in undistributed net (income) loss of subsidiaries | (8,913 | ) | (3,923 | ) | 150 | ||||||
Other-than-temporary impairment on equity securities | — | — | 13 | ||||||||
Net gain on sales of securities | (306 | ) | (644 | ) | (70 | ) | |||||
Loss on termination of interest rate swap | — | 1,866 | — | ||||||||
Bank owned life insurance income | (238 | ) | (1,070 | ) | (255 | ) | |||||
Depreciation of premises and equipment | 364 | 344 | 358 | ||||||||
Stock based compensation | 1,141 | 978 | 1,267 | ||||||||
Contributions to pension and other postretirement benefit plans | (254 | ) | (2,243 | ) | (8,215 | ) | |||||
Decrease in other assets | 714 | 671 | 6,270 | ||||||||
(Decrease) increase in other liabilities | (639 | ) | (2,426 | ) | 2,451 | ||||||
Net cash provided by operating activities | 14,100 | 14,742 | 22,841 | ||||||||
Cash flow from investing activities: | |||||||||||
Proceeds from sales of securities | 1,131 | 1,244 | 2,666 | ||||||||
Liquidation of subsidiary, net of cash acquired | — | 15,011 | 1,096 | ||||||||
Proceeds from bank owned life insurance | — | 772 | 178 | ||||||||
Other, net | (281 | ) | (713 | ) | 1,280 | ||||||
Net cash provided by investing activities | 850 | 16,314 | 5,220 | ||||||||
Cash flows from financing activities: | |||||||||||
Repayment of long-term debt | — | (375 | ) | (1,500 | ) | ||||||
Payment for repurchase of trust preferred securities | — | (20,619 | ) | — | |||||||
Purchases of treasury stock | (4,605 | ) | (12,012 | ) | (2,319 | ) | |||||
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit plans | 2,462 | 2,422 | 2,515 | ||||||||
Proceeds from exercise of stock options | 310 | — | — | ||||||||
Cash dividends paid | (12,996 | ) | (10,029 | ) | (16,755 | ) | |||||
Net cash used in financing activities | (14,829 | ) | (40,613 | ) | (18,059 | ) | |||||
Net increase (decrease) in cash and due from financial institutions | 121 | (9,557 | ) | 10,002 | |||||||
Cash and due from financial institutions at beginning of year | 2,999 | 12,556 | 2,554 | ||||||||
Cash and due from financial institutions at end of year | $ | 3,120 | $ | 2,999 | $ | 12,556 | |||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid during the year for: | |||||||||||
Interest | $ | 2 | $ | 754 | $ | 1,194 | |||||
Income tax, net of refunds received | 5,300 | 5,017 | 1,180 | ||||||||
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Note 25. Quarterly Financial Data (Unaudited)
The unaudited results of operations for the quarters for the years ended December 31, 2014 and 2013 were as follows:
(Dollars in thousands, except per share data) | |||||||||||||||
2014 Quarterly Financial Data: | Fourth | Third | Second | First | |||||||||||
Interest income | $ | 18,995 | $ | 19,219 | $ | 18,725 | $ | 18,946 | |||||||
Interest expense | 1,039 | 978 | 981 | 998 | |||||||||||
Net interest income | 17,956 | 18,241 | 17,744 | 17,948 | |||||||||||
Provision for loan and lease losses | 648 | 233 | 1,251 | 1,475 | |||||||||||
Net interest income after provision for loan and lease losses | 17,308 | 18,008 | 16,493 | 16,473 | |||||||||||
Noninterest income | 12,076 | 12,510 | 11,924 | 12,141 | |||||||||||
Noninterest expense | 22,562 | 22,019 | 21,790 | 20,883 | |||||||||||
Income before income taxes | 6,822 | 8,499 | 6,627 | 7,731 | |||||||||||
Income taxes | 1,632 | 2,264 | 1,547 | 2,005 | |||||||||||
Net income | $ | 5,190 | $ | 6,235 | $ | 5,080 | $ | 5,726 | |||||||
Per share data: | |||||||||||||||
Basic | $ | 0.32 | $ | 0.38 | $ | 0.31 | $ | 0.35 | |||||||
Diluted | $ | 0.32 | $ | 0.38 | $ | 0.31 | $ | 0.35 | |||||||
Dividends per share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | |||||||
2013 Quarterly Financial Data: | Fourth | Third | Second | First | |||||||||||
Interest income | $ | 19,172 | $ | 19,457 | $ | 19,461 | $ | 19,489 | |||||||
Interest expense | 1,080 | 1,138 | 1,353 | 1,546 | |||||||||||
Net interest income | 18,092 | 18,319 | 18,108 | 17,943 | |||||||||||
Provision for loan and lease losses | 1,614 | 4,094 | 3,446 | 2,074 | |||||||||||
Net interest income after provision for loan and lease losses | 16,478 | 14,225 | 14,662 | 15,869 | |||||||||||
Noninterest income | 11,116 | 13,202 | 10,991 | 11,475 | |||||||||||
Noninterest expense | 21,623 | 19,988 | 19,286 | 20,236 | |||||||||||
Income before income taxes | 5,971 | 7,439 | 6,367 | 7,108 | |||||||||||
Income taxes | 1,049 | 1,400 | 1,537 | 1,710 | |||||||||||
Net income | $ | 4,922 | $ | 6,039 | $ | 4,830 | $ | 5,398 | |||||||
Per share data: | |||||||||||||||
Basic | $ | 0.30 | $ | 0.36 | $ | 0.29 | $ | 0.32 | |||||||
Diluted | $ | 0.30 | $ | 0.36 | $ | 0.29 | $ | 0.32 | |||||||
Dividends per share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | |||||||
100 |
Note 26. Subsequent Event
Valley Green Bank
On January 1, 2015, the Corporation completed its acquisition of Valley Green Bank. The merger of Valley Green Bank with and into the Bank was effected pursuant to the terms and conditions of the Merger Agreement dated June 17, 2014. Pursuant to the Merger Agreement, each share of Valley Green Bank common stock was cancelled and converted into the right to receive 1.3541 shares of Univest common stock, $5 par value, with any fractional share entitled to payment in cash. As a result, the Corporation delivered approximately 3,787,866 shares of the Corporation's common stock to the former shareholders of Valley Green Bank. Valley Green Bank outstanding stock options of 122,377 were exchanged for cash and related payroll taxes of $2.2 million. Approximately $3 thousand in cash was paid for fractional shares.
The transaction is being accounted for using the acquisition method of accounting, which requires the Corporation to allocate the total consideration transferred to the assets acquired and liabilities assumed, based on their respective fair values at the merger date, with remaining excess consideration recorded as goodwill. The fair value estimates are subject to adjustment if additional information becomes available. Such adjustments, may change the amount of the purchase price allocation to goodwill while changes to other assets and liabilities may impact the statement of income due to adjustments in the yield and/or amortization/accretion of the adjusted assets and liabilities.
The following table summarizes the consideration paid for Valley Green Bank and the fair value of assets acquired and liabilities assumed at the acquisition date:
(Dollars in thousands, except share data) | ||||||
Purchase price consideration in common stock: | ||||||
Valley Green common shares outstanding | 2,797,454 | |||||
Exchange ratio | 1.3541 | |||||
Univest shares issued | 3,787,866 | |||||
Univest closing stock price at December 31, 2014 | $ | 20.24 | ||||
Purchase price assigned to Valley Green common shares exchanged for Univest stock | $ | 76,667 | ||||
Purchase price assigned to cash in lieu of fractional shares | 3 | |||||
Purchase price assigned to Valley Green options settled for cash | 2,236 | |||||
Total purchase price | $ | 78,906 | ||||
Fair value of assets acquired: | ||||||
Cash and due from banks | $ | 4,919 | ||||
Federal funds sold | 17,442 | |||||
Investment securities available-for-sale | 12,766 | |||||
Loans held for investment | 382,892 | |||||
Premises and equipment, net | 3,102 | |||||
Core deposit intangible | 1,867 | |||||
Accrued interest receivable and other assets | 3,779 | |||||
Total identifiable assets | 426,767 | |||||
Fair value of liabilities assumed: | ||||||
Deposits - noninterest bearing | $ | 49,826 | ||||
Deposits - interest bearing | 336,086 | |||||
Change in control accrued payments | 2,070 | |||||
Accrued interest payable and other liabilities | 1,792 | |||||
Total liabilities | 389,774 | |||||
Net identifiable net assets | 36,993 | |||||
Goodwill resulting from merger (1) | $ | 41,913 | ||||
(1) - Goodwill is not expected to be deductible for federal income tax purposes. The goodwill is allocated to the Banking business segment.
The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. In many cases, determining the fair value of the acquired assets and assumed liabilities required the Corporation to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which required the utilization of significant estimates and judgment in accounting for the acquisition.
Cash and due from banks and federal funds sold: The estimated fair values of cash and due from banks and federal fund sold approximated their stated value.
101 |
Investment securities available-for-sale: The estimated fair values of the investment securities available for sale, comprised of U.S. government and agencies, were determined using Level 2 inputs in the fair value hierarchy. The fair values were determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilized 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. Management reviewed the data and assumptions used in pricing the securities.
Loans held for investment: The most significant fair value determination related to the valuation of acquired loans. The acquisition resulted in loans acquired with and without evidence of credit quality deterioration. There was no carryover related allowance for loan and lease losses.
The acquired loan portfolio was valued based on current guidance which defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the portfolio and included the use of present value techniques employing cash flow estimates and the incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Corporation used its own assumptions in an effort to determine reasonable fair value. Specifically, management utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.
For loans acquired without evidence of credit quality deterioration, the Corporation prepared the interest rate fair value analysis. Loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment. Additionally a general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses; and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the Bank, Valley Green Bank and peer banks. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of specific familiarity with Valley Green Bank's underwriting process. Valley Green's loan portfolio without evidence of credit quality deterioration was recorded at a current fair value of $381.5 million. A fair value premium of $4.3 million was recognized to reflect the fair values of loans. A fair value discount of $5.8 million was recognized to reflect the general credit risk of the loan portfolio. The adjustment will be substantially recognized as interest income over approximately 10 years on a level yield basis amortization method based upon the expected life of the loans.
For loans acquired with evidence of credit quality deterioration the Corporation prepared a specific credit fair value adjustment. Management reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting this definition were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value results in an accretable yield amount. The accretable yield amount will be recognized over the life of the loans on a level yield basis as an adjustment to yield.
At the acquisition date, the Corporation recorded $1.4 million of acquired impaired loans subject to a nonaccretable discount difference of $2.8 million. The aggregate expected cash flows less the acquisition date fair value results in an accretable yield amount of $291 thousand, which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.
The following is a summary of the acquired impaired loans at January 1, 2015 resulting from the merger with Valley Green:
(Dollars in thousands) | |||
Contractually required principal and interest payments | $ | 4,539 | |
Contractual cash flows not expected to be collected (nonaccretable difference) | (2,848 | ) | |
Cash flows expected to be collected | 1,691 | ||
Interest component of expected cash flows (accretable difference) | (291 | ) | |
Fair value of loans acquired with a deterioration of credit quality | $ | 1,400 | |
Bank premises - leased: The Corporation assumed five facility lease contracts and no owned properties. The fair value of the lease contracts represents the present value of the pre-tax differential between the expected contractual payments and current market rate lease payments to the first lease termination date discounted by an assumed required rate of return.
Core deposit intangible: Core deposit intangible represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The core deposit intangible fair value represents the future economic benefit,
102 |
including the present value of future tax benefits, of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost alternative funding sources and was valued utilizing Level 3 inputs. The core deposit intangible of $1.9 million will be amortized over an estimated life of 10 years.
Deposits: The fair values of demand and saving deposits, with no stated maturities, approximated the carrying value as these accounts are payable on demand. The fair values of time deposits with fixed maturities were estimated by discounting the final maturity using current market interest rate for similar instruments. A fair value premium of $686 thousand was recognized and will be recognized as a reduction to interest expense using a level yield method over the life of the time deposit. The fair value of time deposits were determined using Level 2 inputs in the fair value hierarchy.
Deferred tax assets and liabilities: Deferred tax assets and liabilities were established for purchase accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income.
Direct costs related to the acquisition were expensed as incurred. During the year ended December 31, 2014, the Corporation incurred $1.2 million of Valley Green Bank acquisition-related expenses, which have been separately stated in the Corporation's consolidated statements of income.
Supplemental Pro Forma Financial Information (unaudited)
The following unaudited pro forma combined consolidated financial information for the years ended December 31, 2014 and 2013 combine the historical consolidated results of the Corporation and Valley Green Bank and give effect to the merger as if the merger occurred on January 1, 2014 and January 1, 2013, respectively. The pro forma information has been prepared to include the estimated adjustments necessary to record the assets and liabilities of Valley Green Bank at their respective fair values and are subject to adjustment if additional information becomes available. Such adjustments, may change the amount of the purchase price allocation to goodwill while changes to other assets and liabilities may impact the statement of income due to adjustments in the yield and/or amortization/accretion of the adjusted assets and liabilities. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities or anticipated cost savings
The pro forma data is not necessarily indicative of the operating results that the Corporation would have achieved had it completed the merger as of the beginning of the period presented and should not be considered as representative of future operations. The unaudited pro forma data presented below is based on, and should be read together with, the historical financial information of the Corporation included in this Form 10-K for the indicated periods and the historical information of Valley Green Bank included in the Corporation's Current Report on Form 8-K filed with the SEC on January 7, 2015.
Pro Forma For the Years Ended December 31, | |||||||
(Dollars in thousands, except share data) | 2014 | 2013 | |||||
Net interest income | $ | 92,356 | $ | 89,897 | |||
Noninterest income | 49,325 | 47,550 | |||||
Noninterest expense | 98,792 | 90,456 | |||||
Net income | 27,503 | 26,557 | |||||
Earnings per share | |||||||
Basic | $ | 1.37 | $ | 1.30 | |||
Diluted | 1.37 | 1.30 | |||||
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of December 31, 2014.
Management's Report on Internal Control over Financial Reporting
The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of it's inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014, using the criteria set forth in Internal Control - Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. Based on this assessment, management concluded that, as of December 31, 2014, the Corporation’s internal control over financial reporting is effective based on those criteria.
On May 14, 2013, COSO issued an updated version of its Internal Control - Integrated Framework (the "2013 Framework"), requiring full transition to the 2013 Framework by December 15, 2014. The Corporation expects to adopt the complete 2013 Framework during 2015.
KPMG LLP, an independent registered public accounting firm, has audited the Corporation’s consolidated financial statements as of and for the year ended December 31, 2014 and the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014, as stated in their reports, which are included herein.
There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f)) during the year ended December 31, 2014 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Univest Corporation of Pennsylvania:
We have audited Univest Corporation of Pennsylvania and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated March 9, 2015 expressed an unqualified opinion on those consolidated financial statements.
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Philadelphia, Pennsylvania
March 9, 2015
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Item 9B. | Other Information |
None.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5), of Regulation S-K is incorporated herein by reference from the Corporation’s definitive proxy statement on Schedule 14A for the annual meeting of shareholders on April 21, 2015 (2015 Proxy), under the headings: “Election of Directors,” “Compliance with Section 16(a) of the Securities Exchange Act of 1934,” “The Board, the Board’s Committees and Their Functions,” “Audit Committee,” “Compensation Committee of the Board,” “Corporate Governance Disclosure,” "Compensation Committee Interlocks and Insider Participation," and "Nominating and Governance Committee of the Board.”
The Corporation maintains in effect a Code of Conduct for Directors and a Code of Conduct for all officers and employees, which includes the CEO and senior financial officers. The codes of conduct are available on the Corporation’s website. The Corporation’s website also includes the charters for its audit committee, compensation committee, and nominating and governance committee as well as its corporate governance principles. These documents are located on the Corporation’s website at www.univest.net under “Investors Relations” in Governance Documents and are also available to any person without charge by sending a request to the Corporate Secretary at Univest Corporation, P. O. Box 64197, Souderton, PA 18964.
Item 11. | Executive Compensation |
Information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K is incorporated herein by reference from the Corporation’s 2015 Proxy under the headings: “The Board, the Board’s Committees and Their Functions,” “Executive Compensation,” “Director Compensation,” and "Compensation Committee Report."
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by Items 201(d) and 403 of Regulation S-K is incorporated herein by reference from the Corporation’s 2015 Proxy under the heading, “Beneficial Ownership of Directors and Officers” and Item 5 of this Annual Report on Form 10-K.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference from the Corporation’s 2015 Proxy under the headings, “The Board, the Board’s Committees and Their Functions” and “Related Party Transactions.”
Item 14. | Principal Accounting Fees and Services |
Information required by Item 9(e) of Schedule 14A is incorporated herein by reference from the Corporation’s 2015 Proxy under the headings: “Audit Committee” and “Independent Registered Public Accounting Firm Fees.”
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) | 1. & 2. Financial Statements and Schedules |
The financial statements listed in the accompanying index to financial statements are filed as part of this annual report. | |
3. Listing of Exhibits | |
The exhibits listed on the accompanying index to exhibits are filed as part of this annual report. | |
(b) | Exhibits - The response to this portion of Item 15 is submitted as separate section. |
(c) | Financial Statements Schedules - none. |
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UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES
[Item 15(a) 1. & 2.]
Annual Report of Shareholders
Page | |
Certain financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
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UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX OF EXHIBITS
[Item 15(a) 3. & 15(b)]
Description
(3.1) | Amended and Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of Form 10-K, filed with the SEC on March 4, 2014. | |
(3.2) | Amended By-Laws effective January 1, 2015 are incorporated by reference to Exhibit 3.2 of Form 8-K, filed with the SEC on January 2, 2015. | |
(4.1) | Shareholder Rights Agreement dated September 30, 2011 is incorporated by reference to Exhibit 4.1 of Form 8-K, filed with the SEC on October 6, 2011. | |
(10.1)* | Employment Agreement between Jay R. Goldstein and Univest Corporation of Pennsylvania is incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4 of Univest Corporation, filed with the SEC on August 21, 2014. (Registration Statement No. 333-198280) | |
(21) | Subsidiaries of the Registrant | |
(23.1) | Consent of independent registered public accounting firm, KPMG LLP | |
(31.1) | Certification of Jeffrey M. Schweitzer, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. | |
(31.2) | Certification of Michael S. Keim, Senior 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. | |
(32.1)** | Certification of Jeffrey M. Schweitzer, President and Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. | |
(32.2)** | Certification of Michael S. Keim, Senior Executive Vice President and Chief Financial Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. | |
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 | |
* Denotes a compensatory plan or agreement
** A certification furnished pursuant to this item will not be deemed "filed" for purposes of Section 18 of the Exchange Act (15 S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIVEST CORPORATION OF PENNSYLVANIA | |
Registrant | |
By: /s/ Michael S. Keim | |
Michael S. Keim Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |
March 9, 2015 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature | Title | Date |
/s/ WILLIAM S. AICHELE William S. Aichele | Chairman and Director | March 9, 2015 |
/s/ JEFFREY M. SCHWEITZER Jeffrey M. Schweitzer | President, Chief Executive Officer and Director (Principal Executive Officer) | March 9, 2015 |
/s/ DOUGLAS C. CLEMENS Douglas C. Clemens | Director | March 9, 2015 |
/s/ R. LEE DELP R. Lee Delp | Director | March 9, 2015 |
/s/ JAY R. GOLDSTEIN Jay R. Goldstein | Director | March 9, 2015 |
/s/ H. PAUL LEWIS H. Paul Lewis | Director | March 9, 2015 |
/s/ WILLIAM G. MORRAL William G. Morral | Director | March 9, 2015 |
/s/ K. LEON MOYER K. Leon Moyer | Director | March 9, 2015 |
/s/ THOMAS SCANNAPIECO Thomas Scannapieco | Director | March 9, 2015 |
/s/ MARK A. SCHLOSSER Mark A. Schlosser | Director | March 9, 2015 |
/s/ P. GREGORY SHELLY P. Gregory Shelly | Director | March 9, 2015 |
/s/ MICHAEL L. TURNER Michael L. Turner | Director | March 9, 2015 |
/s/ MARGARET K. ZOOK Margaret K. Zook | Director | March 9, 2015 |
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